BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2017 Q2 法說會逐字稿

Thank you for standing by.

This is the conference operator.

Welcome to the Brookfield Asset Management Second Quarter 2017 Conference Call.

(Operator Instructions) And the conference is being recorded.

(Operator Instructions)

I would now like to turn the conference over to Suzanne Fleming, Managing Partner, Branding and Communications.

Please go ahead Ms. Fleming.

Thank you, operator, and good morning.

Welcome to Brookfield's Second Quarter Conference Call.

On the call today are Bruce Flatt, our Chief Executive Officer; and Brian Lawson, our Chief Financial Officer.

Brian will start off by discussing the highlights of our financial and operating results for the quarter, and Bruce will then give an overview of our market outlook and Brookfield's investment approach.

After our formal comments, we'll turn the call over to the operator and take your questions.

(Operator Instructions).

I'd like to remind you that in responding to questions and in talking about new initiatives and our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and U.S. securities law.

These statements reflect predictions of future events and trends and don't relate to historic events.

They are subject to known and unknown risks, and future events may differ materially from such statements.

For further information on these risks and their potential impacts on our company, please see our filings with the securities regulators in Canada and the U.S. and the information available on our website.

Thank you.

And I'll now turn the call over to Brian.

Great.

Thank you, Suzanne, and good morning.

We reported $1 billion of funds from operations, or FFO, for the second quarter, and that compares to $637 million for the 2016 quarter.

Net income was $958 million, just shy of $1 billion, up from $584 million in the same quarter last year.

Breaking the FFO down into its key components, fee-related earnings increase by 22%, that's due to a higher level of fee-bearing capital and growth in unitholder distributions.

FFO from invested capital increased by 2%.

We had good growth from operational improvements at existing operations, although some of this was offset by the impact of lower currency exchange rates on our non-U.

S. operations.

And realized disposition gains totaled $464 million compared to $123 million in the 2016 quarter.

Net income also benefited from a higher level of fair value gains than 2016.

So turning to our asset management operations.

Fee-bearing capital increased to $117 billion.

We had net inflows of $15 billion over the last 12 months and that drove a $32 million quarter-over-quarter increase in fee revenues.

Incentive distributions were higher as a result of increases in distributions to unitholders of our listed funds, and we recorded $25 million of performance income from Brookfield Business Partners, representing our share as manager of the increase in BBU's unit price.

Increases in transaction and advisory fees were largely offset by a lower level of catch-up fees compared to 2016.

So all in all, quarterly fee revenues increased by 21% to $353 million, that's $1.2 billion over the last 12 months.

And fee-related earnings totaled $732 million over the last 12 months, and that's up from -- by 15% from the amounts at this time last year.

Fee revenues are now tracking at an annualized rate of $1.2 billion each year.

And in terms of carried interest, we generated $477 million over the past 12 months based on investment performance in our funds, and that brings total unrealized carried to $1.2 billion at June 30.

As a reminder, this is the amount of carry we would expect to be paid if we wind up all our funds at that date.

As a point of reference, on a simple straight-line basis, what we refer to as target carry, we would expect the existing funds to accumulate carry at roughly $860 million each year based on their target rates of return.

The actual increase at this stage of the game tends to lag somewhat while the funds are being invested, and as we have noted before, we don't book carry in our FFO until the funds are largely wound up, which will take some time as our larger funds were hedged fairly recently.

And to highlight the point, as of June 30, roughly half of our carry eligible private fund capital is still in the process of being invested, it's dry powder, or it was invested fairly recently.

Turning to FFO from our invested capital.

We experienced significantly higher water volumes in our renewable power operations, which led to a significant increase in generation and FFO.

This was partly offset by the impact of continued low prices in North America.

Infrastructure results benefited from operational improvements and the contribution from new operations.

Our property operations experienced similar increases in FFO, although this was somewhat offset by the impact of recent sales of core office properties, which reduced net income -- net operating income from these assets as we no longer own them.

Within our private equity operations, we experienced improved commodity prices, which gave rise to better results from these operations.

However, this was offset by lower FFO within our construction business and our residential business in Brazil, as well as a lower interest in these operations following the spinoff of a portion of our interest in Brookfield Business Partners last year.

Realized disposition gains in both quarters related primarily to our ongoing strategy of selling interest in core office properties in mature markets at favorable values and redeploying the capital through our opportunity to funds in the properties and other asset classes in geographies with higher return potential.

And lastly, before handing the call over to Bruce, I will confirm that the Board of Directors declared the latest quarterly common share dividend, $0.14 per share, payable at the end of September and unchanged from the June dividend.

So with that, I will hand the call over to Bruce.

Thank you, Brian, and good morning, everyone.

As Brian noted, the second quarter '17 was a strong quarter.

Our asset management fees continue to grow at a rapid pace, and most of the operations we have achieved plan.

Most importantly, the selling -- the market we're selling mature property infrastructure assets continue to be very positive, and we've been using the environment to monetize assets and recycle capital where it makes sense.

At the same time, though, we continue to put significant amounts of capital to work, largely targeted at markets that are out-of-favor or in businesses that require our operating expertise to either grow revenues or to rework cost structures in order to enhance returns.

In total, we invested about $9 billion during the quarter.

This included a regulated gas transmission business, a road fuel distribution company, a water distribution business and various real estate properties globally.

At this stage in the business cycle, we are also very focused on enhancing and derisking cash flows in all of our businesses through operational improvements.

Turning to the global investment market for alternative assets.

As this market grows and matures, we continue to adapt our investment products to meet client needs.

We primarily offer two types of products: First is opportunistic return ones and the second are core products.

The former is an alternative for traditional equity investments; the latter for fixed income investments.

In each of our business sectors, we continue to grow our funds and expect to have large-scale opportunistic funds of $10 billion to $20 billion for each of our business sectors.

Our clients consider these substitutes for equities in their portfolios, and the returns we earn for them are welcome despite for lower return we earn for them are a welcome respite from low return or more volatile liquid investments.

Increasingly, institutional investors are also looking for alternatives to supplement the return on their fixed income portfolios.

Since with a 2.25% to 3.5% long U.S. Treasury rate, they also need to earn higher returns with this capital while taking more moderate risk.

In response, we have been growing our credit businesses and have also started to focus on private perpetual long-term entity to enable our clients to own these type of assets.

In particular, we recently established a private Core-Plus fund focused on real estate in the U.S, and given the size and scale of our operations, we believe that over time, our core real estate products could exceed up to -- exceed $50 billion.

We've also been considering this product for long duration renewable energy and infrastructure assets, which we think are ideal for -- also for our clients wishing to match liabilities.

Infrastructure and renewable power assets are also particularly suited for perpetual capital investors.

Longer term, each of these businesses should also be able to grow to the scale that I just mentioned on real estate and be highly complementary to our operations.

Before taking questions, we thought you might be interested in what we are seeing in the United Kingdom, which is continue to capture the news of the day with the political negotiations of Brexit.

Despite the headlines, virtually all of our businesses are doing well.

We have a number of office buildings under construction in the City of London, and leasing continues to be strong.

Since Brexit, we've signed a major law firm to over 200,000 square feet at our 100 Bishopsgate project, and we are progressing construction of a number of major residential rental projects and other office projects, which are substantially fully leased.

Our electricity, gas and fiber connections business in the U.K. is robust.

Sales volumes are up 16% over last year, as housing sales across the U.K. continue to be strong.

Our Central Parcs hospitality business is effectively 100% occupied, and cash flows continue to grow.

Our port on the East Coast is seeing solid volumes.

Our industrial warehouse property business is very strong, with Internet deliveries driving growth and valuations on industrial properties are at all-time high.

Specifically, on real estate prices in City of London, for major high-quality office properties there, at least 30% higher than pre-Brexit.

Lastly, while the full impact of Brexit on the U.K. is still unknown, our view continues to be that the effects will be moderate and that London will remain one of the great global centers of commerce for a long while.

We have not seen any major distress opportunities as a result of Brexit, and we do not know if we will.

But if business weakness appears over the next few years, we will use that as an opportunity to continue to expand our operations, as we have in the past at these moments.

Operator, that completes my remarks, and I'll turn it over to you, and Brian or I would be pleased to answer any questions, if there are any.

(Operator Instructions) Our first question is from Cherilyn Radbourne of TD Securities.

Wanted to touch on a couple of things that are mentioned in the letter to shareholders.

I guess, firstly, you talked about having large-scale opportunistic funds of $10 billion to $20 billion across each of your major business sectors.

And effectively, you're already there in real estate and infrastructure, and its private equity where you have a good investment track record but not the same scale.

So I just wonder if you could speak a little bit more about how you plan to scale up your private equity business?

So, I guess, two things -- thanks for the question.

First of all, I just say that we continue to build out the business.

We launched business -- Brookfield Business Partners last year to be able to assist in that.

So far, that's gone well.

The size of transactions that we're doing, because of that and because of our balance sheet, is much larger than what the funds we have would normally do.

And therefore, we think that next fund will be substantially larger than the fund we have.

I would note, maybe secondly, that the number, the $10 billion to $20 billion did not have a indicated time period on it.

But our goal is to have that in all the businesses that we operate to give us the scale.

Okay.

And then secondly, with respect to perpetual private funds, which does seem to be an industry trend, and when you've already tapped in real estate, can you talk about what you see as the major pluses and minuses of closed-end fixed life funds versus perpetual funds?

Well, perpetual fund -- and I'll try to answer your question, if I don't get it right, please ask me again.

But I would say, for opportunistic investments, generally, what people are buying into is that you're investing their money for them and you return it within a 10- to 12-year period.

Generally, it's a 7-year average life of investment, call it.

With a more core product, what people want is to -- it's a form of investment to otherwise own a direct interest in real estate or power or infrastructure.

But we own it for them and we have to refund it if mixed with diversification.

But it's like owning real estate as a perpetual investor buying a piece of real estate.

And therefore, they just buy it and it's owned for a very long period of time.

So the fees and the incentives of the managers are set up to have very long duration capital invested.

And therefore, the investors get the benefits of owning a piece of infrastructure real estate, they don't have to sell it and they can stay invested.

And the incentives are all lined that way.

But the returns are lower and that's why, I guess, we indicated that it, really, is benchmark off of fixed income alternatives versus others.

And large, large investors may do it themselves.

But most investors don't have the scale and diversification capabilities to do it other than these type of products that we're creating.

The next question is from Ann Dai of KBW.

My first question is around the capital commitments with your private funds business.

So I guess, I'm wondering, does the fact that each listed partnerships have commitments to invest in these next gen private funds that are getting successively larger create any situations where the partnerships can become limited in their ability to invest in other opportunities that they're seeing?

And so it is the cash flow from prior fund sufficient at this point to fulfill those commitments?

And if not, what are the levers that you can pull whether it's taking down the proportion of their commitment, or having them provide liquidity in some way, just maybe talk a little bit about that flexibility?

Sure, Ann.

It's Brian.

And that, I'd say, falls into the overall approach of how we approach bringing capital.

These type of investment opportunities and then what we think is actually one of the great advantages of having the listed funds and the private funds and having BAM with a strong balance sheet as well.

So I think what you're getting at, and just to clarify for other folks on the call, is that our listed partnerships, our listed funds like the BIP, the Brookfield Infrastructure Partners, Brookfield Renewable Energy, are what we describe as cornerstone investors in our flagship private funds.

And so they would have a 20% to 30% ownership interest -- partnership interest in those funds.

So when we approach -- so when the funds are calling for capital, then just to fund a new investment, then the listed issuer would put up its share.

And we -- the funds are organized such that we have multiple sources of capital.

So if it's a large transaction within a private fund, that may be larger than its mandate, it also has the ability to go out and seek coinvestors with our institutional partners.

So that's one alternative avenue of capital.

Second, the listed partnership can act as a coinvestor and has the ability to put in additional funds and what they -- and they organize their affairs as investment-grade issuers with diverse access to capital, whether it's with BAM market equity issue, sale of mature assets, and you've seen us doing that as well.

So there are multiple sources of capital for those entities.

And then finally, we do have Brookfield Asset Management and our balance sheet at the parent level to be able to act as a coinvestor or backstop commitments in respect over the large -- of larger transaction.

So we do think we have multiple access or access to multiple sources of capital that enable us to proceed with some of these larger transactions.

Many of them at the same time, with full flexibility.

I appreciate the color.

The other question I had was around energy marketing business.

So just wondering if you could remind us what the weighted average life is on those purchase agreements with counterparts?

And whether there are any meaningful expirations coming up?

And then also, what's the remaining life on the contract term with that?

Sure.

So most of the contracts that we have from BAM.

A facing the market, what we would describe, they really fall into two camps.

They are ones that are very quite short dated and those really fall into just how we deal with the power that is not sold under the long-term contracts, which I think are really the contracts that you're asking about.

Those have a very long life.

There's a couple of smaller ones that are coming due over the next 5 years.

but most of them are very long life in have renewable -- and have renewal options, so we're talking about an average lifespan of more than 10 years.

The next question is from William Katz of Citigroup.

I'd also like to go back to your letter as well this morning.

All of that is very helpful, so thank you for all that perspective.

You mentioned a couple of things in there and maybe you could expand a little bit on.

One, as you had mentioned, the wealth management business, I think you said you started a feeder fund.

I wonder if you could talk a little bit about strategically, how you sort of think about the opportunities set there.

And then on the renewable infrastructure side, I think you also said that you expect that to be a pretty sizable fund as well.

How you think about pacings to sort of get to that kind of level of AUM?

So with respect to the feeder fund and maybe just to explain what they are is, for smaller investors that don't have the size to invest into our actual private funds and for people that aren't buying in a common market buying our partnerships, we have private products now that are a combination of a number of our different funds.

So we offer that as a product.

And we've just started it, and we think it will be a successful product.

But it's early days in building a product to match an investor needs in the private market.

With respect to renewables, I do think it's a very large business long scale.

It's on the right side of the carbon equation.

It's green and the world is going there over the next 50 years.

And therefore, we think that the renewable funds we have will be able to scale up.

And probably in the future, we will have separate renewable funds from infrastructure.

And we think that can be a very large business, either within both renewable and infrastructure together, but also some portions of both are possibly separate.

Okay.

Just one follow-up.

You put a fair amount of money to work in the second quarter.

I'm assuming all that sort to sell relative to your metrics in June.

But as you think about where you are prospectively with a private equity book, any way to sort of think through how quickly you might have that threshold where you could actually get out there and start marketing the successor fund on private equity side?

Yes, it's Brian.

So it really depends on the rate at which we invest the funds.

Once we get up to that 70% to 80% of current investment, then we are in a position to go out and raise the end market of a successor fund.

So we can't be definitive in terms of when we will do that, but I think that's the kind of timing.

And as you see we've got a pretty good pacing of investment going there.

So we would hope to be up there in a decent amount of time.

The next question is from Andrew Kuske of Crédit Suisse.

I guess, the first question is just along the lines of the product category that you're seeing the most success in selling, or turning around the other way, the most inbounds from clients just from a product category standpoint, what's the most interesting to people?

So I think if I understand the question, just with respect to all our products, what are people most interested in?

Will that be fair to characterize it?

Yes.

Yes, so I would say that there is no real -- there's an enormous amount of institutional investors that like investing into real estate.

Infrastructure only started 10 years ago, but today, there's a big thrust into it.

Probably the biggest increase on allocations to any sector between infrastructure of real asset, being private equity, infrastructure -- real estate is infrastructure, but merely because it started at the lowest level.

So the increases and the new clients coming into it are greater every day.

But that's merely because the base is lower.

And therefore, the allocations, there aren't as many managers is not as established and it continues to grow.

But I would say there's a large amount of money going in to private equity funds, large in infrastructure and large in the real estate, they're all quite significant.

And then maybe just a follow-up, is there any inherent contradiction in just the demand that you're having in certain funds, and just your fundamental reality of your contrarian investors?

Does that create an inherent conflict or an inherent contradiction that you have tremendously inflows in one category, but you like to contrary invest?

So as you know, the reason and then we tried to articulate this before, and I'll try to simplify it, the reason that we set up the business we have, which is in a number of businesses and it's very global, is because countries don't generally come in to favor and out of favor at the same time.

Sometimes, once there's a general economic trend across the world that's positive or negative.

But even within that environment, there are situations where it gets much worse.

And so I would just say that -- and the reason why most of our funds are very global in nature is because we want to be able to capitalize funds on the situation where we can move the capital and the resources we have to the countries where -- which require capital and that we can then capitalize on the opportunities with our local people.

And so to date, I would just say that we haven't really had -- we haven't had a problem putting money to work in the things that we do on a value basis because we've been able to move from country to country.

But we'll have to see longer term as the business continues to scale up.

The next question is from Neil Downey of RBC Capital Markets.

On the subject of perpetual core private funds, if we take real estate as an example, how should we think about one of these funds relative to, let's say, a private REIT in terms of structure, risk of expected return, et cetera?

So the way we think of it is really three buckets of -- We have three buckets of capital, and then I'll come to your private REIT concept, but just to maybe lay you terms.

We think of opportunistic money, we think of our partnership money and then Core/Core-Plus money.

And the return thresholds go down.

Opportunistic money that we're investing is 20% or around there, above or below.

Core -- our partnerships is -- are 12% to 15% long-term IRRs and our Core/Core-Plus are 8% to 10% to 11%, depending on jurisdiction so.

So, it's in -- there's the threshold of returns that we invest across the spectrum of money.

And I think when you say a private REIT, what you mean is the market for -- in the United States where people are marketing private products to smaller investors under the private REIT format.

And I would say our products are largely institutional, it takes a lot of distribution to do private REITs.

And we don't have that today and we haven't focused on it, but it's possible in the future we look at.

But it's likely they are similar in nature to the Core/Core-Plus returns.

Okay.

Thank you.

And the follow-up question maybe for Bruce, maybe better for Brian.

I suspect you saw a Wall Street Journal article earlier this week that was entitled Brookfield's Toll Road to Riches.

And in that article, the journalist focused on a couple of infrastructure investments, Arteris, and I believe natural gas pipeline company of America.

And in the article, it referred to how you quote your evaluation to where at odds with some others on the same asset.

And I think it also went on to discuss the implications or the author's view of the implications of these valuations on your asset management fees, whether it be for the listed issuers or the private funds.

Could you maybe just comment on some of the content of that article?

Sure, Neil.

It's Brian.

So that's a rehash of a story that you may know as [RAM] a while back in Barrington and it doesn't contain a number of fundamental inaccuracies.

And in particular, we felt it was misleading, as you noted, the suggestion that our use of fair value accounting can lead to some questionable increases in book values.

And that, in turn, can result in higher management fees payable to Brookfield.

And that's simply not the case.

As you can imagine, this is something we take very seriously.

So I would say a couple of things, most of you on the call will know this already, but this is important.

So first of all, the management fees that Brookfield earns are based on the stock market capitalization of our listed affiliates, and not based on the IFRS valuations or book values.

And in fact, if you looked at the company that owns those assets that you referred to, Brookfield Infrastructure Partners, most of the assets owned by BIP are not actually mark-to-market at all because they are concessions.

And so the IFRS value is only a fraction of what the value of the company is.

And this is further evidenced by the fact that BIP has sold many business over the past number of years, proceed is significantly above IFRS values.

We've observed that when investors look at a company like BIP, they're really looking at the ability of it to increase its cash flows, and therefore, pay a good dividend, reliable.

And when the increase is steadily over time, and again, none of this is influenced by the IFRS valuations.

And again, the other point we like to make and this comes to your comment on the questions raised about the values of Arteris, which is our Brazilian toll-road to operations in particular, and they're suggesting that we had widely differing values that we apply to it, assign to it.

And again, that's just not true we don't -- we did not revalue this asset over that time period.

In fact, this is an even -- we don't even use fair value accounting for Arteris.

Just to clarify the confusion around that one, the increase in the value of Arteris was due to two factors and two factors only.

First, we invested another $700 million of cash in the business to fund capital projects and purchase has been arranged.

And second, the exchange rate for the Brazil currency went up by over 20% during the period.

So this had nothing to do with the change in our valuation of the business.

So hope that helps clarify your question.

(Operator Instructions) The next question is from Mario Saric of Scotiabank.

I just wanted to come back to the perpetual fund discussion.

So we're sitting here and it seems like a fairly sizable opportunity.

And to me, it's a kin to perhaps the opportunity that surfaced post global financial crisis in '09, 2010 when you launched many of your global opportunistic funds.

So when we sit here today, how do you think about the opportunity going forward in relation to how you thought about the opportunity with respect to launching the opportunistic funds post global financial crisis and is there a catalyst that you can see that can drive that type of fee-bearing third-party capital growth under the perpetual funds similar to what you saw for the opportunistic funds late in the decade?

So I was just -- it's Bruce.

I would just say that firstly, we think there's an opportunity.

If interest rates stay relatively low, then there is -- then this opportunity is going to stay for a long period of time.

These things never happen overnight.

They take a lot of hard work and a lot of getting the franchise to work together.

And it's -- for us, it should be easier than for most because it's just scrapping this business on to what we have and we do a lot of this in other areas.

And therefore, we should be able to do it.

And I would say that over the next 5 to 7 to 10 years, as long as we are in the low interest rate environment, this business is going to expand exponentially because it's going to really replace a portion or a significant portion of fixed income, traditional fixed income investments in pension and other sovereign plans.

So I think -- we think the opportunity is very big, and it will just successful be how we execute over the next 10 years.

Okay.

And then just maybe on your comment on the fixed income investors kind of driving demand for that product offering.

Is there -- Is the offering complementary to your existing offering in terms of your opportunistic funds, and so far as the expectations isn't that your ability to raise this $10 billion to $20 billion opportunistic funds in the foreseeable future is any way compromised by raising substantial perpetual funds?

No.

I'd actually make the opposite argument.

And what we've continue to find is we've broadened out and we continue to bring other products to our clients.

It enhances our relationship with them.

And therefore, enables us to have a better long-term business.

So we don't think it's -- there a different category, that's why we try to make the emphasis.

One is an equity alternative, one is fixed income alternative.

These are different buckets within a pension plan.

But the overall relationship we have is enhanced by the greater number of products that we can offer them in a responsible basis.

And so we think longer term, this is all additive to the franchise.

Understood.

Okay.

And one last clarification question for me and I appreciate it's a longer-term comment; but the $50 billion opportunity that you see in each of real estate infrastructure and renewable power on the perpetual side, will that be an equity figure or an asset value figure?

Let's go with asset values for now.

How about that?

Okay, that's great.

The next question is from William Katz with Citigroup.

Just going back to capital management for a moment.

So I think over the next year or so, looks like you had a nice pivot point in terms of a fee-bearing AUM rising.

How are you thinking about maybe buybacks versus reinvestment back into the business and/or dividend policy?

So I'll maybe start and Brian can add to it.

I have to say, firstly, we've had a general policy to have a relatively modest dividend relative to what we could pay in the business but to increase it over time with increases in cash flow in the business, and we don't really plan on changing that.

Point #2, we do generate very significant amount of excess cash flow and have a highly under leveraged balance sheet.

And the only thing I would say is we always want to have a very significant amount of capital.

A, to support all of our funds and all our affiliates if we needed; and b, be prepared for an opportunity should it come along.

Therefore, I guess, the point I would say is at this point, in the business cycle where the stock markets are more robust certainly than they were in 2009, we're probably more apt to continue to put money into our businesses and liquefy our balance sheet and continue to put cash and financial assets on the books, to be prepared to do things either within the business or buying back stock at a different point in time.

It's Brian the only thing I'd add to that, bill, is the ability to just -- to incubate new fund strategies off our -- on our balance sheet directly, just to clarify Bruce's comments.

This concludes the question-and-answer session.

I would now like to turn the conference back over to Suzanne Fleming for closing remarks.

And with that, we'll end the call.

Thank you, everyone, for participating.

This concludes today's conference call.

You may disconnect your lines.

Thank you for participating, and have a pleasant day.