Kimco's Improved Occupancy and Payout Ratio Strengthen Dividend Profile

In the summer of 2020, Kimco Realty took the drastic step of suspending its dividend when the pandemic sent a severe and sudden shock to the REIT's cash flow while engendering an uncertain recovery.

The move seemed prudent at the time for a retail REIT whose tenants mostly require steady foot traffic to generate enough income to pay rent. With many non-essential stores temporarily closed, Kimco's rent collection rate plunged to 60% in April 2020.

However, the economy quickly rebounded, powered by emboldened consumers flush with cash and eager to return some normality to life.

As such, Kimco's grocery-anchored shopping centers, which account for about 80% of rental income, have been well-positioned to benefit from the recovery.

With more of the workforce working from home, consumers now spend more time and money at grocery stores than before the pandemic, even though most restaurants are open for business. In fact, Kimco's traffic now exceeds 2019 levels.

While a growing number of consumers and supermarkets are adopting online grocery services, physical stores still offer last-minute convenience, and many shoppers are resistant to purchasing groceries online. 

The resilient foot traffic in grocery stores has proven to be a boon for nearby retailers, helping Kimco begin improving its occupancy rate the last two quarters while also renting properties out at increasingly higher rates.
Source: Kimco Investor Presentation, November 2021

Improving occupancy and higher rental rates suggest the BBB+ rated Kimco has weathered the worst of the storm and has a promising outlook of stable rental income and growth opportunities.

Given these improvements, coupled with a reinstated dividend and a far more conservative payout ratio, now around 55% compared to the pre-pandemic level of 95%, we are upgrading Kimco's Dividend Safety Score from Borderline Safe to Safe.

We expect Kimco's 545 properties, found primarily in major metropolitan Sun Belt and coastal markets, will continue improving along with the economy, further strengthening dividend coverage.

Additionally, the open-air property owner has a highly diversified tenant base, which reduces the risk of a sudden shock from a struggling tenant or industry.

Specifically, no tenant accounts for more than 4% of total rent, and only ten contribute more than 1%.

Furthermore, around 44% of Kimco's properties are leased to essential retailers, like grocers, home improvement, medical offices, and banks. Complementary retailers, such as sporting goods stores and personal services providers, make up 40%, while restaurants account for the remaining 16%.

Overall, this tenant diversification and more conservative payout ratio have better positioned Kimco to maintain the dividend through future disruptions to the business while also providing a solid base to grow the payout.

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