Since my post about retail REITs, Brookfield Asset Management (“BAM”) entered into an agreement to acquire a mall REIT, General Growth Properties (“GGP”), so I thought we should take a quick look at that comparable transaction as a touchstone for sector valuations and also because the terms looked interesting.
So we return one more to the bombed-out world of retail REITs (actually, I think my conclusion last time was more “meh, not super cheap”). So BAM, which already held about 34% of the units in GGP, has entered into an agreement to acquire GGP. Actually, the agreement was between BPY (a partnership managed by BAM) and GGP, but I’m going to refer to BAM.
BAM are Canadian real estate/real asset investment managers with a pretty slick reputation. They are kind of like a Blackstone, back when it pretty much only did real estate, or something. They are Canadians, so you can trust them. Right?
Ok, so here is the slide deck that BAM released in connection with the announcement of the transaction. It looks like GGP holders can either tender for $23.50 in cash or one unit of BPY (or a unit in a newly created REIT, BPR). I think the sale will have to be ratified by a majority of the non-BAM unit holders of GGP. The total cash is capped at $9.25 billion with pro-rata distributions, in case too many people prefer cash. 61% of the total consideration paid to non BAM unit holders is to be paid in cash.
This structure strikes me as the kind of deal at which you might want to take a closer look. A sophisticated real estate outfit, Brookfield, is buying out the rest of an entity where it already owns a controlling 34% interest and is giving the other unit holders a choice, with a seeming preference (61%) to “cashier” the majority of their economic interest during a period of apparent distress in the business.
This reminds me of the Special Situations Joel Greenblatt says to keep an eye out for in You Can Be a Stock Market Genius. By the way, if you bought some books and stuff from Amazon via some of these links or ads on the site, it would be appreciated. I haven’t got my Bitcoin mining rig up and running yet.
I’m not too enthused on that BPY/BPR/BAM structure as it looks like BAM runs BPY it as an external manager. The flaws and conflicts of interest with the externally managed REIT model have been well documented. I definitely do not like bad incentives combined with smart people.
So maybe this structure and GGP/BPR is a topic for a future post. For now, I just want to look at the multiples that Brookfield was willing to pay for GGP as sort of another “heat check” on the last post about the retail REIT area.
BAM valued the total GGP equity at about $23 billion ($23.50 x 985 million shares outstanding). The stated consideration was lower (not counting the subsequent sell-off in equity) because it did not include the units of GGP that BAM already owned.
By the way, GGP is only trading at like $20.60 as of 03/29/18, so there seems to be some doubt the deal gets done (or at least a view that the cash will be oversubscribed and unit holders will be stuck with prorated with BPY that is trading @ $19.45; “do not want”). I’m not merger arbitrageur, but I think I remember seeing that the breakup fee for not closing the deal was pretty big. Obviously, both managements will be recommending the deal.
It seems like with 61% of the shares/consideration being cash, they could get enough arbs and people who just want the cash to get a majority of the non BAM holders (indeed they may have sort of obtained a “feel” for whether that could get enough yes voted before inking the deal). Also, GGP has been in play for a while now and no one else has come in with an announced, higher, bid (probably, partially because BAM already owned 34%). None of this is relevant for my purposes at this time, other than just flagging this as a potential opportunity for you or for me to write about at some point.
Turning back to our task, it looks like GGP had about $14 billion in net debt at of 12/31/17. So we are looking at about a $37 billion enterprise value based on the BAM deal (equity + debt assumption). GGP operating income for 2017 was about $840 million. GGP 2017 EBITDA was about $2.1 billion and FFO was about $1.5 billion (which was basically unchanged from 2016).
That makes the EV/FFO based on the BAM deal, about 24.66. The P/FFO is about 15.33. Seems like it is definitely a higher valuation than some of the “strip center” REITs we looked at in the prior post.
Here’s the summary chart from that post:
As a reminder, these REITs are all up ~5% since this post (yes, I am Alpha incarnate). The BAM offer, however, appears to put GGP right around STOR or REG.
I guess this sort of makes sense as these are two of the reputedly higher quality names and GGP is supposed to be a “Class A” mall REIT. STOR is maybe not focused on higher quality tenants, but it purports to focus on the more profitable locations for middle market tenants (it also probably has that fresh coat of Berkshire wax shining up the valuation). GGP has a current dividend yield of around 4.3%, which is also in the same ballpark as REG and STOR.
Conclusion
So, in conclusion, the GGP transaction indicates that a historically successful real estate investor is a buyer at a valuation that is comparable to some of the retail REITs we looked at last time. I guess that means that, since this is a Class A mall REIT with a change of control transaction, we would need some more discounting to get really interested in STOR or REG, but we’re not like in another zip code from a valuation done by some sharp Canadians.
I still would prefer shopping/neighborhood center REITs to mall REITs, but then again what do I know compared to BAM. Also, GGP has some properties in Manhattan and other dense areas, so we’re not talking about 100% suburbia highway hell holes here.
I think I would still prefer KRG and BRX, but probably only on pretty material sell-offs as I would want a healthy margin between my (very) minority interest price and this control premium price and to reflect the potential for some lower quality/less dense locations. I also keep seeing ads for NAREIT on twitter. Why does that exist? Can you imagine like a CPG association promoting stock ownership in Kellogg’s, Post, and Kraft Heinz? Seems very promoter/retail-y.
Next time, I am planning to do an update on CAG. They posted earnings about a week ago and it showed some promising “organic” growth, in frozen foods. By the way did anyone try a healthy choice protein bowl yet? If you will, I will. Unlike some competitors, they didn’t blow the quarter, tank guidance, blame food and transportation inflation, buy a hot growth stock for 25x EBITDA, and fund a large portion of it by issuing stock at 10x EBITDA.
Thanks for reading!