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Kite Realty, RPAI Enter Into $7.5B Merger Agreement to Create New Shopping Center REIT

Miramar-Square-Miami

Pictured is Miramar Square, a 232,000-square-foot shopping center in the Miami area that is anchored by Kohl's and Sprouts Farmers Market. Kite Realty Group, the owner of the center, remains bullish on the long-term performance of grocery-anchored retail assets, and the company's merger with RPAI creates a portfolio in which 70 percent of the assets feature a grocery component of some sort.

INDIANAPOLIS AND CHICAGO — Kite Realty Group Trust (NYSE: KRG) and Retail Properties of America (NYSE: RPAI) have entered into a merger agreement valued at $7.5 billion that will create a new shopping center REIT with a portfolio of 185 assets totaling approximately 32 million gross leasable square feet.

Under the terms of the deal, which is expected to close in the fourth quarter, a subsidiary of Indianapolis-based KRG will acquire Chicago-based RPAI in an all-stock transaction. The $7.5 billion valuation puts the newly formed company in the top five of shopping center REITs in terms of total enterprise valuation, according to company officials.

Specifically, each share of RPAI common stock will be converted to 0.623 shares of KRG common stock. This rate represents a premium of 13 percent over RPAI’s closing share price of $20.83 per share on July 16, 2021.

The new company will trade under the KRG ticker symbol and remain headquartered in Indianapolis. In terms of leadership, KRG’s board will be expanded to 13 trustees via the addition of four new members from the existing RPAI Board. Following the closing of the deal, KRG shareholders are expected to own approximately 40 percent of the combined company’s equity, and RPAI shareholders are expected to own 60 percent.

In addition, KRG plans to assume all of RPAI’s debt and has obtained a $1.1 billion term loan bridge facility in the event certain debt consents cannot be obtained prior to the closing of the transaction.

Among the newly formed company’s 185 open-air shopping centers, 70 percent (about 130 properties) have a grocery component. According to the press release announcing the merger, the combined national portfolio is weighted toward “warmer and cheaper markets” and increases KRG’s presence in cities such as Atlanta, Dallas, Houston and Austin. Prior to the merger, KRG owned and operated 83 centers totaling 12 million square feet, while RPAI’s portfolio spanned 102 properties totaling some 20 million square feet.

The ability to increase market share in these markets and to create a broader mix of open-air retail product types was a significant driver of the deal. The portfolio also includes a number of properties that are actively being developed or redeveloped and are expected to bolster net operating income.

“Our increased scale will benefit the business both operationally and financially, allowing us to take advantage of a reduced cost of capital as well as pursue future value-creation opportunities by partnering KRG’s development expertise with our embedded development pipeline,” says Steven Grimes, CEO of RPAI.

John Kite, chairman and CEO of KRG, adds that in addition to providing immediate financial benefits such as the deleveraging the balance sheets of both firms, the merger reflects each entity’s bullishness on the long-term viability of open-air retail properties as “essential shopping destination and last-mile fulfillment centers.”

“With the current marker environment rewarding the strength of open-air real estate, now is the perfect time to create a leading owner and operator of open-air shopping centers,” Kite added on a Monday morning conference call with shareholders.

“As we enter a post-COVID world, one thing is certain: The retail apocalypse narrative was unwarranted,” Kite continued. “In fact, open-air centers are thriving. Tenant demand and leasing volumes remain strong for both companies. Retailers and consumers continue to recognize the amenities and ease that open-air shopping centers offer.”

Following the announcement, KRG’s stock price opened at $21.40 per share on Monday, July 19, up from $9.92 per share a year ago. RPAI’s stock price opened at $11.81 per share, up from $6.34 per share in mid-July 2020.

Taylor Williams

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