EX-99.2 3 bam2017ex992annualreport.htm EXHIBIT 99.2 Exhibit
Exhibit 99.2
Management’s Discussion and Analysis
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ORGANIZATION OF THE MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”)
PART 1 – OUR BUSINESS AND STRATEGY
Asset Management
Our Business
Real Estate
Organizational Structure
Renewable Power
Competitive Advantages
Infrastructure
Operating Cycle
Private Equity
Liquidity and Capital Resources
Residential Development
Risk Management
Corporate Activities
Environmental, Social and
 
PART 4 – CAPITALIZATION AND LIQUIDITY
 
Governance (“ESG”) Management
Strategy
Fair Value Accounting
Capitalization
PART 2 – REVIEW OF CONSOLIDATED
 
Liquidity
FINANCIAL RESULTS

 
Review of Consolidated Statements of Cash Flows
Key Factors That Impact Our Results
Contractual Obligations
Economic and Market Review
Exposures to Selected Financial Instruments
Income Statement Analysis
PART 5 – ACCOUNTING POLICIES AND INTERNAL
 
Balance Sheet Analysis
CONTROLS
 
Foreign Currency Translation
Accounting Policies, Estimates and Judgments
Summary of Quarterly Results
Management Representations and Internal Controls
Corporate Dividends
Related Party Transactions
PART 3 – OPERATING SEGMENT RESULTS
PART 6 – BUSINESS ENVIRONMENT AND RISKS
Basis of Presentation
GLOSSARY OF TERMS

Summary of Results by Operating Segment
 
 
Throughout our MD&A, we use the following icons:
 
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ASSET MANAGEMENT
REAL
ESTATE
RENEWABLE POWER
INFRASTRUCTURE
PRIVATE EQUITY
RESIDENTIAL DEVELOPMENT
CORPORATE ACTIVITIES
“Brookfield,” the “company,” “we,” “us” or “our” refers to Brookfield Asset Management Inc. and its consolidated subsidiaries. The “corporation” refers to our asset management business which is comprised of our asset management and corporate business segments. Our “invested capital” includes our “listed partnerships,” Brookfield Property Partners L.P., Brookfield Renewable Partners L.P., Brookfield Infrastructure Partners L.P. and Brookfield Business Partners L.P., which are separate public issuers included within our Real Estate, Power, Infrastructure and Private Equity segments, respectively. Additional discussion of their businesses and results can be found in their public filings. We use “private funds” to refer to our real estate funds, infrastructure funds and private equity funds.
Please refer to the Glossary of Terms on page 103 which defines our key performance measures that we use to measure our business. Other businesses include Residential Development and Corporate.
Additional information about the company, including our Annual Information Form, is available on our website at www.brookfield.com, on the Canadian Securities Administrators’ website at www.sedar.com and on the EDGAR section of the U.S. Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
We are incorporated in Ontario, Canada, and qualify as an eligible Canadian issuer under the Multijurisdictional Disclosure System and as a “foreign private issuer” as such term is defined in Rule 405 under the U.S. Securities Act of 1933, as amended, and Rule 3b-4 under the U.S. Securities Exchange Act of 1934, as amended. As a result, we comply with U.S. continuous reporting requirements by filing our Canadian disclosure documents with the SEC; our MD&A is filed under Form 40-F and we furnish our quarterly interim reports under Form 6-K.
Information contained in or otherwise accessible through the websites mentioned does not form part of this report. All references in this report to websites are inactive textual references and are not incorporated by reference.     

2017 MD&A AND FINANCIAL STATEMENTS 16


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This Report contains “forward-looking information” within the meaning of Canadian provincial securities laws and “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements regarding the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook of the corporation and its subsidiaries, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”
Although we believe that our anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information because they involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, which may cause the actual results, performance or achievements of the corporation to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements and information.
Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to: the impact or unanticipated impact of general economic, political and market factors in the countries in which we do business; the behavior of financial markets, including fluctuations in interest and foreign exchange rates; global equity and capital markets and the availability of equity and debt financing and refinancing within these markets; strategic actions including dispositions; the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits; changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and estimates); the ability to appropriately manage human capital; the effect of applying future accounting changes; business competition; operational and reputational risks; technological change; changes in government regulation and legislation within the countries in which we operate; governmental investigations; litigation; changes in tax laws; ability to collect amounts owed; catastrophic events, such as earthquakes and hurricanes; the possible impact of international conflicts and other developments including terrorist acts and cyberterrorism; and other risks and factors detailed from time to time in our documents filed with the securities regulators in Canada and the United States.
We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Except as required by law, the corporation undertakes no obligation to publicly update or revise any forward-looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND USE OF NON-IFRS MEASURES
This Report contains “forward-looking information” within the meaning of Canadian provincial securities laws and “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. We may provide such information and make such statements in the Report, in other filings with Canadian regulators or the U.S. Securities and Exchange Commission or in other communications. See “Cautionary Statement Regarding Forward-Looking Statements and Information” above.
We disclose a number of financial measures in this Report that are calculated and presented using methodologies other than in accordance with IFRS. We utilize these measures in managing the business, including performance measurement, capital allocation and valuation purposes and believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures or other financial metrics may differ from the calculations disclosed by other businesses and, as a result, may not be comparable to similar measures presented by others. Reconciliations of these non-IFRS financial measures to the most directly comparable financial measures calculated and presented in accordance with IFRS, where applicable, are included within this MD&A. Please refer to our Glossary of Terms on page 103 for all non-IFRS measures.

17 BROOKFIELD ASSET MANAGEMENT


PART 1 – OUR BUSINESS AND STRATEGY
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OUR BUSINESS
We are a leading global alternative asset manager, focused on investing in long-life, high-quality assets across real estate, renewable power, infrastructure and private equity. We provide a wide variety of investment products to our investors including private funds,1 listed issuers1 and public securities.1 Our interests are aligned with our investors because we invest large amounts of our own balance sheet capital in our funds: we are typically the largest investor in our private funds and the largest investor in each of our listed issuers.
We have built our business around assets and businesses that are resilient through market cycles and deliver robust returns. Our deep experience investing in, owning, and operating real assets has enabled us to successfully underwrite acquisitions and to enhance returns through our expertise in operational improvements, financing strategies and execution of development projects.
Our financial returns are represented primarily by the combination of fees we earn as an asset manager as well as capital appreciation and distributions from our invested capital.1 Our primary performance measure is funds from operations1 (“FFO”), which we use to evaluate the operating performance of our segments.
In our asset management activities, we manage private funds, listed issuers, and public securities portfolios for investors which we refer to as fee bearing capital.1 FFO from these activities consist of: (i) base and other recurring fees that we earn as manager less direct costs of doing so; (ii) incentive distributions1 and performance fees from our listed issuers; and (iii) realized carried interest1 from private funds. We supplement our performance measurement with economic net income1 (“ENI”) which utilizes unrealized carried interest1 instead of realized carried interest. Unrealized carried interest represents the amount of carried interest generated based on investment performance to date and is therefore more indicative of earnings potential. Continued growth in this measure is a leading indicator of future growth in FFO from our Asset Management segment.
Our invested capital consists largely of investments in our listed issuers and other listed securities, which currently make up 85% of our invested capital. The remaining 15% is largely invested in our residential development business and our energy marketing activities. Our invested capital provides us with FFO and cash distributions, most of which is generated by the investments in our limited partner interests in our listed entities, which pay stable recurring distributions.
Our balance sheet also allows us to capitalize quickly on opportunities as they arise, backstop the transactions of our various businesses as necessary and fund the development of new activities by seeding new investment strategies that are not yet suitable for our investors. Finally, the amount of capital invested by us directly in our listed issuers, and through them into our private funds, creates alignment of interests with our investors.
Refer to Part 2 and 3 of this MD&A for more information on our operations and performance.
 
 
 
 
OUR STRATEGY
As a leading global alternative asset manager, our business strategy is focused on the following:
Generate superior investment returns for our investors, utilizing our competitive advantages of large-scale capital, global reach and operating expertise
Offer a wide range of traditional and innovative products that meet our investors’ requirements
Provide exceptional client service
Utilize our balance sheet to accelerate growth in our asset management activities, align our interests with investors and generate additional returns
 
 
 
 


1.
See definition in Glossary of Terms on page 103

2017 MD&A AND FINANCIAL STATEMENTS 18


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ORGANIZATIONAL STRUCTURE
We employ approximately 1,200 employees within our asset management business and a further 80,000 employees throughout the rest of our operations. We have organized our activities into five principal groups: real estate, renewable power, infrastructure, private equity, and public securities.
Our asset management operations include the creation of and raising capital for new funds, managing existing funds, client relations, product development as well as overseeing the management of the assets and investments owned through our investment strategies. Our invested capital consists primarily of major ownership interests in our listed issuers, our residential development business and other directly held securities. Invested capital is funded in part by our corporate leverage which includes long-term debt and perpetual preferred shares.
Our investment products, or managed funds, include: our flagship listed issuers (BPY,1 BEP,1 BIP1 and BBU1); our private funds, including our flagship private funds along with a number of niche and open-end perpetual funds; and public securities strategies such as mutual funds and separately managed accounts.
Our operating assets encompass all of the assets owned by our funds as well as the various operating groups that we have established over decades to manage operating assets, such as our core office and renewable power group, as well as portfolio investments which have dedicated management teams that are overseen by us.
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1.
See definition in Glossary of Terms on page 103

19 BROOKFIELD ASSET MANAGEMENT


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COMPETITIVE ADVANTAGES
Over the years, we have developed three primary competitive advantages that allow us to identify and undertake transactions that others find more difficult, and to create more value from the assets that we own and operate. These are our large-scale capital, global reach and operating expertise.
Large-Scale Capital
We source capital from public investors, private investors, joint venture partners and lenders. At year end, fee bearing capital totaled $126 billion, and we had $27 billion of core liquidity and uncalled private fund commitments.
We have access to large-scale capital from multiple sources, enabling us to undertake transactions of a size that few others can. In addition, investing significant amounts of our own capital alongside our investors differentiates us and ensures a strong alignment of interests with our investors because we participate directly in the investment returns that we generate as an investor as well as the manager. Our strong balance sheet also allows us to fund investments with our own capital when developing new strategies or while a new fund is being raised. In addition, this allows us to backstop larger acquisitions within our funds that require co-investment capital that has not yet been secured.
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Global Reach
We operate in more than 30 countries around the world with approximately $285 billion in assets under management globally.
Our global reach allows us to diversify and identify a broad range of opportunities. We are able to invest where capital is scarce, and we can move quickly on opportunities across the different markets. Our global reach also allows us to operate our assets more effectively: we believe that a strong local presence is critical to operating successfully in many of our markets, and many of our businesses are truly local. Furthermore, the combination of our strong local presence and global reach allows us to bring global relationships and operating practices to bear across markets to enhance returns.
Operating Expertise
We have more than 80,000 operating employees worldwide who are instrumental in maximizing the value and cash flows from our operations.
We are active managers of assets. Starting with our first investment over 115 years ago, we have built a strong track record which shows that we can add meaningful value and cash flow through our hands-on operating expertise. Whether this is through the negotiation of property leases, energy contracts or regulatory agreements, or through optimizing asset development, or other activities – our focus has been on acquiring businesses and placing a team on the ground to run them operationally. As real asset operations tend to be industry-specific and are often driven by complex regulations, we believe that real operating experience is essential in maximizing efficiency and productivity – and ultimately, returns. This operating expertise is also invaluable in underwriting acquisitions and executing development and capital projects.

2017 MD&A AND FINANCIAL STATEMENTS 20


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OPERATING CYCLE
Raise Capital
As an asset manager, the starting point is forming new funds and other investment products that investors are willing to commit capital to. This will, in turn, provide us with capital to invest and the opportunity to earn base management fees and performance-based returns such as incentive distributions and carried interest. Accordingly, we create value by increasing the amount of fee bearing capital under management and by achieving strong investment performance that leads to increased cash flows and asset values.
 
 
 
 
Identify and Acquire High-Quality Assets
We follow a value-based approach to investing and allocating capital. We believe our disciplined approach, global reach and our expertise in recapitalizations and operational turnarounds, enable us to identify a wide range of potential opportunities, some of which are challenging for others to pursue, and therefore invest at attractive valuations and generate superior returns. We also have considerable expertise in executing large development and capital projects, providing additional opportunities to deploy capital.
 
 
 
 
Secure Long-Term Financing
We finance our operations primarily on a long-term, investment-grade basis, and most of our capital consists of equity and standalone asset-by-asset financing with minimal recourse to other parts of the organization. We utilize relatively modest levels of corporate debt to provide operational flexibility and optimize returns. This provides us with considerable stability, improves our ability to withstand financial downturns and enables our management teams to focus on operations and other growth initiatives.
 
 
 
 
Enhance Value and Cash Flows Through Operating Expertise
Our operating capabilities enable us to increase the value of the assets within our businesses and the cash flows they produce, and they protect capital better in adverse conditions. Through our operating expertise, development capabilities and effective financing, we believe our specialized operating experience can help ensure that an investment’s full value creation potential is realized by optimizing operations and development projects. We believe this is one of our most important competitive advantages as an asset manager.
 
 
 
 
Realize Capital from Asset Sale or Refinancings
We actively monitor opportunities to sell or refinance assets to generate proceeds that we return to investors in the case of limited life funds and redeploy to enhance returns in the case of perpetual entities. In many cases, returning capital from private funds completes the investment process locking in investor returns and giving rise to performance income.
 
 
 
 
Our Operating Cycle Leads to Value Creation
We create value from earning robust returns on our investments that compound over time and grow our fee bearing capital. By generating value for our investors and shareholders, we increase fees and carried interest received in our asset management business and grow cash flows that compound value in our invested capital.
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21 BROOKFIELD ASSET MANAGEMENT


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LIQUIDITY AND CAPITAL RESOURCES
We manage our liquidity and capital resources on a group-wide basis; however, it is organized into three principal tiers:
The corporation;
Our flagship listed issuers such as BPY, BIP, BEP and BBU;
The operating asset level, which includes individual assets, businesses and portfolio investments.
Our overall approach is to maintain appropriate levels of liquidity throughout the organization to fund operating, development and investment activities as well as unforeseen requirements.
Most investment activity takes place within our private funds, listed issuers and operating subsidiaries on a standalone basis without reliance on the corporation. Most of the debt within our business occurs at the operating asset level. Only 7% of our consolidated debt is issued by the corporation and 11% by our listed issuers. Cross collateralization and parental guarantees are avoided with very few well-monitored exceptions, and debt is predominantly investment grade with limited financial maintenance covenants.
For further information please refer to Part 4 Capitalization and Liquidity.
Highlights of our Corporate Capitalization
The corporation has very few capital requirements. Nevertheless, we maintain significant liquidity at the parent company level, supporting larger fund transactions by providing some form of bridge capital or commitment. We also utilize the corporation’s capital resources to seed new fund products in order to establish a track record and establish our team prior to launching to investors.
At the corporate level, we have a stable capitalization profile with long-term debt and perpetual preferred shares to enhance equity returns.
Components of Corporate Capitalization
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10-year average term to maturity for long term debt.
Preferred shares are perpetual.




 
Strong cash earnings
Fee related earnings are underpinned by long-term and perpetual contractual agreements.
Distributions from listed issuers are backed by high-quality operating assets and long-term revenue streams.
YEAR ENDED DEC. 31, 2017
(MILLIONS)
 
Asset Management FFO
$
970

Distributions from listed issuers
1,276

Corporate FFO
(146
)
Preferred dividends
(145
)
Available for distribution/reinvestment1
$
1,955

1.
See Glossary of Terms on page 103

Substantial liquidity
$4 billion of available liquidity in the form financial assets and undrawn credit facilities at the corporate level.
YEAR ENDED DEC. 31, 2017
(MILLIONS)
 
Financial assets
$
2,255

Undrawn credit facilities
1,748

Core liquidity  corporate
$
4,003


2017 MD&A AND FINANCIAL STATEMENTS 22


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RISK MANAGEMENT
Our Approach
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Managing risk is an integral part of our business, and we have a well-established and disciplined approach that is based on clear operating methods and a strong risk-based culture. Given the diversified and decentralized nature of our operations, we seek to ensure that risk is managed as close to its source as possible and by the management teams that have the most knowledge and expertise in the specific business or risk area.
As such, business-specific risks are generally managed at the operating business group level, as the risks vary based on the characteristics of each business. At the same time, we monitor many of these risks on an organization-wide basis to ensure adequacy of risk management practices, adherence to applicable Brookfield practices and facilitate sharing of best practices.
We also recognize that some risks are more pervasive and correlated in their impact across the organization, such as liquidity, foreign exchange and interest rates, and risks where we can bring together specialized knowledge to bear. For these risks, we utilize a centralized approach amongst our corporate and our operating business groups. Management of strategic, reputational and regulatory compliance risks is similarly coordinated to ensure a consistent focus and implementation across the organization.
Risk Management Framework
Brookfield’s risk management program emphasizes the proactive management of risks, ensuring that we have the necessary capacity and resilience to respond to changing environments by evaluating both current and emerging risks.
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23 BROOKFIELD ASSET MANAGEMENT


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ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”) MANAGEMENT
Our business provides critical infrastructure and services used by millions of people. We manage investment strategies that are long term in nature and that underpin the financial welfare of pension plans, insurance companies and individuals, and we impact the lives of tens of thousands of employees, their families and the communities in which we operate. Accordingly, ESG management is a key consideration in the way we conduct our business.
Our long-term owner-operator approach to business means that in many cases we are well positioned to be a positive influence and take active measures to implement effective ESG programs. Many of these programs have been in place for decades, and we are continuing to address new ESG priorities as they emerge, such as those relating to the workplace and climate change.
We recognize that it is important to effectively communicate our ESG initiatives to our investors, because it increasingly influences their decisions. For example, many private fund investors want to better understand our ESG practices before committing capital; an increasing number of public securities investors consider ESG ratings when purchasing shares in our listed issuers; and in the debt markets, we are issuing more green bonds to access those pools of capital.
90%
50 TWh
90%
Core office portfolio achieved a green building certification
of clean energy generation replacing 25 million tons of annual emissions
Reduction in energy usage from our infrastructure district energy business1
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We have developed a multifaceted approach to managing ESG factors throughout Brookfield. The management teams in each area of our business, including portfolio companies and operating businesses, have primary responsibility for the management of ESG factors within their operations. This approach ensures full alignment between responsibility, authority, experience and execution and is particularly important given the wide range of asset types and locations in which we operate. At the same time, we work together collectively across the organization utilizing committees and working groups, such as our ESG Committee to provide guidance, establish common principles and share best practices throughout the organization. We have incorporated ESG factors into our governance framework and strategic planning, including our board of directors and senior executive leadership.
We consider ESG factors arising from new businesses throughout the investment process. During due diligence, we utilize our operating and underwriting expertise to identify ESG factors in acquisition targets, and uncover opportunities to add value by mitigating risk and capitalizing on opportunities post-acquisition, and incorporate these into the potential return analysis. Factors considered included bribery and corruption risks, health and safety risks, ethical considerations and environmental matters as well as opportunities such as energy efficiency improvements and competitive market positioning.
Our business has been built around operations where environmental sustainability has long been core to creating value. Our world-class renewable power operations enable us to benefit from demand for low carbon energy supply and our office portfolio owns and develops buildings that meet environmental standards that fulfill our tenants’ objectives for more sustainable workplaces.
Our people are our most valuable asset. We are committed to developing our talent, and we invest in them by creating opportunities across our businesses. As part of our commitment to our employees, we focus on diversity, competitive wages and inclusive hiring practices. Our Health and Safety Steering Committee, which includes the CEOs of each business group, works to promote a strong health and safety culture, share best practices and monitor safety incidents and the remedial action undertaken across our operations. We support the communities in which we operate through philanthropic initiatives, but more importantly through our approach to the ESG factors that impact them.
Brookfield maintains high governance standards across the organization, which includes the portfolio companies in which we have a controlling interest. Key elements of our governance framework include a code of conduct, an anti-bribery and corruption policy, a whistleblower hotline, and supporting controls and procedures. Those governance standards are designed to meet or exceed the requirements of any jurisdiction in which we operate.
Our commitment to a long-term ownership philosophy means that long-term sustainability is key to our business and, by extension, effective management of ESG factors is key to our success.
1.
As compared to a conventional heat-exchange system

2017 MD&A AND FINANCIAL STATEMENTS 24


FAIR VALUE ACCOUNTING
We account for a number of our assets at fair value including our commercial properties, renewable power facilities, and certain infrastructure assets. We believe the values of these assets in our IFRS financial statements provide useful information to the users when assessing the tangible value of parts of our business. The valuations in our financial statements are not used in the calculation of management fees or management compensation. We note that these values are estimates and subject to exercise of judgment. We do have the opportunity to test our values throughout outright sales from time to time. During 2017, we were successful in selling above IFRS carrying values, selling businesses with an equity value of $3.4 billion at an average of 9% above their carrying value at the prior year end (2016 – $2.5 billion and 8%).
Investment properties: most real estate properties within our Real Estate segment are classified as investment properties. they are recorded at fair value, and changes in the value of these assets are recorded within net income on a quarterly basis. Depreciation is not recorded on investment properties.
Property, plant and equipment (“PP&E”): we record PP&E within our Renewable Power, Infrastructure and Real Estate segments at fair value using the revaluation method. These assets are fair valued annually and increases in value are recorded within other comprehensive income as opposed to net income, while decreases in fair value are recorded in net income to the extent that they result in carrying value below original cost less depreciation. Depreciation is determined on the revalued carrying values at the beginning of each year and recorded in net income over the course of the year.
Significant assets on our balance sheet are not subject to fair value accounting and are therefore carried at amortized cost, including the assets in our Private Equity and Residential segments as well as intangible assets, such as concessions in our Infrastructure segment. This value of our asset management business is not reflected in our balance sheet, despite being a material component of the fair value of the company.
Valuation Process
Valuations of assets without available quoted market prices, in particular those classified as level 3 in the fair value hierarchy, such as our investment properties and PP&E, are determined through a detailed bottom-up process. We have extensive expertise and experience in the valuation of real assets as part of the process we follow for acquisitions and dispositions, as well as providing fair values to lenders and institutional private fund investors, which we incorporate into our financial reporting process.
As our assets span many asset classes and geographies, values are determined on an asset-by-asset basis, using a common framework that is adjusted for asset-specific characteristics. The following are common attributes of valuation process:
1.
Detailed process and reviews We determine the valuations from the bottom up following centrally developed policies and procedures, with the valuations performed by the investing and operating professionals most familiar with each asset and asset class. The cash flows are determined as part of our annual business planning process, prepared within each operating business. Valuation assumptions, such as discount rates and terminal value multiples, are determined by the relevant investment professionals and applied to the cash flows to determine the values. The values are reviewed by the senior management teams responsible for each segment along with senior investment professionals responsible for the relevant asset classes.
2.
Comparable transaction analysis We compare the results of our valuations to comparable open-market transactions on an asset-by-asset basis. The investment professionals that specialize in specific asset classes obtain the relevant valuation metrics for transactions in that class. For example, our infrastructure group will obtain the EBITDA multiples from investment professionals specialized in transport acquisitions and compare these to the equivalent multiples for the assets in our transport valuations. This analysis provides insight into the reasonableness of the valuations from a market participant perspective, in conjunction with asset-specific considerations, and are used to validate our models.
3.
Use of third-party valuation specialists The majority of the assets that we carry at fair value are subject to external valuation or independent review on a regular basis. We utilize this third-party input to validate our internal valuations. Many of our assets receive external appraisals on a periodic basis, for example, our core office assets in real estate and the assets held through our infrastructure funds are generally appraised on a three-year rotating basis, with certain assets appraised on a more frequent basis. We also utilize third parties to provide inputs on key assumptions, for example our core retail business receives external input annually with respect to capitalization rates for each property, which is the most significant assumption for valuing those assets.
For additional details on the valuation approach for the relevant segments, critical assumptions and related sensitivities, refer to Part 5 of this MD&A.

25 BROOKFIELD ASSET MANAGEMENT


PART 2 – REVIEW OF CONSOLIDATED FINANCIAL RESULTS
KEY FACTORS THAT IMPACT OUR RESULTS
Given the nature of our business, certain key factors impact period-to-period variations in our consolidated financial position and financial performance, including:
Our results are affected by the current economic environment; this includes GDP growth, inflation and the interest rate environment in the markets where we invest and operate, which in turn impact metrics such as occupancy in our buildings or volumes in our transportation business. In addition, many of our businesses have inflation linked revenues through contractual rate adjustments or in the prices that we are able to charge. Changes in interest rates will impact the cost of financing our operations over the long term, although we often utilize fixed-rate debt, mitigating short-term fluctuations. In addition, our assumptions with respect to these economic factors impact our fair value estimates for investment properties and property, plant and equipment, with a corresponding impact on net income and equity, respectively.
Our business is to invest in high-quality real assets within our areas of expertise and to harvest mature assets in order to lock in returns and distribute capital to investors or redeploy it into other investments. As an asset manager, we make most of our investments through subsidiaries and funds that we control. We invest alongside our investors and partners resulting in varying economic ownership across our assets. As a result, acquisition and disposition activities may create significant variability in our financial position and performance. We provide additional detail on significant acquisitions and dispositions.
A major part of our business is to utilize our operating expertise to improve our performance over time. As such, operational factors, such as business improvement initiatives, new contracts and leases, changes in financing levels and completion of development projects, impact our results period to period.
Due to our global footprint, we are exposed to various foreign currencies. Changes in the rate of exchange between the U.S. dollar and the currencies in which we conduct our non-U.S. operations impact our operating results and our financial position. We often utilize financial contracts to mitigate the impact of these exposures.
ECONOMIC AND MARKET REVIEW
(As at March 19th, 2018)
The predictions and forecasts within our Economic and Market Review and Outlook are based on information and assumptions from sources we consider reliable. If this information or these assumptions are not accurate, actual economic outcomes may differ materially from the outlook presented in this section. For details on risk factors from general business and economic conditions that may affect our business and financial results, refer to Part 6 Business Environment and Risks.
Overview and Outlook
In 2017, economic growth accelerated across the world’s largest economies, resulting in global real GDP growth rising from 3.2% in 2016 to 3.7% in 2017 the fastest pace since 2011. The acceleration was broad-based, with notable strength in North America and Europe, which both rose from 1.5 – 2.0% growth in 2016 to ~2.5% in 2017. Against this backdrop, many large economies are now operating near full-capacity and central banks are removing the extremely accommodative monetary policy that lasted nearly a decade. The U.S. Federal Reserve, the Bank of England, and the Bank of Canada all pushed interest rates higher than many were expecting just 12 months ago. While the central banks are keen to normalize monetary policy, we expect an orderly rise in policy rates. Higher interest rates also mean that some assets are no longer seen as one-way bets, which is positive from a longer-term stability perspective. In our view, the main risks to economic growth in 2018 are geopolitical in nature: government elections (Italy, Brazil, Mexico), trade frictions (Brexit, NAFTA, U.S. protectionism) and potential conflicts (Middle East, North Korea). Despite the risks, we expect the global economy to continue growing in 2018 at a similar pace to 2017.
United States
The U.S. economy grew by 2.3% in 2017, up from 1.5% in 2016. Growth was driven by solid job gains, household spending and a rebound in business investment. Strength in the labor market was reflected by average monthly job growth of 180,000 and a decline in the unemployment rate to 4.1% (the lowest level since 2001). Nominal wage growth trended higher to 2.5 – 3.0% by the end of the year and is poised to rise further in 2018. With slack in the economy diminished, inflation will continue trending higher towards the Federal Reserve’s 2% target. The U.S. government also enacted expansionary fiscal policy via major tax reform legislation, reducing corporate and individual tax rates, which will provide an additional boost to growth in the near term. Overall, the current pace of growth is expected to persist in 2018, which will give the Federal Reserve confidence to continue raising interest rates and shrinking its balance sheet.

2017 MD&A AND FINANCIAL STATEMENTS 26


Canada
In Canada, real GDP growth surged from 1.4% in 2016 to 3.0% in 2017. Growth was driven by strong household spending and the return of business investment growth as oil prices rebounded. Growth was closer to 4% in the first half of 2017 but slowed to 2% during the second half. Employment grew by 2% (the fastest since 2007), which pushed the unemployment rate to a 40-year low of 5.7%. Combined with a buoyant housing market, strong job gains supported consumer spending growth of 4% year over year. This prompted the Bank of Canada to hike interest rates three times over the last nine months, as the central bank looks to contain risks, particularly those posed by high and rising levels of household debt (~175% of income). Higher interest rates and tighter mortgage rules are expected to cool the housing market in 2018, which has been a key driver of growth recently. Overall, real GDP growth is expected to moderate in 2018 from the 3% pace in 2017.
United Kingdom
Real GDP in the U.K. grew by 1.7% in 2017, down slightly from 1.9% in 2016. However, growth declined continuously throughout the year, falling from 2.1% in Q1 to 1.5% in Q4. The slowdown was caused by weakness in real household spending, due in part to inflation outpacing wage growth (2.7% vs. 2.1%) thus eroding real purchasing power. Despite weaker spending, the economy remains strong with unemployment at the lowest level since 1975 (4.3%). A weak GBP also supported manufacturing and export-oriented sectors in the second half of the year. The tight labor market, resilient GDP growth, and above-target inflation prompted the Bank of England (BoE) to hike its policy rate from 0.25% to 0.50% in November. However, the pace of future hikes will depend on performance, and growth is currently expected to moderate further in 2018. The U.K. reached a tentative agreement on the EU “divorce bill” in December, but Brexit negotiations will get more difficult in 2018 as the two sides seek to iron out a framework for their future trading relationship. Longer term, if the U.K. becomes less open to trade and migration, it will face slower real income growth.
Eurozone
Eurozone real GDP growth jumped from 1.8% in 2016 to 2.5% in 2017, gaining momentum as the year progressed. Eurozone growth reached 2.7% year over year in Q4, led by Spain at 3.1%, Germany at 2.9% and France at 2.5%. Italy continues to lag, growing by 1.5% in 2017. Growth on the continent is being driven mostly by stronger domestic demand (household spending and business investment) but has also benefited from a stronger global economy, which has aided export volumes. Germany’s economy is effectively at full capacity, but there’s still slack in most of the other Eurozone countries, evidenced by elevated unemployment rates in Spain (16.3%), Portugal (8.0%), France (9.0%) and Italy (10.9%). Due to slack and below-target inflation, the European Central Bank (ECB) is not expected to begin hiking rates in 2018, although it may stop expanding its balance sheet. Rising interest rates in the medium term will be a headwind to countries that still have elevated levels of government debt, such as Italy and Portugal, where government debt exceeds 130% of GDP. Franco-German cooperation on Eurozone reforms could be a positive surprise in 2018, while a populist-led government in Italy, tensions between the Spanish government and region of Catalonia and Brexit negotiations remain key political risks. Overall, we expect another strong year of growth in the Eurozone.
Australia
Growth in Australia fell from 2.6% in 2016 to 2.3% in 2017. This was largely due to slow growth in the first half of the year as a result of a cyclone hitting the east coast that disrupted mining output and exports. Growth in the second half was stronger at 2.8%, driven by household spending and government investment on major infrastructure projects. This allowed full-time job growth to reach the fastest pace since 2010. Higher commodity prices (coal, iron ore, and LNG) provided a boost to Australia’s trade balance, and helped the AUD appreciate by 3% on a trade-weighted basis. The housing market was a major driver of growth over the last few years, but it appears to be cooling and is not expected to provide the same boost to growth over the next few years. Overall, growth was strong and balanced in 2017, and this will likely give the Reserve Bank of Australia (RBA) confidence to begin raising interest rates in 2018 from the record low 1.50% maintained throughout 2017.
Brazil
Brazil’s economy rebounded in 2017 after a deep two-year recession, with real GDP growing 2.2% in Q4 and 1.0% overall in 2017. The rebound in 2017 was supported by higher household spending (retail sales +2.0%) and business activity (industrial production +2.8%). Job growth also returned, rising by 2% at the end of the year, while the unemployment rate declined from a peak of 13.7% to 12.0%. Investment growth was muted in 2017, as the Lava Jato investigations continue to constrain activities of some of the largest companies. We believe Brazil has entered a virtuous cycle, where lower inflation and the sharp decline in interest rates (–675 bps in 2017) promote spending growth, job creation, higher tax revenues, narrower government deficits and improved confidence. The large amount of slack in the economy should also allow it to outperform in the near term. However, a key uncertainty to the outlook is the general election in October as it is not clear what sort of leadership and priorities the government will have by the end of the year. Overall, we remain positive on Brazil’s potential and believe the country will be better off in the long run due to the challenges it faced over the past few years.

27 BROOKFIELD ASSET MANAGEMENT


India
Real GDP growth in India dipped to 6.4% in 2017, down from 7.9% in 2016. However, growth firmed in the second half of the year, rising back to 7.2% in Q4. Softer growth was largely due to one-off disruptions, including withdrawing the largest denominated bills from circulation at the end of 2016 which hampered the large cash-based economy and the roll-out of a national goods and services tax (GST) system in July. To boost growth, the government announced a US$106 billion infrastructure spending program in October, which is expected to double the rate of road building in the next several years. They also announced a US$32 billion bank recapitalization plan to address capital shortfalls at state-owned banks. This will help improve access to credit, which has been bogged down by high levels of non-performing loans that accumulated during an investment and credit boom over the past decade. Overall, real GDP is expected to continue rising at a robust pace over the next few years, and we believe that the current policy and reform trajectory is positive and will help India grow towards its significant long-term potential.
China
Annual real GDP growth in China accelerated for the first time since 2010, rising from 6.7% in 2016 to 6.9% in 2017. Very strong credit growth (which averaged 19% year over year from Q4 2016 to Q3 2017) underpinned domestic demand growth as housing starts, steel production and power consumption all grew by 5 – 7% throughout the year. In addition, a strong global economy boosted export volumes, which surged 7% in 2017. In October, the Communist Party National Congress was held, where President Xi Jinping consolidated power and appointed allies to key positions. Going forward, we believe that China will continue to reform and open its economy, moving away from the investment-driven growth model of the past two decades and towards a consumption and services growth model. Over the next decade, China will face challenges posed by high debt levels and a fast-aging population, which will lead to slower growth than what we’ve been accustomed to over the past decade.
INCOME STATEMENT ANALYSIS
The following table summarizes the financial results of the company for 2017, 2016 and 2015:
 
 
 
 
 
 
 
Change
FOR THE YEARS ENDED DEC. 31
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
2017

 
2016

 
2015

 
2017 vs 2016

 
2016 vs 2015

Revenues
$
40,786

 
$
24,411

 
$
19,913

 
$
16,375

 
$
4,498

Direct costs
(32,388
)
 
(17,718
)
 
(14,433
)
 
(14,670
)
 
(3,285
)
Other income and gains
1,180

 
482

 
145

 
698

 
337

Equity accounted income
1,213

 
1,293

 
1,695

 
(80
)
 
(402
)
Expenses
 
 
 
 
 
 
 
 
 
Interest
(3,608
)
 
(3,233
)
 
(2,820
)
 
(375
)
 
(413
)
Corporate costs
(95
)
 
(92
)
 
(106
)
 
(3
)
 
14

Fair value changes
421

 
(130
)
 
2,166

 
551

 
(2,296
)
Depreciation and amortization
(2,345
)
 
(2,020
)
 
(1,695
)
 
(325
)
 
(325
)
Income taxes
(613
)
 
345

 
(196
)
 
(958
)
 
541

Net income
4,551

 
3,338

 
4,669

 
1,213

 
(1,331
)
Non-controlling interests
(3,089
)
 
(1,687
)
 
(2,328
)
 
(1,402
)
 
641

Net income attributable to shareholders
$
1,462

 
$
1,651

 
$
2,341

 
$
(189
)
 
$
(690
)
Net income per share
$
1.34

 
$
1.55

 
$
2.26

 
$
(0.21
)
 
$
(0.71
)
Dividends declared for each class of issued securities for the three most recent years are presented on page 42.
The following section contains a discussion and analysis of line items presented within our consolidated financial statements. The financial data in this section has been prepared in accordance with IFRS for each of the three most recently completed financial years.
2017 vs 2016
Revenues in 2017 increased by $16.4 billion compared to 2016 primarily due to the acquisition of new businesses and assets. The U.K. road fuel distribution business acquired in our Private Equity segment contributed $13.1 billion alone. The impact of dispositions reduced revenues by $731 million during the year. Refer to pages 30 and 31 for further discussion on impacts on revenues from acquisitions and dispositions.
Revenues also increased due to growth in existing operations across our businesses as same-store growth in our infrastructure’s transport business and private equity’s construction business increased revenue by $390 million and $263 million, respectively.

2017 MD&A AND FINANCIAL STATEMENTS 28


These increases were offset by the absence of $296 million of revenues from merchant development sales realized in the prior year in our Real Estate segment and fewer deliveries and lower margins in our Brazilian residential business.
Our direct costs increased by $14.7 billion in 2017 and were mainly associated with our newly acquired businesses, particularly the aforementioned U.K. road fuel distribution business, and higher than planned costs in construction services. These increased costs were partially offset by a reduction in expenses from businesses sold and the benefits of operational improvements.
Other income and gains of $1.2 billion in 2017 include gains from the sale of our bath and shower business, the partial sale of our shares in our panel board business, the sale of a European logistics portfolio within our real estate business and realized gains from the settlement of financial contracts. The 2016 results included realized gains from the sales of a German hotel portfolio, a hospitality trademark and a toehold position in our Australian port business, as well as realized gains from financial contracts.
Equity accounted income decreased by $80 million to $1.2 billion. Appraisal losses at GGP Inc. (“GGP”) and a one-time gain recorded in our infrastructure business during 2016 decreased equity accounted income compared to 2016 by $412 million. The decrease was partially offset by lower mark-to-market losses on interest rate swap contracts at Canary Wharf Group plc (“Canary Wharf”), which increased equity accounted income by $81 million.
Interest expense increased by $375 million as a result of additional borrowings associated with acquisitions across our portfolio and the addition of debt within newly acquired businesses, particularly in the renewable power, infrastructure and private equity operations. We discuss the details of changes in debt and the cost of borrowings in Part 4 – Capitalization and Liquidity.
We recorded fair value gains of $421 million, which compared to a loss of $130 million in 2016, primarily as a result of a higher valuations in our opportunistic property portfolios, a gain recorded upon deconsolidation of Norbord and the absence of a one-time impairment loss that was recorded in the prior year on the conversion of a debt instrument to equity in our Private Equity segment. These positive impacts were partially offset by appraisal losses in our core office portfolio, mark-to-market losses on our GGP warrants prior to exercise and mark-to-market losses on foreign exchange derivatives that do not qualify for hedge accounting.
Depreciation and amortization expense increased by $325 million to $2.3 billion due to depreciation recorded in the businesses acquired within our infrastructure and private equity businesses, particularly the Brazilian regulated gas transmission business, the Brazilian water treatment business and the U.K. road fuel distribution business.
Income tax expense was $613 million, compared to a $345 million recovery in 2016. The prior year included a one-time income tax recovery of $0.9 billion in the prior year as a result of a change in tax rates arising from the reorganization of certain of our U.S. property operations. Excluding the impact of this recovery, income tax expenses were consistent year over year as increased expenses associated with acquisitions were offset by $157 million of recoveries associated with U.S. tax reform.
Net income attributable to common shareholders of $1.5 billion or $1.34 per share decreased from $1.7 billion in the prior year. The decrease is largely driven by the absence of the aforementioned one-time tax recovery recorded in the prior year, of which $600 million was attributed to common shareholders, and is partially offset by the positive impacts discussed above
2016 vs 2015
Revenues and direct costs increased by $4.5 billion and $3.3 billion, respectively. The increase is mainly attributable to new businesses that were acquired or completed during the year and operational improvements across our businesses, including the commencement of new leases in our real estate operations and improved pricing in Norbord.
Other income and gains in 2016 included gains on the disposition of a German hotel portfolio, a hospitality trademark and a partial disposition of a toehold position in publicly traded securities. In 2015, other income and gains included gains related to the sale of investments within our renewable energy and infrastructure operations.
Equity accounted income in 2016 decreased by $402 million as same-store growth in GGP coming from operational improvements and a one-time transaction gain recorded on the privatization of our Brazilian toll road investment were more than offset by the absence of appraisal gains at Canary Wharf that were significant in 2015.
Interest expense increased by $413 million in 2016 mainly due to additional borrowings associated with acquisitions, particularly within our real estate, infrastructure and renewable power operations, partially offset by repayments of credit facilities throughout the year.
In 2016 we recorded fair value losses of $130 million, compared to a fair value gain of $2.2 billion in 2015. The loss recorded in the year was mainly attributable to the recognition of a one-time loss on the conversion of a debt-to-equity instrument in our private equity business, which was partially offset by appraisal gains in our investment properties. Fair value gains in 2015 included higher appraisal gains in our core office investment properties that was caused by improving market conditions driving up underlying property values.

29 BROOKFIELD ASSET MANAGEMENT


The increase of $325 million in depreciation and amortization expense is primarily driven by acquisitions in our renewable power and infrastructure businesses, offset by the elimination of depreciation eliminated on the previously sold infrastructure assets and the impact of foreign exchange on our non-U.S. dollar denominated operations.
Income taxes reflected a net recovery of $345 million in 2016 as a result of a reduction in the effective tax rate on certain real estate assets following a restructuring.
Net income attributable to common shareholders totaled $1.7 billion, or $1.55 per share, compared to $2.3 billion, or $2.26 per share in 2015. The decline of $690 million in the amount of net income attributable to common shareholders reflects the lower level of appraisal gains, partially offset by a reattribution of income related to carried interest earned.
Significant Acquisitions and Dispositions
We have summarized below the impacts of significant acquisitions and dispositions on our current year results:
FOR THE YEAR ENDED DEC. 31, 2017
(MILLIONS)
 
Acquisitions
 
Dispositions
 
Revenue
 
Net Income
 
Revenue
 
Net Income
Real estate
 
$
830

 
$
475

 
$
(118
)
 
$
(133
)
Renewable power
 
240

 
9

 
(28
)
 
(3
)
Infrastructure
 
1,347

 
533

 
(65
)
 
(28
)
Private equity and other
 
14,821

 
26

 
(520
)
 
109

 
 
17,238

 
1,043

 
(731
)
 
(55
)
Gains recognized in net income
 

 
179

 

 
1,036

 
 
$
17,238

 
$
1,222

 
$
(731
)
 
$
981

Acquisitions
Further details relating to the major acquisitions noted below are provided in Note 5 to the consolidated financial statements.
The acquisition of a U.K. road fuel distribution business in our Private Equity segment contributed $13.1 billion of the incremental revenues. Revenue and direct operating costs for the business include approximately $5.0 billion of import duty amounts that are passed through to the customers, which are recorded on a gross basis in revenues and direct costs, with no impact on the margin generated by the business. Revenues and direct costs also include amounts related to the sale of certificates that are generated by the business as a result of the U.K. government’s Renewable Transport Fuel Obligation Order; these certificates are recorded in inventory at fair value and therefore, the margin generated from these sales are minimal. In addition to the aforementioned acquisition of the U.K. road fuel distribution business, our private equity business also completed several other investments throughout the year, including a leading Brazilian water treatment business and a fuel marketing business.
Acquisitions within our Real Estate segment include a portfolio of manufactured housing communities, as well as additional assets added to our existing U.K. student housing portfolio. Significant acquisitions made in the prior year that have now contributed a full year of results include a self-storage portfolio, the privatization of a regional mall business, a mixed-use property in South Korea, and an office building in the U.K.
Our Renewable Power segment completed two major acquisitions in the year: the acquisition of TerraForm Power, Inc. (“TERP”), followed by the acquisition of TerraForm Global, Inc. Since the close of the acquisitions in the fourth quarter of the year, they contributed approximately $147 million and $6 million in revenue and net income, respectively. Other acquisitions that contributed to the incremental revenues and net income this year include a North American pumped storage business and additions to our hydroelectric portfolio; these acquisitions were made partway through the prior year and have now contributed a full year of results.
In our infrastructure business, we acquired a Brazilian regulated gas transmission business which contributed $951 million and $495 million in revenue and net income, respectively. In addition, significant acquisitions made in the prior year that have now contributed a full year of results include a ports business in Australia, a portfolio of toll roads in Peru, and a North American gas storage business.
The gains recognized in net income of $179 million relate primarily to bargain purchase gains arising on the acquisitions in our Real Estate segment.

2017 MD&A AND FINANCIAL STATEMENTS 30


Dispositions
Recent dispositions that impacted our current year’s results include a bath and shower products manufacturing business in our private equity business, an Irish wind facility in our renewable power business, as well as an electricity transmission operation and an energy distribution operation in our infrastructure business. We also converted a debt instrument into an equity investment in the fourth quarter of the prior year, resulting in the absence of distribution and interest income from this investment in the current year. These dispositions collectively resulted in the absence of revenue and net income of $731 million and $55 million in the current year, respectively.
Realized gains of $1.0 billion recognized in net income in the year relate to the aforementioned dispositions, as well as the sale of a European logistics portfolio within our real estate business. We realized a $228 million gain from the disposition of the bath and shower products manufacturing business, $847 million on the sale of the European logistics portfolio, and $9 million on the sale of an Irish wind farm facility in our renewable power business. These results were partially offset by a realized loss of $48 million on the disposition of an oil and gas producer in our Private Equity segment.
Fair Value Changes and Other Income and Gains
The following table disaggregates fair value changes into major components to facilitate analysis: 
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2017

 
2016

 
Change

Investment properties
$
1,021

 
$
960

 
$
61

GGP warrants
(268
)
 
(110
)
 
(158
)
Impairment
(98
)
 
(771
)
 
673

Provisions
(246
)
 
(99
)
 
(147
)
Transaction related gains (losses), net of deal costs
637

 
(148
)
 
785

Financial contracts
(600
)
 
65

 
(665
)
Other fair value changes
(25
)
 
(27
)
 
2

Total fair value changes
421

 
(130
)
 
551

Other income and gains
1,180

 
482

 
698

Fair value changes and other income and gains
$
1,601

 
$
352

 
$
1,249

Investment Properties
Our investment properties are recorded at fair value with changes recorded in net income. The following table disaggregates investment property fair value changes by asset type:
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2017

 
2016

 
Change

Core office
$
(864
)
 
$
51

 
$
(915
)
Opportunistic and other
1,885

 
909

 
976

 
$
1,021

 
$
960

 
$
61

Our investment properties are recorded at fair value, with changes in value reflected in income. We discuss the key valuation inputs of our investment properties on page 82.
Core office property values declined overall by $864 million, compared to a $51 million net gain in the prior year. These declines are primarily attributable to office buildings in New York as a result of revised cash flow projections, which now reflect lower growth rates and changes in other leasing assumptions. Our Houston market valuations were also impacted as a result of the challenges faced by commodity driven markets, causing declines in leasing activity and therefore valuation metrics. These were partially offset by valuation increases in our Canadian and Australian markets, as a result of new leases and strong market conditions. We had modest appraisal gains of $51 million in 2016, reflecting de-risking in our portfolio through leasing activity being offset by lower pricing assumptions for projected lease renewals.

31 BROOKFIELD ASSET MANAGEMENT


The fair value gains of $1.9 billion in our opportunistic and other properties included $1.4 billion from our opportunistic portfolio, $365 million from our directly held assets, and $72 million from our infrastructure investment properties. We have been investing additional capital into our opportunistic portfolio over the past years, increasing the asset base on which we record fair value change increments. The 2017 opportunistic portfolio gains mainly relate to appraisal gains on our European logistics operations throughout the year, recorded prior to its eventual sale in the fourth quarter. In addition, the value of our Indian office portfolio and mixed-used property in South Korea increased due to improved leasing activity and market rents, as well as overall occupancy increases in the U.K. student housing portfolio. The gains on our directly held assets primarily relate to stronger forecasted cash flows in our multifamily properties and an office property in Sydney. We recorded gains of $909 million in 2016 due to improved leasing activity, higher projected rental rates and cash flow, as well as lower terminal capitalization rates resulting from operational improvements and market observations.
GGP Warrants
Our GGP warrants declined in value by $268 million as a result of a 15% depreciation in the GGP’s share price from the end of the prior year to the date we converted the warrants into common shares. The impact of this decrease is on net income and is partially offset by our share of the $101 million gains on the corresponding decrease in the warrant liability recorded by GGP, which is included in equity accounted income. In 2016, we also recorded losses of $110 million due to a decline in GGP’s share price.
During the fourth quarter, BPY exercised all of its outstanding warrants in exchange for 68 million common shares of GGP. The aforementioned mark-to-market impact of the GGP warrants will no longer impact our results going forward.
Impairments
Impairment losses of $98 million relate primarily to our hospitality assets, timber assets and certain investments within our private equity business as a result of year-end impairment testing. In addition, our Brazilian residential business recognized impairment losses on their inventory of completed condominium units. Prior year’s impairment losses relate to the Brazilian residential business, as well as a mark-to-market valuation loss on the conversion of a previously acquired distressed debt into equity of an entity within our private equity operation upon emergence from a multi-year restructuring process.
Provisions
Provisions of $246 million relate primarily to our Brazilian residential business arising from the cost of terminations on condominium sales agreements; prior year’s results were also impacted by similar terminations. In addition, we recorded provisions related to our construction contacts in our private equity business and provisions related to corporate development and transaction costs within our renewable power business.
Transaction Related Gains, Net of Deal Costs
In 2017, transaction related gains related primarily to a $790 million gain recognized on the revaluation of our investment in Norbord Inc. During the year, we reduced our interest to less than 50% which resulted in us no longer consolidating the investment, at which time we revalued Norbords assets and liabilities based on the share price, resulting in the gain. These gains were partially offset by deal costs incurred across our business. We expensed transaction costs of $148 million in 2016 upon completion of transactions.
Financial Contracts
Financial contracts include mark-to-market gains and losses on unrealized financial contracts that are not designated as hedges. We often enter into these contracts in order to offset against foreign currency, interest rate, and pricing exposures. Most currencies have appreciated against the U.S. dollar in the year, resulting in a loss on our long-term financial contracts. Refer to page 39 for further discussion on foreign currency impacts.
The unrealized losses recognized in the year of $600 million relate primarily to contracts entered into to manage the risk of local currencies in the jurisdictions where we hold the majority of our non-U.S. dollar assets, as well as contracts entered into within our financial asset portfolio.
Other Income and Gains
Other income and gains relate to gains and losses upon disposition of assets across our business and realization of financial contracts noted above. The net gain of $1.2 billion includes the disposition of assets throughout the year, including that of our bath and shower business for $228 million, partial sale of our shares in our panel board business for $82 million and the sale of a European logistics portfolio within our real estate business for $847 million. We also realized gains on our infrastructure derivative contracts that were settled in the year. The gains in 2016 included realized gain from sales of a German hotel portfolio, a hospitality trademark, a toehold position in our Australian port business, as well as realized gains from financial contracts.

2017 MD&A AND FINANCIAL STATEMENTS 32


Income Taxes
We recorded an aggregate income tax expense of $613 million in 2017, compared to a recovery of $345 million in 2016 representing a variance of $958 million.
The variance is due primarily to a recovery associated with a $900 million reduction of deferred income tax liabilities in 2016 as a result of a reorganization of the ownership of certain real estate assets.
Income tax expense includes current taxes of $286 million (2016$213 million) and deferred taxes of $327 million (2016 – recovery of $558 million). The current tax provision represents the portion of the provision that gives rise to a current tax liability. The deferred tax provision arises from income that is subject to tax in future periods (commonly referred to as timing differences) and the utilization of existing tax assets such as accumulated tax losses.
In our case, the deferred tax provision relates principally to fair value gains, particularly from investment property appraisals, which are not taxable until the assets are sold and therefore do not give rise to a current tax liability, as well as the depreciation of assets that are depreciated for tax purposes at rates that differ from the rates used in our financial statements.
As a result of the recent U.S. income tax reform, the company’s net deferred tax liability decreased by $753 million, of which $157 million was recorded as a tax recovery in net income and $596 million was recorded as a tax recovery in other comprehensive income. The tax recovery recorded in other comprehensive income relates to tax liabilities that arose in conjunction with the revaluation of PP&E. Over the long term, we expect the decrease in the U.S. federal income tax rate to reduce our overall effective tax rate.
Our income tax provision does not include a number of non-income taxes paid that are recorded elsewhere in our financial statements. For example, a number of our operations in Brazil are required to pay non-recoverable taxes on revenue, which are included in direct costs as opposed to income taxes. In addition, we pay considerable property, payroll and other taxes that represent an important component of the tax base in the jurisdictions in which we operate, which are also predominantly recorded in direct costs.
Our effective income tax rate is different from the Canadian domestic statutory income tax rate due to the following differences:
FOR THE YEARS ENDED DEC. 31
2017

 
2016

 
Change

Statutory income tax rate
26
 %
 
26
 %
 
%
Increase (reduction) in rate resulting from:
 
 
 
 
 
Change in tax rates and new legislation
(3
)
 
(35
)
 
32

International operations subject to different
tax rates
3

 
(5
)
 
8

Taxable income attributed to non-controlling
interests
(9
)
 
(2
)
 
(7
)
(Recognition) derecognition of deferred tax assets
(2
)
 
1

 
(3
)
Non-recognition of the benefit of current year’s tax losses
3

 
6

 
(3
)
Other
(6
)
 
(3
)
 
(3
)
Effective income tax rate
12
 %
 
(12
)%
 
24
%
The change in tax rates and new legislation that reduced our effective tax rate by 3% in 2017 is primarily attributed to U.S. tax reform. The reduction of 35% in our effective tax rate in 2016 is primarily related to the reorganization of the ownership of certain real estate assets.
We operate in countries with different tax rates, most of which vary from our domestic statutory rate and we also benefit from tax incentives introduced in various countries to encourage economic activity. Differences in global tax rates gave rise to a 3% increase in our effective tax rate compared to a 5% reduction in 2016. The difference will vary from period to period depending on the relative proportion of income in each country.
As an asset manager, many of our operations are held in partially owned “flow through” entities, such as partnerships, and any tax liability is incurred by the investors as opposed to the entity. As a result, while our consolidated earnings includes income attributable to non-controlling ownership interests in these entities, our consolidated tax provision includes only our proportionate share of associated tax provision of these entities. In other words, we are consolidating all of the net income, but only our share of their tax provision. This gave rise to a 9% and 2% reduction in the effective tax rate relative to the statutory tax rate in 2017 and 2016, respectively.

33 BROOKFIELD ASSET MANAGEMENT


Equity Accounted Income
Equity accounted income represents our share of the net income recorded by investments over which we exercise significant influence. The following table disaggregates consolidated equity accounted income to facilitate analysis:
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2017

 
2016

 
Change

Real estate operations
 
 
 
 
 
GGP
$
179

 
$
476

 
$
(297
)
Canary Wharf
91

 
10

 
81

Other real estate operations
610

 
445

 
165

Infrastructure operations
199

 
314

 
(115
)
Private equity and other
134

 
48

 
86

 
$
1,213

 
$
1,293

 
$
(80
)
Our share of GGPs equity accounted income decreased to $179 million in the current year compared to $476 million in prior year. This decrease is attributable to $845 million in appraisal losses (2016 – $10 million appraisal gains) recognized on the retail properties as a result of changes in cash flow assumptions. Excluding this impact, our share of GGP’s income increased by $558 million, primarily due to the recognition of $442 million in gains relating to the exercise of GGP’s warrants in exchange for common shares of the company, as the carrying value of the shares exceeded that of the warrants. Prior to the exercise of the warrants, we also recognized $101 million in gains representing our share on the corresponding decrease in warrant liability recorded by GGP. The remainder of the increase represents improvement in operating results on a same-store basis.
Our share of Canary Wharf’s equity accounted income was $91 million in 2017 compared to $10 million in 2016, benefiting from a reduction in unrealized losses on interest rate swap contracts compared 2016. Excluding the impact of fair value changes, income earned from Canary Wharf’s operating activities was relatively consistent with the prior year.
Equity accounted income from other real estate operations, which consist mainly of core office properties, increased by $165 million to $610 million in 2017 due to the incremental income from our Brazilian retail operation as well as two office properties in New York that were partially disposed of and reclassified to equity accounted investments in the current year.
Equity accounted income in our infrastructure business decreased to $199 million compared to $314 million in 2016, as prior year’s results include one-time gains that did not recur this year. These gains were attributable to an impairment reversal at our North American natural gas transmission operation as well as a transaction gain recognized on the privatization of our Brazilian toll road investment.
Equity accounted income from private equity and other investments was $134 million for the year, an increase of $86 million, mainly as a result of our recent investment in a marine energy services business and a joint venture in our Brazilian residential business. We also commenced equity accounting of Norbord following its deconsolidation in the fourth quarter of the year.

2017 MD&A AND FINANCIAL STATEMENTS 34


BALANCE SHEET ANALYSIS
The following table summarizes the statement of financial position of the company as at December 31, 2017, 2016, and 2015:
AS AT DEC. 31
(MILLIONS)
 
 
 
 
 
 
Change
2017

 
2016

 
2015

 
2017 vs 2016

 
2016 vs 2015

Assets
 
 
 
 
 
 
 
 
 
Investment properties
$
56,870

 
$
54,172

 
$
47,164

 
$
2,698

 
$
7,008

Property, plant and equipment
53,005

 
45,346

 
37,273

 
7,659

 
8,073

Equity accounted investments
31,994

 
24,977

 
23,216

 
7,017

 
1,761

Cash and cash equivalents
5,139

 
4,299

 
2,774

 
840

 
1,525

Accounts receivable and other
11,973

 
9,133

 
7,044

 
2,840

 
2,089

Intangible assets
14,242

 
6,073

 
5,170

 
8,169

 
903

Other assets
19,497

 
15,826

 
16,873

 
3,671

 
(1,047
)
Total Assets
$
192,720

 
$
159,826

 
$
139,514

 
$
32,894

 
$
20,312

Liabilities
 
 
 
 
 
 
 
 
 
Borrowings and other non-current financial liabilities
$
88,867

 
$
72,650

 
$
65,420

 
$
16,217

 
$
7,230

Other liabilities
23,981

 
17,488

 
16,867

 
6,493

 
621

Equity
 
 
 
 
 
 
 
 
 
Preferred equity
4,192

 
3,954

 
3,739

 
238

 
215

Non-controlling interests
51,628

 
43,235

 
31,920

 
8,393

 
11,315

Common equity
24,052

 
22,499

 
21,568

 
1,553

 
931

Total Equity
79,872

 
69,688

 
57,227

 
10,184

 
12,461

 
$
192,720

 
$
159,826

 
$
139,514

 
$
32,894

 
$
20,312


35 BROOKFIELD ASSET MANAGEMENT


2017 vs 2016
Consolidated assets at December 31, 2017 were $192.7 billion, an increase of $32.9 billion since December 31, 2016. The increases noted in the table above are largely attributable to acquisitions that made throughout the year. We have summarized below the acquisitions that have had the largest impact on our balance sheet as at December 31, 2017:
 
Private Equity
 
Renewable Power
 
Infrastructure

 
 
 
 
 
 
(MILLIONS)
Brazilian Water Treatment Business

 
U.K. Road Fuel Distribution Business

 
Solar and Wind Assets

 
Brazilian Regulated Gas Transmission Business

 
Real Estate

 
Other

 
Total

Investment properties
$

 
$

 
$

 
$

 
$
5,851

 
$

 
$
5,851

Property, plant and equipment
200

 
154

 
6,886

 

 
281

 
284

 
7,805

Equity accounted investments
109

 
114

 

 

 

 
8

 
231

Cash and cash equivalents
296

 
28

 
760

 
89

 
39

 
13

 
1,225

Accounts receivable and other1
978

 
1,184

 
279

 
317

 
133

 
961

 
3,852

Intangible assets
2,467

 
212

 

 
5,515

 

 
218

 
8,412

Other assets
142

 
857

 
712

 
804

 

 
(577
)
 
1,938

Total Assets
4,192

 
2,549

 
8,637

 
6,725

 
6,304

 
907

 
29,314

Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and other
(227
)
 
(1,744
)
 
(1,381
)
 
(202
)
 
(165
)
 
(172
)
 
(3,891
)
Non-recourse borrowings
(1,468
)
 
(210
)
 
(4,902
)
 

 
(1,955
)
 
(30
)
 
(8,565
)
Deferred income tax liabilities
(746
)
 
(52
)
 
(48
)
 
(946
)
 
(45
)
 
(30
)
 
(1,867
)
Non-controlling interests
(745
)
 
(81
)
 
(830
)
 
(477
)
 
(124
)
 
1

 
(2,256
)
 
(3,186
)
 
(2,087
)
 
(7,161
)
 
(1,625
)
 
(2,289
)
 
(231
)
 
(16,579
)
Net assets acquired
$
1,006

 
$
462

 
$
1,476

 
$
5,100

 
$
4,015

 
$
676

 
$
12,735

1.
Excludes financial assets; these are included within other assets

Further details are provided in Note 5 to the consolidated financial statements.
Investment properties consist primarily of the company’s real estate assets. The balance as at December 31, 2017 increased by $2.7 billion primarily due to acquisitions, as highlighted in the table above, as well as additions of $593 million to the portfolio from the incremental capital invested to enhance properties. Additionally, the impact of valuation gains as well as foreign exchange increased the balances by $1.0 billion and $1.4 billion, respectively. These increases were partially offset by dispositions and assets reclassified to held for sale of $6.2 billion. The dispositions include a European logistics company as well as several office properties in the U.S., Canada and Europe. Refer to Note 11 to the consolidated financial statements for further details.
Property, plant and equipment increased by $7.7 billion primarily due to the acquisitions noted in the table above, offset by depreciation in the year. We provide a continuity of property, plant and equipment in Note 12 to the consolidated financial statements.
The increase of $7.0 billion in equity accounted investments is mainly due to additions, net of dispositions, of $5.3 billion related to increases in our ownership of GGP, our Brazilian toll road portfolio, our North American gas transmission business, as well as the acquisitions highlighted above. Additions also include the impact of the reclassification of our interest in Norbord to equity accounted investments, as well as an office building in midtown New York and a Brazilian retail fund upon deconsolidation of these investments in the current year. Equity accounted investments also increased due to $1.7 billion of comprehensive income and $727 million of foreign exchange gains, partially offset by distributions received of $732 million.
Other assets consists of inventory, goodwill, deferred income tax assets, other financial assets and assets held for sale. The increase in inventory, goodwill, deferred income tax assets and other financial assets are all mainly attributable to the acquisitions noted in the table above, adding $1.9 billion to the balances combined, while the increase of $1.2 billion in assets held for sale is primarily attributable to the aforementioned reclassification of the office building in New York and a Las Vegas hotel.

2017 MD&A AND FINANCIAL STATEMENTS 36


Borrowings and other non-financial liabilities consist of our non-recourse borrowings, corporate borrowings, subsidiary equity obligations, non-current accounts payable and other long-term liabilities that are due after one year. The increase in the balance of $16.2 billion in the year is primarily as a result of a $12.3 billion increase in non-recourse borrowings, of which $8.6 billion relates to debt assumed upon acquisitions. The remainder of the increase is primarily the result of higher borrowings used to finance acquisitions. Corporate borrowings and other non-current financial liabilities also added $1.2 billion and $2.6 billion to the balance. Refer to Part 4 – Capitalization and Liquidity.
Other liabilities include current accounts payable, deferred income tax liabilities, subsidiary equity obligations and liabilities associated with assets held for sale. The increase of $6.5 billion is due to additional current accounts payable and other liabilities assumed in recent acquisitions and deferred income tax liabilities recorded in business combinations as the tax bases of the net assets acquired were lower than their fair values. Liabilities associated with assets held for sale also increased by $1.3 billion as a result of the aforementioned investments reclassified to held for sale as at December 31, 2017.
2016 vs 2015
Consolidated assets at December 31, 2016 were $159.8 billion, an increase of $20.3 billion from December 31, 2015. The increase was primarily due to higher carrying values of our investment properties, property, plant and equipment and equity accounted investments which are discussed below and are predominantly due to acquisitions during the year. Our assets also increased as a result of the appreciation of the Brazilian real against the U.S. dollar, partially offset by a decrease in the value of the British pound.
Investment properties increased by $7.0 billion during 2016. This was driven by acquisitions and additions of $10.8 billion, including $9.2 billion of acquisitions within our Real Estate business, including a mixed-use property in South Korea, a U.S. self-storage business, a U.K. student housing portfolio and the reclassification of properties within a retail mall business in the U.S. which was equity accounted prior to our acquisition of full control during the year. The acquisitions were partially offset by the disposition of mature office properties in 2016, including properties in Sydney and Vancouver and the sale of partial interest in a building in New York.
Property, plant and equipment increased by $8.1 billion during 2016 as a result of acquisitions and revaluations within our renewable power business, including $6.1 billion relating to the acquisitions of hydroelectric portfolios in South America, and $1.1 billion of acquisitions and internal growth capital projects in our Infrastructure business, including the acquisition of an Australian ports business and a U.S. gas storage business. The residual increase is driven by acquisitions of a mixed-use complex and hospitality assets within our Real Estate business and was partially offset by the reclassification of certain operational assets to held for sale within our Private Equity business.
Accounts receivable and other assets increased by $2.1 billion to $9.1 billion as at December 31, 2016. Our private equity operations balance increased by over $300 million primarily due to increased project volumes in our construction services and facilities management business. Our Brazilian residential operations balance increased by $418 million as a result of higher home closings late in the current year as compared to the prior year. Acquisitions during the year throughout all our businesses further increased the balance by $1.0 billion, particularly from our Colombian hydroelectric plants, North American gas storage business and our Peruvian toll roads.
Corporate borrowing increased by $564 million due to the issuance of corporate notes during the year, partially offset by a repayment of maturing notes and the impact of foreign exchange on the Canadian dollar. Property-specific borrowings increased by $6.4 billion during 2016 due to $5.2 billion of debt assumed on acquisitions as well as debt arranged in individual businesses that we consolidate, partially offset by the elimination of debt associated with assets sold. Subsidiary borrowings decreased as a result of repayments of listed partnership credit facility balances outstanding at the end of the prior year, and were partially offset by medium term note issuances at our listed partnerships.

37 BROOKFIELD ASSET MANAGEMENT


Equity
The significant variances in common equity and non-controlling interests are discussed below. Preferred equity is discussed in Part 4 of this report.
Common Equity
The following table presents the major contributors to the period-over-period variances for common equity:
AS AT AND FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2017

 
2016

Common equity, beginning of year
$
22,499

 
$
21,568

Changes in period
 
 
 
Net income to shareholders
1,462

 
1,651

Common dividends
(642
)
 
(941
)
Preferred dividends
(145
)
 
(133
)
Foreign currency translation
280

 
405

Other comprehensive income
569

 
416

Share repurchases, net of option issuances
(103
)
 
(124
)
Ownership changes and other
132

 
(343
)
 
1,553

 
931

Common equity, end of year
$
24,052

 
$
22,499

Common equity increased by $1.6 billion to $24.1 billion during the year. Net income and other comprehensive income attributable to shareholders for the year totaled $1.5 billion and $849 million, respectively. We distributed $787 million to shareholders as common and preferred share dividends, including a $102 million special dividend distribution from the spin-off of an insurance company.
Non-controlling Interests
Non-controlling interests in our consolidated results primarily consist of third-party interests in BPY, BEP, BIP and BBU, and their consolidated entities as well as co-investors and other participating interests in our consolidated investments as follows:
AS AT DEC. 31
(MILLIONS)
2017

 
2016

Brookfield Property Partners L.P.
$
19,736

 
$
18,790

Brookfield Renewable Partners L.P.
10,139

 
8,879

Brookfield Infrastructure Partners L.P.
11,376

 
7,710

Brookfield Business Partners L.P.
4,000

 
2,173

Other participating interests
6,377

 
5,683

 
$
51,628

 
$
43,235

Non-controlling interests increased by $8.4 billion in 2017 to $51.6 billion. The increase was driven by comprehensive income attributable to non-controlling interests which totaled $4.8 billion, net equity issuances to non-controlling interests by our listed partnerships totaling $7.2 billion and ownership changes attributable to non-controlling interest of $1.3 billion. These increases were partially offset by $4.9 billion of distributions to non-controlling interests.

2017 MD&A AND FINANCIAL STATEMENTS 38


FOREIGN CURRENCY TRANSLATION
Approximately half of our capital is invested in non-U.S. currencies and the cash flow generated from these businesses, as well as our equity, is subject to changes in foreign currency exchange rates. From time to time, we utilize financial contracts to adjust these exposures. The most significant currency exchange rates that impact our business are shown in the following table:
AS AT DEC. 31
Average Rate
 
Change
 
Year-End Spot Rate
 
Change
2017

 
2016

 
2015

 
2017 vs 2016

 
2016 vs 2015

 
2017
 
2016
 
2015
 
2017 vs 2016

 
2016 vs 2015

Australian dollar
0.7669

 
0.7441

 
0.7523

 
3
 %
 
(1
)%
 
0.7809
 
0.7197
 
0.7287
 
9
 %
 
(1
)%
Brazilian real1
3.1928

 
3.4904

 
3.2776

 
9
 %
 
(6
)%
 
3.3080
 
3.2595
 
3.9604
 
(1
)%
 
18
 %
British pound
1.2889

 
1.3554

 
1.5285

 
(5
)%
 
(11
)%
 
1.3521
 
1.2357
 
1.4736
 
9
 %
 
(16
)%
Canadian dollar
0.7711

 
0.7555

 
0.7832

 
2
 %
 
(4
)%
 
0.7953
 
0.7439
 
0.7227
 
7
 %
 
3
 %
1.
Based on U.S. dollar to Brazilian real
Currency exchange rates relative to the U.S. dollar at the end of 2017 were higher than December 31, 2016, for most of our significant non-U.S. dollar investments, with the exception of the Brazilian real, which increases the carrying values of the assets and liabilities from our subsidiaries or investments in these regions. As at December 31, 2017, our IFRS net equity of $24.1 billion was invested in the following currencies: United States dollars – 48%; Brazilian reais – 17%; British pounds – 15%; Australian dollars – 9%; Canadian dollars – 6%; and other currencies – 5%.
We use financial contracts and foreign currency debt to reduce exposures to most foreign currencies. We are largely hedged against the Australian, British and Canadian currencies with the result that the gains in the year were substantially offset by these currency hedges. We typically do not hedge our equity in Brazil and other emerging markets, such as Colombia and Peru, due to the high cost associated with these contracts. Foreign currency translation positively impacted equity by $439 million in the current year, including the equity attributable to non-controlling interests, primarily as a result of the strengthening of the unhedged local currencies in the jurisdictions where we hold the majority of our non-U.S. dollar investments relative to the U.S. dollar, with the exception of the Brazilian real. The weakening of the Brazilian real, combined with increased equity from acquisitions in the current year, resulted in a loss of $506 million.
The following table disaggregates the impact of foreign currency translation on our equity by the most significant non-U.S. currencies:
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2017

 
2016

 
Change

Australian dollar
$
406

 
$
(203
)
 
$
609

Brazilian real
(506
)
 
1,314

 
(1,820
)
British pound
768

 
(1,434
)
 
2,202

Canadian dollar
752

 
286

 
466

Other
662

 
397

 
265

 
2,082

 
360

 
1,722

Currency hedges
(1,643
)
 
876

 
(2,519
)
 
$
439

 
$
1,236

 
$
(797
)
Attributable to:
 
 
 
 
 
Shareholders
$
280

 
$
405

 
$
(125
)
Non-controlling interests
159

 
831

 
(672
)
 
$
439

 
$
1,236

 
$
(797
)
The average annual foreign exchange rates relative to the U.S. dollar for the more significant currencies that impact our business, except for the British pound, were higher for the year ended December 31, 2017, than that of 2016 and lower than that of 2015. As a result of these rate variations, the U.S. dollar equivalents of the contributions from our subsidiaries and investments in these regions were higher in 2017 than in 2016 and lower than in 2015, all else being equal. From time to time, we mitigate the impacts of movements in foreign exchange rates through the use of financial contracts, where it is economically feasible to do so.

39 BROOKFIELD ASSET MANAGEMENT


SUMMARY OF QUARTERLY RESULTS
In the past two years the quarterly variances in revenues are due primarily to acquisitions and dispositions. Variances in net income to shareholders relate primarily to the timing and amount of fair value changes and deferred tax provisions recognized, as well as seasonality and cyclical influences in certain businesses. Changes in ownership have resulted in the consolidation and deconsolidation of revenues from some of our assets, particularly in our real estate business. Other factors include the impact of foreign currency on non-U.S. revenues.
Our real estate operations typically generate consistent results on a quarterly basis due to the long-term nature of contractual lease arrangements subject to the intermittent recognition of disposition and lease termination gains. Our retail properties typically experience seasonally higher retail sales during the fourth quarter, and our resort hotels tend to experience higher revenues and costs as a result of increased visits during the first quarter. We fair value our real estate assets on a quarterly basis which results in variations in net income based on changes in the value.
Renewable power hydroelectric operations are seasonal in nature. Generation tends to be higher during the winter rainy season in Brazil and spring thaws in North America; however, this is mitigated to an extent by prices, which tend not to be as strong as they are in the summer and winter seasons due to the more moderate weather conditions and reductions in demand for electricity. Water and wind conditions may also vary from year to year. Our infrastructure operations are generally stable in nature as a result of regulation or long-term sales contracts with our investors, certain of which guarantee minimum volumes.
Our residential development operations are seasonal in nature and a large portion is correlated with the ongoing U.S. housing recovery and, to a lesser extent, economic conditions in Brazil. Results in these businesses are typically higher in the third and fourth quarters compared to the first half of the year, as weather conditions are more favorable in the latter half of the year which tends to increase construction activity levels.
Our condensed statements of operations for the eight most recent quarters are as follows:
 
2017
 
2016
FOR THE PERIODS ENDED
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Q4

 
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

Revenues
$
13,065

 
$
12,276

 
$
9,444

 
$
6,001

 
$
6,935

 
$
6,285

 
$
5,973

 
$
5,218

Net income
2,083

 
992

 
958

 
518

 
97

 
2,021

 
584

 
636

Net income to shareholders
1,046

 
228

 
225

 
(37
)
 
173

 
1,036

 
185

 
257

Per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
– diluted
$
1.02

 
$
0.20

 
$
0.19

 
$
(0.08
)
 
$
0.14

 
$
1.03

 
$
0.15

 
$
0.23

– basic
1.05

 
0.20

 
0.20

 
(0.08
)
 
0.15

 
1.05

 
0.16

 
0.23

The following table shows fair value changes and income taxes for the last eight quarters, as well as their combined impact on net income:
 
2017
 
2016
FOR THE PERIODS ENDED
(MILLIONS)
Q4

 
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

Fair value changes
$
280

 
$
132

 
$
213

 
$
(204
)
 
$
(488
)
 
$
(59
)
 
$
65

 
$
352

Income taxes
(110
)
 
(259
)
 
(119
)
 
(125
)
 
(211
)
 
992

 
(234
)
 
(202
)
Net impact
$
170

 
$
(127
)
 
$
94

 
$
(329
)
 
$
(699
)
 
$
933

 
$
(169
)
 
$
150

Over the last eight completed quarters, the factors discussed below caused variations in revenues and net income to shareholders on a quarterly basis.
The increase in revenues in the fourth quarter of 2017 are attributable to organic growth in existing operations across our business and acquisitions throughout the year. Our results also benefited from gains from the sale of the European logistics company and from a change in basis of accounting for Norbord.
Revenues in the third quarter of 2017 increased as a result of incremental contributions from acquisitions made partway through the second quarter of 2017, as described below, that have now contributed to a full quarter. Current quarter acquisitions also added to the increase, namely the acquisition of a fuel marketing business in our private equity group. Results were partially offset by higher income tax expenses in the quarter.

2017 MD&A AND FINANCIAL STATEMENTS 40


The overall increase in results in the second quarter of 2017 is predominantly attributable to acquisitions completed in the quarter, including the regulated gas transmission operation and the leading water treatment business, both in Brazil, and the U.K. road fuel provider.
In the first quarter of 2017, we recorded fair value losses, predominantly driven by mark-to-market losses on the GGP warrants, as well as decreases in valuations in our core office portfolio. Revenue declined from the prior quarter due to seasonality in the residential business.
In the fourth quarter of 2016, the effect of overall increases in revenues across our businesses was offset by an impairment of $530 million on certain financial assets as a result of lower valuations based on stock market prices in our private equity operations.
In the third quarter of 2016, we recognized a $900 million tax recovery which resulted from a reduction in effective tax rates arising from the restructuring of certain of our U.S. real estate operations, of which $600 million was attributable to shareholders.
In the first and second quarters of 2016, revenues increased from the acquisition of our Colombian hydroelectric facilities, opportunistic real estate assets and private equity investments. The second quarter of 2016 also included $208 million of revenue from the sale of three multifamily developments and additional revenue following an increase in the scale of our construction operations.

41 BROOKFIELD ASSET MANAGEMENT


CORPORATE DIVIDENDS
The dividends paid by Brookfield on outstanding securities by class during the past three years are summarized in the following table:
 
Distribution per Security
 
2017

 
2016

 
20151

Class A and B2 Limited Voting Shares (“Class A and B shares”)
$
0.56

 
$
0.52

 
$
0.47

Special distribution to Class A and Class B shares3,4
0.11

 
0.45

 

Class A Preferred Shares
 
 
 
 
 
Series 2
0.39

 
0.36

 
0.39

Series 4 + Series 7
0.39

 
0.36

 
0.39

Series 8
0.55

 
0.48

 
0.55

Series 9
0.53

 
0.75

 
0.74

Series 13
0.39

 
0.36

 
0.38

Series 145

 
0.11

 
1.40

Series 15
0.28

 
0.23

 
0.24

Series 17
0.92

 
0.90

 
0.93

Series 18
0.92

 
0.90

 
0.93

Series 246
0.58

 
0.80

 
1.06

Series 256
0.56

 
0.27

 

Series 26
0.72

 
0.85

 
0.88

Series 28
0.70

 
0.87

 
0.90

Series 30
0.93

 
0.90

 
0.94

Series 32
0.87

 
0.85

 
0.88

Series 34
0.81

 
0.80

 
0.82

Series 36
0.94

 
0.92

 
0.95

Series 37
0.95

 
0.92

 
0.96

Series 38
0.85

 
0.83

 
0.86

Series 40
0.87

 
0.85

 
0.88

Series 42
0.87

 
0.85

 
0.88

Series 447
0.97

 
0.94

 
0.23

Series 468
1.03

 

 

Series 489
0.28

 

 

 
 
 
 
 
 
1.
2015 dividends to the Class A and Class B shares have been adjusted to reflect a three-for-two stock split on May 12, 2015
2.
Class B Limited Voting Shares (“Class B Shares”)
3.
Distribution of one common share of Trisura Group Ltd. for every 170 Class A Shares and Class B Shares held as of the close of business of June 1, 2017
4.
Distribution of a 20.7% interest in Brookfield Business Partners on June 20, 2016, based on IFRS values
5.
Redeemed March 1, 2016
6.
1,533,133 shares were converted from Series 24 to Series 25 on July 1, 2016
7.
Issued October 2, 2015
8.
Issued November 18, 2016
9.
Issued September 13, 2017
Dividends on the Class A and Class B shares are declared in U.S. dollars whereas Class A Preferred share dividends are declared in Canadian dollars. 

2017 MD&A AND FINANCIAL STATEMENTS 42


PART 3 – OPERATING SEGMENT RESULTS
BASIS OF PRESENTATION
How We Measure and Report Our Operating Segments
Our operations are organized into our asset management business, five operating groups and our corporate activities, which collectively represent seven operating segments for internal and external reporting purposes. We measure operating performance primarily using FFO generated by each operating segment and the amount of capital invested by the corporation in each segment using common equity.1 Common equity relates to invested capital allocated to a particular business segment which we use interchangeably with segment common equity. We also utilize ENI as a supplement to FFO for our Asset Management segment to assess operating performance, including the fee revenues and carried interest generated on unrealized changes in value of our private fund investment portfolios.
Effective the first quarter of 2017, we changed the name of the Property segment to Real Estate. The presentation of financial information for financial reporting and management decision making for this segment has remained the same under the new name. No quantitative changes have been applied to the periods presented as a result of the change of name.
Our operating segments are global in scope and are as follows. We generate fee revenues, incentive distributions and performance fees from our Asset Management segment, receive our share of earnings from the capital invested in our five operation groups, which include our Real Estate, Renewable Power, Infrastructure, Private Equity, Residential segments and generate returns on the investment of our cash and financial assets in our Corporate segment. 
i.
Asset management operations include managing our listed partnerships, private funds and public securities on behalf of our investors and ourselves. We generate contractual base management fees for these activities as well as incentive distributions and performance income, including performance fees, transaction fees and carried interest. Common equity in our asset management segment is immaterial.
ii.
Real estate operations include the ownership, operation and development of core office, core retail, opportunistic and other properties.
iii.
Renewable power operations include the ownership, operation and development of hydroelectric, wind, solar, storage and other power generating facilities.
iv.
Infrastructure operations include the ownership, operation and development of utilities, transport, energy, communications and sustainable resource assets.
v.
Private equity operations include a broad range of industries, and are mostly focused on construction, other business services, energy, and industrial operations.
vi.
Residential development operations consist of homebuilding, condominium development and land development.
vii.
Corporate activities include the investment of cash and financial assets, as well as the management of our corporate capitalization, including corporate borrowings and preferred equity, which fund a portion of the capital invested in our other operations. Certain corporate costs such as technology and operations are incurred on behalf of our operating segments and allocated to each operating segment based on an internal pricing framework.
In assessing results, we separately identify the portion of FFO and common equity within our segments that relate to our primary listed partnerships: BPY, BEP, BIP and BBU. We believe that identifying the FFO and common equity attributable to our listed partnerships enables investors to understand how the results of these public entities are integrated into our financial results and is helpful in analyzing variances in FFO between reporting periods. Additional information with respect to these listed partnerships is available in their public filings. We also separately identify the components of our asset management FFO and realized disposition gains included within the FFO of each segment in order to facilitate analysis of variances in FFO between reporting periods.





1.
See definition in Glossary of Terms on page 103

43 BROOKFIELD ASSET MANAGEMENT


SUMMARY OF RESULTS BY OPERATING SEGMENT
The following table presents revenues, FFO and common equity by segment on a year-over-year basis for comparative purposes:
 
Revenues1
 
FFO2
 
Common Equity
AS AT AND FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2017

 
2016

 
Change 
 
2017

 
2016

 
Change 
 
2017

 
2016

 
Change 
Asset management
$
1,467

 
$
1,320

 
$
147

 
$
970

 
$
866

 
$
104

 
$
312

 
$
328

 
$
(16
)
Real estate
6,862

 
6,338

 
524

 
2,004

 
1,561

 
443

 
16,725

 
16,727

 
(2
)
Renewable power
2,788

 
2,474

 
314

 
270

 
180

 
90

 
4,944

 
4,826

 
118

Infrastructure
3,871

 
2,414

 
1,457

 
345

 
374

 
(29
)
 
2,834

 
2,697

 
137

Private equity
24,577

 
9,962

 
14,615

 
333

 
405

 
(72
)
 
4,215

 
2,862

 
1,353

Residential development
2,447

 
3,019

 
(572
)
 
34

 
63

 
(29
)
 
2,915

 
2,679

 
236

Corporate activities
362

 
235

 
127

 
(146
)
 
(212
)
 
66

 
(7,893
)
 
(7,620
)
 
(273
)
Total
$
42,374

 
$
25,762

 
$
16,612

 
$
3,810

 
$
3,237

 
$
573

 
$
24,052

 
$
22,499

 
$
1,553

1.
Revenues include inter-segment revenues, which are adjusted to arrive at external revenues for IFRS purposes. Please refer to Note 3(c) of the consolidated financial statements for a reconciliation of revenues by segment to external revenues
2.
Total FFO is a non-IFRS measure – see definition in Glossary of Terms on page 103
Total revenues and FFO were $42.4 billion and $3.8 billion in the current year, compared to $25.8 billion and $3.2 billion, in the prior year, respectively. FFO includes realized disposition gains of $1.3 billion in 2017 compared to $923 million in the prior year.
Revenues generated from our private equity operations increased by $14.6 billion primarily as a result of our acquisition of a U.K. road fuel distribution business. Revenue also benefited from acquisitions in our infrastructure segment in Brazil and North America. Further increases across all segments were offset by lower contributions from our Brazilian operations within our Residential development segment.
FFO benefited from increases in tariffs within our infrastructure business, generation in our renewable business and stronger pricing and volumes within our private equity businesses, as well as contributions from recent investments. Realized disposition gains further contributed to increased FFO and included the sale of opportunistic and core office assets within our real estate business. Increases were partially offset by lower results in our construction and Brazilian residential operations and absence of FFO on assets sold prior to or during the current period.
Common equity increased by $1.6 billion to $24.1 billion due to equity issuances at BEP, BIP and BBU, as well as investment contributions from earnings across our businesses.
Further information on segment revenues, FFO and common equity are discussed below.


2017 MD&A AND FINANCIAL STATEMENTS 44


assetmanagement29.jpg
Business Overview
We manage $126 billion of fee bearing capital, of which $61 billion is in listed partnerships, $52 billion is in private funds and $13 billion is within our public securities group.
We earn recurring long-term base management fees and generate performance fees from managing private funds, listed partnerships and public securities on behalf of investors.
Five-Year Fee Bearing Capital
AS AT DEC. 31 (BILLIONS)
 
Five-Year Fee Revenues
YEARS ENDED DEC. 31 (MILLIONS)
fiveyearfeebearingcapitala01.jpg
 
fiveyearfeerevenue22.jpg
 
 
1.
See definition in Glossary of Terms on page 103
Five-Year FFO
YEARS ENDED DEC. 31 (MILLIONS)
 
Five-Year Economic Net Income
YEARS ENDED DEC. 31 (MILLIONS)
fiveyearearffo29.jpg
 
fiveyeareni29.jpg

45 BROOKFIELD ASSET MANAGEMENT


Operations
Listed Partnerships ($61 billion fee bearing capital)
We manage fee bearing capital through publicly listed perpetual capital entities, including BPY, BEP, BIP, BBU, TERP and Acadian Timber Corp. (“Acadian”).
We are compensated for managing these entities through (i) base management fees, which are primarily determined by the market capitalization of these entities; and (ii) incentive distributions or performance fees.
Incentive distributions for BPY, BEP, BIP and TERP are a portion of the increases in distributions above predetermined hurdles. Performance fees for BBU are based on increases in the unit price of BBU above an escalating threshold.
Private Funds ($52 billion fee bearing capital)
We manage our fee bearing capital through 40 active private funds across our major asset classes: real estate, infrastructure/renewable power and private equity. These funds include core, credit, value-add and opportunistic closed-end funds and core open-end funds. These are primarily invested in the equity of private companies, although in certain cases, are invested in publicly traded equities. Our credit strategies invest in debt of companies in our areas of focus.
We refer to our largest private fund series as our flagship funds. We have flagship funds within each of our major asset classes: Real Estate (BSREP series), Infrastructure (BIF series, which includes infrastructure and renewable power investments) and Private Equity (BCP series).
Closed-end private fund capital is typically committed for 10 years from the inception of the fund with two one-year extension options.
Open-end private funds are perpetual vehicles that are able to continually raise capital as new investments arise.
We are compensated for managing these private funds through base management fees, which are generally determined on committed capital during the investment period and invested capital thereafter. We are entitled to receive carried interest on these funds, which represents a portion of fund profits above a preferred return to investors.
Public Securities ($13 billion fee bearing capital)
We manage our fee bearing capital through numerous funds and separately managed accounts, focused on fixed income and equity securities.
We act as advisor and sub-advisor, earning both base and performance fees.
Five-Year Review
Asset management FFO has increased over the past five years primarily as a result of steady growth in fee bearing capital from increased market capitalization of our listed partnerships and growing private fund capital. This has contributed to higher base fees and a corresponding increase in Asset Management FFO. In particular, our private fund fee bearing capital significantly increased in 2016 because we closed a record level of private fund capital. Higher FFO and distribution levels at our listed issuers further contributed to an increase in fee related revenues year over year. In 2013, strong FFO performance was due to the realization of $558 million of accumulated carried interest on the reorganization of GGP.
Our ENI has increased each of the past five years and significantly the past two years as we have earned higher fee related earnings due to the fee bearing capital growth discussed above and as a result of investment performance in many of our funds recently entering the carry generation stage of their fund lives. We participate in the favorable investment performance of our private funds in the form of carried interest contributes to ENI when generated and to FFO when realized.

2017 MD&A AND FINANCIAL STATEMENTS 46


Fee Bearing Capital
The following table summarizes fee bearing capital:
AS AT DEC. 31
(MILLIONS)
Listed 
Partnerships 

 
Private 
Funds 

 
Public 
Securities 

 
Total 2017

 
Total 2016 

Real estate
$
20,171

 
$
21,465

 
$

 
$
41,636

 
$
44,589

Renewable power
16,149

 
7,781

 

 
23,930

 
18,690

Infrastructure
20,599

 
18,152

 

 
38,751

 
28,909

Private equity
3,641

 
4,977

 

 
8,618

 
6,811

Other

 

 
12,655

 
12,655

 
10,577

December 31, 2017
$
60,560

 
$
52,375

 
$
12,655

 
$
125,590

 
n/a

December 31, 2016
$
49,375

 
$
49,624

 
$
10,577

 
n/a

 
$
109,576

Fee bearing capital increased by $16.0 billion during the year. The principal changes are set out in the following table:
FOR THE YEAR ENDED DEC. 31, 2017
(MILLIONS)
Listed 
Partnerships 

 
Private 
Funds 

 
Public 
Securities 

 
Total 

Balance, December 31, 2016
$
49,375

 
$
49,624

 
$
10,577

 
$
109,576

Inflows
3,927

 
8,276

 
3,481

 
15,684

Outflows

 

 
(2,486
)
 
(2,486
)
Distributions
(2,440
)
 
(2,272
)
 

 
(4,712
)
Market valuation
9,901

 
223

 
1,083

 
11,207

Other
2,300

 
(311
)
 

 
1,989

Change
13,688

 
5,916

 
2,078

 
21,682

BPY managed capital1
(2,503
)
 
(3,165
)
 

 
(5,668
)
Balance, December 31, 2017
$
60,560

 
$
52,375

 
$
12,655

 
$
125,590

1.
Represents the removal of listed partnership and private fund capital managed by BPY during the year which reflects the privatization of the previously listed fund BOX and the reclassification of several BPO private funds in order to simplify our reporting
Listed partnership fee bearing capital increased by$13.7 billion, of which $9.9 billion was due to an increase in unit prices. Inflows of $3.9 billion are from common equity issuances at BIP, BEP and BBU, debt and preferred equity issuances at BIP and BEP, and the acquisition of TERP for $1.4 billion in October 2017. Drawings on recourse credit facilities included in capitalization values increased by $2.3 billion to fund new investments. These increases were partially offset by $2.4 billion of distributions to unitholders.
Private fund inflows of $8.3 billion were contributed across each of our business groups. The inflows include $2.2 billion of commitments to our third flagship real estate fund, $977 million to our fifth real estate credit fund, $636 million to our infrastructure debt funds, as well as $511 million to other funds, including our real estate credit funds. Inflows also include $3.3 billion of co-investment capital relating to acquisitions completed by our infrastructure and private equity funds, as well as $605 million related to the acquisition of a European renewable power asset manager. Subsequent to December 31, 2017, we raised an additional $4.4 billion of third-party capital within our third flagship real estate fund that is not included in the table above. Inflows were partially offset by the return of capital of $2.3 billion across several funds as a result of asset dispositions, including the sale of our European logistics business within our first flagship real estate fund, our bath and shower products manufacturing business and an oil and gas producer in western Canada both within our second flagship private equity fund, as well as several dispositions across our multifamily and real estate credit funds.
Fee bearing capital was reduced by $5.7 billion of listed partnership and private fund capital managed by BPY. This reflects the privatization of Brookfield Canada Office Properties (“BOX”) and the reclassification of several legacy Brookfield Office Properties (“BPO”) private funds in order to simplify our reporting. FFO from the reclassified funds is reflected in BPY’s results from the third quarter of 2017 forward.
Public securities fee bearing capital increased due to inflows of $3.5 billion to our real estate focused mutual funds and managed accounts, as well as market appreciation of $1.1 billion. These inflows were partially offset by $2.5 billion of redemptions due to client rebalancing that impacted our real estate and infrastructure mutual funds.

47 BROOKFIELD ASSET MANAGEMENT


Carry Eligible Capital1 
Carry eligible capital increased by $2.1 billion during the year to $42.4 billion as at December 31, 2017. This represents an increase of $4 billion from commitments to our new funds, partially offset by capital of approximately $2 billion that was returned to investors following the asset dispositions discussed above.
Over $5.3 billion of private fund capital was deployed in 2017. The deployment resulted in a shift of uninvested carry eligible capital as a percentage of total carry eligible capital from 50% in 2016 to 44% in 2017.
Carry Eligible Capital Breakdown
 
Five-Year Carry Eligible Capital
AS AT DEC. 31 (BILLIONS)
cecbreakdown.jpg
 
fiveyearcarryeligiblecapital.jpg
Operating Results
Asset management revenues include fee related earnings and realized carried interest earned by us in respect of capital managed for investors, including the capital invested by us in the listed partnerships. This is representative of how we manage the business and measures the returns from our asset management activities.
To facilitate analysis, the following table disaggregates our Asset Management segment revenues and FFO into fee related earnings, realized carried interest, net, and ENI, as these are the measures that we use to analyze the performance of the Asset Management segment. We have provided additional detail, where referenced, to explain significant variances from the prior period.
 
 
 
Segment Revenues
 
Segment FFO
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
Ref.
 
2017

 
2016

 
2017

 
2016

Fee related earnings
i
 
$
1,368

 
$
1,142

 
$
896

 
$
712

Realized carried interest
ii
 
99

 
178

 
74

 
149

Realized disposition gains
 
 

 

 

 
5

 
 
 
$
1,467

 
$
1,320

 
970

 
866

 
 
 
 
 
 
 
 
 
 
Less: Realized carried interest, net
 
 


 


 
(74
)
 
(149
)
Less: Realized disposition gains
 
 


 


 

 
(5
)
Unrealized carried interest, net
iii
 
 
 
 
 
928

 
290

Economic net income
iv
 
 
 
 
 
$
1,824

 
$
1,002





1.
See definition in Glossary of Terms on page 103

2017 MD&A AND FINANCIAL STATEMENTS 48


i.
Fee Related Earnings
Operating Highlights
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2017

 
2016

Fee revenues
 
 
 
Base management fees
$
1,048

 
$
1,005

Incentive distributions
151

 
104

Performance fees
142

 

Transaction and advisory fees
27

 
33

 
1,368

 
1,142

Direct costs and other
(472
)
 
(430
)
Fee related earnings
$
896

 
$
712

Fee related earnings increased by $184 million from prior year as a result of growth in base management fees and incentive distributions from our listed partnerships and increased private fund fees as a result of the contribution of a full year of fees from our latest flagship funds, partially offset by $58 million of catch-up fees earned in the prior year and the absence of $21 million of fees associated with the aforementioned reclassified office funds. The current year also includes our first performance fees earned from BBU. Excluding the impact of catch-up fees, reclassified office funds and the BBU performance fee, operating margins, which are calculated as fee related earnings divided by fee revenues, were 61% for the year compared to 59% in the prior year.
Base management fees of $1.0 billion in 2017 include fees earned from our listed partnerships and private funds. Listed partnerships’ fees increased by $111 million to $529 million and included $87 million in fees relating to increased unit prices across our listed partnerships. Additional increases are due to the issuance of additional debt and equity secured by our listed partnership to fund growth. Excluding the impact of $58 million in catch-up fees earned in the prior year (relating to our latest vintage of flagship funds) and the reclassification of office funds, our private fund fees increased by $18 million to $418 million as we realized a full year of fees from our latest flagship funds and invested capital within our real estate funds.
We received $151 million of incentive distributions from BIP, BEP and BPY, representing a 45% increase from 2016. The growth represents our share as manager of increases in per unit distributions by BIP, BEP and BPY of 12%, 5% and 5%, respectively, as well as the impact of equity issued by BIP and BEP. Both BIP and BEP’s distributions have surpassed their second incentive distribution hurdles and, accordingly, we receive 25% of future distribution increases by those entities. Based on the recently announced BPY dividend rate of $1.26 for 2018, BPY’s distributions will surpass its second hurdle of $1.20, and we will receive 25% of future distribution increases by BPY.
Performance fees represent the first performance fees earned from BBU since it’s spin-out in 2016 and are calculated on an escalating threshold of 20% of the quarterly volume-weighted average price. The initial threshold was $25.00 and, following the fee paid in the fourth quarter of 2017, the threshold was revised upwards to $31.19. The unit price appreciation in 2017 was 45% from the initial hurdle of $25.00.
Transaction and advisory fees during the year were $27 million (2016 $33 million) and include $25 million of fees earned from co-investors relating to the acquisition of a U.K. road fuel distribution business and a regulated gas transmission business. The timing and size of these types of fees earned fluctuate based on transactions occurring.
Direct costs and other consist primarily of employee expenses and professional fees, as well as business related technology costs and other shared services. Direct costs increased by 10% year over year due to expansion of our operations to manage the aforementioned growth in fee bearing capital.
ii.    Realized Carried Interest
We do not recognize carried interest until the end of the relevant determination period under IFRS, which typically occurs at or near the end of a fund term when the amount of carried interest to be recognized is no longer subject to future investment performance. We do, however, provide supplemental information and analysis below on the estimated amount of unrealized carried interest that has accumulated based on fund performance up to the date of the financial statements.
We realized $99 million of carried interest during the year (2016$178 million), or $74 million (2016$149 million) net of directly related costs, triggered primarily by the partial sale of Norbord within our second private equity fund. There were additional realizations relating to our real estate credit and value-add multifamily funds.

49 BROOKFIELD ASSET MANAGEMENT


iii.    Unrealized Carried Interest
The amounts of accumulated unrealized carried interest and associated costs are shown in the following table:
 
2017
 
2016
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
Unrealized 
Carried 
Interest 

 
Direct 
Costs 

 
Net 

 
Unrealized 
Carried 
Interest 

 
Direct 
Costs 

 
Net 

Accumulated unrealized, beginning of year
$
898

 
$
(322
)
 
$
576

 
$
658

 
$
(223
)
 
$
435

In-period change
 
 
 
 
 
 
 
 
 
 
 
Unrealized1
1,280

 
(352
)
 
928

 
418

 
(128
)
 
290

Less: realized
(99
)
 
25

 
(74
)
 
(178
)
 
29

 
(149
)
Accumulated unrealized, end of year
$
2,079

 
$
(649
)
 
$
1,430

 
$
898

 
$
(322
)
 
$
576

1.
Unrealized carried interest generated in period is defined in the Glossary of Terms and represents management’s estimate of carried interest if funds were wound up at period end. Amounts that will be realized are dependent on future investment performance
Operating Highlights
Favorable investment performance in our private funds generated $1.3 billion of unrealized carried interest during the year, compared with $418 million in the prior year, and we are currently tracking ahead of our expected generation pattern.
In 2017, we generated unrealized carried interest across all our major funds. The largest contributors were the increases in value of our graphite electrodes manufacturing business within our fourth private equity fund and our European logistics portfolio within our first flagship real estate fund. We estimate that approximately $352 million of associated costs, compromised of employee compensation and taxes, will arise on the realization of the amounts accumulated in 2017.
Accumulated unrealized carried interest totaled $2.1 billion at December 31, 2017. We estimate that approximately $649 million of associated costs will arise on the realization
 
Five-Year Unrealized Carried Interest1
FOR THE YEARS ENDED DEC. 31 (MILLIONS)
 
fiveyearunrealized.jpg
 
1.
The totals above the stacked columns represent the unrealized carried balance at the end of the period, gross of direct costs

of the amounts accumulated to date, predominantly associated with employee long-term incentive plans and taxes. The funds that comprise the current accumulated unrealized carried interest has a weighted-average term to realization of four years. Recognition of this carried interest is dependent on future investment performance.
iv.    Economic Net Income
Economic net income for our Asset Management segment increased 82% over the prior year period driven by the growth in fee related earnings and unrealized carried interest discussed above. The following table summarizes economic net income for the years ended December 31, 2017 and 2016:
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2017

 
2016

Fee related earnings
$
896

 
$
712

Unrealized carried interest, net1
928

 
290

Economic net income
$
1,824

 
$
1,002

1.
Amounts dependent on future investment performance. Represents management’s estimate of carried interest if funds were wound up at period end

2017 MD&A AND FINANCIAL STATEMENTS 50


Outlook and Growth Initiatives
Real assets and alternatives continue to provide an attractive investment opportunity to institutional and high net worth investors. In periods when stock equity values are high, real assets provide diversification as they have demonstrated the ability to retain their value across cycles. These assets classes also provide investors with alternatives to fix income investments by providing a strong yield profile. Institutional investors, in particular pension funds, must earn and generate returns to meet their long-term obligations while protecting their capital. As a result, inflows to alternative asset management are growing and managers are focused on new product development to meet this demand.
In order to meet the needs of our investors, we currently have five funds in the market and plan to launch five additional funds. These funds add new product strategies, including a European infrastructure debt fund, and open-ended core real estate and infrastructure funds across multiple geographies. We continue to develop additional products in response to investor demand, with a focus on credit products and perpetual capital funds.
Following the successful fundraising of our latest series of flagship funds in 2016, we focused on the deployment of this capital over the course of the year, resulting in both our latest real estate and private equity flagship funds growing to over 80% invested and committed. Accordingly, we have commenced the fundraising process for the next vintage of these funds and our latest flagship real estate fund has raised over $7 billion to date. We have advanced our fundraising efforts in the high net worth space, raising over $400 million through multiple channels in 2017 and the start of 2018.
Our public securities business is expanding as we successfully completed the acquisition of an investment manager and retail fund marketer in early 2018. This has increased our public securities fee bearing capital by over 25%, which will increase management fees as we begin to earn fees on this capital.

51 BROOKFIELD ASSET MANAGEMENT


realestatenew29.jpg
Business Overview
We own and operate property assets primarily through a 64% fully diluted economic ownership interest in BPY.
BPY is listed on the Nasdaq and Toronto Stock Exchange; its equity capitalization was $17.6 billion at December 31, 2017.
BPY owns property assets directly as well as through private funds that we manage.
We own $1.3 billion of preferred shares of BPY which yield 6.2% based on their redemption value.
Operations
Core Office
We own interests in and operate commercial office portfolios, consisting of 147 properties totaling 100 million square feet of office space.
The properties are located primarily in the world’s leading commercial markets, such as New York, London, Los Angeles, Washington, D.C., Sydney, Toronto and Berlin.
We also develop office properties on a selective basis; active development projects consist of interests in six sites totaling 6 million square feet.
Core Retail
Our core retail port