Kevin Brown: We have increased our fair value estimate for Federal Realty to $141 from $138, and we have increased our fair value estimate for Kimco Realty to $17.70 from $15.80. As a result, both companies currently trade at discounts to our fair value estimates. Additionally, we point out that Kimco currently provides a 6.7% dividend yield, one of the highest yields among U.S. REITs for income-oriented investors.
When analyzing the shopping center REITs, it is important to distinguish the rent that will and won't be impacted by e-commerce. Tenants that compete with online options, which includes segments like apparel, home decor and electronics, make up 35% of Federal's base rent and 44% of Kimco's base rent. While e-commerce will continue to grow, which will pressure sales growth at brick-and-mortar locations and force store closures, the negative impact will be greatly weighted toward the lower-end of the retail quality spectrum. Federal's portfolio has the highest average income and population density of all retail REITs, and Kimco has actively improved these metrics over the past decade. Retailers, even struggling ones, are looking to keep their profitable stores in Class A shopping centers that have the dynamics to produce high sales per square foot.
However, most of the rent for these companies comes from tenants insulated from e-commerce, which includes grocery stores, restaurants, fitness centers, dollar stores, autos, and entertainment tenants, as these segments still require consumers to shop directly at the store to get their product. Even as online options penetrate these segments, the physical store will remain the distribution point, driving sales and traffic to the center.
Overall, we expect low but steady and positive sales growth for shopping centers, leading to declining but still positive releasing spreads and internal NOI growth. Combined with a slowing disposition program and an increased focus on redevelopment projects at 7% to 8% yields, we think that these companies should continue to steadily grow over the next decade.