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Brookfield Asset Management Shows Innovation in Retail is Not Dead

Friday, May 15, 2020 | Chris Markoch
Brookfield Asset Management Shows Innovation in Retail is Not Dead

Brookfield Asset Management (NYSE:BAM) stock is down 20% in 2020. The stock is trying to find direction after the company reported first-quarter earnings per share of negative 20 cents. That was well below analysts’ expectations for 48 cents per share.

On first glance, it may be understandable that shareholders would be hesitant to buy shares of Brookfield. The company is a real estate investment trust (REIT) that has one-third of its properties in malls. And malls are the one area of retail that has been hit the hardest, and appear to be less likely to come back. As of this writing, Brookfield says only 75 out of its 170 retail properties are open for business. And those businesses are operating at restricted capacity.

But Brookfield looks like a strong buy on the dip candidate for a couple of reasons.  The first is that the company has an extremely strong balance sheet. For any business, but particularly for a REIT, liquidity is everything. With that in mind, Brookfield is giving investors $60 billion to believe in the strength of its business.

According to Brookfield CEO Bruce Flatt, Brookfield has $46 billion in client commitments for new investments and $15 billion in cash, other financial assets and long-dated credit facilities, most of which remain undrawn.

But the company is trying to do more than merely survive. The company is trying to thrive while the country re-opens.

The Impact of the Lockdown is Starting to Be Quantified

On May 15, investors got their first look at April retail sales. And the results were sobering, but not unexpected. Retail sales decreased 16.4% in April. That’s no surprise. As much as e-commerce is thriving, it just can’t make up for the mass closures of brick-and-mortar stores. The reality is that many retailers are not prepared to compete and win in the omnichannel model.

That would seem to bode poorly for Brookfield. But while e-commerce is associated with customers buying at home, e-commerce companies (i.e. e-tailers) are starting to come to the malls. That’s right. Companies, including Amazon (NASDAQ:AMZN) are beginning to realize there is an opportunity by increasing or initiating a physical store presence.

According to Brian Kingston, CEO of Brookfield’s Retail Group, “digitally native” businesses are realizing that having a physical store presence allows them to fulfill online orders more efficiently by putting inventory close to customers. This is an interesting finding. It seems customers really don’t mind driving to a store to pick-up an item or to get curbside delivery. But they want to shop and buy online.

But this is also helping companies such as Amazon save money. Free next-day or even two-day delivery becomes expensive.  That makes putting distribution centers closer to customers a win-win.

And Brookfield is taking advantage of this emerging trend. While e-tailers are looking into adding physical stores, they’re not just going to locate the stores anywhere. They are specifically targeting densely populated, high-growth markets in which Brookfield has many of their properties.

On the conference call after the earnings release, Kingston said that “this has meant there was a waiting line of new tenants to take the place of old line retailers when they vacate the malls.” And the better news for Brookfield is that the Covid-19 pandemic is hastening the speed at which retailers with weak balance sheets are going by the wayside.

Brookfield is Coming to the Rescue

Brookfield is not sitting idly by while their tenants are trying to keep their businesses afloat. The company is proactively helping retailers navigate the process of applying for stimulus funds through the CARES Act. His is helping those businesses receive the money they’re entitled to and need to ease the financial burden that these companies are facing.

And Brookfield is not stopping there. The company has also established a $5 billion program called the Retail Revitalization Program. This is allowing Brookfield to take a non-controlling interest in high-quality businesses. They are serving as a source of capital for these businesses at a time when capital may be scarce in other areas.

The Retail Revitalization Program targets retail businesses that have at least $250 million in revenue and that have been in business for at least two years. The company already has purchased stakes in Aeropostale and Forever 21 and the company says that many more companies are inquiring about the program.

In a statement regarding the program, Brookfield managing partner Ron Bloom said, “This initiative is being designed to assist medium-sized enterprises in getting back on their feet. We believe this is a critical component to getting the economy moving again, and we would like to partner with companies and entrepreneurs that can draw on our capital and expertise to stabilize and grow their business."

The Bottom Line on Brookfield Asset Management

The private sector was always going to lead the recovery. Brookfield is taking aggressive steps to help its properties open safely. The company is putting in place health and safety mitigation measures such as providing personal protective equipment (PPE) to workers (and customers upon request), hand sanitizing stations, sanitizing wipes at food courts, and strict enforcement of social distancing.

Customers may take a while to come back. But with retailers being allowed to open, Brookfield should be positioned for a strong second half of 2020. And that will be good news for investors who buy the stock on this dip.

 


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