The announcement this week that Brookfield Property Partners offered to buy the 66 percent of General Growth Properties’ (GGP) shares it does not own—to the tune of around $14.8 billion—has some analysts questioning whether the move would help either company.
However, while it appears unlikely that any other player would step in to outbid Brookfield, the move still represents the rare giant mall trade offer in recent memory, and could re-price a sector challenged by the rise of e-commerce.
Brookfield Property Partners, whose portfolio includes office, retail, multifamily and other types of assets, and its affiliates currently hold about 34 percent of GGP’s shares. According to its announcement, Brookfield offered to purchase GGP’s remaining shares for $23 per common share. If GGP accepts the transaction, the first in the mall space in some time, it would create a real estate company that would have nearly $100 billion in real estate assets around the world, with annual net operating income (NOI) of about $5 billion. About 30 percent of the combined company would be owned by current GP shareholders.
“This transaction will provide GGP shareholders the option to immediately realize value for their shares at a 21 percent premium in cash and the opportunity to continue to participate in the growth of a leading, globally diversified real estate company that will be able to grow faster and create more value than either could on a stand-alone basis,” said Brian Kingston, CEO of Brookfield Property Group, in a statement. A Brookfield spokesman declined further comment.
In a statement confirming the offer, Chicago-based GGP said it formed a special committee to review the proposal. The company did not respond to a request for comment.
Brookfield’s offer implies a GGP cap rate in the low 6 to high 5 percent range, which is well north of what people are using to value the REIT’s portfolio from a NAV perspective, or what analysts use from a private market perspective, says Haendel St. Juste, managing director and REIT analyst at Mizuho Securities USA. The offer signals a re-pricing of all mall assets, driving NAVs down, he says. A report from RBC Capital Markets also notes that many GGP shareholders will view the offer as too low. GGP shares have been declining over the year, and shareholders will likely push for a higher bid.
The upward trend in mall cap rates relates to the seismic changes facing the retail sector, says Scott Crowe, chief investment strategist at CenterSquare Investment Management. “The significant component of mall real estate needs to be shuffled or repurposed over the next couple of leasing cycles,” Crowe notes. As retail sales increasingly move online, there is less of a need for retail space, he adds. Brookfield may be seeking to acquire GGP to use its development skills to introduce different real estate components as part of mall properties, such as multifamily, office and hotel—a growing trend in the sector.
A note from Green Street Advisors, a Newport, Calif.-based research firm, states that a merger of a Brookfield entity and GGP “has been long anticipated.” And now may be the time for Brookfield to make the offer, given the discounts to NAVs and the decline in mall share prices over the year. Green Street also questions why a GGP shareholder would want to trade shares that are at a discount to NAV, given the concerns surrounding malls, for cash and units at a greater discount to NAV in Brookfield’s’s diversified real estate portfolio.
Still, many market observers are expecting another offer. “Typically, first offers aren’t always the best,” Juste says.
A counterargument to the offer’s pricing could be that this is a unique scenario and Brookfield has a strategic edge as a large minority stake owner. With no competitive bid process, GGP does not have as high a market value because of the deal’s dynamics, Juste says. As this is the first significant trade seen in a long time in the mall space, it could also set a new paradigm for the sector, he adds.
And even though higher-quality malls, such as those owned by GGP, are holding up better to the threat of e-commerce, they are not immune to these changes, says Matt Kopsky, a REIT analyst at Edward Jones. REIT stock prices have been affected more severely than what the fundamentals in the space would indicate, but it is hard to see that sentiment reversing, says Kopsky.
There is also the question of whether there will be other private or public competitors to acquire GGP. “There is therefore a decent probability that no one else shows up to the party. Brookfield is not in the business of outbidding itself and has picked a unique window to make the offer that many have long speculated,” Green Street states. Still, GGP may be worth more than Brookfield’s offer suggests.
It is possible, but unlikely, that Simon Property Group, GGP’s main competitor in the mall space, will make a competing bid, Kopsky says. Simon’s CEO David Simon has previously said that Simon is not currently interested in a large-scale acquisition. In 2010, Simon tried to buy GGP out of bankruptcy, but those efforts failed, Kopsky says. Now, “there’s little appetite for such large-scale deals,” he says. The reaction to the Brookfield offer serves as proof, in his view—the price of Brookfield’s stock went down 5 percent following its announcement.
Given Brookfield’s existing large stake in GGP, it would likely discourage other offers while limiting the upside for GGP investors, who would want a more competitive process to drive up prices, Juste says.
The current cost of capital for Simon, Westfield and other mall REITs is not strong. They are limited in their ability to issue debt or equity, Crowe notes. “I would be surprised if there are other investors that would come in over the top of GGP,” Crowe says.