Invest your own money, let compound effect be your leverage, and avoid debt like the plague.
- Manlobbi
Stocks A to Z / Stocks B / Brookfield Corporation (BN)
No. of Recommendations: 1
Appears anything Brookfield really took it on the chin today...along with many others.
Was the BN Q3 report that terrible? What was the catalyst for a 7.5% face plant?
m
No. of Recommendations: 11
The market may have been spooked by the total distributable earnings (which includes capital gains) appearing fairly flat year-over-year. This was really misleading because the prior-year period included a huge one-time $1 billion gain from the BAM share sale by BN. Excluding that the underlying business is growing on trend.
Management reaffirmed their 25% compounded annual growth rate (CAGR) for distributable earnings per share over the next five years, which the market is effectively ignoring.
- 20% from its core business units, including asset management, wealth solutions, and operating businesses.
- 5% from capital allocation strategies, such as asset recycling and share buybacks.
The business is in a really strong position of growth right now and they keep exceeding my expectations with how agile they are, tilting direction opportunistically (in recent years their insurance operations expanded incredibly fast, adding Buffett's float leverage model (which enormously suits the semi-perpetual nature of Brookfield's earnings more than it suits Berkshire bond/equity mix) on top of everything they already have, accelerating fund-raising with data-centre builds, etc) despite the business having such huge scale.
Their reported Plan Value in the latest quarter was $69 per share. On average they have traded at a 30% discount to their reported Plan Value ($48 per share), and they are now quotated at $44, so about an 8% discount to where they typically have traded. Yet their growth projections are higher than usual for the coming decade.
- Manlobbi
No. of Recommendations: 2
Was the BN Q3 report that terrible? What was the catalyst for a 7.5% face plant?I have no clue what caused the price decline! But since you asked, below are a couple of potential candidates to consider.
The Capital Allocation page (Supplemental Info page 8) shows 1.025 billion reinvested into Operating Businesses. Commentary says "$2.8 billion ($1.0 billion during the quarter) was reinvested back into our operating businesses, primarily to opportunistically repay corporate and asset-level debt and to fund investments within our real estate business."
I don't know the details, but at least on the surface it looks like the real estate business isn't doing as well as management claims. Are earnings from the real estate business not enough to cover debt payments? Why else do you need to take 1.025 billion of Distributable Earnings (DE) from elsewhere and use it to pay real estate debt in Q3. The amount is 2.8 billion over the last 12 months to pay down real estate debt. I thought the real estate earnings were enough to cover debt payments until such time the asset is monetized and the debt gets fully paid as part of the sale. How much of DE is truly distributable, if a big chunk is needed to pay down debt, presumably to reduce debt payments, because earnings are not able to cover. I would be less concerned if the reinvestment was to grow the business.
Also, the press release shows 20,623 million revenues in Q3 2024 versus 18,917 million revenues in Q3 2025. That can't be good!
Q3 earnings press release
https://bn.brookfield.com/sites/brookfield-bn-v2/f...Q3 supplemental info
https://bn.brookfield.com/sites/brookfield-bn-v2/f...
No. of Recommendations: 11
I'd avoid using revenue changes from year to year as a proxy for intrinsic value. For any asset manager, especially Brookfield which include very lumpy gains from asset sales, the changes in reported revenue are a poor proxy for changes in intrinsic value. Better to use recurring distributable earnings.
Distributable Earnings (DE) before Realizations (per share): +18%. This is a better (probably the best single) year on year measure of the recurring, underlying cash flow generation from its Asset Management and Operating Businesses.
Fee-Related Earnings (Asset Management) was +17%. This segment's consistent, high-margin fee revenue is another far more useful indicator of change in intrinsic value for BN overall.
Regarding the asset sales and monetizations, whilst they are really lumpy, they have been pretty consistently successfully selling what they call "mature assets" at or above carrying value, which validates their book valuations and allows them to recycle capital into higher-growth opportunities. This includes their real estate business. When people panic about their real estate business being marked too high, you should always go back to this point - their sales are consistently at or above the carrying value. Of course they sell mature assets and don't sell assets under development, that is obvious if you manage real estate projects yourself. Real estate assets can be terrible and absolutely superb depending on the location - the need for physical property will never go away, and the pandemic lockdowns were a shrewd time to expand that business whilst frightened sellers were outnumbering the buyers.
Reported Revenue quarterly was -8.3% year on year. This is neutral to irrelevent. This figure is volatile because of the timing of asset sales and cyclical operating businesses, and does not reflect change in value of the fee-based business or overall cash generation (DE).
Regarding paying down debt, the debt is not an expense, so the paying of debt is not deducted from the reported earnings. Paying down debt is a capital allocation decision which could alternatively be buying back shares, paying a dividend, buying or constructing more assets. If they want to reduce debt, good on them.. Their judgement about how to deploy capital each year is definitely exceedingly better than mine, in fact I view Brookfield Corporation as a capital allocator more than anything else though they are never framed in that way.
Regarding the property having low earnings for the real estate business (as reported net income) the reason is primarily due to two non-cash accounting items, depreciation and fair value adjustments. In the 2023-2025 period the cap rates rose very slightly (actually, they widened with the average rising slightly) decreases the fair value (which produce non-cash losses), however this is a non-cash calculation that has no real importance. If we asked BN to increase its cap rates by 2% today, it would report *massive losses* from the abstract write-downs, but it would be entirely abstract and have no effect on the business, whilst the media commentators would go into a frenzy and the latest Paper Properties of Brookfield articles would hit the printing press.
There are reports that come out almost every year about Brookfield's property business not producing earnings and they are completely ridiculous. Part of the drama is also that Brookfield regularly defaults on individual assets each time they decide that keeping the asset is of net negative value for the business. This concept - freely jumping out of individual projects very selectively - is part of their business plan. It is not systemically consequential, by design, as they consistently use non-recourse debt.
The managers at Brookfield must roll their eyes a lot at the commentary, but I'm probably in the minority that I rather like the investing community often misunderstanding Brookfield, as the market dislocations occasionally give them not only buying opportunities but also and selling opportunities (such as BN selling BAM - not a typical sale to the public market but rather a large-scale internal restructuring that involved transferring shares - nearly a year ago whilst BAM on a relative basis was trading optimistically).
- Manlobbi
No. of Recommendations: 1
"$2.8 billion ($1.0 billion during the quarter) was reinvested back into our operating businesses, primarily to opportunistically repay corporate and asset-level debt and to fund investments within our real estate business."
In my previous post, I may have mis-interpreted above statement from management. I assumed above meant 2.8 billion was used to repay corporate and asset-level debt and to fund investments ALL in the real estate (RE) business. This didn't make sense because the RE business should not have significant corporate debt. We have been repeatedly told all RE debt is property specific and non-recourse.
However, upon closer inspection, perhaps they are saying money was used to opportunistically repay [corporate and asset-level debt, (not RE specific)] AND [fund new investments in the RE business.] This makes more sense.
Still, why use earnings to pay asset-level debt? Isn't this a red flag? Doesn't it indicate that the asset isn't able to cover its interest payments and is in some kind of distress? Using earnings to pay down corporate debt and funding new investments is fine.
No. of Recommendations: 6
"$2.8 billion ($1.0 billion during the quarter) was reinvested back into our operating businesses, primarily to opportunistically repay corporate and asset-level debt and to fund investments within our real estate business."
...
Still, why use earnings to pay asset-level debt? Isn't this a red flag? Doesn't it indicate that the asset isn't able to cover its interest payments and is in some kind of distress?
I don't think it's a red flag - the key word is 'opportunistically'. It does not mean that income from the asset was not covering interest payments on its debt, it just means that they decided that paying down that debt (above and beyond interest payments) was a good use of corporate funds.
dtb
