BAM - Brookfield Asset Management

[no_free_lunch]

BPY is interesting.  I tried, briefly, to do the valuation but it is just very difficult due to the large number of properties.  For instance, the office side has equity of $7B, we know they own 50% of BPO which has a market cap of $9.4B, so is canary wharf and the various other properties worth $2.3B?  It's really a lot of work.

 

At any rate, based on what I can figure out, I think at a 25% discount to stated book/intrinsic you are at worst paying fair market value.

 

The way I am thinking about BPY is that based purely on the earnings it is yielding about 14%.  Now the earnings include substantial fair value adjustments so you need to consider if the adjustments can be maintained.  When you compare the adjustments to the assets, the adjustments annualized are only 2.75-3% of assets.  This doesn't seem aggressive, in fact there is likely considerable upside from there if the market turns.

 

At this point I have about 10% invested in BAM.  I am thinking about converting some of that or deploying new cash into BPY as well. 

[no_free_lunch]

Regarding the dialectic attack, I don't quite get the logic. 

 

The hedge fund calls BPY a Ponzi scheme, as the IPO was was used to raise money from new investors to pay off old ones.

..

We estimate they are $150-250 mm short and the shortfall will have to be made up with future debt or equity offerings. This is part of the essential nature of a Ponzi scheme – raise money from new investors to pay out old investors

 

BPY was a spinoff to existing BAM shareholders, what money was raised?  Was there a preceding IPO as well?

[thepupil]

No new money was raised, but BPY committed to a 1.00/Year dividend which as Dialectic points out is not completely covered by cash flow according to Brookfield's own statements. I can see Dialectic's point.

 

The lion's share of BPY's equity are in REITs which distribute almost all their cash flow and have much lower than 5% dividend yields: GGP (2.7%), BPO (3.4%) and RSE (2.7%)

 

So the balance of cash for distributions has to come from the other non listed properties.  BPY's own disclosures say their is not enough cash flow from the properties to maintain the distro without future equity/debt raises, hence the ponzi comparison.

 

In my opinion Brookfield wanted to use an expensive BPY (one that traded close to its generous 25.00 NAV estimate) with a slightly unsustainable distribution as expensive currency to make a big acquisition. The sell off in REITs and BPY at 20.00 makes that less attractive.

 

This is what I mean by "devious financial engineering". Creating BPY gave  them new management fees out of thin air to extract and they are starting it out with an unsustainable distribution. In the end I think it will create lots of value for BAM, but some may be uncomfortable with the means to that end.

[WhoIsWarren]

 

The IFRS "common equity" valuation is the rough and ready value of the group's net assets, per the accounting rules -- mixing 'fair value' and 'at cost' values together. Don't forget, shareholders' equity includes all equity types, including preference shares and non-controlling interests (the share of fully-consolidated businesses not owned).  It's a very important distinction; common equity was less than half of total equity in 2012.

 

I followed and/or knew about most of what you said (and agree regarding discounting the dta), but wanted to follow up on the above.  Should we modify book value to common before adding the incrementals and other adjustments?  Do they do this in their intrinsic value calculation?  Perhaps I did not follow what you meant as well.

 

Racemize, not sure if I'm catching your question correctly -- are you asking if we need to adjust the book value to account for prefs / capital securities / non-controlling interests?  If so, no adjustment needed; the book value per share figure is based off common equity (after prefs / capital securities / non-controlling interests).

 

Let me know if you meant something else.

[nnayyar]

FWIW,

 

BPO is also trading at substantial discount to stated book value (20.76 vs ~16.50 last) On the conference call, mgmt believed this discount was due to large tenant (Merryll) lease expiring at the World Financial Center. I believe they used the words "when not if" a new tenant is found, they believe the overhang and hence discount to book should contract.

[racemize]

 

The IFRS "common equity" valuation is the rough and ready value of the group's net assets, per the accounting rules -- mixing 'fair value' and 'at cost' values together. Don't forget, shareholders' equity includes all equity types, including preference shares and non-controlling interests (the share of fully-consolidated businesses not owned).  It's a very important distinction; common equity was less than half of total equity in 2012.

 

I followed and/or knew about most of what you said (and agree regarding discounting the dta), but wanted to follow up on the above.  Should we modify book value to common before adding the incrementals and other adjustments?  Do they do this in their intrinsic value calculation?  Perhaps I did not follow what you meant as well.

 

Racemize, not sure if I'm catching your question correctly -- are you asking if we need to adjust the book value to account for prefs / capital securities / non-controlling interests?  If so, no adjustment needed; the book value per share figure is based off common equity (after prefs / capital securities / non-controlling interests).

 

Let me know if you meant something else.

 

I apologize, I wasn't very clear; I'm also a little confused, so perhaps I can rephrase in a better way.  I was trying to understand what your comments on IFRS common equity related to, e.g., do the adjustments to get to intrinsic value start with IFRS common equity?  Or said another way, I wanted to make sure that intrinsic value they are listing applied to common shareholders and not the entire capital structure.

[giofranchi]

Quick pace of fundraising for new Brookfield infrastructure fund 11:38 AM

•Brookfield Asset Management (BAM +1.3%) is set to hit its hard cap of $7B on its second infrastructure fund, reports PEHub, making it one of the largest private infrastructure funds ever raised. The fund's initial fundraising target was $5B.

•Brookfield itself is a significant investor and is said to have kicked in about $2B. An investor presentation says the fund plans to make 15-25 investments in the range of $200M-$500M each. It will focus on the U.S, but can invest globally.

 

giofranchi

 

[WhoIsWarren]

 

I apologize, I wasn't very clear; I'm also a little confused, so perhaps I can rephrase in a better way.  I was trying to understand what your comments on IFRS common equity related to, e.g., do the adjustments to get to intrinsic value start with IFRS common equity?  Or said another way, I wanted to make sure that intrinsic value they are listing applied to common shareholders and not the entire capital structure.

 

Ok, yeah I think I understood you first time.  Intrinsic value indeed relates to the common equity only.  So no more adjustments necessary.

 

Reading back over my post, I don't even know why I brought up the common equity / total shareholders' equity distinction......I think I just confused things!

[giofranchi]

Analyst/Investor Day September 2013

 

 

giofranchi

brookfield-asset-management-investor-day-2013.pdf

[giofranchi]

Vale sells $1.2B in cargo stakes, lines up further sales • 6:52 PM

 

- Vale (VALE) is selling stakes in its VLI cargo unit totaling nearly 36% for ~$1.2B to Japan’s Mitsui and a Brazilian government fund, and says it is in exclusive talks with Canada’s Brookfield Asset Management (BAM) to sell ~26% of VLI; Vale's stake would drop to less than 40% after all the deals.

- VLI, which controls ports, terminals and more than 10K km of railroads in Brazil, plans to invest 9B reais through 2017 to expand capacity.

- Vale is selling assets, suspending projects and focusing on its more profitable iron ore business as it tries to recover profit margins amid lower commodities prices.

 

giofranchi

[giofranchi]

CIBC 12th Annual Eastern Institutional Investors Conference (Transcript)

 

 

giofranchi

 

brookfield-asset-management-CIBC-transcript.pdf

[jeffmori7]

Analyst/Investor Day September 2013

 

 

giofranchi

 

Thanks Gio for this. And here is the presentation that goes along:

 

http://www.brookfield.com/_Global/42/img/content/File/Investor%20Relations/Presentations/2013/BAM_Investor_Day_Presentation_2013_Sept17.pdf

[giofranchi]

Thanks Gio for this. And here is the presentation that goes along:

 

http://www.brookfield.com/_Global/42/img/content/File/Investor%20Relations/Presentations/2013/BAM_Investor_Day_Presentation_2013_Sept17.pdf

 

Thank you! :)

 

giofranchi

[giofranchi]

WSJ: Brookfield among bidders for Weyerhaeuser's homebuilding unit • 5:34 PM

 

- Weyerhaeuser's (WY) homebuilding division is attracting interest from Brookfield Residential Properties (BRP), the land developer and home builder controlled by Brookfield Asset Management (BAM), WSJ reports.

- Weyerhaeuser Real Estate Co. executives reportedly have met with bidders to answer questions about its operations; while some bidders are interested in only a portion of the unit, BRP is said to be interested in buying the entire group.

- BAM's size - $180B in assets - might prove an advantage vs. other interested parties since WY wants to sell the homebuilding division in a reverse Morris trust, a tax-free method of spinning off a division to be merged with an acquirer.

 

giofranchi

 

[nnayyar]

Interesting move, BPY buys BPO:

 

http://finance.yahoo.com/news/brookfield-property-partners-proposes-acquire-121500734.html

 

 

[thepupil]

I assume the motivation is :

 

1. Increase liquidity at BPY which will presumably help valuation and BAM wants BPY to be an expensive currency for issuance funded acquisitions

 

2. Bring BPO's assets under the BPY fee structure which over time will benefit the holdco. inflation and a little growth will increase BAM's share of BPY's cash flows without increasing its capital contribution proportionally. Over time BPY will increase distributions and eventually the GP/LP fee structure will be in "high splits" like some MLPs.

 

BPO shareholders should be angry, they owned a pure play office REIT and are being offered to choose between Scylla (unforeseen tax event) and Charybdis (ownership in a more complex, fee-heavy vehicle)

 

it should be good for BAM though.

 

 

 

[thepupil]

Incentive Distribution Fee

15% of dividends over $1.10 per share

25% of dividends over $1.20 per share

 

For clarification, above is BPYs incentive fee structure. with this move BAM is migrating more assets directly into BPY's fee structure.  inflation + a little growth should help BPY grow into its currently unsustainable per unit distribution, and a few good acquisitions should then grow it to the levels where BPY is extracting the incentive fees. 

 

BPY is a very favorable way for BAM to manage assets with permanent captive capital.  they have complete control thanks to GP/LP structure and will eventually receive 25% of the upside of long term ownership without contributing any additional capital. it is almost certain that rents for the types of assets BPY manages will go up by at least inflation, and with no adjustments to the per unit distribution incentive fee calcs, it is almost certain that BAM will extract lots of value from its LPs.

 

Imagine if BPY buys out all its subsidiaries over the next few years without BAM contributing additional capital and then grows assets from there at a decent rate. It is not difficult to envision a scenario where BAM is receiving 25% of rent/income growth on a $100B+ property portfolio in 15 years.

 

 

[giofranchi]

 

Does The Best Brookfield Come In A Small Box?

 

http://seekingalpha.com/article/1718742-does-the-best-brookfield-come-in-a-small-box?source=email_investing_ideas&ifp=0

 

 

giofranchi

[tripleoptician]

Reviewing the Q3 Report/shareholder letter:

 

"Following the BPO/BPY merger, and this transaction(GGP reorganization), BAM will own 68% of BPY and other shareholders will own 32% of BPY. The market cap will be +\- 15 billion with a +\- 5 billion float."

 

This seems like a massive reorganization as current market cap for BPY is about $1.5 billion. BAM currently owns about 90% of BPY. Shouldnt the increased market cap size and available float significantly affect BPY's weighting in index funds based on Murray Stahl's observations of indexing?

 

This could be interesting....

 

[nnayyar]

BAM, BPO, BPY seem to be off quite considerably past few days, is there anything specific news out there that I missed? Perhaps something CAD specific? IYR seems to be relatively stable and GGP is actually green at time of this post.

 

Thanks!

[nnayyar]

Good article on BPY:

 

http://seekingalpha.com/article/1936481-brookfield-property-partners-fair-value-or-inflated-value?source=feed_f

 

Even though its negative! lol I am a bull on the name. I left a response, my value of the units using MARKET prices still gives me a value in the 25's. The uncertain portion of my valuation is the Finance Development, RE Finance Fund, and Sector RE funds which I have at 2.3B. As stated in comment, if i knock 1B off the price I still get ~22 in NAV. The other prices are taken directly from publicly traded market prices and ownership %'s.

 

 

[james22]

Brookfield Asset Management (BAM +0.3%) receives approval from the Toronto Stock Exchange to buy back up to 53.5M shares or 10% of its outstanding shares over the next year. Stock may also be purchased on the NYSE.

 

http://seekingalpha.com/news/1682653-brookfield-asset-management-to-buy-back-up-to-10-percent-of-float

[WhoIsWarren]

Brookfield Asset Management (BAM +0.3%) receives approval from the Toronto Stock Exchange to buy back up to 53.5M shares or 10% of its outstanding shares over the next year. Stock may also be purchased on the NYSE.

 

http://seekingalpha.com/news/1682653-brookfield-asset-management-to-buy-back-up-to-10-percent-of-float

 

This is something BAM receives approval for on an annual basis.  That's not to say they won't buy back a chunk of shares, but the approval in itself is not very newsworthy.

[giofranchi]

GrafTech Enters Into Definitive Transaction Agreement with an Affiliate of Brookfield Asset Management

 

http://seekingalpha.com/pr/13537206-graftech-enters-into-definitive-transaction-agreement-with-an-affiliate-of-brookfield-asset-management

 

 

Gio

[WhoIsWarren]

Brookfield Property Partners agrees to buy Centre Parcs

 

http://www.brookfieldpropertypartners.com/content/2015_press_releases/brookfield_agrees_to_acquire_center_parcs_from_bla-42310.html

 

The purchase price has not been disclosed though is reported in the press as £2.4bn (not clear whether this is the equity value or inclusive of debt).  When I read that Blackstone bought for just £265m in 2006 (i.e. close to the last market peak!), I almost choked on my porridge!  Digging a bit more I read that Blackstone invested at least £1bn in the business (reversing a 2002 sale-and-leaseback costing £825m, opening a new facility in Woburn costing £250m).....perhaps more than this as it seems like the business was previously under-invested.

 

http://www.thisismoney.co.uk/money/markets/article-2666305/CITY-FOCUS-Center-Parcs-road-flotation-stock-market-return-12-months-away.html

 

For me Centre Parcs looks to me a bit of a departure from the core BPY model, namely:

1. Real assets with low obsolescence risk (tick.....though these types of holidays are quite fashionable these days, could reverse in time; in which case I would question value of alternative use)

2. High visibility of cash flows (tick......5-year occupancy rate of 97% is good, though likely highly seasonal and somewhat weather-dependent)

3. Low operating costs and maintenance expenditure (I would think less so the case with Centre Parcs). 

 

That said, I see the Brookfield group already owns a couple of similar resorts in Las Vegas / The Bahamas.

 

Valuation-wise, it's difficult to say anything definitive as I don't have complete information.  According to a Telegraph article the other day, Centre Parcs made £147m EBIT in the year to April 2014.  This excludes earnings from Woburn, which was opened in June 2014; I expect this site to be a major success given its proximity to London.

 

I also imagine Brookfield will avoid paying taxes here as they have a complex web of international holding companies and large NOLs.

 

I would expect there are opportunities to invest more in the business over time.  It recently announced it would spend E200m on a park in Ireland, opening 2019.