Horizon Kinetics ‘case study’ from 2012….
BITS & PIECES: Brookfield Asset Management (BAM); General Growth Properties (GGP); Brookfield Office Properties (BPO)
Brookfield Asset Management is a global asset manager with approximately $150 billion in assets under management, focusing on real estate, power, infrastructure, and private equity. BAM holds significant stakes in a few publicly traded entities, which, when subtracted from the current market capitalization, appear to discount other public and private holdings beyond a reasonable level. Further, an analysis of BAM’s net tangible asset value (NTAV) versus its historical share price shows that the current market capitalization discount to NTAV may be unwarranted.
As an exercise, one could consider BAM’s significant ownership in public entities such as Brookfield Office Properties Inc (NYSE:BPO) (TSE:BPO), Brookfield Residential Properties (NYSE: BRP), Howard Hughes Corporation (NYSE:HHC), General Growth Properties (NYSE: GGP), and Rouse Properties (NYSE:RSE). Additional owned entities worth including in this analysis are Acadian Timber Corp (TSE:ADN), Brookfield Real Estate Services Inc (TSE:BRE), Western Forest Products (WEF TO), and Norbord (NBD TO), among others (see exhibit below, top). On a per share basis, the total of these holdings is equal to $27.42, or, stated another way, the remainder of BAM’s businesses account for just $3.74 per share. This stub value represents a significant discount to all of BAM’s businesses not included in this analysis. While it is difficult to extract true values for all of BAM’s interests, investors could consider just the asset management business. In an attempt to value the asset management business, it may be appropriate to use a cash flow yield. This approach attempts to avoid the potential for double counting any of the above listed assets that may be held by the asset management segment. BAM’s management assigns a franchise value for the asset management business of nearly $4.3 billion based on assumptions of AUM growth of about 10% per year, 1.5% gross margins, and a 15% discount rate. An alternate approach to valuing the asset management business uses income from management and performance charges less transaction costs. An investor may assume these fees are relatively stable and sustainable.
Applying a 10x multiple to the two-year average fee generation of $412 million a value of $4.1 billion could be derived for the asset management business. The 10x multiple implies a cash flow yield of 10%, which is in line with the average free cash flow yield on asset managers Waddell & Reed Financial, Inc. (NYSE: WDR), AllianceBernstein Holding L.P. (NYSE:AB), and Legg Mason, Inc. (NYSE:LM). While it is acknowledged that fee income is not a perfect comparison to free cash flow, it may be reasonable to use this measure as a proxy to cash flow as a backup to management’s stated value given the lack of full disclosure on how management arrives at its $4.3 billion asset management franchise valuation. Purchase of shares at today’s valuation would entitle owners to proportionate shares of the above listed entities, the asset management businesses at a 42% discount, and the numerous other businesses for free.
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From another vantage point, one could look at the net tangible asset value (NTAV) reported by Brookfield Asset Management and compare it to the current share price. BAM’s NTAV as of year-end 2011 was equal to $34.52. The current share price of BAM represents a 10% discount to NTAV. If one were to look back to 2008, BAM’s stock price has traded at a premium to NTAV as high as 42.5%. In fact, as recently as December 2011, BAM’s share price was at a 20% premium. The discount may be attributed to continued overhang of investor concerns about the broader real estate market and may unfairly punish BAM shares. Investors with a positive outlook on BAM’s business prospects may expect shares to return to a premium to NTAV in a recovery environment.
Via Horizon Kinetics