BAM - Brookfield Asset Management

[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.

 

FYI....Partners is a PFIC ;)

 

...which I don’t *think* is an issue for a UK citizen, but I have been trying to find out.

[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 ;)

 

...which I don’t *think* is an issue for a UK citizen, but I have been trying to find out.

 

Pretty sure that's only for US. Didn't know you were a UK citizen.

[jfan]

 

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.

 

 

I dug a little more into this issue. I think the add back of transaction costs related to acquisitions and new financing is due to FASB-141. These transaction costs are likely capitalized due to timing of their letter-of-intent to purchase that have been paid out in cash but buried in the Fair Value of the Investment Properties (like a prepaid expense). This contra-asset is depreciated over the life of the property and hence is not a real cash cost as the cash has already left the building.

 

Here is a webpage that explains this accounting concept: https://blog.meadenmoore.com/blog/atc/accounting-for-merger-and-acquisition-transaction-costs

 

Are the amounts true and verifiable? Who knows - impossible to tell? Trust management? Follow the auditors?

 

 

 

 

[Normax59]

 

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.

 

 

I dug a little more into this issue. I think the add back of transaction costs related to acquisitions and new financing is due to FASB-141. These transaction costs are likely capitalized due to timing of their letter-of-intent to purchase that have been paid out in cash but buried in the Fair Value of the Investment Properties (like a prepaid expense). This contra-asset is depreciated over the life of the property and hence is not a real cash cost as the cash has already left the building.

 

Here is a webpage that explains this accounting concept: https://blog.meadenmoore.com/blog/atc/accounting-for-merger-and-acquisition-transaction-costs

 

Are the amounts true and verifiable? Who knows - impossible to tell? Trust management? Follow the auditors?

 

 

Their reconciliation of their share of FV gains from equity accounted investments actually includes tax expenses and benefits as well so basically any of those calculations I posted are incorrect, FV gains in the prop and any income tax or benefits should be summed and then the share of FV gains/losses from EAI's should be added or deducted, at that point you have a number that's very liberal to BPY and BAM as it assumes any tax expenses that they have a claim on in the consolidated financials are deferred.

 

Doing this for Q1 2018:

 

OCF:

BPY: $21MM

BAM: $39MM

 

A little hint for my WC changes question:

 

Search for demand deposits from Q2 2016 on.

 

[mjs111]

I'm new to BAM, having just gone through its last couple of annual reports and some of its conference calls.  So I have some familiarity with the company but it's nothing like what I've seen on this board. I went through the 120-odd pages of posts to get a grounding on the company, which helped a lot, especially with the bear and bull case for the company.

 

One question I had, since I haven't seen it brought up previously, is Brookfield's apparently low return on equity. The company's long term averages (the 5 and 10 year averages at least) barely meet or miss the cost of capital a typical investor would likely require. I don't see large amounts of goodwill on the balance sheet, which sometimes I'll choose to discount depending on how often a company engages in acquisitions.

 

In the numbers below I'm calculating return on equity in its most basic sense: the year's net income divided by the equity base at the end of the year.

 

I was looking at return on equity as a possible way to value the company, using an excess returns model where the core of the model would be the return on equity minus the cost of equity. I've used this before as a rough means of valuing financial companies.  Not sure if it would be useful here. I was looking at an excess returns model since, due to the opacity and complexity of the financials, a more detailed model may not be useful or possible.

 

 

dollar figures in millions

                        2009      2010      2011      2012      2013      2014      2015      2016      2017      2018

net income        2020    3200      3670      2750    3840      5210      4670      3340      4551      7488

equity            23139  29190    37410    44250  47530    53250    57230    69690    79872    97150

assets            61900  78130    91030  108640  112750  129480  139510  159830  192720  256281

 

roe                    8.7%  11.0%      9.8%      6.2%    8.1%    9.8%      8.2%      4.8%    5.7%      7.7%

roa                    3.3%    4.1%      4.0%      2.5%    3.4%    4.0%      3.3%      2.1%    2.4%      2.9%

 

7.99% roe 10 year average

7.23% roe 5 year average

 

3.21% roa 10 year average

2.95% roa 5 year average

 

 

Mike

 

[racemize]

A little hint for my WC changes question:

 

Search for demand deposits from Q2 2016 on.

 

I don't see this word showing up in any significant way in the reports.

[Jurgis]

I'm new to BAM, having just gone through its last couple of annual reports and some of its conference calls.  So I have some familiarity with the company but it's nothing like what I've seen on this board. I went through the 120-odd pages of posts to get a grounding on the company, which helped a lot, especially with the bear and bull case for the company.

 

One question I had, since I haven't seen it brought up previously, is Brookfield's apparently low return on equity. The company's long term averages (the 5 and 10 year averages at least) barely meet or miss the cost of capital a typical investor would likely require. I don't see large amounts of goodwill on the balance sheet, which sometimes I'll choose to discount depending on how often a company engages in acquisitions.

 

In the numbers below I'm calculating return on equity in its most basic sense: the year's net income divided by the equity base at the end of the year.

 

I was looking at return on equity as a possible way to value the company, using an excess returns model where the core of the model would be the return on equity minus the cost of equity. I've used this before as a rough means of valuing financial companies.  Not sure if it would be useful here. I was looking at an excess returns model since, due to the opacity and complexity of the financials, a more detailed model may not be useful or possible.

 

 

dollar figures in millions

                        2009      2010      2011      2012      2013      2014      2015      2016      2017      2018

net income        2020    3200      3670      2750    3840      5210      4670      3340      4551      7488

equity            23139  29190    37410    44250  47530    53250    57230    69690    79872    97150

assets            61900  78130    91030  108640  112750  129480  139510  159830  192720  256281

 

roe                    8.7%  11.0%      9.8%      6.2%    8.1%    9.8%      8.2%      4.8%    5.7%      7.7%

roa                    3.3%    4.1%      4.0%      2.5%    3.4%    4.0%      3.3%      2.1%    2.4%      2.9%

 

7.99% roe 10 year average

7.23% roe 5 year average

 

3.21% roa 10 year average

2.95% roa 5 year average

 

 

Mike

 

This reminded me that BRK ROE was also always quite low. Was that because unrealized cap gains were not reflected in earnings? Might be similar situation for BAM.

[Normax59]

A little hint for my WC changes question:

 

Search for demand deposits from Q2 2016 on.

 

I don't see this word showing up in any significant way in the reports.

 

For the three and six month periods ended June 30, 2016 and 2015, the partnership made distributions to unitholders of $200 million

(2015 - $189 million) and $399 million (2015 - $378 million), respectively. This compares to cash flow from operating activities of $(315)

million and $(245) million for each period. During the second quarter of 2016, cash flow from operating activities includes the repayment of a

$500 million deposit from Brookfield Asset Management. Excluding this repayment, cash flow from operating activities would have been $185

million and $255 million for the three and six month periods ended June 30, 2016 , respectively. The distributions exceeded the cash flow from

operating activities for the three and six month periods ended June 30, 2016 and June 30, 2015.

 

They completely ignore the $500MM inflow from Q1 BTW, then they make what appears to be an arithmetic error in Q3 (my calculator might be broken but -139 + 500 = 361)  while continuing to ignore the $500MM inflow from Q1.

 

For the three and nine month periods ended September 30, 2016 and 2015, the partnership made distributions to unitholders of $199

million (2015 - $189 million) and $598 million (2015 - $567 million), respectively. This compares to cash flow from operating activities of $106

million (2015 - $222 million) and $(139) million (2015 - $572 million) for each period. During the second quarter of 2016, the partnership repaid

a $500 million deposit from Brookfield Asset Management which was reflected within cash flows from operating activities. Excluding this

repayment, cash flow from operating activities would have been $366 million for the nine month period ended September 30, 2016. The

distributions exceeded the cash flow from operating activities for the three and nine month periods ended September 30, 2016. For the three and

nine month periods ended September 30, 2015, cash flows from operating activities exceeded distributions.

 

A deposit was made in Q4 2016 for $500MM but the disclosure seems to be missing from the annual report, so consolidated operating cash flow for FY 2016 was overstated by 67%.

 

Another $500MM was deposited Q1 2017 but they don't mention the deposit in the disclosure.

 

For the three month periods ended March 31, 2017 and 2016, the partnership made distributions to unitholders of $207 million and

$199 million, respectively. This compares to cash flow from operating activities of $786 million and $70 million for each period. The cash flow

from operating activities exceeded distributions for the three month period ended March 31, 2016. The partnership has a number of alternatives

at its disposal to fund any difference between the cash flow from operating activities and distributions to unitholders.

 

They make another arithmetic error by saying Q1 2016 cash flow exceeded distributions as 199 > 70 and $70MM still includes the $500MM inflow. 

 

They then acknowledge the deposits effect on operating cash flow in Q2 2017 when it benefits them as there was an outflow.

 

For the three and six month periods ended June 30, 2017 and 2016, the partnership made distributions to Unitholders of $209 million

(2016 - $200 million) and $416 million (2016 - $399 million), respectively. This compares to cash flow from operating activities of $(309)

million and $477 million for each period. During the three and six month periods ended June 30, 2017, cash flow from operating activities

included net repayments of $600 million and $100 million in deposit from Brookfield Asset Management. Excluding this repayment, cash flow

from operating activities would have been $291 million and $577 million for the three and six month periods ended June 30, 2017 , respectively,

exceeding distributions to Unitholders.

 

Huge deposit was made in Q1 2019 which is why WC changes swung so much, then in Q3 they repaid.

 

 

[John Hjorth]

I'm new to BAM, having just gone through its last couple of annual reports and some of its conference calls.  So I have some familiarity with the company but it's nothing like what I've seen on this board. I went through the 120-odd pages of posts to get a grounding on the company, which helped a lot, especially with the bear and bull case for the company.

 

One question I had, since I haven't seen it brought up previously, is Brookfield's apparently low return on equity. The company's long term averages (the 5 and 10 year averages at least) barely meet or miss the cost of capital a typical investor would likely require. I don't see large amounts of goodwill on the balance sheet, which sometimes I'll choose to discount depending on how often a company engages in acquisitions.

 

In the numbers below I'm calculating return on equity in its most basic sense: the year's net income divided by the equity base at the end of the year.

 

I was looking at return on equity as a possible way to value the company, using an excess returns model where the core of the model would be the return on equity minus the cost of equity. I've used this before as a rough means of valuing financial companies.  Not sure if it would be useful here. I was looking at an excess returns model since, due to the opacity and complexity of the financials, a more detailed model may not be useful or possible.

 

 

dollar figures in millions

                        2009      2010      2011      2012      2013      2014      2015      2016      2017      2018

net income        2020    3200      3670      2750    3840      5210      4670      3340      4551      7488

equity            23139  29190    37410    44250  47530    53250    57230    69690    79872    97150

assets            61900  78130    91030  108640  112750  129480  139510  159830  192720  256281

                             

roe                    8.7%  11.0%      9.8%      6.2%    8.1%    9.8%      8.2%      4.8%    5.7%      7.7%

roa                    3.3%    4.1%      4.0%      2.5%    3.4%    4.0%      3.3%      2.1%    2.4%      2.9%

 

7.99%  roe 10 year average 

7.23%  roe 5 year average 

     

3.21%  roa 10 year average 

2.95%  roa 5 year average

 

Mike

 

Mike,

 

You are not the only one, nor have you been, and most likely you'll not be the last one.

 

Here is a post from Joel [CoBF member racemize] about 6½ years ago in this topic [just meant as an example, and certainly not meant as criticism or in a condescending way]:

 

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

 

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

 

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

 

Thanks very much!

 

1. The long term measurement of BAM's progress in value, ref. Joel's post quoted above, is "muddy" - to say the least. I suppose all BAM investors are - at least to some extent, and at varying degrees  - struggling with that. However, to me, there is at least an explanation/reason for that. BAM isn't today, what Brascan looked like in the "Brascan days". The Asset Manager business inside BAM has gradually evolved over time, and has been built internally - from what I perceived pretty much by trial and error efforts on the fly, simply because BAM's business connections indicated a demand for it. The earnings from the Asset Manager business have gradually increased in the whole picture of the earnings & value generation of BAM. There are basically no net assets in the Asset Management business [from a the-whole-BAM perspective], so also internal valuation metrics have evolved over time [always forward looking] to reflect the evolution of BAM as a business as a whole. There is no way to maintain consistency in valuation metrics, when a company in this way morphs/transforms itself over time, as BAM has been doing. So now we live with this internal "Plan Value" metric, and let me add here : I have no proposal for a better one. [Easy to say now 6½ years after Joel's original post!]

 

Now to your own calculations :

 

2. Just by looking at your numbers, it appears to me, that you are calculating ROE & ROA metrics based on equity numbers at year end. To me, you should use equity at beginning of the year, or perhaps - as an alternative - average equity during the year.

 

3. You're lumping together in one big bunch several kinds of equity in the whole BAM system [stated by you at YE2018 at USD 97.150 B]. You need to distinguish & split that number to weed out all other layers of equity, that is not BAM common equity at parent level. Your calculations will come out materially different, if you try to do that. [some would perhaps say, that the preferred equity and minorities in the LP subs are served & spoon fed with bread crumbs [<- I don't know if it's dry/without milk or with milk] because of fees & carry etc., while the common equity holders gets the brothers part [of both the returns and the risks involved].

 

4. I think you need to use per share metrics, for things to make sense.

[John Hjorth]

This reminded me that BRK ROE was also always quite low. Was that because unrealized cap gains were not reflected in earnings? Might be similar situation for BAM.

 

Jurgis,

 

BAM switched to IFRS accounting for fair value adjustments in 2009 on most of its assets, if I remember correctly. This implies, that fair value adjustments hit the income statement.

 

The major exemption to this - to my knowledge - is the [long life] hydro electric power plants [82 of them, IIRC] owned by BEP, which are subject to yearly systematic depreciations, after whitch they are re-evaluated on a yearly basis. It's covered in depth in a post by Packer in this topic earlier.

[mjs111]

Thanks, John and Jurgis!

 

BAM's book value increased by 3.1 times "overnight" sometime in 2010 upon adoption of IFRS 1, which required a bunch of assets recorded on the balance sheet at book value to be revalued at fair market value, so that explains some of it. Book value at the end of 2009 was $7.5 billion and if you look at 2010's annual report, 2009's end of year book value was re-recorded as $23.1 billion.  The equity figure I used for 2009 in my table is from 2010's annual report after it was revalued, not from the original 2009 report.

 

 

It looks like IFRS 9 (the current day standard) has similar breakdowns to US GAAP:

 

IFRS 9  has "fair value through profit or loss" (FVTP: recognized in income statement), "fair value through other comprehensive income" (FVTOCI: recognized in other comprehensive income), and "amortised cost" (recognized in the income statement).

 

The big difference I can see between GAAP "available for sale" and FVTOCI is that FVTOCI still bypasses the income statement.  If the asset in question is equity, it will bypass the income statement even upon sale.  Here's a snippet from BAM's 2018 annual report (page 129):

 

Financial assets classified as FVTOCI are initially recognized at their fair value and are subsequently measured at fair value at each reporting date. The cumulative gains or losses related to FVTOCI equity instruments are not reclassified to profit or loss on disposal, whereas the cumulative gains or losses on all other FVTOCI assets are reclassified to profit or loss on disposal, when there is a significant or prolonged decline in fair value or when the company acquires a controlling or significant interest in the underlying investment and commences equity accounting or consolidating the investment. The cumulative gains or losses on all FVTOCI liabilities are reclassified to profit or loss on disposal.

 

 

On page 128 of the 2018 annual report BAM lists what asset types are accounted for under what methods, though not by amount. So some of these assets would have had both realized and unrealized gains and losses that could have bypassed the income statement (and so aren't accounted for in the numerator in ROE, while making the denominator bigger).

 

 

It would appear that a decent chunk of BAM's assets (unknown to me at the moment) would have fair value re-measurements that bypass the income statement (even upon sale if they're equities).

 

 

Mike

 

 

 

[Cigarbutt]

^A helpful reference is the reconciliation at the transition date, page 69. Listed: impact of revaluations, accounting for NCI and deferred taxes; with a plan to "get it right" down the road.

https://bam.brookfield.com/~/media/Files/B/BrookField-BAM-IR-V2/quarterly-reports/2010/2010-q1-interim-report-final.pdf

[racemize]

Looks like Grant's interest rate observer had a bearish article on BPR/BPY last issue.  Anyone seen it?

[Cigarbutt]

^The typical themes are developed: supressed interest rates, reaching for yield behavior and the typical concerns conveyed in pages here.

 

Mr. Grant is not as optimistic about the retail landscape and finds BPY and its REIT offspring a bit stretched (vs Simon for instance). There are some questions about the homogeneity of the class-A malls status. I would say otherwise nothing outstandingly insightful.

 

There is a nice reminder about how BPY, when dealing with the valuation theme, does not spend much time on the 'fees' issue going to the parent while the ultimate consolidator does not seem to hesitate to put a 25 multiple on them.

 

Personal addition: A significant strength in BAM is the (almost permanent) long-term vision but there is an interesting quote in the car racing world: "To finish first, first you have to finish". That's what I understood as the message behind the title: Dividends at risk.

[John Hjorth]

Goldman Sachs US Financial Services Conference 2019 [December 10^th 2019]: Bruce Flatt and Howard Marks to Present at Goldman Sachs Financial Services Conference.

 

If you have a sincere interest in BAM, to me, you should really opt to spend 36 minutes of the rest of your life on this voice clip. The quality of the voice clip is simply awful, the content not. You could cut your allocation of time to it to two thirds by opting to listening to it at speed 1.5x [i tried 2.0x, that did not work satisfactory for me personally.]

 

Much more direct & candid expressions from Mr. Marks and Mr. Flatt than we are in general used to, when these gents talk to & with media outlets.

[Cigarbutt]

Goldman Sachs US Financial Services Conference 2019 [December 10^th 2019]: Bruce Flatt and Howard Marks to Present at Goldman Sachs Financial Services Conference.

 

If you have a sincere interest in BAM, to me, you should really opt to spend 36 minutes of the rest of your life on this voice clip. The quality of the voice clip is simply awful, the content not. You could cut your allocation of time to it to two thirds by opting to listening to it at speed 1.5x [i tried 2.0x, that did not work satisfactory for me personally.]

 

Much more direct & candid expressions from Mr. Marks and Mr. Flatt than we are in general used to, when these gents talk to & with media outlets.

Thanks! That was interesting.

There has been indeed a growing interest in alternative assets (institutional etc).

How do you qualify a situation where one can acquire "reasonable" assets and finance the purchase with 70% debt, with a rate of 1%? I don't remember the exact word but does it rhyme with the mortgage refinancing environment in a Nordic country? :) How can Mr. Buffett compete in such an environment when he (at least he says he does) calculates the prospective return on an investment with the assumption that it's 100% equity financed?

 

Never omitting to cover all possibilities, Mr. Marks, at the extreme end, is able to squeeze in the eventuality that 'we' may suffer from some kind of mass hysteria. With all due respect, Mr. Marks does not use the right terminology but maybe he simply wanted to avoid using the b word, which is fine if opportunism is your credo. True mass hysteria, technically, is extremely rare (read about the Melbourne airport 2005 'emergency' if interested). Contrary to the more generic bubble phenomena where 'experts' can always explain the crowd movement after the fact, it is usually impossible to explain what caused a true mass hysteria, even after it gets resolved.

 

There are days when I'd hope to be more intelligent and invest in BAM now but remain haunted by the dilemma formulated once by a Danish philosopher (Søren Kierkegaard): "Life is understood backwards, but must be lived forwards."

[ValueMaven]

Didnt tell us anything new .. I thought the GS questions stunk however.  Even still - this is my favorite security for the next decade handles down.

[ValueMaven]

WSJ: Brookfield’s Bet on Malls Looks Riskier than Ever:

 

https://www.wsj.com/articles/brookfields-bet-on-malls-looks-riskier-than-ever-11577019601?mod=hp_lead_pos7

[sleepydragon]

WSJ: Brookfield’s Bet on Malls Looks Riskier than Ever:

 

https://www.wsj.com/articles/brookfields-bet-on-malls-looks-riskier-than-ever-11577019601?mod=hp_lead_pos7

 

The WSJ article is not wrong in that the Malls are struggling. A month after the new premium BAM’s mall in Norwalk CT opened (It’s call SONO mall), another Mall in the adjacent town (Stamford Town center Mall) which had an Apple store and was where my wife bought her Rolex watch, announced the entire mall is on sale. I speculate one of the reasons could be that Apple and a couple high end stores are moving to the new Mall.

 

[Gregmal]

WSJ: Brookfield’s Bet on Malls Looks Riskier than Ever:

 

https://www.wsj.com/articles/brookfields-bet-on-malls-looks-riskier-than-ever-11577019601?mod=hp_lead_pos7

 

The WSJ article is not wrong in that the Malls are struggling. A month after the new premium BAM’s mall in Norwalk CT opened (It’s call SONO mall), another Mall in the adjacent town (Stamford Town center Mall) which had an Apple store and was where my wife bought her Rolex watch, announced the entire mall is on sale. I speculate one of the reasons could be that Apple and a couple high end stores are moving to the new Mall.

 

I think for 90% of people just saying that the mall space sucks, avoid it, is good enough. But inside the investment arena, its actually pretty interesting in certain places. So B/C malls basically have no value. That hasn't changed and IMO won't. But Ive noticed now that new development, and high end locations are actually somewhat healthy and even thriving. Ive noticed in several places B mall anchor tenants leaving to take up space as just another tenant in a new development. The key element from what Ive seen is being at the best location in your area. If you are, all the stores still want space. So I wouldn't necessarily be too concerned, as a Brookfield development is almost always shiny, highly promoted, and typically in decent areas. Ive seen the progression of the mall you are referring to; my son loves the aquarium next door...my wallet, not so much. But thats an area that sees traffic and will draw people.

 

Basically, it is my believe that the carnage in mall won't kill everything. It just changed the game. Companies used to be able to get away with multiple locations in close proximity. Now they seem to just want prime ones. But I dont think they will ever not want any. Location, location, location I guess lol. Real estate 101 currently doubling as "How to Survive the Mall Meltdown"

[Spekulatius]

^ Surviving doesn’t mean prospering. It is expensive to reconfigure a mall into multi use and it isn’t clear to me they more rents can be charged for multi use property than for the single use purpose the mall was originally build for.

 

Also, if the WSJ is correct and the valuation implies a 5.2% cap rate, why would I want to own this, when I can buy mall assets at 8% cap rates (MAC, TCO) or DPG close to 7%. At some point this 5.2% cap rate valuation may not be defendable any more and then it’s game over for BPY.

[Gregmal]

I was more referring to the specific Norwalk property, but generally speaking, a tier one, shiny mall like this one, will still easily command a 5 cap or so. There is likely nothing in the portfolios of the names you mentioned that compare to some of the stuff the Brookfields and the Simons own. That said, I’m obviously in agreement on the risk angle. These guys are at least buying hard assets, but they’re spending like drunken sailors. I did have a good chuckle at the Cincinnati Bell acquisition today. It’s a fuckin free for all. And it only ends well if rates stay low for a while. Which I think they do. But I also don’t think we re being adequately compensated for the risk anymore.

 

[sleepydragon]

^ Surviving doesn’t mean prospering. It is expensive to reconfigure a mall into multi use and it isn’t clear to me they more rents can be charged for multi use property than for the single use purpose the mall was originally build for.

 

Also, if the WSJ is correct and the valuation implies a 5.2% cap rate, why would I want to own this, when I can buy mall assets at 8% cap rates (MAC, TCO) or DPG close to 7%. At some point this 5.2% cap rate valuation may not be defendable any more and then it’s game over for BPY.

 

You mentioned TCO and MAC.

The Stamford Town Center Mall I mentioned in my post that is now for sale is in fact owned by TCO.

MAC also owned a nearby mall, called Danbury Mall. It still has a lot of traffic but it’s pretty old mall. Sears/SRG and Macy’s are there.

[Spekulatius]

^ Surviving doesn’t mean prospering. It is expensive to reconfigure a mall into multi use and it isn’t clear to me they more rents can be charged for multi use property than for the single use purpose the mall was originally build for.

 

Also, if the WSJ is correct and the valuation implies a 5.2% cap rate, why would I want to own this, when I can buy mall assets at 8% cap rates (MAC, TCO) or DPG close to 7%. At some point this 5.2% cap rate valuation may not be defendable any more and then it’s game over for BPY.

 

You mentioned TCO and MAC.

The Stamford Town Center Mall I mentioned in my post that is now for sale is in fact owned by TCO.

MAC also owned a nearby mall, called Danbury Mall. It still has a lot of traffic but it’s pretty old mall. Sears/SRG and Macy’s are there.

 

Both TCO and MAC own mostly A malls and in aggregate have positive SSS still. It is true that within The A mall class, some are struggling too and may need to be in a need for a refreshment. The problem they I am seeing is that both MAC and TCO are trading at close to 8% cap rate a and the incremental cap rate they are getting on their mall re-investment projects are less than that - let. Call it 6-6.5% range. This means that metrics like FFO/ share are going down. NAV May be stable, because refreshed malls may command a higher cap rate, but still - we are looking at Reits that might show no growth in operating metrics (FFO, dividend/ share) and stable NAV, what’s the point of owning this, unless they liquidate? Same for GGP, although the look into their numbers isnt that clear. GGP was bought for a 5.x% cap rate, which right now means it’s 30-50% higher valued than peers SPG, TCO and MAC. Where can returns come from. Maybe they can kick the ball down the road forever, if interest rates stay low for a long time, but I don’t see a potential for high return there.

[Normax59]

Turns out the demand deposits run pretty deep, in Q1 2018 BAM decided to book the $535MM that BPY received from returns of capital from equity method investments in their operating cash flow at the parent level instead of in the investing section where it belongs. BPY even booked the proceeds in the investing section of their financials. BAM has always booked them in investing activities before too and appears to have gone back to this same reporting after Q1 2018.

 

If you imagine you have your own personal cash flow statement then you'd book a purchase of a stock at $200 as an outflow in your investing section, let's say you sell it for $250 next year, you'd book the $50 in profit under in operating activities and the cost basis of $200 as an inflow in the investing section.

 

You can see the problem if you're allowed to book the profit and cost basis in your operating cash flow, you could funnel cash through your investing section and stuff cash inflows, regardless of profit, in your operating cash flow. This added about $496MM to BAM's operating cash flow for the quarter and was a means of papering over the large delta, if you summed the 4 Listed LP's operating cash for the Q, that would have been created from the Q1 2018 deposit of $350MM that flowed through BPY's operating activities which is eliminated at BAM's level. Real operating cash flow at BAM's level was $776MM instead of $1.272B.