Kimco Realty: I No Longer Recommend This 6.3%-Yielding REIT Based On Valuation

Kimco Realty Corp.'s (KIM) shares have rebounded strongly from the December market rout, and, as a result, I no longer recommend the REIT for new income investors. Though I like the REIT's overall value proposition in terms of portfolio and distribution coverage, the valuation has become a bit stretched lately, which translates into an unattractive risk/reward ratio for income investors. I'd wait for a drop before gobbling up some more shares.

Core Investment Thesis Remains Intact But Valuation Is No Longer Attractive For New Investors

This article serves as a valuation update for a previous recommendation I have made with respect to Kimco Realty Corp.

I last covered Kimco Realty Corp. at the end of December 2018 in my article titled, "Kimco Realty Corporation: Smart DGI Investors Can Still Buy The Drop" in which I recommended the commercial property REIT to high-yield investors at a price of $15. I recommended the commercial property REIT to income investors for four reasons, specifically:

  1. Kimco Realty Corp. had and continues to have strong diversification stats which reduces cash flow and dividend adjustment risks;
  2. While lots of department stores and retailers struggled or went out of business altogether in the last couple of years - think of J.C. Penney (JCP), Sears (SHLD) or Toys 'R' Us - Kimco Realty Corp.’s lease portfolio actually held up quite well. Kimco Realty Corp. was, in fact, only marginally affected by store closures in the retail industry;
  3. Kimco Realty Corp. has a conservative AFFO payout ratio which suggests that the dividend is quite safe and that management has plenty of room left to grow its dividend payout going forward;
  4. Valuation: Kimco Realty Corp.'s shares were exceptionally attractive in December, from a valuation point of view, when investors’ risk appetite dropped due to growing fears over an economic slowdown, further interest rate hikes in 2019, and an unresolved trade stalemate between the United States and China.

While the first three reasons of my original investment thesis are still intact, Kimco Realty Corp.’s valuation and risk/reward ratio today are no longer as attractive as they were at the end of December.

Valuation Concerns

When I last covered Kimco Realty Corp. just six weeks ago, the commercial property REIT’s shares changed hands for $15.00, or 10.4x run-rate adjusted funds from operations. Since my last article on KIM was published, however, the REIT's share price has risen a whopping ~19 percent, and investors today pay ~12.7x run-rate AFFO.

A major re-rating of the commercial property REIT has taken place in the last six weeks, and an entry at this point exposes investors to considerable downside risks, in my opinion. This is particularly true when realizing that Kimco Realty Corp.’s shares are currently overbought again based on the Relative Strength Index, or RSI.

See for yourself.

Source: StockCharts

Risk Factors Investors Need To Consider

I currently see two major risk factors for Kimco Realty Corp.:

  • After such a strong run-up in price in less than two months, KIM is vulnerable to profit-taking;
  • A U.S. recession could put pressure on Kimco Realty Corp.’s rental and cash flow growth which in turn could trigger a deterioration in the REIT’s distribution coverage.

Your Takeaway

I am holding on to my shares in Kimco Realty Corp. because I locked in a lower cost basis, but I don’t recommend new investors to invest in the commercial property REIT anymore, at least not at today's rather stretched valuation. While the core investment thesis remains largely intact (strong portfolio, high diversification, strong distribution coverage with room for dividend growth), the valuation is just no longer appealing. In addition, the rate of price appreciation we have seen in the last six weeks is not sustainable, and shares are now widely overbought. I'd consider buying KIM again at the $15 price level.

Disclosure: I am/we are long KIM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.