Brookfield Asset Management (NYSE: BAM) believes it owns a highly valuable global real estate portfolio. However, the public stock market has never given Brookfield full credit for the value it sees in its real estate. That's led it to try various methods aimed at unlocking this value, which so far hasn't had the desired effect. Public market investors continue to focus on the short-term headwinds while Brookfield looks at the longer-term potential.
After years of fruitless efforts to get the public market to see what it sees in its real estate portfolio, it's taking matters into its own hands. It's doing that by proposing to take its two publicly traded real estate affiliates, Brookfield Property Partners (NASDAQ: BPY) and Brookfield Property REIT (NASDAQ: BPYU), private. That way, it can have even greater flexibility to realize the value of its real estate assets.
What Brookfield sees that others don't
Brookfield has spent years trying to unlock the value of its vast global real estate portfolio. The leading alternative asset manager has sold properties to showcase the massive gap between their private market value (i.e., what institutional investors will pay for the assets) and the value ascribed to them by the public markets (i.e., their International Financial Reporting Standards (IFRS) carrying value in the portfolio of Brookfield Property Partners). For example, in the second quarter of 2020, Brookfield Property completed $63 million of property sales, which it noted were at prices 3% above their IFRS carrying values.
Brookfield has also highlighted the net asset value (NAV) of Brookfield Property's real estate portfolio at numerous investor events. For example, at its Investor Day last September, it walked through a thorough valuation. At the time, it estimated that its global office portfolio was worth $13.40 per share, valued its U.S. mall portfolio at $12.90 per share, and pegged its investments in real estate funds managed by Brookfield Asset Management at $4.80 per share. Subtract corporate debt and other liabilities, and the implied value of the portfolio was $27.01 per share. That was significantly above its then public market trading price of $11 per share. It was also well above the analysts' consensus NAV of $19.50 per share.
Brookfield has tried to close the gap between its public market value and where it values its real estate by using the proceeds from asset sales to buy back its stock. While that has helped nudge up its value a bit from last fall, Brookfield Property remains well below its NAV. Brookfield Asset Management has grown tired of trying to convince public market investors that they're undervaluing its real estate, which led to the recent proposal to take its real estate affiliates private at $16.50 per unit.
Why Brookfield is changing its approach
Brookfield Asset Management has a long history of exploiting the difference between the public and private real estate markets. It uses its various real estate funds to buy undervalued properties, portfolios, and publicly traded real estate investment trusts (REITs). It then leverages its operational expertise to unlock that value over time.
For example, in 2018, the company took diversified REIT Forest City Realty Trust private in an $11.4 billion deal. Brookfield noted at the time that Forest City had "created a high-quality portfolio" and that it was looking forward to "creating further value in these assets on behalf" of its private fund investors. It has already started doing that by taking advantage of a hot market for life sciences properties to sell Forest City's portfolio of lab office buildings to a fund managed by Blackstone Group (NYSE: BX) for $3.45 billion.
The company sees similarities with Brookfield Property. The market has undervalued the real estate owned by that entity, leading Brookfield to try and take it private so that it has more flexibility to capture the value disconnect.
This move by Brookfield might lead other public real estate companies also to consider going private. For example, many publicly traded office REITs believe that the market has undervalued their portfolios because of concerns that work from home will become permanent post-pandemic. However, private market investors still highly value trophy office buildings. That could lead some of these companies to take advantage of the disconnect by going private.
The public market's loss is Brookfield's gain
Private market real estate investors tend to take a much longer-term view than their public peers. Because of that, they often see value where others see problems. That's true of Brookfield Asset Management, which knows both markets very well. This knowledge is leading it to take its real estate affiliates private since all the public markets see these days are the current headwinds facing its office and retail portfolios.
On the other hand, Brookfield sees bright futures for offices and retail, which is why it's exploiting the current dour public market sentiment so that it can capture the greater long-term value in its real estate as it patiently waits for its thesis to play out.