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SECTION 3 BUSINESS OVERVIEW Principal investment management In addition to investments in the BBRE facility and development-partnership activities, Babcock & Brown is active in other forms of principal real estate investment and management. A selection of representative transactions is listed below: Value Acquisition Project Description ($m) date CSIRO, ACT Underwrote the acquisition of three ACT properties subject to long-term leases to CSIRO 50 2002 TAHL See case study below 800 2001 Commonwealth Office Properties Portfolio Arranged syndicates to acquire various portfolios of office properties in the Commonwealth Government tender program. Underwrote the purchase of seven of these buildings 283 1997 Roselands shopping centre Purchased a Sydney landmark sub-regional shopping centre. Sold two years later at a profit 130 1997 Case study Tourism Asset Holdings Limited (TAHL) TAHL was an Australian listed hotel company whose assets were subject to long-term leases guaranteed by Accor SA, a global hotel operator. TAHL was not well supported in the public equity markets as it was viewed as a fixed income investment with limited capital growth potential. Babcock & Brown identified the opportunity to unlock value by refinancing the assets in a manner that took full advantage of Accor’s strong credit rating and the length of the lease terms. The Real Estate Group worked together with the Corporate Principal Investment Group to structure, coordinate and lead a $180 million public offer for TAHL in a joint bid with Guinness Peat Group Plc, Accor and Jagen in 2001. Babcock & Brown invested a total of $58 million to fund its share of the offer consideration. This has been Babcock & Brown’s largest single equity investment to date with the commitment made only after post-takeover refinancing was fully underwritten by an international banking syndicate. Upon completion, Babcock & Brown releveraged TAHL’s property using this syndicated senior bank facility and a public bond issue in New Zealand. The refinance resulted in a return of approximately 50% of Babcock & Brown’s capital investment. In early 2003, Babcock & Brown sold down most of its interest in TAHL to a syndicate of investors generating an IRR on its investment of approximately 30%. Advisory Babcock & Brown’s reputation for innovative financial structuring of real estate transactions has led it to be engaged in a number of large scale financial advisory assignments. Babcock & Brown has historically limited its advisory work to sizeable transactions requiring complex financing solutions and those which help to establish or cement relationships with potential partners for the Group’s investment activities. Examples include: Completed value Project Babcock & Brown role ($m) Date Kens Building Advised the developer in the structured sale of a 77,000m 2 Sydney office building 670 2003 Eureka Arranged debt financing for an 88-storey residential tower, presently under construction in Melbourne 400 2002 No 1 Martin Place Arranged project financing and funding for a landmark office, hotel and car park property in Sydney 440 1998 46
BABCOCK & BROWN PROSPECTUS Japanese Real Estate Babcock & Brown established a Japanese subsidiary and commenced real estate operations in 1998. Babcock & Brown was attracted to this market due to its size, attractive property yields relative to the cost of funds, and the opportunity to increase returns through more pro-active and cost-effective asset management.The fragmented nature of property ownership, and the historical absence of traditional property-financing techniques led to significant opportunities for Babcock & Brown. Babcock & Brown’s Japanese operations have the same general mix of advisory and investment activities as the Australian Real Estate business, although the Japanese business has more recently focused on syndication rather than use of the Group’s capital to finance transactions. A selection of representative transactions is listed below: Value Project Babcock & Brown role (US$m) Date Akihabara Babcock & Brown sourced and negotiated the acquisition for a large European institution of a single-tenant specialty retail property in central Tokyo and repositioned the building with a lease to a leading retail tenant 91 2004 Tokyo office portfolio Babcock & Brown took over asset management of two Tokyo office properties for a large European institution 120 2003 Vivre/Esquisse Acquired an underperforming retail building in central Tokyo from a distressed seller.With Mitsubishi Corporation as co-investor conducted a major renovation, repositioned the building as a multi-tenant, high-end retail property. Exited profitably within 12 months 140 2001 Motomachi Acquired a non-performing loan secured by a property in a prime retail location in Yokohama and restructured the lease to a luxury retail tenant Gained ownership of the property after resolving debt owed by the property owner and subsequently sold the asset to a syndicate of investors 18 2001 Case study Tokyo area portfolio In late 2002, Babcock & Brown was negotiating with two separate vendors – one distressed, the other making a strategic exit – to acquire two separate portfolios totalling 17 assets, predominantly office properties located in and around Tokyo ranging in size from around US$30 million down to less than US$1 million. Babcock & Brown was able to coordinate and converge the two acquisitions into one closing in March 2003, creating one pool financed on a cross-collateralised basis on attractive terms that gave flexibility either to exit quickly or build long-term cash flow. A number of the assets were older and/or had planning compliance/physical issues which Babcock & Brown believed made them less attractive to pure financial investors lacking the property expertise to be able to price these elements and the high initial yield reflected this. When leveraged on a portfolio basis, the initial cash on cash return from operating revenues alone was more than 20%. Immediately following acquisition Babcock & Brown’s asset management team focused on stabilising and improving cash flow, particularly in some of the larger assets. Within 16 months of acquisition Babcock & Brown has profitably sold more than half of the assets by number and almost 70% by value, which it believes creates a strong likelihood of a very high IRR to investors. 47
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BABCOCK & BROWN PROSPECTUS CORPORAT
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