Brookfield Spinoff Plans to Expand Beyond Offices, Malls

Brookfield Property Partners LP, the $48 billion business being spun off by its Canadian parent, plans to pursue purchases beyond office and retail, the firm’s past areas of focus, as its access to capital improves.

The spinoff, taking effect April 15, is the last of three main business units to be carved out by Toronto-based Brookfield Asset Management Inc. Like the other two, Brookfield Renewable Energy Partners LP and Brookfield Infrastructure Partners LP, Brookfield Property Partners will be a limited partnership based in Bermuda, a traditional tax haven.

“For capital efficiency and to simplify our story, we wanted the three big businesses to operate separately with their own balance sheets,” Ric Clark, Brookfield Property’s chief executive officer, said in a telephone interview. “At the height of the economic crisis in ’09, there were lots of opportunities but also competition amongst the groups at Brookfield for a finite amount of balance-sheet capital.”

Brookfield Property is designed to give investors global exposure to commercial real estate, including investments in multifamily and industrial as well as retail and office buildings. Brookfield Asset Management began investing in U.S. real estate in 1976 with purchases of office buildings and shopping malls.

“They only locate in top markets and top-quality assets,” Ross Moore, director of research for CBRE Canada, a unit of CBRE Group Inc., the world’s largest commercial-property brokerage, said of Brookfield. “They’re good investors and good operators. They are very financially astute.”

Rental Demand

Brookfield has been trying to expand in apartments and industrial properties, two sectors where it hasn’t had large investments, as rental-housing demand and global trade grow. One possible acquisition target is Gazeley Ltd., a London-based industrial developer owned by Dubai-based Economic Zones World that’s valued at about 300 million pounds ($459 million), according to a person briefed on the situation.

Melissa Coley, a spokeswoman for Brookfield Property, declined to comment on possible interest in Gazeley. Economic Zones World didn’t respond to an e-mail seeking comment on a potential sale.

Brookfield Asset Management tried to acquire Archstone Inc. in 2011 when the U.S. apartment landlord’s shareholders sought offers for the company, according to two people with knowledge of the effort. Lehman Brothers Holdings Inc., Archstone’s biggest shareholder at the time, later bought all of Archstone and last year agreed to sell its assets to Equity Residential and AvalonBay Communities Inc.

Andrew Willis, a spokesman for Brookfield Asset, and Kimberly Macleod, a spokeswoman for Lehman, declined to comment on Brookfield’s possible past interest in Archstone.

Apartment Purchases

In February, Brookfield Asset Management bought 19 apartment complexes in the Carolinas and Virginia from Babcock & Brown Residential Inc. for $414 million. The multifamily portfolio is part of Brookfield Property Partners, which has assets valued at about $48 billion.

“Now that we’ve created a separate company, we have the ability to raise our own equity in the public markets to support our growth plans,” Clark, 54, said.

Brookfield Property Partners today consists mainly of stakes in two publicly traded companies: 50 percent of Brookfield Office Properties Inc., the biggest U.S. office landlord, with about 64 million square feet of space either wholly or partly owned, and about 22 percent of General Growth Properties Inc., the No. 2 U.S. shopping-mall landlord.

General Growth

Together with warrants and fund partners, Brookfield owns about 42 percent of General Growth. Brookfield also has a 37 percent direct stake in Rouse Properties Inc., a mall landlord spun off from General Growth, and a 54 percent stake with its partners.

The stakes in Brookfield Office, General Growth and Rouse make up about 75 percent of Brookfield Property Partners, with private real estate funds and directly owned assets accounting for the rest, said Coley, the Brookfield Property spokeswoman. That percentage is likely to shrink as the company makes more direct purchases of real estate, she said.

“The intention is to change that balance so in the near term it’s more like 50-50,” Coley said. “Longer term, the public companies could be less significant -- more like 10 or 20 percent,” with directly held real estate and funds making up the balance.

Hard Rock

In 2011, Brookfield Asset Management seized control of the Hard Rock Hotel and Casino in Las Vegas through a mezzanine loan that was converted to equity, and took over three resorts from South African casino magnate Sol Kerzner’s company, including the Atlantis Paradise Island in the Bahamas. Those assets also are now part of Brookfield Property Partners.

Brookfield Asset Management will spin off the property unit through a special dividend of about 36 million units of the new company. Holders of Class A and B shares will receive 5.74 units of Brookfield Property for every 100 Brookfield Asset shares held as of March 26. After the spinoff, the parent will hold an effective economic stake of about 92.5 percent in the property unit, according to a company filing.

The stake held by Brookfield Asset will decline as Brookfield Property, which pays its parent a management fee, sells shares to fund acquisitions, Coley said. Brookfield Office Properties, meanwhile, will continue to operate as a separate publicly traded company.

‘Get Exposure’

“If there’s a Class A office building that’s for sale in a market that’s a part of Brookfield Office’s strategy, they’re going to pursue that transaction, and Brookfield Property would get exposure through its investment in Brookfield Office Properties,” Clark said. “The creation of Brookfield Property does not change the way Brookfield Office operates.”

Brookfield Asset Management traces its roots to Brazil, where it started as a power company in the 1890s. One of the group’s early real estate investments was the 1971 acquisition of the company that owns the Montreal Forum and the Montreal Canadiens hockey team. The arena and the team were sold in 1978, after the Canadiens won five Stanley Cup championships.

Brookfield Infrastructure Partners, which began trading in January 2008, has doubled since then, compared with a 12 percent gain for the Standard & Poor’s 500 Index. Brookfield Renewable Energy has risen about 21 percent since it began trading on the Toronto Stock Exchange on Nov. 30, 2011, compared with 1.1 percent for the S&P/TSX Composite Index. The returns exclude dividends.

Flagship Complex

Brookfield Asset Management acquired its flagship U.S. property, formerly called the World Financial Center, in the 1990s through the recapitalization of Olympia & York USA, previously owned by Canada’s Reichmann family. The property is now part of Brookfield Office Properties.

Brookfield Office needs to find tenants for the complex, where lead tenant Merrill Lynch’s lease expires in September. New tenants are needed for 3 million square feet (280,000 square meters) after Merrill, which leased 4.6 million square feet, decided to keep some space and Brookfield signed leases for part of the space being vacated. The World Financial Center was renamed Brookfield Place last year.

“I suspect they’re wishing they didn’t have quite that much exposure in lower Manhattan,” said Moore of CBRE. “That’s a fairly large albatross hanging from their neck. It’s a big chunk of real estate and now you’re having to compete with all the new construction.”

Toronto Tower

Other Brookfield Office assets include the 72-story First Canadian Place in Toronto, Bank of America Plaza in Los Angeles, Houston’s Allen Center complex and properties in Australia.

Besides its public-company holdings, Brookfield Property Partners also has stakes in private-equity funds. Its funds include vehicles for opportunistic investments, real estate finance, Canadian offices and Brazilian retail properties.

“We’re seeing opportunities in almost all sectors,” Clark said. “The U.S. economy is poised for growth. We think Europe’s got a way to go, but we are seeing lots of opportunities there.”

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