Brookfield Asset Management (BAM) 3Q14 Update: Growing Platform of Opportunity

Brookfield Asset Management is a global alternative asset manager with $200 billion in Assets under Management (AUM). They own and operate real assets with a focus on: property, renewable power, infrastructure through listed entities and their asset management franchise. Capital is employed with a long term investment horizon, attention to the business cycles and a deep value perspective. The business model is to identify and acquire high quality real assets at favorable valuations and finance them on a long term low risk basis and then enhance the cash flows. The business model works well as the numbers speak for themselves: BAM 3Q14 Historic Returns A fair question given this history is: can Brookfield’s business model continue generating these outsized returns? Brookfield Asset Management, CEO Bruce Flatt, discussed the trends needed during the conference call. For purposes of brevity his comments are paraphrased below and you are encouraged to read the transcript [Source] or listen to the call [Source] in its entirety so nothing gets lost in the translation.

  • The first is institutions continue to allocate capital to real assets. We are confident this will continue from dealing with most global institutions and sovereign funds. Real asset allocations continue to accelerate. The simple reason is alternatives are bleak; we offer 8% to 20% yields with moderate risk, contrasted to bonds that offer 1% to 3% yields and the chance of capital loss in the future. There are many other reasons but this math gives the simplest rational.
  • The second item needed for growth is the ability to deploy vast amounts of capital while maintaining solid returns. We have invested close to $20 billion in the past year and many of these investments will turn out as exceptional investments. This has been during a period when we heard many times that there are no opportunities out there.
    • One reason is that we can invest in very large transactions. Most cannot commit to acquire a $4 billion transmission business, a $4 billion portfolio, or be involved in a $10 billion acquisition of real estate. Our franchise is large and global; few can shift capital and people from markets with excess capital to those under served, in order to capitalize on the lack of capital in those markets.
    • With an investment that requires a $100 million of equity in a U.S. market there will likely be an auction with 30 to 50 bidders; we don’t spent time on these opportunities. In contrast to 2009 we shifted all of our capital to developed markets like the United States and Australia because they had declined significantly and we bought at substantial discounts to replacement cost.
    • We can deploy the capital into solid opportunities globally and make the argument that we are far better setup today than we were 10 to 20 years ago as our global offices mature and our investment people are further integrated into our culture
  • The third trend we need are positive global business conditions. Our observation is that over the past 10, 20, 50, 100 years, the global economy on average continues to grow and the health and wealth of individuals across the world has improved and will continue. The assets we buy are the backbone of the global economy and despite some trying times and downturns which are inevitable, we believe that we will be able to endure these markets and sometimes even advance when periods of global economic disruption and consolidation occur.

BAM Collage Brookfield Asset Management (BAM) reported [Source] a solid quarter of progress. Funds from Operations (FFO) was $564 million or $0.83/share for the 3Q14 and $2.7 billion or $3.98/share on a last twelve month (LTM) basis. FFO excluding gains increased to $362 million from $342 million in the 3Q13 and benefitted from increased fee related earnings and investment returns. This was partially offset by the impact of lower water levels reducing cash flows in the renewable energy business. Total FFO in the 3Q13 included a high level of disposition gains arising from several large monetization transactions. Net income for the 3Q14 was $1.1 billion or $1.09/share and increased to $3.5 billion on a year-to-date basis and $4.4 billion for the LTM. Net income in 2014 reflected a higher level of fair value gains primarily due to the impact of increased cash flows and lower discount rates within the commercial property portfolios. Fee bearing capital increased to $84 billion and represented 14% growth from 3Q13. BAM has more than $12 billion of private funds in marketing for a variety of strategies which should raise approximately $9 billion of third-party capital. Approximately $19 billion was committed to real asset investments over the last twelve months, including a large net lease commercial property portfolio, natural gas assets and a European telecom tower portfolio announced yesterday. Financial Results: BAM 3Q14 Financial Results [Source] BAM 3Q14 Press Release “We continue to deploy capital, increase our fee bearing assets and harvest investments,” commented Bruce Flatt, CEO of Brookfield. “Our access to capital, global scale and operating platforms continue to provide us with competitive advantages when investing our capital.” Operating Highlights: Brookfield expanded the three publicly traded “flagship” entities: Property Partners (BPY); Infrastructure Partners (BIP); and Renewable Energy Partners (BEP) and the asset management franchise.

  • Annualized base fees increased to $630 million at quarter end up 19% from the same time last year. BAM added $4 billion of assets under management in the public markets asset business through both market appreciation and net inflows to funds that invest in property and infrastructure securities.
  • The private funds have committed or invested approximately 70% of their capital commitments in aggregate and BAM continues to maintain a robust pipeline of investment opportunities and expects new funds will grow at a pace approximately twice as large as their predecessors. Approximately $5 billion was raised for private funds in the last 12 months. Total assets under management were $193 billion at the end of the quarter.
  • BAM announced or completed acquisitions and capital expansions that will deploy over $3 billion of capital on behalf of clients and Brookfield shareholders.
  • Expanded the property portfolio by acquiring a 15.6 million square foot net lease commercial property portfolio for $4.3 billion, a portfolio of apartment buildings in New York City for $1.1 billion, a 270,000 square foot office building in São Paulo and interests in three shopping malls.
  • In the infrastructure portfolio, completed $1 billion of investments into rail and port assets in Brazil and district energy businesses in Chicago and Seattle. Subsequent to quarter end, committed to acquire a 50% interest in a portfolio of 6,700 European telecom towers for $2.2 billion.
  • The private equity group committed $540 million to an acquisition that will create one of North America’s largest coal bed methane producers.
  • Increased cash flow and created value with growth initiatives and operational improvements in the major businesses.
  • FFO excluding realized disposition gains was $362 million, compared to $342 million in the same quarter a year ago.
  • Asset management business generated fee revenues of $194 million ($721 million on a LTM basis) leading to quarterly fee related earnings of $102 million.
  • The property group generated FFO of $136 million, excluding gains, up 12% from the same quarter last year, as a result of increased ownership of office and U.S. retail portfolios, opportunistic investments, and increases in net rents compared with expiring leases.
  • Signed new leases that were on average 47% above expiring rents in the office properties and 16% above expiring rents in our retail portfolio.
  • The renewable energy assets generated FFO of $28 million lower than the $57 million in the same quarter a year ago, reflecting lower water levels and wind production in Canada.
  • The infrastructure group recorded $55 million of FFO, which was 12% higher on a comparable or “same store” basis than last year. In 2013 also recorded $163 million of gains on sales of timber assets.
  • The private equity group generated $110 million of FFO excluding gains. FFO in 2013 was $127 million and included $16 million of FFO from assets that were subsequently sold prior to the most recent quarter.
  • Realized disposition gains generated $202 million of FFO, and included a $191 million gain on the sale of our remaining shares in a forest products business.

Asset Management and Services Businesses:

  • Fee related earnings increased by 20% to $346 million LTM, including a 24% increase in base management fees attributable to growth in fee bearing capital in the listed partnerships, private funds and public portfolios.
  • Fee bearing capital totaled $84 billion at3Q14, representing 14% increase on aLTM basis.
    • Inflows of $14 billion on a LTM basis; $2 billion during most recent quarter
    • Annualized fee base and target carry totals more than $1.1 billion.
  • Invested or committed $19 billion of capital LTM, deploying over $3 billion of capital in the 3Q14.
  • Monetized $10 billion of capital through asset salesLTM, including over $1 billion in the recent quarter.
    • Distributed $8 billion of capital to our private fund clients LTM, and generated $4 billion of investment gains.
  • Continued momentum in fundraising activities.
    • Four private funds currently in the market seeking to raise more than $12 billion of capital
    • Expect to be in a position to launch a successor infrastructure fund before the expiry of its investment period, based on progress in investing existing capital.

BAM 3Q14 Asset Management Summary Property Group:

  • BAM holds a 68% interest in Brookfield Property Partners which owns essentially all global property operations.
  • Property FFO excluding gains for the quarter increased by $15 million to $136 million due to increased ownership of the portfolio and positive leasing spreads. This was partially offset by the impact of lower occupancy in lower Manhattan following a large lease expiry in 4Q13.
  • Disposed of 13 properties during the quarter recognizing $11 million of disposition gains.

BAM 3Q14 Property Summary Renewable Energy:

  • BAM holds a 63% interest in Brookfield Renewable Energy Partners (BEP) which owns all their renewable energy facilities. BAM also conducts energy marketing on behalf of BEP).
  • Renewable energy FFO excluding gains decreased by $29 million to $28 million compared to the prior year due to reduced generation levels.
  • BEP contributed $38 million of FFO, below the prior year’s $70 million of FFO, as a result of 13% below long-term average generation compared to 4% above average generation in the prior year.

BAM 3Q14 Renewable Power Summary Infrastructure:

  • BAM holds a 28% interest in Brookfield Infrastructure Partners holding majority of infrastructure operations.
  • InfrastructureFFO increased by 4% to $55 million in the quarter,prior to realized disposition gains.
    • BIP’s FFO increased by $2 million primarily due to same store organic growth from inflation indexation and development initiatives. The contribution from capital deployed resulted in $5 million of FFO, which was partially offset by the elimination of FFO on the sale of non-core assets.
    • Disposed of the Pacific Northwest timberlands in the prior year, generating a $163 million disposition gain.

BAM 3Q14 Infrastructure Summary Private Equity Group:

  • Private equity consists of: Brookfield Capital Partners, a series of private equity funds with $3.3 billion in commitments; Brookfield Residential Properties Inc.; Brookfield Incorporacoes S.A., Construction and Construction & Property Services.
  • Invested capital increased by $0.5 billion to $4.3 billion during the first nine months of 2014, reflecting capital deployed and earnings.
  • Private equity FFO decrease reflects a $28 million lower contribution from the panel board businesses primarily due to prices. Reduced ownership level in investments decreased FFO by $16 million following dispositions since the 3Q13, partially offset from higher levels of FFO from energy related business and the contribution from capital deployed.
  • Residential development FFO increased by $31 million, due to stronger pricing and margins in the North American operations; U.S. operations increased housing gross margins from 22% to 25% in 2014. FFO from the Brazilian operations improved compared to 2013 as a result of increased completions in the current quarter.
  • Service activities FFO decreased by $6 million due to the impact of lower currency values for the Canadian dollar FFO and lower sales volumes in property services operations. Construction revenues were consistent with the prior year, and work-in-hand grew to $5.6 billion.
  • Realized disposition gains reflect the sale of a forest products investment in 3Q14. The prior year gain was a result of the sale of a pulp and paper business ($200 million) and the sell down of a forest products investment ($45 million).

BAM 3Q14 Private Equity Summary [Source] BAM 3Q14 Supplemental Information Dividend Declaration: The Board of Directors declared a quarterly dividend of US$0.16 per share (US$0.64/year), payable on December 31, 2014 to shareholders of record as at the close of business on November 30, 2014. Summary: Brookfield’s global business continues to perform well with three favorable tends helping to fill their pipeline with future organic growth initiatives. As these initiatives are developed they become part of the existing real asset platforms that continue to earn reliable, attractive long term risk adjusted total returns. For the individual investor Brookfield Asset Management provides a rare opportunity to invest in high quality real assets alongside some of the savviest investors in the world. Long: BAM, BIP, BEP, BPY You are encouraged to do your own independent research (due diligence) on any idea discussed here because it could be wrong. This is not an invitation to buy or sell any particular security and at best it is an educated guess as to what a security or the markets may do. This is not intended as investment advice, it is just an opinion. Consult a reputable professional to get personal advice that meets your specialized needs of which that the author has no knowledge. This communication does not provide complete information regarding its subject matter, and no investor should take any investment action based on this information.

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