Brookfield Asset Management (BAM) 2014 and 4Q Results that Didn’t Miss a Beat

Brookfield Asset Management (BAM): reported [Source] Funds from Operation (FFO), their primary measure of cash flow, was $2.2 billion for 2014 or $3.17/share a decrease of 38% on a per share basis from the previous year of $3.4 billion or $5.14/share when the company recorded an all time record high. For the fourth quarter 2014 (4Q14) FFO was $0.78/share for a decrease of about 51% from the year ago quarter (4Q13).

On a more comparable basis FFO actually increased by 5% from 2013 after excluding gains on asset sales and carried interest on private equity investments. Increases in fee related earnings and FFO from property and renewable energy were offset by lower returns on financial assets and private equity investments.

Net income for 2014 was $5.2 billion for the year or $4.67/share an increase of 50% on a per share basis over the previous year’s $3.8 billion or $3.12/share. Operational and value improvements generated significant higher level fair value gains and growth in the asset management activities resulted in a 26% increase in fee related earnings.

Fee bearing capital increased to $89 billion for 20% growth year over year adjusted for the sale of a insurance portfolio advisory business. A further $18 billion was committed to real asset investments including: telecom infrastructure in Europe; properties in India and China; and recently the acquisition of the remainder of the Canary Wharf development in London with partner, the Qatar Investment Authority (QIA).

Financial Results:

BAM 4Q14 Financial Results

[Source] Press Release

At times BAM’s reported results can be lumpy (like this year’s FFO being down about 38% compared to last year) but a total return of 31% was still realized by shareholders for the year. How can this be you might wonder? Last year BAM reported an all time high record year and this year it produced excellent results but not a new record, nonetheless it was an outstanding year.

Investment Performance:

BAM 4Q14 Investment Performance

[Source]: BAM’s 4Q14 Letter to Shareholders

The price of a real assets do not necessarily correlate to the underlying value of the potential cash flow they can generate for any number of reasons. BAM’s business model consists of capital recycling where they buy these assets when they are on sale, use their financing and operating expertise to improve them, and sell when Mr. Market overprices them. The gains are captured (like last year’s assets sales) and the proceeds reinvested, sometimes opportunistically and sometimes in the core businesses (like Canary Wharf this year) depending what’s on sale.

BAM’s business model also invests in real assets comprised of infrastructure, property, and renewable power. These real assets have attractive investment attributes that continue to generate cash, provide returns and offer organic growth opportunities when there is a shortage of bargains or opportunities in the market.

As value investors it is up to decide whether we want to take advantage of Mr. Market or let Mr. Market take advantage of us. As a Brookfield shareholder we have also decided to have some of the best value investors in the world, the Brookfield management team, making that same decision for us on investments otherwise beyond our reach or circle of competence.

And with a two decade track record of 19%/year returns (compared to the S&P 500’s 10% return over the same period) those results are hard to beat. Now, Brookfield can’t produce last year’s 31% every year, but their long term goal of 12-15% total annual return seems to be a good possibility. That’s probably why the shareholders at BAM tend to be longer term focused investors who know when they have a good thing.

Canary Wharf, London

Canary Wharf, London

Strategy and Goals:

Bruce Flatt, CEO of Brookfield Asset Management updates shareholders of the company’s strategy and goals in his must read Letter to Shareholders [Source]: Our strategy is to provide world-class alternative asset management services on a global basis, focused on real assets such as property, renewable energy, infrastructure, and private equity investments. Our business model utilizes our global reach to identify and acquire high quality assets at favorable valuations, finance them prudently, and then enhance the cash flows and values of these assets through our established operating platforms to achieve reliable attractive long-term total returns.

Our primary long-term goal is to achieve 12% to 15% compound 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.

Summary

We remain committed to being a world-class alternative asset manager, and investing capital for you and our investment partners in high quality, simple to understand assets which earn a solid cash return on equity, while emphasizing downside protection for the capital employed. The primary objective of the company continues to be generating increased cash flows on a per share basis, and as a result, higher intrinsic value per share over the longer term.

Dividend Increase and Declaration:

The Board of Directors declared a quarterly dividend of US$0.17 per share (representing US$0.68 per annum), payable on March 31, 2015 to shareholders of record as at the close of business on February 27, 2015. This represents an increase of 6% over the current dividend rate. 

Asset Management and Services Businesses:

  • Fee revenues increased $146 million (24%) over the prior period to $763 million, due to higher levels of fee bearing capital under
    • BAM earned $256 million of base fees from BPY, BIP and BREP, an increase of $80 million over the $176 million in 2013, net of associated fee credits.
    • Private fund base fees increased by $34 million, excluding an $18 million catch up fee recorded in 2013.
    • Public markets fees increased by $25 million, continue to add higher margin accounts within the infrastructure and real estate equities funds.
  • Announced or completed acquisitions and capital expansions that will deploy over $18 billion of capital on behalf of clients and Brookfield shareholders.
  • The flagship private funds have committed or invested approximately 80% of their capital commitments in aggregate, and BAM continues to maintain a robust pipeline of investment opportunities.
    • Approximately $11 billion of private funds in marketing for a variety of strategies and expectations are to launch another $10 billion by the end of this year.
    • Total assets under management were $204 billion at the end of the year.
  • Fee bearing capital totaled $89 billion at 4Q14, representing 11.6% increase on a LTM basis and 20% excluding the sale of $7 billion insurance portfolio advisory business.
  • Incentive distributions increased by 50% reflecting BAM’s share of BIP and BREP distribution increases.Transaction and advisory fees increased due to the completion of a number of large mandates, and transaction fees recognized on the sourcing of co-investment transactions.
  • Recognized $21 million of performance fees on public markets portfolios, a decrease of $9 million from 2013.
  • Direct costs increased by $68 million due to the expansion of operations and the formation of BPY. Gross profit margins were 50% (2013 – 47%, excluding $18 million catch-up fee).
  • Fee revenues include $214 million of base management fees on Brookfield capital (2013 – $172 million).

BAM 4Q14 Asset Management Summary

Property Group:

  • BAM holds a 62% fully diluted interest in Brookfield Property Partners (BPY), which owns virtually all of their global property operations.
  • The property group recorded solid performance, with BAM’s portion of theFFO increasing 60% year over year to $884 million.
    • This reflected excellent returns from our U.S. retail property portfolio, improvements in office leasing
    • The acquisition of the remainder of the office portfolio.
    • Growth initiatives undertaken in the past five years.
    • Crystallization of gains on the sale of mature assets.
  • Closed the merger of our office property company into BPY which expanded the shareholder float by $3.3 billion and further consolidated operations.
  • Retail sales in premier luxury malls, were strong and FFO from U.S. retail business grew at double digit returns and continued to dispose of non-core assets.
  • Signed 2.5 million sq. ft. of new leases with tenants at Brookfield Place in Lower Manhattan in conjunction with a multi-phase renovation and creation of a luxury retail and food themed entertainment complex.
  • Acquired commercial properties in India and China and a triple net lease portfolio of auto dealerships.
  • Subsequent to year end, acquired a controlling interest in Canary Wharf, Europe’s leading business center, in partnership with a sovereign wealth fund.

BAM 4Q14 Property Summary

Renewable Energy:

  • BAM holds a 63% interest in Brookfield Renewable Energy Partners (BREP), which owns all the renewable energy facilities. They also conduct energy marketing initiatives on behalf of BREP.
  • The renewable energy business completed a number of major acquisitions, including an Irish wind farm portfolio with a significant development pipeline, as well as North and South American hydroelectric, wind and biomass facilities.
  • Total generation was 22,548 GWh for the year, 3% below the long-term average of 23,296 GWh and an increase of 326 GWh compared to the prior year.

BAM 4Q14 Renewable Energy Summary

Infrastructure:

  • BAM holds a 28% interest in Brookfield Infrastructure Partners (BIP), which owns the majority of the infrastructure operations.
  • The infrastructure group acquired a Brazilian rail network and committed to acquire a 50% interest in a portfolio of 6,700 European telecom towers.

BAM 4Q14 Infrastructure Summary

Private Equity:

  • Acquisitions within the private equity business included building North America’s leading coal bed methane producer through a series of transactions.
  • Continued investing in the restructuring of a leading Texas utility company.

BAM 4Q14 Private Equity Summary

Summary:

Brookfield Asset Management and its partnerships continue to produce excellent risk adjusted returns for shareholders. Important to recognize is these returns have been in the making for decades as the company went about the business of quietly investing in real assets on a value basis around the world. Over these years they have accumulated a portfolio of real assets that would be impossible to duplicate.

These real assets provide the basic and necessary goods and services needed by mature and growing economies around the world with stable demand, 7-20 years of contracted and recurring cash flows, often indexed to inflation and/or with protective moats. The decades it took to build this portfolio of high quality assets with competitive advantages and management second to none will likely provide many more years of outstanding results and continued growth.

A point meriting continued emphasis is Brookfield Asset Management offers an opportunity for shareholders, us “retail investors,” to enjoy the same results and stewardship demanded and paid for by some of the savviest and wealthiest investors in the world. You are encourage to read the Letter to Shareholders and listen to the recorded conference call. The links are at the bottom of the post.

Long: BAM, BIP, BEP, BPY

Resources:

  • BAM 4Q14 Press Release [Source]
  • BAM 4Q14 Letter to Shareholders [Source]
  • BAM 4Q14 Financials [Source]
  • BAM 4Q14 Supplemental [Source]
  • BAM 4Q14 Conference Call [Source]
  • Brookfield Asset Management Website [Source]

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. 

 

 

Comments

  1. Hi George!
    Thanks for your article confirming my view that BAM continues to be an attractive long term hold. A couple of questions for you. At the micro level, did they still get good value when they had to increase their offer for the balance of Canary Wharf? And at the macro level have you done any sensitivity analysis on the possible impacts of increasing interest rates on their future results?

    • Hello,

      On the Songbird/Canary Wharf acquisition: Brookfield has been a participant in Canary Wharf for years, and with their large prime real estate portfolio around the world, they are certainly an informed buyer as to the Canary Wharf economics and development potential. We do not have any insight into the development plans and leasing activity at Canary Wharf so we must rely on Brookfield management to deploy our equity wisely.

      That’s why we’re investing in them, right? Give Brookfield’s long history of investing wisely, being an informed and “inside” buyer, I’m confident the investment will at a minimum meet Brookfield’s total return target of 12-15% per year. The returns surely would have been higher at the lower purchase price but that doesn’t preclude very attractive returns at the higher price either. At the higher price Songbird said it believes the offer undervalued the company.

      I have not done sensitivity analysis on the impact of rising interest rates on Brookfield’s future results but it is a good question. Interest rates impact property financing costs, property valuations, transaction capitalization rates, etc. Perhaps a good topic for a future post.

      What we do know is all the Brookfield companies continue to report they are busy refinancing debt and extending terms at these historically favorable borrowers terms. That should serve well as a buffer to rising interest rates. At a minimum, Brookfield should fare well versus the competition going forward because of these proactive steps. I view Brookfield as a core holding, because management has proven to me they are good stewards of our money under all market conditions.

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