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Tepid reception to Brookfield-GGP deal pricing

Brookfield Property Partners LP's sweetened takeover offer for GGP Inc. has so far received scant applause on the Street and is likely to get a lukewarm reception from shareholders too, according to analysts.

GGP shares were down more than 3% in midday trading March 27. Its mall real estate investment trust peers also fell: Simon Property Group Inc. and Taubman Centers Inc. dropped roughly 2%, and Macerich Co. slipped more than 4%.

With the deal, detailed after market close March 26, Brookfield raised the cash component of its offer, which was increased to $23.50 per share from the $23.00 per share in its initial November 2017 bid. But Brookfield's stock has traded lower in the intervening months, and so the 61% cash-39% stock offer translates to a price of only $21.90, by Evercore ISI analyst Steve Sakwa's estimate — only about a 3% premium to GGP's March 26 closing price.

The offer, Sakwa said in a note, "will likely not resonate well" with GGP shareholders and raises the possibility that the prospective deal may not pass a shareholder vote. A majority of non-Brookfield shareholders — Brookfield already owns roughly 34% of the REIT — must approve the deal.

Boenning & Scattergood analyst Floris van Dijkum called the offer "underwhelming" and said the deal "significantly undervalues" GGP. His net asset value estimate at present for the mall REIT is $34.79 per share, above the consensus NAV of $27.28 per share. In Boenning & Scattergood's methodology, van Dijkum underwrites each individual mall property.

"For Brookfield it makes a lot of sense. For GGP it doesn't," van Dijkum said in an interview. "Investors get the option to roll into a diversified, leveraged, externally managed tracking vehicle that trades at a perpetual holding company discount, essentially. And then you're re-combining GGP with Rouse."

Brookfield and GGP did not respond to requests for comment by press time.

In recent years, the divide between A-mall REITs and landlords of lower-quality properties has widened amid a broader flight to quality in the space. REITs have worked to shed weaker properties — GGP did so when it spun off Rouse Properties Inc. in 2011, which sold to a Brookfield affiliate in 2016 — and investors, analysts and researchers expect A-malls to be the main group of survivors of the ongoing retail tumult.

Asset pricing in this period of secular flux has been unclear, in part because there have been so few deals. The pending Westfield Corp.-Unibail-Rodamco SE merger transaction has offered some insight into mall valuations and, according to van Dijkum, "demonstrated that investors see the inherent value in mall platforms." He does not view the Brookfield-GGP deal so highly.

"If this deal goes through, it would potentially re-rate all of the mall stocks, and NAVs potentially would have to come down," the analyst said.

Other analysts had similarly lackluster reads on the price. Mizuho's Haendel St. Juste said the deal points to an implied cap rate of 6.1% for GGP, "well above" the mid-5% he uses for high-quality malls.

"While the offer is neither exciting for GGP shareholders nor a good read-through for mall asset values, we think it has a better than not shot of getting approved given the significant turnover in GGP's shareholder base over the past year (lower cost base), negative industry / asset value trends and lack of a competing bid," he said.

BMO Capital Markets' R. Jeremy Metz said the revised offer "could disappoint," but said it is likely sufficient to execute the deal.

"We ultimately think the revised bid will be enough to get the deal done based on numerous prior conversations with shareholders," Metz said in a note.