BAM - Brookfield Asset Management

[ValueMaven]

Sounds nice.  However that would be a poor idea IMHO.  The only real transaction in size BAM should be doing is buying back shares at current levels. 

[petec]

While I’d love to see that, it’s all about what you get for what you give.

[wisowis]

Interview with Bruce Flatt (October 29):

[formthirteen]

Interview with Bruce Flatt (October 29):

 

Thanks.

 

Interesting to hear Flatt share his thoughts on REITs:

&feature=youtu.be&t=1503

 

He believes REITs are trading at such high discounts to TBV because the "narrative of the common media" is very negative about office and retail.

 

He also gives an example on what low interest rates might mean for REITs:

&feature=youtu.be&t=1321

 

Higher cash flows and higher valuations...if you believe we're in a low-interest environment for a while.

 

Can someone tell me when the narrative on REITs will change? Thank you in advance.

[StevieV]

Interview with Bruce Flatt (October 29):

 

Thanks.

 

Interesting to hear Flatt share his thoughts on REITs:

&feature=youtu.be&t=1503

 

He believes REITs are trading at such high discounts to TBV because the "narrative of the common media" is very negative about office and retail.

 

He also gives an example on what low interest rates might mean for REITs:

&feature=youtu.be&t=1321

 

Higher cash flows and higher valuations...if you believe we're in a low-interest environment for a while.

 

Can someone tell me when the narrative on REITs will change? Thank you in advance.

 

Thanks for the interviews.  I haven't listened to them yet, but will this weekend.  But, I don't see how only the narrative is very negative on office and retail.  The reality is negative - https://www.globest.com/2020/08/20/moodys-analytics-predicts-us-office-vacancy-rate-hitting-historic-highs-in-2021/?slreturn=20200931095751 .  BAM does a lot of things.  Is a good operator.  Etc.  So, a negative outlook on office and retail doesn't mean that BAM can's successfully navigate that space or succeed in other spaces, but I don't see how the overall outlook is anything other than negative or maybe really negative.

[Viking]

It looks to me like the key to valuing REITs (and all dividend/yield type stocks - utilities, pipelines, telco) is what is your view on what interest rates are going to do over the next 5 to 10 years.

 

Kind of like Buffett’s answer when asked how the stock market is valued: what is the yield on the 10 year US bond? And where is it likely to go in the future?

 

If the US/Europe/Japan/Canada/Australia see more disinflation or even mild deflation in the coming years and US 10 year bonds remain under 1% (possible even go negative) every investor in the world will be looking for return. Right now in Canada you can buy a basket of utilities/pipelines/telco/banks etc that pays you a blended dividend yield of about 5 to 5.5% (depending on your sector weightings). This basket of stocks also are trading down 15-20% this year (they are not expensive). The basket should also see mid single digit growth in earnings (and dividends) per year over the coming decade. They are well financed (not too much debt) and are, for the most part, well run.

 

Here is the key: the focus right now is still on getting through the pandemic. (I think there is also an election soon in the US so that might be distracting some people). In the next 12-24 months as the reality sinks in that bond yields will be staying crazy low for the next 10 years investors (the professional money) are going to start to panic. Money will start to shift into any sector with yield: stocks, real estate, private equity. For stocks REITs are one asset class that will benefit. It would not surprise me to see PE multiples go to 30 for blue chip dividend stocks. There will be no alternative.

 

I think this is the future that Flatt sees. Covid/recession is just something to throw people off what is really going on under the hood (the secular trend which is disinflation/mild deflation).

[clutch]

It looks to me like the key to valuing REITs (and all dividend/yield type stocks - utilities, pipelines, telco) is what is your view on what interest rates are going to do over the next 5 to 10 years.

 

Kind of like Buffett’s answer when asked how the stock market is valued: what is the yield on the 10 year US bond? And where is it likely to go in the future?

 

If the US/Europe/Japan/Canada/Australia see more disinflation or even mild deflation in the coming years and US 10 year bonds remain under 1% (possible even go negative) every investor in the world will be looking for return. Right now in Canada you can buy a basket of utilities/pipelines/telco/banks etc that pays you a blended dividend yield of about 5 to 5.5% (depending on your sector weightings). This basket of stocks also are trading down 15-20% this year (they are not expensive). The basket should also see mid single digit growth in earnings (and dividends) per year over the coming decade. They are well financed (not too much debt) and are, for the most part, well run.

 

Here is the key: the focus right now is still on getting through the pandemic. (I think there is also an election soon in the US so that might be distracting some people). In the next 12-24 months as the reality sinks in that bond yields will be staying crazy low for the next 10 years investors (the professional money) are going to start to panic. Money will start to shift into any sector with yield: stocks, real estate, private equity. For stocks REITs are one asset class that will benefit. It would not surprise me to see PE multiples go to 30 for blue chip dividend stocks. There will be no alternative.

 

I think this is the future that Flatt sees. Covid/recession is just something to throw people off what is really going on under the hood (the secular trend which is disinflation/mild deflation).

 

Viking, your analysis actually seems spot on, but how come the mainstream investors do not see this? It's almost so obvious that blue chip dividend stocks should be trading at a premium... why is the market so inefficient now?

[Gregmal]

It looks to me like the key to valuing REITs (and all dividend/yield type stocks - utilities, pipelines, telco) is what is your view on what interest rates are going to do over the next 5 to 10 years.

 

Kind of like Buffett’s answer when asked how the stock market is valued: what is the yield on the 10 year US bond? And where is it likely to go in the future?

 

If the US/Europe/Japan/Canada/Australia see more disinflation or even mild deflation in the coming years and US 10 year bonds remain under 1% (possible even go negative) every investor in the world will be looking for return. Right now in Canada you can buy a basket of utilities/pipelines/telco/banks etc that pays you a blended dividend yield of about 5 to 5.5% (depending on your sector weightings). This basket of stocks also are trading down 15-20% this year (they are not expensive). The basket should also see mid single digit growth in earnings (and dividends) per year over the coming decade. They are well financed (not too much debt) and are, for the most part, well run.

 

Here is the key: the focus right now is still on getting through the pandemic. (I think there is also an election soon in the US so that might be distracting some people). In the next 12-24 months as the reality sinks in that bond yields will be staying crazy low for the next 10 years investors (the professional money) are going to start to panic. Money will start to shift into any sector with yield: stocks, real estate, private equity. For stocks REITs are one asset class that will benefit. It would not surprise me to see PE multiples go to 30 for blue chip dividend stocks. There will be no alternative.

 

I think this is the future that Flatt sees. Covid/recession is just something to throw people off what is really going on under the hood (the secular trend which is disinflation/mild deflation).

 

Yup. The concern I have with energy is that its going to be a continuous target, politically. Banks are tough too, and still way to susceptible to disruption. But RE and Utilities...are going to do very well. Covid is just a short term distraction for many. It will all come into focus soon enough. The great ones see things that are obvious before they are obvious, as I believe Flatt has done here.

[petec]

I think you need to distinguish between inflation and rates.

 

Low rates are obviously great: more cash flow to equity as you refinance lower, and those cash flows get capitalized at (hitherto) silly multiples. And for BAM a third win, as they hoover up assets looking for yield.

 

Disinflation is not so good, since the assets are (in theory at least, and sometimes in regulation) inflation linked.

 

Deflation could be an outright disaster, given the amount of debt.

 

The ideal situation here is actually financial repression - ie inflation and low rates. That might be the desired outcome politically to inflate away debt.

[Viking]

I think you need to distinguish between inflation and rates.

 

Low rates are obviously great: more cash flow to equity as you refinance lower, and those cash flows get capitalized at (hitherto) silly multiples. And for BAM a third win, as they hoover up assets looking for yield.

 

Disinflation is not so good, since the assets are (in theory at least, and sometimes in regulation) inflation linked.

 

Deflation could be an outright disaster, given the amount of debt.

 

The ideal situation here is actually financial repression - ie inflation and low rates. That might be the desired outcome politically to inflate away debt.

 

You explain very succinctly why central banks are so worried right now. Mild deflation + debt bubble will be a disaster (hello Great Depression). Powell is BEGGING for more fiscal stimulus; he is VERY worried about something.

 

Yes, mild inflation is nirvana for central banks and governments. Mild deflation (1-2% falling prices) with a debt bubble is catastrophic. With 2% inflation the real value of debt falls over time. With 2% deflation the real value of debt  increases over time.

[petec]

Actually I’m not sure mild deflation is a disaster for the economy. Japan has not been an economic disaster.

 

But it is a disaster for the equity holders of leveraged, inflation linked assets, especially if LTV’s and starting valuations are high.

 

Rapid deflation is a disaster. That’s your Great Depression scenario.

[mattee2264]

Concern I have with real estate is that rents could reset a lot lower especially for retail and prime-office space and with most real estate companies highly leveraged dividends will have to be sacrificed to keep paying interest.

 

Utilities do not look that attractive historically even though they do so relative to Treasuries. XLU has a dividend yield of around 3%. That might be OK as a bond alternative but you aren't going to get equity like returns.

 

But yeah i am also keen on banks and energy. I think they could eventually return to being nice income stocks with an additional kicker as they re-rate once sentiment changes towards them.

 

Not that familiar with pipelines. Yields look good but surely if energy sector consolidates that will undermine their bargaining power. Also debt looks very high.

[Spekulatius]

It looks to me like the key to valuing REITs (and all dividend/yield type stocks - utilities, pipelines, telco) is what is your view on what interest rates are going to do over the next 5 to 10 years.

 

Kind of like Buffett’s answer when asked how the stock market is valued: what is the yield on the 10 year US bond? And where is it likely to go in the future?

 

If the US/Europe/Japan/Canada/Australia see more disinflation or even mild deflation in the coming years and US 10 year bonds remain under 1% (possible even go negative) every investor in the world will be looking for return. Right now in Canada you can buy a basket of utilities/pipelines/telco/banks etc that pays you a blended dividend yield of about 5 to 5.5% (depending on your sector weightings). This basket of stocks also are trading down 15-20% this year (they are not expensive). The basket should also see mid single digit growth in earnings (and dividends) per year over the coming decade. They are well financed (not too much debt) and are, for the most part, well run.

 

Here is the key: the focus right now is still on getting through the pandemic. (I think there is also an election soon in the US so that might be distracting some people). In the next 12-24 months as the reality sinks in that bond yields will be staying crazy low for the next 10 years investors (the professional money) are going to start to panic. Money will start to shift into any sector with yield: stocks, real estate, private equity. For stocks REITs are one asset class that will benefit. It would not surprise me to see PE multiples go to 30 for blue chip dividend stocks. There will be no alternative.

 

I think this is the future that Flatt sees. Covid/recession is just something to throw people off what is really going on under the hood (the secular trend which is disinflation/mild deflation).

 

One thing I would add is that if you like dividends, there are much better things to invest in than Reits - Utility like Pipeline stocks (which you have mentioned as well) and tobacco stocks like BTI, MO and PM.

 

All of them have tail risk (duration of the cash flow is an issue) but not really as much near term risk than Reits.

 

The problem I see with Reits is that some of them trade or should trade on NAV According to the bulls even though it is unlikely they will ever get liquidated. They should trade as if they are ongoing entities taken into account their corporate overhead burden, based on a dividend growth model.

[Gregmal]

If you're talking risk, why would you choose long term decline/challenges over near term and fixable? Seems short sighted. Tobacco has been a great investment almost forever and probably still will be, but everyone is gunning for it and even the companies themselves have acknowledged this time is probably a bit different. If you're worried about bad management and excessive overhead I would say tobacco is easily the biggest culprit of that than utilities or reits. Just go check out the MO thread....It as if you almost have to model a certain 9-10 figure number for "wasted resources" given what these guys have done on a consistent basis the past decade.

 

Energy and even the pipelines have looked good for years and have still gotten wrecked. Again, they're probably good money longer term as well but the past half decade have been brutal and they haven't even really started getting attacked from a regulatory perspective. I mean people were pounding the table on stuff like CVX, KMI, WMB and ET 5 years ago and whats changed? Outside of the capital structures, and that certainly hasn't been for the better.

 

RE is what? People scared and scarred bc of COVID but prices already imply $150-$300 sq/ft for things CURRENTLY going off at $600-$800 a square ft. At a time period which is probably near the darkest of the cycle. The biggest risk in RE right now is a long shot that the 1031 gets axed but otherwise...no one is coming for the sector and much of it simply takes care of itself. It also doesnt really matter whether management wants to sell or not unless you are dealing with dual class shares or high concentration of insider ownership. Its even potentially an area of upside as the acquirer can capitalize the G&A which almost all usually gets axed in a deal. Someone like BAM aint keeping on existing management for an office property acquisition and they sure as heck aint standing down from a deal simply because a C suite doesnt want to sell, should they have an angle to acquire it any way.

 

Its also important to distinguish and not confuse assets vs businesses. Its something I ve long looked at and studied and is quite important. If you can find an asset like for instance a subsurface royalty or a ground lease with 15 year duration and rent increases, you're not really going to have to worry a whole lot about overhead and G&A because the operations are typically slim. If you're looking at a business, then you always find excuses to increases hiring, marketing, r&d, etc...its a big piece of the puzzle and most companies are hybrids but the true gems are purely asset. Something like TPL or some of the triple net lease stuff.

 

 

[John Hjorth]

And here I come, as an elephant in a China boutique, quoting Cardboard, from a topic in the Berkshire Hathaway forum, for discussion here about BAM [from here]:

 

I would be really careful with Brookfield.

 

This is spaghetti like structure with leverage at rates that would disappear at existing terms on any sign of trouble in financial markets.

 

I recall the days of Edper Brascan, big conglomerate discount, hate by market for holding things like Noranda. Now it holds office buildings, hyped up renewable infrastructure, soon 100% of Genworth or mortgage loan insurer in biggest bubble ever in Canada or overtaking Nortel, JDS Uniphase, etc.

 

When you hear can't lose stocks by fund managers you gotta to pay attention.

 

Cardboard

[Gregmal]

And here I come, as an elephant in a China boutique, quoting Cardboard, from a topic in the Berkshire Hathaway forum, for discussion here about BAM [from here]:

 

I would be really careful with Brookfield.

 

This is spaghetti like structure with leverage at rates that would disappear at existing terms on any sign of trouble in financial markets.

 

I recall the days of Edper Brascan, big conglomerate discount, hate by market for holding things like Noranda. Now it holds office buildings, hyped up renewable infrastructure, soon 100% of Genworth or mortgage loan insurer in biggest bubble ever in Canada or overtaking Nortel, JDS Uniphase, etc.

 

When you hear can't lose stocks by fund managers you gotta to pay attention.

 

Cardboard

 

Good thing you removed him from the ignore list again! Haha.

 

Its weird but I do kind of agree with him, cant argue too much against any of that, but also own a position in the shares because I see the other side as well. People talk about reputation, and they often think "integrity" or some sort of moral compass based definition. In the financial world, reputation can take on different things. Tesla has become what it is off the reputation, otherwise known as pixy dust for the people who need to quantify everything, of Elon Musk. Flatt and BAM have this is spades and maximize its utilization which is very powerful and goes a long way. They also have become big enough to bully around lenders and smaller players which is another advantage. I like that so I put a little money on this continuing and if it does, they should have no problem operating as they have, which has been very lucrative for everyone involved.

[Spekulatius]

I am not a fan of BAM’s model either. My main concern is that is the huge leverage in their subs and the crummy assets BPY owns. The GP/LP business model is fraught with bad incentives and is the reason why many of these structures don’t survive. It can work very well for GP’s with economic tailwinds and good management but when things go wrong, they tend to go very wrong.

 

Has anyone done a calculation of what BAM is worth if BPY is a zero (aside from the huge reputational  damage)?

[thepupil]

Has anyone done a calculation of what BAM is worth if BPY is a zero (aside from the huge reputational  damage)?

 

as of June 30th Brookfield had ~$45 billion of "blended"* value of invested capital and $12 billion of debt for $33 billion of equity in listed and unlisted investments.

 

BPY is $14 billion of the $45 billion, so BPY at $0 would knock assets down to $31 billion and equity down to $19 billion.

 

BPY equity is about 16% of BAM's overall "plan value", which is split about 60% asset manager / 40% invested capital. to the extent you think BAM overvalues itself, then BPY is a greater % and vice versa.

 

BAM's $45B of investments throw off $1.6B in regular distributions/divvies. BPY is 42% of that. I believe BAM takes BPY's distribution in stock, which dilutes everyone at today's highly discounted (if you believe BAM) value, so it's not a cash flow thing.

 

BPY pays about $150mm / year to BAM in base management fees and IDR'; BAM in total collects about $2.7B / year in those, so only 5-6% of those fees is BPY.

 

At market value, BPY is a smaller component of BAM as it trades at the worst multiple of anything BAM owns.

 

BAM can thrive even if BPY has trouble. BAM cannot thrive if BPY is a zero because that would have knock on effects to the asset management franchise. I do not think BPY is a zero. I think there are less levered just as discounted alternatives for similar RE, but don't think it's a zero by any means. Plenty of things for BAM to do (sell some of the more dearly valued subs, add equity to BPY via purchase of perpetual multifamily and/or industrial to dilute the retail/office %), non-recourse debt negotiations (discounted pay-offs, buy the properties back at the courthouse, etc).

 

*Blended value is kind of a "what makes BAM look best" metric:

For performance measurement purposes, we consider the value of invested capital to be the quoted value of listed investments and IFRS value of unlisted investments, subject to two adjustments. First, we reflect BPY at its IFRS value as we believe that this best reflects the fair value of the underlying properties. Second, we reflect Brookfield Residential at its privatization value

[thepupil]

if BPY is BAM's only "problem", then BAM is very cheap in my opinion. 

 

 

[Spekulatius]

if BPY is BAM's only "problem", then BAM is very cheap in my opinion.

 

Thanks, those posts are very helpful.

[Viking]

BAM’s purchase of Oaktree will be interesting to watch in the coming years. They look to have timed the purchase perfectly (lucky :-) given Oaktree’s strength in distressed debt.

 

I just watched the one hour presentation from their recent investor day. Holy shit do they have alot of irons in the fire right now. If interest rates stay low and money moves to them like they project their earnings will do very well over the next decade.

 

- https://bam.brookfield.com/events-and-presentations

[petec]

A few thoughts on recent posts, FWIW.

 

I've known BAM for 15 years and done a lot of work recently. I really like it here.

 

I like that they have three ways to win from low rates:

1) Increased value of what they own via low rate refis and lower cap rates.

2) Increased flows to alternative asset managers.

3) Entire new AUM class in the shape of insurance/pension risk transfer.

 

I like their diversity:

1) Yes, real estate might implode, but it might not, and a lot of damage is priced in already.

2) Infrastructure, renewables, private equity, and Oaktree are highly likely to continue growing for BAM.

 

I like their real estate exposure. I lean gently towards the Flatt argument that good real estate will get more valuable. I lean more strongly to the view that falling rates will lift all boats. But more controversially, I think they are more likely to be a winner than a loser if I am wrong and real estate does implode:

1) I think most of their RE equity is concentrated in relatively high quality assets.

2) I think BPY has a huge advantage in having a captive lender of last resort. They are more likely to be a buyer of distressed assets than to become distressed themselves.

3) If real estate does implode, it will happen to everyone, not just BAM. So long as they come out relatively well, they will be able to use their superb network of relationships to raise assets to buy at the bottom. In other words, a real estate implosion need not kill their real estate management business and the associated fee stream to BAM.

 

Most controversially of all, having done a lot of work and thinking I don't worry (much) about the debt. Debt always adds risk, but I like:

1) that BAM sailed through the GFC and corona crises (I doubt they would have done if central banks had allowed a depression, but they didn't and won't).

2) I like the structure, with debt at the assets, limited recourse, and no cross-collateralisation. Edper is the wrong comp in my view.

3) The duration.

 

In short I think BAM have multiple ways to win, multiples ways to turn difficult situations to their advantage, and multiple tailwinds. And I don't think much of that is priced in.

 

If you have read this far:

@Spek, would you elaborate on "BPY's crummy assets"?

@Gregmal, could you elaborate on "prices already imply $150-$300 sq/ft for things CURRENTLY going off at $600-$800 a square ft".

 

 

[Gregmal]

Yea I was loosely referring to many of the transactions discussed in the VNO, PGRE threads. The sales data has been limited but what has been there has been no where near the implied public market valuations. And outside of the sales you can look at refi rates and the valuations posted to those and its a very similar story.

 

Ive followed much more closely some of the retail stuff and a strong lease in a good area will net a cap rate in the ballpark of what you'd have expected pre covid. Some have even eclipsed those prices. The non premium stuff, yes, there is a huge spread. So on something like a Chipotle ground lease in a good MSA you're getting a 4 cap, you might see a Wendys in a lesser area at 7. But the public markets currently seem to be pricing everything as low quality junk.

 

As I made a Tesla comparison earlier, I started to think about BPY in that context as well. Not with a negative connotation or anything, but simply on the basis of what TSLA did with SCTY. If that can be pulled off, it really wouldn't be an issue for BAM to pull something similar with BPY. If BPY goes away and then just becomes muddled in there with everything else for the accountants to play with....that probably changes things a little bit.

[petec]

Thanks.

[Xerxes]

My 2 cents.

Now and then, the discussion resurfaces about BAM, its many tentacles and its impending doom, high debt etc.

 

But how much of that 'fear' is actually "historical bias" because Brookfield is the legal entity that was previously called Brascan, in its prior life when it was not an asset manager rather just an investor. How much of that 'fear' is the fear of another Nortel or Blackberry bias, i.e. great Canadian success story that flopped in a big way. A story that is fun to see and read about it.

 

In the year 2000, red hot NASDAQ peaked at ~$4,500, some 14 years later when NASDAQ crossed again that $4,500 boundary, financial media and analysts and pundits were aghast! Dot.com v.2 they said. Of course, in hindsight, today's monopolistic Big Tech is very different the countless tech zombies of the earlier Doc.com era. But in 2014, it didn't stop people from making comparison and having biases toward that, all to their opportunity cost.

 

Now how about the BAM's posture as an octopus with many tentacles. The structure of having subs, is meant to de-risk the mothership from blowing up if one of the tentacle gets caught. It is a +ve point for BAM on the de-risk list, not a negative. Just check out Fairfax Africa. I am glad that entity is financially far away from main holding in Fairfax Financials. But the BAM octopus posture seem to feed in the narrative of another Brascan gone wild.

 

Yet, we forget that there is another major play that has the same asset size as Brookfield that probably use as much as leverage as BAM, but because it has no tentacles and because it has no "corporate history" prior to its founding in the mid-1985, we are comfortable with its optics. Even the name is re-assuring: Blackstone. Like a rock !

 

Yet that Blackstone on the eve of 2007-8, swallowed Sam Zell's REIT at a big premium, close to $40 billion in one shot, and then turned around and spitted out what it didn't like, while keeping the best part. Flawless execution but a lot of risk to take on the top of the market.

 

Interest rate:

 

BAM's third-party asset management arm wasn't build in the 1990s as a business on the basis that 10 years later we will have interest rate at zero for a long time, so let's build a business that will get a boost from the revaluation to the upside. The basis was that there would be continuous capital moving from public securities toward real assets by large pension and sovereign funds. Lets be the middle-man since we got the operating experience from the Brascan days. The fact that the rate went down in 2008-09 and stayed down just gave them a tail-wind, as much as it gave a tail wind to everyone who has major holdings in technology companies, seeing the present value of their future cash flows soaring as discount rate plummeted.

 

Interest rate is a key input for the BAM business, but so it is to every major financial companies like JP Morgan and Bank of America, on the underlying business (the reverse for the banks). The business will not collapse because the rate at one point will go up. It is not inconceivable to think that BAM has been looking at high rate environment in the last few years and how its affects them prior to the pandemic brought them down again. (i,e indexation of contractual cash flows etc).

 

Seeing this differently, from a fixed-income point of view, when rate goes up, market values goes down, but at the same time coupons can be re-invested at a higher rate. So there is a tug of war, between capital gain/loss and re-investment depending how far off you are in the duration. Not sure what is the real-asset analogy to that, but the point is higher rate probably has some benefit too that may partially offset depressed prices.

 

Lastly, what doesn't kill you will make you stronger.

Like it or not, BAM survived the worse of it.