BAM - Brookfield Asset Management

[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".

 

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

 

So, nobody has a comment on this... interesting. 

[Gregmal]

The consensus seems to be......"trust me, it was a great quarter" and "trust me, everything is great"..... in the echo chamber.

[John Hjorth]

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.

 

Greg,

 

Ref. your last post, and the above, quoted from you earlier, your stance on this is to me inconceivably. I simply don't get it. [And I'm not sure I even want to.] It's all about complexity compared to opacity. I've written about it here on another investment.

 

[Gregmal]

John,

 

All I'd point out, and then continue bitching about, is the following.

 

BX/BAM are probably my two best guess candidates for being the next BRK. However, they both come with their own issues, obviously.

 

We can get into the details, such as compensation and share structure, but we dont need to. I presume that all financial/real estate folks(aka WS people) are inherently selfish pieces of shit who only care about their money and their main purpose is to extract as much as they possibly can for themselves. I am OK with that. That is not irrespective of their abilities to make money. Even America's Grandfather Mr. Buffett, used other peoples money to get himself going and then found excuses to kick them all out once he didn't need them anymore. But riding coattails of great people or great businesses can be highly profitable.

 

Here, and now, I just find there to be greater reason to exercise caution and frankly, am a little disturbed by how naive some people can be. The honest answers of "I just trust them" are few and far between. But those are the honest answers and where I fit in. I just think trusting them at a fraction of fair value($30's/$40's) is superior to trusting them fully valued. Maybe a year ago I remember the guys at BX giving a presentation and talking about how "if only the market valued us properly we'd by trading at $55"....well......BAM is in a similar spot. So willingness to trust can be tied to my perceived risk/reward skew.

 

These things are nowhere near cheap anymore. And quite honestly, if you've been through market cycles or read books on market psychology and behavioral aspects of the markets, how in the world does some of this behavior not scream TOP!!! to you? You've got people openly lying to themselves about their understandings of these things. Or making claims about "oh gee, they've never publicly booked a loss" or "the bears...the shorts".. all amateur hour stuff that seems to rampantly display characteristics of the cycle end being near. Do I think the end is death for BAM/BX? No. But I'm not interested in holding companies with big question marks and hoping for "market perform" +/- a few percent. To a degree maybe I am lying to myself too continuing to hold these things; as my basis for doing so is that they are absolutely great companies at "reasonable" prices NOW. But geez, it's crazy to me how after a massive short term swing in valuation and sentiment, people are now blatantly ignoring MORE risks than ever, at substantially HIGHER valuations, and just seemingly content high fiving and ass slapping in the echo chamber.

 

Normax raised a really valuable question/piece of analysis... and everyone ignores it to continue dancing in the daisy fields.

 

 

[Normax59]

To add to my BPY point, BAM and BPY unit holder's split the ownership in the Operating LP close to 50/50, the Operating LP then directly owns the equity method investments, when you back them out, BAM and BPY unit-holder's are each left with only $4.5B in equity in the actual consolidated properties, so when you purchase BPY units 63% of your equity is in the equity method investments and your slice of BPY at BAM is likewise 63% made out of these equity method investments, which is why the proportional cash flow matters so much, still waiting on an answer to the large delta in the working capital changes because honestly I have no idea why it would be such a big change year over year.

 

The 63% is actually generous seeing as there is preferred equity at the proportional level so the % of consolidated equity composed of equity method investments could very well be higher. 

 

We can also start to talk about the related party transaction contracts between BAM and BEP that generate negative FFO at BAM y/y, propping up net income at BEP if anyone wants to.

[racemize]

To add to my BPY point, BAM and BPY unit holder's split the ownership in the Operating LP close to 50/50, the Operating LP then directly owns the equity method investments, when you back them out, BAM and BPY unit-holder's are each left with only $4.5B in equity in the actual consolidated properties, so when you purchase BPY units 63% of your equity is in the equity method investments and your slice of BPY at BAM is likewise 63% made out of these equity method investments, which is why the proportional cash flow matters so much, still waiting on an answer to the large delta in the working capital changes because honestly I have no idea why it would be such a big change year over year.

 

The 63% is actually generous seeing as there is preferred equity at the proportional level so the % of consolidated equity composed of equity method investments could very well be higher. 

 

We can also start to talk about the related party transaction contracts between BAM and BEP that generate negative FFO at BAM y/y, propping up net income at BEP if anyone wants to.

 

I don't think anyone can answer the WC movement except brookfield--have you asked IR?  If I had to guess, it would be related to their large development projects, some of which are wrapping up presently (and others are starting up substantially).

 

I'm not too sure why you are splitting the ownership with BAM the way you are.  All of those are just convertibles into ownership:

As of December 31, 2018, public holders own units of our company representing an 81% limited partnership interest in our company, and Brookfield owns the remaining units of our company, representing a 19% limited partnership interest in our company. Assuming the exchange of the Redemption-Exchange Units in accordance with the Redemption-Exchange Mechanism and the exchange of the issued and outstanding Exchange LP Units not held by us and the issued and outstanding BPR Units, Brookfield has a 54% interest in our company. On a fullyexchanged basis and taking into account the exchange of the issued and outstanding BPR Units, public holders (excluding the Class A Preferred Unitholder) would own units of our company representing a 42% interest in our company, the Class A Preferred Unitholder would own units of our company representing a 7% interest in our company and Brookfield would own the remaining units of our company, representing a 51% interest in our company. Brookfield also has an approximately 50% interest in the Property Partnership through Brookfield’s ownership of Redemption-Exchange Units. On a fully-exchanged basis, our company would directly own 99% of the limited partnership interests in the Property Partnership.

 

Regarding BPY distributions:

Our distribution policy is to retain sufficient cash flow within our operations to cover tenant improvements, leasing costs and other sustaining capital expenditures and to pay out substantially all remaining cash flow. In order to finance development projects, acquisitions and other investments, we plan to recycle capital or raise external capital. We believe that a payout ratio of 80% of our FFO should accomplish this objective. We have invested a substantial amount of capital in development and redevelopment projects primarily in our Core Office and Core Retail segments. Once we realize stabilized cash flow from these initiatives, we expect the growth in our payout to meet our target range of 5% to 8% per annum.

 

We established our distribution level and our targeted distribution growth rate based on projections of the amount of FFO that we will generate in the short to medium term. These projections reflect the in-place cash flow of all of our investments and our capital investment plans. In a number of our operating entities, we are retaining operating cash flow for reinvestment. As a result, we are required to finance, in the short term, payment of our distributions to our unitholders. To maintain our distributions at the current level, we have a number of alternatives available to us, including (a) using borrowings under our committed revolving credit facilities; (b) electing to accrue and/or waive distributions to be made in respect of the Redemption-Exchange Units that are held by Brookfield Asset Management in accordance with the Property Partnership’s limited partnership agreement; © paying off all or a portion of the fees owed to the Service Providers pursuant to the Master Services Agreement through the issuance of our units and/or Redemption-Exchange Units; (d) paying of any equity enhancement distributions to Property Special LP through the issuance of Redemption-Exchange Units; and (e) utilizing distributions of other operating entities from cash flow from operations, asset sales and/or refinancings. We are not a passive investor and we typically hold positions of control or significant influence over assets in which we invest, enabling us to influence distributions from those assets.

 

On February 6, 2019, the Board of Directors of the BPY General Partner increased the quarterly distribution on our units to $0.33 per unit (or $1.32 per unit on an annualized basis). Despite our projections and the alternative methods available to maintain our distribution level, there can be no assurance that we will be able to maintain an annual distribution of $1.32 per unit or meet our target growth rate. Based on amounts received in distributions from our operating entities and our projected operating cash flow from our direct investments, our proposed distributions are significantly greater than such amounts.

 

Additionally, our ability to make distributions will depend on a number of factors, some of which are out of our control, including, among other things, general economic conditions, our results of operations and financial condition, the amount of cash that is generated by our operations and investments, restrictions imposed by the terms of any indebtedness that is incurred to finance our operations and investments or to fund liquidity needs, levels of operating and other expenses, and contingent liabilities. Furthermore, the Property Partnership, the Holding Entities and our operating entities are legally distinct from our company and they are generally required to service their debt and other obligations, such as distributions to Preferred Unitholders, before making distributions to us or their parent entity as applicable, thereby reducing the amount of our cash flow available to pay distributions on our units, fund working capital and satisfy other needs.

[Spekulatius]

^ I would think the WC movements are very likely inconsequential and related to either investments and divestment balances at the time of the filings. It doesn’t hurt to ask IR though.

[Normax59]

BAM's economic interest is in the operating LP currently, it has the redeemable units so that it can consolidate the listed LP into their financials because the BPY listed unit already consolidates the operating LP.

 

So long as those redeemable units aren't converted they are a NCI to the unit holders of BPY regardless of how Brookfield wants to spin it. Which is why their interest in the operating LP is presented as a NCI in the IFRS financials.

 

You can calculate the WC changes from the JV's from Y/Y and it doesn't equate, also you can roughly do it with the proportional balance sheet, IR was contacted.

[racemize]

BAM's economic interest is in the operating LP currently, it has the redeemable units so that it can consolidate the listed LP into their financials because the BPY listed unit already consolidates the operating LP.

 

So long as those redeemable units aren't converted they are a NCI to the unit holders of BPY regardless of how Brookfield wants to spin it. Which is why their interest in the operating LP is presented as a NCI in the IFRS financials.

 

You can calculate the WC changes from the JV's from Y/Y and it doesn't equate, also you can roughly do it with the proportional balance sheet, IR was contacted.

 

I've spent a fair amount of time trying to figure out what your first post is trying to say, but it is difficult to follow.  Could you please point out each page and report of where you are getting numbers from? 

[Normax59]

BAM's economic interest is in the operating LP currently, it has the redeemable units so that it can consolidate the listed LP into their financials because the BPY listed unit already consolidates the operating LP.

 

So long as those redeemable units aren't converted they are a NCI to the unit holders of BPY regardless of how Brookfield wants to spin it. Which is why their interest in the operating LP is presented as a NCI in the IFRS financials.

 

You can calculate the WC changes from the JV's from Y/Y and it doesn't equate, also you can roughly do it with the proportional balance sheet, IR was contacted.

 

I've spent a fair amount of time trying to figure out what your first post is trying to say, but it is difficult to follow.  Could you please point out each page and report of where you are getting numbers from?

 

So I should say this is a really rough estimate, in the middle of 2018 Brookfield's ownership of the Operating LP decreased from 63% to 50%, if we wanted to be really exact we would have to go through each individual quarter to get the exact claims correct.

 

First, p. 203 of the 2018 PDF [F-7 in the actual document]

 

You can see at the bottom of the income statement where they breakout the claims on net income generated by the consolidated entities. NCI's in the operating entities have the largest claim in 2018, then we have some NCI's from the Office LP and BPR.

 

BPY units holder's have a claim on the consolidated net income of $764MM and the actual Brookfield Asset Management entity and their holdings have an NCI in the consolidated financials of $1,085MM.

 

The share of equity method earnings that are in the consolidated financials is $947MM, then turn to the cash flow statement on p. 206 [F-10 in the actual document] the cash flow statement's don't break out NCI's.

 

As a small aside Verizon at one point consolidated their Wireless business with an NCI to Vodaphone of 45%, if you didn't account for the claims of cash flow to Vodaphone you would have thought Verizon was the cheapest Tele, Brookfield is harder unfortunately.

 

On the cash flow statement we can see that $429MM of the equity method earnings were not paid out, so because the Operating LP owns the equity method investments, again, just taking the end year ownership of a 50/50 split we have to deduct $214.5MM from BPY unit holder's and from Brookfield's NCI.

 

So here is where we are with regard to operating cash flow:

BPY unit holders: $764MM - $215MM = $550MM.

 

BAM: = $1085 - $215MM = $871MM.

 

Now someone pointed out to me that their claims on year end FV gains might be wrong, they actually breakout their claims on equity method FV gains in their FFO calculation, FFO is non-IFRS so I don't like to use it seeing as BPY adds back real expenses like transaction costs, but it is all we got. On p. 77 in the PDF [p.71 in the document] they present their claim of equity method FV gains which was $114MM.

 

Now if we turn to the supplement material for FY 2018 p. 12 [p.11 in the doc.] they have proportional FV gains $1,130MM, if we back out the $114MM that would be included in this number we have $1,016MM, this number is now the proportional FV gains in the consolidated financials that are claimant to the Operating LP, split it 50/50.

 

We are then left with $42MM in operating cash flow to BPY unit holder's and $363MM to BAM's NCI.

 

To construct the proportional operating cash flow, you can grab the numbers from P.12 to get the net income and FV gains and then p.18 to get the changes in working capital.

[racemize]

Another thing regarding BPY and cash flow available for distributions: For a long time, BPY was investing in each new opportunity fund, which was a cash flow drain.  They were also buying out several public entities over 5 years.  Now, the initial funds are wrapping up and returning capital back, so BPY will start having more cash come in.  Of course a fair amount of that will be used to invest in the next funds, but it stops the cash drain.  Or, as they did this year, they may skip some of the reinvestment and use it for buybacks (BAM took BPY's place).

 

See page 61 of the 2019 BPY Investor Day.

 

Edit: Actually page 53 of 2018 BPY Investor Day is more detailed.

[Normax59]

Because it might be interesting to those to have a more exact number, i'll post the quarter by quarter claim's ex equity method and FV gains when I get the chance to go through them.

[peterHK]

Because it might be interesting to those to have a more exact number, i'll post the quarter by quarter claim's ex equity method and FV gains when I get the chance to go through them.

 

Haven't had time to go through it all yet, but thanks Norm for all the work on it. It's important as longs to listen to skeptics, and even if there is no there there, then we at least understand what we own better, so it's tremendously valuable.

[Normax59]

Q1:

 

BPY Net Income: $192MM [p. 43 Q1 report]

BAM Net Income: $330MM

 

non-distributed equity method income was $114MM for the quarter, split it 37% to BPY unit holders 63% to BAM [p. 46 Q1 report]

 

BPY: $120MM

BAM: $258MM

 

Share of equity method fair value gains was $1MM [p. 14 Q1 report]

In the supplemental proportional FV gains was $173MM [p. 11 Q1 supplemental]

 

Consolidated FV gain's is equal to $172MM, give each their portion and we are left with:

 

BPY: $86MM

BAM: $150MM

 

In Q1 the consolidated financials show an income tax benefit of $60MM in the income statement and then a deferred income tax benefit deduction of $110MM in the cash flow statement.

 

In the supplemental the income tax benefit on the income statement is $176MM so we would presumably deduct most of this from CFFO but we don't have exact numbers so I'll let the analyst decide how they want to account for it.

 

Q2:

 

BPY Net Income: $194MM [p. 42 Q2 report]

BAM Net Income: $332MM

 

non-distributed equity method income was $176MM for the quarter (have to back out the $114MM in the cash flow statement in Q1 from the $290MM reported in the Q2 report) , split it 37% to BPY unit holders 63% to BAM [p. 45 Q2 report]

 

BPY: $129MM

BAM: $221MM

 

Share of equity method fair value gains was $84MM [p. 13 Q2 report]

In the supplemental proportional FV gains was $479MM [p. 11 Q2 supplemental]

 

Consolidated FV gain's for the quarter is then is equal to $395MM, give each their portion and we are left with:

 

BPY: -$17MM

BAM: -$28MM

 

 

Q3:

 

BPY Net Income: $144MM [p. 46 Q3 report]

BAM Net Income: $206MM

 

They have a net gain on distributions in the third quarter of $71MM, at this point ownership of the operating LP was 50/50.

 

BPY: $180MM

BAM: $242MM

 

Share of equity method fair value losses was -$52MM [p. 15 Q3 report]

In the supplemental proportional FV gains was $320MM [p. 11 Q3 supplemental]

 

Consolidated FV gain's is equal to $372MM, give each their portion and we are left with:

 

BPY: -$7MM

BAM: $56MM

 

 

Q4:

 

BPY Net Income: $226MM [p. 9 Q4 Press Release]

BAM Net Income: $260MM

 

Equity method FY non-distributed earning were $429MM, deduct $219MM and we are left with $210MM, split 50/50 [p. 206 FY18 for $429MM, p. 49 Q3 report for $219MM]

 

BPY: $121MM

BAM: $155MM

 

Share of equity method fair value gains was $81MM [deducted $33MM from p. 15 Q3 report from $114MM in the annual report on p. 77]

In the supplemental proportional FV gains was $158MM [p. 11 Q4 supplemental]

 

Consolidated FV gain's is equal to $77MM, give each their portion and we are left with:

 

BPY: $83MM

BAM: $117MM

 

In the 4th quarter there was another proportionate tax benefit of $148MM while consolidated tax expenses were $32MM.

 

Backing out the Q3 consolidated cash flow statement from the FY, there is a Q4 deferred tax deduction $161MM from operating cash flow, and FY proportional tax benefits is equal to $160MM, so how much is from equity method investments is anyone's guess.

 

Also we don't know what claim BPY or BAM has on the positive changes in WC of $500MM in the consolidated while proportionate WC changes was -$2.3B, as I said before these are property holding companies and REIT's that they own for JV's so most of their current assets should be in cash, as you can see from the financials of the operating co for Canary Wharf:

 

https://www.tisegroup.com/market/securities/9572

 

Cash drain from investing in funds has nothing to with the cash being generated from the properties or who it is being generated for either and thus the problem with Brookfield, we have no idea what cash is your's or the NCI's because the consolidate financials statements tell us nothing, we have to construct it ourselves.

 

Pardon my skepticism but I don't want management telling me what "cash available for distributions" is, I should be able to figure that out myself from the presented financials.

 

Another picky point, they say in their recent Q3 that proportionate cash retained in subsidiaries is $1,714MM which is equal to the end balance proportionate cash in the supplemental on p.17, then they have a footnote saying the liquidity is contained in entities where the company doesn't have a controlling interest and cannot extract the cash without a distribution because again this balance contains cash held at equity method JV's.   

 

They misused the word subsidiaries completely, and then put a footnote saying otherwise, reading that felt misleading, but that might just be me.

 

 

 

BAM considers their distributions from these listed LP's as cash available for distribution and distributions to BAM's share was $551MM and $410MM to BPY unit holder's while claims on CFFO respective were:

 

BPY claim on CFFO: $145MM before deducting deferred taxes and benefits and WC changes

BAM claim on CFFO: $295MM before other deductions

 

Operating cash flow claimant to both BAM and BPY could very well be negative.

 

On top of that, if BPY is funding their distributions with debt and unit holders found out and the unit prices tanked, it has an effect on BAM's AM business considering the charge their management fee based on EV.

 

 

 

Let me know if you find any error's or questions, I don't have a view on BAM either way, it is more of a fun accounting project.

[racemize]

So, it appears that the exercise you are doing is to figure out, starting with the net income numbers, subtracting out fair value gains as well as any equity accounted earnings that weren't distributed, what cash is available for distribution for the BPY distributions?

 

If so, I think it was already clear from Brookfield that it would not cover distributions.  They said it in the annual report in the section I quoted below.  It's also clear that distributions are greater than FFO for the past number of years from their supplemental.

 

Moreover, these distributions are clearly being funded by asset sales to some extent, particularly in the opportunistic funds, which wouldn't show up in your calculations below, right? 

[Normax59]

So, it appears that the exercise you are doing is to figure out, starting with the net income numbers, subtracting out fair value gains as well as any equity accounted earnings that weren't distributed, what cash is available for distribution for the BPY distributions?

 

If so, I think it was already clear from Brookfield that it would not cover distributions.  They said it in the annual report in the section I quoted below.  It's also clear that distributions are greater than FFO for the past number of years from their supplemental.

 

Moreover, these distributions are clearly being funded by asset sales to some extent, particularly in the opportunistic funds, which wouldn't show up in your calculations below, right?

 

Finding which cash flows are yours at BAM is important I feel, and if the distributions are funded from asset sales, BPY is merely a vehicle for RE speculation, rather you can't expect this kind of level of distributions from the entity in the future. Furthermore, most of the equity claims to BPY unit holders and BAM is in these equity method investments.

[Normax59]

Should probably add that in 2018 the income tax benefits was mostly recognized in the corporate segment $226MM which would be claimant to BAM and BPY unit holder's rather than equity method investments versus the total proportionate tax benefit of $160MM.

 

So the total operating cash flow I posted earlier is likely to be considerably lower.

[John Hjorth]

Economic Times [October 24^th 2019] : Growth prospects intact, India’s a big opportunity: Anuj Ranjan, Brookfield : Brookfield is banking on its expertise in real estate, infra-linked businesses and fin services for India.

[jfan]

Thanks Normax and Gregmal for bringing up these counterpoints about BPY and BAM.

 

With respect to BPY, I just want to make sure that the model in my head is correct.

 

BPY is an entity that:

1) owns real estate

2) invests in real estate-related funds

3) partners with others to own real estate and real-estate related funds

    a) In these situations, BPY may own >50% of the assets OR

    b) BPY may own < 50% of the assets

 

For the most part: #1, 2, and 3a are consolidated on their balance sheet and 3b is equity-accounted.

 

Cash flow in most situations takes primacy, and valuation is based on the proportionate cash flow to the owner (or part owner in the case of BPY LP unit holders).

 

BPY although holds its assets for a long time, at the right price, it would be willing to sell it off to someone else.

 

So in BPY's situation, cash flow comes not only from regular rental income but also from "regular" asset sales. This would create an inherent lumpiness to its cash flows to the owner.

 

The concern is that regular rental income cash flow does not cover its promised distributions adequately without asset (real or from funds) sales. In most situations, if a business is selling off all its assets, it won't have anything left to generate rental income. Except in this situation, some of its sales are retained and recycled back into buying turnaround real estate with a high cap rates to sell later at lower cap rates (this is also the same principle with respect to their real estate fund investments). Therefore, to only focus on operating cash flow would ignore a large segment of their business model.

 

So if BPY buys assets that it can NOT turnaround by stabilizing and increasing rental income and realize lower future cap rates, they would not be able to fund their promised distribution to its owners (LP unit holders, BAM, and institutional clients).

 

To simplify, and let's consolidate all the owners to a single person who would own all the proceeds from operating cash flows and asset sales.

From the cash flow statement: operating cash flow, Sales of investment properties and subsidiaries, sales of equity account investments

2018: $1357, 5520, 1140 = $8,017

2017: $639, 4729, 1006  = $6,374

2016: $745, 3312, 1092  = $5,149

2015: $590, 2167, 1656  = $4,413

2014: $483, 2037, 280    = $2,800

** operating cash flow accounts for distributions from equity accounted investments but not share of earnings (which would be represented in the NAV)

 

The total distributions were:

2018: $3,690

2017: $3,509

2016: $1,750

2015: $1,564

2014: $1,797

 

The total equity was:

2018: $46,740

2017: $35,124

2016: $34,161

2015: $30,933

2014: $28,299

 

So in this situation, this single theoretical owner would have an average retain 53% of the cash to reinvest, buyback shares, pay for maintenance capex its current holdings, pay down debt, etc. The cumulative cash retained from 2014-2018 was $14,443 with the incremental increase in total equity = $18,441. This "suggests" value preservation.

 

But more specifically to LP unit holders:

2018: $31/diluted shares

2017: $22/diluted shares

2016: $20/diluted shares

2015: $20/diluted shares

2014: $26/diluted shares

 

It is always a toss up in my mind whether real estate "intrinsic value" is best based on cash flows or IFRS NAV. I guess if the plan is to hold the real estate forever, then cash flows would be more important, whereas, if there is a potential to sell and liquidate, then IFRS NAV would be informative.

 

If the current distribution yield is 6.76% and LP NAV growth continues at a historical 3.5%, total yield should be ~ 10% at current prices, obviously contingent upon interest rate effects on fair value, turnaround execution especially of GGP, debt financing risk, discount to market value due to accounting complexity, and BAM not repurchasing LP units at a discount and taking it private.

 

After writing this, it appears as clear as mud.

 

 

 

 

 

 

[jfan]

I thought I would challenge myself to re-create the cash flows that flow proportionate to the LP unit holders last week from their financial statements. Alas after a whole week, I am resigned to say that this task is analogous to untangling a feline hairball.

 

The combination of variable ownership via partners, fair value changes to assets, asset sales, circuitous operating LP participation in BAM's private fund, and degree of disclosure available makes it challenging to sort out.

 

Things I've learned for certain:

1) BPY's cash flows come from 4 sources: direct rent, distributions from equity accounted investments, distributions from LP investments (and later return of capital after fund liquidation), and disposition of investment properties.

2) The commercial property revenue is a consolidated amount from both directly owned properties and those owned via a LP investments. Although they give you the net income and total comprehensive income attributed to the partnership. Without NOI, cap rates, cash flows from each property, or their respective fair value gains/losses, it just impossible to reliably figure out BPY's proportionate FFO from its financial statements. You really have to depend on the supplements for information, and to that end, they are somewhat aggregated and hard to reconcile.

3) With respect to the discussion about asset sales, conceptually, they create cash via disposition. However, because of IFRS accounting, only gains/losses above or below the carrying value on the balance sheet are logged onto the income statement. (That said, I really couldn't find this item in their footnotes). The cash generated would only register on the cash flow statement from the line items: investment properties and subsidiaries, proceeds from dispositions and proceeds from sale of equity accounted investments and participating loan interests. It would be helpful if BPY provide more colour on the change in Fair value per property over time, but that would probably require lots of paper.

4) BPY purchases assets primarily via outside institutional capital and their retained cash as evident in their footnote section on investments in subsidiaries. Except for their purchase of GGP with LP unit issuance.

 

Essentially, investing in BPY is like investing in a bond. There is a distribution and at some point in time, you can sell it at "maturity" at NAV and recover the principal.

 

My primary questions are:

1) How well covered at the distributions in the long-term with the 4 ways for cash generation?

2) How successful are the asset and LP investment recycling efforts in generating adequate gains over time?

3) What is likelihood that BPY can use retain earnings and continue to raise more capital (publicly or privately) to grow NAV and cash flows without diluting LP unitholders over time?

4) What is the likelihood that BAM would find some what to take advantage of minority LP unitholders if don't get adequate growth from their incentive distributions and base management fees managing BPY?

 

 

 

[petec]

Interesting to note that Partners Value has liquidated virtually all of its non-Brookfield portfolio and de-levered. IIRC they saw an opportunity in Global Champions in 2013 and in Global Resource Champions (equity plus related bonds) in 2016. They levered the Champions bet with prefs and made a killing on both. That's all gone, plus some of the leverage at the holdco.

[bizaro86]

Interesting to note that Partners Value has liquidated virtually all of its non-Brookfield portfolio and de-levered. IIRC they saw an opportunity in Global Champions in 2013 and in Global Resource Champions (equity plus related bonds) in 2016. They levered the Champions bet with prefs and made a killing on both. That's all gone, plus some of the leverage at the holdco.

 

That IS interesting, thanks for posting! I should have realized, since I participated in the odd lot tender for the prefs, but didn't connect that to PVF de-levering. In many ways I'd prefer they just hold BAM/Trisura with a bit of leverage. Although I guess it's hard to complain about the results if they add leverage to buy high quality assets at cyclical lows and sell at cyclical highs...

[petec]

Although I guess it's hard to complain about the results if they add leverage to buy high quality assets at cyclical lows and sell at cyclical highs...

 

Quite :)

 

I intend to use Partners to "juice" my return in BAM. I own a core position in BAM and will lever it by adding Partners after selloffs.

[EricSchleien]

Although I guess it's hard to complain about the results if they add leverage to buy high quality assets at cyclical lows and sell at cyclical highs...

 

Quite :)

 

I intend to use Partners to "juice" my return in BAM. I own a core position in BAM and will lever it by adding Partners after selloffs.

 

FYI....Partners is a PFIC ;)

[blainehodder]

Can anyone honestly make heads or tails of the reports, or are you just buying it bc book value and stock price is going up and the business case seems to make sense in a general way. I don't think I have ever opened a more confusing clusterfck of accounting in my life.