Brookfield Asset Management (BAM) Reports Strong 1Q12 Results

Brookfield reported strong financial and operating performance and remains well positioned for future growth. The investments made over the past four years are making a significant contribution to results with strong performance from major businesses. More information provided on the spinoff of Brookfield Property Partners at the annual meeting and in the Shareholder Letter.

Management says: The primary objective of the company, as always, is to generate increased cash flows on a per share basis, and as a result, higher intrinsic value over the longer term… Our Primary Objective is to earn 12%-15% compound annual growth in the underlying value of our business on a per share basis.

So how are they doing? Funds from operations increased 21% from the year ago period rising from $.33/share 1Q11 to $.40/share 1Q12. For the three months ending March 31, 2012 intrinsic value increased 3.3% from $40.99/share to $42.35/share. This is a current 24% discount to the closing share price of $32.34/share. The 2011 return was 14%.

Summary for three months ending March 31, 2012:

From the Press Release here:

Highlights

We recorded strong financial and operating performance during the first quarter of  2012, and remain well positioned for future growth. The following list summarizes our more important achievements during the period:

We generated strong financial results, including a Total Return for Brookfield shareholders of $711 million, or $1.13 per share.

Total return is comprised of $283 million in funds from operations (“FFO”) and $457 million in valuation gains offset by $29 million of preferred share dividends. Improved performance and economic conditions in most of our operations contributed to this favorable result.

FFO [totaled] $622 million on a consolidated basis, of which $283 million (or $0.40 per share) accrued to Brookfield shareholders. This represents a $52 million increase over the $231 million attributable to Brookfield shareholders in the 2011 quarter. Notable
FFO growth occurred in our property operations, which benefitted from expansion
initiatives and increased lease rates. Investment and other income also increased meaningfully due to improved capital markets conditions. Certain cyclical businesses that are tied to the U.S. homebuilding business remain below historical levels, but we expect them to outperform over the long term.

Consolidated net income was $720 million, of which $416 million (or $0.60 per share) accrued to Brookfield shareholders. This compares to $278 million (or $0.41 per share) in the 2011 quarter. The increase reflects the higher level of FFO as well as increases in valuation gains recorded in net income, offset in part by an increase in deferred income
tax provisions. The largest portion of valuation gains occurred within our North American office and retail property portfolios.

We continued to expand our asset management franchise with both listed and private
entities.

We filed a registration statement for our proposed listed property business, that will rank as one of the largest and most diversified public property businesses, and are advancing capital campaigns for eight private funds with a goal of obtaining further third party commitments of approximately $5 billion. Our listed renewable energy unit ranks among the world’s largest public renewable power companies and our listed
infrastructure business is well positioned as a global leader; with a number of growth opportunities for each business.

We raised $6.2 billion of capital during the first four months of 2012 through asset sales, equity issuance, fund formation and debt financings.

Low interest rates, receptive credit markets and strong investor interest in our income-generating, high quality assets continued to support our capital raising and refinancing initiatives. These activities enhanced our liquidity, refinanced near-term maturities, lowered our cost of capital and extended terms, and funded new investment
initiatives. Core liquidity was $4.2 billion at March 31, 2012.

We completed and advanced a number of growth initiatives that increased the value and cash flows of our assets.

We leased 2.3 million square feet of commercial property at rents substantially higher than the expiring leases. Initial rents for new leases in our U.S. mall portfolio increased by 7.4% on a comparable basis and we continued to reposition the business by spinning  out 30 malls into a new entity focused on these specific operations.

In our power business, we continue to expand our portfolio through acquisitions and developments, adding 332 megawatts, and continue to advance construction on four projects with a further 99 megawatts of installed capacity. Within our infrastructure operations, we have now completed approximately 60% of our $600 million Australian  rail expansion, which is now contributing meaningfully to FFO.

In total, we completed $2.5 billion of acquisitions and capital expansions, deploying $1.9 billion of equity capital for our operating platforms and our clients.

Intrinsic Value of Common Equity

The intrinsic value of Brookfield’s common equity was $42.35 per share at March 31, 2012. This includes net tangible asset value of $35.88 per share and $6.47 per share related to the company’s asset management franchise.

Dividend Declaration

The Board of Directors declared a quarterly dividend of US$0.14 per share representing US$0.56 per share on an annualized basis), payable on August 31, 2012, to shareholders of record as at the close of business on August 1, 2012. The Board also declared all of the regular monthly and quarterly dividends on its preferred shares.

In BAM’s must read Letter to Shareholders here CEO Bruce Flatt on behalf of
management provides an overview:

We believe that the global recovery continues on track despite market volatility and media reports of continued financial uncertainty in Europe. Underlying fundamentals in our operations continue to improve as the world economy repairs itself, and governments and corporations deleverage. This process will undoubtedly take years to unfold but in the interim, borrowing rates for investors in real assets are exceptionally low, and thereby offer investors the opportunity for excellent returns.

As a result of these low interest rates, institutional clients continue to seek exposure to real assets. Our experience has shown that investors around the world are increasing their allocations to alternative products; both as their funds under management grow, and their allocations to alternative strategies increase.

Brookfield Property Partners (BPY) to spinoff this year:

Several years ago BAM began simplifying the extensive and complex organization into a
more simplified asset management company. The strategy was to provide access to assets through flagship public entities and private funds in each of the real asset platforms. The next step is the launch of a public listed global flagship Brookfield Property Partners (BPY).

Brookfield announced plans to distribute, by way of a special dividend, an interest in the
commercial and income producing property operations, which will be called Brookfield Property Partners, with the stock symbol BPY. BAM has filed a registration statement with U.S. regulators, and subject to approval, intend to list on the New York and Toronto stock exchanges in the second half of the year.

In the 1Q12 Letter to Shareholders here:

We are confident that BPY will find a strong following with investors, as the structure is similar to two successful income-oriented entities we previously introduced: namely, Brookfield Infrastructure Partners (“BIP”), launched in 2008, which has delivered an annual compound return of 18% since inception, and Brookfield Renewable Energy Partners (“BREP”), which since its predecessor’s formation in 1999 has earned shareholders an annual compound return of 15%.

BPY will target significant investments on a “value” basis similar to the manner in which we acquired major assets in the past. Examples of this approach include the acquisition of the Olympia & York portfolio in New York in the mid 1990’s, our investment in Canary Wharf office complex in London in 2002, and the recapitalization of the General Growth retail portfolio in the U.S. in 2009.

The returns of BPY should come from a combination of stable long-term cash flows from our premier portfolios of office, retail, multifamily and industrial properties, and more “opportunistic” returns from our opportunistic fund investing, along with our development and redevelopment initiatives. These activities will be a continuation of the strategies we have used in the past, which since 1989, on $17 billion of investments in core and opportunistic strategies, have generated a compound annual return of over 15%.

With our operational and asset management expertise, and our value approach to investing, we believe that BPY should generate strong performance over the long term.

  1. Like Brookfield Infrastructure (BIP) in 2008 it is being created through partial spin-off to BAM shareholders, as a special dividend.
  2. The business will own and operate income producing property businesses; which since 1989 have generated a compound return of 15.4%.
  3. It will be managed by Brookfield and have a global mandate.
  4. Target distribution of 4% on IFRS values with a target growth rate for the dividend of 3% to 5%.
  5. Initially, BPY will have interests in over 250 million sq. ft. of properties worldwide.

In summary management offers the following:

We remain committed to our objective of investing capital for you and our investment partners in high-quality, simple-to-understand assets which earn a solid cash return on equity, while emphasizing downside protection of the capital employed. With interest rates still low, our chosen areas of real assets continue to offer attractive options for alternative investment portfolios.

Brookfield Asset Management has been managing infrastructure and alternative assets
worldwide for about 100 years, long before this asset class became popular on Wall Street. They continue to show they are value investors, prudent allocators of capital; and shareholder focused management.  An exemplary example of how slow and steady wins the race.

BAM organization may be viewed as complex by some but the business model is simple:

  1. Utilize our global reach to identify and acquire high quality real assets at favorable valuations.
  2. Finance them on a long-term, low risk basis.
  3. Enhance the cash flows and value of these assets through our leading operating platforms.
  4. Expand client capital under management to grow our business.

For further information:

1Q12 Release, Letter to Shareholders, Supplemental, Financials here.

1Q12 Conference Call and Webcast here.

Brookfield Property Partners (BPY) Overview Presentation here.

Disclosures:

I am long BAM, BIP, BRPFF

The information contained herein is provided for informational purposes only, is not
comprehensive, does not contain important disclosures and risk factors associated with  investments, and is subject to change without notice. The author is not responsible for the accuracy, completeness or lack thereof of information, nor has the author verified information from third parties which may be relied upon. The information does not take into account the particular investment objectives or financial circumstances of any specific person or organization which may view it. Nothing contained within may be considered an offer or a solicitation to purchase or sell any particular financial
instrument. Any investment can be very risky and is not suitable for everyone. You should never enter into an investment unless you can afford to lose your entire investment. Always complete your own due diligence
. Before making any investment, investors are advised to review such investment thoroughly and carefully with their financial, legal and tax advisors to determine whether it is suitable for them.

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