Kite Realty, Inland Diversified to merge in $2.1 billion deal

2/10/2014

Indianapolis — Kite Realty Group Trust has announced a definitive agreement with Inland Diversified Real Estate Trust. Under the agreement, Inland Diversified will merge with and into a wholly owned subsidiary of Kite Realty through a stock-for-stock merger. The transaction value is approximately $2.1 billion; the equity value is approximately $1.2 billion; and the enterprise value is approximately $3.9 billion — this based on the closing trading price of Kite realty’s common shares on February 7, 2014.



Subject to the approval of shareholders from both companies and the satisfaction of other customary closing conditions, the parties expect the merger to close late in the second quarter or in third quarter 2014.



According to Kite Realty, the merger consolidates two complementary retail shopping center portfolios. The combined asset base totals 131 properties spanning 20.3 million owned sq. ft. across 26 states.



John A. Kite, Kite Realty’s chairman and CEO called the deal a transformational transaction for the company. “Inland Diversified has assembled a very well located, high quality portfolio,” he continued. “The asset and tenant quality and strong demographic profile will be a great complement to our portfolio. With this transaction, we will be able to substantially increase the size and scale of our portfolio in our core markets and enter into attractive new markets. This transaction will further strengthen our balance sheet and enhance our cash flow, positioning us favorably for future growth and shareholder value creation.”



Strategic and financial results

Kite Realty expects the transaction to produce a number of strategic and financial benefits for Kite Realty shareholders.



First, the Inland Diversified portfolio includes 57 retail properties that are 95.3% leased. According to Kite Realty, the Inland Diversified properties operate in desirable markets with higher annualized base rent and enhanced demographics compared to the existing Kite Realty portfolio.



Second, Kite Realty calls the transaction’s 6.6% capitalization rate compelling and notes that it implies a price of approximately $195 per sq. ft., significantly below replacement cost.



Third, the company believes that the transaction will significantly increase the size and scale of its business in existing core markets while providing entry into new and attractive markets such as Westchester, N.Y., Bayonne, N.J., Las Vegas, Nev., Virginia Beach, Va., and Salt Lake City, Utah. The number of the company’s properties will also increase from 74 to 131, while the total portfolio size will increase from 10.1 million owned sq. ft. to 20.3 million.



Fourth, the transaction will materially improve Kite Realty’s leverage, debt service coverage and other credit metrics. For instance, the company’s net debt to 2014 estimated adjusted EBITDA is expected to improve from 7.3 X to 6.5 X, which will improve public float and shareholder liquidity for shareholders.



Fifth, the company will achieve substantial administrative and operating synergies. For instance, Kite Realties believes it will be able to save $17 to $19 million from Inland Diversified’s operating expense as a result of the termination of external manager contracts and other cost savings. That said, the transaction will likely result in incremental Kite Realty operating expenses of $6 to $8 million. Even so, the company believes that its general and administrative expenses as a percentage of its asset base and revenues will decline as a result of the merger. Further, the transaction will reduce the company’s development and redevelopment pipeline as a percentage of total assets.



Finally, Kite Realty’s reduced leverage couple with its increased operating cash flow and low dividend payout ratio will support future potential dividend growth. Management expects the transaction to be neutral to the estimated 2014 FFO per share after accounting for the significant deleveraging allowed by the transaction.



Leadership

After closing, Kite Realty’s Board of Trustees will consist of nine members, including six current trustees of Kite Realty and three of whom will be designated by Inland Diversified.



John A. Kite, Kite Realty’s current CEO and chairman of the Board of Trustees, will serve as CEO and chairman of the Board of Trustees of the combined company; Thomas K. McGowan, Kite Realty’s current president and COO, will serve as president and COO of the combined company; and Daniel R. Sink, Kite Realty’s current executive VP and CFO, will serve as executive VP and CFO of the combined company.



Upon completion of the merger, the combined company will retain the Kite Realty name and continue to trade under the NYSE ticker symbol KRG. The combined company’s corporate headquarters will remain in Indianapolis, Ind.



Conference call and investor presentation

Kite Realty hosted a conference call to discuss this transaction on Monday, February 10, 2014. The conference call can be accessed by dialing 1-800-798-2864 or 1-617-614-6206 for international participants (passcode 13279054).

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