Big acquisition gives Kite Realty Group new markets, more leverage for future growth

The planned merger of Kite Realty Group Trust with an out-of-state competitor could create growth opportunities for the company as it adds markets and properties to its portfolio to provide new leverage for loans, lease negotiations and redevelopment opportunities.

But the Indianapolis-based company could also face at least some setback from investors, in large part because the acquisition follows a multi-year effort to make what Kite called “the right size.” , the company getting rid of dozens of heavily indebted properties since 2016.

The company announced Monday that it plans to acquire suburban Chicago-based Retail Properties of America Inc. in an all-equity transaction that would place Kite among the top 10 real estate investment trusts focused on nationwide retailing with a total value of $ 7.5 billion.

Similar to mutual funds, REITs are public companies that have most of their income distributed among investors rather than placed in their own vaults.

Kite’s substantial benefits include dozens of well-maintained, newer properties and expansion into two major retail metropolises – Washington, DC and Seattle – as well as other key markets like Phoenix and Southern California.

Doug McCoy

Doug McCoy, director of real estate for Al and Shary Oak at Indiana University, said he sees huge benefits for Kite.

“This merger is really about positioning Kite well in its core business, which is outdoor retail centers,” said McCoy. “In that regard, these two companies fit in very well, as they don’t duplicate properties and each is present in attractive markets. “

The combined company will have approximately 185 shopping centers totaling 32 million square feet, comprised of 83 Kite-owned properties and 102 RPAI centers.

Kite earns 78% of its annual base rent from properties in 15 southern and western states; 26% of its rental income comes from Florida. The combined business will retain a stronghold in Florida and its other major market, Texas. In fact, 37% of its annual base rent would come from those states alone. But it will also benefit from increased revenues at centers owned by Retail Properties in New York and Maryland.

A grocery store is a tenant in at least 70% of shopping centers collectively owned by businesses.

Kite Realty Group owns the Nora Plaza, where a Whole Foods Market anchors the mall. (Photo courtesy of Kite Realty Group)

New opportunities

Roger Lee, senior research analyst at Kirr Marbach and Co. LLC, based in Columbus, Indiana, said the increase in real estate holdings gives Kite an additional growth path as it seeks to solidify its place in as a major player in the market.

Kite could also take advantage of this growth to create new opportunities and use this stronger portfolio to reach out to lenders and seek better financing terms for future redevelopment projects.

Roger lee

Having a larger and more diversified portfolio “makes it easier to issue debt, just because it gets synergy between the two of the combined company,” Lee said. “Having a lot more malls in a lot more geographies means that groups will be much more willing to lend to them. “

It could even extend to Kite’s plans to redevelop the Pan Am Plaza in downtown Indianapolis, a project that is expected to include an extension of the Indiana Convention Center and at least one massive 814-room hotel. A second is planned, but city officials have said construction will not take place until the downtown hotel market absorbs the rooms that will come with the first hotel.

Kite has indicated an interest in keeping the hotel project separate from its retail portfolio, but experts said the acquisition would likely help the company’s efforts to secure development funding. The hotel alone is expected to cost up to $ 300 million. But those experts said shareholders likely didn’t have the hotel project on their radar as part of the deal with Retail Properties of America.

“The bottom line is that they are looking for ways to create value for their shareholders,” McCoy said. “But these things are sort of one-off. It’s positive, but overall they want to keep trying to improve themselves as a retail real estate investment trust, and that’s what they’re trying to do strategically when they bring these two companies together.

Reduce, increase

In 2019, Kite sold 14 properties that he said were not the core of his portfolio, for a combined $ 415 million. In 2017, Retail Properties of America sold 47 properties for a combined $ 917.8 million.

“Kite’s leadership considers their holdings and those of Retail Properties to have been streamlined in the past few years, prior to the pandemic,” said Lee. “Now they’re on the other side of it and see it as an opportunity to start investing again.

“One of the reasons I think they feel more comfortable doing this as a combined entity is that they will have a bit more scale and more diversification,” he said. he adds. “Both of their portfolios are in better shape than before. “

John kite

Alexandre goldfarb

Alexander Goldfarb, managing director and senior research analyst at Wall Street firm Piper Sandler Cos., Said the rationale for the Kite merger made sense.

The company and its CEO, John Kite, weren’t getting credit for their decision to get rid of wary properties because Kite is too small to attract bigger investors, he said. With a larger portfolio, more buyers might want to profit from the stock.

But that doesn’t mean Kite executives won’t have to go through some investor apprehension, especially after the company has spent the first part of the last decade buying companies, only to sell a large chunk of it. these assets to recover losses.

“It’s in the execution,” Goldfarb said. “If they do everything they’ve done in the past year, that will be great. But obviously if that doesn’t happen, that’s a big deal, right? This is why the action fell on Monday, because people are not confident enough to make this “decision to support the game of Kite.”

Kite’s share price fell around 8% when markets opened on Monday, just hours after the company announced it had acquired Retail Properties.

The drop coincided with greater concerns on Wall Street over the delta variant of COVID-19 that pushed the Dow Jones industrial average down 700 points, or 2.1%.

Lee said he was less concerned about the fall in Kite shares because it could be as simple as investors unwilling to pay an acquisition premium for Retail Properties. But, he added, that doesn’t mean that some risk-averse shareholders don’t hesitate.

“A lot of REIT investors might have wanted something very stable, and now some might assume that could change as there is execution risk in integrating the two companies,” he said. declared.

The combined company will be among the top 10 retail-focused real estate investment trusts in the country. (IBJ Photo / Lesley Weidenbener)

History of acquisitions

Part of this hesitation could be related to Kite’s past acquisitions.

In 2014, Kite spent $ 1.2 billion to acquire Inland Diversified Real Estate Trust in an all-equity transaction. This propelled Kite’s holdings from 77 properties to 130, but several of those properties eventually went up for sale as part of Kite’s efforts to resize.

Kite also acquired nine commercial properties in 2013 for a total of $ 307 million, several of which are still in its possession.

“The big risk is, if you look at Kite’s acquisition history… it’s not ideal,” Goldfarb said.

“The remarkable thing is the decision to resume acquisitions after all these years of Kite selling assets and rationalizing. The initial reaction was, “Why is this deal different from the others that haven’t worked?” “”

John Kite said on Monday that the deal “will propel [Kite] at the top level in each key portfolio metric. The deal follows weeks of discussions that culminated in Kite officials visiting around 90% of the properties in Retail Properties’ portfolio.

“We strongly believe that one plus one is five here,” he said. “The things that we’ve both done historically to get us to this point, it matched very, very strongly.”

He added that Kite did not have an immediate plan to sell properties in either company’s portfolio once the deal is done.

Goldfarb said it would be “about the management of Kite – really, John [Kite]- to say to people, “Look, this is not like our previous agreements; it’s very different ”. This is what they will be doing over the next few months until the shareholders vote.

Kite Realty announced that the deal will make it the fifth largest REIT mall in the United States. But it will also be the ninth largest retail investment trust in terms of total value, according to IBJ research.

The largest is Simon Property Group, also based in Indianapolis.

McCoy, of Indiana University, said having two of the top 10 largest retail companies listed is a boon to Indianapolis. But he said that would only come into play if either of those companies made major strides towards growth.

“It’s another step forward, I don’t see it as a huge splash, but it’s definitely a positive point” for the city, he said.

Lee agreed.

“I think it’s in Kite’s DNA to want to grow. I think this is a testament to the fact that local real estate experts are very, very strong players throughout the industry value chain, ”he said.

Under the terms of the agreement, each common share of Retail Properties of America will be converted into 0.6230 newly issued Kite common share. This represents a 13% premium over the Retail Properties share closing price of $ 11.52 on July 16. The deal is expected to close in the fourth quarter, pending approval by shareholders of both companies. •

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