BAM: Bayseian Investing

Brookfield Asset Management (BAM), the Toronto based financial giant, has amassed a treasure trove of $150 billion dollars worth of global assets. The company controls a vast real estate empire across the globe with a special focus on high end commercial real estate, including such iconic properties as the Bank of America Plaza and the World Financial Centre. Brookfield also owns high quality infrastructure assets: one of the world’s largest coal ports in Australia, electricity utilities in Chile and timberlands in North America. The following tables list Brookfield’s assets under management (AUM) by region and platform.

Region AUM (Billions)
Canada $22
United States $93
South America $16
Europe $4
Asia & Australia $16
Platform AUM (Billions)
Property $83
Renewable Power $18
Infrastructure $19
Private Equity $25
Other $7

The results for Brookfield’s shareholders have been impressive: a 20% total return annualized over the past ten years. This has been made possible by Brookfield’s best-in-breed management team that actively manages these high quality, high cash-flow generating assets and reinvests the ample cash stream to compound returns. These spectacular gains have not come from some random fluctuation of the market — look at the internal rate of return Brookfield generates on their assets.

Platform IRR
Infrastructure 14%
Timber 6%
Bridge Lending 14%
Real Estate (Value) 13%
Real Estate (Opportunistic) 25%
Private Equity 25%

These are without a doubt, very impressive numbers. You would think that this diversified portfolio of world class assets, managed by one of the best teams in the world, would be selling for a nice premium to book value. You would be wrong. The closing price of Brookfield’s common shares at $31.89 is about 8% below their current tangible book value of $34.52 and a full 28% less than their “intrinsic” value of $40.99.

I would rate Brookfield a “buy” at anytime their shares are trading at a discount to book value but this alone is not the reason why I am feeling so bullish on the company. It is the fact that Brookfield has almost completed a multi-year restructuring. In the past several years they have spun off assets into subsidiaries like Brookfield Infrastructure Partnership (BIP), Brookfield Properties Corporation (BPO), Brookfield Residential Properties (BRP) and Brookfield Renewable Energy (BRPFF.PK). Swapping the assets for shares in a subsidiary that owns the same assets may not seem like a big deal but let’s take a look at the 2008 spin-off of Brookfield Infrastructure Partnership as an example of the poential value created.

In 2008 Brookfield spun-off their best infrastructure assets into the MLP Brookfield Infrastructure Partnership. These assets included a rail terminal in Australia, a large coal port in the same country, timberlands in North America and an electric utility in Chile. Income oriented investors bid up the price of this quality, high-yield portfolio to a large premium over book value. The shares of BIP that Brookfield owns, proportionally, are now worth more than the assets themselves were.

The news gets better for Brookfield. Along with the some $63 million in cash flow their shares generate, just like with their other clients, Brookfield charges BIP a 1.5% management fee based on their market value: a sweet deal worth another $60 million dollars per year. Oh, and as BIP’s general partner, Brookfield also is entitled to incentive distribution rights.

This restructuring process should be complete by late this year, when Brookfield plans on spinning off most of their remaining real estate holdings into another MLP type structure. I believe the same thing will happen with this new company: an increased premium to book value for the assets along with lucrative new management fees.

Basically, Brookfield is switching from an owner-operator to a true asset manager. As of 2011, Brookfield is earning an incredible $6.47 per share in management feeds (a 20% yield in itself!). This number will only increase as the restructuring finishes, and BAM uses their cash flow to acquire new assets to spin off.

Because of their high, dependable cash flow, most asset managers trade at a premium to book value and a P/E of 15-17x. This compares to Brookfield trading at a discount to book value and a P/E of 11. As the market revaluates Brookfield’s emerging low-risk, high cash-flow model, there is a very high probability of the shares moving to a premium to book value. The gains could be very significant.

As a final note, with investors fearing that the slumbering dragon that is inflation may awaken, BAM shareholders have little reason to fear. Because of their emphasis on hard, “real” assets and management’s insistence on contractual inflation-protected income, there is little danger of inflation taking a bite out of earnings. As well, Brookfield’s management has decided to structure their modest debt levels as long-dated fixed-rate debt, wisely choosing to pay a few more basis points of interest now in order to shield themselves from a possible future rise in rates.


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