US shopping centre REIT General Growth Properties is considering selling its property portfolio in response to continuing discounts of more than 20% on the value of its assets on the stock market.
Sandeep Mathrani, chief executive of the $40bn (£31bn) property giant, said: “There is a wide discount between public and private markets. The sum of the parts is far greater than GGP’s current stock price. We are reviewing all strategic alternatives to bridge the gap.”
The company’s share price has fallen by 29% since last July and is now trading at a 21% discount to its gross asset value.
The company believes the public market has significantly undervalued the portfolio relative to the level at which the private market values it, so shareholders could potentially receive better value if the portfolio were sold.
With some UK REITs also trading at substantial discounts, could one undertake the same strategy as GGP has? Kennedy Wilson Europe Real Estate’s merger with its US-listed sister company and Camden-specialist Market Tech’s take-private by its 71% shareholder, Teddy Sagi’s LabTech, were in part a step in a similar direction.
The retail REITs in particular are suffering, with intu and Hammerson trading at 18% and 11 % discounts to NAV, owing to concerns over the future of the department store sector and the threat of online retailing. Similarly, London office specialists such as Derwent London and Great Portland Estates also carry discounts of 17% because of concerns about slumping occupier demand caused by the impact of the UK leaving the European Union.
For a company to consider selling its assets as an alternative to public trading, it would need to be sure that it has a substantial amount of value to gain from a sale, partly to return value to shareholders and partly to pay back existing debts.
Hemant Kotak, managing director at Green Street Advisors, said: “If [trading] persisted for a couple of years at something like 20% discount to assets, then I think you’ve got a realistic chance of saying that some action needs to be taken.”
Intu and Hammerson are trading at an 8% and a 6% discount to gross asset value as of 2 May according to Green Street, which Kotak said would not be enough to motivate a wide-scale portfolio sale at this stage.
“It is much less likely that they could do that because the discounts simply are not big enough relative to those in the US. The discounts need to be persistent – and we’re getting there – but they haven’t been persistent long enough,” Kotak said.
| REIT | Discount to NAV (%) | Discount to GAV (%) |
|---|---|---|
| Intu | 18 | 8 |
| Grainger | 18 | 9 |
| Derwent London | 17 | 13 |
| Great Portland Estates | 17 | 11 |
| British Land | 17 | 10 |
| Land Securities | 13 | 9 |
| Hammerson | 11 | 6 |
| Capital & Counties | 7 | 5 |
| Workspace | 6 | 5 |
| Hansteen | 4 | 2 |
Matthew Roberts, chief financial officer at intu, said discounts to asset value had not affected the company’s strategy, which includes investing £1.2bn in development in the coming decade.
“We put out our investment story and the market forms a view. That doesn’t impact on our day-to-day strategy,” he said.
“Of course, we’re optimistic. We keep investing in our centres and they’re performing strongly. And because we’re confident about the future, we’re making just under £1.5bn investment into our centres over the next 10 years.”
The retail REITs, Kotak said, have had a relatively stable performance on the stock market and have not “quite shared the pain” with the retailers themselves. Green Street’s UK retail index, which includes Next, M&S, Debenhams and six other major retailers, has shown share price falls of more than 40% since the beginning of 2016. In comparison, intu’s share price has fallen by 7% and Hammerson’s is up by 2.5%.
However, if other retailers follow Jones Bootmaker or Brantano into administration and their share prices keep falling, REITs’ balance sheets would eventually start to take a hit and some portfolio revaluations are likely to start to become evident as results season begins again later this month.
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