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Author: BenGrahamMan Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 402  
Subject: BAM updated through December Date: 12/11/2008 4:43 PM
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Here are some updated stuff. I link it here, not for spam, but certainly for better viewing, tables, links and one central place for over 145 pages of notes.

http://rbcpa.com/companies/BAM_notes.html

constructive debate is welcome.

December 11, 2008 (14.20)



Cap rate Assumptions by Brookfield Asset Management. A history of discussion by BAM and BPO.



At investor day, Bruce Flatt mentioned that he models using a 6.5% long term cap rate assumption. Ric Clark on the October 20, 2008 conference call mentioned he used a 6.5% to 7% cap rate to determine Loan to Values (LTV's).



With that said, in Brascan 2001 AR on page 19 mentions, "The underlying value of our commercial properties is based on a 7.75% capitalization rate applied to estimated 2002 net operating income, prior to lease termination income and other property gains, which is projected to be $1,025 million."



On Investor Day September 20, 2007 The following was written by BAM.



*Speculative building remains well under control.



* Demand for space remains strong



* Escalation in rental rates occurring in most markets.



* Cap rates will remain in LOW SINGLE DIGITS for as long as interest rates are benign and the projection is for higher rental rollovers.





Notes from Wachovia Commercial Real Estate (CRE) Conference 12/9/08



1. Financing trends for all of CRE include lower LTV’s, Fully covered reserves, non-reliance on pro-forma assumptions (unless contractual), floaters and extensions. Cap rate assumptions certainly rising. Non-recourse loans no longer available. Spreads of course have widened.



2. The mood was dire. Most analysts seemed to be talking about the numbness has worn off. Unlike past conferences, most analysts and participants were discussing potential jobs and using the conference as a networking opportunity.



3. Mark Vitner , Senior Economist Wachovia, stated, “Currently we have only seen 20,000 jobs lost in NYC, yet 50,000+ have been announced.



Discussion of Transactions and Financing in 2009



4. “If you think things are bad now, you haven’t even felt it yet.” I was looking over at Bill Powell from Brookfield Asset Management as that was said, and he certainly raised his eyebrows.



5. The key to commercial property valuations is based on if large number of forced sellers. Watch foreclosure sales. If those increase, we may have a large valuation downturn. Consensus was that this is worse than the early 1990’s.



6. Credit markets not normally functioning, as most of the deals are extensions. Consensus is that things will not normalize anytime soon. We have to wait for results of extensions, and if pay-offs or refinancings will be able to be obtained.



7. Barry Blattman, Senior Managing Director of Brookfield Asset Management had to cancel as he had Jury Duty on 12/9/08. Ric Clark of Brookfield Properties was “tentatively supposed to present.” Brookfield Properties did not present. Wachovia clearly stated it was not a cancellation by Brookfield Properties.



8. Watch the jobs numbers. These are most important.



9. Consensus projected 2 years of rent deflation, greater haircuts on loans to value, lenders being “ultra-conservative.” Not accepting stated vacancy rates, imputing there own vacancy rates. “Cap rates need to be higher. Expect to see normalized cap rates of 8%. Expect to see current cap rates increase by 100 – 200 bps.



10. “Cap rates of 5% are dead forever.”



Brookfield Infrastructure Partners



11. Acquiring Public Private Partnerships (PPP) from Brookfield Multiplex. Purchase price of $20M. I asked if this was discount from BAM’s original purchase price, but presenter was not sure. Properties include 2 hospitals. Anticipated close is November / December 2008 (even though presentation was in December 2008.)



12. Described how Transelec will be doing a $1B capex project over next five years. “Of which $200M has already been approved by regulators, and will certainly qualify for 10% regulated return by Chile.” Claimed that another $100M will be approved as regulated going forward. $700M not yet approved. They have both regulated and unregulated assets. There is a regulated return on replacement cost. These should be pre-approved according to BIP in response to my question.



13. Invested in Longview to maintain 30% ownership level. This further investment of $103M was completed in November 2008.



14. BIP claimed they were looking at North American Utilities to invest in. I asked if those would be Hydro plants. BIP claimed, “no, they will not be in the renewable energy arena.”



15. I asked if they have ever bought an investment from an entity not related to BAM. They claimed “No, but we have and are looking at some.”



16. BIP claims estimated liquidity of $821M, broken down as follows at 9/30/08:



Cash
$ 31

Citigroup Credit Facility
100

Credit Suisse Credit Facility
100

RBC Credit Facility
100

HSBC Credit Facility
100

RBS Credit Facility
50

Proceeds from Sale of TBE (est)
270

Longview Investment
(103)

BAM equity commitment
200

Total Estimated Liquidity
$821






17. Interesting that BIP has only bought assets from Parent BAM.



Vornado Realty Trust – Presented by CFO Joe MacNow



18. As I have experienced with occasional meetings with, and word on the street descriptions of typical VNO officers, Joe MacNow seems to live up to the exemplary descriptions given to the chiefs of Vornado. He seems honest and filled with great knowledge. Very cool presentation. I am only writing down parts that interest me, and ones I took notes on. My notes will do VNO no justice. Yet, these should be of interest nevertheless.



19. As of 12/05/08 VNO has a market cap of $9.9B and an enterprise value of $26.2B. Has 16.1M SF of Office in NYC, 17.6M SF of Office in DC, 21.8M SF of Retail Properties, 8.9M SF Merchandise Mart (Chicago), and 32.7% ownership of Toys “R” Us.



20. 1/3rd of NYC business is financial services related. Yet, NYC is a market within itself and over the long-term it will thrive.



21. Merrill was about to sign lease prior to Thain. They were to build massive trading floor at Pennsylvania Hotel (across from Madison Square Garden.) Thain’s tenure halted that process. Thain is from Wall Street, and has a preference for Wall Street locations, yet is not married to Wall Street location. I asked where Joe thinks Merrill will end up going once 2013 lease at World Financial Center expires. He explained that new Bank of America Tower is not big enough for both Merrill and Bank of America. Joe said, ‘I don’t know where they will go, it won’t be at World Financial Center, and I suspect they will go to mid-town.”



22. No acquisitions planned for 2008 and 2009. Looking to preserve a war chest of capital and be prepared for any financial climate when debts of $2.7B and $2.7B respectively come due in 2011 and 2012. He feels that cash flows and current war chest will cover that, even using draconian scenarios, yet they want to be prepared to meet those debts under all circumstances. He indicated, and by no means expects a stock dividend to occur, but if need be, that could save $600M annually. As a REIT they would still have to pay 20% of the required dividend in cash. It is being discussed by NAREIT to change that to 5%, but Joe does not expect that reduction to occur.



23. NYC CRE rents have decreased substantially. He is seeing a general trend of rents decreasing by as much as 43%. He has seen the higher rents of say $200 square feet go down to $125 per square foot.



24. Also saving capital for bargain acquisitions in future. Will commit capital to a franchise in the future. They will stay in the areas they know, which is Class A real estate in Washington DC and NYC. He said, don’t expect us to be buying in Chicago. “We will stick with what we know.” I specifically asked if he would consider the purchase of Brookfield Properties. He said, he doesn’t want to discuss a fellow known landlord, but also offered that the debt attached to BPO creates an enterprise value that they are not interested in. He saw no bargain in Brookfield Properties, as the current debts are attached to any purchase price.



25. He discussed current and future lending environment. He sees no easing over next few years. He said 50% to 60% LTV is very do able, as long as total required is $250M or less. If one is looking for greater than $250M it is “either difficult or impossible.” He used the NYC Palace hotel as an example. He described, “let’s say this building has no debt, yet a conservative value of $1B to $2B. They will not get a loan of greater than $250M. Perhaps they could go to a series of lenders to each put up portions, but again that is difficult if not impossible. That is why a war chest of cash is needed.” Also expect to see Joint Ventures in the future to help funding.



26. If a company has unsecured bonds, they will not be replaceable for at least two years.



27. Typical loans are 50 – 55% Loan To Value, and not exceeding $250M, no matter what the value is. 25 to 3o year amortizations. Easy schedules of last 5 years do not exist. The historical spread of CRE loans to treasuries has been 6.9% over a 46-year period, and 7 % to 10% if you take out boom years. Expect long-term debt rates to eventually settling in at 8.5%, yet that could be after rates shoot up even greater. Don’t be surprised to see interest rates of 10% or greater.



28. Cap rates will be greater than their constants. Constant on a mortgage is total debt service payment/loan amount including principal and interest. If interest rate is 10%, the constant annual payment on a fixed rate loan will be higher because it includes amortization.



29. So if interest rate is 7%...the constant annual payment on a fixed rate loan will be higher because it includes amortization.



30. AAA CMBS should not be 1000 bps over UST.



31. Loves retailers as tenants. They look to make sure that ultimate rent payments is not in great percentage to revenues. Claims retailers can survive when rents as a percentage of sales goes to 18%. Look at sales per square foot.





December 11, 2008 (14.66)



Investor Day Notes from September 16, 2008



Bruce Flatt:



1. Mentioned that all 10,000 employees carry a business card with Brookfield Asset Management on it. Gives them a lot of exposure. That is a lot different than say Berkshire Hathaway. I went to several Dairy Queens, where the manager did not know that Berkshire was the parent company.



2. They focus on putting $$$ right along with clients.



3. Goal is growth in intrinsic value.



4. Focused on appreciation of assets. I wonder how simple that might be. One will always know cash flows and spending (within a range). Yet appreciation is a function of markets, profitability, cap rates, replacement costs, etc.



5. Claims to finance activities on a "conservative long-term basis." All financed separately and typically non-recourse. I still question how $14B - $18B coming due within 3.5 years can be considered "conservative long-term basis."



6. Claims to have completed $9b of financing since August '07. It was asked how much financed since 6/30/08. Lawson wasn't exactly sure, said something like, " 500? 800? I don't remember off hand." Flatt chimed in, "there you have it, about a billion.



Brian Lawson:



7. Right now liquidity is about $2B or less. This is made up of Cash, financial assets and credit facilities. There is $500M in cash or credit in infrastructure and property.



Bruce Flatt:



8. They value properties and businesses uses a long term cap rate. Usually modeling 20 years. They then use Discounted Cash Flow with a final cap rate. Upon questioning Flatt mentioned cap rates differ per business, but 6.5% is typical.



9. Hydro prices are reliant on energy prices. Higher gas prices = higher hydro prices and visa versa. Costs stay the same.



10. Flatt mentioned that counter party CDS had none with AIG. He did not disclose who counterparty cds was with.



11. Since June, BAM has seen credit spreads widen. Covenant patterns have tightened up. Interest only is no longer offered.



12. Flatt mentioned that BIP was a trial of sorts. They started smaller ($700M) to see how perception of market would be.





Brookfield Investments Corporation – a quick look at 9/30/08 report.



1. other income was $28m for the 3 months ended 9/30/08. Included $20M revaluation gain from an exchangeable debenture and $8M of "dividend and other income."



2. Foreign exchange gain of $5M for nine months.



3. I think there is a loan receivable from BAM for $210M at prime rate and payable on demand. Once again BAM gets awesome financing terms.



4. They recorded other income of $132M, their profit including the other income was $58M. The $132M was $31M from Canary Wharf and income from exchangeable Norbord debentures (ownership % went down to 35%).



Stronger USD is worse for Brookfield Investments earnings. Watch Loonie and British Pound.



I need to flow through and see how BAM identified the other income. It appears to be non-recurring.



On December 3, 2008, Brookfield Investments sold Canary Wharf to a division of Multiplex.



"TORONTO, ONTARIO--(Marketwire - Dec. 3, 2008) - The board of directors of Brookfield Investments Corporation (the company) (TSX:BRN.PR.A) today approved the sale of its indirect 15% interest in The Canary Wharf Group plc ("CWG") to Brookfield Europe LP. CWG owns a complex of commercial properties in the United Kingdom. As consideration, the company will receive an approximately 42% limited partnership interest in Brookfield Europe LP with a fair market value of GBP 333,800,000 and cash proceeds in the amount of GBP 107,600,000. Brookfield Europe LP is being formed as part of an initiative by the company's parent, Brookfield Asset Management Inc., to combine all of its European operations into a single operating platform in the commercial office property, property development and asset management sectors. The sale of the CWG interest is expected to close on or about December 5, 2008."



Brookfield Homes gets a new CEO December 4, 2008



"Craig J. Laurie, age 37, was appointed Chief Financial Officer (“CFO”) of the Corporation effective November 28, 2008. Mr. Laurie has been the Chief Financial Officer and Treasurer of Crystal River, since April 2007. Crystal River is a specialty finance REIT that invests in commercial real estate, real estate loans, and real estate-related securities, such as commercial and residential mortgage-backed securities. Prior to joining Crystal River, Mr. Laurie served from June 2003 until March 2007 as Chief Financial Officer for Brookfield Properties Corporation,

an office property company and an affiliate of our largest stockholder, Brookfield Asset Management Inc. (“Brookfield”). Mr. Laurie was Senior Vice President, Finance for Brookfield and Senior Vice President and Chief Financial Officer for Brookfield Power Corporation, from 1999 to June 2003. Mr. Laurie will be eligible to receive from the Corporation an annual bonus award and to participate and receive awards under the Corporation’s stock option and deferred share unit plans applicable to certain officers, directors and employees of the corporation. No such awards have been made to Mr. Laurie to-date. Salary arrangements for Mr. Laurie in his role as CFO of the Corporation had not been finalized at the time of filing."



Craig Laurie was quoted in Brascan 2001 Annual Report. "We strengthened our financial position during the year with the completion of several major initiatives, including the issue of $450m of term notes and $375m of preferred securities." Craig Laurie 2001AR





BAM shares bought back through November 24, 2008





Through 11/24/08, BAM has bought back YTD 13,377,100 shares at an average price of $20.55 per share. Hence they spent $274,899,405 on buy-backs YTD through 11/24/08.



The value of those shares right now using current price of $14.47 is $193,566,637.



BAM bought back 2.4 million shares at an average price of $14.12 from 11/17 - 11/24/08.









Price To Tangible Book Value



Common Equity or book value is $5,821



subtract intangibles and goodwill (3,649)



add Intangible liabilities 963



Adjusted Tangible Book Value $3,135



Current Market Cap of Common using 14.14 per share $8,250.



If you had a price to tangible book of 1.8X you would have market cap of 5,643 or $9.67 per share.



Various price to tangible book



Share Price using 583M shares at adjusted tangible book Values:



0.75X $ 4.03

1.00X $ 5.38

1.80X $ 9.67

2.00X $10.75

2.63X $14.14

3.00X $16.13



Keep in mind the above does not account for any potential future impairments. Potential impairments could include the following:



A. Sales of assets below cost.

B. Loss of specific assets due to non-recourse defaults.

C. Future losses on operations.

D. Write downs of financial assets

E. Derivative losses

F. higher operating costs, lower occupancy rates, higher debt servicing costs.



Keep in mind the above does not account for book value not being relevant to market. This could include:



A. Canary Wharf holdings (not including 20 Canada Square) being reported at cost. Fair Value is probably higher by $500M to $1,000M.



B. Various Power operation holdings. Various metrics can be used to value power.





Brookfield Renewable (BRP) 9/30/08 some notes





A. Tangible Equity $1,430. Fairly close to Book Value. $590M of Book value is loan receivable from BAM.



B. Net Income for 3 months ended 9/30/08 was $148M.



Net Income*****************$148



Less: Derivative gain******(136)

Add: Tax on above**********21



Net Income Adjusted*********33



This would annualize to $132M.



C. Interest Coverage Ratio excluding capital securities, as filed by BRP is 1.87X.



Interest Coverage for the quarter using adjusted Net Income from above would be (NI33+IE79)/IE79 = 1.42X



D. OCI includes $68M in unrealized currency loss for 3 months.



E. Powell River debt comes due in two tiers in 2009, July and December.



F. Twin Cities Finance LP, a subsidiary of the company (BAM), issued $25M notes, due in 2012 and bear interest at 6.01%. Secured by power generating assets of Twin Cities Hydro LLC.



G. Interesting and for me (my fault) are the covenant discussions for Parental Guarantees (PGs). Looks potentially immaterial.



H. Ontario Energy Board on October 30, 2008 (OEB) approved Great Lakes Power an annual revenue requirement of CDN$17m. OEB also denied a recovery of CDN$15m. Company claims to be appealing this, and has not "reversed these accruals."



I. Brascan Energetica S.A. ("BESA").



J. Power Marketing - This is the optimizing the value of their generating assets through a Power Marketing Strategy (PMS) that uses a combination of long-term contracts, etc. Plans to capture rising prices over time and maximize their revenue power.



K. 92% of the quarterly net income ($136M) was generated from a net unrealized gain on a commodity derivative.



L. Has funds on deposit with BAM of $240M.



M. Investment Grade ratings are important to BRP. DBRS (BBB (High)), S&P (BBB) and Fitch (BBB-). BRP states that ratings agencies "are influenced by a prudent level of low-cost asset financing and modest levels of corporate debt. The long life nature of our assets allows us to finance with non-recourse debt and minimal near term maturities, minimizing risks associated with liquidity and refinancing."





N. Related Parties - looked immaterial in the footnotes. Of course, this needs to be monitored on every filing.



O. $673M of debt coming due in 2009.





Brookfield Homes - Debt to market cap



At $2.59, and 26.7M shares outstanding, BHS has a market cap of $69.1M. BHS owed BAM as of October 20th $280M. BHS has an unsecured line of $300M from BAM.



BHS ratio of BAM debt to market cap is 10.5X.





Desjardins (Goldberg) put out the report upon review of the quarterly filing on 11/17/08.



1. Calls BAM a "prolific profit generator of cash."



2. For the past 7 quarters "BAM has been pulling rabbits out of their hats." Rabbits primarily being Gain on Sale of Assets. Reiterating the belief by many BAM investors that assets have been on the books for "several years at a very low cost." Goldberg writes that these should be included as normal operations, but recognize the lumpiness. Personally, I can see their point, but I think tracking historically and prospectively is a good idea. He supplies an awesome table for the past 7 quarters separating and identifying the gains.



3. They praised the Power Operations and growth of production. Reiterated that BAM thought the fair value of net invested capital of Power Operations is $8.1B. As I write that, interesting as BAM market cap is less than $8.1B. I would have to refer to my Analyst Day notes, but I assume debt has to be taken off of the $8.1B figure.



4. Thinks commercial real estate remains stable and pockets of weakness in residential.



5. Thinks BAM will benefit from CDS holding as widening occurred post 9/30 (~40%).



6. Mentioned $3.7B of liquidity, but did not identify the liquidity in total. Agrees with BAM that it generates ~1.5B of FCF annually.



7. Mentions that "BAM has US$20B of permanent capital and only $2.3B of debt at parent level. "An analyst brought up the question of permanent capital. I don't know the answer to that good question. I wonder if Michael G. knows the answer.



8. They concur that low LTV's exist and that interest rate coverage's are healthy and "very manageable."



9. Thinks that BAM is evaluating distress opportunities, and praises BAM for "the ability of BAM to generate this liquidity speaks volumes about its skill in generating a consistently high level of cash flow, which it continues to add to existing liquidity."



10. Claims BAM has benefited from economic climate in Brazil. I have been reading a great deal that Brazil is certainly feeling the economic pain, just like every other nation and person. They identify the 100 year old presence in Brazil.



11. Claims that earnings should not be used as a metric for BAM because BAM's total return should include "current earnings and APPRECIATION of value over time." They reminded the reader that earnings include DEPRECIATION. Pass the kool aid please.



12. Feels stock price decline is not stock specific and is reflective of the times and deleveraging. "The value of BAM's assets has fallen." They hint that when assets drop in price and highly leveraged companies are threatened with solvency, that companies like BAM will thrive. They write, "This is the time for BAM to thrive." Then they whisper to JB Flat, "May we please have the next investment banking deal, or spin-off on the next monetization of one of your grand old assets. If you do, we will add the missing "t" to your last name in the previous sentence."



13. They express concern with commercial properties. They specifically identify NYC real estate. Yet, they correctly identify the longer term leases and years before Merrill makes a decision.



14. Their targets are now, Optimistic $34 (40% probability); neutral $16.25 (40% probability) and pessimistic $9.70 (20% probability). They regard BAM as "deep value and maintain our Buy...."





BAM managed Multiplex funds are getting destroyed



There is no debate. These have crashed. Yet, BAM claims to be able to refinance $1.6B because of low LTV's. I don't get it. Let's see if when liquidity is generated if it is via SALES TO RELATED PARTIES.





MULTIPLEX ACUMEN PROPERTY FUND (MPF) at 12/31/07 was priced at $1.25. It closed at $0.29 on 10/31/08 and $0.20 on 11/24/08.



MULTIPLEX EUROPEAN PROPERTY FUND (MUE)at 12/31/07 was priced at $0.90. It closed at $0.27 on 10/31/08 and $0.20 on 11/24/08.



These funds have not dropped in relation to the market. These funds have dropped YTD 84% and 78% respectively.



I think these funds are somewhat reflective of the real estate market of which Multiplex $1.6B loan is related to. You seem to disagree and that's cool. I don't think either of us are anywhere near experts on this section of BAM.



My disagreement with the Multiplex investment is that BAM has possibly taken on a type of leverage that could make their operations less secure than it once was. Make no mistake about it, BAM is leveraged in a way they probably now wish they weren't. They are trying to deleverage. They were a big borrower and buyer during a time period that the same asset classes have depreciated in value. These would include timberlands and commercial real estate, and a major business in Australia (Multiplex).



Just some Ramblings



Firms like Blackrock do not buy and sell funds to those they are related to. Makes for great cash flow and earnings recognition for the seller (BAM). Yet, the buyer (BIP) needs to possibly sleep with one eye open and watch their wallet.



As you know BPO has nice cost of capital, yet some of the basis for that is now being reviewed by analysts as there is concern that all is not arms length.



As a general rule of thumb commercial real estate is valued by either cap rates or replacement cost. During the last few years cap rates went to historic lows and replacement costs went to historic highs. That now appears to be reversing itself. Without being specific at this point on Trizec portfolio, I suspect that values of Trizec came down with the rest of the commercial real estate world.



There was an excellent article in 11/5/08 FT on commercial property and how cap rates are related to interest rates. subscription required, but on page 12.





“Certain "markets" - the word is from the Latin America , to trade - are not living up to their name. Determining if the US commercial property market is bad, worse or simply terrible is hampered by the virtual absence of deals since September. With only top-notch property drawing interest for much of this year - forced sales by stricken investor Harry Macklowe, for example, account for nearly a third of business district office sales to date - transactional values were already skewed, masking the maelstrom in bricks and mortar.



Beyond frozen credit, there remains a yawning gulf between would-be buyers and reluctant sellers. Capitalization rates - a property's operating income divided by its value - have yet to rise sufficiently to tempt buyers asked to stump up more equity and pay vast spreads even on senior debt. Those relying on price appreciation and a quick sale have departed. With tenancy demand set to weaken, buyers can no longer rely on surging rents to help make the sums add up.”



Here is a note I wrote to someone who is involved in commercial real estate.



“FT article mention of cap rates and long term rates being historically correlated. As I mentioned we have been modeling 5.77% since 2001. Before that we were using 7%. We recently went to 8% and now use 8% and 10%. I have no idea if cap rates are correlated, but just our intrinsic value uses an interest rate assumption.”



I will give you an example. Using XYZ, and only identifying several assumptions, but you will get the gist.



Using 8% interest rate and a 5 year average earnings growth rate of 5% we project possible value in 2013 of $27.00.



Using 10% interest rate and a 5 year average earnings growth rate of 5% we project possible value in 2013 of $21.50.



I imagine same would be with cap rates, and perhaps this article has some validity. This is merely one of many methods we use and certainly not fool proof in results, etc.”



Again, because of huge amounts of debt coming due by BAM over the next 3 years, continued leverage is essential. Question becomes will borrowing be available? If so, at what costs? What will new paradigm of LTV be?”

I am not so sure how easy it will be for Multiplex to refinance. Then again, I was not projecting the sale of some Multiplex assets to BIP. This was mentioned today, but probably old news.



I am going from memory, but wasn't Trizec purchased for around $5.7B in October 2006? If that is correct, that is a fairly large number.



Many commercial real estate operators are finding that the value of their assets purchased in 2006, are no longer worth what they were paid for.



Today on the BPO call, it was discussed at length (and by many more than I) the awesome financing that Brookfield Properties gets. Many on the call seemed surprised that BPO Properties would loan on demand $125M to Brookfield Properties, a 'BBB credit', and only get a rate from that demand loan of "Canadian overnight + 100 BPS). For Brookfield Properties that is awesome financing. For BPO Properties, one could perceive that the loan to a parent at such a low rate to a company that would not typically in arms length transaction get such a rate.



My main point was that if the property funds have crashed 80%, then logic might tell you that assets that BAM purchased in Fall of 2007 might have taken a material valuation hit as well. We have discussed this. I have personally discussed this with Flatt. I certainly see this as a possible stress scenario. If I didn't see the possibility of further stress, I would certainly no longer have my short position.



Again, I can't think of a company with such a fine set of assets as BAM has. Yet, I think the debt levels, reliance on financing, inter company sales and recordings of gains etc, will start to impair BAM. As far as we can see, this has not happened yet. Might not ever happen. If it were to happen, it might be delayed, because required re-financings are being extended.



Tuff to find a buyer of assets in this market. Brookfield found a buyer on December 3, 2008 for their 15% interest in Canary Wharf. The buyer of course was a related entity. I think the conversion of the deal ends up being $601.1M USD. I think most analysts had Canary Wharf valued in the $1B range.



I guess in time we will find out why they sold to a related buyer. Did they need liquidity? Were there covenant breakages or near broken? Will they record gains on sale? Interesting stuff.



ROI speaking, this appears to be an awesome ROI for BAM. Canary Wharf is carried at cost on BAM books. I do not think the sale includes 20 Canada Square, as that is unrelated to their 15% interest.



Just thinking here.....If you find the value that others were placing on Canary Wharf as of 12/31/07.(or maybe review investor packet and notes to see if this was discussed under IFRS.)



Then compare to selling price. Take the difference, maybe reduce it for the related party benefit (meaning could they have done this on the regular market?) and find the percentage loss. Compare that to SongBird and London Land (or something like that as I am going from memory). So, you have a percentage of YTD reduction. What is the % loss? And perhaps extrapolate to Multiplex and get a better determination of LTV.



Whatever the answer to above would just be another tool, and very possibly not relevant. Might be real flawed too. Especially since no real details are out.



More Brookfield Properties Ramblings and Cap rate



Of course the debt is unsecured. If the LTV's are as low as you say they are, then the lenders have less of a concern in taking back the assets. Many say the LTV's are ample, yet I am not convinced of that. You claim the debt is supported by $11.4B of property. Do you have any detailed info on that? It seems to me, so much of the assets were bought 2003 onward, and that typical commercial real estate has gone through a valuation contraction , and speculate that severity could accelerate.



We really have no measure as to when the crisis will end, and more importantly when it does end, I think it doubtful that capital will be available in any way shape or form as it once was.



If I am not mistaken, BPO was able to borrow using high occupancy rates, lower debt service costs and 6.5% ( I seem to remember that) cap rates. I think the norm is 100bps north of the 6.5% cap rate and seems to be growing. Keep in mind that cap rates today are not allowing for the same rental assumptions in relation to occupancy and increases as they did only a few years ago. NOI ain't what it used to be. Lenders are using "in-place income and reducing assumptions with higher credit loss expectations."





In 2002 I think cap rates rose 538BPS, which indicates the possibility that cap rates of BPO type properties could exceed 7.50% in the future. We have not seen dispositions of commercial assets in mass yet. When and if that occurs, we could see a material adjustment of commercial real estate prices.



The current market has severe pricing determination difficulties. There is a lack of comps for one thing. Lenders are expected to be more diligent in their need for worst case valuation. I think lenders will err towards conservatism. Lenders are beefing up foreclosure departments and work-out groups. They will be better prepared to meet the task of re-financings not being met by borrowers.



They are focused on service industry, but I think tenant quality is certainly a big plus.



Like you said, I do focus on the debt, as I see the potential for potential stress. You have always mentioned asset values, but to me, so many of these assets of this 100+ year old company are less than 5 years old. We are in an era where so many of the worlds assets that are less than 60 months old are deflating, while the debt is constant or higher. You have often claimed that BAM is NOT highly leveraged, where I think it is leveraged to a point of valuation concern.



I was just told by a friend in NYC commercial that as of 9/30/08 the property is 91.9% leased. I could be real wrong. I have nothing to show you to support my comment. The building was built in 1967, square footage is 1,586,860 and asking rent is allegedly $150. This might be flawed as the asking rent per 12/07 was $104. At 12/31/07 the vacancy rate was near zero. I wonder if you are using older info? I looked further and BPO reports it as 95.4% leased on 9/30/08. They also assign a square footage of 1.8M square feet, which is 11% higher than my source. I would certainly use BPO reporting and not my source (although mine might just include office and not retail).



The following is just guess work: The low value might be $500 per sq ft, the middle value might be $700 per sq ft and the high value might be $1000 per square Foot. Hence the 100% value of 245 Park might be between $900M and $1.8B. Lets call the mean $1.4B.



If you look at page 42 of Brookfield Properties 9/30/08 report you will see the debt schedules with dates on the US Office Fund Properties. The bulk of those maturities occur in less than 3 years, and carry current interest rates of less than 5%.



The further question could also be, at what price is 245 Park Ave with improvements being shown on BAM financials. I would have to review old reports, but I don't know how the flow through from BAM to BPO affected the financials and costing etc, when the asset was spun to Brookfield Properties.



I can tell you hands down that property presentation on the balance sheet has no basis adjustment or carrying value adjustment for Balance Sheet purposes. The transfer and partially sold, I too do not know.



Ratings Agency Discussion



Taking it a touch further... If an event as you described were to happen, then I would gather there would be ratings agencies concerns, and if there were a downgrade, you would think BAM would be adversely affected. Also, we are not familiar with covenants if such an event were to occur.



But to clearly answer your question if that were to occur my biggest thought would be valuation hurt. Yet, as I write this and we just talk about a fictitious scenario, I gather there would be the other concerns as well.



First level concern would be valuation .

Potential residual concern would be potential credit rating downgrades. I have previously asked BAM for copies of covenants, but they informed me they are not publicly available.



If one property fell, I would agree, a handful, I would say wait and see. S&P emphasizes and bases their rating on cash flow. Should that cash flow change materially because of a default, I think downgrades could happen. Keep in mind that Properties are 26% of BAM's net invested capital at 12/31/07 per S&P report dated 5/6/08. Nevertheless, I think we both agreed that would be a minor issue.



S&P in their 5/6/08 report stated, "Brookfield's core operating subsidiaries, Brookfield Power and Brookfield Properties, have strong competitive positions and benefit from good geographic and asset diversity. Hence, the impact of a disruption in any particular asset or geographic location on its operations should be manageable. Although almost all subsidiary-level debt does not have recourse to Brookfield, the company intends to ensure that these key subsidiaries are financially healthy and maintain investment-grade ratings."



In regards to Brookfield Homes S&P wrote, "Brookfield's relatively low invested capital of US$250 million in the residential development business ensures that any adverse impact from weak market conditions is capped and manageable."

Now I wonder if the $300M is looked at in the same light by S&P as the $250M.



Furthermore they wrote and I think something to watch , the following: "Standard & Poor's bases its rating approach on our belief that Brookfield will maintain its policy of not providing financial support to these non- recourse debts. Deviation from this policy through increased use of recourse debt, increased use of guarantees to its subsidiaries, or other measures that would amplify the financial ties between the parent and its subsidiaries, could prompt us to view the company's leverage on a consolidated basis, which in turn

would likely lead to a material rating downgrade."



Something else to watch and even calculate now is another bullet point by S&P, "Brookfield's company-level financial targets include maintaining the market value of investments in listed companies to the company-level debt of more than 2x and the total debt-to-market value of total assets within 20%. These targets are consistent with our expectation for the current rating level."











November 12, 2008 (17.00)



Notes on Economic Trends and how they might relate to BAM



1.

1. 1. Weakness in labor market will show an increase in sublet space. This will increase over time.



2. 2. Financial centers such as NYC are hard hit by consolidation and recent turmoil. Unlike in the past, this is not expected to be a temporary event.



3. 3. Current 0ffice vacancy rents (through 9/30/08) are 6.2% in NYC, unchanged year over year. DC is at 8.1%, and increase YoY of 140BPS.



4. 4. National cap rates have increased from 5.7% in 3Q07 to 6.5% in 3Q08.



5. 5. Conditions in both domestic and global economies have deteriorated sharply during October. Labor markets have also weakened considerably.



6. 6. Demand for space has weakened for properties of all types. There are still pockets of strength.







Brookfield Properties





1. Brookfield Properties debt workups from Supplemental Information. Quarterly financials not yet filed. The following is a difficult task without the benefit of consolidated financial statements.



Total commercial debt maturities at Ownership Level Through 2011



2008 remainder
$ 16

2009
920

2010
53

2011
2,111




Total
$3,100






Of course one needs to be mindful of the consolidated commercial property debt.



Total commercial debt maturities at Consolidated Level Through 2011



2008 remainder
$ 26

2009
1,017

2010
53

2011
4,474




Total
$5,570






2. I think but am not certain that Brookfield Properties has a $181M bank facility that comes due in 2009.

We know that Brookfield Properties owes $125M to BPO Properties, on demand, yet at very preferential rates and almost unrealistic rates. Remembering that Brookfield Properties is rated BBB by S&P. Here is how S&P defines 'BBB.'

"An obligor rated 'BBB' has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments."



The rate that BPO Properties is loaning money to Brookfield Properties is Canadian Overnight rate + 100BPS. The rate is currently 2.24%. Hence, BBB rated, Brookfield Properties gets to borrow money on demand at 3.25%. In today's market, that is a crazy good deal.

On top of that, Brookfield Investments has a $210M demand loan to Brookfield Asset Management at Prime rate. Prime rate is now 4%.

These are excellent rates for the parent.

The reason I discuss this, and the reason so many of the analysts discussed this at BPO Properties conference call, is there is at a minimum an appearance of potential lack of Arms Length Transactions.

As you know, a section of my thesis is based on related party dealings. This includes inter-company loans (Brookfield Renewable Power Inc and its amalgamation, BPO, Brookfield Properties, Brookfield Homes, etc.).
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