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Kimco Realty adds Weingarten Realty to its cart

Today Kimco Realty

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

for $5.9 billion in stock (90%) and cash (10%). Each WRI share will be converted into 1.408 newly issued KIM shares plus $2.89 cash per share and at closing the combined entities will have an enterprise value of just under $20 billion.

Kimco and Weingarten are highly complementary as they have malls anchored in high-quality grocery, and the combined portfolio will include 559 properties in major MSAs.

A clear advantage 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 (approximately $30-34 million) as costs can now be spread across a $20 billion portfolio.

In addition, Kimco expects to benefit from debt synergies, largely due to Kimco using 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 the long-term NOI profile” for the combined companies.

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

and Flynn told me the “next step is the A grade” which 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 extremely attractive and Flynn told me that “you can’t get that (cap rate) in the market private right now.”

According to data from Nareit, 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 generated -37.2%).

Although shopping center REIT stocks have risen year-to-date (+26.1%), Kimco opted to buy Weingarten so it could use its cost of capital to close the deal (the price of purchase was 90% in shares).

Another catalyst of note is Kimco’s ability to generate NAV (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 planned projects which include 1.7 million square feet of retail and 9,000 multi-family units.

Conor Flynn will remain as CEO of the combined company and Milton Cooper will remain as executive chairman. Weingarten will have a seat on Kimco’s board of directors. There is a break 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 large transaction.

KIM closed up 2.31% and WRI closed up 12.5%.

I own shares in KIM.