In the middle of 2020, if you had said that a debt-laden retail REIT (real estate investment trust) would be pandemic proof, you would have been laughed out of the room. Economic lockdowns and the general public's aversion to public spaces at the time made brick-and-mortar retail prime candidates for financial trouble.
Despite the initial fears and the pandemic's impact on retail real estate, REIT Kimco Realty (KIM -0.54%) was indeed surprisingly pandemic-proof. Here's how the company was able to withstand the blow, as well as how it is also set up rather well to succeed from here.
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Fighting turmoil with quality tenants
Retail real estate comes in many forms, and the type of retail mattered immensely when it came to handling the pandemic. Indoor or enclosed retail, gyms, restaurants, and movie theaters were hit the hardest, but essential retailers like supermarkets, home improvement stores, auto repair, and pet stores, to name a few, weren't socked hard enough to stop paying rent. According to Kimco, rent collections for these essential services remained above 96% throughout the pandemic, and overall rent collections only dipped below 90% for one quarter. Also, occupancy only dipped from a pre-pandemic high of 96.4% to 93.5% at its nadir.
The reason Kimco's portfolio was able to weather the storm so well is that a vast majority of its retail space was anchored by a grocery store. More than 80% of the company's annualized base rent (ABR) comes from grocery-anchored shopping centers, and grocery stores themselves represent about 18% of ABR. Grocery stores may not be high-growth businesses, but they are some of the most stable retail properties and can drive significant traffic to other stores in a shopping center.
Another advantage that Kimco had is the credit quality of its tenants, since 86% of its ABR comes from three kinds of tenants: anchors, such as Costco and Target; mid-tier stores (think Dollar Tree or Trader Joe's); or national or franchise-based small footprint stores -- Starbucks or Panera Bread, for example. These types of tenants tend to have better access to capital and higher credit ratings, making it much more likely that they will continue to pay the rent even when times get tough.
All in all, the company performed surprisingly well through the worst of the pandemic. What should entice investors more, though, is some of the moves it made after the pandemic that could make it look much more attractive in the years ahead.
A lot of baked-in growth
There are several key things that either Kimco has done or are a by-product of Kimco's business that might drive considerable growth in the future:
- Last April, the company agreed to merge with Weingarten Realty Investors. The merger gave Kimco an additional portfolio of grocery-anchored shopping centers and significantly increased its presence in the Sun Belt.
- Kimco has the ability to reap big rewards from an investment in Albertsons (ACI -1.28%). At the end of the most recent quarter, Kimco's stake in Albertsons stock was valued at $1.2 billion. That position alone is equivalent to 8% of Kimco's market capitalization and presents several options should it sell.
- Kimco has found major traction redeveloping some of its retail centers into multi-use properties that incorporate retail, residential, and hotel components. By 2025, management wants to have entitlements -- real estate parlance for approval to build, which typically involves changes to zoning -- for 12,000 apartment units across 40 of its properties and to receive 15% of ABR from its mixed-use portfolio.
- It is also investing alongside its tenants to help many of its anchors leverage their stores into centers for curbside pickup and last-mile fulfillment and distribution of online orders. Giving tenants more ways to increase sales per square foot can lead to significant increases in rental rates when leases are renegotiated.
- Speaking of renegotiating leases, many of its anchor tenants are on very old lease agreements (some more than 20 years) that are paying well below market rental rates. Management says 63% of its anchor leases expire between 2022 and 2023, and the average rent per square foot on those leases is more than 25% below current market rates.
Altogether, there is an immense amount of potential sitting in this company's footprint. If management can fully realize the potential here, it's not hard to see the company delivering incredible results over the next few years.
A pandemic-proof company selling for pandemic-panic prices
There is a lot to like about Kimco Realty right now, but it's fair to say that historically, the company hasn't always been a great investment. Since mid-2016, its stock has fallen, although it's been rising since the depths of the lockdown. The company has spent a significant amount of time and capital selling off unprofitable properties and focusing heavily on major coastal or Sun Belt markets while cleaning up its balance sheet. It has been a slog, but the portfolio is in a much better position now to create value for investors.
Shares of Kimco currently trade at 12.2 times funds from operations (FFO) per share. The average price to FFO per share for similarly sized retail REITs is 16.1 times.
So Kimco is trading at a significant discount to its peers. Considering the catalysts coming over the next few years, this is certainly a stock to consider for your own portfolio.
