BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2014 Q3 法說會逐字稿

Welcome to the Brookfield Asset Management 2014 third-quarter results conference call and webcast.

(Operator Instructions)

The conference is being recorded.

(Operator Instructions)

At this time, I would like to turn the conference over to Amar Dhotar, Investor Relations for Brookfield Asset Management. Please go ahead.

Thank you, and good morning, ladies and gentlemen. Thank you for joining us for our third-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 the call up 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 response 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.

Thank you, Amar, and good morning. We reported funds from operations for the third quarter, of $564 million, $0.83 per share, and net income was $1.1 billion, or $1.09 per share. These results reflect continued growth in the cash flows and values within our business and, in particular, our asset management operations. I'll start by breaking these results down for you.

FFO included $362 million from operating activities, compared to $342 million in the prior year. This represents an increase of 6%; however, I would note that the prior period included the impact of exceptionally strong pricing within several of our more cyclical private-equity investments; the impact of above-average water flows on our power operations; and the inclusion of a large catch-up fee within our asset management results. And, in contrast, the current quarter reflected below-average water flows and a roll-off in late last year of a large lease in lower Manhattan. So, as a result, the 6% growth really understates the solid progress across virtually all of our operations, which I will discuss in a moment.

Disposition gains within FFO totaled $202 million for the quarter, most of which came from the sale of a private-equity investment in a forest products company. In the prior year, we recorded $851 million of gains during the quarter that arose from several large monetizations. The increase in net income, quarter over quarter, reflects a higher level of fair value gains in the current quarter, primarily in our office property portfolio, as well as increased valuations of our retail properties. These gains reflect growth and cash flows, and continued positive leasing spreads within the properties, as well as lower discount rates.

We continue to experience strong momentum in our asset management business. Our fee-bearing capital is now at $84 billion, and this is up 14% over the past 12 months. This growth reflects the acquisition of our office property portfolio earlier this year, the continued expansion of public partnerships, and meaningful expansion in our private funds. Two of our flagship private funds are more than 90% committed. And, as a result, we are currently in the market with four funds that are seeking to raise more than $12 billion of capital.

Our clients continue to allocate an increasing amount of their portfolios to realize their strategies, and, as a result, we expect our flagship funds will be approximately twice as large, on an ongoing basis. Bruce will speak further about our ability to attract more capital in his remarks.

In the quarter, fee-related earnings were $102 million. This is up nicely over the $97 million in the same period in 2013, when you consider that the prior results included $18 million of catch-up fees that related to prior periods. Over the past 12 months, fee-related earnings, i.e., our fee revenues after deducting direct costs, are up 20%, to $346 million, and annualized fee revenues increased by 22% over the same period.

Turning to the results from our investments in our operating businesses, we had a strong quarter in our property business and in a number of the other segments. Looking at each platform, FFO from our property operations was $136 million, and that's up from $121 million in the same quarter last year. Leasing activity was excellent, as we signed major tenants to long-term contracts at properties in New York and London. We leased 3.2 million square feet during the quarter, and Brookfield Place New York is now 95% leased, which will meaningfully increase FFO in 2015 and 2016. And commitments from new tenants put us in a position to launch construction of new office buildings in Manhattan and the City of London. We signed new leases at 47% above expiring rents in our office property and at 16% above expiring rents in our shopping mall business. We disposed of 13 properties for gross proceeds of approximately $700 million, and a modest gain, as part of our continued active recycling of capital.

FFO from our renewable energy group was $28 million. This is a decrease of $29 million over the -- compared to the same quarter last year, and this was due to reduced generation levels. In the current quarter, generation was 13% below long-term average compared to last year, when the results were 4% above long-term average generation. We continue to invest in growth initiatives in the business including investments in three Irish wind farms that would be operational within the next year and, in terms of additional development, add onto the portfolio acquisition that we made earlier, and a Brazilian hydro project that should begin producing electricity in 2016.

In our infrastructure business, FFO was $55 million. That's in line with expectations and 12% higher than the 2013 quarter on a same-store basis. We achieved favorable growth from development initiatives and growth in revenue streams. We closed approximately $1 billion of investments during the quarter, including a Brazilian logistics business and a California natural-gas storage facility.

In our private-equity business, FFO declined somewhat, to $110 million, that reflects the impact of lower prices on several of our more cyclical businesses. But, on the other hand, we experienced continued increase in FFO from our North American residential business. Our private-equity group committed $540 million during the quarters of the acquisition of a natural gas reserves. This is the latest in a series of investments in a sector that has created a company that is among the largest in North American coalbed methane businesses. Finally, the Board of Directors declared a quarterly dividend of $0.16 per share that will be paid at the end of December.

I will now turn the call over to Bruce.

Thank you, Brian, and good morning, everyone. As Brian noted, we had a good quarter. Our results were good, and we advanced a number of strategic items in the business. We did commit or make a number of large investments during the quarter. In property, we added both a large portfolio of buildings in India and a significant net lease commercial property business in the United States. We think both of these transactions will lead to great opportunities for organic growth over time.

In infrastructure, we committed to acquire a telecom tower business in France, which we believe will be a platform for consolidation in the future. And, in the last few days, we joined the Qatar Investment Authority and made a proposal to acquire the balance of Canary Wharf and its publicly listed holding company that holds shares in Canary Wharf. This bid was publicly disclosed yesterday by the UK-listed company, and, at this time, we cannot comment further in the question period due to regulatory requirements. But, as most of you know, we and QIA are the largest owners of Canary Wharf. We jointly own about 43% of Canary Wharf on a look-through basis, and both of us have been owners for over a decade.

We continue to see interest in the investments we make for all of our clients, and I point to a handful of trends that we believe we need in our favor in order to continue to grow the offerings that we -- the investments that we make. And I'll address a few of them for you here. The first is institutions continuing to allocate capital to real-asset investments, and, in this regard, we are confident that this will continue. Our observation, from dealing with most global institutions and sovereign funds, is that real-asset allocations actually continue to accelerate at a quick pace.

The simple reason is that the alternatives for investment are somewhat bleak. To make the point, we offer 8% to 20% yields, with moderate risk. Contrast that with bonds that offer 1% to 3% yields, with the chance of capital loss in the future. There are, of course, many other reasons for these increased allocations, but the math I just explained gives the simplest rationale.

The second item we need for growth is our continued ability to deploy the vast amounts of capital we have, while maintaining solid returns for our clients. In this regard, we have invested close to $20 billion in the past year. We think many of these investments will turn out as exceptional investments. To be very specific, this has been during a period when we have heard many times that there are no opportunities out there. One reason for this that we would offer is that we can invest in very large transactions. Most people cannot commit to acquire, for example, a $4-billion transmission tower business, a $4-billion net lease portfolio, or be involved in a $10-billion acquisition of real estate.

Furthermore, our franchise is large and global, and few people can shift -- have the luxury to be able to shift capital and people from markets which are -- with excess capital to those which are underserved, in order to capitalize on the lack of capital in those markets. To be -- to use an example, our acquisitions today are in contrast to many of the investments available otherwise. For example, if one is looking to acquire a property or infrastructure investment that requires $100 million of equity in a gateway US market, there will likely be an auction with 30 to 50 bidders showing up. But this is not too relevant to us, as we don't generally spend time on any of these opportunities.

This is in stark contrast to 2009 when we shifted virtually all of our capital to these developed markets -- like the United States and Australia -- because they had declined significantly and we were buying at substantial discounts to replacement costs. The number of acquisitions we can complete is always the most unpredictable. But we see no reason that we cannot deploy the capital we have into solid opportunities globally. In fact, we could easily make the argument that we are far better set up today to deploy the capital we have than we were 10 to 20 years ago, as our global offices continue to mature and our investment people across the globe are further integrated into our culture.

The third trend that we have in our favor -- that we need in our favor for success are positive global business conditions. Of course, this is clearly outside our control. But our observation is that, over the past 10, 20, 50, 100 years, the global economy on average has continued to grow, and the health and wealth of individuals across the world has improved. We believe this will continue. The assets we buy are the backbone of the global economy and, despite some trying times and downturns, which are inevitable, we believe that we will be able to endure these markets and sometimes even advance our cause when periods of global economic disruption and consolidation occur.

In this regard, I will end my comments with three about the global markets. The first is that all indications in our businesses have been, and still are that the US economy is growing faster than otherwise believed. With gasoline prices down, this should accelerate retail sales in the fourth quarter, which is not factored into most expectations. In addition, eventually the pause in housing sales will end and sales numbers should resume a march slowly towards 1.5 million sales of homes. This will be positive for the US economy.

As a result, our view is that the US will record good GDP growth and that all of our assets in the United States will benefit. The negative is that we will not be buying a lot of assets in the US in this period, as capital is freely available and buyers abound. But access will be easier and we continue to selectively harvest capital in all of our developed markets.

The second comment is on the three major emerging markets -- Brazil, India, and China. There continues to be a lot uncertainty in many investors' minds about these markets. For short-term investors, those views are likely correct. But for the longer-term investors, the scarcity of capital, the lack of interest by many, and the number of transactions -- completed in more robust times that must be recapitalized -- offer some phenomenal opportunities. Bottom line for us, this means we will be making many more investments in these markets on top of the large list over the past 18 months. Access likely will be limited, and we will be working our own operations hard to squeeze value out of our business in this environment.

The third market I will address is Europe. This large market will not be about growth for a long time, in our view. As a result, we underwrite all transactions expecting very low growth and a decline in currency. Despite this, there are many opportunities to buy assets for value and earn very good returns. As a result, we will also continue to allocate greater amounts of capital to these countries when returns can be earned, assuming low growth and with a hedge currency position.

With that operator, I will end my comments and ask you to open the lines for any questions, if there are any.

Thank you. We will now begin the question-and-answer session.

(Operator instructions)

Our first question today comes from Cherilyn Radbourne of TD Securities. Please go ahead.

Thanks very much and good morning. I wanted to ask you a couple of questions related to the transaction that was announced yesterday. Starting with just if you could tell us how you think about telecom because it has factor associated with it which makes it somewhat different from what you have done traditionally.

I would just say the following. I guess our view is that in the infrastructure business what we are trying to invest into are assets which are the backbone infrastructure of the economy across the world. And we view that telecom infrastructure towers which are really carrying the vast amounts of the technological improvements that are occurring in the world are excellent investments and that over time they're unpredictable.

And if you can get invested in some of them, they will endure time and they will be excellent cash generators. And over time you will be able to continue to participate in this technological improvement that's going on because a lot of the capacity goes through those towers.

So we weren't invested in them in the United States in past and as you know -- as you probably know, there is a number of very high quality companies in the US that own them. But there are other places in the world where we think we can benefit from the knowledge we have about them in the US and other things. And while in some cases, there is more CapEx involved, we think that the returns will be excellent.

So when you have a transaction like that which involves Brookfield Infrastructure Fund, BIF and third party partners can you speak broadly how you deal with issues like operational control, governance and distribution policy?

Yes, so all these investments I think most people on the call know is they get made through -- this one specifically gets made through our infrastructure fund. And the portion of the capital, Brookfield Capital is invested from Brookfield infrastructure partners, the listed entity. I'd say -- and we have partners at the asset level who invested beside us. So we are all interested in the same thing, bottom line.

We're interested in growing the capital -- the distributions in this entity, earning decent and strong yields over time. And we have various arrangements where if we need more capital business or want to grow it, we can do that within the business.

Of course, there may be times when and this has happened in past when there are institutions we have or a fund that's fully invested and what we do is continue those investments in the next successor fund. But obviously offer any partners we have co-investment rights. So it's a pretty tested pattern we have.

Okay. Thank you. That's my two.

Thank you.

Next question comes from Mario Saric of Scotiabank. Pease go ahead.

Hi. Good morning.

I was reading letter to shareholders with interest and specifically under the long term plan section looking at kind of a target valuation for asset management business of $45 billion within 10 years a number that's surely big enough that the vehicle can stand on its own. I am just wondering evaluation aside, how do you see the structure of that franchise evolving over time? And if we look 10 years out, is it more likely than not that your asset management business is stand alone company going forward?

Here is what I would say. It's Bruce.

Our view is that we should do the best thing to maximize value for the shareholders of the company. And we'll do that over time and assess it. Today, we see great value having the capital associated with our asset manager clearly aligns our interest with our clients and that's a big advantage we have.

Whether that changes over time, and whether we should separate capital or drib more capital back to shareholders we think of it all the time. The Board considers it all the time. As you know we have from time to time made special dividends back to shareholders and we will continue do that. We are open to suggestions although we have no plans to do anything to the main structure of Brookfield Asset Management as we speak.

I am just curious. When we look at your investor day presentation $20.18 per share, about 32% is related to the GP as oppose the to investments in other stuff. I am curious wondering whether there is a magic number there where you think that at 32% you get full credit for asset management business that's growing at 15% to 20% per year or is magic number 50% or 75%?

Here is what I would say. We don't think about these things in the short term. It's highly possible that you might be able to in the short term split things apart and make more money next week in the stock market. But our decisions are really made overlooking at over the next 10 years or 15 years in the business model is it a good thing to have capital tied to business or not.

And to the extent it is we'll keep the capital tied to the business. That's been the decision so far. If it isn't then we'll split it apart. And we'll just have to -- where that gets valued in the market in the short term isn't too relevant in our minds to the long term decisions of how we make them because these are very long term businesses.

The one thing I'd add to that Mario, it's Brian, one of the things we've tried to stress is we do have tremendous flexibility in that balance sheet capital. So over time we have the ability to respond to the factors that Bruce was alluding to in the context of the circumstances at that time. And so we can assess on an out going basis whether 32% is the right number or maybe its an absolute dollar number or just what the business looks like. So we do have the latitude to adapt as we move forward.

Okay. And my second question, would just be with respect to comments on increasing allocation to real assets and it seems like primary driver behind that is just the ultra low interest rate environment.

Based on your discussions, is there a magic number where that changes? So if tenure is at two to two and a half, if it goes up to four, four and half is that the number where institutions magically say that number makes sense for us? We are going to contract our allocations to real assets or is it more complicated than that?

Of course every institution has their own views so I would say it's definitely more complicated than that. But my contribution to try to answer your question, I'd say that these institutions are getting introduced to real assets because interest rates are low. I don't think that's ever stopping. Our belief is the global allocations will continue to increase and they'll become a greater amount of institutional clients and as you know some are at 50% already.

Some are at more than 50%. If rates go to 10% on the back end there is no doubt. If we are earning 15% and they can earn 10% in long treasury, you may not choose to put as much to real assets.

To the point, our belief is that long rates in the United States are going to 4% to 6%. Our business works really well at 4% to 6% long rates and our business and institutional allocations will do very well at 4% to 6% long treasuries. So I don't think it's stopping for a long time.

Okay. Great. Thank you.

The next question comes from Andrew Kuske of Credit Suisse. Please go ahead.

Thank you. Good morning. I guess this question is for Bruce. It's just on where you are in the phase of your build out of your asset management business and just from a body count perspective and maybe whether we talk about it in terms of geography or product vertical.

How much more build out do you need or are there certain regions of the world that you need to bulk up more? Say india or China for that matter. Maybe just some color around that whole concept?

So with respect to geography we are in almost every country that we want to be in and have a presence in it. There is no doubt over time as we make more investments we have to increase our presence in some countries and we do that slowly and as we need it. But most of the places where we want to put capital, we have people and it's just additional resources that continue to grow the business. We will add that on a marginal basis.

As to product categories and other investments we could make, I'd say we don't really have a goal to have any other products within the business other than within each of our sectors from time to time we come across a broadening of what we actually do. So telecom towers, we hadn't invested in before. We have looked at them a long time. We couldn't make returns based on US acquisitions, and we found one to be able to invest.

I'd say we'll add different businesses and we can organically grow businesses over a long period of time. Once we learn about those businesses that's more where we'll tend to put our resources.

So I guess the take away is you really view business as quite scalable now so if you had incremental say 25% more AUM there is really not a significant change on body count.

That is correct.

That's very helpful. Thank you.

(Operator Instructions)

Our next question comes from Bert Powell of BMO. Please go ahead.

Thanks. Just a quick question on the base management fee percentage.

The midpoint of the range is 1.35. You are not quite there today. Can you just walk us through the timing around closing that gap and what's keeping it below the target incremental range today?

Sure. You are talking about private funds I presume?

Yes.

It's Brian. So in essence what you're seeing is the roll off of some funds that we had launched a number of years ago, either because it was an initial fund for us or because for example our turn around fund that we launched during the economic crisis was skewed very much towards carry and had minimal based fees which actually turned out to be a very good thing.

But as those funds have wound down or are in the process of winding down, the new funds are at higher base management fees. So I'd say over the next two years or three years, you'll continue to see that creep up. In fact it's probably going to continue for another year or two after that. It's a gradual process because these are long life funds.

Okay. But what you are -- the funds that you are in the market with today and what you are getting are very consistent with that 125 basis points to 150 on basis points.

Absolutely.

That's great. Thank you.

There are no further questions at this time. I'll now hand the call back over to Mr. Dhotar for closing comments.

Thank you for joining us today. This concludes our third quarter webcast and conference call.

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