Brookfield Asset Management (BAM) Impressive 4Q12 and 2012 Results

Brookfield Asset Management (BAM) reported [Source] impressive financial and operational performance for 2012, increasing cash flow and the intrinsic value significantly. The stage is set for solid future growth following the prudent expansion of both private and public asset management and attracting increasing capital to their highly desired real asset platforms.

4Q12 BAM Structure

[Source]: BAM 4Q12 Supplemental

Highlights for 2012:

BAM’s estimated intrinsic value of the business increased to $44.93/share an increase of 9.6% over the $40.99/share year end 2011.

Total return to common shareholders was $3.4 billion, a 12.4% return in 2012 following a $3.3 billion representing a 14% return for 2011 comparing favorably to the long term target of 12-15%.

Net income attributable to shareholders was $1.4 billion, or $1.97 per share, compared to $2.89 per share in 2011. The 2011 results included a higher level of valuation gains.

Funds from operations (FFO) a key metric and the company’s measure of cash flow increased 12% to $1.4 billion for 2012. Excluding disposition gains, FFO was $1.1 billion, representing an 11% increase over the comparable 2011 result.

Total assets under management (AUM) increased 13% to $181 billion. Base management fees including incentive distributions, increased 38% to $415 million. Fee bearing capital increased to $60 billion including consideration for capital raised and distributions.

Accumulated performance fees increased by $310 million, and $34 million of previously accumulated fees were earned.

Valuation:

Tracking the company’s estimated per share intrinsic value and share price is the best way to monitor this investment overtime.

Our intrinsic value estimate includes the earnings power value (EPV) of the company. The EPV reflects BAM’s global reach; the competitive advantage of its irreplaceable real assets; conservative non-recourse financing strategy; value orientation; capital allocation discipline; and experience of the management team.  BAM’s estimate of intrinsic value is a sum of the parts approach, a more conservative estimate in my view, because it does not fully reflect the true earnings power and competitive advantages built into the company’s competitive moat.

4Q12 BAM Valuation Graph

The margin of safety for shares purchased today at about $37/share is 45% on our current $67/share estimate of intrinsic value and a discount of 18% on the company’s approximate $45/share estimate of intrinsic value.

Dividend Increase and Share Repurchases:

The company announced an 8% increase in the dividend from 56 cents to 60 per year (to be paid quarterly) a continuation of a policy to increase distributions while ensuring sufficient capital to build equity and strong investment grade ratings.

The board also approved the repurchase of approximately 55 million common shares of the company. The common share repurchase authorization is used as a capital allocation tool for the use of excess cash based on share price and other investment opportunities available to the company. Dividend increases and share repurchases are often viewed as a sign of management’s confidence in the future of the company.

Transition to Asset Manager:

Brookfield Asset Management is transitioning from a conglomerate to an asset management company with four major operating platforms centered on real assets: Infrastructure, Renewable Power, Commercial Property and Private Equity. Historically conglomerates tend to be undervalued because they are complex and difficult to analyze. This has been the case with Brookfield. BAM is addressing this by creating flagship public entities and private funds deployed in the specific asset classes where they enjoy a distinct competitive advantage.

Early this year, on receipt of approval from the U.S. Securities and Exchange Commission, BAM will implement the last phase of this multi-year transition with the launch of Brookfield Property Partners (BPY) one of the largest commercial property entities in the world. BPY is a spin-off to BAM shareholders who will then own a direct interest in the property operations, BAM’s largest operation. The business has generated an annual compound return of ±15% since 1989, and is likely to continue for years to come.

This is the third milestones of the transition that started with the first step; the listing of Brookfield Infrastructure in 2008; and the second step; the merger of power operations into recently launched Brookfield Renewable Energy Partners completed in 2011.

4Q12 BAM Returns[Source]: BAM 4Q12 Letter to Shareholders

Property Group

Property operations generated $1.25 billion of cash flow. Total assets under management increased to $103 billion; investing additional capital through Brookfield Property Partners and the private institutional Opportunity Fund.

Acquired Thakral Holdings, a $1 billion Australian property company; Purchased 80% of an 18 million sq. ft., a $900 million, industrial portfolio in U.S. and Mexico; Collected most loans of a New Zealand portfolio purchased in 2011 earning exceptional returns; Acquired an office portfolio in London; Optimized numerous office, industrial and retail properties through sales and divestitures.

Completed the new Brookfield Place, a Perth Australia office tower housing BHP, the largest mining company in the world; Leased 420,000 sq. ft. at Bay Adelaide in Toronto and started construction on this tower; Completed the makeover of First Canadian Place.

Leasing activity in U.S. office markets is stronger and bodes well for leasing in 2013 and 2014; Leased a total of 7 million sq. ft.; at rates 35% higher than formerly in place.

Retail sales in the U.S. and General Growth Property’s (GGP) performance was strong; Expected to continue to outperform with solid tenant leasing demand and tenant sales; Acquired 11 Sears stores in malls and transforming to traditional mall in-line retailers.

Acquired 18 million additional GGP warrants and GGP repurchased 52 million warrants; Settled issues with a co-shareholder in a positive manner; now own 43% of GGP.

Infrastructure Group

Cash flow from operations increased 24% to $680 million; assets under management increased to $27 billion; investing additional capital through Brookfield Infrastructure Partners and the private institutional fund.

Four major transactions include: acquisition of the other half of our Santiago toll road; 50% of the controlling stake in 3,200 kilometers of toll roads in Brazil; A gas utility business in the UK then merged with a similar company owned; Acquired the Toronto city district providing  heating and cooling to major property complexes.

Sold half of the 50% investment in Canadian timberlands and considering a number of alternatives for timber including further institutional ownership or listing in the public market.

Brookfield Infrastructure was established as an investment-grade debt issuer; Completed issuance of C$400 million of bonds at an effective coupon for five years of 2.7%.

Completed the $600 million Australian rail construction supported by take-or-pay contracts to increase cash flows in 2013.

Power Group

Lower financial performance was due to extremely low water levels and electricity prices reflecting low natural gas prices. Generated 15,821 gigawatt hours, 13% below plan. Total assets under management increased to $19 billion capitalizing on the low price environment to expand the portfolio. Investing capital through Brookfield Renewable Energy Partners and a private institutional fund. Brookfield Renewable has flourished as a listed company and the stock price increased 27% since launch in 2011; working on a dual listing on the NYSE to be completed 1Q13.

One of the world’s largest renewable power operations, and preferred partner for industrial companies and utilities that seek to sell their power assets; Committed to invest $2 billion in new acquisitions adding 1,000 megawatts; including 378 megawatts of plants from Alcoa and 351 megawatts from NextEra.

The Alcoa transaction included four facilities in the southeastern U.S; the NextEra transaction includes 19 facilities in Maine; both acquisitions increased total installed capacity of renewable energy to more than 5,000 megawatts.

Continued construction on three new hydro projects in Canada and Brazil, and acquired a number of smaller facilities.

Private Equity Group

The private equity group closed the Brookfield Capital Partners Fund III, realized on a number of investments and saw meaningful increases in value of investments made in industries related to the housing sector over the past five years. Total private equity assets under management increased to $26 billion, and investing through Capital Partners Fund III and from the BAM balance sheet when additional capital is required.

Norbord and Ainsworth sells oriented strand board (OSB) to homebuilders and invested substantial capital in the downturn; with recovering housing fundamentals share prices of both companies have more or less tripled, with OSB prices more than doubled from $160 per board foot to over $350.

Brookfield Residential share price increased from $8 to $18 at year end; interest in the housing sector enabled a primary equity offering and bond offering; proceeds of $800 million enabled the recapitalization of Brookfield Residential to acquire new tracts of land in California and Alberta.

Sold the U.S. residential brokerage operations to Berkshire Hathaway for cash and a one-third ownership interest in the combined business now branded under the name Berkshire Hathaway HomeServices.

Summary

Our investment thesis is on track. The launch of Brookfield Property is the final phase of BAM’s multi-year transition to asset manager. We are updating our estimate of intrinsic value to better reflect the value of the transition and the other significant accomplishments over the past years and will publish it in a post shortly. All indications are you will want to be a shareholder in Brookfield Asset Management over the next 10 years!

I encourage you to read CEO’s Bruce Flatt’s letter to shareholder [Source] in its entirety. Brookfield’s management is among the best in the business and the shareholder letters are a great source of investment insight and wisdom presented in a well thought out manner. You can download the letter and find other supporting information at their website [Source].

Disclosure: Long BAM, BIP, BREP

 

 

 

 

 

 

 

 

 

 

 

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