Income investors looking for yield should look at the real estate investment trust (REIT) sector. These companies invest in properties and then lease out the units. REITs can monetize many different assets, from office buildings to shopping malls to cellphone towers. Investors attracted to REIT yields should always ask if the dividend is sustainable; otherwise, it is illusory. Kimco Realty (KIM -0.22%) is a prominent retail REIT. How does it afford its 4.5% dividend yield, and is it sustainable?
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Kimco focuses on grocery-anchored shopping centers
Kimco Realty is a REIT that focuses on open-air, supermarket-anchored shopping centers. As of March 31, 2023, Kimco Realty had interests in 523 properties representing 90.8 million square feet of gross leasable area. The company concentrates primarily on first-ring suburbs in 19 coastal and Sun Belt metropolitan areas. The company believes these metro areas have the population growth and economy to support these properties and considers these areas to have large barriers to entry.
Investors are starting to worry about commercial real estate
Over the past six months, investors have begun to worry about commercial real estate valuations, particularly in office and retail. The issue for office space is based on the resilience of the work-from-home model, which has become more entrenched in corporate culture. Retail is another area of concern, though that is more of a local issue. If you look at trends regarding leasing spreads (rental inflation on expiring leases) and occupancy, it is hard to argue that Kimco is experiencing problems here.
Kimco reported a 95.8% occupancy rate at the end of the first quarter, which is approaching its pre-pandemic level of 96.4%. Leasing spreads were over 10% in the first quarter as well. Retail construction has been depressed ever since the 2008 financial crisis, and in 2021, new development as a percent of existing capacity was under 1%.
Online shopping won't negatively impact Kimco
The relationship between online and brick-and-mortar retailing has changed over the past 30 years. The "buy online, pick up in store" model is becoming favored by retailers as it allows them to save on shipping costs and also gets buyers into the store, which can trigger impulse buys. Second, we are seeing big retailers move stores from shopping malls to properties like Kimco's.
Kimco's top tenants are all top retailers, and most have investment-grade credit ratings. The top tenants include TJX, which owns TJ Maxx and Marshalls, Home Depot, and Amazon, which houses its Whole Foods properties. Kimco's balance sheet is in great shape, with an average borrowing rate of 3.49% (99.7% fixed rate) and a weighted average term over nine years. Kimco has enough liquidity to cover several years' worth of maturing debt, so it won't lkely face liquidity or interest rate shock issues.
Kimco is guiding for 2023 funds from operations (FFO) per share to come in between $1.54 and $1.57. REITs tend to use FFO instead of net income to describe earnings per share because depreciation and amortization is such a large expense under generally accepted accounting principles (GAAP). FFO disregards depreciation and amortization because it is a non-cash charge.
The dividend is well covered
Kimco pays a quarterly dividend of $0.23, which works out to an annual dividend of $0.92. This is more than amply covered by FFO guidance of $1.54 to $1.57 per share. Kimco hiked its dividend every quarter in 2022, and it has maintained its dividend in 2023. At current levels, Kimco is trading at 13.2 times 2023 FFO per share, which is a reasonable multiple for a high-quality REIT and has a 4.5% dividend yield. The dividend looks sustainable over the long term, and it appears that the fears of problems in the commercial real estate market won't affect Kimco.
