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EDITOR'S LETTER: REITs Suddenly in a Buying Mood

Suddenly, in the past four months, a new merger wave has begun to build. On a single day in July Kimco Realty Corp. announced an agreement to purchase Pan Pacific Properties for $4 billion and Centro Watt forged a deal to buy Heritage Property Group for $3.2 billion. As we are going to press in late October, Developers Diversified Realty Corp. has announced plans to buy Inland Retail Real Estate Trust for $6.2 billion in cash and debt.

That's $13.4 billion in deals.

Those deals ended a two-year dry spell following a period where it seemed like there was a major REIT merger or big portfolio deal every other day.

The deal frenzy peaked in 2004 when, in a matter of months, Simon Property Group acquired Chelsea Property Group for $3.5 billion and General Growth Properties completed the largest REIT buyout ever, acquiring Rouse Co. for $12.6 billion.

After Rouse, everyone was talking about who would be next. But that deal never spawned a successor.

So far, the new wave of deals is all about community and grocery-anchored space. A big piece of what's driving the renewed activity is movement in cap rates: Pricing for retail properties had gotten so high that cap rates hit unprecedented lows in many parts of the country. In recent months, however, cap rates have begun to bounce back. Average cap rates on all retail properties moved north of 7 percent this summer, according to Real Capital Analytics.

The recent activity is also being fueled by the REITs' joint venture partners. In all three recent mergers, there are other players involved. On Pan Pacific, Kimco has Prudential Real Estate Investors ponying up $1.1 billion of the deal price. Centro Watt is backed by Australian capital, which traditionally has been willing to pay higher prices than domestic buyers. And Developers Diversified's deal is funded in part by an as-yet-to-be-named institutional investor.

The presence of these joint-venture partners helps explain the new rash of activity as private investors have proven their willingness to pay more dearly for properties than public companies.

The next question is whether regional mall REITs will get back into the buying game. My hunch is that they won't, at least not soon.

The usual suspects — Simon, General Growth, Westfield — have too much on their plates. Simon is occupied with a $6 billion development pipeline. General Growth is still digesting Rouse and trying to ease a huge debt burden. And Westfield has made it clear that it's not interested in portfolio plays right now as it too focuses on development (in the U.S., in its home base of Australia and elsewhere abroad).

My guess is that there will be more big retail deals, but for small-format properties. Kimco, for one, seems to have an insatiable appetite. And Developers Diversified, New Plan Excel Realty Trust and Regency Centers all have joint-venture arrangements with institutional partners that give them ready access to acquisition funding.

Stay tuned.
David Bodamer
Retail Traffic Magazine


Retail Traffic is pleased to welcome Riccardo A. Davis as its new managing editor. Riccardo has a wealth of business journalism experience, amassed from years of covering financial services, manufacturing and economic development. His writing has appeared in publications such as the Hartford Courant, the Arizona Republic, the St. Paul Pioneer Press, the Philadelphia Business Journal and Advertising Age. Most recently, he was Associate Editor of Accounting Technology, writing and editing stories on CPAs' use of technology.

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