KIMCO REALTY CORP

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Kimco Realty Corporation is North America’s largest publicly traded owner and operator of open-air, mixed-use shopping centers, focusing primarily on necessity-based and mixed-use retail properties.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Kimco operates primarily in the U.S., with a portfolio of open-air shopping centers which focus on grocery-anchored, mixed use and single tenant retail locations.

Business Overview

Kimco Realty Corporation (KIM), is a real estate investment trust (REIT). They own and operate a large portfolio of open-air shopping centers, including grocery-anchored centers, mixed-use properties, and single-tenant retail locations.

Kimco Realty is North America’s largest publicly traded owner and operator of open-air shopping centers.

Revenue Distribution:

  • Anchor Stores: These stores, typically grocery stores and big-box retailers, drive a significant amount of traffic to Kimco’s centers and are considered crucial for the company’s performance.
  • Small Shops: These are smaller, frequently local, businesses that benefit from the traffic generated by the larger anchor tenants. They contribute a significant portion of the company’s overall revenue.
  • Other Income: Other sources include lease terminations, management and development fees, reimbursements, and other miscellaneous income.

Industry Trends:

  • Evolving Retail Landscape: The retail sector is consistently evolving, with trends such as the growth of e-commerce and shifts in consumer preferences. There has been a shift away from malls and towards open-air shopping centers
  • Necessity-Based Retail: Centers anchored by grocery stores are generally more resilient than other retail types, because people have to buy essential products in recession or other adverse scenarios.
  • Mixed-Use Developments: Mixed-use properties, combining retail with apartments or other businesses, are gaining popularity because they can diversify income streams and cater to a variety of demands.
  • Evolving consumer preference: Customers are increasingly focused on local brands and experiences, making smaller retailers a strong and more resilient tenant base.

Competitive Landscape:

  • The competition is fragmented, with several large REITs and smaller private owners focusing on specific niches or geographic regions.
  • Competition includes other retail REITs, private real estate owners, and individual property owners.
  • Local expertise, relationships with local brands, and the ability to create unique experiences can differentiate a company in this space.
  • Barriers to entry can be high due to regulatory rules and high capital needed, but there are also many small independent players.

What Makes Kimco Different?

  • Focus on essential tenants: Kimco mainly focuses on locations that are anchored by tenants that are essential for day-to-day life, which makes its tenant base more resilient than others.
  • Scale and diversification: As North America’s largest publicly traded owner of open air shopping centers, they have significant scale and a widely diversified portfolio, making the returns more secure.
  • Focus on long-term relationships with high quality tenants, with longer-term leases which also increases visibility and predictability of cash flows.
  • Active portfolio management: Kimco is actively engaged in optimizing its portfolio, acquiring properties where the economics are strong and selling them where they are not.

Financials

Kimco’s revenue streams are diversified across various lease types, leading to a resilient revenue stream.

Kimco’s occupancy levels have remained high, showing the strength of its properties, even in economic headwinds.

Recent Financial Performance:

  • Revenue: Revenues have consistently grown with organic growth combined with acquisitions and redevelopment of properties
  • Occupancy rate: the occupancy rate is maintained over 95%, a testament of strong demand for their properties.
  • EBITDA margins: EBITDA margins are consistently growing, as higher leasing rates, occupancy and lower expenses more than offset any increases in expenses due to increased inflation
  • Cash flows: Free cash flow grew considerably in the recent years, as the growth in revenue and higher operating margins have lead to a huge boost in cash flow from operations.
  • Debt profile: The company has a considerable amount of debt with a staggered maturity profile. Much of their debt is secured by fixed interest, which insulates the company from increases in interest rates to some extent.
  • Debt ratings: They enjoy a BBB rating from S&P and Baa2 rating from Moody’s, representing investment grade debt profile.

Latest Highlights:

As per the most recent earnings call, the company’s average rent increases were higher than expected.

A growing trend in their properties is having a higher amount of restaurants and non-retail businesses.

The management remains bullish about the company’s long-term prospects in this space.

They are seeing increasing demand for open air shopping centers.

The company is seeing opportunities to create value through acquisitions and redevelopment.

They mentioned that the company’s balance sheet is in strong condition, implying financial stability.

The management noted that they are not seeing any kind of financial stress with their tenants.

Kimco is reducing the company’s share count via a buyback program.

Areas of concern:

  • Lease renewals: Since the leases expire on a rolling basis, this means there is always a continuous risk of leasing out all properties at an adequate rate.
  • Interest rate risk: While a lot of their debt is fixed, not all of it is. There is still interest rate risk inherent in their balance sheet.
  • Consumer spending power: Lower spending habits and a potential recession can affect their tenant’s ability to remain in business, thus decreasing Kimco’s profitability.

Understandability: 3/5

  • While the business model is relatively straightforward—owning and operating shopping centers—the intricacies of real estate valuation, lease structures, and various economic drivers can make analysis somewhat complex. This leads to some amount of effort being required to fully understand their business model.

Balance Sheet Health: 4/5

  • KIM has a solid financial position with a moderate amount of debt. They have investment grade rating for their bonds, with low probability of default. Cash flows are growing at a reasonable pace. All these factors point to an overall healthy balance sheet.

Moat Assessment

While Kimco does have a competitive advantage, it cannot be called a ‘wide’ moat.

  • Limited Scale Advantage: While they are the biggest player in this space, their size does not significantly impact their competitive advantage.
  • Location Advantage: They benefit from prime location in areas with high foot traffic, but other companies can also replicate this strategy or build properties in similar locations.
  • Reputation and Relationship with tenants: Strong and long lasting relationships with their tenants is one of the biggest drivers of the company’s moat, but this is not enough for them to be termed a wide moat company, but they have significant staying power in the industry.
  • Network effects and switching costs: There are none of these present in their business.
  • Intangible assets: The brand is good, but it is not that strong when compared to other industries, for example, a brand in consumer packaged goods.
  • They have some advantages such as prime locations, long-standing business relationships, and ability to tap capital markets, but these do not make their moat wide. They operate in a space where barriers to entry for new competitors are not very high. As such the moat is more of a “narrow” moat rather than “wide”.

Moat Rating: 3/5

Risks to the Moat and Business Resilience:

  • Economic Downturn: A significant downturn or recession can lead to lower consumer spending, which in turn reduces occupancy and revenue at retail centers.
  • Changes in consumer habits: Changing trends such as increased usage of e-commerce can decrease consumer traffic and demand for physical retail spaces.
  • Tenant issues: If their anchor tenants face issues, it could trickle down to affect the entire business. Bankruptcy of major tenants, or inability to pay rent, can materially affect Kimco’s finances.
  • Interest rate risk: Rising interest rates can put a drag on their profitability by increasing cost of capital.

Business Resilience:

  • Their long standing business and diversified tenant base, makes them resilient to economic and company-specific headwinds.
  • Their portfolio primarily caters to necessary retail businesses, with high foot traffic, which means it is more stable during economic uncertainties.
  • Their ability to redevelop properties in an agile manner, gives them the ability to capture opportunities, and grow revenue and profitability.

Therefore, all these factors combined make it a business that can perform consistently well for years to come.