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SECTION 3 BUSINESS OVERVIEW Background Babcock & Brown began its involvement in the real estate sector as an advisor on structured finance transactions. Babcock & Brown’s first principal investment transactions took place in Australia in the early 1990s and focused on sale-and-leaseback transactions to investment grade tenants where Babcock & Brown could add value through efficient, highly leveraged financings. In 1992, Babcock & Brown expanded this model to include pre-committed developments to creditworthy tenants, for example the Australian Taxation Office. In 1994, Babcock & Brown listed Prime Credit Property Trust, an ASX listed property trust that held a number of the assets that had been acquired or developed by Babcock & Brown in conjunction with its clients. In 1997, the Real Estate Group in Australia increased its focus on development transactions; in particular, entering into partnerships with construction companies and smaller development groups that would benefit from Babcock & Brown’s structuring skills and capacity to procure development equity and subordinated debt. Babcock & Brown’s Japanese real estate operations were established in 1998, concentrating on the leveraged acquisition of income-producing properties and building assets under management. In 2001, Babcock & Brown established a UK-based real estate operation and in 2003 commenced its expansion into other European venues. Babcock & Brown is also pursuing a measured expansion into niche markets in the US. Business activities Australian Real Estate BBRE In 2001, Babcock & Brown established Babcock & Brown Real Estate (BBRE), a segregated fund of approximately $120 million that provides equity and subordinated debt (often with equity participation features) to a wide range of real estate investors, builders and developers and takes mezzanine debt and equity positions in various real estate assets and vehicles. Approximately 50% of the capital in BBRE is provided by a third-party senior debt lender, with the balance provided by Babcock & Brown. Since its inception, BBRE has been the principal vehicle for Babcock & Brown’s real estate investment activities in Australia. Babcock & Brown is seeking to replicate the BBRE model in Europe, where Babcock & Brown sees significant potential in its real estate business. Development partnerships Since the mid 1990s Babcock & Brown’s property investment activities have extended to real estate development in partnership with construction firms and developers with access to opportunities in specialist areas. Babcock & Brown has typically contributed finance in the form of either mezzanine debt or equity (or a combination) to individual development projects with a significant portion of this funding coming from the BBRE fund. Babcock & Brown currently has interests in a number of development projects which it anticipates will contribute substantial profits to the Group post the Forecast Period.These embedded profits should contribute to the predictability and consistency of the Group’s long-term earnings profile. 44
BABCOCK & BROWN PROSPECTUS A selection of Babcock & Brown’s development partnerships are shown below. Estimated Estimated completion completion Development JV partner Description value ($m) date Victoria Park Cardy & Co 6.2ha site in Zetland, South Sydney. Site is planned for a predominantly residential, mixed-use development 1,000 2009 Ascot Vale Urbex (BMD Group) Proposed scheme is a master-planned residential precinct in Melbourne 240 2008 Sydney Olympic Park Multiplex Residential apartment development in Homebush, Sydney 350 2006 (stage 1) A selection of Babcock & Brown’s completed development-partnerships are listed below. Completion Year Development JV partner Description value ($m) completed Felix Street Citimark Properties 42-level residential apartment development in Brisbane 95 2004 Amphora Thakral Holdings Amphora is a low rise residential apartment complex in Cairns comprising 108 residential apartments spread over seven buildings 50 2004 David Jones MAB Corporation Major 22,000m 2 Perth department store subject to long-term leases. Sold on completion to Centro Properties Group 90 2002 CUB Brewery Citimark Properties A mixed use development (residential, retail and commercial) on the former CUB Brewery site in Fortitude Valley, Brisbane 155 2000 As an extension of its development-partnership activities, in 2002 Babcock & Brown established Citta Property Group (Citta) in conjunction with three former executives of Lend Lease Developments. Citta has been specifically established to manage, invest in and develop large-scale property development opportunities. Citta’s most significant current project is the $450 million Parkville Gardens residential development in Melbourne which will initially comprise an athletes’ village.This facility is being developed in a 50/50 joint venture with Australand. 45
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BABCOCK & BROWN PROSPECTUS CORPORAT
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