BAM - Brookfield Asset Management

[petec]

It would be very weird for BBU to fund itself with float. BAM takes fees on the EV and EV is not in float. If float was the goal, BAM would have bought Genworth.

[Xerxes]

https://bbu.brookfield.com/~/media/Files/B/Brookfield-BBU-IR-V2/IR%20Day/2019/BBU-InvestorDayTranscript-2019.pdf

 

Here is the statement from last year AGM 2019.

I admit, my comment was off memory lane. See last paragraph.

 

With that context, we most recently announced an agreement to buy a controlling interest in Genworth Canada. Genworth Canada is a great high-quality business, and we were able to buy it for tangible book value. This business had the situational dynamics I described, meaning a seller that needed to sell very quickly. It has the business characteristics which we like. It operates in a highly regulated industry, which means there are very strong barriers to entry. It only has two competitors in the country. It’s a large-scale business with opportunities to grow. It generates consistent earnings and cash flow through business cycles, through housing cycles, with high returns on capital. And our expertise should help increase these returns.

 

So what does it do? It provides insurance to bank and other mortgage lenders against the risk of mortgage default. In Canada, mortgage insurance is mandatory for any home purchase where you have less than 20% down payment. The business backs a highly diversified mortgage book across the country where the average home price being purchased and insured is $350,000. It caters to first-time buyers, the buyers are typically 25 to 45 years old, they are employed, they have growing incomes. And the structure of mortgages in Canada is very favorable to the lender. For every insured mortgage, Genworth gets all the insurance premium upfront. It takes that premium, it invests it in securities, and then ultimately it pays out the bank’s insurance companies if they have a loss. It’s a highly profitable business both from the mortgage underwriting part of the business and also from the income it earns on its $7 billion investment portfolio.

 

And we think we can enhance the returns of this business, which has typically generated about a 13% return on equity for many years. And that’s quite remarkable when you think about a business that has 10% debt relative to its entire capital structure. But what we think we can help them with is, A, grow their market share; B, enhance the returns they can earn on their investment portfolio. Hopefully Howard [is that Howard Marks?] can help us out with that. And we think we can help optimize their capital structure, which we may be able to do given our financial strength. With those changes, we should be able to get this business into our targeted return range.

Genworth has generated positive earnings and cash flow every year, including through the financial crisis. And had you invested in its IPO in 2009, you would have tripled your money by reinvesting your dividends back into Genworth Canada’s stock. Now given our ability to reinvest those dividends at higher returns, Genworth Canada should be a great long-term compounder for BBU, and source of capital to fund our future opportunities.

[petec]

Thanks. My read of that would be that they think

1) Genworth’s float can be invested in BAM/OAK funds, generating both higher returns for Genworth and fees to BAM;

2) Genworth profits can be dividended to BBU to provide cash flow to reinvest;

3) they plan to hold it for a while.

 

That said,

4) I don’t think they can realistically use Genworth’s float to buy investments for BBU and I don’t think BAM has any incentive to do that;

5) All the listed subsids have capital recycling as a core driver. BBU is no different. They’ll sell this at the best time to optimise the IRR and recycle into the next asset that can be bought for TBV and then improved. This is how they become self-funding - ever larger realizations, not investing Genworth’s float.

 

Obviously I could be wrong!

[Xerxes]

Brookfield’s betting real COVID-19 shake-out still to come

https://www.afr.com/chanticleer/brookfield-s-betting-real-covid-19-shake-out-still-to-come-20201020-p566xq

 

I would probably change the title to say Brookfield and Berkshire and every distress investor out there is betting that the real COVID-19 shake-out still to come

[thepupil]

So I keep saying this, but I thought I'd put a little more thought / numbers around it. Please note that I'm not even taking BPY's corporate leverage into consideration here. My view is this: BPY should trade at a BIG discount to its comps. BPY has far higher balance sheet risk and is subject to a good bending over by BAM who will ultimately prioritize mothership value.

 

All operating metrics are pre-corona and backward looking.

 

BPY's NOI composition:

 

Core Office:

$1.3 billion of NOI,  $17 billion of debt (7.6% debt yield on a consolidated basis)

Office geographice breakdown:

 

Retail

$1.7 billion of NOI, $21 billion of debt (8.0% debt yield on a consolidated basis)

 

LP Investments: bunch of 50-60% levered value-add properties dependent on investment sales market for realization.

 

Going in cap rates to value retail and office: 4.7% and 5.3%.

 

Debt is 30% floating, 70% fixed and looks to be pretty well termed out.

 

 

Now let's see where all this stuff is located and what that looks like in comparable securities:

 

A full 20% of the office portfolio is in London. Where does London office trade in the public market?

 

As a comparable, I'll throw out British Land's office portfolio. BL does derive 40% of its value from retail so it's not a pure comp, but nevertheless, British Land's office portfolio is of similar quality to Brookfield's London exposure (97% occupied, Facebook is 9% of rents, centrally located at major transit hubs).

 

British Land has 3.7 billion pounds of debt (at 2.8% interest costs)  and is doing about 450-480mm pounds of annualized NOI equivalent (they call it "net rental income"). Notice the difference with BPY? British Land's NOI (let's use 450mm pounds): 450 / 3700 = 12% debt yield versus BPY's 7.6%. Now we could say "well BL has more retail...UK retail sucks". I would agree with that pushback but if you zero out BL's retail then BL leverage would be about the same as BPY's. Retail sucks, but NOI proabbly won't be zero. I therefore conclude that BRitish Land has materially less leverage than BPY.

 

British Land is perhaps slightly more "expensive" but still has 100-200% upside to a more normal 70-100% of NAV.  British Land trades for 311 pence versus last reported NAV of 850, about 36% of NAV. British Land is "cheap" to NAV on an absolute basis. Cap rates used for the NAV's are similarly optimistic to BPY's.

 

So that's 20% of the office portfolio. I'm sure there's a better british office REIT to compare to; please feel free to correct me.

 

 

25% of office NOI is in downton and midtown NYC. I urge anyone who owns BPY to go check out the VNO thread that I obnoxiously bump every few days. Let's take a look at VNO's balance sheet. Vornado has about $1 billion of office NOI at share and $200mm of retail NOI at share for total of $1.2 billion. By the least generous calculation Vornado has about $10 billion of debt ($5.6 billion of mortgages, $2.8 billion of unconsolidated share of mortgages, some minor corporate obligations). We could go as high as $11 if we count the preferreds. $1.2 billion / $10-$11 billion = 10-12% debt yield. Again, we find a comparable that carries far less leverage than BPY. I encourag anyone to take a close look at VNO's balance and realize that this is a very punitive way of calculating VNO's debt considering the $9 billion of unencumbered assets they own, $1 billion of cash on the balanche sheet, $ 1 billion of unencumbered 220 central park south which is 90% sold, $1 billion + retial JV preferred equity that attaches at very low LTV, etc. I'm not trying to be precise. I'm trying to illustrate that VNO's balance sheet is better than BPY's which I don't think is that disputable.

 

 

VNO trades for $30. PRe-corona NAV as calc'd by VNO is in the mid $90's, sell side mid $80's. Again 100-200% upside.

 

6% is in Houston (scary, have you seen HHC?), 7% is in DC (JBG Smith is 20-30% levered and is going to be HQ2's dominant landlord and trades at a 40% discount to NAV)

 

 

For sake of time I'm going to leave office.

Let's go to retail.

 

 

Macerich has $8.0 billion of debt at share according to their September presentation. I'm doing quick anlaysis so there could be a lot of adjustments. It's well-laddered and mostrly mortgages of the non-recourse single asset variety. I think NOI is about $860mm for a debt yield of 10.7% compared to BPY's retail debt yield of 8.0%. I conclude that BPY is more levered than MAC. MAC trades for $5. Pre-corona NAV was $40-$50 / share. Simon offered like $80 a few years back. To the extent that malls deserve to exist, MAC offers lots of upside.

 

I presume SPG has a better balance sheet than MAC, but I'm trying to cover as much of BPY in a limited amount of time.

 

I'm not going to address the LP investments other than to say that value-add/real estate opportunity funds carry 50-65% leverage, typically with short term floating rate leverage, and they use por-forma optimistic cap rates (the same ones used in all these NAV figures that get no respect in the public market). If you tried to secondary a brookfield real estate PE fund in the PE secondary market, I doubt you would get par. maybe 50-80 cents.

 

We then overlay all that with corporate level leverage.

 

I'll be clear in saying that I think BPY could return 100-200-300-400% and that it has the most upside of probably all of these at $7 / share. But I think you can create very similar assets at similar discounts with far lower leverage and better balance sheets.

 

To create a synthetica BPY: I'd buy VNO, BL, MAC/SPG, some canadian office REIT?, some multi-family REITs see thread), and I'd call up a PE secondary broker and buy brookfield's RE funds for lower than par (this is obviously not easy).

 

I always caution these kind of "look at a presentation for 10 minutes and draw a sweeping conclusion" but I just want BPY unitholders to think about the alternative.

 

So some 6 month accountability here.

 

Since I posted this, BPY has returned 105%

 

British Land as a proxy for London office is up 16% (other british RE REITs are down)

 

Vornado and SL Green as a proxy for NYC office have returned 6% and 23%

 

SPG and MAC as a proxy for malls/GGP hav returned 45-60%.

 

BPY has substantially outperformed all of them on a stock return basis. And that's not just because it fell more. BPY is down 16% YTD whereas SPG is down 53% MAC is down 70% and the NYC office reits are down 50%, london office REITs are down 30-40%.

 

BPY has managed to fall less and rebound more while carrying more leverage, losing more assets, etc.

 

Brookfield magic at work. Credit where it is due.

 

 

 

 

 

 

[Rod]

So I keep saying this, but I thought I'd put a little more thought / numbers around it. Please note that I'm not even taking BPY's corporate leverage into consideration here. My view is this: BPY should trade at a BIG discount to its comps. BPY has far higher balance sheet risk and is subject to a good bending over by BAM who will ultimately prioritize mothership value.

 

All operating metrics are pre-corona and backward looking.

 

BPY's NOI composition:

 

Core Office:

$1.3 billion of NOI,  $17 billion of debt (7.6% debt yield on a consolidated basis)

Office geographice breakdown:

 

Retail

$1.7 billion of NOI, $21 billion of debt (8.0% debt yield on a consolidated basis)

 

LP Investments: bunch of 50-60% levered value-add properties dependent on investment sales market for realization.

 

Going in cap rates to value retail and office: 4.7% and 5.3%.

 

Debt is 30% floating, 70% fixed and looks to be pretty well termed out.

 

 

Now let's see where all this stuff is located and what that looks like in comparable securities:

 

A full 20% of the office portfolio is in London. Where does London office trade in the public market?

 

As a comparable, I'll throw out British Land's office portfolio. BL does derive 40% of its value from retail so it's not a pure comp, but nevertheless, British Land's office portfolio is of similar quality to Brookfield's London exposure (97% occupied, Facebook is 9% of rents, centrally located at major transit hubs).

 

British Land has 3.7 billion pounds of debt (at 2.8% interest costs)  and is doing about 450-480mm pounds of annualized NOI equivalent (they call it "net rental income"). Notice the difference with BPY? British Land's NOI (let's use 450mm pounds): 450 / 3700 = 12% debt yield versus BPY's 7.6%. Now we could say "well BL has more retail...UK retail sucks". I would agree with that pushback but if you zero out BL's retail then BL leverage would be about the same as BPY's. Retail sucks, but NOI proabbly won't be zero. I therefore conclude that BRitish Land has materially less leverage than BPY.

 

British Land is perhaps slightly more "expensive" but still has 100-200% upside to a more normal 70-100% of NAV.  British Land trades for 311 pence versus last reported NAV of 850, about 36% of NAV. British Land is "cheap" to NAV on an absolute basis. Cap rates used for the NAV's are similarly optimistic to BPY's.

 

So that's 20% of the office portfolio. I'm sure there's a better british office REIT to compare to; please feel free to correct me.

 

 

25% of office NOI is in downton and midtown NYC. I urge anyone who owns BPY to go check out the VNO thread that I obnoxiously bump every few days. Let's take a look at VNO's balance sheet. Vornado has about $1 billion of office NOI at share and $200mm of retail NOI at share for total of $1.2 billion. By the least generous calculation Vornado has about $10 billion of debt ($5.6 billion of mortgages, $2.8 billion of unconsolidated share of mortgages, some minor corporate obligations). We could go as high as $11 if we count the preferreds. $1.2 billion / $10-$11 billion = 10-12% debt yield. Again, we find a comparable that carries far less leverage than BPY. I encourag anyone to take a close look at VNO's balance and realize that this is a very punitive way of calculating VNO's debt considering the $9 billion of unencumbered assets they own, $1 billion of cash on the balanche sheet, $ 1 billion of unencumbered 220 central park south which is 90% sold, $1 billion + retial JV preferred equity that attaches at very low LTV, etc. I'm not trying to be precise. I'm trying to illustrate that VNO's balance sheet is better than BPY's which I don't think is that disputable.

 

 

VNO trades for $30. PRe-corona NAV as calc'd by VNO is in the mid $90's, sell side mid $80's. Again 100-200% upside.

 

6% is in Houston (scary, have you seen HHC?), 7% is in DC (JBG Smith is 20-30% levered and is going to be HQ2's dominant landlord and trades at a 40% discount to NAV)

 

 

For sake of time I'm going to leave office.

Let's go to retail.

 

 

Macerich has $8.0 billion of debt at share according to their September presentation. I'm doing quick anlaysis so there could be a lot of adjustments. It's well-laddered and mostrly mortgages of the non-recourse single asset variety. I think NOI is about $860mm for a debt yield of 10.7% compared to BPY's retail debt yield of 8.0%. I conclude that BPY is more levered than MAC. MAC trades for $5. Pre-corona NAV was $40-$50 / share. Simon offered like $80 a few years back. To the extent that malls deserve to exist, MAC offers lots of upside.

 

I presume SPG has a better balance sheet than MAC, but I'm trying to cover as much of BPY in a limited amount of time.

 

I'm not going to address the LP investments other than to say that value-add/real estate opportunity funds carry 50-65% leverage, typically with short term floating rate leverage, and they use por-forma optimistic cap rates (the same ones used in all these NAV figures that get no respect in the public market). If you tried to secondary a brookfield real estate PE fund in the PE secondary market, I doubt you would get par. maybe 50-80 cents.

 

We then overlay all that with corporate level leverage.

 

I'll be clear in saying that I think BPY could return 100-200-300-400% and that it has the most upside of probably all of these at $7 / share. But I think you can create very similar assets at similar discounts with far lower leverage and better balance sheets.

 

To create a synthetica BPY: I'd buy VNO, BL, MAC/SPG, some canadian office REIT?, some multi-family REITs see thread), and I'd call up a PE secondary broker and buy brookfield's RE funds for lower than par (this is obviously not easy).

 

I always caution these kind of "look at a presentation for 10 minutes and draw a sweeping conclusion" but I just want BPY unitholders to think about the alternative.

 

So some 6 month accountability here.

 

Since I posted this, BPY has returned 105%

 

British Land as a proxy for London office is up 16% (other british RE REITs are down)

 

Vornado and SL Green as a proxy for NYC office have returned 6% and 23%

 

SPG and MAC as a proxy for malls/GGP hav returned 45-60%.

 

BPY has substantially outperformed all of them on a stock return basis. And that's not just because it fell more. BPY is down 16% YTD whereas SPG is down 53% MAC is down 70% and the NYC office reits are down 50%, london office REITs are down 30-40%.

 

BPY has managed to fall less and rebound more while carrying more leverage, losing more assets, etc.

 

Brookfield magic at work. Credit where it is due.

 

Do you have any idea why BPY has done so much better?

[thepupil]

- they haven't cut the divvy

- they bought stock (BAM) and brought in an significant institutional partner in the tender

- small float w/ significant short interest

- different shareholder bases. REIT dedicated shareholders don't own BPY, top shareholders are BAM, Royal Bank of Canada, CIBC. generally long and strong canadians and aussies on the register, whereas the US REITs are indexes, REIT dedicated, dumb value schmucks like me. Future Fund thinks and acts differently than Cohen and Steers and vanguard ETF.

- longer than market lease term in NYC, but terrible retail fundamental performance, don't really think the difference is fundamental

- they're better at IR

- speculate that BPY in small size is a way to get long a levered option/better for near term bounce?, whereas the others are more for longer term investment?

- faith in BAM's ability to monetize winners, take advantage of volatility and perception that others can't or won't do that

 

all guesses.

 

[Gregmal]

So I keep saying this, but I thought I'd put a little more thought / numbers around it. Please note that I'm not even taking BPY's corporate leverage into consideration here. My view is this: BPY should trade at a BIG discount to its comps. BPY has far higher balance sheet risk and is subject to a good bending over by BAM who will ultimately prioritize mothership value.

 

All operating metrics are pre-corona and backward looking.

 

BPY's NOI composition:

 

Core Office:

$1.3 billion of NOI,  $17 billion of debt (7.6% debt yield on a consolidated basis)

Office geographice breakdown:

 

Retail

$1.7 billion of NOI, $21 billion of debt (8.0% debt yield on a consolidated basis)

 

LP Investments: bunch of 50-60% levered value-add properties dependent on investment sales market for realization.

 

Going in cap rates to value retail and office: 4.7% and 5.3%.

 

Debt is 30% floating, 70% fixed and looks to be pretty well termed out.

 

 

Now let's see where all this stuff is located and what that looks like in comparable securities:

 

A full 20% of the office portfolio is in London. Where does London office trade in the public market?

 

As a comparable, I'll throw out British Land's office portfolio. BL does derive 40% of its value from retail so it's not a pure comp, but nevertheless, British Land's office portfolio is of similar quality to Brookfield's London exposure (97% occupied, Facebook is 9% of rents, centrally located at major transit hubs).

 

British Land has 3.7 billion pounds of debt (at 2.8% interest costs)  and is doing about 450-480mm pounds of annualized NOI equivalent (they call it "net rental income"). Notice the difference with BPY? British Land's NOI (let's use 450mm pounds): 450 / 3700 = 12% debt yield versus BPY's 7.6%. Now we could say "well BL has more retail...UK retail sucks". I would agree with that pushback but if you zero out BL's retail then BL leverage would be about the same as BPY's. Retail sucks, but NOI proabbly won't be zero. I therefore conclude that BRitish Land has materially less leverage than BPY.

 

British Land is perhaps slightly more "expensive" but still has 100-200% upside to a more normal 70-100% of NAV.  British Land trades for 311 pence versus last reported NAV of 850, about 36% of NAV. British Land is "cheap" to NAV on an absolute basis. Cap rates used for the NAV's are similarly optimistic to BPY's.

 

So that's 20% of the office portfolio. I'm sure there's a better british office REIT to compare to; please feel free to correct me.

 

 

25% of office NOI is in downton and midtown NYC. I urge anyone who owns BPY to go check out the VNO thread that I obnoxiously bump every few days. Let's take a look at VNO's balance sheet. Vornado has about $1 billion of office NOI at share and $200mm of retail NOI at share for total of $1.2 billion. By the least generous calculation Vornado has about $10 billion of debt ($5.6 billion of mortgages, $2.8 billion of unconsolidated share of mortgages, some minor corporate obligations). We could go as high as $11 if we count the preferreds. $1.2 billion / $10-$11 billion = 10-12% debt yield. Again, we find a comparable that carries far less leverage than BPY. I encourag anyone to take a close look at VNO's balance and realize that this is a very punitive way of calculating VNO's debt considering the $9 billion of unencumbered assets they own, $1 billion of cash on the balanche sheet, $ 1 billion of unencumbered 220 central park south which is 90% sold, $1 billion + retial JV preferred equity that attaches at very low LTV, etc. I'm not trying to be precise. I'm trying to illustrate that VNO's balance sheet is better than BPY's which I don't think is that disputable.

 

 

VNO trades for $30. PRe-corona NAV as calc'd by VNO is in the mid $90's, sell side mid $80's. Again 100-200% upside.

 

6% is in Houston (scary, have you seen HHC?), 7% is in DC (JBG Smith is 20-30% levered and is going to be HQ2's dominant landlord and trades at a 40% discount to NAV)

 

 

For sake of time I'm going to leave office.

Let's go to retail.

 

 

Macerich has $8.0 billion of debt at share according to their September presentation. I'm doing quick anlaysis so there could be a lot of adjustments. It's well-laddered and mostrly mortgages of the non-recourse single asset variety. I think NOI is about $860mm for a debt yield of 10.7% compared to BPY's retail debt yield of 8.0%. I conclude that BPY is more levered than MAC. MAC trades for $5. Pre-corona NAV was $40-$50 / share. Simon offered like $80 a few years back. To the extent that malls deserve to exist, MAC offers lots of upside.

 

I presume SPG has a better balance sheet than MAC, but I'm trying to cover as much of BPY in a limited amount of time.

 

I'm not going to address the LP investments other than to say that value-add/real estate opportunity funds carry 50-65% leverage, typically with short term floating rate leverage, and they use por-forma optimistic cap rates (the same ones used in all these NAV figures that get no respect in the public market). If you tried to secondary a brookfield real estate PE fund in the PE secondary market, I doubt you would get par. maybe 50-80 cents.

 

We then overlay all that with corporate level leverage.

 

I'll be clear in saying that I think BPY could return 100-200-300-400% and that it has the most upside of probably all of these at $7 / share. But I think you can create very similar assets at similar discounts with far lower leverage and better balance sheets.

 

To create a synthetica BPY: I'd buy VNO, BL, MAC/SPG, some canadian office REIT?, some multi-family REITs see thread), and I'd call up a PE secondary broker and buy brookfield's RE funds for lower than par (this is obviously not easy).

 

I always caution these kind of "look at a presentation for 10 minutes and draw a sweeping conclusion" but I just want BPY unitholders to think about the alternative.

 

So some 6 month accountability here.

 

Since I posted this, BPY has returned 105%

 

British Land as a proxy for London office is up 16% (other british RE REITs are down)

 

Vornado and SL Green as a proxy for NYC office have returned 6% and 23%

 

SPG and MAC as a proxy for malls/GGP hav returned 45-60%.

 

BPY has substantially outperformed all of them on a stock return basis. And that's not just because it fell more. BPY is down 16% YTD whereas SPG is down 53% MAC is down 70% and the NYC office reits are down 50%, london office REITs are down 30-40%.

 

BPY has managed to fall less and rebound more while carrying more leverage, losing more assets, etc.

 

Brookfield magic at work. Credit where it is due.

 

Do you have any idea why BPY has done so much better?

 

Yea this is downright stunning.

[villainx]

So I messed up not holding on?  Or not adding, I guess more precisely.

 

:(

[petec]

Did it also start cheaper? My recollection is that it did.

[thepupil]

Did it also start cheaper? My recollection is that it did.

 

not drastically so. If you use a mid-high 20's pre-covid BPY NAV, the NAV multiples of the others to start the year were pretty similar.

 

 

[james22]

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!

 

I think if one likes BAM there is no reason as to why not own Blackstone.

 

Thanks!

[ValueMaven]

Blackstone to Buy Simply Self Storage for About $1.2 Billion

 

About 2.5x their money in 3 years ... bought in 2016 for $830M.  Sold part of it for $1.3B in 2018, sold the rest for $1.2B

[petec]

I never understand these PE to PE transactions. Blackstone buys storage from Brookfield, Brookfield buys Cheniere from Blackstone. I assume it’s because partners needs exits rather than because one can extract more value than the other.

[thepupil]

I never understand these PE to PE transactions. Blackstone buys storage from Brookfield, Brookfield buys Cheniere from Blackstone. I assume it’s because partners needs exits rather than because one can extract more value than the other.

 

the PE funds have sold a certain IRR/duration profile of investment to LP's. I assume that this is held in Brookfield's BSREP / opportunistic bucket which is meant to be low duration high IRR (and in this case very high MOIC as well). and is being bought by Blackstone's non-traded REIT which is sold (I am assuming) as a long-term holder of income properties. So I'd say this is more akin to Brookfield oppportunistic "PE approach" selling to a "core/income property" type of entity it's jsut that we associate Blackstone with the same type of opportunistic/value add as what Brookfield did here.

 

In general, I agree with you. I've seen LP portfolios invested in different PE firms where you are trading around the same company multiple times to different PE firms in the portfolio and paying carry at each trade.

[petec]

So I'd say this is more akin to Brookfield oppportunistic "PE approach" selling to a "core/income property" type of entity it's jsut that we associate Blackstone with the same type of opportunistic/value add as what Brookfield did here.

 

Good point. Do either ever sell from opportunistic to core within their own universes?

[Xerxes]

Thanks. My read of that would be that they think

1) Genworth’s float can be invested in BAM/OAK funds, generating both higher returns for Genworth and fees to BAM;

2) Genworth profits can be dividended to BBU to provide cash flow to reinvest;

3) they plan to hold it for a while.

 

That said,

4) I don’t think they can realistically use Genworth’s float to buy investments for BBU and I don’t think BAM has any incentive to do that;

5) All the listed subsids have capital recycling as a core driver. BBU is no different. They’ll sell this at the best time to optimise the IRR and recycle into the next asset that can be bought for TBV and then improved. This is how they become self-funding - ever larger realizations, not investing Genworth’s float.

 

Obviously I could be wrong!

 

 

speaking of which,

 

https://www.bnnbloomberg.ca/brookfield-business-partners-to-buy-genworth-mi-canada-1.1513046

 

"Brookfield Business Partners LP has signed a deal to buy the remaining interest in Genworth MI Canada Inc. that it does not already own in an offer that values the company at about $3.8 billion.

Brookfield owns a 57 per cent stake in the residential mortgage insurance company.

Under the terms of the agreement, Brookfield will pay $43.50 per share for the shares it does not hold.

Genworth shares closed at $35.58 on the Toronto Stock Exchange on Friday.

The deal requires approval by a two-thirds majority vote by shareholders, as well as the approval by a simple majority of votes cast by minority shareholders, which excludes Brookfield.

 

Genworth MI Canada rebranded earlier this month and has been operating under the Sagen MI Canada banner."

[chrispy]

Reviewing all the companies on my 'big board' it jumped out to me how much BAM is down.  One could argue whether the 52H was correct or if today is correct but;

 

Nearly as much as BPY and significantly more then KKR/BX.  For nothing more then comparison purposes, more then MKL, much more then HEI, and a similar amount to TDG in a difficult year.

 

Ticker 52H Today % Decrease

BAM $45.61 $30.96 -32%

BPY $20.13 $13.52 -33%

KKR $37.97 $34.64 -9%

BX $64.97 $49.53 -24%

MKL $1,347 $966.00 -28%

HEI $134.45 $106.92 -20%

TDG $673.51 $458.64 -32%

[StevieV]

I take some issue with the multiples used in the BAM plan value, particularly the 25x on FRE.  However, I believe the framework is reasonable.  Even if you use significantly more conservative multiples you get a value above today's price.  Maybe FRE isn't worth 20x, but it should be worth at least 15x.

 

Assuming the business doesn't have big stumbles, seems like a reasonable/good price here.

 

 

[Rod]

I take some issue with the multiples used in the BAM plan value, particularly the 25x on FRE.  However, I believe the framework is reasonable.  Even if you use significantly more conservative multiples you get a value above today's price.  Maybe FRE isn't worth 20x, but it should be worth at least 15x.

 

Assuming the business doesn't have big stumbles, seems like a reasonable/good price here.

 

A very average, non-growing business might be worth 15x earnings. I think BAM's asset management business is far above average and has plenty of growth.

[petec]

It’s arguably a spectacular business with multiple moats and huge tailwinds. I am very happy to own it at this price.

[StevieV]

I probably wrote my post a bit to cautiously.  I recently bought some shares at $33+ and had a tough time plugging in multiples that got anything lower than a $35 value.

 

I do still view 25X as a bit rich.  However, even if you put a 15X multiple on the FRE, you get a plan value of $43-44, I believe.

 

I have seen some arguments with KKR about taking a discount to the invested capital.  I don't think a discount is warranted for BAM (or KKR for that matter), but let's say you discount book to 90 or 80% AND put a 15X multiple on the FRE.  The adjusted plan value would still be above today's price.

 

I don't think carried interest is worth less than 10X, unless the company fails to generate similar or better carried interest in the future.  But, of course, can also adjust that multiple.

 

Bottom line, the only way to get today's price or lower is to believe that something bad will happen to the business.  One or more of: the invested capital won't compound at good rates; FRE won't grow; success in generating carried interest will dry up.  As you suggest, it is a good business with tailwinds and so I don't expect any of those things.

 

[Xerxes]

Another way to look at.

 

If BYP was not part of BAM, (i.e. didn't have access to its management pipeline, didn't have access to its low cost of capital, stewardship, brand, network etc. (net of the benefit of not having BAM (i.e. no management fee, more direct management alignment etc.))),.... how well BYP would have performed in this current crisis compared to what it did.

 

if one can quantify that 'delta'* into something positive and meaningful, than perhaps one can be closer to a low 20x multiple than to an average 15x multiple when it comes to BAM earning multiples.

 

 

*value of BAM stewardship as an asset manager

[ValueMaven]

Already own a TON of BAM - and agree the current prices are dirt cheap.  It's underperformed the subs recently which really makes no sense.  I'm looking at expanding next into BIP and have been doing specific work on BIPC (bip-C) as I am a taxable US investor. 

[petec]

Just started doing some work on Legal and General in the UK. First impressions are that it would be an interesting fit for BAM. Obviously this is idle speculation but for fun:

- Investment Management and Capital Investment divisions could go to BAM, adding $1.2tn of low margin but growing institutional AUM, some new real asset platforms, and some synergies especially in international growth/relationships (Which BAM have and LG want).

- Retirement and Insurance divisions could be merged and spun into a 5th subsidiary, giving BAM a head start in pension risk transfer (which Flatt said was the focus of the insurance growth effort).

 

They have a small collaboration with Brookfield Annuity Company (me neither) to enter the pension risk transfer business in Canada.

 

Trades for 6.5x earnings and a 9% yield.