BAM - Brookfield Asset Management

[kab60]

This is just great. Monty of Ashford deserves everything that is coming for him. I luckily got out of Ashford Inc at breakeven, but the way he robbed first their managed REITs and then common shareholders of Ashford Inc is incredible. As for BAM, it's PE, and they play by the rules it seems.

[ValueMaven]

Whats the back story with Monty for those of us that are less informed?

[Pauly]

https://seekingalpha.com/filing/4928242

 

Total pieces of you know what. Reputation? Ha!

 

We all know they dont celebrate Easter. They're the types many of the negative stereotypes are derived from.

 

Wait, who are the 'they' you're referring to here, exactly? Could you spell that out a bit more clearly please?

[kab60]

Whats the back story with Monty for those of us that are less informed?

Ashford Inc has some pretty crazy management contracts by which value is siphoned from Ashford and Braemer to Ashford Inc. Some investors, me amongst others, figured we could follow Montys money and camp out in Ashford Inc. Seemed incentives was for him to grow value of Ashford Inc. Naive SOB you might say (true). Then he sold two of his private companies to Ashford Inc and financed it with preferred shares - making the common a far OTM call option. Lots of other stuff going on. I bailed after Ashford Inc bought the first Company. Figured the return on headache and waiting to get stabbed wasn't worth it. Then shortly after Ashford bought the second Company. Buying Ashford Inc with preferred shares worth many times the market cap at the time.

[LC]

https://seekingalpha.com/filing/4928242

 

Total pieces of you know what. Reputation? Ha!

 

We all know they dont celebrate Easter. They're the types many of the negative stereotypes are derived from.

 

Wait, who are the 'they' you're referring to here, exactly? Could you spell that out a bit more clearly please?

 

I'm guessing those free-wheelin' Bronfmen :D

[Pauly]

https://seekingalpha.com/filing/4928242

 

Total pieces of you know what. Reputation? Ha!

 

We all know they dont celebrate Easter. They're the types many of the negative stereotypes are derived from.

 

Wait, who are the 'they' you're referring to here, exactly? Could you spell that out a bit more clearly please?

 

I'm guessing those free-wheelin' Bronfmen :D

 

Yes maybe. Or perhaps Canadians? But then, Canadians celebrate Easter don't they. So, Greg, who are you referring to?

 

[Gregmal]

Both are scoundrels whom worship nothing but money.

[Spekulatius]

Both are scoundrels whom worship nothing but money.

 

So in other words, they are just like the rest of us.

[John Hjorth]

Both are scoundrels whom worship nothing but money.

So in other words, they are just like the rest of us.

 

I'm happy you posted it, Spekulatius, so I didn't have to.

[Spekulatius]

Both are scoundrels whom worship nothing but money.

So in other words, they are just like the rest of us.

 

I'm happy you posted it, Spekulatius, so I didn't have to.

 

You are welcome, John.

 

I cringe when people want to outsmart the BAM guys by investing in some of their satellite vehicles like TOO, BPY, GGP and think they got a better deal. If you really like what they are doing, there is absolutely no reason to invest in anything but BAM.

 

Everything else is asking to get bend over and sooner or later....

[brianr27]

What makes you think that minority shareholders in BAM are safer than minority shareholders in satellites? Isn't BAM a satellite of partners value fund?

[petec]

What makes you think that minority shareholders in BAM are safer than minority shareholders in satellites? Isn't BAM a satellite of partners value fund?

 

Yes, but Partners is levered and the VAST majority of its assets are in BAM. BAM goes down, Partners goes to zero, and with it the personal fortunes of the key BAM managers.

[petec]

 

I cringe when people want to outsmart the BAM guys by investing in some of their satellite vehicles like TOO, BPY, GGP and think they got a better deal. If you really like what they are doing, there is absolutely no reason to invest in anything but BAM.

 

 

I broadly agree with this and my holding is in BAM, but I suspect there is a distinction to be made between assets that are inside the "universe" (BIP, BPY etc) and those that are outside (TOO, GGP). Inside is much, much safer.

[petec]

OAK launching its biggest fund ever, at $15bn.

 

I also note both BIP and BAM have reopened bond issuances since the Covid-19 selloff and raised c.$750m at low 4% rates.

[TwoSigma]

Anyone have thoughts on Brookfield’s overall exposure to Brazil / Brazilian Real?  I’m closest to BIP, so am not sure what it looks like for other Brookfield entities.  I know in the case of BIP, as of Q4, just under 30% of its pre-corporate cash flows were BRL denominated and unhedged.  I think there are two (obvious) issues here.  First is the performance of BIP’s (and Brookfield’s more broadly) assets in Brazil.  Second is the currency exposure.  From what I can tell, the two largest Brazil exposures by far for BIP are NTS (natural gas pipeline) and Arteris (toll road).  My sense is that NTS is under a long-term, fixed fee take-or-pay and I’m guessing has seen limited impact from COVID19, though I guess its counterparty exposure to Petrobras is noteworthy.  On the other hand Arteris has likely been negatively impacted with toll road traffic down significantly in Brazil.  Looking at CCR SA as a comp, it looks like passenger toll road traffic in April was probably down 40-50% year-over-year and commercial traffic was down mid-single digits or so.  Thus, it would seem Arteris could seem a pretty meaningful hit this year.

 

Second, and maybe more important is the currency exposure.  Despite generally hedging FX exposure back to USD, over the years BIP seems to specifically choose not to hedge BRL exposure.  They have cited the cost of hedging (i.e. high cost of carry) as being prohibitive and perhaps have at times had a directional view on the BRL.  The decision not to hedge its largest FX exposure is now going to bite BIP (that is unless we find that they decided to hedge their exposure in Q1, which is possible I guess).  A 30% pre-corporate exposure to Brazilian Real is like a 35% post corporate exposure.  With BRL having depreciated against USD by around 37% YTD, the cash flow hit on this currency alone could be pretty material.  Of course one could argue that BRL is temporarily weak because of COVID19 and should revert once things normalize (as an aside, the situation in Brazil seems pretty scary right now).  I guess the broader point is, it’s one thing to bet on BIP because of its exposure to stable, toll-road like assets.  It’s another to bet on them because of a view that they are prescient global FX traders.

 

This all matters because I’ve always viewed BIP’s payout ratios as stretched and aggressive.  It’s gotten more stretched, under their own metrics, over the past several years and to me it looks like AFFO payout will probably blow through 100% this year.  At some point isn’t someone going to question the stability of this dividend, or at the very least their ability to continue to raise it in the face of multi-year evidence that AFFO growth to LP unit holders has not kept pace with dividend per share growth?

 

[Parsad]

https://seekingalpha.com/filing/4928242

 

Total pieces of you know what. Reputation? Ha!

 

We all know they dont celebrate Easter. They're the types many of the negative stereotypes are derived from.

 

Hey Archie Bunker, next time I read something like this, you get a 30-day suspension!  Cheers!

[petec]

Anyone have thoughts on Brookfield’s overall exposure to Brazil / Brazilian Real?  I’m closest to BIP, so am not sure what it looks like for other Brookfield entities.  I know in the case of BIP, as of Q4, just under 30% of its pre-corporate cash flows were BRL denominated and unhedged.  I think there are two (obvious) issues here.  First is the performance of BIP’s (and Brookfield’s more broadly) assets in Brazil.  Second is the currency exposure.  From what I can tell, the two largest Brazil exposures by far for BIP are NTS (natural gas pipeline) and Arteris (toll road).  My sense is that NTS is under a long-term, fixed fee take-or-pay and I’m guessing has seen limited impact from COVID19, though I guess its counterparty exposure to Petrobras is noteworthy.  On the other hand Arteris has likely been negatively impacted with toll road traffic down significantly in Brazil.  Looking at CCR SA as a comp, it looks like passenger toll road traffic in April was probably down 40-50% year-over-year and commercial traffic was down mid-single digits or so.  Thus, it would seem Arteris could seem a pretty meaningful hit this year.

 

Second, and maybe more important is the currency exposure.  Despite generally hedging FX exposure back to USD, over the years BIP seems to specifically choose not to hedge BRL exposure.  They have cited the cost of hedging (i.e. high cost of carry) as being prohibitive and perhaps have at times had a directional view on the BRL.  The decision not to hedge its largest FX exposure is now going to bite BIP (that is unless we find that they decided to hedge their exposure in Q1, which is possible I guess).  A 30% pre-corporate exposure to Brazilian Real is like a 35% post corporate exposure.  With BRL having depreciated against USD by around 37% YTD, the cash flow hit on this currency alone could be pretty material.  Of course one could argue that BRL is temporarily weak because of COVID19 and should revert once things normalize (as an aside, the situation in Brazil seems pretty scary right now).  I guess the broader point is, it’s one thing to bet on BIP because of its exposure to stable, toll-road like assets.  It’s another to bet on them because of a view that they are prescient global FX traders.

 

This all matters because I’ve always viewed BIP’s payout ratios as stretched and aggressive.  It’s gotten more stretched, under their own metrics, over the past several years and to me it looks like AFFO payout will probably blow through 100% this year.  At some point isn’t someone going to question the stability of this dividend, or at the very least their ability to continue to raise it in the face of multi-year evidence that AFFO growth to LP unit holders has not kept pace with dividend per share growth?

 

The only thing you haven’t mentioned (although I am sure you know) is that asset-level debt is always in the asset’s currency, Which provides a partial hedge. But Real-denominated partnership capital and FFO Are not hedged and you’re right, this will pressure the payout ratio since the divi is in dollars.

 

The real was cheap (on an inflation-adjusted basis) before covid, and the economy was set for a major recovery. It’s dirt cheap now and the economic outlook is uncertain, but probably positive on a 1-3 year view. Brazil trades very much like a risk asset, and I’d be more inclined to view the current situation as an opportunity than anything else. But it will be interesting to see what they say on the call.

 

I’ll also be interested to see what run rate FFO guidance is in a recession and without Cincinnati Bell.

[thepupil]

So over this past 7 or 8 or so years I fell like I've gone from being a staunch defender of Brookfield to a Brookfield hater.

 

When I just read that BIP post about Brazil and went to BIP's most recent supplemental, I said "okay a bunch of levered EM exposure, some ports, short-haul railroads, utes, a 94% pre-COVID payout ratio, I assume this is trading at a 10% yield and 1/2 of book or something" considering what I know of BPY.

 

Then I looked up the stock price, and saw that it's where it was in mid 2019 and at a 5-6% yield, and at 1.75x invested capital.

 

what?  did unit holders not get the memo about that whole global recession thing?

 

I understand that they have low cost debt and have long-term contracts that the demand for infrastructure assets and utilities will increase in a ZIRP world, but it's still tough for me to reconcile the apparent lack of compensation for risk and the huge pass that the market appears to be giving to BIP.

 

Has Brookfield created 1.8x on equity type of value in its recent deals?

 

Genesee and Wyoming was bought out at a 40% premium in 2019. Recognizing that it's only $500mm of equity on a big balance sheet (the rest was GIC and others), how do we thing G&W would be trading today if they didn't? I imagine it'd be 15-40% lower than the undisturbed deal price.

So when you're buying BIP for 1.7x, you are paying (using 15%), 200% of market value for that deal (in my uneducated opinion).

 

Then there's the unhedged INR and BRL exposure that's definitely worth less at least in dollar terms than when this all got going. the rupee admittedly isn't down that much.

 

then there's the (admittedly small) port exposure. 1 HK owns some ports, it's down 22% YTD and trades for 1/2-1/3 of book (it's obviously not a pure play and has other issues) it's just a data point.

 

are there some really good deals that offset these ones that look to be that they'd be marked below 1.0x if they were PE portco's? Just starting to have a look here and it's not obvious to me

 

Am I calculating the equity value correctly? To me it seems unithilders own about $9 billion of equity and it trades for $16 billion.

 

EDIT: I see some data infrastructure stuff, but most is international. my impression (albeit dated and secondhand) is that the tower biz has re-rated substantially in the private market (even more expensive than publics) but that this is a much worse business outside the US (less favorable regulatory /competitive dynamics.

 

[petec]

You may feel better if you look at BPY :)

 

Re BIP, while I can’t speak for recent deals, I do think you need to value it on FFO not book value. A material proportion of the assets are concessions, which have intangibles that get amortized. This can create significant write ups on sale, as happened with the Chilean toll roads sold recently.

[TwoSigma]

I don’t want to do a super long post, so I’ll try to address these points without getting too in the weeds on the numbers.  I’ve thought a lot about BIP valuation and have approached it from both a bottoms up perspective (I’ve attempted to do an SOTP on the entire portfolio) and from a top down perspective (sanity check what the “right” multiple should be, looked at book value versus average sale premium to book for sold investments).  Bottom line, I’m pretty sure if BIP were to liquidate its portfolio today (or even at the end of 2019, pre-COVID), the end result would be value that is substantially lower than current stock price.  Again, I’m not going to go into all the weeds now, but its pretty easy to see at a high level.  On 2019 numbers (so let’s take out any debate about COVID 2020 impact), BIP trades at 15.5x proportionate consolidated EBITDA.  If I were to remove the amount paid out as an IDR to BAM, which I think is appropriate since that is value flowing out of BIP to BAM (this is also how most analysts look at it for MLPs), the multiple grows to 17x EBITDA.  I just don’t see the weighted average of BIPs portfolio being worth anywhere close to this multiple.  While certainly there are some types of infrastructure assets worth this type of multiple, I think you need to consider where BIP actually has its exposure.  From my numbers, BIP’s largest investments in terms of proportionate EBITDA contribution are NTS (Brazil gas pipeline), BUUK (UK regulated utility), NGPL (JV gas pipe asset with Kinder Morgan), Arteris (Brazil toll road), DBCT (Australia coal terminal), TDF (French tower company), NorthRiver (NAM gas pipeline), VLI (Brazil rail company).  BIP bought NTS well (I think around 5x EBITDA), but I really doubt this thing is worth more than 8-9x EBITDA and probably less in today’s environment (last year Petrobras sold its other gas pipeline network for around 8.5x I believe).  NGPL and NorthRiver..just look at what NAM midstream assets are trading for today. At the low end guys like PAA and ET are trading at sub-8x EBITDA.  At the high-end ENB is trading at 11x.  Arteris has a few publicly listed peers that appear to be trading around 6x EBITDA.  I think the weighted average remaining life of Arteris’ toll road concessions are something like 15 years (i.e. no terminal value after 15 years).  A bit hard to see why this should trade at a big EBITDA multiple.

BUUK I think is a good asset and based on UK utility peers would seem this is around a 12x asset.  Tower companies and data center REITs still carry pretty massive multiples, but overall this is still a small business for BIP and not going to move the needle much.  At 10x pre-IDR EBITDA, BIP is a $14 stock.  If I assume value for the IDR, and if you look at the precedent with US MLPs the IDR usually gets more value than it deserves,  BIP is probably a $10 stock at a 10x post-IDR EBITDA multiple.  I can also look at it more top-down.  In July of last year Barclays published a pretty good report on BIP, with one section analyzing multiples of book value that BIP monetized its investments for.  BIP loves pointing out the big gain it booked on its sale of Transelec (Chilean transmission company), but the data shows that on a weighted average basis, post tax, BIP has on average monetized its investments for about 1.1x of book equity carrying value with multiples ranging from 1.0x to 1.6x.  If I gross up BIP’s current book value by 1.1x to account for the fact that they historically have been able to monetize at some premium to carrying value, I see BIP as being worth $18.75 per share.  You would have to believe that BIP could monetize its entire portfolio for around 2x carrying value to believe it is worth the current price (and this assumes no value for the IDR).

 

Of course, one could agree with everything I say above and still believe BIP is a buy because of the capital allocation track record of Brookfield.  I could see the argument that SOTP value doesn’t matter because BIP is going to continue to create value by buying well and funding cheaply.  I sort of get this argument, but one should recognize BIP investors are paying BAM over $400 million per year now for this privilege.  I can think of many companies where investors can get exposure to a great capital allocator without having to pay a steep management fee or incentive carry.  I’m also not completely bought in to the notion that BIP has that amazing of a track-record.  Over the past 5 years BIP has spent approximately $10.5bn in net acquisitions and growth capex on a proportionate basis.  During this time-frame proportionate EBITDA has grown by about $860 million.  Assuming zero organic growth in its portfolio, this implies that BIP has been generating about 8% unlevered cash returns on growth investments (if you assume there is organic growth, than it implies worse returns on their invested capital), which I guess isn’t bad, but doesn’t jump out to me as super impressive either.  This is especially true when considering you could generate similar levels of return just buying government debt in some of the jurisdictions that BIP has been pouring money into.  At these levels of returns, given that BIP is now in the high-splits for its IDR, BIP is going to have to do an ENORMOUS amount of deals to keep the LP dividend growing in the mid-single digit range…which again speaks to the cost that LP holders are paying to the GP for the privilege of its capital allocation prowess.

 

[John Hjorth]

Welcome to CoBF, TwoSigma! [ : - ) ],

 

Great first post!, - thank you!

 

- - - o 0 o - - -

 

TwoSigma & Pete,

 

With regard to hedging in the BAM sphere - related to BIP's Brasilian assets, discussed among Pete and TwoSigma just earlier in this topic, and posted with the intent to elaborate a bit on Pete's reply, please look up BAM 2019 Annual Report, p. 168.

 

Reading section d) i & d) ii it seems to me, that both cash flow hedges and net investment hedges against the functional & reporting currency [uSD] are used in the total BAM sphere.

[thepupil]

twosigma comin' in hot on the first two posts! Very informative posts!

 

So BAM/BPY/BIP holders out there, do you all disagree with any of the following

 

1) my earlier post that stated BPY has more levered office and retail exposure concentrated in NYC and London (office) and malls, sectors which the public market hates and assigns low NAV/high cap rates to less levered companies in the public market

 

2) twosigma's makes a strong high level case that BIP is trading 50-100%+ above fair value using relevant comps and data re historical sales relative to book

 

I feel like there's a lot of love for BAM and I would LOVE to be BAM the asset manager right now, but you have to buy the assets along with the asset managers and those look like pretty bad risk/reward right now

 

is anyone that is long BAM short the subs to express this?

[racemize]

twosigma comin' in hot on the first two posts! Very informative posts!

 

So BAM/BPY/BIP holders out there, do you all disagree with any of the following

 

1) my earlier post that stated BPY has more levered office and retail exposure concentrated in NYC and London (office) and malls, sectors which the public market hates and assigns low NAV/high cap rates to less levered companies in the public market

 

2) twosigma's makes a strong high level case that BIP is trading 50-100%+ above fair value using relevant comps and data re historical sales relative to book

 

I feel like there's a lot of love for BAM and I would LOVE to be BAM the asset manager right now, but you have to buy the assets along with the asset managers and those look like pretty bad risk/reward right now

 

is anyone that is long BAM short the subs to express this?

 

Here's where I'm at:

 

1) Yes, that's true; however, I believe BAM has a lot of reputational risk here, and will do almost anything they can to help BPY.  In dire scenarios, I imagine there are some creative solutions where they use money from funds to buy assets off of BPY (read malls) to reduce leverage and do more redevelopment.  Moreover, and obviously this depends on the environment, there are quite a bit of prior funds winding up that are returning capital, so BPY should start to receive good amounts of cash in the coming years (helps longer term, not shorter term).  It's also worth nothing that the dividend payout to BAM can be in units, which I imagine it will be for a long time, which reduces cash drag on any paid dividends, given how many of the units are owned by BAM.

 

2) Re BIP, I have been adjusting AFFO (Operating Adjusted FFO) to take out the incentive distributions and preferred distributions (why in the world that is in there, I don't know...), and then looking at the multiple.  I have OAFFO at ~$2.00, so it is trading at 19x that now (although clearly, you would expect impairment from CoVID).  The cheapest BIP has traded historically (on a yearly basis anyway) was ~14x (2015), highest was 25x (end of 2019).  They had projected ~15% growth in FFO this year from recycling capital.  I have been concerned about the increasing IDR drag, which is a very good reason why future returns will not be as good as before, IMO.

 

As to comps to both, I think you guys are probably right.  However, I'm not sure that public prices are the correct prices for these assets (e.g., I agree with Pupil on NY RE, but I don't know that we should be buying the public real estate and saying the market is wrong, and then turning around and using the same public cos to denigrate Brookfield entities, though of course we should buy the ones that make more sense).

[thepupil]

As to comps to both, I think you guys are probably right.  However, I'm not sure that public prices are the correct prices for these assets (e.g., I agree with Pupil on NY RE, but I don't know that we should be buying the public real estate and saying the market is wrong, and then turning around and using the same public cos to denigrate Brookfield entities, though of course we should buy the ones that make more sense).

 

good point, to be precise, I am not saying that BPY is a short, I am saying that it is less prepared for the dire scenarios discounted in other similar securities. If SPG is worth $60, then BPY's retail is a $0. if VNO is worth $40 then much of BPY's office is likely a $0. I own VNO and don't think it's worth $40 (which means I think BPY could be worth its price or even multiples thereof).

 

You bring up a very interesting point with respect to Brookfield's funds and their flagship entity's.

 

If BAM has super interesting opportunities to invest more capital into its huge asset base, there's a lot of potential for conflicts. When BPY and an institutional fund are teaming up to buy an external target (like Forest City), BPY and the institutional fund's interest are completely aligned (they want to pay the least for Forest City as possible).

 

But when Brookfield Fund XYZ is bidding to re-cap a BPY owned asset, they'll be put in direct conflict with each other on pricing.

 

Cross-fund transactions happen all the time in PE, but it's usually a sequential fund where the same institutions are often on both sides (i.e. Institutional Investor XYC is invested in Bain Capital Fund IX and Fund X and Fund X is funding an add-on for Fund IX portfolio company). Fund X and Fund IX are in conflict on the implied valuation for the PortCo, but this is mitigated (somewhat) by the fact that you have the same folks subscribed to both funds.

 

But I imagine there are a lot of institutions who are NOT in BPY, but are in BAM's private equity funds.

 

How BAM will handle all this will be super interesting to watch. If they screw the institutional funds, then they alienate their clients that can actually fire them. if they screw the flagship publicly traded entities, I am not sure of any actual consequences (it's my impression the flagship partnerships have virtually no governance rights) but they risk developing perpetual discounts and forever losing the ability to accretively issue. I don't think they'll try to "screw" either. that's an overly cynical view.

 

My broad point is that this distress cycle is going to be very interesting to watch given the state of BAM and its subsidiaries.

 

I have written far too much, for someone with no position  ;D

[racemize]

Yes, it is certainly fraught with conflict issues.  I imagine it would be BPY taking the large discount because it would need the cash.  E.g., at this point, I imagine if someone just bought all of the malls off of BPY's balance sheet at the current prevailing BPY price/relative price, which would infuse BPY with a ton of cash, BPY would go up substantially.  But maybe I'm wrong on that, who knows...