Shares of Kimco (NYSE:KIM) have had a difficult twelve months, dropping about 18% of their worth. Since I really helpful shares final October, they’ve returned a disappointing -10%. As I anticipated, the corporate has been elevating its dividend, up from $0.22 to $0.24 with one other penny improve potential within the subsequent two quarters. Nevertheless, the larger-than-expected improve in rates of interest has been a extra significant drag on actual property shares and valuations, outweighing the dividend. Nevertheless, after inspecting its Q3 outcomes, KIM nonetheless is a gorgeous inventory for dividend-oriented buyers, in my opinion.

Within the firm’s third quarter, KIM generated $0.40 of funds from operations (FFO), beating estimates by $0.01. Alongside these outcomes, it tightened full yr steering to $1.56-$1.57 from $1.55-$1.57. Total, the corporate reported sturdy outcomes with same-store internet working earnings of two.6%. Kimco will get about 82% of its hire from grocery-anchored buying facilities, which have held up a lot better than malls, given they’re largely open-air and that grocery buying has confirmed extra resilient to e-commerce traits.

Certainly, grocery websites drive 90bp increased internet working earnings than non-Grocery areas. Throughout the quarter, occupancy stood at 95.5%, down from 95.8% final quarter. That is up 160b from the top 2020 however nonetheless 90bp beneath 2019, as the corporate’s operations have largely, however not completely, returned to regular from COVID disruptions. The rationale occupancy fell sequentially is that the ultimate Mattress Tub & Past leases have been vacated, a 37bp drag within the quarter’s occupancy.

Whereas BBBY’s liquidation has been a headwind for occupancy, I view it as a medium-term optimistic. First, given the corporate’s struggles, Mattress Tub & Past was not driving significant buyer visitors to Kimco’s buying facilities. Bringing in higher shops ought to assist the vibrancy of these facilities and make different models extra leasable. Furthermore, BBBY was paying beneath market hire, given advantages given to it when it was a extra highly effective anchor. Kimco is capturing a 38% unfold on 14 launched Mattress Tub and Past leases; it expects over 20% on the opposite 12. Whereas the present emptiness is lowering income, when these new leases start at increased charges, we must always see a significant increase to income.

With the BBBY points clearing via, I might additionally word that Kimco’s major tenants are high-quality corporations, from House Depot (HD) to Walmart (WMT) and Kroger (KR). I don’t foresee significant giant tenant bankruptcies over the medium time period. Kimco has a well-balanced portfolio with 53% of income coming from anchors and 47% from smaller tenants. Its 91.1% small-shop occupancy is again at a document, one other signal of post-COVID normalization.

New leases are offering a 35% uplift to hire ranges, with the BBBY releasing taking part in a big function on this. Nevertheless, renewals are additionally sturdy with an 8.8% profit as these rents are introduced as much as market ranges. Kimco has about $52 million of potential progress simply from persevering with to carry leases as much as market ranges, a possible $0.07-$0.08 (or 5%) elevate to FFO. Once more, that is simply from step by step bringing rents to the place the market is at present, not needing any additional enchancment. As the brand new leases take impact, hire per sq. foot rose by 1% sequentially to $20.19.

A serious purpose why KIM is seeing sturdy leasing exercise is as a result of the overwhelming consensus on retail actual property has been so adverse. Let me clarify what I imply by that. Costs are set by provide & demand. As a result of there was widespread concern about retail demand over the long-run, few have been prepared to put money into new provide. That lack of provide has saved the market tight as demand has held-in higher than anticipated, notably for grocery-centers, which have a lot totally different fundamentals than giant, enclosed malls. In reality, retail building is now operating at multi-decade low ranges, down over 80% from 2017.

If a retailer desires to develop, it isn’t as if there are many new building websites for it to occupy. It wants to seek out an accessible present web site. That’s the reason they’re paying up for leases with Kimco seeing sturdy demand for the BBBY openings. That is additionally as a result of Kimco operates in high-quality suburbs within the fast-growing Solar Belt and in higher-income enclaves within the Northeast and West Coast, making its areas comparatively engaging.

To extend its Solar Belt penetration, will probably be closing its buy of RPT Realty (RPT) in 2024, which will likely be modestly accretive to FFO/share, bettering the general dividend protection ratio whereas offering extra publicity to fast-growing markets in Florida, like Tampa. Administration additionally expects $34 million of synergies.

Alongside earnings, KIM elevated its quarterly dividend to $0.24 from $0.23, giving shares a 5.7% yield. Over time, administration targets a mid-70’s% payout ratio—it was 79% in Q3. Because it begins getting income from new BBBY tenants it needs to be again in the direction of this goal. It additionally goals to develop 12,000 multifamily models from 9,600 because it builds mixed-used retail/residential facilities, offering a little bit of diversification to earnings. KIM additionally targets 6-6.5x debt-to-EBITDA leverage; it’s at 5.9x at the moment.

Whereas increased charges weigh on actual property valuations and the attractiveness of dividend shares, KIM’s enterprise itself is just not that negatively impacted by increased charges due to the actual fact leverage is a bit beneath its long run goal. Its debt can also be 99.8% fastened price. 50% of its debt matures in 2030 or later, that means the quantity will probably be rolling over at increased charges will solely modestly influence curiosity expense. Lastly, administration is aiming to be self-funding progress tasks as a lot as potential to restrict its have to borrow at elevated charges.

Total, Kimco’s enterprise has carried out in-line with my expectations. Leasing exercise is robust. It’s working via BBBY’s chapter, and we’re seeing strong same-store earnings progress. In reality, it raised its full yr NOI progress steering to 1.75-2.25% from 1-2% beforehand.

Moreover, it has monetized $282 million of its Albertsons’ (ACI) stake. It nonetheless has a remaining 14.2 million share stake value simply over $300 million as of October 27^th. A particular dividend will likely be declared in November to remain inside REIT tax compliance.

When Kimco disposes of the remainder of its Albertsons’ stake, doubtless in 2024, there may be the potential for an extra dividend fee, and people proceeds will assist fund progress tasks, which is why I don’t anticipate it to wish incremental borrowings subsequent yr. That stake is value about $0.50/share.

Kimco is buying and selling at simply 11x FFO. Its property are comparatively immune from retail pressures, given its grocery-centric place. If charges rise one other 100bp, I count on to see all actual property shares underneath strain, as a 5.7% dividend is just not as engaging if the 10-year treasury is at 5.5%. Nevertheless, not like a bond, these dividends can develop over time. Whereas I don’t essentially see charges falling, it appears that evidently a lot of the improve has doubtless occurred. With a 5.7% yield and 3-5% dividend progress prospects, I proceed to love Kimco for income-seeking buyers, and I might be a purchaser right here.