Merger to Create US $7.5 Billion U.S. Retail REIT
Merger to Create US $7.5 Billion U.S. Retail REIT
Kite Realty Group Trust and Retail Properties of America, Inc., have entered into a definitive merger agreement.
Under the terms of the proposed merger, Retail Properties of America (RPAI) which owns and opertes 102 retail properties in the United States representing 19.9 million SF will merge into a subsidiary of Kite Realty Group (KRG) which operates a portfolio of neighbourhood, community and lifestyle centers across the country and will continue as the surviving public company.
The strategic transaction joins together two high-quality portfolios with complementary geographic footprints creating a top five shopping center REIT by enterprise value. The combined company is expected to have an equity market capitalization of approximately US $4.6 billion and a total enterprise value of approximately US $7.5 billion upon the closing of the transaction – assuming a KRG share price of US $20.83, which was the closing price on 16 July, 2021. An immediately accretive transaction, paired with a strong balance sheet and significant value creation opportunities, is expected to provide a runway to increase long-term value for shareholders.
Under the terms of the merger agreement, each RPAI common share will be converted into 0.6230 newly issued KRG common shares in a 100 per cent stock-for-stock transaction. Based on the closing share price for KRG on July 16, 2021, this represents a 13 per cent premium to RPAI’s closing stock price on July 16, 2021. On a pro forma basis, following the closing of the transaction, KRG shareholders are expected to own approximately 40 per cent of the combined company’s equity and RPAI shareholders are expected to own approximately 60%. KRG anticipates assuming all RPAI debt and has obtained a financing commitment to provide a US $1.1 billion term loan bridge facility in the event certain debt consents cannot be obtained prior to the closing of the transaction. The parties expect the transaction to close during the fourth quarter of 2021 subject to customary closing conditions, including the approval of both KRG and RPAI shareholders. The transaction was unanimously approved by the Board of Trustees of KRG and the Board of Directors of RPAI.
The merger will create an operating portfolio of 185 open-air shopping centers comprised of approximately 32 million square feet of owned gross leasable area. These properties are primarily located in “Warmer and Cheaper” metro markets in the United States with 70% of centers by annualized base rent (“ABR”) having a grocery component. The combined company is expected to benefit from increased scale and density in strategic markets, deeper tenant relationships given the broader mix of open-air retail types, an appropriately sized development pipeline and a strong balance sheet.
“This merger marks a momentous day for KRG and our shareholders,” says John A. Kite, Chairman and CEO of Kite Realty Group. “The combination of our firms brings together two high-quality, complementary portfolios. The combined company will have durable cash flows, operational upside and external value creation opportunities. The financial benefits of the transaction include immediate earnings accretion, while maintaining a strong balance sheet. 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.”
Steven P. Grimes, RPAI CEO, adds: “After many years of curating both of our portfolios, combining them into one company will allow us to generate the best results for both sets of shareholders over the long term,” “Our increased scale will benefit the business both operationally and financially, allowing us to take advantage of reduced cost of capital as well as pursue future value creation opportunities by partnering KRG’s development expertise with our embedded development pipeline. We are excited to present this transaction to our shareholders, who will be the beneficiaries of the near-term and future benefits of the combined company.”
According to Kite Realty, the merger will generate several operational and financial benefits, including:
- Positive Financial Impacts and Immediate Accretion
- Provides immediate accretion to earnings per share upon realizing cash expense synergies of between US $27 to $29 million.
- Larger scale will reduce cost of capital, thereby driving higher net income to shareholders.
- Significantly increases shareholder liquidity allowing larger investor base to hold more meaningful positions in the combined entity.
- Enhances Portfolio Quality and Diversification
- Retail ABR per square foot of US $19.29.
- Broader mix of open-air retail types allowing for deeper and more diverse tenant relationships.
- 70 per cent of ABR is located in centers with a grocery component.
- Diverse combined tenant base with no single tenant representing more than 2.4 per cent of total ABR.
- Significant Presence in Strategic Markets
- Maintains sector-leading exposure to Warmer and Cheaper markets.
- Substantial portfolio concentration, with approximately 40% of ABR in growth states of Texas and Florida.
- Bolsters presence in Dallas, Atlanta, Houston and Austin.
- Meaningful presence in other strategic gateway markets such as Washington, D.C., New York, and Seattle.
- Generates Significant Value Creation Opportunities
- Presents near-term, organic growth opportunities through lease-up of vacancies caused by the pandemic.
- Active development and redevelopment projects expected to deliver additional Net Operating Income.
- KRG’s extensive development expertise in a variety of property types provides additional potential value creation for both active and future development projects.
- Appropriately sized and measured development pipeline will offer potential additional value creation opportunities.
- Strengthens Balance Sheet
- Combined balance sheet poised to capture future growth opportunities.
- Net debt plus preferred to EBITDA ratio anticipated to be 6.0x inclusive of expected G&A synergies.
- No material debt maturities until 2023, with an appropriate maturity ladder going forward.
- Creates a Top 5 Shopping Center REIT
- Combined company will have an estimated $7.5 billion total enterprise value upon the closing of the transaction assuming a KRG share price of US $20.83, which was the closing price on July 16, 2021.
- Combination of operating best practices expected to drive Net Operating Income improvements.
- Deepens tenant relationships and increased optionality to a broader mix of open-air retail formats.
The combined company will continue to be operated at the high standards previously established at both KRG and RPAI. The number of trustees on KRG’s board will be expanded to thirteen with four members of the existing Board of Directors of RPAI to be appointed to KRG’s board. John Kite will continue to serve as Chairman of the Board of Trustees of the combined company. William Bindley will continue to serve as Lead Independent Trustee.
The KRG management team will lead the combined company, with John Kite as Chief Executive Officer, Thomas McGowan as President and Chief Operating Officer and Heath Fear as Chief Financial Officer. The approach to integration will draw from the best practices of both companies to ensure continuity for tenants, employees and other stakeholders.
On completion of the merger, the company’s headquarters will remain in Indianapolis, Indiana. The company will retain the Kite Realty Group name and trademarks and will continue to trade under the NYSE symbol KRG.
BofA Securities is acting as lead financial advisor to KRG, with KeyBanc Capital Markets also acting as financial advisor to KRG. Hogan Lovells US LLP is acting as legal advisor to KRG. Citigroup Global Markets Inc. is acting as exclusive financial advisor and Goodwin Procter LLP is acting as legal advisor to RPAI.
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