GGP is spinning off a bunch of its less-desirable “B” malls in a new entity called Rouse. These malls generate lower rents per square foot than the rest of GGP. I think the idea is that by spinning these off, GGP’s metrics and valuation will go up, and the less-desirable malls will be valued as they are. Also, management challenges for these malls may be different than the “A” malls that dominate its portfolio, and separate teams would be better equipped to manage the two companies. Whatever the reason, here are the numbers:
$160m core net operating income for the real estate, $200m cash against $1.13b debt. One metric to value commercial space is cap rate (basically, yield in NOI per value of the real estate). A cap rate of 8% implies a value of their real estate of $2.0b, for an equity value of $22.13/share. A cap rate of 9% gets equity to $17.70/share. Shares closed yesterday at $11.27, which is stupid cheap. $11.27 implies a cap rate of 11%, which is really in distressed territory and far too high. For comparison, GGP and SPG have bounced around cap rates from 5%-7% over the last year or so.
And what makes me more confident is the rights offering. That $200m cash I included in the valuation is actually from an upcoming rights offering at $15/share. Brookfield Asset Management has agreed to backstop the offering, purchasing any shares not exercised. Since they already own ~35% of GGP, that means they will own 35% of Rouse, exercise their own rights, and are looking to expand their stake by exercising any unused rights of other shareholders. Brookfield is not known as dumb money, which tells me that $15 is attractive. $11-$12 is even better.
Someone tell me what I'm missing!