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Brookfield Properties has announced:

a strategic repositioning plan to transform itself into a global pure-play office property company. The plan includes the acquisition of an interest in a significant portfolio of premier office properties in Australia from Brookfield Asset Management (BAM: NYSE, TSX, Euronext) as well as the divestment of Brookfield Properties’ residential land and housing business.
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Brookfield Properties has agreed to enter into a transaction with Brookfield Asset Management whereby Brookfield Properties will pay Brookfield Asset Management A$1.6 billion (US$1.4 billion) for an interest in 16 premier Australian office properties comprising 8 million square feet in Sydney, Melbourne and Perth which are 99% leased. The properties have a total value of A$3.8 billion (US$3.4 billion).
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Brookfield Properties will fund the transaction from available liquidity of US$1.3 billion and from a US$750 million subordinate bridge acquisition facility from Brookfield Asset Management, which will be repaid from the completion of some or all of the following: asset sales, including a sell down of Brookfield Properties’ equity interest in its publicly-listed company Brookfield Office Properties Canada (TSX: BOX.UN), or other financing or capital activities.

A supplemental information package relating to this transaction is available on Brookfield Properties’ website at www.brookfieldproperties.com.

As a further step in the strategy of converting Brookfield Properties into a global pure play office company, the company announced that it intends to divest of its residential land and housing division. To this end, Brookfield Properties intends to commence discussions with Brookfield Homes Corporation (NYSE: BHS) regarding the possible merger of these operations with Brookfield Homes. Should the merger proceed, Brookfield Properties’ equity interest in the residential business would be converted into a listed security in the merged entity which Brookfield Properties would then dispose of through an offering to its shareholders. Brookfield Asset Management would commit to acquire any shares of the merged entity that are not otherwise subscribed for in the offering, thereby ensuring that Brookfield Properties will successfully dispose of its residential interests and receive full proceeds.

The pricing supplement is titled Australia Office Portfolio Transaction and is of great interest:

BPO’s interest in the Portfolio will be acquired through a Total Return Swap entitling BPO to the net cash flows and any changes in the value of the properties

• This structure preserves the benefit of property-level financing and will allow for efficient transfer of this Portfolio at a future date into a different ownership entity, e.g. public vehicle or private fund in order to continue BPO’s asset management strategy
• BPO will be property manager for the portfolio and will make or approve all significant decisions relating to the properties, including refinancingsand other decisions relating to the property debt
• BPO will be responsible for additional capital requirements and will be entitled to any proceeds from refinancings from the properties
• BPO will have an option to acquire the properties at anytime

The total return swap concept is fascinating, but I haven’t yet thought through all the implications, particularly since the contract is with the parent.

On the whole, the deal seems to me to be a continuation of the basic Brookfield philosophy of accumulating assets at the parent level and then pushing them into subsidiaries; attracting co-investors and increasing (non-recourse!) leverage along the way. It hasn’t been too long since they last did this, with the BPP conversion to a REIT.

BPO has several series of preferreds outstandng: BPO.PR.F, BPO.PR.H, BPO.PR.I, BPO.PR.J, BPO.PR.K, BPO.PR.L and BPO.PR.N.

Update: This is credit-neutral, according to DBRS:

The rating confirmation also takes into consideration that, from a financial risk perspective, the Acquisition is expected to have a neutral impact on the Company’s balance sheet ratios. DBRS expects Brookfield to fund the Acquisition with available liquidity, including un-drawn bank facilities ($788 million) and a cash balance ($475 million) totalling approximately $1.3 billion and from a $750 million bridge facility provided by BAM. Over the next several quarters, DBRS expects Brookfield to repay this bridge facility with a combination of proceeds from the following: a sell-down of the Company’s interest in Brookfield Office Properties Canada (the REIT; of which the Company currently owns a 91% interest), asset sales and other capital activities. As a result, DBRS estimates that the Company’s debt-to-capital ratio will remain close to 55% (including preferred shares) and EBITDA interest coverage should modestly improve to the 2.35 times range (including capitalized interest). This level of interest coverage remains at the low end of the range for the current rating category. However, DBRS takes comfort in the fact that Brookfield has made good progress in improving its overall financial flexibility position and that office fundamentals in the Company’s core markets are showing signs of improvement.

Overall, DBRS believes that the Acquisition complements Brookfield’s existing high-quality office portfolio and offers an immediate and sizeable presence in a new market. Over time, DBRS expects Brookfield to grow this platform, which should further benefit leasing initiatives and tenant retention rates.

This entry was posted on Friday, July 30th, 2010 at 2:20 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.