Brookfield Asset Management (NYSE: BAM) started 2021 off with a bang. The leading global alternative asset manager proposed to acquire all the units of its publicly traded real estate partnership Brookfield Property Partners (NASDAQ: BPY) that it doesn't already own for $5.9 billion. It also extended that offer to investors in its real estate investment trust (REIT) Brookfield Property REIT (NASDAQ: BPYU). Here's a breakdown of the deal and what it means for real estate investors.
Details on the transactions
Brookfield Asset Management has offered to purchase all the limited partnership units of Brookfield Property Partners it doesn't currently own (about 357.6 million units or 40% of those outstanding) for $16.50 apiece. The proposal would enable investors to choose to receive a combination of:
- 0.4 shares of Brookfield Asset Management for each share of Brookfield Property Partners or Brookfield Property REIT they own.
- $16.50 per share in cash.
- Or 0.66 Brookfield Property Partners Class A Cumulative Redeemable Perpetual Preferred Units.
Subject to proration, investors will have the ability to elect to receive all stock, all cash, all preferred, or some combination. However, the company set limits on how much cash, stock, and preferred shares it intends on paying. It plans to cap the share issuance to 59.5 million or 42% of Brookfield Property's units' total value. It intends on only paying $2.95 million in cash or 50% of the value. Finally, it set the preferred limit to $500 million, or 8% of the transaction value. However, it can increase that amount to $1 billion if more investors opt for the preferred units, which it would offset by issuing fewer shares. As a result of this 42/50/8 split, investors might not get their full election.
The $16.50 per unit offer price is a roughly 14% premium to where Brookfield Property Partners closed trading in 2020 and premiums of 8.9% and 29.4% of its 30-day and 180-day volume weighted price.
Brookfield Asset Management structured the offer to allow investors to choose the best option for their situation. Those who want cash can sell at a premium to the recent trading price. Income investors who desire yield can select the preferred units. Finally, those who wish to continue investing in the real estate portfolio's upside can do so via Brookfield Asset Management shares.
What does this offer mean for investors?
It's important to note that this is an acquisition offer, not an agreed-upon deal. Brookfield Property Partners' Board of Directors has acknowledged the proposal and will review it. At this time, existing investors don't need to do anything.
There are many potential outcomes of this offer. Brookfield Property Partners' board could accept the proposal and sign a merger agreement with Brookfield Asset Management at the current terms. The company could negotiate with Brookfield Asset Management for a higher offer or different deal structure, such as all-stock or all cash. It could seek offers from third parties in hopes of finding a better deal, though that seems less likely since Brookfield Asset Management already owns 60% of the company. Finally, it could reject the proposal and remain publicly traded.
It seems most likely that Brookfield Property Partner's board will at least try to solicit a higher offer from Brookfield Asset Management. That's because the company has repeatedly stated that the market has undervalued its units based on the net asset value (NAV) of its real estate portfolio. For example, at its Investor Day in September, the company ran through a thorough valuation presentation, ending in a NAV of $27.01 per share. Meanwhile, in a November investor relations presentation, the company noted that it traded at a discount to the average analyst NAV of $19.50 per unit.
While Brookfield Asset Management is offering investors the opportunity to participate in this upside through its stock, it seems to be getting the better end of this deal, since the current proposal is well below the NAV.
Waiting to see what the board decides
Existing investors can't do anything right now other than wait. Hopefully, Brookfield Property Partners' board will negotiate a better deal for investors than the current one, which seems low. Otherwise, investors will have no choice but to part with a portion of their equity in its high-quality real estate portfolio at a significant discount to its NAV.