Brookfield Asset Management (BAM) 1Q15: Creating Opportunity with Work

Brookfield Asset Management (BAM): reported [Source] Funds from operations (FFO) during the 1Q15 were $557 million, or $0.82/share, up 14% from the 1Q14. FFO benefitted from expansion of the asset management operations, contributing a 27% increase in fee related earnings. Additional contributions from growth initiatives were offset by reduced contributions from renewable energy when compared to the strong energy prices experienced in the 1Q14 and lower hydrology levels in the 1Q15.

Net income for the 1Q15 was $1.4 billion, or $1.09/share for a 36% increase from 1Q14 reflecting the contribution from acquired and developed assets, and by operating initiatives. Strong leasing results and development activities within the property operations contributed to increased fair value gains. Fee bearing capital increased to $93 billion and fee revenues increased 18% to $791 million on a last twelve months basis and the annualized fee base, including target carried interest stands at $1.3 billion.

Financial Results:

BAM 1Q15 Financial Results

[Source] Press Release

The U.S. businesses were strong but the results were partially offset as foreign operations were converted to the strong U.S. dollar. BAM expects private fundraising efforts to achieve or exceed original expectations with several closes by the end of this year. They also announced they expect to be in position begin marketing an additional $10 billion of funds later this year.

Over the past three months the company acquired the balance of Canary Wharf, completed a $1.2 billion corporate equity issue, closed on the acquisition of the remaining North American residential business, added assets to the opportunity funds, bought out their partner in the global facilities business, and made a significant oil investment by acquiring a 50% interest in a U.S. public company’s Australian business.

Equity Offering:

Brookfield Asset Management raised $1.2 billion with an equity offering subsequent to quarter end. This issue of stock is the second time in the last 20 years. Previously BAM issued stock to acquire the Fairholme Fund’s General Growth Property (GGP) interest and further BAM’s ownership in GGP.

So why this issuance? During the conference call CEO Bruce Flatt commented that at times, such as now, money can be put to work at extremely attractive returns and used to widen the franchise existing platforms. As an example he used the Babcock and Brown acquisition in 2009 that significantly increased the infrastructure business. Adding later, “we bought businesses that will continue to use capital and generate very high returns for a very long period of time.”

While existing shareholders generally don’t like equity issues because they dilute the assets that their shares represent and distribute the company’s earnings over more shares. That is unless the stock is significantly overpriced, and the inflated stock “currency” can be used to buy assets or a cash flow stream that is on sale. BAM’s stock is not overpriced at this time in my view.

Apparently there are some significant opportunities on the horizon and attractive enough to issue equity because BAM’s management on numerous occasions have expressed a reluctance to issue equity. Time will show if these opportunities come to fruition, in the meantime this management team has earned my confidence with an exceptional track record of generating excellent returns for BAM shareholders.

BAM 1Q15 Returns

[Source] Annual Meeting Presentation

The company’s management and directors own approximately 20% of the company’s equity so we know their interests are aligned with ours. They also purchased $75 million of this new equity offering, a sign of their confidence in the potential opportunities as well.

Stock Split and Dividend Increase:

Also announced was a 3-for-2 stock split, effective May 12, 2015 to make shares more attractive to retail investors. The dividend was increased 6% and this is on top of a 6% dividend increase announced in February for a 12.5% aggregate increase in the dividend this year.

Operating Highlights:

In the Letter to Shareholders [Source] operations were summarized as follows: “Our asset management fees rose 18% year over year to $791 million over the last 12 months and our assets under management are now well over $200 billion. Fee bearing capital is $93 billion and we continue to see institutional and high net worth investors allocate increasing amounts of their portfolios to real asset strategies.

Our three flagship partnerships in property, renewable energy and infrastructure are all performing well, and each announced increases in their cash distribution targets late last year reflecting continued growth in their underlying FFO. These businesses are all benefitting from new acquisitions as well as operational improvements at existing businesses.

Over the course of this year and into 2016, we expect to be marketing in excess of $20 billion in flagship private funds, including for select new funds focused on specific opportunities we see in certain sectors and markets.”

BAM 1Q15 Collage

Property:

The property group generated $283 million of FFO, up 37% year over year, as a result of increased ownership of North American and European office portfolios, as well as rising lease rates. Capital was recycled by selling mature properties, with disposition gains of $162 million on the sale of an interest in a shopping mall in Honolulu and office buildings in Seattle and Toronto.

Renewable Energy:

The renewable energy business recorded $81 million of FFO, down 49% year over year. Generation levels were 11% below long-term averages, particularly in Brazil, which is experiencing drought conditions. In addition, electricity prices in North America were particularly strong in the same quarter a year ago.

Infrastructure:

The infrastructure group generated FFO of $57 million, down 3% year over year as organic growth and strong performance from the Australian and Brazilian railways and South American toll road network were offset by the impact of lower currencies on the financial results of non-U.S. operations.

Private Equity:

The private equity group closed the merger of the two oriented strand-board (OSB) producers, expanded the cold storage business and moved forward on recapitalizations of a Canadian infrastructure products company and a palladium miner. Quarterly results reflected lower OSB prices in the U.S. housing market compared to last year. The residential operations performed on plan, with strong growth in the United States, while the construction business expanded its operations, securing nearly $1 billion of projects and increased its FFO contribution to $40 million.

Asset Management:

The asset management business generated fee revenues of $206 million or $791 million over the last twelve months, leading to quarterly fee related earnings of $108 million. Fee revenues benefitted from the increase in market values at the flagship listed partnerships and performance-based fees that are linked to increases in cash distributions.

Acquisitions and Capital Expansions:

  • During the quarter and subsequent to quarter end over $3 billion in announced deployment of capital in new regions and asset sectors.
  • Closed the purchase of telecom towers in France.
  • Acquired generation assets in Portugal and Brazil.
  • Completed construction of two wind farms in Ireland.
  • The private equity group committed to acquire an oil and gas business in Australia with a partner for $2.1 billion, and recently offered to take private a producer of graphite electrodes used in steel manufacturing.
  • The property group and a sovereign wealth fund partner closed the acquisition of the portion of the Canary Wharf development not previously own.
  • Agreed to acquire a portfolio of 56 U.S. apartment buildings in a $2.5 billion transaction.
  • The private equity group, completed the privatization of the North American land development business.

The business model and investment methodology at Brookfield Asset Management are focused on long term results that relegate the quarterly reports to essentially status reports in my view. It is important to follow our investments, but similar to Berkshire Hathaway, it’s the long term compounding of results that matter. Any one quarter is just that, one quarter in a long series of implementation steps to produce outstanding compounded returns. For this reason it is worth reviewing the key elements of the business model and investment methodology presented at BAM’s annual shareholder’s meeting.

Simple Business Model:

  • Source equity from clients who wish to invest in real assets
  • Utilize our global reach to identify and acquire high quality real assets on a value basis
  • Finance them on a long-term, low risk basis
  • Enhance the cash flows and value of these assets through our leading operating platforms

Investment Methodology:

  • Acquire great assets – pay more, if one has to, for quality
  • Invest assuming we will own the assets forever
  • Buy at less than replacement cost, as this is critical
  • Finance prudently as surviving downturns is paramount
  • Acquire when capital is scarce as it indicates the right time
  • The rest is execution, execution, execution!

Success Formula:

Accelerate growth in asset management cash flow + Generate attractive returns on invested capital = 12-15% plus returns for common shareholders

Summary:

Brookfield Asset Management and its partnerships continue to produce excellent risk adjusted returns for shareholders over the long term. As always it is important to recognize 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.

In the long run a company’s intrinsic value is simply all future cash flows discounted back to the present. Due to the cyclical nature of corporate profit margins and the vagaries of economies around the world, both can overstate or understate the long term cash generation power of a business. There are good arguments that current earnings are cyclically elevated in the U.S., as are earnings multiples. If this is true caution is warranted.

Brookfield owns and operates high quality real assets delivering essential products and services required by people around the world and in demand by investors. Through commercial property, renewable energy, infrastructure and private equity these assets provide long-term, risk adjusted returns generating cash and capital returns, with lower volatility and inflation hedge attributes. Brookfield’s diversified global portfolio of high quality real assets managed by some of the best in the business offers a balanced, all weather structure for the current environment.

Another point needing continued emphasis is; Brookfield Asset Management has created an opportunity for shareholders, including us “retail investors” to enjoy the same results and stewardship demanded by some of the savviest and wealthiest investors in the world. These expanding platforms of real assets continue to grow with a value and return oriented approach offering the potential for more to come in the future. As Thomas A. Edison said, “Opportunity is missed by most people because it is dressed in overalls and looks like work.”

You are encourage to read all the quarterly release information and listen to the recorded conference call. The links are at the bottom of the post.

Long: BAM, BIP, BEP, BPY

Resources:

  • BAM 1Q15 Press Release [Source]
  • BAM 1Q15 Letter to Shareholders [Source]
  • BAM 1Q15 Financials [Source]
  • BAM 1Q15 Supplemental [Source]
  • BAM 1Q15 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. Nice job summarizing our investment George. I’ve benefited from this one for over 20 years used to work for Brian Lawson.
    Tx
    Peter

    • Peter,

      Thank you for the kind words. It’s encouraging to hear them from a long term investor, someone with an inside perspective and familiar with the company. I’m looking forward to what the next 20 years will bring too.

      Regards,
      George

  2. Cageyone says:

    Thanks for the writeup George. My two biggest holdings -FFH and BAM- both sold additional shares recently and both have been “hit” by Mr. Market. But we’ll continue to be long-term patient value investors based on the track record of both companies!

    • Hello Cageyone,

      Good to hear from you.

      I couldn’t agree more; solid consistent long term performance is hard to find, so when we find a winner we should stick with them. Let’s be thankful Mr. Market offers us bargains from time to time.

      I’m curious to see what BAM might have in store for the equity issue, presumably something with the potential for a greater than 12-15% total return, their target, or they would be buying equity instead of issuing shares.

      Regards,
      George

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