BAM - Brookfield Asset Management

[John Hjorth]

 

I think there is great deal of truth in the recent posts by Spekulatius, villainx, Peregrino & walkie about what this in reality is about for Mr. Marks & Co.

 

Oaktree 2018 10-K, p. 28:

 

... Risks Relating to Our Business

 

Given our focus on achieving superior investment performance with less-than-commensurate risk, and the priority we afford our clients’ interests, we may reduce our AUM, restrain its growth, reduce our fees or otherwise alter the terms under which we do business when we deem it appropriate—even in circumstances where others might deem such actions unnecessary. Our approach could adversely affect our results of operations. ...

[petec]

I think there will be greater benefits given Trump's tax act... there are all kinds of rules in place regarding who and how qualified opportunity zone funds work, and one of the odd rules is that at time of sale, the buyer needs to buy the equity interest to get to the asset rather than buying the asset outright.  This requires inside knowledge of the entity to avoid long-tail risks and now that this can be done in-house using the distributions on distressed bonds, Brookfield can create the ultimate tax efficient fund without material market risk or tax liability despite realization of assets...

 

I'm going to have to reread this several times ;)

[walkie518]

I think there will be greater benefits given Trump's tax act... there are all kinds of rules in place regarding who and how qualified opportunity zone funds work, and one of the odd rules is that at time of sale, the buyer needs to buy the equity interest to get to the asset rather than buying the asset outright.  This requires inside knowledge of the entity to avoid long-tail risks and now that this can be done in-house using the distributions on distressed bonds, Brookfield can create the ultimate tax efficient fund without material market risk or tax liability despite realization of assets...

 

I'm going to have to reread this several times ;)

 

there is certainly opportunity on the private equity side or really anywhere there are realizations, but bonds tend to pay on a more regular basis and have liquidity

 

if Oak Op Fund 1 buys the next bankruptcy's bonds for 20 cents on the dollar, the company reorgs, the bonds are converted into equity or paid off in event of liquidation, that can be material tax hit ... instead, Oak Op Fund 1 sells the cap gain portion and takes a position in Brookfield RE Op Zone Fund 1...this defers the tax for some time and initial capital outlay plus a little can be distributed to LPs, Brookfield RE Op Zone Fund 1 then uses fresh cash to invest 90% of funds in designated op zones and thereby defers taxation and to the available extent does step-up of basis per the tax act

 

more clear? 

 

 

[villainx]

I forgot for which sub or whether it was with BAM, but during recent investor day the new opportunity zones were discussed as really big opportunity areas for companies like BAM (and sub).

[vince]

I forgot for which sub or whether it was with BAM, but during recent investor day the new opportunity zones were discussed as really big opportunity areas for companies like BAM (and sub).

 

Really? How sure are you it was Bam or a bam sub?

[Williams406]

Came across Opportunity zones when FRP holdings (real estate developer and quarry owner) disclosed that they were investing a portion of the proceeds from a RE sale (with a lot of capital gains) in to a joint venture with another developer targeting an opportunity zone. Depending on how many zones will exist and how large they are, the concept could be very significant for a player like BAM, I would think. Put a fund together targeting Opp. zones, identify and execute positive ROI projects that make sense on their own merit, rake in the fees by allowing investors with capital gains on other investments to defer taxes.

[vince]

Came across Opportunity zones when FRP holdings (real estate developer and quarry owner) disclosed that they were investing a portion of the proceeds from a RE sale (with a lot of capital gains) in to a joint venture with another developer targeting an opportunity zone. Depending on how many zones will exist and how large they are, the concept could be very significant for a player like BAM, I would think. Put a fund together targeting Opp. zones, identify and execute positive ROI projects that make sense on their own merit, rake in the fees by allowing investors with capital gains on other investments to defer taxes.

 

I definitely agree about the potential, they could create some successful asset gathering with those funds.  But do you remember Bam specifically addressing the opportunity?

[gokou3]

Came across Opportunity zones when FRP holdings (real estate developer and quarry owner) disclosed that they were investing a portion of the proceeds from a RE sale (with a lot of capital gains) in to a joint venture with another developer targeting an opportunity zone. Depending on how many zones will exist and how large they are, the concept could be very significant for a player like BAM, I would think. Put a fund together targeting Opp. zones, identify and execute positive ROI projects that make sense on their own merit, rake in the fees by allowing investors with capital gains on other investments to defer taxes.

 

I definitely agree about the potential, they could create some successful asset gathering with those funds.  But do you remember Bam specifically addressing the opportunity?

 

2018 Investor Day - BPY presentation, page 69.

[villainx]

Came across Opportunity zones when FRP holdings (real estate developer and quarry owner) disclosed that they were investing a portion of the proceeds from a RE sale (with a lot of capital gains) in to a joint venture with another developer targeting an opportunity zone. Depending on how many zones will exist and how large they are, the concept could be very significant for a player like BAM, I would think. Put a fund together targeting Opp. zones, identify and execute positive ROI projects that make sense on their own merit, rake in the fees by allowing investors with capital gains on other investments to defer taxes.

 

I definitely agree about the potential, they could create some successful asset gathering with those funds.  But do you remember Bam specifically addressing the opportunity?

 

2018 Investor Day - BPY presentation, page 69.

 

Yes, it was BPY.  Long day there and lots of info, but of course, what applies to BPY applies to certain degrees to BAM. 

 

https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/ir-day/2018/ir-day-2018-bpy-transcript-final.pdf

[vince]

Came across Opportunity zones when FRP holdings (real estate developer and quarry owner) disclosed that they were investing a portion of the proceeds from a RE sale (with a lot of capital gains) in to a joint venture with another developer targeting an opportunity zone. Depending on how many zones will exist and how large they are, the concept could be very significant for a player like BAM, I would think. Put a fund together targeting Opp. zones, identify and execute positive ROI projects that make sense on their own merit, rake in the fees by allowing investors with capital gains on other investments to defer taxes.

 

Yes, it sure does, much appreciated.

 

I definitely agree about the potential, they could create some successful asset gathering with those funds.  But do you remember Bam specifically addressing the opportunity?

 

2018 Investor Day - BPY presentation, page 69.

 

Yes, it was BPY.  Long day there and lots of info, but of course, what applies to BPY applies to certain degrees to BAM. 

 

https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/ir-day/2018/ir-day-2018-bpy-transcript-final.pdf

[vince]

Came across Opportunity zones when FRP holdings (real estate developer and quarry owner) disclosed that they were investing a portion of the proceeds from a RE sale (with a lot of capital gains) in to a joint venture with another developer targeting an opportunity zone. Depending on how many zones will exist and how large they are, the concept could be very significant for a player like BAM, I would think. Put a fund together targeting Opp. zones, identify and execute positive ROI projects that make sense on their own merit, rake in the fees by allowing investors with capital gains on other investments to defer taxes.

 

Yes, it sure does, much appreciated.

 

I definitely agree about the potential, they could create some successful asset gathering with those funds.  But do you remember Bam specifically addressing the opportunity?

 

2018 Investor Day - BPY presentation, page 69.

 

Yes, it was BPY.  Long day there and lots of info, but of course, what applies to BPY applies to certain degrees to BAM. 

 

https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/ir-day/2018/ir-day-2018-bpy-transcript-final.pdf

 

Yes, it sure does, much appreciated.  I am pasting what was said on pg 11 of Bpy transcript...."Now, one development advantage that we have, versus others, which I think is really worth noting, is that our

Greenpoint and Mott Haven, and at least 30 of the potential developments within General Growth Properties, are all

located within the opportunity zone, as established last year by the Federal Tax Bill. For those of you not familiar

with that, the Treasury Department has certified more than 8,700 census tracks across the U.S., as economically

distressed communities where new investments, under certain conditions, some of the details still being worked out,

can be eligible for very substantial preferential tax treatment.

And, just sort of paraphrasing some of the benefits, you would get a deferred gain of any rolled over investment into

these new investments through 2026. And, those deferrals are not only real estate deferrals, meaning not only

Brookfield Property Partners – 2018 IR Day Transcript

Wednesday, September 26, 2018 – 11:15 AM ET

Page 12

deferrals of gains that you experience in real estate investments, but they could be equity investments or outside of

real estate, so basically, embedded gains in equity stocks.

You, also, would get a step up to fair market value in your basis for investments made and held for more than ten

years, so those gains would not be subject to tax, as well. This plan is a very good deal for investors wanting to roll

over and shelter gains, as I said, including non-real estate gains and, no doubt, is intended to spur development in

these so-called distressed areas.

Based on calls that we've been receiving, honestly weekly, we're very optimistic that we'll be able to attract efficient

capital to help fund many of these new developments that we have in mind.

[khturbo]

https://concentratedcompounding.com/bam1/

 

Here's an effort to calculate earning's power and valuation for $OAK along with some of the strategic benefits.

[vince]

https://concentratedcompounding.com/bam1/

 

Here's an effort to calculate earning's power and valuation for $OAK along with some of the strategic benefits.

 

Thx

[vince]

https://concentratedcompounding.com/bam1/

 

Here's an effort to calculate earning's power and valuation for $OAK along with some of the strategic benefits.

 

Good straightforward analysis, exactly what I was looking for.  I too like the deal and the starting yield.  I think he's too conservative on earnings growth.  Not only did OAK historically grow aum's at a better clip than his estimate, BAM's umbrella should help, at least a little.  The one thing I don't like about the deal is the fact BAM is using shares as currency.  So whatever discount BAM received, half of the discount was offset by using cheap shares.  It has always bothered me that Flatt doesn't appreciate the value of BAM shares (through issuance and non aggressive buyback) as much as he claims he does.  Obviously things are not that simple sometimes.....and who am I to question his superb overall value creation.  However, even a casual, back of envelope calculation shows significant undervaluation (with considerable liquidity at the parent) for extended periods within last 10 years.

[villainx]

https://concentratedcompounding.com/bam1/

 

Here's an effort to calculate earning's power and valuation for $OAK along with some of the strategic benefits.

 

Good straightforward analysis, exactly what I was looking for.  I too like the deal and the starting yield.  I think he's too conservative on earnings growth.  Not only did OAK historically grow aum's at a better clip than his estimate, BAM's umbrella should help, at least a little.  The one thing I don't like about the deal is the fact BAM is using shares as currency.  So whatever discount BAM received, half of the discount was offset by using cheap shares.  It has always bothered me that Flatt doesn't appreciate the value of BAM shares (through issuance and non aggressive buyback) as much as he claims he does.  Obviously things are not that simple sometimes.....and who am I to question his superb overall value creation.  However, even a casual, back of envelope calculation shows significant undervaluation (with considerable liquidity at the parent) for extended periods within last 10 years.

 

I'm kinda thinking OAK wanted to participate in BAM's future.  Which is why the deal was structured that way. OAK leadership thinks BAM has a bright future and at least wanted to steer the shareholder base that way.  I could be wrong, but OAK shares had been languishing, and BAM makes too much sense not to have a stake.  I might be naive, but how else would Marks and OAK leadership look after their shareholder group?

 

I also dig what you say about BAM not valuing their shares properly.  1, There were restructuring or correcting through these multi year span, whether with BBU, GCP, or the spinoffs.  2, There were serious growth opportunities in the various subs to not worry about those first.  3, And now when there's a relative calm, and there's a serious push to repurchase, bam, OAK happened.  My point being, share buyback was always there, but something always came up. 

 

 

[Cigarbutt]

^I would add (respectfully) that this is what happens when predator meets vulture.

 

The two parties have an unusual focus on value but this is not the typical distressed opportunity transaction. The nature and timing of the deal likely underlines that BAM is using shares as a currency only because they will receive as much in business value as they will give.

 

On Mr. Flatt ("the perfect predator"):

https://www.canadianbusiness.com/business-strategy/brookfield-asset-management-a-perfect-predator/

 

On Mr. Marks ("one of the biggest vulture investors"):

https://www.referenceforbusiness.com/history/Oe-Pa/Oaktree-Capital-Management-LLC.html

 

FWIW, the Villette and Vuillermot book alluded to in the above mentioned canadian business 2010 article is excellent and is also available in English. The book does not mention Mr. Flatt but refers to leaders that are often named in other discussions: B. Arnault, G. Agnelli, V. Bolloré, W. Buffett, S. Walton etc. The book title is From predators to icons.

 

Synergies are often exaggerated but IMO not in this case.

I guess it's like when two tribal leaders agree to make an alliance.

[vince]

https://concentratedcompounding.com/bam1/

 

Here's an effort to calculate earning's power and valuation for $OAK along with some of the strategic benefits.

 

Good straightforward analysis, exactly what I was looking for.  I too like the deal and the starting yield.  I think he's too conservative on earnings growth.  Not only did OAK historically grow aum's at a better clip than his estimate, BAM's umbrella should help, at least a little.  The one thing I don't like about the deal is the fact BAM is using shares as currency.  So whatever discount BAM received, half of the discount was offset by using cheap shares.  It has always bothered me that Flatt doesn't appreciate the value of BAM shares (through issuance and non aggressive buyback) as much as he claims he does.  Obviously things are not that simple sometimes.....and who am I to question his superb overall value creation.  However, even a casual, back of envelope calculation shows significant undervaluation (with considerable liquidity at the parent) for extended periods within last 10 years.

 

I'm kinda thinking OAK wanted to participate in BAM's future.  Which is why the deal was structured that way. OAK leadership thinks BAM has a bright future and at least wanted to steer the shareholder base that way.  I could be wrong, but OAK shares had been languishing, and BAM makes too much sense not to have a stake.  I might be naive, but how else would Marks and OAK leadership look after their shareholder group?

 

I also dig what you say about BAM not valuing their shares properly.  1, There were restructuring or correcting through these multi year span, whether with BBU, GCP, or the spinoffs.  2, There were serious growth opportunities in the various subs to not worry about those first.  3, And now when there's a relative calm, and there's a serious push to repurchase, bam, OAK happened.  My point being, share buyback was always there, but something always came up.

 

I don't think there's any question that Mark's wanted Bam shares and therefore if Flatt really wanted the deal then he had to give some up.  In addition, I believe that Bam received a better price, possibly lower than other firm offers, because of their record and likely good future.  I also agree with your bullets and thats why I qualified my opinion by saying that it's not so simple sometimes.  I dont't want to sound too critical, Bam has been in my portfolio longer than any other stock.

[villainx]

I'm constantly reminded of the difficult investing truism.  I'm always looking to add to BAM because it's a company (or the various front people) that I admire and believe in the business prospects.  But I'm also impatient for the value to justify.  Haha, stock price can't go up fast enough unless when I'm buying, which is also happens to be regularly.  No other scorecard other than share price for whether it's undervalued or not.

[John Hjorth]

Brookfield Asset Management : Oaktree Acquisition [March 13^th 2019].

[khturbo]

Vince and villainx, thanks for the comments. I agree with your guys's thoughts as well. I think there's definitely a possibility that Oaktree grows quicker than I estimated it might. Vince I think you had it right when you said that "BAM's umbrella should help, at least a little." I'm hoping for a bit more growth than I estimated and I think it's fairly reasonable. I think we'll get a good idea of it next time we get a recession. It seems like there could be LOTS of distressed debt.

 

I also agree on the issue of valuing the shares. I'm sure Marks and Karsh wanted shares and it makes sense to give some to get the deal done. But BAM should still have plenty of liquidity and cash left after the deal - $2.35 bb cash for the deal, probably $2.5bb+ in fcf to the parent this year, and $1.7bb in cash once they sell the piece of real estate they took onto their balance sheet to syndicate. They might have a draw for the real estate fund but should definitely have at least $1bb for repurchases and probably a bit more.

 

If they do value the stock correctly, and since they're done with the growth initiatives, it feels like they'll use all of that money for a repurchase. I hope so anyways just like you do.

[John Hjorth]

... I think he's too conservative on earnings growth. ...

 

vince,

 

"He" [<-?] -Kyler [CoBF member khturbo] is is the author of the blog post. [ ;- ) ]

[ValueMaven]

What a brilliant acquisition by BAM management and co ... really love this move.  What I would like to see now is more aggressive buyback at the parent level; similar to what Mr Flatt has written about in the past.  The operating businesses are throwing off so much cash right now...I would like to see management become even more defensive from a cash level, and holding company level...things are really good globally (for now) - and can turn quickly (think 4th quarter of 2018).  BAM is one of my largest positions - but the stock I think in the near-term as gotten ahead of itself. 

[John Hjorth]

... , and since they're done with the growth initiatives, ...

 

Kyler,

 

Where do you get that personal perception from?

[villainx]

... , and since they're done with the growth initiatives, ...

 

Kyler,

 

Where do you get that personal perception from?

 

Trying to translate some of BAM and sub's discussion, 1) stuff are not cheap; 2) focusing more on tuck-ins and puzzle pieces; 3) cycling through assets; 4) their size; and 5) focusing on buybacks. With Brookfield, there's always surprises, and they can react to global markets changes, so something transformative might always happen. But at the moment, they seem to be regrouping.

[no_free_lunch]

What a brilliant acquisition by BAM management and co ... really love this move.  What I would like to see now is more aggressive buyback at the parent level; similar to what Mr Flatt has written about in the past.  The operating businesses are throwing off so much cash right now...I would like to see management become even more defensive from a cash level, and holding company level...things are really good globally (for now) - and can turn quickly (think 4th quarter of 2018).  BAM is one of my largest positions - but the stock I think in the near-term as gotten ahead of itself.

 

It seems a good acquisition to me as well.  Hopefully the combined names are able to attract capital to each other that they might not otherwise have.

 

I am not sure about buybacks at this point.  I don't feel BAM to be particularly undervalued.  If anything buying heavily with stock seems the better move.  I think there will be opportunities to deploy cash ahead.