BAM - Brookfield Asset Management

[Packer16]

Why would you want BAM to lever up at the hold co when you can do it much cheaper vis someone like IB?  IMO the increased leverage at the hold co just adds more risk for everyone while the leverage by individuals holding fund stakes allows investors to leverage to taste.

 

As to loosing control, the funds that are traded are LPs so I do not think BAM can loose control unless the spin-off the GP which would not make sense due to potential loss of control.

 

Packer

[merkhet]

Maybe I'm missing something, but if the idea is that a spin of the subs will close/eliminate the discount, wouldn't you want them to repurchase a bunch of shares before they spin out the subs?

[Shane]

Maybe I'm missing something, but if the idea is that a spin of the subs will close/eliminate the discount, wouldn't you want them to repurchase a bunch of shares before they spin out the subs?

 

I'm confused as well...

[Spos]

Maybe I'm missing something, but if the idea is that a spin of the subs will close/eliminate the discount, wouldn't you want them to repurchase a bunch of shares before they spin out the subs?

 

I think this also depends on management's (and important shareholders') horizon.  And I don't really know these guys, but they seem to have the vast majority of their personal wealth in BAM and they are definitely long-term investors.  This again reminds of Loews.  Loews shares have traded at a discount for years and for for years, Loews just continually buys back shares.  The way I see that strategy is that if you know that you will be holding the shares for a very long time (and you already have control), does it not make sense that the shares perpetually trade at a discount so that you can keep buying them at that discount?

[Packer16]

My assumption is management's choices are buyback or spin-off.  Spin-off IMO adds more value.  If you buyback before the spin-off that would be the best but I have not heard it to be management's intention to do any full spins.  IMO that is the first step.

 

Packer

[Shane]

My assumption is management's choices are buyback or spin-off.  Spin-off IMO adds more value.  If you buyback before the spin-off that would be the best but I have not heard it to be management's intention to do any full spins.  IMO that is the first step.

 

Packer

 

To me the smartest move for a long-term holder would be to take advantage of the discount with buybacks until you are ready to liquidate your position (a spin-off is an option to have in your back pocket).  This way you have created a more or less guaranteed intelligent option to use excess cash when good 'organic' investments are not available.  It makes no sense for long-term holders to spin-off subs today IMO.

 

[Packer16]

The only problem is you as a shareholder have no option to spin-off the stakes & are stuck with the discount until management does the spin-off.  If the management never spins off the stakes you are stuck with a permanent discount, which is where we are today.

 

Packer

[John Hjorth]

As mentioned by gokou in post #643, BAM is actually active buying BPY at the moment. BPY can't do it itself for now, because BPY's acquisition capacity is somehow a bit exhausted right now, because of the GGP deal earlier this year.

 

 

 

 

[Packer16]

The issue here is the hold co discount & the buying of shares at the market price (BPY) actually destroys value because the market will only value these share at 70 cents for every dollar invested due to the hold co discount. 

 

Now if BAM spun off the LP holdings & was selectively buying BPY that would be a different story as the proportion of the BPY holding to the AM would be smaller.

 

Packer

[vince]

Maybe I'm missing something, but if the idea is that a spin of the subs will close/eliminate the discount, wouldn't you want them to repurchase a bunch of shares before they spin out the subs?

 

Bingo

[vince]

Maybe I'm missing something, but if the idea is that a spin of the subs will close/eliminate the discount, wouldn't you want them to repurchase a bunch of shares before they spin out the subs?

 

I think this also depends on management's (and important shareholders') horizon.  And I don't really know these guys, but they seem to have the vast majority of their personal wealth in BAM and they are definitely long-term investors.  This again reminds of Loews.  Loews shares have traded at a discount for years and for for years, Loews just continually buys back shares.  The way I see that strategy is that if you know that you will be holding the shares for a very long time (and you already have control), does it not make sense that the shares perpetually trade at a discount so that you can keep buying them at that discount?

 

If they have been at a discount for many many years then almost by definition they are not trading at a true discount

[John Hjorth]

Packer,

 

I've had a hard time to understand your stance on this, because I'm thinking really long term about BAM and BAM subs. I think the way to look at this in reality boils down to the investors time horizon for this investment, doesen't it?

 

Somehow to me, it boils down to get the discount released - fairly short term - or - as an alternative - to have the advantage to reinvest dividends and do buybacks at a [still] existing discount going forward long term. [We can't get both at the same time.]

 

Mr. Kingston is actually mute about this whole situation in the BPY 2018Q2 Unit Holder Letter, which to me appear a bit odd. [to me, this letter a bit too short, actually.]

 

Mr. Flatt, on the other hand, goes at it at great length in the BAM 2018Q2 Shareholder Letter.

 

From p.5 - the GGP paragraph:

 

Last month, we received shareholder approval to combine the balance of GGP Inc. into Brookfield Property Partners (“BPY”). At closing, later in August, we will complete the last major initiative post the launch of BPY. These initiatives included the privatization of five listed companies, and with all of these now complete, we believe that we are in a strong position to focus our efforts on value enhancements in the business, and on the trading price of BPY. Given the scale of our business, our vast access to institutional capital, and BPY’s now large equity base, BPY has no need to issue additional equity for the foreseeable future. Furthermore, if we continue to trade at discounts to tangible value, we will use our resources to repurchase shares, adding further to its intrinsic value....

 

... We think that this transaction, 10 years from now, will prove to have been transformational to our real estate business. We are acquiring 125 incredible parcels of land in major cities in the U.S. Along with this land, which will be developed into many tens of thousands of multifamily apartments and condominiums, hotels, industrial warehouses, office properties, self-storage and other uses, we are acquiring a 123 million square foot, 94% leased retail business which generates EBITDA of $2.2 billion. Our plan is to redevelop this land into these other real estate uses, concentrate the retail business on the highest quality centers, and integrate our retail offering with an online presence. All the while, the core retail business should generate substantial free cash flow for investment into these other real estate businesses.

 

So to me, it appears quite clear, that BAM has no intentions of any short term actions to eliminate the discount, but want to take advantage of it for the long term via buybacks.

 

The cash flow from the BPY retail real estate business will be recycled into development of the BPY retail real estate. Perhaps BPY will master to do some buybacks on itself going forward. BAM will do the rest, based on what's possible, ref. the word "we" above, as long as this buyback opportunity exists.

[vince]

After many years of reading Buffett and thinking about the way he does things I have come to a few conclusions, one of which I want to mention now because it is related to the discussion on stubborn discounts.  Wells Fargo very often trades at a discount to the market multiple (and Im excluding the recent fiasco) even though it has shown to be superior to the average business over many decades ( I realize they have more assets for every dollar of equity than most businesses but bare with me ).  Many analysts and investors talk about a 15 multiple being at the very high end of what a bank should trade at therefore some very well managed banks have traded at 10-12 times earnings, even when business is good and asset prices high.  Indeed, this characteristic is what has allowed Buffett to accumulate a huge position over time.....investors are hesitant to buy stocks that have limited multiple upside.  So lets do some simple math.  The following numbers are very rough as I havent looked at them in a couple years.  Wells earns roughly 20 billion( assume we can buy them for 240 billion) and dividends out 7.5 billion, buys back 5.5 billion of stock and then puts 7 billion back into the business where it earns 15-20 percent on that new equity.  So assuming a constant multiple (a low 12 times multiple forever) investors will receive a respectable 11-12 percent return here (div+buyback+6 percent growth in earnings).  I know I oversimplified here and I'm sure some things will be pointed out to me but point is you can still do extremely well with a flat multiple.  And Buffett has said soooooo many times, "we buy pieces of businesses, we dont know what the stock will do and we dont care.  We are looking at what the asset can potentially produce and the resulting yield".  And we all know that there is a very good chance to get some changes in multiples over time and consider that icing on the cake

[Packer16]

It has little to do with long-term or short-term but how the market values these types of holding companies of other companies.  The market puts a discount on them.  When you buy you buy at a discount but when you sell you also sell at discount & you as a minority shareholder have no influence on this.  If BAM buys BPY at full price & the market puts a discount on the shares of BPY held by BAM is that value enhancing?  It is only enhancing if somehow the hold co discount is reduced.  Initially it is value destroying & will only be enhanced if the discount is reduced to zero of it BPY's price appreciates to make up for the discount. 

 

How can this discount be reduced?  Two ways.  Spin-off the subs or the subs become a smaller percentage of BAMs value over time.  This situation is akin to Loews mentioned above a continuous discount until liquidation.  The key difference here is if Loews sells a majority stake they can lose control but if BAM spins off its LP units it does not loose control.  So what is advantage of BAM to hold these LP units?  Not very much IMO.  If the AM required cash flows for some reason I could see the benefit but the AM does not need cash flow so IMO the benefit is deminimus. 

 

Packer 

[Spos]

Maybe I'm missing something, but if the idea is that a spin of the subs will close/eliminate the discount, wouldn't you want them to repurchase a bunch of shares before they spin out the subs?

 

I think this also depends on management's (and important shareholders') horizon.  And I don't really know these guys, but they seem to have the vast majority of their personal wealth in BAM and they are definitely long-term investors.  This again reminds of Loews.  Loews shares have traded at a discount for years and for for years, Loews just continually buys back shares.  The way I see that strategy is that if you know that you will be holding the shares for a very long time (and you already have control), does it not make sense that the shares perpetually trade at a discount so that you can keep buying them at that discount?

 

If they have been at a discount for many many years then almost by definition they are not trading at a true discount

 

In a sense yes.  But if you that discount is strictly do to a holdco structure that you could get rid of at any time, as a controlling shareholder you do not necessarily mind.  As a minority shareholder, what is annoying about this is that the company looks like they are not trying to maximize shareholder value by trying to close the discount (at least in the short term).

[villainx]

I thought I followed the recent conversation, but got lost somehow.

 

Spin off subs mean ... spinning off BIP, BPY, etc.?

[John Hjorth]

There is also a good article on SA about valuation of BAM by SA author Eric Sprague from February 28^th 2018. Here is a link to the outlined article. If I remember correctly, Joel has mentioned it on here before, around the time of the release, however I can't right now find Joel's post about it back then.

 

New SA article by Eric Sprague on SA about BAM & subs: Seeking Alpha - Eric Sprague [October 2^nd 2018]:"The Outstanding Track Record At Brookfield Should Continue".

[StevieV]

I thought I followed the recent conversation, but got lost somehow.

 

Spin off subs mean ... spinning off BIP, BPY, etc.?

 

villainx,

 

BIP, BPY, etc. are already separately listed.  BAM is the GP and also owns units of the various subs (BIP, BPY, etc.).  Packer notes that BAM doesn't get as much credit for the units as the units get standing alone.  That is, if BIP has a share price of $10/share, when BAM owns it, BAM only gets 70% of the valuation, or the equivalent of a $7/share.

 

As I understand Packer, he would like to see BAM distribute units of the subs to the BAM shareholders.  So, BAM would give each BAM shareholder some BIP and BPY shares.  Theoretically, the value of your BAM shares would only go down the 70%/$7 number, but you would get the full 100%/$10 share for the units standing alone.

 

I'm not 100% sure I understood your question correctly, so I am sorry if that doesn't answer it.

 

StevieV

[villainx]

Thanks.  I thought s/he was referring to CEF, or other funds within BAM originally, but as the thread continued, I was less certain.

[John Hjorth]

Packer [Keith] is a "he". [ : - ) ]

[Spos]

It has little to do with long-term or short-term but how the market values these types of holding companies of other companies.  The market puts a discount on them.  When you buy you buy at a discount but when you sell you also sell at discount & you as a minority shareholder have no influence on this.  If BAM buys BPY at full price & the market puts a discount on the shares of BPY held by BAM is that value enhancing?  It is only enhancing if somehow the hold co discount is reduced.  Initially it is value destroying & will only be enhanced if the discount is reduced to zero of it BPY's price appreciates to make up for the discount. 

 

How can this discount be reduced?  Two ways.  Spin-off the subs or the subs become a smaller percentage of BAMs value over time.  This situation is akin to Loews mentioned above a continuous discount until liquidation.  The key difference here is if Loews sells a majority stake they can lose control but if BAM spins off its LP units it does not loose control.  So what is advantage of BAM to hold these LP units?  Not very much IMO.  If the AM required cash flows for some reason I could see the benefit but the AM does not need cash flow so IMO the benefit is deminimus. 

 

Packer 

 

I think you evaluate the BPY on its return potential, as a capital allocation decision like any other.  If they are buying an undervalued security, then great.  I don't think the effect of these purchases on the BAM share price is important.  If the market reaction is negative and you have money leftover for buybacks, that could be a good thing.

 

I do agree that these situations are frustrating to minority shareholders and that they deserve a discount, but I think you have to look at it from management's point of view, the people who really count.  This represents all their net worth, running this is what they will be doing for a long time and even if they want to maximize their returns, they don't really have an incentive to close any holdco discounts.  They will always have the spinoff as an option to close the discount.  In the meantime they can repurchase shares at a discount.  IMO, this can almost become like an American call option of non-dividend paying stocks from their point of view, where you have no incentive to exercise early and as such the investment horizon automatically becomes very long, longer than even committed value investors. 

 

I think in the end, this Holdco model becomes more prevalent than the John Malone model as the controlling shareholders/management just don't need that one-time bump in valuation.

 

 

 

[chrispy]

Doesn't management own most of their stuck with Partners Value, sothey really hold it with another hold co?

[John Hjorth]

chrispy,

 

What is your own answer [, based on doing some work.]?

[gokou3]

Doesn't management own most of their stuck with Partners Value, sothey really hold it with another hold co?

 

Going from memory, management owns 90% of PVF.UN (Partners Value LP), which in turns own 20% of BAM directly or through other funds.  Last time I checked, PVF.UN itself has a holdco discount of ~30% based on the market value of its holdings.  So if you consider BAM has a holdco discount, then PVF is doubly discounted.

[chrispy]

Goku described exactly what I was hinting, if Partners is any indicator, management is not concerned about a holdco discount today.