With the economy potentially headed for a recession, income investors should take a good look at their holdings, particularly in the real estate investment trust (REIT) sector. REITs typically offer great yields, but they also use a lot of debt, which can be problematic if the economy enters a recession.
Kimco Realty (KIM -3.37%) It’s one of the more defensive REITs, and should be able to increase its dividend even if the economy stumbles.
Kimco Realty focuses on open-air supermarket-anchored shopping centers and mixed-use assets. The company owns 526 properties with a gross leasable area of 91 million square feet.
It is mainly concentrated in large urban coastal markets. Kimco has a relatively diverse tenant base, with only 10 tenants accounting for more than 1% of base rent. The company’s largest tenant includes TJX (TJX 1.14%) (parent of discount clothing chains TJ Maxx and Marshalls, among others), Home Depot (HD HD 0.89%)And the amazon (AMZN 2.87%) Helpful Whole Foods.
Kimco’s business model will outperform even in a recession
Kimco’s tenant base is defensive in that supermarkets are largely sensitive to the overall economy. Even if the economy slows down, people still buy food. Discount clothing retailers also benefit from a weak economy. Home improvements are also relatively defensive, especially as housing affordability declines and many homeowners may choose to rebuild rather than move.
There are several tailwinds
A few big macro stories also benefit the company. Brick-and-mortar retailers are no longer at a disadvantage compared to e-commerce; The omnichannel retail model captures the best of both worlds. Last-mile delivery logistics are expensive, and consumers increasingly shop online and pick up in stores. Retailers also like it because it saves on shipping.
Kimco says retail construction has become a shadow of its former self since the Great Recession. As a percentage of total stock, new supply represents only 0.4% of existing stock. It is the lowest among all sectors. Limited supply means commercial REITs like Kimco have more pricing power.
Lack of available space means pricing power
This pricing power is translating into an occupancy rate that is approaching pre-pandemic levels. Occupancy stood at 95.3% in the third quarter of 2022, compared to 96% in the first quarter of 2020. Kimco had an all-time record of 96.4% in the fourth quarter of 2019, so the company has almost fully recovered from the pandemic-related issues that hit nearly every REIT out there.
The leasing spread (the price difference between the old lease and the new lease) was 16.5% in the third quarter, a big improvement from a year ago and the early days of the pandemic. In a third-quarter earnings conference call in October, Chief Executive Officer Connor Flynn said its “strong credit tenants are finding it difficult to meet their new-store opening targets and are aggressively pursuing opportunities.”
Dividends are well covered
For 2022, Kimco forecasts that funds from operations (FFO) per share will come in between $1.57 and $1.59. REITs like Kimco typically use FFO to describe their earnings. This is because net income reported under generally accepted accounting principles understates the company’s cash flow. The reason is depreciation and amortization, which is a cash charge. Almost all REITs, except mortgage REITs, use this metric.
Based on Kimco’s FFO forecast, the stock trades at a price-to-FFO ratio of about 13, which is a reasonable multiple. The company raised its dividend three times to $0.92 annually through 2022, which is covered by the company’s forecast FFO per share.
The payout ratio, which is annual dividends divided by earnings (here we’re using FFO per share) is only 58%, which is on the low side for a REIT. The company has plenty of room to grow the dividend.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Brent Nyitray, CFA has no position in the said stock. The Motley Fool has positions on and recommends Amazon.com and Home Depot The Motley Fool recommends Tjx Companies. Motley Fool has a revealing policy.