Flatt’s Letter on GGP Raises Even More Questions

Brookfield was kind enough to email me a copy of this last night. After reading it, my first thought was Dr. Phil. Yup…. For those who watched the show (not sure if it is even still on) Dr. Phil would regularly ask participants questions. Very often, after receiving an answer, he would say “that’s great, now would you mind answering the question I asked?”

This is exactly what this letter is. Read it first and then read my response to the representative at $BAM

To:

Recently, Pershing Square published letters to the board of directors of GGP seeking, among other things, a sale of the Company and making a number of comments related to Brookfield’s interest in GGP. As such, we thought it appropriate to clarify for our fellow shareholders our philosophy regarding our
investment in GGP.

Sale of GGP:

We agree with the position unanimously taken by GGP’s board to have GGP continue to execute on its business plan. GGP is the second largest owner of regional malls in the United States. It owns 134 major retail centers, 70 of those by industry standards are among the very best in the country. These are incredibly well located assets supported by a highly desirable customer base, which each day become more valuable.

GGP is currently performing extremely well and we believe GGP is positioned for superior growth over the next five years versus any comparable retail mall investment. This is largely due to the Company’s new management team, but also the impact of its exceptional leasing progress, increasing occupancy and higher rents. In addition, the management team has identified a significant number of high return redevelopment opportunities which should further enhance value.

GGP started its recovery less than two years ago and the Company is only beginning to turn around. The strategy that GGP is now following holds the promise of enormous upside potential over the next three to five years. Any exchange of shares could dilute the impact of the embedded growth in GGP’s earnings and cash flows.

Our Approach to Investing:

It has been speculated by others that our approach is dictated by the receipt of annual fees we charge for managing third party assets under management. This is simply not correct. Our approach is based on our strategic view that we should focus (and make any sale decision) not just on an investment’s short-term internal rate of return, but also on maximizing the total returns we achieve from the investments we make, which may result in a longer term hold.

In essence, we subscribe to the Berkshire Hathaway view of investing: if a business is a quality business that has an irreplaceable franchise, then one should continue to hold the investment, as compounding at significant rates of return on your capital over a long time can make shareholders very wealthy. GGP is clearly one of these great American franchises and will be able to continue generating returns for a long time as the U.S. generates greater wealth and the population grows around these unique assets. The only caveat to this point of view is that it assumes that the Company does not squander its
resources by undertaking value destroying investments. In this regard, we have tremendous confidence in and support the board of directors and management of GGP.

A sale of GGP at this stage of its recovery would be contrary to the compound return theory of investing and instead subscribe to the theory that generating short-term premiums on assets and moving to the next investment is better. And, while some investors have had tremendous success with this strategy, it
simply is not ours. This is largely because once the short-term premium is received, then an investor must find an equivalent asset to invest in. We have found that comparable type franchises of similar scale are not that easy to find, and hence the premium received in the short term does not compensate
for the disruption of compounding returns over the longer term.

This does not mean we should never sell. What it does mean is that as the underlying company grows in value, the corresponding premium which shareholders receive when they do sell also grows and is available to be captured at the time shareholders decide to sell the company. In the case of GGP, where the embedded growth is not yet reflected in the share price, the premium which could be realized at a future date will, in all likelihood, be far more significant than what would be achieved in a sale today.

The common shares of our company, Brookfield Asset Management, are illustrative. Over the past 20 years, our compound annual return for common shareholders has been 18%. For those who were fortunate enough to own shares over that 20 year period, their capital has multiplied by 27 times. This multiplier far outweighs any premium that could have been received on the sale of the company at any juncture along the way, in particular when taxes are taken into account. As an illustration of this, $100,000 invested in Brookfield shares 20 years ago would be worth approximately $2.7 million today.

You can see the effect of long-term compounding which far outweighs any 30% premium (i.e. an extra payment of $30,000 on an $100,000 investment for example), which may have seemed large at the time, but seldom so in hindsight. That same $30,000 or 30% premium would be approximately $800,000 today.

Governance Arrangements:

During GGP’s restructuring, Brookfield agreed to become the cornerstone investor of GGP, which accorded Brookfield the right to own up to 45% of GGP. This and other terms were approved by the board of directors of GGP, Pershing Square, the US bankruptcy court, and other stakeholders. Furthermore, Brookfield was also granted the right to maintain our ownership should GGP raise capital by selling additional equity. Subject to securities laws, there are no restrictions on when, or how, Brookfield can increase its ownership to 45%. We have honored and will continue to honor this agreement and we believe increasing our interest in GGP as we have done in the past 18 months is a tangible demonstration of our confidence in the Company’s future success.

Lastly, and as a main tenet of the major investment we made to ensure GGP was successfully restructured, we have the right to vote all of our shares in any shareholder vote should one ever be presented to shareholders.

The Future:

In summary, we believe a sale of GGP at this point would substantially undervalue GGP’s future potential. With GGP’s exceptional high quality property portfolio, positive outlook for NOI growth and vast redevelopment opportunities, we believe that the best way to maximize value for all GGP shareholders is to provide the Company with the opportunity to realize its full potential without disruption, and should we be required to, we intend to vote our shares accordingly.

Yours truly,

J. Bruce Flatt
Chief Executive Officer

Here was my reply:

Dear XXXX,

Respectfully,

As a shareholder, it would have been nice if Flatt addressed even one of the issues raised previously. No one has said BAM does not have a great track record, no one has claimed GGP management is not doing a good job and further no one claims quality assets over time do not make money. To be honest, when it was first announced BAM was becoming a part of this, I was thrilled because of the above reasons (reviewing my posts from that period will verify this) and was fully behind the BAM effort from Day 1.

But, in this case Flatt is defending accusation’s no one is making…

Although this does raise the issue that if you combine the #1 and #2 REIT in N. America (GGP/SPG) that “Franchise” would have significantly more compounding in it their either alone. But, that is an issue for another day with no true answer.

It is interesting that at no point are the events depicted by Pershing challenged. That leads one to conclude they are then accurate. So, if the letter is truly how Flatt/BAM have felt all along and given the reference to their 20yr record, we can say they have, then:

1- Why didn’t they simply flat out refuse SPG’s offer in 11/2011 saying GGP was not for sale?
2- Why did they only refuse saying they “could make a better offer”?
3- Why did BAM try to put an offer together for 8 months?
4- Why then did BAM actually make an offer that included selling 68 assets back to SPG? This was essentially a “sale and break-up of GGP”
5- If GGP truly is better alone for GGP shareholders, then why would BAM even consider making an offer?
6- OR did they never intend to and were simply putting Pershing off? If this is the case it raises many additional questions about the motives and veracity of our largest shareholder.
7- Why was SPG made to sign an disclosure prohibiting them from making additional offers? Perhaps SPG would have settled for certain assets at prices that would have been advantageous for GGP shareholders?
8- WHY was none of this run by the other shareholders? I think I was entitled to know there was a legitimate offer made on a company I am part owner of, no?

Honestly this letter puts to rest none of the Pershing issues and in actuality raises more as the actions BAM has taken in this case over the past year conflict with the spirit of and statements in the letter they sent today

This is the letter that should have been sent after the first SPG meeting in which the offer was made, not 10 months later………

I don’t know what I expected but I had hoped for something………this is what I got

Disappointing. Now, I am not of the opinion that I am special and deserve a long drawn out and detailed reply BUT, they reached out to me. If you are going to reach out to engage someone, then I think when they take the time to reply and comment, maybe more than a sentence is deserved?

Anyway…..

So, all the above questions still linger and for me, along with Flatt’s failure to address even one of Pershing’s descriptions of events says that there is WAY more here than meets the eye. It also means the above letter, while perhaps detailing how BAM thinks of investments in general is wholly irrelevant in this case. $BAM clearly though $GGP was worth selling (to themselves) and even further, they felt breaking it up to do so was worth it (for themselves) but just could not get the deal done. The only other explanation is they never intended to buy it and simply put together a shitty deal they knew $SPG would reject and then sat back.

Either scenario is lousy. I’m gonna have a hard time taking at face value anything that comes from Flatt and the $BAM crew for a long time after this. I think it is clear Flatt is doing what is best for $BAM shareholders as he should as he is CEO/Director at the company. He is also Chairman of $GGP and as a shareholder of $GGP I think he should be removed from that post due to how this was handled (more here). What else is he failing to disclose? Were there other offers? Does Flatt realize >55% of the shares in $GGP are owned by other people?

The simple fact that our Chairman failed/refused to disclose a solid offer from $SPG to shareholders is inexcusable. Were it not for Pershing, this would have never come to light. Bruce Flatt should continue to do what is best for $BAM shareholders, this also means he ought to step down from the GGP board immediately as in this case one cannot do both.

More to come….this isn’t over….