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How concerned are you about the governance questions raised about Brookfield (see the link below)? I have been waiting for BIP and BAM to fall, but now am not sure when/whether to pull the trigger on a buy.
I don't have as much issue with the structure as the author does. You also see a somewhat similar structure engineered by the Rothschilds and Paris Orleans, as well as Jardine Matheson (Jardine Strategic owning its parent, Jardine Matheson; Jardine Strategic was also - until recently - owner of 20% of Rothschild Continuation Holdings in an attempt to protect the interests of the Rothschilds.) I do think that calling it in the interests of shareholders is incorrect, it's largely engineered to protect the interest of the principals involved.
If the author finds the Brookfield structure upsetting, they should take a look at the organizational chart of Paris Orleans (the Rothschild's Holding Co):
I think the fact that there has been no filing regarding the SEC investigation of the fact that the company has been accused, Wal Mart-style, of bribery in Brazil is concerning. The company did respond in considerable detail to the author's "group", but I think it's somewhat distressing that they felt the need to potentially take legal action.
As for the company's reliance on financial markets, it certainly did better than most of its peers in terms of handling 2008, and was able to raise money while others were not.
As for conflicts, this is not the first time that the company has caused some irritation: " But in recent months, a crack has appeared in B.A.M.’s sturdy armor. Investor unrest erupted in late July, when Brookfield Properties unveiled plans to acquire an Australian portfolio of office properties owned by B.A.M. and sell its residential business to a unit of B.A.M. without an auction.
Brookfield Properties’ stock fell 13 percent as concerns about conflicts arose. Analysts questioned who benefited more from the deal — the parent or the real estate stepchild. The news made many analysts wonder whether Mr. Flatt was running the show behind the scenes and dictating what Brookfield Properties and other B.A.M.-controlled companies could be bought or sold, and when. (The issue is further complicated because Brookfield’s C.E.O., Mr. Clark, also holds an executive position at B.A.M.)
It was this episode that prompted Michael Knott, a managing director at Green Street Advisors, to call Mr. Flatt a benevolent dictator. “Investors expressed their concerns with their feet by getting out of the stock,” says Mr. Knott, adding that this was the first time potential conflicts had become an issue.
The stock rebounded a few weeks later, though. Investors saw the potential upside in turning Brookfield Properties into a pure-play international office company and having it invest in the Australian market, where the economy is growing and rental rates are rising much faster than they are in the United States.
Mr. Flatt bristles at being dubbed a benevolent dictator, emphasizing his company’s team approach. There may be some who question the relationship and potential conflicts between the two companies, he says, but an equal number of investors are bullish about Brookfield Office Properties precisely because of B.A.M.’s ties to it. He acknowledges that he takes a hands-on approach to the companies in which B.A.M. invests, but he makes no apologies. “Look, we’re an active investor in businesses,” he said."
From the comments section: " You'll notice that the stock usually trades at a substantial discount to management's perception of NAV, probably because most analysts are not nearly as optimistic as Brookfield management."
I think there's an element of complexity (and it is a "paper world", as the title suggests - Brookfield is one of the world's largest holders of real estate and infrastructure/renewable energy; there's an enormous amount of moving parts, accounting and complexity) that has resulted in Brookfield appearing, well, opaque. Some have discussed a "conglomerate discount", similar to Loews or Leucadia; Brookfield is working with Berkshire), but I think the company is complex and likely could improve transparency. I think there's the possibility that the eventual spin-off of the real estate assets into another (and likely final) MLP - Brookfield Property Partners - may help some in that it will push the company towards evolving really largely into an asset manager. That said, I'm curious as to why the spin-off that was supposed to happen last Fall has not yet happened.
Some people have taken issue with Berkshire's conglomerate accounting, although I think Brookfield is more complex: From Berkshire's "Owner's Manual" - "Because of our two-pronged approach to business ownership and because of the limitations of conventional accounting, consolidated reported earnings may reveal relatively little about our true economic performance. We attempt to offset the shortcomings of conventional accounting by regularly reporting "look-through" earnings (though, for special and nonrecurring reasons, we occasionally omit them) "
I have some concerns about aspects of BAM and the response, but I do not think that there is something underhanded going on.
I don't own BAM and admittedly haven't kept track of the parent company recently (I have owned it off and on a few times), but continue to own BIP. I do, however, not have any interest in increasing my position in BIP any further, and already have enough infrastructure-related investments in general, as is (I've pondered Cheung Kong Infrastructure, but already own parent Hutchison Whampoa and decided against it.)
Comments
If the author finds the Brookfield structure upsetting, they should take a look at the organizational chart of Paris Orleans (the Rothschild's Holding Co):
http://www.paris-orleans.com/en-gb/activites/activites-bancaires.html
I think the fact that there has been no filing regarding the SEC investigation of the fact that the company has been accused, Wal Mart-style, of bribery in Brazil is concerning. The company did respond in considerable detail to the author's "group", but I think it's somewhat distressing that they felt the need to potentially take legal action.
As for the company's reliance on financial markets, it certainly did better than most of its peers in terms of handling 2008, and was able to raise money while others were not.
As for conflicts, this is not the first time that the company has caused some irritation: " But in recent months, a crack has appeared in B.A.M.’s sturdy armor. Investor unrest erupted in late July, when Brookfield Properties unveiled plans to acquire an Australian portfolio of office properties owned by B.A.M. and sell its residential business to a unit of B.A.M. without an auction.
Brookfield Properties’ stock fell 13 percent as concerns about conflicts arose. Analysts questioned who benefited more from the deal — the parent or the real estate stepchild. The news made many analysts wonder whether Mr. Flatt was running the show behind the scenes and dictating what Brookfield Properties and other B.A.M.-controlled companies could be bought or sold, and when. (The issue is further complicated because Brookfield’s C.E.O., Mr. Clark, also holds an executive position at B.A.M.)
It was this episode that prompted Michael Knott, a managing director at Green Street Advisors, to call Mr. Flatt a benevolent dictator. “Investors expressed their concerns with their feet by getting out of the stock,” says Mr. Knott, adding that this was the first time potential conflicts had become an issue.
The stock rebounded a few weeks later, though. Investors saw the potential upside in turning Brookfield Properties into a pure-play international office company and having it invest in the Australian market, where the economy is growing and rental rates are rising much faster than they are in the United States.
Mr. Flatt bristles at being dubbed a benevolent dictator, emphasizing his company’s team approach. There may be some who question the relationship and potential conflicts between the two companies, he says, but an equal number of investors are bullish about Brookfield Office Properties precisely because of B.A.M.’s ties to it. He acknowledges that he takes a hands-on approach to the companies in which B.A.M. invests, but he makes no apologies. “Look, we’re an active investor in businesses,” he said."
http://www.nytimes.com/2010/12/19/business/19brook.html?pagewanted=all&_r=0
From the comments section: " You'll notice that the stock usually trades at a substantial discount to management's perception of NAV, probably because most analysts are not nearly as optimistic as Brookfield management."
I think there's an element of complexity (and it is a "paper world", as the title suggests - Brookfield is one of the world's largest holders of real estate and infrastructure/renewable energy; there's an enormous amount of moving parts, accounting and complexity) that has resulted in Brookfield appearing, well, opaque. Some have discussed a "conglomerate discount", similar to Loews or Leucadia; Brookfield is working with Berkshire), but I think the company is complex and likely could improve transparency. I think there's the possibility that the eventual spin-off of the real estate assets into another (and likely final) MLP - Brookfield Property Partners - may help some in that it will push the company towards evolving really largely into an asset manager. That said, I'm curious as to why the spin-off that was supposed to happen last Fall has not yet happened.
Some people have taken issue with Berkshire's conglomerate accounting, although I think Brookfield is more complex: From Berkshire's "Owner's Manual" - "Because of our two-pronged approach to business ownership and because of the limitations of conventional accounting, consolidated reported earnings may reveal relatively little about our true economic performance. We attempt to offset the shortcomings of conventional accounting by regularly reporting "look-through" earnings (though, for special and nonrecurring reasons, we occasionally omit them) "
I have some concerns about aspects of BAM and the response, but I do not think that there is something underhanded going on.
I don't own BAM and admittedly haven't kept track of the parent company recently (I have owned it off and on a few times), but continue to own BIP. I do, however, not have any interest in increasing my position in BIP any further, and already have enough infrastructure-related investments in general, as is (I've pondered Cheung Kong Infrastructure, but already own parent Hutchison Whampoa and decided against it.)
Thanks for the detailed response. Helps me better understand the companies.
BWG