Current Price – $20.25
Acquisition Price – $21.73
Upside – 7.6%
Expiration Date – Q3 2018
This idea was shared by Michael.
Probably my favorite deal this month is the takeover of General Growth Properties (GGP) by Brookfield Property Partners (BPY). GGP had a liquidity crisis during the great recession, and the Brookfield entities plus others recapitalized it at that time. Brookfield is going from a big stake to full ownership, and they are doing so at a time when mall owners are generally trading at low prices. There has been quite a bit of noise that the price is insufficient, and BPY has raised their offer once. The current offer is for one BPY share or $23.50 in cash. Both GGP and BPY.UN have sold off since the announcement, so the cash is worth more than the share option, and you can expect to be close to fully pro-rated to the cash limit.
In that case, the consideration would be $14.34 USD and 0.39 BPY, which is worth $7.39, so the total comes to $21.73, compared to a current price for GGP of $20.25, which is a 7.3% spread. There are also the dividends to consider, as the logical trade here is shorting 0.39 BPY for every long GGP. BPY pays a $0.315 dividend per quarter compared to GGP’s $0.22 per quarter, but being only short 0.39 BPY means the short position will pay out only slightly over $0.12 per quarter. Also, GGP has a dividend record date on the 13th of April, so no matter how long it takes if you collect the first GGP dividend you’ll always have at least as many GGP dividends in as BPY dividends paid out. It is worth noting I think that I shorted BPY in Canada under the symbol BPY.UN. It trades at the same effective price, but the cost of borrow is lower (through IB) at 4.6% per year. There are a lot of moving parts here, so I made a table assuming the deal takes one full year to close, which I think is conservative. That means you pay borrow for a full year, and both pay and receive 4 dividends. A shorter timeline means you’d pay less borrow, and could receive more dividend payments than you pay. It works out to a 7.6% return, although the return and IRR could be much higher if it closes faster, which I think is probable.
While there are a variety of folks making noise about this being insufficient consideration, I think it’s likely to close. Brookfield has committed to creating a US REIT subsidiary of BPY which will be convertable into BPY units. That’s important, because BPY is a Canadian limited partnership, so it isn’t great for some US investors tax wise, while a US REIT is less problematic. Presumably anyone who owns GGP can own US REITs. I doubt a competing bid comes in from elsewhere, as Brookfield already owns a blocking stake in GGP. I also doubt the deal gets blocked, as GGP shares would fall on a failed deal, and anyone who thinks malls are truly worth a 4.5% cap rate can always take their proceeds and buy one of the other beaten down mall REITs. It seems likely to me that anyone who doesn’t like the deal is selling out now to rotate their exposure while arbitrage buyers (who will vote in favor) buy in, which makes the deal more likely to close.
It is worth noting that in the BPY presentation on the deal, they estimated it would close in Q3, which implies no more than 6 months to close, which would put the IRR comfortably into the mid teens.