Kimco Realty (KIM) Dividend Cut

Kimco Realty Corporation (KIM) is real estate investment trust or REIT that focuses on commercial estate. The stock is a popular one as seen by the roughly 23,900 followers on Seeking Alpha since it had a decent dividend yield. But Kimco is another REIT that had to temporarily suspend its dividend due to the adverse effect of the coronavirus pandemic on retail. Most commercial retail REITs are struggling due to lower rent collections. Kimco Realty is no exception and rent collections were well below normal when the pandemic took hold across the U.S. Local governments closed many retail stores or at least restricted their operations. The REIT first temporarily suspended the dividend helping to preserve liquidity and strengthen the balance sheet. Kimco Realty recently reinstated the dividend but at a lower level than before the pandemic, which is effectively a dividend cut.

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Overview of Kimco Realty

Kimco Realty is one of the oldest REITs and traces its history back to 1958. The REIT conducted an IPO in 1991. The REIT focuses on grocery-anchored shopping centers and mixed-use assets in major metropolitan areas. The shopping centers are generally open-air ones. At end of the second quarter 2020, Kimco Realty owned about 400 U.S. shopping centers at 329 sites with over 70 million square feet of leasable space. The properties now tend to be located on the coasts after undergoing a significant portfolio transformation over the past decade. 

Many of its retail properties are anchored by retailers such as Walmart (WMT), Costco Wholesale (COST), Whole Foods, Target (TGT), Albertsons, and CVS Health (CVS) that are over 10,000 square feet. Small and mid-size stores occupy other space. Kimco’s tenants are categorized as 43% essential retail, 43% other retail, and 14% restaurants. The higher exposure to grocery stores, pharmacies, banks, pet stores, and other essentials provided some degree of protection from the negative impact of local government closures and restrictions.

What is a Real Estate Investment Trust Anyway?

A real estate investment trust or ‘REIT’ is a corporation that owns, operates, or finances income-generating real estate. A REIT’s stock is usually publicly traded on stock exchanges. So, in this way, small investors are able to invest in the commercial real estate market without having large amounts of their own capital.

To qualify as a REIT, a company must own real estate that generates income and is distributed to shareholders. Specifically, according to Investopedia, a REIT must

• Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
• Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
• Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
• Be an entity that’s taxable as a corporation
• Be managed by a board of directors or trustees
• Have at least 100 shareholders after its first year of existence 
• Have no more than 50% of its shares held by five or fewer individuals

Details on the Dividend Suspension by Kimco Realty

Kimco Realty first suspended its dividend fairly early in the pandemic when reporting Q1 2020 results. The specific statement from the REIT was 

“As a result of COVID-19 and the future economic uncertainties, the company’s Board of Directors has temporarily suspended the dividend on its common shares. Kimco’s Board of Directors will continue to monitor the company’s financial performance and economic outlook on a monthly basis and, at a later date, intends to reinstate the common dividend during 2020 of at least the amount required to maintain compliance with its REIT taxable income distribution requirements.”

Overall the suspension was not surprising considering the magnitude of the impact on retailers and their landlords. For instance, in the case of Kimco Realty, 89% of essential retail stores were open, 16% of other retail stores were open, and 77% of restaurants were open. For Kimco the average was 56% across its properties. Further, of all its tenants Kimco Realty only collected 68% of rent in April, deferring 22%, and not collecting 10%. Obviously, these numbers are likely much worse than Kimco Realty ever expected or planned for. In any case, they are not sustainable.

Details on the Dividend Cut by Kimco Realty

The statistics related to store closures and rent collections have improved since April and May, which are likely the bottom for 2020. Today, most tenants in the three categories are open but not all.

From the perspective of rent collections, you can see in the chart below that May was pretty much the same as April for Kimco Realty. But June showed a significant improvement with rent collections going up to 76% and deferrals down to 11%. Of concern is that uncollected rent is up from April and still running about 12% to 13% of its portfolio. This is not a small percentage and does not bode well for occupancy rates in 2021. The issue really is that some retailers and restaurants are still operating at a pretty low level in many states and cities.

This improvement permitted Kimco Realty to recently reinstate its quarterly dividend but at a lower rate that effectively made it a -64.3% cut. The new regular quarterly cash dividend is now $0.10 per share. The quarterly cash dividend was $0.28 per share before the pandemic. The specific statement from the REIT was

Kimco Realty Corp. (NYSE: KIM), one of North America’s largest publicly traded owners and operators of open-air, grocery-anchored shopping centers and mixed-use assets, today announced that its Board of Directors declared a quarterly cash dividend of $0.10 per common share, payable on September 24, 2020 to shareholders of record on September 10, 2020.

And

In light of the company’s financial performance, including the improving level of rent collections, excellent liquidity position and the recent affirmation of our investment grade credit rating, this dividend declaration reflects the Board’s confidence in the strength and quality of our portfolio and its ability to provide successful last mile fulfillment opportunities for our tenants and shoppers,” stated Conor Flynn, Kimco’s Chief Executive Officer. “Declaring our dividend at this initial level accounts for the dividends already paid in 2020 and reflects continued focus on maintaining a strong balance sheet and financial flexibility. The Board will continue to monitor Kimco’s financial performance and intends to declare additional dividends on common shares in 2020, as needed, of at least the minimum amount required to maintain compliance with Kimco’s REIT taxable income distribution requirements. We expect to establish a more normalized and well-covered dividend level based on our adjusted funds from operations and REIT taxable income in 2021.

Final Thoughts on the Dividend Cut by Kimco Realty

It is not really clear when Kimco Realty will return its dividend to the prior payout. Although operating metrics are improving, they are not normal. It will likely take a few years for that to happen. Yes, the rebound was initially sharp but that was driven by pent up demand and the large federal stimulus. With the effects of both fading, retail sales will likely stabilize at a lower level. Additionally, many non-essential retailers and restaurants are still operating with restrictions.

For comparison, Kimco did cut the dividend in 2009 during the Great Recession. Afterwards, the REIT started to raise the dividend again but it did not ever return to its high before the Great Recession. Today, COVID-19 combined with the transition to more on-line sales may put downward pressure on occupancy rates and rental rates. In turn, this will keep a lid on the dividend in my opinion.

Related Articles on Dividend Power

• Federal Realty (FRT): A Dividend King REIT
• Foot Locker (FL) Dividend Cut

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