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Brookfield's deal for GGP seen as underpriced, bad for malls

March 27, 2018

Brookfield Property Partners LP’s deal to take over shopping center landlord GGP Inc. isn't winning over Wall Street analysts, nor is it scoring points with investors in retail real estate investment trust stocks, including Indianapolis-based Simon Property Group.

The deal is “wholly inadequate,” “a negative for the sector” and “neither exciting for GGP shareholders nor a good read-through for mall asset values.” And “investors should vote against the transaction as it does not offer sufficient value.”

Those are among the initial conclusions of analysts examining Brookfield’s agreement to buy the 66 percent of GGP that it doesn’t already own. Shareholders of GGP, the second-largest U.S. mall owner, will receive $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 consideration is $9.25 billion with 61 percent of the deal in cash and 39 percent in equity, the companies said, and the total value of the acquisition is almost $15 billion, according to data compiled by Bloomberg.

Mall owners are trying to stay relevant as brick-and-mortar retailers shut down stores at a record pace, hammered by the rise of Amazon.com Inc. and other online retailers. Brookfield’s deal for GGP follows an agreement in December for Australia’s Westfield Corp., which has malls across the U.S., to be acquired by Unibail-Rodamco SE. Meanwhile, Macerich Co. and Taubman Centers Inc. have faced pressure from activist investors.

The bid is dragging down retail REITs across the board. Shares in Simon Property, the largest U.S. mall owner, fell as much as 3 percent Tuesday before closing down 1.9 percent, to $150.46 per share.

GGP shares fell 5.3 percent, to $20.08 each, while a Bloomberg index of regional mall companies fell 3.3 percent. Brookfield Property shares declined 1 percent, to $19.19.

“While we still see value in mall stocks, we think the GGP news is negative for the sector and, as such, we are moving our three previously overweight-rated mall REITs to neutral: GGP, MAC and SPG,” JPMorgan analysts led by Michael W. Mueller and Anthony Paolone said in a note Tuesday, referring to Macerich and Simon Property.

For GGP stockholders, the question is whether Brookfield Property, a unit of Brookfield Asset Management Inc., is underpaying them for their shares. In a note to investors, BTIG LLC analysts James Sullivan and Ami Probandt estimated the value of the new offer at $21.90 a share, below estimates of $28.06 to $32.93 a share for the net asset value of GGP’s holdings. The offer is “wholly inadequate,” they wrote.

“GGP management has clearly stated on numerous occasions to shareholders that its assets are worth substantially more than where its shares are currently trading,” Sullivan and Probandt said. The mall owner’s shares closed at $21.21 on Monday, before the agreement was announced. “We recommend that GGP’s independent shareholders reject the new offer.”

Despite the disappointing price, 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 percent.

“Though the ultimate outcome of the long-awaited ... marriage leaves much to be desired, it is difficult to conclude that shareholders are better off rejecting and waiting for a better offer down the line,” Green Street analysts led by DJ Busch said in a report Tuesday.

Brookfield’s proposed takeover is subject to the approval of GGP shareholders representing at least two-thirds of the company’s outstanding stock and shareholders representing a majority of the GGP stock not owned by Brookfield and its affiliates. The deal is scheduled to close early in the third quarter.

Goldman Sachs Group Inc. is serving as financial adviser to a special committee of the GGP board that approved the deal, and Citigroup Inc. is serving as financial adviser to GGP.
Value Certainty

The deal with Brookfield “provides GGP shareholders with certainty of value, as well as upside potential through ownership in a globally diversified real estate company,” Daniel Hurwitz, GGP’s lead director and chairman of the special committee, said in Monday’s statement.

Brookfield Property is seeking to unlock value like it has since it acquired Rouse Properties Inc., a GGP spinoff, in 2016, said CEO Brian Kingston. The asset manager has since repurposed much of the land that Rouse’s malls were located on for residential, commercial and office space by bringing it into the broader Brookfield business.

“This is a tough environment for retail real estate companies today,” he said. “But there are a lot of things on this land that you can do to enhance the value that may not necessarily be retail. We have expertise in multifamily, office and hotels. As soon as we brought Rouse in, we were able to unleash all of those.”

GGP’s properties include Las Vegas’s Grand Canal Shoppes and Tysons Galleria in McLean, Virginia. The urban areas where the malls are situated are extremely valuable, presenting a major opportunity, Kingston said.

“This is something that is going to play out over very long periods of time,” he said. “These are big repositionings.”

 

 

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