Kimco Realty: This REIT Could Soar In 2022 (NYSE:KIM)

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Mall REITs are making a strong comeback, and Kimco Realty (KIM) stock is expected to rise further in 2022. Kimco Realty is my favorite mall REIT investment right now, with Covid-19 and lockdowns hopefully less of an issue for real estate investment trusts this year. The company’s dividend will most likely be increased in 2022, and the stock’s valuation has room to rise.

Kimco Realty: A Bet On A Broad Economic Recovery

When the Covid-19 pandemic hit the world in 2020, Kimco Realty’s business took a direct hit. While 2020 and, to a lesser extent, 2021 were challenging years for the retail and shopping center industries, 2022 may see a return to business and funds from operations growth.

When the pandemic struck nearly two years ago, mall traffic and shopping excursions sharply declined. Kimco Realty’s net operating income started to drop as a result of this dramatic and unexpected shift in consumer behavior.

Analysts use net operating income to assess the financial performance of residential and commercial properties. Net operating income is calculated by subtracting operating and maintenance expenses from rental revenues to determine how much money landlords make after deducting their expenses. Kimco Realty’s net operating income fell significantly during the pandemic, causing the REIT’s stock to plummet. As retailers struggled to make sales, Kimco Realty was forced to make rent concessions, which had a negative impact on the business.

However, Kimco Realty’s net operating income rebounded sharply in 2Q21, indicating that the negative pandemic effects have begun to fade. The REIT’s net operating income increased 16.7% YoY in 2Q21, with a further 12.1% increase in the third quarter.

KIMCO - Net Operating Income

Source: Kimco Realty REIT

While Kimco Realty isn’t completely out of the woods yet, and there are still concerns about the spread of the Omicron variant, the mall industry is likely to have a much brighter future after two consecutive quarters of strong net operating income growth.

To be fair, Kimco Realty did an excellent job of defending its business during the pandemic. Kimco Realty’s shopping center portfolio’s occupancy rate fell for five consecutive quarters before rebounding in 2Q21, but the rate never fell to the point where the REIT faced an existential crisis. Kimco Realty’s occupancy rate began to improve in the same quarter that the REIT’s net operating income growth resumed. With two consecutive quarters of QoQ occupancy increases, the company may be able to expand further in 2022.

KIMCO - Occupancy

Source: Kimco Realty REIT

Kimco Realty’s portfolio is built around grocery-focused anchor tenants, which helped it survive the pandemic. Stores in the essential category (medical supplies, home appliances, banking services) are subject to relatively stable demand patterns, regardless of whether or not a pandemic disrupts the broader shopping world. Kimco Realty’s mall portfolio has been stabilized by its focus on grocery-anchored shopping centers, which provided approximately 80% of annual rents during a period of extreme anxiety in the mall REIT sector.

KIMCO - ABR by Category

Source: Kimco Realty REIT

Kimco Realty Faces One Significant Risk

Infections with Omicron variant are on the rise. If the Omicron variant proves to be more lethal than medical professionals and scientists anticipate, the economy and the shopping center industry may face new challenges. While the likelihood of this occurring is low, it is a risk for the shopping center industry in general and Kimco Realty in particular.

Recovering FFO And Low Pay-Out Ratio

Kimco Realty’s funds from operations are solidly positive and have improved as the REIT’s net operating income has recovered. Kimco Realty’s quarterly FFO income was $0.32 per share or higher in FY 2021, far exceeding the dividend amount. The pay-out ratio is around 50%, implying that the REIT could afford to raise the dividend, which is currently $0.17.

KIMCO - Author Summary

Source: Author Creation Using Company Financials

At the start of the pandemic, Kimco Realty cut its dividend. Prior to the pandemic, the REIT paid a quarterly dividend of $0.28 per share. Since the dividend is now $0.17 per share, the payout is 40% lower than it was before the dividend cut.

Data by YCharts

Kimco’s Valuation Can Grow

An economic recovery and a rebound in the mall REIT sector provide opportunities to increase Kimco Realty’s valuation, particularly if Kimco Realty’s management decides to raise the dividend. The REIT expects funds from operations to be $1.36-$1.37 per share in 2021, representing a 17% YoY increase in the key cash flow growth rate. FFO may increase by 10% in 2022, implying that Kimco Realty could generate FFO of $1.50 per share. Kimco Realty’s FFO-multiple is 18.5 (2021) and 16.8 (2022).

KIMCO - 2021 Guidance and Assumptions

Source: Kimco Realty REIT

My Conclusion

Kimco Realty’s dividend was reduced last year. With the REIT’s net operating income, occupancy rates, and funds from operations recovering, 2022 could be a year of business expansion. Kimco Realty may also want to make up for the dividend cut last year by increasing its dividend significantly in 2022. Kimco Realty can easily do this based on its 50% pay-out ratio.