**Shopping Center REITs: Capturing Value Through Private/Public Market Arbitrage**
Shopping center REITs are currently well positioned to execute an arbitrage opportunity that can swiftly increase both earnings per share and shareholder value. Let’s unpack how this works, why it exists, and which REITs are acting on this opportunity.
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### Understanding Arbitrage in the REIT Sector
**Arbitrage** traditionally refers to buying and selling the same asset in different markets to profit from price discrepancies. In classic financial markets, if XYZ stock trades at $8 in one market and $10 in another, traders can buy low and sell high, pushing the prices toward equilibrium and closing the gap quickly.
However, pure arbitrage opportunities tend to disappear quickly due to efficient markets. The arbitrage currently available in the REIT sector is what’s called a **partial arbitrage**—one that persists due to practical market barriers.
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### The Private vs. Public Real Estate Market Gap
For the past two years, there’s been a sustained gap between the private and public valuations of real estate. Private market property values have remained stable or grown gradually. In contrast, publicly traded REIT share prices have swung much more widely, often disconnected from the underlying real estate fundamentals.
Currently, assets are trading in the private markets at prices **10%-40% higher** than the valuations implied by public REIT share prices. That means public shopping center REITs often sell at deep discounts to the value of their actual properties.
This mispricing persists because typical traders can’t buy a REIT stock and immediately sell the underlying properties at higher private market prices. Only REITs themselves can attempt to capture this value imbalance.
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### How REITs Execute the Arbitrage
Here’s how this partial arbitrage works for a REIT:
– **Step 1:** A REIT sells one of its properties in the private market, getting full market value (usually at a lower cap rate).
– **Step 2:** The REIT then uses those proceeds to buy back its own deeply discounted shares.
This buyback is the equivalent of repurchasing its property portfolio at the much higher cap rate implied by its market price—resulting in immediate accretion to earnings per share (NOI/AFFO per share).
**Example:**
Suppose a shopping center REIT is priced at an 8% implied cap rate, while its properties would sell for a 6% cap rate in the private market. By selling a property and buying back shares, the REIT consolidates its value into fewer shares, boosting cash flow and property value per share, even though the overall property quality remains unchanged.
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### REITs Taking Action: Recent Examples
This arbitrage isn’t just theoretical—several REITs are actively taking advantage of it.
#### Kite Realty (KRG)
Kite Realty has been direct about its strategy. On their 3Q25 earnings call, CFO Heath Fear stated:
> “Obviously, one of the attractive ones now is the redeployment of capital into our share price based on where the implied yield is versus the implied yield of these assets that we’re selling.”
CEO John Kite added:
> “As we’ve said a couple of different times, in terms of redeploying into the stock, it was an easy decision.”
Kite is selling about $500 million worth of assets and buying back shares to create immediate, accretive growth in AFFO per share.
#### Brixmor Property Group (BRX)
Brixmor isn’t as aggressive with buybacks yet, but the opportunity exists. Leasing activity and renovations have boosted asset values, but BRX shares still trade at a meaningful discount to NAV. On the 3Q25 earnings call, CFO Steven Gallagher announced an extension to their buyback program and a 7% dividend increase, signaling flexibility and the potential for future buybacks if the discount persists.
#### CTO Realty Growth (CTO)
CTO is trading at one of the widest spreads between implied cap rate and private market asset cap rate. Already, CTO repurchased $9.3 million in common stock in 3Q25 and intends to continue buybacks as capital allows.
#### Kimco Realty (KIM)
Kimco is a particularly notable case. While its NAV has steadily climbed, share prices have dropped—creating a large cap rate spread (currently at a 7.4% implied cap rate vs. a 6% asset cap rate). For a blue-chip, A-rated REIT like Kimco, this kind of discount is highly unusual and creates significant arbitrage potential.
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### Illustration: Implied Cap Rates Across the Sector
Many shopping center REITs are trading at **7.5%-9% implied cap rates**, despite their high-quality assets transacting at around **5.5%-6%** cap rates in the private market. MCB Real Estate’s recent offer for Whitestone REIT (WSR) at $15.20 per share is a real-world example—they cited discounted stock prices despite rising NOI, AFFO, and property values. By any measure, WSR’s consensus NAV at $17.99 (using a conservative 6.85% cap rate) underscores just how undervalued these REIT shares are.
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### Why Aren’t Traders Closing This Gap?
It’s not a true arbitrage since regular investors can’t complete both sides of the trade—they can buy the public share but can’t force the company’s hand on selling properties at higher valuations. Only the REIT’s management can do that. But by buying these discounted shares, investors can still position themselves to benefit as REITs continue to sell assets and buy back shares.
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### Wrapping Up
While not a pure arbitrage, the current gap between public and private market real estate valuations offers a compelling opportunity. Shopping center REITs trading at steep discounts to asset values (high implied cap rates) can create significant shareholder value through strategic buybacks funded by property sales at higher private market prices.
For investors, high-quality shopping center REITs are attractively priced. With patience, this arbitrage can deliver substantial returns as REITs close the discount to NAV—either through share buybacks, asset sales, or as market rationalization eventually brings prices in line with underlying real estate values.
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**Key Takeaway:**
The discrepancy between public REIT prices and private real estate values has created a unique, company-executable arbitrage. Investing in REITs actively using this strategy could generate strong gains as the market eventually closes the gap.
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