Mall Landlords Take Hit in Wake of GGP Deal -- WSJ

By Esther Fung 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 28, 2018).

Shares of retail real estate companies plunged Tuesday, as investors raised concerns that the weak acquisition price for GGP Inc. meant that the malaise in the retail world was beginning to drag down values of top-tier malls.

In 4 p.m. trading, shares of Chicago-based GGP were down 5.3%, Macerich Co. 4.1%, Taubman Centers Inc. 2.5% and Simon Property Group 1.9%. The S&P 500 index fell 1.7% Tuesday.

Brookfield Property Partners LP said Monday evening that a special committee of the board of directors at GGP agreed to its offer to buy the 66% stake in the company it doesn't already own. The price -- $23.50 per share in cash or stock -- was a sweetened version of the offer that Brookfield made in November.

But it was below the $24 price tag many investors and analysts felt the company would fetch. Some predicted that GGP shareholders would reject it when the special committee's recommendation is put up for a vote later this year.

In a research report Tuesday, analysts at BTIG pointed out that Brookfield's "wholly inadequate" offer values GGP at a 21.9% discount to what the company would be worth if its properties were sold separately. "Why should the shareholders gift that arbitrage to Brookfield and award a very valuable management fee stream to Brookfield Asset Management shareholders in the process?" the report said.

But others noted that at this juncture, the shareholders of the REIT have little choice since there are no other bids.

"There are people who are upset and want to vote no," said Alexander Goldfarb, managing director at Sandler O'Neill + Partners. "While the transaction price undervalues GGP, we believe GGP shareholders are left with the unpleasant situation of either declining in hopes of a higher price or just accepting reality and moving on."

The low bid comes at a time that competition from online shopping is clobbering bricks-and-mortar retail. In recent weeks alone, Toys "R" Us Inc. said it is starting to wind down its U.S. business and liquidate inventory in all 735 of its U.S. stores. The Wayne, N. J. -- based company filed for bankruptcy protection in September.

Last week, teen-accessories chain Claire's Stores Inc. had also filed for chapter 11 protection from its creditors.

The low bid for GGP gave the market the jitters because its portfolio of 125 properties includes some of the top malls in the country, such as Ala Moana Center in Honolulu. Top-quality malls located in wealthier areas have high rents and occupancy rates and are believed to be more immune to the turmoil in the retail world.

Another sign of Brookfield's low bid is by looking at its so-called capitalization, or "cap" rate, a common measurement in the real-estate industry of annual income from a property compared with its original cost. Lower cap rates mean higher prices.

Analysts say that Brookfield's price amounts to a 6.0% cap rate. In 2016, GGP sold a 50% stake in Fashion Show Mall in Las Vegas to TIAA Global Asset Management at a price that valued the mall at a cap rate of 3.9%.

In December, European shopping center giant Unibail-Rodamco SE made a $15.7 billion takeover offer for Westfield Corp., which has a smaller portfolio of high-end malls in the U.S. compared with GGP. Analysts said the offer placed Westfield at a cap rate of around 4% to 5%. Since then, mergers and acquisitions activity in the upscale mall world has been slow.

GGP was forced into bankruptcy protection in 2009 but recovered after emerging from chapter 11 in 2010. Its portfolio includes more second-tier malls than some of its peers.

Write to Esther Fung at [e-mail]

(END) Dow Jones Newswires

March 28, 2018 02:47 ET (06:47 GMT)

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