Kimco Realty adds Weingarten Realty to his basket

Today Kimco Realty

KIM
, one of the largest shopping center REITs in the United States, announced its merger with Weingarten Realty

WRI
for $ 5.9 billion in a mix of stocks (90%) and cash (10%). Each WRI share will convert into 1,408 newly issued KIM shares plus $ 2.89 in cash per share and at closing, the combined entities will have an enterprise value of just under $ 20 billion.

Kimco and Weingarten are very complementary as they own high quality shopping centers, and the combined portfolio will include 559 properties in top MSAs.

An obvious benefit for Kimco is the fact that Weingarten’s portfolio is focused on the Coastal and Sunbelt markets which have performed relatively well during the pandemic. This merger creates significant synergies (around $ 30-34 million) as the costs can now be spread over a $ 20 billion portfolio.

Additionally, Kimco expects to benefit from debt synergies, thanks in large part to the fact that Kimco uses most of its currency (90%) in inventory and the balance in inventory (10%).

I spoke with Kimco CEO Conor Flynn and he explained that this merger will generate “lower leverage and improve NOI’s profile in the long run” for the combined companies.

Kimco is currently rated BBB + by S&P and Baa2 by Moody’s

AGC
and Flynn told me that the “next step is an A rating” that the CEO hopes to see in 2022 or 2023.

The cap rate on the Weingarten transaction should be immediately accretive and I consider the 5.8% cap rate to be extremely attractive and Flynn told me “you can’t get this (cap rate) in the market private at the moment “.

According to Nareit data, there are 18 shopping center REITs with a combined market capitalization of $ 52.5 billion. In 2020, the shopping center sector generated the second worst total return (-27.6%) behind regional shopping centers (which recorded a return of -37.2%).

Although the shares of shopping center REITs have recovered since the start of the year (+ 26.1%), Kimco chose to buy Weingarten in order to be able to use its cost of capital to close the transaction (the price of purchase was 90% in shares).

Another catalyst to note is Kimco’s ability to generate net asset value (net asset value) through a mix of mixed-use and redevelopment projects. The combined company has a potential of 41 projects which consist of 34 mixed-use projects and 7 main projects which include 1.7 million square feet of retail and 9,000 multi-family units.

Conor Flynn will remain the CEO of the combined company and Milton Cooper will remain the executive chairman. Weingarten will have a seat on Kimco’s board of directors. There is a breakout fee of around 2.5%, but I don’t anticipate another offer given that it will take a big player like Kimco to execute such a big deal.

KIM closed up 2.31% and WRI + 12.5%.

I own shares in KIM.