Shopping center REITs Kite Realty Group Trust (NYSE: KRG) and Retail Properties of America, Inc. (NYSE: RPAI) announced a $7.5 billion merger agreement July 19 in which Retail Properties will merge into a subsidiary of Kite Realty. The transaction will create a combined operating portfolio of 185 open-air shopping centers.
“This merger further demonstrates our conviction in open-air retail centers as essential shopping destinations and last mile fulfillment centers. We are energized about the future of this combined company,” said John Kite, chairman and CEO of Kite Realty.
The properties in the combined company will be primarily located in “warmer and cheaper” metro markets, the companies said, with 70% of centers by annualized base rent having a grocery component.
Steven Grimes, CEO of Retail Properties, said the increased scale would enable the merged company to take advantage of a reduced cost of capital as well as pursue future value creation opportunities by partnering Kite Realty’s development expertise with Retail Properties’ embedded development pipeline.
The combined company is expected to have an equity market capitalization of approximately $4.6 billion and a total enterprise value of approximately $7.5 billion upon the closing of the transaction in the fourth quarter, assuming a Kite share price of $20.83, the closing price on July 16. The company will retain the Kite Realty name.
Meanwhile, the number of trustees on Kite Realty’s board will be expanded to 13 to include four members of the existing Retail Properties’ board.
BTIG analyst Michael Gorman noted that while the transaction will provide Kite Realty with greater scale, the combined entity will have lower exposure to centers with grocers as an anchor and lower exposure to “warmer & cheaper” markets than the Kite Realty portfolio does on its own. Moreover, while the deal represents a 13% premium for Retail Properties’ shareholders, the implied valuation remains a 5%-6% discount to consensus net asset value estimates.