Brookfield Corporation (BN) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the Brookfield Asset Management 2015 Third Quarter Results Conference Call and Webcast. [Operator Instructions] At this time, I would like to turn the conference over to Andrew Willis, Senior Vice President, Communications, for Brookfield Asset Management. Please go ahead, Mr. Willis.

Thank you operator, and good afternoon. Welcome to Brookfield's third quarter webcast and conference call. On the call today are Bruce Flatt, our Chief Executive Officer; and Brian Lawson, our Chief Financial Officer. Brian will start this morning, discussing the highlights of our financial and operating results. Bruce will then discuss our approach to investing and recent developments at Brookfield. After our formal comments, we will turn the call over to the operator and take your questions. In order to accommodate all those who wish to ask questions, we ask that you refrain from asking multiple questions at one time, in order to provide an opportunity for others in the queue. We will be happy to respond to additional questions later in the call, as time permits. At this time, I would remind you that in responding to questions and in talking about our new initiatives and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks, future results may differ materially. For further information, I would encourage you to review our Annual Information Form and our Annual Report, both of which are available on our website. Thank you. And I'll now turn the call over to Brian.

Thanks Andy, and good morning. So in the third quarter we saw the results from many of the investments we've made over the past few years contributing to our returns. And although our financial performance remains below our full potential, we are pleased with the results for the quarter and furthermore, believe we are well positioned to deliver future growth. Funds from operations for the quarter was $501 million, or $0.48 per share. This was up 10% compared to last year, excluding realized disposition gains and carried interests, and up 12% if you exclude the impact of currency fluctuations. The growth in FFO reflects the expansion of our asset management business in particular, along with improved pricing and volumes at many of our operations and a positive contribution from those recent acquisitions. We completed a number of dispositions during the quarter, recognizing $88 million of disposition gains, and also that resulted in the realization of $15 million of accumulated carried interest. Net income for the quarter was $845 million, $0.26 per share. Overall, our asset management business grew by $10 billion over the past 12 months in terms of fee-bearing capital, and that now stands at $95 billion. We hold our fee-bearing assets in three major categories, I'll cover each of them in turn. The first is the private funds that we've managed for institutional investors, we're currently in the process of raising five new funds with a target of $23 billion. Through the first nine months of the year we raised $8 billion towards this goal and expect to complete this over the next 12 to 24 months. The second component of fee-bearing capital is our listed partnerships, these grew over the last 12 months by $1.5 billion and represent over $40 billion of capital. In that regard, we recently announced plans to create a fourth listed flagship entity called Brookfield Property Partners, which will own the industrial services businesses. Bruce will talk about this initiative in more detail. Our third category is our public markets business which includes mutual funds and other products for institutions and individuals. Fee-bearing capital in this business increased by $700 million over the past year to $18 billion, and we're continuing to reorient this capital into higher margin accounts, which resulted in annualized base fees for this part of the business increasing by 22%. As a result of this growth, our fee-related earnings were $126 million for the quarter, and that's an increase of 24% compared to the same quarter last year. We earned an additional $15 million on carried interest that we realized on the sale of properties held in one of our funds, and on an annualized basis, our fee-based and carried interest now stands at $1.4 billion, that's up 22% from the same time last year. Moving now to the results from our operating businesses, in our property segment we generated FFO from operations of $158 million, and that compares to $136 million a year ago. The strong increase reflects new leases signed at our flagship New York property and also rent increases across the retail and office portfolios, along with contributions from recent acquisitions such as Canary Wharf and our UK resort business. We expect to see continued significant FFO growth over the next year, as additional leases that we have already signed begin to make a further contribution to results. In addition to the FFO from operations, we recorded disposition gains of $56 million compared to $11 million last year. As we mentioned before, we continue to recycle capital by selling mature and well-valued assets at attractive valuations and using the proceeds of these sales to fund future growth initiatives. In our renewable energy business, we generated FFO of $48 million. That includes $25 million of gains from the sale of a wind farm in California and two hydro facilities in Brazil. Hydrology was 9% below long-term average during the quarter and we're still seeing some low water levels in Brazil in particular, but since the last quarter, water levels have improved and we do recognize that this is a cyclical aspect of the business and can sometimes persist for a period of time, but we've seen it recover strongly in the past and expect to see this occur again in the future. We've also - while we did have the low water during the period, we used that opportunity to complete a lot of the maintenance and asset optimization work that we carry on periodically. The infrastructure business contributed to FFO from operations of $64 million, that's up 16% from the $55 million last year. The increase reflects new investments, in particular, our telecom infrastructure business in France, as well as a number of other internal growth initiatives. We also recorded $7 million disposition gain on the sale of electrical transmission business, and that reflects a 13% currency adjusted return - increase in FFO on a same-store basis overall. So good results in that segment. The private equity business benefited from the continued improvement in the U.S. housing market and the contribution from a number of new investments. FFO from operations was $84 million compared to $64 million a year ago. This group made some significant investments in the oil and gas sector over the past year at very attractive valuations, acquiring businesses in both, Canada and Australia. On the residential side, our North American operations continue to perform well, benefiting from increased U.S. new home sales. I would note that we did not have any major disposition gains in the private equity business in the quarter, whereas in the prior quarter we did have close to $200 million of gains, largely occurring on the sale of a forest products business. So in addition to a number of the acquisitions mentioned thus far, we are continuing to work on a number of capital projects across the operations which provide us with additional growth opportunities. These include new office and retail properties, wind farms in Europe, expanding in existing toll, rail and port networks. And in total, these projects encompass some $12 billion of capital, and we look to see meaningful FFO contribution in the future that complements our acquisition activity. So finally, before I hand it over to Bruce, just like to note that the Board did declare the quarterly dividend of $0.12 per share payable on December 31, 2015. And with that, I'll hand the call over to Bruce.

Thank you, Brian and good morning, everyone. I will touch on four topics today and then Brian and I would be pleased to take any questions. First, I'll start with an outline of where we see markets today. Then we'll reflect on those market conditions and our approach to investing today in real assets. Third, I will talk about the launch of Brookfield Business Partners. And last, I'll make some brief comments on our involvement with Asciano in our infrastructure business. On investing, we continue to see opportunities to recycle capital by selling mature assets at excellent valuations, while in tandem utilizing our competitive advantages to put money to work at attractive returns. Of course, public markets have been volatile and sometimes this creates opportunity. With respect to capital raising, investors continue to increase allocations to real assets, as a dependable way of generating income and long-term growth. Our capabilities as a manager continue to serve us well, and as allocations continue to increase to this sector, we now have approximately $225 billion of total assets and fee-bearing capital close to $100 billion. With respect to the markets, as we said in past, our portfolio of businesses and operations are an excellent source of market intelligence. We have significant grassroots information based on our direct operations that provide us with knowledge. With respect to these markets and our views on them, based on that North American and European businesses continue to do relatively well and we see no retrenchment of the market. U.S. interest rates are likely to rise, although at a tepid pace and we do not think it will change any of the dynamics of our business. In fact, possibly do the opposite as people come to believe that we are in for lower for longer interest rates. The underlying trends in many Australia, Asia, South American countries are also better than what appears in the western press in our view. As an example of something occurring in the Asia, there are couple of things occurring in the Asian markets. I'd note that we recently sold a property in Shanghai at 2.5X acquisition cost a few years ago and continue to see strong interest in real assets from Asian investment managers. However, the upbeat outlook is not entirely universal. These are very difficult times for commodity-based companies. The prices for oil and gas and base metals have dropped far more than most people in the industry would have expected. This has caused stress for many energy and mining companies who need to raise capital to fix their balance sheets. In respect of our investment strategy towards these sectors and this environment, in North America our view is that valuations on real assets are excellent and we're using this environment to recycle capital by selling mature assets, and selectively putting money to work where our competitive advantages allow us to do that. By the time we're done with this process, we expect to sell in our real estate business, for example, a few billion dollars more on properties at very good valuations and in the process to have DP-wise balance sheet in excellent financial shape. From a deep value perspective, we've been investing in India, Brazil, and around oil and other commodities. For example, in Brazil we're in the process of buying a portion of the airport in Sao Paulo and the subway system in Rio from a construction company that ran into tough times. There are strong headwinds in Brazil, as most of you know, but we've seen this situation before. We believe that Brazil's emerging middle class, the strong corporate base, the abundance of resources, and believe that it makes it a compelling place to invest for the long-term. The same is true with energy and mining companies. As you know, we've had a long experience around mining companies and oil companies and our operational expertise is helping us as we try to work with these companies. One of the ways we can be useful to them is by acquiring infrastructure assets to free up capital as they need it for growth opportunities. The last comment I make on our investment strategy is that no investor can consistently time the private markets. Our view is that when great assets come available in a down market, one should invest, and what we've learned over the years is you can acquire great assets for value if you take a long-term view and you don't have to time the cycle perfectly to earn excellent returns. Third, I'll talk a little bit about Brookfield Business Partners, our new listed partnership. We announced that we planned to launch BBP at our investment and Investor Day and expect to spin out, the spinout to take place in early 2016. This will be done as a special dividend to shareholders of Brookfield Asset Management of approximately $500 million or $0.50 a share. And it will leave us owning approximately 65% of BBP at launch. Overtime, our ownership may be diluted, as BBP issues shares to fund its growth or we'll continue with that percentage. We will continue to update you on the launch of BBP as we get closer to the listing of the company. BBP will own a portfolio of our industrial and service businesses that are currently part of our private equity group. Most of these businesses are leaders in their sector, such as construction, home building, energy, and resources. The portfolio is increasing in size and scale, and to continue to grow this business, we decided it would be helpful to have permanent access to capital specifically for this group. We're using the same approach at this company as we've used to expand our property renewal power and infrastructure businesses where we created flagship listed partnerships that have grown significantly since we've launched them. The only difference here is that BBP will focus more on capital, long-term capital appreciation rather than current dividends. A permanent capital base will broaden the spectrum of investment opportunities for this group and we believe this should present a number of opportunities. We believe that this company will also find growth opportunities because it will be an attractive structure for companies with management teams that would prefer not to be public on their own and subject to the vagaries of the market. We expect therefore, this will be a very attractive investment and believe it can be a home for many great companies that we have, and can acquire in the future. Lastly, I'll make a few comments on the Asciano transaction, but respectfully advise you that afterwards in the question-and-answers, due to securities regulations we will not be able to take any questions related to this situation. As you know, our infrastructure group has been progressing a take private transaction of a rail and portico called Asciano. The company is listed in Australia and we have been working with the Board and management to effective privatization since the summer. Our scheme of arrangement was to be voted on mid-November and last week a group of investors went hostile on Asciano and purchased 20% of the shares of the companies with the objective of disrupting our bid. Following the close of trading on Thursday in Australia, we were successful in purchasing 14.9% of the shares of the company at 880 Australian per share by a series of off-market share purchases, and we've also entered into arrangements giving us economic interests in a further approximately 4.3% of Asciano. The total investment was approximately $1.2 billion, and we coupled this with an announcement indicating our intention to make a takeover offer to shareholders of the company with a 50.1% minimum acceptance condition with the full support of the company. While it is difficult to contemplate all outcomes in this process, it appears that three most likely scenarios are in front of us. First, our scheme of arrangement will be successful and we will receive enough shares voting in our favor to privatize the company. Second, our scheme will not be successful, but our tender offer will meet the minimum condition of 50.1%. In that case, we will take up the shares and own in excess of 50.1% of the shares. At that point, we will fully control Asciano and it will be maintained as a public company for some time, albeit with significantly reduced liquidity. Third, it is possible that we are not successful in our bid and retain our stake in a publicly listed Asciano entity that may or may not be controlled by others. If this is the case, we will ensure that the company operates with the highest degree of corporate governance, and we will not support any breakup of the company. You may recall that we are very comfortable being in this position. Many of you know that we owned a 20% position in Canary Wharf Group for close to 15 years prior to eventually taking the company private. In that situation, another group actually had a controlled position until we ultimately took the business private. As most of you know, we believe in long-term investing, and we will take advantage of the lessons learned at Canary Wharf for this investment as well. With those comments, operator, I'd like to turn it back to you, and Brian and I would be pleased to take any questions.

Thank you. [Operator Instructions] Our first question is from Brendan Maiorana from Wells Fargo. Please go ahead.

Thanks, good morning. Probably for Brian, so Brian it seems like there is - as Bruce alluded to in his comments there is a lot of opportunities that are out there for the company and maybe it's - there are probably some situations where BAM as a sponsor would need to step in at some point. How are you thinking about the liquidity that's available and setting up the balance sheet so that BAM or BAM's affiliated entities are able to act quickly, if needed.

Thanks, Brendan. So that's been something that I think has a very strong - we would view it as - I'll call it a competitive advantage or a strong strength, good strength of our business, particularly in the context of being an asset manager, the ability of Brookfield, of us to be able to access capital at a number of different levels in the organization from a number of different sources. And so we talked about this a bit in the past, but having your having a committed capital to the funds, then having the co-investment relationships with our institutions at the fund level. Also having the availability of liquidity and access to capital at the listed entities, the - BIPs and BEPs and BPYs of the world but then also at the Brookfield Asset Management. So I think you would have seen us carrying what we would describe as heightened levels of liquidity. For quite some time now, really since - for the past number of years, and a big part of that is to have the ability to support initiatives at the fund level, whether by helping out back stopping co-investment opportunities while those are concluded. We maintain a high level of financial assets at the company that we can monetize and also strong access to committed bank facilities and those would be the two primary sources of our core liquidity. Of course, in addition we're rotating capital through monetization of assets and occasionally raising debt capital and preferred equity.

Okay, that's helpful. Just a real quick follow-up to that, it looked like maybe the short-term bank or commercial paper moved up by about $500 million in the quarter. Was there anything specific associated with that or was that just maybe to invest in a few more of the financial assets, so just kind of moving from one line item to the other?

Yes. That related specifically to some co-investments that we took on while they were being syndicated. They've actually - those have been since monetized following the quarter end.

Okay, great. Thank you.

The next question is for Mario Saric from Scotia Bank. Please go ahead.

Good morning. Just maybe following up on the investment strategy, in the letter to shareholders, you kind of talk about your strategic advantage being the global reach, so your preference historically has been to invest in similar types of assets across geographies, taking advantage of regional dislocations to really drive value. Just wondering whether there is any change in that strategy going forward if interest rates perhaps pick up more rapidly than you expect internally, meaning that maybe a disproportionate amount of investment going forward is put forward new types of assets as opposed to similar assets across various geographies to surface value.

Yes, I would just say that our view is that over time you should add - we're comfortable adding - thoughtfully adding adjunct businesses to what we own in the sectors we own. So we've been building out our apartment business in the United States recently. We never used to - we used to single-family sales in the United States and we used to build condos in places, but we never did apartments in the United States, and over the past five years we've been building that out. So I would say in adjunct areas we continue to add businesses when we think it makes sense. And we'll continue to do that in all of our areas of operation and I really don't think or we really don't think that we need to do anything else other than that and we can continue to grow very substantially. And I think there will be enough opportunity for us to put money to work. So I don't think we have to find new sectors to invest in being technology or biotech or pharmaceuticals or something like that.

Okay and just maybe one follow-up question. Just with respect to BBP and the timing of the launch, so BBP is coming out quite smaller than both BEP and BPY did in size. Can you maybe touch on the benefits from a BAM shareholder perspective, as well as from a BBP shareholder perspective going forward to the extent that they may be different in terms of the advantages of coming out now versus couple years from now when arguably there would be more scale?

I would just add to it from the comments that we've made and the materials we produce, I would say the following; our private equity business will continue to invest in very opportunistic investments that are going to earn high returns. There is a segment of businesses that we think can fit into BBP, which are investments that are in between 12% and 20% over the longer term and are great - unbelievably successful long-term cash flowing compounding businesses and they don't necessarily fit a vehicle that has to be wound up in two, three, five years to earn the returns for the investors. So we think there is a great opportunity to be a home for corporations that are either - the shareholders have decided to sell the business, the management team doesn't want to be public anymore, or there is some event that occurs or some family that wants to get out of a business. And so we think there are a number of opportunities in that and often in past when they didn't fit into our own strategy, for our private equity funds we would put them on our own balance sheet or not do them and we think this will be a very big growth area for us in the future. There is no great time to start it, I think we're starting it relatively small with some of the businesses we have, and I think it will be able to grow, and we'll support it to grow with more capital if that's necessary as it continues.

Okay. I think it was three or four years ago Bruce where you mentioned one of your AGMs and infrastructure could very well be the biggest platform for Brookfield within the next 10 years. And when we look at - at least the fee revenues to BAM, its number two, just slightly behind property. So over the longer term, how big can this be as a piece of the pie?

All our groups are in a race to the finish. I think - look, the property business, we have an amazing franchise; it's one of the biggest in the world. It will continue to grow. Infrastructure, there is no doubt it is becoming a much, much bigger industry and I think we have a formidable franchise in it and I think we will be able to continue to grow that business and I think it could become bigger than our property business. I actually think our BBP longer term, if we're successful in creating it, could be extremely positive as well. So we're excited about them all.

Thank you

Thank you. The next question is from Andrew Kuske from Credit Suisse. Please go ahead.

Thank you, good morning. You made some comments earlier on about really the growth of your fund model and effectively the public LPs and the private funds. But could you give us maybe some color and insight to the success of the public LPs when you've launched them and then they go through essentially the seasoning process where your ownership interest declines overtime, they have done some capital market issues and there's maybe greater acceptance in the market. How has that dynamic really helped out on the private fund side? And maybe if we thought about infrastructure, one of your first large raises was around $2.7 billion and then you've managed to scale that.

Thanks, Andrew. It's Brian. I think I interpreted - well, I'll see if I've got the point to the question, which I think is focusing more on how we've seen growth in the private fund side evolve in perhaps contrast that a bit to the listed side, is that fair?

A little bit. Is it this mutually symbiotic behavior where one goes ahead in the public LP vehicle starts to grow and then that helps you on the private side also?

So I'd say that the two absolutely work very well together in that having the relationship between the listed funds as a Cornerstone investor in the private fund, first of all, provides that Cornerstone and that important backing and support of the private fund in terms of capital availability. And it works the same way for the listed fund in the sense that the private - the existence of the private fund and the capital commitments there and the co-invest availability as well, enables the listed fund to pursue larger transactions than it might otherwise on its own and provides everybody with access to the optimally priced capital at any point in time so that we can create the best returns for all of the participants, whether you're in a listed fund or in the private fund. So there is definitely a strong symbiotic relationship to pick up on those words. And then yes, I think that has led towards the ability to continue to scale up the funds. And so you've seen the first vintage - you referenced the growth in the private infrastructure funds, but you do see a significant increase in each vintage. And I think part of that is just as you - as that fund gets better known in the market and you bring in your existing client base, but then you're bringing in new clients as well. I think that's an important part but I think in our particular case, that relationship helps a lot.

Okay, that's helpful. And then if I may, just one follow-up on the fund-raising momentum business, it has been quite positive recently. What's really changed and is it really just a function of now you've got a much broader swath of funds out there that have three to five-year performance time lines, and that's really resonating with the pension fund consultants?

Yes, I would say it's three-fold. One, our organization is more mature, we have more relationships and we have just a penetration that we didn't have before. Two, the real asset business being the allocations that institutional client's sovereign funds are making to real assets are dramatically more than they were ten years ago, seven years ago, three years ago, and even a year ago. So the numbers continue to ramp up because they need to earn out decent return on their capital versus holding treasuries at 2%. And three, I'd just say our franchise has become that more - we've been able to penetrate that many more institutions and a lot of that is that after the global crisis, institutional clients had started to reduce the managers and therefore what they want is multiple funds in larger sizes with fewer managers. And given what we've doing, we're one of the institutions that can actually serve that need for very large clients. And therefore, I'd say those are the three reasons.

Okay, that's extremely helpful. Thank you.

[Operator Instructions] The next question is from Cherilyn Radbourne from TD Securities. Please go ahead.

Thanks very much and good morning. So you started your prepared remarks by saying that you're pleased with your results but you think you're below full potential. And I guess the power business stand there in that regard. But maybe you can just runs us through the areas where you think you're below full potential?

So power, for sure, this is the one for obvious reasons with the low hydrology. On the property side, we have a number of development assets that are - that don't generate current FFO but have - but will generate substantial FFO down the road. We have a number of those that we're pursuing right now. And similarly, some very strong leasing progress, much of which has not yet kicked in. On the private equity side, let's say we're still - we're looking for further strength in the U.S. Housing and a lot of businesses that are related to that. Really, all of our sectors there and a number of recent acquisitions pretty much across the Board, that we're still integrating and working to have the results tick up there as well.

Okay, that's helpful. Switching gears, just on the joint venture that you announced last week with the QIA, I wonder if you could just give us some perspective on why now is the right time to bring out partner into that project, and comment on the level of interest you're seeing more generally among sovereign wealth funds to get involved in development projects.

Yes, so our - the answer to why now? It would have been difficult for us to bring in a partner into that development, given the risk profile or procedure risk profile for the price that we were willing to bring somebody in at years ago. But now that we've progressed the development, have all the entitlements, have launched the project or building it. We could bring somebody in valuation they were pleased to pay and we were okay with selling it. And I don't think we would have been able to achieve that in the past. So there is sort of a point where you can de-risk, but not feel that you're giving away too much and I think just - there is a point in time when that occurs and it happened to be now for that project. With respect to institutional clients investing in development assets, I would say that there are select institutions that will do Greenfield development. There are select institutions that will do more advanced development. And there is obviously many that will buy completed projects. I'd say if you took a global number and I had to guess, I'd say it's probably only 10% or 20% of the institutions in the world that will put meaningful amounts of money into development. But that's still a lot of money, as you know. So - and more and more people are putting money beside managers or with managers into development because they can obviously earn out a higher return on the capital and participate in some of those returns as opposed to just buying completed properties.

Great. That's my two, thank you.

There are no more questions at this time. I will now hand the call back over to Mr. Willis for any closing comments.

Thank you very much, operator. As always, please feel free to reach out to us if you have further questions. We look forward to updating you in the fourth quarter.

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.