They said the best malls would be prized. Brookfield’s GGP deal proves them wrong
Brookfield Property Partners LP’s deal to buy GGP Inc. is a reality check for property investors caught in the maelstrom of the American mall shakeout.
The roughly US$15-billion deal values GGP’s assets well below Wall Street estimates and represents a disappointing resolution for shareholders after the Chicago-based real estate investment trust rejected Brookfield’s initial bid late last year. Some analysts are calling for shareholders to reject the offer, estimated at US$21.90 a share, a slight premium to the stock’s closing price of US$21.21 hours before the deal was announced. That estimate takes into account the mix of cash and stock Brookfield is using to pay shareholders.
The deal is coming together as retail landlords struggle to keep up with the rise of e-commerce and a relentless surge in store closures. GGP, the second-largest owner of U.S. malls, after Simon Property Group Inc., owns some of the most prized retail real estate in the country, such as the Grand Canal Shoppes in Las Vegas and the Ala Moana mall in Honolulu. The transaction could mark a shift in the perceived value of even the best malls, which have been seen as relatively insulated from digital shopping.
It is “a confirmation that asset values are at a new normal,” Matt Kopsky, an analyst at Edward Jones, said in an interview. “We are still in the early innings of a retail overhang that will continue for some time.”
Sales of top-flight malls are increasingly rare, making it difficult to figure out how much these properties are really worth, especially in the tumult of the past 18 months. Sales of all types of retail properties, from strip malls to large-scale shopping complexes, are slumping as buyers and lenders hang back. About US$3.2 billion of deals were completed in February, the lowest monthly volume in almost five years, according to Real Capital Analytics Inc.
Brookfield, which with its affiliates already owns about 34 per cent of GGP, reached an agreement to buy the rest of the company after raising its offer from a November bid. GGP shareholders will receive either US$23.50 in cash, one Brookfield unit or a share of a new real estate investment trust for each share they own, according to a statement Monday. The cash portion of the deal marks a 24 per cent premium over the stock’s closing price on Nov. 6, the day before Bloomberg reported talks between the companies.
The situation at GGP is unique and shouldn’t be used as a proxy for mall values across the board, according to Alexander Goldfarb, an analyst at Sandler O’Neill & Partners LP. GGP Chief Executive Officer Sandeep Mathrani made it known months before Brookfield’s bid emerged that the company was in play, and no other bidders have emerged to top Brookfield’s, Goldfarb said.
“If you’re an investor, you’re obviously frustrated,” he said. “This is not a true reflection of what the company is worth. But without a competing bid, it’s tough to advocate” against the deal.
Shareholders will probably accept the offer, according to Green Street Advisors LLC. The real estate research firm puts the odds of a deal being completed at 90 per cent.
Ripple Effect
Regardless of the circumstances surrounding Brookfield’s bid, the deal is creating ripples for other mall owners. Shares of mall companies fell as Wall Street digested Brookfield’s offer. Simon closed down 1.9 per cent at US$150.46 on Tuesday, while a Bloomberg index of regional mall owners fell 2.8 per cent.
“That GGP’s special committee has unanimously recommended the deal at a US$23.50 price is also telling and entirely inconsistent with the view that Class A mall assets should trade in the low 4 per cent cap rate range that mall bulls often quote. We think this raises new questions about the true value of mall portfolios,” Deutsche Bank wrote in a note to investors.
The cash consideration in the deal is US$9.25 billion, with 61 per cent of the deal in cash and 39 per cent in equity, the companies said. The total value of the acquisition is almost US$15 billion, according to data compiled by Bloomberg.