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In privatization, Brookfield sees a better way to monetize core assets

With its $5.9bn take-private offer, the Toronto-based manager is calling it quits on a public market that never embraced its flagship real estate vehicle.

Brookfield Asset Management is calling it quits on the listed real estate sector by floating a $5.9 billion offer to privatize its flagship real estate vehicle, a platform that never quite resonated with public market investors.

The Toronto-based firm has offered to buy all externally owned shares of Brookfield Property Partners – nearly 40 percent of the issued units – at $16.50 per share. The offer represents a roughly 14 percent premium on the company’s year-end trading value.

However, Brookfield’s chief executive of real estate, Brian Kingston, says the offer is still well below book value for the portfolio, which his group pegs at $27 per share. But that is par for the course for the vehicle, which is listed under the ticker BPY. It has traded at a discount to its net asset value “almost since day one,” he says, limiting its ability to issue new equity. With the company’s stock still below pre-pandemic levels, the firm wants to capitalize on its own depressed valuation to move in a new direction.

“We’ve been at this for seven years,” Kingston tells PERE. “We’ve done everything we feel we can, and it seems unlikely that we’ll be trading at NAV anytime soon. At the same time, we have all our private fund investors saying their biggest issue for 2021 is putting capital to work. They’re looking for ways to do it and all of them are explicitly saying they want to do it at NAV.”

Kingston says several investors have inquired about investing in BPY’s assets – either through funds, co-investments or other structures – once they are in private hands. This speaks to Brookfield’s growing influence with global institutions, particularly Middle Eastern sovereign wealth funds, one capital raiser tells PERE: “Five years ago, they didn’t have the relationships to call up Qatar and present them with the opportunity to take these assets private for $6 billion. Now they have relationships and firepower where they didn’t before.”

Puzzling structure

In 2013, the Toronto-based manager rolled up its core balance sheet properties and its interests in the private real estate funds it managed into a single vehicle and floated it as BPY. The mandate then was twofold: to grow Brookfield’s real estate platform by tapping public capital and increase management fees.

It achieved the latter goal by structuring BPY as a master limited partnership, essentially a publicly traded partnership that owns a perpetual life fund. Brookfield serves as the manager of the partnership, so it can collect fees in a manner akin to its private funds. The MLP model is common among listed infrastructure and energy companies, making it a natural fit for Brookfield Infrastructure Partners and Brookfield Renewable Partners.

However, the MLP format is rare in the listed real estate world. Investors are more familiar with REITs, which have different distribution requirements and are typically managed internally. This disconnect is thought to have contributed to BPY’s limited appeal to public capital, a fund formation lawyer familiar with the platform told PERE: “It’s a bit of a puzzle, and analysts don’t like puzzles.”

Also, because of the unique structure and Brookfield’s contract to manage the platform, a take-private by the parent company was one of the few viable options for restructuring, a capital advisor told PERE: “Who else could come in and buy it? It’s a controlled entity, externally advised.”

Growth stunted

As for its other ambition, growing Brookfield’s real estate platform globally, BPY had a limited runway of success. The listed platform acquired all the outstanding shares of Brookfield Office Partners in 2014, Brookfield Canada Office in 2017 and General Growth Properties in 2018, issuing BPY shares for all three transactions.

Although these acquisitions expanded the firm’s equity, Brookfield already had ownership stakes in each of the entities beforehand. Now that it has exhausted those types of opportunities and it is unable to raise fresh equity at a fair market rate, Kingston says the prospects for BPY had become

Kingston: BPY has been discounted since ‘day one’

limited.

“When you look at the next five years, the ability to grow the platform seems much more challenging than it has been over the last seven years.” he says.

BPY’s underlying composition also clashes with public market preferences. The top 10 REITs by market cap are all sector-specific, and the ones that performed best through the pandemic are focused on resilient properties such as cell towers, data centers, self-storage and logistics. Meanwhile, much of BPY’s diversified $88 billion portfolio consists of US malls and prime office towers, both of which face market skepticism amid pandemic concerns.

Also, because of the focus on development and the inclusion of private fund stakes, Kingston says BPY’s earnings tend to be “lumpier” than those of groups that simply focus on collecting rents and paying a steady dividend. “We were a bit of a size 13 shoe,” he says. “It has never really attracted the right investor base in the public markets to make sure it traded fairly.”

Meanwhile, Brookfield’s chief competitor, Blackstone, has thrived in the retail capital world with its Real Estate Income Trust. It used the platform to execute some of the biggest transactions of 2020, including the acquisitions of Las Vegas casino resorts, a self-storage portfolio and a stake in a sound stage portfolio in Hollywood. But unlike BPY, BREIT is not traded on a public exchange, meaning it is not subject to market volatility or skepticism.

It remains to be seen if Brookfield will take another run at the public markets with a different strategy. For now, the firm is focused on the best way to monetize its core assets, a route that leads back to private ownership.