Brookfield Asset Management (BAM) Reports 3Q12 Results

Brookfield Asset Management (BAM) reported 3Q12 results on November 9, 2012. The company had solid operating performance with a 17% increase in Funds from Operations (FFO), good total returns, and increasing intrinsic value. Especially encouraging is managements continued progress in adding a large number of high quality assets that will generate increasing returns to shareholders for years to come. See operations highlights below.

One significant but temporary negative was a sharp decline in renewable power where hydroelectric power generation was impacted by very low water levels. Water levels have since been restored to average levels primarily as a result of the recent devastating storms in North America.

The two key metrics to measure progress at Brookfield Asset Management is intrinsic value and management’s primary objective of a 12-15%/year targeted total return on equity over the long term.  Historically they’ve done quite well:

And they continue to do so. The charts below show steady progress. The average latest twelve month (LTM) trailing return on intrinsic value is 12.4%. This is during a period of heavy investment that tends to temporarily suppress returns until growth or restructuring occurs.

Applying BAM’s recent lower end 12.4% return over time illustrates how slow and steady can win the race. A $10,000 investment would grow to $92,164 over twenty years. Although there is no guarantee past performance can be repeated there is a lot to be said for demonstrated results.

Financial Results:

“Acquisitions made in the last three years are beginning to generate significant cash flows. Our strategy of investing in high quality assets that compound in value over time, positions Brookfield to continue to deliver strong cash flow growth through periods of economic uncertainty,” said Bruce Flatt, CEO of Brookfield. “Furthermore, our clients are allocating increasing amounts of their capital to property and infrastructure assets globally, which is enabling us to increase our assets under management.”

Highlights:

  1. Total Return for Brookfield shareholders for 3Q12 was $578 million, or $0.92/share
  2. For the nine months of 2012 total return was $1.6 billion, or $2.48/share
  3. Total Return for the quarter includes funds from operations (FFO) of $282 million, $328 million of valuation gains; less $32 million of preferred share dividends

Consolidated basis:

  1. FFO totaled $723 million; of which $282 million (or $0.40/share accrued to Brookfield shareholders; compared to $241 million for Brookfield shareholders in 3Q11
  2. Increase FFO reflects improved operating performance and economics in most operations; increased cash flows in property; increased housing activity in the United States within the private equity group.
  3. Water flows in renewable power operations were well below long-term average, reducing FFO from this segment vs. normalized hydroelectric generation in 3Q11
  4. BAM incurred a $34 million charge on redemption of corporate debt which was
    refinanced with lower cost long-term debt.

Valuation gains include:

Gains of $328 million or $0.52/share for the quarter included: fair value changes in income and increases in commercial property and housing related private equity investments.

Consolidated net income was:

  1. $872 million, of which $334 million or $0.48/share for Brookfield shareholders
  2. Net income includes FFO; non-cash revaluation on accounting depreciation and
    changes in the appraised values of commercial properties
  3. This compares to $253 million for Brookfield shareholders or $0.36/share in 3Q11

 

Operations:

  1. Committed and invested client capital of listed issuers and private funds increased by
    $4.3 billion or 19% since year end.
  2. For the quarter; closed on one private fund and two funds focused on private equity
    & multifamily residential.
  3. Capital campaigns ongoing for private funds seeking $5 billion of third party capital.
  4. Working on launch of third flagship listed entity, Brookfield Property Partners (BPY)  by 4Q12. Will rank as one of the largest & highest quality listed global public property business.
  5. Generated $7.8 billion of capital since June 30 through asset sales, equity issuance, fund formations and debt financings, and total of $20.1 billion year to date.
  6. Improving liquidity and lowering financing costs with low coupon rates and investor
    interest in companies that produce stable cash flows and growth.
  7. Completed a number of organic growth initiatives that increased the value of assets and associated cash flows.
  8. Announced or completed acquisitions and expansions totaling $4.7 billion in the quarter, deploying $2.7 billion of equity capital.
  9. Reached agreement to acquire an industrial property business with assets in the
    southwestern U.S. and Mexico for $870 million.

Renewable Power:

  1. Received regulatory approval for the acquisition of four hydroelectric facilities in the
    southeastern United States with 378 megawatts of capacity for $600 million.
  2. Invested in a listed company with wind farms adjacent to BAM facilities in California.
  3. Progressing $0.4 billion of hydroelectric development projects in North and South America; considering opportunistic acquisitions in Europe.

Infrastructure:

  1. Acquired a district heating and cooling business in Toronto. The total investment is
    close to $500 million with an equity requirement of approximately $300 million.
  2. Advanced $1.7 billion for purchase of a 3,200 kilometer toll road network in Brazil.
  3. In October, closed the acquisition of the Chilean toll road, increasing the investment
    to 100% of the business.
  4. Acquired a UK utility and obtained regulatory clearance for recapitalization of the
    utility; plan to merge with existing natural gas connections unit.
  5. Considering asset dispositions including a portion of timber holdings, to redeploy capital into other growth opportunities.
  6. Completed a $600 million expansion of the Australian railroad, secured revenue streams with long-term “take or pay” contracts from major customers.
  7. Completed majority of construction on Texas transmission network; it will contribute to cash flow in 2013.

Property:

  1. Organic growth initiatives in property business included the leasing of 1.8 million
    square feet of commercial property, bringing the year-to-date total to 5.6 million square feet at rents 33% higher than expiring leases.
  2. Completed the renovation of flagship First Canadian Place office tower in Toronto.
  3. Closed over $700 million in commercial office property financings, netted proceeds of approximately $300 million.
  4. Acquired an Australian property developer with $1 billion of assets including; prime
    office site in Sydney; portfolio of hotels and residential developments; increased interest in a flagship development property at 100 Bishopsgate, in the City of London.

Retail:

  1. U.S. retail business executing on its growth strategy; attracting new tenants; increasing occupancy; and extending the term of leases.
  2. Initial rents for leases commencing occupation in 2012 increased by 10% over the
    comparable expiring rents, increasing net operating income by 4% for regional
    mall portfolio and FFO by 9%.

Other:

  1. Evidence of strength in U.S. housing markets; improving the performance of cyclical
    investments linked to this part of the economy. Approximately $3 billion invested in companies that benefit from the recovery in U.S. residential real estate.

The intrinsic value of common equity was:

  1. $42.86/share at 3Q12 vs. $40.99 at 4Q11and $41.81 at 2Q11
  2. The $42.86/share includes net invested capital of $36.40/share and $6.46/share
    related to the asset management franchise
  3. The 3Q12 increase is due to the total return generated during the quarter; positive
    impact of foreign exchange; partially offset by common equity dividends

Dividend Declaration:

The Board of Directors declared a quarterly dividend of US$0.14/share ($0.56/year) payable on February 28, 2013, to shareholders of record on February 1, 2013.

Summary:

BAM’s management continues to exhibit a high level of patience as they wait for the opportunity to buy quality assets at good prices and then kick it into high gear. This approach historically produced attractive compounded returns for shareholders over many years. Slow and steady wins the race.

For further information:

3Q12 Press Release, Letter to Shareholders, Supplemental, Financials here.

3Q12 Conference Call and Webcast recording here.

Brookfield Asset Management Investor Day here.

Disclosures: I am long BIP,BAM, BREP.

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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