I'm going to skip over the equally impressive quarterly numbers to focus on the annual figures; a year's worth of data is more meaningful and useful. Kimco Realty's funds from operations (FFO) for 2005 were $2 per diluted share, a 13% improvement over last year's performance and quite high growth for a REIT. This puts the company's price-to-FFO ratio at 17.4, which isn't cheap. Nevertheless, given the 13% FFO growth in 2005, the expected 6% to 8% FFO growth for 2006, continued robust business prospects both domestically and in Mexico, and the loftier FFO multiples of some of Kimco's fellow REITs, I find the company's relative valuation reasonable.
Kimco's other financial metrics reveal a healthy balance sheet, with a debt-to-market cap ratio of only 26.1% and a low proportion (i.e., about 25%) of variable-rate debt. Both of these are in line with the company's general goal of maintaining flexibility through conservative leverage. The company's current annual dividend of $1.32 per share is also well-funded, at 66% of FFO.
But the longer-term story at Kimco Realty revolves around change and potential growth. In its online supplemental packet for the quarter, Kimco describes how its portfolio has changed in the last five years. Geographically, Kimco has moved into more densely populated areas, where real estate is scarcer and zoning restrictions work in the company's favor. Meanwhile, the company has diversified its tenant base. In 1999, Kmart was Kimco's No. 1 tenant, accounting for 13.3% of its base rental revenue. Today, Motley Fool Inside Value pick Home Depot
In addition, the company is earning an increasing percentage of its revenue internationally, and it continues to view Mexico as one of its main opportunities for continued growth. The company already works with Home Depot and Wal-Mart
It's hard not to be impressed with Kimco Realty and its prospects. The 3.9% dividend yield is low for a REIT, but could still be alluring for a dividend-oriented investor willing to exchange some yield for increased growth potential. In my case, and in the case of our Motley Fool Income Investor service, the goal is simply to beat the market's long-term 7% return, through any combination of growth and dividends.
I have yet to fully calculate Kimco Realty's valuation, but my hunch is that the business is priced to deliver market-beating growth. The stock lacks my preferred margin of safety, which would usually make me pass it up. Still, I'm curious enough about Kimco to take a deeper look.
Further REIT-minded Foolishness:
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