KIM - Kimco Realty Corp — Grand Galley Capital

Summary:

Estimated target price per share: $23.65 (current price: $20.70).
The Company’s asset composition: IPP (Investment Producing Properties, which include direct ownership of properties), investment in joint ventures, investment in marketable securities, and cash.
We calculated the value of IPPs and compared it with the implied value of IPPs based on current share prices and concluded that the Company’s IPPs are slightly overvalued. See below for further details.
Investments in joint ventures and marketable securities have growth potential in the coming years.
The Company has appropriate capital allocation and a market strategy that is in line with the recent changes in retail real estate.
Investment in KIM is an investment with low risk that provides a reasonable return over time, but at the same time, there will be no exponential growth. See the bear case and bull case scenarios below. The bear case value is close to the current market price (as such we see little downside). That being said, the market dynamics can result in price volatility in the short term.

Profile:

Kimco Realty Corporation (the “Company” or “KIM”) is the largest publicly traded owner and operator of open-air, grocery-anchored shopping centers, including mixed-use assets. The Company completed its IPO in November 1991. In August 2021, Weingarten, a REIT with mixed-use assets merged into the Company.

The Company is a self-administered REIT with an ownership interest in 541 shopping centers, aggregating 93.3 million square feet of GLA, located in 29 states. The Company also has indirect ownership in real estate through investment in joint ventures. Moreover, KIM has diversified its portfolio by investing in Albertson Companies Inc. which is one of the largest food and drug retailers in the United States.

The Company’s open-air shopping center portfolio consists of properties located in drivable first-ring suburbs primarily within 20 major metropolitan sun belt and coastal markets. The Company’s shopping centers provide essential, necessity-based goods and services to the local communities and are primarily anchored by grocery, home improvement, and price-off tenants.

The Company continues to place strategic emphasis on live-work-play environments as it reinvests in its existing assets. The Company plans to achieve this goal by adding residential units to the properties that are suitable to be transformed into mixed-use properties. The merger with Weingarten has provided the Company with the platform and know-how to build and manage mixed-use properties. As of June 2022, the Company had a strong lineup of projects that are either entitled (13 properties) or undergoing entitlement (33 properties). The entitled projects include the addition of 3,947 residential units, 578 hotel keys, 908,000 SF of office space, and 114,000 SF of retail space.

In light of the significant changes that the retail real estate underwent as a result of the COVID pandemic, the Company is embracing the future of retail by creating people-oriented properties that are more convenient and accessible. The Company has announced its commitment to:
- construct or entitle at least 12,000 residential units by 2025, as part of our effort to create quality mixed-use live-work-play environments
- establish curbside pickup infrastructure at 100% of all qualified locations by 2025
- establish dedicated space for the activation of outside common areas at 20% of properties by 2030
- establish low-carbon transportation infrastructure at 25% of properties by 2025

Differentiating factors:

The Company has embraced the work-life-play environments and has been investing in the concept
Focus on redevelopment instead of construction
Collaborating with tenants and providing both financial and non-financial assistance
Engagement with communities

Positive Aspects of the Company:

High-quality portfolio, positioned in desirable locations
Accretive and opportunistic capital allocation
Robust operating platform
Financial strength (strong balance sheet, ability to raise debt at favorable rates (designated investment grade by two major rating agencies), and strong free cash flow)
ESG leadership

Risk Factors:

The Company still has a significant number of below-market leases. Although these will be normalized in the sales calculation, but they are not providing the cash flow to the investors. In addition, many of the tenants have renewal options which they will most likely exercise if they the rents go higher as expected.
High interest rate environment, which would make investing in bonds more appealing to investors
Expansion of cap rates, limiting the gains on the sale of the properties
Tightening of credit and liquidity in the market, putting pressure on the Company’s ability to access capital at a reasonable rate

Methodology:

We calculated NAV per share and used it as a proxy for price per share. Since KIM is a publicly traded REIT, the market conditions impact the share prices but in the long run, we believe that NAV per share provides an appropriate estimate of the REIT’s target price per share. Below are the highlights of our methodology:

Source of information: 10K, 10Q, earnings transcript, and the supplemental information provided by the Company on the company’s website.
Source of market assumptions: CBRE, JLL, and C&W research reports; Nareit and NCREIF publications; high-yeild spreads, Corporate Baa bond rates, Federal Reserve Policy Rate, and market news
in addition to the direct ownership in Income Producing Properties, the Company has ownership interests in multiple joint ventures and a retailer.
- Joint Ventures: We evaluated the Joint Venture investments and concluded that the assets held in those joint ventures are of high quality with the prospect of growth. Therefore, we used Gordon Growth Model to estimate the value of those investments. We used the general 8.5% discount rate, adjusted for 4% growth rate.
- Publicly Traded Food & Drug Retailer (Albertson Companies Inc. - NYSE: ACI). We reviewed the financial position of ACI as well as analysts’ ratings. Overall, we estimated that the current share prices are fair. We used $27.30 per share to value the investment in ACI.
We used 10-year discounted cash flow (unlevered) and four-quarter forward NOI direct capitalization to estimate the Gross Asset Value (GAV) of Income Producing Properties.
Adjustments for debt and other income statements items were done accordingly.