The new year is an opportune time to do some tidying up. Accordingly, Brookfield Asset Management on Monday offered to pay $5.9 billion, along with some unnamed institutional co-investors, to take its listed commercial real estate arm Brookfield Property Partners private. As a majority shareholder in the listed vehicle, fighting Brookfield would be hard at the best of times. Right now it would be borderline foolhardy.
On the face of it, the deal looks cheap, even by the Canadian investment giant’s own admission. At $16.50 a share, it’s almost 40% less than the net asset value reported by Brookfield Property in December. It’s also just a hair’s breadth from where the shares were in March before they got thwacked by the coronavirus.
Saying no to a majority shareholder is always tough, and especially so in this case. Brookfield Asset Management holds more than 60% of its subsidiary’s shares. But the firm run by Bruce Flatt also acts as manager for the listed property vehicle, providing executives, advising on deals and extracting fees. Folding the listed arm back into the mothership – with its $575 billion of assets under management – could free Brookfield up to slice and dice its properties more creatively without being beholden to investors accustomed to a dividend yield of almost 10%.
There may be room for Brookfield Property Partners’ council of independent directors to secure a small increase in the bid. The parent company’s past offers to privatize General Growth Properties, Rouse Properties and Canada Office Properties were all raised by a modest sum before closing. Brookfield Property Partners’ shares were a shade above the $16.50 offer on Monday, raising a glimmer of hope. More importantly, Brookfield’s whole complex model depends on attracting outside investors to expand its empire while sharing the risk. A bit of generosity can only help ease the path next time Brookfield decides to tinker with its financial architecture.
But the allure of a premium is likely to be irresistible in the end. More than 40% of Brookfield Property’s capital is invested in the retail sector, in flux even before shopping malls became the unfortunate economic plaything of Covid-19. Shares in real estate funds like Vornado Realty Trust and Simon Property have fallen almost twice as hard. Perhaps Brookfield the parent company is opportunistic; it might just as well be overoptimistic.