The Real Deal New York

A game changer for mall REITs?

Analysts see Brookfield’s nearly $15 billion bid for GGP’s remaining shares as a lowball offer with a higher bid to come
By Rich Bockmann | December 01, 2017 11:00AM

Sandeep Mathrani

Brookfield Property Partners’ bid last month to the buy the remaining shares of GGP — the country’s second-largest mall REIT — has Wall Street reconsidering the prevailing narrative that the American mall is dead.

Adding fuel to the fire, Daniel Loeb’s Third Point hedge fund purchased a 5 percent stake in Macerich in November, and it was also revealed last month that Paul Singer’s Elliott Management hedge fund had bought a nearly 4 percent stake in Taubman Centers.

Those moves signal what many believe could be another shakeup in the sector, and some industry analysts see Brookfield’s offer as an initial lowball bid.

“Smart money sees that there’s value in malls, and that’s something that the analyst community has been saying for quite some time, ourselves included,” said Andrew Goldfarb, an analyst at Sandler O’Neill who covers GGP, Macerich, Taubman and Simon Property Group.

Brookfield, which helped take GGP out of bankruptcy in 2010, bid $14.8 billion to buy the remaining 66 percent of shares it doesn’t already own in the mall REIT.

GGP’s stock had been trading at about $19 per share before the news broke, and climbed to a height of $24 soon after. Brookfield’s offer amounts to $23 per share — half of which would be split evenly into cash and limited partnership units. But many speculate that the real estate firm will make a second, higher bid at some point in the future as its final offer. On its books, Brookfield values the properties in GGP’s portfolio at $30 per share.

Brian Kingston, Brookfield’s CEO, put out a statement following the November bid saying that the company’s access to large-scale capital and its operating expertise would allow it to create “long-term value in a way that would not otherwise be possible [for GGP].” A representative for Brookfield declined to comment further.

Stock analyst Sheila McGrath of Evercore, who covers Brookfield, said the company could use its expertise developing other kinds of projects — from office towers to student housing — to reposition GGP’s properties in a way that other firms “exclusively focused on retail could not.”

“This is a classic example of Brookfield going into a sector that’s out of favor where they are able to buy at what potentially would be an attractive discount,” she said.

GGP owns 126 properties across the country, most of which are luxury malls that, despite struggles in the retail sector, remain profitable and at high occupancies. But the company is not entirely insulated from store closings and shifts in consumer habits.

GGP has been busy taking spaces back from shuttered retailers and repositioning its indoor shopping centers to make them more experiential. In New York City, the company is currently redeveloping the 1.3 million-square-foot Staten Island Mall, which is more than four decades old. The company is adding another 235,000 square feet to the property — 85 percent of which it says is already preleased — and bringing the space occupied by apparel retailers down to 17 percent from 20 percent.

Brookfield, meanwhile, is redeveloping malls it owns in New Jersey, Vermont and California’s Bay Area, and adding residential units and student housing.

And while competitors Macerich and Taubman have a history of activist investors preying on their low moments, the renewed interest has furthered the debate over whether Wall Street is undervaluing large, public mall companies.

Of course, there’s still much to be seen. Matt Kopsky, an analyst at Edward Jones who covers Simon Property Group, pointed out that activist investors have long pushed for changes at Macerich and Taubman, with little to show for their efforts. Meanwhile, Brookfield’s bid for GGP could fall apart or, worse for the mall sector, could wrap up at a low price and put further downward pressure on stock prices.

“I think the big fear in the mall space is that there hasn’t been a whole lot of price transparency,” he said. “Investors are wary about what the true valuations should be. These stocks already trade at a depressed level. There’s a fear that the market’s pricing could become a reality.”