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Kite Realty Cuts Transformative Merger Deal

$1.2 Billion Acquisition of Inland Diversified Doubles Size and Scale of REIT
February 12, 2014
Making a bold bid to move into the upper echelon of U.S. retail REITs, Kite Realty Group Trust (NYSE:KRG) cut a deal to double its size in one transaction.

The Indianapolis-based real estate investment trust signed a definitive merger agreement to roll up Inland Diversified Real Estate Trust Inc. into a wholly owned subsidiary of Kite in a stock-for-stock merger with a transaction value of $2.1 billion and an equity value of approximately $1.2 billion.

The merger brings together two shopping center portfolios with a combined asset base consisting of 131 properties totaling 20.3 million square feet across 26 states. The combined company will have a total equity market capitalization of $2.1 billion and an enterprise value of $3.9 billion, based on the closing trading price of Kite Realty’s common shares on Feb. 7, 2014.

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According to John A. Kite, Kite Realty’s chairman and CEO, the transaction will substantially increase the size and scale of the REIT's portfolio in its core markets while also enabling it to expand into several new markets.

"We visited about 90% of the NOIs so we have a very strong understanding of the assets and particularly obviously of the large assets,” Kite said in discussing the transaction with investment analysts. “Over the last 10 years we have looked at lots of portfolios, and this is absolutely one of the highest-quality portfolios we have underwritten.”

Kite said that a large acquisition offered the best opportunity to grow given the dramatic decrease in the construction of new retail space.

"Over the last few years, new deliveries of high-quality and overall retail supply has dropped dramatically," said Kite. "In 2006 to 2008 there was 550 million square feet of retail space delivered. In 2009 through 2012 only 142 million (square feet),” Kite said. “What this really means to us is the fact that we can assemble a portfolio of this nature (through an acquisaition), otherwise you just can’t do it. In terms of trying to find something this quality, it is very difficult. That was one of the driving forces for us in this deal.”

In Inland Diversified, Kite is acquiring a portfolio of 57 retail properties that were 95.3% leased as of year-end 2013. A little more than 80% of the portfolio consist of power and community centers and about 20% are grocery-anchored. The average square footage for the shopping centers is 180,000 square feet, a size significantly larger than the current average of Kite Realty’s current properties.

“These are regional, powerful properties in very strong locations throughout the country and generally their properties are the dominant property in the particular submarket,” Kite said.

The valuation of the transaction has a projected 6.6% 2014 estimated cash capitalization rate and an implied purchase price of $195 per square foot, which Kite Realty believes is well below replacement cost.

Kite will assume $784 million of Inland Diversified debt as well as 69 million shares of operating partnership units. The cash on Inland’s balance sheet will primarily consist of the net proceeds expected from the sale of its single tenant net lease portfolio to Realty Income Corp. for $503 million. That deal is expected to close prior to the closing of the Kite merger, which is expected by early in the third quarter of this year.

The new markets Kite Realty is enetering through the Inland acqusition include: Westchester, NY; Bayonne, NJ; Las Vegas, NV; Virginia Beach, VA; and Salt Lake City, UT.

Select Assets, Location, SF
City Center White Plains, NY, 365,905.
Bayonne Crossing, Bayonne, NJ, 360,045.
Centennial Center, Las Vegas, NV 857,831
Landstown Commons, Virginia Beach, VA, 409,747.
Draper Peaks, Draper, UT, 229,794.
Miramar Square, Miramar, FL, 238,334.

Following the deal, the number of properties owned by Kite Realty will increase from 74 to 131, and the total portfolio size will increase from 10.1 million owned square feet to 20.3 million owned square feet.

The REIT believes it can achieve substantial administrative and operating synergies, including saving $17 million to $19 million by terminating external manager contracts and other cost savings.

As CoStar News previously reported one year ago, Inland Diversified started the process of disposing of its then $2.2 billion portfolio, before agreeing to sell its single tenant net lease portfolio to Realty Income Corp.

"This transaction achieves our goal of maximizing value and provides an opportunity for our stockholders to either remain part of the well capitalized combined company or liquidate their investment," said Barry Lazarus, president and chief operating officer at Inland Diversified.

Also before the Kite merger, Inland Diversified is required to complete a 1031 exchange on certain single-tenant assets and redeploy $72 million of capital.

After the closing of the proposed merger with Kite, Kite expects to dispose of three multi-family assets owned by Inland Diversified, as well as Inland Diversified’s securities portfolio. It expects proceeds of about $95 million from the sale of non-core assets and around $61 million from selling the securities portfolio.

The proceeds from these sales will be used to further repay debt and delever the balance sheet.

Commenting on the transaction, Citi Research noted that, “while we are not typically fans of a REIT growing just for growth’s sake, we see benefits for Kite as a larger REIT.”

Citi noted the cost synergies, improvement in Kite’s leasing footprint, greater equity float and liquidity in the stock as well as reduced exposure to development/ redevelopment as a percent of gross asset value.

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