BAM - Brookfield Asset Management

[petec]

In terms of the quality of the assets, there are some very premium assets within the portfolio of GGP. They own malls in affluent areas like Tysons Galleria or Oakbrook Center that generate sales per square foot over $1000. GGP had 120+ properties though and surely not are all premium. But to call these "crummy" assets is an overstatement. Retail is hated currently and we're in the middle of a global pandemic, but owning a premium mall in a high growth area with average household incomes of $150-200k is a great asset, especially when you consider the development potential. This is the retail equivalent of a trophy office tower.

 

Forest City also had good properties.  Rouse on the other hand was widely known as having primarily B malls and I have never quite understood why Brookfield bought them. They were spun off from GGP before Brookfield took them over and they do not seem to fit their profile.

 

But one thing I find interesting is that many malls are not contiguous properties. Back when many malls were built, the department stores like Macy's and JCP were considered anchors and the malls were built around them, the idea being that the department stores would drive traffic to the malls. The department store properties were owned separately, either by the retailers themselves or on long-term ground leases. Sometimes the ownership off the rest of the mall is also fragmented, for example Forest City owned just a portion of the Short Pump mall in Richmond.

 

There is value in having a contiguous property and I wonder if part of Brookfield's strategy is to buy up the different owners of these parcels and combine them. This may explain their interest in Rouse and JCP for example and they have bought some individual locations from Macy's.

 

They made some comments at their investor day which I found really interesting about the concentration of value in their properties.

 

We have $13.5 billion invested in that business. But in recent years, we have either invested in or developed 15 office and mixed-use complexes. These include Brookfield places that are across the globe, Canary Wharf, Manhattan West, Bay Adelaide Center, Potsdamer Platts, amongst others. These are located in top markets: New York, Toronto, London, Berlin, Perth. These properties are 94% occupied with credit quality tenants and have an average 10-year lease life.

 

And alone, these properties comprise $21 billion in asset value, which is about 70% of the total of our entire office business.

 

...

 

Similarly, in retail, where we have 122 properties and $13 billion invested. If you look at only our top 25 properties in that portfolio as measured by sales performance. These include Ala Moana, Oak Brook Center, Tysons Galleria and the Fashion Show, amongst others.

 

All of which regularly achieve sales per square foot in excess of $1,000. It's not surprising they are 97% occupied and consistently outperform in terms of occupancy and leasing spreads and NOI growth. Alone, these properties account for $15 billion of total asset value or about 45% of the total of our entire retail portfolio.

 

https://bam.brookfield.com/~/media/Files/B/BrookField-BAM-IR-V2/ir-day/2020/brookfield-2020-investor-day-transcript.pdf

 

In BPY's Q3 call they were asked a lot of questions about properties getting under water, whether or not they would consider "letting the lender take the keys" i.e. just give them back, and they actually seemed rather cavalier about it, Kingston said that they had no problem doing that and were considering it in many cases.

 

This sounds a little surprising until you look at the overall strategy.  I think that they buy operations like GGP or Forest City not for the breadth of the portfolio but just for the best properties.  They can develop and improve them, especially if they can combine them with other adjacent parcels, and create enough value that way to justify the whole deal.

 

This is exactly the part of the investor day and 3q call that I am trying to highlight. Together they have changed my view on BPY.

 

BPY has

- very good properties that are underlevered.

- lesser properties that are overlevered.

 

This means BPY has

- less equity at risk than you might think looking at consolidated figures

- more optionality than is obvious, because they can either walk away from or renegotiate the troubled assets.

 

I don't think this is cavalier. It's very smart, and almost certainly deliberate, and contrary to your final paragraph it's exactly in line with their strategy. The best assets (which they will redevelop) are not threatened by debt. The rest are options.

 

What I would be very interested to know is whether the debt at the lesser assets was there when Brookfield bought them, or is the result of up-financing and dividending proceeds. If it is the latter then quite a lot of cash may have been returned to Brookfield & partners already.

 

Also, thanks for your points about contiguous properties. I was aware of this angle for the big boxes but didn't realise it extended to some smaller stores too. One point I would make here is that condominium malls are generally a disaster over time because nobody can curate the offering. Stores that own their own box can cling on well past the point where they deliver value and attract footfall. If Brookfield can both renegotiate debt on the lower quality assets and purchase boxes out of bankruptcy, they may be able to curate a much better mix of stores and increase value. Options.

 

EDIT:

 

1) I just realised I misread your last para. We are on the same page. Apologies.

 

2) If the lesser quality assets are indeed condominium properties, this might strengthen BPY's hand against the lenders. No lender in his right mind would want to own a condominium property. In my experience (which admittedly is not US-based, so perhaps things are different) they are a nightmare and very time intensive to manage because every decision involves negotiating with multiple parties.

[spark411]

A)  Most of BPY debt is non-recourse to BAM.  Therefore, not servicing the debt on a property or two does not impact the financial enterprise materially.

B)  There are two ways to buy a property.  One is to buy the equity.  The other is to buy the debt.    The debt is often traded separately from the equity.  If the debt on the existing asset can be bought and interest and debt can be reduced, the equity - especially when the equity is also the operator - has an incentive to not make the debt payments.  Moreover, if the equity thought the debt holders were in "trouble" a smart negotiator would purposely not pay the debt so that the debt holder has an incentive to offload the debt much lower than par. 

 

If A and B are true, then the current environment has LOW RISK and HUGE opportunities to lower basis and/or acquire control of assets for Brookfield.

 

 

[petec]

Agreed. The question in my mind is whether Brookfield did this deliberately. I mean, I am sure being underwater and threatening lenders wasn't plan A, but maybe plan B always looked something like this:

1) Buy portfolios.

2) Keep the gems unlevered, and develop them to add value.

3) Lever the crap to extract value up front, derisk the deal, and create options.

4) Wait for the next recession.

5) Renegotiate debt.

6) Buy stores from struggling retailers and curate a better mix and the lower quality assets.

7) Watch NAV grow.

 

Pure speculation of course, but it explains why they put the debt at the crappier assets and are now talking about handing back the keys.

 

[ValueMaven]

Upgraded by JPM and added to Focus List as a value play.  $51 PT. 

[petec]

Upgraded by JPM and added to Focus List as a value play.  $51 PT.

 

Amazing that they do that at $37 and not at $29!

[chrispy]

Did GGP have the debt structured as non-recourse? If they did not, I think it is indicative of Brookfield following the strategy described here of taking out new debt for the properties sometime since acquisition

[ValueMaven]

Upgraded by JPM and added to Focus List as a value play.  $51 PT.

 

Amazing that they do that at $37 and not at $29!

 

Being a sell-side analysis is extremely hard.  It's possible to nail tops and bottoms and there is so much client specific work + corporate work required just to keep your job.  Publish or die is the saying!!  That said -- these types of reports have real value if they are directionally helpful regarding trends, industries etc. 

[EricSchleien]

I have been wondering how this works exactly though. Say there is a mall owned and operated by Brookfield that is under water.  They get behind on the loans, go to special servicing, and potentially give back the asset. Brookfield's debt is wiped out and the servicer owns the asset.  But then what?

 

The servicer probably can't operate the mall, they are a loan servicer, not a mall operator. If it sits there vacant it will lose even more value. They will want to sell it as fast as they can, and one of the buyers could be Brookfield. So Brookfield is inherently still in the mix even if they give up on the mall. I think this is especially true with CMBS where there is no one party involves but it is securitized.

 

And then what happens if Brookfield gives back the mall but then owns a department store location in that mall like JC Penney? Do they now go from being the owner of the mall to a tenant?

 

Kingston has alluded to this on the past two calls and has said that they can "negotiate" or "work out" the asset. They will take a loss of some kind but might still be involved with it.

 

 

REPLY

 

Question #1: "The servicer probably can't operate the mall, they are a loan servicer, not a mall operator."

Answer #1: Servicers own and operate properties all the time. They can own an asset for up to 3 years according to IRS guidelines.

 

Question #2: "If it sits there vacant it will lose even more value. They will want to sell it as fast as they can, and one of the buyers could be Brookfield."

Answer #2: Again – they don’t often sell quickly. They often hold and stabilize and then sell

 

Question #3: "Do they now go from being the owner of the mall to a tenant?"

Answer #3: Yes

[petec]

Upgraded by JPM and added to Focus List as a value play.  $51 PT.

 

Amazing that they do that at $37 and not at $29!

 

Being a sell-side analysis is extremely hard.  It's possible to nail tops and bottoms and there is so much client specific work + corporate work required just to keep your job.  Publish or die is the saying!!  That said -- these types of reports have real value if they are directionally helpful regarding trends, industries etc.

 

Agree. Still amuses me tho.

[ValueMaven]

BAM Re + Spinout to shareholders as a new listed sub in 1H 2021.  A lot of suggested this was possible 3-5 years out.  But wow...

[tiddman]

I am not sure I'm familiar with the term "condominium mall".

 

BPY discloses some details about each of their properties each quarter for example:

 

https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/core-operations-additional-information/2020/Q3%202020%20Core%20Operations-%20FINAL.pdf

 

You can even punch up individual properties on Google Maps and look at the details if you wish. This also shows the debt on individual consolidated assets, there are also unconsolidated properties which I am assuming are equity-accounted and have separate debt financing for the whole group. They don't provide a value of each property so we can't see what the level of financing is on a per-asset basis.

 

It is an interesting idea that they lever up the poorer properties and leave the better ones less levered but I am not sure how they'd do that. When they acquire a portfolio such as GGP or Forest City they get all of the financing that come with it, they can try to refinance individual properties but would more likely wait until they come due to follow the maturity ladder. Maybe it is just that the better properties increase in valu, so as value is created the leverage declines.

 

But again I am uncertain about a strategy where they buy a portfolio of 100 properties intending on only keeping 25 of them. They still paid for the other 75. Maybe the calculus is that, even if the bottom 50 get into some kind of trouble, they didn't really pay much for them and the "loss" is mitigated through restructuring.

 

For GGP debt I would say that generally it is property-specific and non-recourse, but the GGP deal went a long time and was pretty complicated and both BAM and BPY were involved. I believe they directly or indirectly took on debt to finance the deal, and soon after closing they sold some properties either completely or to JV partners, I am guessing to raise cash to pay down some of that debt. I would say that strategically they probably wanted virtually all of the debt to be tied to the assets. Some interesting color here.

 

https://www.perenews.com/brookfield-property-partners-sell-additional-2-5bn-ggp/

 

Regarding special services, this article gives some interesting color.

 

https://www.lenderliabilitylawyer.com/blog/161/hotel-shopping-center-how-to-survive/

 

The short version is that the noteholder in a CMBS loan isn’t a bank. It is a trust without employees or even an office. Instead, the trust operates through a master servicer and special servicer.

 

...

 

The special servicers are professional management companies like Rialto, LNR Partners, C-III, Midland Loan Services and CWCapital. They all have reputations so bad that would even a great white shark would be frightened.

 

Unlike banks, special servicers can bid and own properties they are servicing. They also only get paid while a loan is in trouble (in special servicing). This gives them a perverse incentive to not help struggling borrowers.

 

...

 

Borrowers with little or no equity might fare better in a CMBS backed loan. Even if you think you have equity, no one really knows what a hotel or shopping center is worth in this environment.

 

Special servers are not mall operators, they are payment collectors and have very different incentives. They don't know how to or even want to market or improve malls. Being a retailers in a mall that has gone to special servicing would probably make you pretty nervous.

 

I think this supports petec's idea that Brookfield plays both sides of the table. When the property does well, invest in it and collect the returns. When it doesn't, renegotiate the property, and since you have additional capital and multiple avenues of investment you have many options, you can buy back the debt at a discount, invest in the reatiler or its other assets, participate in bankruptcies, etc.

[petec]

BAM Re + Spinout to shareholders as a new listed sub in 1H 2021.  A lot of suggested this was possible 3-5 years out.  But wow...

 

By the sounds of it this is economically equivalent to BAM (same distribution, and exchangeable). Which seems very odd to me.

[chrispy]

I do not understand Bam re if it is economically equivalent

[petec]

I am not sure I'm familiar with the term "condominium mall".

 

Condominium mall may not be a US term. I came across it in Colombia, where it describes malls where retailers own their stores. These malls usually slowly die as the mix becomes less relevant and common spaces are allowed to deteriorate.

 

You can even punch up individual properties on Google Maps and look at the details if you wish. This also shows the debt on individual consolidated assets, there are also unconsolidated properties which I am assuming are equity-accounted and have separate debt financing for the whole group. They don't provide a value of each property so we can't see what the level of financing is on a per-asset basis.

 

They don't provide the value per asset, but they did clearly state at the investor day that 25 properties represent $10bn of equity levered at 36%, implying $5.5bn of debt. Since the total equity is $13bn and the total retail debt is $21bn, we can infer that the rest of the portfolio has $3bn of equity and an eye-popping $15.5bn of debt.

 

It is an interesting idea that they lever up the poorer properties and leave the better ones less levered but I am not sure how they'd do that. When they acquire a portfolio such as GGP or Forest City they get all of the financing that come with it, they can try to refinance individual properties but would more likely wait until they come due to follow the maturity ladder. Maybe it is just that the better properties increase in valu, so as value is created the leverage declines.

 

Yes, I would imagine it's a combination of up-financing as debts mature, growing value at good assets, and writedowns at lesser ones.

 

But again I am uncertain about a strategy where they buy a portfolio of 100 properties intending on only keeping 25 of them. They still paid for the other 75. Maybe the calculus is that, even if the bottom 50 get into some kind of trouble, they didn't really pay much for them and the "loss" is mitigated through restructuring.

 

Yes - although it depends on how much they paid for the other 75, and how much of that they were able to recoup fairly quickly by increasing the debt on those assets. In theory they could have paid for themselves fairly quickly if BPY got a good price and then added debt.

 

Who knows!

 

 

 

 

 

 

[petec]

I do not understand Bam re if it is economically equivalent

 

Nor do I. Letter just says "the attributes of these shares should be more attractive to some groups of shareholders".

[tiddman]

Condominium mall may not be a US term. I came across it in Colombia, where it describes malls where retailers own their stores.

 

The US malls we're talking about aren't like this. Generally you have a mall with say 20 to 100 stores, anchored with maybe 1-3 department stores (JCP, Macy's, Lord & Taylor, etc). Generally the mall is owned by a mall operator and the department stores are owned and run separately. Once upon a time, the department stores were intended to drive traffic to the mall, but now it's probably the opposite. But the individual retailers are just tenants in the mall without ownership, though there are some exceptions for larger-format retailers.

 

Now that the department stores are failing those locations are up for grabs and are being repurposed or redeveloped. That is what Seritage is doing with Sears locations and I am guessing why Brookfield and Simon are interested in JC Penney.

 

They don't provide the value per asset, but they did clearly state at the investor day that 25 properties represent $10bn of equity levered at 36%, implying $5.5bn of debt. Since the total equity is $13bn and the total retail debt is $21bn, we can infer that the rest of the portfolio has $3bn of equity and an eye-popping $15.5bn of debt.

 

Yep that is indeed interesting. GGP was valued at about $15.3 billion at the time it was acquired and they say the top 25 properties comprise $10 billion of equity value and $15 billion of asset value.  So it may literally be true that they got the bottom 50%, or even more, of properties for free.

 

This kind of analysis really does put the deal, financing and debt in perspective.  A bunch of the debt is on these "dead" properties and if they ever had a problem servicing it they would either restructure or just let the property go. And the lender probably knows this too. Meanwhile they can invest in the successful properties.

[petec]

I’m aware the malls we are talking about are not exactly condominium malls in the Colombian style, but the principle is the same. The anchors represent a big chunk of the GLA, no longer attract footfall, and make the mall less attractive to paying tenants. Because they own their store, they can’t be kicked out and the store can’t be redeveloped into something more interesting. So the whole mall loses value.

 

If some of the smaller stores also own, which is what I think you said in a post upthread, then the issue is only bigger.

 

Speculating: maybe this is what makes some of the “lesser” malls lesser. And if it is then a downturn provides a double option: renegotiate the debt and buy in gla from struggling owners.

[tiddman]

I think the quality of the mall is driven largely if not entirely by its location and surrounding demographics. The "A" malls are in high-income, growing, high-value areas. In these areas, if a large property owner goes bankrupt or loses control of its buildings they are immediately snapped up by some other party to redevelop because there is ample demand for retail, residential and commercial. Brookfield's Tysons Galleria mall was anchored by a Macy's, when Macy's got in trouble Brookfield bought the location for $30M and is investing $100M to redevelop it into 4 new locations. They are even talking about redeveloping some of the parking lot space.

 

[ValueMaven]

I do not understand Bam re if it is economically equivalent

 

We must be missing something...I'm sure more will come out in the coming months.  Was light in the details I'd agree with that

[gokou3]

In their Q3 letter, Flatt stated that the BAM RE shares will be convertible at the unitholder's option to BAM.  Taxes aside, why will I want to hold BAM instead of BAM-RE?  Maybe it's the difference in tax treatment.  Seeing that the prices of BIPC/BEPC > BIP and BEP, can one assume BAM-RE partnership unit price will be at a discount to BAM as well?

 

 

Question to those of you who follow the JCP restructuring deal.  What are BAM and Simon actually buying?  For sure they would have the inventory, staff, supplier list, etc.  Are they also getting the mall properties as well?  What does the lender get?

 

https://www.businesswire.com/news/home/20201109006218/en/JCPenney-Receives-Court-Approval-for-Asset-Purchase-Agreement-with-Brookfield-Simon-and-First-Lien-Lenders

[Xerxes]

I must say that I am confused.

I think once you get BAM RE distribution, you can either plow back into BAM proper.

Or keep BAM RE that has a re insurance business.

 

Not sure why they say it is comparable to BEP and BIP.

Comparable to those means reinsurance BAM not being economically equivalent to BAM.

BEP.un and BEPC are economically equivalent not BEPC and BAM.

 

There is also BAM REIT coming covering Indian real estate I imagine.

 

They could really slow down the constant spins it tends to really confuse and dilute the brand.

[petec]

I must say that I am confused.

I think once you get BAM RE distribution, you can either plow back into BAM proper.

Or keep BAM RE that has a re insurance business.

 

Not sure why they say it is comparable to BEP and BIP.

Comparable to those means reinsurance BAM not being economically equivalent to BAM.

BEP.un and BEPC are economically equivalent not BEPC and BAM.

 

There is also BAM REIT coming covering Indian real estate I imagine.

 

They could really slow down the constant spins it tends to really confuse and dilute the brand.

 

They didn’t say its equivalent to BIP or BEP. They said BAMRE has the same relationship to BAM that BIP does to BIPC and BEP does to BEPC.

 

So it looks like the difference is tax.

 

Which is very silly because if so, why call it BAMRE? Surely BAMRE should give one exposure to RE?

[cornerbrook]

Hi Folks,

 

Re BPY and possible misunderstanding of the allocation of liabilities in the retail part

 

Just to clarify, according to the Q3 supplemental the BPY retail debt is $21 B, comprising $9.4bn proportionate consolidated, $6.3 bn proportionate unconsolidated and $5.5 bn corporate  This corporate debt is owed by the retail holding company and is secured by all the retail assets, even if it is non- recourse to BPY at the top.

 

 

[petec]

Hi Folks,

 

Re BPY and possible misunderstanding of the allocation of liabilities in the retail part

 

Just to clarify, according to the Q3 supplemental the BPY retail debt is $21 B, comprising $9.4bn proportionate consolidated, $6.3 bn proportionate unconsolidated and $5.5 bn corporate  This corporate debt is owed by the retail holding company and is secured by all the retail assets, even if it is non- recourse to BPY at the top.

 

That’s a good spot. Apologies, I should have seen that.

 

So 5.5bn against the “better” assets, 5.5bn at the corporate sub-holdco, and 10bn at the “lesser” assets.

[Xerxes]

thanks, so BAM RE is to BAM actually what

 

BEPC

BIPC

 

are to ...

 

BEP.UN

BIP.UN

 

respectively.

 

It is just that 'delta' between BEP.UN and BEPC is the difference between partnership and corporation. But not to clear what is BAM and BAM RE (aside tax consideration). Homework for the weekend.