GGP Ggp Inc. (delisted)

By Esther Fung 

Brookfield Property Partners LP had to overcome vocal GGP Inc. shareholder opposition last month to convince stockholders to approve its $15 billion takeover of the mall owner. That may prove to be the easy part.

Now Brookfield has to revitalize GGP's 125-property portfolio at a time when many shopping malls are reeling. That means expanding GGP's top-tier shopping centers with additional stores, while scaling back or reconfiguring less successful malls by adding housing, office space or hotels.

Identifying what real-estate use would be best for each site, obtaining rezoning permits and convincing existing tenants and residents to stick with the program is the challenge. Not many real-estate investors are eager to spend the time and money on this extensive an overhaul.

Brookfield's acquisition also comes at a time when online shopping and fast-changing consumer tastes require landlords to make bigger investments on cosmetic and structural upgrades to make properties attractive to tenants and shoppers.

"There is going to be an exceptional amount of risk to be taken on the redevelopment side," said Kevin Kelly, chief executive officer of real-estate consultancy Benchmark Investments.

But unlike most smaller peers, some analysts say, Brookfield has the means and expertise to undertake a major project like GGP. The real-estate firm also recently transformed another mall owner, Rouse Properties Inc., which it acquired in 2016. With other partners, Brookfield redeveloped a number of Rouse's retail centers, such as adding 272 apartments and office space to a Burlington, Vt., mall.

"Our plan is to bring in partners into malls or portfolios of malls that can be redeveloped or repositioned into assets where additional capital is needed," said Brian Kingston, chief executive officer of Brookfield Property Partners, about GGP. "These are some of the best malls in America and probably in the world. We don't want to sell them necessarily. Our preference is always the partnership model."

Underpinning the strategy is Brookfield's broader belief that more people will move to urban areas and the value of well-located sites in urban areas will rise at a faster pace.

"There's work to do but they are very experienced at getting compelling returns," said Sheila McGrath, a real-estate analyst at Evercore ISI, who covers the company.

Brookfield said it has already sold around $4 billion in stakes in some GGP malls to joint venture partners to help pay down debt it incurred for the acquisition. The firm may continue to sell at least another $2 billion of such interests in the coming year or two as it plans for further development on sites that it considers underutilized.

"They [Brookfield] can harvest a lot of value by looking at the dirt outside the four walls of the mall," said Brian Harper, former CEO of Rouse who recently took the helm of another shopping center REIT, Ramco-Gershenson Properties Trust.

Many GGP's shareholders, who are now Brookfield shareholders, are already skeptical. Some felt that Brookfield's offer to acquire the 66% of the Chicago-based real-estate investment trust it didn't already own was too low.

But analysts said enough voted in favor of the offer because remaining an independent company at a time when the future of the mall business is in doubt seemed a worse outcome.

GGP's operations have been solid. Same-store net operating income rose 1.6% in the first half this year compared with a year ago, and the REIT reported a healthy occupancy rate at 94.2% as of the end of June. But the company's share price has fallen by around 32% since July 2016, as retailer bankruptcies and store closures at some peers have spooked investors on the industry.

If another bidder for GGP didn't materialize, shares could have tumbled further, and Brookfield's 34% stake in the mall owner would likely have discouraged other bidders, analysts said.

For every GGP share, investors will receive $23.50 or one share of Brookfield Property Partners or one share of a new holding company called Brookfield Property REIT that would be listed on the Nasdaq, subject to proration. The new REIT will be externally managed by Brookfield Asset Management Inc., the parent company of Brookfield Property Partners.

Some GGP investors have said privately that they are considering selling the shares they get and investing the proceeds in other A-mall REITs such as Simon Property Group instead as they prefer exposure to a mall-focused firm.

"This is what makes the market," said Mr. Kingston. "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."

Write to Esther Fung at esther.fung@wsj.com

(END) Dow Jones Newswires

August 21, 2018 11:19 ET (15:19 GMT)

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