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Brookfield Invests Another $1.4 Billion in GGP

Also This Week in Capital Markets Report: The Broken Toy Vornado Can’t Get Rid of; Walker & Dunlop, Fortress Team Up on New CMBS Lending Platform; Redwood Trust Looking To Ramp Up its Commercial Lending Platform; Checking in on the Swan and Dolphin (Hotels) in Orlando; and Acquisition financings news from: Extra Space Storage, Kite Realty, Ramco-Gershenson and Security Properties
November 11, 2013
Brookfield Property Partners, the Toronto-based owner and operater of commercial real estate offering investors a diversified global real estate platform, has agreed to acquire additional shares and warrants of mall owner General Growth Properties Inc. for total consideration of $1.4 billion.

As a result of the acquisition, Brookfield Property Partners will up its ownership interest in GGP to 32%.

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“This transaction provides Brookfield Property Partners with the opportunity to increase its exposure to one of the highest quality shopping center portfolios in the world at an attractive valuation,” said Ric Clark, CEO of Brookfield Property Group. “As a result of this and GGP’s strong organic growth prospects, we believe that the investment will earn a return that exceeds our target range of 12% to 15%.”

The additional investment in GGP increases Brookfield Property Partners’ exposure to a portfolio of 123 U.S. malls that produce more than $560 of sales per square foot and a development pipeline that totals more than $1 billion.

Brookfield Property Partners will acquire interests in GGP from certain consortium members, including China Investment Corp. of Beijing; as well as all of the interests in GGP that have been distributed to Brookfield in payment of its carried interest entitlement of $529 million, as manager of the consortium.

In total, BPY will acquire 53 million shares of GGP and warrants to acquire an additional 26 million shares.

In addition, Brookfield Property Partners will acquire 1.1 million common shares of Rouse Properties, Inc. (NYSE: RSE), the independent regional mall company that GGP spun off last year. As a result, Brookfield Property Partners will increase its ownership in Rouse to approximately 39%.

Separately, General Growth Properties amended and restated its corporate line of credit with Wells Fargo Securities LLC, Deutsche Bank Securities Inc., Royal Bank of Canada and J.P. Morgan Securities LLC, as joint lead arrangers.

Among other things, the agreement increases the uncommitted accordion feature of the revolving credit facility from $250 million to $500 million to allow the company to increase the total facility to $1.5 billion. The facility will mature n October 23, 2018 and the drawn pricing of the facility is currently set at LIBOR plus 1.575%.

GGP's $1.3 billion pipeline of development projects include the following:
90,000 square feet of additional in-line retail space and the Macy's Men's store at Fashion Show Mall in Las Vegas that opened earlier this year;
The reconfiguration and retenanting of the outdoor plaza area at Northridge Fashion Center in California;
The opening of Boscov's department store at Woodbridge Center, occupying a once-vacant anchor;
The expected completion next month of the complete interior, exterior redevelopment and renovation of Glendale Galleria in Los Angeles, including the opening of a new Bloomingdales in the long-vacant Mervyn's department store;
The major expansion and renovation of Ala Moana Center, its most productive asset, which will house a new Bloomingdales and other new tenants;
The expansion of Macy's and future opening of Nordstrom's at Ridgedale Center in the Minneapolis market; and
The future opening of Nordstrom's at Mayfair Mall.

Other planned projects include the exterior renovation and expansion of Staten Island Mall in New York, the expansion of Baybrook Mall near Houston, the extensive redevelopment and rebranding of Southwest Plaza in Denver and a planned ground-up development in Fairfield County, CT.

The Broken Toy Vornado Can’t Get Rid of

Even with the Christmas shopping season coming, the outlook is not looking strong for Toys R Us, nor for that matter, Vornado Realty Trust’s nearly 33% ownership of the retailer.

Fitch Ratings this past week said it expects Toys R Us’ comparable store sales to decline 3% to 4% during the fourth quarter and in the mid-single digits in 2013, given material weakness in the juvenile and entertainment categories.

While the toy retailer has approximately 44% of its sales coming from traditional toy categories, Fitch cited sustained weakness in entertainment (approximately 11% of Toys’ total sales) and juvenile categories (31% of total sales) have primarily driven the decline in top line since 2011.

The company’s sales in traditional toy categories have also declined in the low- to mid-single digit over the past several quarters. This compares to relatively flat toy sales over the comparable periods as reported by NPD Group and major toy suppliers such as Hasbro Inc. and Mattel Inc. (which together represent approximately 25% of U.S.’s traditional toy sales). This indicates increasing risk of market share loss for Toys, Fitch said.

Vornado Realty Trust, which holds a $375 million investment in Toys R Us, has said it would like to unload its position. Problem is: nobody wants it.

"We have $500 million of assets for [sale] in the market now, that includes neither Toys [R Us] nor any securities,” Stephen W. Theriot, CFO of Vornado Realty Trust told anaylsts last month. “We have doubled that amount in the on-deck circle.”

But again that does not include Toys R Us.

“Toys [R Us] is proving to be quite difficult to exit,” Theriot said. “Toys is, from our point of view, definitely a seller, and we have said that it’s proving very difficult to accomplish that objective.”

Walker & Dunlop, Fortress Team Up on New CMBS Lending Platform

Walker & Dunlop Inc. entered into a joint venture with an affiliate of a fund managed by Fortress Investment Group to form a CMBS lending platform to provide financing for multifamily and commercial real estate properties nationwide.

The venture, to be named Walker & Dunlop Commercial Property Funding LLC, will provide first mortgage loans on all commercial property types. In addition, the venture will originate high yield whole loans, mezzanine debt and preferred equity.

The joint venture will be based in New York City and overseen by Tim Koltermann, a 25-year industry veteran in commercial loan originations, CMBS trading, loan pricing and structuring, and CMBS securitization.

“Walker & Dunlop finished 2012 as the 10th largest commercial real estate lender in the United States and third largest multifamily lender as a major partner to Fannie Mae, Freddie Mac, and HUD,” said Willy Walker, Walker & Dunlop’s Chairman and CEO. “This new initiative with Fortress Investment Group allows us to leverage our scaled origination, underwriting, servicing and asset management infrastructure to offer an alternative capital source for all commercial real estate asset classes.”

Jeff Goodman, EVP of Walker & Dunlop’s proprietary capital group, commented, “We raised Walker & Dunlop raised its first large-scale, institutionally-backed debt vehicle in August focused on multifamily and seniors housing bridge loans. It has been deploying that capital ever since.

Redwood Trust Looking To Ramp Up Commercial Lending Platform

Lending REIT Redwood Trust Inc., which has a well-established residential platform, is looking to do more in the commercial real estate lending arena.

"We have successfully shifted our focus to originating senior commercial loans, while continuing to originate mezzanine loans," noted Martin Hughes, CEO of Redwood Trust in a note to shareholders last week. "While we will likely fall short of our full year goal to originate $1 billion of senior loans, our overall commercial loan sale margins have exceeded our expectations."

In the past, Redwood has generally capped investment in its commercial platform at $300 million. Hughes said the firm is considering alternatives to fund its continued growth with dedicated capital, which could take on a variety of different forms.

Redwood Trust’s commercial platform provides debt to borrowers on stabilized commercial properties nationwide. Redwood originates senior mortgages, mezzanine loans, and preferred equity investments.

During the third quarter of 2013, it originated and funded 12 senior commercial loans for $113 million, and sold 18 senior loans totaling $238 million. This compares to the second quarter of 2013 when it originated and funded 10 senior loans of $150 million, and sold six senior loans totaling $74 million.

Checking in on the Swan and Dolphin (Hotels) in Orlando

Bank of America is securitizing two loans totaling $345 million backing the Walt Disney World Swan Hotel (also known as the Westin Swan) and the Walt Disney World Dolphin Hotel (also known as the Sheraton Dolphin). The Westin Swan and the Sheraton Dolphin are upscale resorts adjacent to each other in the Epcot Resort area within Walt Disney World in Orlando, FL.

The combined properties include 2,267 guestrooms, 329,000 square feet of indoor meeting space, 17 restaurants and lounges, five resort-style swimming pools, two health clubs and an array of other amenities.

The Westin Swan and the Sheraton Dolphin are the only non-Disney owned resorts that are permitted to use the “Walt Disney World” designation as part of their hotel name. Affiliates of Tishman Hotel & Realty LP and Metropolitan Life Insurance Co. own the properties.

In a presale report on the upcoming offering, Morningstar valued the hotels at $478.8 million (calculated using an 8.15% capitalization rate. The Morningstar value, which equates to $211,217 per room, is 24.9% lower than the appraised value of $638 million.

According to Morningstar, the properties have been well maintained, with more than $94.3 million ($41,608 per room) invested on capital upgrades and renovations on both hotels since 2007. Work included: $39 million in room and bathroom renovations, $23.5 million in upgrades to restaurants, meeting space, and public areas, and $31 million in mechanical systems and other.

Between now and 2018, Tishman and Metropolitan Life are planning another $117.4 million ($51,782 per room) in improvements, primarily related to hotel guestrooms to include new soft goods, case goods, mattresses, carpeting, and wall coverings. Other renovations will include upgrades to restaurants, meeting space, and public space as well as ongoing upgrades to the mechanical and other back-of-the house systems. About $48 million is expected to be spent in the coming year.

Average room rates at the subject hotels were lower than the competitive set by $3.05 during 2011 but were $1.94 higher than the competitive set during 2012. Overall the RevPAR for the Westin Swan and Sheraton Dolphin achieve more than their fair share of both demand and revenue reflecting a penetration rate of 112.8% and 116.8% during 2011 and 2012, respectively.

The CMBS offering is expected to close later this month.

Capital Markets Round-Up

Extra Space Storage Inc. plans to sell 4.5 million common shares to fund its acquisition of a portfolio of 17 properties in Virginia for $200 million in cash. This portfolio consists of approximately 1.5 million square feet of net rentable space in approximately 14,000 units.

Kite Realty Group Trust priced a public offering of 32 million common shares to fund the purchase of a portfolio of nine retail properties. The portfolio contains 2 million square feet for a gross leaseable area for which Kite will pay $307 million in cash. Seven of the properties to be acquired are located in the company’s existing markets of Florida, Georgia, and Texas, while two are in a new market, Birmingham, AL.

Ramco-Gershenson Properties Trust plans to make a public offering of 4.5 million shares with funds to be used for financing a portion of the planned acquisition of two community shopping centers totaling 672,000 square feet in separate transactions totaling $121 million. The properties are located in two major metropolitan markets in the Midwest and are each anchored by five and six national retailers, respectively.

Security Properties, one of the largest investors and operators of residential real estate in the U.S., closed its Security Properties Multifamily Fund, launched in June 2011. The fund acquired, both directly and through joint ventures, 2,471 apartment units located in the Seattle, Portland, the San Francisco Bay Area and Phoenix markets. The total acquisition cost of the fund’s 17 apartment properties was approximately $390 million.

Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published Monday mornings.

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