Street Capitalist: Event Driven Value Investments

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Street Capitalist: Event Driven Value Investments

Brookfield Asset Management: A Perfect Predator

Joanna Pachner at Business Without Borders has a fantastic article profiling Bruce Flatt and his company Brookfield Asset Management:

As a rule, the CEO of Brookfield Asset Management is studiously non-controversial. He rarely appears in public and has little to say to the media. Put-downs? Bravado? “We don’t brag,” he says earnestly. “It always bites you afterwards.”

Instead, Flatt seems to go out of his way to paint Brookfield as boring. “We own 129 office buildings. Some are a little taller, some are a bit shorter,” he says laconically. The strategy? “We’re in the business of buying assets of great quality at less than replacement cost.” The company’s remarkably consistent objective over the years simply has been to earn a 12% to 15% compound annual return per share. “We have no goal to be large or significant,” says Flatt. “If [reaching our objective] meant we should shrink in size, we’d do that.” Even Brookfield’s logo is understated, and its 2009 annual report looks like something thrown together at Kinko’s. Move along, everyone, nothing to see here.

The reality is that this slender 45-year-old executive runs a conglomerate that manages $108-billion worth of real estate, utilities and infrastructure across the planet. In the eight years Flatt has been in charge, Brookfield has emerged as the world’s biggest owner of prime office space—including some of the most prestigious towers on the Manhattan skyline—and its 165 power plants constitute one of the largest hydroelectric portfolios. But what has really impressed observers is how Brookfield weathered the crushing downturn that crippled many of its rivals. Over two years, as its stock plunged by two-thirds along with the markets, the company didn’t panic or go into hype mode. Instead, it quietly added to an already thick cushion of capital. And waited.

…The business landscape is littered with companies that gambled with cheap money and got caught with their shares down and their loans called. Brookfield, meanwhile, has amassed a nearly $10-billion war chest of its own and institutional investors’ cash and has gone hunting. After devouring an Australian port and railway giant and a few real estate portfolios, it’s now tracking perhaps its most succulent prey: General Growth Properties, the second-largest mall operator in the U.S., which adopted the spendthrift ways of its customers, stockpiled a glittering array of trophy properties on credit, and when the markets seized, toppled into bankruptcy. Enter Brookfield, offering up its capital and restructuring expertise in exchange for control of the company.

Whether or not Brookfield secures the deal—the outcome may not be known until this fall —it’s an important chapter for the company, says a close long-time observer who requested anonymity. “This could be a huge new platform for them. Or it could be a huge profit.” Some see it as an unusually risky play for careful Brookfield. But they don’t appreciate its predatory ways.

A Perfect Predator (Business Without Borders)

Be sure to read the entire article. It’s wonderful and details how Flatt has reoriented Brookfield since taking over as CEO.

Brookfield is an interesting business in that much of its revenue stream in that its properties throw off a substantial amount of free cash flow (about $1.5B annually). Some of their properties are more economic sensitive than others – particularly the office buildings and potentially the malls that they would acquire from General Growth Properties. But that would be offset by their infrastructure investments.

For investors hoping to find a savvy team of deal makers who will invest opportunistically in real estate, Brookfield is a good place to start. There aren’t a whole lot of value oriented real estate groups like Brookfield. A lot of the players simply try to buy and sell into bubbles.

Pachner compares Flatt and Brookfield’s approach to investing as similar to the entrepreneurs cited in Michel Villette and Catherine Vuillermot book From Predators to Icons: Exposing the Myth of the Business Hero. This is a good comparison. For the most part, Flatt has been able to steer Brookfield into investing conservatively during bubbles which enables them to build up cash hordes and purchase distressed properties at a discount to their margin of safety when there are few other real competitors.

The most difficult thing about analyzing Brookfield is probably their size. While it helps when they are getting involved in special situations and deals, but it creates difficulty for an analyst attempting to value the company with precision. I think that if you use the intrinsic value estimates that Brookfield provides, along with that average free cash flow figure of $1.5B. You can then get an approximation of what Brookfield is really worth and compare it to its trading price. Ideally you want to obtain a margin of safety and then get the kicker of their investing prowess which should compound intrinsic value.

Category: Superinvestors, Value Investing

  • Rishi Gosalia

    Here is the link to Bruce Flatt's key note address at Whitman School. One can learn quite a bit about how Mr. Flatt runs BAM from this video:…

  • Graeme

    Should be interesting to go back and see what sorts of things management was saying during the height of the bubble. Nothing excites me more than a company with lots of FCF and lots of cash saying things like “you know what, that looks too expensive for us. Pass.”

    btw, LOVE your site. Will comment more frequently from now on. Do keep up the good work!

  • Rishi Gosalia

    Mr. Bruce Flatt comments on valuing the BAM business in his 2005 letter to shareholders:

    “Our investment approach continues to be focussed on high quality cash producing assets, which by virtue of the type of asset, location or barriers to entry, should appreciate in value in contrast to many other assets that generally depreciate over time. In this regard, we recently came across a paragraph in the book “The Aggressive Conservative Investor,” co-authored by longtime value investor Martin J. Whitman. On page 108 it states: “For example, in certain areas of real estate accounting, depreciation charges are an economic fiction; much of wellmaintained, well-located real estate does not depreciate over time, even though for financial accounting and tax purposes, the property is depreciated.”

    We agree fully with Mr. Whitman. In fact, when reviewing the value of the commercial properties we own, we have generally found the required depreciation provisions to be substantially overstated. We also believe this to be true for our hydroelectric power plants, our timber, and most of our other infrastructure
    assets. This is the principal reason why we measure our performance based on the cash flow generated from the operations, less sustaining capital expenditures, and add to this the annual increase in intrinsic value to determine our return on assets. There are some exceptions, but in general, this applies across most of our chosen asset classes.

    In addition, as a portion of the increase in intrinsic value of our type of asset results from capital appreciation, the timing of when taxes are paid is also important to overall returns. Under Brookfield Asset Management | 2005 Annual Report 5 taxation laws, capital appreciation is not taxed until an asset
    is sold, but we are able to deduct depreciation against current income. Accordingly, over time the intrinsic value increase can be greater for the assets we own, than that of assets which
    conversely generate the bulk of their income up front, deplete in value over time and pay substantial current income taxes.

    The challenge for us and other like-minded investors is that many people look principally at price-earnings multiples, and therefore do not focus on the cash flows being generated, or the significant extra returns that accrue from the appreciation in the value of assets. As we build our asset management
    operations, we therefore are continuing to review opportunities to ensure that the intrinsic value of our operations attracts appropriate recognition in the market place.”

  • Graeme


About Me

My name is Tariq Ali, I run Street Capitalist. I recently graduated from the University of Texas at Austin. There, I stumbled onto value investing via the school library. I read everything I could and now I'm here, writing out my thoughts and investment ideas.

I have a lot of heroes when it comes to investing, it seems like every investor has some kind of niche. Some, whose books and writings have had the biggest impact on me are: Warren Buffett, Benjamin Graham, Joel Greenblatt, Seth Klarman, and George Soros.

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