Mall Valuation Post Unibail-Rodamco/Westfield

Earlier this week France based Unibail-Rodamco announced the acquisition of Australian based Westfield, a major owner of A+ malls in the U.S. and Europe for a total valuation of $24 billion. There was a significant difference of opinion on the transaction between The Wall Street Journal and The New York Times today. The Times headline read "Acquisition Signals Hope For the Future of U.S. Malls," while The Journal headline read "Big Name in Malls Heads for the Exits." We side with The Journal.

This is our fourth blog on mall valuation this year and readers familiar with our view know that the Class A mall business is in transition from being a great business to a good business which implies higher cap rates going forward. According to sources we believe to be reliable,  the U.S. assets were valued at a cap rate in the high 4% range, say approximately 4.7%-4.9%. In our view the seller received more than a full price and we might just get a hint of that tomorrow when November retail sales are reported. It is our guess that although traditional retail did well, online retail had a blowout month.

We believe that Westfield's founding Lowy family came to the realization that their huge investments in redevelopment (e.g. Century City) and technology might not payoff and that future investments in redevelopment would be of a defensive nature. Hence it was hard to turn down an offer that approximated Street net asset value.

Nevertheless the stock market responding by boosting the share prices of Simon Property Group, Macerich and GGP. We would view rally as a selling opportunity if only because one of the potential bidders (Unibail) will likely be out of the market for the next two years.

The Dice are Rolling in Mall Land

Last May we wrote "Thus if private equity or sovereign wealth funds don't come in soon to scoop up the apparent bargain, the Street, as I argued, is way off." (https://shulmaven.blogspot.com/2017/05/a-new-look-at-mall-reit-valuations-part.html) Of a sudden, after a long period of sustained discounts to Street estimates of net asset value the dice are starting to roll in Mall Land. First Brookfield Property Partners offered to take in the 64% of GGP that it doesn't already own with a  cash and stock offer valued at $23/share. To be sure the offer was well above the $19/share the stock was trading at, but still well below the $28/share of value ascribed by the Street. As of this writing GGP is trading about 3% above the Brookfield offer price.

We then found out that hedge funds Starboard Value and Third Point have taken a position in Macerich causing its stock to rise from the mid-50s to the mid-60s, still below the $73 valuation estimated by the Street. Further Elliott Management, a $30 billion hedge fund, has taken a position in Taubman that elevated its stock price from the high 40s to the mid-50s again well below the $85 Street valuation. Remember the hedge funds are intermediaries and are ultimately looking for a final buyer like Brookfield to take them out. If no final buyer appears they will find themselves with dead money positions that will be sold back to the market.

Sitting on the sidelines watching and waiting are David Simon of Simon Property Group, the largest mall owner and Jonathan Gray of Blackstone, the largest private equity firm in the real estate arena. How they respond could very well be despositive as to how the price discovery process works out.

My guess is that the potential buyers of mall companies and/or mall assets are looking for what they perceive to be a bargain and with the Street still estimating mall cap rates in the 4-5% range, they will not find a bargain at those prices. Simply put the bid-offer spread is too wide, and as result I do not foresee transactions at anywhere close to the offer side of the market. But again, as we noted in May, time will tell.

A New Look at Mall REIT Valuations: Part 2

Earlier this month I posted my view on how to approach mall REIT valuations given the stresses engendered by online competition. (See https://shulmaven.blogspot.com/2017/05/a-new-look-at-mall-reit-valuations.html) Since then the mall REITs drifted lower rallied and then fell back a bit. Nevertheless I believe that the burden of proof is on the bulls with the mall REITs continuing to trade at substantial discounts to Street net asset values. (See below) If the Street is right then back up the truck, but my question with the world still awash in a sea of liquidity, where are the sovereign wealth funds and private equity? This is especially true for GGP whose CEO all but announced the company is for sale and where Brookfield already owns 29% of the company. The silence, up to now, is deafening. Thus if private equity or sovereign wealth funds don't come in soon to scoop up the apparent bargain, the Street, as I argued, is way off.

REIT   Street   Market Price   Discount   Mkt. Cap.
             NAV                                              (in $bil)

SPG       214                 157             27%        50
GGP         32                  23              28           20
MAC        79                  59              25              8.5
TCO         95                  62              35              4

In my view sophisticated buyers understand two things. One, there is a structural revolution going on in retail as result of online commerce and two, the retail bankruptcies that we have seen this year will look like child's play during the next recession. Remember we are witnessing an onslaught of retail bankruptcies when income, consumption and employment data are relatively benign, what will happen when the economy turns more hostile.

As a result the clock is ticking. In the absence of a major deal or a portfolio sale/jv (a one-off transaction won't really count) over the next few months, Street estimates of net asset value will have to come down. As they say, time will tell.