Inside Brookfield’s $7B Office Takeover Spree
There’s putting your money where your mouth, then there is buying three office REITs for $7B in the space of three months.
Very early in the pandemic, Brookfield Asset Management executives including CEO Bruce Flatt were preaching the gospel that fears for the future of the office had been overblown, and that good office real estate would remain valuable and in demand.
To a certain degree, Brookfield had to say that — it is one of the world’s largest office owners, after all, with a portfolio of 310 office assets across the world valued at $84B, according to a recent public filing.
But a recent acquisition spree shows it is betting serious money that a lot of office property is undervalued. And it is using the public markets to make that bet.
Bisnow took a deep dive into the takeover deals for three big European office REITs announced in the past few months by Brookfield. The deals show that it is buying at a discount to today’s values (but not always), that improving the environmental, social and governance credentials of offices will be key to their future value, and that it thinks it can make returns of 15% or more buying offices in the current market. Brookfield declined to comment for this article.
The biggest deal undertaken by Brookfield, and the one that is closest to completion, is the €4.1B takeover of German office REIT Alstria, which owns a €4.8B ($5.3B) portfolio of 112 offices across Germany, collecting rent of €204M a year.
The deal was first announced in December, and at the end of January Brookfield said that 71% of Alstria shareholders had agreed to sell it their shares, meaning it could press ahead in taking the company private.
The shares in many office REITs around the world are trading at a discount to the underlying value of the real estate the companies own. There can be many reasons why shares trade at a discount, but the most common is that shareholders don’t think the property is worth as much as the last valuation put on it. If you believe it is, buying shares in a company trading at a discount to its asset value is a good way of buying those assets on the cheap.
Brookfield is buying two of these three REITs at a discount to their net asset value, but with Alstria, that isn’t the case. It is paying a premium of 17% to the price at which Alstria’s shares were trading before the takeover deal was announced, and a 7% premium to the company’s last stated NAV.
This deal instead is a bet that energy-efficient properties will see outsized valuation growth in the future. Alstria said in a presentation following full-year results in February that is why the company and Brookfield feel the deal will be profitable for both sides and thus why shareholders agreed to the takeover.
“The consensus view that forms the pricing of the public equity market is inefficient at a time when underlying markets are going through radical change,” the presentation said. In this instance, that radical change is the decarbonisation needed if office properties are going to hit future sustainability regulations.
Alstria has been at the forefront of taking older offices and making them more energy-efficient. In buying the company, Brookfield is betting that assets greener than those of its peers will command a higher price in future, and that Alstria has the skills to buy and improve more assets. Backing from a big beast like Brookfield means Alstria will have access to capital to improve its own portfolio and buy new assets, rather than having to raise money from shareholders.
“The reliance on one large single anchor shareholder will allow the company to release some of the public equity constraints which would have limited its ability to tap the opportunities ahead,” it said.
Then there is a bit of financial engineering that Brookfield can undertake to juice returns. Alstria’s loan-to-value ratio for its portfolio is 29% — shareholders in public companies like leverage to be low. Alstria’s presentation said that following the takeover this ratio is likely to rise to about 50%, which will improve returns if the value of the portfolio stays the same or rises.
The choice of the fund through which Brookfield is buying Alstria indicates it expects to make a high return on the deal. The acquisition is being made through Brookfield Strategic Real Estate Partners IV, the $17B opportunity fund for which Brookfield began raising capital in 2021. That fund has a target return of 15%-plus, highlighting how Brookfield thinks there is a lot of value to be created buying office companies right now.
The same fund with the same return target is buying Hibernia, the Irish office REIT that in late March announced it was recommending its shareholders accept a €1.1B takeover offer from Brookfield’s BSREP IV fund. Befimmo, the Belgian REIT that in February recommended shareholders accept a €1.4B offer for the company, did not specify in its announcement which fund had offered to buy it.
If the three deals used that fund and have that debt-to-equity ratio of about 50%, it means Brookfield has put $3.5B, or 20% of the fund’s $17B in equity, into office REITs in just three months.
Brookfield is buying Hibernia for €1.1B, which is a 36% premium to the company’s share price before the deal was announced, but a 6% discount to its net asset value.
Hibernia’s portfolio was valued at €1.4B at the end of March. Of that portfolio, 80% is in existing Dublin offices, 4% is in office development and land, and the rest is split between residential and industrial assets. The company collects €67M of rent a year.
That discount is one of the key reasons for the Hibernia acquisition. In its announcement explaining why it decided to accept the deal, Hibernia said that it had traded at a discount to NAV for almost all of the last five years, in spite of having a good track record of buying older assets and improving their value. Selling at a 6% discount would give its shareholders good value, it said, especially given the uncertainty around the future of the office.
Like Alstria, Hibernia also said selling to Brookfield would give it access to capital to improve its existing assets, build out its development pipeline and buy new schemes.
As with Alstria, there is also the chance to leverage up the portfolio. Hibernia’s LTV is just 11%. Goldman Sachs, JP Morgan and Société Général are providing Brookfield with an acquisition facility to fund the takeover of Hibernia.
With Belgian REIT Befimmo, the discount to NAV is even more pronounced. Befimmo owns 63 office buildings, primarily around Brussels, valued at €2.7B. It also manages seven coworking spaces.
Brookfield has offered €1.4B for the company, which is a 52% premium to the company’s share price before the takeover offer was announced. But it is also a 23% discount to the company’s last net asset value.
Two of Befimmo’s biggest shareholders, AXA and AG Finance, have already provisionally agreed to sell their shares to Brookfield. They think they are getting a good deal. And if office rebounds strongly from the pandemic, Brookfield is poised to come away with a pretty profit from these bets.