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Flatt: Brookfield’s office and retail portfolio is ‘irreplaceable’

The Toronto-based firm’s CEO says plans to generate $25bn by monetizing its BPY holdings will not include its assets in the two troubled sectors.

Brookfield Asset Management will use its newly privatized real estate holdings to raise upwards of $25 billion in cash, chief executive Bruce Flatt informed investors last week. But it will not exit the sector’s two most troubled property types along the way.

In his quarterly letter to investors, Flatt outlined plans to monetize assets from Brookfield Property Partners, or BPY, the listed platform that the Toronto-based firm took private at a value of roughly $30 billion this summer. While Brookfield will sell down some of the BPY book in the coming years to finance the firm’s expansion, its marquee office and retail holdings are staying put.

Flatt: the BPY privatization is key to Brookfield’s new non-traded REIT.

“Approximately $16 billion of this equity capital is invested in an irreplaceable portfolio of high-quality mixed-use office and retail anchored properties in global gateway cities,” he wrote. “On balance we intend to hold these assets for a very long time, if not forever.”

The letter was the first detailed disclosure of Brookfield’s strategy for its BPY assets since it announced the privatization effort in January. At the time, Brian Kingston, chief executive of Brookfield Property Partners, said the decision was driven by investor demand for a platform that did not trade at a discount to net asset value, as BPY did consistently from its launch in 2013.

Of the $14 billion of non-core assets, roughly half are Brookfield’s general partner co-investments in its Brookfield Strategic Real Estate Partners funds; those will be exited in the next five to seven years, Flatt wrote. Along with its fund stakes, which have exposure across all properties types and geographies, BPY also had direct exposure to a variety of assets, for which it employed a “buy/fix/sell strategy.”

“As with our private fund strategies, as these business plans are executed, we will look to recycle our capital into new opportunities, in property or elsewhere, or use the proceeds to repurchase shares,” Flatt wrote.

Flatt anticipates the continued recovery of the global economy will create a powerful selling opportunity for the firm. In total, he expects Brookfield to realize $15 billion of equity for redeployment as both its funds and direct investments run their course. Another $10 billion will be generated through re-financing and selling minority shares of its core holdings over time, he added.

During Brookfield’s quarterly earnings call last week, Flatt said some BPY assets would be used to seed Brookfield REIT, a new private, non-traded investment trust. Once merged with the existing Oaktree REIT, the retail capital platform will compete with similar offerings from Brookfield’s chief rivals Blackstone and Starwood Capital Group. “The flexibility provided by the privatization of BPY will be instrumental to this launch and the forward business plan for this product,” he said.

Roughly a third of the BPY assets will be distributed to other Brookfield vehicles, another third will sold to outside buyers and the final third will be kept as “liquidity on the balance sheet,” Flatt said.

Onto the next fund

Brookfield also held a first close for its latest opportunistic fund, Brookfield Strategic Real Estate Partners IV, on more than $9 billion last quarter, Flatt said during the call, adding that he expects the vehicle to be larger than BSREP III, which closed on $15 billion in 2019.

“Compared to the first close of its prior vintage, this is more capital raised in a quicker timeline and should lead to a much larger fund than the last vintage,” Flatt said.

In his quarterly letter, Flatt attributed the strong fundraise for BSREP IV, along with similarly robust turnouts for the firm’s other flagship funds, to a growing thirst for yield among insurance companies. With fixed income investments offering sub-optimal returns, these groups have flocked to the alternatives space in droves.

“We currently manage close to $30 billion of private fund capital from insurance companies and we expect that to grow by multiples, in particular as we continue designing regulation-friendly products for them,” Flatt wrote.

Brookfield is targeting $17 billion for BSREP IV, PERE understands. The vehicle has no hard-cap.