BAM - Brookfield Asset Management

[Spekulatius]

Google just published this talk by the CEO:

 

Pretty amazing talk. To extend on what Flatt has talked about, I think ENB fits many of the same narratives (durable/ irreplaceable assets with a cash yield, NG revolution). Its one of my major positions in my “yield” bucket.

 

It’s also worthwhile to note that their investment thesis hinges upon bond yields staying comparatively low. I think this is important to keep in mind.

[chrispy]

As operators go, I think I'd put Flatt second to only Buffett'

 

Flatt is likely a BETTER operator then Buffett.  Either way - one of the best public CEOs out there.  Would be interesting to see how many CEO's have $1bn of common stock exposure like Flatt does...I am sure a lot of Tech...but outside of that???

 

Just as a discussion point; if we think he is one of the best allocators/operators, has all of his networth in the company then shouldn't others feel ok doing it too?

 

I agree that during the next downturn the price will drop more significantly then most other businesses. Buf, they will continue to earn and acquire numerous distressed assets.

[Ahab]

In the spirit of trying to avoid unforced errors, I try to remind myself to keep at least 7 or 8 holdings. Too much concentration risk when putting your entire net worth into one security IMO. An outsized bet of 20% or 30% in a business you know really well is another story. There are good arguments that BAM fits the bill as a high-quality compounder.

[Cigarbutt]

In the spirit of trying to avoid unforced errors, I try to remind myself to keep at least 7 or 8 holdings. Too much concentration risk when putting your entire net worth into one security IMO. An outsized bet of 20% or 30% in a business you know really well is another story. There are good arguments that BAM fits the bill as a high-quality compounder.

I like BAM too and have also seen it as a potential long-term compounder.

Could you elaborate on the "good arguments"?

and

Could you share (that's the part I'm working on now) the factors that will allow them to survive and even thrive through the next inevitable (although impossible to predict when) downside of the cycle?

 

[Uccmal]

In the spirit of trying to avoid unforced errors, I try to remind myself to keep at least 7 or 8 holdings. Too much concentration risk when putting your entire net worth into one security IMO. An outsized bet of 20% or 30% in a business you know really well is another story. There are good arguments that BAM fits the bill as a high-quality compounder.

 

Smart.  I have seen people blow up completely from analyzing (guessing?) wrong.  One took all his "winnings" from FFH and put them into Research in Motion just as Apple came out with the IPAD. 

 

It was a good video.  Bruce Flatt is impressive to say the least.  But we never totally know what is going on.  Everytime I think of putting 100% into something I think of Jared the subway guy, or Bill Crosby, or Elliot Spitzer, or Hank Greenberg (not even anything wrong on his part). In this day and age even unproven allegations can take someone down enough to wipe out an investment for the passive investor. 

 

Tesla is showing the problems when a company is too reliant on one person.  I dont think this is the case with BAM but if the CEO were to have a meltdown the stock would get killed, at least for awhile.  That being said BAM is internally diversified with a few extremely capable management teams. 

 

 

[mcliu]

BAM has obviously been a very astute investor, but I wonder how much of their returns has been a result of the decline in interest rates (credit super cycle?) and corresponding increase in the prices of these long-duration real assets..?

I also wonder how these assets will perform in a long period of rising interest rates..?

Would love to hear your thoughts.

[Ahab]

@Cigarbutt

I like to look for companies that I feel are 'elite' in their areas of focus. Monitoring business news, I'm always struck by how Brookfield is involved in so many restructuring deals involving real assets. The company seems to have a knack for buying coal and turning it into diamonds, rinse and repeat. Its performance record over the last 20 years has been incredibly impressive (high teens over 1997-2017). That being said, I agree that there are some very real risks in a downturn (that would be hopefully offset by skilled management). The upside of tougher times for BAM is the ability to buy assets for a song in an environment of business failure and forced selling. Here, I'm reminded by what Bruce Flatt said at a conference during the financial crisis about the previous speaker's gloomy predictions being valid for the next few months while his outlook was relevant to emerging trends over the next few decades.

 

@Uccmal

I think you highlight some really good cases of individuals the public believed to be above board, even admirable until scandalous/immoral things were revealed about them. Not too worried about key man risk with Flatt, but having him behind the reins is clearly a fantastic tailwind for BAM.

 

@mcliu

That's an important question. I'm optimistic that the values of the real assets that BAM manages (including a solid portion of the Manhattan skyline) will benefit greatly from the continued growth of the global economy even in a much higher rate environment. I'd love to hear your and others thoughts about the sensitivity of BAM's operating performance to rising interest rates.

[Cigarbutt]

@Cigarbutt

I like to look for companies that I feel are 'elite' in their areas of focus. Monitoring business news, I'm always struck by how Brookfield is involved in so many restructuring deals involving real assets. The company seems to have a knack for buying coal and turning it into diamonds, rinse and repeat. Its performance record over the last 20 years has been incredibly impressive (high teens over 1997-2017). That being said, I agree that there are some very real risks in a downturn (that would be hopefully offset by skilled management). The upside of tougher times for BAM is the ability to buy assets for a song in an environment of business failure and forced selling. Here, I'm reminded by what Bruce Flatt said at a conference during the financial crisis about the previous speaker's gloomy predictions being valid for the next few months while his outlook was relevant to emerging trends over the next few decades.

 

@mcliu

"BAM has obviously been a very astute investor, but I wonder how much of their returns has been a result of the decline in interest rates (credit super cycle?) and corresponding increase in the prices of these long-duration real assets..?

I also wonder how these assets will perform in a long period of rising interest rates..?"

 

---)

 

That's an important question. I'm optimistic that the values of the real assets that BAM manages (including a solid portion of the Manhattan skyline) will benefit greatly from the continued growth of the global economy even in a much higher rate environment. I'd love to hear your and others thoughts about the sensitivity of BAM's operating performance to rising interest rates.

 

@Ahab

Good points. Future events are likely to be different from past events but interesting to remember that BAM was able to raise significant capital during 2008 and 2009. Probably useful to run some "stress" tests. This is just opinion on my part and it may take a while but I think that the value of "real" assets will tend to do relatively well over the long term.

 

@mcliu

If you're in this for the long term and are worried about inflation, the volatility or downward pressure on asset valuation should not disturb you because the business is characterized by long term cash flows with embedded indexing provisions and inflation should not preclude management from buying undervalued real assets.

 

If your worry is inflation and if you agree with the principles laid out by Mr. Buffett in his "How inflation swindles the investor" article, you may need to take into account that the value taken away by inflation would be inversely proportional to the inflation protection that the security provides. In addition, Mr. Flatt and the BAM people are savvy capital allocators and, in an inflationary environment, they could possibly lock in long-term debt with fixed interest rates which would mitigate the inflation cheat.

 

However, in the same vein, higher inflation may diminish the relative attractiveness of BAM's returns because institutional investors looking for alternative investments may find that the return differential to be not large enough for the "risk" considered. So, they may handle less fee-bearing capital.

 

Don't want to turn this into a macro discussion and, at this point, this is pretty contrarian but, if you are running various scenarios, the effect of unexpected deflation should be considered.

 

[bizaro86]

My thought is that higher interest rates are likely to be a consequence of d continued strong economic growth and/or increased inflation. I think Brookfield assets are of better than average quality, and so are likely to disproportionately benefit from economic growth.

 

As to the argument about Bruce Flatt having a big percentage of his net worth in BAM, that's a good sign but not conclusive, imo. If I lost 80% of my net worth, it would affect my life dramatically. If that happened to Bruce Flatt, he'd still be excessively rich.

 

[Spekulatius]

My thought is that higher interest rates are likely to be a consequence of d continued strong economic growth and/or increased inflation. I think Brookfield assets are of better than average quality, and so are likely to disproportionately benefit from economic growth.

 

As to the argument about Bruce Flatt having a big percentage of his net worth in BAM, that's a good sign but not conclusive, imo. If I lost 80% of my net worth, it would affect my life dramatically. If that happened to Bruce Flatt, he'd still be excessively rich.

 

Flatt stated it himself that they are working opunder the assumption that interest rates stay reasonably low, so I would take it from the horses mouth that it is necessary condition for them to do well. Certainly rising interest rates or even worse rising spreads can’t be good for an asset  management business that needs access to debt and equity markets for new deals.

[Uccmal]

BAM has obviously been a very astute investor, but I wonder how much of their returns has been a result of the decline in interest rates (credit super cycle?) and corresponding increase in the prices of these long-duration real assets..?

I also wonder how these assets will perform in a long period of rising interest rates..?

Would love to hear your thoughts.

 

I suppose we could worry about this.  But there is no evidence it is happening.  The Gov't of Canada left the overnight at 1.75, which is higher than the US, and higher than Japan and most of the EU.  The yield curve is close to flat which indicates that nothing is going to happen very fast. 

 

BAM gets alot of institutional money both as 'partners' and as prefs. and long bonds.  Any effect from changing interest rates would likely be slow. 

 

Bruce Flatt talks about the urbanization of the planet.  Most of their business is focussed in this direction.  I dont think this is going to reverse, if it even can.  I dont think people en masse can move from cities to the country side and maintain their standard of living.

 

You have a few businesses here.  They are all inter-related to some extent. 

 

BIP invests in widely diverse infrastructure support businesses.  Higher interest rates or recession aren't going to kill the need for these services.  In many they can raise prices lock step with interest rate or inflation pressures. 

 

BEP invests in renewable power generation, storage, and transmission.  In our hot, energy hungry world, I dont see too much danger here. 

 

BPY invests in higher end real estate. If you believe that London, NewYork, Toronto, etc. are going to hell due to higher interest rates then this could be a sore spot.  I am not a real estate expert and really know only enough to know that the BPY people are good at what they do.

 

Then there is all the other stuff directly under BAM. 

 

What is telling is what has little presence in their portfolio:

1) Manufacturing: Excepting the high end, it is crowded and not very profitable.

2) Banking: at least directly, and again very crowded. 

2b) Financial management.  The do private equity as a way to fund projects, and earn fees.  They dont try to compete in the retail finance business the way Blackrock does.

3) Insurance: Crowded, and not particularly profitable. 

4) Retail Tech.

 

BAM could easily buy into any of the above.  They clearly spend alot of time and thought on choosing where to best go.  As the CEO says they try to stay away from crowded areas. 

 

Finally, businesses always face problems.  Its the job of management to solve these problems, or higher the right people to fix them.  Not too many companies have been able to do as well at this as BAM. 

 

 

[Uccmal]

I keep trying to paste up interest rate chart for the last 500 years. 

 

Here is a link to one: https://amp.businessinsider.com/images/554b7b546bb3f7f062881fc8-960-720.jpg

 

If you look at it we are near the lowest interest rates have ever been.  On the other hand the highest they ever were was in the 1980s.  Most of history they spent in the 3 to 6% range, spiking for short periods.  Obviously this kind of data is fraught with caveats but in a general sense I dont get that we will see rates like we saw in the 1980s as long as we live. 

 

Bruce Flatt would likely be aware of interest rate history and know that the 1980s were an anomaly, as much as today is an anomaly.

[villainx]

My main thing with BAM is catching the company when it's at a size where continued growth would be harder to achieve.  Especially with more alternative and real assets being more popular these days.

 

Similar with jumping into Berkshire, Constellation, Amazon, etc. these days. I could be wrong.  And it probably has a lot to do with following the company closely for a while and seeing it grow and grow, which leads to some creeping doubts whether it can be sustained. 

 

 

[Ahab]

I think worrying about company size crimping returns is a legitimate fear, one that I share in regards to pretty much every large cap stock in my portfolio. I try to remind myself that we are reaching trillion dollar companies and someday we will be reaching 10 trillion dollar ones, so size is relative to where the economy is now. I think a big part of the BAM investment case is that urbanization, modernization, and the move towards environmental sustainability require massive amounts of investment in the real assets that are in BAM's wheelhouse. In my minds eye, things like skyscrapers, bridges, pipelines, and malls go hand in hand with modernity and aren't going out of style.

[bizaro86]

He also said they seek financing that won't cause them to be forced sellers. I agree that higher interest rates will be a negative for them, but I think that the quality of their portfolio will mitigate that somewhat.

 

I think it depends on how interest rates move as well. If rates move up to 4-5% (say for the 2 year) I don't think that would be a big deal. If we went back to 80s style double digit rates you wouldn't want to own BAM going into that I don't think.

 

Personally, I think the economy has been getting more capital light every year, so I think real interest rates will probably be lower on average in the future than they have been in the past, but macro forecasting isn't exactly my specialty.

[StevieV]

He also said they seek financing that won't cause them to be forced sellers. I agree that higher interest rates will be a negative for them, but I think that the quality of their portfolio will mitigate that somewhat.

 

I think it depends on how interest rates move as well. If rates move up to 4-5% (say for the 2 year) I don't think that would be a big deal. If we went back to 80s style double digit rates you wouldn't want to own BAM going into that I don't think.

 

Personally, I think the economy has been getting more capital light every year, so I think real interest rates will probably be lower on average in the future than they have been in the past, but macro forecasting isn't exactly my specialty.

 

On rates:

 

The gradual and moderate rising rate environment is the negative situation I am most focused on.  More aggressively rising rates are a big problem for huge swaths of the economy and the US government.  What do housing, autos and the US budget look like at high single-digit rates?  That scenario is a bloodbath for wide swath of the US and world economies.  I don't think there are many safe havens in that situation.

 

 

On size:

 

Always wise to consider size as a potential headwind.  In BAM's case, a few things: (1) I like the geographic diversity.  That can provide a growing opportunity set to mitigate some size issues.  (2) In some instances, size can be helpful for getting deals done.  For example, not many players were in a position to do the GGP deal or, I believe, some of their deals in Brazil.  (3) I don't think size is a big issue yet, but it could happen.  If they grow 15% for the next 5 years, does that doubling make size an issue?  In any event, I expect it to be an issue as a gradual slow-down of growth.

[Cigarbutt]

A credit market meltdown in combination with a downturn in the economy will hit BAM disproportionally harder than let say BRK or GOOG etc. BAM is an asset manager and if assets values  don’t do well, neither will BAM. BAM assets and vehicles also have a lot of leverage (BPY) to both credit markets and the economy. They have shown to manage astutely in the last, but that’s no guarantee for the future, esepicalky since they grow so much in size.

 

They do have significant credit exposure, have grown a lot and it can be hard to evaluate the EV/EBITDA multiples they're paying for acquisitions but these risk factors can be estimated through the capital discipline prism.

 

Mr. Buffett has likely looked at "real" assets deals that intersect with BAM and has described unrealistic expectations of competitive bidders (acquisition multiples, high debt to equity financing ratios and extremely low cost of debt {based on low risk-free rates and spreads}).

 

Looking at long term trends, at BAM, corporate and non-recourse borrowing has grown but seems to have remained in line with underlying cashflows. Compared to BRK, BAM does have a more concentrated risk profile but this appears to be mitigated by maintained financial discipline, a true long-term contrarian mindset (segments of the above linked video are convincing) and have developed a consistent in-house ability to improve (or even "to re-make the business" at times) the acquired businesses by operating the assets better.

 

Despite their discipline, it must be hard to resist the large supply of institutional capital and that may downplay, to some extent, their focus on areas where capital is scarce.

[Spekulatius]

I think it is important to note that BAM makes their money working with other peoples money. From memory, they paid a pretty rich 13x EBITDA multiple for ENB Canadian gas distribution assets sold this year. I am guessing that as long as they meet their investors return targets, finance them solidly and run them well, they don’t really need to buy them cheap.

I don’t think that their GGP buy will work out at a 6.5-7% cap rate, if the 30 year treasury goes to 5% for example, maybe for them, but probably not for the folks supplying the capital.

[walkie518]

I think it is important to note that BAM makes their money working with other peoples money. From memory, they paid a pretty rich 13x EBITDA multiple for ENB Canadian gas distribution assets sold this year. I am guessing that as long as they meet their investors return targets, finance them solidly and run them well, they don’t really need to buy them cheap.

I don’t think that their GGP buy will work out at a 6.5-7% cap rate, if the 30 year treasury goes to 5% for example, maybe for them, but probably not for the folks supplying the capital.

Brookfield has a history of buying mismanaged and underperforming assets, stabilizing and/or realizing greater revenue streams.  Also, it's worth noting that large groups like BAM likely have credit agreements in place with banks collateralized on their institutional LP commitments.  Say Brookfield has no way to increase the value of the GGP assets by further development...if cost of funds is 4% for BAM and GGP is 7 Cap there's a 3% spread.  It may be that if the underlying rental revenues are strong enough, Brookfield might find a way to borrow all the way and take the 3% spread to LPs, who may not shell out any money for this particular deal (unlikely here but hypothetical).

 

The company's track record is very good and they seem to see no shortage of capital.  This likely means that institutional investors trust BAM and that BAM is making, ie showing, real returns on capital. 

[chrispy]

In the latest supplemental they show that all of the funds are tracking or exceeding their performance targets.

 

Edit: Bruce has said on a few different occasions that it is their operating skills that drives much of the performance. Brascan and Brookfield we're operators before they were asset managers. I don't see Buffett wanting to turn around a pipeline (but you guys have more experience in this then me).

 

How common is it for an institutional investor or sovereign wealth fund to want to lock up caital for 10 plus years? Might that limit the available funds to BAM?

[vince]

Chrispy, I have read every presentation and supplemental for years and you basically nailed it perfectly that Bam's advantage stems from their operating capabilities.  Even if they buy at a 5-6 cap rate they can bump that up a couple points by "fixing" the asset.  Then they lever it with cheap capital at long fixed rates (Bruce has stated that they could increase their earnings substantially by borrowing short) and are able to achieve 12-15 percent equity returns with low risk.  So yes they are contrarian and buy smart.  They are also very diversified geographically and have the capital to do big deals that others don't.  And all these things add up to superior returns.....but the secret sauce is their operating abilities that you will probably not find elsewhere, especially not in Buffetts toolbox.  Lastly, because they have shown superior returns over long periods, over many types of assets and through all the economic ups and downs they consistently attract long term capital from diversified sources including institutional and sovereign wealth funds.

[John Hjorth]

Brookfield Property REIT Inc. [bPR] has now got its own subsection on the Brookfield website here with option for subscription for alerts by e-mail, like for the other Brookfield entities.

[ValueMaven]

So for us that HATE K1's here in the States...this is the one to own then..

 

'Brookfield Property REIT (NASDAQ: BPR) (“BPR”) is a subsidiary of BPY, intended to offer investors economic equivalence to BPY units but in the form of a U.S. REIT security. Dividends on BPR shares are identical in amount and timing to distributions paid out for BPY units, and BPR shares are exchangeable on a 1:1 basis for BPY units or their cash equivalence.'

[rkbabang]

Toshiba in talks with Brookfield for UK nuke unit sale

 

"The NuGen project in Moorside, northwest England, was expected to provide around 7 percent of Britain's electricity, but faced setbacks after Toshiba's nuclear arm Westinghouse went bankrupt last year."

[John Hjorth]

Financial Times [september 22^nd 2018]: Bruce Flatt of Brookfield on owning the backbone of the global economy [Article outlined here].

 

[H/T QuesnelCap.]

 

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Edit: Username for QuesnelCap fixed [from Twitter Username Quesnel Capital].