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In renewing its normal course issuer bid to buy back Class A shares, Brookfield reported average buyback prices for the expiring one-year NCIB. That report quantified the damage to the parent's share price resulting from the BAM spinout:

The weighted average price that Brookfield paid per Class A Share acquired under this bid was US$42.22 for the period beginning on May 25, 2022 and ending on December 9, 2022 (being the last trading day before the date on which Brookfield completed the public listing and distribution of a 25% interest in its asset management business) and US$31.64 for the period beginning on December 12, 2022 and ending on May 17, 2023.

In short, the average BN share price declined by exactly 25% ' the same percentage as the slice of the asset management business that was spun out. It suggests the market sees asset management as the entirety of the parent's business and attributes no value to any of its other invested capital.

By contrast, the 25% BAM spinout represented 7.5% of the parent's net invested capital by Brookfield's generous calculation. Using my own valuation, which subtracts all credit for uncollected carried interest and discounts the real estate portfolio to 80% of its dramatically reduced book value, the spinout represented 14.5% of the parent's invested capital. Both suggest the reduction in the parent's share price post-spinout is overdone.

The current BN share price makes sense relative to the pre-spinout share price only if one assigns zero value to everything else in the portfolio, including shares in BEP, BIP, BBU, BPG, other direct investments in hard assets, and the nascent insurance business. It's possible to produce widely different estimates of value for these holdings, but I don't know of any method that produces a value of zero.

Nor is the market internally consistent, although that's not exactly news. If asset management were the entire business, BN would be worth three times the 25% stake held by the public, or roughly $39 billion at current prices. But BN has a current market cap about $12 billion more than that. So other assets count toward total value but not toward the calculation by which 25% of the asset management franchise is subtracted. Seems like a remedial math problem.

Oddly, in the wake of this disconnect the company's language around prospective buybacks has grown less aggressive. In the Q4 2022 letter to shareholders, dated Feb. 9, it said:

"With a net asset value per share which we estimate to be vastly higher than our share price, we expect to continue to use our cash resources to
repurchase shares in the market. If the discount persists, we will also consider other options, including a tender offer."

In the Q1 2023 letter, dated May 11, it boiled it down to this:

"Given the current share price and our view of the intrinsic value of our business, we expect to continue to repurchase shares."

great update.
2 comments :

- seems to be a decent amount of cases where SoTP conglomerate discounts don't close faster than inflation. would be great to hear thoughts on why this may (finally) no longer be the case for Brookfield in the next decade.

- sentiment; although some significant number of investors bought into Brookfield Property at a discount, it was taken out at even a greater discount.
(this i see more of a case where losses have outsized sentiment for those that favored greater discount arbitrage within SoTP, rather than the impact of sentiment towards the entirety of Brookfield. however, i dont want to understimate how brookfield's identity was tied to RE for a long time, and small failures here still outshine media coverage of Brookfield's larger success elsewhere.)

seems to be a decent amount of cases where SoTP conglomerate discounts don't close faster than inflation. would be great to hear thoughts on why this may (finally) no longer be the case for Brookfield in the next decade.

Brookfield is not a conglomerate in the traditional sense. I don't think it suffers from the traditional conglomerate discount, which is often permanent. There was no talk of a conglomerate discount when it hit $60 a share before the 3:2 2020 split or when it exceeded those highs post-split in the fall of '21. Its 20-year CAGR at that point was ~20%.

A traditional conglomerate acquires lots of unrelated businesses based on their individual characteristics. Berkshire Hathaway is a current example. Brookfield is a physical asset owner/operator and investment manager in a handful of well-defined verticals. Its listed subs were not acquired; they were created by the parent to house the various asset verticals. It does make acquisitions, but they are all related to the verticals they join. These days, it packages most of what it does in co-investment deals with institutional and sovereign funds, turning those investor shares into fees. All the verticals contribute to the fee business, which now overshadows everything else.

Berkshire and Brookfield have some investors in common because their leaders share an ingrained value sensibility, but their corporate structures are not comparable. Investors in the alternative asset space would compare Brookfield to Apollo or Carlyle before Berkshire -- old private equity shops that took acquisitions onto their balance sheets. That too is an inexact comp -- Brookfield was never in the LBO space. It has a private equity arm, but it's a very small part of the business. Brookfield presents a complexity issue for retail investors, but that is not the same as a conglomerate discount.

Within the alternative asset universe, valuation distinctions are more often attributed to being "asset-heavy" or "asset-light." The latter category, which includes Blackstone and Ares, enjoyed relatively higher valuations during the last bull market. This was part of Brookfield's motivation in spinning out the new BAM, which now qualifies as an "asset-light" alternatives play -- collecting fees for managing alternative asset investments, but not holding the assets themselves. For BN, the combination of being asset-heavy and many of those assets being in commercial real estate is the central explanation in this universe for its current modest valuation.

It is not a permanent state of affairs. Memories are short.

sentiment; although some significant number of investors bought into Brookfield Property at a discount, it was taken out at even a greater discount.
(this i see more of a case where losses have outsized sentiment for those that favored greater discount arbitrage within SoTP, rather than the impact of sentiment towards the entirety of Brookfield. however, i dont want to understimate how brookfield's identity was tied to RE for a long time, and small failures here still outshine media coverage of Brookfield's larger success elsewhere.)

My guess would be that this gets closer to Brookfield's current problem. An instructive comp here is Blackstone, which operates an enormous private REIT that has limited redemptions for several months in order to avoid forced asset sales at fire-sale prices. Investors don't like hearing their investments have become illiquid, even if it's temporary and well-advised, and Blackstone's share price has suffered as a result. Despite its asset-light balance sheet, it is trading much nearer its 52-week low than its high. (In fact, if you've ever been interested in BX, the leader in the alternative asset space, now would not be a bad time to have a look.) Similarly, the RE market has prevented Brookfield from maintaining the pace of asset sales that is usually a part of its business model.

Doubts about the IFRS values Brookfield has relied upon for its real estate portfolio were validated in the Q1 report, when the company wrote down the value of BPG, the private version of BPY, by 27%. With office defaults rolling across the Bloomberg ticker on an almost daily basis, the suspicion is that those write-downs may be just the beginning -- depending, of course, on the macro economic story and ever-imminent recession. This problem extends to multiple vintages of Brookfield's private real estate funds, from which it is expecting to collect carried interest.

Bruce Flatt has done a series of interviews trying to assuage these concerns, quoting rising lease rates at trophy properties. In one, he claimed that Two Manhattan West is leasing for one-quarter or one-third (I can't remember which) higher rates than One Manhattan West, which opened pre-pandemic. He continues to say that Brookfield holdings of "commodity" office space, properties presumably now underwater and subject to default, represent maybe five percent of the portfolio. Most of the GGP retail portfolio is still in there as well. Simon Properties, the leader in that space, is likewise trading toward the bottom of its 52-week range.

The market has been skeptical of the real estate port for a long time, going back to the days when it was publicly traded. Flatt's numerous attempts to jawbone the BPY share price upward were unsuccessful. It took a tender offer to do that, and only to the level of the offer, which Brookfield thought still enough of a discount to be a good deal for it as the buyer. Eventually, he gave up and took the whole thing private. My guess is the reported book value of the real estate port will have to stabilize at a level the market believes before BN gets back into its good graces.

An obvious question: Wasn't all this true of the RE port when BN (then BAM) was hitting new highs in the fall of '21? The answer is yes. But the astonishing trajectory of the fee business, all housed within the parent at the time, trumped everything. It was a growth story. Post-spinout, growthy investors have flocked to the new BAM. For now, Mr. Market views BN as the asset-heavy, stodgy remainder of the business. The fact that it still owns 75% of the fee business will occur to him at some point (one hopes). No telling when that might be, but I'm guessing it's when the RE overhang eases.

On the bright side, this process has hastened the decline of real estate's role in the Brookfield galaxy of assets. As the fee business grows, and as they methodically sell off RE when the market improves, it will recede further. As Brookfield pivots toward financial assets with its acquisition of Oaktree and development of an insurance operation, the boom-and-bust cycles of real estate should eventually influence its fortunes less than they do now.

Yes, well written. While I know this view isn't shared by too many who own the stock, and while I just bought more BN, I think Bruce has been in a hurry to grow - and it simply shows throughout the organization. Seems to me a bunch of quite average or below average investments have been made based on the model of more and more fees.

20% isn't in the cards for us shareholders going forward, ain't it awful? But I think we will do OK.

I think Bruce will find that complexity, promotion, and not exactly coming forth with the real story will overall over time result in...

...the stock of particularly BN selling for a discount.

I said it once and I'll say it again, BPY was not taken in at a huge discount. We had posters exclaiming BPY was a muti-bagger and selling for tiny fractions of its worth. I pretty much felt the entire time that BPY was worth pretty much close to nothing and I still think it is.

Like Buffett, Flatt makes some boo-boos. Life is great...if you can stand it!

very thoughtful, had to chew on it a bit.

My sense is that for the most part, Brookfield has and does retain a conglomerate discount. Of course it will hit a periodic high time-to-time, but its pretty rare for for flatt , or even most bulls, to ever claim it has become meme-like overpriced.
The conglomerate discount that persists seem to have some general features, the easiest to quantify is perception that managers and shareholders within its subgroups have limited power. Voting shares make this indisputable. Not sure that subsidiaries allow some thematic grouping makes much difference. (Brookfield Business has had its share of companies that could fit into other groups, and vice-versa) An extreme example is that if Brookfield's board decided to completely offload a sub, well it probably could get done.
Again, a comparison to Berkshire is worthwhile, as it enjoys a substantial halo effect for its subs who are subject to even more unidirectional cashflow.

Another more tenuous characteristic for the conglomerate discount is that buybacks dont help much, or only help after very long periods of overperformance in growth and profits. But this may occur longer than the mean shareholder holding period, so attribution would be tough for most to accept.
Again, a comparison to Berkshire is useful, as almost all holders are willing to accept the proclaimed increase in book value. No worry over there about holders ditching for dividend reasons, despite the fact warren drools over dividends from others!

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on another note, its killing me that brookfield looks so inexpensive when so many other good players in the alts space also look good. BN being my largest single-stock holding, some paralysis has set in.

Doubts about the IFRS values Brookfield has relied upon for its real estate portfolio were validated in the Q1 report, when the company wrote down the value of BPG, the private version of BPY, by 27%.

Above is incorrect. If it were true, IFRS book value would have been about 9 billion lower than the 2022 yearend IFRS book value of 39.608 billion and the stock would have massively cratered 20-25% from its already low price. On the contrary, IFRS book value increased to 39.960 billion as of 3/31/23. On a per share basis, book value increased from 25.17 to 25.54 using the basic share count which stood at 1564.4 million at quarter end.

Page 42 of the quarterly report, titled REAL ESTATE (Summary of Operating Results) states that Common Equity of the Brookfield Property Group increased from 31,368 to 32,205 in 1Q 2023.

Page 43 says "Common equity in our Real Estate segment increased to $32.2 billion as at March 31, 2023 compared to $31.9 billion as at December 31, 2022. The increase is mainly attributable to contributions from net acquisitions, which were partially offset by distributions paid during the quarter."

You are being misled because page 6 of the Supplemental doc titled Capital is showing BPG IFRS at 23,149 which is 27% lower than the value reported 3 months ago of 31,868. The difference of 9056 did not get written down. It simply got moved to a line item called 'Direct investments' which shows a value of 12,488. It comprises of the 9056 that got moved from BPG and some other items previously reported as Energy Contracts, Other Unlisted, etc.

More about direct investments from page 14 of the quarterly report. "Our direct investments are primarily comprised of capital invested in flagship real estate private funds which own high-quality assets and portfolios with operational upside 'LP Investments') across office, retail, multifamily, logistics, hospitality, triple net lease, self-storage, student housing and manufactured housing sectors. We also invest directly in certain private equity funds."

I guess investments which BN made directly into the funds were previously lumped into BPG, but now they are trying to draw a distinction. If someone can shed more light on this, it will be useful.

Quarterly Report
https://bn.brookfield.com/reports-filings/quarterl...

Supplemental Information
https://bn.brookfield.com/reports-filings/suppleme...

Above is incorrect.

Thank you for the correction. One of the complaints of former Brookfield shareholders on the old TMF board was that the company regularly changes the components of metrics such that they cannot be compared over time. Alexander Steinberg, a capable Brookfield analyst on Seeking Alpha with a sharper eye for accounting changes than I, reports they added Brookfield Residential to BPG and subtracted LP Investments this quarter, which makes comparisons with previous BPG line items like mine invalid.

What it means is Brookfield continues to stand by a reported book value for its real estate portfolio that the market does not believe. Steinberg's new piece is titled "Brookfield Corporation Is Undervalued And So What". He notes that BPY preferred issues sell for substantially below par, reflecting the market's view of the underlying holdings.

https://seekingalpha.com/article/4607864-brookfiel...

Apropos of another thread where the question was whether retail investors should clone Bruce Flatt sales of BAM to buy more BN, Steinberg advocates holding BAM over BN. It's simpler, growth of the fee business is more predictable, and you don't have to wait around for the commercial real estate sector to recover.

Steinberg's article is very good. Thank you for posting. But he too has made an error. Steinberg says:

The letter was posted on Feb 9 when BN was trading at ~$37. During the next quarter, BN dropped to the low thirties (around $32) but Mr. Flatt's response was immaterial - net buybacks of ~$10M in Q1 23, negligible compared with the market cap of ~$50B.

Not sure where Steinberg gets buybacks of only 10 million in 1Q 23. Capital Allocation (page 7) in Supplemental Information shows share repurchases of 294 million which is 25% of the 1Q 23 distributable earnings of 1,157. The 25% is in line with what CFO Goodman said in the earnings call.

Return of capital
Dividends        110m
Repurchases      294m

Reinvestment in business
BAM              1040m
Insurance         145m

As Mr. Steinberg has correctly pointed out, there is severe competition for cash in BN. 1,040m was reinvested in BAM which is a lot more than what was received from BAM as DE. With insurance, it's a wash. 145m was received as DE but all of it was reinvested right back.

Clearly, management sees growing BAM as the highest opportunity and therefore it makes sense to hold BAM and benefit from the growth. BN will do well too over time.

I would say no need to overthink BN versus BAM. Just decide what percent of your net worth you would like to allocate to Brookfield as a whole. Split 50-50 or some variation thereof between BN and BAM and be done with it. Then patiently sit back and let Bruce Flatt and team do the work.

ultimatespinach and Baybrooke thanks for your work, it is long overdue that there is more independent insight attempts into the Brookfield operations, stocks I have owned for decades buying as Brascan long ago.

What you may also want to do is read Alexander Steinberg's discussions with others in the comments below his article where he nudges towards stating things that he was unable to put in the original article. He says he was encouraged by SA to "soften" some of his wording.

While I will continue to hold Brookfield entities and maybe even add at times, I am still thinking the investment community is far too optimistic on the entities outside of the asset manager. Here is a link to yet another such publication as analysis on Brookfield, the shortcut hype-and-type that drives me nuts for a number of reasons for years now. But it is typical, and again is the majority view of anything Brookfield.

https://baskinwealth.com/an-ernest-opinion/a-compo...

Anyway, you guys are doing good work and I hope you keep it up. As I've said about Brookfield for some time don't overpay! To me the runups are getting more brief as time passes.

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