NEW YORK — The number of retail real estate investment trusts is shrinking, and merger activity in the sector will maintain its dizzy pace.
“There will absolutely be more mergers and acquisition activity in the next year,” said Richard Moore, managing director of equity research for RBC Capital Markets.
Further consolidation is expected among owners of neighborhood shopping centers and strip malls, as well as in the mall sector, where REITs already own 70 percent of the space. For better or worse, retailers will have far fewer calls to make when looking to open new stores.
Acquisition opportunities abound for hungry REITs. Institutional funds and private equity players are looking for deals to diversify their portfolio geographically, add in-house development (or management expertise) or simply grow in size. This is especially true for shopping center REITs — even the largest are dwarfed by the mall companies. Kimco Realty Corp., the largest strip center owner at a $10.7 billion market capitalization, is less than half the size of the $21.4 billion Simon Property Group, while the $6.9 billion Developers Diversified Realty is half of General Growth Properties’ $12.5 billion market cap.
In the strip center and shopping center market, possible targets are the $4.2 billion Federal Realty Investment Trust, which specializes in grocery-anchored centers. The REIT could be picked up by a larger company — namely, Kimco or Developers Diversified, both of which have recently completed multibillion-dollar deals and still seem hungry for more. Though Federal doesn’t develop new properties, its pipeline of redevelopment in the metropolitan Washington area would be appealing to investors looking to break into that market. Its Mid-Pike Plaza in Maryland and Pike 7 in Virginia, for example, are currently average-size properties featuring Filene’s Basement and TJ Maxx stores, but they could be expanded to massive sites in the millions of square feet.
Kite Realty Group Trust, a $524 million shopping center REIT that went public just a few years ago, is another prime candidate for M&A activity. Kite could either be bought by a larger company looking to expand its ground-up development pipeline or it could merge with a similar size company such as the $544 million Ramco-Gershenson Properties Trust to increase its portfolio. Both of these REITs specialize in big-box and strip-center development with tenants such as Marshalls, Target and Wal-Mart.
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In the mall space, the Macerich Co., CBL Associates and Taubman Centers, which hover in the $2.5 billion to $5.8 billion market cap range, “are all take-down candidates,” said David Aubuchon, vice president of securities research with AG Edwards. But when will these deals happen?
“The market doesn’t work on our schedule,” said Dan Hurwitz, chief information officer and senior executive vice president of Developers Diversified. “When opportunities exist, that’s when we go after them. We have a lot on our plate right now, but one of our core competencies is digesting these deals.”
Developers Diversified — its tenants include Old Navy, Macy’s, TJ Maxx, J.C. Penney and Kohl’s — announced a $6.2 billion joint-venture acquisition of Inland Retail Real Estate Trust in October. The deal put the REIT in a better position to compete with Kimco, which in July 2006 announced a $4 billion deal to acquire Pan Pacific Retail Properties, while greatly enhancing its California portfolio.
“Tenants like one-stop shopping when opening stores,” Hurwitz said. “What our scale does is make us the first call on their list.”
The mall sector, which is dominated by a handful of REITs, is accustomed to using their size to vie for tenants’ attention. “The strip center operators have been slower to consolidate than the mall companies, but now it’s happening more quickly,” said Robert Taubman, chairman, president and chief executive officer of Taubman Centers, a luxury mall operator that has largely avoided M&A activity. “But consolidation now is unabated and will follow the way of the mall sector. The companies are getting bigger and bigger.”
“There will always be opportunities to consolidate portfolios for diversification,” said Brad Case, vice president of research at the National Association of Real Estate Investment Trusts, an industry group. “There is a big drop-off in size after Macerich in the mall sector and after Developers Diversified in the shopping center sector. Any of the smaller companies would be targets for acquisition.”