Brookfield's GGP Bid Casts Shadow On Retail: 3 Stocks To Dump

Amid the challenges in the retail sector, the news of GGP Inc.’s (NYSE:GGP) special committee unanimously recommending Brookfield Partners’ (NASDAQ:BPY) buyout deal has been ruling the roost. The transaction, valued at $15.3 billion, will give Brookfield the remaining 64% ownership of the retail real estate investment trust (REIT). This will lead to the formation massive entity with nearly $90 billion in assets and more than $4 billion in annual net operating income.

According to the latest bid, GGP shareholders can choose to receive either $23.5 in cash or one BPY unit or one share of BPR — a new REIT that will be created through the buyout.

Valuation Concerns

Although the cash consideration of the deal indicates a 24% premium over GGP’s closing price as on Nov 6, 2017 — the day before talks between the companies was reported — the news was not well received by the Wall Street.

Per an article by National Real Estate Investor, GGP has agreed to be bought at a cap rate of low 6% to high 5% range. This range is well above market expectations and significantly undervalues the underlying real estates owned by GGP.

In fact, it raises investors’ concerns that a low acquisition offer for GGP could have a ripple effect on peer retail REITs and drag down valuations. This indicates a revised lower pricing for even the best-in-class retail centers that are already facing headwinds from e-commerce and store closures in the retail industry. Specifically, as e-commerce continues to take market share from store-based retailers, mall traffic continues to suffer. This has spiked tenant move-outs and bankruptcy filing while decreasing demand for retail real estate properties.

Three Losers

Given the latest development in the retail real estate market with the GGP deal and the ongoing troubles in the retail sector, investors may consider portfolio reshuffling and discarding these stocks from the said sector.

DDR Corp. (NYSE:DDR) is a retail REITs in the United States with 273 shopping centers, spanning 92 million square feet in 33 states and Puerto Rico. The stock has seen the Zacks Consensus Estimate for current-year funds from operations (FFO) per share was revised downward by nearly 2% in the last 60 days and it carries a Zacks Rank #4 (Sell) and its. Also, DDR has underperformed its industry in the past three months, down 18.7% as compared to the industry’s decline of 11.4%.

Kimco Realty Corporation (NYSE:KIM) is a NY-based retail REIT that is navigating through the challenges in the retail environment by simplifying its business model and making significant disposition of non-core assets. This company has also seen a 2% downward revision in its FFO per share estimate over the last month and carries a Zacks Rank #5 (Strong Sell). Further, shares of the company have tumbled 19.9% in the past three months.

Pennsylvania Real Estate Investment Trust (NYSE:PEI) has been focusing on improving portfolio quality and balance sheet by adopting disciplined capital expenditure measures. However, it carries a Zacks Rank of 4. The Zacks Consensus Estimate for full-year 2018 FFO per share was revised 5% downward in a month’s time. Further, its share price fell 17.6% in three months’ time.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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