The Motley Fool

Brookfield Buys Low, Sells Higher

Recent news suggests Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM), through its 69%-owned subsidiary Brookfield Property Partners, is close to selling IDI Logistics, a company that owns and develops industrial warehouses.

Brookfield Property Partners paid US$1.1 billion for the company in 2013. Sources suggest Ivanhoe Cambridge, the real estate arm of the Caisse de dépôt et placement du Québec, is prepared to pay as much as US$3.1 billion for IDI Logistics.

Should this deal go through, Brookfield Asset Management’s commercial real estate subsidiary would be looking at a 177% return over five years — a nice return for anyone’s portfolio.

It’s this kind of deal that’s made a name for Brookfield. It buys undervalued assets, fixes and grows them, and then sells them at the precise moment the assets have maximized their potential.

“Time to market has become increasingly important in the e-commerce world,” Jonathan Woloshin, head of Americas equities research with UBS AG, said in a note to clients in September. “This is leading to a shrinking of the supply chain and the increased need for warehouse and distribution facilities in higher population densities.”

Last year, IDI Logistics sold its European warehouse business for US$2.8 billion, suggesting Brookfield’s return was much higher than 177%.

Not only does this tell me how good CEO Bruce Flatt and the rest of the Brookfield managers are at evaluating assets, but it also shows me that logistics assets are reaching a saturation point when it comes to valuation.

If you own an industrial REIT, you might want to consider taking profits.

Investing more in real assets

Fool contributor Brad Macintosh recommended BAM stock in September, arguing that the asset manager’s decision to invest more of its capital into real assets is an indication that it sees many opportunities in real estate and other alternatives.

I would agree.

In Brookfield’s Q3 2018 letter to shareholders, Flatt highlighted the fact it’s raised US$12 billion to date for its next opportunistic real estate fund. So, despite the move to exit its industrial real estate investments, institutional investors are confident the company can find places to invest the new capital.

With Brookfield generating almost US$2 billion in free cash flow and another US$800 in annualized cash flow from carried interest, Brookfield has got more cash than it knows what to do with, but that’s an excellent problem to have.

Think Warren Buffett. Sure, it’s frustrating that the company has such a cash hoard, but it’s better than having no cash and lots of investment opportunities — a lot better.

Why more real assets?

Flatt made some interesting points at the company’s September Investor Day presentation.

For instance, Brookfield estimates that institutional investors are currently underweight real assets by US$3 trillion. Furthermore, with global institutional assets expected to be $52 trillion in 2017, almost half the amount invested by 2030, the size of the underweighting could grow significantly.

At some point, institutional investors will get in the game, and when they do, Brookfield shareholders will benefit immensely.

So, consider the growth of alternative assets as part of institutional portfolios. In 2000, they accounted for 5% of the assets. In 2017, that weighting had grown to approximately 25%. By 2030, they should account for 40% of the weighting in institutional portfolios, suggesting equities and fixed-income investments will be on the losing end of the stick.

The bottom line on Brookfield stock

The beauty of owning Brookfield stock is that no matter what happens to the economy, Bruce Flatt and his team will be buying low and selling higher.

It’s a big reason I consider it one of the five best TSX stocks you can own. 

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Fool contributor Will Ashworth has no position in any stocks mentioned. The Motley Fool owns shares of BROOKFIELD ASSET MANAGEMENT INC. CL.A LV.

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