Brookfield Asset Management intends to create a stand-alone commercial property company with an estimated equity value of $10 billion, based on a filing with U.S. securities regulators.
The new publicly traded vehicle, to be called Brookfield Property Partners LP (BPY), “will be one of the largest publicly traded commercial property companies with a geographically diversified, premier portfolio of high quality office, retail, multi-family and industrial assets around the world,” wrote Neil Downey, Managing Director of Global Equity with RBC Capital Markets, in a 15-page analysis of the Brookfield plan.
A Brookfield spokesman confirmed the company made the SEC filing but said he was unable to comment about it citing securities rules.
The spin-off follows a declaration by Brookfield President and CEO Bruce Flatt in his year-end letter to shareholders that the company was working on creating a “flagship” publicly listed entity to hold BAM’s global property investments.
The RBC analyst, who waded through Brookfield’s 321-page filing with the U.S. Securities and Exchange Commission, stated that assets under management of the new entity would be approximately $72 billion.
Brookfield’s spinoff plan mirrors earlier asset distributions to shareholders, namely, those of Brookfield Infrastructure Partners L.P. (BIP) and Brookfield Renewable Energy Partners L.P. (BREP). BIP was partially spun-off to shareholders in January 2008 and Brookfield Asset Management initially retained a 40% exchangeable interest. The spin-off and listing of the Bermuda-based BPY will most closely resemble the BIP process, stated Downey.
If the spinoff goes ahead, Brookfield Asset Management shareholders will get shares in the new company whether they want them or not. Shareholders will end up with 10% stake in BPY with the parent company holding the rest, Downey estimates.
Brookfield Asset Management will not make a financial score initially with the spin-off while shareholders will end up with a new set of shares.
Higher Fees to Brookfield Asset With Spin-off
What Brookfield Asset will get out of the transaction ultimately is fee income. The RBC analyst is critical of the planned asset management fee structure to be levied by Brookfield Asset, which will include a base fee of $50 million annually plus 125 basis points of the increase in BPY’s total capitalization over its initial value. As well, BPY will be subject to performance based management fees which are dependent upon growth in distributions made to limited partners. The initial BPY distribution is expected to be $1.00/unit annually. BAM will earn two-tiered “incentive distributions” to the extent that distributions to BPY limited partners exceed specified thresholds (15% of distributions in excess of $1.10/unit/year, and 25% of distributions in excess of $1.20/unit/year).
By comparison, the fee arrangements for BIP are a base management fee of 125bps annually of the equity market value plus incentive distributions of 15% of distributions in excess of $1.22/unit/year and 25% of distributions in excess of $1.32/unit/year and for BREP of a base management fee of $20 million annually plus 125bps of the increase in BREP’s total capitalization over its initial value, plus incentive distributions of 15% of distributions in excess of $1.50/unit/year and 25% of distributions in excess of $1.69/unit/year.
While the new spinoff is far larger than its prior creations, the majority of the investments in BPY will be shares in investments in two publicly listed companies, namely Brookfield Office Properties Inc. (“BPO”) and General Growth Properties, Inc. (“GGP”). “…we can subtract GGPs equity value (estimated at ~$3.9 billion) and BPO’s equity value (estimated at $4.8 billion) from BPY’s equity of $10.4 billion,” concluded Downey in an April 16 analysis of the planned spin-off. “The result is ~$1.7 billion of “stub” equity, which reflects the net investment in the remaining, largely privately held assets. If we ascribe the entire $50 million initial base asset management fee to this stub equity value, then the management fee equates to a cost of ~300 bps. We believe some investor may view this as high. And, we would agree.”
What Would Be In BPY?
RBC’s Downey finds that the new Brookfield entity’s $72-billion in assets under management (AUM) would be organized into four operating platforms through a combination of direct investment; investments in asset level partnerships or joint venture arrangements; sponsorship and participation in private equity funds; and the ownership of shares in other public companies.
The four platforms are:
Office. Totalling $35 billion of AUM, 126 properties covering 82 million square feet and a development pipeline totaling 18 million sf. The office strategy is focused upon the continued growth of a high quality office portfolio in gateway global cities. The focus is CBD Class AAA (prime) office assets in major financial, energy and professional/financial services centres in North America (New York, Washington, D.C., Houston, Los Angeles, Toronto, Calgary, Ottawa), Australia (Sydney, Melbourne, Perth), and Europe (London).
Retail. Totalling $33 billion of AUM, 184 properties covering 163 million square feet and a $350 million development pipeline.
Multi-Family and Industrial. At year end, Brookfield Asset owned interests in about 11,900 multi-family units located in coastal and select interior markets in North America and interests in several industrial properties in the United States consisting of approximately 2 million square feet.
Opportunistic investments. Totals $3 billion of AUM covering some 12 million square feet of office and other assets, including mezzanine loans and other real estate assets located in North America, Europe, Australia, Brazil and other emerging markets.
What’s Not In The BPY Investment Policy? Downey writes that BPY will typically not invest in: single family residential property construction or other; the real estate services business; and, commercial property construction services.