Brookfield's Crown Prince & Uncle Sam Getting Mezzy?

Brookfield’s Crown Prince

CRE’s premier labyrinth has chosen its new Minotaur: Bruce Flatt of Brookfield, who runs nearly $1T of AUM through one of the most convoluted corporate structures of all time, is grooming (not like that!) a 36-year-old to succeed him as CEO. Connor Teskey, president of Brookfield spinoff BAM, is expected to eventually take the top job, per Bloomberg, but Flatt, 59, won’t give up power all at once.

“I think it will be exactly when all clients, business partners, people inside are 100% comfortable that it’s all natural to happen,” Flatt told the publication. He and Teskey will be relay runners in the race to $2T AUM. 🏃‍♀️🏃‍♂️ 

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Brookfield (cont.)

Teskey has had a Jon Gray-esque rise within Brookfield, only faster: He joined the firm’s rank-and-file in ‘12, eventually overseeing its renewables arm. He was the catalyst for the $5B takeover in ‘19 of Howard Marks’ Oaktree – he read all Marks’ legendary memos, of c – putting Brookfield in the thick of the distressed CRE game. That deal, insiders told Bloomberg, made him the #1 contender for the CEO role, propelling him past other hopefuls such as RE head Brian Kingston. Teskey was also involved in the $15B raise for Brookfield’s transition fund, at the time the largest of its kind. Brookfield shares have tripled over the past decade, and BAM stock is up 30% since the ‘22 spinoff.

The mentor-protégé force is strong: Teskey’s not only mimicking Flatt’s leadership playbook, but also his speaking style - persuasive humility. He gels well w/ Brookfield’s buttoned-up, accountant-type corporate culture: execs fly coach, use public transportation, and beard game is nonexistent. 🧔‍♂️ 

It’s incredibly hard to get succession right at megacorps: Blackstone has done it, with Gray the clear heir-apparent and Schwarzman the elder statesman. But Big Business is littered w/ cautionary tales: Carlyle, Apollo, Bridgewater, and closer to home, Vornado ( 🍻 Fascitelli), Extell (🍻 Torgalkar), and Silverstein Properties (🍻 Burger). Brookfield’s methodical approach to it is buttressed by an unconventional comp structure: instead of carried interest, the company doles out heaps of stock to top execs that serve as golden handcuffs. It also has 2 classes of shares: publicly traded stock that gives owners the right to elect half the board, and another class of stock that only Brookfield insiders hold, w/ the right to elect the other half of the board.

One telling sign of how power will be handed down: Flatt spoke at length w/ the publication about Brookfield’s culture, its ambitious targets for ‘28, and his hopes for Teskey. The company, however, declined to make Teskey available for comment. 🔇 

Getting Mezzy w/ Fannie & Freddie

One way to build ourselves out of the housing crisis? Have Fannie and Freddie get involved in construction lending. That’s the radical new plan being put forward by Jim Millstein, co-head of investment giant Guggenheim Securities. Millstein, in a conversation w/ our favorite pod Odd Lots, laid out a playbook whereby the GSEs provide 20% of construction costs in the form of mezz, giving builders access to much cheaper debt than they could score today. That would boost construction to the tune of 250K-400K units annually, he estimated – keep that up for a few years and the housing crisis would be greatly mitigated.

*High interest rates are a double whammy for builders: Not only is construction debt pricier, cap rates tend to rise which lowers property values. “Here, the government could actually expand financing for new construction and thereby lever the equity of the developer 4-to-1, rather than traditionally 1.5-to-1.” Millstein suggested. His plan would need the FHFA to develop a capital rule for construction lending, which would need the Treasury’s blessing. It has received the wonky backing of the Center of Public Enterprise, which released a report arguing for the establishment of a national housing construction fund. Such a vehicle, it said, would give builders a “degree of insulation from the business cycle factors that are not indicative of housing demand,” and lead to smoother and more stable housing production. NYU finance prof Arpit Gupta, in a nifty historical breakdown, described Millstein’s proposal as a potential “return to the portfolio model of holding loans originated elsewhere” – something Fannie and Freddie have shied away from in recent years.

This is all intoxicating stuff 🍸️ . Does it work in the real world?

One major red flag 🚩 brought up by developers was the lack of a pathway to permanent financing. “In order to be reasonably risk free, the total debt portion of the senior + mezz needs to be sized to the perm debt post-construction takeout,” said Ben Maritz, an AH developer in Seattle. Eli Lever, a Brooklyn-based developer and kosher Energizer bunny, laid out a hypothetical for a $100M project: $20M Equity, $20M GSE Mezz and $60M sr. loan. Permanent capital typically requires a 1.25 DSCR; at a 6% yield, that means max $4.8M debt service.

“At today’s rates that would get you in low $60Ms proceeds and require a massive cash in refi,” Lever wrote 😭. “So the program would need to allow the construction loan to be rolled to a permanent loan <1.25DSCR... or pray for higher rents and lower rates...”

*A previous version of this post misstated the interest rates-cap rates r’ship

Quickies

• 🎥 The Unorthodox dealmaking of lone wolf David Werner 🐺 

• Another great Steve Witkoff cameo: Developer helped cultivate the Elon-Trump bromance 

• Ed Minskoff defaults on $250M loan tied to Playa Vista office

• Are data center REITs a bet against the pace of new tech? 💾  

• More Tides complexes fated for foreclosure in DFW 🌊 

• Owner of SF’s largest multifamily complex defaults on $1.8B debt

• A $500K+/unit multifamily deal in the San Diego burbs 🌴 

• Fed bigwigs suggest rate cuts are near - but not here yet 🫁 

• Ply your trade in REITs? New REIT-focused job board just dropped

• Shaya Prager wants nearly $70M for his South Florida beachfront digs (more on the controversy surrounding the lad here)

• ICYMI: Our dive into the Mormon CRE playbook ⛪️ 

Earnings Szn Highlights

Some snippets from earnings season so far:

• M&T Bank has resolved nearly $1B of problematic CRE loans, particularly in multifamily, retail and hospitality assets. Office remains a major problem: at-risk loans in that sector jumped 5% from last Q

• Bank OZK’s RE loan portfolio grew to $28.5B and the lender remains mad profitable - a record $174M in Q2. Everyone’s favorite construction financier has been upping its allowance for credit losses (ACL) to guard against the prospect of bad loans. “It's just a reflection of the fact that these high interest rates cause stress, and some of that stress is going to translate through into losses,” OZK CEO George Gleason said during the earnings call.

• Blackstone’s RE dragged the firm down, w/ fee-related earnings from RE at $481M, down 18% compared to last year. Inflows were also down by $2B, to $5.9B. But Gray declared the worst to be over, and proclaimed a “new cycle of increasing values” on the horizon. Schwarzman, meanwhile, highlighted the firm’s megabet on data centers - $55B of holdings, he claimed, including stuff under construction.  

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