BAM - Brookfield Asset Management

[John Hjorth]

Thanks, ValueMaven,

 

Link : CNBC - Squawk Box [October 25^th 2019] : Brookfield CEO Bruce Flatt: Invest in real assets that produce cash flow.

 

 

 

[peterHK]

General question for everyone: how did you come to be confident in BAM as an investment?

 

If we stop the "Bruce Flatt is awesome" talk, and look at this from a short-seller's perspective we have:

 

1) accounting that is literally impossible to reconcile (I have spoken with a  few sell side analysts who have said as much as well; none of them is doing the work tbh). Significant minority interests makes tracing the cash flows to shareholders challenging at best, impossible at worst.

2) In concert with #1, management drives eyeballs and attention to management calculated metrics.

3) Perverse incentives at the LP level via IDR's (BAM has an incentive to over distribute at BIP/BEP/BPY to get higher IDR's).

4) Tight insider control via Partners Value (can be a good or a bad thing).

5) Distributions funded, at least in part, via asset sales (in particular BPY).

6) Lots of debt makes the whole structure highly credit/rate sensitive. Non-Recourse debt doesn't help if you get multiple credit issues across the complex and people start pulling back credit from the corporate level as well because they lose confidence in how BAM does things.

7) Context: history is littered with highly leveraged GP/LP or complex credit sensitive structures that have imploded or come very close to imploding (Macquarie, almost the entire MLP Complex in the US energy space etc.).

 

Disclosure: I'm long BAM, but I'm trying to come at it from a bear's perspective today.

[villainx]

I'm mostly from the Bruce Flatt is awesome camp. 

 

But I guess coming from a RE investor background, and learning a lot from Flatt about how to build value in my family's holding, itt seems to make sense where debt is in asset level versus corporate/LP, I can kinda understand cap rate, use of leverage.

 

I haven't gotten any sense of over distribute on LP level yet, thus far, for IDR purposes.  But I'm trying to understand that better.

 

For me, through the prism of lower east side and brooklyn perspective, the variance in debt, valuation, cash flows, distribution, pockets of opportunity, operating expertise, etc., kinda makes sense. I always talk to friends about how to properly evaluate opportunity while they think of various other things, like holding cash, single family homes, etc., which are essentially things they are comfortable with versus good (let alone best) opportunities.

 

BAM does it on a global scale, so I - not necessarily giving - but can see benefits in operating expertise in local markets translating to good performance.

[EricSchleien]

Stage 4 culture.

 

Their office of transformation at BBU is the real thing and not just giving lip service to transformation. Management shared with me it's the "last bastion of value in the business world" which I have been saying for the past decade now. Low competition since most people have no interest in even exploring that realm. As a very well known hedge fund manager shared with me last week - "sharing about this stuff to the vast majority of investors is like casting pearls before swine"

 

In a decade of searching, I've found 6 other people doing this NOT just paying lip service to this. Average profits go up within 2 years by 300 - 600% (depending on the org and methodology).

 

And of course the value was compelling. It's currently a 20-25% position for me depending on the account I manage. Owned BAM since 2014. Bought some more recently last Decemeber.

[EricSchleien]

General question for everyone: how did you come to be confident in BAM as an investment?

 

 

I go into more detail about that here: https://ericschleien.com/podcast/brian-langis-brookfield-asset-management-why-the-modern-shareholder-activist-is-inferior-to-cultural-activism/

[K2SO]

This is an awesome post and explains why I can't bring myself to buy BAM. When I first looked at it BPY was more than half the value, and BPY wasn't generating enough operating cash flow to fund distributions. Felt like they could get caught on the wrong side if the RE market were to correct or if there was a sudden increase in rates. Of course, neither of those things has happened, but I want to make sure I'm comfortable with an outcome in tail events. I couldn't reach that comfort level with BAM.

 

Having said that, Bruce Flatt is pretty awesome, and adding Oaktree and Howard Marks just makes them more awesome, doesn't it? The risk I talk about above becomes less critical as the company morphs into an asset manager and the bulk of the value comes from management and performance fees, which is where the company is trending towards.

 

General question for everyone: how did you come to be confident in BAM as an investment?

 

If we stop the "Bruce Flatt is awesome" talk, and look at this from a short-seller's perspective we have:

 

1) accounting that is literally impossible to reconcile (I have spoken with a  few sell side analysts who have said as much as well; none of them is doing the work tbh). Significant minority interests makes tracing the cash flows to shareholders challenging at best, impossible at worst.

2) In concert with #1, management drives eyeballs and attention to management calculated metrics.

3) Perverse incentives at the LP level via IDR's (BAM has an incentive to over distribute at BIP/BEP/BPY to get higher IDR's).

4) Tight insider control via Partners Value (can be a good or a bad thing).

5) Distributions funded, at least in part, via asset sales (in particular BPY).

6) Lots of debt makes the whole structure highly credit/rate sensitive. Non-Recourse debt doesn't help if you get multiple credit issues across the complex and people start pulling back credit from the corporate level as well because they lose confidence in how BAM does things.

7) Context: history is littered with highly leveraged GP/LP or complex credit sensitive structures that have imploded or come very close to imploding (Macquarie, almost the entire MLP Complex in the US energy space etc.).

 

Disclosure: I'm long BAM, but I'm trying to come at it from a bear's perspective today.

[Gregmal]

This is an awesome post and explains why I can't bring myself to buy BAM. When I first looked at it BPY was more than half the value, and BPY wasn't generating enough operating cash flow to fund distributions. Felt like they could get caught on the wrong side if the RE market were to correct or if there was a sudden increase in rates. Of course, neither of those things has happened, but I want to make sure I'm comfortable with an outcome in tail events. I couldn't reach that comfort level with BAM.

 

Having said that, Bruce Flatt is pretty awesome, and adding Oaktree and Howard Marks just makes them more awesome, doesn't it? The risk I talk about above becomes less critical as the company morphs into an asset manager and the bulk of the value comes from management and performance fees, which is where the company is trending towards.

 

General question for everyone: how did you come to be confident in BAM as an investment?

 

If we stop the "Bruce Flatt is awesome" talk, and look at this from a short-seller's perspective we have:

 

1) accounting that is literally impossible to reconcile (I have spoken with a  few sell side analysts who have said as much as well; none of them is doing the work tbh). Significant minority interests makes tracing the cash flows to shareholders challenging at best, impossible at worst.

2) In concert with #1, management drives eyeballs and attention to management calculated metrics.

3) Perverse incentives at the LP level via IDR's (BAM has an incentive to over distribute at BIP/BEP/BPY to get higher IDR's).

4) Tight insider control via Partners Value (can be a good or a bad thing).

5) Distributions funded, at least in part, via asset sales (in particular BPY).

6) Lots of debt makes the whole structure highly credit/rate sensitive. Non-Recourse debt doesn't help if you get multiple credit issues across the complex and people start pulling back credit from the corporate level as well because they lose confidence in how BAM does things.

7) Context: history is littered with highly leveraged GP/LP or complex credit sensitive structures that have imploded or come very close to imploding (Macquarie, almost the entire MLP Complex in the US energy space etc.).

 

Disclosure: I'm long BAM, but I'm trying to come at it from a bear's perspective today.

 

Going off of some of the things you mentioned, perhaps Affiliated Manager's Group would be of interest. I've begun dabbling there of late. Its a pretty unique, off the radar company. They own interests a ton of very respected boutique shops and do so in a way that mitigates a lot of the risks associated with many "active" management firms. Good exposure to markets outside of just the US as well, including ownership of a handful of equity interests in firms with booming China AM businesses.

[OnTheShouldersOfGiants]

When I first looked at it BPY was more than half the value, and BPY wasn't generating enough operating cash flow to fund distributions.

 

K2SO, can you confirm this with data, my impression was that their payout ratio on BPY originally was high ~90% but never over 100%. I might be wrong.

[John Hjorth]

General question for everyone: how did you come to be confident in BAM as an investment? ...

 

Peter,

 

I'm tempted - and hereby doing it - to respond : "Don't". [ ; - ) ]

 

It's all about position sizing related to risk management of your portfolio. To me, the key is to relate to the risks involved in this as an investment. You do that by reading the BAM 2018 Annual Report, and carefully relating to p. 93 - 107 on a personal level.

 

The list of what can go wrong appears almost endless.

 

- - - o 0 o - - -

 

We each on our own have to decide - and suffer & endure or enjoy the outcome of our decisions.

 

 

 

[ValueMaven]

Awesome stuff here -- really like the pros and cons about the biz and various units...most of which is well known by bulls & bears.  Will be extremely interesting to see how Flatt & Co manage this over the next 3-, 5-, and 10yr period.  I'd prefer them to start de-leverging and buying back stock at this point. 

[peterHK]

General question for everyone: how did you come to be confident in BAM as an investment? ...

 

Peter,

 

I'm tempted - and hereby doing it - to respond : "Don't". [ ; - ) ]

 

It's all about position sizing related to risk management of your portfolio. To me, the key is to relate to the risks involved in this as an investment. You do that by reading the BAM 2018 Annual Report, and carefully relating to p. 93 - 107 on a personal level.

 

The list of what can go wrong appears almost endless.

 

- - - o 0 o - - -

 

We each on our own have to decide - and suffer & endure or enjoy the outcome of our decisions.

 

So I've read the risk sections for BAM and all the LP's and find them unhelpful. Yes I know the business model needs liquidity, yes I know they use leverage, yes I know they're subject to regulations etc. TBH their risk sections are similar to almost any other company. Like go read Medtronic's 10-k if you want to read about political risk, it's a nightmare.

 

I do agree it's a sizing issue, but if a 5% position or a 3% position goes to 0 or 10 cents on the dollar that's not fun and arguably you should own it, so how can we better handicap or get comfortable with those risks is my question? Is there actually a risk of this going to 0 or permanently impairing shareholder capital by say 50%, or does the belief that is likely just miss something key? That's what I'm trying to get after.

[walkie518]

General question for everyone: how did you come to be confident in BAM as an investment? ...

 

Peter,

 

I'm tempted - and hereby doing it - to respond : "Don't". [ ; - ) ]

 

It's all about position sizing related to risk management of your portfolio. To me, the key is to relate to the risks involved in this as an investment. You do that by reading the BAM 2018 Annual Report, and carefully relating to p. 93 - 107 on a personal level.

 

The list of what can go wrong appears almost endless.

 

- - - o 0 o - - -

 

We each on our own have to decide - and suffer & endure or enjoy the outcome of our decisions.

 

So I've read the risk sections for BAM and all the LP's and find them unhelpful. Yes I know the business model needs liquidity, yes I know they use leverage, yes I know they're subject to regulations etc. TBH their risk sections are similar to almost any other company. Like go read Medtronic's 10-k if you want to read about political risk, it's a nightmare.

 

I do agree it's a sizing issue, but if a 5% position or a 3% position goes to 0 or 10 cents on the dollar that's not fun and arguably you should own it, so how can we better handicap or get comfortable with those risks is my question? Is there actually a risk of this going to 0 or permanently impairing shareholder capital by say 50%, or does the belief that is likely just miss something key? That's what I'm trying to get after.

 

a few points to consider:

 

1. Brookfield has $500B committed over it's funds but might be a little more than half deployed, dry powder can transform problems into opportunities (eg Graftech)

2. Brookfield's funds have longer duration than most funds in the same category ... this means that even if there is a 2007 vintage, the fund might not be in liquidation mode until 2017 ... a lot happens in a decade let alone  the 15 years I think is the current requested lock up

3. Brookfield tends to have 10% of its own money invested in every one of its funds as a matter of principal (eat one's own cooking), at the same time, LPs shoulder the vast majority of the risk and Brookfield charges both aum fee and carry on gains past the hurdle... aum fees are fair as is incentive but hurdles are pretty low, this leads to pretty good carry and even with just ok returns Brookfield can do quite well; large institutions are ok with high single digit returns

4. Brookfield is very diversified and when parsing the company's risk profile, you should consider the breadth of investments and correlation between those and your own investments

5. Brookfield corporate debt is not bpy debt... sure, BAM owns BPY stock but is insulated ... it's likely that even each deal inside of BPY is siloed with its own non-recourse debt by partnership by property

 

[Spekulatius]

Yes, I agree the main risk comes from the quite high debt load in their investment vehicles. I haven’t looked at them recently, but BPY for example clearly shows some strain resulting from higher cap rates in retail/mall properties from the GGP acquisition. Anyone noted the $1092M revaluation loss in their retail retail properties  in the 6/30 quarter. It is a noticeable difference from prior quarters and years, where they always showed revaluation gains.

 

One only needs to look at the charts from peers like MAC or TCO to figure out what is going on. Interesting how none of this is mentioned in their investor presentation. I think the GGP takeover will turn out to be a big dud.

 

BAM is basically a bet on two things:

1) multiple expansion in hard assets resulting from lower interest rates

2) BAM’s operational Expertise

[K2SO]

This is an awesome post and explains why I can't bring myself to buy BAM. When I first looked at it BPY was more than half the value, and BPY wasn't generating enough operating cash flow to fund distributions. Felt like they could get caught on the wrong side if the RE market were to correct or if there was a sudden increase in rates. Of course, neither of those things has happened, but I want to make sure I'm comfortable with an outcome in tail events. I couldn't reach that comfort level with BAM.

 

Having said that, Bruce Flatt is pretty awesome, and adding Oaktree and Howard Marks just makes them more awesome, doesn't it? The risk I talk about above becomes less critical as the company morphs into an asset manager and the bulk of the value comes from management and performance fees, which is where the company is trending towards.

 

General question for everyone: how did you come to be confident in BAM as an investment?

 

If we stop the "Bruce Flatt is awesome" talk, and look at this from a short-seller's perspective we have:

 

1) accounting that is literally impossible to reconcile (I have spoken with a  few sell side analysts who have said as much as well; none of them is doing the work tbh). Significant minority interests makes tracing the cash flows to shareholders challenging at best, impossible at worst.

2) In concert with #1, management drives eyeballs and attention to management calculated metrics.

3) Perverse incentives at the LP level via IDR's (BAM has an incentive to over distribute at BIP/BEP/BPY to get higher IDR's).

4) Tight insider control via Partners Value (can be a good or a bad thing).

5) Distributions funded, at least in part, via asset sales (in particular BPY).

6) Lots of debt makes the whole structure highly credit/rate sensitive. Non-Recourse debt doesn't help if you get multiple credit issues across the complex and people start pulling back credit from the corporate level as well because they lose confidence in how BAM does things.

7) Context: history is littered with highly leveraged GP/LP or complex credit sensitive structures that have imploded or come very close to imploding (Macquarie, almost the entire MLP Complex in the US energy space etc.).

 

Disclosure: I'm long BAM, but I'm trying to come at it from a bear's perspective today.

 

Going off of some of the things you mentioned, perhaps Affiliated Manager's Group would be of interest. I've begun dabbling there of late. Its a pretty unique, off the radar company. They own interests a ton of very respected boutique shops and do so in a way that mitigates a lot of the risks associated with many "active" management firms. Good exposure to markets outside of just the US as well, including ownership of a handful of equity interests in firms with booming China AM businesses.

 

Yep, have had an eye on AMG for a while. Thanks.

 

[K2SO]

When I first looked at it BPY was more than half the value, and BPY wasn't generating enough operating cash flow to fund distributions.

 

K2SO, can you confirm this with data, my impression was that their payout ratio on BPY originally was high ~90% but never over 100%. I might be wrong.

 

I hate to bail on this question but it's been a couple of years since I did the work on BAM and that included only a very cursory look at BPY. I looked at different AFFO numbers from various sources (didn't calculate myself) and one particular analyst (I seem to recall from Scotia) showed a payout rate consistently over 100%. I didn't do the work to look into what went into the numbers, but I do recall seeing management commentary that acknowledged that the dividend exceeded AFFO but that difference was made up by asset sales. Their long-term goal, if I recall correctly, was to have a payout ratio in the low 90's.

 

Don't quote me on this, I'm going by memory!

 

[peterHK]

Interesting that in the responses nobody has mentioned their accounting.

[John Hjorth]

Interesting that in the responses nobody has mentioned their accounting.

 

Peter,

 

BAM's accounting is already covered & discussed quite a bit in this topic [, to the best of my recollection, two times]. You just have to go back in this topic to find it and read.

[peterHK]

Interesting that in the responses nobody has mentioned their accounting.

 

Peter,

 

BAM's accounting is already covered & discussed quite a bit in this topic [, to the best of my recollection, two times]. You just have to go back in this topic to find it and read.

 

Will have a look for it then.

[John Hjorth]

Will have a look for it then.

 

Peter,

 

I was not trying to be condescending  [meant : It should not be read as "DYOW"]. This evening I'll try to do some searches in this topic, to triangulate the thing this is about in this topic. [it's all about keywords for search, & hard & cumbersome, when you enter an investment with 115 pages here on CoBF].

[ValueMaven]

No need to search John -

 

Basically, the main issue with BAM (note I am very long this) has to do with around IFRS revaluation of assets, and the quality of the BAM's cash flows.  Bears argue that in 2018 HALF of the co's operating FCF came from VALUATION ADJUSTMENTS higher etc.  Also issues around mark to market valuation of some assets (for example 50/50 JV's with Kinder for example - were Kinder values something at 50% below what BAM values the asset at).  Again, extremely high level here - but there are issues around the Quality of BAM's FCF.  Most bulls point to the fact that historically BAM has sold assets at HIGHER valuations then what is stated on the balance-sheet, and the these underlying assets are valued either through FCF or asset replacement... google 'the paper world of BAM' or something like this ... its a fairly bearish article on the co's FCF/divy policy which was written back in 2012, or 2013.  I think these claims are somewhat valid, however management has done a really, really good job navigating global markets buying things are distressed prices etc.  Account - its complex -- esp for assets in the real assets space.  Mgmt owns $8bn worth of stock - there interests are aligned with ours.  let me know if I am missing something here ---

 

-VM

[no_free_lunch]

Does anyone have any type of valuation methodology on this one?  There has been a huge runup and it could be an opportunity to bail, if it's overpriced.

[Gregmal]

I dont have much to add on the accounting but the general observation with both BRK and ESPECIALLY BAM...that these are two companies whose shareholders demand ZERO accountability from management and 100% seem entirely fine relying on "trust me". So far, they've done admirably well, but this sort of shit wouldn't fly with other companies and their shareholders. To each their own. I mean people lose their shit with Burford(just an example) supposedly generating 30%+ uncorrelated returns because its not transparent, whereas I get the feeling most BAM shareholders would let Bruce Flatt and crew hang out alone naked with their wives as long as they said "dont worry"...

[ValueMaven]

ridiculous statement/conclusion ... but ok

[Gregmal]

ridiculous statement/conclusion ... but ok

 

Well thats certainly great you find it ridiculous. I do too when even the most sophisticated investors look at a company's accounting and just kind of realize they have to accept what they are given by management and have zero ability to reconcile anything themselves. I dont necessarily find this an impediment to investing in a company, but do occasionally find it odd how others can be quite inconsistent with this sort of thing. Theres a lot of examples of risks with BAM, and a lot of instances where shareholders just chose to ignore them or take them in the most naive of contexts. I like this company and what its doing, but lets not be naive. This is a "trust me" stock. There is absolutely the potential for things to go wrong with the amount of debt/leveraged used as well. And these guys certainly have a track record of putting themselves and their interests before that of the minority shareholder. Just because you own the same ticker as them, doesnt mean they still cant screw you.

[Spekulatius]

Besides, Lehman and Bear Stevens had high insider ownership too. It helps, but it’s no panacea. BAM for me is a bridge too far - I simply don’t like the GP/Lp like structure and the high leverage at the subs. It can lead to wrong incentives and has done so many times in the past. I agree it is very profitable for the GP when done wright. Each it’s own. I like BAM’s focus on infrastructure assets, but there are other ways to get this exposure.