BAM - Brookfield Asset Management

[John Hjorth]

vince,

 

The BAM group core liquidity is the main basis, the tool and the key to stay opportunistic [and to some extent contrarian] for BAM to do large deals in its space in general. If BAM goes heavy on buybacks, it might end up constrained, ending up just floating with the general torrent, unable to act, when the opportunities appear.

 

Easy to say, hard to execute.

[vince]

vince,

 

The BAM group core liquidity is the main basis, the tool and the key to stay opportunistic [and to some extent contrarian] for BAM to do large deals in its space in general. If BAM goes heavy on buybacks, it might end up constrained, ending up just floating with the general torrent, unable to act, when the opportunities appear.

 

Easy to say, hard to execute.

Hey John, I agree, the most important value driver going forward is their asset management business which depends in a huge way their ability to find decent places to put client capital which is enhanced by Bam capital going into the same deals.  It's just very hard from the outside when I can see how value creating those buybacks would be at these prices.  Another interesting point is the fact that they are buying Bpy....that shrinks the capitalization which (I think) reduces the base fees they collect from Bpy.  I don't believe you will see this type of behaviour from many other mgmts

[Shane]

vince,

 

The BAM group core liquidity is the main basis, the tool and the key to stay opportunistic [and to some extent contrarian] for BAM to do large deals in its space in general. If BAM goes heavy on buybacks, it might end up constrained, ending up just floating with the general torrent, unable to act, when the opportunities appear.

 

Easy to say, hard to execute.

Hey John, I agree, the most important value driver going forward is their asset management business which depends in a huge way their ability to find decent places to put client capital which is enhanced by Bam capital going into the same deals.  It's just very hard from the outside when I can see how value creating those buybacks would be at these prices.  Another interesting point is the fact that they are buying Bpy....that shrinks the capitalization which (I think) reduces the base fees they collect from Bpy.  I don't believe you will see this type of behaviour from many other mgmts

 

Why would BAM buying BPY reduce the market capitalization?

[vince]

vince,

 

The BAM group core liquidity is the main basis, the tool and the key to stay opportunistic [and to some extent contrarian] for BAM to do large deals in its space in general. If BAM goes heavy on buybacks, it might end up constrained, ending up just floating with the general torrent, unable to act, when the opportunities appear.

 

Easy to say, hard to execute.

Hey John, I agree, the most important value driver going forward is their asset management business which depends in a huge way their ability to find decent places to put client capital which is enhanced by Bam capital going into the same deals.  It's just very hard from the outside when I can see how value creating those buybacks would be at these prices.  Another interesting point is the fact that they are buying Bpy....that shrinks the capitalization which (I think) reduces the base fees they collect from Bpy.  I don't believe you will see this type of behaviour from many other mgmts

 

Why would BAM buying BPY reduce the market capitalization?

 

I just assumed that they wouldnt get mgmt fees on the part of capitalization that they owned but as I think about it more I'm starting to think its wrong

 

[John Hjorth]

Why would BAM buying BPY reduce the market capitalization?

 

Shane,

 

From the perspective of the BAM group balance sheet, BAM is using cash to buyout BPY minorities. So the BAM group balance sheet is shrinking by doing these buybacks.

[khturbo]

Anyone have the link where we can see how much BPY BAM is buying? I saw it once but can't seem to find it again.

[cubsfan]

Anyone have the link where we can see how much BPY BAM is buying? I saw it once but can't seem to find it again.

 

Subsequent to the closing of the GGP acquisition by BPY, we have started to buy units of BPY in the open market. To date we have acquired approximately $200 million of units, with the Price to Value discrepancy of approximately $10 per unit. On just this acquisition of $200 million of units, we added $100 million to the Value of the equity in BAM.

 

https://bam.brookfield.com/~/media/Files/B/BrookField-BAM-IR/letters-to-unitholders/2018/Q3/F%20-%20BAM%20Q3_2018_Ltr_to_Shareholders.pdf

 

Is this what you are referring to..?

[John Hjorth]

Perhaps the link in post #734 by OnTheShouldersOfGiants?

[khturbo]

Ah, yes John thank you. That's exactly what I was looking for. Seems like they were buying at a good pace a couple of weeks ago. I really like this move. I try to estimate fair value for each of the listed partnerships and it seems clear enough that BPY is the cheapest of the three.

 

It also seems like purchases of BPY might be more accretive than repurchases of BAM, although that one's a bit more unclear to me. At any rate, it seems like a solid cash deployment option.

 

By the way, does anyone know of a way to kind of see exactly what they spend what they call their "cash available for distribution"? You can get a sense of what they're doing for example if they buy back stock the share count will go down or if they buy BPY on the open market their shares owned will go up, but I don't know of a way to figure it out with a bit more precision. It's obviously difficult since the consolidated financials have so many moving parts.

[John Hjorth]

Ritzau via Boersen.dk [December 3^rd 2018] : Media : Giants are bidding up to DKK 26 B for Ørsted subsidiary. [unfortunately only in Danish.]

 

Brookfield is mentioned in the article as a bidder. The article appear undocumented. I haven't been able to find that particular Bloomberg News article mentioned.

 

Radius is the Ørsted subsidiary distributing power to customers primarily in the northern part of Sealand, strategically for sale by Ørsted.

 

My personal judgement here is, that most PE funds etc. won't stand a chance here as bidder, based on the political sentiment here in Denmark after the dividend cases etc. related to Macquarie investing in Copenhagen Airport and TDC. [Ørsted is state controlled, but listed.]

[vince]

Ah, yes John thank you. That's exactly what I was looking for. Seems like they were buying at a good pace a couple of weeks ago. I really like this move. I try to estimate fair value for each of the listed partnerships and it seems clear enough that BPY is the cheapest of the three.

 

It also seems like purchases of BPY might be more accretive than repurchases of BAM, although that one's a bit more unclear to me. At any rate, it seems like a solid cash deployment option.

 

By the way, does anyone know of a way to kind of see exactly what they spend what they call their "cash available for distribution"? You can get a sense of what they're doing for example if they buy back stock the share count will go down or if they buy BPY on the open market their shares owned will go up, but I don't know of a way to figure it out with a bit more precision. It's obviously difficult since the consolidated financials have so many moving parts.

 

If you study their quarterly supplemental you should be able to figure it out, very informative with everything you need in that quarterly document

[khturbo]

Yes I mean I think you can get broad strokes. You could see repurchase activity and any activity in buying / selling listed issuers but it would be tough beyond that I think as different valuations / debt levels move around. But point taken.

[khturbo]

I haven't seen any BPY purchases in the last couple of weeks. I really hope they're buying in BAM units in bulk.

[John Hjorth]

How do you interpret the large transactions on December 4^th 2018, khturbo?

[rkbabang]

How do you interpret the large transactions on December 4^th 2018, khturbo?

 

Large equal acquisitions and dispositions on the same day. It looks like exercising stock options for cash.

 

[saltybit]

https://www.google.com/amp/s/seekingalpha.com/amp/article/4226664-went-wrong-brookfield-property-partners-part-1-core-retail

 

Post about BPY

[John Hjorth]

How do you interpret the large transactions on December 4^th 2018, khturbo?

 

Large equal acquisitions and dispositions on the same day. It looks like exercising stock options for cash.

 

Thanks, rkbabang,

 

The one pair of trades attached to BAM, as indirect owner [by prior filings] makes some sense to me, the next pair of filings related to "RE LP Units (BPLP)" I do not understand - For the second pair of filings, please enlighten me in my darkness here.

[khturbo]

I'm not quite sure what's going on there either, but I've seen this big matching transactions in large blocks that net out before and it doesn't affect their net ownership, so I just kind of ignore them.

[khturbo]

What do you guys think about using IFRS to value BPY? I got into a discussion with the author of the article that saltybit mentioned in the comment section of his first article (I'm Kyler Hasson).

 

Personally, it seems super clear to me that if you use IFRS and you count all of the fees that BAM earns from BPY then you're double counting the fees by not deducting them. I get a NPV of ~$4-5 / share of the fees under normalish kinds of scenarios (I talk about it at greater length in that same comment section) but would be interested to hear how others think of it.

[John Hjorth]

Kyler,

 

From BAM Annual Report 2017, p. 80:

 

... As a result, we include 100% of the revenues and expenses of these entities in our consolidated statements of operations, even though a substantial portion of the net income in these consolidated entities is attributable to non-controlling interests. On the other hand, revenues earned, and expenses paid between us and our subsidiaries, such as asset management fees, are eliminated in our consolidated statements of operations; however, these items affect the attribution of net income between shareholders and non-controlling interests. For example, asset management fees paid by our listed partnerships to the corporation are eliminated from consolidated revenues and expenses. However, as the common shareholders are attributed all of the fee revenues while only attributed their proportionate share of the listed partnerships’ expenses, the amount of net income attributable to common shareholders is increased with a corresponding decrease in net income attributable to non-controlling interests. ...

 

So net, no double counting in the BAM financials. It's a logical consequence of generally accepted principles for consolidation, based on a control criteria, to the contrary of a ownership share criteria.

[rkbabang]

How do you interpret the large transactions on December 4^th 2018, khturbo?

 

Large equal acquisitions and dispositions on the same day. It looks like exercising stock options for cash.

 

Thanks, rkbabang,

 

The one pair of trades attached to BAM, as indirect owner [by prior filings] makes some sense to me, the next pair of filings related to "RE LP Units (BPLP)" I do not understand - For the second pair of filings, please enlighten me in my darkness here.

 

I don't understand them either, I was just guessing.

 

[khturbo]

Kyler,

 

From BAM Annual Report 2017, p. 80:

 

... As a result, we include 100% of the revenues and expenses of these entities in our consolidated statements of operations, even though a substantial portion of the net income in these consolidated entities is attributable to non-controlling interests. On the other hand, revenues earned, and expenses paid between us and our subsidiaries, such as asset management fees, are eliminated in our consolidated statements of operations; however, these items affect the attribution of net income between shareholders and non-controlling interests. For example, asset management fees paid by our listed partnerships to the corporation are eliminated from consolidated revenues and expenses. However, as the common shareholders are attributed all of the fee revenues while only attributed their proportionate share of the listed partnerships’ expenses, the amount of net income attributable to common shareholders is increased with a corresponding decrease in net income attributable to non-controlling interests. ...

 

So net, no double counting in the BAM financials. It's a logical consequence of generally accepted principles for consolidation, based on a control criteria, to the contrary of a ownership share criteria.

 

Ah yes sorry for being vague. I meant less of counting in the financials and more of how BAM carries the value on its balance sheet. What I mean is that if you accept the IFRS value for BPY but you also count the earnings that BAM gets managing BPY, then in my opinion you're double counting the value of the fees. IMO the NPV of the fees should be deducted from IFRS value of BPY units. I was wondering how different people thought about that.

[vince]

Kyler,

 

From BAM Annual Report 2017, p. 80:

 

... As a result, we include 100% of the revenues and expenses of these entities in our consolidated statements of operations, even though a substantial portion of the net income in these consolidated entities is attributable to non-controlling interests. On the other hand, revenues earned, and expenses paid between us and our subsidiaries, such as asset management fees, are eliminated in our consolidated statements of operations; however, these items affect the attribution of net income between shareholders and non-controlling interests. For example, asset management fees paid by our listed partnerships to the corporation are eliminated from consolidated revenues and expenses. However, as the common shareholders are attributed all of the fee revenues while only attributed their proportionate share of the listed partnerships’ expenses, the amount of net income attributable to common shareholders is increased with a corresponding decrease in net income attributable to non-controlling interests. ...

 

So net, no double counting in the BAM financials. It's a logical consequence of generally accepted principles for consolidation, based on a control criteria, to the contrary of a ownership share criteria.

 

Ah yes sorry for being vague. I meant less of counting in the financials and more of how BAM carries the value on its balance sheet. What I mean is that if you accept the IFRS value for BPY but you also count the earnings that BAM gets managing BPY, then in my opinion you're double counting the value of the fees. IMO the NPV of the fees should be deducted from IFRS value of BPY units. I was wondering how different people thought about that.

 

I dont believe thats the right way to look at it.  Bam owns somewhere around 65% of bpy and thats counted as 65% of bpy's market cap.  But that value is determined by the market with bpy's earnings that are already net of the fees. I could be wrong though

[johnny]

But that value is determined by the market with bpy's earnings that are already net of the fees. I could be wrong though

 

BAM presents its stake in BPY at book value, not market quote. That's the point KH is driving at. They're telling you to look at the underlying liquidation value of the real estate, and also telling you to put a 20x on the management fees they are receiving from Not Liquidating The Real Estate. As you say, knowing nothing, you'd assume an efficient market would discount the shares to compensate for the value lost to the external manager, so the question is how much the market is overshooting with its current 40% discount--it's certainly not 40%.

[John Hjorth]

Kyler, vince & johnny,

 

Thank you for your posts after the last one of mine. Sometimes communication via a message board can be hard and cumbersome ... - It dosen't exactly makes it easier that I've been doing my best to answer a question, that wasen't asked. [ : - ) ]

 

- - - o 0 o - - -

 

At least I think I understand Kyler's considerations and line of thinking about management fees now with respect to double counting or not.

 

- - - o 0 o - - -

 

Could BPY disregard the management fees while doing the fair value valuations for BPY's investment properties using af DCF model [Thereby getting higher valuations by disregarding/ignoring the load on cash flow from management fees]?

 

No, naturally not. If you look up the BPY notes to the income statement in BPY 2017 Annual Report, management fees are booked as ordinary operational expenses [also with cash flow effect], and are specified as a component of general and administrative expenses in note 28, p. F-57, upper part, as USD 168 M.

 

You are not allowed by IFRS to cherry pick expenses with direct cash flow effect, that you don't want to go into the DCF model. Cash flow is cash flow. Period.

 

PwC UK [November 2017] : Applying IFRS for the real estate industry.

 

- - - o 0 o - - -

 

Now the exactly same question about IFRS valuation of investment properties - this time not for BPY, but for BAM. It's not that hard to try to find the answer to that question. You simply walk through all the financials for all four subs and find all the LEGO bricks more or less hidden and scattered around in the +1K pages of financials for the four BAM subs and try to bolt it all together, and see what it gets you.

 

The conclusion is clear : BAM valuates BPY's investment properties to exactly the same values as BPY. No hanky-panky - no shagging with numbers.

 

Please see attached.

 

So BAM at group level valuates investment properties according to IFRS by use a DCF model, where management fees, which are eliminated in the BAM consolidation, are included as a cash flow burden in the DCF model.

 

The only unknown variables in the calculations are values in the separate categories of investment properties held by BAM the parent, or by subs of BAM controlled directly without involving BPY. The IFRS value of these investment properties is USD 5.321 B at YE2017.

 

That would be a good question at a future conference call to get an explanation & identification of these properties.

BAM_-_Copycat_reverse_engineering_manually_by_hand_consolidation_of_Investment_properties_20171231_-_20181208.pdf