REIT Mergers and Strategic Shifts – What’s in Store with Karly & Chris
Guest: Karly Iacono
Topics: REIT mergers, Kimco, Regency
Transcript:
Chris Ressa 0:00
This is Retail Retold, the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa, and I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC Management.
Karly Iacono 0:24
Welcome, everybody to what’s in store the show where we cover hot topics at the cross section of retail in real estate. I’m Carly Iacono. And I’m joined by my co host, Chris Ressa. Chris, how are you? Great to see you again.
Ressa 0:37
Doing well. How are you? Doing great,
Iacono 0:40
no complaints. Business is good. Over a DLC. Business
Ressa 0:45
is good. We just bought a big deal we’re going to announce yesterday so excited about that.
Iacono 0:54
That’s congrats very excited.
Ressa 0:58
Yeah, I’m getting ready for Thanksgiving hosting. You got any big plans for Thanksgiving? Going
Iacono 1:02
to see family? It’s a whirlwind road trip from New York to New Hampshire and back so should be good.
Ressa 1:10
Is it a like eat drink lay down day for you. After that, it’s
Iacono 1:15
a run, eat drink. Lay down play family board games day.
Ressa 1:19
Okay. Are you good at what board game for you?
Iacono 1:24
Of course I’m good at them. So we really like Rummy Cube, Scrabble, Risk is big. If we’ve got enough time. Just depends. How about you?
Ressa 1:35
Risk is great. You just need the time for Risk. It’s, exactly, you just need time. So we actually, we play Monopoly a lot as family and sometimes we sub out play money for real money in Monopoly.
Iacono 1:52
Yeah, interesting twist, but that gets heated.
Ressa 1:56
It does get heated.
Iacono 2:00
So I think I’d like to be a fly on the wall for real money with Monopoly. I feel like it’s intense enough without it. But yeah, sure. Okay, good luck. We hope you don’t lose your shirt, literally and figuratively. Yeah, good luck. So today, we are covering something a little bit different than we normally do on our show. And that is talking about all of the recent retail REIT mergers and acquisitions. It’s been a really interesting few years. And it seems like activity is just continuing to heat up with ongoing consolidation.
So we wanted to cover some of the big mergers in the REIT space on today’s show and kind of give you our thoughts on what the thought process behind these acquisitions and mergers might have been and what that means for the industry overall. So let’s start with a big one, which was Kimco acquiring RPT. Now, Chris, why don’t you give me your thoughts? And then I have a few things that I thought was was interesting about this deal in particular?
Ressa 3:05
Yeah, I think the overall landscape, can I take a step back, Karly, just one step. I just, I think the landscape on a high level, the concept of growing through M&A is not that unique. Companies do it all the time. But in real estate, the organic way of historic growing is by development, or buying a new shopping center, in our world, new office building, multifamily apartment building. What is done less is buying the company that owns that real estate. And it’s very rare in the private space. Right? Rarely do you see it, right.
And one of the reasons it’s rare in the private space is that the capital stacks of organizations are different from deal to deal, right. And it makes it really challenging to do something like that. And, you know, there’s a lot of legacy families that are holding on to real estate as a means of passive income for generations down the line.
And to that end, you see, we see every day trades happen of individual assets or portfolios of assets, but rarely the company that owns the assets, right is is something different, even in a scenario where there’s a someone who owns real estate, even if like some private family wants to sell all their real estate. They’re typically not selling the company that owns the real estate.
They’re selling all the assets they own from a real estate perspective, and they’re not selling the company that owns the real estate and it has to do with the capital stack has to do with the actual entity ownership structure in the real estate world, that makes it difficult. But in the REIT landscape, what you’re doing is you’re buying all the stock of a company. And therefore you own the company, which just so happens, majority of the assets of that company are real estate, which makes it a very different transaction.
There’s sometimes finance differently. And you’re, they’re certainly very different than just buying assets. Because when you’re doing that, the people that work in those companies are potentially moving over all the office space that comes with that, and everything, the it the computers, everything that happens when you buy a company, that’s different than a piece of real estate. So to me, at first, I think you I start from the premise that it’s interesting, because just in the general capital markets of real estate, that’s the more unique type of transaction than actually buying a piece of real estate.
Iacono 6:06
You’re so right. And I’m glad you made that distinction. Because when you hear publicly traded REITs merging, it’s like, okay, they’re gonna put out stock. And now that stock is assigned a new, you know, ticker, and that’s about it. Now, these assets move over to this fund. But the actual integration of the businesses is so complicated for all those reasons that you just mentioned.
But with overlapping complication, of course, comes cost savings and benefits, which I think is one of the main drivers of a lot of these mergers. It’s not just the underlying assets. It’s the property management and their acquisition teams and all of these overlapping services that make it more efficient once combined.
Ressa 6:47
Yeah, I’ve been involved recently on much smaller scale of some M&A. And the words that are used in the M&A world are synergies, and dyssynergies. Synergies are when you’re combining that, there’s cost savings, right? Typically, one of the big ones when there’s major companies is there’s this you don’t need two CEOs or CFOs. So typically, when there’s a merger, there’s some synergy in the top level labor, for sure.
Sometimes the bottom, the bottom portion of the organization, the middle of the organization, there’s some savings, but definitely at the top right. Then there’s these synergies that might increase costs, right, that you have to look at that is different than a real estate transaction. When you have two organizations, and they have different tech stacks and getting them merged, those can be disintermediated. This dis synergies, I don’t know, was synergistic. I don’t know if that’s the word.
But so there’s that piece of it and pulling all that data. And getting that into one place in today’s world is super important, but also super costly. So those are all the things that people are looking at. When you’re buying a company, and there’s pros and cons to buying the company that owns the real estate, versus buying the real estate itself, like there could be opportunities in the labor pool that comes with that.
There could be, you know, there’s all this, you know, undocumented knowledge about the assets that comes with it, that you don’t get when you just buy the asset. You know, all that historic knowledge is, you know, really valuable at times in understanding what’s going on.
So it’s just very hard to do in our space, especially from a private to private organization, to buy a company. And so when we keep seeing these headlines about these mergers and acquisitions, especially in the capital market, you know, market that we’re in right now, in the climate that we’re in, I think it’s really interesting.
Iacono 9:03
I think it makes sense that you would go through all of that headache and potential synergistic, synergistic, there we go, growth, because you don’t have any other options, or it’s really difficult to grow in scale with individual asset purchases, given where interest rates are, given how constrained the capital markets are. So it’s not so much this is fun, and what a great idea, it’s like, this might be the only way to grow right now. And then it’s resulting in a lot of these other benefits, but it’s certainly a challenge.
Ressa 9:37
Growth is, growth is tough right now, for a lot of reasons, right? From the most basic. There’s less vacancy. So same store. NOI growth is tough when you have no vacancy. You have to, you’re pushing on renewals and we’re getting growth through the renewals, but that’s really up driver A, historically new development in our space since the early 90s, has been a big driver of growth.
And then, obviously, the acquisition of properties and the lack of inventory, the disconnect between the bid ask between buyers and sellers and the debt markets making those things the challenge from a growth perspective. And those are typically bigger movers than same store NOI growth pending on your scale. Right? So, and that’s the other thing that we’re starting to notice, some of these REITs are starting to get pretty big. And they’re creating scale for themselves, which will create bottom line benefits as they continue to scale up.
And that’s, you know, they spent a long time creating pruning their portfolios, creating efficiencies, and now they’re scaling to you know, these some of these are already Kimco. You mentioned already enterprise scale, and continuing to scale. Right. They were enterprise scale, then they bought Weingarten a few years ago, which was a large, you know, I don’t know if it’s about 200 assets, great REIT, all Sunbelt focused that was definitely geography focused.
Then you have, you know, they’re buying RPT which is small in comparison to Kimco, right, they had 50 as 43 assets, 50, assets, something like that, you know, Kimco’s got 500, something like that. So, small. And I think that gets to the really the heart of the reconsolidation, which is size and scale right now. And that’s, I think, a big driver of what’s going on.
Iacono 12:01
And that’s business school 101, right? Economies of scale.
Ressa 12:05
Yeah. Right. Like, if you look at the REITs that are, you know, getting bought, it’s the smaller, public REITs that have a much lower AUM, potentially, the stock is trading below nav, which we could talk about. And then there’s a, you know, it’s how the sale is structured, those are like some of the big drivers, like what is the price of the stock versus the NAV? What is the scale of this organization? And how do we structure a deal to buy this organization?
And I think what the market is essentially saying is, say the market, the equities market is like, is there a need for all these public REITs. And it’s making it tough to compete. And, you know, if you’re a public REIT, because the equities market saying like, do we need all these public REITs, which is, you know, some of that negative sentiment is pushing the stock down and creates this opportunity, where the, the totality of the value of the stock is, you know, lower than NAV.
And there’s analysts all the time that are tracking all the REITs, you know, Green Street does this, Green Street puts out a report that tracks all the REITs and what their market cap and enterprise value is, and what is their NAV, and when there’s a big Delta, some of those REITs could end up with a target on their back.
Iacono 13:42
Right, and I think there’s other benefits than then just scale, right? There’s specific reasons certain REITs go after other partners, right? It’s not just whoever they can gobble gobble up. I know RPT has a pretty big exposure to some, let’s say higher risk, big box tenants, right, like Joanne and they’ve got a ton of Bed Bath exposure, Regal Cinemas.
So do you think, and this is speculation, I don’t have any inside knowledge. It just seems to me that maybe Kimco wanted that space, they saw an opportunity to buy that space at a discount, because of the risk profile and then maybe backfill at a much higher rent rate and really boost the portfolio over the near term. Do you think that could have been a driving part of their strategy as well?
Ressa 14:32
I don’t know. My gut is, I’m sure there’s at least a plan. I think, I think the drivers of the strategy, to me, in that specific deal, and I’m not, I don’t know, but just outside looking in. I think the synergies. If you read the reports, there was a lot of synergies that that they talked about in this deal. And that has a lot to do with the geographies that RPT owns in And the small nature. So I think that’s one.
There’s a immediate bottom line savings based on the synergies. I think there’s clearly probably some of the real estate that they have their eye on. I think RPT was leasing space. And so, you know, some of those tenants haven’t opened yet, there will be, I’m sure there’s some level of down the line that NOI growth that’s already baked in.
So there’s some cager in this, and there’s probably opportunities to relate space, and then they’ll probably de risk by selling I imagine some of the math, maybe not, but maybe there’ll be some assets that gets sold in post closing, so. But I don’t know, I don’t know if they were looking at specific boxes or not and saying, well, this is an opportunity to relate space at a higher rent. I’m sure they underwrote every single deal in the aggregate, right?
They underwrote every asset and the aggregate of that underwriting clearly led them to think there’s opportunity somewhere, right?
Iacono 16:06
Immediate and future.
Ressa 16:07
Yeah, yeah, there’s immediate and future.
Iacono 16:11
Let’s move on to a few other examples, Regency…
Ressa 16:14
And then, and then, I think one of the key drivers, hold on Thursday, we didn’t. We mentioned one thing. One of the key drivers, and this is happening in many of the transactions is that the way they’re funding this is through through issuing stock, right, which is very different than normal real estate transactions in a challenging economic climate from our challenging capital markets climate. That’s a very interesting way to structure a deal.
And that was, you know, Regency did this, Kimco’s doing this with RPT. And so there’s, you know, really clever capital structuring to acquire the assets, because you’re not just acquiring the assets to buy the companies. And so I think that is, I think it’s important to know, because I think without that, and I recently interviewed Glenn Rufrano, when he talked about that, you know, I wonder if there’s a deal in this environment.
So I think it is a key driver is the capital structure to which to acquire it, which a private company can’t do to buy another private company?
Iacono 17:20
Well, they’re basically buying a company on sale, because they’re trading at such a discount to the net asset values. I mean, if you look at it just straight from a real estate perspective simplistically, here’s the value of everything they own. Maybe it’s 30%, below that value that we can acquire it, why not buy as much product as you can on sale instead of paying full price.
Ressa 17:46
So, there’s that. But there’s also, it’s very different if I can buy something at market price, but I’m using current debt pricing. Right? Versus issuing stock, right? If I’m, when you’re talking in the billions, these numbers, those rates and cost of capital start to really move the needle on whether a deal can happen or not. Right. You know, if you read any Business 101, when you’re at scale, you’re in the cost of capital gain. And so I think that is a that that is the big driver.
As it relates to on sale, I think we can say whether any of these companies are on sale or not from the actual market cap versus the NAV, but, you know, some of that, really, the NAV is, you know, in today’s environment, cap rates are moving, you know, are changing, and people are uncertain. So we say it’s on sale, based on what cap rates, right, the cap rates, based on on what cap rates?
That’s why I think the source of funding just like I think this is very, this is the same piece of it on the real estate side, which is over the last few years, what drove the bus in sales and transactions was cheap money. Right, over the last decade, cheap money drove the bus on transactions. Now there’s not cheap money and transactions have slowed.
When you’re a public company, you can issue stock, you’re just you’re finding another lower cost option for money than other people might find, right? The the only source really that these private companies have of lower cost of capital is really the debt markets.
Iacono 19:42
Very different picture if you’re trying to acquire something like Kimco’s deal with an implied cap rate of eight and using debt that’s seven and a half. That’s not very attractive. But if you’re using a stock for stock purchase, it’s a very different picture.
Ressa 19:55
Correct, yeah. And the cost, the cost of that capital is very different.
Iacono 20:02
Correct. Are you ready to move on to a few more examples? Or do you have more?
Ressa 20:06
But that wasn’t really about Kimco. That was just general.
Iacono 20:10
Correct, no very good information. And we don’t have to go into too much detail, but I just want to touch on a few other big mergers. So we, you know, we have a few more examples here. So Regency, there was a lot of geography, I think, a play in play here, tapping into suburban markets, what was your thought on on the driver of that deal?
Ressa 20:30
So I think that’s great, great real estates I think both Kymco and Regency, kudos to them. I think they’re doing a great job and kudos to both are ISTEP Biddle and RPT because they were able to, you know, do something that they felt was accreted for their shareholders. So I think on the Ursdat Biddle you know, I think this is real estate that like our industry for a long time, has always said as quality real estate, they had this very niche focus of grocery anchored centers within 90 minutes of New York City.
And to that point, I think that’s the point which is, does the market, the public markets, the public equity markets, do they need an option to buy a public REIT to get access to retail real estate from an equities perspective in such a niche space? Right. And that one’s a little different, because there was significant family ownership in that, in the equity position there from the Ursdat Biddle side, but I think, listen, this is, you know, Regency is a very laser focused organization from a product side, right?
They they are grocery anchored organization, they want premier grocery anchored things, they love core markets. And, you know, they’ve spent an over the course of time, Regency, even today, they’re still doing stuff where they’ve been a pretty robust developer across the country. I mean, they’ve developed grocery anchored centers everywhere. And to that end, we all know how challenging development is. Right? And they’ve relied on the development pipeline for growth for a while.
This is a company just like Kimco that’s not unfamiliar with M&A. They bought Equity One, you know, some years ago, seven, eight years ago, I forget what it was that brought them to the northeast. And then this really densified them up here to get access to really, really good real estate, in my opinion, some that had, you know, a lot of people had high regard in our industry. And so this is definitely super long term play for them because of the type Ursdat Biddle was.
Iacono 22:55
Yeah, very interesting acquisition. I’m glad it worked out for him, like you said, I think it’s a great long term move, some really interesting assets and markets. Yeah. Let’s move on to some of the net lease REITs, so we had GIC and Oak Street buying store, Capital Spirit was just acquired by Realty, two huge deals, very different companies too.
I think the store acquisition to me is interesting from an integration perspective, because Store’s models so, so laser focused on sort of that middle market sale leaseback, typically noncredit, lots of different types of deals, anything but cookie cutter, but they’ve been really strategic in the space they plan. So I wonder how long term that integration of the two companies will be? Do you have any thoughts on Oak Street GIC and Store?
Ressa 23:53
I think Realty income, you know, they’re in this asset aggregation mode clearly. And because, right, because they bought four REITs recently too. I think growth for them is interesting because they have gotten themselves so big. And they’re buying such small deal sizes, or they own assets of such small deal sizes. So no one acquisition of a freestanding McDonald’s, let’s say, moves the needle.
It doesn’t it doesn’t they’re so big that on a one off basis, at least in in the shopping center, multi tenant space, whatever company you choose, that’s public, you know, they could buy $100 million deal and $100 million deal moves the needle, how many deals does Realty income really need to buy to get to that size of a deal?
They need to buy a lot because they’re buying these freestanding net lease. So for them, like, aggregating assets in one transaction is probably are always going to be more creative than a one off and they’re going to continue to do one off acquisitions. It’s part of it, right? They need to do that. But I think this is, as they get to the size that they’re at, it’s going to be hard for any one single asset to make a difference into their balance sheet and their income statement because they’re so big.
Iacono 25:22
So the original commentary I was making was on Store Capital and GIC. A little different, but that’s okay. We’ll jump forward to it to really get ready to implement Spirit.
Ressa 25:30
Capital, my my fault.
Iacono 25:34
No problem. No problem. So for Spirit, I agree. I think it was all about scale, what roughly $9.3 billion deal, I think in it, it was scale and diversification. Because I completely agree with your point. It’s too hard to grow with individual asset purchases that are, you know, three to $5 million, just too much.
Yeah, for sure.
So that makes total sense. I think that the Store Capital One, they’re a little more nuanced in the types of deals that they underwrite. So I think that’s just interesting, because it’s less cookie cutter. So I think it’s a great strategic play. I love how they underwrite the the middle market sale leasebacks. But it’s, I think, a little harder to wrap your arms around from a quick integration perspective, because each of their deals are so unique.
Ressa 26:20
Yeah, I think on the store capital front, I think they’re in a little bit of, you know, I don’t know where they rank in size of REIT. But like, do you know where they rank and size of REIT?
Iacono 26:42
I want to say it was like the third largest? Yeah, third largest publicly traded Net Lease REIT.
Ressa 26:48
So third largest net lease re, right. So I think, right, you’re either getting to scale, or you’re looking at a different plan. And to me, that’s what I think. And I think these companies are like, deciding, are we going to find a way to get to scale? Or should we find a different plan? Because it’s very hard to compete in the public markets.
Iacono 27:12
Agreed. So with any of these, we have massive consolidation, like we’ve been saying, to me, we’re taking buyers off the table. So as a broker, I’m like, oh, now I have one less person to go to. And I have an institutional asset, or I have less buyers to put against each other to create a competitive landscape. So, minor change, but, you know, that certainly plays in, but on a positive side, I think we will see.
And you and I were chatting about this earlier, more turnover of inventory in the next few years. So as these REITs can come in, they see what works, what does doesn’t. There’ll be some trimming of the portfolios, and trimming and portfolios usually means more assets coming to market. So for that, I’m excited being that we have limited new development, I think that’ll kind of put some new lifeblood into the market that we haven’t seen in the last few years.
Ressa 28:10
Well, a couple things. I think everything you said is right, I do think there’s going to, you know, there’s going to be more M&A activity, it just feels like there’s going to continue to be more of this type of activity in the space. And I think you’re right about the inventory.
Like there’ll be some assets that people can dispose of, but I think I’d like a total off on a tangent. I think some of these companies that got consolidated, some of the people are gonna go off and start their own ventures that’ll create opportunities for you as buyers.
Okay, I think you’re gonna see, I think you’re gonna see some people who end up starting their own ventures and need to aggregate and acquire assets. I don’t think some of these people aren’t just… They’re not setting off into the sunset and, you know, go to Tahiti and starting a surf shop.
Iacono 29:09
No? Nobody’s made that dream come true. Are you sure? That’s funny. Good. Well, I like new ingenuity, new businesses, and of course, more buyers. So that is good news. I’m gonna take it as positive. Anything else do you would like to throw out there before we wrap up today’s episode?
Ressa 29:33
That’s what I’ve got today.
Iacono 29:35
Excellent. I hope everyone listening enjoyed our thoughts on the retail real estate REIT mergers that we’ve seen over the last year, and what we think this means for the industry. As always, feel free to reach out to Chris Ryan, anytime that you would like to talk retail real estate. Thanks so much for listening, and we will see you again next month. Thanks, Chris.
Ressa 30:13
Thanks Karly.
Thank you for listening to Retail Retold. If you want to share a story about a retail real estate deal that you were a part of on our show, please reach out to us at retailretold@dlcmgmt.com This show highlights the stories behind the deals from all perspectives. So it doesn’t matter if you are a retailer, broker, entrepreneur, architect or an attorney Also don’t forget to subscribe to Retail Retold so you don’t miss out on next Thursday’s episode.