Brookfield profit hit by higher costs, slower deal activity; CEO lays out vision for renewable energy

Brookfield Asset Management Inc.’s BAM-A-T third-quarter profit fell 74 per cent as interest costs surged and deal activity slowed, but the company continued to raise funds at a record pace and is flush with cash to pursue new investments.

Chief executive officer Bruce Flatt said in a letter to shareholders that the “dislocation” in financial markets in an environment of rapidly rising interest rates has made it harder for many companies seeking financing to access capital, which has slowed the flow of deals. Interest rates could peak in the next six months and should “slowly come down” as inflation abates, he said, but many of the world’s major economies look like they “will experience a recession.”

As capital grows increasingly scarce, however, Brookfield looks to be in an advantageous position to make deals after booking capital inflows of US$33-billion in the third quarter. The Toronto-based asset manager is on track for its largest fundraising year ever, Mr. Flatt said, and now has US$125-billion of capital available to deploy into new investments.

“During times of less capital availability … those with more capital, more opportunities come to them,” he said on a conference call with analysts on Thursday.

Brookfield’s profit was US$716-million in the quarter that ended Sept. 30, compared with US$2.72-billion a year earlier.

Interest costs swelled to US$2.87-billion – a 51-per-cent increase from last year, as central banks have continued to rapidly raise benchmark rates to combat high inflation.

But Brookfield’s distributable earnings – a cash-like measure that shows how much of company profits could be paid out to shareholders – was up 39 per cent to US$1.2-billion, surpassing analysts’ expectations. And its funds from operations (FFO), a metric that removes some non-cash items, increased 30 per cent to US$1.2-billion.

The increase in FFO was driven partly by an 18-per-cent rise in earnings from fees. Capital managed by Brookfield that generates fees from outside investors increased 19 per cent year-over-year to US$407-billion.

On Wednesday, Brookfield shareholders also approved a plan announced earlier this year to spin off the company’s asset management business. Brookfield invests billions of its own money, plus dollars from outside investors, in giant portfolios of real estate, infrastructure, energy and distressed debt. The proposed split would pull the business of selecting investments into a separate company that would collect management fees as revenue and leave the assets in the original company.

Brookfield Asset Management Inc. will be renamed Brookfield Corp., and will own about US$150-billion of private and listed investments, including a 75-per-cent stake in the newly listed asset manager. The company expects to complete the transactions before the end of the year.

Brookfield’s share price was up 9 per cent to $59.83 in midday trading on the Toronto Stock Exchange on Thursday./UPDATE

In his shareholder letter, Mr. Flatt also outlined a bullish vision for investing in the future of renewable energy. He said a recent deal by affiliate Brookfield Renewable Partners LP in partnership with Cameco Corp., to buy U.S.-based nuclear company Westinghouse Electric Co. is “a new pillar” of its renewables strategy. Brookfield’s long-term plan is to build “a vertically integrated nuclear operator for the western world,” he said.

On Wednesday, Brookfield Renewable announced it is leading a consortium making a non-binding buyout offer worth $18.4-billion Australian ($16-billion) to acquire Origin Energy Ltd., Australia’s second-largest power producer and energy retailer.

Brookfield Renewable and Cameco acquired Westinghouse for US$4.5-billion plus more than US$3-billion in assumed debt. The seller was another Brookfield affiliate, Brookfield Business Partners, which had turned Westinghouse around after buying it out of bankruptcy in 2018.

The fact that both seller and buyer were Brookfield entities raised eyebrows when the deal was announced. But Mr. Flatt said the deal’s structure helped sidestep a pair of key obstacles: A change of control would have forced Westinghouse to repay its low-cost debt, and “if it were sold outright, there was significant risk that governments wouldn’t approve the buyer.” That’s because Westinghouse operates sensitive infrastructure around the world, making it a strategic asset for the United States.

Mr. Flatt expects nuclear power will be a key contributor to global efforts to meet targets for net-zero carbon emissions. “We are now positioned at the heart of the nuclear transformation that we foresee unfolding over the coming decades,” he said.