We did not participate in the rights offering for Brookfield Residential ($BRP) mainly because we have enough exposure the residential RE now. We have been wondering what Brookfield ($BPO) would do with vthe $500M they raised from it:

NEW YORK, June 15, 2011 – Brookfield Office Properties Inc. (BPO: NYSE, TSX) today announced the completion of its rights offering which enabled its shareholders to purchase shares of Brookfield Residential Properties Inc. ($BRP: NYSE, TSX) at a price of $10 per share. 18,174,728 BRP shares were purchased in connection with the rights offering, netting approximately $182 million for Brookfield Office Properties. In addition, Brookfield Asset Management Inc. (TSX: BAM.A, NYSE: $BAM) purchased its pro rata share of BRP shares, as well as all additional shares of BRP not subscribed for in the rights offering by other BPO shareholders, pursuant to a standby commitment, for a total of 33,325,272 shares.

In total, Brookfield Office Properties netted $515 million through the sale of BRP shares

Today we get an answer:

NEW YORK, June 16, 2011 – Brookfield Office Properties (NYSE, TSX: BPO) today unveiled plans for a $250 million retail redevelopment of the World Financial Center in Lower Manhattan. The broad-scope changes expand the retail offerings and include high-end fashion, a European-style marketplace, and waterfront dining. In addition, a dramatic glass pavilion on West Street will link the Center to Lower Manhattan’s new transit hubs and serve as the main entranceway to the eight-million-square-foot complex.

“These improvements to the World Financial Center are coming at the perfect time, given the $20 billion private and public investment in Lower Manhattan, the completion of Hudson River Park, retail expansion throughout the district, and the anticipated completion of the two transit centers,” said Ric Clark, CEO of Brookfield Office Properties. “The World Financial Center Winter Garden has served as Lower Manhattan’s grand and welcoming public space for the past twenty years. In cooperation with the Battery Park City Authority and the Department of City Planning, we are pleased to be moving forward with a plan that incorporates the existing Winter Garden staircase and repositions the World Financial Center for decades to come.“

Construction is set to begin in October 2011 and will conclude in 2013.

“These upgrades are one of the major reasons for the current high level of corporate interest for office space at the World Financial Center,” said Dennis Friedrich, president & chief investment officer of Brookfield Office Properties. In spring 2011, Brookfield Office Properties successfully negotiated leases in excess of 600,000 square feet with corporations such as Oppenheimer Funds and Commerzbank. Brookfield is currently in serious negotiations for more than two million square feet with other major office tenants in the financial services, media and service sectors.

“I applaud Brookfield for making a significant investment in the redevelopment of this iconic space while respecting the concerns of our residents,” said Gayle Horwitz, president of the Battery Park City Authority. “This collaboration between the Battery Park City Authority, the community, and our partners at Brookfield Office Properties will create a first class destination spot for dining, shopping and working in Battery Park City. ”

Brookfield is now a pure office REIT play on some impressive assets. Since our purchase in Aug. 2009 we are up 100% in it (including dividends) and I think there is still room to run.

The article which, as the WSJ has done since David Simon got involved with GGP simply parrots his viewpoint on anything GGP. I could make this a 20k word article but I will keep it brief. For those who desire more, do a “GGP” search on the blog for the past articles (>300 of them)

From the WSJ

Mall king David Simon doesn’t just shrug off those ever-so-rare rejections.

Case in point: Mr. Simon, chairman and chief executive of Simon Property Group Inc., still simmers about rival mall owner General Growth Properties Inc.’s rejection last May of his buyout offer.

He’s done the math, and he said Monday at Citigroup Inc.’s 2011 Global Property CEO Conference in Hollywood, Fla., that GGP shareholders would be better off today as part of his company. A GGP representative declined to comment.

Simon Property’s final bid on May 6 offered $6.5 billion for GGP’s equity, roughly one third in cash and two thirds in Simon stock at an exchange ratio of 0.1765 Simon shares for each one share of GGP. Mr. Simon assumes that a combined Simon-GGP would trade today at about $120, which isn’t a stretch since Simon Property’s stock has risen by roughly 25% to $105.63 since GGP rejected the bid.

Assuming that appreciation and the exchange ratio, Mr. Simon calculates that GGP shareholders today would have value of roughly $21.50 to $22 per share as part of Simon Property Group. “I can’t help it when their board decides to turn something like that down,” Mr. Simon said.

Instead, GGP elected to stay independent via a recapitalization led by Brookfield Asset Management Inc. GGP’s stock has hovered around $15 since the company emerged from bankruptcy in November, closing Monday at $14.57.

In GGP’s defense, the board’s decision was strongly swayed by fears that antitrust concerns ultimately would derail a merger with Simon Property. That would have left GGP without a partner, because Brookfield likely would have left the picture if GGP chose Simon Property.

Regular reader here are already screaming, I can hear them. What are the screaming???? HOWARD HUGHES CO!!!

See Howard Hughes was the little part of GGP that David Simon was going to toss off as a reject and let rot on the vine. In his first offer, he was going to give GGP holders $3 a share for it.  The $GGP board at the time saw the potential value in it and not only saw to it that HHC emerged from 11 funded, but let Bill Ackman become Chairman of the Board.

But before we get to it, let’s review the $SPG/$GGP saga.

David Simon made an initial offer that was nothing short of a joke at the time. It was immediately rejected by $GGP, as it should have been. There was posturing back and forth in which Simon failed to convince shareholders and bondholder taking less money in his offer was better than cashing out at a premium to it in the open market or holding for even better gains down the road. Brookfield Asset ($BAM) then cam along and beat Simon’s offer by $6 a share. This had the expected result of cauing Simon to stomp his feet and hold his breath until he turned blue when he did not get his way.

At the time we here raised the specter of the FTC, which Simon initially spat on until US retailers also raised concerns to the merger. In response Simon then amended their offer to include potential asset sales to accommodate potential FTC objections.

So, to sit here and say that the GGP in totality that exists now is the same $GGP that would have been inside Simon is materially false. Further, Simon even courted Blackstone to help them finance the transaction which means Blackstone would have taken a significant chunk of $GGP with it. In other words, David’s “valuation” above is simply gibberish, nothing more. He cannot say with even a shred of integrity what the final $GGP inside $SPG would have looked looked after the FTC review/asset sales so for him to “value” it today at $21-$22 under his watch is, as I heard it once called “fuzzy math”.

But, lets see were we actually are today? $GGP closed today at $14.57. $HHC, that little chunk spun off the shareholders that the WSJ AND David Simon seem to have forgot about closed at $67.13. Accounting for a 10-1 reverse split before emergence that would skew the #’s for HHC in all the above articles, that amounts to a pre-emergence price of $6.71. That gives us a current combined GGP/HHC price of ………drumroll…… $21.28. And, um, that is a hard number, not one gained through guesswork and a host of highly questionable assumptions. I’ll take it any day

David Simon has been stunningly disingenuous about GGP since the day he first began talking about it……nice to see nothing has changed.

Things are going to get interesting………….glad I’m not short St. Joe

From the filing:

For the 39,403,972 shares of Common Stock acquired from Fairholme Fund on January 25, 2011 by BUSI, BUSI paid $15.10 per share, or an aggregate of $594,999,977.20 through the issuance by Brookfield of 18,035,768 shares of Class A Limited Voting Shares of Broookfield to Fairholme Fund. For the 73,927,484 shares of Common Stock acquired from Fairholme Fund on January 25, 2011 by US Corp., US Corp. paid $15.10 per share, or an aggregate of $1,116,305,008.40, of which $312,225,022.80 was paid through the issuance by Brookfield of 9,464,232 Class A Limited Voting Shares of Brookfield to Fairholme Fund and $804,079,985.60 was paid in cash derived from a loan from Brookfield to US Corp.

The theory here all along has been that Berkowitz is going to cause a huge short squeeze in St. Joe (JOE). He now has a fresh $800M to do so should he choose. It going to be interesting to see what he has to say next week at the Harbor Investment Conference. I am more than a little sure the topic will be brought up.

So you know the drill. I think Fairholme is selling it GGP stake to Brookfield to raise cash to buy a substantial chunk/all of St. Joe. All that was lacking was the “when”. We now have a potential timeline.

SEC Filing

The delivery of the GGP Shares and the delivery of the BAM Shares and payment of Brookfield Cash Payment (the “ Closing ”) shall take place at the offices of Torys LLP, Suite 3000, TD Centre, 79 Wellington Street West, Toronto, Ontario, at 10:00 A.M. (Toronto time) on January 25, 2011 or, if later, the Business Day after the day on which all conditions to Closing have been either satisfied or waived by the party entitled to waive such condition (excluding conditions capable of being satisfied only as part of the Closing). The date and time on which the Closing commences shall be referred to as the “ Closing Date ”.

Fairholme will receive $800M from Brookfield on the 25th. On Feb. 3rd Berkowitz is presenting at the Harbor Investment Conference where he is present an investment idea. Wouldn’t it be neat is he announced his plans for St. Joe at that conference only 7 business days after closing the BAM deal??

Liike I have been saying…..this is gonna be real fun to watch…

What does this all mean? Here is my theory…

- Brookfield Consortium Increases Interest in General Growth

- Fairholme Acquires 4.5% Interest in Brookfield

Toronto, Ontario, January 18, 2011 - Brookfield Asset Management Inc. (TSX/NYSE: BAM; EURONEXT: BAMA) today announced it has signed an agreement to acquire 113.3 million common shares in General Growth Properties Inc., a leading U.S. mall operator, from the Fairholme Fund, in a transaction valued at approximately $1.7 billion. The transaction increases Brookfield’s consortium’s ownership of General Growth from approximately 27% to 38%.

Brookfield will issue 27.5 million Class A shares valued at $907 million to Fairholme based on stock market prices and pay $804 million in cash from general corporate sources to acquire the General Growth shares. On completion of the transaction, Fairholme will own a 4.5% equity interest in Brookfield.

Fairholme is selling its entire common share holding in General Growth, but continues to own warrants to acquire common shares in General Growth.

“We are pleased to have this opportunity to substantially increase our ownership in General Growth’s market dominant portfolio of premier shopping malls at an attractive valuation,” said Bruce Flatt, Chief Executive Officer of Brookfield. “Fairholme’s team provided unwavering support during the recapitalization of General Growth and as one of the top performing mutual fund managers of the last decade, we welcome them as investors in Brookfield.”

Fairholme has agreed to certain restrictions on the acquisition of additional shares of Brookfield. Brookfield’s purchase of Fairholme’s shares in General Growth complies with the agreement entered into at the time of the restructuring of General Growth, which limits the Brookfield consortium’s ownership to 45% of General Growth.

Brookfield Asset Management Inc., focused on property, renewable power and infrastructure assets, has over $100 billion of assets under management and is co-listed on the New York and Toronto Stock Exchanges under the symbol BAM and on NYSE Euronext under the symbol BAMA. For more information, please visit our website at www.brookfield.com.

Why is Berkowitz doing this?

Let’s look at St. Joe…

We all know the story, Bruce has 30% (~27M of 92M shares). David Einhorn is short (we have no idea how much). The stock is battle ground stock and has a market cap of $2.4B

Roughly 30% of the stock is short as of 12/31:

This gives us roughly 40% of the stock that is in play. Berkowitz isn’t selling and the shorts as of 12/31 aren’t covering. Fairholme recently terminated an agreement with Berkowitz that capped his ownership at 30% and added he and Charlie Fernandez th the JOE Board.

That is the 3 min. replay.

My thought process is Bruce is going to engineer a mega-short squeeze in St. Joe. When he receives the 1/27 GGP dividend of ~$42m and the $800M from Brookfield Asset, he will have an additional $1.4B of liquidity. With only 40% of JOE shares in play, it would take ~$960M to eliminate those shares meaning the shorts would have nowhere to run to buyback the shares they sold. The race to cover with essentially no float would cause the price to rocket.

Should he buy >$1B of JOE (> the 40% not shorted/own by him) there simply would no be enough shares for the shorts to cover. He could easily do with with a tender offer for outstanding JOE shares or just start buying large blocks on the open market. Even a few large purchases would make his intentions known and the shorts would start scurrying, driving up the stock price.

Could they short more to drive the price back down? Yes. But they would lose as this is a simple numbers games. The more they drive the price down, the cheaper they make it for Berkowitz to eliminated the remaining shares and cause the squeeze. They would in essence hasten their fate. He has the cash to do it….

How to play it? The cheapest way is options, although if he doesn’t, remember you own nothing. If you believe in the LT real estate story, buying shares and waiting is the better way to go. There is no guarantee he does this, this is just my conjecture.

Shares have risen just under 20% since the 12/31 short report above. We’ll have to see if that price rise has been due to short covering or not (my guess is yes). Even so, there are still plenty left for the above to be true…

Gonna be very exciting to watch…

We have wondered here for a long time if the BAM Fund that was designed to invest in distressed assets was going to be used for GGP. Guess it was.

CIC (China Investment Authority) filed a Form 3 in HHC and a Form 4 in GGP.

HHC:

(1)Stable Investment Corporation (“Stable”) and Best Investment Corporation (“Best”) hold a collective 99.499848% percentage ownership interest in Brookfield Retail Holdings III LLC (subject to a “carry interest” held by the managing member thereof), which owns 621,147 shares of the Common Stock of the Issuer. China Investment Corporation (“CIC”) is the parent of each of Stable and Best. Each of CIC, Stable and Best disclaim any beneficial ownership of the shares of Common Stock reported herein except to the extent of its respective indirect pecuniary interest therein.

(2) Stable and Best hold a collective 99.499848% percentage ownership interest in Brookfield Retail Holdings III LLC (subject to a “carry interest” held by the managing member thereof), which owns 982,036 warrants issued by the Issuer. CIC is the parent of each of Stable and Best. Each of CIC, Stable and Best disclaim any beneficial ownership of the warrants reported herein except to the extent of its respective indirect pecuniary interest therein.

(3) Each warrant is convertible, at the option of the holder thereof, at any time prior to seven years from the issuance of such warrant, into 1 share of common stock of the Issuer, at a price of $50.00, subject to certain adjustments in connection with dividends and certain other events. The warrants also provide each holder with a cash redemption right at a Black-Scholes-based formula value upon certain change in control events.

GGP:

CIC both acquired shares through the BAM venture and bought additional shares on the open market Tuesday the 16th.

So, let’s look at GGP now. We have large owners based in both Canada and China. Both owners are financially very sound and that will give GGP access to cheaper capital than the rest of the REIT industry through either access for outright acquisitions or for JV’s. They also now have a base in markets they have no presence in. GGP must now be looked at as not only a US Regional Mall owner but with the potential to be a very large International one.

BAM is already committed through its agreement w/GGP to use GGP as the vehicle for ANY regional mall project they do in N. America. Clearly CIC has interest in the company if they are buying shares on the open market.

Those valuing GGP today based on results while in Chapter 11 and solely focusing on that are just missing the boat…..almost entirely.

We’ll break this down….

From Barron’s

Shares of shopping mall REIT General Growth Properties (GGP) are down 77 cents, or 5%, after the company last night priced a common stock offering below the day’s closing price, washing out anyone who’d ridden the shares up and up since the company came out of bankruptcy on November 9th.

Some, of course, made money on the offering, including Pershing Square Capital Management and Fairholme Funds, two of the equity investors who helped recapitalize GGP, and who got into the stock at a substantially lower cost basis, on the order of around $10. They also still hold deep-in-the-money warrants on the stock at conversion prices of $10.25 to $10.50.

But for anyone who’s not in on the ground floor like that, the offering seems pricey, opines Credit Suisse analyst Andrew Rosivach, who has a Neutral rating on GGP shares, and thinks shares of Taubman Centers (TCO), the Bloomfield Hills, Michigan, owner of regional malls, might be a better bet.

“Ground floor”? Let’s not forget when Pershing and Fairholme made their offer in conjunction with Brookfield Asset, they were at the time the “high bidder”. They topped a $10 a share offer from Simon with a $15 offer (for the combined GGP/HHC) and set the high price for the stock. They actually got their stock at year highs at the time and investors who bought in the days leading up to the official announcement of the deal actually have a lower cost basis for the combined entities. The insinuation that BAM, Pershing & Fairholme somehow got favorable pricing has no merit.

One reason for the run-up into yesterday’s offering: GGP effectively created a short-squeeze, says Rosivach, by offering fewer shares than originally anticipated. They originally told the street they would offer more than 200 million shares, then backed down to 155 million shares, sending investors scrambling for shares.

This is backwards also….GGP only reduced the number of share because demand for them was so strong. GGP committed to raise “x” amount of money. not sell “x” number of shares in accordance with the plan of reorganization. Because demand for them was so strong, they did not need to issue as many.

The question, says Rosivach, is how many investors who got in last week are long-term investors, how many planned to flip the shares, and how many are simply index investors who are buying GGP because they are anticipating its inclusion in the REIT indices next month?

Rosivach knows that he hasn’t heard enough from GGP about what the future will look like. It seems odd, he notes, that GGP has not disclosed any projections for 2011’s expected funds from operations.

“This is really a quasi-IPO for this stock,” observes Rosivach, “For a company emerging from bankruptcy not to give projections for what we can expect, that seems unusual.”

This is mystifying. One of the requirements for a company exiting Chapter 11 is that they provide these very projections to affirm the assumed outcome of the proposed plan or reorganization. Now, these are not numbers intended for an investment decision and are not “certified” but are simply for the feasibility of the plan. But, with a little work, one can come to some conclusions. With that said, here they are:

Here is the full filing GGP 8K 11/1/2010 (click to open .pdf). It is long and the projections are near the end. You’d have to go through the whole thing to find them I guess?

Here is a link to the GGP road show for the new shares. The road show, if you watch it lays out what is coming, it doesn’t “spell it out” but does lay it out. A little work required…..

Taubman and other peers of GGP, such as Simon Property Group (SPG), have pulled back of late, even as GGP shares climbed in value while the company did a roadshow for the offering.

“A week ago, I thought GGP was fairly priced it was at $14.50,” right after the exit from bankruptcy, says Rosivach. “I thought it made sense then, but then the stock ran as peers fell apart.”

That means that even after today’s dip, GGP is getting about the same valuation as TCO and others, even though there’s less certainty as to what its earnings will be. Both GGP and TCO have an implied cap rate of about 6.4%, according to Rosivach’s data, slightly ahead of the implied cap rate for most U.S. REITs, and TCO’s funds from operation multiple of 15.8 times is just a tad above the 15.5 times that GGP fetches.

OK…..Let’s discuss.

Using current NOI and FFO number for GGP in making a valuation make no sense. Why? The numbers are depressed from being in the Chapter 11 process for 18 months. Also, comparing Taubman and GGP together isn’t really a valid comp. GGP has a national footprint and Taubman for lack of a beter word is a local operation. They do have very high quality malls, just on a far smaller footprint (TCO has 80M sft vs GGP’s 200M sft.). SPG and GGP are the comps. On that level, GGP is not valued as well as SPG and if you take into consideration the improvement that is sure to come, the valuation gap becomes even larger meaning GGP still has room to go. Investors looking at GGP understand that results will improve next year (assuming no double dip which would affect the whole sector, just consistent economic growth) simply from no longer being in Chapter 11.

In Chapter 11 GGP was able to maintain their malls (fix leaks, plumbing etc). What they could not do is invest substantial sums to improve them (build new wings, material upgrades etc.) or expand operations. This put GGP at a competitive disadvantage when dealing with retailers in areas where they had competition.

Now out of 11, they can expand promotional activity to draw traffic to their malls, have increased leverage with retailers, are able to increase cap ex to improve existing locations, enter JV’s and even make an acquisition or two. Investors looking at results today are seeing the bottom of what they will be. If you watch the road show, GGP laid out how debt reduction, increased occupancy and leasing rates are going to materially add to NOI.

So, doing a little work, one just has to take current numbers and do some addition. I think those that have have been the buyers as of late…

There has been a TON of erroneous analysis on GGP since Day 1 in April 2009. It won’t stop now just because they are out of Chapter 11.