George Thoreson

About the Author George Thoreson

I'm a bottom-up value investor and invest in companies selling below their intrinsic value, often because they are out of favor, ignored or in a special situation. Searching for value leads to interesting companies that are out of favor for many possible reasons. Studying successful value investors and learning from my own mistakes the merits of value investing, over the long term, became apparent. After becoming a value investor my results improved. Sure, I still make mistakes, but on average I’ve been fortunate in getting more right than wrong. My investing approach is covered on my blog; The share price of a company often have nothing to do with the underlying value of the company the shares represent. So, I look for investments that are priced low relative to their true or intrinsic value so they provide a margin of safety. Then we must patiently wait, as an owner of the company, until the share price catches up to reflect the underlying value.

Brookfield Asset Management Inc. (BAM) Earnings: Creating Opportunity with Work

Brookfield Asset Management Inc. (USA) (NYSE:BAMreported: Funds from operations (FFO) during the 1Q15 were $557 million, or $0.82/share, up 14% from the 1Q14. FFO benefitted from expansion of the asset management operations, contributing a 27% increase in fee related earnings. Additional contributions from growth initiatives were offset by reduced contributions from renewable energy when compared to the strong energy prices experienced in the 1Q14 and lower hydrology levels in the 1Q15.

Net income for the 1Q15 was $1.4 billion, or $1.09/share for a 36% increase from 1Q14 reflecting the contribution from acquired and developed assets, and by operating initiatives. Strong leasing results and development activities within the property operations contributed to increased fair value gains. Fee bearing capital increased to $93 billion and fee revenues increased 18% to $791 million on a last twelve months basis and the annualized fee base, including target carried interest stands at $1.3 billion.

Financial Results:

BAM 1Q15 Financial Results

[Source] Press Release

The U.S. businesses were strong but the results were partially offset as foreign operations were converted to the strong the U.S. dollar. BAM expects private fundraising efforts to achieve or exceed original expectations with several closes by the end of this year. They also announced they expect to be in position begin marketing an additional $10 billion of funds later this year.

Over the past three months the company acquired the balance of Canary Wharf, completed a $1.2 billion corporate equity issue, closed on the acquisition of the remaining North American residential business, added assets to the opportunity funds, bought out their partner in the global facilities business, and made a significant oil investment by acquiring a 50% interest in a U.S. public company’s Australian business.

Equity Offering:

Brookfield Asset Management raised $1.2 billion with an equity offering subsequent to quarter end. This issue of stock is the second time in the last 20 years. Previously BAM issued stock to acquire the Fairholme Fund’s General Growth Property (GGP) interest and further BAM’s ownership in GGP.

So why this issuance? During the conference call CEO Bruce Flatt commented that at times, such as now, money can be put to work at extremely attractive returns and used to widen the franchise existing platforms. As an example he used the Babcock and Brown acquisition in 2009 that significantly increased the infrastructure business. Adding later, “we bought businesses that will continue to use capital and generate very high returns for a very long period of time.”

While existing shareholders generally don’t like equity issues because they dilute the assets that their shares represent and distribute the companies earnings over more shares. That is unless the stock is significantly overpriced, and the inflated stock “currency” can be used to buy assets or a cash flow stream that is on sale. BAM’s stock is not overpriced at this time in my view.

Apparently there are some significant opportunities on the horizon and attractive enough to issue equity because BAM’s management on numerous occasions have expressed a reluctance to issue equity. Time will show if these opportunities come to fruition, in the meantime this management team has earned my confidence with an exceptional track record of generating excellent returns for BAM shareholders.

BAM 1Q15 Returns

[Source] Annual Meeting Presentation

The company’s management and directors own approximately 20% of the company’s equity so we know their interests are aligned with ours. They also purchased $75 million of this new equity offering, a sign of their confidence in the potential opportunities as well.

Stock Split and Dividend Increase:

Also announced was a 3-for-2 stock split, effective May 12, 2015 to make shares more attractive to retail investors. The dividend was increased 6% and this is on top of a 6% dividend increase announced in February for a 12.5% aggregate increase in the dividend this year.

Operating Highlights:

In the letter to Shareholders operations were summarized as follows: “Our asset management fees rose 18% year over year to $791 million over the last 12 months and our assets under management are now well over $200 billion. Fee bearing capital is $93 billion and we continue to see institutional and high net worth investors allocate increasing amounts of their portfolios to real asset strategies.

Our three flagship partnerships in property, renewable energy and infrastructure are all performing well, and each announced increases in their cash distribution targets late last year reflecting continued growth in their underlying FFO. These businesses are all benefitting from new acquisitions as well as operational improvements at existing businesses.

Over the course of this year and into 2016, we expect to be marketing in excess of $20 billion in flagship private funds, including for select new funds focused on specific opportunities we see in certain sectors and markets.”

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