BAM - Brookfield Asset Management

[LongTermView]

https://www.forbes.com/sites/antoinegara/2018/04/15/bruce-flatt-brookfield-china/#221997273666

[ValueMaven]

Does anyone have all of Bruce's annual shareholder letters in one place? 

 

BAM IR website only goes back to 2012!

 

Sincerely,

VM

[racemize]

Does anyone have all of Bruce's annual shareholder letters in one place? 

 

BAM IR website only goes back to 2012!

 

Sincerely,

VM

 

https://drive.google.com/open?id=0BxTPR9eP5nWeV1JyZktlTncxM00

[Cigarbutt]

“Everything we do is directed at maximizing

shareholder value…”

…

 

“We cannot guarantee the future, but we do

believe we have laid the foundations for achieving

improved returns for you. »

 

First and last sentence from Mr. Flatt’s first letter signed as CEO (2001 annual report).

 

BAM used to be Brascan and the firm has evolved under the new leadership.

 

Racemize is the reference but their website will take you back to 2009:

https://bam.brookfield.com/en/reports-and-filings

 

It takes a bit of work, but you can go back in time some more in:

sedar.com

 

Brascan was related to the Bronfman family and that's another story.

[ValueMaven]

THANKS!

[John Hjorth]

This share by Joel is just soo awesome!

 

- - - o 0 o - - -

 

ValueMaven, what is it with you? - Why don't you get it?  [ ; - ) ] - Last time you asked you got hit by Joel of about 2,241 pages ... - This time about 4,000 pages ... - Next time you ask you'll likely be hit by Joel of 15,000 pages, or something like that!

 

- - - o 0 o - - -

 

Thank you for sharing, Joel! I appreciate it a lot!

[ValueMaven]

haha John...fair enough. 

 

Well, the real reason is that I've always followed BAM, but never really dug deep...honestly FFH is really starting to annoy me with all of the corp governance issues etc...that $50mm investment in his sons fund last year is really bugging me.  Anyway, I've been looking for FFH replacements in my portfolio.  Plus, BAM has been 'hit' recently given the whole REIT selloff/rate movements....Just using it as a reason to do some work on the name.

 

Sincerely,

ValueMaven.

[chrispy]

Two recent purchases in Mumbai and Chicago:

 

Brookfield to buy Essar’s Equinox office complex for Rs 2,450 Crore ($336m)

 

economictimes.indiatimes.com/articleshow/62409063.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

https://economictimes.indiatimes.com/wealth/real-estate/brookfield-to-buy-essars-equinox-office-complex-for-rs-2450-crore/articleshow/62409063.cms

 

Brookfield Property Partners pays $305M for Loop office tower

 

https://therealdeal.com/chicago/2018/04/25/brookfield-venture-pays-305m-for-loop-office-tower/

[Packer16]

The one observation I have here is BIP has outperformed BAM & and the other subs over time.  It appears there is more profit to be made infrastructure vs. real estate or renewable power assets.  Maybe BIP has a more flexible mandate then the other subs & thus has a larger target set than the other subs.  Also BIP has the largest amount of 3rd party investment in its companies versus the other subs (BAM only owns 30% of BIP vs. a high % of other subs). 

 

BIP is really interesting in that you can invest in a non-correlated asset class to stocks with an about 4.6% dividend yield & a 7.5% growth rate.  Currently the price to AFFO is about 13x, an AFFO yield of 7.6%.  This is a far cry from the Graham Formula estimate P/E of 23.5.  (Note: earnings here are meaningless as there is non-cash amortization in them)

 

Packer 

[villainx]

BIP benefited from large transformative acquisitions during distress period.  This fits less with BEP profile.  BPY is too cyclical in that RE positives in one area(s) will be offset by distress in others, despite overall good operations.  BBU has potential to be like BIP, a looser/flexible mandate with potential for large transformative acquisitions. 

 

 

[StevieV]

Packer, or others,

 

I have a general aversion to investing in the subs.  In general, I prefer to be aligned with management.  In this case, it seems to me as though BAM has all the control, and management is at least largely invested in BAM, rather than the subs.

 

Any reason I shouldn't be concerned about the alignment of interests with the subs here?

 

StevieV

[Uccmal]

Packer, or others,

 

I have a general aversion to investing in the subs.  In general, I prefer to be aligned with management.  In this case, it seems to me as though BAM has all the control, and management is at least largely invested in BAM, rather than the subs.

 

Any reason I shouldn't be concerned about the alignment of interests with the subs here?

 

StevieV

 

I have given this alot of thought.  I started with Bep nearly 3 yrs ago, in my margin account.  I decided that losing some of the distributions to taxes was unsatifactory so I slowly shifted the posiiton into our  TFSAs and RRSPs.  At the same time I started to build a posiiton in the parent, maybe a year and a half ago, and reduce the BEP holding in my taxable accounts. 

 

BAM is likely to grow somewhat faster than the subs simply by virtue of the fact that BAM takes fees from the subs, and all the investment funds, as well as making money on its own operations.  Bam dictates how much fees the subs pay and their dividends.  This doesn't mean that certain subs may not grow faster over certain time periods.  It just means that in aggregate BAM should do better (I think). 

 

BEP and AQN (Algonquin) are somewhat analogous.  BEP pays their own managers, and BAM.  AQN ownly has to pay their own managers.  This creates a drag for BEP.  Perhaps it is offset by a lower cost of funding when BAM is the guarantor but I am not seeing that.  Algonquin gets pretty cheap money. 

 

An advantage that BAM provides is their global reach.  Algonquin, Emera, and other BEP comparables just dont have this expertise in non NA deal making. 

 

The other subs have similar advantages and disadvantages as BEP. 

 

 

[John Hjorth]

... Perhaps it is offset by a lower cost of funding when BAM is the guarantor but I am not seeing that. ...

 

Just to support Al's comments about financing at BAM and BAM subs:

 

BAM 2017 Annual Report, p.4:

 

We finance our operations using debt that is primarily at the operating asset level and is predominantly investment grade with limited recourse and covenants. Our asset level debt is supplemented by medium and long-term debt and perpetual preferred shares at the listed issuers and corporate level.

 

This financing structure, combined with a constant high level of dry powder in the whole system, makes it quite unlikely, that the rise of a liquidity problem somewhere in BAM or the subs because something has ended in the ditch would cause a domino-effect [house of cards].

 

- - - o 0 o - - -

 

Good to see you back, Al. I hope you enjoy the spring.

[ValueMaven]

https://www.bloomberg.com/news/videos/2018-05-01/brookfield-ceo-disagrees-with-zell-sees-opportunities-in-real-estate-video

[chrispy]

A key to Malone's success was applying leverage to a business with predictable, and hopefully growing, cash flows.

 

After reading the BEP and BIP earnings transcripts, the Brookfield business model is remarkably similar. Buy an infrastructure asset that has high barriers to entry, negotiate long term contracted prices that increase with inflation, and refinance the asset.  Brookfields twist is to sell the asset after many years to a bidder that is interested in the low risk long term pricing.

[peterHK]

The reason you'd own the listed partnerships is that you want to own them in different weights than they are owned in BAM. I think BEP and BIP and BBU are better businesses than BPY for instance, so I'd like to own more of them. The real reason to own BAM, in my opinion, at the current juncture is that the implied value of the asset management business at current prices is absurdly low given the growth trajectory and fee growth to come.

[gokou3]

The reason you'd own the listed partnerships is that you want to own them in different weights than they are owned in BAM. I think BEP and BIP and BBU are better businesses than BPY for instance, so I'd like to own more of them. The real reason to own BAM, in my opinion, at the current juncture is that the implied value of the asset management business at current prices is absurdly low given the growth trajectory and fee growth to come.

 

It's not just a weighting issue.  In addition to the asset return, BAM also collects management fee and IDR from its LPs, so the ROIC BAM gets from its BIP/BEP/BPY/BBU would be higher than the returns by those LP themselves.

 

Then the next issue is relative valuation.  Similar to BRK, I would use the two-column approach, where one side is the summed values of its LP and other holdings and the other side is the value of its operating (fund management) business.  Even if you use conservative multiples, you should find that BAM is trading at a slight discount to its sum of parts.

[peterHK]

The reason you'd own the listed partnerships is that you want to own them in different weights than they are owned in BAM. I think BEP and BIP and BBU are better businesses than BPY for instance, so I'd like to own more of them. The real reason to own BAM, in my opinion, at the current juncture is that the implied value of the asset management business at current prices is absurdly low given the growth trajectory and fee growth to come.

 

It's not just a weighting issue.  In addition to the asset return, BAM also collects management fee and IDR from its LPs, so the ROIC BAM gets from its BIP/BEP/BPY/BBU would be higher than the returns by those LP themselves.

 

Then the next issue is relative valuation.  Similar to BRK, I would use the two-column approach, where one side is the summed values of its LP and other holdings and the other side is the value of its operating (fund management) business.  Even if you use conservative multiples, you should find that BAM is trading at a slight discount to its sum of parts.

 

Yes BAM's return will be higher than the LP's return, but depending on which LP and what weighting they use, investors can earn a higher return than BAM by correctly picking and weighting the LP's. For example, over the past 3 years, BIP has significantly OP'd BAM on a total return basis. Over the past 5 years, BEP has underperformed BAM significantly. BPY has been by far the worst performer. So by going 100% into BIP, you'd have outperformed. This obviously is a more complex method that would likely involve more rebalancing etc. than owning BAM (and I would note that over 10 years BAM has outperformed its LP's).

 

Agreed on the valuation. I have a live mark to market on all of BAM's LP's in a spreadsheet, so I can mark that part of BAM's balance sheet to market minute by minute and then back out a live valuation for the AM business (more or less) and comp that out to other high quality asset managers. It's actually pretty easy to value due to the public nature of most of it's balance sheet.

[Spekulatius]

The management fees that grow with the Lp’s size are key to almost guarantee outperformance of the GP(BAM) over time. Then there is the advantage that thr GP really has the control, while the L.P. are well - limited. When you are buying BAM, you interest is aligned with mangement, when you are buying the L.P., you are the golden Goose that can’t be slaughtered, but that is fair game for anything else...

[chrispy]

What is happening with BBU is worth keeping an eye on. Graftech just IPOd to wrap up a grand slam investment, the Toronto gambling is about to pick up and expand considerably, Cyrus is very excited about BRK water, Westinghouse operations will start in the next year, and North Palladium may be IPOing this year. One analyst on the call and a market cap of 1.5B

[villainx]

BBU will definitely get a ramp up.  I see it as part of the spinoff process where it becomes a legit vehicle for BAM, until 8-12 bil market cap like the other subs.  Like BIP, near term, it likely will find acquisitions that will lead to good performance. 

[chrispy]

Great results.  The carried interest is starting to take off.  Flatt has frequently mentioned how the carried interest will sky rocket over the next years:

 

"

Fee related earnings increased by 56% to over $1.0 billion over the LTM, attributable to new capital raised across multiple fund strategies and stronger market valuations of our listed partnerships. Earnings included performance fees of $143 million in the quarter from continued strong unit price performance by Brookfield Business Partners.

 

We also achieved growth in economic net income from our asset management activities, which more than doubled from the prior LTM period to $2.1 billion. Unrealized carried interest was $1.5 billion before costs, or $1.0 billion net of costs in the last twelve months, more than triple that of the prior period. The step-change is a result of our earlier vintage funds starting to generate significant amounts of carried interest for the first time. As our fund series have been growing and should continue to grow, we expect to see continued increases in carried interest, as carry eligible capital grows.

 

We continue to generate increasingly significant free cash at the corporate level. We receive significant cash flow from our asset management business as well as distributions from our invested capital, which adds to our robust liquidity profile.

 

On an annual basis, we receive approximately $1 billion in asset management fee related earnings and $1.5 billion of cash distributions from our invested capital annually based on our current profile. After paying approximately $500 million of interest expense, preferred share dividends and corporate costs, we are generating approximately $2 billion of cash flows before common share dividends that is available for distribution or reinvestment. We have few capital requirements at the corporate level and this positions us well to use our cash flow to support larger fund transactions, providing bridge capital, and seeding new fund products.

 

We have significant liquidity to deploy for future opportunities. This includes $22 billion of third-party private fund commitments and $10 billion of core liquidity.

"

 

https://bam.brookfield.com/en/press-releases/2018/05-10-2018-122022041

[Uccmal]

To add fuel to the fire about which unit is better to own (I dont have the answer BTW):

 

" First quarter funds from operations (“FFO”) also increased significantly to $1.2 billion, an increase of 74% from the prior year. Fee related earnings continue to increase as a result of the growth in fee bearing capital and higher performance fee income. This was due to fee bearing capital growth generated by both increases in new private fund capital and listed issuers. We received a performance fee from Brookfield Business Partners in the quarter as the partnership continues to exceed performance hurdles. The increased contribution from our invested capital reflects improved results across our businesses, including higher pricing in our renewable power and private equity operations. FFO included $473 million of disposition gains from assets sold, including the aforementioned utility asset and a partial sale of a core office property.u"

[racemize]

In Q1, they have already hit their projected value from the 5-year guidance from 2013 investor day.

[John Hjorth]

cubsfan attended the Bruce Flatt Dinner arranged by Value Investor Conference held on May 4^th 2018 in the Berkshire Weekend, and cubsfan's report from the meeting can be read here.

 

Absolutely worth your time reading, if you're interested in BAM, and thank you for sharing your notes and impressions here on CoBF, cubsfan.