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Can Brookfield’s Billion Dollar Bet Save Retail?

Next time you go to a mall, try this game: Go to the mall’s directory map, point at a store at random, and try to guess whether or not that tenant is paying rent. The sad truth is that you have about a 50/50 chance of being right, either way. April retail rent collection was reported to be around 49 percent, and as of May 15th, last month’s was only marginally better at 51.3 percent. You can also make a side bet on whether or not the retailer is filing for bankruptcy. Chapter 11 filings are up 48 percent since last May, and the government stimulus has yet to run out. Finally, you could wager on whether or not the mall you are standing in is delinquent on its debts, as one out of every ten loans for retail properties is currently in delinquency. Some retailers were struggling to pay even before the shutdowns, but now, many more face uncertainty as they lack the needed liquidity to make ends meet.

But where there is scarcity of capital, there is opportunity, according to Brookfield Property Partners CEO, Brian Kingston in a recent interview. In early May, Brookfield Asset Management, an enormous firm with over $515 billion in assets under management, announced its plans to create a Retail Revitalization Program within its private equity branch, which currently manages over $64 billion in assets in and of itself. The program plans to invest $5 billion into retailers that have been operational for over two years and have $250 million or more in normalized revenue. The goal of the program is to inject capital into companies with locations in some of the major retail markets where Brookfield operates. Brookfield’s strategy was met with mixed reviews, but this contrarian style of investing has also garnered them a great deal of success. 

While many applaud Brookfield’s efforts to bolster an industry that badly needs it, private equity investment hasn’t always turned out well for retailers in the past. Larry Silvestri, the president of Silvestri Law, PA, was in-house general counsel for various retail developers for over twenty-five years and is now in private practice in St. Petersburg, FL. Silvestri is an expert in the legalities of retail real estate and the relationship between tenants and landlords. “Private equity firms go in with the idea of turning around the retailer, but the leveraged buyouts—the way they structure the purchase—puts a lot of debt on the retailers. The retailer is less agile, less flexible. They can’t invest in their stores or afford things like getting new merchandise,” said Silvestri. He gave a well-known example that’s made headlines recently: “Look at Neiman Marcus. The reason they’re in bankruptcy is because they were acquired through private equity and saddled with a tremendous amount of debt.” 

However, private equity is just one of Brookfield’s many branches. “They’ve got their tentacles into a lot of different areas across the real estate spectrum,” said Silvestri, and this changes the context of their retail investment fund. In addition to Brookfield’s properties across all sectors of real estate throughout the world, they’ve also invested in renewable energy and global infrastructure, including utilities and transportation. Silvestri explained, “Even though Brookfield Asset Management and its investment will be through its private equity group, I see this as a different circumstance. They’ve got a target market they’re going to rescue, they’re taking non-controlling positions in these companies, and they’re lending their expertise from a variety of different ventures.” 

Brookfield makes for an attractive investor, indeed. With its vast knowledge of industries and markets throughout the world, Brookfield offers the companies it partners with a well-rounded perspective. But most importantly, in this instance, “As a major owner of retail properties, Brookfield has a unique lens to be able to help tenants,” said Silvestri. The question remains exactly which retailers will be the beneficiary of this fund. In terms of Brookfield’s selection strategy, Silvestri said, “I see two parts to this, ‘Who have we identified that we have exposure to in our malls? Who else can we prop up and make deals with to put into our malls?’ One of Brookfield’s goals with this is to fill vacant space, but by also fueling growth for these retailers, they have a dual benefit.” They get to fill their vacancies with tenants that have the resources needed for business continuity, and they also see a return by helping retail companies increase profitability. 

During an interview, Kingston provided a clear description of the types of retailers they want to invest in, stating they’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.” Silvestri echoed this sentiment: “They’ll want retailers who are executing their omnichannel strategies.” Brookfield’s long-term vision for their retail properties is based on obtaining “very high-quality, large-scale assets in major gateway markets […] 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,” Kingston said. 

Investing in retailers is certainly within Brookfield’s repertoire, including their collaboration with Simon Property Group and Authentic Brands to purchase Forever 21 out of bankruptcy. Recent reports also indicate that Brookfield is partnering with Simon in a possible bid on J.C. Penney. However, their $5 billion retail revitalization fund is on an entirely different scale. “The program they’re doing is larger than anything I’ve seen like this,” said Silvestri, who cited several historical precedents, including Aeropastle’s purchase by Simon Property Group and General Growth Properties (GGP) back in 2016. Interestingly, Brookfield acquired two thirds of GGP just two years later for nearly $15 billion—another investment move that was criticized as risky. 

This was not the first of Brookfield’s supposedly risky investments, including a deal to pull GGP out of bankruptcy in 2010 when the company had taken severe blows from the Great Recession, a deal that has already garnered them $10 billion, according to the Wall Street Journal. Brookfield’s contrarian strategies often rely on seeking out these discounted assets and applying their expertise to repurpose them. This is exactly their intention with some of their retail properties. Kingston confirmed plans to transform them into mixed-use, “live-work-play” developments, which he believes will only rise in demand because of the pandemic.

The relationship between landlords and tenants of retail properties is complicated. Their fates are often intertwined. “They’re dependent upon one another. It’s not a one way street,” said Silvestri. It is in the best interest of both parties for the other to do well. The more traffic a retail property can generate, the more tenants benefit from potential conversion to sales. Similarly, tenants that attract and maintain loyal customers ensure continued traffic for the rest of the property. “There’s certainly a need for capital in that mid-tier level so that not only the big and the strong can survive. Shopping centers, malls especially, depend upon variety,” said Silvestri. Retail tenants want to be in the busiest shopping centers, and inversely, shopping centers become busy by offering a strong selection of tenants.

Of course, for both the tenant and the landlord, other factors contribute to their abilities to generate traffic. A shopping center with the perfect mix of tenants could still fail in the wrong location in the same way that a retailer in the busiest mall will still fail if it has subpar products or a terrible customer experience. So while a tenant’s or landlord’s success is not entirely contingent upon the other’s, the COVID-19 pandemic has certainly taught us that this relationship deserves more attention and exploration, especially if the industry hopes to once again thrive. Silvestri maintains hope: “I think there’s going to be a place for bricks and mortar always. It’s the third place. It’s the touch and feel, the experiential aspect. It changes. It’s not going away. It’s an evolution. It’s not an apocalypse.”  

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