Brookfield Asset Management has made the private real estate sector’s first big splash of 2021. This week, it proposed a $5.9 billion take-private of its flagship real estate business, Brookfield Property Partners.
Brookfield sees the privatization as an opportunity for growth that is hard to come by in public markets at the moment. In private hands, its $88 billion of assets can be divided up into structures better aligned with its investors’ interests. The properties could be added to existing funds, seed new vehicles or become co-investment opportunities.
In the firm’s announcement on its proposal to acquire the shares in Brookfield Property Partners which it does not already own – accounting for roughly 38 percent of the company’s units – chief financial officer Nick Goodman underscored how the privatization would enable greater flexibility in operating the portfolio to realize intrinsic value.
Arguably such value has been neglected by the equities market, which, as the platform’s boss Brian Kingston told us, often applied valuation multiples to the whole business in line with the general sentiment towards the least popular sector within its holdings: retail. Brookfield Property Partners manages some 120 million square feet of US retail across 122 properties. But it also has large exposures to office – 96 million square feet across 136 properties. To allow retail assumptions to be applied across a broader portfolio would be counterproductive.
Delisting the subsidiary should give Brookfield the chance to find value by subjecting the assets to private, more substantiated valuation criteria, away from sentimental swings. Brookfield Property Partners’ market cap has grown from around $9 billion in 2013 to north of $15 billion today. But the firm says the current valuation still represents a 30 percent discount to its net asset value, noting that it has been consistently undervalued since floatation. As such, privatization could reasonably be labeled value enhancing.
Yet, with the fortunes for offices and retail property set to remain challenged for the foreseeable future, the transaction serves a defensive purpose, too. Given the rocky forecasts for retail and uncertainties around offices, Brookfield Property Partners’ stock is unlikely to trade at anything resembling fair value anytime soon. And as fair value in both sectors continues to be generally hard to ascertain, it is better to have such large positions operated away from the public market glare.
Furthermore, the top performing REITs today are mainly centered on single property types, use little leverage and are focused on steady dividend payouts, making Brookfield Property Partners – with its diversified approach, private equity-style leverage use and focus on development – something of a square peg trying to fit into a round hole.
The original mandate behind the platform’s IPO was expansion. That was achieved through the acquisitions of mall specialist GGP as well as the privatization of its own Brookfield Office Properties and Brookfield Canada Office Properties. Now that those readymade deals are closed and the company cannot issue new equity at a reasonable value, the vehicle, conceived for growth, appears to have run out of road sitting on a stock exchange.
The responsible thing to do then is to delist to find value. Or at least to preserve it.