Investors in Brookfield Property Partners (NYSE: BPY) woke up to an interesting offer on Jan. 4, when parent Brookfield Asset Management (NYSE: BAM) offered to buy the real estate partnership. There's a lot to unpack here, but for investors who watch the real estate investment trust (REIT) space, this deal is very good news. Here's why.
An interesting relationship
The first thing to understand here is how Brookfield Asset Management and Brookfield Property Partners are related. Brookfield Asset Management is an institutional investor with over 100 years of history putting money to work in physical assets. It does this with its own money, with money it invests on behalf of others, and through controlled public entities, like Brookfield Property Partners.
Brookfield Property Partners is structured as a master limited partnership, with Brookfield Asset Management acting as the operating partner. Basically, it earns fees for running the partnership and owns a stake in the partnership as well, netting it distributions along with other investors. Note that there's a REIT version of Brookfield Properties (NYSE: BPYU), too, but it's not particularly important for the overall issues at play here.
Basically, Brookfield Asset Management has deep, intimate knowledge here. Moreover, Brookfield Asset Management has a long history of investing opportunistically, usually picking up assets on the cheap when others are afraid to invest. It then invests in and runs these assets until times are better and it can sell them at a profit, or just hangs on to them if it wants to keep collecting the steady cash flows they throw off.
The deal and what it means
This brings the story to Brookfield Asset Management's proposed takeover offer for Brookfield Property Partners. Brookfield Asset Management offered $16.50 a unit for Brookfield Property Partners. That represented a roughly 15% premium over the price at the end of 2020. This sounds like a pretty good deal when you consider Brookfield Property Partners' largest property types are office buildings and malls. These two areas have been particularly hard-hit during the coronavirus pandemic, with adoption of work-from-home and social distancing trends.
But you have to ask yourself: Why would Brookfield Asset Management buy struggling properties? The answer is that it believes they are worth much more than $16.50. How much more? The company told the world on Dec. 2, 2020: $26.80 per share. It believes the office assets alone are worth $13.90 per share, with retail coming in at $12.90. Other property investments it owns are worth around $5 per share, with offsetting values related to the operating business. In other words, based on Brookfield Asset Management's assessment of value here, it's actually buying these assets cheap.
The real goal is to remove the properties from the public space so it can ride out the current storms without having to deal with investors. That gives it more leeway with what it can do and less pressure to "fix" things quickly when simply holding on is a better long-term approach. The really big takeaway here, however, is that an opportunistic investor with intimate knowledge of the business sees enough value in the properties Brookfield Property Partners owns that it's willing to put its money where its mouth is. And that speaks volumes about the state of the office and mall real estate sectors today.
Put simply, this savvy investor thinks there's good deals to be had in these admittedly troubled sectors. Some names worth looking at, if you want to follow Brookfield Asset Management's lead, include mall landlord Simon Property Group (NYSE: SPG) and office REITs such as SL Green (NYSE: SLG) and Hudson Pacific Properties (NYSE: HPP).
Know what you own
If you're a long-term investor, you probably take a great deal of time and care selecting your investments. That's exactly what Brookfield Asset Management does, too, and it sees value in office and retail properties. These are not easy-to-love REIT sectors today, but if Brookfield is willing to step in with both feet, you too should do a deep dive. Unitholders should probably take the deal being offered, but don't cut and run; consider putting the money right back to work in the same out-of-favor REIT niches -- if you want to invest like an institutional powerhouse, anyway.