Brookfield Asset Management Inc Second Quarter Results Conference Call Transcript

Transcription

1 Brookfield Asset Management Inc Second Quarter Results Conference Call Transcript Date: Friday, August 8, 2014 Time: Speakers: 11:00 AM ET Bruce Flatt Senior Managing Partner and Chief Executive Officer Brian Lawson Senior Managing Partner and Chief Financial Officer Amar Dhotar Associate, Investor Relations

2 1 At this time, I would like to turn the conference over to Amar Dhotar, Investor Relations for Brookfield Asset Management. Please go ahead, Mr. Dhotar. AMAR DHOTAR: Good morning ladies and gentlemen. Thank you for joining us for our Second Quarter Webcast and Conference Call. On the call with me 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 views on the current investment and market environment, as well as a number of our major growth initiatives in the quarter. At the end of our formal comments, we will turn the call over to the Operator to open up the call for questions. In order to accommodate all who want to ask questions, can we please ask that you refrain from asking multiple questions at one time to provide an opportunity for others in the queue? We will be happy to respond to additional questions later in the conference call as time permits. I would at this time 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 and future results may differ materially. For further information for investors, I would encourage you to review our Annual Information Form or our Annual Report, both of which are available on our website. Thank you and I d like to turn the call over to Brian. BRIAN LAWSON: Thank you, Amar, and good morning. We had a solid quarter across all of our major businesses, and looking ahead we are optimistic about the growth prospects for the Company. Our funds from operations in the quarter increased by 24%, compared to the 2013 quarter, to $569 million or $0.84 a share. The increase was driven by a significant rise in our fee income, an increased level of realized disposition gains and a larger contribution from our property business following the acquisition of our office portfolio.

3 2 Disposition gains in the quarter totalled $147 million. Roughly $100 million of that amount came on gains from the sale of commercial properties, and around $30 million from the repayment of a distressed debt investment. We continue to look for opportunities to recycle capital by selling mature assets. Net income nearly doubled in the quarter to $1.6 billion or $1.19 per share, due to substantially higher appraisal gains on US office properties in particular. Fee revenues increased to $702 million on a trailing 12-month basis and our annualized fee base including target carried interest now exceeds $1.1 billion. FFO from Asset Management operations during the quarter totalled $88 million, up 19% year-overyear, and was $341 million over the last 12 months. The increase reflects growth in our listed partnership capital, particularly Brookfield Property Partners, and base management fees were up $36 million to $154 million in the quarter. The incentive distributions from our listed partnerships rose by $5 million to $13 million, representing our share in distribution increases to unitholders. Our fee-bearing capital is up 16% year-over-year on a comparable basis to $84 billion. The increase reflects equity issued by Brookfield Property Partners to complete the acquisition of our office property company and a continued expansion of our renewable power and infrastructure businesses. We deployed capital from all our listed partnerships and private funds at attractive valuations. Our major investments were consistent with our themes of investing in emerging markets, Europe and assets that will benefit from an increase in the price of natural gas. We are acquiring an $800 million portfolio of office properties in India. We closed the purchase of Irish wind farms for approximately $700 million, and we announced plans to acquire a gas storage business in California. Our assets under management on a gross basis are now $192 billion. With our recent investments, our flagship private property fund will soon have invested over 75% of its capital and our product flagship private equity fund is 65% committed. Our flagship infrastructure fund which closed last year is roughly 50% committed. With this much capital now deployed and given the substantial pipeline of new investment opportunities, we expect to be in a position to launch successor funds well before the end of their investment periods.

4 3 Turning to the results from the capital invested in our operations, our property business generated $137 million of FFO, representing at $13 million increase over the 2013 quarter. FFO increased as a result of the privatization of our office property business and strong leasing activity; however, this was offset in part by lower vacancy following the expiry of a major lease in Manhattan late last year. But we have been signing large leases with major media companies and banks and we re making substantial progress in filling that vacancy and increasing occupancy across the portfolio. Specifically, we signed 2.7 million square feet of leases at Brookfield Place New York alone over the past 12 months and expect to more than fully replace net operating income from that lease expiry once the property is fully leased. Overall, new leases in our office portfolio are being done at 5% above expiring rents, and in our shopping mall portfolio new leases are 14% higher than expiring rents. FFO from our renewable energy portfolio was $83 million, up modestly year-over-year. The increase came from new hydroelectric facilities that we acquired in the Northeastern U.S. along with increased pricing and capacity sales. Energy prices rose in Brazil and we used this as an opportunity to lock in long-term power contracts at attractive rates. Generation was in line with long-term averages. In our newly acquired Irish wind farm portfolio we have 321 megawatts of operating wind capacity across 17 facilities along with an additional 137 megawatts of projects already in construction in the development pipeline of approximately 300 additional megawatts, so we see significant growth potential for renewable power in Europe from this project and other opportunities. Our listed renewable power partnership raised $325 million in an equity offering to fund these growth projects. In our infrastructure business, FFO was on target at $53 million which represented a 12% increase on a same store basis. We continue to see improving results from businesses where we have invested in organic growth such as our Australian railroad and South American toll roads. Looking ahead, we expect to close acquisitions of a rail and port network in Brazil, district energy businesses in three U.S. cities and a California gas storage facility during the third quarter. Our private equity business generated FFO of $123 million, which is down year-over-year, but this reflects lower prices and volumes in our panel board business, where we were getting record prices a year ago. We are continuing to see improvement in the results from our North American residential property business and continue to believe that the US housing market is in the early stages of a prolonged recovery.

5 4 Finally, the Board of Directors declared a quarterly dividend of $0.16 per share to be paid at the end of September. So with that, thank you, and I would now like to turn the call over to Bruce. Thank you, Brian, and good morning everyone. Today I ll comment on three items before turning the line over for questions. First, we thought you d be interested in our views on the overall environment for investing; second, how we re responding to this environment; and third, I thought I would mention one investment which we ve been involved with. On the environment, our observation is that this current market is difficult for many investors. Interest rates make it almost impossible to earn any return from a fixed income portfolio, in particular a short one, and valuations on equities are high by many measures. As a result, we continue to see clients making further allocations to real assets, and we are seeing strong inflows into all the products we offer in each of our private funds, our listed partnerships and our public securities mandates. We are also finding many transactions to put money to work at very good returns. This seems incongruous given that we adhere to value-based investment principles, but we believe it is largely because we have access to different opportunities, largely as a result of our vast resources and organization across the world. We believe that this is because we are able to use the competitive advantages we have and which we think of really in three ways: First, the amount of capital that we can deploy; two, our global scale, and three, our operating presence. I ll take each of those in order. But this is in contrast to a regular investor in these types of real assets, who may only have access to assets being bid on in the market by vast numbers of people and the significant amounts of money that are in some markets today. Because these investors are smaller in size, they may have geographic restrictions or they have investment restrictions on the capital that they ve raised. Taking the three points about our competitive advantage in order, when it comes to size of capital we tend to focus on larger transactions and there are only a handful of global investors able to look at significant sized transactions, and we include ourselves in that group. For example, we have approximately $16 billion of capital available for investment and we also have excellent relationships for co-investment on top of that from clients, so this puts us in an exclusive group. This provides us, we believe, with a competitive advantage when looking at large scale transactions. In addition, it allows us

6 5 to look at several transactions all at once. Typically, only a few of those come to an actual investment but even if we had a number of commitments come together at the same time, which has happened on occasion in past, we do have the resources to close all of those transactions. The second point is our global scale, and as many of you know, we have almost 30,000 employees in upwards of 20 countries the world. This allows us to allocate capital to areas where it is scarce and correspondingly, and maybe even more importantly, avoid regions that may be under pricing risk at a certain point in time. For example, right now North America and the U.K. have significant amounts of capital looking to invest in real assets, from many global investors. This is certainly not the case in Brazil, China or India and parts of Europe, and as a result most of our money has recently, as Brian mentioned, been invested in Ireland, Brazil, India and China. Thirdly, our operating presence allows us to invest around the world with confidence. As an example just to highlight that, Brian mentioned we acquired a portfolio of office properties in India. These are mostly office properties with international tenants near Delhi and we think this is a great opportunity, based first on replacement costs, second on cash yields, and third on the recovery of India both economically and with their currency over the next five years. We were able to make this substantial commitment of equity because first, we have a very experienced team of people in India, but we re also able to make use of our skills and the intelligence that come from owning one of the largest global construction businesses, and also one of the most sophisticated office leasing operations in the world. Without the combination of those three things I can tell you that we wouldn t have been comfortable in doing that and over last couple of years that we worked on that specific transaction in India, there weren t many others that we competed with, because of the scale of it, where it was and the many things it involved. The bottom line is our size of capital, our global scale and our operational experience, these three things give us the ability to continue to invest capital on behalf of clients and shareholders, we believe across market cycles, even when it does not appear from the macro economic environment that one should be able to invest and still adhere to value investment principles. Turning to one specific investment, over the past few years we have been accumulating debt in a company called Energy Future Holdings. As many of you may know, this company, which is also referred to as EFH or TXU, is a Texas utility company which recently filed for bankruptcy as it was

7 6 overwhelmed with a very substantial amount of debt, approximately $40 billion. EFH is the main generator and distributor of power in Texas and also owns a transmission business. We believe that EFH is a good company that had a very bad capital structure. This situation that is similar to many of the restructurings that we have been involved in past, where fundamental business is very sound but the balance sheet is burdened. A prime example of that recently was our involvement with General Growth Properties. We came to this investment through our knowledge from being a very large energy producer, but also because we re a very substantial investor in Texas. Some of you may not know that we are the largest owner of office buildings and the largest owner of retail malls in the state of Texas. We re also completing construction of a significant electricity transmission line in the state, and we own the district power company in downtown Houston. As a result of this experience, we have acquired a substantial amount of debt in the power generation and distribution subsidiary of EFH within our private equity funds, and we re now one of the company s largest creditors. We expect to become a cornerstone investor as the company emerges from bankruptcy and intend to do anything we can to assist management make this a solidly financed company and a reliable provider of electricity in Texas. With that, Operator, we ll open the lines to any questions that anyone might have. The first question is from Alex Avery from CIBC. Please go ahead. ALEX AVERY: Thank you. Bruce, on the Energy Future Holdings, I was just wondering if you can provide us with a little bit more insight into how far this restructuring process has progressed so far. Any idea of how long it might take and I guess how complex it might be compared to General Growth, you know, being a private company versus a public company and what that might imply in terms of when you could see a resolution to the restructuring? I m going to limit my comments because there s only so many things that we can say about it. But I d just say that we re very supportive of the company and we ve been having discussions with the groups

8 7 and hope over the next 12 months a plan emerges, and we want it to happen as quickly as possible and get the company properly capitalized and back in the market doing things for all the constituents. But these things are large and it will take time. ALEX AVERY: So is it I guess are there more parties involved or is it I guess just trying to compare it to the experience of General Growth. As you would well imagine, there s originally there was $40 billion of debt so there s lots of parties involved, but there was in General Growth and many other restructurings that we ve been involved in. ALEX AVERY: Okay. That s great. Thanks. The next question is from Andrew Kuske of Credit Suisse. Please go ahead. ANDREW KUSKE: Thank you. Good morning. Just on the Energy Future Holdings possible transaction and your involvement in the restructuring, could you provide any more specificity as to where your investment interest lies? Is it actually at the EFH holdco or is it at Energy Future Intermediate Holding Company or Competitive Holdings? I mean there s a number of things in the capital structure; I m just sort of curious as to what you will disclose at this stage. Yes, it s in the power generation and distribution subsidiary of EFH. ANDREW KUSKE: So is that the Texas Competitive Electricity Holdings? That is Texas Competitive Electricity Holdings, correct.

9 8 ANDREW KUSKE: Okay. That s very helpful. Then I guess the follow up to that is, is this a natural morphing of your business? It s just within that sub the generation exposure is predominantly coal and nuclear, two areas which you ve never had involvement before, and a lot of power contracts on an energy retailing side. So is this a bit of the expansion of Brookfield s business lines into other areas that you really haven t been involved in before? Yes, I d say the following. Firstly, we have invested in the coal business before. Today our renewable power business is hydro and wind, but the private equity business and most of the investments we make, or almost all the investments we make in our private equity business are adjacent businesses to what we invest in. That s really our competitive advantage, we believe, taking the information knowledge that we have by being in those businesses and assisting our private equity group to deploy that knowledge to make investments. I think that s the competitive advantage that we have versus other private equity groups, using information to be able to make private equity investments for that group. ANDREW KUSKE: Okay, that s very helpful. So I guess you look at this as being a really good highlight of the crossover of knowledge among your business groups, much as with the district heating business and your buildings, the malls and the industrials business and this is just another case of that. Yes, as you know, our groups work closely together and we try to share knowledge amongst the different businesses. This wouldn t fit into our renewable power partnership, I think everyone would agree with that, but these businesses are very good businesses. Texas is a very good place to invest and therefore we are just using that information. ANDREW KUSKE: Okay. That s very helpful. Thank you very much. Again, anyone wishing to ask a question may press star and one on your phone now.

10 9 BRIAN LAWSON: Thank you, Operator. There are no more questions at this time. I can hand the call back over to Mr. Dhotar. AMAR DHOTAR: Great. Thank you and we look forward to updating you in the third quarter. This concludes today s conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.