Brookfield Asset Management (BAM): reported [Source] Funds from Operation (FFO), Brookfield’s primary measure of cash flow, was $3.4 billion for 2013 an increase of 149% over the previous year of $1.4 billion and an all-time record high for the company. For the fourth quarter 2013 (4Q13) Funds from Operation was 1 billion for an increase of 124% over the year ago quarter (4Q12) of $459 million.
Consolidated net income was $3.8 billion for the year, an increase of 40% over the previous year and also an all-time record for the company. Net income for 4Q13 increased 9% over 4Q12 from $779 million to $850 million. The net income increase when compared to the FFO increase was primarily offset by a decline in the level of fair value increases in the 4Q13. The 4Q12 included a large number of property appraisal gains that did not recur in 2013. Although net income grew significantly, the reduction in the level of fair value gains were more than offset by the increase in increase in FFO during the year.
[Source] Press Release
Brookfield Asset Management has over a 100-year operating history and now owns and operates assets with a focus on renewable power, property, infrastructure and private equity. In April of this year they completed a multi-year transformation of the company to a global asset manager with the formation a third publicly traded entity, Brookfield Property Partners (BPY).
After decades of making attractive long term investments that yield compound returns of about 20% per year in the past 10 and 20 year periods the performance was difficult to see in what became an unwieldy conglomerate structure. Our investment thesis centers on the transformation to an asset manager coupled with continued excellent performance would surface the sources and magnitude of value creation continually underway. The investment community would then be able to better understand the value proposition. The fourth quarter and year end 2013 results illustrate the outstanding performance and ongoing potential very clearly.
The significance of BAM’s transformation to an asset manager is the continued use of a proven and successful business model focused on real assets. Their success, although at times ignored by Mr. Market, is recognized by savvy institutional investors and sovereign funds willing to pay BAM to manage their capital for similar results. This creates new leverage for common shareholders as the company continues to realize these results on our invested capital and earn fees for producing the same results for institutional investors. By being a common shareholder in Brookfield Asset Management, we “retail investors” can also enjoy the same results as some of the savviest investors in the world.
[Source]: BAM’s 4Q13 Letter to Shareholders
As an asset manager and owner and operator of assets, value creation occurs from either asset appreciation or increases in the operating cash flows of the owned and operated businesses. In the year 2013 FFO included $1.3 billion in gains from asset sales including timberland and private equity assets. FFO also included the realization of $558 million carried interest in the 4Q13 that represents Brookfield’s share of clients’ multibillion dollar gain in the General Growth Property (GGP) investment and recapitalization during the financial crises.
The investment gains are a significant part of the business model because they are a recurring source of value creation at Brookfield. They are difficult to forecast however because they are opportunistic in nature and occur periodically as market opportunities present themselves. While we wait for these investment gains to materialize, increases in cash flows occur from Brookfield’s underlying operating businesses in property, infrastructure and renewable power. During 2013 for example FFO excluding investment gains totaled $1.5 billion for the year an increase of nearly 50% compared 2012 reflecting strong operating results across the businesses.
BAM 11% vs. S&P 500 32%:
During 2013 BAM’s overall return was 11% including the stock market increase in share price, the regular dividends, and a special dividend; a partial share of Brookfield Property Partners distributed to shareholders. Although 11% per year is a nice gain, this compared unfavorably to the S&P 500’s gain of 32%.
Brookfield management writes: “In 2013, real assets performed exceptionally well and our funds reflected this strong performance. Many of our private funds are performing at or above their targeted returns and our flagship listed entities each made significant progress with their business plans.”
Warren Buffet and Benjamin Graham (the Father of Value Investing) like to tell the story of a fickle Mr. Market who from time to time makes offers to investor that just doesn’t make sense. The price of a stock at any given time does not necessarily correlate to the underlying value of the business it represents. It is up to us investors to decide whether we want to take advantage of Mr. Market or let Mr. Market take advantage of us. The compound Brookfield shareholder returns over 10 and 20 years is about 19% per year compared to the S&P 500 7% and 9% respectively. Brookfield’s all-time record FFO indicates these returns are probably not slowing down. It seems to be just another example of why a long term investment horizon is needed. Mr. Market may have not yet recognized the value proposition, but it eventually will and I’ll be a shareholder to enjoy the near 20% returns when it does.
Major Objectives Accomplished:
Two major strategic objectives were accomplished during 2013 that increased the value of the franchise and simplified the business:
Significant expansion of asset management activities:
- Fee bearing capital increased by $19 billion or 32% to $79 billion
- Annualized fees and carry now stand at over $1 billion, a 34% increase from 2012
Completed the launch of Brookfield Property Partners:
- Established a flagship listed fund in each of the our property, renewable energy and infrastructure businesses
- Simplified the balance sheet and increased liquidity and flexibility to reallocate capital
- Approximately 85% of invested capital is in listed investments
[Source]: Brookfield Asset Management 4Q13 Supplemental Information
Brookfield increased cash flow and created value with operational improvements in all of their major businesses.
- Increased fee bearing capital by $19 billion or 32%
- Invested or committed $12 billion of capital
- Monetized $12 billion of net capital through asset sales
- Continued to build out our global capabilities
- Record financial results with FFO up 149% to $3.4 billion
- Net income for shareholders increased 54% to $2.1 billion
Asset Management and Services Businesses:
- Increased fee bearing capital 32% to 79 billion
- Generated $300 million fee related earnings up 67% over 2012
- Realized $565 million of carried interest net of associated costs
- Flagship listed entities increased cash distributions
- Fund raising continues on four funds targeting $2.0 billion
- Liquidity of $9.0 billion available for investment
- Assumed management of a $300 million India property fund
- Launched Brookfield Property Partners (BPY) creating a global property listed issuer
- Same store rental income increased 1% and 6% in our office and retail operations respectively, prior to foreign exchange
- Advanced the merger of Brookfield Property Partners and Brookfield Office Properties
- Committed $750 million to portfolio in Shanghai, China
- Broke ground on office properties in London, New York, Toronto, Calgary and Perth after pre-leasing to tenants
- FFO up 174% on expanded operations, improved hydrology and rising prices for un-contracted power
- Announced plans to acquire wind farms in Ireland
- Expanded hydro and wind portfolio with acquisitions in Pennsylvania, California and Maine
- FFO increased 24% on organic growth initiatives
- Increased traffic on rail and toll road networks
- Commissioned Texas electrical transmission network
- Investing $850 million in Brazilian port and rail assets
- Acquiring ports in California
- Expanded Brazilian toll road portfolio
- FFO increased 152% on realizations from U.S. housing-related Investments
- Acquired energy assets that benefit from rising natural gas prices
In the 4Q13 Letter to Shareholders [Source] Bruce Flatt, CEO of Brookfield wrote on the outlook in part: “Over the next 10 years, our view is that interest rates will remain at levels that are supportive of this continued shift from traditional bond investments towards higher-yielding alternatives such as real assets. The type of assets that we invest in generate strong cash flows, have equity-like features that grow and have inflation protection, should that ever be important. As a result, we continue to see institutional investors shifting capital into real assets, particularly towards platforms that are flexible enough to move capital around the world…
Our goal is to invest capital for our clients in opportunities which have reasonable returns in a downside scenario (6% to 8% on equity), have the potential to generate good returns under most scenarios (12% to 15%), and in the upside cases will generate excellent returns (20% plus). These latter scenarios usually require us to be able to buy right, execute well, and reallocate capital wisely over time…
Our primary long-term goal is to achieve 12% to 15% compound annual returns measured on a per share basis. This increase will not occur consistently each year, but we believe we can achieve this objective over the longer term by:
- Offering a focused group of Funds on a global basis to our clients; while utilizing our discretionary capital to invest beside these clients, and to support our Funds in undertaking transactions they could not otherwise contemplate without our assistance;
- Focusing the majority of our investments on high quality, long-life, cash-generating real assets that require minimal sustaining capital expenditures, having some form of barrier to entry, and characteristics that lead to appreciation in the value of these assets over time;
- Utilizing our operating experience, global platform, scale and extended investment horizons to enhance returns over the long term;
- Maximizing the value of our operations by actively managing our assets to create operating efficiencies, lower our cost of capital and enhance cash flows. Given that our assets generally require a large initial capital investment, have relatively low variable operating costs, and can be financed on a long-term, low-risk basis, even a small increase in the top-line performance typically results in a disproportionately larger contribution to the bottom line; and
- Actively managing our capital. Our strategy of operating our businesses as separate units provides us with opportunities from time to time to enhance value by buying or selling assets or parts of a business if the markets enable access to capital at attractive terms. As a result, in addition to the underlying value created in the business, this strategy allows us to earn extra returns over those which would otherwise be earned. In addition, we often capitalize on mispricing of our securities in the stock market by repurchasing shares of the company when opportunities arise and the valuation is compelling.
It’s hard to expect more than the all-time record results BAM accomplished this year. So, is this the peak, the end of the run? The accelerating performance indicates it may be just the beginning.
Brookfield Asset Managements all time record year has been in the making for decades as the company went about the business of quietly investing in real assets on a value basis with attractive risk adjusted returns around the world. Over these years they have accumulated a portfolio of real assets that would be impossible to duplicate. Assets that provide basic goods and services (prime commercial real estate; hydroelectric (the lowest cost) power generation; infrastructure including; ports, railroads, roadways, pipelines) with stable demand and 7-20 year contracted recurring cash flows. As it took decades to build this portfolio, competitive advantages, and management expertise there are likely many more years to enjoy the results and continued growth.
As always you are encouraged to read the company’s information and listen to the conference call.
Long: BAM, BIP, BEP, BPY
- Press Release [Source]
- Letter to Shareholders [Source]
- Financials [Source]
- Supplemental Information [Source]
- Conference Call [Source]
- Brookfield Website [Source]