Another more recent victory for Brookfield involved General Growth Properties Inc (NYSE:GGP)– then the 55-year-old second-largest mall operator. Back in 2008, the financial crisis froze credit markets, leaving GGP unable to refinance its $27 billion in long- term debt. It was a high-quality business in financial distress. Brookfield’s first investment in GGP was in deeply discounted, defaulted bank debt. Banks don’t like to hold distressed investments, which attract negative attention from regulators. They usually want to get rid of distressed assets as fast as possible, creating opportunities for investors to purchase them at substantial discounts. That’s how Brookfield was able to buy GGP’s unsecured bank debt. Even before General Growth Properties emerged from Chapter 11 bankruptcy, the bank debt returned to par value, providing a solid return on Brookfield’s investment. But that wasn’t the end of it. The real money was to be made in the restructuring of General Growth.
In August 2009, Brookfield formed and quickly invested $1 billion in a new business designed to acquire undervalued real estate debt and equity like General Growth Properties. One year later, GGP emerged from bankruptcy and Brookfield owned 30% of it. Shortly after emerging from bankruptcy, GGP sold $2 billion of new shares for $14.75, providing Brookfield a quick 50% return on its original reorganization investment.
Today, Brookfield Asset Management Inc. (USA) (NYSE:BAM) owns 40% of GGP. Brookfield’s share of GGP’s 2011 funds from operations (free cash flow) was $213 million – an 8% cash return on Brookfield’s total GGP investment of $2.6 billion.
A great partner
Last year, Warren Buffett foresaw the rebound in housing prices, and positioned Berkshire Hathaway Inc. (NYSE:BRK-B) to reap the benefits from such a rebound. Among other things, Berkshire has bought a brick-maker and won the loan portfolio of bankrupt mortgage lender Residential Capital LLC at auction. But the most aggressive step made by Berkshire was to form a venture with Brookfield Asset Management Inc (NYSE:BAM). as low interest rates, inventory and prices spur a real-estate rebound. Berkshire’s HomeServices of America Inc. unit is now the majority owner of the venture to manage a U.S. residential real- estate affiliate network.
I believe that having Berkshire as your business partner is the ultimate Kosher label for any business, especially a business as well run as Brookfield.
Valuation
Brookfield trades for only 1.28 times book value–that’s a fairly cheap price to pay for such a seasoned business. A better way to look at it is through its cash generation capabilities. As of the end of 2012, Brookfield made $1.94 of free cash flow per share, up from $1.76 in the year before. With the stock currently trading at $36, the investor pays 18 times free cash flow. That’s not very cheap, but not very expensive either.
My foolish conclusion
I believe that the best way to ride the rebound in housing is through asset management companies. Brookfield Asset Management Inc. (USA) (NYSE:BAM) has had a rich and successful record of achieving an exceptionally high return for its investors. Now, with Buffett at the helm, I’m positive that it will also have a bright future.
Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway.
The article This Is Your Surest Bet On A Housing Rebound originally appeared on Fool.com.
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