When an investor decides to buy a real estate investment trust (REIT), they are not just buying a real estate company. In essence, they are also buying the large block of tenants that comprise the leasing portfolio that makes up the REIT.
So before you decide to buy any REIT, consider the makeup and solvency of the vast majority of its tenant base. Ask yourself these questions: Are there any tenants who are facing bankruptcy or closing a large number of stores? Are the tenants high quality? Are the tenants diversified — not only geographically but also by industry? Does each tenant account for a small percentage of the total tenant portfolio?
Take a look at one well-known retail REIT, and consider the questions raised above in evaluating its merits:
Kimco Realty Corp. KIM is a Jericho, New York-based retail REIT that owns and operates 532 open-air, grocery store-anchored and nonanchored properties with 91 million square feet of leasable space as well as ground leases. Kimco Realty was founded in 1958, is a member of the S&P 500 and has been publicly traded on the New York Stock Exchange (NYSE) since 1991.
Kimco Realty’s lease terms run the gamut from less than five years to 30 years or longer. Its properties have over 5,000 different tenants, only 10 of which have annual base rent (ABR) exposure of over 1%. Tenant diversity is a positive for Kimco Realty.
Geographic diversity is also a plus for a REIT, as it helps to mitigate the risks involved against declining growth, pandemics or natural disasters, which enhances potential returns for the company.
As you can see from the map below, Kimco Realty’s portfolio is well-diversified by geographic regions. Although 84% of its properties are in coastal and Sun Belt markets, they are spread out across the country.
Kimco Realty is a reputable, long-standing successful REIT. If you are thinking of buying Kimco Realty, here are the 10 largest tenants that you would be adding to your portfolio:
- TJX Cos. Inc.
- The Home Depot Inc.
- Albertsons Cos. Inc.
- Ross Stores Inc.
- Amazon.com Inc. and Whole Foods Market
- Ahold Delhaize
- The Kroger Co.
- Walmart Inc.
The chart below shows the percentage of the total ABR for each tenant:
TJX Cos. Inc. TJX is Kimco Realty’s largest tenant with 3.7% of its ABR. TJ Maxx is a successful clothing retailer with a 47-year history. Since 1995, the average annual total return on its stock has been 20.8%.
The Home Depot Inc. HD is Kimco Realty’s second-largest tenant with 2.1% of its ABR. Home Depot is the largest home improvement retailer in the U.S. and one of the most successful companies in America over the last 45 years. Going back to 1995, it has an average annual total return of 13.8%. Both Home Depot and TJ Maxx have A/A2 ratings by S&P/Moody’s. Amazon.com Inc. and Walmart Inc., two other top 10 tenants in Kimco Realty’s portfolio, also have very high ratings.
Other well-known large companies such as Staples Inc., Dick’s Sporting Goods Inc., Marshalls, Macy’s, Hobby Lobby Stores Inc., Lowe’s Cos. Inc., Target Corp., Best Buy Co. Inc., Dollar Tree Inc., Planet Fitness and Advanced Auto Parts Inc. make up smaller percentages of Kimco Realty’s tenant portfolio.
On Feb. 9, Kimco Realty reported its fourth-quarter operating results, which were mixed. Funds from operations (FFO) for the full year of 2022 exceeded full-year 2021 results by 14%, but the fourth-quarter FFO of $0.38 was below the fourth quarter of 2021 by a penny. Revenue of $439.83 million was 3.5% ahead of revenue of $424.65 million in the year-ago quarter.
Occupancy levels were up 130 basis points year over year and 40 basis points pro rata to 95.7% for the fourth quarter. This was also an increase from 95.3% in the third quarter of 2022 and was the highest occupancy level since the first quarter of 2020, just before the COVID-19 pandemic.
Rent per square foot increased to $19.66 from $19.12 in the fourth quarter of 2021, and lease spreads — the difference between expiring lease rent and new lease rent — were 30.4%, which is a huge increase. Kimco Realty leased approximately 11.5 million square feet, its highest total ever. Several new grocery leases were initiated with Whole Foods and Albertsons Cos. Inc., Kimco Realty’s third-largest tenant that is merging with Kroger Co. pending final regulatory approval.
Kimco Realty also notes on its website that retailers such as Dollar General, Starbucks Corp., McDonald’s Corp., JP Morgan Chase & Co., Five Below Inc. and others have plans for opening more stores in open-air formats this year.
But for all of the strength in its tenant base, there is still one well-known tenant, Bed Bath & Beyond Inc., that has had its share of financial problems recently. Bed Bath & Beyond leases 25 stores from Kimco Realty and it has announced it will be closing six of those stores. Kimco Realty’s management does not seem too concerned.
During the recent fourth-quarter earnings call, CEO Conor Flynn said that Kimco Realty already has two of the six store leases executed for those properties, two that are ready for execution and two that are still being negotiated.
Party City Holdco Inc. is another small tenant that recently announced it will declare Chapter 11 bankruptcy. But Party City only has about 12,000 square feet of leased space.
Although the proposed Albertsons-Kroger merger was a windfall for Kimco Realty, which owns 28.3 million shares in Albertsons stock, the regulatory approval could be conditional upon the sale or spinoff of hundreds of grocery stores. That could be a negative for earnings.
But where Kimco Realty could potentially have a bigger problem is from the 46% of ABR that it derives from small-shop tenants (defined as less than 10,000 square feet of space). These tenants include restaurants, medical and fitness centers and personal services and are more likely to suffer financial hardships in a recession than grocery anchor stores or big box stores like Home Depot, Lowe’s and Walmart.
Some Federal Reserve officials such as Esther George have expressed hopes in 2023 that an economic soft landing is still possible. But given the inflation surprises to the upside that roiled the markets in February and recent hawkish talk of further 50 basis-point Federal Reserve rate hikes, is a soft landing still possible?
It’s the smaller shops in the grocery-anchored open-air strip malls that suffer the most during recessions. When people are laid off and assets decline, the reduced “wealth effect” often leads to consumers cutting back on eating out or getting their hair styled, massages or nails polished less often. Consumers start drinking coffee at home rather than stopping at Starbucks.
Many of Kimco Realty’s small-shop tenants are companies not likely to terminate leases even in a recession. These include JPMorgan Chase & Co, Bank of America Corp., T-Mobile, AT&T Inc., Wells Fargo & Co., Verizon Communications Inc., Dollar Tree, McDonald’s and UPS.
These are the top 50 Small Shop Kimco Realty Tenants, listed by pro-rata ABR%:
Kimco Realty still has enough smaller businesses under lease that could be impacted by a hard-landing recession that defaults by those tenants could diminish Kimco Realty’s revenue and FFO numbers later in 2023 and possibly into 2024.
This much is known about Kimco Realty: Its top tier tenants are well-diversified, high quality and quite recession-proof. But smaller percentage tenants such as Bed, Bath & Beyond are already closing stores and could be followed by the smaller mom-and-pop businesses if continued inflation and Fed rate hikes lead to a hard landing recession.
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