Sunday, November 12, 2017

Brookfield Plans to Capitalize on Distress in US Retail Real Estate

Brookfield Asset Management (BAM) Plans to Capitalize on Distress in US Retail Real Estate by gaining control of GGP. BAM currently owns 35% of GGP through Brookfield Property Partners LP (BPY) and BAM CEO Bruce Flatt is the chairman of GGP.

The pessimism on US Retail stores and affect on US Mall Sector due to disruption from Amazon has driven down valuations to an attractive level with GGP shares hitting $19 per share (< $19B valuation for GGP).

This is a very attractive opportunity if BAM can buy the company for $22B to $25B or less total valuation. This will mean $15B to $16B that BAM/BPY and institutional partners (in managed funds of BAM) will pay for remaining 65% not owned by BPY. Overall BAM/BPY can put up $4B and control 51%  (35% + 1/4*65%) of GGP.

Then next step if they can acquire would be to close or sell off weak malls on non-prime locations and then for prime location class A malls convert excess space in parking lots into residential developments or office complexes of live-work-play. GGP has already done this in Ala Mona Mall in Hawaii and 95% flats have already been sold. They also just announced a deal in North Seattle to build apartments in their mall location with a partner. The well performing malls will keep operating for next 5-10 years and still earn cash flow which is $1.4+ per year per share so that is $1.4B. They can reduce apparel and add more services, entertainment and experiences clients.

The land underneath in many cases is very valuable and in downtown prime locations. Also all the Mortgage debt of GGP is non-recourse to parent company and each of the 125+ malls can default on their debt so if one or two malls fail in the long run the losses will be contained and debt holders get the key to that specific mall only.

Currently GGP and Retail (Including Rouse etc.) accounts for 1/3 of BPY cash flow. A sale of US office assets in North East US and purchase of GGP could boost the retail portion to 50% of BPY but at favorable valuations.

Saturday, October 14, 2017

Distress in Indian Telecom Spells Opportunity in Telecom Infrastructure

Distress in Indian Telecom sector caused by entry of Reliance Jio and the price wars spells Opportunity for investors in Telecom Infrastructure. Brookfield Asset Management, KKR, American Tower and others are eyeing the space with great interest. There is a potential for great returns to be made as data is the fastest growing commodity and India is the country to be due to demographics and projected economic growth.

Canadian National Railway - The Best North American Railroad

Canadian National Railway (CNI) is undoubtedly The Best North American Railroad. The railway network of 20,000 miles connects 3 coasts (Prince Rupert on Pacific, Halifax in Atlantic and New Orleans and Mobile in Gulf coast) to major North American markets including many major cities in Canada (Vancouver, Calygry, Edmonton, Toronto, Montreal, Halifax) and Central United States (Chicago, Detroit, Omaha, St. Louis, Memphis) and Southern United States (New Orleans, Mobile, Baton Rouge).

CNI has one of the best management teams and excellent focus on customer service, growth initiatives leading to top line growth and the industry leading Operation Ratio of less than 60%. CNI also has the best diversified business by business sector and geography. CNI has generated 14+% annual return since 1995 IPO. CNI returns nearly 85-90% of generated cash to shareholders with 30-35% as dividend and remaining 55-60% in the form of buybacks. CNI can grow earnings and dividend at 10% per year growing forward driven by 3% organic growth in revenue, 3% price increases and 3% growth due to buybacks.

Risk of Artificial Intelligence as a Disruptor

Artificial Intelligence (AI) as a disruptor is the biggest risk to many businesses over the next 10 years. Many industries including Retail, Media, Advertising, Banking, Transportation are already facing an uncertain future.

Amazon(AMZN)
Innovation and exceptional customer satisfaction by Amazon is upending the retail industry. Even entrenched companies like Walmart and Costco are having a tough time competing. AI based innovation with Alexa and Echo and Amazons expansion into food retail and brick and mortar with Whole Foods and expansion of fulfillment and Amazon Prime all enhance the wide moat around Amazon's business. AWS and Advertising are two additional pillars of growth and profitability for Amazon.

Alphabet (GOOGL)
Alphabet is investing in Artificial Intelligence through self driving cars and by leveraging AI into all aspects of Google including mail, search, virtual assistant etc. YouTube has a lot of potential for growth and Alphabet continues to be dominant in the advertising market with Facebook a distant second.

Sunday, September 10, 2017

Brookfield Property Partners - A Strong Development Pipeline to Drive Growth

Brookfield Property Partners (BPY) has a strong Development Pipeline that will bring online cash generating assets between 2017 and 2022 that should meaningfully contribute to cash flow growth. The key factor is that this growth is funded organically with retained cash generated from existing assets and through cash proceeds from capital recycling and no new units are being issues. More than 10 million square feet of office and multifamily projects currently in development and include the following:

  1. Manhattan West, New York City
  2. Bay Adelaide North, Toronto
  3. 100 Bishopsgate. London
  4. Brookfield Place Calgary
  5. London Wall Place
  6. ICD Brookfield Place Dubai
  7. 655 New York AvenueWashington, D.C.
  8. Canary Wharf's New District, London
  9. Wynyard Place
  10. Greenpoint Landing, Brooklyn, New York
  11. Principal Place London
BPY trading at $23.50 per unit and at a 5% distribution yield should produce strong risk adjusted returns over the next 10 years. 

Insurance Disasters Harvey & Irma - Short Term Pain & Long Term Gain

Insurance Disasters like Harvey and Irma may cause Short Term Pain but will produce Long Term Gain for well capitalized Insurers and Re-Insurers like Munich Re (MURGY) and Berkshire Hathaway (BRK-B) companies like Geico, General Re and Berkshire Hathaway Reinsurance Group.

The payouts from these disasters will flush out the smaller companies and companies that insured aggressively over last few years with improper risk underwriting. The rise in rates should allow the well capitalized companies to move in now and gain market share with less risk on a going forward basis.

Sunday, July 30, 2017

Brookfield Asset Management Update

Brookfield Asset Management (BAM) shares have been range bound between $30 and $40 over the last 2 years. This however masks the steady progress made by the company in growing value. The company now has AUM of $250B with $120B of fee paying AUM. The spin of of BBU which will unlock value through the growth in the Private Equity side of the business is a positive. The acquisition of Asciano, Brazilian Pipeline and Water Company, Colombian Hydro, Sun Edison assets, India Telecom Towers all are building the platform and growing the value. There has been good progress on the Manhattan West and Canary Wharf developments. Risks remain relating to Emerging Market currency trends and impact to GGP due to the Amazon disruption of retail and Brexit impact on UK currency and growth. If BAM can grow Fee Paying AUM to $200B over next 3-5 years and continue building its asset platform this cash generating business which will grow and prosper with the growth of the global economy and infrastructure should grow the value of BAM from $40B to $100B over the next 10 years.