Some publicly traded real-estate companies have found a buyer for their shares, despite empty offices, deserted hotels and reeling shopping malls—the companies themselves.
Real-estate owners, including SL Green Realty Corp. and Healthcare Trust of America Inc., say stock-market investors have significantly undervalued their property holdings compared with what they could fetch in the private market. While some of these companies authorized buying back their own shares even before the coronavirus pandemic, they are betting that with a vaccine rollout under way, travel, office work and mall shopping will bounce back after a terrible year for major property types.
Brookfield Asset Management Inc. took this strategy one step further last week, when it offered to buy the nearly 40% stake in Brookfield Property Partners LP it doesn’t already own for $5.9 billion. Brookfield Property, which BAM spun off about eight years ago, is one of the world’s largest real-estate investors and owns the giant office and retail complexes Brookfield Place in New York and London’s Canary Wharf.
The stock market “doesn’t properly value or appreciate the quality of the assets that we own,” Brian Kingston, managing partner of BAM’s real-estate group, said last week.
Shares of public mall and office companies last week were trading at average discounts of 20% and 32%, respectively, to the net asset value of their underlying property, according to real-estate analytics firm Green Street.
“When shares are trading at pretty major discounts, it’s easy to justify share buybacks and possibly privatizations,” said Dirk Aulabaugh, Green Street’s global head of advisory services.
The stock repurchases helped prop up share prices last year but weren’t enough to keep the overall sector from succumbing to the pandemic, which caused hotel, retail shopping and office demand to fall. The real-estate investment trust sector fell 7.5% in 2020, according to Green Street, compared with a rise of 18.4% including dividends for the S&P 500 index.
SL Green, the largest owner of Manhattan office buildings by square footage owned, last month increased its share-buyback program by $500 million, bringing it to $3.5 billion. But its share price sagged, nonetheless. As of Jan. 8, SL Green’s shares were trading at a 41.2% discount to net asset value, close to its biggest ever which was earlier this year, Green Street said.
Buybacks aren’t risk-free. They will be a poor investment if the commercial-property market is slow to recover and these companies’ share prices keep falling.
Still, low interest rates are likely to fuel additional stock buybacks, as well as privatizations and merger-and-acquisition activity, analysts say. In one recent example, Blackwells Capital last month offered to buy Monmouth Real Estate Investment Corp. for $3.8 billion in an unsolicited bid for the owner of industrial property.
Toronto-based BAM spun off Brookfield Property as a separate company in 2013, and the new company’s shares have mostly struggled since then. Its shares were hurt by higher leverage than its peers, a large development pipeline and the high management fees it pays BAM, according to analysts. The company also made an ill-timed bet on malls just as online retail was taking off.
BAM’s leaders hoped that property diversification would appeal to investors. Instead, Brookfield Property never traded better than its worst-performing asset, Mr. Kingston said.
In recent months, BAM executives said they realized winning favor in the public markets for Brookfield Property was going to be a long haul. BAM held back on making its privatization offer earlier in the pandemic even though it might have gotten a better price because the market was so volatile, Mr. Kingston said. In late June, Brookfield Property’s shares fell below $10 a share, though they have recovered since then.
BAM’s proposed bid of $16.50 a share was a 14% premium to the $14.47 closing price of Brookfield Property on New Year’s Eve.
Some analysts believe Brookfield Property shares would face even more pressure if the company stays public. Its dividend isn’t sustainable given its high debt, uncertainty about the commercial real-estate recovery, and the company’s plan to invest heavily to redevelop malls, said Mark Rothschild, an analyst with Canaccord Genuity.
“This company was going to have major issues over the next two years,” Mr. Rothschild said. “Brookfield is to some extent cleaning up a mess” with the privatization plan.