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Brookfield Asset Management Formalizes Deal to Acquire Brookfield Property

Apr 05, 2021 by Matthew DiLallo
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Brookfield Asset Management (NYSE: BAM) has reached an agreement with Brookfield Property (NASDAQ: BPY) (NASDAQ: BPYU) to acquire the rest of the shares it doesn't currently own. Brookfield Asset will pay $18.17 per share, or $6.5 billion in total, to outside investors in its real estate affiliate. The agreed-upon price represents a 10% increase from Brookfield's initial offer earlier this year.

Here's a closer look at the transaction and what it means for investors.

Details on the deal

This offer applies to both Brookfield Property Partners and Brookfield Property REIT. That price implies a 26% premium to Brookfield Property's value at the end of 2020 and is 6% above the volume-weighted average price since Brookfield unveiled its offer on Jan. 4.

Further, it's a 10% overall increase from the initial value it offered after accounting for the appreciation in Brookfield Asset Management's stock since the start of the year. The offer price is toward the high end of an independent valuation made by investment bank Lazard, which pegged Brookfield Property's fair market value at $14 to $18.50 per unit.

Existing investors in the company's publicly traded real estate entities can choose to receive $18.17 per share in cash, 0.3979 shares of Brookfield Asset Management, or 0.7268 shares of preferred stock in Brookfield Property.

So what does it all mean? This split leaves Brookfield Property investors with several options. They can:

  1. Cash in on their investment at a premium to the current market price by electing to receive all cash.
  2. Exchange their Brookfield Property shares for stock in Brookfield Asset Management. This selection allows investors to participate in the future upside of its real estate business and alternative asset management franchise. However, they'll collect a lower dividend, as Brookfield Asset currently yields 1.2%, while Brookfield Property's payout is 7.5%.
  3. Elect to receive preferred shares and continue collecting a high fixed-income rate, as that security currently yields 6.375%.
  4. Select some combination of the three options.

Ideally, an investor will receive 100% of their desired election. However, the deal is subject to proration, suggesting that investors might not get all of their first choice.

Overall, Brookfield intends to pay 50% of the value in cash ($3.27 billion in total), 42% in Brookfield Asset Management stock (59.3 million shares), and 8% in preferred units ($500 million total). However, the company said it could issue up to $1 billion in preferred equity depending on investor demand, which would offset the amount of common stock it issues.

Investors should receive instructions on how to make their election from their broker. Brookfield anticipates that this transaction will close by the third quarter of 2021.

What does this deal mean for investors?

Brookfield Asset Management wants to buy complete control over its real estate portfolio by privatizing Brookfield Property. That will allow for "greater optionality in how we manage our portfolio of high-quality real estate assets," according to its CFO Nick Goodman's comments in the transaction press release. It structured the deal to give existing investors the option of cashing in at a premium, participating in the portfolio's upside through Brookfield Asset Management stock, or continuing to collect a relatively high fixed-income stream backed by real estate through preferred equity. Thus, the offer structure should meet the needs of all existing investors one way or the other.

This transaction continues a recent trend of privatizations in the real estate sector, especially for office properties. An investor group recently offered to take office REIT Columbia Properties Trust (NYSE: CXP) private in an all-cash deal at a 29% premium to Columbia's recent closing price. That group currently owns a 3.3% interest in Columbia. While they "believe in the long-term value of Columbia's high-quality office holdings," according to a letter they sent to Columbia's board of directors, they're concerned that the company won't be able to realize that value in the public market.

In addition to that corporate deal, there have been several significant transactions involving public office REITs selling properties to private institutional investors at premium prices.

Like these other buyers, Brookfield sees more value in owning office properties in the private funds it manages for institutional investors than in publicly traded entities. That's because these investors have a longer-term investment time horizon not clouded by the current short-term headwinds facing the office sector due to the pandemic, which has weighed on office REITs over the past year. This means there could be more privatizations in this space this year.

A tough choice

Brookfield Asset Management has decided to privatize its publicly traded real estate affiliates. It's offering existing investors the option of cashing in, continuing to participate in the upside via Brookfield Asset Management stock, or keep collecting a relatively high dividend yield via the preferred equity. That leaves investors having to make a difficult decision as to which option is best for their situation.

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Matthew DiLallo owns shares of Brookfield Asset Management and Brookfield Property Partners. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool has a disclosure policy.