BNY Mellon Shrinks Real Estate Investment Portfolio With Sale Of CenterSquare

by Trefis Team
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BNY Mellon
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Bank of New York Mellon (NYSE:BK) recently announced its decision to sell its boutique real estate unit CenterSquare Investment Management to the latter’s management team and private equity player Lovell Minnick Partners. CenterSquare has about $9.3 billion in total assets under management – making it a very small part of BNY Mellon’s $1.77 trillion portfolio of assets under management. However, the sale is a step by BNY Mellon towards streamlining its asset management business, as it will continue to offer real estate investment options to its institutional clients through its other investment boutiques like Amherst Capital Management. The deal, financial details of which have not been disclosed, is expected to close by the end of 2017.

We do not expect the deal to have a material impact on our $54 price estimate for BNY Mellon’s stock. This price target is slightly above the current market price.

See our full analysis for BNY Mellon here

As the world’s largest custody bank, BNY Mellon relies most on its services as a custodian to generate value. However, as can be seen from the chart above, the bank’s investment management operations are also an integral part of its business model – contributing a little over 20% of its total value.

At the end of the second quarter of the year, the investment management division reported total assets under management (AUM) of $1.77 trillion. This AUM figure includes assets in equity, fixed income, index-linked, currency, alternative and money market funds. According to a detailed breakup of its AUM provided by BNY Mellon, multi-asset and alternative investments accounted for a total of 11% of this figure – or roughly $200 billion. With $9.3 billion worth of assets under management, CenterSquare holds less than 5% of all of BNY Mellon’s multi-asset and alternative investments, and barely 0.5% of BNY Mellon’s total AUM. However, it is the larger of BNY Mellon’s two major real estate investment boutiques – the other being Amherst Capital Management with $6.3 billion in assets.

CenterSquare was founded in 1987 as Urdang Capital Management, and was acquired by BNY Mellon in 2006 when its asset base was roughly around $6 billion. BNY Mellon renamed the unit CenterSquare Capital Management in 2013. Since BNY Mellon’s acquisition, the unit’s asset base has swelled roughly 55%, with the current $9.3 billion portfolio consisting of $8.0 billion in real estate and infrastructure securities and another $1.3 billion in private equity real estate investments. As you can see by making changes to the chart above, the sale will have negligible impact on BNY Mellon’s total AUM. However, the bank is likely to see a marginal improvement in its operating margins from the sale. It should be noted that BNY Mellon was under considerable pressure from activist investor Marcato Capital over 2015-2016 to cut costs – and although Marcato sold its stake in BNY Mellon late last year, existing shareholders continue to voice concerns about the bank’s seemingly inflated operating costs compared to its peers.

You can see how an improvement in BNY Mellon’s investment management margins impacts our estimate for the bank’s share price by making changes to the chart below.

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