Brookfield in buy mode despite $25-billion drop in assets

Open this photo in gallery:

Brookfield Asset Management Inc. says market turmoil in the first quarter cropped US$25-billion from the value of the assets it manages, but said its strong balance sheet is allowing it to plow ahead and buy what it sees as bargains.

The drop came in what Brookfield calls “fee-bearing capital," which is the money it manages for outside investors in large investment funds, and collects fees on. Brookfield reported US$264-billion in fee-bearing capital on March 31, down from US$289-billion on Dec. 31. About US$15-billion of that decline came from the drop in the share price of the various Brookfield partnerships that trade on public exchanges, such as the real estate-focused Brookfield Property Partners LP.

Brookfield’s complex structure, however, means that those market declines aren’t directly reflected in the company’s earnings. Toronto-based Brookfield said it posted a net loss of US$157-million in the first quarter, compared with a profit of US$1.25-billion in 2019′s first quarter. The loss included just US$414-million in fair-value losses for the assets it holds on its balance sheet, which differ from the invested capital. Brookfield did not identify what prompted the fair-value loss.

Brookfield makes money from its fee-bearing capital, giant portfolios of what it calls “alternative assets” – real estate, infrastructure, energy and distressed debt. The assets are placed in partnerships, some of which trade on U.S. and Canadian exchanges, and Brookfield attracts investments in the partnerships from major investors.

Chief executive officer Bruce Flatt told analysts on the company’s investor call that its fee income has increased significantly from a year ago because of very strong fundraising over the past 12 months. “[It] is perpetual or long-term in nature, and largely not impacted by the market volatility.”

Brookfield’s earnings from its fee-bearing capital were US$286-million in the first quarter, down from US$362-million in the quarter ended Dec. 31, but above the US$238-million reported in 2019′s first quarter.

Mr. Flatt issued a special shareholder letter in late March saying the company had turned its eye to the public stock markets, rather than private investments, and Thursday’s earnings announcement gave some detail to Brookfield’s efforts. He said that since the markets turned south in late February, Brookfield has spent US$2-billion on stocks, including $300-million on buybacks of its own shares, and those of its listed partnerships.

“A large portion of this deployment was into high-quality businesses that are trading at a significant discount to our view of intrinsic value,” Mr. Flatt said. “Over time, these positions could lead to privatizations or controlling positions. But today, at the very least, we expect they will provide excellent returns with large margins of safety as markets normalize.”

In a letter to shareholders on Thursday, Mr. Flatt said the company has a goal of having US$75-billion available to invest, including money at Oaktree Capital Management, the distressed-debt investment company that Brookfield took a majority stake in last year. Oaktree, Mr. Flatt says, has moved up fundraising for its latest fund, which it previously thought it would launch in 2021. “This is one of the great environments ... to buy distressed debt that may have ever been in existence,” Mr. Flatt said.

Brookfield positions itself as a patient, well-capitalized, long-term investor – but when public stock markets drop sharply, as they did in February and March when the world grappled with the ramifications of COVID-19, a disconnect opens up between the market’s view and Brookfield’s view of value.

Brookfield’s invested capital at Brookfield Property Partners, which has exposure to retail real estate, had a stock market value of US$4.27-billion on March 31, more than US$5-billion below the Dec. 31 value. But Brookfield recommends investors focus on the $15.3-billion value it places on the stake under International Financial Reporting Standards, a number that dropped by less than $500-million over the same period.

While the listed values of Brookfield’s partnerships and other publicly traded investments dropped by more than US$9-billion in the quarter, Brookfield said their IFRS value fell by just more than US$2-billion. “To the extent quoted prices are less than IFRS values, those values may be relevant to a stock investor, but not to us as a control investor.”

Brookfield recently announced a US$5-billion fund to invest in retail companies, which also happen to be a major source of income for Brookfield Property Partners. Brookfield is one of the largest owner-operators of enclosed shopping centres in the United States, with 170 properties, totalling almost 150 million square feet, located in 43 states. Brookfield Property Partners CEO Brian Kingston, who joined the investor call Thursday, said Brookfield believes the new generation of digital-savvy retailers wants to increase their physical presence. “There was a waiting line of new tenants to take the place of old line retailers when they vacate our malls,” he said.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.