peterHK

Honestly quite annoyed I didn't read the call until today because I would have bought more. Some very interesting stuff going on.

https://seekingalpha.com/article/4333753-bsr-reit-aligned-management-surfacing-value-for-investors

Well, I'm literally just taking a superficial look at various investor presentations; this isn't rocket science. But I haven't seen any evidence to the contrary. There is the whole "corporate leverage vs asset level leverage" thing that would allow one to argue that BLND's corporate financing strategy is a bit more risky, but MAC/VNO have a lot of non-recourse loans and SPG (mostly corporate) has 5x net debt / EBITDA versus BPY's ~10-12x I think it's fine to own BPY; you just have to be more bullish than owners of SPG/VNO/BLND etc on the state of comm. RE and financing. Or you have to really believe in the power of the Brookfield sponsorship/management. And I think BAM shareholders have to care about BPY as its $695mm / $1,717mm of the "cash flow" generated from the invested capital portion of BAM's balance sheet. I think long term one can be bullish of BAM asset manager component because of the OAK/BAM opportunity set of today is super exciting relative to 6 months ago, but I haven't done nearly the amount of work required to decide what happens to BAM if the BPY source of cash becomes a use of cash if they need to provide some sort of sponsorship and/or the divvy gets cut. Cash Flow Definition: Distributed cash flow (current) from our listed investments is calculated by multiplying units held as at December 31, 2019 by the current distribution rates per unit. Corporate cash and financial asset distribution is calculated by applying a 8% total return on the average balance over the last four quarters. Distributions on our unlisted investments is four times the current quarter distribution. BPY has a complicated relationship with parentco. BAM is buying BPY stock right now, and BPY is buying BPY stock right now, and BAM routinely funnels cash to BPY via "demand loans", so BAM effectively is buying BPY stock in 2 places at once. Ultimately, the underlying RE is good, it's a horrendous structure, but that is by design and BAM knows what it's doing when it comes to using structures that make no sense from the outside. That said, I would not own ANY of the LP's simply because the interests are misaligned vs. the pure interests with the parent.

Thing you need to remember about BAM and all the other big PE guys is no bank wants the keys or to destroy the relationship. They will always amend and extend because fundamentally the bank does not want to run a port or a toll road. regarding the LP's, BAM has proven adept at propping them up (see the demand loan stuff at BPY), and if they wanted to, could take down an entire equity issue in the LP's to fund a growth project. I think it's highly unlikely they do this, but they could if they absolutely had to. At a corporate level, BAM has a lot of firepower.

And that Cincinatti Bell deal.

Passive selling of all oil ETF's. Before the plunge, you have to remember distillate demand fell off a cliff because we aren't travelling. The net effect is probably not much, but you'll see refiners have OP'd E&P's by a fair margin.

The story of FB isn't in developed markets. FB is synonymous with the internet in EM. That's the opportunity ahead of it. I also believe Instagram is going to be bigger than core FB in time.

I mean $100 on a $650 stock is less than 15%. Not really "killed" considering its levered 6x... But yes, I picked some up at $525 on Friday.

There are a few issues with this IMO. 1) Since 2010 they've invested an average of 75% of FCFE into acquisitions, and over the past 3 years it's been ~52%. Obviously that number can change and I think somewhere between 50-60% is an appropriate guess for the next 3 to 5 years. 2) We know they reinvest at extremely low multiples and generate at least 25% ROIC on new acquisitions, if not more. Investing 55% of FCF @ 25% ROIC gets you ~13.75% growth in intrinsic value. Add to that a 2.2% free cash flow to equity yield and you're getting ~15% total returns assuming a constant multiple. So the question about valuation... 1) in the 2000's the 10-year treasury rate was 6%. Equities (https://www.multpl.com/s-p-500-earnings-yield) traded at a 2% earnings yield, so a -400bps spread to treasuries. Today the picture is reversed! Arguably, if rates fall in half, multiples assuming constant growth, margins and ROIC, should double, so the 6x sales in t he 2000's should really be 12x sales today. So I don't think CSU is overvalued in the context of where the market is today. The greatest risk to CSU and frankly any high quality growth equity is that rates go up significantly in a short period of time causing rapid multiple contraction. If rates go from 2 to 4 over say 5 years, the growth in intrinsic value is going to offset the multiple contraction nicely.

PeterHK, do you have sources for and/or reasoning behind the bit I have put in bold? I have not come across these relationships before. Go look at something like AMT vs. Boston properties. Look at any tower vs. office REIT's.

Sure it might be biased, they have a product to sell, but which part do you disagree with? I know a lot of PE Guys, they're all smart, but most of them are also doing something which they haven't done historically: Buying large cap Companies at 10-12 EBITDA in highly contested auctions and adding 5-7 turns of leverage. As for their operationel skills, these Guys usually aren't operators. They more often than not hire an Army of consults to co-run their businesses. Perhaps BAM is different, I know they'd like everyone to believe - but that's what every PE shops says. They all say they focus on operationel excellence and have a speciel toolbox they work with, but from what I've seen their returns are driven by the same factors which "used" to work in public equities. But now they're unable to get the deals they used to. BAM is different. One anecdote is all their leasing is done in house vs. BX that does it outside. BAM employs their own engineers who underwrite buildings BEFORE the finance team gets their hands on it (and the engineers tell the finance people what is reasonable rather than the other way around). I've spent a lot of time trying to delve into their culture and talked with their private fund teams at some length and they run a fairly different shop than most appreciate coming from the public markets as non-allocators. Another example is breaking down the returns of the funds. BX for instance takes massive levered swings on macro things like industrial real estate. Their whole goal is that some parts of the fund return 40% IRR's, and some go to 0, but it washes out in the high teens range. BAM's assets very very rarely lose money, but they also rarely put up 40% IRR"s (the only one they can think of is EAF which isn't completed yet), and the return distributions for the assets in the funds are much much lower than other large players.

So far nobody has looked at this correctly IMO. If you're BAM, ~20% of the capital in these deals is yours. The rest is provided by large institutions who are NOT necessarily looking for 15% IRR's. Core infrastructure product is marketed at 10%, that's it. So if you can put $10 billion to work at earn 10%, that is exactly what these pension funds and SWF's want. Always remember that BAM is selling a product, and that product is not necessarily the highest IRR activity, it is the one that meets the hurdle of the product they are selling. Second, lets say BAM earns 10% on its capital investment of say $2bn, so $200mn a year. The other $8bn is earning them ~1.2% in management fees (another $86 million), and then performance fees on top of that of say 15% of the amount above 8%, so another $24 million. In total, BAM is earning on its capital $200 + $86 + $24 = $310 million, or over 15%. Obviously this is gross of compensation expenses etc. so the net return is probably closer to 12%, but the point remains: taking a deal that is 10% but generates fees is still very lucrative for BAM shareholders. Finally, remember that a growing asset management business has a higher multiple than NAV. So from BAM's perspective not only do they juice returns on their own balance sheet capital by earning fees from their AM business, it's also accretive to take deals to grow the AM business and increase the multiple on the stock. The value of BAM in the future is NOT going to be in the invested capital, it's going to be in the AM business, so the key variable is NOT whether deals are 20% IRR's or 12% IRR's, it's whether they can grow the AM business by selling attractive products to SWF's and Pensions.

The unit currently generates 900M Euro on EBIT, but there are probably some overhead costs on a generally corporate level that would need to be out back into the unit. A 20B Euro price would be fairly rich a 15B Euro price might be OK for a competitor with synergie This business is like an annuity, I can see why a pension fund might like it. Another reason for the Canadian Pension guys is that they all have significant Real estate development arms. Makes a lot of sense to own an elevator company. Same for BAM with all their RE business.

Peter, The best one-liner explanation of a good business I've read for a long time! ... -Well, almost ... - make that a two-liner explanation then! [ ; - ) ] - - - o 0 o - - - btw, gfp mentioned this as potential Berkshire acquisition candidate in the Berkshire forum here on CoBF. Thanks! I've been waiting a while for the elevator companies to come public or go private and it looks with the moves at UTX with Otis and then Thyssenkrup that both are happening at the same time.

Elevator tech doesn't change much, there's only a few players (more rational competition), and once you have a product in a building you have a 100 year stream of non-discretionary maintenance revenue (if you don't do it people die), and massive switching costs. They aren't high growth businesses, but they're high ROIC, and can support a fair bit of leverage and like Westinghouse if you can clean it up operationally you can do very well.