Free 7-day Trial
All Articles and Columns »

Brookfield – Real Assets Real Returns

I have been following Brookfield Asset Management (BAM) for the last three years, and I like their approach of investing in long-lasting real assets with contracted cash flows. With interest rates likely to rise in the long term and higher inflation most probable, I decided to take a closer look at BAM at current valuation to see if it is a good candidate to add to my position.

I) The Record

Brookfield Asset Management (BAM) has provided a 19% return per year over the last 20 years. This is very impressive performance by any standard. Shares ofBrookfield Asset Management are trading around $35 as of early June 2013. Shares traded at a price of $41 in 2007 and fell to a price of $11 in March 2009 where shares of all real estate related companies were being punished. BAM invested significant capital during the 2009 to 2012 period and has grown the net asset value (NAV) per share from $26.5 in 2008 to $40 by December 2012.

83713335.jpg

2097379413.jpg

II) Business and History

As per the company website:

“Brookfield is a global alternative asset manager with over $175 billion in assets under management. We have over a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity.

On behalf of our clients and shareholders, we own and manage one of the largest portfolios of premier office properties and renewable power generating facilities as well as long-life infrastructure assets that include utilities, transport and energy and timberlands in North and South America, Australasia and Europe.

We invest our own capital alongside our clients and partners in these high quality assets, ensuring our interests are aligned. Our assets are held through a growing portfolio of private funds and public, listed entities. We are proud of our track record for achieving strong risk-adjusted returns for our clients, partners and shareholders across all market conditions.”

1615862056.jpg

1438219093.jpg

925883140.jpg

1057512597.jpg

III) Operations and Competitive Advantages

Information from the company website about operations is as follows:

“Brookfield operations are categorized in five segments:

Property Overview

1096152707.jpg

Renewable Power & Infrastructure Overview

[/b]534133997.jpg

1. Property

Brookfield Property Group is Brookfield’s most significant investment platform, made up of our sector-specific operating platforms in the office, retail, multi-family, industrial and hotel asset classes. With approximately $103 billion of property assets under management and interests in over 300 million square feet of commercial space globally, we are one of the world’s largest and most sophisticated owners, operators and investors in property. Brookfield has built its property platforms through the integration of formative portfolio acquisitions and single asset transactions over many decades. Our collaborative and disciplined approach to investing has been successful throughout ever-changingmarket cycles. Having invested over $16 billion of equity capital into real estate transactions since 1989, we have a significant track record of delivering strong, risk-adjusted returns to our investors in our many listed company and private partnership vehicles. [b]
1023648879.jpg

2. Renewable Power

With renewable power assets under management valued at approximately $19 billion in North and South America, Brookfield is one of the largest independent owner-operators of high quality, low cost, renewable, hydroelectric and wind power generating facilities. Backed by 100 years of operating experience, our facilities are environmentally friendly, long-life assets that generate stable, sustainable cash flows, and require minimal ongoing capital expenditures. Recognized for our ability to optimize the value of our portfolio through disciplined management and innovative financing, we continue to expand our operations through acquisitions and new development projects, including a newly constructed wind farm in Northern Ontario, the largest of its kind in Canada.

Today we have 185 hydro and wind generation facilities with approximately 5,300 megawatts of capacity.

1749017335.jpg

3. Infrastructure

Brookfield invests globally in long-life, infrastructure assets that generate stable and growing cash flows with high barriers to entry and low maintenance capital requirements.

Infrastructure is recognized as an important asset class critical to the support sustainable economic development with institutional investors increasingly attracted to this sector, because of its relatively low volatility and solid returns. Brookfield has over 100 years of experience owning and operating infrastructure assets. Our portfolio under management includes direct and indirect ownership interests in utilities, transport, energy and timberlands in North and South America, Europe and Australasia.

1440826205.jpg

(3.1) Utilities

Utilities transmit and distribute essential products and services such as electricity, natural gas and water to communities on a global basis. Brookfield has owned and operated various utilities businesses for over 100 years in both North and South America. Today, our portfolio of utilities under management includes electricity transmission, natural gas transmission, distribution and storage services in North America, Australasia and Europe. As an investment, utilities represent a unique asset class. Due to their natural monopoly status, utilities are highly regulated and produce stable cash flows with inflationary growth. Brookfield’s portfolio also benefits from diversity across regulatory regimes with significant opportunities to invest in system expansions at attractive returns.

(3.2) Energy

Brookfield’s energy business is comprised of systems that provide energy transmission, distribution and storage services. The energy infrastructure portfolio includes high quality assets that generate stable revenues, supported by long-term contracts and customer relationships. Brookfield’s holdings include one of the largest natural gas transmission and pipeline systems in the U.S., unregulated natural gas and liquid propane gas (“LPG”) distribution operations in Australia and the UK, and significant natural gas storage capacity in Alberta and the continental U.S.

(3.3) Transport

Brookfield’s transport assets are essential infrastructure networks that move freight, bulk commodities and passengers. Key attributes of our holdings including high barriers to entry, stable revenues supported by long-term contracts or customer relationships and the ability to benefit from increasing customer demand. Assets in this portfolio include toll roads in South America, ports in Australia and Europe and an Australian railroad.

(3.4) Timberlands

Brookfield has an over 35-year track record of owning and operating timberlands in North and South America that generate strong, sustainable cash flows. Our portfolio of timberlands under management is approximately 2.6 million acres and we have a track record for sustainable management of this resource. We believe that our timberland operations have a number of attractive attributes that position us well for continued strong and growing cash flows:

(3.5) Agrilands

Over three decades, Brookfield has built a agricultural development business in Brazil that now encompasses over 540,000 acres of agrilands. We invest our own capital and that of our investment partners in this sector. Our approach is to acquire cattle ranches and, over time, convert this land to more productive uses, typically soya crops as a first step, then sugar cane. This conversion process has generated significant increases in the value of our holdings, and the business holds great promise, as the industry grows to satisfy rising global demand for food and fuel.

4. Private Equity and Finance

Our experience as private equity investors and providers of bridge financing spans three decades, numerous business cycles and some of the most challenging economic times in recent history. Through more than 100 investments and commitments made and $10 billion deployed, we have established a consistent track record of success partnering with companies in industries where we have operating expertise and experience.

Broad sourcing capability positions us to deploy capital throughout the economic cycle. When speed and certainty of commitment are required, Brookfield’s over $150 billion of assets under management and $50 billion client capital base enable us to underwrite investments and loans of all sizes without syndication.

Our Private Equity and Finance investment professionals are located throughout Canada and the United States, Europe, India, Australia and South America. Our global reach and network enables us to surface high quality investment opportunities and provide our portfolio companies with a full range of resources throughout the course of our involvement.

1187563217.jpg

5. Development & Residential

Brookfield is a major residential property owner and operator, with market leadership in land development and home building in North America and Brazil.

Brookfield creates value by applying decades of experience in residential real estate to the full spectrum of development, including land acquisition, planning, design, construction, sales and customer service.

In North America, we operate as Brookfield Residential Properties Inc. and we are active in eleven principal markets in Canada and the United States, with over 100,000 lots under our control. We are the fifth largest residential real estate company in North America, with five decades of experience in the field. Our focus is on master planned communities, where we purchase and develop land, then either build homes or sell lots to third-party builders.

In South America, we are known as Brookfield Incorporacões, a leading Brazilian-based developer. We provide homes to customers across all income classes, with a focus on the middle-income segment. We serve one of the world’s most vibrant economies, and we are market leaders in the metropolitan regions in the states of São Paulo and Rio de Janeiro, as well as the mid-Western region of Brazil. The areas in which we operate generate 60% of Brazil’s GDP.”

106846345.jpg

[b]Competitive Advantages:

1. BAM invests in long-life cash-generating assets which increase in value over time due to inflation.The scale of BAM and unique operating model which allows access to significant capital is a major competitive advantage that allows it to acquire these assets.

2. Assets of BAM have major barriers to entry and competitive advantages. These include Infrastructure assets like transmission lines, ports, rail, toll roads, power plants and premium office buildings.

3. BAM is not just an owner but an operator of assets and has significant expertise in this area, which is a major competitive advantage. BAM has been operating renewable power assets for decades.

4. BAM has a long-term focus on value creation, which is a competitive advantage. This allows it to be contrarian and purchase assets that are out of favor.

5. BAM is an owner-operated company with management (present and past) owning 20% of the company. Management has a major portion of their assets in BAM stock, so their interests are aligned with the shareholders.

IV) Balance Sheet and Profitability

Brookfield Asset Management (BAM) has a reasonably strong balance sheet with up to $10 billion of total liquidity including partner cash and corporate debt of $3.5 billion. BAM has real assets that are long life and generate strong cash flows, and the majority of debt is property-specific and non-recourse.

Also, BAM is taking advantage of the low interest rate environment to lock in long-term fixed mortgages at attractive rates. I expect the company cash flow generation to accelerate in the next two to three years as many of the investments of the last two to three years bear fruit and some of the assets will be harvested to reinvest in higher return and higher growth opportunities. Below is information from the company 2012 annual report, 2013 first quarter report and 2013 company presentations:

497991433.jpg

437108038.jpg

535363725.jpg

1613809393.jpg

[b]V) Management

I like the business philosophy and investment guidelines that guide the actions of BAM management. They are as below (as stated in company 2009 Annual Report). These principles have yielded return of 19% per year over last 20 years for investors an excellent performance in times that included multiple recessions, bubbles and a major financial crisis.

Management of Brookfield(current and past) own 20% of the company and thus management thinks and acts like owners. This is a major advantage for shareholders as historically this has been a good indicator of market outperformance. CEO Bruce Flatt and CFO Brian Lawson are doing an excellent job.

VI) Value and Price

BAM is trading in $34 to $36 range as of the first week of June 2013. The NAV (net asset value) of BAM as of 2012 year-end was in excess of $40. The sum of various parts (including liquid assets) indicates an asset value of at least $37. Brookfield Private Equity business has major global growth opportunities and due to the large scale of the operations, there is a significant organic growth opportunity. Recession in Europe and deleveraging by many companies allows great opportunity for BAM to acquire more assets in Europe and South America at attractive prices when considering the low interest rate environment.

Mritik Capital projects an NAV growth of 9% per year over next three years. This is in line with the NAV growth from $26 to $40 over the last four years. This would mean a NAV of above $50 by 2015. Assets including real estate have been out of favor since the U.S. housing bubble crashed and the financial crisis of 2008 and 2009. Given the high likelihood that real estate and property assets will be a more favorable sector of investors in the next few years it seems probable that BAM will trade close to its NAV by 2015 end. I expect strong cash flow generation to allow EPS to grow at a healthy rate and to be in the range of $4 to $5. There is an opportunity for BAM to return 17% total return per year over next three years which is in line with the return over the last 20 years. The nature of the long life cash producing asset which are indexed to inflation also provides downside protection.

Mritik Capital suggests that investors who have a long investment horizon can invest in BAM at $34 and expect to make a return in excess of 10%. More conservative investors can sell December 2013 $35 puts for a premium in excess of $2.75 for an annual return of 15% if put is not assigned while taking the risk of owning BAM at an attractive price of $32.25.

984085631.jpg

1148481237.jpg

[b]VII) Catalysts

I see the following catalysts for BAM:

1. An increase in long-term inflation will increase the valuation of BAM’s assets while the inflation indexing of cash flows will guarantee a return above inflation.

2. In 2007 to 2008, when property assets were in favor with investors, BAM was trading at 40% premium to NAV. As the housing recovery takes hold BAM is likely to trade at more favorable valuation.

3. Continued organic growth and intelligent capital allocation by BAM management can significantly grow the intrinsic value of the company and the market will ultimately recognize the value.

4. BAM’s private equity business has opportunity for global expansion. The quantitative easing policies of global central banks will increase liquidity further, and BAM will get its fair share of these investable assets, leading to increased fees. Assets under management (AUM) are currently at $175 billion can increase significantly over the next decade.

5. BAM can harvest some of the investments made at attractive rates from 2008 to 2011 and re-invest them at higher rates of return increasing value.

6. BAM can further spin off assets into subsidiary companies to allow the market to value the assets better and to unlock value. The spin-off of Brookfield Property Partners LP (BPY) is an example of this.

7. BAM is in the process of a share buyback with approval to purchase more than 53M shares which is about 8% of the shares outstanding. It is highly like that excess cash could be allocated to this buyback in 2013 and this should increase per share intrinsic value.

VIII) Specific Risks

1. BAM takes calculated risks when management feels that the risk adjusted reward is significant. This can be an issue if management makes a mistake.

2. The onset of a global recession would affect commercial property asset values and reduce the operating cash flow of BAM.

3. Unfavorable tax law changes can have an impact on how BAM operates. Some subsidiaries of BAM including BIP operate from Hamilton, Bermuda, and have tax advantages. REIT and Limited Partnership-related tax law changes will impact BAM.

4. BAM has dual voting stock which concentrates control of the company in the hands of a select few. This can be a risk.

IX) Why Is This Cheap?

1. BAM has a complex corporate structure which is a deterrent for many investors and makes valuing the company difficult.

2. The market is more focused on net income and not at the significant NAV. I expect net income to catch up over the next few years as investments over the last few years bear fruit.

3. BAM shares fell from above $40 to $11 during the 2008 to 2009 financial crisis. This high volatility at the time of the crisis dissuades some investors from investing in BAM.

Disclosure

I am long shares of BAM.

Comments and questions welcome.

Read more:

BAM Investor Relations

Brookfield Property Partners

Brookfield Infrastructure Partners

Brookfield Renewable Energy Partners


Note:

I have used information from the BAM investor presentations and financial statements. I have referenced information from RBC Investing and Yahoo Finance.

About the author:

MritikCapital
Mritik Capital Inc. is a financial advisory firm with focus on identifying quality businesses with durable competitive advantages that are undervalued. Our first goal is to preserve the capital of our clients and look for strategies for enhancing their net worth based on opportunities that present compelling risk adjusted reward.

Please note that investing offers both risks and rewards. Before investing do your own due diligence and consult your financial advisor.

Visit MritikCapital's Website


Rating: 4.3/5 (47 votes)

Voters:

Comments

tonyg34
Tonyg34 - 10 months ago
BAM did investors a huge favour by spinning off BPY. One can get a quick and dirty value for the company by adding up the market cap of its three flagship enterprises and calculate the stub value for the asset management business from this.
MritikCapital
MritikCapital - 10 months ago
Hi Tonyg34,

Thanks for reviewing the article and your comments. It is indeed a good strategy to calculate the stub value as you suggest. Some believe the asset management business is under appreciated by the market and this value is not reflected in BAM share price. It is also easy to scale the asset management business pretty well with less incremental cost. Lets wait and see over the next few years how this turns out.
buynhold
Buynhold - 10 months ago
Thanks for the article. BAM is one of my favorite buy and forget businesses. High quality assets run by value conscious owner-operators who also happen to be very good capital allocators. I have owned it for four years now, but would NOT buy more at current prices; margin of safety is not all that much.

One thing to note (a risk factor) is that their business model is highly leveraged. This works really well when the assets are consistently well managed, but can also backfire if mistakes are made or if they lose access to capital markets.
MritikCapital
MritikCapital - 10 months ago
Hi Buynhold,

Thanks for your comments and it is always good to get a perspective on a company from someone who has owned and followed it for a long time. You definitely bought BAM at an excellent valuation 4 years ago and returns for investors now will not be as compelling. Also the risks you highlight are valid. One thing I take note of is how well BAM has emerged from the 2008/2009 financial crisis and their unique operating model of having access to capital via the public and private funds is a competitive advantage which somewhat mitigates the risk. This allowed BAM to purchase a large number of assets when others were forced to sell. I am hopeful that in the next few months the price of BAM will drop further to provide greater margin of safety.
MritikCapital
MritikCapital - 10 months ago
Hi Buyandhold,

One thing I forgot to list is that most of the debt of BAM is at the asset level and non recourse. So if one asset does not produce cash flows to sustain the debt it has, this should not have an affect on the rest of the company. Your point about the leveraged business model is well taken though and each investor needs to make up their own minds if they perceive this as a risk that is commensurate with the reward they can expect at their purchase price.
MritikCapital
MritikCapital - 10 months ago
Hi,

In Jan 2011 Fairholme Fund of Bruce Berkowitz sold its entire equity stake in GGP to BAM for US$804 million in cash and $907 million in Class A shares of BAM (27.5 million shares). Does anyone know if this position (of 4.5% of BAM shares at that time) is still held by Fairholme or it was sold subsequently. The Guru Focus portfolio data does not show this stake, however I have not come across any news archives that indicate this stake was sold.
svoleti7
Svoleti7 premium member - 10 months ago
He disposed of it to meet redemptions and concentrate the portfolio into his 'best ideas'
vgm
Vgm - 10 months ago
I thought he'd sold them. There's a list of major holders at the end of this BAM presentation from Aug 2012. Fairholme is not listed:

https://www.brookfield.com/_Global/42/img/content/Corporate%20Profile%20-%20August%202012.pdf
MritikCapital
MritikCapital - 10 months ago
Hi Svoleti7, Vgm,

Thanks for clarifying this. I think it was a fair decision from Bruce Berkowitz since his best idea AIG has indeed proved to have been more undervalued and gained significantly since with multiple catalysts.
trinathdasari666
Trinathdasari666 - 10 months ago
Precise and Concise. Great insight. Thank You for great research and analysis.
MritikCapital
MritikCapital - 10 months ago
Hi Trinathdasari666,

Thanks for reviewing and your comments.
MritikCapital
MritikCapital - 10 months ago
Brookfield Acquires Leading European Logistics Assets Company Gazeley from Dubai World. Brookfield Property Partners (BPY) will own an approximate 30% interest in Gazeley. BAM currently owns 92.5% of BPY.
MritikCapital
MritikCapital - 10 months ago
Interesting presentation by BAM CEO Bruce Flatt at Whitman School of Management from April 2008
vgm
Vgm - 10 months ago
Mritik,

Thanks, yes, great presentation. I saw it at the time. Marty Whitman is a big fan of Bruce Flatt and Brookfield. It's a fabulous company.

Any thoughts on the issue of the new preferreds?

http://finance.yahoo.com/news/brookfield-completes-c-200-million-120500113.html
MritikCapital
MritikCapital - 10 months ago
Hi Vgm,

The preferreds yield 4.9% but these are not convertible. For someone who needs income and 4.9% per anum is their target these are safe. However I prefer the common shares as I think for a long term holder the tax-free compounding of value will be much more significant.
MritikCapital
MritikCapital - 10 months ago
BAM CEO Bruce Flatt interview from Nov 2004 that details BAM transition after he became CEO in 2002.
MritikCapital
MritikCapital - 10 months ago
According to Financial Times Brookfield plans Euro 1.65B investment in Europe over next few years. This fits well with BAM strategy of acquiring premium assets for below replacement cost from sellers in distress.
MritikCapital
MritikCapital - 10 months ago
Brookfield sells Longview Timber assets for $3.675B aggregate proceeds. These assets were purchased by Brookfield in 2007 for $1.65B. Net proceeds from sale to BAM & BIP will be $1.32B.
vgm
Vgm - 10 months ago
Thanks Mritik.

I think we can expect significant additional strategic selling from Brookfield in the near future. This is a comment from Bruce Flatt in a recent QnA:

"...generally at the bottom of the market, you own assets and you buy assets and we bought a lot of assets in '09, '10, '11. And you end up with a lot of, I'll call it non-core and tertiary assets, that you otherwise might have sold at the time. But because the markets aren't liquid, there either is not a market to sell them or secondly, you don't like the price.

As markets inflate over time, as the recovery happens, you can harvest capital from those. And so a lot of the cash raising we're doing in many places is getting rid of the tertiary or non-core things that came along with other acquisitions. And it's a lot of capital. And it will be poured back into great long-term real estate,infrastructure and other businesses we have or into our private equity investments, which eventually or sometimes form the basis of our other businesses."

http://www.brookfield.com/_Global/42/documents/relatedlinks/5659.pdf

MritikCapital
MritikCapital - 10 months ago
Hi Vgm,

Thanks for highlighting the info from the recent earnings call.

I am keen to see if they have something in mind for the raised cash from this sale and the recent capital raise for BIP. I suspect they would be looking to add assets in Europe where there is a good opportunity. I guess we will have to wait and watch.
MritikCapital
MritikCapital - 10 months ago
Brookfield to Commence Development of Brookfield Place Tower 2 in Perth. Tenant pre-commitments for approximately 40% of space secured.
MritikCapital
MritikCapital - 9 months ago
Brookfield Renewable (BEP) announces postponement of public offering.
MritikCapital
MritikCapital - 9 months ago
As per information from CBRE Japan’s $1 Trillion Pension Fund Mulls Real Estate Spree. The allocation shift from bonds to real assets over the next decade is something BAM is well positioned for.
perots
Perots premium member - 9 months ago
What happens to BAM if it has long term leases locked in and rates rise? Does the value drop due to different cap ex?
MritikCapital
MritikCapital - 9 months ago
Hi Perots,

Thanks for your comments.

As long as BAM cost of capital is locked in by long term fixed rate borrowing I don't believe a rise in interest rates has a net negative effect, since BAM has long term client contracts with rate escalators which are inflation indexed.
MritikCapital
MritikCapital - 9 months ago
BIP to sell NZ Regulated Distribution assets for $410M. These assets were acquired as part of the restructuring of Babcock & Brown Infrastructure (renamed Prime Infrastructure) for $1,1B in 2009. This asset is one of the handful of assets acquired at that time so BIP is exiting this investment at a good profit and plans to reinvest the capital at a higher rate of return.
MritikCapital
MritikCapital - 9 months ago
BAM continues to repurchase shares at current levels. BAM announces Automatic Repurchase Plan. Under its normal course issuer bid which expires on April 22, 2014, Brookfield may purchase up to 53,571,157 Class A Limited Voting Shares. I think this represents 8.5% of total shares outstanding.
MritikCapital
MritikCapital - 7 months ago
Excellent BAM Investor Day Presentation from principals about current state of the business and outlook to 2018.
stevenramsey
Stevenramsey - 7 months ago
I haven't read all of the presentation, but it looks like the superior opportunity within the Brookfield family is the newest entity, Brookfield Property (BPY), where they lay out how the value is ~$44/share. With BPY now trading at $19.62, it looks like a much bigger gap between price and intrinsic value.

BPY recently was spun out this spring and has edged downward over the past few months.

Thoughts?

MritikCapital
MritikCapital - 7 months ago
Hi Steven,

BPY is undervalued when you consider the high quality of the assets and as capitalization rates in market adjust once people realize interest rates may not rise that much that quickly. Also the property platform is diverse and global and has significant organic growth opportunity. So in short currently value is fair to good considering the low risk but not as undervalued as you suspect. That $44 is a future possible value over next few years as value creation through organic growth, harvesting, acquisitions and market recognition occur.

If you are an investor needing income go for BPY. If not BAM is the best bet in my view. I think BIP looks good here both for income and capital gains. Sam Pollock is doing an excellent job. Also BEP looks good if you believe natural gas prices will normalize and energy prices will rise in the future.

I think over next 5 years more Brookfield Capital may go to BIP so that may grow faster than the already large BPY.

MritikCapital
MritikCapital - 7 months ago
Steven,

You can't go wrong with any of these. I have taken a balanced approach and am long BAM, BIP, BPY, BEP, BPO in that order of weighting.

Best of Luck!
AshishGupta
AshishGupta premium member - 7 months ago
Are any of these like MLPs ie not suitable for buying in retirement accounts?
MritikCapital
MritikCapital - 7 months ago
Hi Ashish,

BAM is a regular Corporation. BPY, BIP, BEP are somewhat similar to an MLP for US holders and they pay distribution and not dividends. Depending on which country you are located in tax consequences will vary. BIP for example is Bermuda based but controls child entities that are domiciled in Canada, US, Brazil, Australia etc. See this BIP Tax Information link for more details.
vgm
Vgm - 7 months ago
MritikCapital
MritikCapital - 6 months ago
BPY to buy out the 49% of BPO shares that it does not own. I think BPO was depressed by the short term issues relating to BAC Merrill lease expiration. I suggest holders of BPO opt for shares of BPY and not cash and BPY is currently undervalued. I believe management believed BPO was more undervalues than BPY. This move will also allow BPY to streamline assets going forward. I plan to take BPY shares for my BPO shares.

Long BAM, BPY, BPO, BIP, BEP.
MritikCapital
MritikCapital - 5 months ago
BAM/BIP price gap to fair value narrowing. Looking forward to 3Q 2013 results over next 2 weeks to re-asses valuation.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Hide