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Brookfield CEO Sees ‘Deal Opportunities’ on the Horizon

Mall operator Brookfield Asset Management remains bullish on the retail sector.

The real estate investment trust is said to be involved in some form of talks in the J.C. Penney bankruptcy, perhaps along with fellow REIT Simon Property Group and also possibly including private equity firm Sycamore Partners. The REIT also said last month that it plans a $5 billion retail-investment fund to help distressed retailers with financing because of the coronavirus pandemic.

The company has about $200 billion of real estate assets, with 40 percent invested in retail. Brookfield CEO Bruce Flatt says the company takes a “long-term view” of the outlook for retail investments.

That long-term view includes recognizing that the current situation “shall pass,” and that great retail “will be better in the future,” he said at a Reuters Newsmaker virtual event Wednesday. Flatt didn’t  comment on Penney’s and a spokeswoman for Brookfield declined comment Friday.

Flatt sees the retail sector adapting to necessary changes as the world begins taking baby steps in restarting the global economy.

Curbside order fulfillment is one aspect of retail that COVID-19 has accelerated. It’s a service that the Brookfield CEO said won’t be going away even retail resumes some semblance of normal. He also expects retailers will increasingly focus on integrating the growth of online sales with their traditional brick-and-mortar spaces, many of which will be used for showrooming and as places to pick up goods. “Our malls touch 60 percent of the population within an hour’s drive,” he said, noting that the stores won’t turn into warehouses, but could still help fulfill orders.

“We see green shoots around the world and things are opening up everywhere, but we must open up in the rest of the places. We have to get things open,” Flatt said.

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Every time there is significant event, it always seems like its the worst, Flatt said, acknowledging that it is the worst for the current moment. “All the other ones were bad too, the 2008 financial [crisis], the 9/11 attacks. They’re all very traumatic and always bad at the moment,” he said, noting the rarity of an event that affects virtually every single country in the world.

“Normally, it hits at different periods of time,” he said. As for the recovery, he said Australia opened two weeks ago, along with Dubai, and now London and the U.S. are starting to open up. “All the markets are going to experience nuances. What’s right, I don’t know. The health experts have to to decide that, but we have to get back and get the economy moving,” he added.

Flatt is expecting what he calls “true gradual normalization, instead of an economic collapse. Deal opportunities will be coming up in the next few months.”

Brookfield will be ready when those deals pop up, armed with the $5 billion retail revitalization program it created last month. Flatt said the funding program is separate from its REIT operations and the “main goal is to make money for our company.” The idea was born from looking at the current operations, then the adjacent businesses connected to it, and planning how to make money from that.

“Very little capital is going into retail today. We have information and the relationships. We can make investments for value and [get] significant upside,” he said. “We have been doing a few before any of this happened [and have been] very successful. We feel we can do more [and] will pick the ones we think will be successful.”

Those investments before the formalization of its $5 billion program include the deals with Simon and Authentic Brands Group for Aérospostale and Forever 21. The Aéropostale stake was made by former competing mall REIT General Growth Properties, which Brookfield later acquired in full after buying shares in the company that it didn’t already own. And Flatt was quick to point out that the program was about making money and wasn’t a play to keep its mall locations afloat.

Flatt also referenced the company’s deal last year in which it acquired a 62 percent majority stake in Oaktree Capital Management in a cash and stock transaction valued at $4.7 billion. Oaktree is well known in financial circles for its specialty in distressed debt investments. Years ago, Oaktree made a name for itself as the lender of last resort when it began providing debtor-in-possession financing for bankrupt companies after traditional financing firms walk away due to the elevated risks.

The fact that Flatt sought to acquire Oaktree says a lot about Brookfield’s thinking on future prospects for debt investing. And the company believes there’s opportunity in the infrastructure space, an area that Flatt said will see increasingly more revitalization projects be taken off the balance sheet of governments and get built by private entities.

Flatt also doesn’t expect to see less need for office space, even as more workers will likely have some flexibility post-COVID-19 for dividing their workspaces between the office and at home. He likened the current work-from-home pattern to 9/11 when people predicted that workers wouldn’t ever again want to work in the tops floors of office towers. While certain changes remained, such as security desks and ID checks, Flatt said a similar scenario will happen this time around too. Brookfield’s office spaces now have glass panels installed between desks and no-touch doors that open automatically. “What will change is the amount of personal space within a building,” Flatt said. And he expects that malls in depressed areas will eventually get “plowed down over the next 10 years” as centers get redeveloped.