BAM! Here Comes Another Real Estate Spin

No, Emeril is not in the kitchen, but BAM (Brookfield Asset Management) is certainly spicing things up with the spinoff of its commercial real estate holdings. The new company, Brookfield Property Partners, is expected to include almost all of BAM’s commercial properties including its stakes in Brookfield Office Properties, General Growth Properties [GGP] (and related spins) and the Canary Wharf Group. The company will have AUM of ~$72b spread out across office properties ($35b), retail ($33b), multifamily & industrial ($1b) and ‘opportunity’ assets ($3b). The company is not expecting to invest in single family homes, real estate service businesses or construction services. Check out this investor presentation and the company’s 20-F filing for additional information on the company and the transaction.

Here is a snapshot of BPP’s recent financial history taken from the 20-F:

(US$M)	2011	2010	2009
Total Revenue	$   2,820	$   2,270	$    1,999
Net income (loss)	3,745	2,109	(734)
Net income (loss) attributable to parent company	2,323	1,026	(477)
FFO(1)	576	426	391
Investment properties	$27,594	$20,960
Equity accounted investments	6,888	4,402
Total assets	40,317	30,567
Property debt	15,387	11,964
Total equity	21,494	15,144
Equity in net assets attributable to parent company	11,881	7,464

Certainly some improvement, but it’s worth recalling how challenging the environment was back in 2009. According to BAM, the idea behind the spin is to ‘showcase the value of our commercial property assets’ and to better access capital for commercial real estate opportunities. Additionally, the spin is expected to pay out a higher dividend yield of ~4% with targeted growth of 3-5% annually.

Not everyone sees the benefits of a new company which will mostly just hold stakes in large, publicly traded real estate companies. For example, Stifel Nicolaus analyst John Guinee notes that “no one can figure out the need for this entity, and BAM has not offered a good explanation or rationale.”

One reason for BAM might be that in addition to receiving steep management fees (beginning at $50m/year), the company will retain 90% ownership of the company and be entitled to an incentive-based distribution linked to distribution growth. Not a bad deal at all! This is a structure that BAM has pursued in the past and the company will certainly have strong influence over the decision making process at BPP. In fact, BPP is expected to contribute $1b to a new $3.5b global property fund that BAM is currently raising.

The 20-F spends pages upon pages detailing the risks behind this spin and the company. Some are more macro in nature, but location is key when it comes to real estate no matter the type of property so it is worth digging into its portfolio in depth. Additionally, I imagine some trades might coalesce due to the numerous cross-holdings in other public companies.

The transaction is expected to be completed via special dividend in the second half of the year and Brookfield Property Partners will trade under the ticker ‘BPY’.

Disclosure: Author holds no position in any stock mentioned.