UPDATED, June 4, 10:31 a.m.: Brookfield has been in the news a lot since the pandemic hit.
The global investment giant’s private equity firm Oaktree Capital Management is looking to raise $15 billion for a distressed-debt fund, and Brookfield Asset Management has announced plans to launch a $5 billion fund for struggling retailers.
Brian Kingston, CEO of Brookfield Property Partners, spoke to The Real Deal in June about the company’s rent negotiations with mall tenants, long-term plans for its $14.8 billion General Growth Properties acquisition, and the country-wide protests over the death of George Floyd.
While Covid-19 and the economic fallout may have decimated an already struggling retail sector, Kingston maintained that Brookfield’s roughly 120 million square feet of retail assets are strong enough to withstand the pandemic and other crises in the long-run.
This interview has been edited and condensed for clarity.
What’s Brookfield’s long-term strategy for its U.S. retail properties?
What we try to do is own very high-quality, large scale assets in major gateway markets. Our strategy and our reasoning for that is we think that those types of assets tend to hold their value better through cycles and create opportunities for us to continuously reinvest capital in them to modernize them and continue to make them relevant.
How is the company feeling about its big bets on retail, specifically its GGP acquisition, in the wake of the pandemic?
There’s no question the pandemic is going to have an impact on the outlook for the sector. But one of the things that attracted us to the portfolio in the first place is we think these centers [in major markets] will hold their value much better than the lower-quality secondary locations. We’ve had challenges with rent collections through April and May, but we’ve reopened close to 100 of our shopping centers already. As those centers get back to operating, we expect those collections to recover.
Has the recent wave of protests and riots impacted Brookfield’s reopening plans at all?
Yes. We’ve had a number of centers that have been impacted by local protests, and in some cases, there has been damage to the malls. We’ve closed about eight centers around the country to the public until things settle down a little bit.
Our emergency response protocols and the teams within the malls are excellent, and they’ve been able to mobilize very quickly and put up plywood to protect the properties. There have been no major injuries, and all the damage has been largely cosmetic. In the context of the larger movement that’s afoot right now, we think it’s a small consideration.
What are your thoughts on the country’s response to the death of George Floyd in general?
For Brookfield generally, we have always taken an approach to our business and our operations that was based on meritocracy. So I think in the sense that these protests and this movement is about fair and equal treatment for all Americans, we support that wholeheartedly.
How challenging have rent collections been for Brookfield’s retail tenants?
When we speak to the tenants, I think they fall into three broad categories. The first one is tenants who want and expect to be able to pay their rent but are facing a short-term liquidity crunch as a result of their businesses being closed down, and so we’re working with them to come up with rent deferral plans where they pay back the rent that they missed over some reasonable period of time.
Number two is businesses that have been severely impacted by the shutdown and are going to really struggle to ever recover their cash flow. In those cases, we’re working with many of those retailers to restructure leases.
And the third category are the larger tenants whose businesses are in serious flux — and that might be as extreme as filing for bankruptcy. They’re going to go through some form of restructuring and look to close down stores, and so in those cases, the negotiations are much more complex than just deferral or abatement.
What have those conversations been like?
They have all been remarkably collegial negotiations. Everybody understands nobody created this, and nobody wanted to be here or be having these conversations. And so whether it’s lenders or tenants or other landlords, the negotiations are very different than you would typically find in a failure-to-pay situation.
Have any of the recent retail bankruptcies come as a surprise to you — namely Neiman Marcus, J. Crew and J.C. Penney — or were they all fairly predictable?
Very large department stores are huge legacy businesses that need time and a lot of capital to pivot their strategies. I don’t think it should be surprising to anyone that, in the midst of trying to pivot, having all of their physical stores temporarily close down was a shock that they just couldn’t take.
Are you expecting another wave of bankruptcies, or do you feel like we’ve seen the worst at this point? Hopefully, we’re through the worst of the health crisis and are now moving into the recovery phase. And as part of that recovery phase, I think a lot of people are expecting there may be a recession. So I think it’s probably too early to say that we’ve seen all of the bankruptcies, because there are tremendous challenges associated with restarting all of these businesses and getting their sales back online. I would expect to see a few more.
How did Brookfield come up with its $5 billion retail relief plan?
I would describe this as a classic Brookfield approach to investing. We try to be contrarian, and we try to invest our capital in places and at times when capital is scarce. That’s a very apt description of retail businesses right now.
So the $5 billion program is designed to allow us to make investments in what we see as very strong, high-growth businesses at a time when capital is scarce, and we think we’ll be able to generate high returns because we’ll be able to pick and choose. There are going to be winners that come out of this, and if we can invest in some of those, it’s good for us, and it’s good for them.
What do you look for when trying to predict who the winners might be?
We’re looking for businesses that have a strong brand with their customers and a sensible online strategy. We think the future of retail is omnichannel, meaning you need to have a strong online presence as well as a physical presence.
How much influence will Brookfield have over how these companies are run? Would it take any board seats?
It will range. In many companies that we invest in, having someone from our management team on the board is helpful, so I think you’ll see us on it where we have something to add. But that doesn’t necessarily have to be the case.
Are there any concerns within the company or from shareholders about Brookfield investing so heavily in malls and other retail properties?
Our shareholders read the same articles everyone else does, and they see things like “Everybody’s going to buy everything online, and they’ll never step foot in a mall again,” so they ask those kinds of questions.
But what’s different about our portfolio is that in many of the towns where we’re operating, this is the center of commerce. There is no question some malls and some retail real estate will disappear over the next couple of years, but it’s important to distinguish that those aren’t the types of assets we own. Ultimately, we and a handful of others who own similar centers will be the survivors in this.
This story has been updated to reflect that Brookfield Asset Management, not Brookfield Property Partners, announced the $5 billion retail fund.