Brookfield Management Evolves, But Culture Is Constant (NYSE:BN)

Introduction

According to my May article, Brookfield Corporation (NYSE:BN) allocate capital shrewdly. Since then, a July 17 Bloomberg article discussed the management changes. The 2Q24 letter to shareholders also talked about the evolution of management. My the thesis is that Brookfield is preserving its culture while gradually and carefully making management transitions.

Management and Culture Development

Brookfield has a collaborative culture, and this was on display in the 2Q20 earnings call, when CEO Bruce Flatt emphasized the importance of people working together in person:

Simply put, our view is that companies use their offices to promote culture, collaboration and talent development. This cannot be replicated from a home office.

Part of Brookfield’s collaborative culture, with a philosophy of promoting from within, is seen in the way it conducts management changes. Executives tend to be groomed for a long time and suddenly changes are avoided. Flatt is currently the CEO of both Brookfield Corporation and Brookfield Asset Management (BAM). CEO Flatt was identified as the next CEO in 1999, but he did not assume the role until 2002. Succession planning for CEO Flatt has been underway for several years, and expectations are particularly high for BAM President Connor Teskey.

A July 17 Bloomberg article notes that it was BAM President Connor Teskey who led the successful acquisition of Oaktree Capital Management, which helped Brookfield expand into credit. The article revealed the next step in management development for President Teskey (emphasis added):

But Flatt’s takeover may be a bit more gradual. He has led Brookfield’s collection of entities for more than two decades and promised the succession would be an evolution, not a revolution. In the next major step, Teskey is likely to become CEO of Brookfield Asset Management. If Flatt copied the playbook for his own rise at the age of 36 under the wing of his predecessor, Jack Cockwell, he would remain chairman for years.

CEO Flatt confirmed Chairman Teskey’s raise in his 2Q24 letter (emphasis added):

In 2019, a state-of-the-art review and planning process was undertaken with Brookfield’s senior partners and Board members, looking at the next 20 years. This process culminated in 2023 with the identification of a new group of younger Partners to take on more senior roles in the coming years. Connor Teskey has been identified as the next CEO of Brookfield Asset Management at that time – and this change will occur when we feel the time is right for all stakeholders.. In addition to Connor’s many exceptional skills and talents, he has the advantage of being 36 years old today, giving him the opportunity to lead the organization for over 20 years through the next phase of our growth. Anuj Ranjan, Sachin Shah, Nick Goodman and others have also been given very senior ‘CEO’ roles in Brookfield and will continue to have crucial responsibilities. as the organization evolves more over time.

ASSESSMENT

The 2Q24 letter says management estimates the shares are worth $84 each and says share buybacks are not a way to boost the stock price (emphasis added):

Our business value based on our estimates is currently $84 per shareand this Value does not take into account the franchise we have, which generates transactions year after year through efficient capital allocation. For example, it does not take into account any value for the new businesses we build or the option we have to buy back other shares at a discount to their intrinsic value, thereby adding additional value to each share.

The 2Q24 letter goes on to explain how the $800 million spent on buybacks this year has been very beneficial to existing shareholders over the long term:

In simple terms, we purchased 20 million shares this year, and the value of those shares was $1.68 billion. Due to market trading conditions, we were able to acquire them for $800 million. That means the selling shareholders left behind $880 million in excess value. In other words, for the ability to obtain $800 million of liquidity, the selling shareholders surrendered $1.68 billion in value to the remaining shareholders, reallocating $880 million of value to the remaining shareholders.

The 2Q24 supplement breaks down the $83.53 per share valuation in the “Combined” column below:

Most of the valuation above comes from BAM’s $45.4 billion in shares, and they are publicly traded, so that part of management’s valuation shouldn’t be questioned. Brookfield Property Group’s (“BPG”) real estate valuation can and should be questioned, with management saying the core part is worth $15.1 billion, while the transition/development part is worth $10.1 billion. These bullish BPG numbers may be valid when viewed through a long-term lens, but I suspect their liquidation value would be much lower. Another big valuation piece that can be questioned is the $26.4 billion target net carried interest. Liquidation risk is low, but we live in an unpredictable world and there is always a small chance that management will be forced to sell off parts of the company at distressed prices. Another risk is what could happen if interest rates are not cut as expected later this year.

Part of the reason management values ​​the company so highly is that they have a proven track record of asset accumulation. According to the Bloomberg article above, it’s hard to compare them to competitors because of different tracking considerations:

Management’s $84 per share valuation above is the upper end of my valuation range. Other investors say management may be too bullish on some of its retail and office real estate holdings. I wouldn’t argue with other investors who have a near-term liquidation valuation that is updated by up to a third of the bullish long-term number used by management. As such, my valuation range is $56 to $84 per share. The stock price of $50.28 as of August 30 is below my rating range and I think the stock is a buy.

Forward-looking investors should watch for developments at Investor Day on September 10 in New York.

Disclaimer: Any material in this article should not be considered an official investment recommendation. Never buy stocks without doing your own thorough research.