BAM - Brookfield Asset Management

[petec]

Buybacks are wildly overrated today. Far more sensible to hoard cash to redeploy (or do big buybacks) in the next recession. BAM is levered - the shares will fall plenty. That’s when to move. And that’s what Flatt has alluded to in discussing buybacks before.

[vince]

Buybacks are wildly overrated today. Far more sensible to hoard cash to redeploy (or do big buybacks) in the next recession. BAM is levered - the shares will fall plenty. That’s when to move. And that’s what Flatt has alluded to in discussing buybacks before.

 

That is great advice when the stock is trading at today's levels but a year ago (and constantly for a couple years before that) the stock was trading at very very attractive multiples of earning power.  And generalizing about buybacks across the investment universe misses the point.  It's completely irrelevant even if 95% of buybacks are not value creating.  Bam's asset mgmt business fundamentals and cash flows combined with their marked to market assets were clearly not being valued appropriately on an absolute basis.  And even more pronounced when one compared it to interest rates and valuations in general.  A great example of a well executed buyback is Davita, you should take a look what the stock has done recently.  There is no chance that the improvement in their business has accounted for all the increase in their stock price

[petec]

Buybacks are wildly overrated today. Far more sensible to hoard cash to redeploy (or do big buybacks) in the next recession. BAM is levered - the shares will fall plenty. That’s when to move. And that’s what Flatt has alluded to in discussing buybacks before.

 

That is great advice when the stock is trading at today's levels but a year ago (and constantly for a couple years before that) the stock was trading at very very attractive multiples of earning power.  And generalizing about buybacks across the investment universe misses the point.  It's completely irrelevant even if 95% of buybacks are not value creating.  Bam's asset mgmt business fundamentals and cash flows combined with their marked to market assets were clearly not being valued appropriately on an absolute basis.  And even more pronounced when one compared it to interest rates and valuations in general.  A great example of a well executed buyback is Davita, you should take a look what the stock has done recently.  There is no chance that the improvement in their business has accounted for all the increase in their stock price

 

I know. I was agreeing with your comment that you wouldn’t want aggressive bb’s at today’s levels.

 

[vince]

Buybacks are wildly overrated today. Far more sensible to hoard cash to redeploy (or do big buybacks) in the next recession. BAM is levered - the shares will fall plenty. That’s when to move. And that’s what Flatt has alluded to in discussing buybacks before.

 

That is great advice when the stock is trading at today's levels but a year ago (and constantly for a couple years before that) the stock was trading at very very attractive multiples of earning power.  And generalizing about buybacks across the investment universe misses the point.  It's completely irrelevant even if 95% of buybacks are not value creating.  Bam's asset mgmt business fundamentals and cash flows combined with their marked to market assets were clearly not being valued appropriately on an absolute basis.  And even more pronounced when one compared it to interest rates and valuations in general.  A great example of a well executed buyback is Davita, you should take a look what the stock has done recently.  There is no chance that the improvement in their business has accounted for all the increase in their stock price

 

I know. I was agreeing with your comment that you wouldn’t want aggressive bb’s at today’s levels.

 

My apologies, totally agree with you

[petec]

Buybacks are wildly overrated today. Far more sensible to hoard cash to redeploy (or do big buybacks) in the next recession. BAM is levered - the shares will fall plenty. That’s when to move. And that’s what Flatt has alluded to in discussing buybacks before.

 

That is great advice when the stock is trading at today's levels but a year ago (and constantly for a couple years before that) the stock was trading at very very attractive multiples of earning power.  And generalizing about buybacks across the investment universe misses the point.  It's completely irrelevant even if 95% of buybacks are not value creating.  Bam's asset mgmt business fundamentals and cash flows combined with their marked to market assets were clearly not being valued appropriately on an absolute basis.  And even more pronounced when one compared it to interest rates and valuations in general.  A great example of a well executed buyback is Davita, you should take a look what the stock has done recently.  There is no chance that the improvement in their business has accounted for all the increase in their stock price

 

I know. I was agreeing with your comment that you wouldn’t want aggressive bb’s at today’s levels.

 

My apologies

 

No need!

[ValueMaven]

anyone have guidance or any insight into when the c-corp for the renewables business will be issued?  I think that could be extremely attractive

[ValueMaven]

Interesting ... looks like BAM did not make the final rounds. 

 

'The announcement of the shortlist on Monday means that private-equity group Brookfield Asset Management Inc. and Temasek Holdings Pte. are also out of the running.'

 

https://www.bloomberg.com/news/articles/2020-02-17/blackstone-advent-advance-in-thyssenkrupp-elevator-bidding

[ValueMaven]

As much as a fascinating asset and business this really is - the price tag is 1) fairly high - although extremely high quality and 2) not really distressed enough for me really.  might be a good thing BAM is no longer in the running.  I think they had better labor positioning then others - however that was just some local market research I was doing -- I think they tried to low-ball the offering b/c of that.

[walkie518]

https://bam.brookfield.com/press-releases/2020/02-18-2020-134936223

 

wonder if this is the cash used for BAM's interest in its funds? 

 

at ~5%, if the fund does 15% net, they keep the spread w/o having to cough up their own cash

 

they also have the advantage to anticipate the calls where most investors get a letter 2 wks ahead?

[John Hjorth]

https://bam.brookfield.com/press-releases/2020/02-18-2020-134936223

wonder if this is the cash used for BAM's interest in its funds? 

 

at ~5%, if the fund does 15% net, they keep the spread w/o having to cough up their own cash

 

they also have the advantage to anticipate the calls where most investors get a letter 2 wks ahead?

 

walkie,

 

Please see :

 

1. Prospectus of February 11^th 2020, &

2. BAM Annual Report 2018, note 16 : "Corporate Borrowings", p. 176.

 

I'm pretty sure this is about active management of BAM parent core liquidity and BAM parent corporate borrowings. Notes in CAD with fixed interest rate of 5.3 percent with maturity March 1^st 2021 are redeemed early, while refinancing - plus some more, going into core liquidity - is rolled into notes due 2050 - likely with fixed rate [and I wouldn't be surprised later to see a rate below 5.3 percent].

 

Basically same menage and circus we have seen going on at Berkshire [posted about by gfp] with long duration fixed interest notes [for Berkshire in EUR & CNY, among other currencies], to take advantage of low long interest rates.

[wisowis]

I came across this post, I am not nearly smart enough to evaluate it, but thought some of you might be interested in reading: https://noremax59.blogspot.com/2020/02/blog-post_16.html

 

h/t @Noremax59

[villainx]

I came across this post, I am not nearly smart enough to evaluate it, but thought some of you might be interested in reading: https://noremax59.blogspot.com/2020/02/blog-post_16.html

 

h/t @Noremax59

 

No smart enough either, but thanks!

[petec]

I came across this post, I am not nearly smart enough to evaluate it, but thought some of you might be interested in reading: https://noremax59.blogspot.com/2020/02/blog-post_16.html

 

h/t @Noremax59

 

I assume the author is our very own Normax59 despite the extra "e". If so much of this (excellent) blog is reproduced upthread. There are also some very good responses by jfan.

 

The FT article referenced in the blog was a masterpiece of insinuation. Very poor journalism in my view.

 

Looks like I need to spend some time reading BPY accounts  :'(

[petec]

From the link given above:

 

I'm going to ignore that he said that this transaction was to fund the cash consideration portion of the GGP transaction because it would be a waste of time to go into the details to prove that this is garbage. For those who are curious and willing to put two and two together, I suggest the BPY Q2 and Q3 2018 earnings call, page: 21-22 and 31 of the BPR Q3 2018 quarterly report, and page: 52-53 of the BPY Q3 2018 quarterly report.

 

Normax59, if you don't mind, I'd be really interested if you could elaborate on this. If Flatt's claim is indeed garbage it's important to know, but a cursory glance at the pages you reference don't seem to provide the smoking gun*. I will read the calls later but if you have the time and inclination to lay it out for me I'd greatly appreciate it.

 

*Edit: this may be because I often found the data you cited on different pages. Also the reports seem to be split in two, so when you say page 53 I have to manually add page numbers because they reset to 1 after page 42. Weird.

[petec]

FY 2018 Company FFO for the "other real estate properties" that included the interest in the NYC properties for only half of Q3 2018 and Q4 2018 was $47 million versus $36 million in 2017. You can see this on page 57 of the BAM 2018 annual report.

 

I'm sure most of you already know that the boys and gals over at BAM reported earnings last week (congrats on the quarter btw). The "other real estate properties" bucket reported FY 2019 Company FFO of $71 million (page 36 of the FY 2019 Supplemental), some arithmetic gives us incremental Company FFO generation of $24 million for these investments (71 - 47).

 

As I said earlier, BAM now reports their share of Company FFO from BSREP III in this bucket, but it is not broken out so we'll have to use our own ingenuity to get an idea of their share of Company FFO from the fund. In Q1 2019 BPY reduced their commitment in BSREP III from 25% to 7%, and the fund is now recognized as a financial asset on their balance sheet. Luckily for you and I, BPY breaks out their proportionate share of Company FFO from BSREP III in their Company FFO calculations. Give some poetry slam snaps for that, you love to see it.

 

BPY's attributable share of FY 2019 Company FFO from BSREP III was a whopping $14 million per their Q4 2019 supplemental material on page 10. Again, using my very refined and battle tested arithmetic skills, we can figure that the BSREP III fund generated around $200 million of Company FFO for the year in total (14 / 7%). BAM retained the 18% difference that BPY would no longer commit so we can attribute $36 million of the Company FFO to BAM's share (200 * 18%).

 

For those keeping score at home that's 150% of incremental FFO generated by this segment for the year. (36 / 24)

 

In a perfect world we'd assume the other investments besides the interest in the NYC portfolio generated not a single dollar of Company FFO for the year and that the rest of the $35 million of Company FFO generated by the segment came from the NYC portfolio.

 

From memory BPY and BAM use different definitions of FFO. BPY (like BIP) excludes realised disposition gains, but BAM includes them. This could mean that BPY and BAM calculate and report FFO from BSREPIII differently. Could this be confusing your maths?

 

Also other Other assets could have reported an FFO loss - either due to development properties or assets sold at a loss - in which case the FFO from the NYC assets could be higher than you've calculated.

 

Edit: more obviously, if the NYC portfolio included development assets as you say, then these may not yet be producing FFO, making the comparison of FFO with the purchase price invalid.

 

 

[petec]

Sorry for the bombardment but it is easiest to work through this piece by piece.

 

I am not a good enough accountant to know why the deposits from BAM are flowing through working capital and, therefore, operating cash flow. I would have thought the deposits were financing items even if they are to fund working capital (such as development projects intended for sale).

 

But, one key point I do think needs making is that as of 3Q19 the deposits had been fully repaid. Assuming that all the deposits and repayments have flowed through operating cash flows over the years, the deposits have impacted q/q OCF comparability but not OCF overall. (I say assuming because if the repayments didn't go through OCF, then OCF has been materially overstated over the years.)

 

Incidentally I don't find it at all worrying that BPY occasionally has -ve underlying OCF. The working cash flows into and out of development assets can easily swamp the cash flows from renting stabilised properties over the short term. This is the simplest explanation for the turning on and off of the "money printers in the basements". For example, if 3Q18 had a working capital inflow of $102m including a $500m repayment to BAM, then it had a working capital inflow of $602m excluding that repayment. This compares with a working capital outflow of $360m in the first 6 months of 2018 (reported as a $240m inflow but this includes $600m of deposit inflow from BAM). That kind of working capital inflow and outflow can only be explained by development projects being completed and sold or financed. (Unless annual rents are all paid at once in 3q which seems unlikely.)

[petec]

And finally...

 

Nor(e)max59 makes a compelling case that the sale of the NYC properties may have been recorded through working capital and therefore OCF. There are a couple of minor areas where I can't make your maths tally (I make 3q18 dispositions of investment properties as 2028-609=1419, not 1316, but that still covers the sale of Simply Storage nicely) but I can't find a big hole.

 

I also checked 4q dispositions of investment properties to see if the cash flows from the sale of NYC got shoved into that quarter, but the 4q figure in that line item tallies with the sale of a US logistics portfolio.

 

The only thing I find weird is how well the final table correlates with the NYC purchase price. Are we to believe that the entirety of the rest of BAM produced no net working capital flows in 9M18? I need to think about that.

 

The other complication for me is that I don't understand accounting rules well enough. Could the transaction have been split between different line items? I ask because it may not, legally, have been one sale. Could the assets have been in different legal entities each given different accounting treatments for one reason or another?

 

Edit: as an aside, I care less about how they report FFO at BPY than at BIP. The primary valuation tool for BPY is the IFRS NAV. The issue for me is more about honesty and transparency.

[Normax59]

From the link given above:

 

I'm going to ignore that he said that this transaction was to fund the cash consideration portion of the GGP transaction because it would be a waste of time to go into the details to prove that this is garbage. For those who are curious and willing to put two and two together, I suggest the BPY Q2 and Q3 2018 earnings call, page: 21-22 and 31 of the BPR Q3 2018 quarterly report, and page: 52-53 of the BPY Q3 2018 quarterly report.

 

Normax59, if you don't mind, I'd be really interested if you could elaborate on this. If Flatt's claim is indeed garbage it's important to know, but a cursory glance at the pages you reference don't seem to provide the smoking gun*. I will read the calls later but if you have the time and inclination to lay it out for me I'd greatly appreciate it.

 

*Edit: this may be because I often found the data you cited on different pages. Also the reports seem to be split in two, so when you say page 53 I have to manually add page numbers because they reset to 1 after page 42. Weird.

 

Here was a part of the draft that I cut out because it took away from my point:

 

Anyway, here is where my eyebrows were raised:

 

Even today, shareholders know little about why BPY wanted to sell 28 per cent of its core office portfolio for $1.4bn, or why BAM wanted to buy. The rationale was that BPY needed cash. "The only reason we did that," Mr Flatt says of the tower deal, was that "it [bPY] needed some extra capital. And this was an easy way to do it."

 

The money was needed, Mr Flatt explains, to pay for a big wager on US malls - a sector that many investors have left for dead. BPY consummated the bet in August 2018 when it merged with retail landlord GGP, whose shareholders received cash payments worth $9.3bn

 

I'll be the first to tell you that Bruce Flatt is a smart guy, a very smart guy, and no one can take that away from him. But, a problem that smart people like Flatt sometimes run into is that they end up in positions where people recognize their genius and begin to just take their word. When you've built up a castle of opaqueness surrounded by a moat filled with complexity it becomes really easy to stretch the truth because, well, no one really checks to see if anything you've said is true.

 

With that being said Flatt knows as much as I do that this transaction was not because BPY needed the capital for the GGP acquisition.

 

But don't take my word for it, take CFO Bryan Davis's word from the BPY Q3 2018 earnings call where he discussed the funding for the acquisition:

 

As everyone is aware, prior to the acquisition, BPY accounted for its investment in GGP under the equity method. As mentioned earlier, the acquisition of the company closed on August 28, the date which we deem Brookfield to gain control and, therefore, consolidate. To fund the transaction, alongside the close, GGP entered into various joint venture arrangements with a number of partners on 35 assets, resulting in $2.7 billion of net proceeds. On our consolidated IFRS books, these investments are now accounted for under the equity method. In addition, 10% of the whole company was sold to another investor for consideration of $1.5 billion. This interest is accounted for as a noncontrolling interest on BPY's IFRS financial statements. Within our proportionate financial statements, all of these are adjusted for to reflect BPY's ownership interest.

 

In addition to the sale of these interests, we issued $4.9 billion of new acquisition debt with an average maturity of 5 years and an average interest rate of LIBOR plus 236 basis points, and issued $5.2 billion of new equity, 251 units at a $21 price per unit on the date of close. This consideration in our share acquired for us $19 billion in malls. As part of determining our opening balance sheet, all of GGP malls were valued by a third party. At a high level, the valuation came to an equivalent per GGP share value that fell between where we held our original investment at the end of Q2 of $25.20, net of our goodwill, and the value we put on the transaction of $23.50. That midpoint value provided for a bargain purchase gain of slightly over $800 million, which allowed us to write off the goodwill from our original investments with minimal impact to our net income.

 

- BPY Q3 Earnings Call

 

The pre-close transactions included a dividend recapitalization with debt financing from a revolving credit facility, a Term A-1, A-2, and Term B loan.

 

- Term A-1 $900 million commitment

 

- Term A-2 $2.0 billion commitment

 

- Term B $2.0 billion commitment

 

- Revolving Credit Facility had $347 million outstanding on September 30, 2018

 

The rest of the cash came from selling pieces of consolidated properties to JV partners, or selling down their ownership in already existing JV's prior to the merger as well as a 10% ownership stake in the operating LP at BPR that was sold to an unnamed institutional investor.

 

-  BPR formed the BPR-FF JV LLC ("Future Fund") with Brookfield Real Estate Partners F LP:

 

Brookfield Real Estate Partners F LP is owned by the Australian Government Future Fund, the new JV purchased a 49% interest in 21 properties and a 24% interest in an existing JV property.

 

- 4 Property JV's were set up with Teachers Insurance and Annuity Association of America.

 

- 3 Property JV's were set up with CBRE Global Investment Partners.

 

- 2 Property JV's were set up with California Public Employees' Retirement System.

 

The acquisition debt, JV sales and 10% sale of the Operating LP at BPR were customary prior to the close and occurred on August 27, 2018, the consideration that BPY ultimately paid was reduced by the special dividend. All of these cash transactions occurred at GGP, not BPY, the day before the merger closed, which is an important detail when measured against Flatt's comment.

 

The rest of the consideration was paid with equity in the new vehicle, BPR, and equity issuance at BPY depending on which security GGP shareholders chose following the special dividend.

 

The reason behind the related party transaction was also brought up several times in BPY earnings press releases and calls. It was always described as a deal to facilitate a New York City venture, not once was GGP mentioned. Investors were told that Brookfield Asset Management would syndicate their newly purchased 27.5% interest in these assets to third party investors in the "near future". About a year and half later this simply hasn't happened and these assets still sit on the balance sheet at BAM.

 

Subsequent to quarter-end, [bPY] seeded a new Brookfield Asset Management (“BAM”)-sponsored New York City real estate venture with a 28% interest in our New York core office portfolio. We plan to syndicate up to an additional 7% interest in this portfolio, with total projected proceeds of $1.8 billion to BPY.

 

- BPY Q2 2018 Earnings Press Release

 

Analyst A: "Okay. And then on the timing of the New York fund, what percent will BPY own of these assets? And what is the timing of the close of that transaction roughly?"

 

Kingston: "So the -- we have sold a 28% interest in the assets. Now within some of those assets, we already had partners. So that's not a 28% interest at the asset level. That's 28% interest in our ownership that you would see on the balance sheet at June 30. And we may sell a further 7% interest. So longer term, we would hold 65% of -- effectively of the ownership that we had at June."

 

- BPY Q2 2018 Earnings Call

 

Reported last quarter, seeded into a new Brookfield Asset Management-sponsored New York City real estate venture, a 27.4% interest in our New York core office portfolio, for net proceeds of $1.4 billion to BPY

 

- BPY Q3 2018 Earnings Press Release

 

Analyst B: "Okay. And just on the sale of the New York portfolio. Do you envision creating similar funds through other core assets that are held on a 100% basis in the near term?"

 

Kingston: "We have -- it is possible that we may do it in other jurisdictions. What we've found with LP investors in particular is on the opportunistic strategies, many of them prefer global strategy with multiple currencies involved. But really, when it comes to these core buyers or core-plus investors at these types of returns, currency becomes a lot more important for them. And so having vehicles like this in different countries with different currencies is potentially appealing. So you may see us do something similar to this in places like Australia or Canada or even the U.K."

 

- BPY Q3 2018 Earnings Call

 

The last time the syndication of the interest was mentioned was on the Q1 2019 BAM earnings call where Lawson said they were still working on syndicating the interest, a tough pill to swallow given how BPY describes their office portfolio.

 

Analyst C: "And my follow up would be, if you can provide us with an update on the syndication efforts on the acquired 28% interest in New York real estate portfolio from BPY last year."

 

Lawson: "Sure. So, I guess the shorter answer to it is we continue to own that interest and we’re continuing to work on syndicating and monetizing those assets."

 

- BAM Q1 2019 Earnings Call

 

Even so, the related party transaction closed before GGP shareholders approved the merger and was almost two months before the GGP acquisition closed:

 

On July 6, 2018, the partnership sold 27.5% of its interest in a portfolio of operating and development assets in New York. The partnership retains control over and will continue to consolidate these assets after the sale. The interest was sold to the parent, which is currently in the process of syndicating its entire 27.5% equity interest to third-party investors.

 

On July 26, 2018, common stockholders of GGP approved the proposed acquisition of GGP by the partnership, as well as all the other proposals voted upon at a special meeting. The partnership expects the acquisition to close in August 2018. The transaction is expected to be accounted for as a business combination. 

 

So, why does any of this matter?

 

Often times people tell you a whole lot of information without realizing that they've told you anything. Being, what I would call, less than truthful with regards to something as simple as the reason behind a transaction tells me a whole lot.

 

I believe Flatt when he says that BPY needed extra capital, though not because they needed it for GGP acquisition. Anyone who wastes their time in dis aggregating how exactly BPY generates its operating cash flow would tell you the same thing, BPY always needs extra capital.

 

This transaction has always just seemed fishy to me and the longer it's sat on the balance sheet at BAM the more that smell has turned rotten.

 

 

Hope that helps.

[petec]

Thanks - will read.

[Normax59]

Thanks - will read.

 

your numbers are off because I used the 2019 Q's where they break stuff out better, will respond to your other points soon.

[racemize]

Alternative narrative:

 

1) Money is fungible.  They are still in the process of reducing debt/leverage ratios post-GGP, so hard to say whether any particular dollar is for GGP or not, but it certainly makes sense that they would raise money for GGP if they don't want leverage to be too high, which doesn't discount the fact that they could pay with it with various credit facilities.

 

2) They were intending to syndicate in 2018 Q4.  I'm not sure if you guys recall, but 2018 Q4 turned into a shitshow--not the best time to try to sell/syndicate.  BAM wants to get full price, so they wait.  Also see 2019 Investor day their comments on how lower interest rates have not spilled over into property values as 2019 continued.  Plus, as you note, that set of properties included development property (1 Manhattan West, I believe), and it is certainly easier to syndicate once that one is up and running, which I believe it has just started cash flowing.

[petec]

Alternative narrative:

 

1) Money is fungible.  They are still in the process of reducing debt/leverage ratios post-GGP, so hard to say whether any particular dollar is for GGP or not, but it certainly makes sense that they would raise money for GGP if they don't want leverage to be too high, which doesn't discount the fact that they could pay with it with various credit facilities.

 

2) They were intending to syndicate in 2018 Q4.  I'm not sure if you guys recall, but 2018 Q4 turned into a shitshow--not the best time to try to sell/syndicate.  BAM wants to get full price, so they wait.  Also see 2019 Investor day their comments on how lower interest rates have not spilled over into property values as 2019 continued.  Plus, as you note, that set of properties included development property (1 Manhattan West, I believe), and it is certainly easier to syndicate once that one is up and running, which I believe it has just started cash flowing.

 

Agreed - but I think the deeper point is that they seem to have put the transaction cash inflow through working capital, which flatters BPY's operating cash flow.

[Normax59]

We don't know the properties included, this was 30% of their core office portfolio.

 

and I'm not saying definitively they put it in working capital and other, that's why I asked the question.

[racemize]

We don't know the properties included, this was 30% of their core office portfolio.

 

and I'm not saying definitively they put it in working capital and other, that's why I asked the question.

 

I think I found a quote that it included 1 Manhattan.  I'll see if I can dig it up again.

[petec]

We don't know the properties included, this was 30% of their core office portfolio.

 

and I'm not saying definitively they put it in working capital and other, that's why I asked the question.

 

No I realise you're not, but you make a good case that they may have done.