Brookfield Asset Management (BAM) reported results [Source] for the first quarter 2013. Funds from Operations (FFO) the primary metric Brookfield uses to measure its business performance increased 34% over the prior year period and above the target 12-15% per year. It is a strong result and the encouraging aspect of this report is it across all operating platforms and shows all indications of continuing for the foreseeable future.
Brookfield’s CEO Bruce Flatt summarized the quarter well in his Letter to Shareholders [Source]: “Financial results for the quarter were strong with cash flow (“FFO”) of $689 million compared with $515 million last year. This increase was generally across all of our operations but was led by asset management fees which increased approximately 30% based on expanded mandates and capital under management in virtually all of our operations. Other contributors were strong retail sales, continued growth in North America’s housing related businesses, better pricing in our renewable power business and strong contributions from most of our infrastructure businesses.
Business conditions are good and financing markets remain strong as we continue to utilize the global market reflation to extend maturities, and sell non-strategic assets to restock our liquidity after major investments of capital between 2009 and 2012. During the quarter, we sold non-core securities for approximately $750 million of proceeds and real estate properties generating approximately $500 million. We are continuing this program in all of our operations given that markets are strong.
We expect Real Assets to continue to emerge as an even more compelling investment alternative, as they offer attractive current yields, stable bond-like cash flows, tangible growth, and hedges against future inflation. In a slowly improving economic climate in which the opportunity to invest in sustainable cash flows offering meaningful current yield is rare, we believe Real Assets are an exceptional investment.”
The first quarter of 2013 can be marked as the culmination of Brookfield’s multiyear transformation to an asset management company. The final step of the transformation was the spinoff of Brookfield Property Partners (BPY) during the quarter. BPY is Brookfield’s flagship commercial property company and the primary entity where Brookfield will carry on its commercial property operations around the globe similar to the earlier spinoffs of the infrastructure and renewable energy platforms.
The transformation uncovers Brookfield’s unique and irreplaceable collection of real assets delivering essential products and services that were accumulated over decades. Their long history of producing outstanding risk adjusted returns is no longer hidden in an unwieldy conglomerate structure. Configured as four separate easy to understand and focused business platforms, under Brookfield’s proven asset management and value investing framework, investors worldwide are taking notice.
We can view the transformation as a catalyst for years to come, accelerating Brookfield’s value based growth and attractive returns. This catalyst was apparent in this quarter’s results. Highlighted below are the three potential sources of economic gain for shareholders: operating activities; disposition gains; and valuation items.
Highlights for 1Q13:
“Our operating performance was strong in the first quarter of 2013, with virtually all of the operations contributing growth. Performance was good across our operations, contributing to a significant increase in our cash flow,” commented Bruce Flatt, CEO of Brookfield. “Our three flagship public entities are now operating and clients are increasing their commitments to our portfolio of private funds.”
- Net income during the first three months of 2013 was $697 million, resulting in $0.51 per share attributable to Brookfield shareholders.
- Funds from operations (“FFO”) for the first quarter of 2013 increased 34% to $689 million.
- Annualized base management fees, including incentive distributions, increased 20% to $500 million, following the launch of a number of funds, and accumulated performance fees increased to $724 million.
- Fee bearing capital in our listed, private and public funds increased by $14 billion, increasing fee bearing capital under management to approximately $74 billion.
- Brookfield Property Partners was launched as our flagship global commercial property business, in tandem with our listed infrastructure and renewable power entities.
Our financial results reflect increases in a number of our operations including significant contributions from housing related businesses and an increased contribution from asset management and other service activities. We also benefitted from improved pricing in our renewable power operations, contributions from recent capital expansion projects in our infrastructure operations and favorable rental growth in our property portfolios. Net income reflects a lower level of fair value gains in the quarter compared to the same period in 2012.
FFO for Brookfield shareholders increased by $174 million to $689 million, with the increase due primarily to the positive operating variances noted in the preceding paragraph. Disposition gains included in FFO were relatively consistent, with $325 million recorded in the current quarter compared to $299 million in the 2012 quarter.
- We expanded our asset management franchise with both listed and private entities.
- Our fee-bearing capital under management increased to approximately $74 billion, up 24% from year end. We launched our third flagship listed entity, Brookfield Property Partners, with one of the world’s premier commercial property portfolios. This new partnership has the scale needed to undertake significant transactions, as do our infrastructure and renewable power businesses, and we believe that all three entities have excellent growth potential.
- Our private funds group continues to move forward with capital campaigns for seven new funds that are targeting commitments of an additional $5 billion in third party capital. We have a total of $23 billion committed to our private funds at the end of the quarter.
- We increased cash flow with operational improvements in all of our major businesses.
- Our private equity business continues to achieve strong performance from a number of operations linked to the North American housing industry. We signed 1.3 million square feet of new leases in our office property business at rates 16% higher than the previous rents, and we see opportunities to attract new tenants on terms that are significantly better than expiring leases. Our renewable power operations experienced better pricing and also generated more electricity as a result of acquisitions and developments. In our infrastructure business, we achieved approximately a 10% year-over-year increase in traffic on our South American toll roads, due to rising consumer acceptance of the networks.
- We invested in growth opportunities in all our major operating businesses, increasing the capital deployed by both our listed entities and private funds.
- We announced or completed acquisitions and capital expansions during the quarter, deploying $1.8 billion of capital on behalf of clients and Brookfield shareholders. We expect these businesses will make a significant contribution to our future cash flows and value increases.
- In our property business, we moved forward with construction of new office projects in New York and Toronto and announced the purchase of a Los Angeles office property portfolio for $550 million subsequent to quarter end. Our infrastructure group expects to begin moving electricity through an $830 million new-build transmission system in Texas this quarter.
- Our renewable power business invested $600 million in three transactions: a portfolio of hydroelectric facilities in New England, a California wind farm and the remaining 50% of a hydroelectric project in British Columbia. We continue to advance new hydroelectric and wind projects in North and South America. In our private equity business, we continue to harvest capital from housing related businesses and invest in businesses with exposure to the U.S. natural gas market.
- We generated additional liquidity over the course of the quarter through asset sales, equity issuance, fund formations and debt financings.
- We sold $250 million of units in our renewable power business and a portion of our equity position in one of our panelboard operations generating approximately $100 million in proceeds.
- We continue to refinance debt at attractive long term rates. We obtained $1.5 billion of debt within our retail property portfolios. Our infrastructure group refinanced over $2 billion of short term borrowings at our Australian railway and UK utility, generating $300 million of incremental proceeds. The renewable power platform refinanced $1 billion of debt, including a $450 million bond issue backed by one of our Canadian wind farms.
The Board of Directors declared a quarterly dividend of US$0.15 per share (representing US$0.60 per annum), payable on August 31, 2013, to shareholders of record as at the close of business on August 1, 2013. The Board also declared all of the regular monthly and quarterly dividends on its preferred shares. Information on our dividends can be found on our website under Investors/Stock and Dividend Information.
The competitive advantage Brookfield Asset Management has over many are its role as both owner and manager of assets, value perspective and restructuring expertise. The company and management invests along side us shareholders and institutional investors and by operating the assets they have a unique perspective only an owner and operating can have. They “eat their own cooking.” As owner and operator there are three primary sources of economic impact highlighted below and detailed in their informative supplemental reporting [Source].
Operating Activities: represents the company’s operating income, their share of revenues less operating costs and interest expenses. It also includes their proportionate share of similar items recorded by equity accounted investments. This measure assists in describing BAM real economic results and explaining net income and Funds from Operations (FFO).
Disposition Gains: are included in FFO as the purchase and sale of assets and is a normal part of the company’s asset management business. Disposition gains include gains and losses recorded directly in net income or equity in the current period and adjusted to include fair value changes and revaluation as needed for prior periods.
Valuation Items: are excluded from the FFO calculations. Valuation items included in net income consist of fair value changes and depreciation and amortization.
- Operating Activities reflect substantial increases in the contribution from housing related businesses within our private equity operations and continued growth in asset management fee revenues. We also benefitted from improved pricing in our renewable power operations, recent capital expansion projects in our infrastructure operations, and favorable rental growth in our office and retail portfolios. ‒ The strong operating performance led to a 34% increase in funds from operations to $689 million over the same quarter in the prior year.
- We recorded a higher level of disposition gains in the current quarter including gains on the sale of BREP units and Norbord common shares.
- Net income in 2013 reflects a lower level of valuation items compared to 2012. We recorded less appraisal gains and additional depreciation on acquired assets. ‒ The lower level of valuations items resulted in net income attributable to Brookfield shareholders declining to $360 million, or $0.51 per share compared to $416 million in the prior year
- Asset Management base fees and incentive distributions increased 37% ($30 million) over the prior year quarter. We generated $36 million of performance fees, of which $35 million was deferred (2012 – $98 million deferred). Construction FFO up $16 million from increased activities and reduced costs.
- Property FFO increased by $16 million (12%) driven by a 2% increase in “same store” office and retail net rents and the contribution from acquired and completed assets. The 2012 office results included a $9 million dividend from our investment in Canary Wharf. The contribution from capital deployed in private funds increased FFO in opportunistic assets.
- Renewable Power increased by $19 million (33%) due to higher spot market pricing in uncontracted regions (+$25 million impact) and the contribution from newly acquired and commissioned assets.
- This was partially offset by generation on existing facilities, which while slightly above LTA, was lower than the prior year quarter (-$15 million impact).
- Infrastructure FFO increased by $12 million (26%) and benefitted from our rail expansion which is now fully operational (+$5 million) and newly acquired assets. We experienced strong harvest levels and pricing in our timber operations, increasing FFO by $8 million compared to the prior year quarter.
- Private equity and residential FFO increased by $65 million as the continued recovery in U.S. housing activity resulted in higher pricing and volumes within our North American panelboard operations and other related businesses.
- Unallocated costs remained consistent in aggregate as decreased leverage costs from reduced amount of debt and capital securities, was offset by increased corporate costs and taxes.
- We bought back $182 million of our debt at a discount to par value and recorded a $22 million gain ($11 million net).
- The prior year included the sale of office and opportunistic assets and the recognition of a $77 million gain ($34 million net). Property gains are determined based on the cumulative amount of valuation gains recognized for the assets disposed.
- We sold 8.1 million units (3%) of BREP, realizing $233 million of net proceeds and recorded a $172 million gain representing the accumulated revaluation surplus associated with the units. In 2012 we disposed of a 5% interest (13.1 million units) in BREP and recorded a $214 million realization gain.
- Brookfield Infrastructure disposed of a 20% interest in its UK connections business for $235 million of proceeds and a $106 million gain, our share of which was $30 million.
Private Equity and Residential:
- We sold 2.8 million shares of Norbord Inc. for proceeds of $85 million and recognized a $62 million gain.
- Includes a $12 million prepayment penalty on early redemption of high coupon term debt in 2013.
- Positive portfolio gains in 2013 and 2012.
- Appraisal gains within our property operations include the quarterly revaluation of our office, retail and opportunity and other property portfolios:
- Capitalization rates within General Growth Properties decreased by 10 basis points to 5.4% on a portfolio basis, reflecting increased sales per square foot in high quality malls, resulting in a $85 million (net) valuation gain.
- We recorded a $46 million valuation gain on our 22% investment in Canary Wharf group, increasing our carrying value to £4.20 per share. The increased valuation reflects lower yields, increased occupancy and leasing.
- Positive leasing and continued discount rate compression increased the value of our share of our North American Office properties by $45 million.
- Interest rate contracts within our infrastructure operations include mark-to-market losses on interest rate and inflation hedge contracts ($23 million net). These contracts offset the impact of changes in rates on certain of our underlying assets, which are recorded at fair value within equity on an annual basis.
- Power sales agreements decreased in value by $53 million, reflecting the impact of increased in spot market pricing on fixed price electricity sales contracts. Our renewable power assets are not revalued until the end of the year.
- Our share of depreciation and amortization was $183 million during the quarter, of which $140 million related to depreciation on assets which are revalued on an annual basis.
Disclosures: Long BAM, BIP, BEP, BPY
- Press Release 1Q13 Results [Source]
- Letter to Shareholders [Source]
- Financials [Source]
- Supplemental Information [Source]
- Conference Call Recording [Source]