Mergers can change everything -- sometimes for the better and sometimes for the worse. Strip mall real estate investment trust (REIT) Kimco Realty (NYSE: KIM) completed its merger with peer Weingarten Realty in early August. What does Kimco look like now? Is it better positioned than before? Here's a quick look at whether this REIT is worth buying today.
Strip malls are not exactly a thrilling property type in the REIT space, but they are central to everyday life for most end customers. That's because they house retailers like grocery stores, hair salons, dry cleaners, and restaurants -- places we all frequent on a regular basis.
Well-maintained properties are boring but reliable, which is why investors like strip malls. Kimco is one of the largest names in the space, with a post-merger portfolio of around 550 properties (roughly 80% of which are anchored by a grocery store).
Before buying Weingarten, Kimco was focused most heavily on coastal markets, with a notable presence in the Northeast. Those have historically been strong areas, with plenty of wealthy customers. The merger expanded the REIT's reach in the U.S. Sun Belt region, which has been seeing faster population growth in recent years.
The combined company has some clusters in the middle of the country and a few one-off locations. But at this point, just over 80% of its portfolio is located in historically strong coastal areas or up-and-coming regions.
The portfolio is well diversified by store, with no single nameplate representing more than 3.7% of rents. It is diversified by store type, getting around half its rent from national anchor tenants and the rest from a mix of mid-tier national brands, well-known franchise names, and local tenants. And it has a long runway on the lease front, with around half its leases expiring after 2032 -- roughly a decade from now.
What about the stock?
So, from a business perspective, post-merger Kimco looks fairly attractive. But is it worth buying?
Mergers often weaken a company's balance sheet. However, this deal actually improved Kimco's financial position, because Weingarten was in better fiscal shape. So, post-merger, Kimco's net debt (plus preferred equity)-to-EBITDA ratio is expected to drop from 7.9 times to 7.6 times. That's not a massive change, but it is a move in the "right" direction. It should also convince conservative types that the REIT didn't bite off more than it can chew.
On the growth front, Kimco now has two attractive avenues ahead of it. There is the legacy project pipeline of value-enhancing internal investments. And, now, there's the faster-growing Sun Belt portfolio, which is likely to experience relatively strong rent growth. Kimco has entered several new markets and gained scale in many existing regions, presenting opportunities for future acquisitions and cost savings. The company's larger scale, meanwhile, should make it easier to find low-cost capital.
So far this looks like a real win for Kimco. That said, the first quarter post-merger is going to see a roughly $0.10 per share hit to the REIT's funds from operations (FFO) because of one-time costs associated with the deal. That kind of unavoidable adjustment is nothing to be too concerned about. The real problem today is valuation.
All of the positives here are pretty well known. The stock has rallied some 80% over the past year. The dividend yield has dropped to just 3.1%. While that's better than the 2.3% on offer from the average REIT, using Vanguard Real Estate ETF (NYSEARCA: VNQ) as a proxy, and the dismal 1.3% typical from an S&P 500 Index fund, Kimco's yield is near the lowest levels in recent history. That makes the company less than compelling at this point and suggests that value investors should probably steer clear of Kimco today.
The Millionacres bottom line
All in, it looks like Kimco inked a good deal, improving its industry position, financial strength, and growth prospects. It also appears that investors have rewarded the REIT for this change.
That said, investors looking at the strip mall space shouldn't pass this REIT by. Value-oriented types might want to put it on their wish lists. More conservative income investors, meanwhile, may want to dive into the largest strip mall REIT as it looks to capitalize on its improved business fundamentals. This decision, however, may depend on the current, painfully low, interest rate environment. If you don't have to put money to work, it would probably pay to wait along with the value folks.