Brookfield Asset Management Inc. (TSX: BAM.A)(NYSE: BAM)(EURONEXT:
BAMA) -
Investors, analysts and other interested parties can access
Brookfield Asset Management's 2010 First Quarter Results as well as
the Shareholders' Letter and Supplemental Information on
Brookfield's website under the Investor Centre/Financial Reports
section at www.brookfield.com.
The 2010 Results conference call can be accessed via webcast on
May 6, 2010 at 2 p.m. Eastern Time at www.brookfield.com or via
teleconference at 1-800-319-4610 toll free in North America. For
overseas calls please dial 1-604-638-5340, at approximately 1:50
p.m. Eastern Time. The teleconference taped rebroadcast can be
accessed at 1-800-319-6413 or 604-638-9010 (Password 2811#).
Brookfield Asset Management Inc. (TSX: BAM.A)(NYSE:
BAM)(EURONEXT: BAMA) today announced its financial results for the
first quarter ended March 31, 2010. The financial results are
reported under International Financial Reporting Standards ("IFRS")
unless otherwise noted.
Cash Flow From Operations
Cash flow from operations for the first quarter based on IFRS
results increased to $366 million ($0.60 per share) from $248
million ($0.42 per share), representing a 48% increase. Cash flow
from operations in 2009 based on Canadian GAAP results was $273
million ($0.46 per share). The operating results benefitted from
continued strong performance by the company's renewable power and
commercial office businesses and disposition gains within the
company's specialty investment operations.
-----------------------------
Three months ended March 31
----------------------------------------------------------------------------
US$ millions (except per share amounts) 2010(1) 2009(1) 2009(2)
----------------------------------------------------------------------------
Cash flow from operations $ 366 $ 248 $ 273
- per share 0.60 0.42 0.46
----------------------------------------------------------------------------
1. IFRS basis.
2. Canadian GAAP basis.
"We continue to see a number of positive developments throughout
our businesses which point towards a continued economic recovery
and growth in the cash flows from our existing businesses,"
commented Bruce Flatt, CEO of Brookfield. "We should also benefit
from the substantial amount of capital we invested over the past 24
months and are continuing to see many attractive investment
opportunities, which we hope to capitalize on."
Net Income
Net income prior to fair value adjustments, depreciation and
deferred taxes was $281 million in the first quarter of 2010,
compared to $228 million in the 2009 quarter, reflecting improved
operating cash flows. The company reported net income of $93
million in 2009 under Canadian GAAP. Adjustments to arrive at net
income in 2010 consist largely of accounting depreciation on the
power generating facilities and industrial businesses, partially
offset by net revaluation gains. Net income in 2009 under IFRS
reflected a reduction in the appraisal values of the commercial
office portfolio, whereas office properties are not fair valued
under Canadian GAAP and, accordingly, no such adjustment was
recorded.
Three months ended March 31
------------------------------
US$ millions (except per share amounts) 2010(1) 2009(1) 2009(2)
----------------------------------------------------------------------------
Cash flow from operations $ 366 $ 248 $ 273
Less: disposition gains (85) (20) -
----------------------------------------------------------------------------
Net income before fair value and other
adjustments 281 228 273
Fair value adjustments, depreciation and
deferred taxes (117) (520) (180)
----------------------------------------------------------------------------
Net income (loss) $ 164 $ (292) $ 93
- per share 0.25 (0.52) 0.15
----------------------------------------------------------------------------
1. IFRS basis.
2. Canadian GAAP basis.
This news release and accompanying financial statements make
reference to cash flow from operations on a total and per share
basis. Cash flow from operations is defined as net income prior to
depreciation and amortization, revaluation gains or losses, future
income taxes and includes certain disposition gains that are not
otherwise included in net income as determined under IFRS, together
with the associated interests of non-controlling shareholders.
Brookfield uses cash flow from operations to assess its operating
results and the value of its business and believes that many of its
shareholders and analysts also find this measure of value to them.
The company provides the components of cash flow from operations
and a full reconciliation between cash flow from operations and net
income in the Supplemental Information accompanying this news
release. Cash flow from operations is a non-IFRS measure which does
not have any standard meaning prescribed by IFRS and therefore may
not be comparable to similar measures presented by other
companies.
Underlying Value
The underlying value of Brookfield's common equity was $29.09
per share at quarter end, representing an annualized 10% increase
from $28.53 per share at year end, including the dividend received
by shareholders during the quarter.
The increase was due to operating cash flow and disposition
gains retained during the quarter and improvements in the
valuations of our commercial office portfolio due to favourable
leasing activity. Brookfield's renewable power and utility assets
are revalued on an annual basis, so this represents only a partial
update of underlying values. Please see page 6 of this release for
further information on the company's underlying values.
Dividend Declaration
The Board of Directors declared a dividend of US$0.13 per Class
A Common Share, payable on August 31, 2010, to shareholders of
record as at the close of business on August 1, 2010. The Board
also declared all of the regular monthly and quarterly dividends on
its preferred shares.
Information on Brookfield Asset Management's declared share
dividends can be found on the company's website under Investor
Centre/Stock and Dividend Information.
Additional Information
The Letter to Shareholders and the company's Supplemental
Information for the quarter ended March 31, 2010 contain further
information on the company's strategy, operations and financial
results. Shareholders are encouraged to read these documents, which
are available on the company's website.
The attached statements are based primarily on information that
has been extracted from our interim financial statements for the
three months ended March 31, 2010, which have been prepared using
the standards and interpretations currently issued under
International Financial Reporting Standards ("IFRS") and expected
to be effective at the end of our first annual IFRS reporting
period, which is intended to be December 31, 2010. Certain
accounting policies expected to be adopted under IFRS may not be
adopted and the application of such policies to certain
transactions or circumstances may be modified and as a result the
pro-forma March 31, 2010 and December 31, 2009 underlying values
prepared on a basis consistent with IFRS are subject to change. The
amounts have not been audited or subject to review by our external
auditor.
Brookfield Asset Management Inc., focused on property, renewable
power and infrastructure assets, has over $100 billion of assets
under management and is co-listed on the New York and Toronto Stock
Exchanges under the symbol BAM and on NYSE Euronext under the
symbol BAMA. For more information, please visit our website at
www.brookfield.com.
Please note that Brookfield's audited annual and unaudited
quarterly reports have been filed on EDGAR and SEDAR and can also
be found in the investor section of our website at
www.brookfield.com. Hard copies of the annual and quarterly reports
can be obtained free of charge upon request.
For more information, please visit our website at
www.brookfield.com.
Note: This news release contains forward-looking information
within the meaning of Canadian provincial securities laws and
"forward-looking statements" within the meaning of Section 27A of
the U.S. Securities Act of 1933, as amended, Section 21E of the
U.S. Securities Exchange Act of 1934, as amended, "safe harbour"
provisions of the United States Private Securities Litigation
Reform Act of 1995 and in any applicable Canadian securities
regulations. The words "hope," "opportunities," "expected,"
"intended," and "payable," derivations thereof and other
expressions, including conditional verbs such as "may," are
predictions of or indicate future events, trends or prospects or
identify forward-looking statements. Forward-looking statements in
this news release include statements in regards to investment
opportunities, accounting policies adopted under IFRS and the
potential modification of the application thereof. Although
Brookfield Asset Management believes that its anticipated future
results, performance or achievements expressed or implied of such
assets by the forward-looking statements and information are based
upon reasonable assumptions and expectations, the reader should not
place undue reliance on forward-looking statements and information
as such statements and information involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the company to differ materially
from anticipated future results, performance or achievement
expressed or implied by such forward-looking statements and
information.
Factors that could cause actual results to differ materially
from those contemplated or implied by forward-looking statements
include: economic and financial conditions in the countries in
which we do business; the behaviour of financial markets, including
fluctuations in interest and exchange rates; availability of equity
and debt financing; strategic actions including dispositions; the
ability to complete and effectively integrate acquisitions into
existing operations and the ability to attain expected benefits;
the company's continued ability to attract institutional partners
to its Specialty Funds; adverse hydrology conditions; regulatory
and political factors within the countries in which the company
operates; acts of God, such as earthquakes and hurricanes; the
possible impact of international conflicts and other developments
including terrorist acts; changes in accounting policies to be
adopted under IFRS and other risks and factors detailed from time
to time in the company's form 40-F filed with the Securities and
Exchange Commission as well as other documents filed by the company
with the securities regulators in Canada and the United States,
including the company's most recent Management's Discussion and
Analysis of Financial Results under the heading "Business
Environment and Risks."
We caution that the foregoing factors that may affect future
results is not exhaustive. When relying on our forward-looking
statements to make decisions with respect to Brookfield Asset
Management, investors and others should carefully consider the
foregoing factors and other uncertainties and potential events.
Except as required by law, the company undertakes no obligation to
publicly update or revise any forward-looking statements or
information, whether written or oral, as a result of new
information, future events or otherwise.
STATEMENTS OF CASH FLOW FROM OPERATIONS
(Unaudited) Three months ended March
31 Segmented Total
----------------------------------------
US$ millions (except per share
amounts) 2010 2009 2010 2009
----------------------------------------------------------------------------
Asset management and other services $ 71 $ 52 $ 71 $ 52
Revenues less direct operating costs
Renewable power generation 113 117 246 217
Commercial properties 70 56 354 276
Infrastructure 30 19 97 49
Development activities 7 (12) 78 (3)
Special situations 42 8 88 45
Investment and other income 86 117 103 124
----------------------------------------------------------------------------
419 357 1,037 760
Expenses
Interest 75 60 427 335
Operating costs 58 68 93 96
Current income taxes 5 1 21 11
----------------------------------------------------------------------------
281 228 496 318
Non-controlling interests - - 215 90
----------------------------------------------------------------------------
Net income before the following 281 228 281 228
Disposition gains(1) 85 20 85 20
----------------------------------------------------------------------------
Cash flow from operations $ 366 $ 248 $ 366 $ 248
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flow from operations per common
share - diluted $ 0.60 $ 0.42 $ 0.60 $ 0.42
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Represents disposition gains recorded on sale of interests in controlled
subsidiaries that are recorded directly in equity under IFRS reporting.
Notes:
The statements of net cash flow from operations above are
prepared on a basis that is consistent with the company's
Supplemental Information (see below) and differs from net income
and loss as presented in the company's consolidated statements of
operations on page 7 of this release, which is prepared in
accordance with International Financial Reporting Standards
("IFRS"). Management uses cash flow from operations as a key
measure to evaluate performance and to determine the underlying
value of its businesses. Readers are encouraged to consider both
measures in assessing Brookfield Asset Management's results. Cash
flow from operations is equal to net income prior to "other items"
of $496 million (2009 - $318 million) as presented in the
consolidated statements of operations on page 7 of this release,
adjusted for non-controlling interests and certain disposition
gains as presented in the table above.
Cash flow from operations in this statement on a segmented basis
represents the operations of Brookfield Asset Management and is net
of carrying charges associated with related liabilities and cash
flows attributable to non-controlling interests. Readers are
encouraged to refer to the company's Supplemental Information which
is available at www.brookfield.com.
STATEMENT OF CHANGES IN UNDERLYING VALUE
(Unaudited) Three months ended
March 31, 2010
----------------------
US$ millions (except per share amounts) Total Per Share
----------------------------------------------------------------------------
Opening $ 16,706 $ 28.53
Operating cash flow 366 0.60(3)
Fair values 101 0.11
Foreign currency 3 0.00
Unrecognized values(1) 150 0.24
Depreciation and amortization (157) (0.26)
Preferred share dividends (16) na(3)
Other 3 0.00
----------------------------------------------------------------------------
450 0.69
Common share dividends paid (75) (0.13)
----------------------------------------------------------------------------
Closing equity for common shareholders $ 17,081 $ 29.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprised of:
Common equity under IFRS(2) $ 14,881 $ 25.52
Values not recognized under IFRS(3) 2,200 3.57
----------------------------------------------------------------------------
$ 17,081 $ 29.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Management estimate of fair value increment attributable to assets that
are not revalued under IFRS such as residential development assets and
industrial businesses, and changes therein.
2. Presented on a pre-tax basis.
3. Operating cash flow per share presented net of preferred share dividends.
STATEMENTS OF INVESTED CAPITAL(1)
Net Invested
Consolidated(2) Capital(3)
----------------------------------------
December December
(Unaudited) March 31 31 March 31 31
US$ millions 2010 2009 2010 2009
----------------------------------------------------------------------------
Assets
Asset management and other services $ 1,591 $ 1,640 $ 750 $ 803
Operating platforms
Renewable power generation 15,034 15,017 7,895 8,018
Commercial properties 22,851 21,973 5,132 4,841
Infrastructure 6,358 6,379 1,567 1,546
Development activities 8,941 8,630 2,473 2,403
Special situations 6,641 6,865 1,631 1,631
Cash and financial assets 2,272 1,996 1,805 1,645
Other assets 950 947 950 945
----------------------------------------------------------------------------
$ 64,638 $ 63,447 $ 22,203 $ 21,832
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Corporate borrowings $ 2,471 $ 2,593 $ 2,471 $ 2,593
Subsidiary borrowings 23,691 23,478 802 779
Other liabilities 8,412 8,681 1,980 2,028
----------------------------------------------------------------------------
34,574 34,752 5,253 5,400
Capitalization
Capital securities 1,699 1,641 656 632
Shareholders' equity
Non-controlling interests 12,071 11,254 - -
Preferred equity 1,413 1,144 1,413 1,144
Common equity(4) 14,881 14,656 14,881 14,656
----------------------------------------------------------------------------
30,064 28,695 16,950 16,432
----------------------------------------------------------------------------
$ 64,638 $ 63,447 $ 22,203 $ 21,832
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. Balances exclude upward adjustments to reflect the fair value of
assets that are carried at the lower of cost or net realizable value or
otherwise not recognized under IFRS, and also exclude deferred tax
adjustments that reflect the application of tax rates to the difference
between these carrying values and tax values (see page 6).
2. Consolidated balances are prepared on a basis consistent with the
company's interim financial statements with the principal exception that
assets are organized by business segment and balances are not classified
between current and long term.
3. Net invested capital balances prepared on a segmented basis, net of
non-recourse debt and non-controlling interests.
4. Common equity and non-controlling interests are presented on a pre-tax
basis.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three months ended March 31
----------------------------
US$ millions (except per share amounts) 2010 2009
----------------------------------------------------------------------------
Total revenues $ 2,744 $ 2,033
Asset management and other services 71 52
Revenues less direct operating costs
Renewable power generation 239 211
Commercial properties 279 217
Infrastructure 47 31
Development activities 70 (10)
Special situations 74 38
Equity accounted income 115 74
Investment and other income 142 147
----------------------------------------------------------------------------
1,037 760
Expenses
Interest 427 335
Operating costs 93 96
Current income taxes 21 11
----------------------------------------------------------------------------
Net income prior to other items 496 318
Other items
Depreciation and amortization (179) (185)
Revaluation and other items 128 (787)
Future income taxes (36) 51
----------------------------------------------------------------------------
Net income (loss) $ 409 $ (603)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) attributable to:
Common shareholders $ 164 $ (292)
Non-controlling interests 245 (311)
----------------------------------------------------------------------------
$ 409 $ (603)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per common share
Diluted $ 0.25 $ (0.52)
Basic $ 0.26 $ (0.52)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes:
The following table presents certain items of the Consolidated Statement of
Operations prior to and after reflecting non-controlling interests.
(Unaudited) Three months ended March 31 2010 2009
--------------------------------
US$ millions Total Net Total Net
----------------------------------------------------------------------------
Net income prior to other items $ 496 $ 281 $ 318 $ 228
----------------------------------------------------------------------------
Depreciation and amortization (179) (157) (185) (160)
Revaluation and other items 128 63 (787) (388)
Future income taxes (36) (23) 51 28
----------------------------------------------------------------------------
(87) (117) (921) (520)
----------------------------------------------------------------------------
Net income $ 409 $ 164 $ (603) $ (292)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Brookfield Asset Management Inc.
Letter to Shareholders
Overview
We are seeing improved fundamentals in virtually all of our
businesses, which confirms to us that the economic recovery has
begun to take hold. As a result, our operations performed well in
the first quarter and should continue to do so for the balance of
the year. And while we are cognisant of the broad set of challenges
the world has in front of it, we believe that this continues to be
an exceptional period of time to be acquiring assets, as virtually
everything we have been purchasing has been done so at meaningful
discounts to replacement cost. This enables us to have a
significant margin of safety with these acquisitions, and the
potential to generate very attractive returns over the longer
term.
Among the various transactions we are working on, two moved from
passive debt holdings into active negotiations during the quarter.
The first is our bid to assist General Growth to recapitalize
itself, and the second is our involvement with a portfolio of
office properties in Washington, D.C. While each is important to
us, they have already received more than their fair share of press.
So before covering these, we would like to tell you about how we
are doing otherwise.
Operating Results
Our renewable power business experienced favourable hydrology
conditions that enabled us to generate electricity at a level above
the long-term average. Furthermore, the long-term profile of our
contracts enabled us to generate strong cash flows, despite lower
spot energy prices across North America. We achieved average
revenues for the quarter of $81 per megawatt hour compared with $73
per megawatt hour last year. Assuming average water conditions,
this should enable us to produce strong returns for 2010.
During the quarter, we acquired a 15 megawatt hydro facility in
Maine and completed construction of two projects in Brazil
totalling 65 megawatts, which are now operational. We also signed
contracts for the sale of electricity for two new development
projects which enabled us to launch construction. These included a
20-year contract on a 165 megawatt +/-$425 million wind facility in
southern Ontario and a 40-year contract on a 45 megawatt +/-$200
million hydro facility in British Columbia.
Our commercial office business generated stronger cash flows in
the current quarter than in 2009. Leasing was strong in Canada and
Australia, and for the first time in two years, picked up in
virtually all markets across the U.S. Occupancy in our portfolio
remains solid and we believe that rental rates have bottomed in
most global markets. Decisions which had been delayed on space
requirements are now back on the agenda with most corporations. In
this regard, we leased approximately 3 million square feet of space
in our portfolio, which was more than 50% of the total space leased
in all of 2009.
We continue to advance the leasing and construction of three new
signature office projects. Our 1.2 million square foot Bay Adelaide
Centre in Toronto is complete and now close to 80% leased. Our
930,000 square foot property in Perth is 75% leased to BHP Billiton
and scheduled for completion in 2011, and our 800,000 square foot
Faria Lima property in central Sao Paulo is now 30% complete, with
substantial leasing demand. We also added an office development
site in London to our future pipeline.
Subsequent to quarter end, we received all regulatory and
shareholder approvals to convert our 90% owned Canadian office
company into a REIT. Subject to price and capital allocation
decisions, our intention will be to decrease our interest in this
entity over time, and turn this into a widely held large
capitalization REIT in the Canadian market, while at the same time
liberating capital to be redeployed elsewhere in our
operations.
Our residential housing operations outside of the U.S. achieved
strong results in the first quarter. The Canadian industry has been
consistently strong, driven in part by a favourable environment
which we expect to continue. In Australia, residential demand was
strong enough that it led the government to continue to raise rates
to cool the market. Brazil has also been robust, with strong demand
across the board. Finally, in the U.S., residential housing appears
to have passed through the bottom of the cycle.
As a further indication of what is occurring globally, our
timber operations had their first good month in over two years in
April and reported reasonable cash flows. Orders began to increase
across North America, and for the first time ever, Chinese demand
was meaningful for our business. It is expected that our timber
operations will report substantially increased results for 2010,
although not yet at the expected average level of cash flow. We
have been "storing our trees" over the past few years, so as prices
increase we will begin to sell our surplus inventory. As a result,
for a period of time the cash flows from this business should
exceed the average levels expected over the longer term.
Our regulated transmission, rail and port operations contributed
stable returns, as one would expect from regulated rate-base
businesses. On a positive note, we agreed with our constituents to
a new five-year tariff for our coal terminal in Australia. With all
parties' consent we have filed approval of these rates with
regulators. In our other port operations, volumes increased 15%
year-over-year, as inventory restocking pushed shipments of goods
higher globally. In our pipeline business in the U.S., we have an
agreement in principle to settle the issues encountered on the NGPL
pipeline with the U.S. Federal Regulatory Energy Commission.
A number of our restructuring fund investments, which by their
nature are cyclical investments, have seen dramatic positive
changes in their business outlook over the past six months. This
includes our investments in Norbord and Ainsworth, both of which
produce OSB panelboard products. OSB prices started the year near
$150 per unit and closed in on $400 in the past few weeks. During
the quarter, we sold nine million shares of Norbord for $150
million in order to enhance the float of the company, although we
continue to own 63% on a fully diluted basis. At the same time, we
reached agreement to acquire a further 25% of Ainsworth, an
investment held for many years in our restructuring fund, from
another large holder, increasing our interest in this company to
53%, subject to competition and anti-trust approvals. Once this is
in place, we will consider our options for both of these
investments.
For the balance of this year and next, we expect to focus on
investing substantial amounts of capital. In this regard, it has
been difficult to keep up with the number of very attractive
opportunities which are finding their way to us. We are working
hard to maintain our financial flexibility and not stretch our
human resources, in order to be in a position to respond quickly to
the exceptional transactions.
And while we are always harvesting some capital in order to fund
new growth opportunities in our operations, we believe that on
balance, most of our assets continue to have major value increases
coming as the full recovery takes hold. Furthermore, a vast
majority of the assets we recently purchased are still being
operationally improved and integrated into our risk and financing
plans. It will take time for the full value of many of these assets
to completely surface.
How We Generate Returns
As many of you know, from time to time we like to use these
shareholder letters to describe various areas of our business to
you in more detail. This quarter, we decided to focus on how we
attempt to differentiate ourselves from others, and how we generate
value for you. The following attempts to capture this.
Simply stated, our business strategy is to provide world-class
asset management services on a global basis, focused on real assets
such as property, renewable power and infrastructure assets. Our
business model is to utilize our global reach to identify and
acquire high quality assets at favourable valuations, finance them
prudently, and then enhance the cash flows and values of these
assets through our leading operating platforms to achieve reliable
attractive long-term total returns for the benefit of our clients
and the company.
We focus on assets and businesses that form part of the critical
backbone of economic activity, such as generating reliable clean
electricity, providing high quality office space in major urban
markets, or transporting goods and resources to or from key
locations. These assets and businesses typically benefit from some
form of barrier to entry, regulatory regime or other competitive
advantage that provides stability in cash flows, strong operating
margins and value appreciation over the longer term.
Our business is organized into a number of operating groups that
we have established over many years, and is comprised of more than
15,000 employees. These groups, with their broad operating
capabilities and expertise, enable us to maximize the value of our
operating assets, businesses and investments.
To facilitate an efficient and risk averse way to finance our
business, we have established a number of private and public
entities to enable our clients and other investors to participate
with us in the ownership of these assets. Our clients are sovereign
wealth funds, pension funds, insurance companies, high net worth
individual investors and retail customers on a global basis. These
funding entities provide us with additional capital, and often
provide compensation for our efforts on their behalf, which enables
us to increase operating cash flow per share at a faster rate than
if we relied solely on deploying our own capital. These activities
also provide us with additional capital to pursue a broader range
of transactions and expand our operating base without straining our
own resources, as well as establishing important relationships with
many of the world's premier global investors.
We often get asked how we are compensated in our asset
management business, and how we differ from other asset management
companies. We believe that we differ in three important ways.
-- The first is the industry leading operating platforms we have built up
over many years. Our commitment to maintaining these platforms has
enabled us to attract and retain best-in-class people and gives us the
capability to maximize the long-term cash flows and values of our
assets.
-- The second difference is our substantial permanent capital base which
today is approximately $33 billion. As a result, we are in a position to
commit substantial amounts of capital to the same investment strategies
alongside our clients. This invested capital aligns our interests with
our clients, generates substantial cash flows to reinvest and provides a
solid capitalization to further enhance our role as a reliable sponsor
of investment transactions.
-- The third difference is how we seek to benefit from managing assets for
our clients and investment partners. The significant annual cash flow
that we generate on our own capital, and the scale of our operations
allow us to fund our activities without being overly dependent on large
base management fee streams to cover the operating costs that we incur.
And while we often receive fees from clients, our capital base enables
us to be more open to earning returns in the form of equity
participations or other long-term interests which typically align well
with our clients and co-investors.
As examples, the following are some of the ways we benefit from
these asset management activities:
-- In many cases, we are compensated in a traditional manner, which
includes a base management fee and some form of incentive return that is
based on performance. As noted above, our strong cash flow position
allows us to skew our returns towards performance based compensation if
we choose.
-- Another way we generate returns is to assume certain risks from others,
and therefore our rewards are commensurately higher or if we are wrong,
lower. For example, in the case of our 50%-owned Canadian Brookfield
Renewable Power Fund, we purchase almost all of the electricity
generated by it at a fixed rate. This provides the other investors in
the Fund with cash flow stability to support a reliable payout
distribution policy, consistent with the profile of the Fund. On the
other hand, it provides us with additional electricity and an increased
opportunity to participate in future increases (or decreases) in
electricity prices.
-- We also list some of our business units on public stock exchanges. For
example, we took our Brazilian residential business public on the
Bovespa in 2006 and since then we have completed two mergers and two
further equity financings. While we have earned no direct compensation
in respect of the capital provided by other shareholders in the business
(i.e., no fees or promotes are paid to us by the other shareholders),
these financings enabled us to establish an initial value for the
business greater than when we invested in the business, and also allowed
us to expand into new geographic markets and the important middle-income
segment without committing additional capital resources from our own
balance sheet. The company had a record year in 2009 and we have
benefitted from our participation in these increased returns as an
investor, far greater than that we would have been able to, if we had
not taken the company public.
There are many other ways we utilize our asset management
activities to generate returns, and we will try to point these out
to you in the future. In the interim, rest assured that our focus
is on generating the maximum amount of value out of our franchise
on a per share basis. We are never too concerned how we earn this
value, or in what form it comes. On the other hand, we are very
focused on ensuring we generate solid returns for our clients, and
that the value of our asset management franchise ultimately accrues
to our shareholders.
International Financial Reporting Standards (IFRS) Balance
Sheet
Over the past year, we have provided supplementary disclosure on
how our IFRS statements will look once IFRS accounting is adopted
by us. As you will see in our detailed materials, we have now fully
converted our financial statements to IFRS accounting, and the
March 31 balance sheet as well as the first quarter results are
completed under these standards.
While no accounting methodology is perfect, we believe IFRS
accounting is the most representative of the true underlying
economics of a business such as ours. As a result, for the first
time we believe our adjusted balance sheet, cash flow and income
statement represent a close approximation of the tangible asset
value of the company (value of assets with no value reflected for
the franchise). And while we are sure we will have to refine our
disclosures over the next year to get it "right" for you, we
believe that at the end of that period, you will have a much
greater understanding of our company. An abridged balance sheet is
as follows:
($billions)
------------
Assets $ 66.0
------------
Corporate debt $ 3.5
Non-recourse liabilities 22.5
Other payables 7.0
Equity of the business 33.0
------------
$ 66.0
------------
The $33 billion of permanent equity, which includes deferred
taxes, (which assumes we liquidate the business; something we do
not intend to do) supports a $66 billion balance sheet with
approximately $26 billion of liabilities, only $3.5 billion of
which are recourse to the parent company. On top of this, we manage
a further +/-$40 billion of client assets both in private funds and
public securities which are not consolidated onto our balance
sheet.
On an adjusted IFRS value basis, the underlying value of the
company for a common shareholder increased to $29.09 from $28.53 at
year end. Adding to that, the $0.13 dividend received by
shareholders, this resulted in approximately a 10% annualized
return during the quarter. Furthermore, this excludes any
revaluation of our power or utilities operations as we have chosen
to revalue these only once a year.
General Growth
Background:
Two years ago, prior to General Growth entering bankruptcy in
the U.S., we approached General Growth to complete a "pre-packaged"
recapitalization plan with us. Events overtook us but we were
fortunate to have completed extensive due diligence on General
Growth in order to understand the assets, and the management
platform that they had. During early 2009, this led us to both
acquire a significant debt position in the company, and more
importantly, to educate a number of our institutional clients on
our thesis that General Growth was a company which fit the profile
of the perfect restructuring candidate. These actions led us to an
agreement with General Growth in the first quarter of 2010 on our
sponsorship, with a number of our Real Estate Turnaround Fund
partners, of a recapitalization plan for General Growth, that was
shortly thereafter supplemented with investments alongside us by
two best-in-class investors, Pershing Square Capital and Fairholme
Capital, all of whom have been exceptional partners.
Our view of General Growth was and is very simple. General
Growth is a great company, which has excellent assets and whose
scale, quality and platform would be impossible to replicate other
than possibly by paying substantial premiums to tangible value for
assets over a very long period of time. Other than a few events
conspiring to cause the company a number of issues (too much
short-term debt, the total shut-down of the capital markets, and a
consumer-led U.S. recession), this opportunity would never have
been available.
Too often we see companies with broken operating models in
bankruptcy. Restructuring these companies is very hard work and
sometimes the price at which you acquire your debt does not justify
the risk taken. We try to avoid these situations. On the other
hand, the great restructurings involve a company which is
experiencing temporary issues due to market conditions or one which
is overleveraged, causing stock market investors to value it at
liquidation value instead of as a going concern.
General Growth has outstanding assets, great people, and a
business which we believe will continue to grow. Seldom have
premier retail shopping malls sold at capitalization rates above
6.5%. We believe that General Growth's portfolio, with appropriate
sponsorship, has the potential to trade at lower capitalization
rates (i.e., higher values) than this as the going-in cash flows
are unduly suppressed because of what they have had to endure for
the last two years. As a result, growth rates should be far greater
than comparable portfolios and overall returns higher.
Our Plan:
Our plan will result in new General Growth ("GGP") emerging from
bankruptcy on a standalone basis with one of the largest premier
quality portfolios of retail shopping malls in the U.S. GGP will
emerge with strong cash flows, a restructured balance sheet, and
predominantly long-term non-recourse debt. On emergence, existing
shareholders will own approximately 34% of GGP, which will be one
of the largest, high quality publicly traded real estate entities
in the U.S., and the second-largest retail shopping mall company in
the U.S. GGP will have a prudently capitalized balance sheet, and
extended maturities on virtually all of its property financings,
and no corporate debt, other than a $1.5 billion newly structured
corporate facility.
We believe that the Brookfield sponsored stand-alone
recapitalization plan agreed to with General Growth provides an
exceptional investment opportunity for existing shareholders as
compared to selling the company today. Our plan is to assist GGP to
grow, including re-establishing capital markets credibility,
lowering the company's cost of capital, redeveloping existing
properties and expanding internationally.
The Alternative Plans:
General Growth's largest competitor has made proposals to buy
the company and alternative proposals to become a large investor in
the company. We are very pleased with the support for our vision of
the value of the General Growth franchise through our
recapitalization plan which enables shareholders to participate in
the future of General Growth. In our view, this is the wrong time
to sell the company. A General Growth shareholder who would like to
sell their shares has access to liquidity in cash today in the
stock market, and the alternative of receiving a competitors' stock
at valuations much higher than that of the current multiple of
General Growth makes no sense. Should any shareholder wish to buy
these shares, they have ready access to this in the open market
today.
In regards to the other alternative plan, in very simple terms,
the idea of an investment in General Growth by its largest
competitor is absurd. They suggested our plan should be rejected
because we are receiving warrants as consideration for our
commitment and sponsorship. No doubt, should they try to buy the
company again in the future, the warrants will make them pay a
little more. However, the amount is irrelevant to long-term returns
for shareholders and the opportunity presented by the Brookfield
sponsored plan is much more substantial. To put this into
perspective, the value of the warrants is less than 2% of
enterprise value, and therefore not meaningful to the long-term
value proposition of a $30 billion company.
Summary:
With our plan, we have $2.6 billion reasons, and no conflicts,
to assist General Growth to enhance the value of their company for
the benefit of all shareholders. On the other hand, if the largest
competitor is able to acquire a negative control block (they may
not technically control General Growth with their investment, but
nobody else can ever buy the company and they will never have an
incentive to sell it should an appropriate opportunity arise) they
have every reason to frustrate the ongoing success of General
Growth to the benefit of themselves. The business conflicts which
will inevitably arise are insurmountable. This includes employee
retention issues, potential corporate opportunity conflicts, issues
with retailers and most importantly the anti-trust issues, which
would result from this type of situation on a day-to-day basis. The
story is as simple as, if given the choice, would any company
willingly sell 25% of its shares to its major competitor. Think
about this in the context of Wells Fargo and JP Morgan, Pepsi and
Coke, Apple and Microsoft, or Target and Walmart.
Portfolio of Washington Properties
We also acquired approximately 50% of the unsecured bank debt of
a +$2.5 billion portfolio of office properties in Washington D.C.
The portfolio has term financing at the asset level but defaulted
on the interest payments on its unsecured debt. We were approached
to assist with this portfolio after the ownership group defaulted
on its obligations, which eventually led to us purchase the
unsecured bank debt to assist a number of financial
institutions.
Alternative outcomes include the borrower repaying our lending
group at par plus accrued interest, or working out a mutually
satisfactory reorganization for all involved. In the meantime we
have started foreclosure proceedings which may entail us taking
title to the assets, or the borrower may decide to try to stop us
from doing so by filing the borrowing entity into bankruptcy. We
believe our loan is well secured, and we will achieve a favourable
outcome under virtually all circumstances.
Summary
We remain committed to being a world-class asset manager, and
investing capital for you and our investment partners in
high-quality, simple-to-understand assets which earn a solid
cash-on-cash return on equity, while emphasizing downside
protection of the capital employed.
The primary objective of the company continues to be generating
increased cash flows on a per share basis, and as a result, higher
intrinsic value over the longer term.
And, while I personally sign this letter, I respectfully do so
on behalf of all of the members of the Brookfield team, who
collectively generate the results for you. Please do not hesitate
to contact any of us, should you have suggestions, questions,
comments, or ideas.
J. Bruce Flatt, Chief Executive Officer
May 6, 2010
Note: This letter to shareholders contains forward-looking
information within the meaning of Canadian provincial securities
laws and "forward-looking statements" within the meaning of Section
27A of the U.S. Securities Act of 1933, as amended, Section 21E of
the U.S. Securities Exchange Act of 1934, as amended, "safe
harbour" provisions of the United States Private Securities
Litigation Reform Act of 1995 and in any applicable Canadian
securities regulations. The words, "potential," "scheduled,"
"future," "intention," "intend," "begin," "typically," "pursue,"
"often," "ensuring," "emerging," "grow," "plan," "expect,"
"predominantly," "believe," "objective," "continue," "enable,"
"generating," "generate," "maintain," "coming," "providing,"
"expand," and derivations thereof and other expressions, including
conditional verbs such as "will," "can," "may," "would" and
"should" are predictions of or indicate future events, trends or
prospects which performance of our operations in 2010;
opportunities to acquire assets; our potential to generate returns
over the longer term; our beliefs about commercial rental rates;
advancement and scheduled completion of our office projects;
maintenance of our financial flexibility; our ownership interest in
our Canadian office unit; our expectations about the residential
housing industry and our timber operations; our plans to sell our
surplus timber inventory; our options in connection with our
investments in Norbord and Ainsworth; our expectations regarding
our capital investments; our beliefs about future increases in and
maximization of the value of our assets; our ability to increase
cash flow resulting from capital provided by our clients and to
pursue transactions and expand our operating base; how we differ
from other asset management companies; our beliefs about IFRS
accounting and the IFRS presentation of our balance sheet; our
beliefs about the future of General Growth and our recapitalization
plan for General Growth; our beliefs about our investment in a
portfolio of office properties in Washington D.C.; our primary
objective to increase cash flows on a per share basis; and other
statements with respect to our beliefs, outlooks, plans,
expectations, and intentions. Although Brookfield Asset Management
believes that its anticipated future results, performance or
achievements expressed or implied by the forward-looking statements
and information are based upon reasonable assumptions and
expectations, the reader should not place undue reliance on
forward-looking statements and information because they involve
known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the
company to differ materially from anticipated future results,
performance or achievement expressed or implied by such
forward-looking statements and information.
Factors that could cause actual results to differ materially
from those contemplated or implied by forward-looking statements
include: economic and financial conditions in the countries in
which we do business; rate of recovery of the current financial
crisis; the behaviour of financial markets, including fluctuations
in interest and exchange rates; availability of equity and debt
financing and refinancing; strategic actions including
dispositions; the ability to complete and effectively integrate
acquisitions into existing operations and the ability to attain
expected benefits; adverse hydrology conditions; regulatory and
political factors within the countries in which the company
operates; tenant renewal rates; availability of new tenants to fill
office property vacancies; tenant bankruptcies; acts of God, such
as earthquakes and hurricanes; the possible impact of international
conflicts and other developments including terrorist acts; and
other risks and factors detailed from time to time in the company's
form 40-F filed with the Securities and Exchange Commission as well
as other documents filed by the company with the securities
regulators in Canada and the United States including Management's
Discussion and Analysis of Financial Results under the heading
"Business Environment and Risks."
We caution that the foregoing list of important factors that may
affect future results is not exhaustive. When relying on our
forward-looking statements to make decisions with respect to
Brookfield Asset Management, investors and others should carefully
consider the foregoing factors and other uncertainties and
potential events. Except as required by law, the company undertakes
no obligation to publicly update or revise any forward-looking
statements or information, whether written or oral, that may be as
a result of new information, future events or otherwise.
Contacts: Investors/Media Brookfield Asset Management Inc.
Katherine Vyse, SVP, Investor Relations and Communication (416)
369-8246 (416) 363-2856 (FAX) kvyse@brookfield.com
www.brookfield.com
Brookfield Asset Managem... (TSX:BAM.A)
Historical Stock Chart
Von Jun 2024 bis Jul 2024
Brookfield Asset Managem... (TSX:BAM.A)
Historical Stock Chart
Von Jul 2023 bis Jul 2024
