BAM - Brookfield Asset Management

[petec]

Investor day notes for first (BAM) presentation, if anyone is interested. Comments on their plans in insurance are interesting. I think this could become a fifth significant listed subsidiary over time.

 

○ 2025: plan value $110/share and annual FCF $5bn or $7bn including realised carry.

○ 80-90% of businesses were unaffected or positively affected by covid.

○ Fewer issues than ever before in a downturn, more liquidity, business stronger and more diverse.

○ Vast resources to ensure each business comes out stronger.

○ Significant opportunities are coming.

○ Oaktree partnership going well. Major area of overlap is product development and marketing. "We felt it would be a good investment if there was never going to be another recession and an excellent investment if [there was]".

○ A prolonged period of low interest rates is very good for the franchise in many ways.

§ Drives allocations to alternatives.

§ Raises prices of what they own.

§ 1 month ago financed 100% of the cost of One Manhattan West at 3%. 

○ Business is now launching into the next stage of growth.

§ Have grown significantly and "very methodically" - both bigger flagships and more products (p14).

§ Decarbonisation of the power grid, 1-in-100 year upgrade cycle in data, recapitalisations in private equity, and corporate demand for credit as stimulus winds down are all drivers.

§ Fee bearing capital could reach $500bn in 5 years:

□ $100bn next round of flagships. Other private funds will also grow and total private funds can grow from $130bn to $260bn.

□ Perpetual strategies (which includes private funds and listed affiliates) can grow from $75bn to $150bn.

□ Open ended credit and public securities can go from $40bn to $70bn.

§ New platforms to drive growth in years 5-10:

□ $20-50bn opportunity in secondary funds - new segment trading illiquid fund commitments.

□ $50-100bn opportunity in impact funds.

□ $50-100bn in utility-like technology cash flows. Doing this on a small scale now.

□ $100-200bn in insurance. Have a small business doing pension risk transfer - buying small pension plans off corporate balance sheets. Learned a lot. Significant area for growth. Right time to buy long tail/annuity liabilities with defined cash flows, where the risk is that rates fall. It is possible rates could be negative for a very long time but not probable so the biggest risk is low and the odds are in favour. Lack of capital in insurance today. Presumably BAM would use 1P and 3P capital. BAM have the ability to invest the assets - game changer to have Oaktree to do the fixed interest side.

§ Disappointingly perhaps, margins will stay in long term 55-65% range as business scales.

§ Diversification by fund, asset type, hurdle etc. improves quality of carried interest which is $2.8bn/year and growing. 70 funds contribute and no one fund contributes more than 15%.

 

[John Hjorth]

Thank you for a great write-up, Pete! [ : - ) ],

 

I haven't had time to see and listen to the videos of the presentations for the BAM subs yet [only BAM so far], but will do.

 

Definitely seducing PowerPoints, as you have expressed before here. I got a good impression [subjective expression from me here] of the new BAM CFO Nicholas Goodman [pretty easy to hear he's Scottish by origin! [ ; - ) ]].

[petec]

Thank you for a great write-up, Pete! [ : - ) ],

 

I haven't had time to see and listen to the videos of the presentations for the BAM subs yet [only BAM so far], but will do.

 

Definitely seducing PowerPoints, as you have expressed before here. I got a good impression [subjective expression from me here] of the new BAM CFO Nicholas Goodman [pretty easy to hear he's Scottish by origin! [ ; - ) ]].

 

Yes, so did I. Miserable people, the Scots. Make good CFOs ;)

[Gregmal]

https://therealdeal.com/2020/10/05/brookfield-weighs-bid-for-sl-greens-hudson-yards-building/

 

Cant stop. Wont stop. With the way they raise funds, soon enough they will own every office property in NYC.

[petec]

BPY notes. Not much new, although the details behind their office and retail theses were interesting. The standout point for me was the one in bold which I half-knew but hadn't thought through properly. I think it is a key risk mitigant that the vast majority of the equity is in the best assets with the least leverage.

 

○ Core Office and Retail (85%) plus Opportunistic "buy, fix, sell" exposure in the funds (15%).

○ They have $13bn of equity in office and $13bn in retail. $10bn of the equity in office is in 15 properties levered at 50% LTV, and $10bn of the equity in retail is in 25 properties levered at 36% LTV.

○ In office:

§ Extensive tenant discussions drive thinking.

§ Work from home (aka living at work) doesn't work. You can get through, but you can't develop.

§ Office needs will change - different floor plans, more distance, better air systems. Modern buildings will thrive and older property that can't be retrofit will be obsolete.

§ Urbanisation is not over. People want to live where they can find other people, jobs, entertainment, etc.

○ In retail:

§ Business Intelligence and Strategy team studies how consumers spend time and money.

§ 80% of US retail sales are offline and growing at 2% 2016-2019 (3% in Brookfield centres).

§ High quality retail centres make up 36% of GLA and do 58% of retail sales.

§ BPY owns 19% of US high quality retail GLA. 60% of the population lives with a 1h drive.

§ Believe pandemic has proved the need for physical locations to run omnichannel, as they offer revenue, fulfilment (distribution/pickup/returns), brand building, and customer acquisition.

§ High quality retail centres can work with tenants to create hubs for daily life, product discovery, fulfilment, and returns.

§ 62% of customers who started using buy online, pickup instore will use it after the pandemic ends.

§ YTD 3,000 new stores have opened in the US, up 5% over 2019.

○ Not in BPY, but the retail revitalisation programme aims to invest in high quality retailers that will survive but have temporary cashflow issues and can't invest in the technology and platforms they need. Brookfield can use their extensive knowledge and capital to help them win.

 

[Xerxes]

Thanks Petec

 

One thing to add on the bold part. They were saying they are looking to polish the rough diamonds to get to the core that you shown above by getting smaller.

 

Almost as if they are replicating what Blackstone did with EQP but in slow motion give that the market deflated. Blackstone went straight (literally days later) to selling in the hot market what they considered as non-core when they swallow EQP in 2007-08. 

[thepupil]

Anybody want to volunteer some of the top retail properties that have 36% LTV or top office properties that are underlevwred?

 

I have a hard time squaring the top down debt yield statistics with what BAM is saying.

 

As an example, Ala Moana Center has a 2012 CMBS deal against it (GSMS 2012 ALOH) that is $1.4B in size. Anyone know current NOI / have a rough value for Ala Moana?

 

In September 2019 they said the properties in total were at about 50% LTV. Hard to believe that their top retail/ office assets are so underlevwred now, a year later, given what has occurred.

 

https://bpy.brookfield.com/~/media/Files/B/Brookfield-BPY-IR-V2/ir-day/2019/5_BPY_%20IR-Day-2019_Presentation.pdf

[ValueMaven]

Is Flatt's plan to start a 5th insurance sub - writing super-cat biz...really long-term tail exposure - invest in the premiums via oaktree and large prop infrastructure projects??  It's an interesting idea...but they would need a world-class underwriting team.  Maybe make a large acquisition in the insurance space?  Arch would be a great target - but its large.  Just some random thoughts

[petec]

Is Flatt's plan to start a 5th insurance sub - writing super-cat biz...really long-term tail exposure - invest in the premiums via oaktree and large prop infrastructure projects??  It's an interesting idea...but they would need a world-class underwriting team.  Maybe make a large acquisition in the insurance space?  Arch would be a great target - but its large.  Just some random thoughts

 

He referred to buying books (specifically pension and annuity books), not writing them. Equally that might stretch to buying long tail companies, many of which trade well below BV.

[OnTheShouldersOfGiants]

Am I missing something or has BAM purchased ~55m BPY shares in the open market within the last month?

[gfp]

Am I missing something or has BAM purchased ~55m BPY shares in the open market within the last month?

 

The shares purchased at $12 were not 'open market' but BAM funding the BPY tender at $12 through their standing equity commitment.  50% of that investment was for BAM's own account.  Since then, BAM has apparently purchased around 12.5 million units at 11.36 / share.  At least I think I am understanding that correctly.

 

I'm not sure I understand the point of an issuer tendering for shares at $12 only to issue the exact same amount of partnership units to their sponsor at the same price.  Its not a repurchase - why not just have BAM tender for BPY shares instead of making it look like a repurchase by BPY?

 

The second 12.5 million shares was this - a similar deal to the tender using the equity commitment:

"From September 15, 2020 until September 28, 2020, the Issuer took up and purchased for cancellation in open market transactions on the Toronto Stock Exchange and the Nasdaq Stock Market an aggregate of 9,949,466 Units at average prices ranging from $10.88 to $11.83 per Unit in accordance terms of the Issuer’s previously announced normal course issuer bid (“NCIB”). During the same period, Brookfield Property REIT Inc. (“BPYU”), a subsidiary of the Issuer, took up and purchased for cancellation in open market transactions on the Nasdaq Stock Market an aggregate of 2,606,289 shares of Class A Stock of BPYU (“BPYU Shares”) at average prices ranging from $11.02 to $12.01 per share. Following the take up of the aforementioned Units and BPYU Shares, on September 30, 2020, the Issuer issued 5,022,302 Units to BPG LLC, 6,277,877 Units to BPGUSH Subco, and 1,255,576 Units to K SIB LP for aggregate consideration of approximately $142.6 million (average of $11.36 per Unit), each in accordance with the terms of the Equity Commitment. The source of funds used by BPG LLC, BPGUSH Subco and K SIB LP to purchase these Units was working capital of BPG LLC, BPGUSH Subco and K SIB LP, respectively."

[petec]

They’ve also been selling BEP.

 

 

[OnTheShouldersOfGiants]

gfp, thanks for the response. I appreciate it

[petec]

BIP notes. I have to say I think BIP is knocking it out of the park.

 

○ 1H20 FFO was down less than 5% and FFOPU is expected to rise for the full year, despite losing 15% of FFO to shutdowns, BRL weakness, and an 8-month delay in the closing of Reliance Jio, which has "very strong cash-on-cash yields right from the get-go". On top of that "our outlook on organic growth heading into next year is fairly positive" and "momentum on the M&A front is quite strong" so "2021 is shaping up to be a fairly strong year". Very resilient because:

§ 70% of FFO is from utilities, data and energy segments. In these segments asset recycling offset fx and covid impacts leaving organic growth of 8% (c/c) in 1H20.

□ Utilities is 35% of FFO, 95% contracted or regulated, and diversified across 5 countries and regulators. Margins are 75% and cash conversion 95% on low maintenance capex.

□ Energy is 20% of FFO and  covers 3 asset types in 3 countries. 85% of cash flows in this segment are secured by thousands of contracts; only three individual counterparties account for 1% of BIP total revenues. FFO is up 13%, largely on organic growth investments.

□ Data is 15% of FFO. Investments cover the span of connectivity from towers to data centres to FTTH and wireless. The average duration of contracts is 15 years and 95% of the contracts are not volume sensitive.

§ 30% of FFO is transport. 40% of this (12% of total) is underpinned by long-term take-or-pay contracts and the rest has diverse drivers, so it's only down about 3% and they expect to be made whole on most of this shortfall.

□ 15% is rail in Australia, North America, Brazil and the UK, with diversification by type of goods. Half of this has minimum volume guarantees. Rail FFO grew in 1H20 driven by ag.

□ 10% is toll roads. They can reclaim lost FFO thorugh force majeure here, but 75% is in Brazil where they are mainly exposed to heavy traffic which has been robust anyway.

□ 5% is ports, which declined 15% - this is where they have economic loss.

○ Buy, enhance, sell, repeat. In 2020 they

§ Have sold $500m and $700m more in the next 3-6 months.

§ Have spent $1bn on UK telco (2,000 towers and opportunity to deploy small cell technology and wireless in-building solutions), Reliance Jio (135,000 towers), and a stake in Sabine Pass.

○ Enercare example

§ CEO was COO before Brookfield took it private. They promoted her.

§ Provides hot water, heating, and cooling systems in the home, leased for a simple monthly fee. "Essentially, we are a utility. We have a rate base with steady recurring revenues. We just operate the rate base in your home."

§ Strong brand in Canada and second largest player with 1% in the very fragmented US market.

§ Stable customer base with low attrition, which drives margins.

§ Board has Brookfield employees who worked on the original deal plus members of the asset management team. CEO talks to members once every two weeks at least. "Together, we have built a path for growth that is…transformational for our business, but also for our industry because we have a rental product in the market that is unique."

§ Brookfield

□ Recommended and helped implement the new securitised financing structure (not simple).

□ Refined the US growth strategy, moving from transactional model to annuity, using what they learned from the last mile connections business in the U.K. to build out a dealer channel who sell rentals in return for a service contract.

□ Provides high-quality personnel quickly in key areas where Enercare is short.

□ Provides advice on critical projects - e.g. a big IT project has been de-risked and accelerated.

□ Provides access to the Brookfield economy - Brookfield Residential, Properties, and Multifamily, plus TXU with whom Enercare are about to jointly launch a campaign that bundles Enercare home services together with TXU electricity products. This may be replicable with other utility partners.

§ In the two years since Brookfield acquired Enercare, they've added over 110,000 new annuity. customers. Rental conversion is 50% up from 10%, and dealer adoption is starting to gain momentum. Returns were 12% with low risk; with Brookfield's help, they should be 20%.

○ Growth drivers. "We can't help but believe that the secular trends for the infrastructure sector have never been better and, in fact, we may be [beginning] an infrastructure investment super-cycle."

§ Organic. Invest $800-1bn a year ($400m equity).

§ Acquisitions. 80 professionals on 5 continents. Another fairly constant $400m a year in BIP equity.

§ Think they can consistently originate over $2 billion per annum of capital projects and acquisitions that meet their investment hurdles. 

□ Upgrades to the global telecom sector and networks will require over $1 trillion in the next five years alone. Telcos don't have the capital. Reliance Jio has invested $50 billion to build out its tower and fibre networks but they also are spending tens of billions of dollars to build out their e-commerce business, which is the future of the company. As a result, they needed to recycle out of their infrastructure assets. BAM had a great relationship with Reliance because of the gas pipeline carve-out transaction in 2019, so Reliance trusted them as a long term operator/partner.

□ The energy sector is out of favour, and the MLP structure is very out of favour in the United States. With few alternatives to source capital, oil majors are selling assets to investors. BAM like midstream assets because they have scarcity value, contracted revenues, and usually involve large capital outlays. Sabine Pass is a premier asset with 85% of its EBITDA contracted  in USD for a weighted average of 18 years with a globally diversified group of investment-grade counterparties. LNG is a critical bridge fuel for decarbonization efforts in emerging markets.

□ Many airports have raised capital in the short run to support their businesses and keep themselves going but with pending airline bankruptcies, and very uncertain futures, our expectation is that they'll need to raise capital from long-term investors like ourselves.

○ BIP raises capital from three sources.

§ Retained cash flow - around 15% of FFO or $200m/year.

§ Common equity, preferred shares and medium-term notes raised in the public capital markets. Just raised $200m of perpetual prefs at 5.125%.

§ Capital recycling - 60% of capital raised in the last 2 years and $3-4bn of sales over the next 2 years.

 

[ValueMaven]

https://www.brookfield.com/sites/default/files/2020-10/Brookfield_Contrarian_View_PERE_Oct_20.pdf

 

 

[petec]

Sachin Shah moves to Brookfield CIO from BEP CEO. At 43.

 

Flatt’s successor?

[ValueMaven]

Very interesting actually. 

[John Hjorth]

Sachin Shah moves to Brookfield CIO from BEP CEO. At 43.

 

Flatt’s successor?

Very interesting actually.

 

It's great,

 

Imagine a life at 43, where there is no sex, because your spouse is already [& always] asleep when you jump into the hay.

[Shane]

Sachin Shah moves to Brookfield CIO from BEP CEO. At 43.

 

Flatt’s successor?

Very interesting actually.

 

It's great,

 

Imagine a life at 43, where there is no sex, because your spouse is already [& always] asleep when you jump into the hay.

 

Am I missing something here???

[ValueMaven]

Sachin Shah moves to Brookfield CIO from BEP CEO. At 43.

 

Flatt’s successor?

Very interesting actually.

 

It's great,

 

Imagine a life at 43, where there is no sex, because your spouse is already [& always] asleep when you jump into the hay.

 

Am I missing something here???

 

 

Nope - I'm clueless as well

[ValueMaven]

Great interview:

 

https://www.bloomberg.com/news/videos/2020-10-06/brookfield-transalta-superior-plus-execs-on-canadian-renewables-video

[james22]

Any BAM owners own Blackstone as well?

 

Why?

[racemize]

Any BAM owners own Blackstone as well?

 

Why?

 

I own KKR, BAM, and BX—all of these guys have the same IRRs for their funds and have the same tailwinds. BAM has done well but they are all close to each other on returns generally. Ride the alt tailwind!

[Xerxes]

James

I own only BAM (and all of its subs except BYP). I had wanted to get into Blackstone for years. Had an opportunity in March but was too chicken. 

 

I think if one likes BAM there is no reason as to why not own Blackstone. Having read the two books on Blackstone I would say that although Schwarzman talks about making sure never losing money and knowing the downside etc, he seems to be swinging for the fences more often that the Brookfield machine and its legion of accountants. But that is schwarzman-era Blackstone, buying now means buying Jon Grey’ Blackstone with more focus on real-estate and less so on private equity.

 

As a side note, I don’t know why, but U.S. based financial media when talking about private equity, they always mention Blackstone, KKR, Carlyle etc. But never Brookfield. I get that the latter is Canadian and private equity is small part of their business but their business is hugely global and they alongside Blackstone each has an AUM north of half-trillion. And Blackstone today is far away from private equity and is much closer to real-estate (not mall though). So BX and BAM are very similar even if they have a hugely different background.

[Xerxes]

Had sold off the BIPC + BEPC spinoffs and re-deployed mostly back into BAM at current prices.

 

Still have the original BIP.UN + BEP.UN. The latter I was lucky enough to get in on it at its bottom back in Dec 2018 and has been blockbuster since.

 

On a different note, I don't know if anyone listened to BBU at the AGM. find it interesting that these guys deployed heavily, nearly $500 million back in March-April. And now are mostly up 100% on that investment. For a $3.5 billion market cap business that is good. Of course the gains are somewhat offset by some of they private equity business being impacted. But they did what you expect them to do in a downdraft. Take action.