Shares of mall-focused REIT GGP (NYSE:GGP) have plunged in 2018. Initially, the stock price fell due to ongoing worries about the so-called "retail apocalypse" and its effect on mall occupancy and lease rates.
Then, in March, GGP's board agreed to accept a buyout offer from Brookfield Property Partners (NASDAQ:BPY) valued at $23.50 per share -- a price that was less than GGP's net asset value. Many GGP investors were disappointed, having expected a bid closer to $30. Still, now that GGP stock has fallen below $20, there's enough upside to make it attractive.
The basics of the Brookfield deal
The terms of GGP's pending sale to Brookfield Property Partners call for investors to receive either $23.50 in cash or one unit of Brookfield Property Partners (or one share of BPR, an equivalent REIT stock that will be created) for each share of GGP stock that they own.
In theory, shareholders can choose whether they want to receive cash or stock. Given that Brookfield Property Partners units have also fallen below the $20 mark, everyone will presumably ask for the cash. However, the proportions of cash and shares to be distributed are fixed at about 61% and 39%, respectively..
As a result, for each share of GGP stock, investors will get a prorated cash amount of $14.335 and 0.39 units of Brookfield Property Partners (or 0.39 shares of BPR stock). That puts the total value of the deal today at a little less than $22 per share. GGP shareholders will also be entitled to a second-quarter dividend of $0.22.
The price is starting to look pretty good
Considering that GGP stock traded for more than $23.50 earlier this year, it's easy to understand why investors weren't satisfied with the sale price negotiated by the board. However, including GGP's second quarter dividend, the total value of the deal is about 13% ahead of the REIT's Thursday closing price of $19.49.
GGP and Brookfield Property Partners expect the sale to close in the third quarter, subject to shareholder approval. GGP stock trades at a surprisingly high discount to the value of the deal considering how soon it could be completed.
Furthermore, for GGP shareholders who think that company is being undervalued, Brookfield Property Partners units should appear equally underpriced. Brookfield has enormous access to capital, and huge amounts of experience doing redevelopment work, which should allow it to accelerate efforts to densify and add value to GGP's properties. As an added perk, Brookfield Property Partners' quarterly dividend is more than 40% higher than GGP's current dividend. Indeed, Brookfield units currently yield 6.5%.
Where's the downside?
The biggest risk of buying GGP stock at the current price is that a majority of shareholders might vote against the deal in hopes of getting a better offer that never turns up. However, that seems a less likely result in the wake of the somewhat disappointing first quarter results GGP reported on Thursday.
Furthermore, in the unlikely event that the sale gets voted down -- or falls through for some other reason -- GGP could still be very successful over time as a standalone entity. While rising vacancy rates do represent a short-term challenge, most of the company's malls are high-quality properties.
As a result, GGP should be able to boost its net income by redeveloping vacant anchor stores for higher-paying tenants. It may also have opportunities to sell its top properties to institutional investors at favorable prices, and return the proceeds to shareholders. In the long run, those factors provide pretty good insurance against further declines in GGP's stock price.