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Dreamy Quarter Ends With S&P at Record High

Posted by Joe Cornell, CFA on Tue, Apr 02, 2013 @ 09:04 AM

Spin-Off Research, Spin-Off Advisors, Joe Cornell, Spin-Off to Pay-Off, Spin-Off, Ipo, Carve-out

Dreamy Quarter Ends With S&P at Record High



Below is an excerpt on the Brookfield Asset Management spin-off, Brookfield Property Partners, from Barron's The Trader.

BROOKFIELD ASSET MANAGEMENT (BAM), a Canadian firm with a market cap of US$23 billion, owns and manages $150 billion worth of businesses around the world. It's a complex company, with holdings ranging from toll roads to rail lines to apartment houses. Its conglomerate nature has been one of the bearish knocks on BAM, which also reports according to International Financial Reporting Standards, instead of U.S. Generally Accepted Accounting Principles. Recent published reports say that BAM's Brazilian operations are under SEC investigation over alleged bribes in a construction deal. BAM has denied wrongdoing.

On April 15, BAM will spin off its commercial real-estate holdings into a new entity, called Brookfield Property Partners (BPY), which will be one of the world's largest property companies, owning more than 250 million square feet of space.

Given BAM's success in such moves previously, investors might want to look closer at both it and BPY. BAM has spawned a number of stocks that have done well, says Andrew Boord, a portfolio manager at Fenimore Asset Management, a BAM shareholder. For example, shares of Brookfield Infrastructure Partners (BIP), in which BAM owns 28%, have doubled since they began trading in 2008, while the market is up 10% in the same period. BAM owns 68% of Brookfield Renewable Energy Partners (BRPFF), whose stock is up 260% since early 2001, compared with the market's 31%.

BAM's own stock has risen more than 500%, compared with the market's 42%, over the past 15 years. "It's a complicated company, and the BPY spinoff should make it easier to understand," adds Boord.

BAM is a "unique real-asset manager that adheres to a strict value discipline in cobbling together assets for long-term holding," says another fan, Pat Dorsey, president of Sanibel Captiva Investment Advisers, which owns BAM shares. Its management gets a lot of points for transparency and business acumen, he adds.

Cash flows come from tolls and rents, as well as management fees. A typical BAM investment is to get an equity partner to invest in a toll road, which will then be managed by BAM for a fee.

BPY already trades on a when-issued basis, closing at $21.35 last week. On April 15, BAM plans to distribute 7.5% of BPY to BAM shareholders of record March 26 in the form of a tax-free special dividend of one BPY unit for each 17.42 BAM shares held. BPY is initially pursuing a distribution growth-rate target of 3% to 5% annually and expects to pay $1 per unit annually, for a yield of 4.7%.

According to a report from Spin Off Research, BPY should benefit from a recovering U.S. economy, and further expansion into Brazil and Europe will drive growth. It values BPY at $30 a share, giving BPY a higher than median peer group valuation because of its considerable size and attractive payout targets.

As for BAM, as its business model moves closer to that of an asset-management company, less capital-intensive and with more income from fees, it should get a higher valuation as well, says Spin Off Research, which values BAM at $41.50, 14% higher than its close Thursday of $36.49.

When BPY begins trading, some current BAM holders won't be able to keep their BPY shares for nonfundamental reasons, so investors might wait to see at least a few days of BPY trading before wading in.


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Tags: Brookfield Asset Management Spin-Off, Brookfield Property Partners Spin-Off