Brookfield Property Partners recently convinced GGP, Inc. stakeholders to approve its $15 billion takeover of the mall owner, The Wall Street Journal reports.
Now comes perhaps the more difficult part.
With the approval process behind it, Brookfield now has to make over GGP’s 125-property portfolio, in an era when shopping malls are not having as much success as in the past . To do this, Brookfield is looking to expand GGP’s top-tier shopping centers with more stores and at the same time, scale back on less successful malls. Configuring the less successful malls by adding housing, office space or hotels is also an option.
For Brookfield, part of its challenge will be deciding which real estate tactic suits each site the best. The company is also tasked with securing zoning permits and encouraging current tenants to stay the course. Unfortunately, real estate investors don’t find putting time and money towards a project with this many moving parts particularly attractive.
Currently, landlords have been investing more on cosmetic and structural upgrades to make their properties more appealing to shoppers and tenants alike. It’s seen as a necessary course of action in order to compete with the growing online shopping trend and consumers’ changing tastes.
“There is going to be an exceptional amount of risk to be taken on the redevelopment side,” Kevin Kelly, chief executive officer of real-estate consultancy Benchmark Investments, told The Wall Street Journal.
According to analysts, Brookfield is more equipped to handle a project this size than smaller companies in the industry in terms of resources and experience. For instance, Brookfield acquired mall owner Rouse Properties, Inc. in 2016 and alongside other partners, the company redeveloped a number of Rouse’s retailer centers, added 272 apartments and office space to a mall in Burlington, VT.
Brookfield Property Partners CEO Brian Kingston said of GGP its goal is to bring partners into its portfolio of malls that can be redeveloped or repositioned into assets where extra capital could be used. Brookfield’s first choice is to serve as partner, rather than sell the malls, according to Kingston.
Part of Brookfield’s strategy is it believes more people will move to urban areas, which would increase the value of the sites if they are located in the right places.
“There’s work to do but they are very experienced at getting compelling returns,” Sheila McGrath, a real-estate analyst at Evercore ISI, who covers the company told The Wall Street Journal.
According to Brookfield, it has sold approximately $4 billion in stakes in some of GGP malls to joint venture partners already. Those sales were made to help pay off some of the debt the company assumed when it acquired GGP. There is a possibility Brookfield could sell an additional $2 billion of similar interests in the coming year or two, given its desire to do more development on sites it believes to be underutilized.
Although GGP’s operations have been solid—its same store operating income increased 1.6% during the first half of 2018 from a year ago and the company reported an occupancy rate of 94.2% at the end June—the REIT’s share price had dropped by almost 32% since July of 2016. The decline was the result of retailer bankruptcies and other mall owners closing stores scaring investors.
Analysts believe if no one else made a bid for GGP, its share price would have dropped further. Plus, Brookfield’s 34% stake in the company might have scared off other bidders.
With the acquisition, investors will receive $23.50 for every GGP share—or one share of Brookfield Property Partners, or one share of the new holding company, Brookfield Property REIT. Brookfield Property Partners parent company, Brookfield Asset Management, Inc. will manage the new REIT externally.
Privately, some GGP investors has mentioned they’re considering selling the shares they receive and investing the money in other mall REITs like Simon Property Group because they prefer exposure to a mall-focused firm.
“This is what makes the market,” Kingston told The Wall Street Journal. “There are some people who want to own sector specific stock and for others, it’s going to be very appealing to them to have a more diversified exposure to a number of different asset classes.”