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BAM - Brookfield Asset Management

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Shane Newbie

Shane

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https://www.reuters.com/article/us-brookfield-asset-commercial-real-esta-idUSKBN23H2UP

 

Pandemic will not be the end of office buildings, Brookfield CEO Flatt says

 

"But social distancing practices may ultimately be a boon for office building owners like Brookfield as companies seek to space out employees more. “We’ve had more tenants ask us for more space since this occurred than for less,” he said, “to accommodate more distancing."

 

I have to say... I find this to be concerning.  I think it is emotionally difficult for anyone in an entrenched position to recognize secular shifts that work against them.  How can this not be a negative for commercial office space?  At my firm, we have found employees are just as productive if not more productive at home.  Individuals with young children do seem to prefer coming into the office to get some peace and quiet, but the rest of the firm has now voted to come in ~3x per week on average even after the Pandemic is over.  We've sent everyone printers and monitors to set up home offices recognizing that this is a very long-term trend.  I hear the same from nearly everyone in my network.  We won't get rid of an office, but we won't prioritize it as a cost anymore either and we will likely downsize.

 

Additionally - aren't Twitter and Facebook permanently shifting to remote work?

 

If everyone comes in at least 3 times a week, wouldn't the office space required be the same at least? Unless you guys plan to hot (hostel) desk?

 

Yes hot seating for half of the office and it isn't everyone, we already had a few remote workers.  I imagine we will have many more by 2021 as we now have the green light to live wherever we want.

 

For those of you that have followed BPY closely - is this potentially a concerning trend?  They've clearly not gotten the results they wanted out of the retail acquisition... and that MIGHT not be their fault given the circumstances... but now they seem to be at least somewhat in denial about commercial real estate.  I agree with Xerxes - it's very difficult to know how it changes, but I have no doubt at all that rents will be under pressure.

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Jurgis Newbie

Jurgis

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We should probably move this to general RE thread.

 

Hot seating sucks. People have different preferences in terms of desks/monitors/keyboards/etc. Hot seating costs probably half hour to hour+ of productivity loss per day per person.

 

A company I know pre-Covid has had some teams with about 50% of people working from home and another 20%+ coming only few days a week. Still had cubes for everyone. Whether that's gonna stay the same in the future, who knows. If I had to guess, the people working from home will lose their cubes at some point. The few-days-a-week people might not. In any case, I'm sure people will gonna fight hot seating with passion. (Yeah, good luck, let go all the engineers who don't like hot seating... that's gonna be good for business.)

 

Just one place though.

 

On the other hand, I've been to an office of a logistics division of huge company and they have had the hot seating + open floor space couple years ago. And presumably they are doing fine with getting people to work there. So there was a mix pre-Covid and there's gonna be a mix post-Covid.

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rkbabang Newbie

rkbabang

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We should probably move this to general RE thread.

 

Hot seating sucks. People have different preferences in terms of desks/monitors/keyboards/etc. Hot seating costs probably half hour to hour+ of productivity loss per day per person.

 

A company I know pre-Covid has had some teams with about 50% of people working from home and another 20%+ coming only few days a week. Still had cubes for everyone. Whether that's gonna stay the same in the future, who knows. If I had to guess, the people working from home will lose their cubes at some point. The few-days-a-week people might not. In any case, I'm sure people will gonna fight hot seating with passion. (Yeah, good luck, let go all the engineers who don't like hot seating... that's gonna be good for business.)

 

Just one place though.

 

On the other hand, I've been to an office of a logistics division of huge company and they have had the hot seating + open floor space couple years ago. And presumably they are doing fine with getting people to work there. So there was a mix pre-Covid and there's gonna be a mix post-Covid.

 

I was going to say that if you are only in the office 1 or 2 days per week or only when you have a meeting that you don't need as big a cube and more cubes can be put in the same amount of space, but that goes against the whole social distancing trend.  I really don't know how all of this is going to shake out long term.  Is social distancing going to be permanent thing?  Are we really going to stay 6 ft apart from one another for the rest of our lives?  I hope not.  There are too many unknowns right now to see where this is all going to lead.  My prediction is a little of both.  Many companies will need less office space, some a lot less, but some companies will need/want more.  Will the latter make up for the former?  I don't know.  Also freed up office space in cities could be re-purposed for other uses for other types of businesses (gyms, restaurants, private clubs, who knows what).

 

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Gregmal Newbie

Gregmal

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https://seekingalpha.com/news/3583068-simon-brookfield-authentic-consider-j-c-penney-bid-bloomberg

 

The future of retail.... BAM and SPG will own everything. Book it.

 

This is a positive for BAM and SPG?  Honest question, as they have expertise, but current events seem to be pivoting away from that area.

 

The key to success(IMO of course) for these two, at least in this space, is buying themselves enough time to redevelop and transition the properties in an orderly way. If 70% of retailers went belly up next month, it would be ugly owning these. But to the extent that they can extend that bridge, and even do so profitably, I think things will ultimately get rosier.

 

If public market multiples are any indication, retail operations are currently very cheap(albeit risky). So as we've seen these guys do several times before, they buy out one of their key tenants with the objective of keeping the space filled and just collecting rent until they are good and ready to pull the plug in an orderly way.

 

In a somewhat related note, I have been surprised by the interest from multiple parties in JCP.

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ValueMaven Newbie

ValueMaven

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Anyone have any idea what equities BAM bought in the public markets?  Right now I can only find a 7.3% stake in British Land - which is required by filing. 

 

I'm guessing TransAlta Corp as well - stock went from $8 to $3.50 .... just wondering here a bit more broadly.  Thx!!!

 

-VM

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Gregmal Newbie

Gregmal

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$60B in the war chest, but they simultaneously arent paying some of their mortgages and begging lenders for forbearance, while showing no mercy and demanding their tenants pay their rents..... I really dont like these guys as people, but I guess its about making money, eh?

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chompsterama Newbie

chompsterama

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$60B in the war chest, but they simultaneously arent paying some of their mortgages and begging lenders for forbearance, while showing no mercy and demanding their tenants pay their rents..... I really dont like these guys as people, but I guess its about making money, eh?

while claiming that purchases of retailers on life support has nothing to do with their retail real estate business - it's just an investment opportunity.  And something along the lines of SPG is not a mall company. 

 

There is more than one way to go through life I guess. 

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Shane Newbie

Shane

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$60B in the war chest, but they simultaneously arent paying some of their mortgages and begging lenders for forbearance, while showing no mercy and demanding their tenants pay their rents..... I really dont like these guys as people, but I guess its about making money, eh?

while claiming that purchases of retailers on life support has nothing to do with their retail real estate business - it's just an investment opportunity.  And something along the lines of SPG is not a mall company. 

 

There is more than one way to go through life I guess. 

 

https://www.cnbc.com/2020/05/07/mall-owner-brookfield-will-spend-5-billion-to-save-retailers.html.  It looks like the retail investment is more of a distressed call and will be through the PE arm.

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petec Newbie

petec

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$60B in the war chest, but they simultaneously arent paying some of their mortgages and begging lenders for forbearance, while showing no mercy and demanding their tenants pay their rents..... I really dont like these guys as people, but I guess its about making money, eh?

 

The war chest is primarily investor money in new funds. It can’t be used to pay mortgages on assets held in old funds. If you look at where the assets are owned, you don’t see much cash. They need tenant income to service mortgages.

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ValueMaven Newbie

ValueMaven

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Decent interview actually.  Appears to be on the same day Flatt interviewed with Reuters.  Flatt has been making his media rounds again lately.  Interesting commentary on the ADNOC deal recently.  I still find it interesting that: BAM hasnt issued a PR on this deal re: size for investors + co-invest levels and IRR expected on the transaction. 

 

BTW: comment on $60B of cash - its hard to say how much cash b/c of the sub's BAM can issue equity if needed....last figure I saw was: $12B of corp credit lines on BAM + subs, plus another $5B in cash and liquid holdings at the parent...plus another $50B of investor capital

 

This is a great quote from Flatt on 3/23 (market bottom):It is very easy to invest in the markets when times are good, but it is in times of market decline that following the tenets of value investing matters most. We encourage you to follow them. We know this is a very stressful time for everyone. Please know that we are watching out for your capital.

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thepupil Newbie

thepupil

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https://seekingalpha.com/news/3588199-brookfield-property-soars-13-on-plan-to-buy-back-890m-of-units

 

Seeking alpha is labeling this as a buyback, but it is actually a tender offer where BAM and institutional partners are buying BPY from public holders at a premium.

 

I find it interesting for a number of reasons:

 

BAM doubling (tripling?) down on BPY’s office and highly levered retail.

 

The institutional buyers are acknowledging that the undisturbed price was too cheap and/or illiquid So they’re having to tender rather than buy in the open market. It also helps that the GP (Brookfield) probably game up with the transaction and pitched it rather than the institutional buyer thinking of doing this on their own.

 

Will be curious to see if other real estate companies follow suit? Will Blackstone get tired of owning 2-3% of the companies it bought and make a tender for a larger stake, for example.

 

Also, yesterday, the ratings agencies mostly affirmed the NYC REITs credit ratings (but changed outlook to negative). They downgraded BPY a notch though.

 

Moody's downgrades Brookfield Property REIT's CFR to Ba3; negative outlook

New York, July 01, 2020 -- Moody's Investors Service, ("Moody's") downgraded the ratings of Brookfield Property REIT Inc. ("BPYU"), including its Corporate Family Rating to Ba3 from Ba2 and its senior secured bank credit facility and senior secured notes to B1 from Ba3. The REIT's Speculative Grade Liquidity rating remains unchanged at SGL-4. The rating outlook is negative. This concludes the review for downgrade on Brookfield that was initiated on April 2, 2020.

The downgrade reflects Brookfield's elevated leverage entering the pandemic and the high likelihood of weakening operating income in the next four to six quarters such that its net debt/EBITDA will be sustained well above the downgrade trigger of 11.5x on a pro-rata JV basis. Moody's also expects Brookfield to face significant hurdles in order to refinance its large amount of mortgage debt maturities this year while its covenant compliance cushion remains very modest.

 

 

The Company will fund the Offer by drawing on an equity commitment (the “equity commitment”) it has received from Brookfield Asset Management Inc. (“BAM”) for up to $1 billion. BAM’s equity commitment will be funded as to 50% from cash on hand and the remainder from managed accounts on behalf of certain of its institutional clients. The equity commitment can be called upon by the Company until December 31, 2020 in exchange for the issuance of Units and/or Redeemable/Exchangeable Partnership Units of the Company’s subsidiary, Brookfield Property L.P., at a price per unit equal to the price to be paid by the Company in the applicable buyback.

 

“This offer will provide unitholders who desire liquidity an opportunity to sell their stock at a premium to the market price, while preserving BPY’s liquidity,” said Brian Kingston, Chief Executive Officer. “BAM is providing support for the offer by agreeing to fund the bid in exchange for an additional equity interest in our business.”

 

The equity commitment has been approved by the board of directors of the Company’s general partner upon the recommendation of a special committee comprised of all the independent directors.

 

BAM currently owns 55% of the outstanding Units (calculated on a fully exchanged basis, including Redeemable/Exchangeable Partnership Units of Brookfield Property L.P.). If the Offer results in 74,166,670 Units being purchased and cancelled by our Company, BAM and its affiliates will hold an aggregate of 593,915,513 Units and Redeemable/Exchangeable Units, or approximately 63% of our business on a fully exchanged basis. The issuance of Units and Redeemable/Exchangeable Units is subject to approval by Nasdaq and the Toronto Stock Exchange.

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Spekulatius Newbie

Spekulatius

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The more BAM owns of BPY, the larger the discount to NAV is going to get, which makes a buyout a necessity. Then they are paying the management fees from their left pocket into their right.

 

This thing is so highly levered with underwater assets that are impaired to a significant extend (Retail, Office) that really wonder what the end game is going to look like.

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thepupil Newbie

thepupil

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Since London office is important to BPY (and therefore BAM) and a bit underdiscussed in my view, I'd point out that this weekend, a Hong Kong REIT decided that the best use of about half a billion USD was to buy Morgan Stanley's London HQ at about a 5 cap. We don't know how long the MS lease goes, but it's still a very big post-covid print.

 

So far, it seems that those with actual skin in the game (the purchasers and financers of office buildings) don't seem to understand that all these buildings are doomed and are bidding/financing buildings just a little bit back of pre-covid marks, albeit on small sample size/low volume.

 

this purchase is also kind of funny in the context of Morgan Stanley specifically talking about how they don't need offices and are doing great with 90% of employees at home.

https://www.cnbc.com/2020/07/17/wall-street-banks-are-in-no-rush-to-bring-employees-back-to-the-office.html

“We’ve been now at 90% of the folks working from home for a while now, and the plant continues to hold up quite well,” said Jonathan M. Pruzan, Morgan Stanley’s chief financial officer.

 

 

The below article notes that huge discount of 40 bps to where the building was marked.

 

The amount paid to HGR Liquidating Trust represents a marginal 0.4 per cent discount on a valuation conducted by Colliers International (Hong Kong) on July 17. The discount reflects the impact of Brexit and the coronavirus pandemic on London’s office market, said Raymond Cheng, head of Hong Kong and China research at CGS-CIMB Securities. “British assets, after Brexit, after all, carry some uncertainty. Secondly, the office market outlook is a little clouded after Covid-19,” he said. “Although the net operating income yield stands at 5 per cent, it is possible for rents to drop because of Covid-19. I think [Link] might have factored this in.”

 

https://www.scmp.com/business/article/3094824/hong-kongs-link-reit-announces-entry-europe-us4875-million-acquisition

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