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ultimatespinach: At Friday's close, my Brookfield stake consisted of 64.2% BN, 32.6% BAM and 3.2% BNRE.

ultimatespinach,

Like Bruce Flatt did with some of his BAM holdings, why not sell some/all BAM and roll the proceeds into BN which seems to be the more attractive investment?

Using round numbers, BN distributable earnings are 5 billion annually. Current BN market cap is 50 billion which gives you an earnings yield of 5/50 = 10%. Management says distributable earnings are the primary performance metric and expected to grow 15% annually which gives you a total return of 25%.

BAM dividend yield is (0.32*4)/33.23 = 3.85% also expected to go up 15% annually for a total return of around 20% annually. With a 95% payout ratio, earnings yield is almost as the same as dividend yield for BAM.

Regardless of whether the expected increases actually occur, simply based on current earnings yield, BN is yielding 6% more than BAM. I am tempted to sell all by BAM and roll the proceeds into BN, but would like your opinion as a sanity check before I pull the trigger.

From a balance sheet perspective also, BN seems super cheap. If you attribute 40 billion of the 50 billion market cap to their 75% BAM ownership, you are getting everything else for just 10 billion. Everything else as in their direct investments into BAM funds, their stakes in BNRE, BEP, BIP and BBU. Plus BN will get 1/3 of carried interest from BAM in perpetuity even if they give up all ownership stake in BAM. All this for 10 billion seems ridiculously cheap.

BN is currently 35% lower than its all time high of 50.50 (adjusted for BAM spin-off) reached on 2/10/22. It's a 55% climb back to it's all time high which of course it's going to reach, we just don't know when. Even if it does that in 5 years, it's a pleasant 9% annual return.

Thank you for your excellent posts!

From a balance sheet perspective also, BN seems super cheap. If you attribute 40 billion of the 50 billion market cap to their 75% BAM ownership, you are getting everything else for just 10 billion. Everything else as in their direct investments into BAM funds, their stakes in BNRE, BEP, BIP and BBU. Plus BN will get 1/3 of carried interest from BAM in perpetuity even if they give up all ownership stake in BAM. All this for 10 billion seems ridiculously cheap.

In above alphabet soup from my previous post, I of course missed the biggest component Brookfield Property Group (BPG).

Speaking of alphabet soups, the complexity doesn't bother me too much as long as the numbers are not fraudulent. I don't think anyone here thinks that's the case. Otherwise, why are we even here. It's best to just move on and completely forget about Brookfield.

Assuming the raw numbers can be relied on, we don't have to pay too much attention to management cheerleading, abstract away the complexity, and simply look at the numbers and judge for ourselves how the business is doing.

Distributable Earnings (page 6 of BN supplemental information) clearly lays out the sources of BN earnings. Currently it's about 5 billion per year and this is the most important number to keep an eye on. Is it going up and at what rate? If it goes up to 6 billion per year, is BN really going to sit at current price levels? Of course, not.

Next, what does BN do with the earnings? This too is clearly laid out in Capital Allocation (page 8 of BN supplemental information). It spends tiny amounts on paying dividends and share repurchases. The bulk is reinvested in BAM. That's what the Direct Investments line item means. It is money BN has directly invested in flagship funds managed by BAM. BNRE is also getting reinvestment funds to help it grow. All this seems fine to me. Like at Berkshire, I want management to reinvest earnings at attractive rates of return. I don't want dividends.

Finally, it's also important to pay attention to the balance sheet. Capital (page 7 of BN supplemental information) does just that. Look at the IFRS and Blended columns to get a sense of how much Shareholder's Equity is worth and compare it to the market capitalization. Make sure the debt to capital ratio is low and stable.

Every quarter reviewing just these just these 3 pages should be enough for the average BN investor. As long as the numbers are moving in the right direction, a pleasant return can be expected.

Keeping aside the endless cheerleading and marketing, and looking at just performance numbers, it is a fact that Bruce Flatt has handily beaten the SP500 index in the past 2 decades. I see no reason to think that he won't continue growing BN and provide good returns to investors. Possibly less impressive than in the past, but that's okay.

Having said all this, numbers alone are not enough. You do need to like and trust Bruce Flatt, which I do, to be a BN investor. However, if you simply can't bring yourself to do so, and think that he is creepy and untrustworthy, it's best to sell and move on.

https://bn.brookfield.com/sites/brookfield-bn/file...

Baybrooke, the trust is in this computation of copy/paste. I wonder if there's options and subjective involved, actually I don't wander. The simple truth is that we'd be out in droves questioning...if it wasn't for Bruce Flatt. With Bruce? Trust is it, nothing more and nothing less. Second thing by the way...you mention Brookfield Property. Have you read their latest report and FFO/DE figures?

Brookfield's posting:

We make reference to Distributable Earnings ('DE'). We define DE as the sum of distributable earnings from our asset management business, distributable operating earnings from our insurance solutions business, distributions received from our ownership of investments, realized carried interest and disposition gains from principal investments, net of earnings from our Corporate Activities, preferred share dividends and equity-based compensation costs. We also make reference to DE before realizations, which refers to DE before realized carried interest and realized disposition gains from principal investments. We believe these measures provide insight into earnings received by the company that are available for distribution to common shareholders or to be reinvested into the business.

Realized carried interest and realized disposition gains are further described below:

Realized Carried Interest represents our contractual share of investment gains generated within a private fund after considering our clients' minimum return requirements. Realized carried interest is determined on third-party capital that is no longer subject to future investment performance.
Realized Disposition Gains from principal investments are included in DE because we consider the purchase and sale of assets from our directly held investments to be a normal part of the company's business. Realized disposition gains include gains and losses recorded in net income and equity in the current period, and are adjusted to include fair value changes and revaluation surplus balances recorded in prior periods which were not included in prior period DE.
We make reference to Funds from Operations ('FFO'). We define FFO as net income attributable to shareholders prior to fair value changes, depreciation and amortization, and deferred income taxes, and it includes realized disposition gains that are not recorded in net income as determined under IFRS. FFO also includes the company's share of equity accounted investments' FFO on a fully diluted basis.

FFO consists of the following components:

Operating FFO represents the company's share of revenues less direct costs and interest expenses; excludes realized carried interest and disposition gains, fair value changes, depreciation and amortization and deferred income taxes; and includes our proportionate share of FFO from operating activities recorded by equity accounted investments on a fully diluted basis. We present this measure as we believe it assists in describing our results and variances within FFO.
Realized Carried Interest as defined above.
Realized Disposition Gains are included in FFO because we consider the purchase and sale of assets to be a normal part of the company's business. Realized disposition gains include gains and losses recorded in net income and equity in the current period, and are adjusted to include fair value changes and revaluation surplus balances recorded in prior periods which were not included in prior period FFO.
We use DE and FFO to assess our operating results and the value of Brookfield Corporation's business and believe that many shareholders and analysts also find these measures of value to them.

Like Bruce Flatt did with some of his BAM holdings, why not sell some/all BAM and roll the proceeds into BN which seems to be the more attractive investment?

If my financial profile were similar to Mr. Flatt's, I might do what he did. According to the filings, he started with about 14.5 million shares of new BAM at the spinout last December, got new grants in February that took his total over 17 million, then converted most of the new shares to BN, bringing his BAM count down to ~15 million, still more than he had in December. That's currently about $19 million a year in dividends, which would cover my living expenses nicely. I don't know about his.😁

I read Mr. Flatt's trades as more market signal than meaningful change in his portfolio. His BN share count went from roughly 63.5 million to 66 million, an increase of about 4%. If I altered my allocations in the same proportions, BN would grow from 64.2 to 65.7% of my Brookfield stake, BAM would fall from 32.6 to 31. Given my eyesight, I probably wouldn't notice.

Regardless of whether the expected increases actually occur, simply based on current earnings yield, BN is yielding 6% more than BAM. I am tempted to sell all by BAM and roll the proceeds into BN, but would like your opinion as a sanity check before I pull the trigger.

I agree BN is currently the more undervalued of the two. That's why it represents the bulk of my Brookfield allocation. It is also a more complicated investment. Its valuation is more subjective. I like the new BAM for its simplicity. I spend less mental energy worrying about it. I own enough BN to benefit should it return to its historical highs. I don't feel any compulsion to make my allocation among Brookfield tickers more lopsided than it already is.

In fact, I'm going in the other direction. I sold some BN this year and established a basket of other alt managers to diffuse the single-company concentration risk. I just reread The Smartest Guys in the Room and found it hit a little close to home. I'm sorry to say that I no longer find management as credible as I once did. Brookfield is the Lake Wobegon of companies. Everything and everyone are always above average.

My allocation decisions are idiosyncratic, relating to my age, risk appetite and financial profile. I do not recommend that anyone else pay the slightest attention to them. I encourage you to follow your own plan.

Speaking of alphabet soups, the complexity doesn't bother me too much as long as the numbers are not fraudulent. I don't think anyone here thinks that's the case. Otherwise, why are we even here. It's best to just move on and completely forget about Brookfield.

Here is where we part company intellectually. You present this as a binary choice. Either the numbers are fraudulent or they're not. If you think they are, you shouldn't be invested. If you think they're not, you shouldn't worry about anything else.

The reality is outside investors never know numbers are fraudulent until it's too late. The ways one judges the risks of that along the way are myriad. Mr. Buffett, for example, has built credibility over the years with a constant stream of self-criticism. Rare is the annual letter in which he doesn't mention some mistake he's made.

Mr. Flatt and the growing ranks of CEOs of the various spinoffs are not like that. I cannot remember the last time Mr. Flatt acknowledged a mistake. And yet we know he has made some because he is human. In any field, when one hears an uninterrupted cascade of self-promotion interspersed with grievance, the grounded listener may become suspicious.

Lots of businesses engage in self-promotion similar to Brookfield's, but many of them are less complex. When a retailer sells less stuff than expected, no amount of rhetorical hype can disguise that fact. With Brookfield, the metrics change regularly. The categories in which values and revenues are reported change as well. The multiples they assign various revenue streams change, often with no explanation. Earlier this year they abruptly removed LP real estate investments from the BPG line item. Why did they do that? They will say streamlining or some such corporate-speak. The answer that occurs to the skeptic is it made the out-of-fashion BPG line item smaller, perhaps in an attempt to downplay or disguise the aggregate allocation to real estate.

All these things can affect the comfort level with which an investor holds a security. Knowing the limits of my ability to see through opaque accounting maneuvers, BN becomes something of a black box. In its favor is the performance of its common shares during the 21 years Mr. Flatt has been in charge. Even at today's low ebb of an endpoint, the record is reasonably good, although not as good as it has been at various points in the past.

Less favorable is the vast increase in complexity over that span. The common stock has metastasized from a single ticker to nine. The real estate portfolio has gone from private to public back to private in a so-far largely unsuccessful attempt to unlock value. Multiple entities have small parts of multiple transactions well beyond my ability to dissect for advantage or valuation.

In the face of this extraordinary combination of complexity and opacity, trust in management becomes the coin of the realm. I would have more faith if the messaging seemed more straightforward and honest. Can no one acknowledge, in retrospect, that the GGP transaction was poorly timed? Can no one acknowledge the ethical tightrope that sometimes accompanies investing alongside sovereign wealth funds representing autocratic governments?

Being a critic of companies in which one owns shares does not necessarily imply one should sell those shares. No company is perfect, notwithstanding public messaging to the contrary. Trust is not a binary choice, it is a sliding scale. Over time, my trust in Brookfield management has declined, and with it the size of my investment allocation.

I still like the substance of their business -- the value sensibility, the operational dexterity, the fact that, as Tom Gayner says, they come to work every day looking at the whole world. But the opacity and complexity introduce an element of risk that does not exist in other potential investments. If something blew up tomorrow, some accounting maneuver that turned out to be illegal, would any attentive shareholder honestly be shocked?

There are more unknown unknowns here than in many common stock investments and that is a legitimate consideration in position sizing. At least, that's how I look at it.

Interesting discussion. Thanks to both Baybrooke an Ultimatespinach both.

I lean more to the UltimateS side in that I hate how everything is restated and I chase the figures around. I have sold/exchanged all the spin outs and have only BN and BAM remaining. I had BIP but sold it a while back when it dividend was equal to new BAM's. I bought Bam with proceeds. I like dividends! New BAM says 15% + div growth going forward.


They are now about equal size in our portfolio and I consider it a horse race. Let's see what happens.

I cannot remember the last time Mr. Flatt acknowledged a mistake. And yet we know he has made some because he is human. In any field, when one hears an uninterrupted cascade of self-promotion interspersed with grievance, the grounded listener may become suspicious.

Excellent post by you, as readers are getting used to ultimatespinache. Just a narrow observation within it: Baybrooke citied specifically no evidence of substantial fraud, as distinct from humility. Corruption has basically no relation whatsoever to the culture of admitting mistakes or not, as appealing as the latter is as a personality type.

We know people who have a personality type admitting mistakes and others that like to talk about their mistake. Yet do you know which is the two might be prone to conducting fraud? In fact I think observing humility is a poor predictor of dishonesty as dishonest people tend to master the art of appearing the opposite.

The way to observe corruption I don't believe is the complexity of their business also, which is continually cited as a very negative point for owning the firm.

Brookfield Corporation have a culture of financial optimisation, and almost brag about it, bordering upon obsession. They really - as they like to remind - like having access to capital; and the reason seems healthy enough given that it is central to keeping their bank relationships positive and partners confident - they don't want to be desperate for such during market declines for multiple reasons. Not just for balance sheet loss by forced liquidation but more importantly for their reputation. Their financial reputation is actually extremely strong where it matters (with banks, and with partners) through this isn't cited much.

From my reading into each little optimisation decision to add some complexity, I admit many I miss though sheer boredom but the ones I research, each time seems to be purposeful and sensible either in creating some, even if meagre, opportunities for future IV gain.

The byproduct of all these little financial optimisations is a lot do complexity when this is iterated month after month over 20 years. You can view it as hiding something but I tend to view it as a byproduct.

Berkshire Hathaway has a culture of deliberately seeking simplicity, partnership non-interference - Buffet is almost anarchistic - and emphasising exactly the opposite of optimisation. For example they don't sell Coke because they want a relationship with partners to be business-like, even when it is owned within their portfolio rather than directly owned. This doesn't make Buffett more honest than someone who things this is ridiculous, but is just Buffet's psychologically tendency.

A not bad test at all for BN's management integrity is the massive scale of transactions, along with changes in structure. You can get away with some fraud if you have a highly centralised accountancy office (ironically, like Berkshire's, or Madoff's) but it is harder to hide corruption with as many transactions, separate banks, massive number of separate partners, that Brookfield deals with daily.

More risky problem in my view is the question of their robustness to financial turbulence and rare events, or the capacity for a few really bad decisions to land them in sudden danger. For this I'm extremely grateful for a lot of bad luck within just 15 years. It exposed whether they are just talkers or if their actions are truly meaningful. In this time we have enormous aggregate intrinsic value gains on a per-share basis, despite passing through the two worst situations for debt-loaded commercial property in the last century (2009 and the recent pandemic in 2020 with real state shut down for months).

- Manlobbi

We know people who have a personality type admitting mistakes and others that like to talk about their mistake. Yet do you know which is the two might be prone to conducting fraud? In fact I think observing humility is a poor predictor of dishonesty as dishonest people tend to master the art of appearing the opposite.

It is certainly true that many accomplished con artists mastered the art of false humility. It is also certainly true that Mr. Flatt cannot be accused of this.

I would suggest there is a difference between born con artists -- the snake oil salesmen -- and initially well-intentioned people whose egos will not permit them to admit mistakes. The latter group tends to take small, seemingly insignificant steps to obscure the mistakes they prefer not to acknowledge. Many of these initial steps seem perfectly harmless. But obfuscation compounds in much the way interest does, until it forms a cage that cannot be escaped.

Over the past few months, I developed a keen interest in reading up on some big business frauds. I wanted to know what made them do it, whether these crimes were intentional or accidental or some mix of the two. Without excusing any of these perpetrators, a couple of common elements shone through their very different crimes. Each of three high-profile frauds began with perfectly legitimate business aspirations. Each encountered unexpected difficulties in pursuit of these aspirations. And in each case the perpetrators were unable or unwilling to own up to these difficulties. It was in purposefully obscuring them -- in the coverups -- that they became criminals:

* At a very young age, Bernie Madoff covered up investment losses incurred with funds from friends and family by borrowing money from his father-in-law and making his investors whole. This was a well-intentioned, even generous solution, but it was rooted in his reluctance to admit his failure. Later on, he would employ more sophisticated techniques of subterfuge on a much larger scale.

* Elizabeth Holmes seems to have sincerely believed she could revolutionize the world of blood testing, despite her lack of background in medicine or science. This might well qualify as delusional, but she did not become a criminal until she refused to admit, and took pains to cover up, the fact that her device did not work.

* The boys at Enron definitely believed they were the smartest guys in the room. They pioneered energy trading techniques that proved highly profitable and confirmed to them the merits of a Darwinian corporate culture that rewarded money-making innovations. Bad trading outcomes and investment decisions were covered up with accounting tricks because acknowledging them would have meant admitting they weren't so smart. They devised a catalog of such tricks to avoid disappointing Wall Street, to avoid admitting a series of mistakes.

I am not suggesting Brookfield has taken any steps down this path. I have no knowledge that it has. Lots of people too egotistical to admit mistakes manage to obfuscate them legally.

I am suggesting that the inability or unwillingness to admit mistakes makes people and organizations susceptible to this noticeable historical pattern of the corruption of honest aspiration into deceitful obfuscation. If an entity required to report periodically to the public will not acknowledge mistakes, the alternative is to obfuscate them in some way.

Thanks everyone for the super insightful comments. It's noteworthy that no one said sell and run. Seems to me we all, including our super skeptical friend dealraker!, want to continue to stay invested in Brookfield. We just need to think about the best position size to suit our individual situation. Continuing these discussions will obviously help in that regard.

If something blew up tomorrow, some accounting maneuver that turned out to be illegal, would any attentive shareholder honestly be shocked?

Actually, yes I would be shocked if it came to light that they intentionally engaged in illegal and fraudulent accounting in any material way leading to a major blow up. Am I being too naive? I suppose mistakes due to negligence or incompetence where they end up paying a fine to regulators for non-compliance could happen, although I am not aware of even that happening to Brookfield in the past. But illegal accounting orchestrated by senior management? Yes, that would definitely be extremely shocking and disappointing.

The reason I would be shocked is because of a good point that Manlobbi made. Just look at the scale and frequency of transactions. The numerous parties involved in each transaction. Tens of billions of dollars flowing like water. Deals being made seemingly daily. Institutional investors, sovereign wealth funds, lenders, banks, auditors, regulators, retail investors, buyers and sellers of all stripes across multiple continents participating. Surely there is a whole lot of due diligence going on. No? Is it possible to commit accounting fraud in this type of an endless fund raising and deal making environment? How does this compare with Enron which you said you have been reading about recently?

A revolving C-suite door is also a telltale sign of questionable management integrity. We don't see that at Brookfield. It's a very stable senior management team. It's also been several years since Howard Marks and Bruce Karsh of Oaktree joined Brookfield after they agreed to get bought. They too seem to be getting along fine.

<< You can get away with some fraud if you have a highly centralised accountancy
office (ironically, like Berkshire's, or Madoff's) but it is harder to hide
corruption with as many transactions, separate banks, massive number of separate
partners, that Brookfield deals with daily. >>

I might suggest another check for potential chicanery, what might be called
the "No Bad Quarters" test. Most businesses are going to have good and bad
times throughout the cycle. If a business hits their numbers *every* quarter
over a period of time (Madoff, Enron, WorldCom, GE), it might be worth examining
how they've managed such consistency.

-Rubic

Brookfield/Oaktree Real Estate Income Fund: https://www.brookfieldoaktree.com/fund/brookfield-...

We get a 1.25 management fee and performance fees on top. Trophy Class 1 properties only:

https://seekingalpha.com/news/4007389-brookfield-r...

Brookfield/Oaktree Real Estate Income Fund

We get a 1.25 management fee and performance fees on top. Trophy Class 1 properties only:

Thanks for posting. I looked it up and it's a closed end ETF with ticker symbol RA. Ouch! Price is down 20% today!

Distrib amount was cut from 0.199 to 0.118 monthly.

Before today's plunge, the distribution yield as 0.199*12/16.88 = 14.14%. I think this was a warning sign that it's unsustainable. Especially because only 38% of the distribution amount came from income, the other 62% was return of capital. It was also trading at a 15% premium to NAV, no idea why!

The distribution yield going forward is 0.118*12/13.43 = 10.54%, but even here only 32% is coming from income, the other 68% comping from return of capital. So the yield based on actual income is only 3.38%. Buyer beware with closed end ETFs. You have to pay attention to the actual earning power, not just the superficial distribution amount.

It's not accurate to say trophy class 1 properties only. This is not a fund that actually owns any properties. It's just an Oaktree bond fund which invests in Corporate and Securitized Credit.

Anyway, thanks again for posting. Please continue to post anything negative you can find about anything Brookfield related and I sincerely mean that.

Portfolio Composition page shows:

Corporate Credit
  infrastructure 16%
  real estate 16%
  natural resources 9.1%
Securitized Credit
  real estate - rmbs 25%
  real estate - cmbs 11%
Equities
  infrastructure - 2.6%
  other - 0.3%
Cash - 4.5%


Top Ten Holdings:
CCO Holdings LLC / CCO Holdings Capital Corp
2.0
Nomura Resecuritization Trust 2014-1R
1.5
Tenet Healthcare Corp
1.1
Hilton USA Trust 2016-HHV
1.0
Alternative Loan Trust 2005-84
0.9
Holly Energy Partners LP / Holly Energy Finance Corp
0.9
Whitewater Whistler Holdings LLC
0.8
EQM Midstream Partners LP
0.8
Altice France SA/France
0.8
Continental Resources Inc/OK
0.8

https://finance.yahoo.com/quote/RA/

https://www.cefconnect.com/fund/RA

https://www.brookfieldoaktree.com/fund/brookfield-...

Baybrooke your sarcasm reigns strong. I just incite occasionally as the praise for all things Brookfield gets a tad mushy, even for the long term holders. As a matter of interest, long before others began their chants of Bruce-the-great we had some very outstanding returns with the entities. Seems the more cultist the stock becomes the less return ensues. Maybe I'm singlehandedly trying to change that?

As I mention, when reading the financial statements I see X and when I read managements comments I hear Y. X and Y seem increasingly divergent.

Baybrooke your sarcasm reigns strong.

Hi Dealraker - You are misinterpreting me. I was not being sarcastic. I really meant what I said. Please post anything negative you find about Brookfield. It's a signficant portion of my portfolio and I really do want to know if my confidence is misplaced. I like it that you are a participant on this board and value your contributions.

Cheers!

If something blew up tomorrow, some accounting maneuver that turned out to be illegal, would any attentive shareholder honestly be shocked?
. . .
Actually, yes I would be shocked if it came to light that they intentionally engaged in illegal and fraudulent accounting in any material way leading to a major blow up.

These sentences are saying different things. The first refers to something that "turned out" to be illegal. The second refers to "intentional" illegal acts.

We tend to underestimate our ability as a species to believe what we want to believe. Two of the better-known descriptions of this tendency:

* 'It is difficult to get a man to understand something when his salary depends on his not understanding it.' -- Upton Sinclair

* "A man hears what he wants to hear and disregards the rest." -- Paul Simon

The leadership at Enron insisted to the end they had authorized nothing illegal. When the details of Andy Fastow's off-balance-sheet vehicles were made public, they retreated to the position that they hadn't known what he was doing. Ken Lay and Jeff Skilling insisted that was true to the end -- quite belligerently in Skilling's case. In their heads, it probably was. They wanted outcomes, namely, quarterly results that hit the mark. By then, Lay's incentives had nothing to do with the details of company operations. He was hoping for an appointment to President Bush's cabinet. He liked his image as a master of the universe, which required a perpetually rising Enron stock price. That's what all the deals that turned out to be illegal were intended to achieve.

When the results of actual trades or investments failed to produce the necessary quarterly results, they let Fastow do his magic. Fastow gave them and the somnolent board assurances that everything was OK. His incentive was to cover up the massive fees he was taking, not to monitor whether his complex arrangements met the legal definition of fraud. The complexity of these deals went over the heads of executives and board members who had no particular incentive to dig deeper.

This is a very common tale. The top dogs dont' want to know how the results they demand are produced. It's the story of pretty much every amateur athletics payoff scandal in the U.S., which is why assistant coaches are so often nabbed while their lavishly-paid superiors walk away unscathed. An American federal administration of some decades ago introduced the phrase "plausible deniability" into the lexicon.

So, no, I was not imagining a concerted conspiracy by top management to engage in illegal acts. I was imagining subsidiaries of subsidiaries in some far-flung places pushing the envelope to produce the impressive numbers Brookfield publishes like quarterly clockwork. It would be more surprising if such activity were monitored or caught by outside authorities than if it were going on. Cops on the white-collar fraud beat are underpaid and badly outnumbered. Neither Madoff nor Enron were caught by authorities. Their frauds blew up of their own accord. The incompetence of the SEC in the Madoff case was breathtaking.

The consolation for the shareholders of black box companies like BN is that even if something improper is going on, it is unlikely to be revealed. Witness the allegation that BPY facilitated a payoff to a former U.S. federal official by the Qatar Investment Authority in its buyout of an underwater Manhattan office tower. Was it true? Who knows? No government agency felt compelled to investigate.

rubic: I might suggest another check for potential chicanery, what might be called
the "No Bad Quarters" test. Most businesses are going to have good and bad
times throughout the cycle. If a business hits their numbers *every* quarter
over a period of time (Madoff, Enron, WorldCom, GE), it might be worth examining
how they've managed such consistency.

ultimatespinach: So, no, I was not imagining a concerted conspiracy by top management to engage in illegal acts. I was imagining subsidiaries of subsidiaries in some far-flung places pushing the envelope to produce the impressive numbers Brookfield publishes like quarterly clockwork.

All good points. I don't disagree. Arthur Anderson paid the price for Enron & Worldcom. I doubt present day Deloitte, EY, KPMG or PWC would dare repeat the behavior. Time will tell. One of them is most likely Brookfield's auditor.

Meanwhile, all we can do is look at the numbers and look for telltale signs of potential chicanery. Below are distributable earnings for the period ending June 30 for the last 6 years. Numbers include realized carried interest and disposition gains. For consistency, numbers are for BN and BAM combined and don't take the split into account.

We can't conclude much from just one metric. Nevertheless, FWIW, at least in this set of numbers, I don't see clockwork or Madoff!. Stock price has followed DE. It plunged in 2022. YTD we are up a modest 8.63% due the recovery in DE.

TTM ending Jun 30 (millions)

Year	DE	% change

2018	2353
2019	2702	14.83%
2020	3009	11.36%
2021	6254	107.84%
2022	4911	-21.47%
2023	5205	5.99%

I recommend watching the Madoff series on Netflix.

We can't conclude much from just one metric. Nevertheless, FWIW, at least in this set of numbers, I don't see clockwork or Madoff!

They have trained the analysts, not unreasonably, to focus on DE before realizations because dispositions vary widely from year to year based on market conditions, as the bouncing DE numbers reflect. DE before realizations represents the picture they paint of profits from ongoing operations:

2018     2133
2019     2197     3%
2020     2687     22%
2021     3467     29%
2022     4314     24%
2023     1958*

*first half of the year, roughly equivalent to comparable 2022 number 

I recommend watching the Madoff series on Netflix.

To offer a dissenting view, I would say these dramatizations, including the movie with Robert DeNiro and Michelle Pfeiffer, are heavy on the elements that make for general entertainment and light on the details someone trying to understand the anatomy of the fraud needs. The best source material I found is the book the movie is (very loosely) based on: The Wizard of Lies by Diana B. Henriques. It is understandable, I suppose, if you sign and pay big stars like DeNiro and Pfeiffer to be in your movie that you would make it a soap opera all about them, but it's unfortunate they took the name of the book, which is the most thorough journalistic deconstruction available. The Netflix "doc" is full of shadowy pictures of an actor pretending to be Madoff, in the current style of reconstructed crime stories, but I didn't find it very helpful in exploring the key turning points of the saga.

While we're reviewing skeptical angles on Brookfield, another thought: One prism through which BN might be comparable to Enron is the quality of earnings issue. Although most analysts went along with Enron's accounting "innovations" in order to get along, as analysts do, over time a few began to highlight quality of earnings issues based on the off-balance-sheet vehicles. Near the end, management was still contriving decent numbers, but the market wasn't buying them and the stock price, upon which so much of the fancy accounting relied, began to fall.

The rather dramatic undervaluation of BN, especially since the BAM spinout, can be attributed to many factors, among them the large real estate portfolio, a complexity discount or a conglomerate discount. Another possibility is a quality of earnings discount. In the Southern Investigative Reporting Foundation investigation published 10 years ago, the main thesis was a low or undeterminable quality of earnings owing to related-party transactions, non-cash earnings and difficulty confirming stated values of private assets. Most of the other alt managers are pretty near their 52-week highs. BN is not. Again, lots of potential explanations, and if it is back to its highs when the real estate cycle turns, the heavy CRE balance sheet exposure will probably be the best explanation. But if the market is skeptical of BN's quality of earnings, that could explain the divergence from the rest of the sector too.

Most of the other alt managers are pretty near their 52-week highs. BN is not. Again, lots of potential explanations, and if it is back to its highs when the real estate cycle turns, the heavy CRE balance sheet exposure will probably be the best explanation. But if the market is skeptical of BN's quality of earnings, that could explain the divergence from the rest of the sector too.

ultimatespinach - your comments are starting to worry me! let's please dig deeper into he quality of earnings issue.

BN says "DE represents the deconsolidated earnings of the Corporation that are available for distribution to shareholders and it is our primary performance metric. DE is comprised of distributions we receive from our Asset Management, Insurance Solutions and our Operating Businesses. It also includes disposition gains on our principal investments and our share of realized carried interest that is earned by our Asset Management business."

When I read above, I visualize cold hard cash flowing into BN's DE account. How else can it be available for distribution to shareholders unless it's actual money. I am assuming you don't disagree with this. But are you saying some of the money may be generated not by honest earnings, but by some other means? If yes, how can we be vigilant and monitor?

You mentioned off-balance-sheet vehicles at Enron. If some such thing existed at BN, would there be some telltale signs in their financial reporting that we could notice? This board gives participants a chance to collaborate and collectively dig deeper.

ther alt managers are pretty near their 52-week highs. BN is not.

above is a good point. if you don't mind sharing, please let us wich other alt managers you are tracking/diversifying into. I would like to add to my tracking list and learn more.

For the record, I do not question Brookfield's accounting as per the figures themselves. What is evident though is that both DE and FFO have such leeway and thus management options are many to make a desired or what I'd call "celebratory" figure. And even with this, as a shareholder, I would not mind one bit if it was done to bridge a brief poor period. But from my reading I think this has been done for some time now, to the point of ad nauseum.

I think higher interest rates and increased relative debt have hurt Brookfield more than management is presenting and more than shareholders want to do the homework (it takes only minutes) to accept, and that this is throughout the organization. I think that real estate, both purchases (many clear examples to me) in recent years and the oddities of Covid and work-from-home have put more stresses, far-far more, than management wants you to hear.

I think the spin-out of BAM is dilutive to outside passive shareholders in two ways. I think several deals celebrated as homeruns were zero gain given what I see as all things involved in the transactions.

I think Bruce is as desparate for growth as anyone I've ever seen, and I can tell you with near 50 years of watching I've seen a few. Too fast for sanity? Could be, we will see.

I do think Brookfield has tremendous leeway, even today, to make some numbers that they want (those very adjustable/maniplatale DE and FFO things) if either or both of the following happen:

1) They can sell that asset managing business and get huge inflows to fee;
2) They can find lenders who know full well going in that any downturn will result in massive loan restructurings.

1) and 2) above offer Bruce options that others would die to have. The problem, and it is the biggest problem of all now (that's today) in my view, is that Bruce has an ego to mantain and I'm pretty sure he's gunna do some not-so-classy or maybe better said "not so Buffett-like" stuff to make sure something close to home continues its ascent of upwards to the right (on the charts). That close to home may get a tad not-so-admired by shareholders.

We will see. When I was a younger man, and things like my Brookfield investment actually mattered to my wellbeing, I'd do a lot more study. Today I do not need to and simply will never have the interest to do so.

I do very much enjoy the stimulation of the Brookfield yard sale. What I do not understand is investor willingness to just worship whatever DE and FFO numbers are used by management. I'm 100% certain that with any other entity on earth, and that would include Berkshire, investors would not under any circumstances simply go aroud for years quoting managments claims of DE and FFO without a clean/clear/precise study of how these figures got added up.

To allude to what I just wrote in the previous post, I'll make a very brief synopsis of what we did in the mid to late 1990's and GE. We, 5 of us, wrote "The 12 Ways GE Misleads Investors." It got us royally assaulted, people used the numbers Jack presented, never questioned them, but gave us hell-on-earth for saying, "Yea, those are legal numbers but..."

My thesis for some time is that Brookfield simply isn't doing as well as presented by its choices of how to attain the DE and FFO they present. It is a mild case in my view of the GE of the late 1990's.

I don't write things like "I could be wrong of course" which is and should always be a given or redundant use of words. We all are human.

I don't write to be a jerk or a oddball. I often have questioned mungo (Jim) over on the Berkshire board for his non-Berkshire posts, posts almost always given in the parent ego state. I'm not a child, I want to discuss things openly with other adults, I don't need a father figure.

I write to stimulate, interact, and gain insight to things that interest me and others. Nothing more, nothing less.

other alt managers are pretty near their 52-week highs. BN is not.
. . .
above is a good point. if you don't mind sharing, please let us wich other alt managers you are tracking/diversifying into. I would like to add to my tracking list and learn more.

alt manager     9.1 close     52-week high     difference

ARES              103.18        104.48           -1.2%
APO                86.44         88.20           -2%
KKR                62.20         63.64           -2.3%
BAM                34.89         36.50           -4.4%
BX                104.49        109.99           -5%
OWL                11.99         14.04           -14.6%
CG                 32.67         38.32           -14.7%
BN                 34.68         41.59           -16.6%

Of the three managers off their 52-week highs by double-digit percentages, OWL and CG are both having well-publicized leadership issues. I don't know how to explain BN's underperformance except to observe that its 52-week high predates the BAM spinout in December. In fact, it was nearly a year ago, in September of last year. As we've discussed here, following the spinout BN's market valuation was hit by more than the 25% of BAM it surrendered and it has yet to recover.

Very little about BN has changed since before the spinout. All the usual suspects -- the commercial real estate exposure, the complexity -- were present both before and after. My wild-ass guess would be that spinning out BAM highlighted the simplicity and consistency of the fee business and made it possible for investors to sever it from everything else.

Management hoped the pure-play fee business multiple earned by the spinout would improve BN's valuation, given its majority ownership of that business. Instead, it may have emphasized or illuminated the fact that owning BN brings all the more opaque stuff, too -- questionable real estate valuations, direct investments in impenetrable private funds, etc. Now that investors can separate the fee business from all the rest by owning BAM, maybe the contrast has caused a devaluation of BN.

Like I said, it's just a guess. But market sentiment seems clearly to have favored Ares, KKR, Apollo and Blackstone over Brookfield the parent since the spin. The one-year chart comparing these seven tickers (left OWL out of the chart) is not pretty for BN (hope this link works):

https://rb.gy/dshq8

Alternative explanations welcome.

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