There are many ways to play a housing rebound. You can invest directly through stocks of home-builders, or indirectly through home maintenance supplies like carpeting, paint or dishes. You can even take it one step further and invest in banks with high exposure to retail mortgage portfolios, such as Wells Fargo, which controls roughly a third of the U.S retail mortgage market. But there’s another way, a worry-free, risk averse way, to play a rebound in the housing market: investing in asset management firms.
The core business
Brookfield Asset Management Inc. (USA) (NYSE:BAM) is a former owner of real estate and other cash-generating assets, but has transformed into an asset management business. Brookfield manages about $152 billion, invested among four distinct types of assets: real estate, renewable electric power, infrastructure (like toll roads, sea ports, and gas pipelines), and private equity. As an asset management company, Brookfield handles other people’s capital. It invests capital on behalf of its clients, the largest of whom are government and private-pension funds. Brookfield also usually buys between 20%-40% of the investments it makes for clients.
Management has skin in the game alongside shareholders, too. Brookfield Asset Management Inc. (USA) (NYSE:BAM)’s management and directors own 19% of its outstanding shares, providing a powerful incentive to potential investors. Because it owns a significant portion of shares, management’s interests are aligned with shareholders’, which creates shareholder value. So it’s no surprise that Brookfield’s track record is excellent–shareholders have enjoyed an average year-over-year growth rate of 16% over the last 20 years. That’s nothing short of spectacular.
You see, Brookfield’s management is known for pouncing on deeply distressed investments. That’s how they make their great returns. They don’t need to sell anything to anyone, they don’t depend on market currents or on the banking sector’s success. They simply wait on disastrous events, buy assets at basement prices and then rent these assets, and sit on them. The return on capital is more than satisfactory.
Brookfield’s management has demonstrated its bargain-seeking capabilities several times in the past. In 2002, fearful of another terrorist attack, tenants fled Manhattan. Brookfield Asset Management Inc. (USA) (NYSE:BAM) stepped in and paid $128 a square foot for Lehman Brothers’ stake in one of the four World Financial Center towers adjacent to the site of the former Twin Towers. Two years ago, a similar building sold for over $600 per square foot. Today, Brookfield owns all four World Financial Towers, totaling 7.97 million square feet of Class A office space in the world’s biggest, busiest, most important financial center.