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A man takes the escalator up to the main floor at Brookfield Place in Toronto's Financial District, on Jan. 4, 2021.Fred Lum/The Globe and Mail

Brookfield Asset Management Inc. (BAM-N) wants to buy back its giant real estate division in a major shakeup fuelled by the recent property rout, which has been particularly rough on retail landlords.

The company announced plans Monday to purchase the 38-per-cent stake of publicly listed Brookfield Property Partners LP (BPY-UN-T) that it does not own for US$16.50 a unit, a 14-per-cent premium over last week’s closing price. The deal is valued at US$5.9-billion, which includes assumed debt.

Brookfield Property is one of the largest retail and office landlords in the United States, and like many of its rivals, notably Simon Property Group Inc., the real estate giant has struggled to win over investors during the pandemic. Many malls have reported substantially weaker foot traffic, and many historic retailers have filed for bankruptcy protection, which has hit rent collections.

The company operates more than 170 malls in the U.S. and both directly and indirectly owns real estate around the world, including 253 office and 180 apartment buildings, as well as student housing, storage warehouses and hotels – the latter of which is suffering from record-low occupancy rates.

The proposed deal is being marketed by Brookfield Asset Management, or BAM, as a privatization, even though the buyer is a publicly traded company. BAM is so large that Brookfield Property’s assets would likely fall out of the spotlight, allowing for a long-term restructuring that could take years to pay off. BAM declined to comment but said in a statement that the deal, which is not yet a formal offer, would give “greater flexibility in operating the portfolio.”

BAM believes its real estate subsidiary is worth far more than its market value, and as of Sept. 30 said Brookfield Property represented US$15.2-billion of its US$51.8-billion invested capital. Before Monday’s proposal, the market value of BAM’s current stake in Brookfield Property was US$8.4-billion.

“Despite management’s valiant efforts to close this valuation gap, we believe that the market’s sentiment toward certain asset classes (i.e. U.S. malls specifically) has been a fundamental roadblock toward the realization of a higher (and more appropriate) valuation,” CIBC World Markets analyst Dean Wilkinson wrote in a note to clients Monday.

Brookfield Property’s units jumped 18 per cent Monday to close at US$17.01 a unit but remain down 7 per cent year-over-year. The units struggled over a five-year period before the pandemic, losing 26 per cent of their value from early 2015 to early 2020. Last summer BAM provided Brookfield Property with US$1-billion to buy back some of its units in order to prop up the real estate subsidiary’s stock price.

Although Brookfield Property owns a large office portfolio spread across the U.S., Canada, Australia and Europe whose rent collections have not been hard hit, investors have been particularly attuned to the retail portfolio – especially after the company bought large U.S. mall owner GGP Inc. in 2018 as a contrarian bet on the value of the target’s real estate holdings.

BAM originally invested in GGP, then known as General Growth Properties, in 2010, when it led a consortium of investors that recapitalized the mall owner after the 2008 financial crisis. By the time of the full takeover in 2018, which valued GGP’s portfolio at US$15-billion, BAM owned 34 per cent of the company.

When the full takeover was announced, U.S. retail real estate was already seen as a tough sector, yet Brookfield envisaged a long-term turnaround that involved leasing mall space to a new class of tenants, including e-commerce brands that want physical footprints and service-oriented retailers such as boutique gyms. Brookfield Property also hoped to redevelop many of the malls to increase density on their sprawling parking lots in the form of condos or office towers.

Despite the long-term potential, such redevelopment plans require a lot of capital – at a time when retail rent collections are hurting. In Canada, retail real estate landlord RioCan REIT is moving forward with a similar vision but was prompted to cut its monthly distribution by a third in early December amid growing uncertainty about some of its tenants’ futures.

Before the proposed buyout, there was speculation that Brookfield Property would have to cut its own distribution for similar reasons. Recent analyst projections estimated it would pay out roughly 110 per cent of its adjusted funds from operations in each of the next two fiscal years, meaning its annual distributions to unitholders would amount to more than its annual cash flow.

The retail sector has been one of the hardest-hit corners of the real estate market. Like other shopping centre landlords, Brookfield Property has had to contend with dozens of tenants unable to pay rent as the pandemic shut down the economy. Big tenants such as department store chains Neiman Marcus, Lord & Taylor and J.C. Penney have filed for creditor protection.

Brookfield Property reported collecting roughly 70 per cent of its core retail portfolio rents in the third quarter. It recently cut 20 per cent of staff in its U.S. retail division and accelerated plans to improve its mall portfolio.

With a report from David Milstead

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