On Wall Street, mergers are usually greeted with great fanfare, even though they often fail to pan out for investors. Just recently real estate investment trust (REIT) Kimco (NYSE: KIM) has agreed to buy peer Weingarten Realty (NYSE: WRI), effectively creating a giant new company in the shopping-center space. Meanwhile, bigger, long-term investors should ask themselves if the combined entity will actually be better.
The deal, in a nutshell
Kimco is a large shopping center REIT with a portfolio of 400 properties. It has agreed to buy each share of Weingarten for 1.408 shares of Kimco stock and $2.89 in cash. Weingarten owns 159 properties, so the combined entity will have a huge 559-property portfolio. Looking at the market caps of each company, the newly formed entity will vault to the head of the shopping- center pack once the merger is consummated.
There are some clear positives here for investors. For example, there is a benefit that comes with scale, since buying supplies and such in larger quantities can reduce costs. In addition, the combined entity will likely be able to reduce headcount by eliminating redundant positions. Kimco believes it will be able to reduce costs by somewhere between $35 million and $38 million a year. The deal is also expected to improve Kimco's balance sheet strength, which is somewhat unusual but nice to hear.
And from a growth perspective, the acquisition will increase Kimco's exposure in the desirable sunbelt region. This is an area that has been benefiting from U.S. migration patterns and is expected to see continued population growth for years to come. And at the same time, there will be a material backlog of property-enhancement projects, offering robust internal growth prospects. All in, it's not a bad deal, but here's something to think about before you get too excited.
More than size
The old saying in the real estate market is location, location, location. It's a simple saying, but one that holds a great deal of importance. For example, in 2020 Kimco generated $1.045 billion in rent across its 400 properties. Using some simple, back-of-the envelope math, that means that each of its shopping centers averaged around $2.6 million in rent. Obviously this is just a rough number, with some properties doing better than others. But it provides a quick comparison point.
Weingarten, meanwhile, generated rent of $422 million from its 159 assets last year. That comes out to roughly $2.66 million per property. So Kimco's results should see a small boost in rental income, but when spread over the entire portfolio, it won't be that huge. The portfolio is indeed bigger, but it will be important for management to be able to live up to its cost cutting and growth plans to really see a benefit here.
Now compare these stats to peer Federal Realty Investment Trust (NYSE: FRT). This landlord owns 101 shopping centers, so it is much smaller than both Kimco and Weingarten, let alone the combined company. But Federal Realty generated $832 million of rent in 2020, which comes out to roughly $8.2 million per property. Federal Realty has long focused on owning assets in high-density areas with wealthy populations. While smaller in size, its portfolio has been curated over the years and is clearly well positioned. And this simplified comparison point highlights that location matters a great deal. That's not to suggest that the Kimco/Weingarten merger is bad, only that the combined entity's position as the largest shopping-center REIT by market cap may not actually make it the best shopping-center REIT.
A deeper look
Wall Street loves stories, but sometimes the story glosses over important information. Federal Realty's small portfolio of highly productive properties is evidence that size isn't always the best gauge when looking at a company or a merger. It's worth noting, too, that both Kimco and Weingarten cut dividends in 2020 while Federal Realty actually increased its distribution (adding another year to the Dividend King's over five-decade-long streak). If you are attracted to the Kimco/Weingarten merger, you might want to step back and consider some other factors before jumping at the news.