Brookfield’s big revamp

Behind the mega-REIT’s recent shakeups, from its corporate restructuring to its leadership changes
By Adam Pincus | September 01, 2014 07:00AM
From left:

From left: Mitch Rudin, a rendering of the retail at Brookfield Place and Brookfield Property Partners CEO Ric Clark

The massive real estate company now known as Brookfield Property Partners is undergoing a shake-up that’s impacting everything from the ranks of its top leadership team to the direction of its New York City portfolio.

The firm has seen two of its top executives depart in the last few months and has inked a contract to buy its first residential portfolio in Manhattan. That all comes on the heels of going public last year, a move which prompted financial analysts to begin covering it for the first time this summer.

Sources say that the new level of scrutiny is likely to have a positive impact on the flagging stock price at the firm, one of the largest publicly traded real estate companies in the world, with assets valued at $95 billion.

Amidst all this activity, the firm is, of course, in the throes of two high-profile New York City projects: The construction of its 5.5 million-square-foot mixed-use Manhattan West complex and the lease-up of the newly rehabbed Brookfield Place, the office complex once known as the World Financial Center.

“It’s very dynamic,” said Paul Massey, CEO of commercial firm Massey Knakal Realty Services, referring to the recent activity at the firm and its expansion efforts.

“[Brookfield is] huge already in the office and regional mall business, and is really making a push into the multi-family sector, as well as a big push into industrial and hotel,” said Massey, who served on the board of directors of Brookfield Office Properties, before it was acquired by Brookfield Property Partners this spring.

The company has, however, been largely mum on the personnel moves. In addition, its complicated corporate restructuring — which involved a merger of two of its affiliated firms — has left many industry officials trying to wrap their heads around all of the changes. And some are at a loss for words on why the firm’s undeniable office leasing success at Brookfield Place hasn’t translated into a boost in its stock price.

Instead, for much of the year, the company saw its stock price drop as its rivals have seen theirs soar.

Real estate pros said despite the long history of its affiliates and executives, its stock is going through the growing pains of a new, untested company.

“New public companies like Brookfield Property Partners often trade at a discount,” said Alex Avery, a stock analyst at the Canadian investment bank CIBC World Markets. “Investors like to see a track record. It is one thing to tell the world what you are going to do. It is another to actually do it. Investors value proven accomplishments.”

Personnel matters

In 2011, when Mitch Rudin jumped over from CBRE to become president and CEO of U.S. Commercial Operations for Brookfield Office Properties, the industry was split on whether his experience was a good match for the job.

Some industry players thought his job at CBRE — where he was president and CEO of New York’s Tri-State Region — didn’t align with his new position, which was focused on steering the company’s immense property portfolio rather than mediating between warring brokers. Others, however, said his previous experience at development firm Tishman Speyer, where he was a partner in the mid-1980s, made him well suited for the Brookfield role.

Either way, Rudin’s departure from Brookfield this past June shocked the industry. Not only was he the highest-compensated executive at the firm between 2011 and 2013 — according to records filed with the U.S. Securities and Exchange Commission he raked in $10.5 million in cash and stock — sources say he’s well-liked and even-keeled.

In addition, at least one source said he was friends with Ric Clark, CEO of Brookfield Property Partners.

Nonetheless, company sources said Rudin’s exit was a mutual decision. They said that Rudin’s skill set (and price tag) was not needed once Brookfield Office Properties was acquired by Brookfield Property Partners and was no longer a standalone public company.

“Rudin is a very talented executive — and the company, and I, hold him in very high regard,” Massey said.

However, the explanations about Rudin’s departure don’t address the fact that when Rudin was hired, the plan to create Brookfield Property Partners was already in motion.

Massey noted that the plan to fully merge the Brookfield companies was not known at that time. Rudin did not respond to several requests for comment.

While Rudin’s next move has been shrouded in secrecy, one source said he may be flirting with a regional or national executive position at Cushman & Wakefield, or with a position at commercial services firm DTZ, which CBRE’s former global CEO Brett White will soon reportedly lead. A Cushman spokesperson said “there is no truth to that rumor.” DTZ did not comment.

Rudin was not the only top executive to leave Brookfield in recent months.

Michael McNamara, who was hired in 2012 as head of U.S. acquisitions and dispositions for Brookfield Office Properties, also left this year. He declined to comment.

Sources told The Real Deal that they wouldn’t be surprised if several more Brookfield employees were squeezed out in an effort to trim costs and remove a layer of corporate redundancy in the wake of its merger. “There probably were a few more people that were impacted by the overlap,” one company source said.

Investment sales brokers Eric Anton and Ron Solarz — who joined Brookfield’s affiliate Brookfield Financial in 2011— left earlier this year. Insiders said despite the timing, the affiliates are different companies and Anton and Solarz departures were not related to the merger.

Corporate conundrum

Even those who closely follow Brookfield have a hard time explaining its complicated corporate structure.

The simplified version, however, is that Brookfield Asset Management spun off Brookfield Property Partners in January 2012, in order to hold and manage its real estate assets, which had been spread among several of its affiliated companies.

Analysts said the move created more narrowly focused companies, which has been en vogue recently with corporate investors.

The firm is certainly continuing its predecessors’ aggressive approach to New York real estate.

“We are looking for mispriced opportunities. We are capital recyclers. That is a big part of our strategy,” Clark said during a recent phone interview with TRD. “We are constantly looking for things in New York.”

Clark noted on an earnings call last month that the company is also considering bringing on an investment partner once leasing is farther along at Brookfield Place.

In New York, the company has about 18.4 million square feet of office space plus about 700,000 square feet of retail. It also owns a 32 percent stake in mall operator General Growth Properties and 39 percent in another mall REIT, Rouse Properties.

By comparison, the city’s largest REIT, SL Green Realty, owns about 28 million square feet of commercial space in Manhattan. And competitor Vornado Realty Trust has about 27 million in all of New York City.

Yet Brookfield has a reputation for making big moves.

For example, in 1996 it bought a stake in properties owned by the bankrupt real estate firm Olympia & York, which owned some 14.7 million square feet of office space, mostly at the then-World Financial Center.

Today Brookfield is, of course, developing Manhattan West in Hudson Yards, which in addition to office space will have about 800 residential rental units.

In addition, last month, Clark said on the corporate earning call that the company was in contract to buy its first residential building portfolio in New York City — a huge package of nearly 4,000 units.

Sources priced that so-called “Putnam portfolio,” which is based in Upper Manhattan and owned by the residential firm Urban American Management and partners, at about $1 billion. The deal is expected to close this month.

In addition, insiders told TRD that Brookfield may ramp up its residential arm in New York and acquire Urban American.

Both Clark and Urban American declined to comment.

“Often when we make a large acquisition, they come with the management team, but not always,” Clark told TRD.

In an even more ambitious plan, Brookfield is more than two years into negotiations to partner with the Stuyvesant Town and Peter Cooper Village tenants association to take the 11,000-unit rental complex on Manhattan’s East Side partly condo. The deal would create a non-eviction plan that would allow rent-regulated tenants to remain in place.

Stagnant stock

Despite all of Brookfield’s recent activity and leasing success, Brookfield Property Partners’ stock has remained stubbornly stagnant.

The stock, which began trading in April 2013, is trading far below SL Green’s and Vornado’s.

Those stocks were both battered in the downturn, but have since rebounded. SL Green was trading above $108 a share in the middle of last month, up about 25 percent from two years ago. Vornado was above $105 per share, up about 30 percent.

By comparison, Brookfield’s stock was trading at just over $21 a share last month, below the roughly $22 price it hit its opening day.

The weak price is especially worrisome because the company has inked more than 3.5 million square feet of office and retail leases in Manhattan over the past 12 months.

That’s while its main rivals at the World Trade Center, across the street, have been in a comparative rut.

Meanwhile, Brookfield announced last month that the advertising firm R/GA Media Group signed a lease for 173,000 square feet at Manhattan West, indicating momentum for the Far West Side project.

The Canadian financial firm Canaccord Genuity, the first company to cover Brookfield Property stock, recently told investors it believed the stock was worth $24 per share, some 15 percent higher than the stock was at the time of the report. It also rated the shares a “buy.”

Yet it cited potential financial pitfalls for Brookfield Property because the company will be required to pay $50 million to Brookfield Asset annually, which will impact its bottom line.

“In our view, an externally managed company is not the ideal structure for a real estate entity,” Canaccord said in a report released in July. “At this point, it is not clear to what extent the external structure will impact [Brookfield Property’s] valuation.”

Overall, financial analysts said that Brookfield Property’s broad real estate portfolio should make the stock attractive. Several insiders predicted that as more banks cover the company, its profile will rise and, in turn, boost its stock price.

Massey predicted that the diversified portfolio would attract stock buyers.

“People want global exposure to real estate,” he said.

But others noted that investors may be turned off by its diversification.

Often investors pick REITs or similar stocks in companies because of their specialty in hotels, office or retail, said Larry Longua, an adjunct associate professor at New York University’s Schack Institute of Real Estate.

“Not to disparage them, but [it’s like] they have cats and dogs all over the globe. I would step back and wait and see. I would be cautious,” Longua said.