• Keith Dalrymple

GGP Investors' Corporate governance issues

Updated: Dec 12, 2018

Courtesy of Paramount Pictures

Free Candy, Anyone?

The Deal

A recent article in the Wall Street Journal discussed the revitalization of malls that Brookfield Property Partners BPY ($14B market cap) will engage in to unlock value from its recent acquisition of 100% of GGP ($20B market cap), the second largest US-mall operator. The analysis noted that there was “vocal GGP shareholder opposition” to the deal. There should have been an outcry given the significant corporate governance, shareholder rights, lack of fiduciary duty and conflicts of interest issues associated with the transaction. However, a combination of suppression of GGP shareholder opinions and the surprisingly united support from the two major proxy services firms got the deal passed.

Brookfield has had a de facto control of GGP since the company’s emergence from bankruptcy at the end of 2010 through a significant minority ownership position (up to 34% before the offer) and material board representation and influence over key management. In 2011, Brookfield exercised that control to block a deal proposed by activist investor Bill Ackman to sell the company to arguably the best operator in the space, Simon Properties for a price of $21 per share, a 60% premium at the time. In comparison, the current deal structure resulted in a total value of $22.05 – well below the headline offer price of $23.50. When the offer was announced, GGP had recently traded as high as $24.96 and trade publications reported analyst outcry over the lowball offer.

It has been impossible to determine the GGP shareholders reaction to the offer. The company has not held a conference call since the board accepted the bid, effectively denying shareholders a public forum to express opinions.

The Issues

It is laudable that Brookfield is considering new ways of enhancing the GGP properties’ valuations and cashflow by repurposing them and revitalizing community spaces across the nation. The company has done significantly less over the last seven years of its management of those same assets. GGP has maintained a highly levered balance sheet, increased distributions substantially faster than cashflow within a troubled industry and has not managed to secure investment grade rating. The independence of the GGP board that approved the transaction is not certain; and Broofkield’s financial incentives mean that the interests of GGP’s independent shareholders and the acquirer differ significantly. Most importantly, why would Brookfield pursue 100% ownership interest in an entity it already controls?

BPY offered $23.50 per share in cash or stock, either BPY LP units or a newly created BRP REIT on a one-to-one basis. BPY traded at a discount to the cash offer, giving most investors the incentive to elect cash. The cash limit of $9B on the deal indicated that most would receive a pro-rata share of cash and the remainder in stock. The actual split was 62% or $14.64 cash and 40% or $7.41 in stock for a total of $22.05. The deal will transform most of GGP shareholders into BPY (or a derivative security) unitholders. The change is significant.

BPY is a Bermuda limited partnership managed externally for capitalization-based fees and incentive distributions by Brookfield Asset Management (BAM), another related-entity. The units are non-voting. The LP is managed by its general partner’s board of directors, all of which are elected by BAM. Further, the board of directors does not owe fiduciary duty to BPY unitholders and can take the interests of third-parties, including BAM, into consideration when managing the LP.

These conflicts of interest and governance issues including those associated with pyramid control structures are disclosed in the LP’s annual filings. We encourage investors, regulators and corporate governance advisory firms to review them thoroughly.

Who Benefits?

BPY, in a way, does not exist. It has no employees and management is compensated by BAM. The partnership is run as a yieldco hosting real estate assets within the Brookfield complex. BPY has not covered distributions with cash flow from operations since it was spun out of BAM in 2013. The 20-F confirms that the proposed distribution rate is significantly higher than amounts received from operating entities and projected operating cash flows from direct investments.

BPY Cash Flow Coverage of Distributions

Source: BPY financial statements.

BPY has complex financial statements and consolidate numerous BAM-managed private equity fund entities in which it holds minority stakes. As a result, the cash flow from operations includes cash on which outside investors have claims. We adjust cash flow from operations by subtracting distributions paid to non-controlling interests to arrive at cash flow available to LP owners. In 2017, the deficit was unusually large due to a large distribution associated with an asset sale. On an adjusted basis, we estimate the 2017 deficit was probably in the $1B range.

Total distributions comprise those paid to LP unitholders and BAM, which holds its ownership interest in redeemable preferred stock, junior preferred stock and units. BAM received an estimated $775M in fees, interest and distributions from BPY in 2017 or approximately 5.5% of its market value.

The LP has a persistent cash deficit approaching $1B requiring BPY to either finance part of the distribution or fund it with asset sales. As a 100% owner of GGP, BPY will control its $1.3B in annual cash flow from operations and it can claim all the proceeds associated with any asset sales or outside financing sharing arrangements some of which have already been announced. Additionally, the deployment of capital will positively impact the fees collected from the partnership by BAM.

Why It Matters

Protection of shareholder rights through good governance practices is becoming more important in the age of passive investments and increasingly complex corporate structures. GGP is one of the nations’ most important mall REITs with significant retail ownership, trading on the NYSE.

GGP shareholders should have been awarded the protections and corporate governance standards customary to U.S. listed issuers. Including, an independent board presenting shareholders with a number of options to realize value discussed in a public forum. Corporate decisions should be made for the full benefit of all owners. This is not what occurred with GGP. It is being absorbed by an offshore entity with no shareholder rights and limited fiduciary duties within the context of a pyramid control structure that is illegal in the US.

Allowing these practices to persist will weaken our public markets. It’s time to pay attention.

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