Brookfield Asset Management (BAM) reported results [Source] for the third quarter 2013. Funds from Operations (FFO) the primary metric Brookfield uses to measure its performance increased 435% and net income attributable to shareholders increased 143% over the prior year period. These results follow the strong 34% FFO increase reported in the 1Q13 and the 192% increase in the 2Q13 when compared to the year period.
Funds from Operations for 3Q13 increased $970 million to $1,193 million or $1.85 per share and net income increased $479 million to $813 million when compared to the year ago period of 3Q12. The increase in FFO reflects strong operating performance and gains from several large realizations from asset sales. The realization gains included in FFO totaled $851 million during 3Q13 when compared to losses of $77 million in the 3Q13. These included a $525 million gain on the settlement of a long dated interest rate contract with AIG and the gains on the sales of timberlands and private equity investments.
In our investment thesis on BAM [Source] we discussed the significance of BAM’s transformation to an asset manager and how it creates new leverage as the company realizes these results on its own invested capital and earn fees for producing the excellent results for other investors. “The increasing fee bearing capital, entrusted to BAM as an asset manager, results in a stream of fees with a high rate of growth incrementally adding to the outsized returns already realized”.
In the 3Q13 FFO from operating activities showed continued growth operations and a substantial increase in fee bearing capital leading to higher fee related earnings. The company’s annualized fee base grew to $992 million up from $740 million in 4Q12. Subsequent to 3Q13 end the sale of assets from a private fund consortium captured $558 million of previously accumulated carried interests.
J. Bruce Flatt, Chief Executive Officer writes in the 3Q13 Letter to Shareholders [Source] that prospects are for continued global growth in real asset investments and if so, we can look forward to more quarters of fee related earnings growth: “The theme of our [annual Investor day] presentation was real assets; the new essential for institutional clients. We believe for many reasons that allocations by institutional clients to real assets will continue to increase. This is borne out by the success we have had of late in marketing our global funds. More importantly, we believe that this shift in allocations is still only in its early stages. Our goal has been to establish one of the global managers with the trust, relationships and scale to invest capital for global institutions into real assets across the world. We continue with this goal”.
Note: You are encouraged to listen to the Brookfield Asset Management Investor Day Presentation in its entirety [Source].
Later in the Shareholder Letter CEO Bruce Flatt writes about share repurchases. This too is encouraging because share repurchases are further indication of management’s positive view of the prospects of the company. Maybe more importantly, as value investors, Brookfield’s management must believe the company’s shares are a bargain at today’s prices. This too is consistent with our investment thesis: “During the quarter, we repurchased 2.4 million shares of Brookfield, bringing the number of shares repurchased this year to approximately 9 million. Over the last 15 years we have repurchased over 50 million common shares and only once issued common shares (45 million) for strategic reasons. We intend to continue with this strategy.
During the past three years, as we digested the substantial acquisitions made during the financial crisis to grow our business, we did not repurchase a large number of shares. With values of many assets now increasing and capital more freely available, we have completed a number of realizations. This has resulted in a substantial amount of liquidity at Brookfield and our major subsidiaries.
In addition, since we are close to completing the realignment of our listed flagship entities, and have significantly expanded our private funds, there is less of a burden on our corporate balance sheet to fund investments.
Our annual free cash flows, as well as our capital generated from realizations of investments are therefore increasingly being directed towards share repurchases when values are cheap, and to broadening the base of our asset management business globally. In addition, and once again depending on price, we intend to monetize assets on our balance sheet over time and use portions of this capital to repurchase share”.
Highlights for 3Q13:
“Fee income and operating performance from all our businesses was strong. In addition, realizations from investments made during the downturn contributed to our results,” commented Bruce Flatt, CEO of Brookfield. “Clients continue to allocate capital to our global private funds and the scale, breadth and trading liquidity of our three flagship listed issuers advanced in the quarter.”
- Funds from operations (“FFO”) for the third quarter of 2013 [increased six fold to] $1.2 billion, or $1.85 per share, an increase of $970 million from the third quarter of 2012.
- Consolidated net income doubled during the third quarter to $1.5 billion, or $1.23 per common share. Total net income for the nine months increased to $3.0 billion.
- The company’s annualized fee base grew to $992 million, including $562 million of annualized base management fees and incentive distributions, $55 million of transaction and advisory fees and $375 million of target annualized carried interests. Subsequent to quarter end we completed the sale of assets from a private fund consortium and crystallized $558 million of previously accumulated carried interests.
- Fee bearing capital increased to approximately $80 billion and total assets under management increased to $184 billion. The fundraising for our $1 billion timber fund was completed during the quarter, and subsequent to quarter end, we closed our latest flagship private global infrastructure fund with commitments of $7 billion.
- Realizations of investments generated proceeds of nearly $4.1 billion, returning significant cash to limited partners and increasing our balance sheet resources.
- We invested or committed $4.6 billion of total capital in the quarter on behalf of clients and Brookfield bringing year-to-date investing activity to $7.4 billion.
BAM 3Q13 News Release [Source]
The increase in FFO reflects strong operating performance and gains from several large realizations. Disposition gains included in FFO totalled $851 million for the quarter, compared to losses of $77 million in the prior year, and included a $525 million gain on the settlement of a long dated interest rate contract, as well as gains on the sales of North American timberlands and private equity investments.
FFO from operating activities reflects continued growth in all of our operations, including a substantial increase in fee bearing capital, leading to higher fee related earnings as well as a return to normal hydroelectric generation levels following levels that were significantly below average in the prior year.
FFO and net income for the nine months ended September 30, 2013 was $2.3 billion and $3.0 billion, respectively, both of which increased substantially over comparable periods in the prior year.
- We expanded the asset management franchise.
- Fee-bearing capital increased to approximately $80 billion, up 34% from year end.
- We held a final close on a $1 billion timber fund during the quarter and subsequent to quarter end held the final close of the $7 billion global infrastructure fund.
- We continue to move forward with fundraising initiatives for other real asset strategies, with four private funds in marketing.
- We have approximately $10 billion of committed client capital that can be invested across strategies.
- We announced two major initiatives to enhance our flagship listed property entity Brookfield Property Partners (or BPY). The first was a tender offer to acquire the 49% of our office property company it does not currently own. The second initiative, subsequent to quarter end, was the reorganization of the consortium that acquired our U.S. shopping mall business, which allowed our clients to realize significant gains and monetize their investments while increasing our ownership in the business. This crystallized $558 million of performance fees which will be reflected in our fourth quarter financial statements. BPY issued $1.4 billion of equity to finance the transaction, of which we purchased $1 billion
- We generated additional liquidity through asset realizations and debt financings.
- We announced or completed the sale of several investments in our private equity business as well as a number of timberland, property and utility assets; all at attractive valuations. This generated $4.1 billion in gross proceeds, and increased group core liquidity by approximately $1.7 billion after repayment of project debt and distributions to private fund clients.
- We continue to refinance debt at attractive long-term rates. We refinanced $1.5 billion (at share) within our retail property portfolio, generating proceeds of $239 million, and $1.2 billion of refinancings in our office property portfolio, resulting in $166 million of incremental cash proceeds.
- We announced or completed acquisitions and capital expansions during the quarter that will deploy $4.6 billion of capital on behalf of clients and Brookfield shareholders bringing year-to-date investments to $7.4 billion.
- In our property group, we acquired a U.S. warehouse business for $1.1 billion and merged it with our existing operations to create one of North America’s largest logistics platforms. We committed $750 million to acquire a 22% interest in an office and retail portfolio in Shanghai, China. We closed the purchase of a $2 billion portfolio of office buildings in downtown Los Angeles and acquired two urban shopping malls and an office property in San Francisco.
- Our infrastructure group increased its investment in South American toll roads by $490 million, purchased district energy assets in Louisiana and Texas for $130 million and is in exclusive negotiations to acquire a significant stake in a Brazilian railroad and ports business. Our renewable power team announced plans to acquired 10 hydroelectric facilities in Maine and California, and continues to develop new hydroelectric and wind projects in North and South America. In our private equity business, we increased our investment in the energy sector with a $215 million acquisition of coal-bed methane assets.
- In addition, we repurchased and cancelled 2.4 million of our shares for approximately $85 million
- We increased cash flow with operational improvements in all of our major businesses.
- The continued recovery in U.S. housing markets resulted in strong performance from a number of our private equity investments, and we recycled capital by continuing to sell mature assets. In our property group, our retail business signed new stores as tenants and increased occupancy rates to 96.6% from 95.1% in the same quarter last year, and signed new leases at rates that were 12% higher than expiring leases. We signed 1.1 million square feet of new leases in our office property business at rates that were 9% higher than the previous rents, and launched construction of our new flagship office property in Calgary, leased primarily to a major oil sands company.
- Our infrastructure business recorded a significant increase in FFO, reflecting expansion and improved performance from our utility and transport assets. Our UK gas and electrical utility benefited from an increased scale of operation following a merger last year. Traffic on our Australian railway rose due to a better-than-average grain harvest and utilization from resource companies following an expansion completed earlier this year. Our renewable power group achieved higher prices on sales of uncontracted power, improved hydrology and increased contributions from U.S. hydroelectric and wind facilities acquired in the past year.
Key Operating Metrics:
BAM 3Q13 Supplemental Information [Source]
Our investment thesis relies on five sources of value creation for shareholders: Operations, Restructuring, Capital Allocation, Asset Appreciation, and Outstanding Management. The flagship listed entities; Property, Infrastructure, Renewable Power, and Brookfield Capital Partners are the sources of these value levers we are relying on to increase BAM intrinsic value. Lets take a look at each platform to better understand the underlying performance and future potential.
Asset Management and Services:
- Fee bearing capital of $80 billion up +34% since 4Q12
- Gross profit margin of 55% up from 44% in 2Q13
- Annualized fee base of $992 million up from $932 million in 2Q13 and up +34% since 4Q12
- Third party committed but undrawn capital (dry powder) of $9.8 billion for the following investment strategies: $3.3 billion property, $5.6 billion infrastructure and timber and $0.9 billion private equity.
- 4 funds in market seeking an additional $2 billion of third party capital.
- Subsequent to quarter end; reorganized the consortium that acquired U.S. shopping mall business, allowing clients and BAM to realize a 38% gross IRR and 2.6x gross multiple of invested capital, realized $558 million of previously unrealized performance fees.
- Listed Entities: Consists of 6 listed entities and $31.6 billion of fee bearing capital;
- Private Funds: Consists of 30 private funds and $28.7 billion of fee bearing capital;
- Public Securities: Manages $20.1 billion of fixed income and equity securities;
- Construction & Property Services: Global construction and property servcies with $3.8 billion work under contract.
- Assets under Management (AUM) of $105 billion up from $104 billion for 2Q13.
- Over 340 million square feet of office, retail, multifamily, industrial and opportunistic investments up from 300 million square feet for 2Q13.
- Flagship listed entity is Brookfield Property Partners (BPY) with $12.2 billion market captilaization up from $11.1 billion 2Q13.
- Property FFO excluding gains decreased by $64 million to $121 million compared to 2012.
- BPY’s FFO prior to disposition gains was $111 million, a decrease of $70 million from the $181 million recorded in 2012.
- The 2012 results included a $31 million distribution from the 22% investment in Canary Wharf Group, the current period includes $19 million of dividends paid on preferred shares issued on the formation of BPY and $20 million of base fees paid relating to the capital of BPY and a “catch up” fee on the closing of the global opportunity private funds that were not incurred in 2012. Excluding the impact of these items, BPY’s FFO was consistent with prior year, and included the following:
- Office NOI increased 1% excluding the impact of foreign currency on a same store basis, and FFO also benefitted from reduced financing costs as a result of asset dispositions and refinancings at lower interest rates.
- Brookfield’s share of GGP’s reported FFO was $64 million, which represents 22% increase on a U.S. GAAP basis over the prior year, primarily from a 6.8% increase in same store NOI and a significant reduction in interest expense on existing borrowings from favorable refinancings.
- Reduced FFO contribution following the disposition of office and retail assets and higher levels of corporate costs.
- Disposed of 17 properties and investments during the quarter for proceeds of $400 million net of associated liabilities, recognizing $19 million of disposition losses in aggregate.
- Common equity by segment decreased by $584 million as a result of the BPY spin-off ($906 million) and negative foreign currency revaluation partially offset by earnings.
Key Metrics Office:
- Average rent is $31.11 psf, a discount of 13% to market rent, average term of 6.9 years. Occupancy decreased by 50 bps from year end to 91% due to acquisitions of assets with lower occupancy rates in addition to lease expiries in New York and Washington D.C.
- Leased 1.2 million sf at average 9% higher than expiring rents.
- Reduced pre-2018 rollover by 480 bps compared to year end.
Key Metrics Retail:
- The average in-place rent of $53.42 psf represents a discount of 11% to market rents, 6.0 year average term to maturity.
- Occupancy increased by 40 bps to 95.5% compared to year end following strong U.S. leasing.
- GGP’s suite-to-suite initial rents increased 12% to $63.32 psf, compared to rental rate for expiring leases.
Renewable Power Operations:
- Assets under Management (AUM) of $20 billion.
- Consists of about 200 hydro-electric generation facilities, 11 wind farms with combined 5900 MegaWatts (MW)of power up from 5800 for 2Q13..
- Flagship listed entity is Brookfield Renewable Energy Partners (BEP, BREP) with $7.1 billion market captilaization down from $7.4 billion for 2Q13.
- BREP’s FFO was $108 million for the quarter, representing an increase of $97 million over the prior year primarily due to the return to longterm average hydrology and wind conditions and the contribution from assets acquired within the last year.
- BAM’s share of BREP’s FFO, after adjusting for power contracts, was $57 million, representing a $63 million increase from the prior year due to:
- long-term average hydrology on a same store basis (+$56 million),
- higher spot pricing on uncontracted generation (+$13 million) the contribution from newly acquired assets (+$9 million)
- offset by increased levels of corporate costs, unfavourable foreign exchange and reduced ownership of BREP.
- Common equity by segment decreased by $401 million mainly due to the sale of a 3% interest in BREP during 1Q13 and lower foreign currency valuations of our Canadian and Brazilian operations.
- Total generation was 5,154 GWh for the quarter, 4% above long-term average of 4,960 GWh and representing a 73% increase over the 2,971 GWh generated in the same period in the prior year, which was 27% below average generation levels.
- Generation from existing hydroelectric assets increased 51% to 3,688 GWh (2012 – 2,450 GWh) while contributions from recent acquisitions and assets reaching commercial operations within the last year resulted in 851 GWh of generation (2012 – 12 GWh).
- Generation from existing wind facilities was 359 GWh (2012 – 90 GWh) while ontributions from facilities recently acquired in California resulted in 82 GWh of generation (2012 – 211 GWh)
- Assets under Management (AUM) of $26 billion down from $27 billion 2Q13.
- 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 captilaization.
- BIP’s FFO prior to disposition gains was $167 million for the quarter of which BAM share was $45 million, an increase of 45% over the $31 million recorded in 3Q12.
- BIP’s utilities FFO increased to $97 million, driven by the expansion of our UK regulated distribution operations (+$13); and an increased ownership in our Chilean transmission operations (+$7 million).
- Transport and energy results reflect the contribution of our recently acquired Brazilian and Chilean toll roads (+$25 million) and the completion of our Australian rail expansion project (+$16 million), which is now fully operational. These amounts were partially offset by weak market fundamentals within our North American gas transmission operations.
- Directly held investments include a 45% owned Acadian Timber as well as Brazilian agricultural land and timberlands. FFO from directly held assets decreased by $5 million as the direct 10% interest in our Chilean transmission operations was sold to BIP in 2012, resulting in a reduced FFO contribution, as well as the impact of the sale of our direct timberland operations.
- Sold Pacific Northwest timberlands during the third quarter, generating proceeds of $725 million and recognized a $163 million disposition gain in FFO.
- Valuation items decreased by $5 million on a net basis due to depreciation and amortization on newly acquired and commissioned assets.
- Common equity by segment decreased by $570 million following the sale of the directly held timberlands for $600 million. The investment in BIP remained consistent with year end, as our investment of $95 million as a part of a $330 million BIP equity issue, was offset by foreign currency revaluation on non-U.S. assets and distributions received.
Private Equity Operations:
- Assets under Management (AUM) of $27 billion.
- Private Equity: Brookfield Capital Partners with $3.0 billion Private Fund commitments up from $2.7 billion 2Q13.
- Residential: N. America; Brookfield Residential Properties (BRP); Brazil; Brookfield Incorporacoes.
- FFO increased to $78 million prior to disposition gains, reflecting the ongoing U.S. housing market recovery on our operations, offset by the elimination of earnings from businesses sold since the comparative quarter.
- Private equity FFO increased by $6 million, driven by improved results in our lumber businesses, partially offset by lower contributions from the panel board businesses reflecting lower prices and higher costs vs 3Q13. The impact of a reduced ownership level in our investments decreased FFO by $11 million.
- Residential FFO increased to $15 million, from increased land and housing sales as well as stronger pricing in North American operations. Brazilian operations FFO was reduced by non-core asset dispositions and increases in construction costs.
- Recorded $245 million of disposition gains during the quarter. Completed the sale of a pulp and paper business achieving a 70% IRR and 10x multiple on our capital. Received $200 million of cash proceeds and recognized a $200 million disposition gain in FFO on the transaction. Also reduced ownership in Western Forest Products from 68% to 53% through two transactions, generating proceeds of $150 million and recorded a $45 million monetization gain. Also entered into an agreement to sell an additional 40 million shares at $1.60 per unit, at the holder’s option.
- Common equity by segment increased to $2.7 billion at the end of the quarter, reflecting a further $321 million direct investment in private funds energy and industrial businesses, more than offsetting the impact of the above asset sales.
The Board of Directors modified the dividend payment schedule in order to pay dividends on the last day of each quarter starting 2Q14. The change is to create a consistent record and payment date with the three flagship public entities and the payment dates for most of the preferred shares. To Accomplish this, the Board of Directors declared a quarterly dividend of US$0.20 per share, payable on February 28, 2014, to shareholders of record as at the close of business on February 1, 2014. This dividend is not an increase in the annualized rate because it represent the four-month period up to and including March 31, 2014. The next quarterly dividend is anticipated to be on June 30, 2014, representing the three month period.
Long: BAM, BPY, BIP, BEP
- Press Release 2Q13 Results [Source]
- Letter to Shareholders [Source]
- Supplemental Information [Source]
- Conference Call Recording [Source]