Mallnutrition at BAM?

Brookfield Asset Management (BAM) is a powerful asset manager specializing in real estate, infrastructure, private equity and all things requiring high management fees. Due to their scale, BAM has found itself with little competition - a feature that attracted my attention. However, the complexity of BAM's structure is unlike any I have ever seen and I will leave a discussion of that to another post.

In early May, BAM announced that $5 billion had been set aside to support retailers affected by the pandemic. My assumption was that this simply allowed BAM to show this $5 billion as some type of infusion to offset the loss of $5 billion in rent payments. By using this approach, BAM should be able to avoid violating some debt provisions that secure various properties. BAM will likely have different approaches that may even include minority ownership stakes in the businesses of some of their renters.

But this week's announcement demonstrated that these concepts have reached a new level. BAM and another prominent mall owner are exploring the purchase of J.C. Penney Co. Rather than risk losing a major anchor tenant and being forced to look for others, BAM is evaluating an ownership structure that would allow it to retain J.C. Penney's presence. Losing an anchor tenant means losing traffic which means losing the smaller, higher-paying tenants.

In my mind, this is a perfect example of a "confirmation" bias. Either this is a secular change bringing the future of retail forward more rapidly or this is a cyclical downturn building pent-up demand for leaving the home and shopping in malls. If the latter, BAM is brilliant. But I believe that the former is indicated and, as a non-owner of malls, am less knowledgeable than BAM but also less susceptible to a "confirmation" bias.

One of my favorite stories of confirmation bias is about a young Jewish man that quit being observant. One day he ran into a rabbi friend of his and said that his lack of observance was because he had some questions. The rabbi said he had only one thing to ask the young man - did he stop being observant before or after these questions arose? The young man thought for a moment and said these questions arose after he stopped being observant. The rabbi chuckled and said the young man didn't have questions in need of answers but answers in need of support.