BAM - Brookfield Asset Management

[Shane]

Looking back a year...I find it absolutely amusing that Flatt was dead on...when EVERYONE was at best like "yo guys just talking his book"...and at worst people thought he was lying....so far, he's nailed it. Office hasn't done too poorly and retail/hospitality especially has killed it since the vaccine. Bruce is bossman.

 

Disclosure, I too was quite skeptical of his enthusiasm, albeit investing in a lot of the same type of stuff. Long live the king.

 

I'm actually mulling the idea of buying an apartment in Boston right now and have been trying to get a handle on how the remote work environment might look after the pandemic for the obvious implications.  I think you've probably come across more useful data/articles than I have been able to find.  Can you explain or share some info on why you're so confident about his call on offices and retail in urban centers?  I'm still a little worried demand might be lower for an extended period of time.  Regarding offices - people have long-term contracts so it was never going to show up in a big way in the near term unless we got a ton of bankruptcies.  Curious what you're seeing?

[Gregmal]

If you look at whats happened with a lot of assets, I think its a very real scenario where you can have secular headwinds and as you stated, lower occupancy rates, while still seeing much higher asset values. Especially for hard assets. So I would just raise the question, is it possible your fears come true but that buying these assets at certain prices still provided both a margin of safety but also just in general, a satisfactory return profile?

[Shane]

If you look at whats happened with a lot of assets, I think its a very real scenario where you can have secular headwinds and as you stated, lower occupancy rates, while still seeing much higher asset values. Especially for hard assets. So I would just raise the question, is it possible your fears come true but that buying these assets at certain prices still provided both a margin of safety but also just in general, a satisfactory return profile?

 

All situation specific but nearly all urban center residential properties in Boston and NY wouldn't be close to collecting rent that would cover your fixed costs assuming 80% leverage.  Rent is down 20% this year in Boston and it was already not cash flowing.  So while possible I wouldn't be confident in it being probable over a 5-7 year period without rental growth.

[Gregmal]

I think a lot is situation dependent and definitely very area dependent. Im not personally a huge office bull. I think if you're willing to take the office risk you're better off just betting on well located retail.

 

Boston for instance has a huge life sciences crowd....thats not going anywhere. NY financial district? LOLz

 

But generally speaking I like Flatt and BAM is a jockey bet for me. They have enough on hand to made things work as everyone just saw masterfully executed with BPY.

 

Could the whole thing topple over? Its always possible. But again I think you have to account for monetary policy being accommodative and I have a decent bit of confidence in a return to normal. After the easy money was made in coastal urban office in November I basically exited most of that stuff and just swung some of the allocation into BAM. Lazily, I'll let those guys handle it and more onto greener pastures myself, as far as company or asset specific investments goes.

[fareastwarriors]

If you look at whats happened with a lot of assets, I think its a very real scenario where you can have secular headwinds and as you stated, lower occupancy rates, while still seeing much higher asset values. Especially for hard assets. So I would just raise the question, is it possible your fears come true but that buying these assets at certain prices still provided both a margin of safety but also just in general, a satisfactory return profile?

 

All situation specific but nearly all urban center residential properties in Boston and NY wouldn't be close to collecting rent that would cover your fixed costs assuming 80% leverage.  Rent is down 20% this year in Boston and it was already not cash flowing.  So while possible I wouldn't be confident in it being probable over a 5-7 year period without rental growth.

 

I am in SF Bay Area and own multi-properties. My strategy has been to buy at least cash flow neutral properties. While I collect rent growth slowly over the years, the appreciation is the real gravy. Even with general rent compression over past year or so, my rents are still slightly below market.

 

Do you really want to be a landlord? For me, there is no point if you just plan to own 1 or 2 properties especially in tenant-friendly cities/states. It's too hard. Real estate is about scale.

[ValueMaven]

So it looks like the deal for BPY will be finalized shortly.  However this is troubling to me as a BAM shareholder: 

Lazard Frères & Co. LLC (“Lazard”), acting as independent valuator and financial adviser to the special committee, has provided an opinion to the special committee that, as of March 31, 2021 and based upon their analysis and subject to various assumptions, qualifications and limitations to be set forth in its written valuation report, in addition to other factors that it considered relevant, the fair market value of a BPY unit was in the range of $14.00 to $18.50, 

 

Yet BAM and BPY management were telling us all along BPY was worth north of $25+ ??  What gives...

[Gregmal]

To be fair, theres plenty of people who thought it was or should be 0. I dont think anyone believed $25 either. Just guys talking their book/product. 

[thepupil]

agree with Greg. 

- Real Estate NAV's get no respect in the public market, particularly for urban office and malls. 

- BPY is / was more levered than peers. public market hates leverage. no discount for leverage in the NAV

- Many think BPY is worthless. I don't. But some do. hatred for malls deserves some discount. the private market on malls no longer exists since BAM / SPG/ MAC now own all the A malls and B malls have gone to ("will it be a 5 cent recovery or 30 cent recovery on the CMBS")

- overall, BAM supported BPY shareholders throughout rona. BAM took its pound of flesh by keeping a dividend that shouldn't exist (which issued shares to BAM), but also supported it by arranging big placements to the aussies and are supporting it with this takeout. it doesn't make sense for BAM to do what it needs to do with BPY in public (give back tons of keys on the bad, support/redevelop and invest in the good)

- BAM is a PE firm. PE firms mark their assets generously and promotionally. one should sanity check every BAM line item. They are going to do what's in their and BAM's best interest. I own some BAM. It got cheap enough for me to ignore some it its less savory elements. But if you think that every line item on the NAV build up is conservative or intellectually honest, you need to look again! 

 

[MattR]

5 hours ago, thepupil said:

agree with Greg. 

- Real Estate NAV's get no respect in the public market, particularly for urban office and malls. 

- BPY is / was more levered than peers. public market hates leverage. no discount for leverage in the NAV

- Many think BPY is worthless. I don't. But some do. hatred for malls deserves some discount. the private market on malls no longer exists since BAM / SPG/ MAC now own all the A malls and B malls have gone to ("will it be a 5 cent recovery or 30 cent recovery on the CMBS")

- overall, BAM supported BPY shareholders throughout rona. BAM took its pound of flesh by keeping a dividend that shouldn't exist (which issued shares to BAM), but also supported it by arranging big placements to the aussies and are supporting it with this takeout. it doesn't make sense for BAM to do what it needs to do with BPY in public (give back tons of keys on the bad, support/redevelop and invest in the good)

- BAM is a PE firm. PE firms mark their assets generously and promotionally. one should sanity check every BAM line item. They are going to do what's in their and BAM's best interest. I own some BAM. It got cheap enough for me to ignore some it its less savory elements. But if you think that every line item on the NAV build up is conservative or intellectually honest, you need to look again! 

 

What would you put as fair value on BAM. I read through their earnings and annual reports, yet is seems impossible to tell their fair value due to their complicated structure.

[thepupil]

short answer is of all the companies I own, I probably have the most squishy view of value on BAM. I think one can take their "plan value" and analyze the credibility thereof, haircut some things as they wish (15-20x multiple on mgt fees vs 25x for example, much lower multiple on carry) and get to something close to the current stock price. biggest question is "is the fundraising franchise intact" and i think the answer is a resounding yes. the fundraising franchise will continue to feed BAM fees and capital which can be used to plug any holes in the invested capital created from rona (BPY) or offset any market overvaluation. I have a small position bought mostly in mid $30's. 

maybe if stock keeps going up, I'll do more rigorous work, but when this was mid $30's I think you only had to take a view on the fundraising franchise, because if shit hit the fan on the invested capital side of things with an intact fundraising franchise, then BAM would aggressively be buying everything at great prices. Since shit hasn't really hit the fan, BAM will still aggressively be buying everything, just not at great prices, but the asset values are more intact. if the fundraising franchise becomes impaired AND you have problems at multiple big portions of the invested capital, then you could lose money. I don't see evidence of that. 

in some cases, I go super deep/detailed. in others, I don't. others with bigger positions, greater conviction, who have done more work, over longer hold periods can provide more additive commentary. 

Edited April 2, 2021 by thepupil

[ValueMaven]

How could he make such a basic mistake?  

https://financialpost.com/financial-times/mark-carneys-big-stumble-at-brookfield-intensifies-focus-on-net-zero-emissions-claims?utm_medium=Social&utm_source=Twitter#Echobox=1617985247

[petec]

Buying more retail:

https://www.hammerson.com/media/press-releases/hammerson-disposes-of-retail-parks-portfolio-brookfield/

[ValueMaven]

BIP is going activist with this Inter-Pipeline transaction.  Lots of interesting things to read here

BAM 2.0 & Co activist investors going forward?  Seems like it

[Xerxes]

While Prem is not selling his Resolute into the rally, Brookfield is .... $1.25 billion worth 

Brookfield sells $1.25-billion of West Fraser Timber shares as lumber prices soar - The Globe and Mail

"The sales – totalling 14.8 million shares – have cut Brookfield’s ownership of West Fraser from nearly 20 per cent to 7.3 per cent, according to Brookfield’s filings with securities regulators. In the past two weeks, Brookfield has sold nearly 1.24 million shares for $128-million; in a single day, April 1, it sold more than six million shares for $517-million. 

Brookfield is a new shareholder of West Fraser: It received its shares on Feb. 1, when West Fraser bought Norbord Inc. in an all-stock transaction. Brookfield owned 43 per cent of Norbord, and had three executives on the Norbord board, including former Brookfield chief executive Jack Cockwell.

But in many ways, the sales represent an unwinding of one of Brookfield’s longest-held positions.

Brookfield can trace its stake back decades, when it was called Brascan Financial Corp. and it held a major position in a resources company called Noranda Inc. In 1998, Noranda spun off its building-products division, calling it Nexfor Inc. In 2004, Nexfor did another spinoff and renamed itself Norbord."

Edited April 30, 2021 by Xerxes

[Gregmal]

Yea well thats the difference between Brookfield and Fairfax. A bit back I was looking at putting money in the space, and this, as well as a bunch of other reasons led to me to conclude Id rather pay FV-ish for BAM than deal with a cheap FRFH. 

Prem seems to mimic Buffetts buy and hold forever approach. The problem is that he applies it to crapcos. When BAM buys a crapco, they at least finance it creatively and pull their principle quickly. 

[Xerxes]

Gregmal, 

i may be totally off, but i think (based on past interviews) the one person Prem Watsa has been using as a model is John Templeton; sure Fairfax, the company, the model is based on Berkshire, but the investment style philosophy is that of john Templeton.

Not that I know the difference between John Templeton and Warren Buffet, but just my observation.

Bruce is the other extreme. The unemotional accountant who doesn't fall in love with investments. His Excel spreadsheets and the NPV output are his North Star. 

Edited April 30, 2021 by Xerxes

[ValueMaven]

BAM is also highly unique in its operating experience with turnarounds as well.  More so then typical P/E investors.  Look at what they are doing with Westinghouse.  That is turning out to be a massive homerun right now.  I'm still very optimistic here still - however the leverage, and aggressive assumptions + complexity is something I try to balance out.  Havent sold a share ever however.

[Xerxes]

7 minutes ago, ValueMaven said:

BAM is also highly unique in its operating experience with turnarounds as well.  More so then typical P/E investors.  Look at what they are doing with Westinghouse.  That is turning out to be a massive homerun right now.  I'm still very optimistic here still - however the leverage, and aggressive assumptions + complexity is something I try to balance out.  Havent sold a share ever however.

VM,

Most of the value of Westinghouse is in Brookfield Business Partners. Do you own the flagship BAM, do you tend to give it a bit of PE tilt by having Brookfield Business Partners directly.

[cubsfan]

Anybody know what BAM paid for their Timber stake?

[petec]

1 hour ago, Gregmal said:

Yea well thats the difference between Brookfield and Fairfax. A bit back I was looking at putting money in the space, and this, as well as a bunch of other reasons led to me to conclude Id rather pay FV-ish for BAM than deal with a cheap FRFH. 

Prem seems to mimic Buffetts buy and hold forever approach. The problem is that he applies it to crapcos. When BAM buys a crapco, they at least finance it creatively and pull their principle quickly. 

Actually I’m pretty sure BAM held Norbord longer than FFH held Resolute. 

[Gregmal]

For the specific asset I think they did. Just in general though BAM has done a good job calculating and managing risks. Whereas I remember buying and selling RFP in like 2013 and the main hype generator around the investment was "ooh Prem Watsa/FFH"...and now almost a decade later its like "oh wow RFP is on a tear!"...to like $12 lol which is still down substantially from those levels. And then Blackberry its like "oh well if you take his $30 cost and add in this and adjust for the converts, etc...maybe he made a bit of money"...after like half a decade. And then on top of it, you get these retail investor driven gifts, where everyone and their mother know you should be selling....and then there's Prem. And its just pathetic and something to appreciate not having to worry about with BAM. Bruce gets his number he's out. Plain and simple, cut and dry. 

[petec]

7 minutes ago, Gregmal said:

For the specific asset I think they did. Just in general though BAM has done a good job calculating and managing risks. Whereas I remember buying and selling RFP in like 2013 and the main hype generator around the investment was "ooh Prem Watsa/FFH"...and now almost a decade later its like "oh wow RFP is on a tear!"...to like $12 lol which is still down substantially from those levels. And then Blackberry its like "oh well if you take his $30 cost and add in this and adjust for the converts, etc...maybe he made a bit of money"...after like half a decade. And then on top of it, you get these retail investor driven gifts, where everyone and their mother know you should be selling....and then there's Prem. And its just pathetic and something to appreciate not having to worry about with BAM. Bruce gets his number he's out. Plain and simple, cut and dry. 

Yes, I think that is substantially fair. Sadly I think BB has been longer than half a decade. That said, I think Prem often gets out when he gets his number (BKIR). It’s just that he hasn’t often got it in the last few years.

[Xerxes]

36 minutes ago, cubsfan said:

Anybody know what BAM paid for their Timber stake?

Here is the rest of the article: 

It doesn't have the initial cost. In 2002, it was said to be valued at $1.88 billion and was than a whopping 6% of the company. I think we can call that a successful pivot out of resources sector. It went through share-split and few other things, so share count is not very useful and there was another transaction in 2013. Bruce would be best to capture the historical arc of Brookfield involvement in timer in his next shareholder letter for the Q1 earning. 

Brookfield's $3.68-billion sale spotlights new interest in lumber sector - The Globe and Mail 

"In a March, 2002, interview with The Globe and Mail, newly appointed Brascan CEO Bruce Flatt said the company would focus on three “stable” core industries: real estate, hydroelectricity and financial services. The plan seemed to leave little room for its Noranda and Nexfor stakes, which, at $1.88-billion, represented about 6 per cent of the company and were combining to give Brascan $100-million a year in dividend income. Mr. Flatt – who continues to serve today as Brookfield CEO – told The Globe in 2002 he had “absolutely no intention” of selling the resource companies during what was then a cyclical downturn in commodity prices, but he did not rule out selling the two companies over the long term. (In 2005, Noranda merged with Falconbridge Ltd. and took the latter’s name; it was acquired by Xstrata Ltd. in 2006, which was then acquired by Glencore PLC in 2013.)

Indeed, Brascan – soon renamed Brookfield – rode through several cycles with Nexfor/Norbord. It was a shareholder of Norbord spinoff Fraser Papers Inc. when it sought bankruptcy protection in 2009 during the financial crisis. Norbord itself had to do a 1-for-10 reverse split in October, 2009. (Companies do a reverse split, where stockholders receive fewer shares with a higher per-share price, to avoid getting classified as a penny stock.)

Since that time, however, timber stocks have done well. West Fraser Timber is up 675 per cent since the reverse split, better than 80 per cent of the companies on the S&P/TSX Composite that have been trading over that period.

When Norbord shareholders agreed to the sale to West Fraser last November, West Fraser shares traded at about $73. They closed Thursday at $95.53, and hit a high of $109.25 on April 19.

Brookfield says in its securities filings that it started selling on Feb. 17 with a sale of 163,377 shares at an average price of $90.01. Some of its mid-April sales were at prices above $100. All told, the average sales price was just above $85. 

Brookfield also said in one of its filings that it has entered a hedging transaction for an additional 5.16 million West Fraser shares. While it still technically holds those shares, the transaction has effectively eliminated its economic ownership of them by transferring the risks, and potential upside, to others. With that additional deal, it has cut its economic stake to just over 3.5 million shares, worth $336-million."

[Xerxes]

"We issued an inaugural $500 million green bond in April with an interest rate of 2.724% for 10 years. This is the lowest coupon we have ever paid for a 10-year term. The proceeds will be used for green initiatives, but to keep our debt unchanged we have called approximately $500 million of 2023 bonds. The net result is that we have extended the duration of our debt and lowered the average interest rates."

Is that like sort of "greenwashing" ... money is money

"Therefore, in the last quarter of 2020 and first quarter of 2021, we harvested substantial cash through asset sales – resulting in $19 billion returned to clients and $5 billion added to our balance sheet, with most of these sales in excess of our view of long term value, and almost all in excess of IFRS values."

Not bad

Edited May 14, 2021 by Xerxes

[ValueMaven]

mr market is finally - and correctly I might add - realizing that this is a defensive-aggressive reopening name