EQY @ STRH - Quick Thoughts: Our sole Buy-rated shopping REIT is being taken out
Our sole Buy-rated shopping REIT is being taken out
Rating: Buy
Market Cap (M): $3,985; Price: $27.87 as of 11/14/2016
Price Target: $35.00
Sector: Retail REITs
This evening REG announced the acquisition/merger of EQY, under which EQY will merge into REG, creating an ~$16bn total enterprise value company. The merger will be an all-stock deal, in which each EQY stock will be converted into 0.45 of REG stock. Offer price for EQY stock implies $31.44/sh (implied cap rate of 5.24%), representing 12.8% premium over today’s closing price of $27.87/sh.
Net-net: At first blush, we think REG’s offer for EQY shareholders appears to be close to fair value (but not at a premium to our NAV), given that the offer price of $31.44/sh is in-line with our EQY estimated NAV of $31.46/sh using 5.24% applied cap (note that consensus NAV is $29.91/sh). Our NAV estimate implicitly includes net discounted value stemming from value creation from development projects (Potrero Center, Westwood Complex, Piemont Crossing, Serramonte, Medford Shaw’s Supermarket, etc.) and potential upside from small shop occupancy.
As a reminder, we have had a favorable view on EQY (our previous note) and EQY remains our only BUY-rated shopping center REIT. Our NAV estimate of $31.46/sh is higher than consensus of $29.91, reflecting our granular assessment of EQY’s high quality portfolio, upside from development projects, below market leases, and significant upside potential from small shop occupancy. We will further analyze the transaction in the upcoming days, while we maintain our Buy rating.
The Transaction: The 100% stock-for-stock transaction involves 0.45 REG shares issued for each EQY share. The new combined company will consist of ~62% of REG shareholders and ~38% EQY shareholders, of which ~13% is Gazit-Globe Ltd. The merger is expected to close in early 2017. We still need to update our models and run the numbers, but management projects $27m of annual G&A synergies, realizable by 2018. The transaction is expected to be FFO accretive, exclusive of GAAP mark-to-market accounting. Management’s underlying underwriting assumptions also include assets sales (unknown amount); excluding these dispositions, FFO could potentially be more accretive.
Pro Forma Portfolio: The pro forma portfolio will consists of 429 properties totaling 57msqf with an ABR/sf of $19.94. The top 5 markets will be Southern California (14% of total ABR), Northern California (13%), Southeast Florida (12%), New York Metro (9%), and DC Metro (7%). Based on a 3-mile radius, the portfolio boasts excellent demographics including median population of 145,000 with a median household income level of $85,000.