Brookfield's bid for GGP seen undercutting true mall values

By Herbert Lash

NEW YORK (Reuters) - Brookfield Property Partners LP's (BPY.O) latest bid to acquire the two-thirds of mall owner GGP Inc (GGP.N) it does not already own low-balls the price of prime retail assets whose value has been obscured by e-commerce, analysts said on Tuesday.

Brookfield's cash and stock offer for GGP values the company, one of the largest owners and operators of U.S. shopping centres, at about $15.3 billion, or $500 million more than a similar bid it made four months ago that GGP rejected.

As of last week, GGP's shares were trading more than a quarter below the company's relative value, which measures an asset against similar ones, Thomson Reuters data shows.

Brookfield's existing 34 percent stake in GGP, a real estate investment trust, puts it in the driver's seat because it only has to pay 65 cents on the dollar to match other offers, said Alex Goldfarb, a managing director at Sandler O'Neill + Partners LP.

Another offer would have to replace the board and management, which Brookfield does not need to do, he said.

"There was no way they were going to bid against themselves," Goldfarb said of Brookfield. "They used that to their advantage.

"I understand the market frustration because it's completely a low-ball bid, but at the same time the alternative is less appealing," Goldfarb said.

The offer is a smart move on Brookfield's part because the majority of GGP's portfolio is urban, making Brookfield well positioned to redevelop the assets as offices, apartments or hotels, said Garrick Brown, a retail analyst at Cushman & Wakefield.

GGP cut most its weaker properties from 2010 to 2015, but the REIT was not immune to the impact of e-commerce, he said.

When department store operator Macy's (M.N) announced plans to shutter 100 stores last year, not a single closure was in a GGP property, yet GGP's stock took a hit as all mall REITs did that day, Brown said.

The S&P 500 real estate sector (.SPLRCR) rose 0.15 percent on Tuesday but mall operators were down. Simon Property Group (SPG.N) fell 1.9 percent, Macerich Co. (MAC.N) slid 4.0 percent, Kimco Realty (KIM.N) slipped 0.42 percent and GGP tumbled 5.3 percent.

The best malls, called Class A by real estate brokers, have easily filled the vacancies left by the wave of bankruptcies in the retail industry and most have waiting lists for potential tenants, Brown said.

That is not the case for Class B and C properties, whose vacancies mar the outlook for better properties.

"This is only likely to worsen as we begin to see more bankruptcies this year, and I believe the trend will peak late 2018 or early 2019," he said.

GGP's stock fell because the offer is not a great price, said Scott Crowe, chief investment strategist at CenterSquare Investment Management in Philadelphia.

"You end up with this security that's externally managed, that's invested in Brookfield funds and that has this diversified portfolio of all these different assets, Crowe said.

There's a lack of institutional capital that is willing to take on the changing retail environment, he said, but the fall in the stock price could encourage others to bid for GGP.

Graphic: Mall REITs v. overall real estate sector - https://reut.rs/2DZHUGd

(Reporting by Herbert Lash; Editing by Daniel Bases and Leslie Adler)