A Real Estate Spin-Off to Watch
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Traditionally Real Estate Investment Trusts (REITs) have always been the easiest way for individual investors to gain access to this asset class which paid fairly decent dividends. Most REITs are concentrated on one niche within real estate and for the most part are concentrated on only owning real estate domestically. That is about to change in a big way.
At some point during the second half of this year Brookfield Asset Management (NYSE: BAM) is expected to distribute units of Brookfield Property Partners to their shareholders via a special dividend. Initially they plan on distributing a 10% interest in the underlying business while holding the other 90%. This will mark the third such spin-off transaction as they’ve sent both Brookfield Renewable Energy Partners and Brookfield Infrastructure Partners (NYSE: BIP) to the public markets. Like Brookfield Infrastructure the company will be a publicly traded partnership (as opposed to being another REIT), which has very similar characteristics to a Master Limited Partnership.
The new company will own a portfolio of premier office, retail, multi-family and industrial assets around the world. The company will initially have $72 billion dollars of assets under management with over 250 million sq. ft. of commercial space in North America, Europe, Australia and Brazil. In addition to this it will hold direct equity stakes companies that Brookfield has invested in: Brookfield Office Properties (NYSE: BPO), General Growth Properties (NYSE: GGP) and Rouse Properties (NYSE: RSE).
Their portfolio is broken down into four platforms that they plan to grow substantially over the coming years. The office platform will have $35 billion in assets spread across 126 properties encompassing 82 million sq. ft. of space with another 18 million sq. ft. in development. A bulk of that is invested through Brookfield Office Properties. Their retail platform, which includes General Growth Properties, has $33 billion of assets spread across 184 properties which encompass 163 million sq. ft. of space. They have an additional $350 million worth of properties under development. The smallest platform will be their multifamily and industrial which will have just a billion dollars assets which will include 11,900 multi-family units and 2 million sq. ft. of industrial space. Finally, the company will have an opportunity platform which initially has $3 billion of assets under management spread across 12 million sq. ft. of office space and other assets.
Investors should be watching two things initially with this spinoff: Valuation and Parent Company Ownership. The company is planning to initially payout 80% of their earnings to unit holders and plans to value the company with a distribution of 4% of its IFRS accounting value. They further plan to grow the distribution by 3% to 5% per year. I’ll be watching how the newly public company trades with that valuation in mind. If shares start to trade substantially below that initial yield it might be time to add them to my portfolio.
As I mentioned in the beginning, BAM will initially own 90% of this new company but they do plan to reduce their ownership over time. What I’ll be watching is how they go about reducing their stake. When they spun out Brookfield Infrastructure they reduced their stake as that company grew and began to issue shares to buy assets and at times Brookfield participated as a buyer of those shares. If they just start selling shares on the open market to reduce their stake I’d be concerned.
One other item I will be watching is how long they hold their direct stakes in Brookfield Office, Rouse and General Growth. They state in the investor slide deck that they are not passive investors but want to have control or significant influence over their investments. They currently own 50% of Brookfield Properties, 40% of General Growth and 55% of Rouse so it will be interesting to see what they plan to do with these positions. As they are already publicly traded it would be easier for them to reduce their stakes in each company so it is worth watching to see what they plan to do with these assets. Opposite to this, the company could begin to take stakes in other publicly traded vehicles to beef up their industrial or multi-family platforms so they do have a lot of flexibility.
I have always been a big fan of the management team over at Brookfield. They are working to transform the parent company into a true asset manager by putting the actual assets into more appropriate vehicles. I think that Brookfield Property will make for an interesting spin-off that’s worth watching.
latimerburned owns shares of Brookfield Asset Management. The Motley Fool owns shares of Brookfield Infrastructure Partners. Motley Fool newsletter services recommend Brookfield Asset Management and Brookfield Infrastructure Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.