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Morningstar | Kimco 2Q Results Benefit From Toys 'R' Us; Disposition Progress Ahead of Schedule

Kimco Realty posted strong second-quarter results. Excluding the nonrecurring impact of the extra cash rent received from 22 closed or closing Toys 'R' Us stores Kimco performed in line with our estimates, which leads us to reaffirm our $14.60 fair value estimate and no-moat rating. Anchor occupancy was up 60 basis points year over year to 98.1% and small-shop occupancy was up 50 basis points to reach an all-time high of 90.2% for the company. Same-store net operating income growth was up 3.9% for the quarter, though NOI benefited by approximately 80 basis points of the slow unwind of Toys 'R' Us. Removing this impact brings NOI in line with our estimate of 3.0% growth for the portfolio. However, a combination of stronger-than-expected leasing along with continued rents from Toys 'R' Us gave Kimco's management confidence to raise same-store NOI growth guidance by 50 basis points to a new range of 2.0%-2.5% with management saying on their call that they think the high end is more likely, which is closer to our forecast for the year.

Funds from operation as adjusted were down a penny year-over-year to $0.37, below our estimate for the quarter. However, the reason for the drop and the miss was due to the company executing on their 2018 disposition plan quicker than they had previously anticipated. The company sold 17 shopping centers in the quarter for $317 million at an average 7.5% cap rate, bringing its total dispositions for the year up to $532 million. We commend the company for choosing to sell noncore assets to improve the portfolio's average quality and focus on 20 high-growth markets. Management did not change disposition guidance, though with $49 million sold subsequent to quarter-end and with $200 million currently under contract they are nearly at the midpoint of the $700 million-$900 million disposition range given for 2018. Kimco may top $1 billion for assets sold in 2018 as it looks to have its portfolio strategically repositioned by 2020.

We will be watching to see how Kimco's same-store NOI growth trends in the back half of 2018. While the company has had same-store NOI growth of 3.2% in the first half, even using the midpoint of management's current 2018 guidance of 2.25% would imply that second-half same-store NOI growth will be 1.3%. The company pointed out that it received a $1.5 million rent refund in the third quarter of 2017 that is nonrecurring and will create a tough comp for next quarter, but we estimate that will only be a 70 basis points impact. If there is no Toys 'R' Us cash rent collected, then that accounts for another 80 basis points difference for a total of explained slowdown in same-store NOI growth from the first to second half of the year. The midpoint would suggest that the rest of the portfolio may see some further slowdown, but we agree with management that the high-end is more likely and that there may be further upside to growth in the portfolio this year. While the portfolio's leased occupancy is at 96.1%, near an all-time high for the company, the economic occupancy (defined as tenants leased and paying cash rent) is only 93.0%. Given that the company has successfully leased seven of the 22 Toys 'R' Us boxes and is making progress on the others, this spread between leased occupancy and economic occupancy is likely to grow over the next few quarters. However, given that the company has executed newly signed leases at an average 21.2% spread over the past four quarters we believe that there could be significant growth baked into the portfolio as tenants start occupying their spaces and the spread between leased and economic occupancy starts to close. This could lead to same-store NOI growth outperforming the growth management is implying for the second half and could set-up 2019 to be another solid year.