Editor's Note: This article was originally published on May 10, 2014.
Brookfield Asset Management (NYSE:BAM) reported funds from operation (FFO), Brookfield’s measure of cash flow, was $492 million for Q1 2014 increasing 6% over the Q1 2013 quarter level of $387 million excluding realized gains on asset sales. The increase was due to stronger pricing in renewable energy operations and increased asset management fees partially offset by reduced prices in some of the more cyclical private equity investments.
Including realized gains Q1 2014 FFO was $492 million a decrease of 29% compared to the Q1 2013 level of $689 million. The realized gains were $105 million in the Q1 2014 vs. $325 million in the Q1 2013, which included a $172 million gain on the sale of a partial interest in Brookfield Renewable Energy Partners. These gains are a recurring and significant part of BAM’s ongoing value creation business model but opportunistic in nature. The gains occur when market opportunities present themselves so they do not occur consistently.
Consolidated net income including amounts attributable to non-controlling interests was $843 million in Q1 2014 compared to $697 million in Q1 2013 for a 21% increase. The increase is due to growth in FFO and fair value gains on office, retail and private equity investments offset by an increase if deferred taxes. Total assets under management increased to $190 billion, fee bearing capital increased to $84 billion. During the Q1 2014 $6 billion of capital was committed or invested on behalf of clients and shareholders.
Source: BAM 1Q14 Press Release.
Last year Brookfield Asset Management completed their transformation to a global asset manager and seems to be at an inflection point. The company’s years of investment and operating experience in increasingly popular real asset classes; infrastructure, property, hydroelectric power has produced outstanding risk adjusted returns over a long period of time.
BAM’s assets are located in the major developed markets of; North America, Europe, and Australia and the emerging markets of South America primarily Brazil and Chile. As shorter term investors pull cash out of China and India, due to slowed economies there, Brookfield’s is establishing a presence in these huge and growing markets. BAM’s longer term perspective and value orientation is contrarian in nature so they are taking advantage of the opportunities (bargains) created as cash flees. Like Brazil these are emerging markets with a large growing middle classes that is increasingly dependent on real assets and will be for decades to come.
BAM’s performance track record generates funding for new investments from the cash flows created in operations and their capital recycling program. As the performance becomes more recognized it is also attracting more outside public and private funding. More investors want to participate in these results from BAM’s disciplined value investment approach. This success was previously recognized only to some degree by savvy institutional investors and sovereign funds willing to pay BAM to manage their capital to produce these results.
As the wider investment community recognizes BAM’s value orientation success a beneficial cycle of increased funding for increased value opportunities develops. While others leave a given sector BAM moves their attention to the asset classes, economies, markets or geographies that are on sale. And if the bargains are not there; BAM can look internally to an increasing slate of organic growth opportunities created from its expanding asset platforms around the world.
You can sense the change occurring and the inflection point is the tremendous optionality now available to BAM. The investment community more than ever understanding the value proposition and they wish to participate. As the asset management transformation kicks into gear increased cash flow from operations or funding from investors is available for larger and more frequent opportunities. The opportunities become more available as BAM’s presence grows, a beneficial cycle where a sum of the parts valuation unfortunately just doesn’t capture the value of this optionality built over decades.
As common shareholders in BAM our investment is producing the same outstanding risk adjusted results realized by some of the savviest investors in the world along with the talented management team invested alongside of us.
BAM’s success is rooted deeply in its property, energy, and infrastructure operating and investment experience. These long life real assets require relatively minimal maintenance capital expenditures, generate sustainable cash flows, appreciate in value, and have varying degrees of barriers to entry. Modern society will always require commercial property, low cost electrical power generation and infrastructure assets to function and deliver; raw materials, energy and people. These simple to understand businesses are fulfilling the basic needs for the growing middle class around the world and will be around for a long time.
Source: Annual Meeting Presentation May 7, 2014.
- Expanded asset management franchise and flagship public entities
- Fee bearing capital increased by $4 billion to $84 billion
- Acquired office property portfolio increasing equity base of BPY by $2.8 billion
- Continued to invest capital from listed entities, property, infrastructure and private equity funds
- Marketing four new funds with a target of over $2 billion of third party capital
- Have $8 billion of uncalled client commitments that can be invested across strategies.
- Completed acquisitions expansions deploying $6 billion on behalf of clients and shareholders
- Property group made nine acquisitions, deploying close to $400 million of capital
- $3.5 billion equity investment in $12 billion office portfolio
- Invested $1 billion in a Spanish property company restructuring for a gain of ±$150 million
- Acquired renewable energy assets in North America; commissioned a new $200 million hydro facility in British Columbia; acquiring $680 million of wind facilities in Ireland
- Infrastructure group agreed to acquire a port in New York/New Jersey; district energy systems in Chicago, Las Vegas and Seattle; closed acquisition of a port in Los Angeles; progress on acquisition of a port and rail business in Brazil
- Increased cash flow and created value with growth and operational improvements; increased scale of operations contributed to strong results
- Property group generated FFO of $199 million, up 21% vs. 1Q13, due to increased ownership of retail portfolio and increases in net rents compared to expiring leases
- Renewable power generated FFO of $164 million and benefitted from higher prices for un-contracted power and U.S. hydroelectric facilities acquired in the last year
- Infrastructure group recorded $59 million of FFO, reflecting increased ownership of Brazilian toll roads, and additional traffic on recently expanded Australian rail road
- Private equity group generated $63 million of FFO down due to fewer asset monetizations compared 1Q13
- Residential development business’ FFO increased by $35 million reflecting sales of land and homes
Source: Operations Highlights from Supplemental Information.
Asset Management and Services Businesses
- Fee revenues increased 45% over vs. Q1 2013 due to higher amounts of fee bearing capital
- Base management fees increased 38% to $142 million due to formation of BPY, private funds and public securities
- Incentive Distribution Rights (IDRs) increased $4 million to $12 million now earning IDRs on both BIP and BEP
- Gross profit margins were 48% vs. 50% in Q1 2013; decline due to lower margins on initial BPY fee
- Direct costs increased due to expansion of operations and the reclassification of $10 million of costs from corporate activities to asset management following launch of BPY in April 2013
Source: Annual Meeting Presentation 050714.
Invested Capital Property
- Global portfolio of premier properties with over 330 million square feet (msf) focused on:
- Office: 168 properties, 97 msf and 19 msf development pipeline
- Retail: 163 high quality regional malls, 152 msf predominately based in the U.S. with average sales of $526 per sq. ft.
- Multifamily, Industrial and Hospitality: 22,200 multifamily units, 58 msf of industrial space, 79 msf of future industrial development, and 8 hotels with 7,500 rooms.
- Property FFO excluding gains decreased by $31 million to $123 million due primarily to reduced ownership following the spin-off and subsequent dilution of BPY ($16 million) and fees incurred by BPY ($16 million at BAM share)
- Disposed of 22 properties and investments for gross proceeds of $1.2 billion, recognizing $59 million of disposition gains. Additionally, GGP recognized a gain on the extinguishment of debt ($17 million at BAM share)
- BPY completed tender offer of BPO and acquired 220 million BPO common shares, increasing BPY’s ownership of BPO to 92.5% and diluting BAM ownership in BPY to 70.2%, following the March and April issuance of 147 million units to fund the transaction
- Will acquire the remaining BPO shares, which upon completion will decrease BAM ownership in BPY to 66%
Invested Capital Property Brookfield Property Partners
- $16.8 billion1 market capitalization
- $1.00 annual distribution per unit
- 3%-5% Target distribution growth
- 80% FFO Payout
Financial Position and Performance of BPY
Invested Capital Renewable Energy
- 216 generating facilities that provide 6,057 MW of generating capacity
- 85% of our generation is hydroelectric, situated on 71 river systems
- Generate 22,860 GWh per year based on long-term average hydrology and wind conditions
- Contracted 74% of long-term average generation for the balance of 2014 at an average price of $77/MWh
- Renewable energy FFO, prior to realized disposition gains increased by $88 million to $164 million
- Increased pricing and capacity sales contributed an additional $95 million of FFO
- The contribution from capital deployed generated $6 million of FFO partially offset by $10 million of negative currency revaluation and a reduced ownership in BREP
- Sold a 3% interest in BREP during the first quarter of 2013 generating proceeds of $233 million and a gain of $172 million
Invested Capital Property Brookfield Renewable Energy Partners
- $7.7 billion market capitalization
- $1.55 annual distribution per unit
- 3%-5% Target distribution growth
- 60%-70% FFO Payout
Financial Position and Performance of BEP:
Invested Capital Infrastructure
- High quality, long-life assets:
- Utilities: Networks in North and South America, Europe and Australasia, including 10,500 km of transmission lines and 2.1 million connections
- Transport: 30 ports, 3,200 km of toll roads and 5,100 km of rail operations
- Energy transmission, distribution and storage: 15,500 km of transmission pipelines, over 50,000 gas distribution customers and 300 billion cubic feet of natural gas storage capacity in the U.S. and Canada
- Infrastructure FFO prior to disposition gains of $59 million slightly increased over the prior quarter
- BAM’s share of BIP’s FFO increased by 16% to $50 million as a result of the contribution from capital deployed over the past twelve months
- FFO from directly held assets decreased due to the sale of U.S. timberlands operations in the prior year
Invested Capital Property Brookfield Renewable Energy Partners
- $8 billion market capitalization
- $1.92 annual distribution per unit
- 5%-9% Target distribution growth
- 60%-70% FFO Payout
Financial Position and Performance of BIP:
Invested Capital Private Equity and Other
- Private Equity: Brookfield Capital Partners; Series of private equity funds with$3.4 billion of commitments
- Residential Development: Brookfield Residential Properties Inc., Brookfield Incorporações S.A.
- Service Activities: Construction and Property Services
- FFO prior to disposition gains decreased by $48 million to $59 million in the first quarter, due largely to a decline in panel board prices from high levels in Q1 2013 and the elimination of earnings from businesses sold
- Private equity FFO from businesses owned throughout both quarters decreased by $41 million reflecting 50% lower North American panel board prices, resulted in a $49 million decline, sales volumes continued to be strong. Pricing in Q1 2013 was high as a result of increased housing starts and panel board supply constraints, partially offset by an $8 million increase in energy related business. The impact of a reduced ownership level in investments decreased FFO by $18 million
- Residential development FFO increased by $35 million, due to a $21 million gain on the sale of two commercial properties and stronger pricing and volumes in North American operations, FFO from Brazilian operations was reduced by non-core asset dispositions; exited lower performing markets, and increases in construction costs
- Service activities FFO decreased as a result of lower levels of construction activity during the quarter in Australian operations
- Invested capital increased to $4.3 billion Q1 2014 reflecting capital deployed and earnings in combination with the impact of higher currency values for the Australian dollar and Brazilian real.
Outlook from Letter to Shareholders [Source]:
In the Q1 2014 Letter to Shareholders, Bruce Flatt, CEO of Brookfield wrote:
The first quarter of 2014 started off with good momentum in all of our operations. We were particularly pleased with the continued growth in fee revenues, as well as the results in our renewable energy operations. The financial results reflect strong earnings growth in our core businesses year over year; however the impact of this on our overall performance was understated due to several cyclical private equity investments having particularly strong results in the comparable period last year.
Looking forward for the year we expect to generate favourable growth in virtually all of our businesses in terms of operating results. This should lead to continued value appreciation for clients and shareholders.
Returns are solid, growth is strong and optimism seems to prevail as the investment community’s appreciation takes hold. BAM is likely at an inflection point where the growing number of opportunities indicates the good start this year is likely also a good start for years to come. As common shareholders our invested capital is working alongside some of the savviest investors in the world and a talented management team at BAM producing outstanding risk adjusted returns. Let’s sit back and watch this picture continue to unfold.
Disclosures: Long BAM, BIP, BEP, BPY.