Yet another REIT is being acquired -- but instead of being purchased by private equity, Pan Pacific Retail Properties
Roughly $2.9 billion of the purchase price represents equity, while the rest accounts for Pan Pacific's debt. Both of the companies are REITs focused on shopping centers.
One of Kimco's actions over the past five years, as outlined in the supplemental materials issued with its recent earnings release, is further expansion into West and East Coast markets. The acquisition of Pan Pacific Retail Properties certainly fits the strategy, since Pan Pacific's shopping-center properties are located exclusively in West Coast markets.
In the press release announcing the acquisition, Kimco stated that it's planning to take many of the Pan Pacific properties and move them into the company's coinvestment programs. In other words, Kimco will sell a percentage of its ownership in many of these properties to joint ventures. The company will earn property management fees and should still earn healthy returns, but will participate in only a percentage of the earnings and increases in property value.
It's hard to find fault with the portfolio Kimco is picking up from Pan Pacific. Pan Pacific's largest tenants include Safeway
Pan Pacific shareholders may not feel happy, since there is no premium being paid to the recent share price. However, having done a back-of-the-envelope look at Pan Pacific's net operating income and the purchase price being paid, I get a capitalization rate (net operating income divided by the $4 billion price paid) of around 6% -- subject to math errors, I'll admit. I find that rate hard to argue with. In fact, if Kimco didn't have a history of focusing on properties with below-market rents, which it can increase over time, and a proven co-investment strategy, I'd probably think Kimco had overpaid. But taking all of the factors into account, it looks like a good fit for all parties.