Brookfield Real Estate Finance V “REF V” - · PDF fileSC Retirement System...

SC Retirement SystemInvestment Commission

Brookfield Real Estate Finance V“BREF V”

Eric Rovelli, CFAAlexander Campbell, CAIA

Chris Alexander

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• Up to $100M commitment to BREF V– BREF V is a $3B real estate debt vehicle– Value-Add Strategy targeting 9 - 10% net returns– $400M commitment from Brookfield Property Partners– RSIC invested in BREF III ($75M) & BREF IV ($50M)

• Fund Terms:– 4-Year Commitment Period– 10-year Fund Term (+2)– 1.4% Management Fee on invested capital– 15% Carried Interest above a 6% Preferred Return– European waterfall (all assets aggregated) – 50/50 Catchup; Clawback guaranteed by BAM

• Seat on LPAC• RSIC ODD pass• AHIC rates the Fund a “Buy”

Investment Recommendation

2

71


Portfolio Fit – Strategy Diversification

3

Core vs. Non-core Post Debt Fund Allocation

Prior to Debt Fund Allocation Post-Debt Fund Allocation

Core/Core+39%

Non-Core32%

Debt14%

REITs15%

Core/Core+41%

REITs16%

Debt10%

VA-Equity6%

Opp-Equity27%

Core/Core+39%

REITs15%

Debt14%

VA-Equity6%

Opp-Equity26%

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RE Debt Market Opportunity

4

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• Post-GFC changes to regulatory landscape:

– Basel III – Risk weighting capital requirements

• HVCRE requires 150% capital charge

• Banks focusing more on core, stabilized assets

• Gap in funding to transitional and development assets

• Equity gap on pre-crisis loans being refinanced

– Dodd Frank – CMBS Risk Retention

• Sponsors must retain a slice of the stack

• New issuance roughly half of pre-crisis peak

• Increased transaction volumes

Market Opportunity

5

74


Outstanding Mortgages by Originator ($B)

6

Shifting Origination Market 2011 - 2016

2011 2016

$1,93652%

$41311%

$38210%

$40711%

$39011%

$1795% Commercial Banks

Non-Regulated Lenders

CMBS

Insurance Co's

GSE

Other Fed

$1,50648%

$2779%

$60319%

$31010%

$2869%

$1445%

Commercial Banks

Non-RegulatedLenders

CMBS

Insurance Co's

GSE

Other Fed

29%

49%

-37%

31% 36%24%

-60%

-40%

-20%

0%

20%

40%

60%

Commercial Banks Non-RegulatedLenders

CMBS Insurance Co's GSE Other Fed

Source: Federal Reserve 6/30/2016

75


Transaction Volume

7

76


Background on Brookfield

8

77


Brookfield Investment Platform

9

78


Brookfield Real Estate Platform

10

79


BREF Investment Strategy

11

80


• Originate Whole Loans on well located assets– Syndicate Senior loan to 3rd party

– Retain ~60-80% LTV Tranche Mezzanine loan

• Focus on U.S. assets in primary markets– Across property types with emphasis on Office

BREF Value-Add Strategy

12

• Avg GAV of properties: $329M

• Avg fund equity exposure: $43M

• Weighted Avg LTV: 67%

• Foreclosures: 2

• Syndications: 27

• Warehouse facility: 1

• Mezzanine originations: 7

• Asset status at investment:– Transitional: 21– Stabilized: 7– Redevelopment: 4– Development: 2

Prior Funds Snapshot*

*BREF III and IV

81


Capital Structure Relative to Returns

13

Estimated Current Gross ReturnsTypical Capital Structure (LTV)

0 - 50%

50 - 75%

75 - 100% Equity

MezzanineLoan

Senior Loan

Loan

to

Val

ue

(LT

V)

3 – 5%

12 – 13%

16% Value-Add Equity

MezzanineLoan

Senior Loan

IRR & R

isk

82


Mezzanine Loan Characteristics

14

Senior Loan50%

Senior Loan55%

Mezz Loan25%

Mezz Loan28%

Borrower Equity25%

Equity17%

Loss in Value

$100M $90M

10% Loss Scenario

Senior Loan75%

Senior Loan50%

Mezz Loan17%

Mezz Loan25%

Equity8%

Equity25%

Mezz 1.0 (pre-2008) Mezz 2.0 (post-2008)

Mezzanine Loan Progression

$50M

$25M

$25M

$50M

$25M

$15M

-$10M

83


Structured Loan Example

15

Equity

$25MB-Note /

Mezz Loan

$50M A-Note or

Senior

$100M Building

$25M Equity

$75M First

Mortgage

50 – 75% LTV

0 – 50% LTV

Originate Sell Senior

84


Structured Loan Example

16

Equity

$25MB-Note /

Mezz Loan

$50M A-Note /

Senior

$25M Equity

$75M First

Mortgage

Originate Sell Senior

L + 4.50%

L + 8.50%

L + 2.50%

85


BREF Performance

17

86


Prior Fund Performance

18

*As of 9/30/16 $mm

Fund Vintage # of Loans Contributions Distributions NAV Gross TVPI Net TVPI Gross IRR Net IRR

BREF I 2004 41 $1,580 $1,581 $853 1.54x 1.47x 13.8% 10.5%

BREF II 2007 9 $696 $868 $0 1.25x 1.18x 8.8% 5.3%

BREF III 2011 11 $396 $462 $37 1.26x 1.19x 14.8% 11.1%

BREF IV 2014 23 $996 $276 $859 1.14x 1.1x 13.2% 11.3%

Grand Total 84 $3,669 $3,187 $1,750 1.35x 1.28x

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• 6 of 84 loans resulted in foreclosure:

Foreclosures

19

1.00x

2.48x

0.13x

2.53x

1.32x1.17x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

Loan 1 Loan 2 Loan 3 Loan 4 Loan 5 Loan 6

Invested Capital (LHS) TVPI (RHS)

$ m

illio

ns

88


Property Strategy by % of Capital Invested

20

0%

10%

20%

30%

40%

50%

60%

70%

Stabilized Transitional Redevelopment Development

BREF III BREF IV

1.23x

1.30x

1.15x

1.21x1.09x

1.15x 1.11x

1.26x

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Property Type by % of Capital Invested

21

0%

5%

10%

15%

20%

25%

30%

35%

Office Retail Hospitality Apartment Condos Mixed Land

BREF III BREF IV

1.20x

1.16x1.37x

1.18x 1.34x

1.14x

1.22x

1.17x

1.09x

1.12x 1.15x

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Investment Considerations

22

91


• Increase in fund size:– Mitigant: Staff size has nearly doubled since the fundraise of

BREF IV and the manager intends to hire several more at junior level. Have an extra year to invest and will continue to target same loan sizes but do more loans.

• Increased competition from debt funds:– Mitigant: Most of the new capital will be targeting loans to

smaller assets on account of concentration issues and lack of track record and relationships. Debt funds constitute a small percentage of total origination volume.

• Bank deregulation under current administration:– Mitigant: Any changes are likely to take several years to institute

and several banks have indicated an interest to keep regulations in place.

Considerations

23

92


• Up to $100M commitment to BREF V– BREF V is a $3B real estate debt vehicle– Value-Add Strategy targeting 12-13% Gross returns– $400M commitment from Brookfield Property Partners– RSIC invested in BREF III ($75M) & BREF IV ($50M)

• Fund Terms:– 4-Year Commitment Period– 10-year Fund Term (+2)– 1.4% Management Fee on invested capital– 15% Carried Interest above a 6% Preferred Return– European waterfall (all assets aggregated) – 50/50 Catchup; Clawback guaranteed by BAM

• Seat on LPAC• RSIC ODD pass• AHIC rates the Fund a “Buy”

Investment Recommendation

24

93


Appendix

25

94


Market Opportunity

26

Anticipated Loan Maturities

CMBS Issuance

Source: GSAM

Source: Commercial Mortgage Alert

95


Comparative Risk and Return

27

20%

50%

75%

25%80%

25% 25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Building ODCE Value-Add Mezz Opportunistic

Debt Mezz Equity

12 - 13%

16% 20%

Loan

to

Val

ue

Risk Level

8%

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Summary; Investment Expectations:

BREF V is a value‐add strategy that will primarily structure floating rate, interest only loans on assets located in the United States, with flexibility to lend up to 20% in select countries internationally, and across property types. The Fund will target well‐located real estate assets to originate whole loans, syndicate the senior loan to a third party, and retain the mezzanine tranche for the Fund. (See Figure 1) BREF will utilize the broader Brookfield real estate platform to source and underwrite investment opportunities in areas where it believes it possesses a comparative advantage. The RSIC is an investor in the prior two funds, BREF III and BREF IV.

Investment Rationale:

Staff believes real estate debt investments are sensible given that we are in the latter stages of the current credit cycle and this will allow us to position ourselves in a more defensive posture while still achieving attractive returns. The market for mezzanine loans has evolved since the financial crisis. Today, the market requires a greater equity investment by the borrower/sponsor, which reduces risk for the mezzanine lender while still creating a compelling return. (See Figure 2)

Since the financial crisis, bank regulations have reduced the amount of credit available to borrowers, particularly in the mezzanine tranche.

The senior leadership has worked together since the initial BREF fund in 2004 and demonstrated its ability to operate through a credit cycle. This continuity gives us confidence to forecast continued strong returns.

Brookfield is the second largest real estate manager in the world with over $145 billion in assets under management globally. The Brookfield Property Group manages over 400 million square feet across office, retail, multifamily, hospitality, and industrial. This provides the BREF team with real‐time market analytics to assist in underwriting and sourcing loans. In a downside scenario, the broader operating platform is available to step in and protect the Fund’s capital when BREF forecloses on a property and assumes the equity position. Across all 84 loans since the inception of the strategy, there have been only 5 foreclosures and, in aggregate, the manager has been able to outperform all other realized loans.

Investment Considerations:

Growth in fund size: BREF IV had roughly $1.5 billion in commitments while BREF V is raising $3 billion. The staff has nearly doubled in size since the fundraise for BREV IV and the manager intends to hire several more at the junior level. BREF V will operate with a 4‐year investment period giving it an additional year to allocate capital. The Fund will operate under the same strategy as prior funds and will continue to target similar assets and loan sizes, but will execute more loans.

Increased competition from new debt funds entering the market: Most of the new capital being raised is likely to target loans to smaller assets and, therefore, less in the primary markets. This is due to two reasons: most debt funds will not have the same scale and breadth as BREF V and will not be able to finance larger whole loans. As it relates to the total loan origination space, non‐regulated lenders (e.g. Debt Funds) still comprise just a small portion of the total loans originated. Additionally, transaction volumes, which will create a need for debt financing, have been steadily increasing. (See Figure 3) Further, this is a relationship driven business, and the lender’s reputation, track record, and ability to close are important to borrowers/sponsors.

The potential for bank deregulation under the current administration: Any changes to the current regulatory framework are likely to take several years to institute. Additionally, the Basel accords are an international agreement that the United States cannot unilaterally amend. Further, a number of banks have indicated an interest in keeping regulations in place, largely due to the amount of capital spent hiring new compliance personnel and the uncertainty it would create for their profit model.

There is no method by which Limited Partners can remove the General Partner without cause: Though Brookfield has stated its intentions are solely to protect being removed from managing its $400 million investment into BREF V without a for‐cause event, there is still a for‐cause removal option available to Limited Partners. Also, Limited Partners may vote to terminate the investment period or to dissolve the Fund, should they so choose. Brookfield’s $400 million commitment is non‐voting.

Investment Performance:

Returns on the types of loans in the BREF series are predominantly composed of current income and little anticipated appreciation. The funds will also earn fees from borrowers on originations, loan term extensions, and prepayments. Loans will tend to return cash quicker to investors and much earlier than equity funds. The most a lender can expect to yield on a loan is the interest payments and the return of loan principal. The exception coming in a foreclosure situation where the lender is able to take over the assets and rehabilitate them.

The prior funds have been able to consistently achieve attractive returns. Since 2004, the BREF funds have invested over $3.6 billion in equity capital in 84 loans, achieving an aggregate multiple of invested capital equal to 1.35x. On the 5 foreclosed assets, BREF has attained a 1.7x multiple of invested capital. The lone underperforming fund is BREF II, which was invested near the peak of the market, but the manager was still able to return a 1.25x multiple of invested capital. The RSIC is an investor in BREF III and BREF IV, which have each performed well. BREF IV is still early in its fund life so returns should continue to improve as more loan interest payments are received. (See Figure 4)

Brookfield Real Estate Finance Fund V (THE “FUND” or “BREF V”)

INVESTMENT SUMMARY

RSIC Investment Staff Staff recommends a commitment of $100 million to BREF V as outlined in the Summary Terms Chart.

RSIC ODD Rating: Pass

AonHewitt (“AHIC”) “Buy” Rating

AHIC ODD Pass

97

Figure 1: Origination and Syndication Process

Figure 2: Mezzanine Loan Characteristics and Return Comparisons


INVESTMENT SUMMARY

98

Figure 3: Market Analysis

Figure 4: Investment Returns


INVESTMENT SUMMARY

99

South Carolina Retirement System Investment Commission Brookfield Real Estate Finance V Due Diligence Report

May 25, 2017 Confidential Material

Page 1 of 29

SC Due Diligence Team:

Eric Rovelli, CFA – Senior Real Estate Officer Alexander Campbell, CAIA – Investment Officer

Summary Terms Chart

Investment Officer Summary: Source Location:

Manager Name: Brookfield Asset Management Private Institutional Capital Adviser US, LLC

LPA – Definitions 1.115

Fund/Investment Name: BROOKFIELD REAL ESTATE FINANCE FUND V, L.P. LPA – Recitals

Primary Custodian(s) or Safekeeping Agent(s) (together with point of contact information if other than BONY Mellon):

JP Morgan Tom Ishikawa Email: [email protected] Phone: 312.954.9084

RSIC Operational Due Diligence Questionnaire P. 45

RSIC Investment Size & Limitations (Commitment):

$100 million

Management Fee: 1.40% on invested LPA – Definitions 1.114

Performance Fees/Carried Interest: 15% LPA – Section 6.1(c)

Hurdle Rate/Preferred Return: 6% LPA – Section 6.1 (b)

Organizational Expenses: $3 million LPA – Section 4.3 (d)

Other Expenses/Fees: Yes LPA – Section 4.4 (b)

Manager Commitment: $400 million by Brookfield Property Partners or affiliate(s)

LPA – Section 3.1 (a)

Anticipated Investment Period: 4 years from Initial Close LPA – Definitions 1.47

Anticipated Investment/Fund Term: 10 years from Initial Close (w/ 2 1‐year ext options) LPA – Section 2.4

Withdrawal Rights: Generally no ‐‐ limited LPA – Section 3.4

Placement Agent Used in Obtaining Investment by RSIC:

None used See Placement Agent Letter

100

Aon Hewitt Retirement and Inv estment Proprietary and Confidential

Brookfield Real Estate Financing V Data is as of 12/31/2015, unless otherwise noted.

3

Executive Summary Review Date Current Rating Prev ious Rating

June 2016 Buy Not Rated

Fund Strategy Summary

Brookfield Real Estate Finance Fund V (“BREF” or the “Fund”) is a closed-end, commercial real estate debt fund seeking to originate loans as well as provide capital to acquire or recapitalize real estate investments located primarily in the U.S. The strategy will predominately focus on the mezzanine position of the capital stack, typically originating the whole loan and then selling off the senior debt while holding onto the subordinate piece, specifically in the 60 – 80% LTV tranche. Overall, Fund V is targeting a net IRR of 9%-10%, comprised predominantly of current income.

Component Ratings Performance by Vintage Year

Firm Summary

Head Office Location Toronto, ON, New York, NY Parent Name Brookfield Asset Management

Assets Under Mgmt $225 billion Investment Staff 700

Real Estate

Real Estate AUM $144 billion Investment Staff 255

Portfolio Strategy Characteristics

Team Location New York, NY Portfolio Manager Andrea Balkan

Team Size / Strategy Inception 2004

Fund Size $2 billion (no hard cap)

Dedicated 11/0 Target range of Holdings 30-40 assets

Liquidity / Structure Close Ended Opportunity Set U.S. Real Estate Risk Level of Strategy Average Max/Target Leverage 35% Max Non-US Allocation 20% Max Development 10% Valuation Policy Internal Quarterly Performance Objective 12%-13% Gross / 9%-10% Net IRR Client Restrictions None

Rating Previous

Rating Overall Buy New RatingBusiness 3 New Rating

Staff 3 New RatingProcess 4 New RatingRisk 3 New RatingODD A1 New Rating

Performance 3 New RatingT&C 1 New Rating

Fund

Vintage Year

% Realized

Net IRR

Quartile

Net TVPI

Quartile

BREF I 2004 100% 10.5% 2 2.1x 2

BREF II 2007 100% 5.4% 3 1.2x 3

BREFIII 2011 73.1% 11.6% 4 1.2x 4

BREFIV 2014 4.4% 12.2% 3 1.1x 2

Fund Performance (USD) is net of fees relative to Burgiss Private iQ Global Value-Added RE Universe for Funds I - IV as of 12/31/2015; Source: Manager, Burgiss Private iQ

101

Aon Hewitt | Retirement and Investment 200 E. Randolph Street, Suite 1500 | Chicago, IL 60601 t +1.312.381.1200 | f +1.312.381.1366 | aonhewitt.com Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company

Memo

To South Carolina Retirement System Investment Commission

From Chae Hong

Date June 20, 2017

Re Brookfield Real Estate Finance Fund V Rating Confirmation Brookfield Real Estate Finance Fund V (“BREF” or the “Fund”) is a closed-end, commercial real estate debt fund seeking to originate loans as well as provide capital to acquire or recapitalize real estate investments located primarily in the U.S. The strategy will predominately focus on the mezzanine position of the capital stack, typically originating the whole loan and then selling off the senior debt while holding onto the subordinate piece, specifically in the 60 – 80% LTV tranche. Overall, Fund V is targeting a net IRR of 9%-10%, comprised predominantly of current income. Aon Hewitt Investment Consulting (“AHIC”) gave the Fund a Buy rating in June of 2016. There have been no significant events or changes to the fund that would impact AHIC’s initial rating. This memorandum is to confirm that the Buy rating still stands.

102

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