BAM - Brookfield Asset Management

[ValueMaven]

Thanks John!  You are highly beneficial member here!!

[John Hjorth]

Thank you, ValueMaven,

 

To me, the book has been instrumental to my decision [subject to change, however, as always] to mothball all my thoughts about getting invested in the BAM superstructure [PVF.UN]. [i have been messing around with - now for several years - about how to circumvent some tax issues for a Danish investor with regard to investing in PVF.UN.]

 

The book gives - at least to me - a nuanced description of the business culture and modus operandi at Brookfield [as a whole]. Mr. Cockwell is the key here, because he's still around on the inner lines [at least I speculate so], and has been a material influencer for Mr. Flatt.

 

It is to me still a great idea to read about PVF.UN and its predecessor legal identities in Joel's BAM compilation parallel to reading the book and to read the PVF.UN financials there.

 

I personally have a perception from here on CoBF, that there here on CoBF exists [at least] three "camp"s [perhaps more than three] :

• "Rattle-rattle" totally amazed about all that high-end real estate around the World [-just visit it and look at it!] "- It can't go wrong long term",
  
• Mr. Flatt has appeared soo pale and tired the last two [long] interviews presented on the BAM website - what is actually going on?,
  
• It goes into the "too hard" pile because of complexity [absolutely impossible to tear apart, to value and nitpick at],
  
• It will eventually collapse under its own bloat and complexity,
  
• Massive corporate governance issues [massive options program in place for the incumbent "Brass Ring", & screwing around with minorities in subs and sub-subs etc.] BG2008 has introduced the hashtag #BAM_METOO here on CoBF ... -How about #BAM_BANGED_METOO or #BAM_GANG_BANGED_METOO? [Here, I think I peaked lyrically...], &
  
• BAM is a doomed B&M turd, plus some other stuff [thereby not investable].
  

- - - o 0 o - - -

 

Well, now I ended up with six bullets instead of three ...

[thepupil]

is it too short term oriented to get a little um worried about the 34% retail rent collection in the face of 10x+ pre-covid EBITDA leverage on the retail?

 

EDIT: is this number right? I see headlines but can't find it in their press release/presentation/etc.

 

34% is a scary number. I mean, my $0.80 stock price ghetto strip center company ( CDR ) is collecting 70%. I feel like htis number has to be wrong

 

https://www.reallylist.com/2020/08/06/brookfield-propertys-retail-tenants-paid-34-of-rent-in-q2/

 

Brookfield Property Partners collected just 34 percent of rent across its retail portfolio in the second quarter, helping drive another sharp decline in earnings this year. Its office holdings also took a hit.

 

The real estate arm of Brookfield Asset Management reported a net loss of $1.5 billion from April through June, compared with $23 million of net income over the same period in 2019.

 

At Thursday’s earnings call, company executives blamed its poor April through June results on coronavirus-caused mall closures. Most of its malls didn’t reopen until June, and the company has seen improved rent collections since July.

 

[John Hjorth]

is it too short term oriented to get a little um worried about the 34% retail rent collection in the face of 10x+ pre-covid EBITDA leverage on the retail? ...

 

To me, no, it's not. -Time to dive in, to understand, what's going on.

[Gregmal]

34% on a blended basis doesnt seem too out there. I had heard from several folks 15-20% collection for indoor mall tenants was about the norm. Will be interesting to see when SPG reports in a few days.

[Shane]

I'm just increasingly worried that BAM is exhibiting denial of problems instead of pragmatism.  Perhaps it is my own bias - but their insistence that remote work isn't a long-term threat to office properties just sounds insane to me.  Does anyone have a variant perception that agrees with them?  I am a shareholder, but feel like they are displaying a lot of the characteristics from 'How the mighty fall'.

 

I'm seeking out dis-confirming evidence - would be a big help to hear the other side.

[chrispy]

Brookfield could very well be wrong.  The two points I have found interesting are;

 

1) Bruce talking about how office space above the ~4th floor was considered undesirable after 9/11 (in a previously posted video interview).  The office space quickly went back to being desirable and more nuanced things changed like bomb dogs and security at the entrance to the building. Similarly with Covid, he expects nuanced things to change in buildings but not the idea of working collaboratively in an office.

2) The following Q&A from BPY call yesterday:

 

Sheila McGrath

 

Okay. Thank you. And then just on office for a second. I think it was good news for New York and Vornado. And the office sector that Facebook was – executed a lease at Farley in Manhattan. I was just wondering, if you could tell us or give us any insights on discussions at Two Manhattan West has everything paused? Or just your thoughts on that project now and the challenge with sentiment on the office sector with work-from-home discussions.

 

Brian Kingston

 

Yes sure. So maybe taking those in a little bit in reverse order. The – as I sort of said earlier, our belief is look under current circumstances where people are being asked to socially distance and not overburden public transit or other things like that clearly office populations are down and businesses are largely functioning remotely through Zoom calls and conference calls et cetera.

 

And I think the good news is like the technology has developed over the last 20 years, or so that enables us – enables businesses to be able to do that without completely grinding to a halt. However, it really is a stop-gap measure until we get into a position where you can relax some of those social distancing and get – allow people to sort of congregate in larger groups again. We think as soon as that happens and we've seen this in parts of the world that have reopened including South Korea, including China and even starting to see it in parts of Europe as those countries have started to relax some of these there is a quick move to get back to the office as soon as possible, because you really can't effectively operate a business and build culture and train young staff et cetera with all completely remotely.

 

And frankly, most people's homes are not set up for them to function and work from them. And the toll that it's taking on a lot of those people from a sort of mental and social respect has been pretty great. So we expect that during this period of time that we're in right now where we're trying to manage through this crisis, you will continue to see people working remotely and that's not likely to change in the very near term. But longer term the idea that everyone will work from home and never return to the office, again we just don't think seems realistic.

 

And so the discussions that, we're having with our tenants are focused both on the short term and the long term. The short-term conversations are around how we're going to manage elevator capacity within the complexes, what cleaning procedures are in place the air filtration systems et cetera that we're putting in place to improve the air handling et cetera. And that's really focused around triage in terms of how they bring – how they stage bringing their people back into the office.

 

And then separately from that there's the longer term conversation where they're starting to think about their own densities and what the permanent changes in how they're going to operate their businesses within the office might mean? And therefore, how does that translate into what their future space requirements maybe or what the office of the future really looks like.

 

And I'd say, it's early, everybody is still trying to figure it out. I think when you hear companies like those that have come out and said they're going to allow people to work remotely indefinitely or maybe even forever, what they're really saying is they're going to allow increased flexibility, meaning if people want to work from home part-time or from a different location, some of the time this has shown that actually that is viable and you can do it on a relatively short-term basis.

 

What I don't think any of them are saying is that, they're going to completely eliminate their office footprint and go to a virtual company. And as you said like Facebook is a prime example of that. They've been one of the ones that are the most vocal about giving their employees that flexibility, and yet they've just signed this lease at Farley, which brings their total space in that immediate submarket right around Manhattan West to 2.2 million square feet of occupancy. So we don't think it means the office is going away, I think it's just a change in how maybe people will think about their office going forward.

[mbreject]

I think the numbers make sense. CDR consists of outdoor malls and have many tenants that are considered essential like groceries, hardware stores and dollar stores wheras BAM's retail side mostly consists of indoor malls that were basically shut down during this period.

 

is it too short term oriented to get a little um worried about the 34% retail rent collection in the face of 10x+ pre-covid EBITDA leverage on the retail?

 

EDIT: is this number right? I see headlines but can't find it in their press release/presentation/etc.

 

34% is a scary number. I mean, my $0.80 stock price ghetto strip center company ( CDR ) is collecting 70%. I feel like htis number has to be wrong

 

https://www.reallylist.com/2020/08/06/brookfield-propertys-retail-tenants-paid-34-of-rent-in-q2/

 

Brookfield Property Partners collected just 34 percent of rent across its retail portfolio in the second quarter, helping drive another sharp decline in earnings this year. Its office holdings also took a hit.

 

The real estate arm of Brookfield Asset Management reported a net loss of $1.5 billion from April through June, compared with $23 million of net income over the same period in 2019.

 

At Thursday’s earnings call, company executives blamed its poor April through June results on coronavirus-caused mall closures. Most of its malls didn’t reopen until June, and the company has seen improved rent collections since July.

[Shane]

Brookfield could very well be wrong.  The two points I have found interesting are;

 

1) Bruce talking about how office space above the ~4th floor was considered undesirable after 9/11 (in a previously posted video interview).  The office space quickly went back to being desirable and more nuanced things changed like bomb dogs and security at the entrance to the building. Similarly with Covid, he expects nuanced things to change in buildings but not the idea of working collaboratively in an office.

2) The following Q&A from BPY call yesterday:

 

Sheila McGrath

 

Okay. Thank you. And then just on office for a second. I think it was good news for New York and Vornado. And the office sector that Facebook was – executed a lease at Farley in Manhattan. I was just wondering, if you could tell us or give us any insights on discussions at Two Manhattan West has everything paused? Or just your thoughts on that project now and the challenge with sentiment on the office sector with work-from-home discussions.

 

Brian Kingston

 

Yes sure. So maybe taking those in a little bit in reverse order. The – as I sort of said earlier, our belief is look under current circumstances where people are being asked to socially distance and not overburden public transit or other things like that clearly office populations are down and businesses are largely functioning remotely through Zoom calls and conference calls et cetera.

 

And I think the good news is like the technology has developed over the last 20 years, or so that enables us – enables businesses to be able to do that without completely grinding to a halt. However, it really is a stop-gap measure until we get into a position where you can relax some of those social distancing and get – allow people to sort of congregate in larger groups again. We think as soon as that happens and we've seen this in parts of the world that have reopened including South Korea, including China and even starting to see it in parts of Europe as those countries have started to relax some of these there is a quick move to get back to the office as soon as possible, because you really can't effectively operate a business and build culture and train young staff et cetera with all completely remotely.

 

And frankly, most people's homes are not set up for them to function and work from them. And the toll that it's taking on a lot of those people from a sort of mental and social respect has been pretty great. So we expect that during this period of time that we're in right now where we're trying to manage through this crisis, you will continue to see people working remotely and that's not likely to change in the very near term. But longer term the idea that everyone will work from home and never return to the office, again we just don't think seems realistic.

 

And so the discussions that, we're having with our tenants are focused both on the short term and the long term. The short-term conversations are around how we're going to manage elevator capacity within the complexes, what cleaning procedures are in place the air filtration systems et cetera that we're putting in place to improve the air handling et cetera. And that's really focused around triage in terms of how they bring – how they stage bringing their people back into the office.

 

And then separately from that there's the longer term conversation where they're starting to think about their own densities and what the permanent changes in how they're going to operate their businesses within the office might mean? And therefore, how does that translate into what their future space requirements maybe or what the office of the future really looks like.

 

And I'd say, it's early, everybody is still trying to figure it out. I think when you hear companies like those that have come out and said they're going to allow people to work remotely indefinitely or maybe even forever, what they're really saying is they're going to allow increased flexibility, meaning if people want to work from home part-time or from a different location, some of the time this has shown that actually that is viable and you can do it on a relatively short-term basis.

 

What I don't think any of them are saying is that, they're going to completely eliminate their office footprint and go to a virtual company. And as you said like Facebook is a prime example of that. They've been one of the ones that are the most vocal about giving their employees that flexibility, and yet they've just signed this lease at Farley, which brings their total space in that immediate submarket right around Manhattan West to 2.2 million square feet of occupancy. So we don't think it means the office is going away, I think it's just a change in how maybe people will think about their office going forward.

 

Thanks for this - this point of view makes sense... but the trend prior to the pandemic was to increase density and that allowed many firms to pay increasingly higher rents... that trend looks like it will reverse and my expectation would be for rent to come down and therefore their investments to come down.  Of course I agree offices aren't going away... but their headline insistence that it won't affect them long-term seems like denial.  Here they are a little more candid saying that they don't know, but in other forums they play it off as if it is not a negative.

[Xerxes]

https://www.bloomberg.com/news/articles/2020-08-11/brookfield-said-to-be-in-talks-for-blackstone-s-cheniere-stake?srnd=premium-canada

 

Brookfield in Talks To Buy Blackstone’s Cheniere Stake

[John Hjorth]

Chrispy,

 

What's your source for quoting, based on what Shane quoted? [Maybe I've got it wrong, being confused - in that case I apologize.]

[Xerxes]

Thank you, ValueMaven,

 

To me, the book has been instrumental to my decision [subject to change, however, as always] to mothball all my thoughts about getting invested in the BAM superstructure [PVF.UN]. [i have been messing around with - now for several years - about how to circumvent some tax issues for a Danish investor with regard to investing in PVF.UN.]

 

The book gives - at least to me - a nuanced description of the business culture and modus operandi at Brookfield [as a whole]. Mr. Cockwell is the key here, because he's still around on the inner lines [at least I speculate so], and has been a material influencer for Mr. Flatt.

 

John,

You might find the book Reichmanns interesting as well. I bought it six years ago but sadly has been sitting on my bookshelf unread.

Browsing through it in the index section last week, the book has references to Cockwell, Brascan and Bronfmans etc. given that Reichmanns had business dealing with them in the latter part of the book.

If I recall Canary Wharf was also owned by Reichmanns, prior to its sales to another party, which then sold to BAM.

 

You might get additional insight, though I think its value is more toward business history than recent event.

 

Based on reviews from this board, I got my copy of Brass Ring. It will sit next to Reichmanns, to be read hopefully in a not so distant future.

 

https://www.amazon.ca/Reichmanns-Family-Fortune-Empire-Olympia/dp/0679308865/ref=sr_1_1?dchild=1&keywords=reichmann&qid=1597184015&sr=8-1

 

[John Hjorth]

Thanks for the book tip, Xerxes,

 

I hope you'll take the time to start a topic in the Books Forum about it, so the tip doesn't "drown" here in the BAM topic.

 

 

 

 

[Xerxes]

sure do

cheers

[John Hjorth]

Thanks, Xerxes! [ : - ) ]

[thepupil]

https://seekingalpha.com/pr/17970509-brookfield-asset-management-announces-record-23-billion-of-fundraising-and-reports-second

 

Bruce Flatt, CEO of Brookfield, stated, “We had our best fundraising period, ever; with $23 billion of capital added to our franchise, increasing total capital for deployment to $77 billion.

 

As at June 30, 2020 fee-bearing capital was $277 billion, representing an increase of 69% from the prior year. We have an additional $29 billion of capital that is currently committed and will earn fees when deployed, of which $15 billion was raised since we last reported. Our growth in fee-bearing capital over the last twelve months led to an increase in fee-related earnings of 23% in the quarter relative to the same period a year ago, and a 41% increase in earnings for the last twelve months, before performance fees.

 

Subsequent to quarter-end, we announced a commitment, along with other institutional partners, to purchase up to $1 billion units and shares of Brookfield Property Partners. We view that we are buying at a fraction of the underlying value of the business, even in the most draconian scenario.

 

I just have this vision of Bruce Flatt as Tony Montana looking over all that glorious dry powder, getting ready to buy every square foot of real estate and mile of pipeline in the world.

 

No position here because of the leverage at the subs, but the asset manager is absolutely freaking killing it! I just love how they are unabashedly doubling down and aggressively deploying across the whole spectrum.

 

"ya we own a bunch of london office, it's awesome, so we aren't afraid and bought 7% of BLND at 1/3-40% of NAV"

 

"ya we own a bunch of infinity levered retail, we're buying more from the public market...and we are buying JC Penney while we're at it"

 

 

J.C. Penney Landlords Nearing Deal to Buy Bankrupt Retailer -- Update

By Alexander Gladstone and Andrew Scurria

(Dow Jones) -- Two of J.C. Penney Co.'s largest landlords have emerged as the leading contenders to acquire the department-store chain's retail business out of bankruptcy, according to people familiar with the matter.

Simon Property Group Inc., the biggest mall owner in the U.S. by number of malls, and Brookfield Property Partners LP, another big shopping center owner, have joined together and are in advanced talks to purchase Penney's retail operations, people familiar with the matter said. In recent days, the pair have eclipsed other interested bidders, according to the people.

Penney reviewed a competing offer from private-equity firm Sycamore Partners that carried a slightly higher price tag, some of the people said. But Simon and Brookfield offered certain concessions over lease agreements that Penney and its lenders viewed as delivering better value, the same people said.

Simon didn't respond to requests for comment. Representatives for Penney, Brookfield and Sycamore declined to comment.

The negotiations are fluid, the people said, and aren't certain to produce an agreement acceptable to Penney and its top lenders. Other bidders would have the opportunity to top the lead offer, which also requires approval from the judge presiding over Penney's chapter 11 case in the U.S. Bankruptcy Court in Corpus Christi, Texas.

Penney is one of Simon's top anchor tenants, second only to Macy's Inc. If a deal comes together, it would save Penney from a possible liquidation and mark another acquisition by Simon of a bankrupt tenant. The company was part of a group that bought Forever 21 Inc. out of chapter 11 in February and Aéropostale Inc. in 2016. Simon also has agreed to buy Brooks Brothers out of bankruptcy for $325 million in a joint bid with apparel-licensing firm Authentic Brands Group LLC.

Years of changing shopping habits and growing e-commerce competition have pressured many bricks-and-mortar retailers. More recently, the coronavirus pandemic has choked off rent collections for retail landlords.

Simon has been exploring with Amazon.com Inc. the possibility of turning over space left by ailing department stores like Penney into Amazon distribution hubs, reflecting both the decline of malls as shopping destinations and the boom in online buying.

During a court hearing Wednesday, Penney bankruptcy lawyer Joshua Sussberg said the company was "in the red zone" regarding a sale but didn't offer specifics. Top lenders including H/2 Capital Partners LLC, Sixth Street Partners and Sculptor Capital Management have bid for Penney's real-estate assets, which would be spun off into an investment trust.

The coronavirus pandemic accelerated Penney's long decline when malls and stores around the country were forced to close temporarily. As state and local governments relaxed restrictions on nonessential shopping in recent weeks, all of the company's stores have reopened. It has said 150 locations out of the roughly 850 it brought into bankruptcy will close for good.

Esther Fung contributed to this article.

Write to Alexander Gladstone at alexander.gladstone@wsj.com and Andrew Scurria at Andrew.Scurria@wsj.com

 

 

[NotSoWise]

Given your post - do you think its a Ponzi scheme and it will fall apart at some point - i.e. write offs to "real" market value, etc?

[thepupil]

Given your post - do you think its a Ponzi scheme and it will fall apart at some point - i.e. write offs to "real" market value, etc?

 

no, I think Brookfield will most likely do very well over time. I think there's lower risk/almost as much reward elsewhere with respect to the subs, but I think BAM shareholders will be significantly wealthier 3-5-10 years from now. Even with the subs, I think will do well, but again are simply more risky than alternatives. Because of the way Brookfield has structured its leverage, BPY is basically a portfolio of call options on a lot of real estate and BAM has a massive amount of capital to decide which call option it wants to keep in the money to the extent there's trouble anywhere.

 

I have no idea how the retail thing will work out, but even if it fails, it probably won't break BAM's fundraising franchise/other stuff.

 

I'm not in the "brookfield is a ponzi scheme" camp. I follow what they’re doing as it relates to other holdings (ie I’m sliughtly more inclined to buy British Land now, though I don’t own it). They’ve taken me out before (in forest city) and wouldn’t be surprised if they get involved in something else I own.

 

 

[ValueMaven]

Another solid quarter - very much enjoy reading from Mr. Flatt.  The Oaktree acquisition was extremely timely.  Even Blackstone doesn't have a credit franchise that comes anywhere near close to this.

 

 

[Gregmal]

I thought the interesting part on Penney was that they received a few higher offers...but BPY and SPG holding the leases gave them an angle to play that others couldn't. Will be interesting here for sure.

[villainx]

Was there more about what they did in public markets other than British Lands?

[thepupil]

One Manhattan West (BPY owned Hudson yards trophy, 95% leased) is in the market today with a SASB CMBS. $1.5B , 7 year interest only at 2.4% if I read the Bloomberg announcement correctly. The cutoff debt yield is about 8% (in equity speak, 12x debt to EBITDA). This implies $120mm NOI and a 4.8% cap rate if you put any credibility in the LTV.

 

I frankly find BPY’s supplemental difficult to read, but I think BPY owns 40% of the building and has put $713mmof cost into it with $479mm of that borrowed. At completion it will be $750mm cost /$550mm loan. This CMBS values the building at $2.5B ($1200/foot, with $715/ foot of debt)

 

In summary, I think Brookfield will end up with $400mm of equity or so in the property and a cost basis of less than $0. A great deal and a validation of high quality office (through this is the best and not necessarily comparable to others)

 

this is an example of good optically high leverage.

[LearningMachine]

Because of the way Brookfield has structured its leverage, BPY is basically a portfolio of call options on a lot of real estate and BAM has a massive amount of capital to decide which call option it wants to keep in the money to the extent there's trouble anywhere.

 

thepupil, I like how you think about highly leveraged real estate investments as call options.  That would be true if all property-level borrowings were non-recourse and there was no corporate-level borrowing that could get called as a result of walking away from property-level loans. 

 

Has anyone meticulously been able to go through all the property-level loans to confirm they are all non-recourse and corporate-level loans are fixed, long-term and non-callable loans?

[petec]

The asset manager is absolutely freaking killing it! I just love how they are unabashedly doubling down and aggressively deploying across the whole spectrum.

 

 

Absolutely agree.

 

Also amused by one particular comment on the call, about whether they'd be interested in insurance: "An insurance business is about putting credit to work...and historically our credit franchise was not that big...with Oaktree...[buying a big insurer is] something we may and could look at."

 

If only I could think of a struggling Canadian insurer with great underwriting and a meaningful but badly managed investment portfolio that BAM could buy at a discount to book...

 

OK that one won't happen, but I can easily see BAM with a fifth big listed subsidiary at some point in the future.

 

 

 

[Xerxes]

^^

 

How B. Flatt had folded Oaktree into BAM would be a case study for any potential future interested parties. An interesting structure as well with the founder (Howard M.) keeping his stake, while the minority shareholder gets bought out. Prem probably has zero interest to sell, until at least he has fixed the latter chapter of his legacy (i.e. picked the low hanging fruits sort of speak) and has the stock price at something like 1.3 book.

 

However, if that ever happens, it would be an interesting turn of events 5 years down the road.