BAM - Brookfield Asset Management

[Spekulatius]

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.

 

I agree. I think higher inflation will be a disaster for hard asset managers like BAM. Cap rate will go up, which means that the assets that they are managing for their clients will go down in value. Capital will exit and incentive fees will go down. Eventually this will stabilize again and maybe lead to a boom in hard assets, but not before a major adjustment.  I also expect a lot of bankrupticies in the financial sector due to loans going bad and asset/liability mismatches.

[Uccmal]

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...

 

Nothing so far.  I am hesitant to take on more leverage.

[Uccmal]

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.

 

I agree. I think higher inflation will be a disaster for hard asset managers like BAM. Cap rate will go up, which means that the assets that they are managing for their clients will go down in value. Capital will exit and incentive fees will go down. Eventually this will stabilize again and maybe lead to a boom in hard assets, but not before a major adjustment.  I also expect a lot of bankrupticies in the financial sector due to loans going bad and asset/liability mismatches.

 

This need to be kept in context.  The property ownership segment is only a percentage of the whole.  And Brookfield tends to be a buyer in depressed markets.  There is also some churn as assets come to value and they sell.  It mostly depends on if you think that BAM operates ahead of the curve or not.  I suspect they have gamed an inflation scenario and will continue to do so.  They haven't shown themselves to be suckers to this point. 

[Jerry Capital]

IWG receives takeover bid from Brookfield and Onex

 

"For Brookfield, an acquisition would be its highest profile UK deal since it teamed up with the sovereign wealth fund of Qatar to acquire Songbird, the holding company whose sole asset is a majority stake in the Canary Wharf Group, for £2.6bn in 2015." 

 

https://www.ft.com/content/2e670bea-e82a-11e7-bd17-521324c81e23

[bizaro86]

Seems like some obvious synergy for a company that owns office buildings around the world. I'm usually pretty skeptical of synergy claims, but this seems to have potential.

[John Hjorth]

IWG Plc Announcement [December 24, 2017].

 

- - - o 0 o - - -

 

Thank you for sharing, Jerry, and a belated welcome to CoBF!

[cmlber]

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.

 

I agree. I think higher inflation will be a disaster for hard asset managers like BAM. Cap rate will go up, which means that the assets that they are managing for their clients will go down in value. Capital will exit and incentive fees will go down. Eventually this will stabilize again and maybe lead to a boom in hard assets, but not before a major adjustment.  I also expect a lot of bankrupticies in the financial sector due to loans going bad and asset/liability mismatches.

 

Aren't you guys forgetting about growth?  A diverse portfolio of real assets should grow by real GDP + inflation, i.e. by nominal GDP.

 

Theoretically, intrinsic value should be earnings / (cap rate - growth rate).  If inflation goes from 2% to 4%, the cap rate should go up by 2% and the growth rate should go up by 2% and the two should cancel out.  If you're of the view that cap rates will go up because real interest rates will go up (without a corresponding increase in real GDP growth), that's a different story. 

[cubsfan]

If you own assets with monopoly/oligopoly-like characteristics - you have pricing power and should be able

to raise prices to keep pace with inflation or in excess of inflation. Pipelines, transmission lines, hydro dams,

cell towers,  that can't be easily duplicated in geographic regions - or even the best located real estate.

 

This comprises many of BAM's assets.

[John Hjorth]

Here is an Mail Online article about Mr. Dixon [December 27, 2017] - Founder and major shareholder in IWG: Office rental pioneer Mark Dixon makes £600m as he sells empire to Canadian funds.

 

Let's see how this plays out.

[sleepydragon]

My brokerage account logged an "Exchange" transaction, swiping all my TRISURA GROUP shares into "CONTRA TRINTY VALLEY XPN PARENT"

 

Does anyone know what this is about?

Thanks!

[John Hjorth]

sleepydragon,

 

A 1 for 10 share consolidation, followed by a 10 for 1 share split is taking place in Trisura, to weed out all shareholders with less than 10 shares, if I have understood things correctly.

 

It must be covered on the Trisura website, I think.

[John Hjorth]

I'm sorry for double posting.

 

It seems that Brookfield just did it again: BBP.UN to aquire Westinghouse Electric Company.

 

Seems like a deal similar to the Terraform deal after SUNE filed for bankruptcy. And a lot of capital send to work for the BAM system and BAM clients/BAM funds, most likely.

 

Subject to Bankruptcy Court approval, expected to close in third quarter of 2018.

 

- - - o 0 o - - -

 

BAM certainly has a lot of appeal to me. Let BAM do the value investing, and I can continue to behave like Beetle Bailey.

[racemize]

I'm sorry for double posting.

 

It seems that Brookfield just did it again: BBP.UN to aquire Westinghouse Electric Company.

 

Seems like a deal similar to the Terraform deal after SUNE filed for bankruptcy. And a lot of capital send to work for the BAM system and BAM clients/BAM funds, most likely.

 

Subject to Bankruptcy Court approval, expected to close in third quarter of 2018.

 

- - - o 0 o - - -

 

BAM certainly has a lot of appeal to me. Let BAM do the value investing, and I can continue to behave like Beetle Bailey.

 

As long as they didn't take on those &*#%$^& CBI nuclear projects.  I'm assuming they wouldn't do something like that.

[John Hjorth]

... As long as they didn't take on those &*#%$^& CBI nuclear projects.  I'm assuming they wouldn't do something like that.

 

I almost spluttered coffee into the keyboard! Yes, you are right here, Joel. That's actually important - very!, - and not covered - at all - by the news release.

[John Hjorth]

I've found this Toshiba news announcement, dated December 14, 2017, that at least partly supports Joel's assumption. [i haven't been following the CBI topic here on CoBF closely, so I'm not fully and in all details informed.]

[villainx]

BIP found a way to scale up in a meaningful way quickly after their spinoff, looks like BBU is doing the same.

[gokou3]

I'm sorry for double posting.

 

It seems that Brookfield just did it again: BBP.UN to aquire Westinghouse Electric Company.

 

Seems like a deal similar to the Terraform deal after SUNE filed for bankruptcy. And a lot of capital send to work for the BAM system and BAM clients/BAM funds, most likely.

 

Subject to Bankruptcy Court approval, expected to close in third quarter of 2018.

 

- - - o 0 o - - -

 

BAM certainly has a lot of appeal to me. Let BAM do the value investing, and I can continue to behave like Beetle Bailey.

 

As long as they didn't take on those &*#%$^& CBI nuclear projects.  I'm assuming they wouldn't do something like that.

 

I believe this alleviates your concern?

 

Brookfield to buy Westinghouse's global nuclear business in $4.6-billion deal

http://business.financialpost.com/commodities/energy/brookfield-business-partners-to-buy-westinghouse-for-4-6-billion

 

The deal won’t include what had been the company’s most prized projects — plans to build its AP1000 reactors for U.S. utilities in South Carolina and Georgia. Those projects, plagued by delays and cost overruns, eventually led to its downfall, and Westinghouse has used the Chapter 11 process to distance itself from any obligations to them.

 

[John Hjorth]

Here is an article from NewsMaxFinance, that supplements gokou's post well.

 

BAM cherry picking & fishing in frothy white waters, leaving some proceeds and all the crappy things [in total, likely breadcrumbs] to the Westinghouse creditors.

 

Forbes [January 4, 2018]: Brookfield Goes Nuclear: Why You Should Watch The Canadian Giant's Restructuring Work.

[investmd]

Thank you for the informative article - that continues the bullish on BAM theme present on this board.

 

Question: What does BAM actually hold vs. the spinoffs (BEP, BIP, BPO, others...) ? Do these spinoffs pay a fee to parent BAM? When an acquisition is made how do they decide if it is held by BAM or other? In this case it seems that the investment is being made and held under Brookfield Business Partners. If one owns BAM does one reap the benefits from spinoff companies? Seems to me that each spinoff has it's own CEO but works alongside BAM management to make deals.

 

Thanks for clarification.

 

 

Here is an article from NewsMaxFinance, that supplements gokou's post well.

 

BAM cherry picking & fishing in frothy white waters, leaving some proceeds and all the crappy things [in total, likely breadcrumbs] to the Westinghouse creditors.

 

Forbes [January 4, 2018]: Brookfield Goes Nuclear: Why You Should Watch The Canadian Giant's Restructuring Work.

[chrispy]

This acquisition seems a lot like Teekay where it is service/fee based and not very dependent on commodity pricing.

 

Bam owns a portion of all LPs and receieves fees from them. They have criteria that helps determine which LP gets which assets. For instance, BBU receieved a water infrastructure business in Brazil because it wasn't a dividend producer. If it was, BIP would have receieved it.

[investmd]

This acquisition seems a lot like Teekay where it is service/fee based and not very dependent on commodity pricing.

 

Bam owns a portion of all LPs and receieves fees from them. They have criteria that helps determine which LP gets which assets. For instance, BBU receieved a water infrastructure business in Brazil because it wasn't a dividend producer. If it was, BIP would have receieved it.

 

Thanks Chrispy. In that case, for one looking to compound over a 10 yr + time period, and who doesn't need regular dividend payout, likely best to buy the parent BAM rather than buying individual LPs such as BIP, BEP. Does that make sense?

[John Hjorth]

Not in any way trying to take chrispy's privilege to respond here, just trying to contribute in a constructive way here for all readers on investmd's question.

 

The short and simplified answer to the question is yes.

 

The easiest way to get a perception of the fee structure inside the whole BAM system is to study Investor Day Presentation September 27, 2017 Presentation Material, section "Scorecard", p. 62 & onwards.

[chrispy]

I agree with John. BAM benefits from the performance of all and receives fees.

 

The investor days presentations and transcripts are very enlightening. Very helpful with understanding what they do and how the business will grow.

 

Additionally, BAM invests along side the institutional clients. During the talk, Bruce mentioned how they will begin receiving the returns from early funds that will be immediately reinvested. I believe he talked about how that does not fully show up yet in the financials. I need to refresh myself on that and could be mistaken.

[chrispy]

Hidden behind the shadows of the Westinghouse deal:

 

http://m.nasdaq.com/press-release/brookfield-business-partners-to-acquire-controlling-interest-in-schoeller-allibert-in-partnership-20180105-00038

 

Bruce mentioned in the recently posted Bloomberg video he was bullish on private equity. This must have been what he was talking about. BBU up 5 percent yesterday and today

[TorontoRaptorsFan]

If Buffett is looking for an elephant to purchase why not acquire BAM and make Flatt the next CEO...