RPT - Kimco: RPT Realty's Preferreds To Get Credit Quality Boost After Acquisition

2023-11-27 09:10:02 ET

Summary

• Kimco's acquisition of RPT Realty is set to deliver a credit boost to RPT Realty's Series D preferreds.
• The all-stock transaction does not represent a fundamental change, so the preferreds will remain outstanding.
• They currently offer a higher yield on cost than Kimco's other outstanding preferreds but trade at a premium to their par value.

Kimco ( KIM ) is acquiring RPT Realty ( RPT ) in a deal set to see its adjusted funds from operations per share ramp up, enhancing the prospect of further dividend growth gains and a recovery of the quarterly payout back to their pre-pandemic trajectory. Kimco last declared a quarterly cash dividend of $0.24 per share , a nice 4.3% increase from its prior payout for what's currently a 5.1% annualized dividend yield. The REIT also declared a $0.09 per share one-time special dividend driven by the partial sale of its stake in Albertsons Companies ( ACI ) for $300 million late last year. Kimco still owns 28.3 million shares of ACI valued at $607.6 million.

Whilst the aggregate dividend for the fourth quarter at $0.33 per share has eked above Kimco's pre-pandemic payout of $0.28 per share, the base dividend still sits around 4 cents below this watermark. Kimco was hit hard during the pandemic, suspending the dividend for a quarter and then reinstating a truncated payout that's yet to recover to its pre-pandemic level. The all-stock acquisition of RPT is immediately accretive to FFO and will see the consolidated company realize cost synergies of roughly $34 million .

Kimco's portfolio is concentrated on grocery-anchored and open-air shopping centers. The REIT has been aggressive in maximizing the value of its real estate properties through mixed-use developments, its Signature Series® properties . Hence, the acquisition will see Kimco build on its deep mixed-use development experience to drive densification of certain RPT assets including its trophy Mary Brickell Village in Miami. When I last covered RPT I recommended its sole outstanding preferreds as an investment for forever income due to a busted convertible feature. What happens to these now?

The RPT And Kimco Preferreds

The acquisition is being pushed through at a 0.6049 all-stock fixed exchange ratio for a $2 billion enterprise value when RPT's debt and preferred equity are included. Pro forma ownership will see RPT's current shareholders own 8% of the consolidated entity. RPT's 7.25% Series D cumulative preferreds ( RPT.PR.D ) are currently changing hands for $52.08 per share, roughly $2.08 above their $50 par value or a 4% premium to par. These are perpetual and convertible with a $3.63 per share annual coupon for what's currently a 6.96% yield on cost. This is to say that you'd get a yield that's 29 basis points below the coupon rate if you bought the preferreds today as they're trading above par.

Kimco also has two outstanding preferreds; 5.25% Class M ( KIM.PR.M ) and 5.125% Class L ( KIM.PR.L ). Both of these were rated lower investment grade at BBB- by the S&P when they both started trading in 2017. The M series is currently offering a 5.88% yield on cost and trading for $22.33 per share, a 10.7% discount to par value. The L series currently offers a yield that's roughly 12 basis points higher at 6% whilst trading at a larger 14.6% discount to par at $21.35 per share. It's important to note that all three securities are also trading past their redemption dates.

The Series D will remain outstanding and become a new Kimco preferred equity with its current holders seeing the name and ticker change following the closure of the acquisition. Critically, Kimco stated it had no plans to redeem the series during the conference to discuss the acquisition held on 28 August .

Oh, the preferreds. The preferred is not. The preferred has - there's no immediate call feature in that preferred. At 130% of the reference price, it can be called. So, we'll be replacing the preferred with a similar Kimco preferred that's convertible under the same similar terms as the existing instrument. - Glenn Cohen, Kimco CFO

These will become Kimco 7.25% Series D to become backed by a BBB+ balance sheet, a moderate reduction of inherent credit risk from RPT, and a substantial credit upgrade for the Series D. To be clear, the Series D was issued with a high non-investment grade coupon rate, but that has now been transformed.

Further, the acquisition does not represent a fundamental change, so there won't be an opportunity for preferred shareholders to exercise the option to redeem their shares as implied by its fundamental change features. The prospectus supplement from their IPO defines this non-fundamental change scenario as when at least 90% of the consideration of their common shares consists of common stock of a fully US-based company traded on a national securities exchange.

According to RPT's investor site, the Series D is currently convertible at a 3.7962 conversion ratio . Conversion might happen in the scenario where the common stock price exceeds 130% of the conversion price of $13.17 for 20 of any 30 consecutive trading days. As Kimco is currently trading hands for $18.71 per share, this would have to be adjusted post-acquisition by the 0.6049 all-stock fixed exchange ratio. Overall, the deal represents a strengthening of credit quality and could see the Series D open a wider premium above its par value once the Fed starts cutting interest rates.

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