Brookfield AM still a real estate operator at heart

Brookfield Asset Management has grown from a Canadian firm that owned and managed mainly North American office and apartment properties for its own account to a contender in the real estate money management industry.

Since 2014, Brookfield's worldwide assets under management has grown about fivefold to $56 billion as of June 30, Pensions & Investments' real estate money manager data shows. Over time, Brookfield has transitioned to a real estate money manager as well as real estate operator, mainly offering a series of diversified real estate funds.

The firm's first third-party institutional investors were Canadian pension funds that 20 years ago "were just bursting onto the international scene," said Brian Kingston, chief executive officer of Brookfield's real estate business.

Instead of creating funds with hundreds of smaller investors, Brookfield put together clubs of a few larger investors, he said.

"We're not a fund manager in the pure sense," Kingston said. "We are an owner and operator, and you can invest alongside us."

To ensure that the institutional funds are diversified across sector and geography, Brookfield methodically built out its business to about 30 countries around the world. It not only makes the investments, but Brookfield also operates or manages its properties, a capability not many real estate managers have.

Brookfield has also grown by acquisition. Among the deals with real estate components was Brookfield's September 2019 acquisition of about 61% of alternative investment manager Oaktree Capital Group. At the time, about 10% of Oaktree's assets under management were in real assets. Oaktree had $120 billion in assets under management as of June 30, 2019. Also, in 2018 Brookfield acquired real estate investment trust Forest City Realty Trust in an $11.4 billion transaction that helped Brookfield expand into new regions and new sectors such as life sciences, while turning Brookfield into the largest commercial real estate owner in New York. In 2007, the firm expanded its listed real estate securities business by acquiring REIT manager KG Redding, with $6 billion in assets under management.

Brookfield has a total of $850 billion in assets under management across all strategies.

Brookfield had $14.2 billion in assets managed for U.S. institutional tax-exempt investors as of June 30, which was down 17.5% from the prior year's survey. Over the last 18 months or so, Brookfield has been a very active seller of real estate, particularly of multifamily properties that it had purchased in 2017 and 2021, Kingston said. Over the last 18 months, Brookfield sold $18 billion worth of multifamily properties in the U.S. "at very attractive prices," he said.

"We executed our business plan and got the properties ready for market," he said. "We brought forward properties that would have sold next year this year" to take advantage of attractive pricing.

Brookfield has also been building out a suite of open-end funds in the U.S., Europe and in Australia, and it has a non-traded REIT for retail investors, Kingston said.

At the same time as the firm was expanding its third-party money management business, Brookfield also continued to grow its own balance sheet, which is about $270 billion, and is a large real estate owner particularly in office and retail, Kingston said.

"We continue to own a lot of office" but over the past decade, most of it was on the balance sheet and very little in the firm's funds, which make opportunistic investments, he said.

Most of Brookfield's office holdings are newer buildings that today perform well, Kingston said.

"We're signing leases at record rents," he said.

However, the rest of the existing properties are not performing well because there is an oversupply of older office buildings at a time when demand is shrinking, Kingston said. Brookfield executives expect that over the next decade, offices will comprise less than 10% of new investments for the funds because it is hard to make opportunistic returns in office assets, he said. Funds have 10-year lives made up of three years making investments, execution of a five-year business plan and then exiting. P&I data shows that 22% of Brookfield's current U.S. institutional tax-exempt real estate portfolio is invested in offices, which is down 1 percentage point from the prior year.

Offices are very capital intensive and for that reason, an investor would have to get the timing right, Kingston said, whereas the balance sheet owns assets for 50 years and "you need to think far, far down the road," he said.

So, a property like Brookfield Place, which is a shopping center and office building complex in Manhattan, is good for very long-term ownership because occupancy is always high and the investment is a steady earner, Kingston said.

"You don't get so fussed over mark to market if you own an asset for 50 years," he said. "It does matter for funds because at some point you need to sell."

Self-storage is a growing area in Brookfield's funds because self-storage properties require very minimal capital expenditures and so the revenues get converted to cash, which is always good in a high-interest-rate environment, he said. The challenge is that it is hard to make large enough investments because the self-storage sector is very fragmented with many smaller owners, Kingston said.

Shelter and housing is another favored theme for Brookfield, which is not only investing in multifamily properties but also niche areas including single-family rental homes, student housing, senior housing and extended stay hotels as a proxy for residential, he said. The reason is that over the past 15 years, new household formations have surpassed the number of homes, Kingston said. Every year, the housing deficit increases, he said.

"I think the current market volatility will create opportunities across multiple asset classes," Kingston added. "Fundamentals are still very good, as good as one or two years ago, but everyone thinks the real estate market is terrible because interest rates are high and debt is hard to come by."

There should be stressed properties available, sold by people who paid too much for their properties and bogged it down with too much debt. When that occurs, it will be a good time to buy good properties with broken capital structures.

It has also been a good time for real estate debt investing opportunities, he said. Whether its mezzanine lending, preferred equity or hybrid debt, the risk-return is more attractive today, Kingston said.

Brookfield had $1.1 billion in mezzanine debt managed for U.S. institutional tax-exempt investors as of June 30, placing it in the third spot on P&I's list of mezzanine managers, but down from $2.2 billion the year before due to realizations.

"With banks pulling back and being less active, it's given us the opportunity to pick and choose the deals that we like the best," he said.

As for its current book of real estate loans, it varies by asset class, but Brookfield executives have had to step in and work with borrowers whose debt has come due at a time of higher interest rates, Kingston said.

But since Brookfield is not purely a financial buyer, if a borrower cannot repay the loan or is not willing or able to invest more capital to refinance it, Brookfield can step in and take over the asset, he said.