Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Sarah Halzack is a Bloomberg Gadfly columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

Struggling retailers may soon have fewer landlords. Two of the nation's biggest mall owners -- GGP Inc. and Macerich Co. -- could feasibly be acquired in the near future.

Over the weekend, $21 billion GGP received a bid, albeit at a slim premium, from its biggest shareholder, Brookfield Asset Management Inc. And Macerich may be pushed into the arms of a suitor if Dan Loeb's Third Point LLC, which last week disclosed a stake in the $9 billion mall-owner, can successfully agitate for change. 

Despite the pain their tenants are enduring as consumers lean on e-commerce alternatives, these landlords are prime consolidation candidates because their portfolios are largely comprised of "Class A" malls, which have the best possible growth prospects and seem most likely to stay relevant.

Quality Matters
One reason Macerich and GGP are likely takeover targets: Their mall portfolios are performing
Source: Bloomberg Intelligence

And yes, e-commerce will no doubt continue to siphon traffic away from brick-and-mortar retailers. But it's important to remember that the vast majority of shopping still takes place in the physical world.

Slow Burn
Online shopping is growing quickly, but it still comprises less than 10 percent of total U.S. retail sales
Source: U.S. Census Bureau

So while many malls will undoubtedly shut their doors over the next several years, there is still plenty of customer demand for in-store shopping.

And malls are increasingly plugging vacancies with different kinds of businesses, such as fitness centers and kiddie entertainment parks. In theory, even if you're doing more online shopping, such offerings will entice you to the mall anyway. GGP, for one, is well aware of this shift and has been repositioning itself by scaling back deals with struggling apparel chains and signing up more food and entertainment tenants.  

Adapting to Change
An increasing percentage of GGP's gross leasable area is attached to non-apparel tenants
Source: Company presentation

The mall owners' relatively subdued valuations may be one thing spurring potential takeovers. Brookfield reportedly last mulled an acquisition of GGP back in January 2016, when the company was valued at a forward price-to-funds-from-operations multiple of roughly 18.9, compared to about 14.3 based on its reported offer price of $23 per share. And Macerich fielded an unsolicited offer from larger rival Simon Property Group Inc. in early 2015, when its P/FFO multiple was roughly 21.4; now it's just 15.7.  

To be sure, some of the world's largest real-estate investors have actively avoided U.S. malls partly due to the e-commerce threat. Blackstone Group LP's head of real estate Jon Gray, who oversees $111 billion in assets under management, last year said: "There has to be a reason to go to the mall, other than just buying a good."

And you can't overlook the fact that even the best-positioned malls still rely on stores whose futures don't look especially bright right now:

Exposed to Trouble
Macerich's list of largest tenants is peppered with faltering stores
Source: Company filings
L Brands includes Victoria's Secret, Bath & Body Works. Signet includes Zales and Kay Jewelers. Golden Gate Capital includes Payless ShoeSource, Eddie Bauer, PacSun.

Foot Locker Inc.'s stock has fallen more than 50 percent this year, thanks to the grim business outlook it offered investors back in August. Gap Inc. hasn't seen positive comparable-sales growth at its eponymous chain in any quarter since 2013. And Sears Holdings Corp. has been teetering on the edge of extinction for years. Malls have their wagons hitched to these retailers and must be creative and fiercely proactive to avoid getting dragged down by them. 

Still, some malls have a chance to successfully remake themselves as must-visit destinations and outlast their lesser counterparts. Amassing such high-quality properties seems to be a sound strategy, especially if the price is right.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. An acquisition by Brookfield would help it further diversify by adding other features such as apartments and office space, according to the Wall Street Journal.

  2. Macerich also recently disclosed a change of control clause that would grant the company’s top executives increased payouts if they were terminated within 24 months of an ownership switch, which could indicate openness to a transaction. 

  3. Notably, Simon's own P/FFO multiple has fallen to 13.6 from roughly 20. 

To contact the authors of this story:
Gillian Tan in New York at gtan129@bloomberg.net
Sarah Halzack in Washington at shalzack@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net