Activism and Re-Awakened Value Hunting Sparks Private Investor Interes


Mall REIT executives have long asserted that the public markets consistently undervalue their company stock, even though the properties in their portfolios trade at relatively low cap rates. The public markets might now have incentive to change their positions, however, after three separate mall REITs have attracted strong interest from private investment groups.

Earlier this month Brookfield Asset Management submitted a bid of about $14.8 billion to acquire Chicago-based GGP Inc., effectively taking the company private.

Investors are expressing interest in mall REITs in other aggressive ways, too. Elliott Management, a New York City-based hedge fund, reportedly has accumulated enough shares in Bloomfield Hills, Mich.-based Taubman Centers to hold a so-called activist position, yet not enough to publicly disclose them, according to media reports. This comes amid Stamford, Conn.-based Land & Buildings Investment Management pressuring Taubman to make significant management changes at the company. Taubman recently made some changes to its board. Elsewhere, the hedge fund Third Point recently accumulated enough shares in Macerich Co., to own a 5 percent position in the company and give it an activist voice in the company, according to media reports and regulatory filings.

REIT sector experts say the attention that the retail sector is now receiving is long overdue.

“The surprise is that it didn’t happen a long time ago,” says Brad Case, NAREIT’s senior vice president of research and industry information. “The value of REIT stocks depends on the value of the buildings, and there has been a real disconnect.”

Experts at Boenning & Scattergood, a securities, asset management and investment banking firm headquartered in New York City, say Brookfield’s initial offer of about $23 for GGP might be too low, given Brookfield’s track record of raising its offer for buyout targets. Any other candidate to buy out GGP might have to bid at least $30 per share, according to a research note from Floris van Dijkum, a senior REIT analyst at Boenning & Scattergood.

In order to successfully capture GGP, van Dijkum wrote in the report, an investor would have to bid at least $30 per share of GGP stock. In a recent follow-up note, van Dijkum reiterated Brookfield would have to raise its bid significantly if it expects to prevail in buying GGP’s shares, and he cited very low cap rates on recent mall sales to underpin GGP’s true market value.

“Every single transaction posted has confirmed that ‘A’ malls trade at cap rates between 4 percent and 5 percent,” according to van Dijkum’s note. In one example, van Dijkum noted, Brisbane, Australia-based Queensland Investment Authority bought ownership interests in 10 malls from Forest City Realty Trust in October, resulting in a cumulative cap rate of about 5.1 percent on the properties. Those properties were widely considered of lesser quality than the properties under GGP’s ownership, according to van Dijkum’s research.

Another reason that mall REITs are attracting more attention lately is that real estate investors in general are looking beyond brick-and-mortar opportunities for investment. That is happening across all property categories, not just retail, Case said. Also, the public market’s chronic undervaluing of mall REITs’ portfolios might also be a more short-term phenomenon, Case said, because REIT stock prices and property prices attain parity on a long-term basis.

Retail REITs Turn More Heads

Not all mall REIT ownership revolves around a recent awakening of private investor interest. In the case of Taubman Centers, for instance, investors have wanted to increase the values of its shares for some time. L&B has been particularly aggressive in pushing for changes in Taubman’s board structure and management—while staunchly maintaining that the REIT’s properties are extremely high performing.

“Taubman trades at a 6.3 percent implied cap rate and is likely worth twice the current share price due to the extraordinary value of Taubman’s nine dominant malls and the dearth of high-quality malls available for institutions to purchase,” according to a press release that L&B issue through the site The company added that it believes some cap rates on Taubman properties could be as low as 4 percent.

L&B is not alone in that sentiment. In its note, “Brookfield Bid Revisited—Opportunistic and Too Low,” Dijkum extrapolated an assumed cap rate of 4.15 percent and a net asset value of about $102.73 per share for Taubman partially based on the quality of its properties.

Overall, according to NAREIT’s Case, the current interest in retail REITs are not likely to abate soon.

“There are people who are concerned that the broad stock market might be overvalued, but that is not the case for the REIT market,” Case says. “This recovery has not yet reached the half-way point.”

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