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Monday, September 30, 2019

Brookfield Asset Management…Recap of Investor Day

Brookfield Asset Management…Recap of Investor Day

Event

Late last week, BAM hosted a well-attended Investor Day in New York.

Impact: POSITIVE

■ In an environment where interest rates across all major capital markets are low or negative, alternative assets have arguably become the only way to earn a reasonable return with modest risk, and, against that backdrop, the already powerful flow of funds into alternatives could substantially increase, which should disproportionately benefit top-tier managers like BAM, in our view. With the addition of Oaktree's premier credit franchise, the company believes that its next round of flagship fundraising could reach $100bln in size.

■ BAM has been preparing to capitalize on the next downturn for some time, but the company continues to deploy capital cautiously, and outlined four key investment themes: 1) special situations in North America, where valuations are high (e.g. Forest City, Westinghouse); 2) interest rate inversion, particularly in Europe; 3) banking stress in India; and 4) balance sheet reorganization in China.

■ BAM's investment performance has been strong, and the company's projection of carried interest generated has increased and shifted forward vs. 2018. The company expects to realize $15bln of cumulative carried interest (gross) during 2019-2029, up substantially vs. its 2018 projection of $10bln. Including that increasing stream of realized carried interest, BAM expects free cash flow to increase by 2.5x to $6.3bln in 2024 vs. $2.5bln in 2019, and we expect capital allocation to pivot towards share buybacks over time, as the company signalled in its Q2/18 letter to shareholders.

■ As usual, BAM provided a five-year outlook, which outlined potential upside to ~ $141.00/share for a total potential annualized return of 22% vs. the current share price (including dividends).

TD Investment Conclusion

We believe that an investment in BAM provides exposure to a very high-quality portfolio of real assets, with the added leverage of a rapidly growing asset management franchise, which is clearly established as one of a select group of institutions capable of raising very large pools of capital to invest in real assets. We have increased our target price based on higher target prices for BEP and BIP, and the inclusion of Oaktree, among other adjustments.

Details

Alternatives Becoming a Necessity 

Last year, BAM was anticipating that interest rates would move higher but remain “low-ish”. The company now believes that we have likely entered a new phase in which interest rates across all major capital markets are low or negative. 

BAM projects that allocations to alternatives could reach 60% by 2030 vs. its previous view of 40%, because against that backdrop, alternatives have become the only way to earn a reasonable return with modest risk.

An increase in allocations to 60% would imply $25tn of inflows to alternatives by 2030, which should disproportionately benefit top-tier managers like BAM. 

The Oaktree acquisition is timely, because it gives BAM immediate scale in credit, and enables the company to provide clients with one of the most comprehensive offerings of alternative investment products. 

We also see good scope for the companies to expand their combined client base, with Oaktree having very high penetration among the largest U.S. pension fund managers, and BAM having more relationships with sovereign wealth funds. 

The company anticipates that its next round of flagship fundraising should raise $100bln (including Oaktree) vs. ~$50bln for the current round.

Investing Cautiously 

BAM is still cautiously optimistic about the business environment, but has been preparing to capitalize on the next downturn for some time, and ended Q2⁄19 with a record $49bln of available liquidity. 

The acquisition of Oaktree will reduce the corporate cash balance by $2bln-$3bln, but BAM’s annual free cash flow run-rate is ~$2.5bln (including realized carried interest), and the company believes that having access to Oaktree’s premier credit franchise will be a distinct advantage when the cycle turns. 

BAM deployed ~$33bln of capital over the last 12 months, and highlighted four themes that it expects will drive future investments: 1) special situations in North America, where valuations are high; 2) interest rate inversion, particularly in Europe; 3) banking stress in India; and 4) balance sheet reorganization in China.

Delivering Strong Investment Returns 

BAM's investment performance has been strong, with most of its funds tracking to meet or exceed their target returns, which means that they are performing well above the preferred return (~5%-9%), and should generate carried interest. 

The company's projection of carried interest generated has increased and shifted forward vs. 2018.

Carried Interest Projection

BAM now expects to realize $15bln of cumulative carried interest (gross) during 2019-2029, up substantially vs. its 2018 projection of $10bln. 

Importantly, the $15bln projection is based on existing funds only and excludes Oaktree funds; future fundraising should be incremental. 

Including this increasing stream of realized carried interest, BAM expects free cash flow to increase by ~2.5x to $6.3bln in 2024 from $2.5bln in 2019, which should enable the company to return more capital to shareholders through share buybacks.

Free Cash Flow Projection

As usual, BAM provided a five-year outlook, outlining potential upside to ~$141.00/share, which represents a total potential annualized return (including dividends) of ~22% vs. the current share price. 

These projections assume that fee-bearing capital compounds at a 12% CAGR to $396bln (including 62% of Oaktree), and invested capital compounds at ~11% to $75bln vs. $45bln in Q2/19 (a blend of quoted and IFRS values).

Key Risks to Target Price

Key risks to our target price include: 1) global economic risk; 2) rising interest rates; 3) sovereign/regulatory risk; 4) counterparty risk; 5) variable hydroelectric generation; 6) financing risk; 7) significant FX movement; and 8) corporate governance considerations related to non-proportionate Class A share voting rights to appoint the Board of Directors.

Resources,

Cherilyn Radbourne, CA, CFA,
TD Securities Inc.

Saturday, September 28, 2019

Altus Group Ltd


Altus Group Ltd

I already hold this in my investment portfolio but am becoming increasingly interested in this company’s business model and the industry in which they operate…so that being the case the following in just a little reminder to myself to keep track of what is going on in their business…

Company Profile

Altus Group Limited is a leading provider of software, data solutions and independent advisory services to the global commercial real estate industry. Our businesses, Altus Analytics and Altus Expert Services, reflect decades of experience, a range of expertise, and technology-enabled capabilities. Our solutions empower clients to analyze, gain insight and recognize value on their real estate investments. Headquartered in Canada, we have approximately 2,500 employees around the world, with operations in North America, Europe and Asia Pacific. Our clients include some of the world’s largest real estate industry participants. Altus Group pays a quarterly dividend of $0.15 per share and our shares are traded on the TSX under the symbol AIF.

Altus Group Ltd provides independent advisory services, software and data solutions. The Company's segments include Property Tax Consulting (Property Tax); Research, Valuation & Advisory (RVA); ARGUS Software; Geomatics, and Cost Consulting & Project Management (Cost). The Property Tax segment performs property tax assessment reviews and appeals, and assists with property tax compliance filings. The RVA segment performs real estate valuations, litigation support, financial due diligence, research and real estate-related services. The ARGUS Software segment offers software and solutions for analysis and management of commercial real estate investments. The Geomatics segment provides geomatics solutions, such as geographic information systems, digital mapping, remote sensing, three-dimensional laser scanning and orthophoto maps. The Cost segment provides construction cost planning, loan monitoring and project management services to construction companies and financial institutions.


Investment highlights

 

Industry Leadership
Market share leader for core CRE practice areas; Altus Analytics solutions have market standard distinction

Global Market Opportunity
Long growth runway ahead for current offerings & new future vertical opportunities; well positioned to capitalize on increasing need for CRE tech adoption and expert advisory, with solid market fundamentals

Sustainable Competitive Advantage 
Limited competition and wide moats; Altus Analytics has very strong barriers to entry due to industry standard products, scale and global customer adoption 

Financial Strength
Strong balance sheet and cash generation with stable and recurring revenues from global blue chip client base, with long-standing and sustainable dividend policy in place

Strong Track Record of Execution
Steady revenue growth since IPO (17% CAGR, 2005-2018) & successful business transition into technology driven by financially-invested management team and workforce (approx. 5% employee ownership)  

Executive Summary

Targeting to transition Altus Analytics to +90% recurring revenue model by 2021

In Q3, all ARGUS Enterprise (AE) sales to net new customers are expected to be cloud subscriptions & over time migrating on premise ARGUS software customers to cloud subscriptions

Strong recurring revenue base sustains y/y Altus Analytics revenue growth during key transition years in 2019 & 2020

Leveraging past development investments, revenue growth and controlled expenses supports margin expansion, targeting 30+ % by 2023

Setting 5-year goal to double revenues by 2023


For more gory details see link below hi-lighting the companies overall strategy



Wednesday, September 25, 2019

Plaza Retail REIT (PLZ.UN)

Plaza Retail REIT (PLZ.UN)

Just picked this up today at 4.24. I bought 850 shares and will probably add to that when my dividends come in at the end of this month.

Plaza Retail REIT (PLZ.UN) is up 14.1% from its 52-week low of $3.68 set on December 24th, but it continues to offer a market-beating prospective distribution yield of 6.7% which is paid monthly. Plaza operates primarily in Newfoundland, Prince Edward Island, Nova Scotia, New Brunswick, Quebec, and Ontario. A core focus of the REIT's business model is the development of open-air and enclosed retail projects for its own account. As of June 30th, the REIT had an interest in 277 properties including those under or held for development, representing 8.4 million gross leasable square feet.

As part of its strategy to deal with the Amazon (Rainy; AMZN) threat, Plaza is favouring open-air projects because it believes that market conditions favour unenclosed malls. It has four open-air projects under construction plus one open-air conversion underway with between a 20% and 50% ownership stake. It also has 12 open-air centres in the development or planning phases. Plaza is also involved with the construction of four expansion or single-use projects and has 13 such properties in the planning or development stages. Plaza appears to be gaining some momentum with its strategy of taking on Amazon out in the open air. According to Refintiv data, as of June 30th, EPS for the past 12 months was $0.40 per unit, up $0.21 from a year ago. 12-month trailing EBITDA was $0.61 per unit, up 10.9% from $0.55 a year ago. The REIT's 5-year EBITDA growth is 3.7%. Meanwhile, its net-interest coverage ratio comes in at 2.9 for the past 12 months. Importantly, Plaza CEO Michael Zakuta is demonstrating conviction about the REIT's future via share purchases. That stands in stark contrast to Amazon CEO Jeff Bezos who, along with other insiders, has been selling recently. We note that Plaza units are up 1.2% over the past year while Amazon stock is down 6.8%, and Amazon does not pay a dividend either.

Insider Activity

Over the past month, Plaza Retail REIT (PLZ) CEO Michael Zakuta has spent $469,880 buying a total of 112,000 units at an average price of $4.195. His most recent purchase was on September 23rd when he bought 10,000 units at $4.20. He is the largest insider beneficial unit holder with 12,373,065 units representing 12.1% of all units outstanding.

The company has also been repurchasing units. Over the last 6 months, it has reported repurchasing 441,424 units at an average price of $4.20.

Plaza Retail REIT has above median ownership (direct & indirect holdings) by Officers and Directors compared to other small-cap stocks in the Financials sector according to SEDI filings as of September 22nd, 2019.

The REIT holds a mostly sunny INK Edge outlook on the equally weighted V.I.P. criteria of valuations, insider commitment and price momentum which places it in the top 30% of all stocks ranked. INK outlook categories are designed to identify groups of stocks that have the potential to out- or under-perform the market. However, any individual stock could surprise on the up or downside. As such, outlook categories are not meant to be stock-specific recommendations. For background on our INK Edge outlook, please watch our short video or visit our FAQ #5 at INKResearch.com.

Ink Research Report, Sept 24, 2019

Company Profile

Plaza Retail REIT (Plaza) is a Canada-based open-ended real estate investment trust. The Company's objective is to deliver a growing yield to unitholders from a diversified portfolio of retail properties. The Company develops, owns and manages retail real estate primarily in Atlantic Canada, Quebec and Ontario. The Company offers a business strategy that differs from various peers in the real estate industry. The Company's portfolio includes interests in approximately 310 properties totaling over 7.1 million square feet, which are predominantly occupied by national tenants and additional lands held for development. These include properties indirectly held by Plaza through its subsidiaries and through joint arrangements. The Company's properties are located in AlbertaNewfoundland and LabradorNew BrunswickNova ScotiaManitobaOntarioPrince Edward Island and Quebec. The Company's subsidiaries include Plaza Master Limited Partnership and Scott's Real Estate Limited Partnership.

Observations from Stephen Takacsy circa January 28, 2019

Plaza Corp is a strong internalized developer of retail properties with holdings in QuebecOntario and the Maritimes. It has tenants resistant to e-commerce, like Shoppers Drug Mart (25 per cent of gross leasable area), KFC, Dollarama, Sobeys and Canadian Tire.

It has a strong pipeline of 25 projects, including acquiring old Sears sites for redevelopment. Plaza Corp is the only REIT to consistently increase AFFO/share and increase dividend every year for 15 years. Retail real estate is out of favor, so it’s a good time to buy this undervalued stock. Insiders own 21 per cent and are buying shares (Michael Zakuta). We recently bought more at $3.30. Nice safe dividend yield of 6.5 per cent.

Company’s Website

Tuesday, September 10, 2019

Stephen Takacsy on BNN-Bloomberg’s Market Call – Sept 10, 2019

Stephen Takacsy on BNN-Bloomberg’s Market Call – Sept 10, 2019

Market Outlook

After rebounding strongly this year as fears of an impending recession faded and central banks cut interest rates, equity markets have starting getting volatile again as the U.S.-China trade war drags out and corporations start feeling the impact. Large caps have become extremely expensive as a result of passive ETF investing to the detriment of small- and mid-cap stocks which have gotten even cheaper. Michael Burry of The Big Short fame recently called this phenomenon an index bubble and he’s investing heavily in small-cap value stocks. We also see many good long-term opportunities in the neglected and mispriced Canadian small- and mid-cap sector at valuations well below private market values. IPOs such as Uber priced at ridiculously high valuations signal a market top for money-losing tech stocks, which are now starting to deflate, with the WeWork IPO valuation to be priced nearly 50 per cent lower than the last private equity round.

Top Picks

Diamond Estates Wines (DWS:CV)
Core holding

Diamond is the only publicly traded wine company in Canada besides Andrew Peller and the third-largest VQA producer in Ontario. The stock has been weak due to a drop in exports due to trade tensions with China and the loss of two customers at its agency business one year ago, although both businesses are growing again.

The big news is that Diamond recently announced in July that Lassonde Industries (one of North America’s largest juice companies) has taken a 20 per-cent stake in it. This is a game changer, providing Diamond with capital to grow its newly acquired B.C. operations and a strategic partner to increase wine distribution in grocery stores across Canada and agency sales in Quebec. We also expect Lassonde to acquire the entire company at a significant premium to the current share price within a few years. We recently bought another 3.1 million shares and increased our ownership up to 9.9-per cent at an average cost of 19 cents.

Goodfood Market (FOOD:CT)
Core holding

One of the fastest growing companies on the TSX, Goodfood is Canada’s largest meal kit provider, with an estimated 45-per-cent share of the fast-growing market. Sales have more than quintupled since we first mentioned Goodfood on BNN less than two years ago. Goodfood now has 200,000 active subscribers and gross sales run rate of over $250 million per year.

Goodfood now describes itself as an online grocery company, delivery fresh food from farm to kitchen. Goodfood is now a disruptor with a more efficient business model than traditional grocery stores since there is no inventory, no wastage and minimal handling, thus is generating higher gross margins. Enterprise value is under 0.5-times gross sales run-rate, while grocery chains in the U.S. like Kroger and Albertsons have been acquiring meal kit companies for 1.5 to 2 times sales. Goodfood can grow its sales to $500 million within a few years and become an attractive acquisition target. Stock is worth $5 to $6 based on 1-times forward gross sales.

Baylin Technologies (BYL:CT)
Core holding

One of our largest holdings, Baylin is a world leader in wireless antenna design for mobile, network and infrastructure applications. It will benefit from huge infrastructure spending next 25 years with increasing Wi-Fi coverage (DAS), wireless network densification using small cell systems and new antennae/components needed for 5G for connected devices. It should benefit from backlash against Huawei since Baylin deals with Samsung, Erickson and Nokia. Made several transformational acquisitions in 2018 (Advantech and Alga) to add complementary RF/microwave components for satellite and wireless base stations. Baylin is currently seeing a significant increase in sales with 2019 revenues expected to reach $170 million and EBITDA of $23 million. At $3, Baylin is only trading at an EV/EBITDA of 7 times. Our target price is $5 to $6 within 12 to 18 months based on 9 to 10 times 2020 EBITDA similar to peer group.

Sunday, September 8, 2019

Mission Statement from Brookfield Business Partners

Mission Statement from Brookfield Business Partners

A good example of how the management team at Brookfield communicate their investment philosophy to their stackholders... 

Our Mission

Our overall objective remains the same as when we created BBU in 2016; to deliver an attractive long-term risk-adjusted return to unit-holders, primarily through capital appreciation. Our goal is to acquire and manage businesses with high barriers to entry, low production costs and the potential to benefit from Brookfield’s global expertise as an owner and operator of real assets. We create value at BBU by buying businesses at reasonable values relative to their cash flow potential, and then work to enhance their operating cash flows.

A key advantage of our business model is that we have the flexibility to invest in any form. This means we can acquire businesses outright, make loans to them or acquire debt and equity securities in businesses when they become mispriced.

A consequence of our strategy is that we may not acquire businesses that generate consistent cash flows, and certain of our businesses may generate weak or even negative earnings at the outset but have the potential to generate substantial gains in the longer term. For this reason, our cash flow and earnings may, sometimes, be volatile but the overall intrinsic value of our business should increase over time.

Intrinsic Value

Our objective is to acquire businesses at a discount to ‘intrinsic value’, which we define as the present value of cash flows that a business will generate in the future. This is generally possible when we take a contrarian approach to investing, meaning that our view of a business’ future is more favorable than what others may think. We believe that, in certain circumstances, our knowledge base enables us to make such judgements.

From time-to-time publicly traded securities, both equity and debt, trade at discounts to the intrinsic value of their underlying businesses. As capital markets have been robust for some time we have found few such opportunities, but will be prepared to act should they arise. Toward the end of 2018 public company share valuations declined meaningfully, and as a result the Dow Jones Industrial Average and S&P 500 index were down approximately 20% peak-to-trough in 2018. We have not been immune to the recent market volatility and experienced a reduction in our unit price. Our approach to intrinsic value for BBU considers both the current value of our existing businesses, plus the growth in value we are likely to achieve through capital recycling, meaning the reinvestment of proceeds from mature businesses into new opportunities. We believe our recent capital recycling initiatives have meaningfully increased the intrinsic value of our business, which will be evidenced, in part, by substantial growth in FFO per unit over the coming year.

Towards the end of the year the discount between the trading price of our units and our view of value of the business was so substantial that, notwithstanding the many opportunities available to us, purchasing our units became a compelling opportunity. We have been buying back BBU units which, at recent price levels, presents a very attractive use of capital.

As we look forward, while we are conscious of short-term unit price performance, our focus is on building long term intrinsic value for our unitholders.

Capital Structure and Leverage

Our approach to financial risk management is designed to protect our overall business during challenging circumstances, maximize flexibility across our activities and utilize leverage prudently to enhance the returns we earn on our invested capital.

We do this by (a) maintaining substantial liquidity at the parent company level(b) ensuring that each of our businesses is financed without recourse to BBU or other businesses, so that we are never forced to support a business that is impaired (although we may choose to); and (c) utilizing debt prudently at the operating company level, at the time a business is acquired and throughout the period we own it.

At the operating company level, we seek to borrow longer dated debt, with maturities at least five years out, and at levels of debt service that the business can readily sustain. Our goal is to have limited or ideally no financial maintenance covenants, so that in the event a business experiences a reduction in earnings we aren’t forced to repay its debt. In some cases, it may be appropriate to increase debt if a business is a stable, cash flow generating operation, while other businesses may require a reduction in indebtedness. Our investments provide examples of both scenarios.

Brookfield Business Partners,
Excerpt from Q4 2018 Letter to Shareholders

Friday, September 6, 2019

Opinion: Michael Burry

Opinion: Michael Burry

I've never been a fan of investing in the huge mega-cap stocks. I find the're always over-owned and often attract money not due to attractive fundamentals but because of their sheer size and ability to absorb liquidity. The stock market is very much an institutionalized entity where the herd mindlessly runs in the same direction and in the end always over-do the current trend dominating the markets. Michael Burry shares his views on the current trend in the stock market below...


Michael Burry shot to fame and fortune by betting against mortgage securities before the 2008 crisis, a trade immortalized in “The Big Short.”

Now, Burry sees another contrarian opportunity emerging from what he calls the “bubble” in passive investment. As money pours into exchange-traded funds and other index-tracking products that skew toward big companies, Burry says smaller value stocks are being unduly neglected around the world.

In the past three weeks, his Scion Asset Management has disclosed major stakes in at least four small-cap companies in the U.S. and South Korea, taking an activist approach at three of them.

“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,” Burry, whose Cupertino, California-based firm oversees about US$343 million, wrote in an emailed response to questions from Bloomberg News.

Active money managers have bled assets in recent years as investors rebelled against high fees and disappointing returns -- a trend that prompted Moody’s Investors Service to predict that index funds will overtake active management in the U.S. by 2021. The shift has coincided with a multiyear stretch of underperformance by value stocks and, more recently, by small-caps.

“There is all this opportunity, but so few active managers looking to take advantage,” wrote Burry, who was played by Christian Bale in the film version of Michael Lewis’s book on the collapse of the U.S. housing bubble and ensuing financial crisis.

While Burry is best known for his bearish wagers, he said his passion is “long-oriented investing in undervalued and overlooked situations.” He said he’s turning to activism in some cases because there’s not a “critical mass of smaller value-seeking active managers like me” to help companies make themselves more attractive to investors.

Source,
BNN Bloomberg