Kimco Realty Stock Upside Hinges On Recovery In Brick-And-Mortar Retail

We believe that Kimco Realty stock (NYSE: KIM) has an upside potential of 60% in 1-2 years once the consumer demand improves and the brick-and-mortar retail sales recovers to the pre-Covid levels. KIM trades at $11 currently and it has lost 47% in value year-to-date. It traded at a pre-Covid high of $19 in February and is 41% below that level now. Also, KIM stock has gained 17% from the lows of $9 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market recover to a large extent. The stock is lagging the broader markets by a huge margin (S&P 500 is up about 50% from the March lows), as investors are cautious about the drop in brick-and-mortar retail and its impact on REITs (Real Estate Investment Trust) like Kimco Realty. 

The company owns and operates open-air, grocery-anchored shopping centers, and mixed-use assets. Due to the recent crisis, brick and mortar retail has suffered the most. This is also evident from a drop in KIM’s same-property net operating income in Q2 (-13.6% y-o-y). However, easing of lockdown restrictions and improvement in consumer spending is likely to improve its revenue prospects in the near term. Further, the company holds a portfolio of 400 properties (70 million square feet of gross leasable space) in the U.S, concentrated in the country’s largest metro areas. This is likely to ensure a high demand for its properties. In view of the meager rise in KIM stock since late March, we believe that the stock has room for growth in the near future provided there is no sudden uptick in the Covid-19 cases leading to further lockdown restrictions. Our conclusion is based on our detailed analysis of Kimco Realty’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 51% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how KIM and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

Kimco Realty vs S&P 500 Performance Over 2007-08 Financial Crisis

KIM stock declined from levels of around $46 in October 2007 (the pre-crisis peak) to roughly $9 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 81% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.

However, KIM recovered strongly post the 2008 crisis to about $14 in early 2010 – rising by 53% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

Kimco Realty’ Fundamentals in Recent Years Look Strong

Kimco Realty revenues have hovered around the $1.2 billion mark over 2015-2019. However, the company’s adjusted net income decreased from $831 million to $340 million over the same period, mainly driven by an increase in equity in income of joint ventures primarily from gains on the sale of Canadian assets in 2015. The company’s Q2 2020 revenues were 16% below the year-ago period, however, its EPS figure increased from $0.20 to $0.71 due to gain on marketable securities in Q2.

Does Kimco Realty Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Kimco Realty’s total debt increased from $5.1 billion in 2016 to $5.4 billion at the end of Q2 2020, while its total cash increased from $142.5 million to around $201.7 million over the same period. The company generated around $237.5 million in cash from its operations in the first half of 2020, and it appears to be in a good position to weather the crisis.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $18 (60% upside) once economic conditions begin to show signs of improving. This marks a partial recovery to the $19 level Kimco Realty’ stock was at before the coronavirus outbreak gained global momentum.

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