Retail REIT Consolidation Accelerates With Share Prices Down And Debt Costs Up

As investment into retail real estate from institutions picks up and interest rates make financing property acquisitions more expensive, mergers and acquisitions among publicly traded retail owners are on the rise.

Kimco Realty this week agreed to buy RPT Realty for $2B in an all-stock deal that market watchers say is likely the tip of the iceberg. It follows two other M&A deals in recent months: Regency Centers' planned acquisition of Urstadt Biddle Properties in an all-stock merger valued at $1.4B and Global Net Lease’s planned $4B merger with Necessity Retail REIT.

“There is going to be consistently steady M&A activity in the retail REIT sector,” Ermengarde Jabir, a senior economist with Moody’s Analytics, told Bisnow. 

She added that the economic environment “gives the strong REITs the opportunity to acquire properties, operated by REITs that perhaps are much more sluggish, at discounts.”

The retail real estate sector has been resilient coming out of the depths of the pandemic, and recent retailer bankruptcies haven't affected occupancies and rents overall. The largest of the retail REITs — players like Kimco, Brixmor Property Group and Federal Realty Investment Trust — are poised to use the dislocation in the commercial real estate market caused by rising interest rates to buy smaller retail REITs, especially those that may have near-term debt coming due in their portfolios, said David Auerbach, a longtime REIT analyst and publisher of The Daily REITBeat Newsletter.

“Everybody is in play, I think," Auerbach said. 

Urban Edge Properties, whose portfolio is focused on the high-value metro New York retail market, and Acadia Realty Trust, which has a concentration of urban street retail, could be attractive prospects for other REITs wanting exposure to those markets, Compass Point Research & Trading Managing Director Floris van Dijkum wrote in a note about the Kimco-RPT deal.

Other potential M&A targets could include CTO Realty, which is eliminating its exposure to office real estate, and Site Centers, which is pivoting to convenience centers in high-income markets, van Dijkum said. 

"We believe that further consolidation in the shopping center industry appears inevitable given the benefits of scale on financing and overhead costs," he wrote.

A number of factors are fueling the increase in retail REIT M&A activity. The acquisitive firms are looking to enhance and expand their geographic coverage, seeking efficiencies of scale and looking to acquire new properties without relying on taking on new debt, especially since banks have been reducing their exposure to individual commercial real estate loans in the past year.

“It’s more expensive to buy individually from a maintenance and operating cost perspective,” Jabir said. “So the fact that [REITs are] able to buy essentially in bulk reduces the operating expenses, both from long term and those costs at the time of purchase.”

Kimco said in its investor presentation discussing the RPT deal that it expects annual cost savings of $34M with the deal, which gives it significant footholds in high-growth markets like Boston, Miami and Tampa, Florida. 

Buying REIT stocks also is far cheaper than raising debt and equity to buy the underlying real estate, Piper Sandler & Co. Managing Director Alexander Goldfarb told Bisnow.

The Dow Jones U.S. Retail REIT Index entered the year trading at around $90 per share, rising to a high of $96 in early February. The stock has trended down since then and closed at around $82 on Wednesday. REIT stocks tend to underperform in market declines, and all commercial real estate has been impacted by high interest rates, Jabir said.

Lower average stock prices mean buying REITs has become more compelling versus paying for the underlying real estate assets alone, Goldfarb said.

“[REITs] can’t really issue equity to buy assets because it's hard to make the math work,” Goldfarb said. “If you’re talking about a merger, you’re talking about stock, so you can make the math work.” 

Goldfarb added that the pool of new retail real estate has dwindled since 2008. Before then, developers built an average of 200M SF of retail a year. Since 2008, the average has been 50M SF a year, he said. That trend isn't likely to reverse given the bank pullback in construction lending, so the opportunities for REITs to pick up newly delivered retail assets are fewer.

Retail is a CRE asset class where economies of scale make a lot of sense, he said, not only by consolidating operating costs but also with leasing. National retailers need a footprint across the U.S., and retail REITs with more options are more likely to capture those leases.

“It’s one-stop shopping,” Goldfarb said. “Office size and scale isn’t necessarily an advantage. Just because a tenant leases in New York doesn’t mean they’re going to lease in LA.”