Out Of The Spotlight, Brookfield Can Carve Up Its Global Property Giant
The old saying goes that sunlight is the best disinfectant. But when it comes to Brookfield and its $88B public property subsidiary, the opposite may be true.
At the start of the year, Brookfield Asset Management made an offer to take private Brookfield Property Partners, the Nasdaq-listed real estate company it manages. Brookfield Property has issues, but it also has one of the largest portfolios of any listed company anywhere in the world. Taking Brookfield Property out of the limelight could allow BAM to address those problems and unlock opportunity for BAM and for other investors.
"Once you are outside of the public eye, you have a lot more flexibility,” BMO Capital Markets Managing Director Sohrab Movahedi told Bisnow.
If the deal to take Brookfield Property private goes through, it would be one of the largest corporate real estate deals since the start of the coronavirus pandemic. It could also begin a process that entails the sale of a significant number of assets and the creation of new funds — it could catalyse a flurry of deals with one of the world's largest property investors.
“We could envision the portfolio being carved up by asset class (office, retail, etc.) and/or by geography to seed various perpetual core real-estate strategies,” TD Securities Managing Director Cherilyn Radbourne said in a note to clients.
When Brookfield Property Partners was created and listed in 2013, it was almost entirely unique. Brookfield Asset Management, the giant Canadian asset management company with $575B in assets under management in alternative sectors, bundled together a big chunk of the real estate assets it managed in other vehicles and created one massive listed company.
Brookfield Property owned stakes in office buildings in the U.S., Canada, London and Asia; hotels in the Caribbean; shopping malls in the U.S., Australia and Brazil; and stakes in the real estate opportunity funds BAM manages, with a combined value of $31B. At that point, BAM owned 92% of the shares in the new company.
Listed property companies typically invest in either a single defined sector, like offices, or a single region, like Europe or North America — rarely had one of such size had such global breadth.
For the first few years, shares traded at or higher than the price at which the company floated, the company expanded, and Brookfield reduced its stake to about 65%, selling to new shareholders willing to buy into the company.
Brookfield Property teamed up with the Qatar Investment Authority to buy the giant Canary Wharf office district in London for £2.6B ($3.9B at the time) in 2015, and later that year it sold a 50% stake in the $8B Manhattan West development in New York City to the same investor. In 2016, it bought the famous Potsdamer Platz office scheme in Berlin for $1.4B with the Korea Investment Corp. The location used to be a no man’s land between East and West Germany, and its redevelopment became a symbol of the country’s reunification.
Today the company directly owns 262 office and retail properties across the world, stakes in those opportunity funds and stakes in hospitality assets, principally the Atlantis resort in the Bahamas and the Centre Parts holiday village in the UK. Those assets were valued at $88B at the end of September, making the company by far the largest party of BAM’s property empire, which totals $202B of assets under management.
But shares in Brookfield Property have not traded above their IPO price for almost three years, as stock market investors have placed less value on its assets than the company and its appraisers have.
One of the big factors consistently cited by analysts as holding back Brookfield Property’s performance has been its retail exposure. When the company listed in 2013, it owned a 22% stake in General Growth Properties, the giant listed mall company that BAM rescued from bankruptcy in 2010. Over the years, Brookfield Property added to its retail holdings through corporate deals, and in 2018 it took full ownership of GGP, giving it control of 122 U.S. malls totalling 119M SF, which the company valued at the end of September at $21B. The retail sector has been consistently devalued in the past five years, a situation that has only accelerated recently.
COVID-19 has caused other sectors of the company’s portfolio to suffer, especially hospitality. The acquisition of the Atlantis holiday resort in 2012 was one of the first big distressed deals undertaken by Brookfield in the wake of the global financial crisis — it took over the company by buying the debt taken out by the developer, hospitality veteran Sol Kerzner.
Brookfield Property refinanced the $1.2B of debt secured against the scheme in 2019, but in its Q3 report last year, the company quietly revealed a consortium had to provide $300M of finance to recapitalise the resort due to pandemic-related performance. That consortium comprised BAM, Brookfield Property and outside investors.
And as a result of the pandemic, the resilience of offices has come into question, and listed office companies in the U.S. and Europe are trading at discounts to their net asset value.
Brookfield Property’s shares dropped sharply in 2020, falling by almost two-thirds between January and April. They subsequently recovered, but they were still trading 25% down as the year came to a close.
Throughout the pandemic, and indeed for the past few years, Brookfield Property and BAM’s management has consistently argued that the company’s assets are worth more than the stock market was giving it credit for. In a presentation to analysts following Q3 results last year, Brookfield Property Chief Executive Brian Kingston pointed to the sale of 1 London Wall Place in the UK capital at a 3.8% cap rate and the securing of $1.8B of financing at 1 Manhattan West at a margin of below 3% as examples of the strength of its office portfolio. Brookfield's Q4 results are not yet out.
On retail, Kingston said that while the sector remained tough, Q3 had seen improved performance on rents and leasing. The company is in the process of redeveloping malls where it thinks there is value in alternative uses and, quizzed by analysts on the $3.5B of retail loans that are due to be refinanced in 2021, Kingston said the company would not be averse to handing back the keys to lenders if there was no equity left in schemes. As revealed by Bisnow, it did exactly that on a 1.3M SF Georgia mall this month.
The confidence it has shown in the value of its assets means it is little surprise that BAM has put its money where its mouth is and decided to take Brookfield Property private, analysts said.
“It was a case of when, not if,” Green Street Director of Global REIT Research Cedrik Lachance said.
BAM has offered to buy the roughly 35% of Brookfield Property shares it does not own for $5.9B. The price it has offered is above the price at which shares were trading before the offer was announced, but below the net value of the assets the company owns. That means shareholders not linked to Brookfield need to decide if they would rather cash out now or hold on if they think the shares might recover and trade closer to the NAV.
If the deal does go through, those $88B of assets will become part of BAM and be subsumed into a wider company with less public disclosure and scrutiny on the performance and valuation of individual asset classes. And as BMO’s Movahedi said, once the company is out of the public spotlight, it has more flexibility to get maximum value out of the portfolio.
“There is a gap between Main Street and Wall Street that Brookfield will look to take advantage of,” Lachance said, meaning that assets are selling for more in the private market than stock market investors give them credit for.
At this point nothing is set in stone, but the expectation from analysts is that Brookfield will carve out that diverse portfolio and use it to bring in new capital. Some assets, like London Wall Place, could be sold to institutions hungry in a world of low interest rates for income-producing assets that are perceived as safe.
In a presentation in November, Brookfield Property highlighted 1 Bank Street, which it delivered in August with its Canary Wharf joint venture in London, as having the potential to be sold for £900M, which would net the company a £400M gain.
Analysts expect Brookfield Property to group together assets in similar sectors and geographies to create new funds, bringing in new investors and selling part of its stake but also retaining management fees.
“It could be that you see changes in the kind of revenue stream, that assets are owned privately and that creates better revenue streams for BAM over time,” Lachance said.
This would take advantage of a growing trend that could drive more capital migration from public to private real estate markets over time. It used to be that one of the only ways for a real estate manager like BAM to create real estate vehicles for institutional investors it could manage forever was to set up public companies. Real estate funds for institutional investors tended to have a closed life, raising capital, spending it, selling the assets and then giving them money back after seven or 10 years. Public companies allowed you to set up “permanent capital” vehicles where you could manage the assets in perpetuity.
But the system was not perfect — as happened with Brookfield Property, those pesky shareholders could push down the price of shares, making it hard to raise fresh equity to expand.
But in the past few years, institutional investors have been increasingly willing to back open-ended funds that allow managers to keep generating management fees in perpetuity, while also selling down some of their own equity. A good recent example is Blackstone’s sale of its U.S. life sciences assets into a new open-ended fund.
With that in mind, Brookfield funds based around London, New York or Washington, D.C., offices could be in the cards in the near future, analysts predicted.
Retail will be a trickier sell in the foreseeable future, but for now, at least its problems aren’t bringing down the perception of value for the whole company.
“In the case of NRE, the value of the European assets was being diluted in the larger US vehicle. Separating them allowed investors to value them independently, at a higher multiple,” former NorthStar Realty Europe CEO Mahbod Nia said.
Nia led the carve-out of NorthStar’s European assets in 2015 from the U.S. parent for exactly that reason: European assets typically trade at higher prices than their U.S. equivalents, so having the two together in one company dilutes the value of everything.
At $88B, Brookfield Property is the biggest single chunk of Brookfield’s $202B real estate empire, but it is still the minority share, with the majority being managed in individual funds and vehicles. From here on, Brookfield’s experiment with creating a diverse, global giant could well be over, and that could prompt a flurry of transactions.