Kimco Realty Corp. to Acquire
Pan Pacific Retail for $2.9 Billion
Kimco Realty Corp. agreed to buy Pan Pacific Retail Properties Inc. for $2.9 billion, accelerating consolidation in the strip-mall sector and continuing a torrid pace of activity in real-estate investment trusts.
The move Monday comes less than a day after Centro Watt, an Australian and American joint venture, agreed to purchase strip-mall owner Heritage Property Investment Trust Inc. of Boston for $1.83 billion.
The deal allows Kimco, already the nation's largest strip-mall real-estate investment trust in terms of both market capitalization and square feet owned, to beef up its presence on the West Coast. All of Pan Pacific's 138 properties, with 22.6 million square feet of space, are located on the West Coast, where Kimco has only 11% of its properties, according to UBS Investment Research analyst Scott Crowe. The purchase also fits Kimco's strategy of upgrading the quality of its portfolio, because 74% of Pan Pacific's properties are in the 10 largest markets. Kimco has stakes in 1,117 centers with 143.2 million square feet.
Kimco, of New Hyde Park, N.Y., will pay $70 a share in cash, which is what Pan Pacific was trading for at Friday's close, though it had risen about 7% in the past two weeks on speculation of a deal. Pan Pacific shares were down 65 cents to $69.35 in 4 p.m. New York Stock Exchange composite trading, while Kimco's rose 54 cents to $37.41.
Kimco is also assuming $1.1 billion in debt.
Combined with the Heritage deal, which sold for a 3.3% premium to share price, the amount Kimco is paying suggests that the strip-mall sector could be fully priced. Morgan Stanley analyst Matthew Ostrower estimated the capitalization rate -- the return on investment in the first year of ownership -- on the transaction to be 6.3%, higher than many observers would have expected, he said. Prices move inversely to capitalization rates. "It's an indication that [values] have come down somewhat in the shopping-center sector," Mr. Ostrower said.
"This merger fits well with our strategy of owning the highest-quality shopping-center portfolio, growing our management business and generating solid investment returns for our partners and shareholders while conserving our own equity capital," Kimco Chief Executive Milton Cooper said in a statement.
More broadly for the real-estate industry, the deal adds to what so far this year is already a record amount of mergers and acquisitions in the REIT world. Thus far in 2006, there have been REIT mergers, acquisitions and privatizations valued at $30.6 billion including debt, according to SNL Financial. That tops the record set in 2005, which saw $28.8 billion in deals for the full year.
Most of the increased activity during the past year has involved private buyers of real estate, and REITs have been largely supplanted in the acquisition game as the flood of private money has pushed down capitalization rates, Mr. Crowe said. Kimco's acquisition of Pan Pacific is an exception to that trend.
Analysts said Kimco will likely put much of the Pan Pacific real estate into its joint ventures with institutional investors.
The transaction is expected to be completed in the fourth quarter.
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