After producing big gains for years, the two Brookfield limited partnerships that I recommended over a decade ago in my Income Investor newsletter went into a deep slump.
Brookfield Infrastructure Partners LP (BIP.UN-T) saw its price drop from $56.49 in August 2022 all the way to $40.84 in late December. That’s a loss of almost 28 per cent in five months. Investors were getting antsy, and rightly so.
Its sister LP, Brookfield Renewable Partners (BEP.UN-T) was faring even worse. At the start of 2021, the units were trading at over $58. By December 2022, they were down to $32.58, a drop of almost 44 per cent.
Thankfully, the bleeding seems to have stopped. The infrastructure partnership closed on June 14 in Toronto at $49.09, up about 20 per cent from its low point.
BEP.UN finished that day at $39.77, ahead about 22 per cent from its December low.
What happened? In the case of BIP.UN, the main problem appears to have been the decline of the broad market. Almost everything was down in 2022, even companies with strong revenue producing assets. Brookfield Infrastructure Partners falls into that category.
BIP.UN
The Bermuda-based operation has interests in assets around the world. They include 62,000 kilometres of operational electricity distribution and transmission lines, 4,200 kilometres of natural gas pipelines, 25,600 kilometres of gathering, transmission and transportation pipelines, as well as 600 billion cubic feet of natural gas storage and 5.7 billion cubic feet per day of NGL processing capacity.
That’s not all. The partnership also has a stake in 32,300 kilometres of rail, 3,800 kilometres of toll roads, 11 terminals and two export facilities. It has a position in 209,000 telecom towers, two semiconductor manufacturing foundries, 46,600 kilometres of fiber-optic cable, and 900,000 fiber-to-the-premise connections. Then there’s its 50 data centres, with 230 megawatts of critical load capacity. The total value of these investments is over US$56-billion.
The corporate strategy is to acquire high-quality assets at reasonable prices, enhance their value by applying its management expertise, and eventually sell them at a profit (Brookfield calls it “recycling”), using the revenue for new investments.
The partnership recently reported first quarter funds from operations (FFO) of US$554-million, up 12 per cent relative to the year before. Organic growth was 9 per cent, “reflecting the benefits of continued elevated levels of inflation on tariffs, strong volumes across our transport networks, and the commissioning of approximately $1-billion in new capital projects over the last twelve months.”
The utilities sector produced the largest gain with FFO of US$208-million, a 25 per cent increase from US$167-million in the same quarter of 2022.
The LP continues to add new assets. In April it invested US$1.6-billion in a European database platform with operations in Germany, France, Italy and Poland, and the buyout of all the shares of Triton International. Triton is the world’s largest owner and lessor of intermodal shipping containers.
Investors are currently receiving a quarterly distribution of 38.25 US cents (US$1.53 per year) for a yield of 4.2 per cent at the current price. The partnership’s distribution growth target is 5-9 per cent annually.
BEP.UN
The plunge in the value of Brookfield Renewable Partners was exacerbated by the weakness in the green energy sector. Most of these companies were hit by rising interest rates, reduction in subsidies in some countries and by the renewed emphasis on conventional oil and gas because of the war in Ukraine.
Also based in Bermuda, the partnership operates one of the world’s largest publicly traded platforms for renewable power and decarbonization solutions. The diversified portfolio consists of hydroelectric, wind, solar, distributed energy and sustainable solutions across five continents. About 60 per cent of its assets are located in North America. Hydro accounts for 8,200 megawatts of installed generating captivity, with wind at 6,900 MW and solar at 4,000 MW. It has 59,600 MW of solar under development, 19,800 MW of wind and 2,500 MW of hydro.
BEP plans to invest US$6-7-billion in new projects over the next five years. It has already committed over $1-billion for this year, in multiple transactions. One example was an agreement to acquire the 50 per cent of Spanish-based X-Elio for US$900-million (US$75-million net to Brookfield Renewable).
X-Elio is a fully integrated global solar development platform with 1,200 megawatts of operating and in construction assets, 1,500 megawatts of late-stage development projects and an additional approximately 12,000 megawatt development pipeline.
The partnership reported first quarter funds from operations of US$275-million (43 US cents per unit), a significant improvement over US$243-million (38 US cents per unit) in the same period of 2022.
BEP said its balance sheet is in “an excellent position” with a credit rating of BBB+. Its available liquidity is almost US$4-billion, which allows significant flexibility to fund growth. “We remain protected from higher interest rates, with 90 per cent of our borrowings being project level nonrecourse debt, with an average remaining term of 12 years, and only 3 per cent exposure to floating rate debt,” the company said.
The current rate of distributions is 33.75 US cents per quarter (US$1.35 per year), with the next payment scheduled for June 30. The yield is 4.3 per cent. As with BIP, the target for annual distribution growth is 5-9 per cent.
I continue to like both these limited partnerships, and own positions in them. There are also corporate equivalents for each (BIPC-T and BEPC-T), but they trade at a higher price and therefore offer a lower yield.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape