Are critics of Brookfield-GGP deal ignoring strong asset performance?

Critics of this week’s big listed retail property transaction may be overlooking one key element: the strong performance of class-A shopping malls.

Shares of listed retail property companies weakened after analysts said Brookfield Property Partners’ $15.3bn (€12.3bn) cash-and-stock offer to acquire US shopping mall owner GGP was inadequate. Some cut ratings on GGP and other mall real estate investment trusts (REITs), and one index of regional mall companies declined more than 3% in early trading on Tuesday, while Brookfield shares were down by 4.5%.

JPMorgan analysts said in a note on Tuesday that, “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,” referring to GGP, Macerich, and Simon Property Group.

While pointing to “the stellar recent performance of their properties”, Trepp analyst Jen Loukedis said in an analysis on Tuesday that “someone needs to tell class-A mall owners that the consensus among market pundits is that the mall is dying”.

Mall owners “probably didn’t receive the memo,” she wrote. That’s because inline store sales for Macerich, Simon Property, Taubman Centers and GGP “all increased year over year, a strong barometer of just how successful their properties have been.”

Even though occupancy declined for most of the country’s top mall operators, Trepp noted, all four of the aforementioned REITs managed to maintain year-over-year occupancy levels above 95%.

Across its portfolio of 125 retail properties, GGP’s sales per sqft increased about 10bps, Trepp said, and the company’s portfolio includes three of the 10 most valuable REIT-owned malls. “At the top of that list is the Ala Moana Center in Hawaii, the most valuable mall in the US,” Trepp said. The firm’s portfolio also includes such iconic assets as the Oak Brook Center in Oak Brook, Illinois, and Fashion Show Mall in Las Vegas.

Although the Chicago REIT saw a modest decline in base rent, excluding anchor tenants, of about 10bps, Trepp noted that its average rent of $62.57 per sqft is among the sector’s highest.

“What really differentiates the country’s top malls from all others, besides geography and area demographics, is their tenant rosters,” Trepp wrote. Oak Brook Center, for example, includes an Apple store, and data from eMarketer, a research company that specialises in the retail sector, shows that Apple’s retail stores generate an average of $5,546 per sqft in annual sales, the most of any retailer.

Other retail tenants with high sales volume that populate class-A malls include Tiffany ($2,951 per sqft), Lululemon ($1,560 per sqft), Kate Spade ($1,523 per sqft), and Coach ($1,237 per sqft).

Some of the opposition to the proposed deal is based on recognition of the financial strength of top-tier mall REITs. “We believe investors should vote against the transaction as it does not offer sufficient value,” said a research note by Boenning & Scattergood REIT analyst Floris van Dijkum. “GGP does not need to do any transaction as it has balance sheet strength and earnings growth to ride out the cyclical slowdown.”

Brookfield’s proposed acquisition of the remainder of GGP is scheduled to close in the third quarter. One analyst estimated the value of the offer at $21.90 per share, and called the bid “wholly inadequate” in light of his estimate that GGP’s net asset value per share is $32.83 based on a 4.5% cap rate.

But Brookfield owns and develops office, hotel and residential property in addition to retail assets, often undertaking complex repositioning strategies for major assets.

Related images

  • Fashion Show Mall, Las Vegas

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