Brookfield Asset Management (BAM) 2Q13 Results; FFO up 192%

Brookfield Asset Management (BAM) reported results [Source] for the second quarter 2013. Funds from Operations (FFO) the primary metric Brookfield uses to measure its performance increased 192% and net income attributable to shareholders increased 67% over the prior year period.

It is another excellent quarter following the strong 34% FFO increase reported in the 1Q13. There just wasn’t much not to like. The good performance across all operating platforms shows all indications of continuing for the foreseeable future.

BAM Collage 1Q13 120

Brian Lawson, Chief Financial Officer summarized it in part this way in while beginning the earnings conference call: “Funds from operations increased threefold to $464 million, and our consolidated net income more than doubled to $802 million…Starting with our FFO, the $300 million increase over the second quarter of 2012 is due in equal parts to improved operating results and to disposition gains, roughly $150 million each. The improved operating results reflect a return to normal generation levels in our power operations after unusually low water levels last year, as well as better pricing and the contribution from recently acquired and commissioned facilities…U.S. housing recovery on the housing-related investments in our private equity business…and finally, an increased level of base management fees and incentive distributions from our asset management activities.”

This strong sequential quarterly performance continues to show the culmination of Brookfield’s multiyear transformation to an asset management company. As expected the transformation is showing early signs of uncovering Brookfield’s unique and irreplaceable collection of real assets delivering essential products and services that took decades to accumulate. Their long history of producing outstanding risk adjusted returns no longer hidden in an unwieldy conglomerate structure is surfacing and the in beginning stages of recognition by the larger investing community.

As a small testament to this gaining recognition (and a larger testament to his courage);  CEO Bruce Flatt agreed to an appearance on CNBC’s “Squawk Box” where he described the company as being in the early stages of the transformation.  It’s a good interview and the show’s hosts limited themselves to only one unrelated tangent letting the CEO discuss BAM’s perspective [Source].

Highlights for 2Q13:

“Asset management fees increased 72% during the quarter and virtually all of our operating groups are performing well and positioned for growth. We closed a number of realizations and raised over $14 billion of fund commitments for new investments,” commented Bruce Flatt, CEO of Brookfield. “We are also seeing attractive opportunities to put money to work in all of our businesses.”

  • Funds from operations (“FFO”) for the second quarter of 2013 increased 192% to $464 million, or $0.68 per share.
  • Net income attributable to shareholders increased 67% during the second quarter to $230 million, or $0.31 per share.
  • The company’s annualized fee base increased 21% over March 31, 2013 to $932 million, including $557 million of annualized base management fees and incentive distributions, and $375 million of annualized carried interests, based on targeted fund returns.
  • ·Fee bearing capital in listed, private and public funds increased by $4 billion, increasing fee bearing capital under management to approximately $78 billion.
  • Subsequent to quarter end, our flagship private global opportunistic property fund was closed with total commitments of $4.4 billion.
  • Realizations of nearly $6 billion of proceeds were closed, which return significant cash to limited partners and increase our balance sheet resources.

BAM 2Q13 Financial Results

BAM 2Q13 News Release [Source]

Our financial results reflect substantial increases in asset management fees as a result of higher capital under management; improved hydrology levels and higher spot market power pricing in our renewable power operations; and higher prices and volumes related to operations with exposure to the continuing U.S. housing recovery.

FFO for Brookfield shareholders increased to $464 million. Disposition gains included in FFO were $58 million in the current quarter compared to disposition losses of $87 million in the comparable 2012 quarter. This excludes gains which will be booked on a number of realizations which were closed after quarter end and therefore will be recorded in the third quarter.

FFO and net income for the six months ended June 30, 2013 were $1,153 million and $1,499 million, both of which increased substantially over the same period in the prior year.

Operating Highlights

  • We expanded our asset management franchise.
    • Our fee-bearing capital under management increased to approximately $78 billion, up 30% from year end.
    • We held a final close on our $4.4 billion global opportunistic property fund and have already invested $1.1 billion of this capital in European, Australian and North American commercial properties.
    • We continue to move forward with fundraising initiatives for other real asset strategies, marketing five private funds.
    • We hold nearly $10 billion of committed client capital that can be invested across our platforms.
  • We generated additional liquidity through asset sales, equity issuance, fund formations and debt financings.
    • We sold investments in timberlands, a utility and a paper and packaging company at attractive valuations. This generated $4.2 billion in gross proceeds, and increases liquidity by approximately $2.0 billion after repayment of project debt and distributions to private fund clients.
    • Our retail property operations raised a total of $1.6 billion through asset sales including a 50% interest in two Las Vegas shopping malls and, subsequent to quarter end, a minority interest in a Brazilian shopping centre company.
  • We continue to refinance debt at attractive long term rates. We refinanced $1.9 billion within our retail property portfolio, generating proceeds of $300 million, and $1.1 billion of refinancings in our commercial property portfolio, resulting in $500 million of proceeds.
  • We increased cash flow with operational improvements in all of our major businesses.
  • We announced or completed acquisitions and capital expansions during the quarter, deploying $1 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.
  • 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.

Key Operating Metrics:

BAM 2Q13 Key MetricsBAM 2Q13 Supplemental Information [Source]

The flagship listed entities (Property, Infrastructure and Power) along with Brookfield Capital Partners expanded operations and are well positioned for future growth in cash distributions and asset value that will increase BAM performance fee income. Lets take a high level look at each platform to better understand this performance and future potential.

BAM Organizational Structure

Overview of Asset Management and Services

Highlights

  • Fee bearing capital of $78 billion up +30% since 4Q12.
  • Gross profit margin of 44% in 2Q13
  • Annualized fee base of $932 million up +36% since 4Q12
  • Closed on over $14 billion of commitments for recent initiatives in private funds and public securities.
  • Invested in growth opportunities in all major operating businesses, increasing the capital deployed by both listed entities and private funds.

Asset Management Summary

Description

  • Listed Entities: Consists of 6 listed entities and $31.3 billion of fee bearing capital; high payout, investment grade, growth vehicles.
  • Private Funds: Consists of 30 private funds and $28.5 billion of fee bearing capital; $9.1 billion of dry powder, 5 funds in market seeking an additional $2 billion capital; about 200 limited partners with average commitment of abot 103 million.
  • Public Securities: Manages $18.5 billion of fixed income and equity securities.
  • Construction & Property Services: Global construction and property servcies with $4.0 billion work under contract.

Overview of Property Operations

Highlights

  • Assets under Management (AUM) of $104 billion.
  • Over 300 million square feet of office, retail, multifamily, industrial and opportunistic investments.
  • Flagship listed entity is Brookfield Property Partners (BPY) with $11.1 billion market captilaization.
  • Subsequent to quarter end; closed $4.4 billion Brookfield Strategic Real Estate Partners Fund where BPY serves as the cornerstone investor with a $1.3 billion commitment.
  • Acquired a European warehouse company with significant growth potential.
  • Broke ground on an office tower in Perth, Australia.
  • Subsequent to quarter end, launched construction of a flagship 2.4 million square foot office project in Calgary with a leading energy company as lead tenant.
  • Investing $900 million on renovations at 24 properties, including flagship malls in Hawaii, Nevada and Arizona.
  • Continued to renew the mix of stores in retail portfolio, and signed new leases at rates that were 7% higher than expiring leases.
  • Signed 2.0 million square feet of new leases in office property business at rates that were 8% higher than the previous rents.

Property Summary

 Operations

  •  FFO decreased by $38 million (23%) to $124 million, primarily due to the formation and spin-off of a 7.6% interest of BPY to our shareholders (-$20 million).
  • The 2012 quarter includes $16 million of portfolio gains on loans and securities held within our opportunistic funds.
  • Common equity decreased by $671 million as a result of the BPY spin-off ($906 million) and negative foreign currency revaluation partially offset by earnings.

Overview of Renewable Power Operations

Highlights

  • Assets under Management (AUM) of $20 billion.
  • Consists of about 200 hydro-electric generation facilities, 11 wind farms with combined 5800 Megawatts (MW)of power.
  • Flagship listed entity is Brookfield Renewable Energy Partners (BEP,BREP) with $7.4 billion market capitalization.
  • Achieved higher prices on sales of un-contracted spot power and experienced significant cash contributions from U.S. hydroelectric and wind assets acquired in the past nine months.
  • Continues to advance new hydroelectric and wind projects in North and South America.

Power Summary

Operations

  • FFO increased by $58 million to $79 million.
  • Generation from existing facilities approximated long-term average, compared to significantly below average generation in the prior year (+$43 million) due to draught conditions.
  • Generation increase by 2,193 GWh (54%) leading to higher revenues and FFO.
  • Spot market prices increased in un-contracted regions (+$17 million); and newly acquired and commissioned assets all contributed to the increase.
  • Positive results were partially offset by increased borrowing costs on higher amounts of borrowings and a reduction of about 3% ownership interest in BEP.

Overview of Infrastructure Operations

Highlights

  • Assets under Management (AUM) of $27 billion.
  • Ports, rails, toll roads, natural gas pipelines, transmission lines, timberlands and agrilands.
  • Flagship listed entity is Brookfield Infrastructure Partners (BIP) with $8.0 billion market capitalization.
  • Recorded a significant increase in traffic on its Australian railway, where cash flow doubled year-over-year after an expansion of the network.
  • Expects to complete construction of an $830 million electrical transmission system in Texas this quarter.

Infrastructure Summary

 Operations

  •  FFO increased by $11 million to $60 million (22%) and benefitted from rail expansion, now fully operational (+$7 million), and newly acquired assets.
  • Experienced strong harvest levels and pricing in timber operations, increasing FFO by $7 million compared to the prior year quarter.
  • BIP sold its Canadian timber operations generating proceeds of $173 million. The proportionate share of the gain was $15 million.

Overview of Private Equity Operations

Highlights

  • Assets under Management (AUM) of $27 billion.
  • Private Equity: Brookfield Capital Partners with $2.7 billion Private Fund commitments.
  • Residential: N. America; Brookfield Residential Properties (BRP); Brazil; Brookfield Incorporacoes.
  • Continued recovery in U.S. housing markets resulted in strong performance from a number of private equity investments.
  • Continue to harvest capital from housing related businesses
  • Acquired a Canadian cold storage company.
  • Made a loan to a mining company and invested in a number of businesses with exposure to the U.S. natural gas market.

Private Equity Summary

Operations

  •  FFO increased by $64 million to $116 million as the continued recovery in U.S. housing activity.
  • Experienced higher pricing and volumes within housing and related businesses, in particular the North American panel board operations.
  • Disposed of 0.5 million Norbord shares during the quarter, bringing ownership interest to 52% at June 30, 2013, and recorded an $11 million gain.
  • Subsequent to quarter end completed the sale of a pulp and paper business achieving a 69% IRR and 10x multiple on our capital.
  • Received $200 million of cash proceeds and estimate recognizing an approximate $250 million disposition gain in the third quarter.

Dividend

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.

Long: BAM, BPY, BIP, BEP

BAM 2Q13 References:

  • Press Release 2Q13 Results [Source]
  • Letter to Shareholders [Source]
  • Supplemental Information [Source]
  • Conference Call Recording [Source]

 

 

Comments

  1. Tripleoptician says:

    Hi George
    Thanks for all the wonderful summaries for BAM!
    I had 2 questions for you:
    1. Do you have any charts done of the growth of NAV on a year over year basis(ie. long term CAGR) with the associated discount/premiums that the stock price traded around the NAV each year?
    2. After the NAV is given at year end, do you have a specific calculation you do to continue to modify the NAV after each quarterly report? There are so many moving parts to the business that I’m looking for a way to estimate intrinsic value as best as possible.

    Thanks in advance

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