Kimco Realty Corp. may be in talks with Target Corp. to buy some or all of the company's Mervyn's real estate. The New Hyde Park, N.Y.-based REIT needs to keep up its current pace of FFO growth (more than 8 percent for the recently ended first quarter 2004), and acquiring a huge chunk of the 260-store Mervyn's portfolio could do just that.

Kimco recently surpassed Wall Street estimates with its first quarter numbers, providing $0.89 per share in FFO, $0.04 more than most analysts had anticipated. The gains were driven by an above average acquisitions volume for the quarter (a total of $257 million, with an average cap rate of 8.1 percent), and the REIT's temporary warehousing of the acquired assets before transferring them to its joint ventures.

In the next few weeks, Kimco will transfer four of the six assets acquired during the quarter to KROP, its joint venture with GE Capital, and KIF, its joint venture with several insurance companies. An unexpected $4 million in recoveries from the bankrupt Kmart helped offset a $0.04 per share impairment charge related to two vacant former Ames still up for sale. But even with Kimco's planned $1.1 billion in gross acquisitions for 2005, the REIT will need a huge acquisition to act as a growth driver for next year.

Kimco's FFO growth will likely slide to only 4.2 percent in 2005, unless it can pull a rabbit out of its hat, says Citigroup Smith Barney analyst Jonathan Litt. The Mervyn's real estate portfolio, currently being shopped around by Target Corp., could provide the needed catalyst. "Kimco declined to discuss any retailer by name on its recent earning call, suggesting to us that management is in talks regarding a potential acquisition of all or some of Mervyn's real estate," Litt says. This Monday was the deadline for bids on Mervyn's, but no further information has been provided by Target as to the sale.

The majority of Mervyn's stores are in the retailer's birth state of California, and competition will be hot for stores in that hard-to-break market, with Sears and Kohl's fighting for a piece of the action, says Credit Suisse First Boston analyst Michael Exstein. Only 5 percent of Kimco's portfolio is in California, but Mervyn's doesn't have a presence in Florida or Ohio, the two states where Kimco has the largest number of properties.