Brookfield Asset Management Inc. BAM-A-T chief executive Bruce Flatt says the inflationary environment is enhancing the value of its investments – but the company’s second-quarter results show it is not completely immune from current market conditions.
On Thursday, Brookfield also revealed a few more details of the planned spinoff of its asset-management business, including the appointment of former Bank of Canada governor Mark Carney as chair of the new company, and the spinoff’s new name: Brookfield Asset Management Ltd.
Brookfield Asset Management Inc. will then be renamed Brookfield Corp.
The company reported a 39-per-cent decline in net income in the second quarter, to US$1.48-billion, owing in part to decreased gains on the sale of assets and interest expenses that outpaced revenue gains.
The company’s funds-from-operations metric, which removes a number of non-cash items from the calculation, and its “distributable earnings,” which removes additional expense items and adds dividends from its investments back into the mix, fell by more modest amounts.
Brookfield recorded US$2.41-billion in interest expenses in the quarter, up 31 per cent year over year. The amount of corporate borrowings on the balance sheet rose 11 per cent, to US$12.05-billion.
Brookfield uses debt to finance many of the purchases of real estate, infrastructure and entire companies owned by the funds it manages. In addition to the corporate borrowings, it has US$187.6-billion in debt secured by properties and other investments.
About two-thirds of Brookfield debt is fixed-rate, with the remainder floating upward as rates rise.
Brookfield shares closed up 1 per cent Thursday, at $68.40, on the Toronto Stock Exchange.
“Interest rate stress caused significant market disruption in the second quarter of 2022, but it is important to keep this in context,” Mr. Flatt wrote in his shareholder letter, addressing interest-rate increases in a macroeconomic context.
Despite two U.S. Federal Reserve rate increases, and more to come, Mr. Flatt theorizes that “rates are expected to settle at historically ‘low-ish’ levels, which should still be very conducive to business … balance sheets for individuals and companies are in a good position to withstand this shift, and before we know it, we expect to be in a recovery.”
Brookfield has billions of its own money invested in giant portfolios of what it calls “alternative assets” – real estate, infrastructure, energy and distressed debt. It also attracts outside money, from institutional investors and the wealthy, to invest alongside it. The assets it buys are placed in partnerships, some of which trade on U.S. and Canadian exchanges, and other private funds.
Mr. Flatt said many of Brookfield’s infrastructure, renewables and real estate assets are positioned to benefit from inflation and its revenue and cash profit margins are increasing. With many stock markets down more than 20 per cent and credit markets “turning sideways for many corporate borrowers,” he wrote, Brookfield is “investing capital at excellent returns – much higher than we would have otherwise achieved under conditions like those experienced in late 2020 and 2021.”
Indeed, Brookfield seems to have no trouble attracting money. It said it had record inflows of US$56-billion since the end of the last quarter. Its fee-bearing capital – the amount of outside investor money Brookfield manages – was US$392-billion as of June 30.
Brookfield said in May that it would spin off a new asset-management business to shareholders by the year’s end, creating a roughly US$80-billion new entity that would pay most of the dividends its shareholders now receive.
Mr. Flatt said in his letter that Mr. Carney, who joined Brookfield as vice-chair and as an adviser to its Transition funds in 2020, will serve as chairman of the board of the new money manager. Mr. Flatt will be its CEO while remaining CEO of the rechristened Brookfield Corp.
Brookfield also said Connor Teskey, the CEO of its renewables and transition group, will add the title of president of the new asset manager to his CV. Nicholas Goodman, Brookfield’s chief financial officer, will also serve as the president of Brookfield Corp.
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David Milstead