BAM - Brookfield Asset Management

[racemize]

I put together a spreadsheet with some fundamental data (with the help of WhoIsWarren).  Here's my results:

 

https://docs.google.com/spreadsheet/ccc?key=0AhTPR9eP5nWedHZXZVBTMWlSa0pMRTFDc1ViN3B3a1E&usp=sharing

 

 

There were some really odd adjustments to BVPS throughout (wasn't just share adjustments, as far as I could tell)--not sure what to make of that.  In any event, I ended up with some rough adjustments to the BVPS, and then just used valueline's all the way back to 2003.  Hopefully this is helpful to others.

[racemize]

Not sure if this has been posted, but a friend of mine directed me to this video of Flatt:

 

http://apps.whitman.syr.edu/video/Video.aspx?vid=d24baee9-40e0-4ee2-b6f3-593382be2c50

[giofranchi]

Not sure if this has been posted, but a friend of mine directed me to this video of Flatt:

 

http://apps.whitman.syr.edu/video/Video.aspx?vid=d24baee9-40e0-4ee2-b6f3-593382be2c50

 

Thank you for posting this video, Joel!

 

I hadn't seen it yet, and I will watch it with much pleasure. :)

 

giofranchi

[giofranchi]

Value by George: Brookfield June 2013 Update.

 

http://www.valuebygeorge.com/2013/06/21/brookfield-bam-bpy-bip-bep-june-update/

 

giofranchi

[Kiltacular]

July 09, 2013 07:55 ET

 

Brookfield Asset Management Announces Automatic Purchase Plan

 

TORONTO, ONTARIO--(Marketwired - July 9, 2013) - Brookfield Asset Management Inc. (NYSE:BAM)(TSX:BAM.A)(EURONEXT:BAMA) today announced that, in connection with its previously announced normal course issuer bid program, it will enter into an automatic purchase plan with its designated broker to allow for purchases of its Class A Limited Voting Shares when Brookfield ordinarily would not be active in the market due to its own internal trading black-out period, insider trading rules or otherwise. Outside of these periods, shares will be repurchased in accordance with management's discretion, subject to applicable law.

 

Under its normal course issuer bid which expires on April 22, 2014, Brookfield may purchase up to 53,571,157 Class A Limited Voting Shares. Purchases under the bid can be made through the facilities of the Toronto Stock Exchange (the "TSX"), the New York Stock Exchange and any other applicable stock exchange. In accordance with the rules of the TSX, any daily purchases on the TSX under this bid (other than pursuant to a block purchase exemption) will be limited to 195,080 Class A Limited Voting Shares.

 

http://www.marketwire.com/press-release/brookfield-asset-management-announces-automatic-purchase-plan-tsx-bam.a-1809191.htm

 

[racemize]

Ok, has the listing of intrinsic value per share disappeared again?  I can't find it in the most recent letter/report/supplemental...

[fareastwarriors]

http://www.cnbc.com/id/100952444

 

'Buffett of Canada' says he's a big bull on the US

 

 

 

(I thought the Buffett of Canada is Prem Wasta!)

[WhoIsWarren]

Ok, has the listing of intrinsic value per share disappeared again?  I can't find it in the most recent letter/report/supplemental...

 

Hi racemize, I missed this post of yours from a few weeks back.

 

You're right -- they didn't publish an intrinsic value for the most recent quarterly.  You might have noted they didn't report it in the Q1:13 report either.  And as you mentioned in an earlier post, finding the intrinsic value number for 2012 was not easy, certainly not compared to Q3:12 reports and earlier (quarterly and annual, back to 2008 when they first produced an intrinsic or 'underlying' value).

 

I don't think the SEC is totally comfortable with the use of intrinsic value.  Therefore, from the 2012 annual report onwards, Brookfield discloses the firm's intrinsic value on an annual basis only (i.e. not quarterly) and all discussion and derivation of intrinsic value will take place in the "Additional Information" report, which is released alongside the annual report.

 

http://www.brookfield.com/_Global/42/img/content/File/Investor%20Relations/Supplemental%20Information/2012/Supplemental%20Information%202012_F1.pdf

 

Hope this helps.

 

[racemize]

Ok, has the listing of intrinsic value per share disappeared again?  I can't find it in the most recent letter/report/supplemental...

 

Hi racemize, I missed this post of yours from a few weeks back.

 

You're right -- they didn't publish an intrinsic value for the most recent quarterly.  You might have noted they didn't report it in the Q1:13 report either.  And as you mentioned in an earlier post, finding the intrinsic value number for 2012 was not easy, certainly not compared to Q3:12 reports and earlier (quarterly and annual, back to 2008 when they first produced an intrinsic or 'underlying' value).

 

I don't think the SEC is totally comfortable with the use of intrinsic value.  Therefore, from the 2012 annual report onwards, Brookfield discloses the firm's intrinsic value on an annual basis only (i.e. not quarterly) and all discussion and derivation of intrinsic value will take place in the "Additional Information" report, which is released alongside the annual report.

 

http://www.brookfield.com/_Global/42/img/content/File/Investor%20Relations/Supplemental%20Information/2012/Supplemental%20Information%202012_F1.pdf

 

Hope this helps.

 

I was hoping that it would still be listed annually--did you get that confirmed?  I was mostly concerned that we would not get that information anymore.

[WhoIsWarren]

Yes Racemize, we should still get the annual info.  At least that's my understanding of it!

 

Incidentally, I'm only now getting to looking closely at the spreadsheet of historic BVPS that you posted up a few months back.  I carried out the same exercise and, I've not double-checked my work yet but, my numbers don't exactly tally with yours.  Not that we're a million miles out -- mostly plus or minus 5% each year -- but I'd still like to see your workings in case I've made mistakes.

 

I'm also not finding the "really odd adjustments to BVPS throughout" that you mentioned.  The group changed its reporting currency in 2003 from C$ to U$ and there were 3 for 2 share splits on 3 occasions.  Apart from that, the numbers were hardly ever restated, with the exception of the introduction of IFRS and intrinsic value, which the group first estimated in 2008 and later revised significantly upwards in 2009.

 

I'll hopefully get to post my spreadsheet up tomorrow and we can discuss these issues then.

[racemize]

Yes Racemize, we should still get the annual info.  At least that's my understanding of it!

 

Incidentally, I'm only now getting to looking closely at the spreadsheet of historic BVPS that you posted up a few months back.  I carried out the same exercise and, I've not double-checked my work yet but, my numbers don't exactly tally with yours.  Not that we're a million miles out -- mostly plus or minus 5% each year -- but I'd still like to see your workings in case I've made mistakes.

 

I'm also not finding that the "really odd adjustments to BVPS throughout" that you mentioned.  The group changed its reporting currency in 2003 from C$ to U$ and there were 3 for 2 share splits on 3 occasions.  Apart from that, the numbers were hardly ever restated, with the exception of the introduction of IFRS and intrinsic value, which the group first estimated in 2008 and later revised significantly upwards in 2009.

 

I'll hopefully get to post my spreadsheet up tomorrow and we can discuss these issues then.

 

When I did my sheet, I didn't notice the C$ to U$ change in 2003, which could have caused at least part of the issue.  I essentially had problems where I would restate the book value after adjustment and the ratios would not be the same as they were previously (e.g., if the adjustments were 1.5:1, two would match, but a previous one would not); by the end, I just started using BVPS from ValueLine, and then readjusted backward from there, using the same ratios.

[no_free_lunch]

Thanks for bringing this one to my attention guys. 

 

Regarding rising rates, found this in the latest 10q.

 

Investors have been worried lately about the effect of rising interest rates on fixed income investments. The bottom line is that

we believe they should be concerned, as interest rates have no way to go but up over the longer term. As an indication of this

conviction, you may recall that we own no long-term bonds on our own balance sheet. Furthermore, over the last four years we

have been locking in as many long-term fixed rate financings as possible, and we have also hedged approximately 50% of the

financings across our companies that come due in the next three years.

But, contrary to being negative about real assets, we in fact believe that real assets are one of the great investments to own

in this

environment and while often confused with fixed income investments, they are very different. We will attempt to explain this in

more detail, but the main reasons are:

•

most real asset income flows adjust upward with positive business conditions, inflation or both;

•

interest rates for borrowing are still historically low, and fixed interest rate loans tied to real assets, enhance equity returns

as revenues increase;

•

expenses tend to grow more slowly than revenues on real assets, and therefore operating margins expand; and

•

the cash flows earned on real assets are substantially greater than government treasury securities. Furthermore, as interest

rates declined, and in anticipation of future interest rate increases capitalization rates did not go down as much as treasurie

s

over the last number of years. As a result spreads between the two are at historic highs. Consequently there is substantial

room to absorb increases in treasury rates without a commensurate deterioration in capitalization rates

[racemize]

WhoisWarren was having some difficulty getting the spreadsheet posted, and I couldn't get the spreadsheet to post (I got an error message), so I've posted it as a google spreadsheet (incidentally, it is fantastic):

https://docs.google.com/spreadsheet/ccc?key=0AhTPR9eP5nWedHdlN0dKcXlJU0ZPcmF4cExGQnNWOUE&usp=sharing

 

Here is his post:

 

See attached the spreadsheet on BAM that I've been working on.  If anyone has any questions figuring out what's what (or mistakes I may have made!), please let me know.

 

I've taken two approaches : one focusing on BVPS and the other on Intrinsic / Underlying values.

 

Typically the company has reported BVPS numbers for the year in question and the previous 4 or 5 years.  The earliest Annual Report I've been able to get my hands on is 2000, for which BAM reports comparable figures back to 1995.  Roll forward to 2001, figures for 2001 and the previous 4 years are reported, adjusted for any restatements (over the entire period I didn't find any restatements worthy of mention).  And so on; in this way I've created a matrix.  Issues to be aware of are the change in reporting currency in 2003, 3-for-2 stocks splits in 2004, 2006 and 2007, as well as the switch to IFRS from CGAAP in 2010, but everything is consistent.  For example, the company reported BVPS in 2003 of U$17.54.  In 2004 it reported BVPS of U$13.41 for 2004 and U$11.63 for 2003.  U$11.63 is (almost) equivalent to previously reported U$17.54, after taking account of the 3-for-2 split.

 

I've ended up with a BVPS series back to to 1995.  Note that this is a fully-diluted calculation, adjusted for the cash value of unexercised options.  This measure is more correct than shareholders' equity divided by ordinary shares outstanding.  Racemize -- this might explain for why your numbers don't quite tally with mine.  I've also added in dividends paid out along the way to come up with a dividend-adjusted BVPS series.  Using that series, adjusted-BVPS has compounded by 14% p.a. since 1995 and by 18% since 2001, when Bruce Flatt took over from Jack Cockwell.  However, this is not an apples-to-apples comparison, as the switch to IFRS since 2010 means that the majority of assets are calculated at fair value, whereas previously they were accounted at cost (and some assets they've held for a long time!).

 

The company's "intrinsic value" calculation, first reported in 2010, attempts to overcome the short-comings of IFRS (mainly, to revalue to fair value assets still held at cost, adding a franchise value for asset management, and excluding deferred income taxes).  You can argue the toss over these adjustments, but I believe it's closer to the truth than just taking the IFRS book value per share.  In addition, Brookfield quoted an "underlying value" of the company for years 1999 to 2003.  Essentially, this took stated BVPS and adjusted for the market value of large, publicly-quoted stakes in companies such as miner Noranda.  Again, the earlier "underlying" numbers and the more recent "intrinsic" numbers are not apples-to-apples, so a comparison is not very meaningful but for what it's worth the CAGR (including dividends) from 1999 to 2012 was 24% p.a.

 

Hope this helps.

[no_free_lunch]

Racemize/WhoIsWarren,

 

First off this is fantastic.  Can I just ask whether this takes into account the spinoff of BIP in 2008?  It is not huge compared to the market cap but worth considering.

 

http://www.reuters.com/article/2008/01/03/brookfieldasset-spinoff-idUSN0322101120080103

 

EDIT : After thinking about this a bit, the simplest thing might be to treat the spinoff as a dividend.  The stock was spunoff in 2008, valued at $20 with 1 share per 25 BAM shares.  So it is just an $0.80 dividend.

[WhoIsWarren]

Racemize/WhoIsWarren,

 

First off this is fantastic.  Can I just ask whether this takes into account the spinoff of BIP in 2008?  It is not huge compared to the market cap but worth considering.

 

http://www.reuters.com/article/2008/01/03/brookfieldasset-spinoff-idUSN0322101120080103

 

EDIT : After thinking about this a bit, the simplest thing might be to treat the spinoff as a dividend.  The stock was spunoff in 2008, valued at $20 with 1 share per 25 BAM shares.  So it is just an $0.80 dividend.

 

Thanks no_free_lunch --

 

I thought about the BPY spinoff that occurred this year, worth about $1 per share (0.0574 BPY for every BAM share owned; BPY valued at $20 per share = $1.14), but I completely forgot about BIP.

 

Racemize, would you mind updating the spreadsheet for an additional $0.8 divi for 2008?

[racemize]

Racemize, would you mind updating the spreadsheet for an additional $0.8 divi for 2008?

 

done!

[WhoIsWarren]

Thanks Racemize!

 

And just to complete things.....

 

Offsetting the $1.14 per share BPY spin off earlier this year (and $0.44 per share of ordinary dividends year-to-date) is around $0.8 (or $0.5bn) of balance sheet gains from the termination of the AIG swap agreement, which was settled in August.  BAM had recorded the swap as a $1.4bn liability in June; they agreed to pay $0.9bn.

 

Q2:13 common equity per share $16,688m (BPY spin out and two divi payments already taken out)

Add: cash value of exercised options outstanding $900m (not up to date -- using year end 2012 figure)

Add: reserve release for AIG swap $500m

Add: taxes, incremental values, asset management franchise value $10,489m (year end 2012 figures)

Less: Quarterly dividend paid ($0.15 per share; Q2 avg shares o/s 616m) $92

 

Diluted shares o/s Q2:13 653m

Estimated intrinsic value per share Q2:13 $43.6

 

That's slightly down on the $44.93 at year end 2012, but doesn't take account of:

- the likely notable uplift in management's intrinsic value of the AM business (now including BPY) since year-end

- possibly some uplift to those assets not accounted for at fair value under IFRS since year-end

 

I'd also point out that the fair value of Brookfield's assets increase with the passage of time and do not require constant upward revaluations of the assets.  Fair values are calculated using 10-year DCFs of what are mostly contracted (and increasing) cash flows, followed by a terminal value, all discounted at at various rates.  So roll forward a year, the fair value will increase by say 6%.  And as Brookfield is roughly 2x geared, that translates into 12% RoE.  On top of that the company expects it can, on average, buy assets cheaply.  Finally it believes that it can squeeze efficiencies out of its assets over time.  So that's where the management's target of 12-15% growth in intrinsic value comes from.

 

(I understand that growth in the intrinsic value of the Asset Management business is additive to this).

 

Hope this helps.

 

 

 

[no_free_lunch]

WhoIsWarren,

 

Appreciate the extensive valuation you did.  I am still not 100% sure on it all but between their track record and buying at a discount to book, I feel the odds are in my favor.

 

For my own part I am still trying to understand just how BAM values the various subsidiaries.  Given the term 'common equity per share' it sounds as though they are using their portion of the market cap of the subsidiaries, as opposed to say the book value of the subsidiaries.  When I did the math this seemed to work for BIP & BREP but their equity number for BRP was too low.  They own 65% of BRP with a mcap of $2.3B, equity should be $1.5B.  In the latest 10Q they only list their equity in BRP at $894M.  Any idea what's going on?

 

 

[WhoIsWarren]

WhoIsWarren,

 

Appreciate the extensive valuation you did.  I am still not 100% sure on it all but between their track record and buying at a discount to book, I feel the odds are in my favor.

 

For my own part I am still trying to understand just how BAM values the various subsidiaries.  Given the term 'common equity per share' it sounds as though they are using their portion of the market cap of the subsidiaries, as opposed to say the book value of the subsidiaries.  When I did the math this seemed to work for BIP & BREP but their equity number for BRP was too low.  They own 65% of BRP with a mcap of $2.3B, equity should be $1.5B.  In the latest 10Q they only list their equity in BRP at $894M.  Any idea what's going on?

 

no_free_lunch

 

Getting your head around Brookfield and how it accounts and values assets is tougher than for your average company, primarily due to its control of separately listed entities.  If you haven't already done it, I suggest you go spend time going through at least one (or better, a few) of their annual reports.

 

I'll try to outline how the group's assets are valued.

 

By moving to IFRS in 2010, the company was required to mark many (not all) of the assets under its control to fair value.  Fair value is not to be confused with market values.  Fair value here means projecting out cash flows, mostly 10 years, adding a terminal value and discounting it all back.

 

Just to make clear, even though BIP, BREP, BPY and General Growth Properties are quoted (and therefore "independently" valued by the market), market values do not input into BAM's accounts.  This is not a criticism of BAM management (this was an angle taken by the critical Roddy Boyd article a few months back) -- they are merely following the accounting rules and investors are free to make their own adjustments, up or down, to BAM's published accounts.

 

Now as I said already, not all BAM's assets are marked at fair value.  Some, such as those owned within the private equity portfolios or residential property assets, are not permitted to be marked at fair value under IFRS and are instead marked at cost. 

 

The IFRS "common equity" valuation is the rough and ready value of the group's net assets, per the accounting rules -- mixing 'fair value' and 'at cost' values together. Don't forget, shareholders' equity includes all equity types, including preference shares and non-controlling interests (the share of fully-consolidated businesses not owned).  It's a very important distinction; common equity was less than half of total equity in 2012.

 

In order to provide a clearer picture of the true value of the group, management provides an estimate of the fair value of these assets required to be accounted for at cost.  It calls these "Incremental Values" and they're found across all divisions, though mainly in Asset Management and Private Equity.  It's no 'rounding' exercise -- it added nearly 20% to the IFRS common equity number in 2012.

 

Management makes two more adjustments to get to it's estimate of "intrinsic value".  Firstly it adds back deferred taxes.  Deferred taxes is a calculation of the tax that would be payable on assets were they sold today at the values on the balance sheet.  Management argues that this is a 'going concern' business and the assets will likely be held for a long time.  At the very least, it's a liability that should be discounted heavily (perhaps 10-15 years out), but management chooses to completely remove the tax liability from their intrinsic value calculation (why they do this is something I would like to get to the bottom of).  Taxes added back gives another 13% to 2012 IFRS common equity. 

 

The last adjustment is the value it puts on the asset management business, which management openly acknowledges is really a finger-in-the-air estimate and is put into the mix more to highlight to investors the business and its potential.  This added a quarter to 2012 IFRS common equity.

 

I say all this because in you mentioned that you can currently buy the stock at a "discount to book".  The IFRS common equity number in Q2:13 was $27, fully diluted.  So actually on that basis the stock is trading at a c.30% premium to book, but I think that is being far too conservative.  The 2011 annual letter mentioned that management believed that an orderly winding down of the company would likely yield even more than the then $41 intrinsic value estimate.

 

I hope that answers your questions.

[no_free_lunch]

WhoIsWarren,

 

You are an exteremely prolific analyst!  Really, this is just fantastic, thanks for taking the time.

 

I definitely misspoke on book value, I really meant something analogous to what they call "intrinsic value" and which you calculated for the most recent quarter. 

 

Based on this, getting the company for a discount to intrinsic seems like a great deal.  It is difficult to compare (as we don't know the numbers) but it seems likely that it was trading substantially above intrinsic in the 2006/2007 time frame.  Other high quality investment conglomerates (FFH,BRK,LUK) will routinely trade above intrinsic so why not bam?

 

I would still like to build up the valuation based on the equity prices, maybe push it into a spreadsheet so it's easy to update the prices.  There would still need to be some assumptions regarding the asset management and the investment business as their are components which aren't listed.  Still, my quick and dirty analysis indicated that it is likely trading somewhere around the book as valued by the market.  Of course the number you plug in for the asset management business is critical but you can always fall back on brookfield's own number from year end. 

 

The one thing I would like to see is the asset management business to be valued independently.  With the recent property spinoff it seems that this would be on the table but I am not sure that management has in any way committed to it.  If their estimates are correct, it seems that alone could unlock some extra value.

[WhoIsWarren]

I see what you're trying to get at.  It's a pretty complicated calculation.  the_pupil made a stab at this back in March and posted up a spreadsheet; that's after gio posted a seeking alpha (I think) article by someone who had double counted some assets / omitted certain liabilities, resulting in a nonsensical 'market value of BAM'.

 

I haven't double-checked the_pupil's numbers, so cannot tell if they are right or not, but you should definitely use that as a base.  I may try my hand at this exercise at some stage, but then maybe not -- I'm not sure if it's worth the effort as I'm not looking to 'arb' or switch between the various quoted entities.

 

I don't imagine BAM has any intention of floating the asset management business.  Taking a step back, BAM in the process of transforming itself from a capital intensive property / other assets operator, which it was for all of its history up to 10-12 years ago, to a less capital intensive asset manager.  Your typical asset manager has virtually no money invested in the assets it manages.  Brookfield aims to invest substantially alongside outside investors and thus will ultimately own roughly a quarter of BIP, BREP and BPY.  It also owns other assets, notably Private Equity, which are not floated and will likely never be.

 

Another thing that occurred to me -- that I should have mentioned in my previous post -- is that part of the intrinsic value calculation is made up of 'carried interest' in assets managed on behalf of 3rd parties.  In other words, were these assets to be sold today, Brookfield would be entitled to certain performance fees (net of expenses).  The accounting rules don't allow their inclusion until likelihood of collection of fees is very high.  I think these values are included in the 'Incremental Values' part of the intrinsic value calculation.

 

[giofranchi]

WhoIsWarren,

 

You are an exteremely prolific analyst!  Really, this is just fantastic, thanks for taking the time.

 

I agree 100%! Thank you WhoIsWarren & racemize! Great job! :)

 

giofranchi

 

[WhoIsWarren]

No problem. That's the beauty of this board.  I rely on many others to educate me in various other areas.  Where I feel I can add some value (not very often!), I'm more than happy to do so.

[racemize]

 

The IFRS "common equity" valuation is the rough and ready value of the group's net assets, per the accounting rules -- mixing 'fair value' and 'at cost' values together. Don't forget, shareholders' equity includes all equity types, including preference shares and non-controlling interests (the share of fully-consolidated businesses not owned).  It's a very important distinction; common equity was less than half of total equity in 2012.

 

I followed and/or knew about most of what you said (and agree regarding discounting the dta), but wanted to follow up on the above.  Should we modify book value to common before adding the incrementals and other adjustments?  Do they do this in their intrinsic value calculation?  Perhaps I did not follow what you meant as well.

[thepupil]

Hi guys,

Good to see more work being done on BAM. It is a complex beast! Here is the spreadsheet I started back in march when BPY was still trading in the when issued market. It needs to be updated, but I do think it is a good framework for looking at how BAM values itself and then looking at market values of the corresponding assets.

 

A couple of remarks:

 

BPY is most likely undervalued because you are most likely getting the non-publicly traded core for free at these prices (BPY less its interes in GGP, RSE, and BPO). You have to decide what holdco discount is deserved due to the fee structure (and if GGP, BPO and RSE are under/fairly/overvalued) to get an idea of what BPY is worth to an outside investor. That's obviously not easy. I've considered going long BPY against GGP BPO and RSE which would be positive carry and create a stub that owns Atlantis, 22% interest in Canary Wharf, recent industrial acquisitons, etc. for a very low price, but I haven't finalized what the valuation of that stub is; if anyone wants to do the dirty work on that, it may be interesting.

 

The recent monetizations of Ainsworth Lumber and Longview Timber  at Brookfield Capital have been nice confirmations of the embedded value on the Private Equity side. I think this is what you get "for free" when you buy BAM. No one focuses on this and it doesn't have a publicly listed entity and it is small but still material.

 

BAM has its naysyers ( www.valuewalk.com/2013/05/dialectic-brookfield-a-ponzi-scheme/ ) and its cheerleaders ( Marty Whitman, Tom Gayner, Lou Simpson, etc.) <--my money is on them. I bought BAM putting full trust in management's value of its own assets and admittedly put little work into it. The short sellers' accusations made me look further into some transactions and overall valuation of the holdco but at some point, as with all complex financial companies, you either have to trust management or not. It's a judgement call. In my opinion, they are amazingly savvy purchasers/sellers of assets AND also somewhat devious in terms of financial engineering (creating BPY is a great example since it allows them a lucrative very advantaged fee stream on assets they already owned).

Brookfield_Asset_Management.xls