People walk to Brookfield Place off Bay Street in Toronto on May 7, 2014.Mark Blinch
Since Brookfield Property Partners LP made a big bet on shopping malls earlier this year, investors haven’t been impressed: The units, already weighed down by rising interest rates and slowing global economic activity, fell to a 4½-year low this week.
But with the units down 23 per cent this year alone and now yielding a hard-to-ignore 7.8 per cent, maybe it’s time to give shopping malls a closer look.
Brookfield is the publicly traded real estate arm of Brookfield Asset Management (full disclosure: I own units in Brookfield Infrastructure Partners). It debuted on the Toronto Stock Exchange in December of 2013, after it was spun out from the parent company. The units trade in New York as well.
Total assets under management increased from US$31-billion in 2014 to about US$50-billion in 2017, reflecting a portfolio of residential complexes and office buildings that includes London’s Canary Wharf, Toronto’s First Canadian Place and New York’s Brookfield Place.
Its strategy of pursuing undervalued properties led to a whopper deal this year that has transformed Brookfield into one of the largest commercial real estate companies in the world, with ownership interest in about US$90-billion worth of assets. In August, 2018, it completed a US$15-billion takeover of Chicago-based GGP Inc., the second-largest U.S. mall owner behind Simon Property Group.
The hesitation from investors since then is understandable. Consumers are increasingly turning to online stores, including Amazon.com, which raises questions about the future of bricks-and-mortar retailing. It doesn’t help that the United States had too many malls even when online shopping was a novelty.
But did we mention that Brookfield Property Partners now yields 7.8 per cent?
Yes, chasing high-dividend yields can get investors into trouble if they gravitate toward companies whose business models are imploding. Brookfield, though, looks solid – and there are four reasons its contrarian take on malls should pay off, making the yield more of a gift than a warning sign.
First, Brookfield got a good price for GGP.
Malls are out of favour, which the Bloomberg REIT Regional Mall Index makes clear: The seven-member basket of real estate investment trusts, which includes Simon and Taubman Centers Inc., fell 38 per cent from August, 2016, to its low this April, amid the failure of Sears and Toys “R” Us. Although Brookfield ended up sweetening its initial bid for GGP, some analysts felt that the final price was still too low.
Second, Brookfield didn’t approach GGP cold.
The property company already owned a 34-per-cent stake in the mall operator before making its bid for full ownership. And in 2016, Brookfield bought Rouse Properties Inc., a REIT that owned 35 malls in 21 U.S. states. This track record suggests that Brookfield isn’t experimenting with an unproven contrarian concept here. Rather, it suggests the company’s earlier bet on malls is already showing signs of paying off.
Third, Brookfield has solid backing.
If you’re worried that the company is a lone contrarian in an environment dominated by mall skeptics, here’s a comforting fact: Sophisticated institutional investors, such as the California Public Employees’ Retirement System, CBRE Group Inc. and TH Real Estate (an affiliate of TIAA) – together, they have assets of US$560-billion – have sided with Brookfield by taking stakes in select GGP malls, according to Bloomberg News.
Fourth (and most importantly), the demise of malls is overstated.
Sure, online retailers are grabbing business from traditional outlets. But total online sales are still hovering around just 10 per cent, which doesn’t point to mall extinction. As well, malls come in various grades. Many observers believe that the top grade, the Class A malls that underpin Brookfield’s portfolio, are better-positioned to survive a further migration toward online shopping, especially as the mix of tenants shifts toward businesses such as gyms, shared office space and even online merchants that want storefronts.
According to Reis Inc., a company that provides data on commercial real estate, U.S. neighbourhood and community shopping centres are holding the line on vacancy rates at 10.2 per cent, and even raised asking rents by 1.7 per cent in the third quarter, year over year, suggesting that owners can fill empty spaces.
“Our data shows that high-end malls in better locations are thriving while those in weaker areas are seeing declines that are dragging down the average,” Barbara Byrne Denham, senior economist at Reis, said in a recent report.
Brookfield has the heft and financial backing to renovate and expand existing malls to meet these new demands. You can wait for concrete evidence that it’s succeeding – but investors who pounce now will likely get a better price and a bigger dividend yield.
David Berman