Are Malls Too Cheap to Ignore?

By Esther Fung Features Dow Jones Newswires

Mall operators are in the bargain bin, and some big-time investors are picking them over.

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Brookfield Property Partners LP's $14.8 billion proposal to acquire the shares of Chicago-based GGP Inc. that it doesn't already own is fueling expectations that other operators of so-called class-A malls are becoming acquisition targets -- or will face pressure from their investors to carve up their best assets for sale.

Shares of A-mall real-estate investment trusts Taubman Centers Inc., Macerich Co. and GGP all have risen between 14% and 24% since the start of November after having underperformed the broader REIT market since August 2016.

"Two weeks ago everyone hated malls -- 'the mall is dead.' But now the mall is alive," said Alexander Goldfarb, managing director at investment bank Sandler O'Neill and Partners.

The takeout offer by Brookfield, which already owns 34.4% of GGP, has been widely anticipated since another Brookfield affiliate acquired mall owner Rouse Properties in 2016 and took it private.

There also are widespread hopes that Brookfield will sweeten its current $23 per share offer for GGP. Shares of GGP rose to as much as $23.97 on Monday on news of the unsolicited bid. Shares of Brookfield Property Partners fell 5% on Monday.

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"We're pretty disappointed in the offer price," said Matthew Werner, managing director at Chilton Capital Management LLC, whose mutual fund has invested in shares of GGP and had been gradually increasing its holdings of the mall REIT in the past year. "Hopefully this is the beginning of the negotiations. If it is the final offer this would be a negative for mall REITs."

As recently as Nov. 2, Brookfield Chief Financial Officer Bryan Kenneth Davis said in an earnings call the company valued GGP at about $30 per share, up from about $29 in the second quarter because of a pickup in its earnings.

Shares of mall REIT Macerich Co. also have shot up in the past week, on expectations of activism or a potential deal after its board of directors on Nov. 3 approved an increase in severance pay for senior executives if there is a change in control of the company.

Those expectations were further fueled after hedge fund Third Point, run by billionaire Dan Loeb, last Thursday disclosed it had a stake of 1.73 million shares, or 1.2% of the Santa Monica-based REIT as of Sept. 30. Macerich didn't respond to requests for comment and Third Point declined to comment.

Land & Buildings Investment Management, run by activist investor Jonathan Litt, continues to demand changes in Taubman Center's management despite losing a proxy contest in June. The push from Land & Buildings, which has a roughly 1.7% stake in Taubman, has resulted in Taubman agreeing to make changes to its board.

Since August 2016, when Macy's Inc. announced it planned to close 100 stores, share prices of mall real-estate investment trusts have tanked by as much as 55%, as more retailers started filing for bankruptcy protection and closing stores at a faster pace.

REIT investors were spooked at the prospect of higher vacancy rates as more consumers migrate to online shopping from bricks-and-mortar stores, worsening pressures for landlords in an already oversupplied retail real-estate market in the U.S.

Short sellers, betting the pickup in retailer bankruptcies and the rise of e-commerce will hurt landlords, also have targeted mall REITs. Shares of so-called B-mall operators, which own malls in secondary locations, have fallen more sharply, largely because landlords have less bargaining power in tenant negotiations.

Owners of class-A malls have argued their share prices have taken an unfair hit, because they own the top-quality malls in more affluent markets around the U.S. and have been able to attract new tenants and retain high occupancy levels.

Shares of mall operator Simon Property Group, the world's largest REIT with a $58.6 billion market capitalization, have bucked the November trend, rising by a more modest 3.2%. The main reason: it isn't seen as an acquisition target but rather a potential buyer.

Simon Property in 2015 offered to acquire Macerich for $95 per share and in 2010 offered $20 per share for GGP, then known as General Growth Properties. Both companies rebuffed Simon Property's offers.

"If we get approached we'd certainly consider something, but we're not actually looking at much externally," said David Simon, Simon Property's chief executive officer during the latest earnings call in late October.

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

November 14, 2017 09:28 ET (14:28 GMT)