Kimco Realty Corp (NYSE:KIM) and Macerich Co (NYSE:MAC) are retail real estate investment trusts (REITs) specializing in shopping centers. REITs buy, sell, lease, and manage buildings for profit. Companies functioning as REITs must distribute 90% of their taxable income to shareholders in the form of dividends.
Due to the fact that they give out so much money as dividends (thereby hampering their growth, as that money could otherwise be used to invest further in the company), I usually treat REITs as income investments. Kimco Realty Corp (NYSE:KIM) and Macerich Co (NYSE:MAC), however, have some great growth opportunities over the next few years.
A quick note on methodology
In this article, I avoid comparisons with Simon Property Group, Inc (NYSE:SPG) and General Growth Properties Inc (NYSE:GGP), which primarily or exclusively own and operate mall properties. In my opinion, malls and shopping centers are different retail property types (for example, shopping centers often have grocery stores as anchors, while malls rarely do), so I worked to avoid lumping them together.
Kimco Realty Corp (NYSE:KIM) is making good portfolio re-positioning decisions right now. It recently acquired a partner’s stake in 70 high-performing shopping centers (with 96% occupancy), while management also divested from several properties in Mexico. Kimco’s Mexican portfolio under-performed in terms of both income and occupancy compared to the American and Canadian portfolios, so I view this divestiture as a good move.
Management’s new investment strategy is to purchase and consolidate ownership in large, stable shopping centers in areas with high median incomes while selling older, under-performing properties in secondary and tertiary markets. This will position Kimco Realty Corp (NYSE:KIM) well for future profits.
Macerich Co (NYSE:MAC) has focused on redeveloping properties in densely-populated markets to assure that its properties capture a large market share. Management anticipates annual returns of 8%-10% for these redevelopments. About 63% of Macerich Co (NYSE:MAC) leases have increases chained to the consumer price index (CPI), which will limit the damage inflation does to net operating income by stepping-up the leases with the inflation rate.
Macerich Co (NYSE:MAC) also has big plans to construct a 22-story Class A office tower, new luxury apartments, and a large Hyatt hotel adjacent to Tyson’s Corner in Northern Virginia. Given its proximity to the shopping center and a new metro stop under construction, the apartments will rent at a premium.
Macerich Co (NYSE:MAC) has also pre-leased 60% of the office building to Intelsat SA (NYSE:I) and Deloitte, thereby guaranteeing a strong cash flow. I like Macerich’s overall strategy of focusing on the top end of the market. I believe both companies will profit from their investment decisions over the next several years.
Financial platform and growth
Kimco Realty Corp (NYSE:KIM) reported earnings per share (EPS) of $0.42 in 2012. The REIT reported funds from operations (FFO) of $1.26 in 2012. This is a popular supplementary metric used by REITs; FFO functions like EPS but excludes depreciation and one-time profits and losses from property sales (the idea being that buildings held for investment purposes don’t depreciate as quickly as the IRS thinks – and in many cases, will even appreciate in value).