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Is Brookfield a Millionaire-Maker REIT?

Jan 17, 2021 by Matthew DiLallo
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Brookfield Asset Management's (NYSE: BAM) publicly traded real estate arms have been flops so far. Brookfield Property Partners (NASDAQ: BPY) has only generated a roughly 20% total return since its spinoff in 2013, implying a meager 2.5% total annualized return. Meanwhile, Brookfield Property REIT's (NASDAQ: BPYU) total return is a negative 11.7% since Brookfield formed it to help Brookfield Property Partners acquire mall real estate investment trust (REIT) GGP in 2018. Thus, neither company is on pace to mint millionaires.

Brookfield Asset Management's recent proposal to take both entities private is further complicating matters. On one hand, that could put an abrupt end to Brookfield Property's ability to enrich investors. However, it's not a done deal, and it has some upside potential. With that in mind, here's a look at whether Brookfield Property can produce millionaire-making returns.

The math to $1 million

Any investment can grow into $1 million, given enough time and rate of return. A good baseline is an S&P 500 index fund, which has historically returned about 10% annually. A $1,000 investment in that fund would need about 75 years to grow into $1 million -- assuming the market maintained its historic trajectory -- while $10,000 would need about 46 years to grow into $1 million. Meanwhile, a higher-returning investment could mint millionaires at an even faster pace.

Brookfield Property's millionaire-making potential

Brookfield Property is currently well off the pace of minting millionaires faster than the S&P 500. However, that doesn't mean the global real estate giant can't do so in the future. One factor driving that belief is the underlying value of its real estate.

The company ran through a thorough analysis of its valuation at its Investor Day last fall. Brookfield noted its top 15 office complexes alone (out of 134 total) are worth $21 billion, and its 25 best-performing malls (out of 122 total) are worth $15 billion. It has $10 billion of equity in each premier property group. Add in the rest of its portfolio, and Brookfield estimates that its underlying real estate's net asset value (NAV) is worth $27 per share.

With Brookfield Property recently trading at about $17 a share, it implies the market has undervalued its stock by about 37%, suggesting nearly 60% upside. If it could get the market to realize its real value, Brookfield Property would be much closer to producing the returns needed to mint millionaires.

However, because the public market hasn't given Brookfield enough credit for its real estate value, Brookfield Asset Management plans to privatize both entities at an implied value of $16.50 per share. That company has offered Brookfield Property investors the option to receive cash, Brookfield Asset Management shares, or preferred stock, all subject to proration.

It's not a done deal. But, if Brookfield Property Partners agrees to the current terms and investors choose the all-cash offer, it would transfer all the upside of the company's portfolio to Brookfield Asset Management's shareholders. Thus, it would end the company's potential for minting millionaires. Similarly, the preferred stock option would limit the upside to the income produced by that investment.

However, two alternatives could set investors on a course to greater wealth creation. First, Brookfield Property could balk at the offer, remain publicly traded, and go on to unlock and grow the value of its real estate, enriching investors in the coming decades.

The other option is if Brookfield Property agrees to the deal and investors accept Brookfield Asset Management shares. That would enable them to participate in the upside of Brookfield Property's real estate portfolio as its parent unlocks the value.

It would also allow investors to benefit from the wealth created by Brookfield Asset Management's other businesses, which has been significant over the years. Since 2005, Brookfield Asset Management has produced an average annual total return of 13.5%, outpacing the nearly 10% total return of the S&P 500 during that time frame. Meanwhile, it envisions even higher total returns of 28% annualized over the next several years as it delivers on its wealth-creation strategy.

A potential path to a millionaire-making investment

While Brookfield Property hasn't enriched investors since its formation, that's more a market issue, since it holds highly valuable real estate that public investors don't give it enough credit for owning. Because of that, its parent Brookfield Asset Management wants to take its real estate affiliates private so it can capture this value for its shareholders. That could open a side door to a potential millionaire-making stock for Brookfield Property investors if they opt to receive shares in Brookfield Asset Management, given its long history of producing market-beating returns. If it can maintain its current pace, it could mint millionaires faster than the S&P 500 in the decades ahead.

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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.