The global coronavirus pandemic was particularly tough on the retail sector and, by extension, retail-related real estate. While many real estate investment trusts (REITs) simply circled the wagons and hoped for the best, others, like strip mall owner Kimco Realty (NYSE: KIM), went on the offensive. Here's why its deal to buy competitor Weingarten is so important.
Getting things done, fast
On April 15, 2021, REIT Weingarten announced that it had agreed to be acquired by Kimco in a stock-and-cash deal that would create an industry giant with an expected combined market capitalization of roughly $12 billion. On Aug. 4, less than four months later, the deal was completed. Today, Kimco has a market cap of around $13.3 billion, about 12% above the level suggested when the merger was agreed to, showing that the deal has been very well received by Wall Street.
Part of that has to do with the excellent timing of the acquisition. Yes, prices were obviously cheaper during the worst of the coronavirus downturn in 2020. However, taking on an acquisition then would have been difficult to get past investors, given the great uncertainty at the time. However, by waiting until the market was just starting to see notable improvement, Kimco was still able to get a fair price and enhance its operations in important ways.
Not only did Kimco add 159 shopping centers to its portfolio, an increase of roughly 40%, but it also expanded its exposure to faster-growing Sun Belt states. The new larger size, meanwhile, should allow it easier access to capital markets, reducing its cost of capital for redevelopment projects and acquisitions.
Kimco will also be able to get rid of redundant costs, like accounting, to make operations more efficient. The deal also ended up strengthening Kimco's balance sheet, because Weingarten was in better financial shape than the company that was acquiring it.
A quick timeline of events
Still, the best part of the deal is probably the timing. In the final quarter of 2020, Kimco's portfolio was 93.9% leased. It collected 92% of the rent it was owed. And new leases were being signed at rates 6% higher than previous leases.
At the end of the first quarter, Kimco's portfolio was 93.5% leased, a slight tick down from the year-end figure. That's not shocking, however, given that many retailers try to make it through the holiday season, usually the biggest sales period of the year, before shutting stores. It collected 94% of the rents it was owed, showing its customers were getting stronger. And new leases were being signed at a rate 8.2% higher than previous rents, which suggested increasing demand for retail space.
Second-quarter occupancy, however, ticked even higher, returning to 93.9%. When combined with the other trends, it looks like the first quarter could turn out to be the inflection point for this metric. The REIT was able to collect 96% of its rents, showing continued improvement for its customers. And new leases were being signed at a rate 9.2% higher than previous levels, suggesting that demand continues to strengthen.
So, the Weingarten acquisition was worked on during the first quarter, when there was still some lingering pandemic-related weakness; inked in the stronger second quarter; and finally consummated in the third. Although third-quarter results aren't out yet, the trends here suggest it will be good reading and that Kimco's timing on this deal was pretty darn good. This is the type of thing you want to see a management team doing.
Basically, at this point, it looks like the worst of the pandemic hit is in the past and the future is getting increasingly bright, partly thanks to a well-timed acquisition. To be fair, when asked directly about the business environment, Kimco CEO Conor Flynn punted, saying that the future was hard to predict, given that coronavirus mutations complicate the virus response. However, having previously explained a host of positive developments during the call, he added, "But right now, where we sit, we like what we see."
Investors should, too, since it looks like the deal to add Weingarten was inked almost exactly as the shopping center business was turning up again.