GLP announced that it plans to acquire a portfolio of 34 completed assets (1.2m sq m in GLA) in Brazil from BR Properties S.A (BRPR) for c.US$1.36bn or BRL3.18bn. This transaction is subject to due diligence and if successful, will be funded through internal funds. The portfolio is 99% occupied with 86% of the total area located in Sao Paulo and Rio de Janeiro.
What We Think
We understand that BRPR is a motivated seller, with plans to reduce its high debt obligations through this sale. This portfolio was initially to be sold to WTGoodman, a JV between Goodman Group and WTorre (Brazil-based developer) for the same BRL3.18bn price. We understand that the exclusivity agreement has expired and BRPR has chosen to enter into the transaction with GLP instead. We are unsure of the reasons that the sale to WTGoodman fell through. The sale price implies a 5% discount to its Nov 2013 appraised value (reflected in BRPR’s latest 4Q13 results) or at a c.9% cap rate, which looks reasonable. We understand that the leases are structured on a triple net basis (NOI margins of 95-97%), with yearly inflation-linked step-ups that will provide surety of cash flows. Strategically, we would prefer GLP to deploy its excess capital to China, a region with clearer growth trends. That said, we expect GLP to inject a portion of the Brazil assets into its existing fund platform (or create new funds), with the ultimate goal of growing its AUM fee income. GLP guides that its optimal target for Brazil remains below 10% of total assets. China will remain its core market, with GLP still having the firepower to increase its China investments by 40% yoy in FY15.
What You Should Do
If the deal materialises, the assets that are eventually injected into its funds are likely to result in upsides to GLP’s RNAV. We maintain our Add rating.