BAM - Brookfield Asset Management

[ValueMaven]

https://www.brookfield.com/sites/default/files/2019-11/Big%20Opportunity%20India.pdf

 

 

[no_free_lunch]

Regarding the valuation.  They listed $1.1b in fee earnings and $1.2b in targeted carry interest. I think that's USD.  They have a 20 x on the fees and 10x on carry. There is also $35b in net assets. So about $68b valuation, according to the most recent annual report.  Current market cap is $59b.

 

They have $11b leverage so total assets are $46b. They are double leveraged. They have this leverage at the parent level and more at the subs.

 

It's still reasonable. Markets still aren't pricing in too much growth. It appears to not be cheap but still defensible as a kind of leveraged garp investment. 

[villainx]

I love the push back in the recent discussion.  Some of it are old criticism, but overall, I don't mind rehashing, and find it helpful.

 

I would say (caveat with position size and portfolio makeup), I'm in the trust me / bruce flatt hero worship group.

 

At the same time, accounting and IFRS wise, I do a bit of real estate investing, and I always have a tough time communicating the value of my holdings to other people.  Many people have biases about what things should be worth, and I try to impress on them that valuation in a rapid changing demographic and interest rate environment is very different from what has been the historical norm.  This is even when I value things on a fairly conservative basis but realistically reflects current (and projected) realities.  Most still can't understand. 

 

BAM always stress that most debt is non recourse, and I still hear stuff like BAM is highly leveraged.  Refinancing and carrying acceptable debt is just the norm of real asset investing.  It's also one of the advantages of regular and predictable rent/cash flow.  Or how operational improvements with real assets are also more reliable. 

 

I don't know.  BAM could be one real scandal away from a prolong slump/skepticism, but as I follow most of their subs exit, acquisitions, and holdings, don't seem so out of line.

[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].

 

Peter,

 

One of the instances where accounting has been discussed more in depth is around my own post # 800 at December 8^th 2018. Please try to read - so to say - "around it" [posts before & posts after], to get the context, among that especially the posts by Kyler [CoBF member khturbo], vince & Johnny. For that month there exist some very good posts by Jerome [CoBF member jfan], about accounting for BEP, too.

 

Another instance where accounting is discussed is earlier in this topic [it must 2 - 3 years ago, I think, however I'm not sure of the place in time - it may be earlier], where the basis for discussion of accounting was the SIRF report on BAM. That was "early on" [before the BAM topic got real traction in the Investment Ideas forum]. I think a search for the words "BAM" and "SIRF" focused/limited to the investment Ideas forum will do the trick and get you there.

 

Edit :

 

Well, now I did it anyway, ValueMaven. [ : - ) ]

[vince]

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.

 

I usually heavily discount what a stock price has done in terms of telling me whether I own part of a good business or not.  And Everyone should follow their  own strategy when deciding that some business has too much risk, debt, wrong incentives, etc....but the LONG TERM record, and stock price have been fantastic AND consistent with mgmt projections over time.  Do they have more than average "trust me" investors?  I'm absolutely certain they do, but I think the reason they have that is because they probably deserve it.  Are they one scandal from dead money for years?  I'm sure they are, but isn't every company?  I have owned this stock since 2012 and have heard every bear argument (which happens with every company I have ever owned, no matter how good) but you would have to be blind (or worse) to claim that this business has not created enormous value and has every indication of continuing.  I'm not suggesting that Bam bears change their opinions, they may turn out to be right at some point....but it is a CERTAINTY that they have been wrong for a long time.

[ValueMaven]

+1

 

Well said

 

Let me ask this question: Can anyone find a transaction were BAM or related entities sold something below carrying value on the b/s?  I think the avg is something like +8 or 9% ABOVE carrying value.  The paper world of BAM does a decent job laying out the risks etc here -- however, I think most of this is debunked by now.  Earnings this week should be extremely interesting.  Also, I am a huge fan of the Oaktree deal.  Marks has praised BAM several times as well - and I am sure OAK completed a ton of DD on BAM overall before assuming all of that equity as part of the deal.  From a BAM shareholders perspective, we just basically got the best distressed credit investor over the past 35 years on our board of directors...what a win!

[John Hjorth]

+1

 

Well said

 

Let me ask this question: Can anyone find a transaction were BAM or related entities sold something below carrying value on the b/s?  I think the avg is something like +8 or 9% ABOVE carrying value.  The paper world of BAM does a decent job laying out the risks etc here -- however, I think most of this is debunked by now.  Earnings this week should be extremely interesting.  Also, I am a huge fan of the Oaktree deal.  Marks has praised BAM several times as well - and I am sure OAK completed a ton of DD on BAM overall before assuming all of that equity as part of the deal.  From a BAM shareholders perspective, we just basically got the best distressed credit investor over the past 35 years on our board of directors...what a win!

 

ValueMaven,

 

Actually, that's - [at least to me personally] - not the right question here to ask [ref. my emphasis above].

 

You have to ask the same question, subject to arms lengths principles.

 

As per my recollection, I recall two transactions, which to me have two big question marks within the last few years, ref. Greg's posts within the last couple of days. [Personally, I get a great deal of entertainment from Greg's posting style, - to me is just so great, because it's entertaining, - but here, we really have to focus on "the message" from Greg, and with regard to that, I'm in no doubt that Greg is - so to say - dead serious.] In short, the application of sound skepticism & down to the soil reason hasn't [at least to my knowledge] yet taken anyone out of this game, that we're in general in.

 

For me personally, those two cases are :

 

1. The "parking" of some BPY properties at BAM recently [discussed earlier in this topic], &

2. The Trisura spin-off [after which, to see the BAM superstructure building its position in Trisura].

 

- - - o 0 o - - -

 

I may have failed already - by not doing any real effort to follow those two transactions - so to say - "to the door".

[Gregmal]

I also would like to clarify, that I am not in the "bear" camp at all here. I just sometimes like to focus on the stuff that others dont, or perhaps find taking things to an extreme and saying "if I had 100% of my net worth in this investment, what issues would keep me up at night?". I am actually quite bullish on this complex, although my exposure is not very meaningful, I have just simply been invested in BX for a long time, and then after watching the big runs in these names, couldn't bring myself to buy at the new prices. But its definitely on the watchlist and a pullback buy for sure. So there is that.

 

I wouldn't ask "when is the last time they didn't monetize for x% gain"... thats an easy game to play and win from a management perspective. Sears didn't show a property sale that wasn't supporting a $150 share price for quite a while...it didn't mean anything. A lot of companies sit on their losers the same way investors do. I mean look at BRK's KHC investment and its accounting for instance. If BAM had one of these, it would be much harder to find. The bigger point of mine, is just to highlight that you have to be comfortable "not knowing" certain things here. You have to trust management a good amount. And you have to realize that if LTCM can wipe out, so can anyone; regardless of how "unlikely". For that reason, I would have significant difficulty giving this big time size, same goes for BX. Whereas something like BRK is very transparent, just frustrating in other ways. BAM isn't frustrating at all, just transparent as mud.

 

A lot of really smart investors have a hard time admitting to themselves, and especially to others "I dont know". I think its important people acknowledge "I dont know", and account for that. Rather than make up the "know" and then tread forward with false security.

 

And yes, after a few misunderstandings or exhibits of "lost in translation"... I think John gets my style. Its hard sometimes to extract real responses on some of the more difficult issues at times, so I often turn to more unorthodox methods which may "trigger" a response from people that helps bring out the substance....sometimes it doesnt. I just like to get to the nitty gritty, because its way more useful to me as an investor than just gushing about OMG BAM guys are geniuses, or BRK prints money, or whatever. Those things take care of themselves. But they arent issues that keep me up at night. Anyone being honest with themselves, can find issues or areas of unease, with anything they own, even their biggest positions. Nobody agrees on everything. That doesnt mean you shouldn't seek to explore it anyway.

[Spekulatius]

Actually BAM has shown losses in their investment, but I am not sure they have shown ever realized losses. I entwined before that their GGP investment is under water and this is what they said in their latest 10-q:

 

Fair value losses, net for our Core Retail segment were $5 million and $832 million for the three and nine months ended September 30, 2019. The fair value losses, net from the Core Retail portfolio for the nine months ended September 30, 2019 reflects updated cashflow assumptions and valuation metrics agreed upon by an independent third party.

 

The prior year included fair value gains related to our acquisition of GGP.

 

I am seeing this the same way then Greg. I am not bearish on BAM, I just don’t like as much as some alternatives I am seeing where I think I have a better idea idea about fundamentals. As for showing gains on disposal, it may well be true they thry he er taken a loss, but that could be because they keep the losers, which is actually not they difficult in a Complex structure and when assets grow a lot. I think their GGP investment for example is something where they need to paddle pretty hard upstream to come out ahead.

[vince]

+1

 

Well said

 

Let me ask this question: Can anyone find a transaction were BAM or related entities sold something below carrying value on the b/s?  I think the avg is something like +8 or 9% ABOVE carrying value.  The paper world of BAM does a decent job laying out the risks etc here -- however, I think most of this is debunked by now.  Earnings this week should be extremely interesting.  Also, I am a huge fan of the Oaktree deal.  Marks has praised BAM several times as well - and I am sure OAK completed a ton of DD on BAM overall before assuming all of that equity as part of the deal.  From a BAM shareholders perspective, we just basically got the best distressed credit investor over the past 35 years on our board of directors...what a win!

 

I totally agree, I think it was a brilliant move, and having Marks DD supports the thesis that this is a good business without excessive risk, accounting shenanigans, etc.  Now he can't see the future perfectly and he makes mistakes as does everyone but there's no question he's a sophisticated investor that spends much of his time on what can go wrong.  Maybe it's just me but this little transaction seems like it probably doesn't receive the attention it deserves, especially for potential "trust me" investors or someone that's hung-up on one uncertainty or another.

[james22]

Also, I am a huge fan of the Oaktree deal.  Marks has praised BAM several times as well - and I am sure OAK completed a ton of DD on BAM overall before assuming all of that equity as part of the deal.  From a BAM shareholders perspective, we just basically got the best distressed credit investor over the past 35 years on our board of directors...what a win!

 

I totally agree, I think it was a brilliant move, and having Marks DD supports the thesis that this is a good business without excessive risk, accounting shenanigans, etc.  Now he can't see the future perfectly and he makes mistakes as does everyone but there's no question he's a sophisticated investor that spends much of his time on what can go wrong.  Maybe it's just me but this little transaction seems like it probably doesn't receive the attention it deserves, especially for potential "trust me" investors or someone that's hung-up on one uncertainty or another.

 

+2

 

Unsophisticated, all stocks require my trust.

 

But it seems unlikely both Flatt and Marks will prove untrustworthy.

 

Both (BAM, OAK) were 5% positions; I believe BAM is now no more risky at 15-20%.

[peterHK]

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].

 

Peter,

 

One of the instances where accounting has been discussed more in depth is around my own post # 800 at December 8^th 2018. Please try to read - so to say - "around it" [posts before & posts after], to get the context, among that especially the posts by Kyler [CoBF member khturbo], vince & Johnny. For that month there exist some very good posts by Jerome [CoBF member jfan], about accounting for BEP, too.

 

Another instance where accounting is discussed is earlier in this topic [it must 2 - 3 years ago, I think, however I'm not sure of the place in time - it may be earlier], where the basis for discussion of accounting was the SIRF report on BAM. That was "early on" [before the BAM topic got real traction in the Investment Ideas forum]. I think a search for the words "BAM" and "SIRF" focused/limited to the investment Ideas forum will do the trick and get you there.

 

Edit :

 

Well, now I did it anyway, ValueMaven. [ : - ) ]

 

So most of the old discussions were on the issue of IFRS consolidation and asset values. Those I'm fine with. Others have noted that BPY sells things regularly above IFRS values and does realize a loss from time to time, so I don't think BAM's accounting of asset values is suspect.

 

There are 2 things that give me pause:

 

1) when faced with the statement that BAM's accounting is opaque, most people say "look at the supplemental". The supplemental is mgmt created metrics, and essentially every fraud ever has created a story to drive investors eyes toward these metrics and AWAY from the actual IFRS/GAAP financials. If you don't take it on faith, it's a red flag, NOT BAM being helpful.

 

2) take BIP:

 

1) BIP has a 379 page annual report. It takes them more than 1 page per day to tell us what they did in a year.

 

2) BIP generates FFO from the operations in which it has LP stakes and then some other one offs. We get cash from operations in 2018 they generated $1362mn in cash from operations, and distributed $140mn to the GP, $775mn to other unitholders, $676mn to  non-controlling interest for a total of almost $1.6bn.

 

Now, BIP also generated $546 mn in 2018 in FFO from JV's and associates. If you read through their annual report they outline that any JV/Associate is structured so that all cash flow generated is swept out UNLESS BAM explicitly agrees to keep the cash in the JV.  They recieved $56mn in dividends.

 

SO the BIP narrative is that FFO covers the $1.6bn distribution because they generate $546mn of FFO in JV's. However, FFO is not free cash flow. In other words, you MUST trust management that FFO converts to cash and that the cash covers the distributions. We don't know what's in the JV's, but let's take real estate as an example. Towers convert ~90-95% of FFO to AFFO and cash. Office buildings covert about 66% of FFO to AFFO and cash. So how much cash is actually avaliable for BIP depends hugely on what type of assets these are.

 

If you take BIP's consolidated CFO + distributions from JV's, it empirically does NOT cover the sum of distributions to unitholders, minority interests and the GP.

 

This is what I mean by "opaque" accounting. The risk is that the off balance sheet JV's don't actually generate teh cash required in which case, BIP is basically a ponzi scheme that relies on taking in cash from LP's and unit issuances in order to pay the distribution. If not that, then at the very least, if BIP can't access the CASH from the JV's because they don't actually generate that much, then if capital markets shut, the structure falls apart and BAM has to ride to the rescue, and you know they're going to take their pound of flesh for doing that.

 

Again, I'm long BAM, but it concerns me I haven't seen this issue mentioned once and the rebuttal to it is "well you just can't figure it out, look at the metrics management is directing you to look at".

 

[John Hjorth]

Thank you, Peter,

 

Now I understand your questions and the shades of your skepticism towards BAM much, much better. [i'm referring to your bullet point about BAM specifically here.]

 

Earlier we have had our personal interchanges about the forward looking statements in i.e. the presentations ["BAM plan value X years from Y point in time"].

 

- - - o 0 o - - -

 

Personally, I'm not going to engage in a BIP discussion here, because I perceive BIP differently than what has been posted in this topic recently.

[Normax59]

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].

 

Peter,

 

One of the instances where accounting has been discussed more in depth is around my own post # 800 at December 8^th 2018. Please try to read - so to say - "around it" [posts before & posts after], to get the context, among that especially the posts by Kyler [CoBF member khturbo], vince & Johnny. For that month there exist some very good posts by Jerome [CoBF member jfan], about accounting for BEP, too.

 

Another instance where accounting is discussed is earlier in this topic [it must 2 - 3 years ago, I think, however I'm not sure of the place in time - it may be earlier], where the basis for discussion of accounting was the SIRF report on BAM. That was "early on" [before the BAM topic got real traction in the Investment Ideas forum]. I think a search for the words "BAM" and "SIRF" focused/limited to the investment Ideas forum will do the trick and get you there.

 

Edit :

 

Well, now I did it anyway, ValueMaven. [ : - ) ]

 

So most of the old discussions were on the issue of IFRS consolidation and asset values. Those I'm fine with. Others have noted that BPY sells things regularly above IFRS values and does realize a loss from time to time, so I don't think BAM's accounting of asset values is suspect.

 

There are 2 things that give me pause:

 

1) when faced with the statement that BAM's accounting is opaque, most people say "look at the supplemental". The supplemental is mgmt created metrics, and essentially every fraud ever has created a story to drive investors eyes toward these metrics and AWAY from the actual IFRS/GAAP financials. If you don't take it on faith, it's a red flag, NOT BAM being helpful.

 

2) take BIP:

 

1) BIP has a 379 page annual report. It takes them more than 1 page per day to tell us what they did in a year.

 

2) BIP generates FFO from the operations in which it has LP stakes and then some other one offs. We get cash from operations in 2018 they generated $1362mn in cash from operations, and distributed $140mn to the GP, $775mn to other unitholders, $676mn to  non-controlling interest for a total of almost $1.6bn.

 

Now, BIP also generated $546 mn in 2018 in FFO from JV's and associates. If you read through their annual report they outline that any JV/Associate is structured so that all cash flow generated is swept out UNLESS BAM explicitly agrees to keep the cash in the JV.  They recieved $56mn in dividends.

 

SO the BIP narrative is that FFO covers the $1.6bn distribution because they generate $546mn of FFO in JV's. However, FFO is not free cash flow. In other words, you MUST trust management that FFO converts to cash and that the cash covers the distributions. We don't know what's in the JV's, but let's take real estate as an example. Towers convert ~90-95% of FFO to AFFO and cash. Office buildings covert about 66% of FFO to AFFO and cash. So how much cash is actually avaliable for BIP depends hugely on what type of assets these are.

 

If you take BIP's consolidated CFO + distributions from JV's, it empirically does NOT cover the sum of distributions to unitholders, minority interests and the GP.

 

This is what I mean by "opaque" accounting. The risk is that the off balance sheet JV's don't actually generate teh cash required in which case, BIP is basically a ponzi scheme that relies on taking in cash from LP's and unit issuances in order to pay the distribution. If not that, then at the very least, if BIP can't access the CASH from the JV's because they don't actually generate that much, then if capital markets shut, the structure falls apart and BAM has to ride to the rescue, and you know they're going to take their pound of flesh for doing that.

 

Again, I'm long BAM, but it concerns me I haven't seen this issue mentioned once and the rebuttal to it is "well you just can't figure it out, look at the metrics management is directing you to look at".

 

Wanted to send my regards, for what it is worth, for doing the work on BIP.

 

Now my turn on BPY.

 

If you look at 2018 you can knock down both BAM's portion of operating cash flow and BPY unit holder OCF by taking non-distributed equity method investment earnings and splitting it 50% to BPY LP unit holders and 50% to BAM, given the corp structure where BAM owns 50% of the operating LP and BPY unit holders owning the other 50%

 

OCF claimant to unit holders is $553MM and $891MM claimant to BAM at that point.

 

Fair value gains are tough but if you look at the supplemental for end of year 2018 it is reported that there are $1.13B in fair value gains in the proportional statements, but the proportional statements include JV's given BPY's ownership %. If you back out fair value gains from JV's given BPY's ownership (which was negative in 2018) you get $1.27B claimant to BPY unit holders and BAM, splitting 50-50 operating cash flow claimant to the LP units is now -$82MM and only $256MM to BAM's NCI's.

 

Now the issue is with changes in WC which I'm stilling working out, in the consolidated financials statements there is a positive $500MM change in WC, but if you look in the proportional it is a -$2.3B change y/y, if you work out what would be applicable to equity method JV WC changes you can't get anywhere close to -$2.3B, so the question is, why would a REIT and property holding companies have such wild changes in WC. There was  a similarly large WC negative change in 2017 and the theme continues in the recent supplemental reports. Maybe someone has a good answer, I'd love to hear it.

 

Now if we piece together the proportional in the supplemental we can construct proportional OCF (again this includes equity method accounted for investments)

 

$1.978B in net income

-$1.130B in fair value changes

+$95MM in depreciation

-$2.386B working capital changes

 

=-$1.443B in proportional operating cash flow

[ValueMaven]

renewable business will offer a C-Corp: BEPC for US investors ...

 

 

[absolutbrian]

Great results this morning: https://web.tmxmoney.com/article.php?newsid=6348345720372113&qm_symbol=BAM.A

[chrispy]

Chuck Akre transitioned his 2-3 percent of portfolio from Ubiquiti to BAM:

 

Brookfield Asset Management (BAM): BAM is a 2.79% of the portfolio stake established this quarter at prices between $48 and $54 and the stock currently trades at $57.24. For investors attempting to follow, BAM is a good option to consider for further research.

[snowball82]

This should be useful for some worried shareholders.

 

Fitch Assigns First-Time 'A-' Rating to Brookfield Asset Management; Outlook Stable

 

https://www.fitchratings.com/site/pr/10101703

[ValueMaven]

extremely strong results - was surprised the name wasnt up more!!

 

I am very interested in Brookfield Infrastructure Corporation, and Brookfield Renewable Corporation ..

 

We now have C-Corps to invest in!! 

[villainx]

This should be useful for some worried shareholders.

 

Fitch Assigns First-Time 'A-' Rating to Brookfield Asset Management; Outlook Stable

 

https://www.fitchratings.com/site/pr/10101703

 

I'll start of by saying I can't resist.

 

Rating agency opinions are small comfort.  Though if it brings down financing cost, yay!

 

[snowball82]

This should be useful for some worried shareholders.

 

Fitch Assigns First-Time 'A-' Rating to Brookfield Asset Management; Outlook Stable

 

https://www.fitchratings.com/site/pr/10101703

 

I'll start of by saying I can't resist.

 

Rating agency opinions are small comfort.  Though if it brings down financing cost, yay!

 

That said if we analyse the content... facts helps to formulate unbiased opinions.

[John Hjorth]

That said if we analyse the content... facts helps to formulate unbiased opinions.

 

snowball,

 

Yes, let's do that :

 

BAM just slapped a 25 multiple on annualized fee related earnings in plan value calculation instead of a 20 multiple earlier, thereby increasing that particular component of plan value 25 percent, which constitutes ~USD 6 [uSD 6.34 if I'm calculating right] per share of plan value increase, ref. BAM 2019-Q3 Supplemental Information, p. 5.

[snowball82]

That said if we analyse the content... facts helps to formulate unbiased opinions.

 

snowball,

 

Yes, let's do that :

 

BAM just slapped a 25 multiple on annualized fee related earnings in plan value calculation instead of a 20 multiple earlier, thereby increasing that particular component of plan value 25 percent, which constitutes ~USD 6 [uSD 6.34 if I'm calculating right] per share of plan value increase, ref. BAM 2019-Q3 Supplemental Information, p. 5.

[/quot

Well, we saw that. Is that change your investment thesis ?

[John Hjorth]

snowball,

 

I don't know right now. I haven't had time to study the BAM 2019Q3 Quarterly Report yet [it wasn't available for me yesterday], and I really miss the option to listen to the Conference Call afterwards [, without calling a NA telephone number][<- Am I missing something here?]. [ : - / ]

 

- I would really appreciate, if a fellow board member had something to share about the content of the Conference Call, thank you.

[walkie518]

That said if we analyse the content... facts helps to formulate unbiased opinions.

 

snowball,

 

Yes, let's do that :

 

BAM just slapped a 25 multiple on annualized fee related earnings in plan value calculation instead of a 20 multiple earlier, thereby increasing that particular component of plan value 25 percent, which constitutes ~USD 6 [uSD 6.34 if I'm calculating right] per share of plan value increase, ref. BAM 2019-Q3 Supplemental Information, p. 5.

What I find kind of interesting is when taking into account new AUM to date (not end of Q) and account for dilution, even if Oaktree is a very different business from BAM, the stock has moved pretty tightly with fund closings...  I can't speak to rationale behind changes in plan value, while I don't think they are deceptive in practice, plan value must be drafted simply to appeal to the laziness of investors?