Developers Diversified Realty Trust's proposed $6.2 billion purchase of Inland Retail Real Estate Trust will bolster the REITs presence in the Southeast.
"This was a very rare opportunity to acquire high quality assets in attractive markets," says Scott Wolstein, chairman and CEO. "It enhances our position as the nation's leading owner of properties in the South."
Inland, headquartered in Oak Brook, Ill., is a public, unlisted REIT that is part of an umbrella of subsidiaries launched by the Inland Real Estate Group of Companies. Inland Retail Real Estate controls a portfolio of 307 shopping centers containing 43.6 million square feet in such markets as Atlanta, Charlotte, Miami, Orlando and Tampa.
Thewill vault Developers Diversified's portfolio-including properties it owns in joint ventures-to more than 160 million square feet.
The biggest upside in the deal is that it increases Developers Diversified's presence in the Sun Belt, which it views as a fast-growing region.
"This gives us more opportunities," says Daniel Hurwitz, senior executive vice president and chiefofficer of Developers Diversified. "It enhances our relationship with the most successful retailers in the United States."
And the deal should provide economies of scale, says Richard Moore, an analyst with RBC Capital Markets. "Operating expense efficiency is increased as shopping center density increases," he says.
Deutsche Bank analyst Louis Taylor increased his target for Developers Diversified's stock to $63 per share, up from $58 per share, based on the deal. The company "continues to find ways to create value and with a consistent track record of producing solid core growth, we believe there is still value in the shares that is not fully priced in," he wrote in a research note.
Developers Diverisified stock was trading at $58.66 in Wednesday trading, about the same level as before its proposed buyout was announced.
The merger will be split in two pieces. A joint venture with a new, as-yet-unnamed institutional partner will purchase the 67 properties in Inland's portfolio that are 250,000 square feet and larger. That piece is worth about $3 billion with Developers Diversified contributing 15 percent of the equity and receiving management and leasing fees on the portfolio. The REIT will purchase the balance of the portfolio and own them directly.
Developers Diversified says it will review the portfolio to determine if any of the new properties will be re-sold.
"No doubt, some will be retained, some will be put in the joint venture and some sold," Wolstein says.
Under terms of the agreement, which includes the assumption of $2.3 billion of debt, Developers Diversified will pay $14 per share for all outstanding Inland shares. It is scheduled to close during the first quarter of 2007, pending approval by Inland's shareholders.
Barry Lazarus, president and chief executive of Inland Retail, notes the attractive return the deal affords its investors who initial acquired the stock at $10 per share.
"We are delighted to be able to offer our investors an outstanding return on their initial investments while delivering our extremely high quality portfolio to one of the premier owner/operators in the sector," Lazarus said in a statement.
The deal wraps up a busy four days for the REIT. On Friday, the company announced an agreement to acquire a 50 percent stake in Sonae Sierra Brazil, an owner and developer of the second largest retail real estate portfolio in Brazil at 3.4 million square feet.
Hurwitz says its foray into Brazil capitalizes on that country's emerging economy. He says the market is fragmented with multiple owners controlling small portfolios.
"Consolidation opportunities are voluminous," Hurwitz says. "We wanted to access it earlier rather than later."
-- Riccardo A. Davis