BAM - Brookfield Asset Management

[chrispy]

Fun interview.

 

Someone at BAM needs to help Bruce start his sentences with more then, "look, what I'd say is"

 

So what ways are there to invest more directly in India?!

[villainx]

Fun interview.

 

Someone at BAM needs to help Bruce start his sentences with more then, "look, what I'd say is"

 

 

I love that bit of his personality.  It's either say that or beat the interviewer with a baseball bat.

[petec]

Hi all. Accounting question.

 

My understanding is that BPY revalues its properties regularly, using DCFs, such that book value ought to be a good proxy for equity value. However, BIP accounts for concessions as intangible assets which are amortised over time. Presumably the starting value of the intangible is set by the price paid, so that in effect BIP accounts for many of its assets using amortised cost and book value is not a good proxy for equity value.

 

1) Have I understood this correctly?

2) If so, is there are quick and dirty way to mark BIP's book value to market in the way IFRS does for BPY?

[racemize]

Hi all. Accounting question.

 

My understanding is that BPY revalues its properties regularly, using DCFs, such that book value ought to be a good proxy for equity value. However, BIP accounts for concessions as intangible assets which are amortised over time. Presumably the starting value of the intangible is set by the price paid, so that in effect BIP accounts for many of its assets using amortised cost and book value is not a good proxy for equity value.

 

1) Have I understood this correctly?

2) If so, is there are quick and dirty way to mark BIP's book value to market in the way IFRS does for BPY?

 

1) Yes, and most analyst reports have NAV value within 10% of BPYs book value.

2) Not that I know of. I usually use a multiple of adjusted AFFO.

[ValueMaven]

Anyone paying attention to Brookfield Renewable's C-Corp offering sometime in 1H2020?  Could be extremely interesting

[petec]

Related to that - and this is probably a very stupid question - but anyone know why they don’t do something similar with BPY? Probably something to do with tax but I don’t know details.

[ValueMaven]

ummmm ... they did : Brookfield Property REIT - BPR

[petec]

ummmm ... they did : Brookfield Property REIT - BPR

 

Yes, I'm aware of that - I should have clarified I am looking at this from the perspective of a UK investor and there are restrictions on what I can invest in in tax-efficient accounts. One restriction is that I can't buy US REITs. So I'd need BPY in C-corp form (which I imagine is highly tax-inefficient) or listed in the UK as a REIT.

 

I guess it is fairly obvious why they don't do either of those things so I guess I have answered my own question ;)

[petec]

I'm not saying these guys can't improve ops, but usually that's just PE hyperbole. Verdad Capital made some studies and found that historical returns (these Guys killed pubic returns from 1980-2008) were driven not my operating efficiency but buying small value (6-8x ebitda) and dropping 3-4 turns of leverage on top. While there was a big difference in private and public valuations back then, I see lots of PE investments done today at HIGHER valuation privately than publicly.

 

One thing to bear in mind is that debt is so much cheaper than it was. Flatt has talked about the extraordinary returns you can get in Europe today because you can get long term debt at 1%. That completely transforms the returns on equity capital that you can get if you have a M/HSD going-in yield. I am not saying that this is without risk, but it is rational to expect that under these conditions, deal multiples and leverage levels will be different than they used to be, and the risks are somewhat mitigated if you're buying businesses with reliable cash flows which you think you can boost via operational improvements.

[John Hjorth]

Hi all. Accounting question.

 

My understanding is that BPY revalues its properties regularly, using DCFs, such that book value ought to be a good proxy for equity value. However, BIP accounts for concessions as intangible assets which are amortised over time. Presumably the starting value of the intangible is set by the price paid, so that in effect BIP accounts for many of its assets using amortised cost and book value is not a good proxy for equity value.

 

1) Have I understood this correctly?

2) If so, is there are quick and dirty way to mark BIP's book value to market in the way IFRS does for BPY?

 

1) Yes, and most analyst reports have NAV value within 10% of BPYs book value.

2) Not that I know of. I usually use a multiple of adjusted AFFO.

 

Pete,

 

I agree with Joel - totally -, on both bullets. Somehow, from an accounting perspective, it's [perhaps [<- ?] a quite weird phenomen [write-ups of intangible assets aren't in general allowed according to IFRS, while still the intangible assets may provide steady increasing cash flows going forward [, like for some quality real estate, where write-ups are allowed].

 

- - - o 0 o - - -

 

Somehow, it reminds me of BEP, where the hydro plants are subject to systematic depreciations, based on revaluations on a running basis & estimated useful lives, which - from an accounting perspective - generates depreciations on write-ups done earlier. [Mentioned by Packer earlier in this BAM topic.]

[petec]

Hi all. Accounting question.

 

My understanding is that BPY revalues its properties regularly, using DCFs, such that book value ought to be a good proxy for equity value. However, BIP accounts for concessions as intangible assets which are amortised over time. Presumably the starting value of the intangible is set by the price paid, so that in effect BIP accounts for many of its assets using amortised cost and book value is not a good proxy for equity value.

 

1) Have I understood this correctly?

2) If so, is there are quick and dirty way to mark BIP's book value to market in the way IFRS does for BPY?

 

1) Yes, and most analyst reports have NAV value within 10% of BPYs book value.

2) Not that I know of. I usually use a multiple of adjusted AFFO.

 

Pete,

 

I agree with Joel - totally -, on both bullets. Somehow, from an accounting perspective, it's [perhaps [<- ?] a quite weird phenomen [write-ups of intangible assets aren't in general allowed according to IFRS, while still the intangible assets may provide steady increasing cash flows going forward [, like for some quality real estate, where write-ups are allowed].

 

- - - o 0 o - - -

 

Somehow, it reminds me of BEP, where the hydro plants are subject to systematic depreciations, based on revaluations on a running basis & estimated useful lives, which - from an accounting perspective - generates depreciations on write-ups done earlier. [Mentioned by Packer earlier in this BAM topic.]

 

Yes. It's quite amazing how far accounting can be from economic reality. I broadly like the BPY treatment best although it is clearly subject to a lot of assumptions.

[petec]

More accounting, this time relating to BIP.

 

1) From what I can tell BIP's FFO does not include gains on sales of assets. This confuses me because I thought BAM's FFO did include gains on sale, so if anyone can confirm I'd appreciate it.

 

2) BIP's FFO includes deferred taxes - in other words deferred taxes are added back as you travel from net income to FFO - definition on p7 of the 2018 annual report. However, on p9 they seem to add all taxes back: current taxes are given as -318 and deferred tax as -46 for a total of -364, and p11 gives 364 as the amount added back to get to FFO. Now, $129m of the -318 in current tax is associated with the $338m gain on the sale of Transelec (note 5). The gain is subtracted for FFO purposes, so I can understand why $129m of current tax is added back, but I can't understand why the rest of current tax is added back. Maybe this is to do with BIP not actually being taxable (note 25) but in that case why do they recognize a tax charge at all? My understanding is the underlying corporate subsidiaries are taxable...in which case I am back to square 1 with regards to tax and FFO. Any help would be appreciated.

[petec]

 

So most of the old discussions were on the issue of IFRS consolidation and asset values. Those I'm fine with. Others have noted that BPY sells things regularly above IFRS values and does realize a loss from time to time, so I don't think BAM's accounting of asset values is suspect.

 

There are 2 things that give me pause:

 

1) when faced with the statement that BAM's accounting is opaque, most people say "look at the supplemental". The supplemental is mgmt created metrics, and essentially every fraud ever has created a story to drive investors eyes toward these metrics and AWAY from the actual IFRS/GAAP financials. If you don't take it on faith, it's a red flag, NOT BAM being helpful.

 

2) take BIP:

 

1) BIP has a 379 page annual report. It takes them more than 1 page per day to tell us what they did in a year.

 

2) BIP generates FFO from the operations in which it has LP stakes and then some other one offs. We get cash from operations in 2018 they generated $1362mn in cash from operations, and distributed $140mn to the GP, $775mn to other unitholders, $676mn to  non-controlling interest for a total of almost $1.6bn.

 

Now, BIP also generated $546 mn in 2018 in FFO from JV's and associates. If you read through their annual report they outline that any JV/Associate is structured so that all cash flow generated is swept out UNLESS BAM explicitly agrees to keep the cash in the JV.  They recieved $56mn in dividends.

 

SO the BIP narrative is that FFO covers the $1.6bn distribution because they generate $546mn of FFO in JV's. However, FFO is not free cash flow. In other words, you MUST trust management that FFO converts to cash and that the cash covers the distributions. We don't know what's in the JV's, but let's take real estate as an example. Towers convert ~90-95% of FFO to AFFO and cash. Office buildings covert about 66% of FFO to AFFO and cash. So how much cash is actually avaliable for BIP depends hugely on what type of assets these are.

 

If you take BIP's consolidated CFO + distributions from JV's, it empirically does NOT cover the sum of distributions to unitholders, minority interests and the GP.

 

This is what I mean by "opaque" accounting. The risk is that the off balance sheet JV's don't actually generate teh cash required in which case, BIP is basically a ponzi scheme that relies on taking in cash from LP's and unit issuances in order to pay the distribution. If not that, then at the very least, if BIP can't access the CASH from the JV's because they don't actually generate that much, then if capital markets shut, the structure falls apart and BAM has to ride to the rescue, and you know they're going to take their pound of flesh for doing that.

 

Again, I'm long BAM, but it concerns me I haven't seen this issue mentioned once and the rebuttal to it is "well you just can't figure it out, look at the metrics management is directing you to look at".

 

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.

[peterHK]

 

So most of the old discussions were on the issue of IFRS consolidation and asset values. Those I'm fine with. Others have noted that BPY sells things regularly above IFRS values and does realize a loss from time to time, so I don't think BAM's accounting of asset values is suspect.

 

There are 2 things that give me pause:

 

1) when faced with the statement that BAM's accounting is opaque, most people say "look at the supplemental". The supplemental is mgmt created metrics, and essentially every fraud ever has created a story to drive investors eyes toward these metrics and AWAY from the actual IFRS/GAAP financials. If you don't take it on faith, it's a red flag, NOT BAM being helpful.

 

2) take BIP:

 

1) BIP has a 379 page annual report. It takes them more than 1 page per day to tell us what they did in a year.

 

2) BIP generates FFO from the operations in which it has LP stakes and then some other one offs. We get cash from operations in 2018 they generated $1362mn in cash from operations, and distributed $140mn to the GP, $775mn to other unitholders, $676mn to  non-controlling interest for a total of almost $1.6bn.

 

Now, BIP also generated $546 mn in 2018 in FFO from JV's and associates. If you read through their annual report they outline that any JV/Associate is structured so that all cash flow generated is swept out UNLESS BAM explicitly agrees to keep the cash in the JV.  They recieved $56mn in dividends.

 

SO the BIP narrative is that FFO covers the $1.6bn distribution because they generate $546mn of FFO in JV's. However, FFO is not free cash flow. In other words, you MUST trust management that FFO converts to cash and that the cash covers the distributions. We don't know what's in the JV's, but let's take real estate as an example. Towers convert ~90-95% of FFO to AFFO and cash. Office buildings covert about 66% of FFO to AFFO and cash. So how much cash is actually avaliable for BIP depends hugely on what type of assets these are.

 

If you take BIP's consolidated CFO + distributions from JV's, it empirically does NOT cover the sum of distributions to unitholders, minority interests and the GP.

 

This is what I mean by "opaque" accounting. The risk is that the off balance sheet JV's don't actually generate teh cash required in which case, BIP is basically a ponzi scheme that relies on taking in cash from LP's and unit issuances in order to pay the distribution. If not that, then at the very least, if BIP can't access the CASH from the JV's because they don't actually generate that much, then if capital markets shut, the structure falls apart and BAM has to ride to the rescue, and you know they're going to take their pound of flesh for doing that.

 

Again, I'm long BAM, but it concerns me I haven't seen this issue mentioned once and the rebuttal to it is "well you just can't figure it out, look at the metrics management is directing you to look at".

 

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.

[petec]

Go look at something like AMT vs. Boston properties. Look at any tower vs. office REIT's.

 

Thanks, and thanks for raising the point, which is interesting to think through. I agree that different assets probably have different FFO -> AFFO conversion rates (and younger assets probably have higher conversion rates than older ones) but I am not sure the magnitude is quite as high as your comparison suggests.

 

For Boston Properties, I get 66% conversion of FFO to AFFO if I assume all building & other and tenant improvements are maintenance capex. In practice I suspect a portion of that spending is growth capex that drives step-ups in rent, in which case FFO->AFFO conversion would be higher using a genuine maintenance capex figure like BIP claim to use.

 

It does make sense that the maintenance capex required to keep a building competitive is higher than the capex required to keep a tower competitive. I can't imagine anybody cares if a tower has a few scuff marks. But what is very hard to quantify from the outside is how much higher maintenance capex needs to be relative to rents for each asset class, which is what matters for % conversion.

 

BIP expressly invests in assets with opportunities to deploy organic growth capex at high returns and to do tuck-ins. So there is no reason to think that low conversion of JV FFO into dividends is a red flag, although I agree it could be.

 

EDIT: also worth saying that towers probably require the least maintenance capex of all (they don't need to look good and there isn't a real safety risk), and BIP doesn't own offices. Excluding these two asset classes may tighten the range of FFO -> AFFO conversion for BIP's assets.

[John Hjorth]

So most of the old discussions were on the issue of IFRS consolidation and asset values. Those I'm fine with. Others have noted that BPY sells things regularly above IFRS values and does realize a loss from time to time, so I don't think BAM's accounting of asset values is suspect.

 

There are 2 things that give me pause:

 

1) when faced with the statement that BAM's accounting is opaque, most people say "look at the supplemental". The supplemental is mgmt created metrics, and essentially every fraud ever has created a story to drive investors eyes toward these metrics and AWAY from the actual IFRS/GAAP financials. If you don't take it on faith, it's a red flag, NOT BAM being helpful.

 

2) take BIP:

 

1) BIP has a 379 page annual report. It takes them more than 1 page per day to tell us what they did in a year.

 

2) BIP generates FFO from the operations in which it has LP stakes and then some other one offs. We get cash from operations in 2018 they generated $1362mn in cash from operations, and distributed $140mn to the GP, $775mn to other unitholders, $676mn to  non-controlling interest for a total of almost $1.6bn.

 

Now, BIP also generated $546 mn in 2018 in FFO from JV's and associates. If you read through their annual report they outline that any JV/Associate is structured so that all cash flow generated is swept out UNLESS BAM explicitly agrees to keep the cash in the JV.  They recieved $56mn in dividends.

 

SO the BIP narrative is that FFO covers the $1.6bn distribution because they generate $546mn of FFO in JV's. However, FFO is not free cash flow. In other words, you MUST trust management that FFO converts to cash and that the cash covers the distributions. We don't know what's in the JV's, but let's take real estate as an example. Towers convert ~90-95% of FFO to AFFO and cash. Office buildings covert about 66% of FFO to AFFO and cash. So how much cash is actually avaliable for BIP depends hugely on what type of assets these are.

 

If you take BIP's consolidated CFO + distributions from JV's, it empirically does NOT cover the sum of distributions to unitholders, minority interests and the GP.

 

This is what I mean by "opaque" accounting. The risk is that the off balance sheet JV's don't actually generate teh cash required in which case, BIP is basically a ponzi scheme that relies on taking in cash from LP's and unit issuances in order to pay the distribution. If not that, then at the very least, if BIP can't access the CASH from the JV's because they don't actually generate that much, then if capital markets shut, the structure falls apart and BAM has to ride to the rescue, and you know they're going to take their pound of flesh for doing that.

 

Again, I'm long BAM, but it concerns me I haven't seen this issue mentioned once and the rebuttal to it is "well you just can't figure it out, look at the metrics management is directing you to look at".

 

To me, it's pretty evident, that Pete is working quite hard on BAM these days! [ : - ) ] - Great!

 

- - - o 0 o - - -

 

Now back to Peter's post quoted above [,which I do not remember to have ever replied to].

 

I've been caught up in IRL stuff in a period since September / October 2019, and I'm now - gradually - "resurfacing" - and "getting back to "normal"" [at least I think so, right now] here, meant as participation here on CoBF.

 

So, Peter, please don't take my lack of commentary on your post quoted above as if you for my part were ignored [or, even worse as "just ditched", without commentary].

 

We've had discussions about complexity versus opacity related to BAM earlier. Pete's quoting of your your post has been an eye-opener for me now, combined with other stuff [,more later below]. Somehow, you managed to bent your stance in neon tubes for me now [now, because I wasn't paying sufficient attention while you posted it.]

 

There are quiite some other posts recently related to your post, that deserve attention, too [especially the posts by normax and Joel [CoBF member racemize]].

 

- - - o 0 o - - -

 

Peter, have your read this book?

 

- - - o 0 o - - -

 

Here, we're dealing with financial engineers [former auditors and lawyers, who haven't forgotten their "original merit", actually using their fund of [basic and advanced] professional knowledge very actively].

 

- - - o 0 o - - -

 

I'll need all BAM, subs  & sub-subs [bPR] 10-K's to engage here [Last year, I got really p**ssed, because at some point in time I was missing the 10-K for BPR, so it was impossible to make any considerations for BPY also.]

[K2SO]

FT on Brookfield's notorious lack of transparency:

 

Brookfield: inside the $500bn secretive investment firm

 

https://www.ft.com/content/595a77d0-3867-11ea-a6d3-9a26f8c3cba4

 

 

[cubsfan]

3:2 Stock split, 12% dividend increase

 

https://bam.brookfield.com/press-releases/2020/02-13-2020-115348450

 

 

[rkbabang]

3:2 Stock split, 12% dividend increase

 

https://bam.brookfield.com/press-releases/2020/02-13-2020-115348450

 

"Brookfield is undertaking the stock split to ensure its shares remain accessible to individual shareholders and to improve the liquidity of the shares."

 

The split is odd. They are trading at $64, I don't see that as out of reach to individual shareholders.

 

[petec]

3:2 Stock split, 12% dividend increase

 

https://bam.brookfield.com/press-releases/2020/02-13-2020-115348450

 

"Brookfield is undertaking the stock split to ensure its shares remain accessible to individual shareholders and to improve the liquidity of the shares."

 

The split is odd. They are trading at $64, I don't see that as out of reach to individual shareholders.

 

Agreed. Pointless. But they’ve done it before, and it costs nothing.

[vince]

I realize it's kind of silly to complain about Bam's returns but what a mistake it was not to repurchase shares.  And I'm not just playing the 20-20 hindsight game.....I previously posted that they should be aggressively repurchasing shares when the share price was much lower maybe 18 months ago.  I mean does it really make sense to claim every year that the stock is undervalued by 40% and not buyback shares?

[Gregmal]

BX did the same thing and the argument was quite simple. Even if they are undervalued, they can make more putting the cash to work in the business. The example from BX was something along the lines of "if they can start a $40B fund and their commitment requirement is 2%, thats 800M in cash that will then earn 1.5% annually in fees." In other words, that $800M generates $600M every year, plus an additional profit cut. Hard to argue there.

[ValueMaven]

Awesome quarter and what a year - what great results!! Not a fan of the split - but it is what it is ... would like some aggressive buybacks here - or at least knowing that it something being seriously considered.  Nice job by Flatt re: Partners section too.  I really want to invest in the Renewable C-Corp once that starts trading. 

 

You really do wonder about Berkshire now - with all of the P/E, direct lending, alternative capital, and BAM etc - buying things; you really wonder how Berkshire can deploy all of that capital. 

 

Also this German elevator deal is coming down to the wire - which would be massive for BAM ...

 

Others thoughts?

[vince]

BX did the same thing and the argument was quite simple. Even if they are undervalued, they can make more putting the cash to work in the business. The example from BX was something along the lines of "if they can start a $40B fund and their commitment requirement is 2%, thats 800M in cash that will then earn 1.5% annually in fees." In other words, that $800M generates $600M every year, plus an additional profit cut. Hard to argue there.

 

That is a great point.  However I think they could have still been more aggressive on the repurchases without hindering their ability to invest in their business.

[vince]

Awesome quarter and what a year - what great results!! Not a fan of the split - but it is what it is ... would like some aggressive buybacks here - or at least knowing that it something being seriously considered.  Nice job by Flatt re: Partners section too.  I really want to invest in the Renewable C-Corp once that starts trading. 

 

You really do wonder about Berkshire now - with all of the P/E, direct lending, alternative capital, and BAM etc - buying things; you really wonder how Berkshire can deploy all of that capital. 

 

Also this German elevator deal is coming down to the wire - which would be massive for BAM ...

 

Others thoughts?

 

I wouldnt really want aggressive buybacks at these prices