BAM - Brookfield Asset Management

[bizaro86]

I'm on my phone so it's hard for me to check, but doesn't BAM consolidate BPY? They own a majority and have direction/control, so it seems like they should.

 

If that's the case, wouldn't the management fee from BPY to BAM be eliminated on consolidation?

[John Hjorth]

bizaro,

 

BAM does full line-by-line consolidation of BPY, and management fees are eliminated. I have documented it in my post #795.

[gary17]

I must be missing something

 

I read BAM's report; the earnings attributed to common shareholders is $1.57 for the last 9 month of 2018...  So at $ 41... this is still 20x earnings... I am not getting why people seems to think this is a very attractive investment at current valuation.  Am I missing some important facts?  Would really appreciate someone able to enlighten me!

 

Thanks!

Gary

[racemize]

I must be missing something

 

I read BAM's report; the earnings attributed to common shareholders is $1.57 for the last 9 month of 2018...  So at $ 41... this is still 20x earnings... I am not getting why people seems to think this is a very attractive investment at current valuation.  Am I missing some important facts?  Would really appreciate someone able to enlighten me!

 

Thanks!

Gary

 

I would recommend looking at the investor day presentation.

[Uccmal]

Really good analysis being done on BPY by this fellow:

 

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

 

https://seekingalpha.com/article/4226967-went-wrong-brookfield-property-partners-part-2-core-office

 

 

[John Hjorth]

... 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.

 

Today my thoughts have been circling about this particular BAM asset item of USD 5.321 B. It's a lot of value, and material compared to BAM BV. [YE2017 : BAM common equity USD 24.052 B, so gross [ex. eventual property debt] : 22%.]

 

I'm getting nosy and really persistent here [verging to become stubborn as some donkey]. Next, I'm going to dismantle and compare the notes in the financials about investment properties for BAM and BPY. By doing that, it must be possible to identify these investment properties. As basis, it should not be possible to "hide" a value that large in the BAM financials, when the notes are in some way structured and set as an asset directory.

 

Why is it so? [That there are investment properties owned by BAM, and not by the separate sub for that purpose: PBY?]: I don't know right now, but I hope to find out.

 

A possible explanation could be, that there at the formation of BPY years ago were certain properties considered "core-core"/"top notch"/"ultra-valuable", where BAM did not want to share the future progress in value and cash yield with the BPY minority LP unit holders.

 

[Like "the beer" in

, where everything is shared in the commune - women, toothbrushes and such - but not the beer! [i think English translation is not needed! [ : - ) ]]

[John Hjorth]

Really good analysis being done on BPY by this fellow:

 

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

 

https://seekingalpha.com/article/4226967-went-wrong-brookfield-property-partners-part-2-core-office

 

Thank you, Al,

 

Yes, Mr. Mazák is good. Here is his part 3 article, in a row of 4, just released today.

 

However, I have to say, that his NAV development analysis is a bit flawed, because it skips changes over time in capitalization rates applied under the IFRS valuation of investment properties. [And without getting too impolite or even rude, that is surprising, considering he's a "pure play" numbers/math guy/"nerd", ref. his SA profile description.]

[vince]

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.

 

So I was right even though i was dead wrong, lol

[khturbo]

John thanks for responding in depth. I implicitly trusted that the valuations were clean between BPY and BAM, but it's good to see the hard numbers there.

 

I just emailed IR asking about the management fees and whether they're reflected in the IFRS value. I always thought that the IFRS value was simply the summation of the individual properties, which would imply that corporate level management fees aren't reflected, but I could be (and hope I am) wrong. I think Brookfield IR is usually pretty good at getting back to you within a couple of days so I'll let everyone know what they say.

 

One other thing is the IDRs. If you assume 5% distribution growth and use a 12% discount rate (I just used 7% yield + 5% growth as the approximate return on the stock so used the same dr on the IDRs) the NPV of the IDRs is a bit above $2 / BPY share. I think everyone would agree that that should come out of the value in some way. Whether you deduct the fees from the IDRs by BAM's 53% ownership percentage in BPY or you deduct ~$2 / share (or whatever your estimate is) from BAM's holdings in BPY, I think you have to do one of those or else you really are double counting.

 

You have the same issue with BIP and BEP. Hypothetically since BAM uses the market price in their SOTP for themselves you don't need to make adjustments as the market should account for IDRs in the prices. I personally prefer to value them independently for mine but I guess you don't need to.

[John Hjorth]

Thank you, Kyler,

 

Great initiative from you to get in contact with BAM IR about it. It's certainly better to ask the company and get confirmation [- or the opposite] with certainty, and perhaps also some supplemental elaboration. I'm looking forward to read the reply you'll get from BAM IR.

[jfan]

... 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.

 

Today my thoughts have been circling about this particular BAM asset item of USD 5.321 B. It's a lot of value, and material compared to BAM BV. [YE2017 : BAM common equity USD 24.052 B, so gross [ex. eventual property debt] : 22%.]

 

I'm getting nosy and really persistent here [verging to become stubborn as some donkey]. Next, I'm going to dismantle and compare the notes in the financials about investment properties for BAM and BPY. By doing that, it must be possible to identify these investment properties. As basis, it should not be possible to "hide" a value that large in the BAM financials, when the notes are in some way structured and set as an asset directory.

 

Why is it so? [That there are investment properties owned by BAM, and not by the separate sub for that purpose: PBY?]: I don't know right now, but I hope to find out.

 

A possible explanation could be, that there at the formation of BPY years ago were certain properties considered "core-core"/"top notch"/"ultra-valuable", where BAM did not want to share the future progress in value and cash yield with the BPY minority LP unit holders.

 

[Like "the beer" in

, where everything is shared in the commune - women, toothbrushes and such - but not the beer! [i think English translation is not needed! [ : - ) ]]

 

Hi John,

 

I'm just curious where you got the USD 5.321 Other investment property number from? I've been searching for this differential between BAM and BPY's reports and can't seem to find it.

 

Thanks

Jerome

 

[John Hjorth]

Hi Jerome, Welcome to CoBF! [ : - ) ],

 

You have to study the downloadable attachment to my post mentioning that particular figure. It's explained and documented there, cf. the content of my post.

[jfan]

Thanks John.

 

Sorting through BAM's financials is a challenging task. I think you are right about BAM keeping some investment properties to themselves without placing them into BPY.

 

Looking back at BAM's and BPY's 2012 annual report. It would appear that at least from the property acquisition perspective that there were more BAM consolidated purchases than attributed to just BPY's activity.

 

As an example, in BAM's 2012 report, page 30 under Investment properties and PPE, there were $4.508 B of property acquisitions. Whereas in BPY's 2012 report, page 194 (F-22) note 5, there were only $2.58 B of property acquisitions. Similar thing occurred in 2013.

 

Unfortunately, their disclosure on these properties is not forthcoming.

 

The only other possibility is that they have re-allocated their sustainable timberland properties to higher value use (?Brazil agricultural lands).

They sold off $3+ Billion in timberland in 2013. The remaining is attributable to Acadian Timber Corp ~ $123 million (based on Market Value on Dec 2017) and the rest is unlisted ~ $613 million. This is usually located in the accounts receivable but again disclosure is not consistent to make a concrete conclusion that they were shifted out to investment properties.

 

 

 

 

 

 

 

 

 

 

 

[khturbo]

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.

 

I wonder if these properties are reflected as the "unlisted" investments? Unlisted was $5,885mm quoted and $4,797mm IFRS as per the discussion in at YE 2017. Seems pretty close.

[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.]

 

Finans.dk [December 11^th 2018] : Ørsted filters politically unwanted bidders.

[jfan]

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.

 

I wonder if these properties are reflected as the "unlisted" investments? Unlisted was $5,885mm quoted and $4,797mm IFRS as per the discussion in at YE 2017. Seems pretty close.

 

No. The unlisted investments (IFRS amount $ 4797)on the pg3 of the 2017 annual report consists of Brookfield Energy Marketing ($801 Common equity), Brookfield Residential (common equity $2915), and $1081 of other unlisted investments. This "Other" category is consistent with the footnotes in the YE 2017 supplemental where its states $1.1 B of unlisted investments spread across real estate, private equity and sustainable resources.

 

Acadian is also follows similar IFRS Mark to Market accounting. Its market value is about $123 million. The sustainable resource common equity as quoted in the Infrastructure section of BAM's annual report is $736 million. My guess is that they have an excess of $613 million invested in other unlisted timberland resources.

 

Knowing this and the fact that the unlisted real estate investments are $72 (as disclosed in the 2017 supplemental).  There is probably $396 million in unlisted investments buried within the private equity portion.

 

Along the same lines, the "Other Listed" investments are Acadian Lumber and Norbord where BAM owns 45% and 49% of their respective shares. TERP is consolidated within BEP given that BAM owns Orion who in turns owns 51% of TERP.

 

If we estimate that the value of Acadian Lumber is $123 million and Norbord is $1801 million, plus the net cash and financial asset carried on the BAM corporate activities ($2255) gives you ~ $4179 million.

 

This estimate is roughly in line with the printed value of $4015 on BAM's annual report.

 

Knowing this, I think the most likely explanation for the $5.513 of other investment properties is that they are likely highly leveraged. The other investments in the real estate section ($72) is likely the residual amount.

 

BAM does state that they on occasion will use their corporate balance sheet to facilitate acquisitions so that they have a speed advantage when opportunities arise and so that they can close transactions efficiently.

 

 

[John Hjorth]

Awesome posts from you gents recently, Kyler & Jerome!,

 

Please keep them coming! To me, it's like one guy asking a specific question, triggering another guy a new way to look at BAM things from another perspective, triggering a new analysis, and thereby new ways to look at it.

[Jerry Capital]

Agreed thanks for your work.

[khturbo]

Ok guys, just heard back from IR. Here's verbatim what I got back when I asked about management fees being reflected in NAV:

 

"The equity per unit we disclose reflects all assets and liabilities, not just the properties. Insofar as the management fee is reflected in net income, it’s also reflected in the equity per unit calculation."

 

I responded asking him to confirm that the management fees were reflected in net income as they appeared to be in the Q's. He replied that that was correct.

 

So the management fees are reflected in NAV, which means that it is certainly not double counting to put a multiple on the management fee and value BAM's stake in BPY at NAV (or some multiple thereof).

 

Agreed with the other posters. Lots of good info in here and appreciate all of the learnings!

[jfan]

... BAM can do the spins of the LPs & selectively purchase LPs when they think they think they are cheap & spin them off at some time in the future.  Management can also maintain their ownership of the LP interests they now have in direct interests which will have a higher value. The reason why these structures make sense for others is to maintain control but Brookfield has control via the GPs.  What is point of holding the LPs in BAM if they can retain control of the LP assets via the GP (and thus access to permanent capital) & retain management ownership/incentive of some of the funds directly?  I just do not see the benefits as all the benefits folks have been discussing can be retained via an LP spin-off with a reduced discount. There would have to be some explanation but I think clients & investors would understand the economics have not changed but the structure has to increase everyone's value.

 

Maybe I am missing something about how the GP/LP structure works.  Can the LPs remove Brookfield as the GP if a certain number of LP units vote to remove them?  I do not think so.

 

Packer

 

Those are some positions and questions, that actually qualify - at least, to me , personally. Time to go BAM digging - again! [To me, it's [ still] about the understanding of the whole inner workings of the Brookfield sphere, going forward.]

 

Thank you for your post, Packer.

 

I thought I try to ask this question at least with respect to BPY and BAM. In BPY's filings, page 156, it quotes: "Our company may not be removed as managing general partner by the partners of the Property Partnership". BPY GP can withdraw from being managing GP without the approval of the unitholders. So Packer is absolutely correct that the power is held by BAM with or without owning the LP units.

 

I have not read the filings for the other LPs, but I suspect they are similar in structure as well.

 

This is also consistent with BAM, given that 1/2 the board is elected by the Class B shares, and these shares are owned by Partner's Limited. Since Partner's Limited is wholly controlled by the group of likely prior Brascan managing partners. BAM similarly is protected from outside activists.

 

All this is consistent with the Brascan ethos, where they sought control of companies via ownership via debt or equity. All this in order to unlock shareholder value. This has always been their primary goal. (The Brass Ring is quite an insightful book)

 

Trying to see how it is from BAM's perspective, despite having control over BPY via the GP structure. If the LP shares are at a discount, why not purchase them for themselves for future capital gains? Particularly since, you have control over the direction of the LP anyways and most likely have a plan to unlock or at least make the value more transparent in the future. This would be preferable to purchasing another non-related business or debt/equity of someone else's company.

 

Furthermore, BAM still gets their base management fees from the LP, equity enhancements and incentive distributions albeit at a reduced rate if the BPY share price languishes, but always adding to their cash flow.

 

I think ultimately BAM prioritizes in this order of importance: 1) full control at all times 2) unlock value to be reflected in the share prices over time 3) then fees to themselves via AUM.

 

Anybody that invests with BAM has to "trust" that they will look after the outside passive minority investor and believe they know best. The question you have to answer in your mind, is BAM +/- LPs properly aligned with the common shareholder?

[Packer16]

I agree that knowing if you are aligned is important but also another factor as long as a large portion of BAM's NAV is investments in the subs is what type of discount is the market going to put on these stakes.  Some folks assume that is does not matter because the discount will be removed or decrease over time.  I disagree with this unless BAM has a policy of full or larger spin-off of subs.  What is happening today is BAM is investing cash flow in BPY at $1 and the market is only giving them 70c credit for this dollar.  Now this would be good if you were assured that the discount is going to decline but that is not a guarantee at all.  Quite the opposite has occurred since BAM has partially spun-off its subs.  Just look at the long-term performance of BAM vs. BIP.  The drag on BAM IMO is caused by this discount issue which I think is with us until there a full or larger spin-offs.  As a part of the partial spin-off structure BAM has "created" these discounts that would not exist if they did a full spin-off.  It would also IMO make BAM an easier entity to value.  In the end, there may be a conflicting alignment here if BAM thinks they have created the best alignment with shareholders with partially spun-off subs.

 

Packer

[Jerry Capital]

What you are saying doesn't make sense.

 

When BAM buys BPY at market value they are not turning a dollar into 70 cents.

 

BIP outperformed BAM because BAM less BIP didn't perform as well as BIP.

 

 

[Spekulatius]

Well, if the discounts too book value for BAM’s vehicles persist, then it is an indication that the GP/Lp model is Breaking down. BAM can patch this over buy purchasing LP units (and valuing them on their balance sheet to book, but they forgo the asset management fees (which they now pay to themselves for the units they own) and convert from an asset light than to an asset heavier model.

 

It might be instructive to see what happen in the pipeline sector where the GP/LP relationship wasn’t working any more, because the cost of capital got to high for the LP units (due to persistent rerating at lower valuations). The issues with pipelines GP and BAM are somewhat different (IDR burdens were higher for the pipeline Lp’s, but their seem some similarities as well.

 

In any case, I think the Go buying Lp units is a sign of weakness for the operating model and not strength. BAM goes from an asset manager to an asset owner essentially.

[John Hjorth]

... BAM can do the spins of the LPs & selectively purchase LPs when they think they think they are cheap & spin them off at some time in the future.  Management can also maintain their ownership of the LP interests they now have in direct interests which will have a higher value. The reason why these structures make sense for others is to maintain control but Brookfield has control via the GPs.  What is point of holding the LPs in BAM if they can retain control of the LP assets via the GP (and thus access to permanent capital) & retain management ownership/incentive of some of the funds directly?  I just do not see the benefits as all the benefits folks have been discussing can be retained via an LP spin-off with a reduced discount. There would have to be some explanation but I think clients & investors would understand the economics have not changed but the structure has to increase everyone's value.

 

Maybe I am missing something about how the GP/LP structure works.  Can the LPs remove Brookfield as the GP if a certain number of LP units vote to remove them?  I do not think so.

 

Packer

 

Those are some positions and questions, that actually qualify - at least, to me , personally. Time to go BAM digging - again! [To me, it's [ still] about the understanding of the whole inner workings of the Brookfield sphere, going forward.]

 

Thank you for your post, Packer.

 

I thought I try to ask this question at least with respect to BPY and BAM. In BPY's filings, page 156, it quotes: "Our company may not be removed as managing general partner by the partners of the Property Partnership". BPY GP can withdraw from being managing GP without the approval of the unitholders. So Packer is absolutely correct that the power is held by BAM with or without owning the LP units.

 

I have not read the filings for the other LPs, but I suspect they are similar in structure as well.

 

This is also consistent with BAM, given that 1/2 the board is elected by the Class B shares, and these shares are owned by Partner's Limited. Since Partner's Limited is wholly controlled by the group of likely prior Brascan managing partners. BAM similarly is protected from outside activists.

 

All this is consistent with the Brascan ethos, where they sought control of companies via ownership via debt or equity. All this in order to unlock shareholder value. This has always been their primary goal. (The Brass Ring is quite an insightful book)

 

Trying to see how it is from BAM's perspective, despite having control over BPY via the GP structure. If the LP shares are at a discount, why not purchase them for themselves for future capital gains? Particularly since, you have control over the direction of the LP anyways and most likely have a plan to unlock or at least make the value more transparent in the future. This would be preferable to purchasing another non-related business or debt/equity of someone else's company.

 

Furthermore, BAM still gets their base management fees from the LP, equity enhancements and incentive distributions albeit at a reduced rate if the BPY share price languishes, but always adding to their cash flow.

 

I think ultimately BAM prioritizes 1) full control at all times 2) unlock value to be reflected in the share prices over time 3) then fees to themselves via AUM.

 

Anybody that invests with BAM has to "trust" that they will look after the outside passive minority investor and believe they know best. The question you have to answer in your mind, is BAM +/- LPs properly aligned with the common shareholder?

 

Jerome,

 

Dense quoting here [i'm sorry for that - but required for the purpose here, for me]:

 

I actually appreciate your posts - a lot. You're thinking like me. With regard to BPY, or for that matter : any of the BAM subs, for now, we have [ and with this investment to live with] an assumption of BAM consolidated balance sheet includes all assets at fair value. [if one does not feel comfortable about this, it's just time to leave.]

[khturbo]

Honestly I don't really think it's a big deal if BAM trades at a discount to all of the underlying assets or even if the underlying assets trade at a discount themselves.

 

I think a better way to describe the BPY situation is that BAM is investing 70c to get a cash flow stream that they believe is worth $1. If the market is right and it's only worth 70c, then we haven't gone backwards really. Saying it's "worth" 70c means that you'd get a fair return on it over time. In this way we're exposed to the same risk that a BRK holder would be - that BAM is just making a bad investment. If you think BAM is smart then you should be okay with that, on balance.

 

But if the market continues to value BPY at 70c and it really is worth $1, then that will significantly increase BAM's return on the investment over time. Let's say BPY has three years of deleveraging before they could buy back stock in bulk. At that point, as a long-term owner of BAM, wouldn't you like to be invested in an entity where your partners prefer to be taken out at a discount to fair value? Of course you would.

 

The same reasoning goes for BAM. The lowest current value that I can possibly get to is ~$48 / share. If BAM continues to trade at a ~20% discount over time then the cash that they devote to buybacks will have higher IRRs attached to them even if the undervaluation persists.

 

It's like Malone said at the liberty investor day - there's no reason to try to close the discount on all the tracking stocks because they let you have higher returns over the long term.

 

And on the spin of the LP interests, I think having them on BAM's balance sheet prevents a lot of potential bad behavior from BAM. As it stands, BAM has incentives to dramatically increase the size of the partnerships even if the new investments come in right at the cost of capital - they'd get a fair return on their own investment and they'd get the increased management fees on the portions that they don't own. Obviously, if they put a lot of money to work below their cost of capital, then they're just hurting themselves since they own those assets. If they were to hard spin the partnership interests now you pretty much just have an incentive to get as big as possible as fast as possible. While Flatt might be able to keep a culture of value creation, I think you'd almost be guaranteed to have problems down the line.