It’s been an eventful few weeks for two well-known brands. Co-working startup WeWork fired its chief executive officer and pulled its hotly anticipated initial public offering (IPO), while fashion giant Forever 21 declared bankruptcy.
Over the next few months, both brands are expected to drastically restructure their businesses, which could have an impact on the landlords that leased them space. One of the biggest landlords the two companies have in common is Canadian property giant Brookfield Property Partners (TSX:BPY.UN)(NASDAQ:BPY).
Here’s a closer look at how these recent developments impact Brookfield’s operations and whether investors should be worried about more store and office closures in the future.
Retail apocalypse
A report from Coresight Research suggests that U.S. retailers have shut down over 8,567 stores so far this year. Major brands such as Abercrombie & Fitch, J. Crew, Macy’s, and JCPenny are on the list of retailers cutting back. However, with over 600 locations across the country, Forever 21 is one of the largest retail failures in recent memory.
The brand represents 2.2% of Brookfield’s Core Retail portfolio, and the company’s management was trying to negotiate a restructuring deal with Brookfield for weeks before it declared bankruptcy, according to Bloomberg. There’s been no update on whether the two sides reached a deal before Forever 21 filed Chapter 11.
Botched IPO
WeWork’s capital-intensive business model means it desperately needed the cash it was hoping to raise through its public offering. The cash would have helped the firm continue growing and paying its massive collection of office leases. Last year, it became the largest office tenant in New York and one of the biggest in London.
According to its latest filing, the company is on the hook for over US$47 billion in long-term leases.
Investors in the company decided to push founder Adam Neumann out and pull the IPO filing earlier this week. Experts now warn that the company could cut back on branches and slash its workforce in an effort to stay afloat.
The Brill Building in Times Square seems to be the only WeWork branch owned by Brookfield. Brookfield doesn’t mention WeWork at all in its annual report, which could suggest that the exposure is low. However, WeWork’s collapse could boost office vacancies across North America, and this could have an impact on Brookfield, which has billions of dollars in exposure to the office rental industry.
Brookfield’s portfolio
It’s important to note that Brookfield is one of the largest real estate companies on the planet. With a portfolio worth US$194 billion that’s spread across five continents, Brookfield’s business is unbelievably well-diversified and robust.
The company’s largest retail tenant, L Brands, accounts for just under 3.8% of gross rents, while a wide range of government institutions from across the world occupy the biggest portion (9.4%) of office rentals. That means the default of a few brands in its portfolio of tenants will barely move the needle.
Meanwhile, macroeconomic trends like the retail apocalypse and the spike in office vacancies in New York could prove to be an opportunity for Brookfield to add more investments to its portfolio at attractive valuations. At the end of last year, the company had over $2 billion in cash and cash equivalents ready to deploy.
Foolish takeaway
The downfall of WeWork and Forever 21’s bankruptcy could indicate growing trouble for North America’s retail and office property sectors. But with its massive and diversified portfolio and access to immense resources, Brookfield Property Partners could easily weather this storm and come out ahead.
