Kimco Realty (NYSE: KIM) has agreed to acquire fellow retail REIT (real estate investment trust) Weingarten Realty Investors (NYSE: WRI) in a cash-and-stock deal. The transaction will create a sector-leading retail REIT with a $12 billion market capitalization and more than $20 billion enterprise value. The increased scale will reduce costs and improve the combined company's balance sheet while putting it in a stronger position to weather the upheaval in the retail sector from the accelerating shift to e-commerce.
Details on the deal
Kimco Realty has agreed to acquire Weingarten Realty for 1.408 shares of its stock and $2.89 per share in cash, or $30.32 per share overall, based on Kimco's closing price on April 14th. That represents an 11% premium to Weingarten's closing price, valuing the REIT's equity at $3.5 billion and a $5.3 billion enterprise value.
The combination will create a premier open-air shopping center and mixed-use real estate company. Weingarten operates 159 primarily grocery-anchored shopping centers with 30 million square feet of gross leasable space, principally in the fast-growing Sun Belt region as well as the West Coast. Overall, 82% of its annual base rent (ABR) comes from grocery-anchored shopping centers, with 81% of its locations in Sun Belt markets.
That will increase Kimco's portfolio to 559 properties with 100 million square feet of gross leasable space. Further, its ABR exposure from grocery-anchored centers will improve from 78% to 79%, while the REIT will boost its presence in the Sun Belt region as its ABR from those markets will rise from 42% to 53%. That focus on essential retailers like grocery stores in fast-growing Sun Belt markets should position the combined company to better compete against the accelerating shift toward e-commerce.
The combination should also enable Kimco to capture $31 million to $34 million of annual cash expense savings while improving its leverage ratio and enhancing its growth profile. Weingarten has several near fully funded development projects underway that should drive earnings growth as those properties reach stabilization in the future.
Setting the stage for more deals
This transaction could drive an acceleration of M&A in the REIT sector. While the industry has seen several go-private transactions and proposals this year, the Kimco-Weingarten tie-up is the first major strategic merger in the REIT sector since the pandemic started. Thus, it could spur other REITs to seek merger transactions to grow their scale and boost returns as the economy emerges from the pandemic.
One of the key drivers of Kimco's acquisition of Weingarten is that the combined company will benefit from having a much larger scale. The deal will vault Kimco from the second-largest shopping center REIT behind Regency Centers (NYSE: REG) to the largest in the subgroup by market cap. It will also boost it from the 38th-largest REIT overall to the 25th biggest in the sector. That increased scale should improve Kimco's access to capital while reducing its cost of capital. It will also reduce operating costs, which should boost its earnings.
Those factors should enable this deal to pay big dividends for investors in the coming years as the retail sector recovers in a post-pandemic world. Historically, merger transactions right after a downturn have yielded the best total returns for investors, according to an analysis by global corporate law firm Goodwin. While Kimco has secured the first-mover advantage in the shopping center sector, REITs in other downtrodden property groups like office, healthcare, apartments, and hospitality could benefit from scale-drive consolidation.
Expect to see a steady string of M&A announcements this year
Kimco Realty is boosting its scale and presence in the fast-growing Sun Belt market by acquiring rival Weingarten, better positioning it for the future of retail. That combination could create significant value for investors in the coming years, given that deals have historically paid big dividends at this point in the real estate cycle. This could spur more REITs to explore mergers, which could give the sector the booster shot it needs following a challenging year.