BAM - Brookfield Asset Management

[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.

 

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

 

it's in my post.

[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.

 

Here's the quote from Q2 conference call (although now I can't tell if he means all core excluding 1 Manhattan or not):

Sure. Quickly ­­ effectively, it's all of our core holdings in Manhattan in addition to One Manhattan West, and the first of our residential towers in Greenpoint will be added as well. So it's basically our core holding.

[racemize]

Here's a better quote:

 

Yes. Sheila, quickly -- effectively, it's all of our core holdings in Manhattan, in addition to One Manhattan West and the first of our residential towers

in Greenpoint, will be added as well. So it's basically our core holding. So just the things that are to be developed that aren't in the portfolio. And

also 300 Madison because it has a self-amortizing mortgage on it. So I think everything else, effectively is in here.

[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.

 

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.

 

For what little it may be worth, my read is similar to Joel's:

 

1) they wanted to create an NYC office fund because core (not opportunistic) investors want single currency portfolios. They may do others in other jurisdictions. Makes sense to me.

 

2) they may not have actually needed the money to fund GGP, but as you highlighted they closed the NYC deal before the GGP shareholders approved the deal and before the financing transactions closed. In other words they may not have known that they wouldn't need the money because they didn't know the final price for GGP or (possibly) whether the financing JVs would close in time. Also, money is fungible, and even if they didn't have to sell NYC to fund GGP, they may just have felt it used up a little too much of their liquidity. So I don't find Flatt's statement that they needed the cash for GGP to be inconsistent with what we know. It looks to me like they accelerated the creation of the NYC fund to ensure plenty of liquidity through the transaction.

 

3) the easiest way to accelerate was to sell to BAM, who are basically the LOLR for the subs, providing short term capital to allow the subs to invest opportunistically. In effect they moved liquidity from BAM, which didn't need liquidity, to BPY, which conceivably might have done if they'd had to raise the offer for GGP or if a financing hadn't closed.

 

4) BAM planned to syndicate the assets asap but then the markets collapsed. BAM is well capitalised, so rather than panic they held on to sell later. Then interest rates dropped sharply and there's a chance cap rates follow, so 2019 wasn't a smart time to sell, especially as the development assets aren't complete and haven't stabilised.

 

5) worth noting that BPY sold 28% of what they owned in these assets, not 28% of the assets. In other words they still own 72% of what they originally owned. Not sure this would be the case if the intention was to "hide" failing assets at the parent.

 

Who knows.

[Guest Schwab711]

I don't think the concern would be hiding failing assets so much as overpaying to shore up a subsidiary. Further, the 27.5% + 7.5% was about as much as could be transacted with BAM without hitting certain thresholds.

 

At the time, the deal represented ~14% of BPY's market cap. If BAM had syndicated 35% as planned, the total would have been nearly 19% of BPY's market cap. Full syndication plus a further decline in BPY's market cap at that point could've led to mandatory valuation and vote on the transaction.

 

Canadian Securities Law Exemptions

 

MI 61-101 provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. Our company has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of our market capitalization, if the indirect equity interest in our company, which is held in the form of Redemption-Exchange Units, or in the form of non-voting Exchange LP Units, is included in the calculation of our company’s market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements apply, is increased to include the approximate 50% indirect interest in our company held in the form of Redemption-Exchange Units.

[petec]

 

I don't think the concern would be hiding failing assets so much as overpaying to shore up a subsidiary.

 

I'm not sure I draw a huge distinction between the two!

 

Further, the 27.5% + 7.5% was about as much as could be transacted with BAM without hitting certain thresholds.

 

At the time, the deal represented ~14% of BPY's market cap. If BAM had syndicated 35% as planned, the total would have been nearly 19% of BPY's market cap. Full syndication plus a further decline in BPY's market cap at that point could've led to mandatory valuation and vote on the transaction.

 

Revaluation happens every year anyway under IFRS.

 

Your point is valid, but the facts could be interpreted as BAM knowing the rules and making sure not to even flirt with a breach that could have led to a delay, rather than BAM knowing the rules and sailing as close to the wind as possible.

[Guest Schwab711]

 

I don't think the concern would be hiding failing assets so much as overpaying to shore up a subsidiary.

 

I'm not sure I draw a huge distinction between the two!

 

Further, the 27.5% + 7.5% was about as much as could be transacted with BAM without hitting certain thresholds.

 

At the time, the deal represented ~14% of BPY's market cap. If BAM had syndicated 35% as planned, the total would have been nearly 19% of BPY's market cap. Full syndication plus a further decline in BPY's market cap at that point could've led to mandatory valuation and vote on the transaction.

 

Revaluation happens every year anyway under IFRS.

 

Your point is valid, but the facts could be interpreted as BAM knowing the rules and making sure not to even flirt with a breach that could have led to a delay, rather than BAM knowing the rules and sailing as close to the wind as possible.

 

Edit: I'm holding off on the $10b claim.

 

 

Of course, but we don't see the valuations that support those FV moves. We also don't know why the RP transaction was done, but it's probably a reasonable transaction. A 15% RP transaction is really big though. Way too early for me to have an opinion, but it's worth exploring possibilities because there are some unexplained things around the transaction, imo.

 

I never would've looked at BAM/BPY if not for Normax's posts. They've done some great work on BAM, even if none of it ultimately leads to a different conclusion as an investment.

[petec]

Sorry if I am being thick but why are we looking for $10bn?

 

Agree re Normax's posts - very thought provoking and useful regardless of outcome.

[Guest Schwab711]

Sorry if I am being thick but why are we looking for $10bn?

 

Agree re Normax's posts - very thought provoking and useful regardless of outcome.

 

No, it's a good question. I'm having trouble keeping track of everything myself.

 

https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/quarterly-reports/2018/q3/q3-2018-supplemental.pdf

p.51

[petec]

Sorry if I am being thick but why are we looking for $10bn?

 

Agree re Normax's posts - very thought provoking and useful regardless of outcome.

 

No, it's a good question. I'm having trouble keeping track of everything myself.

 

https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/quarterly-reports/2018/q3/q3-2018-supplemental.pdf

p.51

 

I'm still a bit lost. Are you questioning the valuations given on the proportionate table for NYC, 7.3+2.6=$9.9bn?

[Normax59]

A lot of this is complex so I want to make sure I have time to sit down and be cogent on what I'm saying instead of firing off posts, so let me try to go one by one. 

 

Something I'm having trouble reconciling, Petec is that you think I've provided sufficient evidence that there is some funny business going on with their operating cash flow yet you don't think the transaction was to cover up failing assets, these two seem like A to B points, but I'm open to the possibility of being wrong here.

 

 

[Normax59]

The Company FFO comparisons, if you look at the source doc footnotes that I provide, you'll see in the BAM annual report that they breakout disposition gains separately by the segment. Company FFO is provided the same way and without these gains for BAM's and BPY's reporting.

 

We don't know the properties, if the dev props are dragging on FFO, I'm open to that too, but it seems like a large % of BPY FFO in total is coming from their proportionate share of FFO from equity accounted investments.

[petec]

A lot of this is complex so I want to make sure I have time to sit down and be cogent on what I'm saying instead of firing off posts, so let me try to go one by one. 

 

Something I'm having trouble reconciling, Petec is that you think I've provided sufficient evidence that there is some funny business going on with their operating cash flow yet you don't think the transaction was to cover up failing assets, these two seem like A to B points, but I'm open to the possibility of being wrong here.

 

My tentative position at this point is that the motivation for the transaction was as described but that the cash flows were recorded as OCF, which on the face of it should not have happened.

 

I'm open to revising my conclusion on both. As you say they may be linked, but they may not.

 

EDIT: not sure I have been clear. I tend to think the burden of proof falls on the accuser. I don't think we have compelling evidence that the valuation of the deal was wrong or that the motive was not the one stated. We have reason to be suspicious, but not compelling evidence.

 

However having parsed the cash flows (not something I would have done without your groundwork - thanks) I do think that it looks like the deal went through OCF. There may be a good reason for that - I am not enough of an accountant to know. But there might not.

 

 

[Normax59]

wrt to Schwab's post and subsequent responses; Brookfield knows the accounting and disclosures rules full well, that I'm 100% certain on.

 

It's probably been said here in the thread but 20% of BAM/BPY property valuations are verified by third parties, that's on their total portfolio including equity accounted investments as those are reported at FV as well.

 

The sensitivity in the analysis is another point of contention, you can see it on page: 54 of the Q3 2019 report, they had a CORSEP with the SEC over this previously. They tout their "discount" to IFRS values all the time. 

 

I believe BPY once said a 1% decrease in cap rates adds $20 in value to the stock, no one asked what happens if they increase 1%. 

 

 

[petec]

I believe BPY once said a 1% decrease in cap rates adds $20 in value to the stock, no one asked what happens if they increase 1%.

 

My recollection was that was $20 to BAM, not BPY. Might be wrong.

[Guest Schwab711]

Sorry if I am being thick but why are we looking for $10bn?

 

Agree re Normax's posts - very thought provoking and useful regardless of outcome.

 

No, it's a good question. I'm having trouble keeping track of everything myself.

 

https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/quarterly-reports/2018/q3/q3-2018-supplemental.pdf

p.51

 

I'm still a bit lost. Are you questioning the valuations given on the proportionate table for NYC, 7.3+2.6=$9.9bn?

 

That's square footage, not value. I'm holding off on the $10b claim for now either way.

[Normax59]

Before I continue on the next point:

 

"In a typical real estate cycle, movements in cap rates tend to move in lockstep with interest rates. Over the last 12 months, while we've seen a

dramatic decline in interest rates in both U.S. and in Europe, this is yet to be reflected in the valuation of our assets. To put this into perspective, a

100 basispoint reduction in cap ratesaddsalmost $20 to our net asset value per unit.Acontinued low interest rate environment should translate

into higher demand for real assets, which will increase the value of our portfolio of properties. It also assists us in continuing to monetize mature,

de-risked assets at great prices and reallocating that capital to development and other higher returning investment opportunities."

 

BPY Q3 2019 earnings call.

 

 

[petec]

Before I continue on the next point:

 

"In a typical real estate cycle, movements in cap rates tend to move in lockstep with interest rates. Over the last 12 months, while we've seen a

dramatic decline in interest rates in both U.S. and in Europe, this is yet to be reflected in the valuation of our assets. To put this into perspective, a

100 basispoint reduction in cap ratesaddsalmost $20 to our net asset value per unit.Acontinued low interest rate environment should translate

into higher demand for real assets, which will increase the value of our portfolio of properties. It also assists us in continuing to monetize mature,

de-risked assets at great prices and reallocating that capital to development and other higher returning investment opportunities."

 

BPY Q3 2019 earnings call.

 

I stand corrected!

[Normax59]

Before I continue on the next point:

 

"In a typical real estate cycle, movements in cap rates tend to move in lockstep with interest rates. Over the last 12 months, while we've seen a

dramatic decline in interest rates in both U.S. and in Europe, this is yet to be reflected in the valuation of our assets. To put this into perspective, a

100 basispoint reduction in cap ratesaddsalmost $20 to our net asset value per unit.Acontinued low interest rate environment should translate

into higher demand for real assets, which will increase the value of our portfolio of properties. It also assists us in continuing to monetize mature,

de-risked assets at great prices and reallocating that capital to development and other higher returning investment opportunities."

 

BPY Q3 2019 earnings call.

 

I stand corrected!

 

don't worry about it, I'm sure I'll make some mistakes here too.

[Normax59]

I have to run right now, but I'll touch on more of the stuff laid out later.

[Normax59]

Ok, back at it.

 

I think the goal posts are being moved when it comes to the exact reason for the transaction.

 

Take a step back and think of all the details and quotes from the earning calls before the article came out, there doesn't seem (at least to me) that there was a piece of information that would tie the transaction to GGP other than the timing. To me, it's as swiss cheese an argument as saying that the transaction was to help pay for 666 Fifth avenue in the BSREP III fund. I can only take the word of what was said, if the transaction was to help pay for GGP I would at least think they would have mentioned this once.

 

Regarding the article, I reached out to the author after it was published because I thought that Flatt had to have been quoted out of context regarding the fact that it was done to pay for the cash consideration for GGP. He told me he was quoted in context as such.

 

I don't have an exact reason for why the transaction was done, but I know for certain it wasn't to pay for the cash consideration of GGP.

 

An inconsistency like that is what drove me to write what I did given what I saw in the financials at the time, it's really simple to be truthful regarding the reason for a RPT that was 10%> of BPY market cap, my thought is what else are they not being truthful about, example: their operating cash flow.

 

Hypothetically, let's say the cash was run through operating cash flow:

 

2018's operating cash flow would have been slightly negative. I understand thinking the intention wasn't "hey, let's do this transaction so we can shove it in operating cash flow", maybe they just happened upon an opportunity to do so, if in fact they did. I don't think that takes away from the point that I was trying to draw.

 

[John Hjorth]

Normax,

 

Have you read The Brass Ring ?

[jfan]

Questions from Normax:

I'm going to cheat with my first question because it's a three parter:

 

1. With a $500 million repayment why did 'working capital and other' increase by $102 million in Q3 2018 in the consolidated accounts?

 

2. What can explain away the goofiness in the Supplemental Material relative to the consolidated accounts?

 

3. And what other transactions does BPY and BAM consider as 'working capital and other'?

 

    The "working capital and other" item in BPY's consolidated cash flow statement is the most confusing. I'm going to list each item in the operating activities section to see if it makes accounting sense. I'm going to use the 2018 annual report because it was much easier to work from paper. Every number is in USD millions.

 

a) Net income is taken straight from the income statement. This is the after-tax amount from its consolidated operations (wholly owned and partially owned via equity accounted investments (EAI)). This is pretty straight forward.

 

b) Share of equity accounted earnings, net of distribution. This strips out the non-cash earnings from equity accounted investment. It is net of distributions because this would represent true cash sent from the real estate companies to BPY. eg in 2018, there was $947 in share of net earnings from EAI, and $518 in distributions. $947 - 518 = $429. This is the amount shown on the statement.

 

c) Fair value (gains), net. This is also straight from the income statement. It is described in Note 31. It comprises of commercial property, commercial developments, and financial instruments and other.

 

d) Deferred income tax expense (benefit). This is straight from Note 19. This is non-cash spending due to its deferred nature.

 

e) Depreciation and amortization. This amount encompasses both real estate and non-real estate depreciation and amortization amounts.

 

f) Working capital and other.

    BPY defines their working capital as their Current Assets (which include cash and cash equivalents, accounts receivable and other, loans and notes receivable MINUS Accounts payable and other liabilities). For the 2018 numbers, they would be $3288, $2361, $461, and $3749. However to be more precise, you can find a some amount of working capital from their assets held for sale on Note 16.

 

    They do NOT include their current capital securities and debt obligations in this definition. They include that portion in their financing activities on the cash flow statement. These capital securities and debt obligations also have non-cash changes as well. By not doing the tradition calculation, these non-cash changes are already reflected by using only the net issuance/repayment methodology.

 

    The 2018 Working capital change was + $2,934 (which would be denoted as - $2,934 on the cash flow statement). However, instead, the cash flow statement has + $ 508. There is a + $3,314 that is only explained by "OTHER".

 

    What is the "OTHER"? This is the part I'm struggling with. I wonder if it has something to do with return of capital from its equity accounted for investments or investment properties that should affect cash accounts directly.

[jfan]

Didn't quite solve the "other" but came across some accounting tidbits and footnotes that might shed some more light.

 

In the Fair value (gains), net line of the operating activities - this represents a mixed bag of things, FV changes on its consolidated investment properties, as well as realized gains from LP investments sold (difference between transaction price - invested capital). It also includes any accumulated foreign currency translations that are released when these properties are disposed.

 

Now the LP investments include both consolidated investment properties and equity accounted investments.

 

Because these FV (gains) are stripped out of the operating activities, they likely get transferred down to the investing activities section under investment properties and subsidiaries, proceeds of disposition.

 

Normally, with IFRS, it is suggested that gains or losses beyond the depreciated long-term asset (or in this case, IFRS fair value of the property) be included in the operating cash flow segment. Given that BPY's business is to both hold long-term assets for rent and to flip, it is a bit of a grey area with respect to whether a property they own is a "long-term fixed asset" OR "inventory". Hence, there can be leeway for interpretation.

 

With respect to the LP's EAIs, this is really hard to recreate. According to IFRS, for distributions that are given IF they exceed the difference of the current year of share of earnings and cumulative share of earnings from prior years, that amount of distribution should be put in the operating cash flow section (to be viewed as return ON capital). If they don't exceed, they should be allocated to the investing activities section and be consisted return OF capital.

 

BPY seems to include all regular distributions from the operating cash flow section regardless of the IFRS suggestion above. However, they do include an item in their footnotes under the Equity accounted for investments section, called "disposals and return of capital distribution". I am not sure where precisely these amounts fall on the cash flow statement.

 

Perhaps the most simple way to look at their cash flow statement is in aggregrate since BPY is in the business of collecting rent and flipping properties with "equity" partners. They are always working to finance, refinance, buy and sell all their properties.

 

If I exclude all distributions to limited partners, non-controlled interests, and their parent --> BPY has negative cash flow due to their high rate of investment and capex. I guess their description of Company FFO is to help investors understand no-growth "cash"-like earnings before investment and capex.

 

 

[5xEBITDA]

I've been following this thread for a really long time and I love the nuanced discussion. But with all due respect to everyone who has spent time contributing here, what is the point of all of this analysis and reading between the lines?

 

Is the goal that this may uncover a great short via one of the Brookfield entities via soft creative accounting or even fraud? Is it to become comfortable going long one of the entities? Or, is it just to "finish" the work on this one and understand something complicated?

 

It is certainly a structurally and legally complicated situation which has some appeal, but without seeing what the end game is this seems like a poor return on time?