Normax59

My comments in bold Re: The earnings, cash flow etc. I haven't really checked up on this in a long time so hopefully I can remember everything. Burford's cash flow statement mirrors that of KKR, BX etc. where their total proceeds from and capital provided to investments runs through operating cash flow. Unlike, say BAM. Because of the way realized gains are recognized on their income statement (the reverse entries that I think were pointed out on here before the MW report) their income statement in that regard matches loosely to cash accounting and IMO is a better barometer for "cash flow" to shareholder's. It'll look more like KKR's distributable earnings metric. My suggestion, and what I did to get a dirty idea, go through each year and strip out the unrealized gains from the income statement, then adjust the reserve account for these unrealized gains on the balance sheet to get an understanding of what the book value is made out of, from the figures I have $743m of their book value in fair-value gains, with retained hard earnings of $173m with div distributions of $130m up to 1H19. Stripped out earnings w/o fv changes in 1H19 was $67.5m with the $98m minus some transactions costs from the Petersen sale. So they were pretty reliant on Petersen for the half. It's not really surprising that 2h would be bad given they've restricted themselves on selling Petersen in any meaningful way until a decision and they've pulled on the string almost as far as they can. They've been reliant on Petersen, and to a lesser extent the Teinver sale, since 2017. I had an expected profit from unrealized gains estimation laying around based on some of the quantum allocation figures they presented previously that I'll try to explain. Basically if we're using their past figures of expected profit from currently recognized unrealized gains and the quantum and timing allocations that they give in the 2018 annual report i.e. only 33% of total realized gains were previously recognized as unrealized gains a year out, 10% two years out etc. Allocate whatever amount of unrealized gains you want to each quantum. For my FY 2018 calculation I took their figure 39% of unrealized gains in their 'investment' of 1.592 billion, and it equated to $620m of unrealized gains. I tried to be conservative: 95% allocated to 33% already recognized: $1.787b 2.5% allocated to 10%" " ": $155m 2.0% allocated to 8% " " ": $155m 0.5% allocated to 5%" " ": $62m Total expected profit: 2.159b on $620m of unrealized gains already recognized. To me it implies they are expecting Petersen to come in at $2b or they've been aggressively recognizing unrealized gains. This whole company still seems like a binary option on the Petersen outcome. wrt to IRR, they're doing more appraisal right's litigation in their complex strategies (h/t Schwab for finding this), these kinds of transactions boost their IRR because they get the capital back quickly, but it'll hurt their ROIC over time because returns are razor thin. Also, allocate whatever kind of costs you want to IRR, but something I don't think has been discussed is that they can't allocate 100% of their capital to the investments, they have to use some cash just for liquidity etc. that generates a less than spectacular return. They put maybe 85-90% of their capital into investments.. Either way, it knocks your IRR down a little bit.

Ok, back at it. I think the goal posts are being moved when it comes to the exact reason for the transaction. Take a step back and think of all the details and quotes from the earning calls before the article came out, there doesn't seem (at least to me) that there was a piece of information that would tie the transaction to GGP other than the timing. To me, it's as swiss cheese an argument as saying that the transaction was to help pay for 666 Fifth avenue in the BSREP III fund. I can only take the word of what was said, if the transaction was to help pay for GGP I would at least think they would have mentioned this once. Regarding the article, I reached out to the author after it was published because I thought that Flatt had to have been quoted out of context regarding the fact that it was done to pay for the cash consideration for GGP. He told me he was quoted in context as such. I don't have an exact reason for why the transaction was done, but I know for certain it wasn't to pay for the cash consideration of GGP. An inconsistency like that is what drove me to write what I did given what I saw in the financials at the time, it's really simple to be truthful regarding the reason for a RPT that was 10%> of BPY market cap, my thought is what else are they not being truthful about, example: their operating cash flow. Hypothetically, let's say the cash was run through operating cash flow: 2018's operating cash flow would have been slightly negative. I understand thinking the intention wasn't "hey, let's do this transaction so we can shove it in operating cash flow", maybe they just happened upon an opportunity to do so, if in fact they did. I don't think that takes away from the point that I was trying to draw.

I have to run right now, but I'll touch on more of the stuff laid out later.

I stand corrected! don't worry about it, I'm sure I'll make some mistakes here too.

Before I continue on the next point: "In a typical real estate cycle, movements in cap rates tend to move in lockstep with interest rates. Over the last 12 months, while we've seen a dramatic decline in interest rates in both U.S. and in Europe, this is yet to be reflected in the valuation of our assets. To put this into perspective, a 100 basispoint reduction in cap ratesaddsalmost $20 to our net asset value per unit.Acontinued low interest rate environment should translate into higher demand for real assets, which will increase the value of our portfolio of properties. It also assists us in continuing to monetize mature, de-risked assets at great prices and reallocating that capital to development and other higher returning investment opportunities." BPY Q3 2019 earnings call.

wrt to Schwab's post and subsequent responses; Brookfield knows the accounting and disclosures rules full well, that I'm 100% certain on. It's probably been said here in the thread but 20% of BAM/BPY property valuations are verified by third parties, that's on their total portfolio including equity accounted investments as those are reported at FV as well. The sensitivity in the analysis is another point of contention, you can see it on page: 54 of the Q3 2019 report, they had a CORSEP with the SEC over this previously. They tout their "discount" to IFRS values all the time. I believe BPY once said a 1% decrease in cap rates adds $20 in value to the stock, no one asked what happens if they increase 1%.

The Company FFO comparisons, if you look at the source doc footnotes that I provide, you'll see in the BAM annual report that they breakout disposition gains separately by the segment. Company FFO is provided the same way and without these gains for BAM's and BPY's reporting. We don't know the properties, if the dev props are dragging on FFO, I'm open to that too, but it seems like a large % of BPY FFO in total is coming from their proportionate share of FFO from equity accounted investments.

A lot of this is complex so I want to make sure I have time to sit down and be cogent on what I'm saying instead of firing off posts, so let me try to go one by one. Something I'm having trouble reconciling, Petec is that you think I've provided sufficient evidence that there is some funny business going on with their operating cash flow yet you don't think the transaction was to cover up failing assets, these two seem like A to B points, but I'm open to the possibility of being wrong here.

I think I found a quote that it included 1 Manhattan. I'll see if I can dig it up again. it's in my post.

We don't know the properties included, this was 30% of their core office portfolio. and I'm not saying definitively they put it in working capital and other, that's why I asked the question.

your numbers are off because I used the 2019 Q's where they break stuff out better, will respond to your other points soon.

Normax59, if you don't mind, I'd be really interested if you could elaborate on this. If Flatt's claim is indeed garbage it's important to know, but a cursory glance at the pages you reference don't seem to provide the smoking gun*. I will read the calls later but if you have the time and inclination to lay it out for me I'd greatly appreciate it. *Edit: this may be because I often found the data you cited on different pages. Also the reports seem to be split in two, so when you say page 53 I have to manually add page numbers because they reset to 1 after page 42. Weird. Here was a part of the draft that I cut out because it took away from my point: Anyway, here is where my eyebrows were raised: Even today, shareholders know little about why BPY wanted to sell 28 per cent of its core office portfolio for $1.4bn, or why BAM wanted to buy. The rationale was that BPY needed cash. "The only reason we did that," Mr Flatt says of the tower deal, was that "it [bPY] needed some extra capital. And this was an easy way to do it." The money was needed, Mr Flatt explains, to pay for a big wager on US malls - a sector that many investors have left for dead. BPY consummated the bet in August 2018 when it merged with retail landlord GGP, whose shareholders received cash payments worth $9.3bn I'll be the first to tell you that Bruce Flatt is a smart guy, a very smart guy, and no one can take that away from him. But, a problem that smart people like Flatt sometimes run into is that they end up in positions where people recognize their genius and begin to just take their word. When you've built up a castle of opaqueness surrounded by a moat filled with complexity it becomes really easy to stretch the truth because, well, no one really checks to see if anything you've said is true. With that being said Flatt knows as much as I do that this transaction was not because BPY needed the capital for the GGP acquisition. But don't take my word for it, take CFO Bryan Davis's word from the BPY Q3 2018 earnings call where he discussed the funding for the acquisition: As everyone is aware, prior to the acquisition, BPY accounted for its investment in GGP under the equity method. As mentioned earlier, the acquisition of the company closed on August 28, the date which we deem Brookfield to gain control and, therefore, consolidate. To fund the transaction, alongside the close, GGP entered into various joint venture arrangements with a number of partners on 35 assets, resulting in $2.7 billion of net proceeds. On our consolidated IFRS books, these investments are now accounted for under the equity method. In addition, 10% of the whole company was sold to another investor for consideration of $1.5 billion. This interest is accounted for as a noncontrolling interest on BPY's IFRS financial statements. Within our proportionate financial statements, all of these are adjusted for to reflect BPY's ownership interest. In addition to the sale of these interests, we issued $4.9 billion of new acquisition debt with an average maturity of 5 years and an average interest rate of LIBOR plus 236 basis points, and issued $5.2 billion of new equity, 251 units at a $21 price per unit on the date of close. This consideration in our share acquired for us $19 billion in malls. As part of determining our opening balance sheet, all of GGP malls were valued by a third party. At a high level, the valuation came to an equivalent per GGP share value that fell between where we held our original investment at the end of Q2 of $25.20, net of our goodwill, and the value we put on the transaction of $23.50. That midpoint value provided for a bargain purchase gain of slightly over $800 million, which allowed us to write off the goodwill from our original investments with minimal impact to our net income. - BPY Q3 Earnings Call The pre-close transactions included a dividend recapitalization with debt financing from a revolving credit facility, a Term A-1, A-2, and Term B loan. - Term A-1 $900 million commitment - Term A-2 $2.0 billion commitment - Term B $2.0 billion commitment - Revolving Credit Facility had $347 million outstanding on September 30, 2018 The rest of the cash came from selling pieces of consolidated properties to JV partners, or selling down their ownership in already existing JV's prior to the merger as well as a 10% ownership stake in the operating LP at BPR that was sold to an unnamed institutional investor. - BPR formed the BPR-FF JV LLC ("Future Fund") with Brookfield Real Estate Partners F LP: Brookfield Real Estate Partners F LP is owned by the Australian Government Future Fund, the new JV purchased a 49% interest in 21 properties and a 24% interest in an existing JV property. - 4 Property JV's were set up with Teachers Insurance and Annuity Association of America. - 3 Property JV's were set up with CBRE Global Investment Partners. - 2 Property JV's were set up with California Public Employees' Retirement System. The acquisition debt, JV sales and 10% sale of the Operating LP at BPR were customary prior to the close and occurred on August 27, 2018, the consideration that BPY ultimately paid was reduced by the special dividend. All of these cash transactions occurred at GGP, not BPY, the day before the merger closed, which is an important detail when measured against Flatt's comment. The rest of the consideration was paid with equity in the new vehicle, BPR, and equity issuance at BPY depending on which security GGP shareholders chose following the special dividend. The reason behind the related party transaction was also brought up several times in BPY earnings press releases and calls. It was always described as a deal to facilitate a New York City venture, not once was GGP mentioned. Investors were told that Brookfield Asset Management would syndicate their newly purchased 27.5% interest in these assets to third party investors in the "near future". About a year and half later this simply hasn't happened and these assets still sit on the balance sheet at BAM. Subsequent to quarter-end, [bPY] seeded a new Brookfield Asset Management (“BAM”)-sponsored New York City real estate venture with a 28% interest in our New York core office portfolio. We plan to syndicate up to an additional 7% interest in this portfolio, with total projected proceeds of $1.8 billion to BPY. - BPY Q2 2018 Earnings Press Release Analyst A: "Okay. And then on the timing of the New York fund, what percent will BPY own of these assets? And what is the timing of the close of that transaction roughly?" Kingston: "So the -- we have sold a 28% interest in the assets. Now within some of those assets, we already had partners. So that's not a 28% interest at the asset level. That's 28% interest in our ownership that you would see on the balance sheet at June 30. And we may sell a further 7% interest. So longer term, we would hold 65% of -- effectively of the ownership that we had at June." - BPY Q2 2018 Earnings Call Reported last quarter, seeded into a new Brookfield Asset Management-sponsored New York City real estate venture, a 27.4% interest in our New York core office portfolio, for net proceeds of $1.4 billion to BPY - BPY Q3 2018 Earnings Press Release Analyst B: "Okay. And just on the sale of the New York portfolio. Do you envision creating similar funds through other core assets that are held on a 100% basis in the near term?" Kingston: "We have -- it is possible that we may do it in other jurisdictions. What we've found with LP investors in particular is on the opportunistic strategies, many of them prefer global strategy with multiple currencies involved. But really, when it comes to these core buyers or core-plus investors at these types of returns, currency becomes a lot more important for them. And so having vehicles like this in different countries with different currencies is potentially appealing. So you may see us do something similar to this in places like Australia or Canada or even the U.K." - BPY Q3 2018 Earnings Call The last time the syndication of the interest was mentioned was on the Q1 2019 BAM earnings call where Lawson said they were still working on syndicating the interest, a tough pill to swallow given how BPY describes their office portfolio. Analyst C: "And my follow up would be, if you can provide us with an update on the syndication efforts on the acquired 28% interest in New York real estate portfolio from BPY last year." Lawson: "Sure. So, I guess the shorter answer to it is we continue to own that interest and we’re continuing to work on syndicating and monetizing those assets." - BAM Q1 2019 Earnings Call Even so, the related party transaction closed before GGP shareholders approved the merger and was almost two months before the GGP acquisition closed: On July 6, 2018, the partnership sold 27.5% of its interest in a portfolio of operating and development assets in New York. The partnership retains control over and will continue to consolidate these assets after the sale. The interest was sold to the parent, which is currently in the process of syndicating its entire 27.5% equity interest to third-party investors. On July 26, 2018, common stockholders of GGP approved the proposed acquisition of GGP by the partnership, as well as all the other proposals voted upon at a special meeting. The partnership expects the acquisition to close in August 2018. The transaction is expected to be accounted for as a business combination. So, why does any of this matter? Often times people tell you a whole lot of information without realizing that they've told you anything. Being, what I would call, less than truthful with regards to something as simple as the reason behind a transaction tells me a whole lot. I believe Flatt when he says that BPY needed extra capital, though not because they needed it for GGP acquisition. Anyone who wastes their time in dis aggregating how exactly BPY generates its operating cash flow would tell you the same thing, BPY always needs extra capital. This transaction has always just seemed fishy to me and the longer it's sat on the balance sheet at BAM the more that smell has turned rotten. Hope that helps.

Look at it from Q to Q, not a FY basis, they re paper over what they did in Q3 and Q4.

Actually, let me put a ? on whether or not this was their first time doing this, looking at it closer now, it appears in other periods they may have stuffed returns of capital in operating cash flow.

Can you explain how you determined they did this? Look at equity accounted distributions to BAM in Q1 2018 you'll see it's positive $366MM in the cash flow statement with $288MM of earnings from equity accounted investments meaning that a total of $654MM was "distributed", this is odd since BAM never has received distributions this high before. On page 18 of their PDF you'll see they say they received $653MM of equity accounted investments from distributions and returns of capital from equity method investments. So, exactly our figure with some rounding. BIP disposed of an equity method investment for about 1.28B, BPY also had distributions from returns of capital from equity method investments of $535MM in Q1 2018, if you look at BAM's figure for inflows from equity method investments in the investing section it only shows about $1.3 billion. Mind you that BBU also was stuffing bank overdrafts in their working capital changes at the time, in Q2 2018 they restated their Q1 2018 operating cash flow from $130MM to -$47MM.