Shares of retail-focused real estate investment trust (REIT) Kimco Realty (KIM -1.43%) fell 44% in March according to data from S&P Global Market Intelligence. That decline was dramatically worse than the S&P 500 Index's 13% drop or the performance of the average REIT, as reflected in the 20% fall of the Vanguard Real Estate ETF. But the relatively hard hit wasn't out of line with the risks Kimco faces today, largely because of COVID-19.
Kimco has transitioned its portfolio over the last few years to the point where it is now largely focused on desirable retail assets located in wealthy areas. Many of its properties are anchored by necessity tenants like grocery stores and pharmacies. That said, it still owns retail properties. As COVID-19 started to spread across the United States in February and March, state and local governments began to take increasingly aggressive actions in their efforts to slow its progress.
Those protective measures included ordering all non-essential businesses to close and asking people to stay home as much as possible. Many of the tenants in Kimco's properties do qualify essential, so they have remained open. And only about 15% of its rents come from small businesses, which are more likely to lack the financial resources necessary to weather an extended shutdown. Still, the pandemic has forced a large number of its tenants to close up shop, and others are now limited in their ability to provide services (notably restaurants). And even those that were allowed to remain open are dealing with business impacts of social distancing.
In short, Kimco's retail-focused business is likely to take a hit due to the COVID-19 pandemic. However, it appears relatively well-positioned to muddle through. In fact, the REIT has explained that roughly 86% of its rents come from tenants it believes are large enough to deal with extended closures or that have been allowed to remain open. That said, this is the first real test KIMCO has faced since it began reorienting its portfolio. Conservative investors might want to wait until the picture becomes clearer before stepping in here. More aggressive investors might want to dig in a little more, but buyers should go into this stock knowing that its rents and occupancy rates are likely to fall in the near term.