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Is Brookfield's Real Estate Business in Trouble?


Sep 20, 2020 by Matthew DiLallo

Brookfield Asset Management (NYSE: BAM) is a behemoth in the alternative asset management segment. The company currently has $550 billion of assets under management across real estate, infrastructure, renewable power, private equity, and credit. While most of those businesses are thriving, the company is facing some serious headwinds in real estate.

Because of that, its two publicly traded real estate affiliates, Brookfield Property Partners (NASDAQ: BPY) and real estate investment trust (REIT) Brookfield Property REIT (NASDAQ: BPYU), have lost more than a third of their value this year. As a result, its dividend yields are currently in the double digits, a sign the market fears Brookfield's real estate business might be in serious trouble.

Headwinds abound

Brookfield has more than $200 billion of real estate assets under management, consisting of those directly owned by Brookfield Property and held in Brookfield-managed REITs. Brookfield Property's core business focuses on owning Class A office and retail properties. Meanwhile, Brookfield's funds invest in various property types, including office, retail, multifamily, industrial, hospitality, triple net lease, self-storage, student housing, and manufactured housing.

Both of Brookfield's core portfolio holdings are facing strong headwinds. First, the retail apocalypse, which had already significantly impacted its mall portfolio, has accelerated because of COVID-19. Many of its tenants went bankrupt while others couldn't afford to pay their rent. Because of that, about a dozen of its properties are struggling to manage their debt obligations. That led Brookfield Property to ask some of its lenders for 12-month extensions on loans maturing this year.

COVID-19 also caused a new potential threat to its office portfolio. While most office tenants are paying their rent, investors are growing concerned that companies are adapting to telework quite well, which might make this arrangement permanent for many employees. If that happens, it could crush office occupancy levels, rental rates, and property values.

Meanwhile, COVID-19 also affected some Brookfield fund investments. Brookfield Property reported a loss during the second quarter from its share of these funds, due primarily to hospitality property closures and a decline in the gain on asset sales.

All this means the market has concerns about the sustainability of Brookfield's high-yielding dividend.

Beneath the troubling trends

While COVID-19 has impacted Brookfield's real estate business, things aren't as bad as they might seem. For example, while the company made headlines in June due to some of its malls' financial troubles, it has worked out loan extensions on five core retail assets for one year, pushing out $1.2 billion in maturities.

Because of those and other financing transactions, the company ended the period with $6 billion of group-wide liquidity, including $1.5 billion in cash. Meanwhile, it bolstered that number in August by completing another $2.2 billion of financing transactions at attractive interest rates.

Brookfield is also exploring opportunities to monetize some of its real estate assets to bolster its liquidity further. For example, it reportedly put its Simply Self Storage business on the block, which could raise $1.3 billion in cash for its investment funds. Given its current liquidity level and funding options, the company doesn't believe it needs to reduce its dividend.

Further, while investors fear work-from-home trends will negatively impact office buildings, Brookfield thinks they've blown these fears out of proportion. Brookfield Property CEO Brian Kingston commented on the future of the office in the company's second-quarter investor letter. He wrote:

"A corporate office represents much more than a place for employees to sit every day; companies utilize their offices as incubators of culture and as an important tool to recruit and train younger talent. Collaboration and innovation cannot take place remotely or over conference calls, and some companies are already observing a decline in these areas amongst their employees. As time goes on, we think the loss of innovation and collaboration will become even more apparent and companies will shift emphasis back to having employees in the office."

Instead of a headwind, COVID-19 could turn into a tailwind. Kingston noted that "concerns around social distancing and density ratios are very likely to drive additional office demand in the future and may prove to reverse the trend of increased densification we have witnessed over the past 20 years."

Given its deep access to capital, long-term investment outlook, and disbelief that office and retail market conditions are as bad as investors fear, Brookfield doesn't believe its real estate business is in trouble. Instead, it thinks the current downturn is an excellent buying opportunity. That led the company to launch a $1 billion buyback program to increase its stake in Brookfield Property.

A bump in the road

Brookfield's real estate business is undoubtedly facing some pressure, especially at its retail properties. However, the company doesn't believe those issues are as dire as the market seems to think. Not only does it have lots of access to funding but it thinks office space will become more important, not less, in the future. That's why it was willing to spend up to $1 billion buying back the public equity of Brookfield Properties in a major vote of confidence for its real estate business.

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Matthew DiLallo owns shares of Brookfield Asset Management and Brookfield Property Partners. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool has a disclosure policy.