Ending a lull in the retail REIT merger and acquisition market, Kimco Realty Corp. and Centro Properties Group today each announced big, with Kimco grabbing West Coast shopping center REIT Pan Pacific Retail Properties Inc. for $4 billion and Centro landing East Coast shopping center REIT Heritage Property Investment Trust for $3.2 billion. What has raised observers’ eyebrows on both deals is that neither Kimco or Centro seems to be paying a premium, which could be a sign that the market for retail real estate is slowing.
According to the terms of the Kimco deal, it will pay $70 per share for Pan Pacific’s outstanding stock. The Pan Pacific price comes out to where the REIT’s shares closed at end of trading on Friday. (Its stock rallied in late June rising nearly $4 from $65.25 per share on June 26 to $69.37 by June 30 on increased volume.)
Meanwhile, Centro is paying $36.15 per share for Heritagee-- a 3.2 percent premium over where Heritage’s stock closed in Friday trading.
Pricing on both deals also represents a discount to consensus NAV estimates for Pan Pacific and Heritage. Pan Pacific’s consensus NAV stands at $71 per share.
“Given the quality of the portfolio and solid balance sheet with plenty of dry powder for external investment, we would have believed it plausible that PNP could have been taken out at a premium to NAV,” wrote Banc of America Securities analyst Ross Nussbaum. “The portfolio has little occupancy upside (currently at 97 percent), but has embedded growth with rental rates roughly 10-15 percent below market. To our knowledge, this was not an auctioned bidding process, which leaves the door partially open for another offer to be put on the table.”
Meanwhile Heritage’s consensus NAV is $41.00 per share. That’s a divergence from recent REIT takeovers that have occurred in the past two years where buyers have typically paid a 5 to 15 percent premium above consensus NAV, according to BMO Capital Markets.
Morgan Stanley retail REIT analyst Matthew Ostrower wrote in a research note, “We believe the primary lesson investors should take from this transaction is that lower quality shopping centers are becoming more challenging to sell, particularly in large quantities and for large prices.”
The disconnect between the deals, however, comes in the assumed cap rates and price per square foot. Pan Pacific, with its portfolio concentrated in West Coast markets with high barriers to entry, is selling at a 6 percent cap rate with the properties garnering $200 per square foot. Heritage’s portfolio, which is in the Northeast and Midwest, is considered second-tier and Centro’s price comes to a 7.2 percent cap rate and $115 per square foot. According to data from Real Capital Analytics, of the $1.1 billion on grocery-anchored deals in the first quarter, the average cap rate was 6.8 percent with an average price of $149 per square foot.
Kimco’s Zero-Premium Bid for Pan Pacific
Wall Street had been expecting Kimco, the New Hyde Park, N.Y., based shopping center REIT, to make a deal for several weeks. It had been mentioned as a potential buyer of both Lord & Taylor (which was acquired by NRDC Equity Partners LINK TO EARLIER STORY for $1.2 billion), Heritage, and even New Plan Excel Realty Trust.
The deal will significantly increase Kimco’s presence on the West Coast. It also advances the company’s strategy to move from a property owner to asset manager, which Chairman & CEO Milton Cooper’s has been signaling to investors recently.
The Kimco/Pan Pacific deal differs from the Heritage deal, however, in a cap rate of approximately 6 per cent, which is more in line with market pricing; Heritage is going for a 7.2 percent cap rate. And at $200, Pan Pacific commands a steep premium on a square-foot basis.: According to Real Capital Analytics, the average deal for grocery anchored space in the first half was $149 per square foot. The average cap rate was 6.8 percent.
“Based on the cap rate on the NOI of the company we felt the price is a good price,” says Stuart Tanz, president and CEO of Pan Pacific. “We felt it was a good time to sell, given [market] valuations.”
He declined to discuss whether the company received any other offers, noting that the information would become available when the papers are filed with the Securities and Exchange Commission.
Pan Pacific is the largest shopping center REIT focusing exclusively on the West Coast, with 22.6 million square feet of properties in states including, Washington, Arizona, New Mexico, Nevada and Oregon. Kimco owns a number of shopping centers in the region, but they represent only a fraction of Pan Pacific’s portfolio; the majority of the company’s holdings are located in the Northeast and the South. Analysts at JP Morgan Securities Inc. believe that Kimco will hold an approximately 20 percent ownership stake in Pan Pacific’s assets, with its various joint venture partners taking on the remaining 80 percent.
“This is a modest upgrade to its portfolio, but Kimco has been focused on trying to expand its West Coast presence for quite some time,” says Barry Vinocur, editor of Realty Stock Review. “I think the biggest thing, though, is simply that Milton Cooper made a statement earlier this year that Kimco saw itself as an asset manager and wanted $75 billion in assets. Historically, people have looked at the value in real estate as owning the assets, but more recently they have come to appreciate that there’s more than one way to make money, one of them being fund management. The Pan Pacific portfolio is not highly leveraged, so they will be able to leverage it up.”
The Kimco/Pan Pacific merger is expected to close in the fourth quarter of 2006. Kimco announced that it may issue up to $10 per share of the total merger consideration in its common stock prior to the Pan Pacific stockholders’ meeting.
Kimco shares rose 51 cents to $37.38 after the merger was announced.
Heritage Deal Has Price Breakthrough—on the Downside
In the other deal, Australia-based Centro Properties Group reached an agreement this morning to purchase Boston-based Heritage Property Investment Trust, a REIT with 157 primarily supermarket-anchored properties with a combined 28.7 million square feet, in a $3.2 billion deal.
Heritage and Centro have been working on the deal for nearly eight months and concluded negotiations Sunday afternoon.
“The heavy work started in March 2006, with the signing of a confidentially agreement and we’ve been in heavy negotiations since then until closing the deal,” said John Hutchinson, Centro’s head of acquisitions, in a conference call with investors.
He compared the deal to Centro’s acquisition of Kramont in late 2004. In the near-term, Centro plans to continue operating Heritage through its Boston headquarters and 16 regional offices. Ultimately, it expects to move about $2.6 billion worth of assets into new and existing funds it co-owns and manages. About $700 million of the portfolio will either be divested or improved and moved into Centro’s funds later.
“In terms of our syndication business, there will be at least two international syndicates that will spun out from Heritage,” said Centro CEO Andrew Scott said during the conference call. “We’ll also create an international wholesale fund with some of these assets. The pipeline of available assets coming to us through this deal is significant and the assets are very appropriate for those investment opportunities.”
The deal more than doubles Centro’s U.S. portfolio to 49 million square feet. When the deal closes—which the companies say will happen by October--Centro will rank as the 10th largest retail property owner in the U.S, according to Retail Traffic’s figures. After the transaction closes, of the top dozen owners of U.S. retail property, five will have some connection with Australian limited property trusts. Centro will rank 10th. Developers Diversified Realty, ranks 4th, and Regency Centers, which will fall to 12th, both have joint ventures with Macquarie Bank on limited property trusts (LPT) traded in Australia. Westfield America, the ninth largest owner, is a subsidiary of Australia-based LPT Westfield Group. New Plan Excel, which ranks eighth, has a joint venture with Galileo Shopping America Trust, yet another Australian LPT.
Centro has a complicated management structure. It manages and owns 50 percent interests in numerous funds and syndications, many of which will contribute to the total acquisition cost. In addition, it will put some of the Heritage properties into new wholesale funds. Through this arrangement, Centro retains direct ownership of about 25 percent of its $15.7 billion portfolio while the rest is owned by investors in its various funds and syndications.
Globally, the deal increases Cento Watt’s portfolio by 38 percent, with its post-merger portfolio being worth $15.7 billion.
From Heritage’s perspective, the deal price--$36.15 per share--represents a 3.2 percent premium over where Heritage’s stock closed in Friday trading. Centro says the cap rate on the portfolio comes to 7.25 percent. The price represents a 5.7 percent premium to Heritage's average closing price over the past 10 days, and a 7.3 percent premium to the average closing price over the past 30 days. In Monday trading, Heritage’s stock had risen 2.6 percent as of mid-day to $35.91 per share.
Heritage issued a press release on the deal, but has not yet held a conference call for investors and did not return calls seeking comment on the deal.
-- David Bodamer & Elaine Misonzhnik