城市混合用途愿景让布鲁克菲尔德房产成为一个买家

Brookfield Property is increasingly focused on large, urban, mixed-use developments.\n

A lot of the former GGP assets have an unclear future as they seem incompatible with this strategy, yet are hard to sell on good terms.\n

Brookfield Property\'s former enthusiasm for reducing debt has faded, but I don\'t think this is necessarily a problem.\n

I own shares of both BAM and BPR, and think they remain attractive.\n

On September 26, Brookfield held its annual Investor Day. Representatives from the parent company Brookfield Asset Management (BAM) and each of the major listed subsidiaries spoke. I was particularly interested in the presentations by BAM and Brookfield Property (BPY) (BPR).

While there were no major surprises, I think what Brookfield said - and did not say - gives investors a somewhat updated and clearer vision for the companies.

I have owned BAM for nearly a decade, and have owned Brookfield Property (and its acquiree GGP) intermittently over that period.

Both are large positions in my portfolio (approximately 20% each). Based on what I learned, I remain bullish on both.

Rather than proceed chronologically through each presentation, I will examine a few themes that kept appearing throughout the event - or that received curiously little attention.

For a lot of retail assets, "redevelopment" means taking an old Sears anchor box and converting it into two restaurants and a fitness club. And Brookfield is doing just this at many properties. But at a few select properties they are doing a lot more.

Brookfield's development vision is focused on the very best of the former GGP assets. A huge share of the development budget will be spent on assets that are already trophies, or have the potential to become them.

Take the very best of the GGP assets, Ala Moana in Honolulu:

(Source: Brookfield)

Ala Moana was already one of the top 10 shopping centers in the country, and the largest outdoor shopping center. It attracts 52 million visitors per year, generating $1.5 billion in tenant sales.

Brookfield Property is in the process of getting the zoning amended to, in the words of CEO Brian Kingston, "fundamentally transform this into a small city" with as many as 10 residential towers. (In the next 2 years, Brookfield only expects to build ~550 rental units and ~340 hotel and condo units. How much additional construction they expect within 5 years was not entirely clear.)

(Source: Brookfield)

Just the two-year Ala Moana budget ($1.2 billion) is

almost half

of Brookfield total two-year mall densification budget ($2.5 billion):

(Source: Brookfield)

That's one asset out of the 125 they acquired via GGP.

That shows a tremendous focus on their premier assets and says a lot about where they see returns.

As Brian Kingston explained,

Another important property is Stonestown Galleria in San Francisco. Macy's (M) and Nordstrom (JWN) will be leaving their boxes and will soon be replaced by an expanded Target (TGT) along with a Whole Foods (AMZN), Sports Basement, and Regal Cinemas.

In the longer term, Brookfield Property plans to build 2,400 residential units on the premises.

These units and other improvements at Stonestown are projected to consume 65% of the 2-5 year mall densification budget ($1.7 billion of $2.6 billion)

along with $165 million of the shorter-term (0-2 year) budget:

(Source: Brookfield)

This is another major bet to build a mixed-use miniature city in an area with:

Similarly, Brookfield Property is creating mixed-use communities in New York, Los Angeles, and other major cities.

Of course, not all of the old GGP malls have such a bright future.

Bea Hsu (Brookfield Property Senior VP of Mixed Use Development Capabilities) showed a map of Brookfield's current mall developments and densification projects.

(Source: Brookfield)

Brookfield Property picked up 125 assets in the GGP deal, and has only identified 11 assets for the first round of major mixed use densification projects. Another 30 or so are getting more conventional developments (such as former department store locations becoming restaurants and fitness clubs).

To be fair, there are a lot of solidly Class A properties in the portfolio that are hardly facing a "death spiral", and Brookfield Property has been very successful at bringing in new tenants. As old ones leave due to unsatisfactory sales or as part of a bankruptcy restructuring, Brookfield earns reasonable rents from new tenants.

But it begs an important question:

If the above are the assets Brookfield will improve meaningfully in the next 5 years, then what's to become of the other ~80 GGP assets?

A key aspect of the Brookfield culture is that it is an active, involved owner-manager. It likes to have a local operating team that knows the market well. It likes to buy assets, improve them, sell them, and move on to new projects.

It keeps a few healthy properties, but these tend to be exceptional ones. Even when it remains as asset manager, it usually sells much of its equity interest to institutions. It would seem to be very much out of Brookfield's style to simply keep the weaker GGP assets as permanent "core retail" properties, only spending a limited amount of money to make minor changes.

Most of the assets marked above for development are already healthy and may offer good returns on a marginal investment - but they may not need the improvements as much as weaker assets.

With a lot of the Class B/B+ assets, Brookfield Property seems more like a somewhat reluctant owner than an investor with a clear strategic plan.

It sounds like the plan is to hold the Class B retail assets, release space as needed, and just hope they don't decay too much before they can be sold. I think they had hoped to have sold more by now, but encountered a wider-than-expected spread between the 10-year US Treasury and mall cap rates:

(Source: Brookfield)

The 10-year US Treasury yield has been falling, but mall cap rates have been rising. The presentation cited Real Capital Analytics as a source of the cap rates, though the corresponding data on the Real Capital Analytics website was not very specific about which markets (major city, minor city, suburban, rural) or retail asset subcategories (enclosed mall vs. outlet vs. power center) they were including.

Natalie Adomait (Brookfield Property Senior VP, Portfolio Management) and Hsu spoke a lot about the value of building a local real estate team in the markets where they invest. This offers Brookfield some key advantages:

Adomait spoke about how having a local team and hiring a student housing expert let Brookfield quickly build Student Roost. With 55 assets and 20,000 beds, it is now the third-largest direct-let student housing business in the UK. Adomait emphasized that while the business had not yet been sold, investors would be willing to pay a premium price (beyond the value of the assets) because the business would come with excellent management in place.

But I didn't hear Brookfield talk about building a lot of new teams - teams in places where some of the less-valuable GGP assets are located.

Brookfield entities seem more interested in growing their presence in the cities and countries where they are already located - mostly the Northeast, California, and a few parts of the Midwest.

Brookfield seems unable to manage the retail properties outside of these markets up to their usual (very high) standard - but neither are they seemingly able to sell them on attractive terms.

Even relative proximity to a local team is no guarantee of getting major renovations.

SoNo, an upscale mall that recently opened in Norwalk, CT (not far from New York) is prospering while the Brass Mill Center in Waterbury, CT (45 miles away from SoNo) hasn't been doing so well.

This is a company accustomed to doing large-scale, complicated, expensive renovations and turnarounds - and doing them fairly quickly.

But I don't see a great plan for a lot of the weaker GGP assets, especially the ones outside of Brookfield's primary operating regions.

That said, I don't think it makes Brookfield Property a poor value, given the low share price and mostly excellent other assets.

Brookfield Property and some institutional partners took on a $7 billion term loan package to purchase GGP. In the months before and after the deal closed, they spoke a lot about reducing debt in the near future with asset sales. And Brookfield Property did sell fractional interests in a few of the nicer properties within weeks of closing, but since then things have been fairly quiet. They were able to extend the maturity of $1 billion of the term loan package to 7 years.

Brookfield Property returned one struggling asset (Oak View Mall in Omaha) to the lender on Nov 1, 2018, but Brookfield retains at least a fractional interest in virtually all of the GGP portfolio.

On Investor Day, the drive to reduce debt in general seemed a lot more muted, even reversed in some cases.

Most debt is at the property or fund level and does not have recourse to BAM or Brookfield Property, so this is reasonable. They have refinanced several prime European properties at very low rates, noting with pride how much they have been able to borrow against a property so cheaply.

BAM CEO Bruce Flatt mentioned a portfolio of German real estate (26 or 27 assets) against which Brookfield had borrowed (in Euros) at 0.72% for 7 years. I'm not sure if these include the assets described as "A1-5, B1-9, C1-3, D1-2" in the Q2 Brookfield Property supplementary (page 6) or are part of a different fund.

Bryan Davis (CFO of Brookfield Property) spoke about the planned sale of $2 billion of assets to reduce the term loan from the GGP acquisition, but as cap rates on both retail and office properties have risen, it's wasn't entirely clear what they will be selling to do this. Given Brookfield Property's sheer size and cash generation in excess of quarterly distributions, a lot of debt reduction could potentially come from operating cash flow.

All Brookfield entities have tended to make frequent, small adjustments to their capital structure. They'll borrow cheaply against one asset to repay a more expensive loan against another, or retire one class of preferred securities and replace them with another. Brookfield has a good track record of making these little changes to reduce their overall cost of capital.

Overall, Brookfield Property expects to reduce total debt from $36 billion to $33 billion over 5 years, while growing property values from $66B to $73B. Their strategy is to grow NOI (and, correspondingly, asset values)

so the debt ratios are lower.

Reducing debt in absolute terms in the short term seemed less important.

Malls aren't the only assets Brookfield is turning into mixed-use communities. One benefit of focusing on a few major cities is that Brookfield can concentrate its capital and expertise to purchase several assets in close proximity to each other and create a unified vision for the properties. In Los Angeles, Brookfield Property is transforming the area around Figueroa and 7th and 8th Streets. As Hsu noted,

Hsu further emphasized the value of "a sense of place" and communities that emphasized experiences over products in accordance with changing consumer tastes.

Share repurchases did not get much discussion. On the day of the presentation (September 26), BPY units closed at $20.44. As I write this on October 30, units sit at $19.11 (6.5% lower, and a more appealing level for repurchases).

Brookfield Property had such conviction that units/shares were undervalued as to launch a Substantial Issuer Bid earlier this year, paying up to $21. By contrast, on Investor Day

they seemed surprisingly quiet about repurchases

as opposed to retaining and reinvesting excess capital. It was unclear whether this was to maximize growth, to minimize the need to sell assets, a result of a then-higher unit/share price, constraints based on a limited trading volume, or for some other reason.

Bruce Flatt seemed more open to the idea of major repurchases at BAM as its income from distributions, fees, and incentives grows.

Some members of the SA community have occasionally speculated that Brookfield Property might want to buy the assets of a distressed retail REIT like CBL (CBL) or Washington Prime (WPG) through a friendly takeover deal that would avoid bankruptcy and give a good-enough sales price to preferred and even common shareholders. I didn't think it was likely before, but this notion seems even more unlikely to me now.

Brookfield Property's planned developments will consume a lot of cash, and any excess beyond that will likely go to debt reduction or unit/share repurchases. Brookfield doesn't even seem to have a lot of interest in seriously transforming even the Class B retail assets it already owns anytime soon.

Those struggling REITs have even worse assets. Lower rents and tenant sales make them even harder to turn around, and they are less geographically (and thus strategically) relevant to the higher-end communities Brookfield clearly likes.

Consider Forest City, another major acquisition a Brookfield fund made shortly after GGP. The valuation was fairly high, but the assets fit very neatly into the existing Brookfield portfolio: high-end, urban, mixed-use properties, with local Brookfield teams.

BAM purchased Rouse (the renamed low-end assets spun off from GGP after bankruptcy, not the original high-end assets GGP purchased before bankruptcy) years ago and has encountered a lot of trouble with those assets. I doubt Brookfield will have an appetite for more lower-end, lesser-market retail space anytime soon.

Brookfield Property seems more focused than ever on creating mixed-use high-value urban communities. Debt is high, but a lot of it is at low rates and most is tied to single assets or small portfolios.

Several of the former GGP assets have an unclear future, but despite this I think Brookfield Property is an appealing investment, as is Brookfield Asset Management.

I am/we are long BAM, BPR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure:

I own a lot of BAM and BPR. I may purchase more, or some BPRAP if I think shares are temporarily weak.

Do your own research or consult a professional. Nothing here is formal professional advice, and it certainly isn't personalized to you. You may have different investment goals and/or a different risk tolerance.