Brookfield profit declines 39% as rates rise

Brookfield profit declines 39% as rates rise

Brookfield Asset Management Inc. BAM-A-T +1.31%increaseCEO Bruce Flatt says the inflationary environment is enhancing the value of its investments – but the company’s second-quarter results show the company is not completely immune from current market conditions.

The company reported a 39-per-cent decline in net income, to US$1.48-billion, owing, in part, to decreased gains on the sale of assets and an increase in 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 the company’s “distributable earnings,” which removes additional expense items and adds back in dividends from Brookfield’s investments, fell by more modest amounts.

Brookfield recorded US$2.41-billion in interest expense in the quarter, up 31 per cent from 2021′s second quarter. The amount of corporate borrowings on the balance sheet rose 11 per cent, to $12.05-billion.

‘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 the interest-rate rises in a macroeconomic context.

Despite two U.S. Federal Reserve rate increases, and more to come, Mr. Flatt theorizes, “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. Brookfield 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.

“With many of our infrastructure, renewables and real estate assets positioned to benefit from inflation, our revenue streams and cash margins are widening as the compounding effect of inflation takes hold,” Mr. Flatt wrote. “With equity markets down 20 per cent to 30 per cent from their peak and credit markets “turning sideways for many corporate borrowers,” he wrote, “the investing environment for businesses like ours continues to strengthen. We are therefore 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 dollars from current and new clients. Brookfield said it had record inflows of US$56-billion since the end of the last quarter. Fee-bearing capital – the amount of outside investor money Brookfield manages – was US$392-billion at June 30.

In the quarter, Brookfield closed its green-energy Global Transition Fund at US$15-billion Mr. Flatt said Brookfield is completing a first close for its latest infrastructure fund of US$20-billion and private equity fund of US$8-billion. Brookfield has also raised about US$14.5-billion for an opportunistic real estate fund.

Mr. Flatt said a US$16-billion opportunistic debt strategy fund will soon be mostly invested, which will set the stage for Brookfield to launch another.

Brookfield said in May it will spin off a new asset-management business to shareholders by the year’s end, creating a roughly US$80-billion entity that will pay most of the dividends its shareholders now receive. The company invests for itself, which requires it to raise billions of dollars in capital, but also manages money for others. Money managers who need little capital tend to get higher valuations from investors, a benefit Brookfield wasn’t receiving with the two businesses yoked together as one.

Mr. Flatt said in his letter that former Bank of Canada governor Mark Carney, who joined Brookfield as as an advisor to its Transition funds, will serve as chairman of the board of the new money manager, which will be called Brookfield Asset Management Ltd.

Mr. Flatt will be CEO of the asset manager while also remaining CEO of the current company, which will be renamed Brookfield Corp.

The separate asset-management company would add to a dizzying array of Brookfield entities available to investors. Three limited partnerships – Brookfield Infrastructure Partners LP, Brookfield Renewable Partners LP and Brookfield Business Partners LP – trade on the New York and Toronto exchanges. Brookfield Infrastructure Corp., a subsidiary of the limited partnership, trades on the NYSE. Brookfield Asset Management Reinsurance Partners Ltd. trades on both exchanges. And the Brookfield Global Infrastructure Securities Income Fund trades in Toronto.