AMERICAS: Taking real estate for a spin

When Bruce Flatt took the helm of Brookfield Asset Management in 2002, he unveiled a strategy to restructure what was then a complicated conglomerate – with holdings ranging from a beer company to Brazilian cattle ranches – into a streamlined business focused on three core asset classes: real estate, renewable power and infrastructure.

Since then, Brookfield has been building all three platforms and has launched publicly-traded flagship companies for two of the asset classes: Brookfield Infrastructure Partners (BIP) in 2008 and Brookfield Renewable Energy Partners (BREP) in 2011. Now, a decade after Flatt presented his vision for the company, the Toronto-based investment management firm is preparing for the anticipated spinoff of its largest business into Brookfield Property Partners (BPY) later this year.

At the heart of the move appears to be a view that Brookfield is not maximising fee income from its assorted real estate holdings as things currently stand. For example, the company currently doesn’t earn an asset management fee for its interest in Brookfield Office Properties. However, after that interest is moved to the new listed entity, shareholders in the new company will pay asset management fees on all of the entity’s holdings, including the Brookfield Office Properties stake. 

“Like our other flagship entities, this entity would have a mandate to expand globally, be managed by us and have a strong dividend policy,” Flatt wrote in a letter to shareholders in February. “As with the others, we would retain a very meaningful investment in this business.”

The new entity – encompassing the majority of Brookfield’s commercial real estate operations, including its opportunistic assets – likely will be created through the partial spinoff of shares to the company’s shareholders, who are expected to hold a 10 percent interest. Brookfield is expected to hold a 90 percent interest, although the firm expects to reduce its ownership in the new entity over time. 

The spinoff, for which Brookfield is seeking dual listing on the Toronto and New York stock exchanges, will create one of the world’s largest publicly-traded commercial real estate companies, with $72 billion in assets under management (AUM) in North America, Europe, Australia and Brazil.  BYP’s primary mandate will be to invest in commercial properties, development sites that would be converted into commercial properties and direct and fund investments in opportunistic assets.

Documents posted on Brookfield’s website last month show that BPY will be divided into four operating entities. The office entity, with $35 billion in AUM, will include Brookfield’s 50 percent interest in Brookfield Office Properties, all of its Australian and European office assets not held through Brookfield Office Properties and a 22 percent stake in Canary Wharf Group. The retail entity, with $33 billion in AUM, will encompass a 21 percent share in General Growth Properties, a 37 percent interest in Rouse Properties, a 35 percent stake in its Brazil Retail Fund and its entire retail platform in Australia. The multifamily and industrial entity, with $1 billion in AUM, will comprise interests – ranging from 10 percent to 52 percent – in multifamily properties and a 29 percent stake in industrial assets that are held through various Brookfield-sponsored private funds. 

The opportunistic investments entity, with $3 billion in AUM, will include Brookfield’s sponsorship interests in its opportunity and finance funds. Fund interests that could be moved to the new company include interests in both existing and future funds. However, nothing inherently changes with any of the real estate funds, as Brookfield will continue to control all of the underlying assets. 

What will change is that BPY, rather than Brookfield, will be making an investment in the fund. BPY, for example, is expected to be the lead investor when Brookfield raises its flagship opportunistic real estate fund. Brookfield’s interest in any particular fund will be proportional to its percentage of ownership in BPY. As Brookfield eventually reduces its ownership in the new company, the amount of capital it puts into its real estate funds also will decline. For example, if Brookfield had invested $200 million in a $1 billion fund, moved that interest to BPY and the ownership of that entity was eventually split between Brookfield and public shareholders, Brookfield’s share in that fund interest would become just $100 million.

One benefit of the new structure for Brookfield’s funds business is that BPY could serve as a major source of co-investment capital for Brookfield, particularly if the company sources a large co-investment that would require more capital than would be prudent for a fund to invest. Furthermore, by having a dedicated real estate entity, Brookfield would be able to broaden its investor base by providing shareholders with better exposure to the asset class than it previously had. 

However, “the prospect for surfacing hidden value is somewhat lesser” for BPY than Brookfield’s other two spinoffs, said Alan Avery, executive director of institutional equity research at CIBC World Markets, which provides analyst coverage of Brookfield. The firm’s infrastructure and renewable energy platforms have performed well in the public markets partly because “they have few peers in terms of a publicly-traded entity of the same calibre,” he explained. A real estate-focused entity, however, would have to compete with more than 300 US REITs,

and real estate “is a much better understood asset class and much more easily investable in the public markets than renewable power and infrastructure assets.”