BAM - Brookfield Asset Management

[ValueMaven]

BAM RE will be economically linked to BAM until it is decoupled from BAM.  This will occur once management feels that the reinsurance business is fully up and running.  I've never seen anything like this before - but it makes some sense.  We will learn more over the next few months imho.  Basically its a spinout that will track BAM...at some point it will then start to track the reinsurance business. 

 

Bottom line: We have a new reinsurance sub. 

 

PS: wow an indian REIT.  Never thought of that. 

[tiddman]

Question to those of you who follow the JCP restructuring deal.  What are BAM and Simon actually buying?  For sure they would have the inventory, staff, supplier list, etc.  Are they also getting the mall properties as well?  What does the lender get?

 

I am not sure that this has been completely determined/disclosed. JCP has been in restructuring for a while and the lenders and other stakeholders have already been claiming different assets. Brookfield and Simon are buying the company/corporation itself but I don't think it's clear what it still owns exactly, or if what they own is not already encumbered by debt, in which case that debt holder may have a claim on those assets. JCP owned a lot of their locations but that collateral has been used for various things as they have been in trouble. Honestly I have not been following it too closely.

 

My take is that Brookfield and Simon did this deal to get themselves a seat at the table to help drive the disposition of JCP's property assets. I am not sure if they'll be able to take ownership of them but they may be able to control the process. Brookfield has said they have 99 JCP locations in their portfolio and that none of them will close. At the same time JCP is struggling and will undoubtedly have to close some locations.  So Brookfield are probably trying to exert influence so that the locations that get closed are not theirs.

 

In some cases JCP owns their location, in other cases they are on a ground lease and pay a landlord which might be Brookfield. Brookfield will want to make sure their tenants keep paying even if the underlying location loses money. They may also be looking for redevelopment opportunities for locations that they can take ownership of.

 

They must see some option for getting a return on investment for the retailer itself, that does not look clear to me at this point because I think the "department store" as we know it might be a thing of the past, but they must see some outcome.

 

Overall I think it is like buying a bunch of options and also helps to defend parts of their portfolio. By the way I think the investment was done by Brookfield the parent company, not BPY, though obviously BPY is involved and will be impacted/benefitted.

[petec]

I think the investment is being done by the retail rescue fund BAM launched several months ago.

 

There’s some discussion on the Simon call. Their partner in Brooks etc may also come in. They sound confident they can make money on the retail side. I don’t have info on what property comes with it.

[tiddman]

Here is a spicy exchange on the SPG call about JCP.

 

Alexander Goldfarb

 

Okay. So, correct, so basically, you’ve taken the hard approach with both for all of the abatements in 2Q and 3Q. So hopefully, going forward is less. Okay. I got it. The second question, David is on the retailer front. Brooks Brothers, Lucky Brand, you did Aeropostale, Now you’re going to do J.C. Penney. You highlighted the sales; you highlighted this customer base, that’s loyal to the brand. What are – I mean, what are the elements without giving away totally the secret sauce? What are the elements that give you confidence when you look at trouble retailers and bankrupt ones, hey, what the core shopper for this brand is still there, despite that the retailers had trouble and is in bankruptcy, we feel that the core shopper is substantially still in place that we’ve – that we can recover. Because it’s certainly not just buying something cheap enough, anything can be cheap. there’s got to be something tangible that makes you feel like you can get these customers to really come back and do it in a profitable way. So, what is it that gives you that confidence?

 

David Simon

 

Well first of all, we’re – we do, don’t underestimating buying things cheap. Okay, Alex. So, that’s always, it’s always good to do that regardless. Listen, I just think based on the sales that we’re seeing from the brands, we do a lot of brand research and then we attacked the problems with the profitability, given I won’t name names, but Brooks brothers is a great example. It’s got a great following. It had the strangest real estate footprint. They were – they had single stores that were paying $3 million a year in rent. I won’t name names and the ability to reject those leases and create profitability there, get out of bad stores, reduce the overhead and then do all this special marketing and with ABG has been a winning formula.

 

In addition to that, we source it better and since we have this platform, where we can leverage our base off of, it’s just like – it’s been a very profitable thing. I will tell you one day spark will be worth. I mean, this isn’t my style, but it’s going to be worth, we’re going to make a plus on that investment without question. And it’s just – we know the brands, we do a lot of research. ABG has been a very good partner. They know how to blow out the license aspect of it, which we’re a partner in. We get out of bad stores. We buy the inventory at a discount. We right-size the overhead and we’re just – and with better business judgment and lo and behold, you suddenly have a business that’s got positive – significant positive EBITDA and you haven’t paid much for it that and I think when you put it all together, we’ll have something that’ll have great positive EBITDA and we’ll end up making $1 billion plus out of it.

 

https://seekingalpha.com/article/4387421-simon-property-groups-spg-ceo-david-simon-on-q3-2020-results-earnings-call-transcript?part=single

 

Frankly I think Simon's answer is a non-answer. So either they don't have a plan, or they have an ace in the hole that they are not revealing.

[petec]

A thought on the BAMRP structure.

 

I think they're spinning BAMRP to make it crystal clear that they are building a big reinsurance operation - but they know it will need equity to grow.

 

The vast majority of the starting equity is the initial 10% stake in AEL. If they span it out as a separate entity, it would basically start life as an AEL tracking stock. AEL trades well below adjusted book, and a tracking stock might trade below NAV, so there is a significant risk that an unpaired BAMRP would be forced to issue shares well below what BAM clearly consider to be intrinsic value.

 

However, if BAMRP is paired, BAM can inject new equity without issuing shares and at book value.

 

Does this make sense as the real reason for pairing the stock?

 

 

[tiddman]

Yeah I am not sure that I totally get it. It's a tracking stock, tracking some combination of AEL and their internal operations. They have said that part of the deal with AEL is reinsuring some of their liabilities, that would be outside of AEL and probably on BAM's balance sheet or a subsidiary's. So the tracking stock would in part track this also. The juice in the squeeze is from the investments that BAM looks to make with AEL's float plus I'm guessing asset management fees on that float. Will the tracking stock include all of this, or just the returns, or just the fees? It's a tangled web we weave.

 

Reinsurance is a big boy's game with big boy losses if something goes wrong, so I think that BAM using their own balance sheet in this way is a bit of a red flag for me, but I guess they know what they are doing.

 

I do understand the basic motivation, basically small insurers like AEL are essentially pools of tens of billions of investable AUM that are particularly well suited for credit strategies that Brookfield now has the capacity for after the Oaktree deal. When trying to grow AUM from $500B to $1500B and beyond you need to get it in larger chunks and you can't really spin up $50 billion investment funds. But accounting for it is going to be tricky.

[Jurgis]

I am not sure I understand BAMs thought process of first spinning off Trisura (which has been growing gangbusters after spinoff) and then going into reinsurance themselves. Maybe Trisura was too small to matter compared to potential reinsurance but still you'd think it could have been a foundation for insurance/reinsurance group inside BAM.  ::)

[petec]

I found the call illuminating.

 

They were clear that, although they will earn fees on the AUM, their main motivation is to compound the capital invested. They see the equity backing long tail liabilities like AEL's as trading well below market due to several decades of falling rates and think this is the lowest-risk time to buy such liabilities in their lifetime.

 

As for the structure, you need to differentiate between contents and pairing.

 

BAMRP equity will have the assets and liabilities of the AEL reinsurance deal as well as those of other reinsurance deals seeded on the BAM balance sheet. The difference between the assets and liabilities is obviously BAMRP equity, which will consist of the initial stake in AEL and the equity BAM has used to seed the aforementioned insurance ops.

 

However BAMRP will be paired with BAM. This is done by giving shareholders the same dividends as BAM pays and convertibility into BAM stock. BAMRP therefore does not track AEL.  But much more importantly, by not completely separating BAMRP, BAM can inject equity without causing BAMRP to issue new shares (they were explicit about this on the call). This means they can inject equity at 1xBV whenever they want.

 

Had they not done this, BAMRP would have been at the mercy of the market and might have been forced to issue equity below intrinsic value. In fact this is quite likely: most of BAMRP's starting equity is AEL stock, so it would have basically been an illiquid AEL tracking stock. It might well have traded at a discount to a BV made up of what BAM considers to be undervalued stock.

[petec]

I am not sure I understand BAMs thought process of first spinning off Trisura (which has been growing gangbusters after spinoff) and then going into reinsurance themselves. Maybe Trisura was too small to matter compared to potential reinsurance but still you'd think it could have been a foundation for insurance/reinsurance group inside BAM.  ::)

 

Yeah I wondered that. I don't know Trisura well enough to comment. But they are explicitly looking for long tail liabilities, I think - life insurance, annuities, pension risk transfer. Is that what Trisura does? I don't think BAM care about short tail stuff.

 

The cynic in me says maybe Trisura didn't need the scale of capital BAMRP needs, and therefore could realistically be spun off, with the BAM principals keeping their upside via the holding in Partners, whereas BAMRP will need a lot of capital over the next decade and therefore needs to stay near the maternal teat.

[gokou3]

...by not completely separating BAMRP, BAM can inject equity without causing BAMRP to issue new shares (they were explicit about this on the call). This means they can inject equity at 1xBV whenever they want.

 

This is the part from the Q3 call that I do not understand.  How does BAMRP get incremental equity capital from BAM without the former issuing new shares to BAM?

[petec]

...by not completely separating BAMRP, BAM can inject equity without causing BAMRP to issue new shares (they were explicit about this on the call). This means they can inject equity at 1xBV whenever they want.

 

This is the part from the Q3 call that I do not understand.  How does BAMRP get incremental equity capital from BAM without the former issuing new shares to BAM?

 

I’m not sure and don’t have the legal knowledge to give a proper answer. But I think it must retain the legal status of a wholly owned subsidiary. As such, BAM can inject money by issuing new shares or by increasing the value of existing shares. In effect BAM sets the issue price, not the market.

[tiddman]

The type of float/liabilities that you get at AEL are very different than Trisura. AEL is primarily a life insurance / annuity company whereas Trisura is primarily commercial, surety, etc. I am not an expert but Brookfield has said that the annuity type float lends itself to credit investments, I am guessing it is more of a spread game.  Commercial insurance would have very different actuarial qualities I would imagine.

[ValueMaven]

The type of float/liabilities that you get at AEL are very different than Trisura. AEL is primarily a life insurance / annuity company whereas Trisura is primarily commercial, surety, etc. I am not an expert but Brookfield has said that the annuity type float lends itself to credit investments, I am guessing it is more of a spread game.  Commercial insurance would have very different actuarial qualities I would imagine.

 

Yes.  That is correct.

[petec]

All float lends itself to credit. I think what matters more is the duration of the float. BAM are basically betting that rates don’t go much further down. If that’s true then the discounted value of long tail liabilities will stop rising, which is why they think there is little risk in buying them and they can pocket the spread. My guess is Trisura writes short tail risks.

[Gregmal]

https://seekingalpha.com/article/4390625-billionaire-investor-says-buy-reits

 

Good collection of thoughts from Flatt on various RE. Obviously, I tend to agree with him.

[petec]

Norbord being bought by West Fraser. By my maths BAM will have 19% of the merged entity worth $1.7bn.

[tiddman]

Flatt of course is pretty sanguine. The comments about cap rates are interesting. It is amazing that they recently sold a partial interest in a London tower at a cap rate below 4%. I think that is the first time I've ever seen that. Imagine being the buyer and locking in a < 4% return. If cap rates came down from say 5% to 4% broadly that's a 20% increase to equity value.

 

He seems pretty committed to the ideas that 0% rates will be around for a while and that there will be no interruption or disruption in the cash flows from office towers.  I tend to agree but these are key assumptions. A falling cap rate only leads to higher equity value if the income remains steady.

 

The story with retail is different. Retailers tend to sign 3-5 year leases with their malls as compared to 10-20 year leases in office towers. So malls are much more subject to economic trends and cycles. I think it is hard to make such long term predictions here.

 

The market is certainly believing that the REITs broadly will be fine. Guess we'll see.

[ValueMaven]

It is really interesting to see how the listed C-Corps for the renewables and infrastructure subs are massively outperforming the listed LPs.  Could the K1-producing LPs really be that much of a discount?  I get the you have forced index buying here for the C-Corps, but something seems off at this point.  For example over the past 6 months:

 

BIP vs. BIPC: +18.03% vs. +44.73%

BEP vs. BEPC: +49.28% vs. +85.27%

 

I mean with this type of valuation - or maybe even price difference - could anyone see BAM changing the structures of the LP's to C-Corps more broadly? 

 

-VM

[gokou3]

It is really interesting to see how the listed C-Corps for the renewables and infrastructure subs are massively outperforming the listed LPs.  Could the K1-producing LPs really be that much of a discount?  I get the you have forced index buying here for the C-Corps, but something seems off at this point.  For example over the past 6 months:

 

BIP vs. BIPC: +18.03% vs. +44.73%

BEP vs. BEPC: +49.28% vs. +85.27%

 

I mean with this type of valuation - or maybe even price difference - could anyone see BAM changing the structures of the LP's to C-Corps more broadly? 

 

-VM

 

BBU is the remaining LP that does not yet have a C-Corp.  BPY already has a REIT version and BAM itself is already a C-Corp.

[Xerxes]

It is possible that there is narrower band of float available on the C-shares and more broader float on LP. Surely, the former is more desirable for certain institutional entities, but the discrepancy between the two is noticeable. Maybe, BAM has an opportunity here to offload more and more of the C-shares that it owns, to the minimum desired threshold, such that the C-shares can take a breather, while keeping all of its LP units.

 

I should say that I never clearly understood the LP and C-shares split. I imagine like all investors BAM received a proportional C-shares as per the split ratio that we all got. But now it is choosing to sell its C-shares into the market to increase the float while keeping its LP shares.

 

Also, given that the C-shares can be converted into LP units but not the reverse, it means that overtime, the ratio of all C-shares and LP units, which was say X:Y at the initial date, would slowly drift toward a new equilibrium where there is more LP shares than the initial X:Y snapshot. But at the same time, if the flow is only one-directional and the institutional demand is really for C-shares, wouldn't that increase the scarcity of C-shares. I guess the other question, is there any benefit for the owners of C-shares to convert to LP shares. I get the market price is cheaper for the LPs as new buyer, but if you are given the C-shares is there any incentive to switch to LP units, so it looks all the same.

 

In my case, since i am suffering from OCD, i need everything to be in one form, so i take the broom to clean up after their mess, everytime there is one these things.

[petec]

I think BAM will keep both lines because they want access to every source of capital possible, and different buyers have different tax preferences.

 

The main implication for me is they have access to cheaper capital than they used to, because they can issue C-shares in BIP and BEP.

[tiddman]

This is interesting because so far BPY and BPYU are tracking pretty closely to one another but diverging today.

 

This could be self-fulfilling because once the trend starts that one security outperforms the other, it leads to a premium to one and a discount to the other.

 

I would have expected arbitragers to keep them closer to one another like BRKA and BRKB but I guess the securities are different enough from one another. I think economically they are identical? Like the same assets and sources of earnings etc?

 

Brookfield could theoretically play this spread themselves and sell new shares of the corps and buy in the units of the partnerships.

[ValueMaven]

Frankly, at this point - BAM should restructure all of the LP's into fully listed C-Corps.  The benefits of the LP (to the investor - not to BAM I would point out), do not outweigh the MUCH higher valuation the market is willing to assign to the listed subs at this point.  C-Corp subs are also benefiting from passive investing and forced index buying as well.  I believe both BEPC and BIPC are in Russell benchmarks right now.

 

this reminds me a lot of Kinder Morgan back in 2013/2014 when it had all of the different structures, and then collapsed it all to get ride of the LP.

[tiddman]

I had always assumed they had the partnership structure for tax reasons, but I don't have any clear reason for that.

 

It would be an interesting development if they just slowly transitioned from the partnerships to the corporations, just distribute more shares of one and buy in the units of the other. The difference in value is substantial and they would essentially pocket the difference. Not a whole lot different than them selling units of BEP to buy units of BPY as they did a couple of months ago.

[ValueMaven]

Why cant BAM headquarters exchange their C-Corp holdings into LP units at the same % ownership and just realize the gain at this point ????  This would increase the float of the listed C-Corps as well.  I realize this is extreme financial alchemy - but given the % spread between the two - I dont see why they wouldnt want to do this.