03/27/2018 | by
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Brookfield Property Partners LP and GGP Inc. (NYSE: GGP) have reached an agreement for Brookfield to buy the remaining 66 percent share in the mall REIT that it doesn’t already own for approximately $9.3 billion in cash.

In morning trade, GGP shares had dropped from their previous day’s close of $21.21 to a level of $20.31.

Brookfield is the real estate arm of the Canadian-based institutional investor, Brookfield Asset Management. The deal has been endorsed by a special committee of GGP’s board.

The combined company, expected to be one of the world’s largest commercial real estate entities, will own approximately $90 billion in total assets with annual net operating income of more than $4 billion.

In November, GGP rejected Brookfield’s offer to pay $7.4 billion in cash. In the new offer, Brookfield raised the amount it would pay per GGP share to $23.50 from $23.00.

Under the terms of the deal, GGP shareholders can opt to receive either $23.50 in cash, one Brookfield unit or one share of a new REIT that Brookfield plans to create.

Brian Kingston, CEO of Brookfield Property Partners, said the agreement will allow GGP shareholders to receive “premium value” for their shares and gives them the ability to participate in the long-term upside of their investment.

“We are excited about combining Brookfield’s access to large-scale capital and deep operating expertise across multiple real estate sectors with GGP’s portfolio of irreplaceable retail assets,” Kingston said. The introduction of the new Brookfield shares will allow GGP shareholders to “efficiently participate in the transaction,” he added.

Daniel Hurwitz, chairman of the GGP special committee, said Brookfield’s latest proposal, “provides GGP shareholders with certainty of value, as well as upside potential through ownership in a globally diversified real estate company.”

Pricing Concerns

Analysts expressed concerns about the pricing of the deal and said it could put stocks in mall REITs under pressure.

Haendel St. Juste, analyst at Mizuho Americas, pointed out that the offer is “neither exciting for GGP shareholders nor a good read-through for mall asset values.”

Green Street Advisors analyst DJ Busch noted that “some investors may be sensing a sour taste” as the latest implied offer represents only a 3 percent premium to the current share price and is lower than the initial offer due to a recent decline in Brookfield’s share price.

However, if approved, GGP shareholders will still be getting a premium to its class-A mall peers, “even if that premium still represents a discount to private market mall values that prevailed recently,” he added.

Matt Kopsky, an analyst at Edward Jones, described the deal’s pricing as a “disappointment,” given that the implied cap rate is in the high 5 percent range. He noted that many class-A mall companies have said that individual properties would sell in the mid-to-high 4 percent cap rate range, “which is where historical acquisitions for high-quality properties have been.”

Kopsky said the deal is “confirmation that a new reality/pricing has set in, even for high-quality centers. Certainly, one-off properties could receive better pricing, but there is little appetite for a portfolio of malls in this environment.”

Busch added that although the deal “leaves much to be desired,” it is likely to receive GGP shareholder approval. “With high-productivity mall REITs trading at ‘going-concern’ discounts, there is a sizable risk that GGP would trade down substantially—closer to its peers—if shareholders deemed the new offer unacceptable and rejected it,” he pointed out.