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Brookfield Asset Management (BAM) Stock | NYSE: BAM | TSX: BAM.TO

Covered by Stratosphere

The Behemoth of Real Assets

Brookfield Asset Management ("Brookfield" or "BAM") owns and manages commercial property, power, and infrastructure assets. Its investment focus includes Real Estate, Infrastructure, Renewable Power, and Private Equity. Real Estate is made up of office and retail properties; Renewable power is made up of hydroelectric, wind, solar, and storage generating facilities; Infrastructure is made up of utilities, transport, energy, data infrastructure, and sustainable resource assets; and Private Equity is focused on business services, infrastructure services, and industrial operations.

Incredible scale and value-oriented capital allocation into real assets has created a global empire that may one day surpass $1 trillion in assets under management ("AUM").

The business owns sizeable chunks of its listed businesses (i.e., subsidiaries): Brookfield Property Partners, Brookfield Infrastructure Partners, Brookfield Renewable Partners, and Brookfield Business Partners.

Stratosphere Score

9

Growth

9

Valuation

10

Quality

8

Margins

3

Dividend

8

Balance Sheet

2
Braden Dennis

Author

Braden Dennis

Founder

Investment Thesis

  1. Brookfield is an owner, operator, and investor of real assets over the globe including real estate, infrastructure, renewable power and private equity through its publicly-listed subsidiaries. These businesses enable wide reach across geographies, asset classes, and secular trends, making Brookfield the behemoth that it is.

  2. Brookfield's ability to deploy capital at scale allows it to make deals around the globe that few enterprises would ever be able to perform.

  3. There is a growing demand for investments in alternative and real assets. Low real yields in fixed income is driving capital away from "safe" assets into "riskier" assets as investors and funds seek to make satisfactory yields on their investments. Alternative and real assets provide a higher yield alternative that is not fixed income nor public stock markets, which can face extreme "mark-to-market" volatility.

  4. Brookfield is a high-quality, durable, and proven cash flow compounder led by a team of experienced and disciplined capital allocators.

  5. BAM is positioned well to take advantage of positive global tailwinds including renewables growth, low interest rates, acceleration of appetite for real assets, and global infrastructure growth.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Capital Deployment at Scale

Brookfield's scale across many classes is a trait many asset managers aspire to achieve.

Size is often believed to be a constraint in alternative asset management. Once a fund, bank, or other large investor is big enough, competition increases as these organizations or investors try to out-bid each other for quality assets.

For example, the markets for businesses and certain assets under $1 million in valuation is generally thin. Mom-and-pop investors may not have the expertise to operate the asset, while the size is too small for larger investors to even bother. At higher levels of absolute dollar valuation, for example, $100 million or a few billion dollars, large funds and investors get involved. These types of assets tend to carry higher valuations (i.e., as a function of their future cash flows, not just absolute dollar amount) as large investors fight for quality assets.

Brookfield, however, has the global presence, scale, and diverse operating capabilities across sectors and asset classes. Brookfield is able to play its own game.

Despite Brookfield's size, the company is still able to find value in a world of heightened valuations. This is crucial for an asset manager, and any investor too, frankly.

If one purchases an asset at a high valuation, it's possible value is destroyed on day one. If assets are not purchased at a reasonable price at worst, no amount of improvements to the asset will help the investor hit their investment return targets.

Brookfield witnesses little competition for its targeted assets. Not only is Brookfield's size a deterrent to many competitors, but Brookfield also looks to areas where capital is scarce. In these markets, Brookfield is able to buy assets at a cheap price, improve the asset(s) using decades of built-up operating expertise, and create value for the company and shareholders.

Not to mention, Brookfield can find or raise capital much quicker than most asset managers out there. Simply using speed and agility, Brookfield can close a deal before other competitors even find out about the asset.

This competitive edge is Brookfield's bread and butter. In the words of Brookfield, here is an example of how it's done the Brookfield way:

"[T]here is a very large bid today in renewable power, in infrastructure on low cost of capital assets. Anybody with a low cost of capital can buy a very clean stream of cash flows and just out-pay a competitor for that. We have the ability to find off-the-run cash flows, assets that might need further development, might need an operational turnaround. And therefore, there's less competition. We can find that pocket of value. We can bring our operational depth to bear and continue to drive value."

Operational Expertise

Brookfield has a deeply rooted history in owning and operating its assets. As an owner-operator, Brookfield has built up the operating expertise required to run a diverse set of businesses across any geography, size of business, and niche industry.

As a result, Brookfield has a number of subsidiaries that operate autonomously under the BAM umbrella:

  • Brookfield Property Partners

  • Brookfield Renewable Partners

  • Brookfield Infrastructure Partners

  • Brookfield Business Partners

  • Brookfield Investment Management. This subsidiary manages investment funds within public securities through Oaktree Capital Management.

  • Brookfield Reinsurance Partners

BAM Stake in Every Brookfield Business Unit

Each unit, as an expert in its particular field, owns and operates all of its assets. This has several major advantages that other asset managers have been unable to narrow down on:

  1. Brookfield and its subsidiaries can perform complex, large, even obscure acquisitions of alternative assets and businesses at any point in a market / macroeconomic cycle and make it work.

  2. Operators have seen a lot, and so they can do a lot. Like clockwork, operators rely on their vast experience to improve operations with the ultimate goal of creating value.

  3. Global operations provide a global perspective. Each market operates differently. By operating assets around the world, Brookfield and its subsidiaries have firsthand insight into real-time insights from its operators. This is usually a large disconnect for limited partners (or regular "hands-off" investors) who may not see disaster or windfalls coming until after the fact.

Flexibility of Capital

Brookfield's competitive and operational edge over peers foster a world-class balance sheet with financial optionality. Stemming from this is also the flexibility to raise capital from various sources. Brookfield can efficiently invest into large projects by tapping into public and private markets (and its own balance sheet too) at large across various financing structures.

The ability to source and maintain a targeted capital structure is what separates the good asset managers from the great. We believe Brookfield is a great asset manager given how it manages its capital structure.

The underlying principle of Brookfield's capital structure is to target funding sources that do not put pressure on the asset manager at various points of an economic cycle. Therefore, permanent (i.e., indefinite financing) or long-term funding sources are preferred to short-term capital.

If most of Brookfield's capital is permanent or long-term, the organization and its affiliates (which have been able to self-fund their endeavours) can focus on operations and purchasing the next deal. The last thing a Brookfield investor would want to see is the company scrambling to scrape together cash to pay off maturing debt or blowing up deals with short-term funding applied to a long-term asset.

Brookfield's capital strategy allows it to do several things that serve shareholders well:

  • raise capital quickly due to diverse funding sources (mainly Brookfield's own balance sheet, affiliate listings' capital, and capital from institutional investors) and high credit rating;

  • continue investing during dire economic times;

  • align shareholders' and investors' interests with its own — avoiding mismatches in time horizon between capital contributed and underlying asset purchases made by Brookfield; and

  • maintain a low debt to total capitalization ratio, meaning Brookfield can always stay in the game without risks of blowing up.

Opportunities Ahead

  • Decarbonization. Brookfield is well positioned to be the leader of decarbonization. The organization estimates the transition to net zero - the elimination of additional greenhouse gas emissions - will require $100 trillion of investments around the world over the next three decades. ESG (i.e., environmental, social, and governance) is gaining ground as a concept that is increasingly driving the world towards a more sustainable future. With the amount of money flowing towards these initiatives, Brookfield's critical renewable power and transition sectors will help Brookfield commit itself to these initiatives while also helping the world. The company's wind, solar, hydro, and energy transition assets will undoubtedly prove lucrative as forward-looking organizations and governments commit more resources to fighting for a more sustainable future while the myopic organizations are left in the dust.

  • New fund opportunities in technology, ESG impact, and insurance. If there is a chance Brookfield can take advantages of emerging trends, you bet the company will take the opportunity to increase fee-bearing capital. Brookfield's quick and agile way of raising capital will make sure the company gets to a trend before the entire world has its eyes on it. With its capital strategy, shareholders can rest assured they have an "in" on these new trends in a value-creating manner - Brookfield's mantra.

  • Alternatives are increasingly sought-after in our yield-starved world. Interest rates, despite the recent increases globally, are still incredibly low. When interest rates are low - particularly real interest rates (in simple terms, the interest rates / bond yields one sees quoted minus inflation, usually CPI) - investors seek shelter either in riskier assets, like stocks, or "hard assets" like real estate and infrastructure. Fortunately, Brookfield is the king of alternatives. With hundreds of billions of assets under management, Brookfield will be able to efficiently and effectively deploy investors' capital into quality alternatives. We can see Brookfield surpassing $1 trillion in AUM in the foreseeable future if this trend continues (which we believe will).

  • Brookfield is now supposedly going forward with spinning off the asset management part of its business. Brookfield is no stranger to spinoffs to extract value for shareholders. The wonderful business of asset management is Brookfield's newest target for a spinoff. Brookfield's CEO, Bruce Flatt, revealed he and the company's management team are mulled the possibility of splitting up Brookfield into smaller, easier-to-understand pieces. More specifically, splitting a piece of the capital-light asset management business from the capital-heavy parent company will allow for greater transparency and allow investors to get the capital-light aspect of the business without the capital-heavy part of it. We feel that this spinoff would unlock a decent amount of shareholder value given the nuances and level of knowledge required to value the company in its current state. Investors should note that this is mostly just financial engineering and accounting which will help provide greater visibility into Brookfield's complicated conglomerate. There will be no immediate internal value created by proceeding with the spin-off in terms of a revenue lift or lower costs. Brookfield's assets will simply appeal to a wider investor base, attracting debt and equity holders alike to continue expanding AUM.

Risks

Interest Rates

The most obvious risk to Brookfield's business is interest rates rising too quickly. While global interest rates today are low on an absolute and relative basis, a quick rise in interest rates and bond yields could result in mass asset liquidations and a reduction in fresh demand for assets, even quality ones.

We have no intention to make a prediction on interest rates nor do we have a forecasted interest rate figure on, say, US government 10-year bonds, that would significantly reduce risk appetite.

However, investors must be aware that interest rates are a significant driver of asset demand, and therefore, asset prices.

Should demand weaken, Brookfield may see impairments to some of its assets held as well as reductions in revenues.

On the bright side, Brookfield maintains a capital structure that is meant to withstand such environments, even prolonged ones. If raising capital from external parties is a challenge, Brookfield has room to invest its own capital from its balance sheet.

Over long periods of time, we think Brookfield has the skills and expertise to continue creating value.

Office and Retail Exposure

The COVID-19 pandemic changed the way we live our lives. It's obvious he work-from-home and work-from-anywhere threat to office real estate and e-commerce threat to retail real estate changed investor sentiment towards these asset classes.

Brookfield holds over 160 million square feet of office real estate around the world and over 150 million square feet of retail space, mainly in the US.

It is still unclear whether these assets will be permanently impaired, but we do recognize that work-from-home and e-commerce are strong trends that are here to stay.

These impairments could hurt the income statement. Similarly, future cash flows from these properties could be lower as vacancies rise.

On the bright side, Brookfield invests in these asset classes primarily in prime locations. While office and retail space is not quite as desirable as it once was, hybrid work environments and in-person shopping is still in tact.

We believe if these asset classes are impaired, there might be short-term pain. But, Brookfield invests in many other alternatives, which may be a larger focus moving forward. Despite potential short-term pain, Brookfield's diverse portfolio will prove to be a strength.

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