Kimco Realty (KIM) is getting a nice boost today form some measures to strengthen the balance sheet. Shares have soared more than 20% on news that the company will be hacking its dividend by 86% to 6 cents in order to conserve capital in the third and fourth quarters. In addition to this the company also said it has price 91.5 million shares at $7.10, which should raise just under $650 million. Of course this will be highly dilutive, as the new raise would give an additional 33% of total outstanding shares. Of course, no company, given their druthers, would prefer to have a secondary offering when share value are already very depressed, but it seems that at this point there are bigger concerns at KIM. The highly-leveraged real estate investment trust has lost a very significant amount of market value as there have been concerns about their debt maturing in the near term.
In addition to the secondary offering and the dividend cut, the company also said that it has begun marketing a new $200 million unsecured loan around to some banks. Not only that but Kimco tamped down guidance for the year ahead yesterday. As the company’s actions have made clear, they are in desperate need of capital. They are getting less in Funds from Operations than was expected. However, it is surprising that the stock is rallying 22% at this point, which seems very counter intuitive at this point. Kimco is diluting shares with a large secondary offering at prices that are slightly better than the 52-week low–split adjusted Kimco hasn’t been below its secondary offering price since 1993. In addition, the already highly levered company would like to take on more debt, all the while cutting dividends in the second half of the year.
Granted, the dividend cut was not very unexpected, as the yield has been over 20% for a while. However, the way that the market has responded to the capital raising efforts is truly a surprise to us. We would be very wary of a pull back in shares in the coming week and also after the second quarter dividend is paid out and the dividend cut realistically takes effect. We have Kimco rated Undervalued based on historically normally valuations, but given today’s appreciation we are not recommending these shares at this time.