Brookfield Asset Management (NYSE: BAM) took its publicly traded real estate affiliate, Brookfield Property, private earlier this year in a $6.5 billion deal. That transaction gave it complete control over its real estate holdings, increasing its flexibility to harvest capital from that portfolio as it sees fit. While the company plans to hold many of its assets for the long term, it expects to generate as much as $25 billion in cash by monetizing its commercial real estate portfolio in the coming years. That will give it the money to drive its next stage of growth, including making new real estate investments.
Here's a closer look at the company's real estate strategy.
Trimming around the core
Following the purchase of the remaining outside interest in Brookfield Property, Brookfield Asset Management has now invested about $30 billion of its investors' capital in commercial real estate. Roughly $16 billion of that money is in "an irreplaceable portfolio of high-quality mixed-use office and retail anchored properties in global gateway cities," according to comments by CEO Bruce Flatt in the company's second-quarter shareholder letter. The core portfolio comprises about 50 assets in 25 global gateway cities, though most of its best properties are in New York and London.
He noted that the company plans to "hold these assets for a very long time, if not forever." That's because they'll provide an excellent total return for its investors over the long term. They have "proven to increase in value over the longer term, maintain high occupancy, and create numerous opportunities for us to put new capital to work at very high rates of return."
However, Flatt also sees this core portfolio as a liquidity pool if Brookfield needs capital. It can harvest that portfolio over time by refinancing properties and selling partial interests to third parties. In its current view, Brookfield expects to eventually reduce its equity in this portfolio to around $10 billion. It sees this strategy unlocking up to $10 billion in cash that it can use for other purposes.
Opportunistically cashing in
Flatt also noted that Brookfield invested the rest of its capital, roughly $14 billion, in shorter-term opportunistic property investments that it holds directly or through its various real estate investment funds. Flatt said that "virtually all of these assets will be monetized opportunistically over the next five to seven years, with the proceeds then available to invest across the entire franchise."
He noted that "while most are very high quality in nature, and they are mostly situated in great locations, we maximize the returns on these investments through a buy/fix/sell strategy." Some need an operational turnaround, while others need to be developed or redeveloped.
Brookfield believes "the economic recovery and ensuing real estate recovery will enable us to monetize significant capital from our property investments." Assuming reasonable returns, Brookfield believes it can generate more than $15 billion of equity for reinvestment from the $14 billion of capital currently invested in opportunistic properties even after retaining partial stakes in many of these assets. Combined with the $10 billion of cash it can pull out of its core portfolio, Brookfield sees up to $25 billion of cash to put to work on the next phase of growth.
What will Brookfield do with all this money?
While Brookfield envisions harvesting $25 billion of cash from its real estate holdings, that doesn't necessarily signal that it's reducing its exposure to the sector. Instead, that will give it more flexibility to invest capital where it sees the best opportunities, including real estate.
For example, the company recently purchased a portfolio of office buildings in Washington, D.C. Meanwhile, Brookfield held the first close for its fourth flagship real estate fund. It has raised $9 billion so far and sees that fund exceeding the $15 billion raised in its last fund. Further, the company took over the advisory role for a private non-traded REIT. That private REIT is one of several new offerings the company plans to develop and introduce to clients in the coming years. By freeing up capital tied up in some real estate investments, Brookfield can redeploy those proceeds into new opportunities, including seeding new products and launching larger-scale funds.
Cashing in to do more
Selling is a big part of Brookfield's real estate strategy. The company routinely sells partial stakes in core holdings to unlock value and cashes in on opportunistic investments upon completing its turnaround plan. Because of that, investors shouldn't see the company's plan to sell billions of dollars of real estate in the coming years as a sign that real estate is falling out of favor. Instead, these sales will give it the cash to drive the next phase of its growth.