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Nola,
thanks for the interesting write-up!
I would like to like the company due to the excellent track record (with a decent chance of replicating in the future) and the fact that the management team (and especially Flatt) seem to
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<p>Nola, </p>
<p>thanks for the interesting write-up!</p>
<p>I would <em>like to like</em> the company due to the excellent track record (with a decent chance of replicating in the future) and the fact that the management team (and especially Flatt) seem to be all-in with their money on BN.</p>
<p>What I really dislike is their intransparent and selective communication. So I'm curious what your view on that is? For me, the only way to invest would be to (blindly) trust Flatt & Co., since too many aspects (e.g. in the real estate business) are so intransparent and (potentially purposefully?) misleading.</p>
<p>When browsing through the different filings (BN and BPY quarterly reports, BN quarterly supplementals) I found the following "issues":</p>
<ul>
<li>Brookfield uses FFO and NOI to value their real estate business. When FFO was still (slightly) positive in Q1 2023, it was still included in the <span style="text-decoration: underline;">2023 Q1 BN report</span>, then later, when FFO turned negative, they dropped FFO from the report and only NOI remained. My issue here is, that they say <em>everything is great in high-end real estate </em>while dropping the KPI that shows how interest costs are tearing a hole in their P&L.</li>
<li>In <span style="text-decoration: underline;">BN's 2023 Q3 supplemental</span>, they still list "operating FFO" for the Real Estate business. While it's slightly negative with -4M, it shows a much more optimistic picture than "FFO" from <span style="text-decoration: underline;">BPYs Q3 report</span> (-165M). From the definitions I understand that a key difference is that BPY's FFO includes their share of equity accounted investments FFO, while "operating" FFO does not. But there is no reconciliation between the two. Again, the BN supplemental shows a much rosier picture than you find in the BPY statements.</li>
<li>Next, it seems like Brookfield prefers to appraise the value of their own properties rather themselves (as opposed to using external appraisals). In a <span style="text-decoration: underline;">2019 AR of BPY</span>, they state <em>".. the partnership compares the results of those external appraisals to its internally prepared values and reconcile significant differences when they arise. Discount rates and terminal cap rates are verified by comparing to market data, third party reports, research material and brokers opinions." <br /></em>After rates increased, discount rates and cap rates have expanded, they just drop these statements (e.g. in <span style="text-decoration: underline;">Q3 2023 BPY report</span>) and further weaken the to: "<em>Management compares the external valuations to the partnership's internal valuations to review the work performed by the external valuation professionals. Additionally, a number of properties are externally appraised each year and the results of those appraisals are compared to the partnership's internally prepared values." </em> So instead of verifying or reconciling the internal appraisals, they now rather review and compare the external appraisals..</li>
</ul>
<p>I have many screenshots from various examples, if someone is interested, I'm happy to share so you don't have to scroll through all the files - I just didn't want to spam the chat.</p>
<p> </p>
<p>So my big question is: Why does management believe that it is necessary to use such hiding/misleading measures? Can they not rely enough on their strong track record and state the facts as they are?</p>
<p>My assumption is, that they want to maintain the image of being a flawless investor. Perhaps they feel that they need to appear flawless in order to keep their fundraising machine running.</p>
<p>This got a bit longer than intended, but I'm basically just interested in your view on Flatt & Co's transparency and candor.</p>
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