Brookfield Asset Management Inc. (BAM/A) is keeping a tight grip on its stake in General Growth Properties Inc. (GGP) in a bet the second-largest U.S. mall owner is better off as an independent company that will jump in value.
General Growth (BBREMALL) this week rejected a call by minority investor Bill Ackman to explore a deal with larger rival Simon (SPG) Property Group Inc. Brookfield owns 42 percent of General Growth after teaming with Ackman to bring it out of bankruptcy in 2010, and the Toronto-based asset manager opposes a sale as it seeks to capitalize on the mall company’s recovery and prepares to form a new entity for its own real estate holdings.
Brookfield’s investment is “impossible to replicate,” because of General Growth’s high-quality group of properties, which include Ala Moana Center in Honolulu and Grand Canal Shoppes and Fashion Show in Las Vegas, according to Mark Rothschild, an analyst at Canaccord Genuity Corp. It also is a wager that rental revenue and real estate values will keep rising amid increased demand from retailers.
“The BAM philosophy is largely to invest for the very long term,” Cedrik Lachance, an analyst at Green Street Advisors Inc. in Newport Beach, California, said in a telephone interview. “It is a portfolio of very good quality real estate and they like to control platforms.”
Brookfield has three seats on the board of Chicago-based General Growth, including one held by Chairman J. Bruce Flatt, the chief executive officer of Brookfield. Flatt, in a Sept. 10 letter to General Growth shareholders, likened Brookfield’s investment strategy to that of Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), buying stakes in businesses that have franchises that can’t be replaced and holding on for the returns.
Brookfield shares have a total return of 18 percent in the past five years, compared with 11 percent for Omaha, Nebraska- based Berkshire Hathaway.
Brookfield, whose other real estate investments range from office towers to apartment company Fairfield Residential Co., plans to spin off its commercial property holdings into a new public company that it will control, according to plans filed with the Securities and Exchange Commission in May. The asset manager’s General Growth ownership will be included in the new company, Brookfield Property Partners LP.
“They think over decades,” Rothschild, based in Toronto, said of Brookfield in a telephone interview. “It’s not about making an extra 5 percent today.”
Ackman, whose Pershing Square Capital Management LP is General Growth’s No. 2 shareholder, with a 10 percent stake, indicated yesterday that he isn’t giving up on his efforts for the company to explore a merger.
“You can expect you will hear more from us on this topic,” he said in a telephone interview.
General Growth, led by former Vornado Realty Trust executive Sandeep Mathrani, has jumped about 50 percent since the company exited bankruptcy in November 2010, including an 8 percent gain from Aug. 22, the day before Ackman first proposed exploring a sale, through yesterday. The shares advanced 7 cents today to $20.07.
Since the restructuring, the real estate investment trust has spun off two companies, Howard Hughes Corp. (HHC) and Rouse Properties Inc., in an effort to focus on the highest-quality real estate. It has paid down and refinanced debt to reduce costs. It also is keeping up with Simon in some areas of retail real estate performance, including tenant sales and occupancy.
“Since the company’s come out of bankruptcy, it has focused on rationalizing its portfolio,” David Harris, a real estate investment trust analyst at Imperial Capital LLC in New York, said in a telephone interview. “They have a sensible business strategy.”
General Growth “is positioned for superior growth over the next five years versus any comparable retail mall investment,” Flatt wrote in the Sept. 10 letter. The landlord, in its letter rejecting Ackman’s proposal, said the best value for shareholders can be achieved if it continues with its business plan.
Ackman said in a letter to General Growth’s board that he discussed a takeover of the company with Indianapolis-based Simon through an all-stock deal. Brookfield didn’t support the plan and ultimately said it would try to pursue an acquisition on its own, he wrote. Brookfield, in response, said it isn’t taking any steps to buy the company.
A proposed takeover by Simon should be viewed as a merger since General Growth shareholders would keep their investment in the combined company, Ackman said.
“The correct analysis is to compare where GGP shareholders would be if it remained an independent company versus a merger with Simon today over the next five to 10 years because shareholders in the merger begin with a substantial premium and because the combined company gets the benefits from the revenue and cost synergies that are unavailable to standalone GGP,” Ackman said yesterday in the telephone interview. “Shareholders are vastly better off in a merger today than if the company were to remain independent.”
Simon’s market value is about $50 billion, compared with $18.8 billion for General Growth. Simon isn’t interested in buying General Growth, Stephen Sterrett, Simon’s chief financial officer, said Sept. 11 at a Barclays Plc investment-banking unit conference.
“There’s been a fair bit of speculation and inquiry lately about General Growth and our rumored interest in that company and I think it’s important to respond and set the record straight,” Sterrett said. “We have no interest in General Growth.”
Andy Willis, a spokesman for Brookfield, David Keating, a spokesman for General Growth, and Les Morris, a spokesman for Simon, all declined to comment.
General Growth owns or has stakes in 149 regional malls with about 141 million square feet (13 million square meters) of leasable space in the U.S. and Brazil. The company’s tenant sales rose 9 percent to $533 per square foot on a trailing 12- month basis in the second quarter, compared with a gain of 10 percent to $554 for Simon. Occupancy at General Growth’s regional malls was 94.3 percent, compared with 94.2 percent for Simon’s U.S. shopping centers and outlet malls.
“GGP’s board believes, and we agree, that its high-quality mall portfolio contains significant embedded growth as the management team executes on its long road back from bankruptcy,” Nathan Isbee, an analyst at Stifel Nicolaus & Co. in Baltimore, wrote in a note to investors Sept. 11.
General Growth will benefit from increased occupancy and converting short-term leases to long-term leases at “significantly higher rents,” Isbee wrote.
The company is focused on internal growth through increasing occupancy and redevelopment of properties. It may be an acquirer of assets in three to five years, Chief Financial Officer Michael Berman said at the Barclays conference Sept. 12.
“The regional mall business is a very, very healthy business,” Rich Moore, an analyst at RBC Capital Markets in Solon, Ohio, said in a telephone interview. “You could make the argument that left on their own, GGP will probably do just fine.”
Mall owners are the best performing group in the Bloomberg REIT Index (BBREIT) this year, advancing 29 percent compared with the broader index’s 18 percent increase. General Growth has climbed 38 percent in 2012, compared with a gain of 26 percent for Simon. General Growth is the third-best performing mall REIT, after Pennsylvania Real Estate Investment Trust (PEI) and CBL & Associates Properties Inc. (CBL)
Simon would pay 0.1765 of a Simon share for each General Growth share, according to one of Ackman’s letters. That would value General Growth at $28.72 a share, based on Simon’s closing price today.
That would have given General Growth a higher per-share value than Simon’s proposed takeover from more than two years ago. Simon said in May 2010 that it offered $20 a share for its competitor, which was under bankruptcy protection at the time.
“What was attractive to Simon and BAM two years ago is the quality of the asset base of GGP,” said Lachance of Green Street. “The mall business in the U.S. is largely concentrated in the hands of a limited number of owners and the good quality malls, I’d say even more so.”
A Simon and General Growth combination would be even more diversified in the Class A mall business and would have the largest outlet-mall operation. General Growth doesn’t own outlet malls, which have been “a significant contributor to Simon’s long-term” growth in funds from operations, Ackman wrote in his letter. A combined company also would have lower leverage.
Ackman will probably keep pushing for change at General Growth and could nominate his own slate of directors at the company’s next annual meeting, according to Moore.
General Growth and Simon properties tend to be top-tier malls in areas with little space for development, making it harder to build competing properties. The lack of new regional- mall supply and rising demand from retailers for space will help boost rents for landlords, Moore said.
“The supply of new regional malls is essentially zero,” he said. “The population of the country continues to grow and, hence, you have these wonderful destination shopping centers.”
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