Brookfield Raises the Profile of Malls Again

chart01Brookfield Asset Management surprised investors when they made an unsolicited offer to buy a majority stake in Rouse Properties. Brookfield currently owns 33% of Rouse Properties, and the offer boosted its stock price by 30%. During a week when the equity markets have seen a number of selloffs, this offer is seen as being opportunistic, and its bringing attention to the mall industry which has been seen as a risky and dying industry since the great recession.

Many experts predicted the downfall of malls when GGP, the second largest owner of malls in the US, filed for Chapter 11 bankruptcy in April of 2009. GGP was founded as a small grocery business in Iowa and developed one of the firsts malls in the Midwest in the 1950’s. By 1989, GGP became the second largest owner of malls largely due to the availability of land tracts where big box stores could be developed. This allowed suburban middle class families to shop closer to home and avoid having to go to stores downtown.

Brookfield came to the rescue and made a $2.3 billion investment in GGP’s common stock, resulting in almost 40% ownership of the shares. GGP continued to liquidate some of its assets until January 2012 when Rouse Properties was spun out of GGP as an independent company pursuing its own goals. GGP provided Rouse Properties with 30 Class B malls while GGP focused on its core properties, strengthening its operations and transitioning out of bankruptcy relief. Brookfield remained as a majority shareholder of Rouse Properties.

chart02Malls may be classified as being Class A, B, or C, and these categories are based on the average sale per square feet. Class A malls have the highest rate of sales, and Class C have the lowest rate of sales. This has created a two tiered system of mall REITs with Class A REITs in one category and Classes B and C REITs in a second category. Class A mall REITs have been trading at 25x AFFO, and Class B/C mall REITs have been trading at 12x AFFO. Rouse Properties, which belongs in the Class B/C REITs, are now trading at 15x AFFO after Brookfield announced its offer to purchase a majority stake in the company.

Rouse Properties has asked Brookfield to sign a standstill agreement while they form a special committee to evaluate the proposal. In the meantime, Rouse has hired Bank of America Merrill Lynch to act as an independent financial adviser.

Source: Rouse Properties, Inc.(NYSE:RSE), Brookfield Asset Management In(NYSE:BAM), Fast Graphs, Yahoo!Finance, General Growth Properties, Inc(NYSE:GGP)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Regional Mall REITs: Minor Hiccup?

chart02.pngRegional mall REITs have suffered due to weak Q3 results and sales forecast from major mall-based retail stores. This has caused an underperformance in share prices for the month of November. The entire regional mall REIT sector returned negative results, with a median return of -8.1 percent. Leading the drop was General Growth Properties with a decrease of 12 percent.

chart01In general, the brick and mortar retail shopping industry has been negatively affected due to the change in consumers habits related to e-commerce. A perfect example is Best Buy. Oftentimes consumers will go to their stores to research physical products, and then end up purchasing them on Amazon. That being said, we should not expect that behavior to be the new norm.

A telling study from ATKearney shows that the majority of consumers continue to shop at brick and mortar stores, with only 5 percent of sales being pure play online. In addition, millennials, the largest U.S. population after baby boomers, still go to malls. Millennials tend to use online tools as well. In this ever-changing environment, the most successful retailers will combine physical and online stores, feeding off one another.

Through the years, we have witnessed many large retailers moving to e-commerce platforms. Macy’s is a good example. On the other hand, online retailers, such as Apple and Microsoft, have opened brick and mortar stores. In addition, there are companies that employ strategies of crossing channels. For example, consumers make the purchase online, and then pick up the items at the store. This presents retailers with the ability to sell them additional products while physically at the location.

Regional mall REITs continue to grow on par with other average REITs. Since there have no recent indications of a major change in trends, the share drop appears to be a minor hiccup. Besides, the drop was not large enough to make the fastest growing REITs less valuable.

See additional thoughts on this Seeking Alpha article.

Source: General Growth Properties (NYSE:GGP), Yahoo Finance, ATKearney

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.