BAM - Brookfield Asset Management

[Jerry Capital]

Nailed it. That's the right way to think about the situation.

[Packer16]

I think you are missing my point.  I am describing a discount for structure which the market applies to all assets.  This discount is applied to all look through economics as a minority shareholder.  In your example if BAM buys something they think is worth $1 & it is selling for 70 cents & BAM buys the market will only attribute (70% of $0.70) 49c to the $1 of assets.  Remember the discount is based upon the market value of the assets less a discount for lack of control & overhead it is not based upon BAM's estimate of intrinsic value.  So you are losing 30% out of the gate.  What is worse is if BAM is right you end up at breakeven, if they are wrong you get a loss.  The 30% discount on the purchase only goes away in a spin-off.  IMO a 30% discount is alot to pay for an incentive for BAM not to do something in the shareholder's best interest which can be implemented in a different way easily, have managers own direct interests in subs directly versus via BAM.  IMO you should not be invested here if you think Bruce has set up a culture that will flip to asset gathering when he is no longer around.

 

The difference between BAM & Liberty & the trackers is BAM gets a fee stream that is safer & should be valued higher than the value of the assets they are managing.  As far as I know, there is no part of the Liberty universe where this is happening.  IMO if BAM were a pure asset manager, they would trade at a higher valuation than as an asset manager holding large stakes in their investments. 

 

I agree buying back BAM stock today with the subs discounts makes more sense then buying back more of the subs unless you think the sub is discounted by more than the discount applied to subs in BAM's price.

 

I see the buy at a discount & hope it closes in value investment thesis all the time but it is an illusion.  You will never close the gap. I have yet to find a situation where this occurs because you do not control the asset & there are corporate expenses.  This is not mispricing or discount unless the discount is excessive.  This discount is one reason why BAM has lagged the performance of its subs.  You would expect the asset manager of asset to have better economics & returns than the underlying assets but here you do not.  Why?  The reason is the discount associated with holding the subs & holding large stakes in the subs in the first place.  This is a drag that will only get worse the more investments they make in the subs.  I do agree discounts can be excessive, but to say they should not be there IMO is wrong, misleading & not proven out by market evidence.  Spekulatius pointed out another example of this in the GP/LP structure of MLPs & how eventually the situation became untenable & now they are restructuring.  IMO the same should happen here.

 

Packer

[Mondegreen]

I just want to add that this is a fascinating business/discussion

[khturbo]

I think you are missing my point.  I am describing a discount for structure which the market applies to all assets.  In your example if BAM buys something they think is worth $1 & it is selling for 70 cents & BAM buys the market will only attribute (70% of $0.70) 49c to the $1 of assets.  Remember the discount is based upon the market value of the assets less a discount for lack of control & overhead it is not based upon BAM's estimate of intrinsic value.  So you are losing 30% out of the gate.  What is worse is if BAM is right you end up at breakeven, if they are wrong you get a loss.  The 30% discount on the purchase only goes away in a spin-off.  IMO a 30% discount is alot to pay for an incentive for BAM not to do something in the shareholder's best interest which can be implemented in a different way easily, have managers own direct interests in subs directly versus via BAM.  IMO you should not be invested here if you think Bruce has set up a culture that will flip to asset gathering when he is no longer around.

 

The difference between BAM & Liberty & the trackers is BAM gets a fee stream that is safer & should be valued higher than the value of the assets they are managing.  As far as I know, there is no part of the Liberty universe where this is happening.  IMO if BAM were a pure asset manager, they would trade at a higher valuation than as an asset manager holding large stakes in their investments. 

 

I see the buy at a discount & hope it closes in value investment thesis all the time but it is an illusion.  You will never close the gap. I have yet to find a situation where this occurs because you do not control the asset & there are corporate expenses.  This is not mispricing or discount that will disappear due to economics.  This discount is the reason why BAM has lagged the performance of its subs.  You would expect the asset manager of asset to have better economics & returns than the underlying assets but here you do not.  Why?  The reason is the discount associated with holding the subs.  This is drag that will only get worse the more investments they make in the subs.  I do agree the discounts can be excessive, but to say they should not be there IMO is wrong, misleading & not proven out by market evidence.  Spekulatius pointed out another example of this in the GP/LP structure of MLPs & how eventually the situation became untenable & now they are restructuring.  IMO the same should happen here.

 

Packer

 

No I understand what you're saying. I get that it hurts a bit to have the market not assign full value to the underlying asset. And you're right, a hard spin of the partnerships would almost certainly lead to a higher multiple on all the cash flow. I'd think if they did that your value as a BAM holder would probably go up 20-25% overnight.

 

But you give up a lot for that. Now you have a bunch of fcf that can either be paid out as dividends or used to buy back stock that is less undervalued, hurting your IRRs on the value of your company by at least a couple percent. You can't buy more partnership units when they're really cheap. You're less aligned with the partnerships, which your institutional investors wouldn't like. You have a higher stock multiple but less accretive investments to make and you're inviting long-term incentive problems. As a long-term owner, wouldn't you just rather have the stock be a bit cheaper, have the value compound at a higher annual rate, and align the incentives better with your clients?

[jfan]

I think that this is analogous to the question: Is Berkshire better broken up to surface market values or kept together as a conglomerate with a perpetual discount?

 

It really depends on your time frame with the investment.

 

Although Berkshire has a perpetual conglomerate discount, it has over a very long-time (measurable in decades) produced significant market value despite this impediment (likely due to its decentralized decision structure). It would also be equally true that spinning off all the businesses fully would provide a huge jump in monetary value for those holding the stock. However, it would also mean that the flexibility of capital allocation will disappear and the ability to cross-interact with other subsidiaries reduced. Which in turn would likely reduce the long-term sustainability of the spun-off parts.

 

This is the same question for Brookfield.

 

That being said, here is an interesting quote from the 2011 Letter to Shareholders for us to ponder in the near future.

 

"Lastly, and maybe most importantly, in five to 10 years we believe that our asset

management operations will mature to a point that if its intrinsic value is not reflected in

the share price, we will be able to separate this business from our real assets to ensure the

values are surfaced. Of course, this value may be recognized in the stock market as more

investors better understand our strategies, but we will always have the option to take steps

to sell assets and repurchase shares, or spin-off assets to shareholders in order to surface

value."

 

Jerome

[Packer16]

IMO the fundamental difference between Brookfield & Berkshire & the Liberty entities is the asset management cash flows earned by BAM.  BAM is getting an overriding royalty on all asset managed/owned (an asset light business).  If either Berkshire or Liberty had such an entity, I would have the same point of view.  IMO if a spin-off of the subs occurs there will be more than a one-time pop due to the sub discounts going away.  BAM will be transformed from a capital intensive business (with half its NAV in a capital heavy investment) to a capital light one & the market will increase its value as a result.  I also think the best strategy is for BAM to buy back it own shares versus the capital heavy subs before the spin takes place.  In the long-term IMO the asset management business would be more appropriately priced as a separate entity & it sounds like they are open to the spin-off possibility.  Thanks for the quote jfan.

 

Packer     

[jfan]

Hope everyone is enjoying the capital markets these days. I thought I distract myself and dig into Brookfield Renewable LP to:

 

a) see if there is substance to BAM's valuation

b) examine how this part of the business works

 

As a warning, I haven't pulled apart all the numbers yet but I wanted to write down my thoughts before I lose them.

 

Essentially BEP invests in renewable energy resources and participates in the Private Brookfield infrastructure funds. 80%+ for the Long-term GWh generation is from long duration hydroelectric assets. 16% is from Wind and the remainder from Solar.

 

BEP's strategy is not to do greenfield development but to use capital deployment when greenfield projects become brownfield projects in financial distress (2018 BEP Investor's Day presentation). This eliminates the development risk which are fragile (as per Nassim Taleb) due to their size and complexity resulting in lots of black swan events. The goal is to achieve FFO growth per LP unit at a target of 12-15%.

 

The beauty of having these long-duration assets especially hydroelectric dams are that they often have a lifespan of 115 years (75+ years for BAM's assets). The cash flow characteristics are particularly interesting because:

 

1) after the initial capital expense, there is little sustaining maintenance expenditures, which translates to cash flows to the owner. In the 2017 annual report, the depreciation attributable to Unitholders was $539 million. The sustaining capital expenditures attributable to Unitholders was $68 million.

 

2) the ability in the US to depreciate these assets over 10 - 20 years or in an accelerated method over 20- 50 years creates little tax in the early years and builds up large deferred tax liabilities that act economically like insurance float or zero-coupon bonds payable to the government. And if BEP continues to grow, larger and larger deferred tax liabilities build reducing the need for equity to capitalize the business. Except for 2017, due to the US tax cuts, the amount grew from $2265 million in 2013 to $3588 in 2017. If the tax cuts were implemented, it would have be ($3588 + $586) (from the tax footnotes) = $4174 million. Meanwhile, the debt to capitalization averaged 40%.

 

Wind and Solar do not have likely the same advantages (shorter lifespan, more maintenance capex?) to the degree that hydroelectric plants do, however, I would imagine they are similar in cash flow as above.

 

With these assets in hand, the 90% of the generated electricity is contracted for the next 2 years. It declines to 65% in 2022, but BEP expects to have these contracts renewed. The weighted-average remaining contract durations are on pg 42 of BEP 2017 Annual report. The range from 2 to 20 years. These contracts have inflation escalators built in. Also Brookfield Energy Marketing (42%) provides guaranteed purchase of power for BEP. The remainder with public power authorities (21%), distribution companies (18%) and industrial users (19%).

 

So it seems like the cash flow is potentially quite predictable and sustainable. The Unitholder's Adjusted FFO in 2017 was $513 million.

 

So the value that BAM ascribes to BEP is essentially the IFRS value of its General Partner Units, Redeemable/Exchange Units, and its share of Limited Partner's Units.

 

Again with IFRS, these assets are presented in a fair value manner via revaluation methodology (as opposed to Mark-to-Market value for Real Estate eg Brookfield Property Partner's). The assets are revalued annually, with increases in value placed into an equity account (revaluation surplus). These assets are also depreciated over time on the income statement. So theoretically, equity value should be a good proxy of the value attributed to the different unitholders. Brookfield does this with a 20 year DCF model (ref pg 105) and their discount rates and terminal cap rate listed on pg 137. This is transparent but up to one's judgement of whether it is appropriate.

 

Interestingly, its Brazilian hydroelectric assets have no terminal value. If it did, there would be $1.5 Billion more in fair value.

 

Furthermore, BAM gives no value to BEP's deferred tax liabilities which is not economic reality. These liabilities don't have to be paid out for a very long time. For argument sake, if the zero coupon 30 year bond yield is 3% (Bank of Canada rate), that bond should be trading at 40-41. Which means that there is ~60% of the deferred tax liability which is actually more "equity" like than liability.

 

Coupled together, BAM has seems to be fairly conservative with how it views its intrinsic value calculation. It is nice to see that they at least present both market value and IFRS value in its calculation.

 

BEP also provides its PPE at historical cost basis as well on pg 138. This makes it more feasible to calculate the traditional ROE if we want to approach valuation through other methods. It will be interesting to see if the different valuation methods triangulate to a general range.

 

 

 

 

 

[Spekulatius]

Probably more productive to look at a companies internals, rather than a quote screen showing a sea of red and charts looking like a toilet flush.

 

I didn’t do much work on this, but went to some of their presentation and the last annual report. I noticed that their DCF/ share had actually fallen since 2013, while distribution has increased to almost 100% of DCF. I guess they will have to hold the distribution flat or increase DCF going forward.

 

To triangulate valuation, I looked at their PPE ($27B+ $3B in other investments) generating $1.7B in EBITDA. This means that the assets are valued at a ~6.5% EBITDA yield.

 

Valuation seems high to me, but what do I know. I am sticking with my pipeline companies KMI, WMB and ENB that are trading at 10-12x EV/EBITDA and have 10%+ and growing DCF yields. In fact I bought a bit more WMB today.

[scorpioncapital]

What's the growth rate of asset management business without adding more assets to manage?

Is the fees received a function of the performance of the underlying assets, or the demand for such management ?

It seems almost, in the ultimate abstract, BAM is the 'salary' of the team. It's like the $100k a year Buffet gets. True it is directly linked to royalties on the assets but if they are forever , so is compensation expense.

[spark411]

With BPY yielding 8.3%.  Does it make sense to sell BAM and trade into BPY?

[dutchman]

is bpy.un the same security in Toronto?

Why does it have a lower yield?

[John Hjorth]

... Does it make sense to sell BAM and trade into BPY?

 

spark,

 

There is some good stuff written by the Seeking Alpha author Ján Mazák about it recently in an articles serie of 5 articles, that may end up being worth your time.

[Studesy]

is bpy.un the same security in Toronto?

Why does it have a lower yield?

 

I believe the Bpy.un dividend is paid in USD. You may have to convert to CAD then calculate the yield.

[spark411]

@ john h

 

Thanks for the reference to the article.  Just read it.  Article says under $17, it may make sense to trade BAM for BPY.  Since that article, both BAM and BPY dropped 10%+.  BPY now trades at $15.05.  I think it makes sense short term for the trade out of BAM and into BPY but long term it's best to hold BAM.... 

 

Each time a trade is made, one risks making a mistake.  When in doubt hold (I'm writing this to convince myself to hold..8-)).

[chrispy]

BAM is buying units of BPY and will benefit from any gains in BPY, whether that is fees, share price, or simply investor confidence in Brookfield.

 

BBU has gone down 30% and they will benefit long term from tightening of markets if that is to happen.They can invest in debt, public securities, make loans, etc.  Their public holdings EAF and TOO have been hammered but they just received about $130m in dividends from EAF.  I am curious what happens with TOO now...

 

During letters and presentations Bruce has made it clear that private equity will be a big piece of the puzzle followed by credit. BAM only gets paid from share price appreciation of BBU.

 

I am curious what people think with BBU and/or if I am too exuberant on their prospects.

[Uccmal]

@ john h

 

Thanks for the reference to the article.  Just read it.  Article says under $17, it may make sense to trade BAM for BPY.  Since that article, both BAM and BPY dropped 10%+.  BPY now trades at $15.05.  I think it makes sense short term for the trade out of BAM and into BPY but long term it's best to hold BAM.... 

 

Each time a trade is made, one risks making a mistake.  When in doubt hold (I'm writing this to convince myself to hold..8-)).

 

I originally held bep and bpy in my taxable account.  Over time I sold out both and bought them in my non-taxable accounts.  At the same time I took the proceeds in my taxable account to buy BAM.  Bam, based on present market cap is a close 2nd in size in my taxable account.  The subs: BEP, BIP, and BPY make up the largest positions in aggregate in my RRSPs and TFSA. 

 

At this juncture I am happy to hold what I have where it is.  I can use the dividends in my non-taxable accounts to buy other stocks or add more BIP.  As you said, making trades opens me up to more mistakes.  All 4 of these entities are undervalued right now to varying degrees given they all have new acquisitions yet to hit cash flow, especially BIP and BPY. 

 

Individually:

BPY: Is trading down due to the market not knowing how its recent huge acquisitions will unfold, and the possibility of higher interest rates.  If the Brookfield magic works BPY will do well and is very undervalued.  If it doesn't the stock will lanquish. 

 

BEP: Is trading down due to interest rate fears perhaps?  They have alot of debt. 

 

BIP: Is trading down to a lull in cash flow between dispositions and acquisitions, and perhaps interest rate fears as well.

 

On interest rates:  The US is the only country raising them at this point.  All the other big economies have paused, and many are still in the zero bound.  The US, Canada, and Britain may well retrace their steps if a recession ensues which is looking more likely all the time. 

 

So, all in all I think the group is undervalued by a not insignificant margin. 

 

 

[John Hjorth]

Al,

 

I reads to me, - with the dividend yields we see for these investments - that you don't have to visit any weather forecast website. -Your rainy days are already predetermined - I mean the rainy days when it's raining on you with money! [ : - ) ]

[no_free_lunch]

spark, I think there is a lot more risk with BPY than BAM as BPY is very heavily leveraged.  However there is more upside, and you could see it in a relatively short period of time.  I own both but my BAM position is 5x my BPY position and I will keep it that way.

[Libs]

Great thread, thanks to all who've contributed. I have a question.

 

I think of Berkshire, and their willingness to explore / discuss failures. Does this happen at BAM? How often do projects fail / underperform? Any notable ones?

 

TIA.

[Rod]

Great thread, thanks to all who've contributed. I have a question.

 

I think of Berkshire, and their willingness to explore / discuss failures. Does this happen at BAM? How often do projects fail / underperform? Any notable ones?

 

TIA.

 

If you watch the recent Google talk Bruce Flatt gave, you will see that he talked about mistakes. Specifically he mentioned not getting into data centres earlier. And, more generally, he listed some of the causes of past mistakes they have made, most notably buying poorer quality businesses with the hope of making up for it with a low price.

[Libs]

Great thread, thanks to all who've contributed. I have a question.

 

I think of Berkshire, and their willingness to explore / discuss failures. Does this happen at BAM? How often do projects fail / underperform? Any notable ones?

 

TIA.

 

If you watch the recent Google talk Bruce Flatt gave, you will see that he talked about mistakes. Specifically he mentioned not getting into data centres earlier. And, more generally, he listed some of the causes of past mistakes they have made, most notably buying poorer quality businesses with the hope of making up for it with a low price.

 

Thanks. Very good talk.

[ValueMaven]

How can you own BIP in a non-taxable account like an IRA??  It’s a limited partnership…I thought distributions from an LP in a non-taxable account would trigger an unrelated business taxable income, or UBTI??

 

I believe you can own BAM in a non-taxable account, but if they start spinning stuff off again, you need to sell before you receive a cash-distribution.

 

Anyone would has more insights into this - it would be most welcome!!

 

 

 

 

@ john h

 

Thanks for the reference to the article.  Just read it.  Article says under $17, it may make sense to trade BAM for BPY.  Since that article, both BAM and BPY dropped 10%+.  BPY now trades at $15.05.  I think it makes sense short term for the trade out of BAM and into BPY but long term it's best to hold BAM.... 

 

Each time a trade is made, one risks making a mistake.  When in doubt hold (I'm writing this to convince myself to hold..8-)).

 

I originally held bep and bpy in my taxable account.  Over time I sold out both and bought them in my non-taxable accounts.  At the same time I took the proceeds in my taxable account to buy BAM.  Bam, based on present market cap is a close 2nd in size in my taxable account.  The subs: BEP, BIP, and BPY make up the largest positions in aggregate in my RRSPs and TFSA. 

 

At this juncture I am happy to hold what I have where it is.  I can use the dividends in my non-taxable accounts to buy other stocks or add more BIP.  As you said, making trades opens me up to more mistakes.  All 4 of these entities are undervalued right now to varying degrees given they all have new acquisitions yet to hit cash flow, especially BIP and BPY. 

 

Individually:

BPY: Is trading down due to the market not knowing how its recent huge acquisitions will unfold, and the possibility of higher interest rates.  If the Brookfield magic works BPY will do well and is very undervalued.  If it doesn't the stock will lanquish. 

 

BEP: Is trading down due to interest rate fears perhaps?  They have alot of debt. 

 

BIP: Is trading down to a lull in cash flow between dispositions and acquisitions, and perhaps interest rate fears as well.

 

On interest rates:  The US is the only country raising them at this point.  All the other big economies have paused, and many are still in the zero bound.  The US, Canada, and Britain may well retrace their steps if a recession ensues which is looking more likely all the time. 

 

So, all in all I think the group is undervalued by a not insignificant margin.

[Grafter]

How can you own BIP in a non-taxable account like an IRA??  It’s a limited partnership…I thought distributions from an LP in a non-taxable account would trigger an unrelated business taxable income, or UBTI??

 

I believe you can own BAM in a non-taxable account, but if they start spinning stuff off again, you need to sell before you receive a cash-distribution.

 

I've not heard of any US based custodian that doesn't allow for purpose of a publicly traded partnership inside of an IRA, though I suppose it may be possible.  Though other types of plans (like a 401k) can definitely restrict such investments. 

 

It isn't the distributions that cause the UBTI, as the income from the PTP isn't the same as the cash received from it (as a distribution).  Instead, you have to wait until the K-1 is generated at year end to determine how much UBTI and income the PTP generated (as it depends on many factors, including your purchase price and date).  Though, it does seem like some custodians treat the ordinary gain on disposal of a PTP as income subject to UBTI, which is a much bigger issue (due to how taxation works for partnerships and the operations of most PTP).  Though to my knowledge, this is still a bit of a grey area due to the complexity of the tax code (though I've heard of various NFP examinations started by the IRS where they found this fact pattern and required the NFP to treat this ordinary income

as UBTI and assessed tax on it).

 

You can read a little bit more at https://content.rwbaird.com/RWB/Content/PDF/Help/Taxation-Master-Limited-Partnerships-FAQs.pdf

[Guest MarkS]

How can you own BIP in a non-taxable account like an IRA??  It’s a limited partnership…I thought distributions from an LP in a non-taxable account would trigger an unrelated business taxable income, or UBTI??

 

I believe you can own BAM in a non-taxable account, but if they start spinning stuff off again, you need to sell before you receive a cash-distribution.

 

Anyone would has more insights into this - it would be most welcome!!

 

 

 

 

@ john h

 

Thanks for the reference to the article.  Just read it.  Article says under $17, it may make sense to trade BAM for BPY.  Since that article, both BAM and BPY dropped 10%+.  BPY now trades at $15.05.  I think it makes sense short term for the trade out of BAM and into BPY but long term it's best to hold BAM.... 

 

Each time a trade is made, one risks making a mistake.  When in doubt hold (I'm writing this to convince myself to hold..8-)).

 

I originally held bep and bpy in my taxable account.  Over time I sold out both and bought them in my non-taxable accounts.  At the same time I took the proceeds in my taxable account to buy BAM.  Bam, based on present market cap is a close 2nd in size in my taxable account.  The subs: BEP, BIP, and BPY make up the largest positions in aggregate in my RRSPs and TFSA. 

 

At this juncture I am happy to hold what I have where it is.  I can use the dividends in my non-taxable accounts to buy other stocks or add more BIP.  As you said, making trades opens me up to more mistakes.  All 4 of these entities are undervalued right now to varying degrees given they all have new acquisitions yet to hit cash flow, especially BIP and BPY. 

 

Individually:

BPY: Is trading down due to the market not knowing how its recent huge acquisitions will unfold, and the possibility of higher interest rates.  If the Brookfield magic works BPY will do well and is very undervalued.  If it doesn't the stock will lanquish. 

 

BEP: Is trading down due to interest rate fears perhaps?  They have alot of debt. 

 

BIP: Is trading down to a lull in cash flow between dispositions and acquisitions, and perhaps interest rate fears as well.

 

On interest rates:  The US is the only country raising them at this point.  All the other big economies have paused, and many are still in the zero bound.  The US, Canada, and Britain may well retrace their steps if a recession ensues which is looking more likely all the time. 

 

So, all in all I think the group is undervalued by a not insignificant margin.

 

If I understand what your asking, research Brookfield Assets Property Reit.  https://bpy.brookfield.com/en/bpr

[John Hjorth]

... If I understand what your asking, research Brookfield Assets Property Reit.  https://bpy.brookfield.com/en/bpr ...

 

Mark,

 

That may be right with regard to BPY, which has BPR as "company corporation/REIT mirror" - via a conversion option/peg - which I just happen to hate. [bPR = former GGP.] So ValueMaven's question still apply for [at least] BEP, BIP, BBU [& also PVF.UN, for that matter].

 

Supplementary question here for ValueMaven : Are you a US citizen?