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CEO Departs After Brookfield REIT Posts $39M Loss

Brookfield's Zach Vaughan, right, on a 2019 Bisnow event panel.

The head of Brookfield's nontraded REIT has stepped down as the fund and its larger counterparts grapple with slowing fundraising, falling property values and rising investor redemptions.

Brookfield Real Estate Income Trust announced in a Securities and Exchange Commission filing Tuesday that its CEO, Zach Vaughan, stepped down from the role last week and was replaced by Brian Kingston, the top real estate executive at the REIT's parent company, Brookfield Asset Management.

Vaughan will continue to serve as a director on Brookfield REIT's board, but the company said he is stepping down from the full-time role "to pursue other business opportunities."

He had held the CEO role since Brookfield REIT launched in November 2021. He previously served as BAM's managing partner and global head of core plus and perpetual funds for two years, and before that he led its European real estate business for nearly six years, according to his LinkedIn page

Kingston has served as the chairman of Brookfield REIT's board since its launch. He has also served since 2015 as CEO of Brookfield Property Partners, the investment giant's publicly traded real estate subsidiary. 

Brookfield was relatively late to the buzzy nontraded REIT space. Blackstone and Starwood launched their nontraded REITs in 2016 and 2017, respectively, and have raised far more money than their competitors. The entire nontraded REIT segment had already blossomed to an annual fundraising pace of over $35B before Brookfield launched its fund. 

The launch of Brookfield REIT combined some of Brookfield's legacy assets with those it acquired when it bought Oaktree Capital Management in 2019. It reported a positive net income of $5M at the end of 2021, but then last year, as the real estate industry faced a series of headwinds, Brookfield REIT posted a net loss of $39M. 

Despite the fund not making positive cash flow, its net asset value increased over the course of the year, allowing shareholders to realize a 12.7% return on their investment in 2022. Brookfield REIT's NAV, a portfolio valuation metric it reports monthly, rose from $536M at the end of 2021 to $1.22B at the end of last year, according to research firm Robert A. Stanger & Co. 

Brookfield REIT's NAV did begin to tick down slightly in Q4, dropping 2.4% in November and 2% in December. These value drops led to two consecutive months of negative returns for shareholders, which had previously only happened once. But the drop in nontraded REIT values last year was still far lower than the share prices of their publicly traded counterparts. 

"Our portfolio proved to be resilient in 2022, performing exceptionally well despite the broader macroeconomic pressures we faced," Vaughan wrote in an annual letter to investors last month.

"Given this pressure, our third-party valuation firms began reflecting increased risk premiums in the form of widening exit cap rates and discount rates," he added. "This resulted in some downward valuation movements in our portfolio, primarily in the fourth quarter. These movements, however, are in no way a reflection of the operating performance and outlook in our properties, which remain strong with a very favorable outlook." 

At year-end, Brookfield REIT owned a portfolio of 18 commercial properties and 480 single-family rental homes totaling an estimated $1.58B, according to its annual report. This portfolio is made up of 56% multifamily, 26% net lease assets, 7% single-family rentals, 6% office and 5% logistics. 

Additionally, it owns a joint venture interest it valued at $80.6M, and it owns real estate debt and securities totaling $333M. 

Last year, the fund acquired three multifamily properties, two logistics properties and 466 single-family rentals with a combined acquisition price of $545.2M. 

Brookfield REIT's fundraising pace slowed significantly toward the end of last year. After five straight months of raising over $50M from April to August, including $147M in May, it ended the year with lower monthly totals: $34M in September, $26M in October, $32M in November and $16M in December, according to Stanger's data. 

Redemption requests at Brookfield REIT rose sharply throughout last year. Investors sought to cash out $1M in shares in Q1 2022, then $12M in Q2, $18M in Q3 and $31M in Q4, according to Stanger. 

This combination of slowing funding and surging redemptions has occurred across the nontraded REIT space. Brookfield's redemption requests as a percentage of NAV have been smaller than that of Blackstone and Starwood, which both made waves in December by restricting withdrawals. The two sector leaders have both continued to limit redemptions this year as investors try to pull out billions of dollars from the funds.