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Brookfield Asset Management – A “Cash Flow-Spinning Machine” Despite Real Estate Distress

March 01, 2010 | About:
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Daily Recknoning

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Brookfield Asset Management (BAM), the Toronto-based global property, power and infrastructure asset management company, has been in the news recently bidding for General Growth Properties… is that a sign that the company is grasping at straws?

Not at all, according to Chris Mayer, an investments editor for Agora Financial. He recently issued a hotline announcement detailing where he sees the company as being headed:

“Brookfield Asset Management (BAM) is a conglomerate, with interests in real estate, hydropower, infrastructure and asset management. I like BAM’s assets and management team — which has a substantial part of its net worth invested in BAM shares.

“The stock has a good track record of delivering returns over time. Over the last 20 years, investors earned 13% annually. Over the last 10 years, 22%. That last period is particularly remarkable, considering the overall market lost money.

“What you own in BAM is a cash flow-spinning machine with a strong financial condition. And it still trades below net asset value, which is around $28 per share. All of these factors trump my concerns over its commercial real estate portfolio.

“BAM is also a good investment now, because it invests in distressed situations. There is a lot of distress in real estate. And that spells opportunity for BAM. As CEO Bruce Flatt wrote in his letter to shareholders, ‘We are generally investing when markets are pessimistic, and the current cash flows from the assets we are acquiring have been substantially reduced.’

“For example, BAM has acquired port assets in 2009. Flatt sums up this asset in his letter:

“‘We acquired the world’s largest metallurgical coal shipping terminal, Dalrymple Bay Coal Terminal. This shipping terminal on the northeast coast of Australia serves as a critical link in the export of metallurgical coal (used for steel making) from the Bowen Basin in Queensland, Australia, the most prolific low-cost metallurgical coal basin in the world.

“‘The rate base of this asset is approximately $2 billion and the rated capacity is 85 million tonnes per annum, most of which is shipped to steel companies in Japan, Korea, India and China. For context of size, this terminal ships approximately $8 billion of coal annually, which represents approximately 20% of the seaborne metallurgical coal in the world. On average, two ships load daily, or about 700 ships annually, each carrying approximately $150 million of coal.’

“Sounds like a great place to be. BAM has been busy in this area. It bought the second largest port in the U.K. It picked up 17 shipping terminals in 2009. The recession crushed global trade. The market just mauled shipping stocks, sending them down 80-90% from their highs. The market also beat up ports and terminals, even though these businesses are much less risky than shippers. Ports are like the toll operators of global trade.

“So BAM is in there picking up these assets on the cheap. That’s just a sliver of the activity in 2009. The company also bought rail assets, wind farms, natural gas pipelines and more. It acquired a 42% interest in the second largest electricity provider in New Zealand, which serves 400,000 people. BAM owns a 43% interest in a property development company in Brazil that has a market value of $2 billion.

“Flatt and his team have a good nose for value. The company is complex with all that’s going on and BAM makes excellent disclosures every quarter on what’s going on, along with a detailed quarterly presentation and conference call. It takes some time to get through it all.

“The bottom line is that BAM is doing well. It generated about $1.5 billion in operating cash flows, or about $2.43 per share. It has ample liquidity and cash to invest.

“BAM has made headlines of late bidding for General Growth Properties. I guess I don’t get the whole appeal of owning a bunch of malls. Simon Properties owns 100-plus ‘high-quality malls.’ To me, saying you own a high-quality mall is like saying you own a high-class outhouse. It’s still an outhouse. But it’s a distressed asset and BAM may get it cheap.”

Mayer’s clearly not impressed with the GGP bid in particular, but remains optimistic regarding Brookfield’s outlook overall.

You can read more of his research in the newsletter, Capital & Crisis, with details available at the Agora Financial reports page. In July, Mayer will also be a speaker at the Agora Financial Investment Symposium in Vancouver. You can find details about the event here.

Best,

Rocky Vega,

The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]


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