We are pleased to report that the business is off to a good start in 2018. We generated funds from operations (FFO) of $333 million, or $0.85 per unit – a 20% increase over the first quarter of last year. During the quarter, distributions were raised by 8% to $0.47 per unit. These results translate into a payout ratio of 68%, which is within our long-term target range of 60-70%.
Entering the year, a key focus was to build up Brookfield Infrastructure’s corporate liquidity in response to signals suggesting a period of greater volatility. Even though economic conditions are quite favourable in most jurisdictions where we operate, we often source some of our best investment opportunities when markets are volatile. Consequently, heading into 2018, a major priority was completing the sale of our Chilean electricity transmission business. We are pleased to report that the transaction closed on March 15 and Brookfield Infrastructure received net proceeds of $1.1 billion, putting us in excellent financial condition.
Results of Operations
Our results in the period reflect the contribution of new investments, as well as organic growth of 9% across the company. A stronger U.S. dollar has negatively impacted our results in the quarter by approximately $13 million, predominantly relating to lower hedge rates on our Australian dollar and pound sterling cash flow hedges.
Our FFO hedging program is designed to lock in currency rates over a period of 12 to 24 months to reduce volatility in our cash flows, provide visibility into our results and enhance our planning capabilities. Our contracted hedge rates will naturally reflect the prevailing market conditions at the time the hedges are entered into. Consequently, from time to time, changing market conditions may result in a lower locked-in hedge rate relative to the spot rates in place at maturity. However, when this situation occurs it typically reverses in a year or two.
Our utilities segment contributed FFO of $169 million compared to $100 million in the prior year. This step-change increase was primarily attributable to the contribution from our Brazilian regulated gas transmission business acquired in April 2017 and, to a lesser extent, an increase in our rate base and upward inflation adjustments in our other utility businesses.
At our Brazilian electricity transmission business, we are making substantial progress in constructing our lines. At our first project, the final segment received its operating license in early March and the concession is now earning 100% of its regulated revenues. Discussions have commenced to acquire the 50% equity interest in this project held by our joint venture partner, which we expect to occur in the second half of 2018.
Our transport segment reported FFO of $137 million in the period, compared to $123 million in the previous year. This increase was driven by higher tariffs and volumes in our Brazilian rail and South American toll road businesses. Results were partially offset by lower contribution from our ports business, and foreign exchange which reduced our results by $4 million.
Our transport operations in South America continue to benefit from improving macroeconomic conditions. Results in our toll roads business in local currency terms were up by 10%. This was the result of 4% growth in traffic levels, higher tariffs and the commissioning of an expansion project at one of our roads that was completed in December of 2017. This road has already experienced a 7% increase in traffic levels in the first three months of the year. At our integrated logistics business, activity levels are ramping up after brief delays related to the soy harvest. We have now received all licenses that are required to be fully operational at our newly expanded TIPLAM port, and despite the delay in the soy harvest this year, we anticipate a record harvest, which should positively impact results for the balance of the year.
While we are benefiting from strong GDP-linked growth in our transport assets in South America, we may experience headwinds at our Australian rail business in the second half of this year due to potential closures or production curtailments at two of our iron ore customers. We do not as of yet have a clear picture of the timing or scale of these curtailments, as consolidation among industry players is being explored which may result in certain existing operations remaining in production for several more years. The business will respond to any volume reductions with operating and capital cost reduction programs. If all announced curtailments do take place, the impact on our FFO in the second half of the year would be in the range of $20-25 million, with lower impact if consolidation occurs. On a more positive note, several of our larger customers are evaluating expansions at their operations to take place over the next several years, which are expected to largely replace drop-offs that may occur in near term revenues.
Our energy segment generated FFO of $66 million, compared to $62 million in the same period last year. This improvement captures the incremental contribution from new contracts, higher gas transport volumes and further equity invested into our North American natural gas transmission operations. Results were partially offset by lower contribution from our gas storage business that is being impacted by a weak spread environment.
At our district energy operations, the City of Toronto approved a strategic partnership with our business to develop several large-scale, low-carbon thermal systems in key communities throughout the city. As part of a competitive process that began in 2016, our business was selected to help the city achieve its long-term energy and climate goals using district energy. To date, eight communities have been identified for potential development. This is a very exciting initiative for our business, with the potential to drive significant growth in the future. Additionally, the business finalized planning for a second combined heat and power facility in London, Ontario, that is underpinned by a 20-year fixed capacity contract with Ontario’s Independent Electricity System Operator (IESO). The project involves C$35 million of total capital investment and is expected to come online in the third quarter of 2019, generating attractive risk-adjusted returns.
Our communications infrastructure segment, currently comprised of operations in France, contributed FFO of $19 million for the period, which was consistent with the prior year. The business delivered results in-line with expectations due to its stable and predictable cash flow profile. The business has been working closely with the mobile network operators (MNOs) to help achieve their license coverage obligations by building new telecom towers. In the last 18 months, the business has delivered over 150 new sites and has a good backlog of sites to be built over the next 12 months. The momentum in this segment should continue as the French government recently announced an agreement with the MNOs to accelerate and improve 4G coverage across France, which will require more points of presence.
Balance Sheet & Funding Plan
We employ a diversified funding strategy to ensure that our business is protected against potential periods of weakness in capital markets and has the flexibility to capture attractive investment opportunities. Core elements of our funding strategy include maintaining a strong level of corporate liquidity, recycling capital from mature assets when market conditions are strong and funding our recurring organic growth pipeline with retained cash flows and asset level, non-recourse, investment grade financings.
We completed the period with over $4 billion of total liquidity, of which $3 billion is at the corporate level. This liquidity is expected to be further bolstered in the coming weeks, with proceeds to us of $500 million from an up-financing at our Brazilian regulated gas transmission business. The company is finalizing discussions with lenders to issue five-year bonds in the local market at an approximate rate of 7%. This financing evidences the dramatic rebound being experienced in Brazil, which has led to a significant decline in interest rates and improvement in capital market conditions. We are very pleased with this outcome.
Also, during the period we launched sale processes for other mature businesses. We expect to see significant demand for these assets given their high-quality cash flows, growth potential and the attractive jurisdictions they reside in. We are hopeful these processes will close before the end of the year, generating further meaningful proceeds for Brookfield Infrastructure.
Our committed capital backlog of growth projects currently stands at $2.5 billion, of which $0.5 billion has already been invested, but not yet commissioned. The remaining $2 billion to be invested can be broken down into the following two categories, for which we have different funding approaches:
The first category, which will require approximately $0.8 billion of new capital spend over the next two to three years, consists of small, recurring mandates within our operating groups. Projects in this category include the home connections we complete in our U.K. regulated distribution business and debottlenecking expansions of our various port, rail and energy networks. These mandates are typically financed through a combination of project level non-recourse debt, sized to investment grade metrics (on average with 50% debt-to-capitalization) and equity, with the latter component funded by operating cash flows generated and retained within our businesses. To illustrate, we currently have close to $1.2 billion of annual FFO and retain 15 – 20% of this amount in our business - or approximately $200 million - to satisfy such funding requirements.
- The second category, which currently stands at $1.2 billion, consists of larger scale tuck-in projects, multi-year network expansions or new business lines that we establish. These initiatives arise on a less frequent basis and take place over a finite period. Projects that fall into this category include the establishment of our electricity transmission business in Brazil, our smart meter portfolios to be adopted, the fibre-to-the-home business line we established within our French communication business, and several toll road expansions. We typically finance these mandates with an amount of debt sized to investment grade levels and the balance through equity. The equity component is generally funded by new capital injections from Brookfield Infrastructure, through proceeds from asset sales and capital market issuances. For the next year, we anticipate that approximately $0.5 billion will be required to fund the equity component of these projects. This equity capital has already been raised and set aside.
Update on Strategic Initiatives
Gas Natural Colombia Acquisition
The previously announced acquisition of a controlling interest in Gas Natural S.A. ESP (GN Colombia), the second largest distribution network in the country, is advancing well. This business services almost three million customers, predominantly in the City of Bogota. It generates predictable cash flows within a favorable regulatory environment that we have significant experience with, given that our initial investment in the country in 2012 was an electricity distribution company. We initially acquired 11% of GN Colombia late last year and are currently progressing the second phase of the acquisition, which we expect to complete during the second quarter. Upon completion, this will result in Brookfield Infrastructure and its institutional partners owning a controlling interest in the company. In early April, we received anti-trust approval and once approvals have been received from the local securities regulator, we will launch a tender offer.
North American Energy
We are seeing pockets of potential value arising from market dislocation in select sectors and geographies. In particular, there has been a stock market sell-off in listed North American energy infrastructure companies and sentiment is negative. We have monitored this space for many years and observed that competition to deploy capital by both financial and strategic investors had driven asset returns to levels we viewed as unattractive. Moreover, the amount of leverage underlying many of the historical acquisitions seemed to leave little margin for error.
As the U.S. transitions to become a net exporter of energy, there is also a significant need for capital to invest in infrastructure to extract, transport and process energy resources. Therefore, our opportunity set includes potential asset carve-outs, take-privates and partnership arrangements with owners of energy infrastructure assets. We are in various stages of discussions with large midstream energy companies and are encouraged by the number of interesting opportunities in front of us. The recent market environment has presented us with a greater set of acquisition and partnership opportunities from industry players and we are hopeful we can assist some of the companies. We believe that we are well-positioned given our solid balance sheet, proven operational track record and ability to act as a single counterparty for large transactions.
Full Cycle Investment Strategy
When we look at funding our organic growth and new investment opportunities, capital recycling has always been a key part of our funding strategy. The cycle begins with acquiring high-quality core infrastructure assets for value. We do this by focusing on situations where we can leverage our competitive advantages of scale, local presence and operating expertise to source and execute on proprietary transactions. Next, we implement an operations-oriented approach to de-risk the business and enhance cash flows. Finally, once the business reaches maturity, we seek to opportunistically exit at strong valuations in order to redeploy capital into higher returning investments. With the recent sale of Transelec, our Chilean electricity transmission business, we thought we would summarize that investment as an example of our full cycle investment strategy.
In 2006, a Brookfield-led consortium acquired Transelec, the largest electricity transmission company in Chile, for $2.7 billion ($1.3 billion of equity). At that time, Chile was generally viewed as an emerging market economy and capital from foreign investors was relatively scarce. Assets in the country were discounted by investors relative to those in North America or Europe, which were valued at premiums given the abundance of capital in those regions seeking utility assets. In that environment, we were disciplined and contrarian, and when the opportunity to acquire Transelec presented itself, we acquired it with a view that: i) Chile would emerge as an excellent country in which to invest, ii) the fundamental need for the country to grow its electricity infrastructure would drive attractive opportunities over time, and iii) employing our operating capabilities, we could improve asset performance, margins and reduce the cost of capital over time.
During our period of ownership, Chile achieved both sovereign debt ratings upgrades and admission as an OECD member country. As demand for electricity and improved reliability increased, we worked closely with management to ensure that we were well positioned to bid on and execute highly attractive growth projects. We were able to grow the business from 8,000 to over 10,000 km of lines and increased the number of substations by approximately 20%, growing our rate base from approximately $1.6 billion in 2006 to approximately $3.5 billion by 2017. In addition, we added value by implementing a risk-based maintenance program that resulted in lower line losses. Furthermore, we put in place non-recourse project financing on a selective basis and extended debt maturities opportunistically to reduce our cost of capital. At the time of our sale, the nearest debt maturity in the business was 2023.
So, what prompted us to sell this asset? First, as an OECD country with an investment grade credit rating, foreign investment has grown dramatically and the market has continued to mature since our acquisition of Transelec. Today, Chile is viewed very favorably by foreign investors and return expectations are comparable to the U.S. and Western Europe, given the country’s solid institutions and respect for private capital. Second, Transelec is a high-quality asset in the mature phase of the life-cycle. It has revenues based on a regulated return on its asset base and a stable capital expenditure program that supports consistent and predictable growth. Consequently, we were confident that we could achieve a strong valuation for this mature, de-risked asset with regulated revenues.
We recently closed on the sale of our 28% interest in the company in March for $1.3 billion ($1.1 billion net of tax), achieving a compound internal rate of return of approximately 18% over 11 years, and a multiple of capital of three times. The sale was opportunistic in that we were able to realize an attractive valuation, which took into account future growth expectations. Transelec provided us with strong and predictable cash flows, however, we see opportunities to reinvest the net proceeds from the sale into investments that have the ability to generate significantly higher returns.
Global economic conditions are generally good and upward trending, driven by the U.S. and Chinese economies that appear to be steadily expanding. We believe that global economic growth will be strong for the balance of the year. In that environment, we expect our business to continue to perform well.
The U.S. Federal Reserve has increased interest rates twice in the past six months and has telegraphed that a few more hikes are likely to occur in 2018. As a result, notwithstanding the favourable economic conditions, a number of indicators are suggesting there is the potential for market volatility. We are fortunate to have a strong balance sheet and substantial liquidity. This positions the company to react quickly to value opportunities should they arise. Our significant liquidity may act as a partial drag on our near-term FFO until we deploy the capital, however, the flexibility to respond to uncertainty in a period of market volatility is far more valuable to us in the long run. We have a solid, high quality pipeline of new investments currently being progressed by our teams in Europe and North America. In addition, our robust internally-generated capital backlog is expected to result in attractive returns and should provide for strong organic growth in the foreseeable future.
Chief Executive Officer
Brookfield Infrastructure Group L.P.
May 2, 2018
Note: This letter to unitholders 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 harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. The words, “will”, “continue”, “believe”, “growth”, “potential”, “prospect”, “expect”, “target”, “should””, “future”, “could”, “plan”, “ “anticipate”, “outlook”, “focus”, derivatives thereof and other expressions which are predictions of or indicate future events, trends or prospects and which do not relate to historical matters identify the above mentioned and other forward-looking statements. Forward-looking statements in this letter to unitholders include statements regarding the likelihood and timing of successfully completing the transactions and other growth initiatives referred to in this letter to unitholders, the integration of newly acquired businesses into our existing operations, the future performance of those acquired businesses and growth projects, financial and operating performance of Brookfield Infrastructure and some of its businesses, commissioning of our capital backlog, availability of investment opportunities, performance of global capital markets and our strategies to hedge against risk in such markets, ability to access capital, the continued growth of Brookfield Infrastructure and its businesses in a competitive infrastructure sector, the effect expansion and growth projects of our customers will have on our businesses, and future revenue and distribution growth prospects in general. Although Brookfield Infrastructure believes that these forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on them, or any other forward looking statements or information in this letter. The future performance and prospects of Brookfield Infrastructure are subject to a number of known and unknown risks and uncertainties. Factors that could cause actual results of the Partnership and Brookfield Infrastructure to differ materially from those contemplated or implied by the statements in this letter to unitholders include general economic conditions in the jurisdictions in which we operate and elsewhere which may impact the markets for our products or services, the ability to achieve growth within Brookfield Infrastructure’s businesses, some of which depends on access to capital and continuing favourable commodity prices, the impact of market conditions on our businesses, the fact that success of Brookfield Infrastructure is dependent on market demand for an infrastructure company, which is unknown, the availability and terms of equity and debt financing for Brookfield Infrastructure, the ability to effectively complete transactions in the competitive infrastructure space (including the ability to complete announced and potential transactions referred to in this letter to unitholders, some of which remain subject to the satisfaction of conditions precedent, and the inability to reach final agreement with counterparties to such transactions, given that there can be no assurance that any such transactions will be agreed to or completed) and to integrate acquisitions into existing operations, changes in technology which have the potential to disrupt the businesses and industries in which we invest, the market conditions of key commodities, the price, supply or demand for which can have a significant impact upon the financial and operating performance of our business, regulatory decisions affecting our regulated businesses, weather events affecting our business, the effectiveness of our hedging strategies, completion of growth and expansion projects by customers of our businesses, traffic volumes on our toll road businesses and other risks and factors described in the documents filed by Brookfield Infrastructure with the securities regulators in Canada and the United States including under “Risk Factors” in Brookfield Infrastructure’s most recent Annual Report on Form 20-F and other risks and factors that are described therein. Except as required by law, Brookfield Infrastructure undertakes no obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise.
|AS AT AND FOR THE 12 MONTHS ENDED MARCH 31 (MILLIONS, EXCEPT PER SHARE AMOUNTS)||2017||2018||2019||2020||2021||CAGR|
Distributable earnings (DE)
– Per share
|Fee-related earnings (before performance fees)||691||791||889||1,284||1,520||22%|
|Gross annual run rate of fees plus target carry||2,058||2,465||3,100||5,561||6,637||34%|
|Total assets under management||245,205||282,731||365,957||518,956||609,075||26%|
Assets Under Management are Growing
Assets under management and fee-related earnings continued to grow, with both the size and the scope of our funds increasing. Over the last 12 months, fee-bearing capital and fee-related earnings grew by 21% and 18% respectively.
We are in the early stages of fundraising for our next round of flagship funds, targeting $100 billion of capital. This includes the launch of our fourth flagship real estate fund, and the Brookfield Global Transition Fund, as well as being in the final closing of our flagship distressed debt fund. In addition, over the next 12 months, we expect to be back in the market with our next vintage flagship infrastructure and private equity funds.
The sustained low interest rate environment combined with institutions’ need to earn returns from alternatives has created a very constructive fundraising environment. In addition to the flagship funds, we are steadily growing our perpetual core private fund products, which take in capital on a quarterly basis. Success on these two fronts should drive another step change in our fee-related earnings, potentially doubling them over the next five years.
Monetizations are Driving Carried Interest and Gains
In the current low interest rate environment, demand for the type of assets we own is strong. Many of our businesses are critical infrastructure assets that are underpinned by long dated, contracted or regulated cash flows. With the capital markets being highly accommodative, we have been monetizing assets. This has resulted and will continue to result – in both investment gains and carried interest being recognized into income.
During the quarter we sold $13.0 billion of assets. This resulted in the realization of $6.4 billion of investment gains, including $1.8 billion for BAM, and $4.6 billion for our clients. On the client gains, we realized $681 million of carried interest into income. We also have a further $5.4 billion of accrued carried interest to be recognized into income at a future date, which is not recorded in our accounts due to both our conservative accounting methodology and the terms of our funds. A few notable monetizations in the first quarter include an IPO of a solar products business, the private sale of a life sciences real estate portfolio, and two secondary offerings of our graphite electrode manufacturer.
We also continued to sell assets directly off our balance sheet, and generated large disposition gains during the quarter. This included a portion of our shares in Brookfield Renewable and West Fraser. In addition to these gains from our own investment portfolio, further fund monetizations should generate upwards of $1 billion of gross carried interest this year.
Our Liquidity is Very Strong
Our balance sheet has never been stronger, with total capital availability at approximately $80 billion: $18 billion of corporate liquidity and $62 billion of fund capital. In addition to making asset sales, we continue to strengthen our debt structure. We issued an inaugural $500 million green bond in April with an interest rate of 2.724% for 10 years. This is the lowest coupon we have ever paid for a 10-year term. The proceeds will be used for green initiatives, but to keep our debt unchanged we have called approximately $500 million of 2023 bonds. The net result is that we have extended the duration of our debt and lowered the average interest rates.
The combination of strong markets and realizations means we have more than enough cash on hand for both the announced privatization of BPY, and when market opportunities arise, the repurchase of BAM shares which are being issued to close the BPY transaction.
Interest Rates are Still Very Low
We believe central banks will be successful in engineering GDP growth and increased employment, which will in turn allow central banks to increase short rates from the zero bound level they have been tethered to for over a year. The ideal scenario is to have short rates in the U.S. increase slowly from zero to 2-ish% in the 2022/23 period. If this is in fact the case, a 10-year treasury note may see ±3%; this will mean global economies are doing well, creating a very constructive environment for the assets we own.
Many of our assets benefit from inflation protection, in addition to low-ish interest rates. It is very important to note that short rates at roughly 2% and long rates at roughly 3% are still very low compared to what has historically been reflected in underwriting the investments we make. In addition, rising rates generally means GDP is growing. Most of our businesses are resilient in tough environments but more valuable when underlying fundamentals are strong. The ideal conditions for us are strong economic growth combined with somewhat higher rates.
The only scenario that would be disruptive is short rates increasing precipitously to 4-5% due to out-of-control inflation, and no growth in the underlying economies (stagflation). However, we do not expect this to arise in this cycle, and therefore we expect the environment to be constructive.
The return demanded for most of our investable asset classes have come down due to the decrease in risk-free rates globally, producing increases in asset values. The one laggard is commercial property assets, which are only now starting to move up. We would normally have seen values rise before now in response to the interest rate reductions; however, this hasn’t yet happened as a result of the perception of the impact of Covid and all that came with it in terms of real estate. As this perception abates, and in particular as people re-occupy offices globally, there is room for cap rates to move down and value to go up. If views toward commercial property strengthen, the appreciation of assets should occur irrespective of modest interest rate movements upward, as the spread of cap rates over interest rates is currently one of the widest ever.
Privatization of Brookfield Property Partners
We have formally agreed with the special committee of BPY to privatize Brookfield Property Partners. The transaction should close around the end of the second quarter, subject to regulatory approvals and the favorable vote of the BPY unitholders. We believe we are paying a fair price, given the trading values of other property companies in the stock market, but we should be able to do more with BPY’s assets once they’re privately owned than BPY could do with them under the constraints affecting a public entity.
Unitholders of BPY can choose to receive proceeds of $18.17 per BPY unit in the form of cash (permitting them to move on to other investments), preferred shares (which will pay them a similar dividend to what they received before), or Brookfield Asset Management Class A shares (where they will be able to stay invested with all of us). We believe the offer is in the best interests of BPY – and the Special Committee, with the assistance of its advisors, has agreed with us. Most importantly, we believe BPY unitholders who receive Brookfield Class A shares will have a greater opportunity to compound wealth than if they remain invested in BPY.
The tone in the market for commercial property assets is very negative at the moment. Real estate stocks have been trading as though no company will ever occupy an office again, no person will ever set foot in a store and nobody will ever travel again, for either business or leisure. We do not believe that any of these will be the case, and so we are investing accordingly.
Culture is Everything
Part of our confidence in our real estate business stems from our long-term perspective, and our having been in the business for many decades. The other factor is our experience in building a company culture. There has been a debate going on in the news globally about whether a company should have office space, or whether instead it can merely exist online. Our view is that in the short term many survived without an office, but in the long term, a company will not prosper without the interaction that comes with people working together in an office. We come to this conclusion for numerous reasons, but mostly because of Culture.
Clayton M. Christensen, James Allworth and Karen Dillon captured the meaning of Culture in a section of their book “How Will You Measure Your Life?” It goes as follows:
Culture is a way of working toward common goals that have been followed so frequently and so successfully that people don’t even think about trying to do things another way. If a Culture has formed, people will autonomously do what they need to be successful. These instincts aren’t formed overnight. Rather they are the result of shared learning—of employees working together to solve problems and figuring out what works.
The advantage of this is that it effectively causes an organization to become self-managing. Managers don’t need to be omnipotent to enforce the rules. People instinctively get on with what needs to be done.
As far back as ancient Rome, emperors would send off an associate to govern a newly conquered territory thousands of miles away. As the emperors watched the chariot go over the hill—knowing full well they would not see their associate again for years—they needed to know that their understudy’s priorities were consistent with their own, and that he [or she] would use proven, accepted methods to solve problems. Culture was the only way to make sure this happened.
We are not in Roman times, but the Culture of an organization is often the difference between those seemingly always able to make good decisions, and those which often seem to make bad decisions. To make this specific point, we ask you to pause and reflect on companies and management teams you have invested with. We suspect that when you do so, you will find a strong Culture in the great companies you’ve invested with, and a weak Culture in the average to below-average ones. This is not an accident.
This leads us back to office space. We believe the Culture of a company can only be maintained with a physical presence. Video technology can assist, but it cannot replace physical presence. Companies without a distinct Culture will slowly die over time if they try to get by on video interaction. Of course, some jobs can be done from home, and many specific activities in fact are augmented by video technology, but offices are a very important part of bringing people together in order to build trust for advancing goals and dealing with the inevitable tough times all organizations face on occasions. Furthermore, without the learning that is passed on from more experienced colleagues to younger generations—and the camaraderie created by an office—there is no link between humans. With no links between humans, a Culture does not exist, and with no Culture, eventually there will be no company.
We look forward to seeing you at the office.
Infrastructure Privatization is Accelerating
Infrastructure assets continue to move into private hands; institutional capital is increasingly available for investment in infrastructure; and the stability of cash flows over the last year has proved the durability of the infrastructure business.
During the last year, two very significant macro events occurred. Each adds very substantially to the positive backdrop for global infrastructure investment. The first is that to create the stimulus programs to combat the pandemic, virtually every government in the world borrowed more money than they ever imagined and have yet to address the question of how to pay it back.
The second is that interest rates were reduced very substantially and unless central banks get it wrong in exiting this period, they look to stay “lowish” for this cycle. As a result, institutional investors increasingly turn to alternative investments to enhance returns as they continue to rotate out of low-yielding government bonds.
With respect to repaying government debt, there are only two ways out: economies must grow and generate increased taxes to ensure that the debt can be serviced and reduced, or assets must be sold. For a government, asset sales generally mean the sale of infrastructure assets and/or letting others (the private sector) make future investment when they are required. As a result, private infrastructure spending is set to increase in a step change fashion. This will create opportunities for private investors for decades.
Using just two examples, the global economy will require trillions of dollars of investment to bring 5G to their citizens (cell towers, data centers, fiber) and to transport natural gas to Asian economies so they can decarbonize away from coal. Farther away, the capital required to decarbonize the electricity grid and transition away from fossil fuels is one of the greatest investment undertakings to have ever been contemplated.
The returns earned from our infrastructure investments have been excellent. The ±15% compound annual returns we’ve realized over 15 years would be a strong return in any asset class, but given the durability of infrastructure cash flows, it is even more exceptional. The cash-flow durability showed through during 2020, as every asset of ours was deemed essential and, with very few exceptions, generated the cash flows that were expected. This means infrastructure has passed the test and has become a full-scale asset class for investors – a far cry from where we started 20 years ago. As a result, we are now in a growth cycle of opportunities to invest, greater capital available to put to work, and a very strong backdrop to the business.
Even with an extremely positive backdrop, business is never easy; others have observed these same trends and are investing directly or raising third-party capital to invest into infrastructure. As a result, we have to be creative with our deals, but as always we will utilize our global reach and scale of operations to differentiate our capital from that of others. We think the odds favor a good decade ahead.
Our Business is About Planting Seeds and Then Harvesting the Crops
Our business is about buying and growing businesses. We buy in areas in which we have expertise; we then try to operate the assets well; and finally we harvest cash from those assets when it makes sense. Some years are better for planting seeds, others are better for harvesting. Rarely are both exceptional at the same time, in the same place. This is why being diversified by business and country is important.
During 2020, we made many investments and deployed substantial capital. As we turn to 2021, the capital markets in developed markets are robust and we are monetizing assets at excellent values. On the other hand, in some markets like India, China, and Europe, markets are less flush with capital and therefore offer opportunities for buyers. In addition, some businesses were more affected by the pandemic – such as hotels, travel, tourism, in-person retail and other businesses which rely on human touch. Many of these sectors need capital, and we are focused on a number of them.
On the opposite end of the spectrum, there are times when it is good to sell assets and times when it is not. It is better to sell when markets are robust. In the first half of 2020, most private assets were not saleable at reasonable prices, so we sold almost nothing. Our results reflected it.
Today, on the other hand, it is time to harvest in many places. Central banks have put enormous stimulus into developed economies to ensure markets recover from the recession, resulting in substantial availability of capital. Therefore, in the last quarter of 2020 and first quarter of 2021, we harvested substantial cash through asset sales – resulting in $19 billion returned to clients and $5 billion added to our balance sheet, with most of these sales in excess of our view of long term value, and almost all in excess of IFRS values.
We remain committed to being a world-class asset manager, and to investing capital for you and the rest of our investment partners in high-quality assets that earn solid cash returns on equity, while emphasizing downside protection for the capital employed. The primary objective of the company continues to be to generate increasing cash flows on a per-share basis and, as a result, higher intrinsic value per share over the longer term.
And do not hesitate to contact any of us should you have suggestions, questions, comments or ideas you wish to share.
Chief Executive Officer
May 13, 2021
Cautionary Statement Regarding Forward-Looking Statements and Information
All references to “$” or “Dollars” are to U.S. Dollars. 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 harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements which reflect management’s expectations regarding the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook of Brookfield Asset Management Inc. and its subsidiaries, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” In particular, the forward-looking statements contained in this letter include statements referring to the impact of current market or economic conditions on our businesses, the future state of the economy or securities market, the expected future trading price of our shares or financial results, the results of future fundraising efforts, the expected growth, size or performance of future or existing strategies, future investment opportunities, or the results of future asset sales. In addition, forward-looking statements contained in this letter include statements regarding the privatization of our property business, including the impact such privatization may have on our business and the actions we may take following such privatization. References in this letter to the “Value” of our shares are forward-looking statements. Additional detail regarding how we measure the Value of our shares can be found on page 5 of our Q1 2021 Supplemental Information which can be accessed here: https://bam.brookfield.com/reports-and-filings/financial-reports/supplemental-information.
Although we believe that our 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, many of which are beyond our control, including the ongoing and developing COVID-19 pandemic and the global economic shutdown, which may cause the actual results, performance or achievements of Brookfield Asset Management Inc. 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, but are not limited to: (i) investment returns that are lower than target; (ii) the impact or unanticipated impact of general economic, political and market factors in the countries in which we do business including as a result of Covid-19 and the related global economic shutdown; (iii) the behavior of financial markets, including fluctuations in interest and foreign exchange rates; (iv) global equity and capital markets and the availability of equity and debt financing and refinancing within these markets; (v) strategic actions including dispositions; the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits; (vi) changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and estimates); (vii) the ability to appropriately manage human capital; (viii) the effect of applying future accounting changes; (ix) business competition; (x) operational and reputational risks; (xi) technological change; (xii) changes in government regulation and legislation within the countries in which we operate; (xiii) governmental investigations; (xiv) litigation; (xv) changes in tax laws; (xvi) ability to collect amounts owed; (xvii) catastrophic events, such as earthquakes, hurricanes and epidemics/pandemics; (xviii) the possible impact of international conflicts and other developments including terrorist acts and cyberterrorism; (xix) the introduction, withdrawal, success and timing of business initiatives and strategies; (xx) the failure of effective disclosure controls and procedures and internal controls over financial reporting and other risks; (xxi) health, safety and environmental risks; (xxii) the maintenance of adequate insurance coverage;(xxiii) the existence of information barriers between certain businesses within our asset management operations; (xxiv) risks specific to our business segments including our real estate, renewable power, infrastructure, private equity, credit, and residential development activities; and (xxv) and factors detailed from time to time in our documents filed with the securities regulators in Canada and the United States.
We caution that the foregoing list of important factors that may affect future results is not exhaustive and other factors could also adversely affect its results. Investors and other readers are urged to consider the foregoing risks, as well as other uncertainties, factors and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information.
Expect where otherwise indicated, the information provided herein is based on matters as they exist as of the date hereof and not as of any future date. Unless required by law, we undertake no obligation to publicly update or otherwise revise any such information, whether written or oral, to reflect information that subsequently becomes available or circumstances existing or changes occurring after the date hereof.
Past performance is not indicative nor a guarantee of future results. There can be no assurance that comparable results will be achieved in the future, that future investments will be similar to the historic investments discussed herein (because of economic conditions, the availability of investment opportunities or otherwise), that targeted returns, diversification or asset allocations will be met or that an investment strategy or investment objectives will be achieved.
Certain of the information contained herein is based on or derived from information provided by independent third-party sources. While Brookfield believes that such information is accurate as of the date it was produced and that the sources from which such information has been obtained are reliable, Brookfield makes no representation or warranty, express or implied, with respect to the accuracy, reasonableness or completeness of any of the information or the assumptions on which such information is based, contained herein, including but not limited to, information obtained from third parties.