Brookfield's Private REIT Goes Back On Offense

Brookfield's nontraded REIT has been seeing investors pull money out, like many of its competitors — its redemptions have far surpassed new fundraising — but its executives have decided to make a big splash in hopes of courting investment.

The $1B fund, Brookfield Real Estate Income Trust, on Thursday announced its first new acquisitions since May 2022, a trio of properties totaling $150M. 

It paid $116M for a student housing building in Atlanta: the 25-story, 741-bed Reflection community that opened in 2022 near Georgia State University. 

Brookfield also bought an 89-home townhouse community in Chattanooga, Tennessee, and it is under contract on a 92-unit built-to-rent community in Birmingham, Alabama, that it expects to close next week. 

Brookfield REIT Portfolio Manager and Chief Operating Officer Dana Petitto told Bisnow in an interview Thursday that the firm is aiming to "do something that others aren’t right now, which is buy, and buy when the pricing is attractive."

For the last two years after the Fed began hiking interest rates, Brookfield REIT has focused on investing in credit positions, which still generated returns while being more liquid than equity stakes in real estate assets. 

Those credit positions helped it build up $550M in liquidity as of the end of Q1, before these latest acquisitions. It had previously been using that liquidity to pay investor redemptions, which have spiked across the nontraded REIT sector. 

"Now that the equity markets are starting to come back in favor, we’re able to liquidate those positions to flip back into equity," Petitto said. 

Equity investments are favorable today, she said, because the underlying fundamentals of many property sectors are strong, especially the types of residential communities it is buying with these latest deals. But the combination of high interest rates, owners with capital needs and a shallow buying pool has brought down values. 

Apartment prices were down more than 6% year-over-year in May, according to Green Street's Commercial Property Price Index, and are 26% down from their peak in March 2022.

Two of the REIT's three deals were off-market transactions, and Petitto said because they didn't involve a competitive bidding process, Brookfield was able to negotiate "pretty attractive prices."

The two smaller residential acquisitions, totaling $34M, are being financed with Brookfield's own equity, while she said the firm is working to put a loan on the $116M Atlanta deal. 

Through that process, Petitto says she sees the debt market coming back.

"The banks are definitely willing to have some decent conversations, and it’s not as challenged as it probably was six months ago," she said. "So I would say we’re in line with our underwriting. What we were planning to execute on the financing front is pretty much where we’re landing."

Acquisitions like this have become a rare move in the nontraded REIT space lately because the funds are seeing their capital base shrink as investor redemptions outpace new fundraising. 

Some of the largest asset managers have put up gates on investor redemptions — Starwood tightened its restrictions last month, while Blackstone removed its limits in February after more than a year — but Petitto said Brookfield has continued to fulfill 100% of its redemption requests even as new funding has slowed. 

Brookfield REIT's fundraising has fallen from $617M in 2022 to $97M in 2023 to $15M in the first quarter of this year, according to Robert A. Stanger & Co.'s latest data. Meanwhile, its investor redemptions totaled $184M last year and $51M in Q1. 

Petitto said she thinks some investors were "perhaps spooked" by other firms putting up gates on redemptions, and she expects the net outflow of capital to continue in the short term. But rather than waiting and hoping for the market to turn around, Brookfield decided to stand out by doing deals. 

"We’re hoping that being a buyer in this market and taking advantage of the opportunities we’re seeing will set us apart and hopefully jumpstart some new investors coming in," she said. 

Brookfield isn't alone in this pivot. Blackstone's nontraded REIT, the biggest at $59B in asset value, has also moved back into acquisition mode. Blackstone's Global co-Head of Real Estate Nadeem Meghji said this week that buyers and liquidity are returning to the market

But Petitto is wary of being too aggressive. While Brookfield REIT expects to buy more properties in the near term, unless it can start to induce more investors to put money back in the fund, "We probably will have to hit pause," she said.

"We're not going to run ourselves dry," she added.