BAM - Brookfield Asset Management

[chrispy]

BIPC is quoted close to 50usd while BIP is 45usd (approximate numbers). The share classes are equivalent righht? What am I missing?

[racemize]

BIPC is quoted close to 50usd while BIP is 45usd (approximate numbers). The share classes are equivalent righht? What am I missing?

 

One has annoying tax-filing requirements and the other doesn't.

[chrispy]

I did not think that would account for such a difference as it doesn't seem to with BPY and BPYU

[racemize]

I did not think that would account for such a difference as it doesn't seem to with BPY and BPYU

 

There was a gap earlier in the summer, but I think the tender offer made them get a lot closer.  Not sure though.

[ValueMaven]

https://www.brookfield.com/future-office-not-what-you-might-think

 

this is interesting ...

[Packer16]

BIPC is quoted close to 50usd while BIP is 45usd (approximate numbers). The share classes are equivalent righht? What am I missing?

 

I think BIPC can be included in indices vs. exclusion of BIP.  Given the greater importance of indices this should cause BIPC to trade higher. If there was some type of exchangability should reduce the discount.

 

Packer

[chrispy]

On Brookfield a website they have this - I guess you can convert BIPC to BIP. I have not seen anything about the reverse:

 

Brookfield Infrastructure Corporation (NYSE: BIPC; TSX: BIPC) is a Canadian corporation, created to provide investors with greater flexibility in how they access BIP’s globally diversified portfolio of high-quality infrastructure assets. Class A shares of BIPC are structured to provide an economic return equivalent to BIP units though a traditional corporate structure. Each BIPC Class A share has same distribution as a BIP unit, and is exchangeable, at the shareholders option, for one BIP unit.

[John Hjorth]

Yes, the reverse conversion option [bIP to BIPC] does not exist.

[Xerxes]

BIPC is quoted close to 50usd while BIP is 45usd (approximate numbers). The share classes are equivalent righht? What am I missing?

 

 

Chrispy,

 

I am a Canadian and hold BAM and its many sons & daughters (with the exception of the real-estate subsidiary) in a tax-free-registered account (i.e. RRSP).

There is no tax forms at least not for Canadians in a tax-free registered account if you hold the XXX.UN entities, as far as I know.

 

I think though on a going forward basis if you have a choice between the XXX.UN and Corps, it is best to go with the latter, due to larger float.

I personally sold my BIPC and re-invested it into BAM and plan to do the samething with BEPC.

 

And will keep BIP.UN and BEP.UN as they are, since my XXX.UN holdings were of the larger size than the Corps that were spuned off to me.

 

[Packer16]

Yes, the reverse conversion option [bIP to BIPC] does not exist.

 

Thus the discount that will only close if BIP can be converted to BIPC.

 

Packer

[cmlber]

BIPC is quoted close to 50usd while BIP is 45usd (approximate numbers). The share classes are equivalent righht? What am I missing?

 

I think BIPC can be included in indices vs. exclusion of BIP.  Given the greater importance of indices this should cause BIPC to trade higher. If there was some type of exchangability should reduce the discount.

 

Packer

 

I think the bigger reason is tax differences.  As far as I understand, BIPC pays qualified dividends (24% max tax rate) whereas BIP pays ordinary dividends to US investors (41% max tax rate).  However, (a) if you aren't a tax payer, BIP is clearly the better long-term hold, and (b) I think that tax differential would disappear under a Biden administration (w/ a democratic senate).  I swapped my BIP for BIPC when the split happened and recently swapped back.  If Biden wins and raises capital gains taxes to ordinary rates, I think the spread collapses. 

[chrispy]

From memory, in a Roth/401k there is nothing to worry about with the tax filing requirements so the non-Corp would be the better holding

[TorontoRaptorsFan]

Mark Carney joining Brookfield as Vice-Chairman

 

https://www.bloomberg.com/news/articles/2020-08-26/carney-joins-brookfield-to-lead-firm-s-expansion-into-esg-funds

 

[John Hjorth]

Mark Carney joining Brookfield as Vice-Chairman

 

https://www.bloomberg.com/news/articles/2020-08-26/carney-joins-brookfield-to-lead-firm-s-expansion-into-esg-funds

 

To me, it's [the same] old wine on new bottles.

 

I've for years been poking and joking around with the Lady of the House, that next time she wants the walls in the living room redecorated with new wallpaper, I would create a complete group chart of BAM and put it on one of the walls. Gradually I realized, that such job likely would be endless, because of all the transactions over time.

 

The post of today by TorontoRaptorsFan definitively killed the idea, because I consider a three-dimensional wallpaper severely dysfunctional in relation to the basic purpose of wallpaper.

[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.

 

just updating this here, they actually ended up putting $1.8B on the building, because of a $300mm mezz in addition to the $1.5B CMBS. In equity speak, 15x EBITDA. In CRE speak a 6.6% debt yield / 72% combined LTV if you think the building is worth $2.5B (4.8% cap rate).

 

this is not a good comp for assets in the public market owned by SLG/VNO/PGRE or the majority of BPY's portfolio because it is higher quality than the bulk of what they own, but obviously is a very strong print as it relates to the financeability of high quality office.

 

the press release also illustrates a frustration i have with brookfield. Every other RE owner would say what their net proceeds were from this transaction. I don't think this actually raised much cash for BPY. I think they funded their 40% ($795mm) with $550mm of debt and $245mm of equity, they'll get $720mm back from this financing, so that pays off the loan and returns almost all their equity leaving them with virtually no basis in an asset "worth" $280mm (40% of the $700m of equity in the property).

 

It's a good deal for them, but I think it only generated $170mm or so of cash and I think that's omitted from the press release because $1.8B of financing sounds a lot better than "our levered 40% stake was recapped for $170mm of net proceeds). It's this type of stuff that makes them look promotional.

 

I am basing all this on page 80 of the 20-F. BPY doesn't make it easy.

 

 

 

In addition, BPY borrowed USD $1.8 billion of total debt at a weighted average coupon of 2.95% to refinance the recently completed One Manhattan West office building in New York.  $1.5 billion of the mortgage debt was securitized and distributed in the CMBS market, and $300 million was structured as mezzanine debt. The mortgage debt is backed by a senior loan on One Manhattan West office tower and backs one of the largest single-asset, single-borrower CMBS transactions issued in 2020.“The strong interest in both of these transactions in today’s environment is further evidence of investors’ support of BPY and their belief in the long-term durability of high-quality real estate assets,” said Brian Kingston, Chief Executive Officer of Brookfield Property Partners.

[thepupil]

https://seekingalpha.com/news/3609822-keep-eye-on-bpy-bpyu-this-week-tender-offers-end-fts-dizard-says

 

Keep an eye on BPY, BPYU this week as tender offers end, FT's Dizard says

Aug. 30, 2020 5:07 AM ET|About: Brookfield Property Partner... (BPY)|By: Liz Kiesche, SA News Editor

Financial Times columnist John Dizard warns investors to watch closely Brookfield Property Partners (BPY +0.6%) and Brookfield Property REIT (BPYU -2.1%) shares next week.

 

That's when tender offers for their shares, sponsored by patent Brookfield Asset Management (BAM +0.4%), no longer apply.

 

"The share prices of BPY and BPYU will have to totter forward based on their own merits," he writes.

 

Dizard questions whether the two mall owners will be able to continue to pay out dividends that have a retrospective yield over 11% when properties they own are in default.

 

He points out that BPYU had $188M in adjusted cash flow from operations in H1 2020 to cover $343M of interest expense and compares that with Simon Property (SPG +1.0%), which had $1.2B to cover $385M of interest expense, and Taubman (TCO -0.2%), which had $80M of adjusted cash flow from operations to cover $68M of interest expense.

 

 

[thepupil]

https://financialpost.com/real-estate/property-post/retail-apocalypse-now-a-day-of-reckoning-may-be-approaching-for-two-of-brookfields-property-entities/wcm/98840a31-f700-463c-bbac-6cfd411de7bf/

 

the actual article is pretty scathing.

 

Mark Carney, until recently Bank of England governor and before that Bank of Canada governor, just joined Brookfield Asset Management as a vice-chair and head of its environmental, social and governance unit. In his remarks on joining the Canadian asset management group, Carney referred to “an accelerated transition to a net zero economy.”

 

In some ways, Brookfield is already at and even beyond net zero, though that would seem to be more related to the profitability of its giant shopping malls collection than to carbon reduction.

 

As a sort of Canadian national treasure, at least for those Canadians who receive investment banking and consulting fees, Brookfield and its controlled entities can generally count on fawning securities analysts and trouble-free investor calls. But that is changing. Veritas Investment Research, a Toronto firm centred on accounting expertise, put out an “accounting alert flash” in mid-August about how BPY reported its second-quarter results. As Veritas pointed out, BPY’s net operating income declined 7.7 per cent year over year, following a 3.4 per cent drop in the first quarter of this year. As the Veritas analyst wrote: “How did NOI not decline more given that BPY collected just 34 per cent (of its) rents during the quarter?”

 

I believe Carney will be very busy indeed at Brookfield. Possibly on problems other than renewable resource investment.

[Pauly]

Financial Times, and Dizard in particular, seem to write nothing but sinister articles about Brookfield. Not that that's a reason to ignore what he's saying, but it is something to be aware of.

 

https://financialpost.com/real-estate/property-post/retail-apocalypse-now-a-day-of-reckoning-may-be-approaching-for-two-of-brookfields-property-entities/wcm/98840a31-f700-463c-bbac-6cfd411de7bf/

 

the actual article is pretty scathing.

 

Mark Carney, until recently Bank of England governor and before that Bank of Canada governor, just joined Brookfield Asset Management as a vice-chair and head of its environmental, social and governance unit. In his remarks on joining the Canadian asset management group, Carney referred to “an accelerated transition to a net zero economy.”

 

In some ways, Brookfield is already at and even beyond net zero, though that would seem to be more related to the profitability of its giant shopping malls collection than to carbon reduction.

 

As a sort of Canadian national treasure, at least for those Canadians who receive investment banking and consulting fees, Brookfield and its controlled entities can generally count on fawning securities analysts and trouble-free investor calls. But that is changing. Veritas Investment Research, a Toronto firm centred on accounting expertise, put out an “accounting alert flash” in mid-August about how BPY reported its second-quarter results. As Veritas pointed out, BPY’s net operating income declined 7.7 per cent year over year, following a 3.4 per cent drop in the first quarter of this year. As the Veritas analyst wrote: “How did NOI not decline more given that BPY collected just 34 per cent (of its) rents during the quarter?”

 

I believe Carney will be very busy indeed at Brookfield. Possibly on problems other than renewable resource investment.

[John Hjorth]

....He points out that BPYU had $188M in adjusted cash flow from operations in H1 2020 to cover $343M of interest expense and compares that with Simon Property (SPG +1.0%), which had $1.2B to cover $385M of interest expense, and Taubman (TCO -0.2%), which had $80M of adjusted cash flow from operations to cover $68M of interest expense.

 

Why are you even quoting here on CoBF what other people say based on their own sources?

[bizaro86]

....He points out that BPYU had $188M in adjusted cash flow from operations in H1 2020 to cover $343M of interest expense and compares that with Simon Property (SPG +1.0%), which had $1.2B to cover $385M of interest expense, and Taubman (TCO -0.2%), which had $80M of adjusted cash flow from operations to cover $68M of interest expense.

 

Why are you even quoting here on CoBF what other people say based on their own sources?

 

Not thepupil, but presumably because sharing facts, analysis and opinion on investment ideas is the point of the board?

[thepupil]

....He points out that BPYU had $188M in adjusted cash flow from operations in H1 2020 to cover $343M of interest expense and compares that with Simon Property (SPG +1.0%), which had $1.2B to cover $385M of interest expense, and Taubman (TCO -0.2%), which had $80M of adjusted cash flow from operations to cover $68M of interest expense.

 

Why are you even quoting here on CoBF what other people say based on their own sources?

 

A writer in the FT, a globally recognized publisher of financial news, is discussing the fundamental state of BAM's largest holding (BPY) which is discussed extensively on this thread.

 

This seems relevant to the analysis of BPY and BAM. If anyone wants to discuss why Dizard's characterization is short sighted, incorrect, or correct, they may do so.

 

I don't understand your point here.

 

if you are saying something about copyright, I found a publicly available version on financialpost.com and did not quote the entire article. I think it is kosher to snip small sections of articles.

[TwoSigma]

Thoughts on this?  I don't really follow BPY and don't mean to pile-on, but thought this was an interesting read:

 

https://assets.empirefinancialresearch.com/uploads/2020/09/BPY-BPYU-short-thesis-Dalrymple-Finance-9-20.pdf

 

 

 

[petec]

Thanks. I haven’t looked at BPY in enough depth yet, or read the article fully, but I will.

 

One fairly obvious pushback is that lower rates may change their “negative equity” conclusion.

 

But a bigger one for me is this. Why on earth would BAM (who are widely accused of being selfish with their equity and for shafting minorities) buy back stock above market (as they effectively did in the recent tender) if this thing was going under? Why not underwrite a rights issue below market? That way BPY would get the cash and BAM could hoover up any unexercised rights at a lower price, so they win two ways round. What am I missing?

[chrispy]

They all could be wrong, but, Brookfield is frequently mentioned as acting only in their self interest and the following has occurred since the middle of March 2020:

 

BPY buying shares

BAM buying shares for themselves and their clients

Numerous BPY executives buying:

 

CEO Recent Trades:

 

    CEO Brian Kingston bought 115,000 shares of BPYU stock on 03/12/2020 at the average price of $12.44. The price of the stock has decreased by 5.55% since.

    CEO Brian Kingston bought 75,000 shares of BPYU stock on 02/28/2020 at the average price of $16.66. The price of the stock has decreased by 29.47% since.

 

CFO Recent Trades:

 

    CFO Bryan K. Davis bought 40,000 shares of BPYU stock on 03/16/2020 at the average price of $12.42. The price of the stock has decreased by 5.39% since.

    CFO Bryan K. Davis bought 27,500 shares of BPYU stock on 02/27/2020 at the average price of $16.67. The price of the stock has decreased by 29.51% since.

 

Directors and Officers Recent Trades:

 

    Director Ric Clark bought 159,154 shares of BPYU stock on 03/12/2020 at the average price of $13.22. The price of the stock has decreased by 11.12% since.

    Director Ric Clark bought 63,000 shares of BPYU stock on 03/09/2020 at the average price of $15.89. The price of the stock has decreased by 26.05% since.

 

https://www.gurufocus.com/news/1075136/brookfield-property-reit-inc-bpyu-ceo-brian-kingston-bought-14-million-of-shares

[thepupil]

I agree with some aspects of the short article, and strongly disagree with others:

 

Where I agree

- BPY is indeed significantly more levered than public peers. this is not news.

- BPY is in default on a few retail assets

- the fact that BPY has not cut its dividend is just plain ridiculous and speaks to the conflict-riddled management structure, the best thing for long-term unitholders is to preserve liquidity/maximize flexibility and cut the divvy. my suspiciion is they are diluting minorities by giving BAM stock dividends, a shadow way to issue themselves equity at "low" prices

- BPY/BAM's tone has been a little promotional or overly optimistic. i would cite the Manhattan West refi as an example where they failed to mentiion they only got $175mm of cash from their big flashy $1.8B refi (because they only owned 40% of the asset and it was already encumbered substantially)

 

Where I disagree

 

- the constant use of "cash flow from operations" and EBITDA as the most relevant metric in assessing leverage.

 

-Brookfield Property Partners has ~$5.3/share of investments in BAM's opportunistic RE funds. Now I'm open to an argument that these are mismarked or wouldn't get par if you had to sell them in a secondary auction, but I think it would be premature to write these off completely. these aren't "cash yielding/cash flowing assets" in the traditional sense, but they are assets and they equal about ~90% of BPY's corporate debt. If you write them off by 50%, then they still cover a substantial portion thereof.

 

- BPY also has a lot of development assets that wouldn't throw off cash flow that nevertheless have some value. 

 

- Using CFFO/EBITDA on 1H2020 is overly punitive to the retail assets. I myself have pointed out that the retail assets are way overlevered, but this is too punitive given the lockdowns.

 

- the "well GGP 2008 style BK may happen so the debt is recourse" argument.

 

I think this is the worst of the arguments and will go out on a limb in favor of BPY and say THIS WON'T HAPPEN. Admittedly, I haven't studied GGP BK in depth, but I read these two articles.

 

https://www.choate.com/images/content/1/2/v2/1210/Gooding-Ventola-Law360-Lessons-From-General-Growth-Properties.pdf

https://turnaround.org/sites/default/files/5.%20Paper%20-%20GGP%20-%20NYU.pdf

 

So what exactly is the argument the short author is making? This is how I read it, if anyone with more knowledge/a different interpretation wants to chime in feel free:

 

the short authore is saying that in GGP the "bankruptcy remote" structure that underlies the entire securitization market was called into question/ violated by the GGP bankruptcy, because when GGP corporate went bankrupt, GGP and its creditors attempted to secure new money (DIP) using the secured assets as collateral and put healthy SPE's into bankruptcy.

 

Many holders of CMBS found this alarming because their assets were cash flowing and money good. they wanted to have their loans only look to the single asset that was underwritten and (correctly) did not think any of their assets could be used to secure other debt. many of the holders of CMBS (or rather their appointed special servicers) objected to the SPE's which held GGP's assets being put into BK because the assets that they encumbered were cash flowing and money good and in many cases maturity was not immediate.

 

to shorten a 35 page document that is complex: holders of the CMBS did not want to be included in GGP's corporate bankruptcy because the assets were too good their security was not in question. the courts said "actually its okay for you to be included in this BK but we're going to preserve the value of your first lien against the assets you underwrote":

 

From the NYU paper:

In hindsight, one can fairly say that the inclusion of the SPEs in the bankruptcy was both wise

and fair. There was plenty of value in the business, so none of the SPE loans ended up being

impaired. Meanwhile, the restructuring of mortgage debt within bankruptcy ended up being more

efficient and orderly than would have been possible outside of bankruptcy. Additionally, had

none of the “healthy” SPEs been included in the filing, the GGP parent company (the health of

which was crucial to the health of the SPEs) would not have exited bankruptcy in nearly as

healthy of a state as it did

 

I think this is where the short author is distorting what occurred in the GGP bankruptcy. GGP put healthy assets into bankruptcy last time and strategically consolidated non-recourse debt in order to efficiently restructure and term out its liquidity in light of the frozen financing market. the assets were healthy, the financing market was not.

 

this time around BPY will be handing back the keys on unhealthy or overlevered assets and maturities are staggered to deal with each on an individual basis. BPY is not facing a liquidity crisis and in fact has plenty of corporate liquidity and the sponsorship of BAM. BPY has NO REASON to consolidate its non-recourse debt and instead will use the structure to its advantage. For example, recently BPY defaulted on Tyson's Galleria; they negotiated a 1 year extension because that's a good overlevered asset and BPY thinks the market will be better 1 year from now.

 

i think it's a huge leap to say "GGP went bankrupt in 08/09 and consolidated its debt, therefore BPY might consolidate its non recourse debt this time". That ignores the substance of why GGP made the decisions it did. this time the circumstances are much different. BPY will be putting its unhealthy assets back to the CMBS market or favorably restructuring.

 

Consolidation of non-recourse debt underlies a lot of the short author's valuation metrics (such as adding the non-consolidated debt to the EV and determining there is negative equity).

 

I think the bar for "I want to avoid BPY in favor of other securities" is much lower than the bar for "BPY is a zero".

 

I think the short author's work fails to meet the second bar.

 

I think BPY is a very dangerous short, particularly in light of their office weighted average lease term, which is very long and BAM sponsorship. the office cash flow stability and the BAM sponsorship will allow BPY to outlast a lot of bears projections. BPY and BAM have the upper hand in restructurings. BPY will give back a lot of assets, but they won't give back all of them and any positive equity accrues to BPY.