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Friday, August 30, 2019

Long-term Value Creation Requires Hard Work

Long-term Value Creation Requires Hard Work 

A good example of how the management team at Brookfield go about their business in optimizing and financing newly bought assets even when the winds of economic change put up roadblocks that hinder the development of those same assets. Notice the emphasis on patience and long-term thinking...Brookfield trademarks...

We create shareholder value in a number of ways but often it requires contrarian thinking and hard work. Once in a while we get lucky, and our timing and execution is perfect. Other times we have to dig in and work hard to turn an investment around. An example of this is our investment in Natural Gas Pipeline Company of America LLC (“NGPL”).

We initially acquired a 27% position in NGPL through Brookfield Infrastructure Partners as part of a larger recapitalization transaction that we completed at the height of the global financial crisis in 2009. While many of the other investments acquired in this transaction performed exceptionally well following the financial crisis, this business faced a number of headwinds – including a regulatory review that reduced the rates it could charge to customers, and a natural gas market that had fundamentally shifted to a position of oversupply, adding further pressure to pricing. By 2014, revenue had declined substantially and with its debt ratings downgraded, NGPL was faced with a challenging environment to refinance its $2 billion of near-term debt maturities.

Despite its poor financial performance after we acquired our stake, and contrary to common opinion, we viewed NGPL as a high-quality asset strategically located and positioned to benefit from the changing dynamics of the North American natural gas market. We were confident that we could fix the issues. To this end, with a partner, we acquired 100% of NGPL and created a 50/50 joint venture with a multi-year strategy to unlock value.

Together we recapitalized the business with $1 billion of new equity, then refinanced the company’s debt. We re‑aligned management with a plan that focused on generating value over the long term and established a simple governance framework that allowed for efficient decision making on key business matters
. Lastly, we came up with an operational plan that included various capital projects that expanded capacity and reversed flow on several sections of the pipeline to facilitate new demand from customers to flow gas north to south.

The culmination of these efforts is that NGPL has turned around and cash flows have increased 20% in the last few years to almost $400 million. We also put in place longer duration capacity contracts to reduce our risk to volume fluctuations. 
This all led to a recapitalization plan last year that concluded with a successful $1.4 billion long-term bond issuance. With this issuance, NGPL’s debt rating increased nine notches (almost unprecedented), recently receiving an investment grade rating, and the annual interest costs declined by $130 million due to the lower rates and reduced leverage.

We also identified over $500 million of expansion projects backed by long-term contracts with high-quality customers
. Some of these are already in service, or will be soon. All in all, we expect annual EBITDA of approximately $500 million within the next few years, which represents a 50% increase since we started our re‑work of the asset.

Bottom line: by doubling down on a good business and by putting our operational and financial skills to work, together with an aligned and high-quality partner, we turned around performance and set the foundation for a great future at NGPL. This success was due to a number of things, but most importantly to a lot of hard work.

Closing

We remain committed to being a leading, world-class alternative asset manager, and investing capital for you and our investment partners in high-quality assets that earn solid cash returns on equity, while emphasizing downside protection for the capital employed.

The primary objective of the company continues to be generating increased cash flows on a per share basis and as a result, higher intrinsic value per share over the longer term.

Resources

Brookfield Asset Mangement
Q2 2018 Letter to Shareholders

Monday, August 26, 2019

Brookfield or Brookfield or Brookfield?

Brookfield or Brookfield or Brookfield?

A general overview of the Brookfield family of companies. Brookfield do business in North and South America as well as Europe, India and China. Their business is world-wide in scope while they work their way into the arteries of the world economy. While the media report on the knee-jerk news of the day and Wall street fixate on the next quarterly earnings reports, the management team at Brookfield patiently place their chess pieces on the strategic squares of the world economy and wait while planning for the future.


Brookfield or Brookfield or Brookfield?

We are often asked by investors which Brookfield stock they should own – BAM or one of our four listed partnerships. While it sounds self-serving, we recommend “all of them,” because while each carries the Brookfield brand and owns and operates high-quality businesses, each one is different and has a specific goal of being best in class in their specific area of expertise – asset management, real estate, renewable power, infrastructure or private equity.

Of course, BAM is a significant owner of each of our listed partnerships, benefiting from their cash flows and value creation, but is focused and driven by our asset management business. It is though notable that our franchise is differentiated in the asset management industry by the scale and growth potential of these best-in-class listed partnerships which are managed by us in the same way as we manage our private funds for private investors. Furthermore, with very large ownership stakes in each partnership, we are incented to ensure each creates longterm value because as each of our entities does well, and trades well, this translates into further value creation for BAM.

The commonality of our entities is that all share the same disciplined investment approach, respect for capital, and access to our global operating platform and relationships. These characteristics have stood us well for a long time.

Brookfield Property Partners (BPY) is a premier, diversified commercial real estate portfolio featuring some of the world’s premier propertiesThis is a portfolio that is well leased to high credit-quality tenants, generating stable, sustainable cash flows. The business features significant organic growth through an active development and redevelopment pipeline, in which the company leverages its multi-sector expertise. Investment returns are supplemented by BPY’s participation in Brookfield-sponsored real estate opportunity funds, which invest in high-quality assets that are mispriced or feature significant operational upside across various property sectors, such as logistics, multifamily and self-storage.

Brookfield Infrastructure Partners (BIP) owns high-quality infrastructure assets that are the backbone of the global economy. Infrastructure cash flows are supported by regulated and long-term contractual frameworks and typically their cash flows are linked to inflation and/or global growth. The opportunity set in the business is very substantial as governments and corporations outsource their infrastructure investment to entities specialized in managing these types of assets. BIP is positioned with an investment-grade balance sheet, and irreplaceable assets on five continents across four sectors; energy, transportation, utilities and data.

Brookfield Renewable Partners (BEP) is one of the largest pure-play renewable power businesses globally, offering exposure to decarbonized energy, at a time when the global power grid is transforming from fossil fuels to renewables. BEP has 100+ years of experience in power generation, with over 17,000 megawatts of hydro, wind, solar, distributed generation and storage capacity across four continents. Over 75% of the generation is from hydro, leading to long-term cash flows with minimal annual re-investment.

Brookfield Business Partners (BBU) offers a unique opportunity to invest publicly in private equity investments. BBU invests in businesses with high barriers to entry, low production costs and those with the potential to benefit from Brookfield’s global operating expertise. BBU has the flexibility to invest in any form (debt, equity, public, private) and across industries, enabling investment flexibility for when we find “good businesses” in times of market dislocation.

While each of our five securities is different, they are all investments that we expect will generate significant value creation over the long term. We hope that at least one of them will suit your investment needs, but we think all of them can belong in a well-diversified portfolio of investments.

Bruce Flatt,
Excerpt from Brookfield Asset Management’s Quarterly Letter,
February 14, 2019

Tuesday, August 20, 2019

A Thumbnail Sketch of the Brookfield Empire


A Thumbnail Sketch of the Brookfield Empire

Since I own the parent company in the Brookfield empire along with all four of their limited partnerships, I thought I would post this thumbnail synopsis of their varying business lines...They are in fact, all core holdings for me which make up 60 percent of the value of my whole portfolio on their own...

The Parent Company

Brookfield Asset Management Inc. is an alternative asset manager. The Company operates in eight segments. The Asset Management segment manages its listed partnerships, private funds and public markets on behalf of its clients. The Property segment includes the ownership, operation and development of office, retail and other properties. The Renewable power segment operates and develops hydroelectric, wind power and other generating facilities. The Infrastructure segment includes the ownership, operation and development of utilities and agricultural operations, among others. The Residential development segment includes homebuilding, condominium development and land development. The Service activities segment includes construction management and contracting services and property services. The Private equity segment includes the investments and operations overseen by its private equity group. The Corporate activities segment includes the allocation of capital to its operating platforms.

The Four Limited Partnerships

Brookfield Infrastructure Partners L.P. owns and operates utilities, transport, energy and communications infrastructure businesses in North and South America, Europe and Asia Pacific. The Company's segments include utilities, transport, energy, communications infrastructure and other. The utilities segment consists of regulated businesses, including regulated distribution (electricity and natural gas connections), electricity transmission and a regulated terminal (coal export terminal). The transport segment consists of open access systems that provide transportation, storage and handling services for freight, bulk commodities and passengers. The Company's energy segment consists of systems that provide transportation, storage and distribution services. The Company's communications infrastructure segment provides services and infrastructure to the media broadcasting and telecommunication sectors.

Brookfield Renewable Partners L.P., formerly Brookfield Renewable Energy Partners L.P., is the owner and operator of a portfolio of assets that generate electricity from renewable resources. The Company operates as a pure-play renewable power platform. Its segments include Hydroelectric, Wind, Other and Corporate. It operates renewable power generating assets, which include conventional hydroelectric facilities and wind facilities located in North America, Colombia, Brazil and Europe. It also operates approximately four biomass facilities and three Co-gen facilities. It owns approximately 10,730 megawatts (MW) of installed capacity and an over 6,000 MW development pipeline diversified across 15 power markets in North America, Colombia, Brazil and Europe. This portfolio includes approximately 217 hydroelectric generating stations on over 82 river systems and approximately 38 wind facilities. Its portfolio also includes over 3,000 MW of medium to long-term development projects.

Brookfield Property Partners L.P. is a diversified global real estate company. The Company owns, operates and develops a portfolio of office, retail, multifamily, industrial, hospitality, triple net lease, self-storage and student housing assets. Its partnership is Brookfield Asset Management Inc.'s public commercial property entity and the primary vehicle through which it invests in real estate on a global basis. It operates through four segments: Core Office, Core Retail, Opportunistic and Corporate. As of December 31, 2016, its Core Office segment consisted of interests in 142 office properties totaling 99 million square feet. As of December 31, 2016, its Core Retail segment consisted of interests in 127 regional malls and urban retail properties. As of December 31, 2016, its Opportunistic segment consisted of 107 office properties comprising approximately 29 million square feet of office space in the United States, United Kingdom, Brazil and Asia.

Brookfield Business Partners L.P. is a provider of business services, including construction services, residential real estate services and facilities management. The Company operates through five segments: Construction services, Other business services, Energy operations, Other industrial operations, and Corporate and other. The Construction services segment includes construction management and contracting services. Other business services include commercial and residential real estate services, facilities management, logistics and financial services. The Energy operations include oil and gas production, and related businesses. The industrial operations include select manufacturing and mining operations. The Company's operations are primarily located in Australia, Canada, the United Kingdom, the United States and the Middle East.


Monday, August 12, 2019

Book summary: ‘The Big Secret for the Small Investor’ by Joel Greenblatt

Book summary: ‘The Big Secret for the Small Investor’ by Joel Greenblatt

Suppose you’re a beginning investor who wants to invest for yourself but is not interested in doing all the work that’s involved with that undertaking. Nor do you want to abdicate control of your investments to the financial advisers out there as your not sure you can trust them (generally thinking, you would be wise in assuming this.)  Joel Greenblatt’s third book which apparently few people have read is the perfect prescription…This man Greenblatt writes superb investing books…


Chapter 1: How to beat the market

The Efficient Market Hypothesis (EMH) which says that markets are efficient, and therefore it is not possible to beat the market, other than by luck, is false. Still, beating the market can be very difficult, even for highly intelligent, hard working people who have attended top business schools. The secret to beating the market is in learning just a few simple concepts that almost anyone can master, and that serve as a road map. Even though the concepts needed to be a successful stock market investor are simple and most people can do it, it’s just that most people won’t.

Chapter 2: The secret to successful investing

The secret to successful investing is to figure out the value of something and then pay a lot less. The ‘a lot less’-part is called the margin of safety. The value of a business comes from how much that business can earn over its entire lifetime (20-30 years). (Actually it is better to use cash flow instead of earnings, but in the book it is assumed that earnings are a good approximation for cash received.) The earnings need to be discounted to the present, which is called a Discounted Cash flow analysis (DCF) to get the Present Value (PV). The problem with a DCF is that 1) it is almost impossible to predict earnings for the next 30 years and 2) small changes in growth rates and discount rates end up making a huge difference in the present value.

Chapter 3: Other valuation methods

Besides a DCF, there are also other ways to determine the value of something. For instance, you can use a relative value, acquisition value or liquidation value analysis. For larger companies with multiple divisions, you can use a different analysis for each division, and then combine the values of the divisions to get a sum-of-the-parts value. But each of these valuation methods has its own drawbacks and difficulties. So the main point is that it is not so easy to figure out the value of a company. And if we can’t determine the value of a company, we can’t determine an amount that we’d be willing to pay where we’d have a margin of safety.

Chapter 4: Capital allocation

An important part of investing is capital allocation: you compare different investment possibilities to find that ones that are most attractive, that is which you think will provide the best risk-adjusted returns. The first hurdle an investment in a stock must pass, is an investment in a 10-year US government bond, for which we assume the interest is at least 6%. The interest rate on a 10-year US government bond, we call the risk-free rate. If the earnings yield (earnings/price) of a stock is much higher than the risk-free rate, then it might be a good investment depending on how certain we are of our estimates of future earnings of the company. If the first hurdle is passed, we can compare the attractiveness of investing on stock A to different stocks. If we can’t make an estimate of future earnings of a company, we just skip that investment.

Chapter 5: Ways in which individual investors can beat the market

If you’d want to beat Tiger Woods, it would be best to choose a different game than golf. If you’d want to beat professional money managers in investing, it is better to choose a style of investing where they can’t or won’t compete with you. Some possibilities are investing in small capitalization companies (small caps), focused investing (where you analyze and invest in just a few companies where you have a special insight or some deeper knowledge) and special situations investing (spinoffs, bankrupties, restructurings, etc.) The drawbacks of investing in special situations, is that they still require a reasonable amount of work and you still need to have some valuation skills.

Chapter 6: Mutual funds

If you don’t want to do your investing yourself, you can invest in mutual funds. Mutual funds come in two flavors: active and passive. In an active mutual fund an manager tries to invest in a basket of stocks that will beat the market. In a passive mutual fund (also called an index fund) the approach is to try to replicate the returns of an index such as the S&P 500 by buying all or most of the stocks in that index. This chapter focuses on active mutual funds. Managers of mutual funds earn money through the fees paid by investors: the more money they manage, the more they generally earn. So managers of mutual funds try to get investors to invest as much money as possible with them, but this effectively excludes them from investing in small caps (especially focused investing in small caps). Focused investing in large caps is still possible, and though this has the chance to outperform the benchmark, it also has the chance to underperform the benchmark for long periods of time. And since investors in mutual funds usually don’t have a lot of patience, they flee the mutual fund before it has the chance to outperform. Since this is not what the managers want, they will generally not invest in a focused way. Investing in special situation is also no option for mutual funds due to a variety of reasons.

Conclusion: some of the most effective ways to beat the market (as explained in chapter 5), can’t or won’t be used by mutual fund managers. Therefore, most mutual funds don’t beat the market, and because of fees, they don’t even match the market. Although there are some superstar managers who manage to beat the market over longer periods of time, 1) it is difficult to finds these managers ahead of time and 2) most investors time their investments in the fund poorly: they come in after the fund has performed well and they leave after the fund has performed poorly, thereby realizing a much worse return than if they had stayed with the fund for a long period of time.

Chapter 7: Index funds

As we’ve seen above, it’s almost impossible for most investors to value companies on their own, and hiring experts (active mutual fund managers) also doesn’t work because most funds under-perform the market and it’s very difficult to find that funds that will outperform the market ahead of time. A good alternative is to buy an index fund, like a fund which tracks the S&P 500 index. The advantage is that can be implemented very cost-effectively and efficiently. The problem is that investing this way is fundamentally flawed: since the index is market-cap weighted (the larger the market capitalization of a company, the larger the part of that company in the index), the more overvalued a company is the more over-weighted it becomes (and vice-versa). So you end up systematically owning too much of the companies that are over-valued and systematically too little of the companies that are undervalued.

A better alternative to market-cap weighted indexes are equally weighted indexes in which each company has the same weighting. This adds on average 1-2% of return per year over market-cap weighted indexes. The problem with equal weighting is that these indexes can’t handle too much money due to the smaller constituents in the index. Another alternative is fundamentally weighted indexes, where the weighting of a company in an index is determined on the basis of one or more fundamentals like earnings, sales, dividends, book value, etc. This also adds on average 1-2% of return per year, and –unlike equal weighted indexes– it can handle large amounts of money, since larger cap companies are still overweight in the index, and also requires much less trading within the fund. So fundamentally based indexes are a better way to replace market cap weighted indexes than are equally weighted indexes.

Chapter 8: Value-weighted index funds

An attempt to improve upon fundamentally based indexes, is to use the value effect: companies that appear cheap relative to earnings, book value, etc. have been shown to beat the major market indexes by as much as 2-3% per year over long periods of time. So we could design a value-weighted index in which the cheaper a company appears, the larger its weight in the index. And while we are at it, why don’t we add the philosophy of Warren Buffett and Charles Munger to the mix, and look for companies that are not just cheap, but cheap and also good. Trailing earnings yield (the earnings yields based on last fiscal year’s financial data) can be used as a proxy for cheapness and trailing return on capital as a proxy for quality (see ‘The little book that still beats the market’, also by Joel Greenblatt). Had you done this over the last 20 years, you would have beaten the S&P 500 by about 6% annualized (trading costs and market impact modeled, but fund fees not included). When you use a value-weighted index, you not only remove the systematic error that is present in a market-cap weighted index, but you also add to the performance by buying more of stocks when they are available at bargain prices.

Chapter 9: Staying the course

The first part of the big secret for the small investor, is to have the right strategy, which is to invest in companies that are both cheap and good. The second part is that we need to stick to the strategy over long periods of time. This is very difficult for many investors to do, because –as research on the subject of behavioral finance has shown– most investors are practically hardwired from birth to be lousy investors: among other things they are impatient, loss-averse, have a herd mentality, are focused on recent events and are overconfident. As we have already seen above, value investing strategies can under-perform the market for periods of multiple years. For very good investors this is a blessing in disguise: if a strategy would work every week, every month and every year, everyone would be a value investor and eventually the strategy would stop working, because in that case the market would be truly efficient. For all other investors, long periods of under-performance are a curse, because they will be tempted to abandon their strategy much too soon and probably at precisely the wrong time.

To help us deal with our human flaws in the area of investing, we need a policy in which we first define what part of our portfolio should be allocated to equities, and then how much that part may vary over time. After we have done that, we need to stick to our policy.

When we combine the strategy and the policy, we have The big secret for the small investor: a new route to long-term investment success.

Resources,

Saturday, August 10, 2019

Time Stops

Time Stops

Before I started to invest in the stock market, I studied trading in great detail, especially as it pertained to the futures market. I learned a lot of traders insisted on using price stops called ‘stop losses’ in order to help them manage their risk and limit their downside losses on trades that turned against them.

In time I learned that short-term trading wasn’t for me but I did pick up some unique ideas from my study of trading the futures market. One was an aberration on the stop loss idea…One trader advocated the idea of using ‘time stops’ in stead of price stops, in other words, instead of selling out your position when it reached a certain price level, one would hold on to it after a certain period of time and re-evaluate. This idea had instant appeal to me as it was different from the conventional wisdom and took the emotion out of the trade.

After a few years of investing in the stock market, I have resurrected this idea and am currently using it in the management of my investment portfolio. When I now buy a stock I tell myself I am going to make at least a three year commitment to holding my position. This has the benefit of making me a lot more discerning in my selection of stocks I want to buy. When I know I am committing to a stock for at least three years I try to make sure that I really want to own it. Of course sometimes shit happens and I sell out before my three-year time-frame, nevertheless my mandate is to hold on to my position for at least three years and then re-valuate my situation. This has improved my overall investing as it acts as a filter to my initial buying process and essentially anchors my whole investing philosophy.

Recently I sold half my position in Stantec Inc (STN), and together with the little money I had in the cash account of my portfolio I bought a few hundred shares of Blackberry Ltd (BB)…The investing thesis for Blackberry is covered in the blogpost below…


I first bought Stantec in January of 2016, so I have held it for three and half years. It didn’t really work out as I had hoped as I was under water on my position and wondering if it was time to cut bait. I decided to sell half my position in Stantec as I still thought it might work out over the long term. Two days after I sold, Stantec released their earnings and missed their numbers and sold off sharply, I guess I got lucky with my timing.

The three year time stop idea instills a certain discipline in my investing and makes me think twice before I buy anything…A good idea for any investor who focuses on the long term.

Thursday, August 8, 2019

Brookfield Asset Management…Q2, 2019…Excerpt from Letter to Shareholders

Brookfield Asset Management…Q2, 2019…Excerpt from Letter to Shareholders

I often see headlines on the net that read, ‘What you need to know before the market opens’…Keep this madness in mind while you read the latest Letter to the Shareholders from Brookfield Asset Management’s CEO, Bruce Flatt…Remember when you buy a share of stock in a public company you are essentially partnering yourself up with the management team of that company. I can’t think of any management team I would rather invest with than the management team at the Brookfield family of companies.

Overview

During the second quarter we continued to grow the business on several fronts. We announced the $14.5 billion first close of our latest flagship private infrastructure fund and added capital to our latest flagship private equity fund, as well as our other private long-life real estate and infrastructure funds. Our listed partnerships achieved their plans for the quarter, and the share price of each recovered as stock markets around the world advanced. This enabled us to pre-fund their equity plans by issuing $840 million of equity for Brookfield Business Partners, and $825 million for Brookfield Infrastructure Partners.

Overall liquidity at Brookfield and our permanent listed partnerships stood at nearly $15 billion. In addition, we have over $35 billion of committed capital from private clients available for investment. With nearly $50 billion of capital available, our resources have never been stronger. This is particularly important, given that we are now 10 years into this market recovery.

We invested $33 billion of capital across our businesses over the past twelve months. This included one of the largest battery companies globally, a number of data infrastructure businesses, 50% of a solar power development business, a rail company, a hospital business, and the continued build of our real estate development projects. At the same time, we monetized a number of assets where we had achieved our goals—and with capital markets open, we continue to dispose of assets across our businesses.

Market Environment

The global business environment continues to be constructive despite the constant political distractions. The U.S. economy is slowing but still remarkably resilient, and with interest rate reductions started, should stay positive in the short term. Europe is decelerating—due largely to a trade slowdown, although it is worth recalling the stress Europe was under just a few years ago. We are a long way from that.

India’s growth is strong, although corporations are capital constrained. This is leading to opportunity for us. Brazil is stuttering, however with pension reform tail winds, business investment is expected to recover. Asia is being hit with an export slowdown but will still grow at strong rates on a relative basis.

Long-term interest rates are now back below 2% in the U.S., and negative in both other major markets for capital globally: Japan and Europe. We are not certain what that means for the global economy, but we do know that in this environment real assets and businesses tend to earn high returns on a relative and absolute basis and can be leveraged for the long term at low interest rates. This results in excellent cash on cash returns. For investors looking for yield and overall return globally, the types of assets we acquire are one of the few places left to earn a decent return.

Capital is freely available both in the credit and equity markets. Global sovereign and institutional investors continue to increase allocations to the types of assets we invest in for them. While good for our capital raising activities, this has commensurately increased capital to other sponsors like us, and therefore increased competition for investments. Despite this, and largely because of our scale, global business and operating capabilities, we believe we will continue to be able to invest capital in good companies on behalf of our investors in a disciplined way and generate strong returns.

Free Cash Flow

There are many factors that contribute to the success of a business and various ways to measure that success. Increasingly, we have been focusing our reporting on a few key metrics. One of the most important measures, we believe, is the Free Cash Flow available for shareholders. This measure is important as it is the cash that can be utilized by owners for investment, or distributed back to owners (similar to what remains in a bank account after paying the bills, making home repairs, and paying for the family expenses).

Our Free Cash Flow is expected to grow steadily and in the absence of something more beneficial, we will increasingly return this cash to shareholders through increased share buybacks (our preferred choice) or increased dividends. The following table was shown in our recent prospectus, but we thought worth highlighting here as it was on page 82 of the document, and some of you may have missed it. It highlights the expected Free Cash Flow generated in Brookfield’s parent company (before the Oaktree transaction) over the next five years.

(MILLIONS)          2019       2020       2021         2022       2023
Free Cash Flow1    $ 2,550    $ 2,990   $ 3,400    $ 4,180    $ 5,390
1. “Free Cash Flow” is cash available for distribution and/or reinvestment as defined in our Supplemental.

As you can see, should we be successful with our plans, the Free Cash Flow numbers grow significantly. To emphasize this, if we achieve our plans, in five years we will be generating an 11% Free Cash Flow yield for shareholders on our current equity market capitalization of approximately $49 billion. This compares to zero return in a bank account and 2% on a 10-year treasury bond. Assuming we have not determined that there is a more beneficial use for this cash, our base case plan is that ±$50 billion will be available to be returned from time to time to shareholders over the next 10 years.

The recently announced transaction with Oaktree utilizes $2.4 billion of cash that could otherwise have been returned to owners. We will also issue 53 million Brookfield shares to complete the transaction. This moves us in the opposite direction to reducing the share count and returning capital; however, we think the benefits of buying Oaktree will be as great or greater than returning the capital to shareholders, as we will add an exceptional asset management franchise to Brookfield. The benefits are expected to enable us to achieve more on a per share basis than we could have without the addition of Oaktree. Rest assured, it has not altered our long-term plans for the return of capital to owners.

Genesee & Wyoming (G&W)

We look for investment opportunities that allow us to utilize our competitive advantages to earn attractive returns. The recently announced take private of Genesee & Wyoming, Inc. (“G&W”) for a total consideration of $8.4 billion is an example of this approach at work.

G&W is a strategic rail business with a long history of providing critical “last mile” transport and related services to a base of 3,000+ customers. It is the lowest cost provider of this necessary market connectivity to customers and Class I rail operators, and benefits from limited competition across its service area. The large customer base and diversification of goods moved across its network result in a cash flow profile that is resilient through economic cycles. This is a rare opportunity to make a significant investment in a business that forms an essential component of the transportation network in the world’s largest economy.

This transaction highlights three key advantages we have that we believe will enable us to earn strong returns over the long term. They were all critical in enabling us to move fast to execute on this opportunity.

First, our size and scale provide access to multiple sources of capital, which enabled us to assemble the capital in a short period of time. We were able to access capital from our publicly listed infrastructure entity, our latest private infrastructure fund, and from a number of co-investment and joint venture partners.

Second, our global presence provides us with a unique perspective across the global markets where we operate. In this case, we formed an investment thesis informed by our experience as owners and operators of logistics networks that include rail and port operations in the U.S., Australia, South America and the U.K. This expertise allowed us to underwrite the company’s international operations. Being both a local and global business makes a difference.

Finally, our significant operating capabilities in this sector allowed us to establish views on unlocking value to earn the returns we require for our capital. Our key areas of focus for G&W include margin improvements and utilizing our relationships to maximize commercial opportunities to position the business for growth. The company also has an expansive and attractive real estate footprint across North America and the U.K., with certain sites to realize value through alternate uses. We will look to leverage our expertise in real estate development to explore these opportunities, something that most other purchasers likely did not focus on.

Vistra Investment

Several years ago, we formed a consortium to acquire distressed debt in a Texas-based electricity generator called Energy Future Holdings. In 2016 following a lengthy Chapter 11 bankruptcy proceeding, the company emerged from bankruptcy as Vistra Energy.

Over the past few years, we have assisted Vistra in hiring a new management team led by industry veteran Curt Morgan. Under his leadership and following a series of acquisitions, as well as a repositioning of the business, Vistra is now a leading competitive power producer in the U.S., serving 3.7 million retail customers in 20 states, and with a generation fleet totaling 41,000 megawatts.

The company has been substantially transformed from a Texas-only business to one that today has many competitive advantages that give it strong investment characteristics, including (a) a national integrated retail and generation platform with high-quality generation assets supporting the lowest operating costs in the industry; (b) diversity in fuel types, including natural gas, wind and solar generation; and (c) stable cash flows backed by its large-scale retail customer base and capacity payments.

Through a combination of improved operating performance and synergies, annual cash flow has improved by more than $1 billion, and the business now expects to generate $3.3 billion in annual adjusted EBITDA and $2.2 billion in annual adjusted free cash flow. Its strong cash flow generation has enabled Vistra to reduce debt (it is well positioned to achieve an investment grade credit rating in the near future with this continued performance) and repurchase shares. To put this in context, the business is yielding greater than 20% in free cash flow relative to its current equity trading price, meaning the company, in the absence of something better, could buy itself back within five years.

Given that the share price of Vistra has doubled since emerging from bankruptcy, we plan to distribute our consortium’s Vistra shares to individual consortium members. That said, we believe the trading price of the company’s shares remains remarkably inexpensive and have the potential to increase considerably. As a result, we intend to hold a portion of our own investment in Vistra for a much longer duration.

Asia-Pacific

The Asia-Pacific region represents $36 billion of our assets under management, or approximately 9% of the total. Australia is the largest portion of this, and we have made great strides with our business there over the past 15 years. India is next, and our scale continues to grow with recent large property and infrastructure transactions. Our presence also continues to grow in China, Japan and South Korea, and while each of these markets will be important, it is inevitable due to sheer scale that over the long term, China will be the largest investment concentration for us in this region.

China continues its march toward becoming one of the leading global economies, and while its growth rate has slowed, it still exceeds 6%—a very rapid pace. More importantly, its economy continues to mature in terms of the institutions, support structures, capital markets and ease of doing business. Of particular relevance to us is China’s real estate market, which has now matured to the point where its major cities resemble most global office markets, and therefore opportunity exists to acquire scale investments. It is also apparent to us that the quality of product and service is generally lower than most global organizations are used to, and therefore can be upgraded for international companies. We believe this will be an attractive opportunity for us for years.

In retail, e-commerce is at greater percentages than anywhere else globally. Ironically, this is because the property offerings for retailers lagged the market build-out of e-commerce. As street and mall retail is built to be utilized by retailers, this integration is the opposite perspective to Western markets, but it is happening and will offer investment opportunities. Industrial and cold storage build-out has years to go to even come close to matching Western economies, and therefore we believe these areas of investment will also offer opportunities for years.

In power, Chinese renewables continue to capture the largest percentage of new build-out, however thermal generation will be extremely important as base-load capacity. We are installing solar on rooftops of industrial properties, and we own wind facilities where we sell power into the grid. Our focus will continue to be on well-located renewables in major population markets in China and Japan. In China, we have yet to find infrastructure opportunities we feel comfortable with, but we are confident that we will eventually also build a presence in this area.

The banks in China are now encouraging companies to reduce debt, which means that for the first time we are seeing excellent opportunities to acquire assets from owners without having to complete ground-up construction. For example, we recently bought a major mixed-use office complex in Shanghai for $1.5 billion, as well as three completed community retail centers. We believe this trend will continue and it will therefore present excellent opportunities.

We are laying the foundation for significant growth in Asia. As a result, it is reasonable to estimate that in 10 years, the Asia-Pacific markets will represent 25% of our total assets under management, offering significant growth for our business.

Closing

We look forward to seeing you on September 26 in Manhattan at our Investor Day. If you cannot attend in person, our main sessions will be webcast live on our website, and also available for replay.

We remain committed to being a leading, world-class alternative asset manager, and investing capital for you and our investment partners in high-quality assets that earn solid cash returns on equity, while emphasizing downside protection for the capital employed. The primary objective of the company continues to be generating increased cash flows on a per share basis and as a result, higher intrinsic value per share over the longer term.

Please do not hesitate to contact any of us should you have suggestions, questions, comments, or ideas you wish to share with us.

Sincerely, J. Bruce Flatt,
Chief Executive Officer,
August 8, 2019

Monday, August 5, 2019

Brookfield Infrastructure Partners…Q2 2019, Letter to Shareholders

Brookfield Infrastructure Partners…Q2 2019, Letter to Shareholders

On a day when the markets are plunging and the media is inciting bedlam on the news of the day, Brookfield Infrastructure Partners quietly and without fanfare reported their 2nd quarter results yesterday…Infrastructure Partners represents about 28 percent of my entire portfolio…Too risky you say…read the following Letter to the Shareholders written by the CEO, Sam Pollock (son of the famous GM of the Montreal Canadians, by the way)…Investing in the Brookfield family of companies has taught me a lot over the years about having a long-term perspective and the importance of risk-adjusted returns…They have also schooled me in the importance of hooking up with management teams that are smart, honest and transparent and know how to communicate to their stakeholders…

Overview

Brookfield Infrastructure reported another strong quarter with Funds from Operations (‘FFO’) of $337 million, or $0.85 per unit, for the three months ended June 30, 2019, representing increases of 15% and 13%, respectively, over the same quarter of the prior year. These second quarter results are the first to reflect the full benefit of the most recent phase of our asset rotation strategy.

Last year, we generated combined proceeds of $1.5 billion from selling an interest in a mature, de-risked electricity transmission business in Chile and completing a financing at our Brazilian regulated gas transmission business. These monetizations occurred at values that represented a 7% average FFO yield and the proceeds were subsequently redeployed into seven higher growth businesses across our utilities, energy and data infrastructure segments that generate an average FFO yield of 12%. The value created through this phase of capital recycling is meaningful: in this quarter alone, it contributed incremental FFO per unit of almost $0.05, and on an annualized basis, should benefit our FFO by approximately $75 million.

Results of Operations

Results for the quarter benefited from both organic growth and the contributions from capital recently deployed in new investments. FFO grew organically by 10%, relative to the prior year, marking the second consecutive period of growth that exceeded our annual long-term target of 6-9%. Contributing to this outsized growth are volume increases that averaged 2% across our business, inflation-indexation of approximately 3% and earnings generated from the commissioning of $650 million of capital expansion projects that were completed during the last twelve months.

FFO from our utilities segment totaled $143 million for the quarter, compared to $139 million in the prior year. This segment delivered organic growth of 10%, primarily the result of $275 million of projects that were commissioned into the rate base in the last year and the benefit of inflation-indexation across our portfolio. These positive factors were partially offset by interest charges associated with a debt financing completed in the prior year at our Brazilian regulated gas transmission business, as well as the impact of foreign exchange.

We recently agreed to construct another 900 kilometers of transmission lines to expand our existing Brazilian electricity transmission business. We expect this line will require $30 million of capital from Brookfield (beside our institutional partners) and will be completed in 2021. Inclusive of this project, we are currently in the process of building almost 5,200 kilometers of lines in the country, which will provide very attractive risk-adjusted returns under 30-year contracts.

Our transport segment contributed FFO of $135 million, compared to $133 million during the same period of 2018. Results in the current quarter benefited from volume growth across our ports and toll road businesses, as well as rising tariffs which were 4% higher than those earned in 2018. These positive contributions were partially offset by the impact of the sale of a 33% interest in our Chilean toll road operation that closed in February.

Our global ports business generated FFO of $26 million, representing an 18% increase over the prior year. The year-over-year increase was driven by strong volumes globally, which increased by 10%, in addition to a 5% improvement in rates. In particular, our U.K. port operation reported another excellent quarter, with container volumes exceeding the prior year by 5%. This was predominantly the result of new customer mandates and increased economic development in the area surrounding our port lands. In Australia, revenue at our container terminal business was 8% ahead of last year, primarily due to new services that commenced in the second half of 2018 and higher average tariffs. Our North American port business recently won a new contract that will add approximately 2,000 moves per week at our Los Angeles terminal. We expect this service to increase EBITDA generated by this business by approximately 10%.

FFO from our energy segment was $96 million, a 78% increase relative to the prior year. The increase was predominantly attributed to the $1.2 billion of capital deployed in the last nine months to acquire a North American residential infrastructure business, a Canadian midstream operation, and a natural gas pipeline in India. Additionally, results benefited from higher natural gas transportation volumes and the commissioning of capital expansion projects at our U.S. gas transmission business.

At our North American district energy business, construction is underway on a large thermal storage site that will serve as a hub to expand our deep lake water cooling system in the western corridors of downtown Toronto. This particular area of the city is undergoing significant re-development and we believe there is potential to add over 50 buildings to our network over the long-term. This project will require approximately $65 million of capital and is expected to generate substantial returns once commissioned in 2021.

Our North American residential infrastructure operation is successfully advancing its plans to grow in the U.S. During the quarter, we completed a $30 million acquisition of a business based in Phoenix, Arizona that services 12,000 heating, ventilation and air conditioning (HVAC) customers. This acquisition expands our presence to a new, fast-growing region of the country, and our business will benefit as these service contracts are converted into long-term rental contracts over time. With the highly fragmented residential infrastructure segment in the U.S., we believe there will be additional opportunities to complete tuck-ins and build scale on an accretive basis. Also, our business recently launched its pilot program with a utility in Texas to offer our residential infrastructure products to a large subset of current clients. Early indications and feedback show that the program has been well received. Lastly, customer adoption of our lease offering for HVAC equipment has proven very strong in the U.S. and has significantly exceeded our expectations.

Our data infrastructure segment generated FFO of $30 million in the second quarter, a 58% increase year-over year. The increase was primarily the result of contributions from investments we recently made in a global data center portfolio, as well as the benefits of inflationary price increases and new towers added to the network at our French telecommunication business.

The second quarter of this year was the first period to see full contributions from the capital we have deployed to establish a large-scale global data center platform. Today, our business is well-diversified and includes 49 facilities on four continents. Integration efforts are now largely complete, and the businesses are performing in-line with expectations. In our South American business, we have focused on the build-out of several new sites, which are all underpinned by attractive long-term contracts to investment grade, global hyper-scale customers. So far this year, we have commissioned four new data centers and added 21MW of capacity. We expect to construct two new centers this year, adding a further 18MW of capacity. The total expected capital spend for these projects is approximately $290 million (BIP’s share – $35 million), and upon completion, these new sites will more than double our current EBITDA in this business. In addition, we are on track to complete construction of our first data center and network in Chile by 2020, and we are preparing for future expansion into Colombia and Mexico.

Balance Sheet & Funding Plan

Our balance sheet continues to be healthy with total liquidity of $3.0 billion, with $1.9 billion at the corporate level. Recently in July, we added to our liquidity position by way of an equity issuance of approximately 20 million units, which provided capital of approximately $825 million.

Additionally, we are making good progress on a number of capital recycling initiatives including the sale of a further 33% stake of our Chilean toll road business. We have another four ongoing processes that are progressing well. Through these initiatives, we are targeting approximately $700 million of after-tax proceeds to be generated in the next six months, with a further $1.0 - $1.5 billion generated by end of 2020.

Update on Strategic Initiatives

Our pipeline of new opportunities is robust, and we have secured several new investments in recent months. We invested $200 million in a New Zealand data distribution business in July and we expect to invest a further $1.3 billion (BIP’s share) in other initiatives by the end of 2019. These investments will meaningfully expand our presence in the North America and Asia Pacific markets.

New Zealand Data Distribution Business
Along with a strategic partner, we acquired an integrated telecommunications provider in New Zealand for $2.3 billion. This is a market-leading business that provides utility-like broadband and wireless services to 2.5 million customers. With this acquisition, we own and operate a country-wide wireless and fiber infrastructure network, including 1,600 cell sites providing wireless coverage to over 98% of the population, and over 10,000 kilometers of fiber optic cable. Brookfield and its institutional partners contributed $700 million of equity for our 50% stake (BIP’s share – approximately $200 million).

North American Rail Business
We recently announced the $8.4 billion take-private acquisition of Genesee & Wyoming, Inc. (“G&W”), a highquality rail business based primarily in the U.S., but also with operations in Canada, the U.K. and Australia. We will be acquiring the business alongside institutional partners (BIP’s share – approximately $500 million). While the original transaction included G&W’s 51% interest in an Australian business, we recently agreed to sell this stake to a consortium led by the existing 49% owner.

G&W represents a great addition to our existing rail platform. This is a rare opportunity to acquire a rail infrastructure network of scale, particularly in North America, for good, risk-adjusted returns. G&W owns 120 short line railroads and 26,000 kilometers of track. It is the key provider of critical last mile transport services to customers and Class I rail operators. Its cash flows are resilient as the business is well-diversified across the variety of goods it moves across its networks and the 3,000-plus customers it serves.

Backed by our deep expertise as an owner and operator of rail and other transport assets, we are well-positioned to drive value through our operational approach. Our areas of focus will be to maximize commercial opportunities, expand through strategic tuck-ins and improve margins over time. We anticipate the close of the acquisition and sale of the Australian operation to occur concurrently in Q4 2019, once customary regulatory approvals have been received. Upon completion of the G&W acquisition, combined with our existing businesses, we will own a large-scale, world-class rail operation on four continents.

North American Gas Pipeline
We are expanding our geographic footprint by investing in a natural gas pipeline business which carries natural gas from Texas to Mexico. Brookfield opened an office in Mexico City in 2015 with the intention of establishing a local presence in the country, consistent with our approach in other locales. However, up until now, we have not seen opportunities to acquire assets at appropriate risk-adjusted returns. We view Mexico as a business-friendly country with good market fundamentals and we see the value of investing in the country over the long-term. Institutional investor interest recently moderated in the country, which created an opportunity for us to enter the market and acquire a low-risk, high-quality asset within our target return range.

These pipelines were built in 2016 and represent critical infrastructure supplying Mexico’s growing Central and West gas demand regions with low-cost natural gas from Texas. This business is very attractive, as the pipelines generate stable and predictable cash flows without volume or commodity price risk. Revenues are fully contracted under a long-term, take-or-pay arrangement through 2041 with an investment-grade off-taker. In addition, foreign exchange risk is minimized as revenues are dollarized with an inflation-linked escalator. These assets will continue to be operated under a fixed-price arrangement by existing co-owners in the business, who have a wellestablished track record as energy infrastructure owners and operators in Mexico and abroad. We will be investing alongside our institutional partners and BIP will be deploying approximately $150 million of equity. We anticipate completing this acquisition in Q4 2019.

Indian Telecom Towers
We have been closely monitoring opportunities in the telecom market in India over the past several years. The market has stabilized following a consolidation of the mobile network operators (“MNOs”), leaving three main players, including Reliance Jio. As the competitive landscape settles, MNOs are focused on creating liquidity to invest in the expansion of their networks and view the divestment of their tower portfolios as an efficient way to raise capital.

Leveraging our existing relationship with Reliance Industries (the counterparty to our Indian pipeline investment), we recently secured an exclusive agreement to acquire a portfolio of 130,000 communication towers from Reliance Jio. These are recently constructed assets, with low maintenance requirements and over 30 years of remaining useful life. These towers are unlike most Indian telecom towers as they are largely connected by fiber backhaul, which gives us a unique platform to capitalize on the rollout of 5G.

This is a high-quality business that has similarities to our existing tower business in France. It generates stable and predictable cash flows that will benefit from expected increases in data usage. In India, the growth in data consumption has been robust, with per-capita usage increasing 10-fold in the last two years alone, which is a trend that is expected to continue. We believe that this investment will provide good downside protection, with meaningful upside through introducing co-location of other MNOs on the towers, which to-date, have only carried Jio equipment. There will also be further growth as we execute a tower build-out program with Reliance Jio, who will be committing to a fixed-cost contract to fund the expansion.

Overall, we see this as a great opportunity to enter a high-growth market at strong risk-adjusted returns. Brookfield Infrastructure is expected to invest approximately $400 million upon completion of the transaction.

Outlook

The outlook for our business for the remainder of 2019 is strong. We expect FFO to benefit from continued organic growth and contributions from acquisitions that have or are expected to close in the third quarter, including the second phase of our Western Canadian Midstream business and the New Zealand data distribution business. We expect the exit run-rate in 2019 for our FFO per unit to be over 20% higher than it was at the time we sold our Chilean electricity business over a year ago.

The pace of new investment activity this year has surpassed our expectations, and we anticipate this momentum to continue in the foreseeable future. We are operating in a global economy that continues to experience solid growth with a need for additional capital to fund large-scale investments in both developed and emerging economies around the world. We are currently monitoring a number of very interesting situations in the energy and data segments in North America and Europe, where we expect to bring to bear our competitive advantages of size, operating capabilities and access to capital.

On behalf of the Board and management of Brookfield Infrastructure, I would like to thank all our unitholders for their ongoing support.

Sincerely,
Sam Pollock
Chief Executive Officer
August 2, 2019

Thursday, August 1, 2019

Jeffrey Olin on BNN-Bloomberg’s Market Call – July 31, 2019

Jeffrey Olin on BNN-Bloomberg’s Market Call – July 31, 2019

MARKET OUTLOOK

Across the broader markets, the mix of economic and political events continues to cause confusion and uncertainty. Against this challenging backdrop, it is noteworthy that stocks have mostly been able to move higher thus far in 2019. Within the real estate sector, the strength of the unit/share prices of North American REITs and REOCs in the first half of 2019 has narrowed the gap between unit/share prices and the underlying net asset value of these companies. Nonetheless, Vision anticipates there is further potential upside in select real estate equities over the next 12 months.

For industrial real estate, the secular trends remain very bullish. The continuing shift to e-commerce has added significant demand for space, while in many markets the supply of industrially-zoned land is severely constrained.

Secular trends in the multi-family sector remain similarly positive. Young adults delaying marriage and having children as well as the preference to live in or near urban centres continue to support the sector. In addition, the financial burdens, constraints and high costs of homeownership also bode well for rental apartment demand.

Another long-term positive structural force derives from the aging North American population. This inexorable trend should positively impact those public entities operating in the seniors housing sector, even if there is short-term oversupply in certain markets.

In contrast to the above subsectors, secular trend for retail space, especially in larger shopping centres, has become increasingly difficult. The continuing shift to e-commerce is causing problems for many traditional retailers, from the department stores to iconic specialty brands. Nonetheless, many retailers with foresight and acumen are responding positively to the current challenge. The adverse impact at the margin has negatively impacted investors’ attitudes towards shopping centre REITs, even when agile management and long-term leases have allowed properties to maintain their occupancies and revenue streams.

TOP PICKS


This company is Canada’s largest publicly-traded rental residential enterprise. Earlier this year, the REIT appointed long-time chief operating officer Mark Kenney as CEO, and he has embarked on a strategy of surfacing “hidden” value across the portfolio. This includes the intensification of existing properties in Toronto and Vancouver with the goal of adding 10,000 units over the next 10 years. If fully built out, this could potentially add about $4 per unit of value on a net present value basis (8 per cent higher than current unit price). Vision believes CAPREIT might be able to zone and develop these units sooner than anticipated, with proposed legislation by Ontario favouring new residential development.

The REIT recently spun out its $634-million Netherlands multi-family portfolio into European Residential REIT (ERE_u.V) to better align existing unitholder interest and surface the true value of these assets. While still holding an 80-pe-cent interest in the venture, CAPREIT can still benefit from the European growth story without relying on its own balance sheet. Netherlands is the third most densely populated country in the world and there is a huge housing shortage there.

CAPREIT’s units currently trade at an implied cap rate of 4.2 per cent, compared to recent transactions in the REIT’s markets of sub-4 per cent.

Jeffrey Olin, president, CEO and portfolio manager at Vision Capital
Focus: Real estate stocks