Sunday, November 12, 2017

Brookfield Plans to Capitalize on Distress in US Retail Real Estate

Brookfield Asset Management (BAM) Plans to Capitalize on Distress in US Retail Real Estate by gaining control of GGP. BAM currently owns 35% of GGP through Brookfield Property Partners LP (BPY) and BAM CEO Bruce Flatt is the chairman of GGP.

The pessimism on US Retail stores and affect on US Mall Sector due to disruption from Amazon has driven down valuations to an attractive level with GGP shares hitting $19 per share (< $19B valuation for GGP).

This is a very attractive opportunity if BAM can buy the company for $22B to $25B or less total valuation. This will mean $15B to $16B that BAM/BPY and institutional partners (in managed funds of BAM) will pay for remaining 65% not owned by BPY. Overall BAM/BPY can put up $4B and control 51%  (35% + 1/4*65%) of GGP.

Then next step if they can acquire would be to close or sell off weak malls on non-prime locations and then for prime location class A malls convert excess space in parking lots into residential developments or office complexes of live-work-play. GGP has already done this in Ala Mona Mall in Hawaii and 95% flats have already been sold. They also just announced a deal in North Seattle to build apartments in their mall location with a partner. The well performing malls will keep operating for next 5-10 years and still earn cash flow which is $1.4+ per year per share so that is $1.4B. They can reduce apparel and add more services, entertainment and experiences clients.

The land underneath in many cases is very valuable and in downtown prime locations. Also all the Mortgage debt of GGP is non-recourse to parent company and each of the 125+ malls can default on their debt so if one or two malls fail in the long run the losses will be contained and debt holders get the key to that specific mall only.

Currently GGP and Retail (Including Rouse etc.) accounts for 1/3 of BPY cash flow. A sale of US office assets in North East US and purchase of GGP could boost the retail portion to 50% of BPY but at favorable valuations.