Kimco Realty Bears: Beware The Potential For M&A

At around a 20 percent discount to net asset value, retail REIT Kimco Realty Corp KIM is certainly not expensive. But the stock may have a difficult time outperforming the market if cash flow estimates are too high.

The Analyst

Baird analyst RJ Milligan downgraded Kimco from Outperform to Neutral and reduced the price target for the REIT from $23 to $20.

The Thesis

Wall Street is overestimating Kimco’s funds from operations for 2018, Milligan said. (See Milligan's track record here.)

Baird has lowered its FFO estimates across the board for retail REITs. Milligan dialed back his FFO projection for Kimco by 7 percent to $1.51. More analysts will likely do the same in coming months, making it difficult for Kimco to beat the market, the analyst said. 

Kimco has roughly $700 million in development projects on its plate in the next two years, and the company plans on funding them via dispositions rather than equity sales, according to Baird. 

“While the asset sales and redeployment of capital into redevelopment should still be accretive (selling at 7.5 percent caps and redeploying into 8-10 percent redevelopment yields), the expected mismatch in timing is weighing on growth in the short term,” Milligan said.

Despite headlines of even more retailer bankruptcies in 2017, Milligan sees an overall strong demand for REITs with top-tier properties. In addition, there has been very little new supply entering the shopping center market, making for a winning long-term combo for investors, he said. 

M&A deals could drive major upside for the entire retail REIT space, even if Kimco is not directly involved in a deal, Milligan said. 

Price Action

Kimco shares traded lower by 3.3 percent on Monday morning.

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