Who’s looking for a REIT?

In the wake of two major retail real estate investment trust take-overs, Meghan Morris and Lisa Fu examine how ripe the M&A environment is for more deals.

Two mega-deals headlined this year’s retail REIT M&A activity, but industry observers say even after billions changed hands, there is more to come.

With many REITs trading at a discount to net asset value across property types, private equity buyers are targeting groups with varying focuses. The first half of 2018 saw deal chatter for REITs that focus on US luxury hotels, industrial properties and student housing, among others.

Overall, US REITs – the deepest market of its type – saw companies trading at a 6.1 percent discount to gross asset value, according to Newport Beach, California-based Green Street Advisors’ June report on real estate securities. The outlook for retail REITs is worse: mall REITs had an 11.9 percent discount to GAV, while strip centers had an 11.3 percent discount.

Mall REITs’ super sales

PERE takes a deep dive into how two major retail REIT deals unfolded



Ala Moana Center: one of GGP’s Class A malls

Late last year, a division of Brookfield Asset Management said it would buy the remainder of mall owner General Growth Properties that it did not already own with a $15.3 billion bid.

Brookfield is no stranger to GGP. It helped pull GGP out of bankruptcy in 2010 after the REIT was unable to refinance its $27 billion debt in 2009. Brookfield also acquired GGP spinoff Rouse Properties in 2016 for $2.8 billion. Rouse, which oversaw a portfolio of 30 Class B US regional malls, spun off from GGP in 2012. In Q3 2017, Brookfield exercised the warrants it owned to bring its stake in GGP to 34 percent.

GGP initially rejected Brookfield’s $14.8 billion bid in November, a figure Boenning & Scattergood analyst Floris van Dijkum called “too low” in a report at the time. However, the REIT decided to sell when Brookfield bumped up its bid by half a billion in March, which Green Street said was likely a buy at a modest discount.

The deal, anticipated to close in the third quarter, will give Brookfield the remaining 66 percent of GGP it did not already own, adding 125 Class A malls to its portfolio. The cash-and-stock deal included a $9.25 billion cash payment, $4 billion of which was reportedly financed by the California Public Employees’ Retirement System, a CBRE Group unit, Australian sovereign wealth fund Future Fund and TH Real Estate. The groups agreed to invest in specific GGP shopping centers, Bloomberg reported.


Unibail-Rodamco agreed to buy Australian REIT Westfield in December in a €13.4 billion deal. Europe’s largest publicly traded commercial real estate company will take control of Westfield’s 35 shopping centers and 6,565 retail outlets dispersed around Europe and the US. Of the 35 shopping centers, 31 are located in the US.

Brick-and-mortar retailers in the US have suffered declining sales and Westfield has spent years trying to lower its exposure to retail. In the US, 46 percent of gross leasable areas throughout malls is dedicated to department stores, according to a 2017 JLL research report. In the last few years, mall operators have seen rapid closure of storefronts as e-commerce giants like Amazon continue to gain popularity.

“To say that a consolidation wave has now begun in the global mall business would be understating the obvious,” Green Street advisors wrote in response to the deal. “The environment has likely created a sense of urgency to get deals done.” The two companies closed the deal on June 7.

While the headline figures, combined with record retailer bankruptcies in 2018, paint a negative picture for retail, Ronald Dickerman, the chief executive of Madison International Realty, points out nuance in the sector’s evolution. Macy’s, for example, has seen its stock rebound in the last 18 months, even while another common mall anchor tenant, Sears, goes bankrupt.

“Things have been gyrating in the retail space. We’ve gone from death and doom and gloom to the new normal. We’re now at a place where people are willing to stake their claim in retail – you’re seeing that with Brookfield,” Dickerman says. “Our view is quality at a discount often results in some type of M&A activity.

REIT buyers can be split into two categories: those looking to acquire a company’s underlying real estate and those looking to buy the full company.

For the former, buyers are assessing portfolios. Just like any real estate deal, they consider location and asset quality, says Greg Wolkom, head of Wells Fargo’s REIT finance group. A+ malls in fortress locations and 24-hour cities are top of buyers’ most-wanted list, while power centers with big box stores are at the bottom. For buyers seeking full platforms, quality management teams are key. Brookfield’s acquisition of GGP was driven partly by GGP’s leadership, one source said.

“There are some great management teams out there that the public markets aren’t fully valuing,” says Wolkom. “I don’t think the public markets in our sector, the REIT world, do a good enough job of differentiating management teams. Does it matter to firms like Blackstone as much? Maybe not, as for the most part they’re looking to acquire assets and not necessarily platforms. Does it matter if there’s a sovereign or a pension fund looking to buy a platform? I think it does matter more.”

Profile of likely buyers

Private equity, rather than other REITs, are more likely buyers in the current environment, Wolkom says. As retail landlords increasingly prefer experiential tenants – cinemas, gyms and other groups that bring consumers in, sometimes weekly or daily – and department stores close up, they need capital to change their centers. Public companies typically cannot write the same checks, or syndicate capital out, like their private counterparts.

“It makes sense for private equity buyers if there are opportunities to redevelop, to reposition, to do things that are in my view better done outside the glare of quarterly reporting,” Wolkom says. “When you’re heavy on redevelopment, it’s harder to predict your quarterly numbers. It’s costing more, it’s taking longer to execute on those redevelopment plans, which is not a great recipe within the public markets.”

Wolkom adds that private equity’s dominance over public buyers for retail REITs is also driven by capital structuring: use of 60-65 percent leverage or higher, common for private equity players, is likely too high for the public markets. The buyer pool narrows further within private equity real estate. Green Street’s Cedrik Lachance, director of REIT research, highlights that few firms can afford the cost of upfront capital, regardless of post-closing syndication strategies, that take-privates often require.

Lachance says public-private buyer combinations are attractive when private capital seeks to partner with an experienced operator that lacks size to buy a company itself. The public entity may contribute 10-20 percent of the deal’s capital and manage the assets, while the private partner comprises the bulk of the capital.

“In the mall business, we’ve seen mall companies partnering together, long ago, to purchase assets, but I don’t see that happening now,” Lachance says. “I see public and private capital partnering, not public partnerships.”

Green Street’s takeout odds point to more M&A activity this year, which Dickerman and Wolkom also say they predict. “If you take malls and strip centers combined, it would be very surprising if we didn’t see at least one more takeout or public to public transaction because the net asset value discounts are big, because the cost differentials are big and because we’ve been at numbers like that for a long time,” Lachance says. “Over the next six months, I wouldn’t be surprised if one REIT was taken out.”