An Introduction to Edper and Brookfield

Part III: From Command to Collapse

Kimberly Noble’s investigative work on Edper from the 1990s has had a remarkably long shelf-life.  Reading the “Edper Puzzle” today not only conveys a compelling and detailed story of the company at the time, but it is also surprisingly relevant and helpful in understanding contemporary Brookfield. 

In her November 28, 1990 edition of The Edper Puzzle, Ms. Noble compares investing in Edper companies to watching a basketball game in the dark.  It is a strange analogy for a corporation.  Stranger still is how appropriate it was and remains. 

“Shareholder-spectators know there is a game going on because they can hear the ball bouncing and feet scuffling on the floor; they just can’t see what’s happening. ”   But there is a big electronic board overhead that periodically flashes the score so spectators can see how their team is doing.  Chief strategist Jack Cockwell and his team of crackerjack lawyers, accountants and bankers tell their shareholders ahead of time what the score will be. They believe the audience should be satisfied as long as the numbers match up to what the managers promised.”

Anyone who has followed Brookfield companies will recognize both the calculated opacity of behind the scenes machinations, as well as management’s propensity to “tell shareholders what the score will be ahead of time.” 

Investors that dare look beyond management’s Non-GAAP/IFRS metrics know that deciphering Brookfield financial statements is a delicate, refined art requiring persistence and creativity if one expects to extract any meaning.  The complexity of the statements and lack of substantive narrative disclosure seems particularly odd for company run by accountants.  Surely Brookfield’s team is capable of simultaneously observing both the letter of the law and the spirit and purpose of accounting disclosure.

While investors may be scratching their heads trying to figure out what the financial filings say about recent performance and their economic interests, management convincingly projects company NAV 5-years out with precision, despite myriad moving parts that include the market-driven enterprise value of some of their publicly traded companies. 

To wit, at the 2020 investor’s day meeting, management projected that BAM’s value per share would reach $110 in 2025.  Reaching an informed investment decision on BAM would require reading a combined 1,446 pages of company and affiliate annual reports. Perhaps investors should just focus on what management says the score will be in 2025.

The problem with predictions is that they often don’t pan-out as planned. And with a corporate pyramid, the failure of one key asset can be spark contagion.

Bramalea was the first domino to fall in the Edper pyramid. It was a public developer that expanded into US residential real estate. The affiliate went on an acquisition spree that included the purchase of $1.5B of land in the US at the very peak of the housing market.  To finance the expansion, “the company layered every conceivable type of debt on every asset”.[1] The timing could not have been worse.

The fall was painful. In early 1990, Bramalea’s stock traded at C$22.75.  By 1992, the good times had ended, the company defaulted on debt, and the stock plummeted 94% to C$1.41. 

It didn’t end there. In 1993, Adam Corelli chronicled Edper’s fall from grace in article called Legacy of a Bootlegger in the Independent.  In it, Mr. Corelli notes that stocks in the group were down between -50% and -98% at the time.  While management insisted there was value “many believed the groups NAV to be significantly less than the $100B Edper is able to claim due to some complex double accounting.”  He further stated that not even “Edper’s bankers knew how much debt was tied to the empire”, and when they examined due to bank and government fears “Bankers fell out of their chairs in shock”. 

In 1989, the Edper crew were crowned princes of Bay Street displaying what appeared unshakable command over their corporate empire.  But cracks turned to chasms and control gave way to chaos and collapse.

Bramalea’s ill-fated move into US residential real estate is echoed in Brookfield’s all-in bet on retail real estate with BPY’s purchase of GGP in 2018.  BPY’s financial position has always seemed dubious and leverage high; the LP has made many acquisitions over the years, growing its balance sheet if its cash flow lagged. Despite a large distribution, investor buy-in never came for BPY. Much to the chagrin of management, the units typically traded at a steep discount to management’s IFRS NAV.

The acquisition of GGP was completed shortly after valuations for retail properties peaked and just before they fell off a cliff.  However, unlike Edper and Bramalea, Brookfield didn’t let BPY find its own level in the market, but doubled down with a tender offer, open market purchases and eventually an offer to purchase the 35% or so of BPY units it doesn’t own.  The actions inflated BPY’s price and may have prevented the first domino from falling – at least in public view. 

The cost of the buy(bail)-out to BAM shareholders and private equity fund LPs is steep; however for senior Brookfield managers with lingering memories of the Bramalea nightmare, the buy-in might calm unsteady nerves and be viewed as an insurance policy. 

The question is, do investors view the bail-out as a cop waiving traffic past a wreck with a ‘nothing to see here, folks’ nonchalance and move on without lingering, or as an eyebrow raising investment anomaly necessitating scrutiny. 

Congratulations!  You have made it through part III of the introduction to Brookfield. 

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[1] How Bramalea Gambled and Lost…, Kimberly Noble, The Globe and Mail, April 1, 1995.