It’s been an especially busy few months for Canadian investment giant Brookfield, which is upping its bets on everything from struggling chain stores to distressed real estate.
Brian Kingston, CEO of Brookfield Property Partners, spoke to The Real Deal in June about the company’s rent negotiations with mall tenants, its plans to launch a $5 billion retail relief fund and the countrywide protests over the death of George Floyd.
While Covid-19 and the economic fallout may have decimated an already struggling retail sector — with recent looting further complicating matters — Kingston maintained that Brookfield’s roughly 120 million square feet of retail space is strong enough to withstand the pandemic and other crises in the long run. That includes plans to redevelop dozens of malls around the country following the acquisition of General Growth Properties for $14.8 billion in 2018, he said.
Kingston also told TRD that his company is moving “full steam ahead” on the final tower in its $2 billion Manhattan West megadevelopment and talked about Brookfield and Tod Waterman’s recent takeover of the iconic Lever House.
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.
Did any of the retail companies that recently declared bankruptcy hurt Brookfield more than others?
The act of filing bankruptcy isn’t the real issue. It’s when they close stores. Using J.C. Penney as an example, they’re going to close [about] 200 stores over the next two years or so. We would expect some of those will be in our malls. It’s not a big rent loss when they close one of their stores down, but it impacts the flow of traffic in the remainder of the mall. In some cases, we could build apartments in the store’s place. We have a lot of those options available to us.
So the plan to convert several Brookfield malls into “mini-cities” is still a go?
Yes. If anything, the pandemic may drive demand for housing, particularly for new housing that is going to be taking into account everything that we know — from HVAC systems to hallways to how to design proper common areas. There may be some cosmetic changes, but the desire for people to live in these live-work-play environments, I don’t think that changes longer-term. I just think we’re going to need to make a few adjustments.
Are you already making some design changes in the malls that are reopening?
When you come to one of our malls now, all of our staff are wearing PPE. We are closely monitoring social distancing. We’re cleaning more often. We’re cleaning more intensively, particularly those high-touchpoint areas. And the feedback from customers and our tenants has been really good.
Are you having any issues collecting rent from nonretail tenants, namely from Brookfield’s office or multifamily properties?
No. A lot of the other public office and multifamily companies have reported their rent collections are at normal levels, and that’s consistent with ours as well. Our office collections are exactly the same as last year, and multifamily is actually slightly higher than it was in 2019, so there are no
Brookfield is obviously an enormous global company. Are there any aspects of the business that have been doing especially well during the pandemic?
Out of the four publicly traded partnerships, our business is clearly the most impacted. Private equity might be a close second to that. Our infrastructure business operates on very long-term contracts, the vast majority of which are take-or-pay. Same with our renewable power generation business, which is just power dams in the woods. So I would say those businesses are almost unaffected.
Is the company looking to make any distress bets going forward?
This is in our DNA. If you look at 2008 to 2011, we were very opportunistic the last time we had a major downturn like this. We have a tremendous amount of dry powder, both on our balance sheet but also from client capital, so if opportunities present themselves, it could be a great investment environment for us in the second half of the year.
Switching gears just a little, any comment on Brookfield and Tod Waterman taking over the Lever House from Aby Rosen?
Why was the company interested in that property? We’re always interested in trophy office buildings in New York City. In this particular case, it was an investment that we made in, effectively, a sandwich ground lease, and ultimately the leaseholder elected not to renew it. So we will effectively step into the leasehold. It’s a great asset and a great location. We expect we’ll have to invest a bit of capital into it, but it’s one of the most iconic buildings in New York City.
And what’s the outlook for Manhattan West?
Are you reevaluating it at all assuming there will be a lower demand for commercial space than when Brookfield first started working on the project? No, we’re full steam ahead on the final tower. We were able to have it designated as essential construction, so there was a brief setback in the middle of the pandemic for about a week, but otherwise we’re right back on track. The rest of the complex is virtually fully leased, so the task ahead is really related to Two Manhattan West, which is about 25 percent leased already and won’t be completed for three more years, so we have a lot of time to take care of that. We probably will not be where we thought we would be at the end of this year with respect to leasing. There’s never a perfect time for something like this to happen, but if you could have picked a time for it to happen, this is the right time.
So you aren’t worried that there will be less demand for office space after the pandemic with so many people working from home?
I always laugh when somebody asks me, “Are you worried that everybody’s just going to start working from home, and they won’t need an office anymore?” I say to them, “Well, how are you enjoying working from home?” And they say, “Oh, it’s terrible. I can’t wait to get back to the office.” I think that’s the way most people feel. There are lots of conversations around preferring to have more flexibility and being able to work from home.
But the idea of working from home full-time does not seem to have much appeal. I think we’ll see certain changes in the way that companies utilize their offices, but we don’t see this as an existential threat.
How have you liked working from home?
I hate it. I can’t wait to get back.