GGP Looks Undervalued as It Explores Alternatives

Overall, performance across GGP's portfolio was steady. Tenant sales per square foot gained almost 1% while same-store net operating income increased 2.5%, year over year, on marginally lower leased percentage of 95.9% and leasing spreads of 10.5%. However, management highlighted that performance in its best assets, which represent 80% of NOI, exhibited more positive results, with weighted sales per square foot growth and leasing spreads of 1.8% and 15.5%, respectively. Management also expects a roughly $25 million impact on NOI from retailer bankruptcies and store closures, with most of the effect in the second quarter. However, GGP has done a decent job of managing closures, in our view, with almost 80% of recent store closures already re-leased while continuously lining up new tenants for other at-risk space. Given the current retail environment, we think this highlights the continued demand for productive retail environments and GGP's prudent asset management.

During GGP's earnings call, management disclosed that it and the board "are reviewing all strategic alternatives to bridge the gap" between private market and public market valuations and that the company will "pick a path in the near term." With the company currently trading at what we estimate as a roughly 25% discount to net asset value (similar to its other class A mall REIT peers), we think GGP has an opportunity to demonstrate valuation not only for its own portfolio but for the whole mall sector. At this point, we think more likely scenarios include selling a minority stake in assets in the private markets. However, with Brookfield, a large real estate investor, heavily involved at the board level since GGP's restructuring, we would not be surprised to see an entity-level transaction on the table.

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