Pensions, Brookfield nab O&Y office portfolio

Canadian pension funds added another trophy to their collection of blue-chip office towers yesterday as a group including Canada Pension Plan Investment Board, Alberta Investment Management and Brookfield Properties Corp. picked up O&Y's real estate portfolio in a deal valued at $2-billion.

The transaction, which includes Toronto skyscraper First Canadian Place and 24 other office buildings across Canada, is the first significant real estate investment for the massive CPP Investment Board, which is a 50-per-cent partner in the deal.

The arrangement involves bids for the outstanding shares of two firms -- O&Y Properties Corp. and O&Y Real Estate Investment Trust -- both led by Philip Reichmann. The value of the all-cash offer includes both assets and liabilities.

The O&Y portfolio is one of the largest packages of real estate ever to change hands in Canada.

As such, it marks a shift in the real estate market from risk-taking entrepreneurs such as the legendary Reichmann family to conservative pension funds.

The one public player in the deal -- Brookfield -- is a 25-per-cent partner and will collect fees from the pension funds for asset management. Brookfield, controlled by Toronto-based Brascan Corp., will invest $200-million in the transaction through its Canadian unit, Brookfield Properties Ltd.

The deal also marks an expansion of Brookfield's role as an asset manager. Given the money chasing real estate in North America, this strategy provides Brookfield with added income and access to deals.

Indeed, Mr. Reichmann said in an interview yesterday that every one of the final nine bidder groups involved a similar arrangement -- a real estate operator paired up with institutional money.

"The only way that the private players can compete is if they partner with the institutions," he said. "That is really the model of the future. It is the only way to make the math work."

That's because, he said, institutions have a much lower cost of capital than corporations and can take a much longer-term perspective on investments, which is ideal with holdings such as real estate.

Mr. Reichmann said he is relieved that the marathon auction process is drawing to an end. Investors in O&Y REIT and O&Y Properties will vote on the arrangement in early July and the deal is expected to close by the end of that month. The winning bid includes a $13 a share offer for O&Y Properties. The group also will buy all the assets and liabilities of O&Y REIT, which will, in turn, redeem all of its limited voting units for $15.50 a unit. O&Y Properties supports the deal, which carries a $25-million break fee.

During the first round of bidding, 29 groups received packages of confidential information and nine advanced to the final round. Mr. Reichmann said Brookfield and its partners were picked as the winners when final bids were accepted in early May, but the due diligence process took longer than expected.

Brookfield provided few details of its plans yesterday, but there is speculation that some of the assets in smaller centres will be sold when the transaction closes.

While the name of the other partner in the group was not released, a spokeswoman for Alberta Investment Management confirmed it was in on the deal. AIM is an arm of the provincial government that manages more than $42-billion in assets for public sector pension funds and others.

While this is the first major move into real estate by CPP, more are likely. Last month, the Ontario Municipal Employees Retirement Board confirmed the pension fund was in talks to sell a 50-per-cent stake in some properties to CPP.

Mr. Reichmann said it is fitting that Brookfield and its pension partners had the winning offer. He said their bid was the "highest and the best" in an international field.

"It's kind of strange to go around the world and do a deal with the guy next door," he said.

Yesterday's announcement marks the latest in a string of transactions that have involved the Reichmanns and Brookfield and its affiliates over the past two decades.

O&Y surprised many in February when it put all its property up for sale. Many took the move as evidence the commercial real estate market was near its peak.

Yesterday, Mr. Reichmann refused to hint at his next move. He suggested he might improve his golf game. But the plan of arrangement does not include a non-compete agreement. "I could go out and put up a building tomorrow," he said. "I just need to find the financing and the tenants."