By Miriam Gottfried and Esther Fung
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 23, 2019).
Brookfield Asset Management Inc.'s big bet on malls last year,
the firm's latest wager on an out-of-favor asset, is looking
riskier than ever as other investors increasingly sour on the
sector.
In August 2018, the Canadian investment firm closed a deal to
buy the two-thirds of real-estate investment trust GGP Inc. it
didn't already own. The transaction valued the 125-property
portfolio, mostly comprised of malls, at around $15 billion.
The buyout was a gamble that investors preoccupied with the rise
of Amazon.com Inc. and e-commerce had become overly negative about
the fate of bricks-and-mortar retail -- particularly the
high-quality malls in GGP's portfolio like Las Vegas' Fashion Show.
Brookfield officials believe that while there are probably too many
malls in the country, many of the strongest ones will survive and
thrive.
The move was also an assertion that Brookfield, with its
expertise in new construction, could wring more value out of the
properties by reconfiguring their stores and redeveloping the land
around them.
But since the deal closed, things have gone from bad to worse
for mall owners.
Major tenants Sears Holdings Corp. and Forever 21 Inc. have
filed for bankruptcy protection and announced significant store
closures. Shares of others including J.C. Penney Co., Gap Inc. and
Macy's Inc. have collapsed following weak earnings reports.
A few months ago, Brookfield approached some institutions that
had previously invested alongside the firm about buying stakes in
other malls, according to people familiar with the matter. The
investors declined to make new commitments, arguing it would be too
expensive to improve the malls and citing further risk of store
closures, among other concerns, the people said.
Adding to the bleak picture, stocks of mall-owners Simon
Property Group Inc., Taubman Centers Inc. and Macerich Co. have
fallen by double-digit percentages since the GGP deal closed, while
the S&P 500 is up more than 10%.
Shares of Brookfield Property REIT Inc., a real-estate
investment trust whose portfolio includes GGP as well as a
substantial portion of nonretail assets, have fallen by about 13%
since it was formed upon completion of the takeover. Brookfield
Property REIT is an investment vehicle created by Brookfield
Property Partners LP, the firm's separate publicly traded
real-estate business.
Other cracks are starting to appear across the retail landscape.
Outside appraisers last month valued the Saks Fifth Avenue flagship
store in Manhattan at $1.6 billion as part of parent company
Hudson's Bay Co.'s bid to go private. In 2014, the building was
appraised at $3.7 billion. And UBS Group AG's Trumbull Property
Fund -- a roughly $20 billion real estate vehicle -- has amassed a
backlog of requests from investors wanting to pull about $5 billion
in commitments since it wrote down the value of retail assets it
owns, according to a person familiar with the matter.
Other big investors are bearish on retail real estate.
Brookfield's chief rival Blackstone Group Inc. has eschewed it,
instead buying up big portfolios of warehouses used for e-commerce.
Billionaire investor Carl Icahn placed a bet that mall owners will
run into challenges servicing their debt, The Wall Street Journal
reported.
"The sentiment is so negative on malls," said Vince Tibone, lead
retail analyst at real-estate research firm Green Street Advisors
LLC. He said that investors can justify paying up for warehouses
because the growth of e-commerce makes them a safer investment, but
"if you buy a mall and you're wrong, you're probably going to get
fired."
Brookfield remains optimistic about a portfolio that ranges from
Baltimore's Mondawmin Mall to Portland, Ore.'s high-end Pioneer
Place.
In an interview, Brian Kingston, chief executive of Brookfield
Property Partners, expressed confidence that the bet will pay off
despite recent weakness. "This is part of our strategy in that
we're contrarian investors," he said. "This is what it always feels
like."
Brookfield hit it big in the past when it dared to tread where
other investors wouldn't. It bought the World Financial Center in
lower Manhattan in the aftermath of the Sept. 11 terrorist attacks
and redeveloped it, bringing businesses and commerce back to a
neighborhood some thought couldn't be revived -- and earning the
firm 15 times its initial investment. The huge portfolio of
real-estate and infrastructure assets Brookfield bought in Brazil
when government corruption scandals and a deep recession kept other
investors away has also proved to be a canny bet.
A big part of Brookfield's strategy for making the GGP bet pay
off involves squeezing more out of the properties it owns. It has
$2.5 billion of projects under way to build new residential
complexes, office space and hotels on the sites of nine of its
malls and to remodel some of their existing retail space. For
example, it is building new residential towers next to the Ala
Moana Center mall in Honolulu and redeveloping large spaces once
occupied by Nordstrom Inc. and Macy's at San Francisco's Stonestown
Galleria.
The firm has also identified $2.6 billion of longer-term
projects including more residential towers at Ala Moana and
residential units next to Stonestown Galleria.
Brookfield aims to reap returns by selling the buildings it is
constructing on land around malls to other investors. It is
projecting it can create a combined $1.8 billion in incremental
value through the current and long-term construction projects it
has identified, and that doesn't count the indirect benefits of
driving more foot traffic to its malls.
The firm believes there will continue to be demand for the
strongest malls, particularly as weaker retailers are replaced by
digital-native brands like glasses seller Warby Parker and
experience-oriented tenants such as movie theaters and
restaurants.
The outcome of Brookfield's bet very much remains to be seen.
One closely watched indicator has raised some eyebrows in the
industry. The value Brookfield assigned to its retail portfolio --
almost entirely GGP -- implies a cap rate of 5.2%, according to
Green Street.
Brookfield's cap rate is the same as what Green Street applies
to malls rated A+, yet the researcher rates nearly half of
Brookfield's 113 malls B+ or lower. And while Green Street
estimates a 10% drop in the value of malls this year, Brookfield's
balance-sheet valuation of its retail segment hasn't materially
changed over the period.
In a statement, Brookfield said it disagrees with Green Street's
ratings analysis given that its average tenant sales per square
foot is a relatively high $787.
A major reason for the divergent views: While a number of
lower-quality malls have been sold since Brookfield's deal for GGP,
very few higher-quality ones have changed hands, and transaction
values are a major factor in valuations in the industry.
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com and Esther
Fung at esther.fung@wsj.com
(END) Dow Jones Newswires
December 23, 2019 02:47 ET (07:47 GMT)
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