Investors, analysts and other interested parties can access
Brookfield Asset Management's 2010 Second Quarter Results as well
as the Shareholders' Letter, Financial Review and Supplemental
Information on Brookfield's website under the Investor
Centre/Financial Reports section at www.brookfield.com.
The 2010 Second Quarter Results conference call can be accessed
via webcast on August 6, 2010 at 11 a.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 10:50 a.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
second quarter ended June 30, 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 second quarter increased to
$327 million ($0.53 per share) from $294 million ($0.49 per share)
in the second quarter of 2009, representing an 11% increase. The
operating results benefited from continued strong performance by
the company's commercial office businesses reflecting high
occupancy levels and improved leasing markets as well as
disposition gains within the company's power generation and
specialty investment operations. Operating returns from
infrastructure operations increased due to improving economic
conditions and investment of additional capital at favourable
returns, while lower water levels more than offset the impact of
higher realized prices within the company's power generating
operations.
Three months ended June
30 Six months ended June 30
--------------------------------------------------
US$ millions 2010 2009 2009 2010 2009 2009
(except per share amounts) IFRS IFRS CGAAP IFRS IFRS CGAAP
----------------------------------------------------------------------------
Cash flow from operations $ 327 $ 294 $ 276 $ 693 $ 542 $ 549
- per share $ 0.53 $ 0.49 $ 0.46 $ 1.13 $ 0.91 $ 0.92
----------------------------------------------------------------------------
"The current environment is providing us with favourable
circumstances to increase the returns from our existing businesses
by driving operating excellence," commented Bruce Flatt, CEO of
Brookfield. "At the same time, given the volatility in the capital
markets, there continue to be a number of attractive investment
opportunities that we are reviewing to add to our portfolio of
assets."
Net Income
The following table reconciles cash flow from operations to net
income attributable to common shareholders. Adjustments to arrive
at net income in 2010 consist largely of accounting depreciation on
power generating facilities and industrial businesses, which for
the six month period was 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 in the same period
under that basis of accounting.
Three months ended June
30 Six months ended June 30
--------------------------------------------------
US$ millions 2010 2009 2009 2010 2009 2009
(except per share amounts) IFRS IFRS CGAAP IFRS IFRS CGAAP
----------------------------------------------------------------------------
Cash flow from operations $ 327 $ 294 $ 276 $ 693 $ 542 $ 549
Less: disposition gains(1) (102) (23) - (187) (43) -
----------------------------------------------------------------------------
Net income before fair
value and other
adjustments 225 271 276 506 499 549
Fair value adjustments,
depreciation and deferred
taxes (136) (613) (129) (253) (1,133) (309)
----------------------------------------------------------------------------
Net income (loss)
attributable to common
shareholders $ 89 $ (342) $ 147 $ 253 $ (634) $ 240
- per share $ 0.12 $(0.60) $ 0.24 $ 0.37 $ (1.12) $ 0.39
----------------------------------------------------------------------------
(1) Recorded in equity under IFRS, as opposed to net income.
(2) Presented net of non-controlling interests.
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, and
after deducting 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 available
at www.brookfield.com and on page 8 of this 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.
Net Asset Value
The net asset value of Brookfield's common equity was $29.69 per
share at quarter end. Brookfield's renewable power and utility
assets are revalued on an annual basis, so this represents only a
partial update of net asset values. Please see page 6 of this
release for further information on the company's net asset
values.
Dividend Declaration
The Board of Directors declared a dividend of US$0.13 per Class
A Common Share, payable on November 30, 2010, to shareholders of
record as at the close of business on November 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 Financial Review
and Supplemental Information for the quarter ended June 30, 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
six months ended June 30, 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. 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 "continue," "expect," "intend," derivations
thereof and other expressions, including conditional verbs such as
"may," "will," "can," "would," and "should," are predictions of or
indicate future events, trends or prospects or identify
forward-looking statements. Forward-looking statements in this news
release include statements with respect to: improving economic
conditions; attractive investment opportunities; and 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 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;
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
Three months Six months ended
ended June 30 June 30
------------------------------------
(Unaudited) Segmented Segmented
------------------------------------
US$ millions (except per share amounts) 2010 2009 2010 2009
----------------------------------------------------------------------------
Asset management and other services $ 78 $ 58 $ 149 $ 110
Revenues less direct operating costs
Renewable power generation 149 106 262 252
Commercial properties 90 89 160 145
Infrastructure 34 15 64 34
Development activities 37 22 45 10
Special situations 29 71 155 79
Investment and other income 38 50 124 158
----------------------------------------------------------------------------
455 411 959 788
Expenses
Interest 74 64 149 124
Operating costs 54 48 112 116
Current income taxes - 5 5 6
----------------------------------------------------------------------------
Cash flow from operations $ 327 $ 294 $ 693 $ 542
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flow from operations per common
share - diluted $ 0.53 $ 0.49 $ 1.13 $ 0.91
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes:
Cash flow from operations in this statement is on a segmented
basis and represents the operations of Brookfield Asset Management
net of charges associated with related liabilities and
non-controlling interests. Readers are encouraged to refer to the
company's Financial Review and Supplemental Information which is
available at www.brookfield.com.
The statements of cash flow from operations above are prepared
on a basis that is consistent with the company's Supplemental
Information 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. A reconciliation between these two bases of
presentation is provided on page 8 of this release.
STATEMENTS OF INVESTED CAPITAL(1)
Consolidated(2) Net Invested Capital(3)
---------------- ----------------------------
(Unaudited) June 30 June 30 December 31
US$ millions 2010 2010 2009
----------------------------------------------------------------------------
Assets
Asset management and other
services $ 1,524 $ 686 $ 803
Operating platforms
Renewable power generation 14,474 7,545 8,018
Commercial properties 22,556 5,126 4,841
Infrastructure 6,220 1,485 1,546
Development activities 8,608 2,596 2,403
Special situations 7,434 1,716 1,631
Cash and financial assets 2,282 1,708 1,645
Other assets 951 951 945
----------------------------------------------------------------------------
$ 64,049 $ 21,813 $ 21,832
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Corporate borrowings $ 2,625 $ 2,625 $ 2,593
Subsidiary borrowings 23,368 832 779
Other liabilities 8,389 1,832 2,028
----------------------------------------------------------------------------
34,382 5,289 5,400
Capitalization
Capital securities 1,628 627 632
Shareholders' equity
Non-controlling interests 12,142 - -
Preferred equity 1,413 1,413 1,144
Common equity(4) 14,484 14,484 14,656
----------------------------------------------------------------------------
29,667 16,524 16,432
----------------------------------------------------------------------------
$ 64,049 $ 21,813 $ 21,832
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Invested
Consolidated(2) Capital(3)
------------------------------------
December
(Unaudited) June 30 June 30 31
US$ millions (except per share amounts) 2010 2010 2009
----------------------------------------------------------------------------
Common equity $ 14,484 $ 14,484 $ 14,656
Unrecognized values under IFRS 3,000 3,000 2,050
----------------------------------------------------------------------------
Net asset value $ 17,484 $ 17,484 $ 16,706
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per common share $ 29.69 $ 29.69 $ 28.53
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 (see table below), and also exclude
deferred tax adjustments that reflect the application of tax rates to
the difference between these carrying values and tax values.
(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.
(5) See page 6 for further information on net asset values.
STATEMENTS OF CHANGES IN NET ASSET VALUE
Three months ended June Six months ended June
(Unaudited) 30, 2010 30, 2010
-------------------------------------------------
US$ millions (except per
share amounts) Total Per Share Total Per Share
----------------------------------------------------------------------------
Opening net asset value $ 17,081 $ 29.09 $ 16,706 $ 28.53
----------------------------------------------------------------------------
Operating cash flow 327 0.53(1) 693 1.13(1)
Less: realization
gains(2) (102) (0.19) (102) (0.19)
Preferred share dividends (19) n/a(1) (35) n/a(1)
Fair value changes
Asset valuations 858 1.39 1,109 1.74
Foreign currency (311) (0.50) (308) (0.50)
Depreciation and
amortization (184) (0.30) (341) (0.56)
Other (92) (0.20) (89) (0.20)
----------------------------------------------------------------------------
Total return 477 0.73 927 1.42
Common share dividends (74) (0.13) (149) (0.26)
----------------------------------------------------------------------------
Total change in value 403 0.60 778 1.16
----------------------------------------------------------------------------
Closing net asset value -
June 30 $ 17,484 $ 29.69 $ 17,484 $ 29.69
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Operating cash flow per share is presented net of preferred share
dividends.
(2) Represents the portion of disposition gains that were previously
included in equity as unrealized gains or appraisal surplus.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June Six months ended June
(Unaudited) 30 30
-------------------------------------------------
US$ millions (except per
share amounts) 2010 2009 2010 2009
----------------------------------------------------------------------------
Total revenues $ 3,081 $ 2,549 $ 5,825 $ 4,582
Asset management and other
services 78 58 149 110
Revenues less direct
operating costs
Renewable power
generation 164 208 403 419
Commercial properties 300 240 579 457
Infrastructure 58 18 105 49
Development activities 112 74 182 64
Special situations 104 34 178 72
Equity accounted income 121 91 236 165
Investment and other income 173 187 315 334
----------------------------------------------------------------------------
1,110 910 2,147 1,670
Expenses
Interest 433 367 860 702
Operating costs 109 91 202 187
Current income taxes 25 30 46 41
----------------------------------------------------------------------------
Net income prior to other
items 543 422 1,039 740
Other items
Depreciation and
amortization (208) (137) (387) (322)
Fair value changes (1) (887) 127 (1,674)
Future income taxes 39 92 3 143
----------------------------------------------------------------------------
Net income (loss) $ 373 $ (510) $ 782 $ (1,113)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss)
attributable to:
Common shareholders $ 89 $ (342) $ 253 $ (634)
Non-controlling interests 284 (168) 529 (479)
----------------------------------------------------------------------------
$ 373 $ (510) $ 782 $ (1,113)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per
common share
Diluted $ 0.12 $ (0.60) $ 0.37 $ (1.12)
Basic $ 0.12 $ (0.62) $ 0.38 $ (1.14)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes:
The foregoing table includes the results attributable to
non-controlling interests whereas the corporation's segmented
operating results presented elsewhere do not.
RECONCILIATION OF CASH FLOW FROM OPERATIONS TO NET INCOME
Three months ended June 30
---------------------------------------
(Unaudited) 2010 2009
---------------------------------------
US$ millions Total(1) Net(2) Total(1) Net(2)
----------------------------------------------------------------------
Cash flow from operations
(page 4) n/a $ 327 n/a $ 294
Less: disposition gains
recognized in equity under
IFRS n/a (102) n/a (23)
----------------------------------------------------------------------
Net income prior to other
items 543 225 422 271
Depreciation and amortization (208) (184) (137) (121)
Fair value changes (1) (5) (887) (574)
Future income taxes 39 53 92 82
----------------------------------------------------------------------
Net income (loss) attributable
to common shareholders n/a 89 n/a (342)
Non-controlling interests - 284 - (168)
----------------------------------------------------------------------
Net income (loss) (page 7) $ 373 $ 373 $ (510) $ (510)
----------------------------------------------------------------------
----------------------------------------------------------------------
Six months ended June 30
----------------------------------------
(Unaudited) 2010 2009
----------------------------------------
US$ millions Total(1) Net(2) Total(1) Net(2)
------------------------------ ----------------------------------------
Cash flow from operations
(page 4) n/a $ 693 n/a $ 542
Less: disposition gains
recognized in equity under
IFRS n/a (187) n/a (43)
-----------------------------------------------------------------------
Net income prior to other
items 1,039 506 740 499
Depreciation and amortization (387) (341) (322) (281)
Fair value changes 127 58 (1,674) (962)
Future income taxes 3 30 143 110
-----------------------------------------------------------------------
Net income (loss) attributable
to common shareholders n/a 253 n/a (634)
Non-controlling interests - 529 - (479)
-----------------------------------------------------------------------
Net income (loss) (page 7) $ 782 $ 782 $ (1,113) $ (1,113)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
(1) Includes results attributable to non-controlling interests.
(2) Excludes results attributable to non-controlling interests.
Letter to Shareholders
Investment Environment
While global economic events are not the focus of our day-to-day
activities, we sometimes alter our pace of investment or areas of
focus based on the macro-economic environment. Our regular
activities are instead focused on owning and operating real assets
with growing long-term cash flows, at attractive prices with a
margin of safety, so that most macro-economic events are as much as
possible irrelevant to our long-term underwriting criteria.
Since we last wrote to you, much of the global focus has been on
the EU, the Euro, and Greece in particular. While this is creating
uncertainty in the capital markets, we are comforted that the
issues are now in the open, and being addressed by the governments
in Europe. This bodes well for the long-term stability of the
economy, and as a global company, our success partly depends on
growth in the global economy.
In the meantime, we believe the current uncertain and volatile
environment is positive for our business model as we are able to
execute transactions at valuations which should result in strong
long-term capital returns. Our position is in contrast to marginal,
or start-up companies who are finding it hard (or impossible in
today's environment) to secure capital. This results in fewer
sizeable global asset managers to compete with us.
Our stock price, on the other hand, tends to respond to broader
economic events and has a tendency to trade in sympathy with the
markets. Although we have range traded over the past year, we
believe we are building value within the company, and when markets
turn more positive, this value should be reflected in the stock
price. If not, we will use a portion of our cash resources to
execute share repurchases, although at this time, given the vast
array of investment options available to us, we have slowed these
repurchases.
The single most important advantage we have in this environment
is full access to a variety of forms of capital. The first is the
permanent public equity base of Brookfield and our affiliates.
Totalling over $30 billion, we have invested decades in building
relationships with public equity investors.
The second advantage is our institutional relationships with
sovereign, pension and institutional funds who invest alongside us.
We have built up many relationships with world-class institutional
investors that have enabled us to achieve a number of things in the
last 24 months which otherwise would not have been possible. We
continue to build on these relationships, and develop new ones.
Third, we feel fortunate to have very long-term relationships
with a number of well capitalized global financial institutions. In
many cases, we have priority relationships, and therefore, we take
great care to ensure that the transactions we sponsor are
conservatively financed so that all constituents are successful.
This inevitably results in us having lower leverage. Consequently,
we had very few issues during the past few years, and as a result,
our reputation has emerged stronger than before. This has enabled
us to enhance our reputation with these institutions as a sponsor,
and should allow us to continue to access greater amounts of
capital as we require it.
Operating Results
Property
During the quarter, we continued to see positive leasing results
in our global office business and while rental rates have not
increased in many markets, leasing activity has recovered. In most
of our markets, overall vacancies improved from the start of 2010,
which sets a strong base for rental increases once employment
begins to rise. As a result of the duration of our leases in place,
occupancies in our portfolio are very strong in our major markets
in Canada, Australia and the United States. Overall, our portfolio
is 95% leased and approximately 4 million square feet of space was
leased in the first six months of 2010.
We were repaid at par on a loan which we had purchased at a
discount, and which was secured by a number of office properties.
This unfortunately did not result in us being able to secure an
interest in the portfolio of Washington properties, but did result
in a gain on the debt purchase of close to $100 million for our
clients and ourselves. We also recently sold two smaller office
properties in the southern U.S. and an office building in Montreal.
All of these were sold at attractive yields and substantial gains
over their purchase prices. Despite the malaise in the general
markets, well leased office and multi-family properties are being
sought after at attractive yields to sellers. We expect to
capitalize on these continuing trends.
On the other hand, our acquisitions have largely been focused on
property restructurings and on acquiring properties which generate
no current income due to large vacancies. These properties are
being disposed of by distressed sellers at substantial discounts to
replacement costs. It is clearly a tale of two markets and we are
therefore both buyers and sellers at this time. For example, we
recently purchased a vacant, recently constructed 200,000 square
foot office property in Dallas at 50% of its replacement cost. And
while it is vacant, we believe we can convert it into an income
producing property delivering substantial value enhancement to
us.
Over the past two years, through foreclosure or distressed
purchase, we acquired over 6,000 multi-family apartment units in
the U.S. Through a bankruptcy process, we also recently purchased a
65% interest in a large multi-family operating business called
Fairfield Residential. Fairfield acquires, entitles, develops and
manages multi-family apartments in the U.S. Fairfield currently
manages approximately 55,000 apartment units and we intend to
utilize this platform to expand these operations with a number of
our clients who are interested in owning these types of assets,
which traditionally have earned stable long-term returns.
In our land development and homebuilding operations, the markets
are similar to where they were at the start of the year. In Canada,
markets are good, in Brazil they are very strong and in the U.S.
they are slowly recovering.
Renewable Power
Our renewable power operations this quarter were affected by low
water levels in the northeastern region of North America and, in
particular, a record dry spell in Ontario. Our hydro power cash
flows, as you will recall, are affected by marketplace volatility
(although this is largely mitigated through long-term power sales
contracts) and by water levels, which are essentially
uncontrollable.
When assessing our hydro power business we look at long-term
average hydrology, which we believe is a very effective proxy for
future long-term water levels. We have had some very good recent
years, and I am sure in the future will have some further good
years. Unfortunately, statistically we were due for a low period,
and we have had one over the last six months. The good news is that
precipitation levels have recently recovered, leading us to expect
average generation for the balance of the year.
With respect to price, our realized prices on our conventional
hydro portfolio increased 19% from the same period in 2009 to $83
per megawatt hour as a result of long-term contracts signed last
year, improving wholesale markets, and the conversion of our
foreign operations at higher exchange rates in 2010.
We continue to advance construction of a 50 megawatt wind
project in southern Ontario which will sell its output to the
Ontario government over the next 20 years. The project's access
roads and foundations have all been completed, and we are in the
midst of installing the 22 turbines that will comprise the final
project. We also recently signed two other long-term contracts to
build a further 267 megawatts of wind power. The first project is a
165 megawatt project in Ontario which secured a 20-year power
purchase agreement with the Government of Ontario, and the second
is a 102 megawatt project with a 20-year contract with Pacific Gas
and Electric Company in California, subject to approval of
regulatory authorities.
In Brazil, we launched development of two new hydro plants
totalling 48 megawatts and have a number of others in the
feasibility stage. We also advanced our 45 megawatt
run-of-the-river hydro project in British Columbia and announced
the start of feasibility work on a 250 megawatt hydro project in
Saskatchewan.
Infrastructure
In our infrastructure operations, cash flows from each of our
businesses are generally on track with our expectations. The port
operations continue to generate year-over-year positive
comparisons, although a big part of this is the result of the lows
experienced a year ago. Improving economic activity in many of our
markets is also resulting in a stronger backlog of attractive
organic investment opportunities.
We are negotiating an expansion and upgrade of our rail lines in
Western Australia which will increase the capacity of a major
portion of our rail lines to carry iron-ore from new mining
projects that are located nearby.
We expect approval of an enhanced five-year tariff contract at
our major Australian coal terminal, and we also recently announced
the first phase of an expansion of our UK port facility to
ultimately double its annual throughput capacity.
Market conditions for our timber operations have improved but
selling prices for the majority of our products are not yet at
long-term averages. As a result, we are continuing to constrain our
harvest levels to preserve value, and therefore cash flows for the
short term do not reflect the earnings potential of these
assets.
As a further indication of global recovery, our infrastructure
and property construction business has begun to increase its order
book as both expansions and new builds for hospitals, schools and
property developments get put back on the drawing board. This is
being seen in all of our operations in the UK, Australia, Brazil
and the Middle East.
Capital
During the quarter, we completed a number of public market
transactions to recycle capital from the sale of assets, hoping to
reinvest this capital at exceptional value in future transactions.
And, while none of these are particularly meaningful on their own,
they do indicate the slow return of the capital markets.
We sold $150 million Norbord shares, $170 million of shares of
our Canadian renewable power company, three fully leased office
properties in Canada and the United States, and a +/-400,000 square
foot signature office development on Avenue Faria Lima in Sao Paulo
for US$350 million or close to approximately US$900 per square
foot, which is among the highest prices per square foot paid for an
office building in Brazil. This site was purchased two years ago,
and we will complete construction over the next 18 months. This
sale is reflective of both the premier location of the site, and
Brazil's continued renaissance.
Global Property Reorganization
We recently announced a reorganization of our global office
business which will result in the transfer of our office assets
owned outside of Brookfield Properties ("BPO") into 50% owned
Brookfield Properties. Our goal in doing this is to have all of our
premier office property investments and operations conducted in one
entity. Our office business, as distinct from some others, is
focused on providing high quality space to global corporations in
major gateway cities. Our strategic advantage is our relationships
with major corporations (global financial firms, accounting firms,
consultants, oil companies, etc.), and our reputation for providing
quality environments for them to house their people, as well as our
ability to deliver on their expectations. Ric Clark and his team at
BPO have done an incredible job differentiating the Brookfield
Office brand in North America with our clients, and we believe that
they will be able to earn outsized returns in other select markets
across the globe by applying the same strategy.
Furthermore, we believe that over the next five years as this
strategy plays out, BPO will be transformed into the global
security in the capital markets for those who wish to invest in the
office business, as a result of BPO owning one of the premier
office portfolios in each of the U.S., Canada and Australia, and
the genesis of a business in the UK.
In simple terms, we will sell an interest in our core long-term
office portfolio in Australia to BPO for cash and the assumption of
the existing debt on the properties. In the longer term, these
assets may form the basis of an Australian listed or unlisted
entity, or may be funded by BPO through the sale of interests in
assets.
We have further agreed that we will support BPO in disposing of
its residential business to its shareholders so that when these
transactions are completed, BPO will have divested itself of its
residential business which no longer fits with the strategic
direction of BPO.
Our intention is to combine BPO's residential business into
Brookfield Homes, which will then contain all of our North American
residential businesses. We are undertaking this transaction to
create a first class North American master-planned developer and
homebuilder. Our thesis is that when the residential markets
improve over the next few years, this combined entity will thrive.
On the other hand, in the short-term we will be able to integrate
these businesses and benefit from best-in-class operating skills
across the platform.
As a result of these strategic transactions, our property
investments will be conducted through four fully integrated
flagship real estate platforms, three which will be publicly
traded, and one privately run: Brookfield Office Properties (NYSE:
BPO)(TSX: BPO); Brookfield Residential (NYSE: BHS) for land
development and homebuilding; General Growth (NYSE: GGP) for retail
shopping malls; and our privately held Opportunity Fund for
opportunistic investing. Each one of the public entities will have
full access to the public markets and all of the platforms will
benefit from our institutional client relationships to augment
their financial resources and give them a competitive advantage
over similar stand-alone entities.
General Growth
General Growth Properties ("GGP") expects to emerge from
bankruptcy in the fall of this year when our investor group will
make a substantial investment in GGP. We will own approximately 30%
of GGP upon the company's emergence from bankruptcy.
As we see it, GGP has one of the few great retail franchises in
the United States. The company has +/-175 major regional shopping
malls - approximately 20% of the regional malls in the U.S., of
which at least 100 are extremely high quality, and at least 25
among the very best. As with all companies, there are also some
properties which are underperforming. Some have been disposed of as
part of the bankruptcy process, the balance we will work to
re-establish in the retail marketplace.
Our goal for GGP over the next 10 years is to achieve the
following:
1) Stabilize the operations and re-energize GGP as the finest operating
platform for retail shopping malls in the U.S.;
2) Dispose of non-core assets when opportunities arise to maximize value
from these assets as the retail markets recover;
3) Introduce institutional clients into partial direct interests in assets,
in order to leverage our returns; and
4) Utilize excess cash to reduce debt levels over time, while retaining the
balance of the cash to reinvest into redeveloping and intensifying
assets, repurchasing shares, and expanding the franchise internationally.
This should enable us to achieve attractive results in a stable
to moderate retail environment, but should the U.S. market
normalize over the next 10 years, returns should be even
stronger.
There are two main issues on GGP which a number of shareholders
have asked us about recently which we thought it worthwhile to
address. The first is the leverage level of GGP, and the second is
the free float of shares traded in the market after it emerges from
bankruptcy.
On leverage, we believe that this bankruptcy process has
established an exceptional capital structure, providing all the
benefits of appropriate leverage, but with substantially diminished
risk that is typically associated with financial leverage. First, a
majority of the debt has been established as property specific, and
without recourse to the parent company. That means any debt
difficulties at a particular property will not impact the company
as a whole. Second, the debt has been extended such that GGP will
have the longest dated debt maturity profile of any of its peers.
Third, the cost of the debt averages only 5.4%, which is readily
serviceable by the +/-175 regional malls that will remain in GGP.
Finally, because this company generates substantial excess cash
flow, the debt will be paid down over time from internal resources,
and merely by virtue of this fact, GGP will likely become an
investment grade company within two to three years, well before any
material amounts of debt mature.
The most important part of this reorganization is that very
seldom can one raise approximately $20 billion of debt on a
low-risk basis, and on favourable terms to the borrower. This
results from the fact that our capital infusion is being used to
prepay the majority of GGP's corporate indebtedness. Post
bankruptcy, GGP will emerge with a strong capital structure, one
that will protect our equity investment, but create excess returns
for shareholders as the economy continues to recover and the market
for retail properties improves.
With respect to free float, there will be a substantial number
of shares in the marketplace to be purchased by investors. At
regularized trading multiples of similar companies, the traded
value of the company will be +/-$15 billion and the float in the
range of +/-$8 billion, larger than most of the REITS in the United
States. We believe that this entity will be highly attractive for
investors who wish exposure to the retail shopping mall industry,
and we think it will find a spot in the capital market portfolios
of many investors.
U.S. Office Fund
During the first half of the year, we repurchased at a discount
to face value approximately $570 million of mezzanine debt in our
U.S. Office Fund. As a result, we have now pre-funded the equity
deleveraging we might have otherwise required in order to refinance
this portfolio. We also recently worked out arrangements with our
partners in this fund, so we are now able to refinance the
properties on a more conventional basis over the next 12
months.
Our properties in this portfolio have performed well over the
past four years and, while capitalization rates have increased
since purchase, cash flows have grown substantially. With the two
largely offsetting each other, and with our recent bond repurchases
being turned into a future equity investment, this should ensure we
can establish investment grade financing on each of these
properties.
Brazilian Residential Operations
One of the most exciting areas of our operations continues to be
Brazil. This applies to all of our operations in that country, but
in particular to our residential operations. Sales in the last
three months were extremely positive, with 2010 set to be a record
year based on a strong economy and continued wealth creation in the
middle class.
With an enormously under-served market, we cannot build
condominiums quickly enough to satisfy the demand. As an example,
we recently launched a project in our mid-west market, in Brasilia,
where we sold approximately 1,100 of the 1,700 units or 65% upon
launch. Sales of residential units during the quarter approached a
record US$250 million, which speaks to the strength of this
market.
Investment Returns and AUM
Performance of our investment funds has been strong in the first
half of 2010. This has enabled us to continue to attract capital
from clients for virtually all of our businesses, but in particular
for direct infrastructure and real estate mandates. We have
continued to add assets under management in the first six months in
both our direct institutional business and our listed mandates. We
believe that we are also on the preferred list for many other
mandates and continue to establish ourselves as one of the global
asset managers of choice for property, power and infrastructure
assets.
We closed approximately $500 million of new private capital
raising into various investment funds during the quarter including
the final close of our real estate fund at $600 million, which will
invest alongside our +/-$5.0 billion real estate protocol program.
In total, in the first six months of 2010, we closed approximately
$1 billion of third-party commitments into our private funds from
institutional investors in Europe, the Middle East, North America
and South America.
We feel fortunate with the above success, in particular given
that the overall private fundraising market for private equity
continues to be slow. On a global basis, approximately $40 billion
was raised for private equity funds and $7 billion for real estate
funds, the lowest levels since 2004.
We expect the positive trend in raising private capital to
continue, as both our track record and our strategies are further
understood by institutional clients, and as the broader fundraising
market for private capital improves.
Board Changes
Our continued international expansion and commitment to
maintaining best-in-class governance has led us to make two
important board changes.
The first change involves our infrastructure operations, as we
continue to integrate our existing global operations and pursue
expansion opportunities. We have established a Global
Infrastructure Advisory Board to assist us in the further
development of this business. Bob Harding, who has been Chairman of
Brookfield for many years and will remain on the Brookfield board,
has agreed to spearhead this important effort.
In order to accommodate the above, Frank McKenna, who has served
as our Lead Independent Director for a number of years, was
appointed Chairman of the board of Brookfield. We feel fortunate to
have Frank as our new Chairman and with a distinguished career that
has included serving as the Canadian Ambassador to the United
States and the Premier of the Province of New Brunswick, we think
Frank will be able to assist us in many ways.
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
August 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," "intend," "grow,"
"plan," "expect," "believe," "objective," "continue," "enable,"
"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 or identify forward-looking statements. Forward-looking
statements in this letter include statements with respect to: our
ability to execute transactions at valuations that should result in
strong long-term capital returns; our expectation of fewer sizeable
global asset managers; our use of cash resources to execute share
repurchases; our ability to continue and develop new relationships
with sovereign, pension and institutional funds; our ability to
continue to access capital from financial institutions; our
expectation of rental increases and rising employment; our
expectation to capitalize on attractive yields to property sellers;
our ability to convert a recently purchased property in Dallas to
an income producing property; our intention to utilize Fairfield as
a platform to expand our residential management operations; the
state of Canada, Brazil and the U.S.'s homebuilding markets; our
belief that long-term average hydrology is an effective proxy for
future long-term water levels, and our expectation of future
precipitation levels and their impact on power generation; our
expectations regarding hydro and wind projects; our expectations
regarding cash flows from our infrastructure operations and organic
investment opportunities; the expansion of our rail lines in
Western Australia and UK port facility and approval of an enhanced
tariff contract at our major Australian coal terminal; the earnings
potential of our timber assets; the completion of a Brazilian
office development; the reorganization of our global office
business and our ability to earn outsized returns, as well as to
transform BPO into a global security;
our intentions and thesis regarding our residential business;
our expectations and goals regarding General Growth Properties and
our returns from such investment; the establishment of investment
grade financing on properties in our U.S. Office Fund; the
continued strength in the Brazilian economy and its impact on our
Brazilian operations; the positive trend in raising private capital
into our investment funds; 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
