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BAM AT A GLANCE

P/E ► 24.0 AVG EV/EBITDA ► 8.37 AVG ROA ► 3.9% AVG ROE ► 8.4% AVG Debt to Equity ► 8.72 HIGH Current Ratio ► 1.11 AVG Interest Coverage Ratio ► 1.21 AVG

 

 

 

 

 

 

Brookfield Asset Management (NYSE: BAM) invests in physical assets, including real estate, energy, and infrastructure investments. The firm has $95 billion in assets under management. Essentially a publicly-traded private equity firm, Brookfield earns over 50% of its revenue by owning, renting, and operating office and residential properties. The firm also invests in global hydroelectric power generation plants, timberlands, and electricity transmission infrastructure in Brazil and Canada. Brookfield's revenue grew by over 35% in 2007, bolstered by 56% revenue growth^[1] in the firms Commercial Properties segment, where BAM owns and manages office and residential properties around the globe. Brookfield CP earnings soared thanks to US portfolio acquisitions in late 2006 which contributed $899 million in revenue.^[2]

Brookfield invests capital on behalf of its institutional investors and itself. In most cases, institutions provide funds for BAM to manage. Over 2007, Brookfield added nearly $10 billion in capital, with the majority coming from institutional investors.^[3]

Rising Interest rates as well as fluctuating foreign exchange rates affect BAM operations. When interest rates rise, Brookfield (and the firms whose money Brookfield manages) is less inclined to borrow and make leveraged investments. Also, Brookfield is headquartered in Canada and owns and operates properties, power plants, and timberlands across the globe, making the firm subject to worldwide foreign exchange rates. Also, adverse weather conditions around the globe hurt BAM's timberland and hydroelectric power segments. Reduced water levels in 2007 (by 10%)^[4] hurt hydroelectric power generation and a longer fire season also inhibited timberland productivity. Finally, the real estate bubble of 2007 impacted affected BAM revenues. The firm carries significant debt, namely two outstanding loans totaling $3.5 billion. With tight credit conditions, Brookfield's desire to refinance both loans by 2009 may be in jeopardy.

Corporate Overview

Business and Financials

Brookfield Asset Management (BAM)reported Q3 results. (All results in $US unless otherwise noted.)

• Through nine months of 2008, net operating cash flow (FCF) came in at $1.2B, down 12% y/y. With the Wall Street meltdown, the performance of BAM’s largest segments (commercial properties, power, infrastructure) is reassuring, with increases across the board except for the infrastructure segment, which was partially spun off earlier in the year. Unfortunately, expenses jumped by 24% y/y, depressing FCF.
• As covered in my initial report on BAM, the balance sheet is misleading. Without getting deep into it, the balance sheet seemed fairly stable from YE 2007. The company has managed its capital well and has over $3B in liquidity on-hand which more than covers all short-term maturing corporate debt.
• While gross and net income aren’t keeping up with total revenue growth, the numbers are still up 22% on gross income and 8% net. Despite the turmoil in the global markets, BAM’s stable asset base is reflected in its income statement and management expects this to continue going forward.

2007 BAM Revenue Breakdown; Note: $ in millions^[5]

2007 BAM Consolidated Balance Sheet Assets Note: $ in millions^[6]

In January of 2008, Brookfield began a series of timber and power asset spin-offs. A spin-off refers to the creation of a new firm with the assets of a parent company.^[7] In this case, BAM denominated "Brookfield Infrastructure Partners LP" as an investment tool, giving shareholders 60 percent as a special dividend and keeping the remaining 40 percent for itself.^[8] The partnership is headquartered in Bermuda, where it is exempt from Canadian taxes.^[8] Brookfield Infrastructure began trading on the New York Stock Exchange on January 31, 2008.

FY 2007 was a record year for BAM in terms of revenue, operating income, and cash flow of $1.9 billion, boosted by the acquisition of Multiplex, an Australian construction and property company, as well as strong performances from the property and specialty fund segments.^[1] Also, assets under management grew by nearly 33%, bolstered by almost 50% growth in assets invested in their Commercial Properties segment.^[9] Key places for the commercial property boost were Australia and New Zealand, where $7 billion of real estate assets were acquired.^[10] Finally, revenue grew by a little over 35%, helped by 48% growth in investment income (other).^[11] The increase in investment income can be attributed to $6 billion added to real estate and fixed-income equities to the Brookfield portfolio in 2007.^[10]

2007 BAM Consolidated Assets by Segment Note: $ in millions^[12]

BAM divides its business into the following segments.

• Commercial Properties (25% of Revenue; 3% of Net Income) Brookfield's operations in this segment consist of owning and operating office buildings and retail properties for themselves and other companies. As of FY2007, BAM had $29 billion^[13] in assets under management invested in their office activities. Brookfield also owns 75 million sq. feet of office property, and large tenants include J P Morgan Chase (JPM) and Merrill Lynch (MER).^[14] Brookfield's Commercial Properties segment net incomes specifically have been hit hard by the 2007 credit crunch and housing bubble. Though revenue nearly doubled to $2.8 billion since 2006, net income only increased by $5 million to $24 million.^[15] Brookfield changed their segment denominations in 2006, but, for comparison, the comparable category of Core Office Properties alone generated $1.1 billion in revenue and $690 million in net income.^[16] Brookfield also owns a 50% stake in Brookfield Properties (BPO), a real estate investment trust, or a corporate tax designation for a real estate company.

• Residential Development (23% of Revenue; 18% of Net Income) This segment includes investments in residential and other properties in or waiting to be in development. AUM and capital invested in Development nearly doubled since FY2006^[17], mainly due to the acquisition of Multiplex, an Australian construction and property company.

• Power Generation (10% of Revenue; 13% of Net Income) BAM also invests in power plants around the globe. Brookfield mainly channels funds into hydroelectric plants in the US, Canada, and Brazil. Total assets in this segment grew 26% over Fiscal 2007, chiefly due to plant acquisitions and foreign currency gains.^[17]

• Infrastructure (6% of Revenue; <1% of Net Income) Brookfield's Infrastructure investments include money placed in the timber and electricity transmission segments. BAM manages 2.5 million acres of timberland, which is valued at $3 billion.^[17] Also, the firm is the largest operator of electrical transmission lines in Chile, where nearly $2.7 billion of AUM is invested.^[17]

• Specialty Funds (13% of Revenue; 24% of Net Income) Specialty funds refer to bridge lending and real estate finance, which are operated for BAM and institutional partners.^[18] As of FY2007, BAM manages $5 billion in capital and total AUM of $7 billion in this segment.^[18]

• Other (22% of Revenue; 42% of Net Income) Other revenue comes from BAM's advisory services, private equity investments, and other investment income. The high percentage of net income can be attributed to lower margins in the other segments, as 2006 net income margin was less than 30% and only 3% greater in dollar terms.^[19] As of FY2007, BAM manages $5 billion in capital and total AUM of $7 billion in this segment.^[18]

In the longer term, from 2003-2007, Brookfield revenues and operating incomes have averaged 35% and 39% growth respectively. Brookfield's net income dropped in 2007 for the second year in a row. However, when realization gains/losses (gains/losses accounted for at the time of property transacions) are not included, net income was $941 million compared to the $624 million of 2006.^[1] In other words, Brookfield's realization items were a net income liability in 2007 but a net income asset in 2006. When these transaction items are excluded, net income skyrocketed by over $300 million over 2007. Note that the chart depicts net income including realization items. Depreciation on such newly acquired items also factored into the net income fall. Finally, another key BAM achievement of 2007 included a $10 billion spike in committed capital to create new investment channels and expand established ones^[1], which helped bolster the revenue surge.

Historical BAM Financial Stats ($ in millions)^[20]

Key Trends and Forces

Rising Interest rates and foreign exchange rate fluctuations hurt BAM

BAM owns and operates real estate, power plants, and timberlands around the world, and are affected foreign exchange rates. Brookfield's foreign exchange derivative positions took a minimal hit over 2007, falling $21 million to nearly $2.9 billion.^[21] With major holdings outside of Canada (especially in the US), Brookfield stands to lose from a falling dollar.

The firm has $31 billion in debt,^[22] and rising interest rates makes it more expensive. However, Brookfield does slightly benefit with rising interest rates, as the firm cites that a 10 basis point increase in interest rates would result in a $16 million increase in their operating cash flow,^[23] relative to its more than $9.3 billion in revenue. Similarly, the same increase in rates would boost Brookfield income by $13 million before taxes.^[23] Moreover, the firm has $1.6 billion in fixed-rate liabilities,^[23] whose value moves opposite to that of interest rates. Finally, rising interest rates correspond to lower real estate prices as consumer spending falls. Lower property prices offer Brookfield to benefit in accumulating cheaper real estate/timberland to exploit but prevent BAM from maximizing profit on land and building sales.

Adverse weather conditions hurt Brookfield timberland and hydroelectric operations

Brookfield's Power Generation and Development segments are both at the mercy of global weather conditions. In FY2006, BAM saw reduced returns due to a prolonged fire season as well as worse than expected weather conditions on timberland properties for the latter half of the year.^[24] Not only is Brookfield's Development segment affected by bad weather conditions, but its Power Generation operations are vulnerable as well. For instance, over FY2007, water levels dropped by 10% on average^[4] at BAM hydroelectric power plant locations, causing hydroelectric power generation to fall 7%.^[4] In general, Brookfield, more than most asset managers, is subject to adverse weather conditions around the globe.

Credit crunch conditions hurt Brookfield's outstanding loans

Brookfield has two key refinancings due by 2009: a $1.9 billion loan against timberlands in the Pacific NW as well as a $1.6 billion loan against Multiplex, which BAM acquired in 2007.^[4] Also, a 4Q2007 conference call lists the firm's corporate debt at $2 billion.^[1] The 2007 credit crunch aftermath hampers the company's ability to efficiently refinance the loan by March of 2009. If the firm is unable to rework the payments on the outstanding loans, Brookfield must reach into its own assets to repay the large debts. However, the firm reports earning anywhere between $1.5 and $2 billion each year^[1], perhaps cushioning Brookfield from the full blunt of these debts.

Competition

Though no asset managers totally match the distribution of assets of Brookfield, a few do overlap BAM operations. Competitors are primarily companies that also invest in physical capital, which include the Vornado Realty Trust (VNO), SL Green Realty (SLG), and Boston Properties (BXP). Below is a relevant chart of Operating Metrics for these companies. Note the effect of the 2007 Credit Crunch and the Housing bubble on the trailing twelve month (TTM) returns statistics of the firms.

Note: Margins Data from Reuters

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} BAM Q42007 Earnings Call Transcript
2. ↑ BAM 2007 Annual Report pg. 66  
3. ↑ BAM 2007 Annual Report pg. 7  
4. ↑ ^{4.0 4.1 4.2 4.3} iStockAnalyst: A Review on Brookfield Asset Management
5. ↑ BAM 2007 Annual Report pg. 66  
6. ↑ BAM 2007 Annual Report pg. 115  
7. ↑ Wikipedia: Spin-out
8. ↑ ^{8.0 8.1} Brookfield to spin off timber assets
9. ↑ BAM 2007 Annual Report pg. 15  
10. ↑ ^{10.0 10.1} BAM 2007 Annual Report pg. 4  
11. ↑ BAM 2007 Annual Report pg. 66  
12. ↑ BAM 2007 Annual Report pg. 115  
13. ↑ BAM 2007 Annual Report pg. 48  
14. ↑ Hoovers: Brookfield Asset Management
15. ↑ BAM 2007 Annual Report pg. 115  
16. ↑ BAM 2005 Annual Report pg. 96  
17. ↑ ^{17.0 17.1 17.2 17.3} BAM 2007 Annual Report pg. 23-25  
18. ↑ ^{18.0 18.1 18.2} BAM 2007 Annual Report pg. 114  
19. ↑ BAM 2007 Annual Report pg. 115  
20. ↑ BAM 2007 Annual Report pg. 116  
21. ↑ BAM 2007 Annual Report pg. 109  
22. ↑ A Review on Brookfield Asset Management
23. ↑ ^{23.0 23.1 23.2} BAM 2007 Annual Report pg. 43  
24. ↑ BAM 2007 Annual Report pg. 23