On malls, Brookfield zigs while others zag
US$15B DEAL FOR U.S. SHOPPING CENTRE OPERATOR
Brookfield Asset Management Inc. is betting against the retail apocalypse with its takeover of GGP Inc., which was to close Tuesday.
The Toronto-based firm is paying about US$15 billion for the second-largest mall owner in the U.S. as investors — and shoppers — shun brick-and-mortar retail.
Brookfield, which already owned a third of GGP, was the only bidder that showed up when the company put itself on the block last year.
Brookfield’s top real estate executive wasn’t surprised.
“We look for places where people are running away from,” said Brian Kingston, chief executive of Brookfield Property Partners LP, the asset manager’s publicly traded real estate arm. “Ultimately we’re value investors. So that means many times it leads you to being contrarian.”
That willingness to zig while others zag helped make Brookfield the top real estate deal-maker in North America this year by total transaction value, surpassing traditional powerhouse Blackstone Group LP.
Other high-profile deals include Brookfield’s agreement in July to pay US$6.8 billion for Forest City Realty Trust Inc., which owns office and apartment buildings in Boston, Chicago and Dallas.
This month, Brookfield took a 99-year-lease on 666 Fifth Ave., the Manhattan skyscraper owned by Kushner Cos., the family business of presidential son-in-law Jared Kushner. Brookfield intends to update the aging property to attract new tenants willing to pay more, as it did with 5 Manhattan West. The firm has been able to raise rents to about US$100 per square foot from $30 at that building after giving it a US$350 million facelift.
GGP is the main reason Brookfield has taken the property M&A crown this year. The deal is the thirdlargest real estate investment trust takeover ever, behind Unibail-Rodamco SE’s US$16-billion acquisition of Westfield Corp. and Blackstone’s US$20-billion purchase of Equity Office Properties Trust, according to data compiled by Bloomberg.
Regional malls have come under increasing pressure from Amazon.com and other online retailers. The Bloomberg REIT Regional Mall Index has fallen about 23 per cent from its peak in July 2016. GGP’s shares are down about 27 per cent over the same period.
That slide enabled Brookfield Property Partners to buy the rest of the Chicagobased company that it didn’t already own.
It was the only bidder because few fund managers can match its size, redevelopment expertise and optimism around the retail sector, according to Kingston.
“What is unique, and I don’t think is fully appreciated by the market, is that these are really great malls,” he said. “Yes, there’s trouble with retailers but not in the Class A shopping centres.”
GGP has about 125 malls in the U.S., including Ala Moana Center in Honolulu, Glendale Galleria in Los Angeles and Water Tower Place in Chicago.
Brookfield’s plan for GGP is similar to what it has done
WE LOOK FOR PLACES WHERE PEOPLE ARE RUNNING AWAY FROM.
with Rouse Properties Inc., another REIT it acquired in 2016.
It’s about redevelopment. Brookfield is building apartments at one Rouse mall outside of San Francisco, where housing is scarce. That could make the land 10 times more valuable than it is today, Kingston said.
Brookfield sees opportunities at about 100 of GGP’s malls. In some cases, that could mean replacing a big box store with a movie theatre; in others, levelling half a mall and building apartments.
There is immense value locked up in GGP’s land and Brookfield is banking on its ability to free it. It’s better to overhaul GGP as a private company because of the amount of capital it will require, Kingston said.
The company — which is changing its name to Brookfield Property REIT Inc. — will add to Brookfield’s US$160 billion real estate portfolio.