‘The recovery is here:’ Brookfield is ready for rates to rise

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Brookfield Asset Management Inc. (BAM) doesn’t need interest rates to stay lower for longer. In fact, CEO Bruce Flatt wouldn’t mind seeing them go up more than a little bit.

“Rising interest rates? That would be great, if we could get interest rates from 1 per cent to 3 per cent,” Mr. Flatt said in an interview with The Globe and Mail. “That would be really great for the world, because it means things are coming back.”

Mr. Flatt is not an economist, and it is not simply an academic question for Brookfield. The Toronto colossus has roughly US$575-billion in assets, and it uses debt to help make its investments in real estate, infrastructure and energy. The economic tumult of 2020 has made borrowings, and the amount Brookfield pays for them, central to the dialogue about the company.

As the COVID-19 pandemic erupted, the economy crumbled and markets tumbled in March, investors feared for every company that had debt on its balance sheet. Mr. Flatt’s message was that Brookfield had reasonable levels of borrowings at the parent-company level (US$7-billion, versus a market cap that was around US$50-billion), significant undrawn lines of credit, and plenty of assets to sell if things got really, really bad. Then, as equity markets quickly rebounded, Mr. Flatt turned to emphasizing the power of rock-bottom interest rates in goosing the company’s cash flow.

Mr. Flatt said a lot of that work has been accomplished, with new corporate-level debt financings floated for 60 to 80 year durations, and real-estate mortgages locked in at half the interest rates Brookfield had planned for.

“What’s amazing today is that we are rolling over financings and fixing them for 25 years at rates which you could have never imagined before. We put a US$1.8-billion mortgage on one [New York City] building, and when we started the building, in the models we ran a 5.5-per-cent mortgage – but we financed it at 2.75 per cent. You could do the math. ... It’s enormous amounts of money to the owner.” (The math on a US$1.8-billion borrowing is, in fact, a US$50-million per year savings in year one, and more than US$800-million over 25 years.)

People used to think of the normal level interest rates at 8 per cent, Mr. Flatt notes, and have had to adjust their thinking all the way down to the current rock-bottom levels. Now, with the Bank of Canada’s key overnight lending rate at a record-low 0.25 per cent and its global peers in similar territory, “rising interest rates” mean a significant jump, but to a level that used to be considered historically low.

As it happens, Mr. Flatt has a colleague with some experience in the matter: Mark Carney, former head of the Bank of Canada and the Bank of England, has chosen Brookfield for his re-entry to the private sector. Mr. Carney, who has been a leader on climate issues, is Brookfield’s new head of ESG (environmental, social and governance) and impact investing. ”I had options in terms of what I did after being governor and I chose not to spend my time in a world where I was trying to market-time interest rates,” Mr. Carney told The Globe in a joint interview with Mr. Flatt.

That said, Mr. Carney offered a view on rates anyways. “[In the] longer term, interest rates should go up,” Mr. Carney said. “But if they’re going up for the right reasons, if they’re going up in the environment where we’re getting broader traction globally, that’s going to [benefit] people who are well-positioned in the backbone of the real economy, which is the core strategy of Brookfield.”

Certainly, a rebound in the economy, coupled with an end to the widespread pandemic, will assist Brookfield with a number of its investments – as well as its stock price. The TSX-listed shares closed Friday at $53.15, off 12 per cent from their 52-week high that was set just as the broader S&P/TSX Composite Index peaked in February. The Composite is now just about 2 per cent away from a full rebound.

Real estate has been a particular concern of investors: Shareholders have punished the shares of offshoot Brookfield Property Partners LP, which at once point fell more than 60 per cent, and with Friday’s close of $19.81 remains 25 per cent off its 2020 high. The Brookfield parent continues to insist the value of its stake in the company is nearly twice what the TSX-traded share price suggests.

Mr. Flatt has been very bullish on downtown office space, which Brookfield owns by the billions of dollars. He said in the interview that “people are coming back and people are going to use offices again. Now, will they use them a little differently? Yes. Will they change the footprint? Yes, some more, some less. On balance, probably not much.”

Brookfield also owns millions of square feet of retail space, which had secular issues even before the pandemic. And now, it owns some of the retailers: Brookfield partnered with Indianapolis-based Simon Property Group earlier this month to acquire nearly all the assets of U.S. department-store company J.C. Penney. A major tenant in many of Brookfield’s U.S. shopping centres, J.C. Penney had struggled to find its way in a world with Walmart and discounters on one end, luxury shops on the other, and sellers all over the internet.

Simon and Brookfield essentially bought the chain for liquidation value, Mr. Flatt said. Having control of the chain’s real estate will help the two redevelop the shopping centres, he said, but they also think they can “re-energize the business to actually make it something that’s interesting for the future. ... We may not be able to do it, but we will see.”

Broadly, Mr. Flatt said, “Our view is that we are slowly coming out of the situation that we’ve been in, and the recovery is here, and we’re in it right now. We just don’t quite realize it because every day you take two steps back and three forward, and that’s the way a recovery happens. ...

“Our view is by the end of 2021, economies are going to be coming back. We can see it in all the businesses we have today. When you have $600-billion of stuff and it’s in 30 countries, we see a lot of things happening.”

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