Brookfield Property Partners L.P. (NYSE:BPY), the real estate arm of Brookfield Asset Management Inc (NYSE:BAM) in Toronto, got a steal this week in buying the rest of GGP Inc (NYSE:GGP), the second-largest shopping mall operator in the U.S. This could be a big mover for Brookfield stock.
The price, either $23.50 in cash or a unit of Brookfield stock , which opened for trade March 29 at $19.85 per share and already owns one-third of GGP, had to be a steal, or else law firms wouldn’t be complaining so loudly. At least one analyst firm raised Brookfield stock to a buy after the bid was accepted.
The result of the deal, assuming shareholders approve it, will be a new Real Estate Investment Trust (REIT), to be called BPY U.S. REIT. The price is 2.2% higher than Brookfield offered in a deal rejected last November, and roughly a 10% premium over where GGP closed at on March 26. The new REIT would have $90 billion in assets and net operating income of over $4 billion/year.
But the deal itself isn’t nearly as important as what it may portend, namely a new bidding war for good mall operators, which have been beaten down by e-commerce but still offer huge tracts of land that are ripe for re-development.
What Comes Next for Brookfield Stock
Brad Thomas, who runs the iREIT Investor newsletter, now sees Pennsylvania R.E.I.T. (NYSE:PEI) as an obvious takeover target. PREIT owns 29 malls, mostly in the mid-Atlantic region, including 9 in the Philadelphia market, where it is the dominant player.
PREIT has been busy closing money-losing anchors and replacing clothing stores with dining and entertainment. This is in line with the general industry trend, which is seeing enclosed malls with department stores replaced by outdoor malls with high-end brands and fine dining around the country.
Such “un-mall malls” have a smaller footprint than the malls they replace and leave plenty of parking lot available for redevelopment. Better yet, they attract affluent shoppers and luxury brands. Unfortunately, they’re expensive, and require a huge investment of capital to tear down what doesn’t work and replace it with what does.
While waiting for the turnaround, shopping center REITs still offer high dividends, due to their financial structure. BPY’s dividend is over 6%.
GGP said it sold because of Brookfield’s operating expertise and “access to large scale capital.” Brookfield Asset Management has a market cap of over $36 billion, $4.3 billion in cash on its balance sheet at the end of the year, and only about one-third of its assets subject to debt.
Management of capital, and a willingness to sell losing properties, are two keys to mall operator success, according to Thomas. PEI is a target because it is well run and a “drop in the bucket” next to Simon Property Group Inc (NYSE:SPG), the largest mall operator and most-likely acquirer.
But the fate of PEI is less important than Thomas’ larger point, which is that big capital is needed to redevelop suburban malls and that big capital is now focused on the opportunity. “We are entering a wave of consolidation in which the dominant players will raise the bar,” he concludes.
The Bottom Line on Brookfield Stock
The GGP deal may be the best news shopping mall owners, and investors, have had so far this decade.
The decline of big department store chains like Sears Holdings Corp. (NASDAQ:SHLD), J.C. Penney Co. Inc. (NYSE:JCP) and Macy’s Inc. (NYSE:M) has left giant holes in the suburban landscape. While many analysts consider the GGP deal bad for the American mall and, thus, the American suburb, it does represent weak assets going into stronger hands, and could portend a renaissance of this real estate class in the decade to come.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.