Bruce Flatt on investing in hard assets
It is one year since we mentioned Maguire Properties Group as a potential opportunity only to be followed some months later with a specific recommendation to buy the preferreds. It has bothered me that the series was interrupted by a sharp price increase before I could disclose the common equity thesis. Now it is time to make amendments, so next week we will continue that series and hopefully end it this time.
The company has gone through some big changes in this period. It has a new name, MPG Office Trust, and a new CEO. Also the common stock is not as cheap as it was in December last year but is cheap enough to make it worthwhile to dust off those notes that I thought were not going to see daylight again. And if the price gets away once again so be it.
As an introduction, I thought that this overview by Brookfield’s CEO Bruce Flatt was one of the best presentations I have seen on the issue of investing in hard assets.
What is Brookfield’s way? The best explanation I have read comes from the interview “The Perfect Predator”
Flatt laid out his new game plan: the giant squid of a holding corporation would focus on operating in just three sectors—real estate, power generation and infrastructure, areas that could deliver consistent revenue, locked in by long-term contracts, and where assets tended to rise in value, making them relatively cheap to finance. With this simplified focus, Flatt invited pension funds to put money into Brookfield-run investment funds, with the resulting management fees serving as a cushion for the company’s own investment returns.
When we review MPG next week please keep this presentation in mind. Do not miss his discussion on 245 Park Avenue (yes, the one in the picture):
- Great location: downtown Manhattan
- Acquisition price: bought in 1995 for $500 million ($250 per sqf)
- Market perception: Due to the internet most people will work at home
- Variant perception: People want to work close to other people
- Current valuation: $2 billion ($1000 per sqf)
- Profit: 4x enterprise value, 10x equity due to leverage, plus rent income
The Q&A follow-up session is also very good – $1,000 per sqf replacement cost estimate for downtown Manhattan- and of course take note of the 8 principles that guide Brookfield’s operations. Mmm, maybe I can be of help with that:
- Buy great assets: look for good locations with good fundamentals even if that means paying a premium
- Buy on the assumption of owning forever: allows to avoid fads, think long term and compound tax free
- Prudently finance your assets: Long term and investment grade financing to avoid situations when you can not get financing. Live to see another day (I would add non-recourse)
- Never become too positive or too negative: Toughest rule to follow. Assets revert to the mean and seldom the mean changes. Technology in the few cases that it has an impact it takes time.
- Invest against the common trend: prepare for the great opportunity. Look for the 1% of business activity that generates outsized return. In normal times, be prudent.
- Build with quality people: turbulent times test the cohesiveness of a team.
- Execution, execution, execution
- Never deviate from the first 7 principles: the consequences of short term solutions can be sometimes, not always, business threatening