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Is Regency Making a Smart Choice with Equity One Buy?

In a first retail REIT merger in two years, shopping center operator Regency Centers Corp. agreed to buy Equity One Inc. for $4.6 billion. Regency executives estimate that as a result of the deal the combined company will have total market capitalization of $15.6 billion. It will also catapult to the position of the largest REIT in the shopping center sector by equity market capitalization, at $11.7 billion, ahead of current leader Kimco Realty Corp., according to a press release on the company website.

As of October 31, the U.S. REIT sector included 17 shopping center REITs with an equity market capitalization of approximately $71.5 billion, according to the National Association of Real Estate Investment Trusts (NAREIT). Year-to-date, those REITs delivered a total return of 4.6 percent, lower than the 6.57 percent figure for all equity REITs, but higher than the 2.67 percent average for the retail REIT sector in general.

The main reasons for Regency’s decision to acquire Equity One, however, include the latter’s portfolio of assets in urban infill locations, as well as more growth opportunities with a cheaper cost of capital as a combined company. Curtailed access to capital, as well as intense competition for development sites and tenants from rivals, were both cited as among the top risks facing REITs in 2016 in a study released earlier this year.

Purchasing Equity One will significantly expand Regency's holdings in some key areas, including in Florida (where Regency's GLA will increase by 165 percent), California and New York, according to S&P Global Market Intelligence.

Some analysts, however, question whether the merger will ultimately prove beneficial for the two companies. Analysts with Newport Beach, Calif.-based research firm Green Street Advisors, for example, point out that Equity One has been open to the idea of a sale for a while. “Why sell now?” they ask in a Nov. 14 note. “For Regency, the cost savings and expense synergies are real, but alone are not compelling enough to do a deal of this size. Hence, the ability to vet out new external growth opportunities, while growing the current portfolio at a faster pace as a combined entity, will be the benchmark on the success of this transaction.”

Back in June, 45 percent of respondents to NREI’s exclusive survey on REITs noted that now may be a good time for REITs to acquire smaller rivals. This was driven partly by REITs’ appeal to investors looking to place their capital in the real estate sector.

But the last merger involving two publicly-traded retail REITs took place in 2014, when Washington Prime Group acquired Glimcher Realty Trust for $4.3 billion. The last merger involving two shopping center REITs specifically happened almost a decade ago, when Australian REIT Centro Properties Group bought New Plan Excel Realty Trust in a $6.2 billion deal in 2007. Neither of the above transactions proved particularly successful. Investors were shunning WP Glimcher earlier this year, with long-term CEO Michael P. Glimcher stepping down from his post in June. Meanwhile, Centro’s purchase of New Plan Excel at the peak of the last cycle led the company to face some serious refinancing troubles during the financial crisis.

Regency leverage ratio is currently in the average territory for the sector, at 1.71, according to Equity One’s is on the low end of the spectrum, at 1.09.

As of the third quarter of 2016, Regency Centers owned 307 retail properties totaling 42.1 million sq. ft., including assets owned through co-investment partnerships. It posted a same-property occupancy rate of 96.0 percent and same-property NOI growth of 2.9 percent for the quarter. There were 21 properties in the various stages of development or redevelopment.

During the same period, Equity One’s occupancy totaled 95.4 percent and its NOI growth was 3.6 percent. Its portfolio currently includes 112 properties, as well as 9 development/redevelopment projects.

The merger is expected to close in the first half of 2017.

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