Real estate investment trust (REIT) Kimco Realty (NYSE: KIM) has a pretty impressive track record in the shopping center space. One of the largest in the niche, it's about to gobble up a competitor, further enhancing its scale advantages.
But there's another name in the sector you should be looking at if Kimco interests you: Federal Realty Investment Trust (NYSE: FRT). Here's a breakdown of why, if you're thinking of buying Kimco, you might want to buy Federal Realty instead.
1. The dividend
REITs are specifically designed to pass income on to shareholders via dividends, so dividends are one of the most important factors to look at in the sector. Right now, Kimco's dividend yield is roughly 3.2% while Federal Realty's is 3.6%. That gives Federal Realty the edge for investors looking to maximize the income they generate.
But that's nowhere near the end of the story on the dividend front. Facing the uncertainty of the coronavirus pandemic, Kimco cut its dividend in 2020. It did the same thing during the deep 2007 to 2009 recession. Both were prudent moves to preserve liquidity, but investors looking for dividend consistency were probably unhappy with them.
Federal Realty has an over 50-year streak of annual dividend increases under its belt, making it a Dividend King -- an elite group of companies that have proven through good times and bad that rewarding investors via regular dividend hikes is core to their purpose. So the real story here is a higher yield and a better dividend track record, which gives Federal Realty the clear advantage.
2. Bigger vs. better
The next thing to look at is size. Both Kimco and Federal Realty have market caps of around $9 billion today. However, their portfolios are vastly different. Kimco owns around 400 properties versus Federal Realty's roughly 100 or so. In this way, Kimco is a bigger player in the shopping center sector.
However, there's an important question to ask here: Why does a REIT with four times as many properties have the same market cap as Federal Realty? The answer is the productivity of the assets. In the first quarter, Kimco generated nearly $280 million in rent from its roughly 400 properties. Federal Realty generated a little under $220 million from 100.
You don't need to do any math to see that Federal Realty's properties generate huge amounts of cash. That's largely attributable to the REIT's focus on owning the best properties in the best markets -- and keeping them that way via solid maintenance, regular upgrades, and careful attention to the tenant roster. Kimco's properties aren't bad, but they just don't measure up to what Federal Realty owns, giving Federal Realty another win.
3. Growing things
That said, Kimco is about to buy peer Weingarten (WRI), adding another 160 or so properties to its portfolio. It's not a bad deal per se, as it expands the company's scale, allows it to cut costs, and increases its presence in growing regions. Only, Weingarten's properties are no more productive than those Kimco currently owns. Yes, the REIT is getting bigger, but it's still a long way from the type of portfolio that Federal Realty has.
That said, Federal Realty isn't exactly sitting on its laurels. It recently inked deals to buy four properties. As you might expect from the modest size of its portfolio, it takes something of a sharpshooter approach to expansion. Each new property comes with a different growth track, but the list of opportunities includes redeveloping properties, re-tenanting properties, leasing unused spaces, and developing vacant land.
While Federal Realty is getting bigger more slowly, it's sticking to its knitting of deliberate expansion via a highly curated collection of prime assets. Given the REIT's track record, that seems a lot more attractive than growth via big portfolio acquisitions (given that buying entire companies doesn't always turn out as well as hoped).
The better option
At the end of the day, this really boils down to a question of quality over quantity. That's not to suggest that Kimco is a bad REIT -- it isn't. However, Federal Realty's more focused approach has simply created more consistent (dividend-wise), higher-quality (rent generation) performance for investors. Given the highly similar yields today, most will probably prefer Federal Realty over Kimco.