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Morningstar | Higher Occupancies but Lower Re-Leasing Spreads Lead to Mixed 4Q for Kimco Realty

While there were some bright spots in Kimco Realty's fourth-quarter results, Kimco missed our estimates for the quarter. However, management's guidance for 2019 is in line with our outlook, so we do not currently foresee changing our $17.70 fair value estimate for the no-moat company. Anchor occupancy slipped a little this quarter to 97.4%, but small-shop occupancy set an all-time high for the second quarter in a row at 91.1%, leading to Kimco reporting 95.8% total occupancy for the fourth quarter and beating our estimate by 60 basis points. However, total re-leasing spreads were only up 7.0%, the lowest spread for a quarter in nearly five years and well below our estimate. As a result, minimum rent only increased 2.6% and with other income falling 12% same-store revenue only rose 1.9%. Same-store expenses actually fell 0.2%, so net operating income was up 2.6% for the quarter and margins went up 50 basis points. Kimco reported adjusted funds from operations of $0.35, 4 cents below our estimate in part due to the lower re-leasing spreads and other income but also because it saw more dispositions in the quarter than we expected. The company is projecting that same-store NOI for 2019 will come in between 1.5% and 2.5%, with our 1.9% estimate near the midpoint, and 2019 Adjusted FFO will be between $1.44 and $1.48, which would put our estimate near the high end after adjusting our estimate for the new accounting rules for 2019. While the lower re-leasing spread is disappointing and may be a sign of spreads falling faster than we anticipated, the higher occupancy is a positive and sets up Kimco for solid results in 2019.

Kimco has nearly completed its eight-year disposition program, having sold over $8 billion in assets since 2010. In 2018, the company sold $856 million from its consolidated portfolio and $214 million from its unconsolidated portfolio for over $1 billion in total assets sold in 2018. Kimco sold mainly lower-quality, noncore assets, which is why the assets were sold at an average cap rate of 7.6% compared with our 6.5% nominal cap rate assumption for the company. We applaud the company's efforts to reposition itself, which can be seen from several improved metrics. While total number of properties are down 11% since last year and 53% since 2011, gross leasable area is down a smaller 9% since 2017 and 29% since 2011, showing that it has been favoring larger properties. Additionally, average base rent per square foot is up 6% since 2017 and 37% from 2011, significantly higher than increases from just contractual rent bumps, which shows that it has been improving the average quality through dispositions. Demand for some of Kimco's grocery-anchored properties has increased recently, allowing it to selectively dispose of assets in the fourth quarter and into the first quarter of 2019 at 5% cap rates. Going forward, Kimco only plans to sell noncore assets to cover the portion of its development pipeline that its free-cash flow cannot. Management expects to do $275 million to $350 million in development this year, which we think is very reasonable volume and think can be done at 7.5% yields. Therefore, we think Kimco's disposition program not only improves portfolio quality but is accretive to cashflows and shareholder value.