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In recent years, investors have become increasingly fearful about the so-called "death of the mall." As a result, shares of top-tier mall REITs like Taubman Centers (NYSE: TCO), Simon Property Group (NYSE: SPG), GGP (NYSE: GGP), and Macerich (NYSE: MAC) have tended to trade at a discount to their net asset values (NAV), the underlying value of their assets.
That discount widened late last month, after GGP agreed to be acquired by Brookfield Property Partners (NASDAQ: BPY) for substantially less than its NAV. Let's take a look at what this deal means for other high-quality mall REITs like Taubman Centers, Simon Property Group, and Macerich.
Mall REIT Stock Performance. Data by YCharts.
GGP's board gives in easily
Brookfield Property Partners currently owns a 34% stake in GGP. It has been looking to buy the rest of the company for a while. In late 2017, Brookfield offered a cash and stock deal valued at $23 per share to acquire the other 66% of GGP. However, a special committee of the latter's board of directors rejected the offer, declaring that it was inadequate.
Brookfield didn't have to sweeten the offer very much to get the support of GGP's board. Last month, it submitted a revised offer that valued GGP at $23.50 per share and included a larger cash component (roughly 61%, compared to 50% in the original offer).
This new offer was still well below GGP's NAV, which REIT analysts have estimated at about $30/share. Brookfield countered that current GGP shareholders will benefit from having the option of an immediate cash payment, plus a higher dividend and upside potential if they convert their GGP shares to Brookfield Property units, or shares of an equivalent REIT that will be created. In any case, the special committee voted to accept this offer.
GGP investors now must decide whether or not to vote for Brookfield Property Partners' offer. Unfortunately for them, Brookfield's existing 34% stake in GGP deterred other potential bidders from submitting rival offers.
A special committee of GGP's board has agreed to sell the company for $23.50 per share. Image source: GGP.
Some analysts believe GGP could fetch a higher total price by selling properties one by one and using the proceeds to buy back stock. That said, investors can't be sure that management will follow this strategy if they vote against the Brookfield deal. Thus, the only real alternative for GGP shareholders is to be patient and hope that mall REIT valuations eventually recover.
Bad news for other mall REITs?
Retail REITs are typically valued based on "cap rates": the annual income from a property or set of properties as a percentage of its market value. (Lower cap rates are the equivalent of higher earnings multiples.) Declining customer traffic has severely affected cap rates for low-quality malls, but most REIT investors have been confident that "Class A" malls -- those with the highest sales per square foot -- would be immune to this pressure.