BAM - Brookfield Asset Management

[nnayyar]

Good writeup on BPY here:

 

http://www.valuebygeorge.com/2013/04/17/brookfield-property-partners-bpy/

 

 

[giofranchi]

Good writeup on BPY here:

 

http://www.valuebygeorge.com/2013/04/17/brookfield-property-partners-bpy/

 

I agree. And I also like the blog! :) Here is a good summing up on BAM Q1 2013 results:

 

http://www.valuebygeorge.com/2013/05/10/brookfield-asset-management-bam-1q13-results-ffo-up-34-more-to-come/

 

giofranchi

[giofranchi]

http://www.valuebygeorge.com/2013/05/23/brookfield-asset-management-bam-investment-thesis-part-ii

 

giofranchi

[nnayyar]

There's an obvious rotation out of yield, partially led IMO by Japan. This article in particular highlights the risk from Japanese investors in US REITS:

 

    http://online.wsj.com/article/SB10001424127887324010704578419041839826094.html

 

 

Below is an argument on the sensitivity of REIT's to Interest Rates, it seems sometimes it matters and sometimes it doesn't"

http://t.co/YVMLoEADE6

 

I was just wondering if anyone had some thoughts if there is a real shift in business fundamentals or simply a re-allocation / de-leveraging going on? Tks!

 

 

[indythinker85]

Same hedge fund now targeting BPY calling it a Ponzi Scheme. They dont have the greatest track record, but then again few short funds have decent performance this year http://www.valuewalk.com/2013/05/dialectic-brookfield-a-ponzi-scheme/

[nnayyar]

Tks for the link. Definitely sounds like they have an axe to grind. I went searching through their prospectus and finally found the reference to cash shortfall:

 

In particular, our

proposed distribution amounts are significantly greater than our

projected cash flow from operations based on dividend policies

currently in place at our operating entities and our projected

operating cash flow from our direct investments. Despite our

intention to use the proceeds of sales of certain of our direct

investments or borrowings to fund any shortfall in distributions, we

may not be able to do so on a consistent and sustainable basis.

 

Pg 13 of Prospectus:

http://www.brookfield.com/_Global/42/img/content/File/Investor%20Relations/Presentations/2013/BPY_Prospectus_E_March_15_2013.pdf

 

It sounds to me like they planned on using asset sales to cover some of the distribution? Is this normal?

[giofranchi]

Tks for the link. Definitely sounds like they have an axe to grind. I went searching through their prospectus and finally found the reference to cash shortfall:

 

In particular, our

proposed distribution amounts are significantly greater than our

projected cash flow from operations based on dividend policies

currently in place at our operating entities and our projected

operating cash flow from our direct investments. Despite our

intention to use the proceeds of sales of certain of our direct

investments or borrowings to fund any shortfall in distributions, we

may not be able to do so on a consistent and sustainable basis.

 

Pg 13 of Prospectus:

http://www.brookfield.com/_Global/42/img/content/File/Investor%20Relations/Presentations/2013/BPY_Prospectus_E_March_15_2013.pdf

 

It sounds to me like they planned on using asset sales to cover some of the distribution? Is this normal?

 

Well, one way BAM creates value for its shareholders follows:

As an investor and capital allocator, we strive to invest at attractive valuations, particularly in distressed situations that create opportunities for superior valuation gains and cash flow returns, or by monetizing assets at appropriate times to realize value;

In other words, they certainly strive to buy low, but also have no problem to sell, once valuations have recovered and the assets they own are no longer cheap.

Then, why not to distribute the proceeds? Of course, it is not a predictable source of cash, and that’s why they warned against the fact they

may not be able to do so on a consistent and sustainable basis.

But, when the cash is actually there, why not to use it?

 

giofranchi

 

[nnayyar]

Gio,

 

You are a large holder of BAM it seems? What are your thoughts/feelings on the move in Interest Rates and the effect on BAM, BPY? Feels very much like de-leveraging but more and more articles popping up on the 'expensiveness' of the group. Appreciate it!

 

 

[WhoIsWarren]

 

In other words, they certainly strive to buy low, but also have no problem to sell, once valuations have recovered and the assets they own are no longer cheap.

 

giofranchi

 

gio, you're right.

 

However, as they sell assets they'll have to pay capital gains taxes.  The company's own calculation of intrinsic value excludes net deferred income taxes (adjusted for non-controlling interests).  I can't find this number for 2012 but the 2011 number was $3.4 per share.

 

It's not a deal breaker, but I've always adjusted downwards this source of intrinsic value.

[WhoIsWarren]

Gio,

 

You are a large holder of BAM it seems? What are your thoughts/feelings on the move in Interest Rates and the effect on BAM, BPY? Feels very much like de-leveraging but more and more articles popping up on the 'expensiveness' of the group. Appreciate it!

 

I'm not Gio, but here's my tuppence worth!

 

The company has spoken about rising interest rates on numerous occasions.  In essence, they say they're not buying assets on current yields and that their IFRS valuations are marked at discount rates a couple of percent higher.  In other words as rates rise, the first 200bps or so won't affect their IFRS valuations.

 

Then management goes on to say that they own real assets and as such rents / cash flows will eventually adjust to the higher yield environment, albeit with a lag.  So rising rates shouldn't affect the underlying intrinsic value, though of course the IFRS values will likely be hit.

 

This is a nice story and it's probably the most likely scenario.  However stagflation would present a pretty tough environment for BAM -- try increasing rents when the economy is shrinking.  And remember the company is twice geared.

 

The last thing to say is that no matter what the reality, the market will probably 'shoot first and ask questions later' as rates rise.  I don't think the stock is 'expensive' currently and I personally don't think that the underlying intrinsic value of the company will be significantly impaired by rising interest rates.  However, I'm hopeful that such an environment could present a nice opportunity for patient investors armed with good knowledge of the company.

 

Disclosure: long BAM

[giofranchi]

Well, here is one of the reason I love this board: by now I have come to the conclusion that, whenever I want to know something about an investment of mine, there is at least one person I know I must turn to: if I want to know something about Lancashire, twacowfca is undoubtedly the man! If I want to know something about Liberty Media, I always ask dcollon! (Also ItsAValueTrap has done great work on LMCA!). And as far as Brookfield Asset Management is concerned, whenever I want to know something about it, WhoIsWarren is the one I turn to! :)

 

And now I agree with him both on capital gains taxes and on rising interest rates.

 

Just a few words about those articles ‘popping up’: I have read all of them, and I have found them unfounded and unconvincing. I think I understand what BAM is doing, and has been doing for decades with great success! Culture hasn’t changed, goals haven’t changed, competitive advantages haven’t changed. Until something really changes for the worst, I see no reason to part ways with BAM, just because some articles have been published by short sellers.

 

giofranchi

[WhoIsWarren]

Well, here is one of the reason I love this board: by now I have come to the conclusion that, whenever I want to know something about an investment of mine, there is at least one person I know I must turn to: if I want to know something about Lancashire, twacowfca is undoubtedly the man! If I want to know something about Liberty Media, I always ask dcollon! (Also ItsAValueTrap has done great work on LMCA!). And as far as Brookfield Asset Management is concerned, whenever I want to know something about it, WhoIsWarren is the one I turn to! :)

 

 

Oh I think you're doing yourself a disservice Gio!  And don't be so sure I'm I'm your guy here.  'Course, I'll chip in where I can, but I am sure others on this board would put me to shame with their knowledge.

 

[giofranchi]

Well, here is one of the reason I love this board: by now I have come to the conclusion that, whenever I want to know something about an investment of mine, there is at least one person I know I must turn to: if I want to know something about Lancashire, twacowfca is undoubtedly the man! If I want to know something about Liberty Media, I always ask dcollon! (Also ItsAValueTrap has done great work on LMCA!). And as far as Brookfield Asset Management is concerned, whenever I want to know something about it, WhoIsWarren is the one I turn to! :)

 

 

Oh I think you're doing yourself a disservice Gio!  And don't be so sure I'm I'm your guy here.  'Course, I'll chip in where I can, but I am sure others on this board would put me to shame with their knowledge.

 

Always too humble! :)

 

Cheers!

 

Gio

[giofranchi]

Brookfield - Real Assets Real Returns

 

giofranchi

Brookfield_-_Real_Assets_Real_Returns.pdf

[nnayyar]

Some insider purchasing of BPY. I find it interesting that BAM is a buyer of 750k since the idea was to reduce their holdings, perhaps a little of the value approach at work?

 

http://canadianinsider.com/node/7?ticker=BPY

 

 

[thepupil]

In my opinion, the idea was not to reduce their holdings. BPY was formed as the third leg of the tripod of "flagship listed entities" that BAM manages in their three main areas: Property (BPY), Renewable Power (BRP) and Infrastructure (BIP).

 

BPY was not very tax efficient in terms of distributing value (one reason why the size of the spinoff was a small percentage of BPY's value ~7.5%) and is much more of a "strategic" move that will (hopefully) be a source of low-cost permanent capital for expanding BAM's crown jewel: the asset management business.

 

It gives Bruce Flatt and co another currency that can be bought when cheap and issued to fund expansion when dear. I would expect BPY to make a BIG acquisition in the multifamily or industrial space to complete the empire (Retail-GGP, Office-BPO, Multifamily-???). Newly issued BPY units will probably be a very important part of that acquisition.

 

 

[racemize]

Hey guys, I've just started looking into this one in a bit more depth.  One thing that bothers me on BAM is that they are very sporadic about how they value their long-term results.  For example, in the initial letters (and from what I gather the old Brascan letters) focused on share price appreciation, which I am not a fan of.  Then, they later have a new intrinsic value measurement that they used; however, they are not consistent about showing what the value is or how it changes over time.  For example, there is a nice chart in the 2011 annual report that shows their calculation (and how it was gotten) of intrinsic value, but I didn't find it in the 2012.

 

For those that follow this company, have you just figured out how to do the adjustments yourselves and recalculate it each quarter/year, or am I missing something obvious?

 

I also read through valuebygeorge's write-up.  For anyone who has studied this a lot, did you find his analysis on-target?

 

Thanks very much!

[giofranchi]

Hey guys, I've just started looking into this one in a bit more depth.  One thing that bothers me on BAM is that they are very sporadic about how they value their long-term results.  For example, in the initial letters (and from what I gather the old Brascan letters) focused on share price appreciation, which I am not a fan of.  Then, they later have a new intrinsic value measurement that they used; however, they are not consistent about showing what the value is or how it changes over time.  For example, there is a nice chart in the 2011 annual report that shows their calculation (and how it was gotten) of intrinsic value, but I didn't find it in the 2012.

 

For those that follow this company, have you just figured out how to do the adjustments yourselves and recalculate it each quarter/year, or am I missing something obvious?

 

I also read through valuebygeorge's write-up.  For anyone who has studied this a lot, did you find his analysis on-target?

 

Thanks very much!

 

The total return for each Brookfield share was $5.39 in 2012, a 12.4% return on our calculated intrinsic value of the business, in line with our long-term goals. There are two components to this performance: $1.4 billion ($1.94 per share) of funds from operations amounting to approximately a 5% return from cash generated; and a further $2.2 billion ($3.45 per share) or approximately 8% from the overall increase in the value of the equity of the company. Values of real assets generally increased across the board, with a substantial increase in our private equity investments in the housing industry, offset in part by investments impacted by the low natural gas prices.

Q4 2012 Letter

 

I think BAM has a stated goal of achieving in between 12% and 15% annual increase in the intrinsic value of the business. And at the end of each year they openly comment on what was the actual result for the 12 months just passed.

Then, of course, they keep track on the share performance:

  Investment Performance

  Brookfield NYSE  Brookfield Intrinsic Value  S&P 500      10 Year Treasuries

1 35%                                12%                        16%                          4%

3 20%                                12%                        11%                          9%

5 3%                                  n/a                          2%                            7%

10 22%                              n/a                          7%                            6%

20 19%                              n/a                          8%                            6%

Q4 2012 Letter

 

Personally, I would not know how to calculate intrinsic value by myself… how could you know the increase or decrease in value of a port, a railroad, or real estate scattered across the globe?! …That’s why I think that to invest in BAM you must trust management. :)

 

giofranchi

 

[racemize]

Hi Gio, I agree on needing to trust management, but I need to be sure I am buying at a decent price, e.g., I want to by FFH at ~1 of book, not 2.

[giofranchi]

Hi Gio, I agree on needing to trust management, but I need to be sure I am buying at a decent price, e.g., I want to by FFH at ~1 of book, not 2.

 

Hi Joel,

Of course you are right! What I actually meant is that, when management says at year end 2012 that fair value has increased to $44.93 from $40.99 at year end 2011, it is very difficult to check if that figure ($44.93) is correct or otherwise. So, either you trust what they say, or you don’t. If you trust management, it is plain to see that you now are able to buy something that might go on increasing in fair value 12%-15% annual for 0.77 x what it is actually worth today: so, it is a great bargain and you will invest! Instead, if you don’t trust management, you won’t invest no matter what!

The fact that management has more or less $5 billion invested in BAM should provide at least some comfort! :)

 

giofranchi

 

[racemize]

Hi Gio, I agree on needing to trust management, but I need to be sure I am buying at a decent price, e.g., I want to by FFH at ~1 of book, not 2.

 

Hi Joel,

Of course you are right! What I actually meant is that, when management says at year end 2012 that fair value has increased to $44.93 from $40.99 at year end 2011, it is very difficult to check if that figure ($44.93) is correct or otherwise. So, either you trust what they say, or you don’t. If you trust management, it is plain to see that you now are able to buy something that might go on increasing in fair value 12%-15% annual for 0.77 x what it is actually worth today: so, it is a great bargain and you will invest! Instead, if you don’t trust management, you won’t invest no matter what!

The fact that management has more or less $5 billion invested in BAM should provide at least some comfort! :)

 

giofranchi

 

Gio, I think I should have been more clear--I was actually just looking for where they consistently showed that calculation, e.g., it was not in the 2012 annual report.  I presume the 44.93 figure also came from the q4? 

 

Personally, I wish they had a chart like Buffett on the front of every annual!

[WhoIsWarren]

Personally, I wish they had a chart like Buffett on the front of every annual!

 

Racemize, you probably know this, but just in case, BAM changed how they account for the value of their assets in I think 2009 or 2010.  Previously everything accounted for at cost, under Canadian GAAP.  Now under IFRS they mark most assets to market, per the accounting rules, and for assets that aren't m2m they make adjustments to arrive at management's own estimate of intrinsic value.  You can dispute it, but as gio says if you trust them you should be willing to accept their aim is to give a conservative estimate of the worth of the company.

 

Anyway prior to the move to IFRS the company's 'long-term objective' was two-fold:

- Annual growth in operating cash flow per share (including disposition gains) of 12%

- Cash return on book equity per share of 20%

 

I just pulled up the 2008 AR and they show their achievements for the prior 5 years.  The 5-year numbers to 2008 were 20% (16% ex. disposition gains) and 26% respectively.  If you pull up the earlier ARs you'll be able to cobble together the company's historic numbers.  I did this at one time and the numbers were well-above targets.

 

Anyway the point I'm trying to make is that it is not possible to get BAM's historic intrinsic value track record because of the change in accounting treatment.

 

 

 

 

[racemize]

Personally, I wish they had a chart like Buffett on the front of every annual!

 

Racemize, you probably know this, but just in case, BAM changed how they account for the value of their assets in I think 2009 or 2010.  Previously everything accounted for at cost, under Canadian GAAP.  Now under IFRS they mark most assets to market, per the accounting rules, and for assets that aren't m2m they make adjustments to arrive at management's own estimate of intrinsic value.  You can dispute it, but as gio says if you trust them you should be willing to accept their aim is to give a conservative estimate of the worth of the company.

 

Anyway prior to the move to IFRS the company's 'long-term objective' was two-fold:

- Annual growth in operating cash flow per share (including disposition gains) of 12%

- Cash return on book equity per share of 20%

 

I just pulled up the 2008 AR and they show their achievements for the prior 5 years.  The 5-year numbers to 2007 were 20% (16% ex. disposition gains) and 26% respectively.  If you pull up the earlier ARs you'll be able to cobble together the company's historic numbers.  I did this at one time and the numbers were well-above targets.

 

Anyway the point I'm trying to make is that it is not possible to get BAM's historic intrinsic value track record because of the change in accounting treatment.

 

Thanks WhoIsWarren, I was aware of the accounting change and the reason for switching over to Intrinsic Value, so I see how it would be difficult for them to put together a nice chart for us.  Perhaps they will be able to with the intrinsic value calculation over time, e.g., like the chart Gio quoted, but they don't post the value every year!

 

I will go download the brascan letters and see if I can make a long term chart myself, as you suggest.

[giofranchi]

http://seekingalpha.com/article/1503352-brookfield-property-partners-has-meaningful-upside-potential?source=email_investing_ideas&ifp=0

 

giofranchi

[nnayyar]

ValuebyGeorge discussing some of short seller Dialect points:

 

http://www.valuebygeorge.com/2013/06/17/readers-question-on-brookfield-property-partners-bpy/