A New Normal?
Prior to the financial crisis, KIM traded at a premium to the REIT sector on a relative P/NAV basis pretty regularly. However for most of the time since then, KIM has traded at a discount to the sector as the company transitioned back to more of a pure play North American shopping center business model.
For the better part of the past year now, KIM has been trading at a premium to the REIT sector and currently trades at its largest spread to the REIT sector since late 2010. The stock’s relative P/NAV spread is actually more than two standard deviations above its historical mean spread (since 2010) to the group.
Now that management has made substantial progress in refocusing the company on its core competency of owning and operating shopping centers in markets close to home, it appears the market is rewarding the stock by pushing it into premium territory versus the broader REIT sector.
Historically, when REIT stocks reach the +2 standard deviation level of relative valuation, one of three things tends to happen:
1) A stock will revert fairly quickly on a relative basis;
2) A stock will continue to move higher due to a structural change in the stock’s relative valuation profile;
3) A stock will consolidate around the elevated level while the market looks for validation justifying the current relative valuation.
KIM appears to be somewhere between #2 and #3 right now with the trend pointing higher. So while the stock may appear expensive on a relative basis, keep in mind that KIM may be undergoing a structural change in its valuation relationship relative to the REIT sector, which could lead to a continued increase in the stock’s premium valuation going forward.
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