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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by, this is the conference operator. Welcome to the Brookfield Asset Management's 2017 Year-end Conference Call and Webcast. As a reminder, all participants in the listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions].
I would now like to turn the conference call over to Suzanne Fleming, Managing Partner, Branding & Communications. Please go ahead, Ms. Fleming.
Thank you, Operator, and good morning. Welcome to Brookfield's 2017 year-end 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 the year, and Bruce will then give a business update. After our formal comments, we will turn the call over to the operator and take your questions.
In order to accommodate all of those who would like 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.
I would like to remind you that in responding to questions and in talking about new initiatives in 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 laws. These statements reflect predictions of future events and trends, and do not 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 other 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 will now turn the call over to Brian.
Thank you, Suzanne and good morning to all of you on the call. Let me start off by saying that we are pleased with the results for 2017. In particular, it highlights a successful year of growth for Asset Management franchise and a further step change increase in our earnings base.
Bruce will extend on this in his remarks, but in summary we continue to expand our fee bearing capital, generate carried interest and deploy capital across the multiple asset classes and geographies.
Funds From Operations or FFO totaled $3.8 billion for the year that's a record for us. This represents $3.74 per share and an 18% increase over the last year. Net income was $4.6 billion for the year or $1.34 per share attributable to shareholders.
Both FFO and net income benefitted from the significant increase in fee related earnings as well as growth in our existing businesses and contributions from new investments. And they also benefitted from an increase in the level of realized disposition gains and fair value gains respectively.
I will now cover some of the highlights within FFO. First focusing on our Asset Management results, fee related earnings increased by 26% to $896 million and that's due to growth in fee bearing capital, which now stands at a $126 billion.
This growth is driven by both capital committed to new private funds and growth in the capitalization of our listed issuers. We also earned our first performance fees from BDU as a result of the significant growth in its unit price following several notable acquisitions.
Moving over to carried interest, which is becoming increasingly relevant to our financial results. As our earlier vintage funds mature, they are staring to generate meaningful levels of unrealized carried interest. As we have noted in the past carry doesn’t typically arise in a fund until the capital has been invested and we begin creating value, so there is a natural lag.
In 2017, we generated $1.3 billion of unrealized carried interest or $928 million net of costs. Total crude carry interest is now over $2 billion more than double of the prior year and while nothing is guarantee just provides a good indication of how are tracking against the carried interest targets that we expect to realize over the coming years and puts us ahead of plan.
The growth in fee bearing capital led to a 22% growth or increase in annualized fees and target carryover the last year which now - together at $2.5 billion. Within that annualized fees stand at $1.5 billion net at significantly to our current earning potential of the asset manager franchise while the annualized target carry interest increased to $1 billion representing significant features earnings potential.
Turning to the invested capital side, FFO increased to $1.5 billion which reflects improved results across our businesses. We benefitted from strong pricing and volumes, including higher generation within our Renewable Power operations increases in across our transportation businesses at a higher pricing in some of our industrial businesses.
We benefitted from the contribution from completed development projects, which provide us with opportunities for capital to work within our existing businesses and we also deployed capital into a number of significant acquisitions including $3 billion within our private equity operations and the acquisition of a $5 billion Brazilian regulated transmission business, which enabled a step change in that business as well.
The strong growth in FFO per unit in Brookfield Infrastructure Partners, Renewable Energy Partners and Property Partners supported distribution increases in each of those businesses within their 5% to 9% target ranges. Disposition gains in FFO contributed $1.3 billion as we completed several significant sales in 2017, including the sale of our European Logistics Company and several core office buildings.
Before I turn it over to Bruce, I wanted to provide a brief update on fund raising. As you are aware, we are through 80% investors, who are committed on both of our flagship, real estate and private equity funds. And so we are currently fund raising in these sectors. Our infrastructure fund is 50% deployed, which is right on track given us vintage.
And in 2017, while we didn't hold final closets for any of our larger flagship funds, we made every good progress in building out our other strategies such as our credit business. We have raised our first infrastructure credit fund, which exceeded the target size and held the first close on an open-ended real estate credit fund.
The interest rates still expected to be very low compared to the returns we can generate, we continue to see demand in the foreseeable future for products, which are alternative to fixed income investments.
We are pleased with our initial progress in the high network space, where we have raised over $400 million since the beginning of 2017. There are multiple channels including private banks and registered investment advisors. Going forward, we planned to offer more of our product declines in this channel and expected to be a good area of growth for us.
Finally, I’m pleased to confirm that our board of directors has declared a $0.15 quarterly dividend payable at the end of February and this represents a 7% increase over the prior year.
And with that, I will hand the call over to Bruce. Thank you.
Thank you all for joining the call. As Brian mentioned, assets under management continue to grow and our investments performed well last year. We continue to find opportunities to invest the capital that we have been raising despite a competitive environment and we put that down to three of our core advantages, which are sized our global presence in our operating platforms. These advantages allow us not only to identify a wide range of investment opportunities globally, but also to acquire assets per value and then use our operating businesses to create upside.
With strong markets as Brian mentioned, we sold a number of assets more than usual and we will continue to do so in the 2018. Our strategy has been two-fold, first to sell mature stabilized assets and redeploy the proceeds in the higher yielding assets, or secondly into returning capital to investors particularly when this allows us to substantially complete a defined investment strategy.
Fund raising for real assets in both the public and the private markets for the assets that we manage remains strong with institutional funds continue to allocate greater amounts of capital to these sectors. With interest rates expected to remain in a low range compared to the returns that we can generate, I will return to that in a second. This growth should continue for the foreseeable future.
Turning to general markets, we see no signs of underlying economic issues despite the U.S. economy being nine years into an expansion. While this economic cycle shows no signs of ending. It is clearly in the mid-to-later stages of elongated expansion. So we are being cautious. Through that end, we continue to focus on our liquidity and our funding profiles to ensure we are in excellent financial shape and position to react to substantial growth opportunities in the next down market as we have done in past.
Outside the U.S., economies are continuing to recover and in general offer more value than available in the United States. Looking at a few of those markets in the UK, Brexit stress is offering select opportunities; Broader Europe is looking slightly stronger than it has been for a long time.
Brazil is recovering remarkably, interest rates have dropped from over 13% to six and three quarters percent now on the short-term rate. Australia has been very resilient. China continues on its path to becoming the largest economy in the world and in India, where we have done a number of transactions.
They are dealing with an over leverage corporate sector and that’s presenting opportunities. Across the developed markets, the main place where this cycle’s excess liquidity had been and has been building up. We have been monetizing mature assets and values that align with our investment strategies or where we can put it to work more productively.
This has also enabled us to add liquidity to the balance sheet and invest more capital in the emerging markets and out of favorable businesses, where multiples have not seen the same expansion. We currently have over $25 billion of core liquidity and dry powder in our private funds and in this environment, we believe that real assets do continue to offer excellent long-term value. I would also point out that most competitive capital targeted acted sector does not have the breadth or the advantages of size global reach and operating capabilities that we have.
Over the past year for example, these specific points enabled us to complete the purchases even in the United States, where values were higher. We have bought to SunEdison subsidiaries out of bankruptcy; as well we recently announced an agreement to acquire Westinghouse Electric Company out of our bankruptcy. We also added a number of quality businesses from sellers in need of capital expenditures in Brazil and India, which totaled around $10 billion.
Lastly, I wanted to make few comments on our business of managing real assets for private investors across real-estate, infrastructure, renewal power and other related businesses. This business continues to mature and is now firmly established as a component of investment portfolios of most pension and severance plans.
With these plans expected to double to upwards of $80 trillion and with the allocation of real assets and alternatives to also expect it to double. There could be a further $20 trillion of capital available over the next 10 years for investment into the type of assets that we invest in. This will continue to fuel significant growth in the industry.
We believe this is a long-term trend and it is important to reflect on absolute returns when looking at our investments. In the context of low interest rates and highly correlated equity returns as well as growing liabilities’ longevity risk.
our investors are seeking alternatives to generate sufficient returns, diversify their portfolios and reduce volatility. Our products address these needs and to make that point on our more opportunistic strategies, we generally earn 20% plus or minus and our lower risk strategies earn in the range of 7%
Today, these returns compare very favorably to a tenure treasury in the U.S. even at its increased rate of 2.9%, Europe at 0.7% and Japan at essentially zero. In our opinion, the only thing that can stop this trend of continued funding going towards these types of products is a significant increase in global inflation that pushes the long-term interest rates into the territory, in which and this is the important point, in which returns are not sufficiently superior to the yields that we can earn.
Despite interest rates increasing from unduly low levels they were at, something we have expected for a very long time, we do not expect that this will affect our business and believe that it will be a long time before high rate paradigm returns.
So with that operator, that completes my remarks, I will turn it over to you and Brian or I will take any questions if there are any.
[Operator Instructions]. Your first question comes from Cherilyn Radbourne with TD Securities. Your line is open.
Thanks very much and good morning. Wanted to start by asking about the private fund client base, which is up nicely to 500 clients. Can you talk about how the high net-worth channel discounted within that number and give us some color on how your private fund capital has continued to evolve by size and type of clients and also the distribution by geography.
Sure. So I will start off on the private client side it's Brian, Cherilyn thanks for that. So much of that happens into what I would recall on an aggregated basis. So we would not include if there is I will say one channel that we go through that represents 51. So that does so that's how that plays it.
So a lot of the increase in the number of clients which I think you remember about 40 new clients that we introduced across the funds over the past year, which was in a wide variety of geography I would say very well diversified. A very minimum amount of that was actually from a numbers perspective private clients.
And so just in terms of some of the areas that you have been focused on. Can you just comment on progress relative to small and mid-sized institutions in the U.S. and then also Europe where you have seen a little bit underrepresented arguably.
Sure, Cheril I might just comment that I would say across the board they are known. And we keep growing in all areas. So I would say we are pushing we are adding more U.S. small clients, we are adding a number of European clients to our list when we continue to add clients really across the board in all jurisdictions.
Great. My second question relates to something you have referred to in the letter, which is the idea that as a value investor you have to be increasingly aware of the potential impact of the technological change, but I wondered if you could just talk about how you have adapted your underwriting processor or your regular business reviews to incorporate considerations of that type of risk?
Hey look I would say that there is nothing that scientific about it. other than we are extremely aware in some businesses. In fact in all businesses, technology is effecting them some more than others and the business is where there is direct effects we need to understand and try to better incorporate it into our underwriting.
So although what I would say is generally it’s more technological change usually people over estimate what it's going to do to most businesses, and very sell them as it is dramatically as quick as what most people expect.
So often getting people getting over exuberant about it means that there is opportunities for us to invest in the interim stages where people are just wrong on predicting the time or the impact on businesses.
So that's probably the biggest focus for us is that more from a value perspective versus looking at it from where we can grow businesses from scratch, which most of the investors would be focused on.
Thank you. That’s my two.
Your next question comes from Ann Dai with KBW. Your line is open.
Hi good morning, thanks for taking my question. So first one is one Tax Reform, I guess I was just wondering if you guys can talk about the impact of Tax Reform on some of your underlying businesses and investments. Just given the size of the investments you have in U.S. in the nature of real asset investing so maybe what are some areas where you might see investments start to look fundamentally less attractive due to limitations on deductibility and then conversely other areas where changes to rules around capital investment and deductibility around that might make other opportunities look more attractive in the near-term?
Sure, thanks Ann, its Brian. So in general our take of this is that it is overall positive for us and some of that's going to play at overtime. You mentioned that couple of things in there and yes there will absolutely be some benefits from accelerated write off or deductibility of capital expenditures in a number of our businesses that will be helpful.
Interest expense is probably overall not a big issue for us in part because we run an investment grade model above fundamentally and so we keep our leverage and the interest accordingly the interest cost is on the lower side in that regard.
Also I would observe that several of the industries that we operate in our exempt from a number of these changes whether it's utilities or certain real-estate, so those would be some of the of ongoing impact and then off course having the tax rate to go from 35 down to 21 is obviously a benefit.
So overall, I would say it's generally a positive for us and then of course a lot of that is just how does that kick into the economic environment overall, which it has a positive impact on that is good for us.
Thanks Brian. Bruce, I also wanted to address some things from the shareholder letter, so there is a line in there talking about you guys thinking about the next stage of Brookfield's post 2025, so I understand that’s long time away and maybe not a conversation today, but I guess I'm just kind of curious with some of those growth considerations are and at that point what might some of the concerns be that you would want to talk through and then what is the motivation for taking those discussions off today?
Yes. I would say the line in the letter is really - it was meant to indicate two things to shareholders. The first one is, the next seven to eight years by virtue of the business we have and the maturing of the business we have and the continued growth we think that can happen just with the business we have. For six, seven, eight years, this business grows at a very fast cliff. And we don’t have to do anything else, and we will do. We think the returns that we have set out for the company.
Once the business matures, if we haven’t done anything else. 10 years from now, the growth rate will slow. Of course, we are going to do other things and what we need to do is between now and 10 years from now is to figure out how do we widen out the franchise and use what we have for the brand, and our fund raising capabilities and our investment capabilities to add other products for our clients. And we don’t think that will be an issue.
So the reason for the comment was really two-fold. One to say, that the growth rate is, we don’t have to do anything for the next seven to eight years. Post that, we need to figure out, but we have a long time to figure that out. Most companies can’t give you that predictability on the growth of the business from that perspective.
Okay. Thanks for the insight.
You’re welcome.
Your next question comes from the Mario Saric with Scotiabank. Your line is open.
Hi, good morning and thank you. I just wanted to tell you back off of a last question with respect to this post 2025. One thing that you have talked about in the past is just trying to identify perhaps what the optimal balance sheet for Brookfield Asset Management looks like over time. And I was just wondering how that may play into any potential restructuring if you will as you kind of go through that next phase of revolution.
Yes, thanks for the question. I would just say that we are always open to doing things with the companies that maximize the value for all the shareholders in the business in the longer-term. So if that means 10 years from now that we should distribute out to shareholders and of course, we will do that.
And at some point that might make sense. I think if you would have looked back 20 years ago or even in 10 years ago, and looked at where we are with business today, we might have said we were overcapitalized and we should distribute capital out.
The thing that’s differentiating is this business keeps getting bigger and we can use the capital we have to keep building a bigger franchise. And we think that will continue for a while. At the point when the franchise doesn’t get built, we can’t put the money productively to work.
Then, we will look at what we do with that capital whether we increase dividends and get back to shareholders or buyback shares or distribute it out in some other forms. So we are open to all suggestions and we look at it all the time.
Right now, I would say, we think that is an enormous competitive advantage to have the capital we have. And that gives us a lot of ways to grow the business that others don’t have.
Okay, thank you for that. And then my second question just again referencing to the Letter to Shareholders and specifically, the market environment. You have been noting more of a cautious stand in the last several quarters. Just kind of referencing the elongated expansion and then I guess in this letter also referencing a couple of specific items that may raise a question mark with respect to valuation in the broader market, making a bit more cautious, outside of pace of capital deployment, how does that shift the deployment mix in terms of capital allocation for you? And has the cycle changed in the last three to six months for the shift that makes from the high deployed capital changing?
I would just say that we always are investing and we are always putting money to work. We try to move our capital to where value is, so where our remark everywhere in the world today there is not overvalued, never the industry is overvalue.
There are a many businesses I referenced to investing how is that these are two bankruptcies that happen in the United States, so this is the most liquid highly valued market in the world over the past 12 months and those are over 10 billion of assets we have purchased, because of two specific situations.
So, we are always putting money to work. I would just say on balance though, we try to have themes of should we be more cautious or more aggressive, and in 2009, while we were worried like everybody else, we viewed that the best thing we could possibly do was as much as prudently possible, we were trying to put money to work at that point in time, that wouldn’t be what we are added to today.
As we should be cautious, we should keep investing, because we have strategies to invest and we see we have to keep growing our businesses, but on balance with excess capital, we have our own balance sheet and with funds we are just a little more cautious today in some of the more highly valued markets, but that doesn’t mean there aren’t other places and that’s really the value we have in the breadth of the franchise, because there are places still in the world that are undervalued today.
I agree. Thanks Bruce.
[Operator Instructions]. Your next question comes from Andrew Kuske with Credit Suisse. Your line is open.
Of course, it’s probably for Brain and it just relates to the ENI comparative and I appreciate that being on the results this time around, but maybe beyond the really obvious, but you might want to also address the really obvious as why did you include the ENI in your supplemental today?
We are really trying to do is get as some comparable metrics relative to the other alternative asset managers and trying to facilitate that, and if you do think about and as you know, how we think about the business that really are the easiest way to think about is with the two components, one is the economics of the asset management business itself and then the other is the tangible value of our balance sheet and so by putting out the easy ENI, it gives folks inside into the fee-related earnings as well as the carry that we look.
But more as importantly or more importantly, the amount of carry that is generating and building up in the system, and we think now the business has evolved to the stage where that has more representatives. There’s still a lag, but it's more representative of what is actually going on or as five years ago, I’m not sure it would have been as good metric for valuation purposes.
And then maybe just a follow-up on that when you think about your ENI calculation and how it compares to some of the US holds. How do you think about the quality of your ENI number versus the US holds tend to be very reliant upon IPO markets for cycling assets?
Yes. So, I think really what that's giving at is on the carry side. And so we would maintain that, the IPO markets obviously are relevant as an exit for certain types of investments. We feel fortunate in that because of the breadth of the business that we are in.
And in particular the nature of some of that business is that there in that they lend to a much wider variety of exit opportunities. So we think that our ability to crystallize carry should more which should be more robust as a result, because we have more options on how we can monetize an investment.
Okay, that's great. Thank you.
There are no further questions queued up at this time. I will turn the call back over to Fleming for closing remarks.
Thank you, operator. And with that, we will end today's call. Thank you everybody for participating.
This concludes today's conference. Thank you for participating and have a good day.