BAM - Brookfield Asset Management

[LongTermView]

Nice video, Max! Some cliffs:

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What sets you apart? Operational focus from how we started.

 

Advantages:

1. size

2. global scale

3. operating capabilities

 


In 2009 we put every dollar to work. Today is not one of those times.

###

 

At about the 9:50 mark, the first of two charts is shown. It is noted that the first chart dates back to when Bruce started as CEO. It shows BAM outperforming Berkshire and the S&P.

 

It is noted that the charts are simple price appreciation, not total return.

 

Bruce is asked what the second chart [between BAM and the S&P over the past 5 years] is telling us?

I would say that in an up market we do ok but not as well as some others.

 

And what you've seen in the past 5 years is a tremendous bull market in capital appreciation of stocks and we've gone along with it but we haven't outperformed that.

 

Bruce is asked what will change that.

I think the next downturn. And it always does.

We have a lot of capital sitting on the  balance sheet today.

 

I'm surprised Bruce didn't talk about the difference between simple price appreciation and total return. The value of spinoffs is substantial and it doesn't show up in the charts. Recent examples are Trisura and BBU.

[villainx]

Definitely good interview.  Better than average, with surprisingly adequate questions, and nice responses.

 

This is the first time I noticed, but the amount of time Flatt starts his response with "look" is noticeable though. 

[John Hjorth]

Posted by Uccmal in another topic here on CoBF on December 12, 2017 - to me, absolutely worth the time to pursue and follow up on, with the aim to get to better understanding of BAM:

 

... It also speaks volumes in how people can get enraptured by numbers and by the story.  We all do this.  I have a similar reverence for BAM and its subs.  I think the difference is that BAM and subs have real assets that you can go visit, and real fee income, and a long track record under current management.  I get around my rapture by buying on dips and sizing my position accordingly, and genrally handicapping my expectations. ...

 

I don't know the exact name of this bias mentioned here by Uccmal [perhaps, it's actually also an anti bias], but I'm surely aware of it with regard to BAM [like Uccmal is], while trying to stay rational going forward. Perhaps it's somehow related to the Halo Effect around Mr. Flatt. [i think there is a such.]

 

I think a way to [try to] stay rational towards BAM would be to discuss the moaty aspects af BAM [bAM's enduring & long term competitive advantages in its operational space].

 

So, what do you consider to be the moats of BAM? [, basically, based on your own opinion? ... we can all read the BAM website ...] How do you weigh them up against each other? - And especially: Do you consider some of the moats presented by BAM as actually also being concerning, disadvantages and / or disqualifying going forward?

Thank you in advance. The more pushback, the better.

[Uccmal]

General Growth Properties - GGP

 

I see that they have rejected Brookfields current proposal which was shares and cash for 23.  Allegedly the NAV of GGP is 28 US.  Without Brookfields plans and ingenuity is it really worth that much? 

 

I am considering it as an arbitrage opportunity.  Bruce Flatt has been quoted as saying that these type of negotiations can be a long process. 

 

I am just thinking out loud:

 

1) If Brookfield sweetens the offer then easy money is made by me.

 

2) If Brookfield drops the offer then GGP stock will likely tank.  Then:

 

2a) Brookfield either sits on their position and initiates a potentially lower offer at a later date.

 

2b) Brookfiled never makes another offer, and sits on their position, and the stock and company languish for the foreseeable future.  I see this as the least likely outcome.  BAM has plans for this asset and if they cannot execute them I dont see them wasting resources to make money for the 64% shareholders. 

 

2c) Brookfield decides to sell their stake to someone else at an unknown price.  It could be higher, lower, or the same. 

 

I dont want to colour anyones opinion with my thoughts and I have not spent alot of time on this.  The last good arbitrage I had was making 40k when FFH took ORH private again. 

 

Positions in BAM, and BPY, but not GGP

 

 

[sampr01]

You also have to look at recent MAC take out offer around 4.5 cap rate and and So they have to  around that to acquire with out litigation quote author=Uccmal " data-ipsquote-contentapp="forums" data-ipsquote-contenttype="forums" data-ipsquote-contentid="5462" data-ipsquote-contentclass="forums_Topic" 318478#msg318478 data-ipsquote-timestamp=1513443113]

General Growth Properties - GGP

 

I see that they have rejected Brookfields current proposal which was shares and cash for 23.  Allegedly the NAV of GGP is 28 US.  Without Brookfields plans and ingenuity is it really worth that much? 

 

I am considering it as an arbitrage opportunity.  Bruce Flatt has been quoted as saying that these type of negotiations can be a long process. 

 

I am just thinking out loud:

 

1) If Brookfield sweetens the offer then easy money is made by me.

 

2) If Brookfield drops the offer then GGP stock will likely tank.  Then:

 

2a) Brookfield either sits on their position and initiates a potentially lower offer at a later date.

 

2b) Brookfiled never makes another offer, and sits on their position, and the stock and company languish for the foreseeable future.  I see this as the least likely outcome.  BAM has plans for this asset and if they cannot execute them I dont see them wasting resources to make money for the 64% shareholders. 

 

2c) Brookfield decides to sell their stake to someone else at an unknown price.  It could be higher, lower, or the same. 

 

I dont want to colour anyones opinion with my thoughts and I have not spent alot of time on this.  The last good arbitrage I had was making 40k when FFH took ORH private again. 

 

Positions in BAM, and BPY, but not GGP

[Shane]

Question for the group - what are your thoughts if inflation is unexpectedly high?

 

On one hand, cost of capital is likely to go up so the assets will be devalued and the accommodating credit environment would end, growth will likely slow dramatically....

 

However - management has commented that the cash flow streams are largely protected from inflation via the contracts.... so cash flows should keep up with inflation without an issue.

 

What would happen with the value of the floated subs?  I would assume market cap comes down in this environment meaning the stream of cash flows declines as well (~125bps X market cap is the formula, off memory).

 

Thoughts?  I don't think the market is considering inflation so this could be interesting.

[John Hjorth]

Shane,

 

Personally & right now, I consider BAM antifragile to inflation, from what I've read so far. Analysis of the total debt in the group balance sheet for BAM is however required [terms, rates [fixed [for how long etc.] or not, recourse etc.].

 

I expect to do some work on that in the coming period.

[Shane]

Hi John,

 

Can you elaborate a little more on why it is antifragile?  It is a little perplexing to me as many forces counteract.  Maybe I should spend the time and try to model it while I have some free time over the holidays.

[cubsfan]

It would seem to me that in periods of inflation, real assets, like real estate are going to inflate substantially.

Replacement costs go up, existing assets will as well.

[no_free_lunch]

This is an interesting conversation.  This is what the annual report says on the subject:

 

Our business is positioned to thrive in a higher interest rate environment; there are three simple reasons for this. First, and most important, we own “real return” assets that increase their cash flow generating capacity over time, either through contractual rights, our ability to operate them better, or an expansion of the operation. These enhancements should far outpace any extra interest costs, in particular in a more inflationary environment. Second, we generally earn total returns on equity of 10% to 20%. This is much greater than treasury yields and therefore a few percentage increases aren’t material. And third, much of our debt is fixed rate debt; therefore, cash flows until maturity of that debt will not change at all.

[John Hjorth]

Hi John,

 

Can you elaborate a little more on why it is antifragile?  It is a little perplexing to me as many forces counteract.  Maybe I should spend the time and try to model it while I have some free time over the holidays.

It would seem to me that in periods of inflation, real assets, like real estate are going to inflate substantially.

Replacement costs go up, existing assets will as well.

 

Hi Shane,

 

Basically, what cubsfan said.

[TBW]

No position in BAM, I just follow because I think it is interesting.

 

I disagree with the view that inflation will increase real estate prices.  It may, but I think it won't.  Particularly in markets that have a lot of leverage.

 

Take NYC and its ~4% cap rates.  What happens in inflation?  First interest rates go up.  That 4% cap rate looks terrible if inflation is north of 3%.  Second, all real estate needs to be financed and interest rates will be higher.  Both of those point to higher cap rates.  Finally, the cost to repair and manage will go up.  That too should mean higher cap rates and lower prices.

 

Then there is the secondary effects.  There is so much debt with real estate as collateral.  If we have real estate prices dropping, the security drops.  I think this will make lenders more reluctant to make real estate backed loans.

 

I think in theory inflation increases real estate prices, but that is only if real estate was bought for cash.  But you add in the leverage, I think the dynamic is the opposite.

 

If you went back to the 80s, real estate did not do well.  The ramp up in global real estate prices has come in the last 10 to 15 years in a period of low inflation, which leads to lower interest rates, and the opposite of what I describe above.

[Shane]

Additionally - the stock today is priced for growth in the asset management business.  Investing in real assets becomes less attractive as interest rates go up.  4-5% inflation would likely mean 6-8% cost of incremental debt.... I think BAM, at the price today, would be likely to take a hit.

 

Any thoughts on this comment?  Trying to do a little devil's advocate here.

[LongTermView]

https://skift.com/2017/12/18/airbnb-is-getting-a-200-million-boost-to-build-its-hotel-like-apartment-business/

Brookfield Property Partners announced it has entered into a $200 million equity investment program with Niido, a new hotel-like concept that Airbnb announced in October

[chrispy]

Are we overlooking that brookfield operates all over the world and acquires assets where capital is limited (inflation is probably high) and therefore a run up in US interest rates may not impact them as much as others?  Surely their US assets would be impacted as many have described.  I believe that ~85% of there debt is fixed rate and non-recourse though.

 

Bruce talks about how their size actually is starting to allow them to grow even more.  For instance, interest rates were ~14% in Brazil when they acquired their recent assets as the only bidder.  BAM had the ability to buy the whole thing with cash.  Now interest rates in Brazil are near 7% and they can mortgage the assets.

 

As mentioned by another poster, their asset management accounts for ~50% of their projected value in 5 years.

[EricSchleien]

Are we overlooking that brookfield operates all over the world and acquires assets where capital is limited (inflation is probably high) and therefore a run up in US interest rates may not impact them as much as others?  Surely their US assets would be impacted as many have described.  I believe that ~85% of there debt is fixed rate and non-recourse though.

 

Bruce talks about how their size actually is starting to allow them to grow even more.  For instance, interest rates were ~14% in Brazil when they acquired their recent assets as the only bidder.  BAM had the ability to buy the whole thing with cash.  Now interest rates in Brazil are near 7% and they can mortgage the assets.

 

As mentioned by another poster, their asset management accounts for ~50% of their projected value in 5 years.

 

Exactly. I'm not too concerned with this and I think that the trend towards real assets and privatization of assets that have historically have been controlled by government are only in the beginning phases. I think the BAM is one of the few businesses of their size where growth rates will continue to be pretty high. And like someone said before, they hedge interest rate risk.

 

I put my money where my mouth is too and have been increasing my position in BAM throughout the year. The vast majority of my position is through the Limited Partnership, Partners Value Investments, LP which is essentially a leveraged bet on Brookfield and a vehicle that management uses to participate in the upside of the common stock.

[Shane]

Are we overlooking that brookfield operates all over the world and acquires assets where capital is limited (inflation is probably high) and therefore a run up in US interest rates may not impact them as much as others?  Surely their US assets would be impacted as many have described.  I believe that ~85% of there debt is fixed rate and non-recourse though.

 

Bruce talks about how their size actually is starting to allow them to grow even more.  For instance, interest rates were ~14% in Brazil when they acquired their recent assets as the only bidder.  BAM had the ability to buy the whole thing with cash.  Now interest rates in Brazil are near 7% and they can mortgage the assets.

 

As mentioned by another poster, their asset management accounts for ~50% of their projected value in 5 years.

 

Exactly. I'm not too concerned with this and I think that the trend towards real assets and privatization of assets that have historically have been controlled by government are only in the beginning phases. I think the BAM is one of the few businesses of their size where growth rates will continue to be pretty high. And like someone said before, they hedge interest rate risk.

 

I put my money where my mouth is too and have been increasing my position in BAM throughout the year. The vast majority of my position is through the Limited Partnership, Partners Value Investments, LP which is essentially a leveraged bet on Brookfield and a vehicle that management uses to participate in the upside of the common stock.

 

Yes - had lost sight of this.  Very fair point.

[plato1976]

curious how do they hedge the interest risk?

suppose they use some kind of interest future?

 

Are we overlooking that brookfield operates all over the world and acquires assets where capital is limited (inflation is probably high) and therefore a run up in US interest rates may not impact them as much as others?  Surely their US assets would be impacted as many have described.  I believe that ~85% of there debt is fixed rate and non-recourse though.

 

Bruce talks about how their size actually is starting to allow them to grow even more.  For instance, interest rates were ~14% in Brazil when they acquired their recent assets as the only bidder.  BAM had the ability to buy the whole thing with cash.  Now interest rates in Brazil are near 7% and they can mortgage the assets.

 

As mentioned by another poster, their asset management accounts for ~50% of their projected value in 5 years.

 

Exactly. I'm not too concerned with this and I think that the trend towards real assets and privatization of assets that have historically have been controlled by government are only in the beginning phases. I think the BAM is one of the few businesses of their size where growth rates will continue to be pretty high. And like someone said before, they hedge interest rate risk.

 

I put my money where my mouth is too and have been increasing my position in BAM throughout the year. The vast majority of my position is through the Limited Partnership, Partners Value Investments, LP which is essentially a leveraged bet on Brookfield and a vehicle that management uses to participate in the upside of the common stock.

[John Hjorth]

From the Brookfield website: Forbes [May 16, 2017]: World Builder.

 

ON THE EVE OF THE financial crisis in 2007, hundreds of skeptical investors gathered at the New-York Historical Society for a one-day conference on the fragile state of the global economy, hosted by Grant's Interest Rate Observer. Bearish Merrill Lynch economist David Rosenberg warned that a severe recession was imminent. Hedge fund manager Bill Ackman railed against a new Wall Street creation called CDOs, which he predicted would soon implode.

But when the young chief executive of Canada's Brookfield Asset Management got up to speak, he turned the topic to infrastructure--a $35 trillion opportunity hiding in plain sight.

Forget the gloom. Pipelines, wireless towers, power generation, ports and toll roads--the backbone of the global economy--would soon become the holy grail investment product for trillions of dollars stagnating in pension funds and savings. "David [Rosenberg's] presentation is probably about the next six months," Flatt told the doomsday-obsessed audience. "Mine is more relevant to the next 25 to 60 years."

 

- - - o 0 o - - -

"To win, you have to finish." [No use  of quotation here, I suppose, it's not needed here on CoBF].

To be able to just not to "finish", but to "win", must in this case [ time horizon 25 - 65 years] be based on analysis on debt, preferred equity and minority interests.

The financing being absolutely crucial to holding on to assets - for the long term - to avoid forced sales - in a downturn - for a very very long time horizon.

- - - o 0 o - - -

So, I think the most important question we have to ask ourselves here, is actually: " What does have to happen to take this thing down?"

[Uccmal]

"So, I think the most important question we have to ask ourselves here, is actually: " What does have to happen to take this thing down?"

 

Fraud at the top? 

Involvement in bribery? 

Unethical, amoral behaviour by the CEO, or one of his closest associates?  No evidence of this.  The guy eats lunch with employees in the food court when he is in town, and apparently doesn't have a private office. 

 

The usual things Buffett worries about.  Not saying anything like this could happen, but it could happen.  In other words, dont make this a 100% holding. 

 

Some major hits could be felt if a Venezuela happens in one of the primary operating countries.

 

The stock may come way down in a market crash but that provides opportunity for the BAMs of the world and they are clearly primed for this.  As Bruce has said, the business cycle has not been repealed.  Each day we get closer to a crash...

[John Hjorth]

Thank you for sharing your view, Al, it's as always appreciated.

 

- - - o 0 o - - -

 

I read your post as divided into related to two major components: Compliance with company values & economic scenarios going forward.

 

Risks related to [lack of] compliance with company values:

 

Findings of lacks of compliance with company values revealed in the public space would most likely result in the loss of a part [perhaps material] of those client relationships to those 200+ clients with deep pockets, hitting fees going forward, and available capital.

 

Risks related to economic scenarios going forward:

 

Maybe I would add to Al's list:

A  massive [and successful] cyber attack.

A major geopolitical nuclear event.

 

I don't know how process those situations mentioned by Al and here. I don't know where to buy a crystal ball, that works for this. [Off topic: Viking is reluctant to share! [: - D]]

 

BAM is so diversified, almost to the extremes [geografical & among asset classes].

 

For BAM to fail, the cash flow/liquidity has to break/fall apart.

 

Some 2017Q3 numbers [trying not to nitpick here]:

 

BAM core equity: 22.964 B

BAM cash flow from operations: 2.874 B

BAM cash and financial assets [net] - total: 2.592 B

BAM undrawn committed credit lines - total: 5.765 B

BAM core liquidity - total: 8.832 B

 

Add to that 17.300 B of commited [available] capital from clients.

 

That's actually - to me - an enormous amount of powder.

 

- - - o 0 o - - -

 

I still don't know if BAM can be taken down by something. But I'm pretty sure that I would also have other things to think about, if that particular scenario - an extreme adverse one - would be about to unfold.

[chrispy]

WSJ - Brookfield Property Partners LP is working to restructure its offer for the shares of mall owner GGP Inc. that it doesn’t already own, according to people familiar with the matter.

 

I'm curious what you did uccmal...

[John Hjorth]

I found this SA article elaborating a bit on chrispy's reference to WSJ:

 

... BPY is said to be considering two options to change its proposal: In one, it would increase the cash component and continue to offer some of its stock, while the other option would involve the creation of of a new form form of stock to use as consideration.

 

I speculate the last alternative would be to spin off BPY's own malls [plus some cash and BAM's GGP stock] in a separate company, and then merge that with GGP, while keeping the continuing merged entity listed, paying the other GGP shareholders with cash and shares in the new listed entity.

[chrispy]

John, I was beginning to think the same thing.  BPY share holders would receive stock then of the new entity?

[John Hjorth]

Yes, crispy, or a separate listed entity as a sub of BPY, thereby a sub-sub of BAM.

 

Please take a look at the number of employeés at GGP, it's ~10 [a bit above that] per mall. It simply can't be other than sales/customer relations organisation and administration staff, meaning about everything else is outsourced [, thereby paying gross margin on all curating etc. of the malls].

 

I speculate that BAM [& BPY] want to insource that by a take over of effective control af the GGP malls. [Also think about geographical overlap between BPY & GGP.]

 

- - - o 0 o - - -

 

Partly on topic:

 

I'm a shareholder for years of a Danish real estate company called Jeudan A/S [JEU.CPH] - it's operating footprint is Copenhagen Inner City - which has done the same - building a technical organisation - here organised in a separate sub called Jeudan Servicepartner A/S, customers being both the parent and external customers.

 

Tons of money saved over the years on maintenance, capex and reconstruction work.

 

- - - o 0 o - - -

 

So I actually think, that the ones that should be shaking in their trousers here, are the non financial vendors of GGP.