Kite Realty–Inland Diversified Merger Shows Retail’s Resurgent Strength

The pending merger of Inland Diversified Real Estate Trust Inc. into a wholly owned subsidiary of Kite Realty Group Trust in a stock-for-stock transaction worth $1.2 billion is just another sign, albeit a very sizable one, of the retail sector’s strength, in light of a recent report from Real Capital Analytics.
John Kite, Kite Realty

John Kite, Kite Realty

 The pending merger of Inland Diversified Real Estate Trust Inc. into a wholly owned subsidiary of Kite Realty Group Trust in a stock-for-stock transaction worth $1.2 billion is just another sign, albeit a very sizable one, of the retail sector’s strength, in light of a recent report from Real Capital Analytics.

The merger, announced on Monday, will create an entity (still known as Kite Realty, and headquartered in Indianapolis and still trading on the NYSE under the “KRG” symbol) with a combined asset base of 131 properties (previously 74) across 26 states and totaling 20.3 million owned square feet (previously 10.1 million). The combined company will have a total equity market cap of about $2.1 billion and an enterprise value of about $3.9 billion.

The transaction is expected to close late in the second quarter or in the third quarter.

In a release, Kite Realty chairman/CEO John Kite called the deal “a transformational transaction for our company” and emphasized the complementary nature of the two portfolios.

Inland Diversified’s portfolio consists of 57 retail properties that were 95.3 percent leased as of Dec. 31, 2013. The transaction is projected to have a 6.6 percent 2014 estimated cash cap rate and an implied purchase price of about $195 per square foot, which Kite Realty judges to be “significantly below replacement cost.”

The deal will bring Kite Realty into some new markets, including Westchester, N.Y.; Bayonne, N.J.; Las Vegas; Virginia Beach, Va.; and Salt Lake City.

The RCA report noted that sales of significant retail properties totaled $60.8 billion in 2013, up 8 percent from the previous year, and sales of strip centers and single-tenant properties jumped 26 percent. Entity-level transactions in all of 2013 comprised about $6.0 billion of the $60.8 billion total.

This surge in activity is accompanied by what RCA calls a “remarkable rebound in prices” for retail properties in 2013. The Moody’s/RCA Commercial Property Price Index for retail is expected to post a 23 percent increase for the year, “well above any other property type,” according to the report.

Once the merger is closed, Kite Realty’s board of trustees will consist of nine members, six of whom will be current trustees of Kite Realty and three of whom will be designated by Inland Diversified. John Kite will serve as CEO & chairman of the combined company. Thomas McGowan and Daniel Sink, Kite Realty’s current president & COO and its current executive vice president & CFO, respectively, will retain those positions in the combined company.

In mid-December, Inland Diversified agreed to sell a portfolio of 84 single-tenant net-leased retail and industrial properties to Realty Income Corp. for $503 million.