EX-99.1 2 a2018-q3exx991interimreport.htm EXHIBIT 99.1 Exhibit


Exhibit 99.1
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Interim Report Q3 2018
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Three Months Ended    
Nine Months Ended
FOR THE PERIODS ENDED SEP. 30
2018

 
2017

 
2018

 
2017

TOTAL (MILLIONS)
 
 
 
 
 
 
 
Revenues
$
14,858

 
$
12,276

 
$
40,765

 
$
27,721

Net income
941

 
992

 
4,460

 
2,468

Funds from operations1
1,085

 
809

 
3,045

 
2,509

PER SHARE
 
 
 
 
 
 
 
Net income
$
0.11

 
$
0.20

 
$
1.53

 
$
0.32

Funds from operations
1.07

 
0.79

 
3.00

 
2.46

Dividends2
 
 
 
 
 
 
 
Cash
0.15

 
0.14

 
0.45

 
0.42

Special

 

 

 
0.11

 
 
 
 
 
 
 
 
AS AT SEP. 30, 2018 AND DEC. 31, 2017
 
 
 
 
2018

 
2017

TOTAL (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
 
 
 
 
 
 
Assets under management1
 
 
 
 
$
331,622

 
$
283,141

Consolidated results
 
 
 
 
 
 
 
Balance sheet assets
 
 
 
 
233,961

 
192,720

Equity
 
 
 
 
88,259

 
79,872

Common equity
 
 
 
 
22,691

 
24,052

Diluted number of common shares outstanding
 
 
 
 
1,005

 
1,006

Market trading price per share  NYSE
 
 
 
 
44.53

 
43.54

 
CONTENTS
 
 
 
 
 
 
 
 
 
 
 
PART 1 – Our Business and Strategy
 
PART 2 – Review of Consolidated Financial Results
 
PART 3 – Operating Segment Results
 
PART 4 – Capitalization and Liquidity
 
PART 5 – Accounting Policies and Internal Controls
 
 
 
 
 
 
 
 
 
Throughout our interim report, we use the following icons:
 
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ASSET MANAGEMENT
REAL ESTATE
RENEWABLE POWER
INFRASTRUCTURE
PRIVATE EQUITY
RESIDENTIAL DEVELOPMENT
CORPORATE ACTIVITIES
1.
See definition in Glossary of Terms beginning on page 56
2.
See Corporate Dividends on page 27



Overview
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We are a leading alternative asset manager, focused on investing in long-life, high-quality assets spanning over 30 countries globally. Our investments include one of the largest real estate portfolios in the world, an industry-leading infrastructure business, one of the largest pure-play renewable power businesses and a rapidly expanding private equity business. These businesses are each important components of the backbone of the global economy, supporting the endeavors of individuals, corporations and governments worldwide.
We offer a broad range of products to our investors through our private funds1 and listed issuers. We aim to provide consistent, strong returns for our investors, which include sovereign wealth plans, pensions, institutional and individual investors. Brookfield is typically the largest investor in our funds, ensuring alignment of interests with our investors.
Our primary objective is to generate increased cash flows on a per share basis, and as a result, higher intrinsic value per share, with a goal to generate 12% to 15% total compound returns over the longer term. These returns are generated by our asset management1 business and the capital appreciation and distributions from our invested capital1.
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The business is organized into the following principal areas2:
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“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” or “listed issuers” includes our subsidiaries, 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, Renewable Power, Infrastructure and Private Equity segments, respectively. We use “private funds” to refer to our real estate funds, infrastructure funds and private equity funds. Please refer to the Glossary of Terms beginning on page 56 which defines our key performance measures that we use to measure our business

1.
See definition in Glossary of Terms beginning on page 56
2.
Excludes residential development and corporate activities which are distinct business segments for IFRS reporting purposes

Q3 2018 INTERIM REPORT 2


Letter to Shareholders
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OVERVIEW
Funds from operations (FFO) generated during the quarter were strong, increasing to $1.1 billion compared to $800 million last year. Fee bearing capital continued to grow, leading to higher management fees, incentive fees and carried interest.
We raised $12 billion of capital since our last quarter end, and are now in the midst of raising capital across all three flagship funds. We committed or invested $25 billion into new investments, including the privatization of our retail property company, the acquisition of a pipeline business, and the take-private of a U.S. REIT and a Canadian infrastructure business.
MARKET ENVIRONMENT
As is often the case, the third quarter was calm followed by increased volatility in October. Despite this volatility, stock markets are still “near” their all-time highs, interest rates remain lowish, credit markets are in excellent shape, and most global economies are doing well. But, while global economies are strong, at some point the strong fundamentals must slow down. With this in mind, we continue to prudently invest our capital, while remaining focused on preparing for this inevitability.
Global capital flowing into alternative assets continues to grow. Our strategies and funds are seeing robust inflows, including flows of $12 billion to date into our next opportunistic real estate fund, $6.5 billion into the first close of our private equity fund, and the initial launch of our next infrastructure fund.
Politics continue to be volatile globally and while not directly affecting our business, there is always some impact. The Brazilian election is now behind us, and many decisions that had been on hold pending the results can now move forward with a government that looks to be very focused on getting Brazil’s economy growing again. This should bode well for our businesses in Brazil.
PERFORMANCE IN THE QUARTER
Our total assets under management now exceeds $330 billion as we continue to raise and deploy large amounts of capital across our businesses. As a result, fee bearing capital continues to grow across our franchise, which has led to an even greater growth rate in our free cash flow.
AS AT AND FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30 (MILLIONS)
2014

2015

2016

2017

2018

CAGR

Total assets under management
$
192,863

$
220,383

$
238,015

$
268,987

$
331,622

15
%
Fee bearing capital
81,738

90,018

110,747

119,860

140,614

15
%
Annual run rate of fees plus target carry
1,143

1,399

1,992

2,210

2,700

24
%
Fee related earnings (last twelve months)
346

464

690

745

1,218

37
%
Despite measuring the performance of our businesses with a focus on the long term, we do use our quarterly reporting to track the progress against long-term objectives. In our asset management business, we continue to grow our fee bearing capital and as mentioned, are currently fundraising for the successor funds in each of our flagship strategies: real estate, private equity and infrastructure. We earn base management fees from these private funds on both committed and invested capital, which provides stable fee revenues. Fee revenues and fee related earnings were over $1.7 billion and $1.2 billion, respectively, for the twelve months ended September 30, 2018,

3 BROOKFIELD ASSET MANAGEMENT


representing 43% and 63% growth, respectively, over the prior period. These increases are largely due to performance related fees and the capital commitments to our latest real estate flagship fund.
The other key value driver within our asset management business is carried interest. For business planning purposes, we expect to generate and realize approximately $10 billion of carried interest over the next 10 years. Annualized target carry before costs based on capital as at September 30, 2018 was $1.2 billion, compared to $860 million one year ago. The $1.2 billion target is made up of $725 million on capital that has been deployed and $470 million on uncalled fund commitments. We generated carry of $1.1 billion during the past twelve months based on actual performance, exceeding our $725 million target on capital deployed.
In addition to our fee revenues, we have over $30 billion of net invested capital alongside our investors. In addition to aligning our interests, this capital provides us with diversified, long-term stable cash flows. Our balance sheet is approximately 85% invested in listed securities—mostly investments in our four listed partnerships. This capital continues to generate an increasing and significant amount of cash flow, now at $1.6 billion annually, based on the current distributions from these investments. These cash flows should continue to grow at 5-9% annually, underpinned by our robust organic growth pipeline, the reinvestment of the balance of the partnerships’ cash flow into growth opportunities, and continuous operating enhancements.
INVESTOR DAY OVERVIEW
We held our 14th Annual Investor Day in New York in September. Once again, we would like to thank those who participated either in person or by webcast. For those not able to attend, the presentation material and transcripts, which provide an overview of our business and key objectives, are available on our website.
The event focused on Brookfield Asset Management (BAM) and each of the four listed partnerships. While a lot of ground was covered, the following is an attempt to condense the key messages into a few paragraphs.
As one of the largest global alternative asset managers, we have continued to expand our franchise and now have more than 500 institutional investors in our private funds. As the rotation of capital towards private assets by investors continues, we plan to increase the size of our flagship funds, broaden our product offering and diversify our distribution channels to meet investor demand. In addition to continuing to deliver strong compound annual returns, the key to success will be our ability to deliver best-in-class service to these investors, which is why we continue to add resources in this area. Should we achieve our objectives, we expect to double the size of our business over the next five years and deliver commensurate growth in the intrinsic value of BAM.
The success of Brookfield has been built on our culture and people. We dedicated a section of our Investor Day presentation to outlining how we have created a culture where our people are encouraged to be collaborative, entrepreneurial and disciplined. By hiring people who thrive in this environment and favoring a “promote from within” approach to succession planning, we have been able to grow the business without diluting the culture. We also emphasized how a long-term compensation structure has created strong alignment of interests and an ownership mentality throughout the company. This results in many of our people staying with us for the long term, with many progressing into a leadership role. Maintaining this culture is a top priority and will be crucial to our success.
As well as outlining the objectives and outlook for BAM, we also provided a detailed review of each of our listed partnerships. A simple synopsis is as follows:
In Brookfield Property Partners, we are focused on completing major office development projects, optimizing the value of our retail portfolio, particularly through redevelopment opportunities and utilizing the liquidity generated from opportunistic investments and core asset sales to deleverage the balance sheet, fund new investments, and return capital to shareholders.

Q3 2018 INTERIM REPORT 4


In Brookfield Infrastructure Partners, we continue to rotate capital, selling mature assets and redeploying the proceeds into higher yielding opportunities. The business is on track to complete a number of major acquisitions in 2018, while at the same time advancing organic growth projects.
In Brookfield Renewable Partners, we remain well positioned to grow cash flows and our asset base through our strong balance sheet and deep operating expertise. We are capitalizing on the global shift from fossil fuels to renewable energy, which should offer us increased growth in the years ahead.
Lastly, Brookfield Business Partners profiled recent landmark transactions and highlighted our key competitive advantages such as access to long-term capital, our investment approach and operating focus. We continue to be very excited about the outlook for our private equity group as we continue to scale up our operations.
CASH GENERATION AND DEPLOYMENT – THE NEXT DECADE
Our parent company currently generates nearly $2 billion of free cash annually, and we expect this to continue to grow at a rapid pace. In addition, this does not include any carried interest, which we believe is currently accumulating at over $800 million on an annualized basis and growing. At this point, we are paying out $600 million in common share dividends and have historically been reinvesting the rest in growing our business.
Over the next 10 years, we expect these numbers to continue to grow as our operations and asset management business expands. Our business plans call for roughly $60 billion of cash generation over the next ten years, as follows:
(BILLIONS)
 
Fee related cash flows
$
20

Cash flow from net invested capital
25

Realized from carried interest, net
15

 
$
60

While we will continue to invest in our business, we expect that these opportunities will be increasingly outstripped by the amount of cash generated each year. Therefore, our current expectation for deployment of this cash will be as follows:
(BILLIONS)
 
Cash investment into listed partnerships and other growth opportunities
$
10

Return of capital to you through dividends
10

Return of capital to you in some other form
40

 
$
60

It is most likely that the return of capital to shareholders will be accomplished through share repurchases but alternatively, the dividend could be increased. For many, the route of share purchases is more tax effective—but more importantly, it has the added benefit of enabling us to be selective about timing, and create additional intrinsic value per share by undertaking repurchases opportunistically. Furthermore, we can also balance repurchases with opportunities to invest in our business directly when they arise.

5 BROOKFIELD ASSET MANAGEMENT


PRICE VS. VALUE
It is often difficult to describe the concept of value investing, and specifically the difference between Price versus Value. We have a very simple example of this within our portfolio, where the markets are, for various reasons, pricing a security at nowhere near Value. More importantly, we view the aberration as an opportunity to be capitalized on—to your benefit.
Price is a function of supply and demand characteristics, which are often influenced by the news of the day and short-term results. This has always been true, but is even more so today with social media, the 24‑hour news cycle and all the information available to investors. Value, on the other hand, is the net present value of future cash flows based on assumptions for growth, discounted at an appropriate interest rate. The Price of a publicly traded security is often not the Value of it. The trading Price is known daily. Value takes knowledge and experience to fully define, and is more often an art than an exact science.
The Value of Brookfield Property Partners (BPY), for example, is in the range of $30 per share. We believe it may be greater than that, as the franchise is not valued in this share price. In addition, this Value assumes that all properties are valued at once, and not sold selectively over time to maximize the value of the whole portfolio. In fact, we have regularly sold assets above IFRS values by exploiting this differential. For simplicity, we will use $30 as the Value, which is merely the accounting IFRS value and is the summation asset appraisals provided to investors and others.
Subsequent to the closing of the GGP acquisition by BPY, we have started to buy units of BPY in the open market. To date we have acquired approximately $200 million of units, with the Price to Value discrepancy of approximately $10 per unit. On just this acquisition of $200 million of units, we added $100 million to the Value of the equity in BAM. This amounts to 10 cents for each BAM share. This is without anyone doing anything, so in essence we are picking up dimes for each share of yours for free.
It is clear that Price can be different for many reasons. Our job, however, is to know Value. We have transacted on more properties than anyone globally—for over 25 years. This gives us comfort in our ability to understand Value. Furthermore, we have control over the assets we own, and in virtually all cases can realize the Value as we so choose. A stock market participant likely does not have this benefit, even though he/she may believe in the Value. The issue for the stock market investor is knowing “when” the Value may be reflected in Price. We can only assume that the people sold us their shares at the prevailing Price last quarter do not believe that the Value will be recognized in the market any time soon, have a different view of Value than us, or just decided to do other things with their money. Regardless, to us, this is a stark example of the difference between Value and Price.
We intend to continue to utilize resources within BAM and directly in BPY to capitalize on this discrepancy as appropriate. If these shares are repurchased into the treasury of BPY, the Value of BPY will also increase due to shrinking the share count, and this will be even more compelling for everyone else. Furthermore, with BPY now having completed all of its consolidation activity, this should enable BPY to focus their excess resources on this endeavor.
Over time we expect that by dedicating resources to this goal, we will narrow Price and Value—but if not, annually as we have free cash flow, we will continue to add further Value to the company with no extra work expended.
3-ISH
It seems that interest rates in the U.S. are headed into the 3’s for the cash rate out to 10 years; somewhat unusual, but not unprecedented. Fiscal stimulus in the U.S. and a pickup in inflation expectations, as well as the remnants of quantitative easing around the world appear to be the primary reasons for this. It is the latter, along with other factors that have created negative cash rates in Europe, and essentially zero rates from one day to 30 years in Japan.
The real question is, what happens next? It appears to us that despite solid U.S. growth, long rates in the U.S. will only break higher if rates in Japan, Germany and the U.K. break higher or there is a break-out in U.S. inflation. However, none of these markets show any signs of doing so in any meaningful way and each has its own local—as well as global—issues.

Q3 2018 INTERIM REPORT 6


Furthermore, the U.S. is long into this cycle, employment in the U.S. is almost as robust as it can get, the economy is very strong and it could be said that, despite political rhetoric, “it doesn’t get much better than this.” It is therefore possible that we see low 4% on the 10-year U.S. treasury steepening the yield curve, but our view is that while the cash rate is likely to continue to increase, perhaps into the 3’s, we do not expect much more beyond this.
We think that concern about a period of “high” interest rates might be better placed post the next downturn, and well into the next up market (i.e., 10+ years from now), as then—and only possibly then—will we need to worry about global inflation, versus deflation, that we all have/had been worried about.
As a result, we still believe that alternative assets are the place to be for at least another 10 years. These private assets generate cash flows that are stable, they continue to expand with GDP growth, there is significant positive leverage compared to fixed return assets, and the margin of safety is significant.
WESTINGHOUSE
During the quarter we acquired Westinghouse, an iconic U.S. company. The company dates back to the 1800s and was involved in the business of creating electric lights, and eventually became a conglomerate. Over the last 20 years the Westinghouse Electric Company name remained with just one original division: the servicing company for the nuclear industry globally.
Westinghouse today is a very focused company, owning the technology and patents for the Westinghouse brand of nuclear technology, including the most recently developed reactor called the AP1000. Westinghouse, with its 10,000 people, services over 65% of the nuclear plants in the world and provides fuel to many. It does not own nor does it operate any nuclear plants, and as the liability of operating a nuclear plant flows only to the owner and operator, the risks with this business are low, despite some headline risk.
We purchased the company for $4 billion in an unusual situation. The former owner had sought to expand the business and its technology by building two new nuclear plants in the U.S., and by providing the nuclear plant owners with fixed price contracts. Unfortunately, the projects went vastly over budget and the company had to file for bankruptcy. We acquired it through a sale approved by the U.S. bankruptcy court, excluding any construction obligations with respect to the two nuclear power plant contracts. On closing, we financed $3.1 billion of the acquisition price with debt on a seven-year loan in Westinghouse Electric Company and invested approximately $900 million of equity.
Our plan is to re-focus the company on business excellence and grow the utility relationships globally. We service plants in 30 countries today and while the nuclear industry is not growing rapidly, the business is extremely stable and opportunities to enhance the operations are significant. Our beginning EBITDA was $440 million, and we think that within the next few years we can grow that to over $550 million, which will generate strong cash flows for us. If we can achieve this in the medium term, we will be pleased.
We do not intend to get back into the construction business for nuclear plants, but we do intend to work with utility owners who wish to license our technology and will look for creative ways to assist the building of plants globally. For example, servicing plants that commission our AP1000 technology will support our future growth. Furthermore, there may be other ways for us to widen the servicing we do for utilities outside of just nuclear plants as we look to grow the business in a sensible way.
It is early days, but we are thrilled to be invested in this company and will support Westinghouse in being the premier infrastructure servicing company globally.

7 BROOKFIELD ASSET MANAGEMENT


CLOSING
We remain committed to being a leading, world-class alternative asset manager, and investing capital for you and our investment partners in high-quality assets that earn solid cash returns on equity, while emphasizing downside protection for the capital employed.
The primary objective of the company continues to be generating increased cash flows on a per share basis and as a result, higher intrinsic value per share over the longer term.
Please do not hesitate to contact any of us should you have suggestions, questions, comments, or ideas you wish to share with us.
Sincerely,
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J. Bruce Flatt
Chief Executive Officer

November 8, 2018
 
Note: In addition to the disclosures set forth in the cautionary statements included elsewhere in this Report, there are other important disclosures that must be read in conjunction with, and that have been incorporated in, this letter as posted on our website at https://bam.brookfield.com/en/reports-and-filings.

Q3 2018 INTERIM REPORT 8


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
Renewable Power
Our Business
Infrastructure
Organizational Structure
Private Equity
PART 2 – REVIEW OF CONSOLIDATED
 
Residential Development
FINANCIAL RESULTS

 
Corporate Activities
Overview
PART 4 – CAPITALIZATION AND LIQUIDITY
 
Income Statement Analysis
Strategy
Balance Sheet Analysis
Capitalization
Foreign Currency Translation
Liquidity
Summary of Quarterly Results
Review of Consolidated Statements of Cash Flows
Corporate Dividends
PART 5 – ACCOUNTING POLICIES AND INTERNAL
 
PART 3 – OPERATING SEGMENT RESULTS
CONTROLS
 
Basis of Presentation
Accounting Policies, Estimates and Judgments
Summary of Results by Operating Segment
Management Representations and Internal Controls
Asset Management
GLOSSARY OF TERMS

Real Estate
 
 
“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, Renewable 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 beginning on page 56 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.     

9 BROOKFIELD ASSET MANAGEMENT


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: investment returns that are lower than target; 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 International Financial Reporting Standards (“IFRS”). We utilize these measures in managing the business, including for 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 the sole measure of our performance and should not be considered in isolation from, or 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 other issuers and entities. 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 Report. Please refer to our Glossary of Terms beginning on page 56 for all non-IFRS measures.

Q3 2018 INTERIM REPORT 10


PART 1 – OUR BUSINESS AND STRATEGY
OUR BUSINESS
We are a leading global alternative asset manager1, 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 funds1, listed issuers1 and public securities1. 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 capital1. 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 capital1. FFO from these activities consist of: (i) base1 and other recurring fees that we earn as manager less direct costs of doing so; (ii) incentive distributions1 and performance fees1 from our listed issuers; and (iii) realized carried interest1 from private funds. As a supplement to our performance measurement, we also provide unrealized carried interest1 which represents the amount of carried interest1 generated based on investment performance to date and is therefore more indicative of earnings potential.
Our invested capital consists largely of investments in our listed issuers and other listed securities, which currently make up 83% of our invested capital. The remaining 17% 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 investors1.
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 beginning on page 56

11 BROOKFIELD ASSET MANAGEMENT


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 and 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 real estate and renewable power groups, as well as portfolio investments which have dedicated management teams that are overseen by us.

orchchartq31814.jpg







1.
See definition in Glossary of Terms beginning on page 56

Q3 2018 INTERIM REPORT 12


PART 2 – REVIEW OF CONSOLIDATED FINANCIAL RESULTS
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.
OVERVIEW
Net income decreased to $941 million in the current period, with $163 million attributable to common shareholders ($0.11 per share) and $778 million attributable to non-controlling interests.
The current quarter’s results were significantly impacted by the following notable transactions:
On August 28, 2018, we privatized GGP Inc. (“GGP”)1, previously a 34%-owned equity accounted investment, and formed a new entity known as Brookfield Property REIT Inc. (“BPR”)1 to hold the GGP assets. We began consolidating BPR immediately after completing this step-up acquisition. As BPR shareholders are entitled to an economic return equivalent to BPY shareholders, BPR will be treated as a separate class of non-controlling interest in the equity of BPY.
As part of the transaction, we paid $9.3 billion in cash ($9.05 billion as a pre-closing dividend and $200 million as merger consideration), and issued $5.2 billion of new BPY and BPR equity to GGP shareholders. The cash was raised through acquisition debt, proceeds from the sale of interests in GGP assets and the issuance of non-controlling interests in subsidiaries of GGP. The equity issuances reduced our interest in BPY from 69% to 53%.
The privatization also resulted in significant fair value adjustments to reflect the impact of the derecognition of our equity accounted investment and the initial consolidation of BPR’s net assets as well as respective deferred tax impacts. Additional information on the fair value changes is included on pages 17 and 18 and the transaction is discussed in more detail in Part 3 – Real Estate.
On August 1, 2018, our Private Equity segment acquired a 100% interest in Westinghouse Electric Company (“Westinghouse”), a provider of services to the power generation industry, for total consideration of $3.8 billion.
Significant acquisitions and dispositions are discussed in more detail on pages 16 and 17.
The $51 million decrease in consolidated net income and the $65 million decrease in net income attributable to common shareholders were primarily attributable to:
lower appraisal gains on consolidated investment properties compared to the prior year quarter; partially offset by
contributions from recently acquired businesses and organic growth across multiple operations.
The privatization of GGP had a significant impact on our balance sheet as its assets and liabilities are now included in our consolidated results. Other significant acquisitions also contributed to the increase. These include our power generation industry service provider; a marine energy services business; a New York office building; and numerous entities acquired in the first three quarters of the year. In total, we acquired $57.3 billion of assets through business combinations, inclusive of the assets acquired in the step-up acquisitions of GGP and our marine energy services business. We also sold a number of assets during the first nine months of 2018, most notably our Chilean electricity transmission business, an office property in Toronto and various assets in our LP investments portfolio, including a portfolio of self-storage assets.







1.
See definition in Glossary of Terms beginning on page 56

13 BROOKFIELD ASSET MANAGEMENT


INCOME STATEMENT ANALYSIS
The following table summarizes the financial results of the company for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended
 
Nine Months Ended
FOR THE PERIODS ENDED SEP. 30
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
2018

 
2017

 
Change 

 
2018

 
2017

 
Change 

Revenues
$
14,858

 
$
12,276

 
$
2,582

 
$
40,765

 
$
27,721

 
$
13,044

Direct costs
(11,967
)
 
(10,034
)
 
(1,933
)
 
(32,839
)
 
(21,753
)
 
(11,086
)
Other income and gains/losses
144

 
(29
)
 
173

 
581

 
236

 
345

Equity accounted income
50

 
505

 
(455
)
 
680

 
1,090

 
(410
)
Expenses
 
 
 
 
 
 
 
 
 
 

Interest
(1,274
)
 
(932
)
 
(342
)
 
(3,377
)
 
(2,640
)
 
(737
)
Corporate costs
(25
)
 
(24
)
 
(1
)
 
(76
)
 
(69
)
 
(7
)
Fair value changes
132

 
132

 

 
1,537

 
141

 
1,396

Depreciation and amortization
(833
)
 
(643
)
 
(190
)
 
(2,175
)
 
(1,755
)
 
(420
)
Income taxes
(144
)
 
(259
)
 
115

 
(636
)
 
(503
)
 
(133
)
Net income
941

 
992

 
(51
)
 
4,460

 
2,468

 
1,992

Non-controlling interests
(778
)
 
(764
)
 
(14
)
 
(2,760
)
 
(2,052
)
 
(708
)
Net income attributable to shareholders
$
163

 
$
228

 
$
(65
)
 
$
1,700

 
$
416

 
$
1,284

Net income per share
$
0.11

 
$
0.20

 
$
(0.09
)
 
$
1.53

 
$
0.32

 
$
1.21

Three Months Ended September 30
Revenues for the quarter were $14.9 billion, an increase of $2.6 billion compared to the third quarter of 2017 primarily due to:
additional revenues earned from numerous acquisitions completed since the prior year quarter across each of our listed partnerships1. This is inclusive of the $439 million of revenues recognized this quarter at GGP and our marine energy services business, both of which were previously equity accounted. The most significant contributions from recent acquisitions include:
$740 million from a power generation industry service provider in our Private Equity segment acquired in August 2018;
$333 million from portfolios of solar and wind assets in our Renewable Power segment; and
$240 million from a Colombian natural gas distribution and commercialization business in our Infrastructure segment.
same-store1 increases, including improved performance at our graphite electrode manufacturing business and additional revenues at our road fuel distribution business; partially offset by
the absence of revenues from assets sold and lower gross revenues from Norbord Inc. (“Norbord”)1 which was consolidated until the fourth quarter of 2017 at which time we sold a portion of our investment and therefore no longer hold a controlling interest in the business. Norbord contributed $579 million of revenues in the third quarter of 2017.
Our direct costs increased by $1.9 billion in the third quarter of 2018 due to:
recent acquisitions, as discussed above; and
organic growth within existing operations, including higher input prices at our road fuel distribution business; partially offset by
the deconsolidation of Norbord, which incurred $379 million of direct costs in the third quarter of 2017.
Other income and gains of $144 million in the third quarter of 2018 relate primarily to the sale of a portfolio of self-storage properties in our Real Estate segment.

1.
See definition in Glossary of Terms beginning on page 56

Q3 2018 INTERIM REPORT 14


Equity accounted income decreased by $455 million to $50 million primarily due to:
the impact of consolidating two entities through step acquisitions during the quarter that were previously equity accounted, partially offset by the impact of equity accounting for Norbord, which was previously consolidated; and
appraisal and valuation losses at various equity accounted investments.
Interest expense increased by $342 million due to additional borrowings associated with acquisitions across our portfolio and additional corporate debt issued in the last twelve months.
We recorded fair value gains of $132 million in the current quarter, primarily as a result of:
the impact of step-up acquisitions of GGP in our Real Estate segment and our marine energy services business in the Private Equity segment;
appraisal gains on properties in our core office and LP investments1 portfolios; and
unrealized gains on financial contracts entered into to manage foreign currency, interest rate profiles and pricing exposures.
Depreciation and amortization expense increased by $190 million to $833 million due primarily to businesses acquired in the last twelve months within our renewable power operations, particularly TerraForm Power, Inc. (“TERP”)2 and TerraForm Global, Inc. (“TerraForm Global”), as well as recent acquisitions in our private equity operations.
Income tax expense decreased by $115 million to $144 million primarily due to a higher proportion of income earned in jurisdictions subject to lower tax rates than the Canadian domestic statutory income tax rate.
Nine Months Ended September 30
Revenues and direct costs for the first nine months of 2018 increased by $13.0 billion and $11.1 billion, respectively, compared to the same period in 2017, due primarily to the recent acquisitions described above. The acquisition of our road fuel distribution also contributed to the increase, as revenues include significant flow through duty amounts that are passed to customers and presented gross under IFRS, with minimal impact on gross margin.
Other income and gains on a year-to-date basis include:
a $338 million gain from the sale of our Chilean electricity transmission business in the first quarter of 2018; and
a $106 million gain on the sale of self-storage properties in our Real Estate segment during the current quarter.
Equity accounted income in the first nine months of 2018 decreased to $680 million, compared to $1.1 billion during the same period in 2017. In addition to the aforementioned explanations, the decrease is attributable to appraisal losses on certain GGP properties during the first quarter of 2018.
Fair value gains of $1.5 billion for the first nine months of 2018 were significantly higher than the $141 million reported in the prior period. In addition to the gains recognized during the current quarter, we recognized transaction-related gains relating to the recognition of deferred tax assets following a restructuring of our U.S. group in the first quarter of 2018 and strong valuation gains within our core office and LP investments real estate portfolios.









1.
Formerly referred to as Opportunistic
2.
See definition in Glossary of Terms beginning on page 56

15 BROOKFIELD ASSET MANAGEMENT


Significant Acquisitions and Dispositions
We have summarized below the impact of recent significant acquisitions and dispositions on our results for the three and nine months ended September 30:
 
Three Months Ended
 
Nine Months Ended
FOR THE PERIODS ENDED SEP. 30, 2018
(MILLIONS)
Acquisitions
 
Dispositions
 
Acquisitions
 
Dispositions
Revenue
 
Net Income
 
Revenue
 
Net Income
 
Revenue
 
Net Income
 
Revenue
 
Net Income
Real estate
$
330

 
$
100

 
$
(90
)
 
$
(21
)
 
$
663

 
$
159

 
$
(250
)
 
$
(131
)
Renewable power
333

 
(4
)
 

 

 
814

 
(73
)
 

 

Infrastructure
248

 
19

 

 
(5
)
 
647

 
181

 

 
(19
)
Private equity and other
1,672

 
13

 
(2
)
 
(17
)
 
11,013

 
3

 
(9
)
 
(6
)
 
2,583

 
128

 
(92
)
 
(43
)
 
13,137

 
270

 
(259
)
 
(156
)
Gains recognized in net income

 
15

 

 
106

 

 
624

 

 
159

 
$
2,583

 
$
143

 
$
(92
)
$
206

$
63

 
$
13,137

 
$
894

 
$
(259
)
 
$
3

Acquisitions
Private Equity
Recent acquisitions within our Private Equity segment contributed $1.7 billion of revenues and $13 million of net income for the three months ended September 30, 2018. Significant acquisitions include Westinghouse, our power generation industry service provider, acquired this quarter; a returnable plastic container business acquired in the second quarter of 2018; and tuck-in acquisitions completed at our road fuel distribution business in the fourth quarter of 2017.
Our results this quarter also benefited from the consolidation of our marine energy services business, previously an equity accounted investment. We are reflecting 100% of our marine energy services business’ third quarter revenues and 100% of the business’ net income in the table above as our original investment was made at the end of the third quarter of 2017. Gains that relate directly to the consolidation of this business are reported through the “Gains recognized in net income” line.
Renewable Power
Within our Renewable Power segment, recent acquisitions, primarily TERP and TerraForm Global, both of which are portfolios of wind and solar assets acquired in the fourth quarter of 2017, as well as a portfolio of European wind and solar assets acquired by TERP in the second quarter of 2018, contributed $333 million of revenues and a net loss of $4 million this quarter.
Real Estate
Numerous acquisitions in our core office and LP investment portfolios contributed $201 million and $49 million to revenues and net income, respectively.
In addition, since August 28, 2018, we have been consolidating the results of BPR; previously, we reported our 34% proportionate ownership share of GGP’s results as equity accounted income. We recognized $129 million of revenues since we began to consolidate this entity. We are also reporting our increased share of GGP’s net income, an incremental $51 million this quarter, to reflect our additional ownership interest as we are now consolidating the business. The net loss directly associated with the privatization of GGP is reported through the “Gains recognized in net income” line.
Infrastructure
Within our infrastructure operations, revenues increased by $248 million and net income increased by $19 million, primarily due to contributions from our recently acquired Colombian natural gas distribution and commercialization business.
Gains Recognized in Net Income
Gains of $15 million relate primarily to the net impact of the step-up acquisitions of GGP and our marine energy services business as well as gains relating to the acquisitions of certain assets in our Real Estate segment’s LP investments portfolio.

Q3 2018 INTERIM REPORT 16


Revenues and net income for the nine months ended September 30, 2018 increased by $13.1 billion and $0.9 billion, respectively, from the aforementioned transactions as well as contributions from businesses acquired during the first half of the prior year, most notably our road fuel distribution business, our Brazilian regulated gas transmission business and our Brazilian water treatment business.
On a year-to-date basis, we recognized total gains in net income of $624 million relating primarily to changes in the ownership of entities in the first quarter which gave rise to the recognition of previously unrecognized tax assets.
Further details relating to the significant acquisitions described above that were completed during the nine months ended September 30, 2018 are provided in Note 4 of the interim consolidated financial statements.
Dispositions
Recent asset sales across our listed issuers, including our European logistics business, our Chilean electricity transmission operation, several office properties and an oil and gas producer in Western Canada decreased revenues and net income by $92 million and $43 million, respectively in the third quarter of 2018. The gains recognized in net income relate to the portfolio premium earned on our sale of a portfolio of self-storage assets in our Real Estate segment.
Revenues and net income for the nine months ended September 30, 2018 decreased by $259 million and $156 million from the aforementioned transactions as well as the absence of revenues and net income from office property sales in Midtown Manhattan and our bath and shower manufacturing business.
Fair Value Changes
The following table disaggregates fair value changes into major components to facilitate analysis: 
 
Three Months Ended
 
Nine Months Ended
FOR THE PERIODS ENDED SEP. 30
(MILLIONS)
2018

 
2017

 
Change 

 
2018

 
2017

 
Change

Investment properties
$
409

 
$
713

 
$
(304
)
 
$
1,273

 
$
1,102

 
$
171

Transaction related gains, net of deal costs
(133
)
 
(105
)
 
(28
)
 
844

 
20

 
824

Financial contracts
103

 
(390
)
 
493

 
86

 
(704
)
 
790

Impairment and provisions
(214
)
 
(22
)
 
(192
)
 
(265
)
 
(102
)
 
(163
)
Other fair value changes
(33
)
 
(64
)
 
31

 
(401
)
 
(175
)
 
(226
)
Total fair value changes
$
132

 
$
132

 
$

 
$
1,537

 
$
141

 
$
1,396

Investment Properties
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:
 
Three Months Ended
 
Nine Months Ended
FOR THE PERIODS ENDED SEP. 30
(MILLIONS)
2018

 
2017

 
Change 

 
2018

 
2017

 
Change

Core office
$
63

 
$
53

 
$
10

 
$
131

 
$
(296
)
 
$
427

LP investments and other
346

 
660

 
(314
)
 
1,142

 
1,398

 
(256
)
 
$
409

 
$
713

 
$
(304
)
 
$
1,273

 
$
1,102

 
$
171

We discuss the key valuation inputs of our investment properties on page 54.
Core Office
Appraisal gains in the current quarter related primarily to discount rate compression at certain Australian properties that are nearly ready for sale and higher rent growth assumptions for our Toronto properties, totaling $63 million.
Valuation gains of $53 million in the prior year quarter were primarily attributable to improved cash flow projections and higher market appraisals in our New York, Sydney and Calgary office portfolios, partially offset by losses from tenant departures and an amended projected sales price of a New York office building.
The nine-month appraisal gains also include increases in market rents at two office properties in Sydney.

17 BROOKFIELD ASSET MANAGEMENT


LP Investments and Other
Appraisal gains totaled $346 million in the quarter due to:
strong leasing activity and the completion of several developments within our India office portfolio; and
strengthened market conditions in several markets and compressed discount rates; partially offset by
losses in our U.S. opportunistic retail portfolio due to tenant move-outs.
In the prior year quarter, valuation gains of $660 million were primarily due to the signing of an agreement to sell our European industrial portfolio, strong cash flow growth and occupancy increases in our multifamily portfolios and strong leasing activity and increased market rents in our Indian office portfolio and our South Korean mixed-use building.
The nine-month period also includes gains on our manufactured housing portfolio for which the original appraisal model was updated during the first quarter, as well as tightening of discount and terminal capitalization rates in our U.S. industrial portfolios during the second quarter as valuation assumptions were updated to reflect de-risking of development properties upon meeting construction milestones.
Transaction Related Gains, Net of Deal Costs
Transaction related losses of $133 million in the third quarter of 2018 relate primarily to:
the privatization of GGP, resulting in a net transaction loss of $253 million, primarily due to the recognition of a $330 million deferred tax liability on the formation of BPR. Excluding this deferred tax liability, we recorded a $77 million gain on the transaction as the net bargain purchase gain was only partially offset by the fair value adjustments to write down the carrying value of our investment in GGP to its fair value immediately prior to acquiring control; and
deal costs of $146 million across the company; partially offset by
a $250 million gain recognized on taking control of our marine energy services business in our Private Equity segment. The fair value of our investment the day that it ceased to be equity accounted exceeded our carrying value, resulting in a fair value gain of $206 million. We also extinguished subsidiary level debt and warrants for a total gain of $44 million.
The year-to-date gains also include the recognition of previously unrecognized tax assets following the acquisition and restructuring of two businesses, as well as a gain following the extinguishment of outstanding debt relating to a hospitality asset.
Financial Contracts
Financial contracts include mark-to-market gains and losses on contracts related to foreign currency, interest rate, and pricing exposures that are not designated as hedges.
Unrealized gains of $103 million in the current quarter relate primarily to the mark-to-market movements on our interest rate swaps, cross-currency swaps and commodity derivatives as well as fair value changes on currency hedges which do not qualify for hedge accounting, partially offset by the amortization of option premiums.
The prior period losses relate to a change in fair value of our GGP warrants primarily due to a decrease in share price, as well as losses incurred on the valuation of our power, interest rate and foreign currency contracts.
Impairment and Provisions
Impairment charges relate primarily to a $180 million write-down of property, plant and equipment in our Canadian energy options in our Private Equity segment as a result of continued weakness in natural gas prices.

Q3 2018 INTERIM REPORT 18


Income Taxes
We recorded an aggregate income tax expense of $144 million in the third quarter of 2018, compared to $259 million in the same period of 2017, including current taxes of $119 million (2017$97 million) and a deferred tax expense of $25 million (2017 – $162 million).
The decrease in income tax expense relates primarily to a higher proportion of income earned in jurisdictions subject to lower tax rates than the Canadian domestic statutory income 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:
 
Three Months Ended
 
Nine Months Ended
FOR THE PERIODS ENDED SEP. 30
2018

 
2017

 
Change 

 
2018

 
2017

 
Change

Statutory income tax rate
26
%
 
26
 %
 
 %
 
26
%
 
26
 %
 
 %
Increase (reduction) in rate resulting from:
 
 
 
 
 
 
 
 
 
 
 
Portion of gains subject to different tax rates
(1
)
 
(1
)
 

 
(4
)
 
1

 
(5
)
Change in tax rates and new legislation

 

 

 
(4
)
 

 
(4
)
International operations subject to different tax rates
(14
)
 
4

 
(18
)
 
(3
)
 
1

 
(4
)
Taxable income attributed to non-controlling interests
(8
)
 
(6
)
 
(2
)
 
(6
)
 
(9
)
 
3

Derecognition (recognition) of deferred tax assets
8

 
(3
)
 
11

 

 
(4
)
 
4

Non-recognition of the benefit of current year’s tax losses
2

 
2

 

 
2

 
4

 
(2
)
Other

 
(1
)
 
1

 
1

 
(2
)
 
3

Effective income tax rate
13
%
 
21
 %
 
(8
)%
 
12
%
 
17
 %
 
(5
)%
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 an 8% and 6% reduction in the effective tax rate relative to the statutory tax rate in 2018 and 2017, respectively.
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 14% reduction in our effective tax rate in the current quarter, compared to a 4% increase in the prior year quarter. The difference will vary from period to period depending on the relative proportion of income in each country.

19 BROOKFIELD ASSET MANAGEMENT


BALANCE SHEET ANALYSIS
The following table summarizes the statement of financial position of the company as at September 30, 2018 and December 31, 2017:
AS AT SEP. 30, 2018 AND DEC. 31, 2017
(MILLIONS)
2018

 
2017

 
Change

Assets
 
 
 
 
 
Investment properties
$
79,217

 
$
56,870

 
$
22,347

Property, plant and equipment
59,688

 
53,005

 
6,683

Equity accounted investments
31,994

 
31,994

 

Cash and cash equivalents
7,839

 
5,139

 
2,700

Accounts receivable and other
15,424

 
11,973

 
3,451

Intangible assets
16,146

 
14,242

 
1,904

Other assets
23,653

 
19,497

 
4,156

Total Assets
$
233,961

 
$
192,720

 
$
41,241

Liabilities
 
 
 
 
 
Borrowings and other non-current financial liabilities
$
119,411

 
$
88,867

 
$
30,544

Other liabilities
26,291

 
23,981

 
2,310

Equity
 
 
 
 
 
Preferred equity
4,192

 
4,192

 

Non-controlling interests
61,376

 
51,628

 
9,748

Common equity
22,691

 
24,052

 
(1,361
)
Total Equity
88,259

 
79,872

 
8,387

 
$
233,961

 
$
192,720

 
$
41,241

September 30, 2018 vs. December 31, 2017
Recent acquisitions had a significant impact on our consolidated balance sheet this period. Consolidated assets at September 30, 2018 were $234.0 billion, an increase of $41.2 billion since December 31, 2017. The increases noted in the table above are largely attributable to $57.3 billion of assets acquired through business combinations, increases in the fair value of our investment properties and additions to our fixed asset portfolios, including ongoing construction of existing assets and asset purchases. Further details on business combinations are provided in Note 4 of the interim consolidated financial statements.
Asset increases were partially offset by the derecognition of certain equity accounted investments upon obtaining controlling interests, asset sales during the period and decreasing foreign exchange rates in the major non-U.S. currencies in which we operate.
Investment properties consist primarily of the company’s real estate assets. The balance as at September 30, 2018, increased by $22.3 billion, primarily due to:
acquisitions of $23.2 billion, including $18.0 billion of investment properties at GGP previously reported through equity accounted investments. In addition, our investments in office buildings in New York and Chicago, retail properties in China, a U.K. student housing portfolio, an office park in Mumbai and a mixed-use entertainment complex in Germany increased investment properties by $5.2 billion;
additions of $1.8 billion as we enhanced or expanded numerous properties through capital expenditures; and
appraisal gains recorded in fair value changes of $1.3 billion, largely within our LP investments portfolio (refer to pages 17 and 18 for further information); partially offset by
the $1.4 billion impact of decreasing foreign exchange rates; and
sales or reclassifications of $2.5 billion, including the partial sale of an office property in Toronto, the sale of 112 self-storage properties across the U.S. and the reclassification of a number of properties to held for sale, including a terminal building in Toronto and an office tower in Ottawa.
We provide a continuity of investment properties in Note 9 of the interim consolidated financial statements.

Q3 2018 INTERIM REPORT 20


Property, plant and equipment increased by $6.7 billion primarily as a result of:
acquisitions of $9.7 billion, across all our operating segments, most significantly an infrastructure services provider in our Private Equity segment, a portfolio of extended-stay hotels across the U.S., hotel properties in Washington and Florida, wind and solar assets in Europe, a Colombian natural gas distribution and commercialization business and the consolidation of a marine energy services business that was previously equity accounted; and
additions of $1.4 billion primarily related to growth capital expenditures across all our operating segments; partially offset by
the negative impact of foreign currency translation of $1.7 billion; and
depreciation expense of $1.7 billion as well as sales in the period, including the reclassification of $781 million to assets held for sale, most notably certain South African wind and solar assets within our Renewable Power segment.
We provide a continuity of property, plant and equipment in Note 10 of the interim consolidated financial statements.
Our September 30, 2018 equity accounted investments balance is consistent with year-end. Significant in-period changes include:
the $2.5 billion net impact of the GGP transaction, as the derecognition of our investment in GGP was more than offset by the consolidation of equity accounted investments held within GGP;
$1.4 billion of other additions or acquisitions through business combinations across our operating segments; and
our share of comprehensive income of $702 million; offset by
the sale of our $1.0 billion Chilean electricity transmission operation;
the reclassification of our marine energy services business and two entities in our Real Estate and Corporate segments to consolidated subsidiaries after taking control of these entities;
distributions received and returns of capital of $1.3 billion; and
the $1.0 billion impact of decreasing foreign exchange rates.
We provide a continuity of equity accounted investments in Note 8 of the interim consolidated financial statements.
Cash and cash equivalents increased by $2.7 billion as at September 30, 2018 compared to year end primarily due to timing of cash flows. For further information, refer to our Consolidated Statements of Cash Flows in the interim consolidated financial statements and to the Review of Consolidated Statements of Cash Flows within Part 4 – Capitalization and Liquidity.
Intangible assets increased by $1.9 billion resulting from:
acquisitions of $3.8 billion, primarily from our third quarter acquisitions of an infrastructure services provider in our Private Equity segment and an Indian toll road in our Infrastructure segment; and
additions of $221 million across our various businesses; partially offset by
the negative impact of foreign exchange of $1.7 billion; and
depreciation expense of $452 million.
Other assets are comprised of inventory, goodwill, deferred income tax assets, assets classified as held for sale and other financial assets. The increase of $4.2 billion is primarily a result of acquisitions completed in the year which increased all components of other assets, including adding $2.0 billion of goodwill, partially offset by the impact of decreasing foreign exchange rates.

21 BROOKFIELD ASSET MANAGEMENT


Borrowings and other non-current 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 of $30.5 billion since year end is primarily related to increases in borrowings as a result of:
$27.8 billion in additional property-specific borrowings due to acquisitions across multiple operating segments, most notably the privatization of GGP, and debt refinancings in various businesses, including our graphite electrode manufacturing business, our Brazilian regulated gas transmission business and our U.S. self-storage portfolio, partially offset by the impact of decreasing foreign exchange rates;
$1.0 billion increase in corporate borrowings due to a corporate debt issuance and commercial paper issuances, partially offset by decreasing foreign exchange rates; partially offset by
a $247 million decrease in subsidiary borrowings, largely attributable to the repayment of amounts previously drawn on revolving or term bank facilities, particularly within our infrastructure business, and the impact of decreasing foreign exchange rates, partially offset by our real estate operations issuing debt to raise funds for new acquisitions.
Refer to Part 4 – Capitalization and Liquidity for more information.
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 NINE MONTHS ENDED SEP. 30, 2018
(MILLIONS)
Total

Common equity, beginning of period
$
24,052

Changes in period
 
Changes in accounting policies
(218
)
Net income to shareholders
1,700

Common dividends
(431
)
Preferred dividends
(114
)
Foreign currency translation
(1,176
)
Other comprehensive income
333

Share repurchases, net of issuances and vesting
(178
)
Ownership changes and other
(1,277
)
 
(1,361
)
Common equity, end of period
$
22,691

Common equity decreased by $1.4 billion to $22.7 billion during the nine-month period ended September 30, 2018. The change includes:
a reduction in opening common equity of $218 million to reflect the adjustments required to transition to IFRS 15 Revenue from Contracts with Customers (“IFRS 15”), and IFRS 9 Financial Instruments (“IFRS 9”);
net income attributable to shareholders of $1.7 billion during the first nine months of 2018;
other comprehensive losses of $843 million, mostly attributable to foreign currency translation losses of $1.2 billion as average foreign currency rates in the jurisdictions where we hold the majority of our non-U.S. dollar investments weakened relative to the U.S. dollar;
share repurchases, net of issuances and vesting, of $190 million, which included $211 million paid to repurchase 5.2 million Class A common shares (“Class A shares”), of which $160 million was to fund long-term compensation plans; and
ownership changes and other which are primarily related to the dilution loss to reflect our reduced ownership interest in BPY following the GGP privatization, partially offset by gains relating to the partial disposition of our graphite electrode manufacturing business through initial public and secondary offerings in the second and third quarters, respectively.

Q3 2018 INTERIM REPORT 22


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 SEP. 30, 2018 AND DEC. 31, 2017
(MILLIONS)
2018

 
2017

Brookfield Property Partners L.P.
$
30,841

 
$
19,736

Brookfield Renewable Partners L.P.
9,729

 
10,139

Brookfield Infrastructure Partners L.P.
10,305

 
11,376

Brookfield Business Partners L.P.
4,505

 
4,000

Other participating interests
5,996

 
6,377

 
$
61,376

 
$
51,628

Non-controlling interests increased by $9.7 billion to $61.4 billion as at September 30, 2018, primarily due to:
ownership changes attributable to non-controlling interests of $9.2 billion relate to equity issued to former GGP shareholders as consideration for their interest in GGP and co-investment capital raised within GGP as part of the acquisition;
comprehensive income attributable to non-controlling interests which totaled $890 million; this is inclusive of foreign currency translation losses as average foreign currency rates in the jurisdictions where we hold the majority of our non-U.S. dollar investments weakened relative to the U.S. dollar; and
net equity issuances to non-controlling interests totaling $3.8 billion; partially offset by
$4.1 billion of distributions to non-controlling interests.

23 BROOKFIELD ASSET MANAGEMENT


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 SEP. 30, 2018 AND DEC. 31, 2017
AND FOR THE PERIODS ENDED SEP. 30
 
 
Average Rate
Period End Rates
 
Three Months Ended
 
Nine Months Ended
2018

 
2017

 
Change

 
2018

 
2017

 
Change

 
2018

 
2017

 
Change 

Australian dollar
0.7222

 
0.7809

 
(8
)%
 
0.7315

 
0.7897

 
(7
)%
 
0.7579

 
0.7662

 
(1
)%
Brazilian real1
4.0032

 
3.3080

 
(17
)%
 
3.9510

 
3.1636

 
(20
)%
 
3.6049

 
3.1746

 
(12
)%
British pound
1.3031

 
1.3521

 
(4
)%
 
1.3032

 
1.3086

 
 %
 
1.3516

 
1.2760

 
6
 %
Canadian dollar
0.7745

 
0.7953

 
(3
)%
 
0.7652

 
0.7980

 
(4
)%
 
0.7769

 
0.7658

 
1
 %
1.
U.S. dollar to Brazilian real
As at September 30, 2018, our IFRS net equity of $22.7 billion was invested in the following currencies: United States dollars – 58%; Brazilian reais – 13%; British pounds – 13%; Australian dollars – 6%; Canadian dollars – 4%; and other currencies – 6%. Currency exchange rates relative to the U.S. dollar at the end of the third quarter of 2018 were lower than December 31, 2017 for all of our significant non-U.S. dollar investments.
The following table disaggregates the impact of foreign currency translation on our equity by the most significant non-U.S. currencies:
FOR THE PERIODS ENDED SEP. 30
(MILLIONS)
Three Months Ended
 
Nine Months Ended
2018

 
2017

 
2018

 
2017

Australian dollar
$
(154
)
 
$
122

 
$
(489
)
 
$
503

Brazilian real
(436
)
 
674

 
(2,563
)
 
149

British pound
(131
)
 
308

 
(342
)
 
753

Canadian dollar
(133
)
 
344

 
(397
)
 
687

Other
(199
)
 
278

 
(277
)
 
557

 
(1,053
)
 
1,726

 
(4,068
)
 
2,649

Currency hedges1
143

 
(588
)
 
775

 
(1,598
)
 
$
(910
)
 
$
1,138

 
$
(3,293
)
 
$
1,051

Attributable to:
 
 
 
 
 
 
 
Shareholders
$
(437
)
 
$
379

 
$
(1,176
)
 
$
420

Non-controlling interests
(473
)
 
759

 
(2,117
)
 
631

 
$
(910
)
 
$
1,138

 
$
(3,293
)
 
$
1,051

1.
Net of deferred income taxes of $1 million for the three months ended September 30, 2018 and $42 million for the nine months ended September 30, 2018
Lower period end rates for our non-U.S. dollar investments, particularly the Brazilian real which decreased 17% from the beginning of the year, reduced our equity net of currency hedges for the three and nine months ended September 30 by $910 million and $3.3 billion, respectively. Gains on our hedges against the Australian, British and Canadian currencies, for which financial contracts and foreign currency debt are used to reduce exposures, partially offset the foreign currency translation losses. We typically do not hedge our equity in Brazil and other emerging markets due to the high costs associated with these contracts.

Q3 2018 INTERIM REPORT 24


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, 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 and private equity businesses. Other factors include the impact of foreign currency on non-U.S. revenues and net income attributable to non-controlling interests.
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:
 
2018
 
2017
 
2016
FOR THE THREE MONTHS ENDED
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

 
Q4

Revenues1
$
14,858

 
$
13,276

 
$
12,631

 
$
13,065

 
$
12,276

 
$
9,444

 
$
6,001

 
$
6,935

Net income
941

 
1,664

 
1,855

 
2,083

 
992

 
958

 
518

 
97

Net income (loss) to shareholders
163

 
680

 
857

 
1,046

 
228

 
225

 
(37
)
 
173

Per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
– diluted
$
0.11

 
$
0.62

 
$
0.84

 
$
1.02

 
$
0.20

 
$
0.19

 
$
(0.08
)
 
$
0.14

– basic
0.11

 
0.64

 
0.85

 
1.05

 
0.20

 
0.20

 
(0.08
)
 
0.15

1.
Prior period revenues have not been restated as we adopted IFRS 15 using the modified retrospective method as at January 1, 2018
The following table shows fair value changes and income taxes for the last eight quarters, as well as their combined impact on net income:
 
2018
 
2017
 
2016
FOR THE THREE MONTHS ENDED
(MILLIONS)
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

 
Q4

Fair value changes
$
132

 
$
833

 
$
572

 
$
280

 
$
132

 
$
213

 
$
(204
)
 
$
(488
)
Income taxes
(144
)
 
(339
)
 
(153
)
 
(110
)
 
(259
)
 
(119
)
 
(125
)
 
(211
)
Net impact
$
(12
)
 
$
494

 
$
419

 
$
170

 
$
(127
)
 
$
94

 
$
(329
)
 
$
(699
)
Over the last eight completed quarters, the factors discussed below caused variations in revenues and net income to shareholders on a quarterly basis:
Revenues increased primarily due to recent acquisitions across all segments, including the privatization of GGP, and organic growth, in particular improved pricing at our graphite electrode manufacturing business. Higher interest and depreciation expenses associated with recent acquisitions, and the recognition of a deferred tax expense associated with the GGP privatization, more than offset the increase in revenues.
The increase in revenues in the second quarter of 2018 is primarily attributable to recent acquisitions, additional home closings in our North American residential business and improved pricing at our graphite electrode manufacturing business. Increases in direct costs offset these changes in revenue. While net income also benefited from strong performance at Norbord and appraisal and transaction-related gains in our Real Estate segment, results were more than offset by higher income tax expenses and the absence of a one-time gain recognized on the sale of a business in the first quarter.

25 BROOKFIELD ASSET MANAGEMENT


In the first quarter of 2018, revenues decreased due to the seasonality of our residential homebuilding and construction services businesses, partially offset by a full quarter of revenues contributed by recent acquisitions in our Renewable Power segment. Net income benefited from investment property valuation gains and other fair value gains recognized in the current quarter.
The increase in revenues in the fourth quarter of 2017 is attributable to organic growth in existing operations across our business and acquisitions throughout the year. Net income benefited from gains from the sale of our 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 segment. Results were partially offset by higher income tax expenses in the quarter.
The overall increase in results in the second quarter of 2017 is predominantly attributable to acquisitions completed in the quarter, including a regulated gas transmission operation and leading water treatment business, both in Brazil, and a road fuel distribution business.
In the first quarter of 2017, we recorded fair value losses, predominantly driven by mark-to-market losses on our GGP warrants, as well as decreases in valuations in our core office portfolio. Revenue declined from the prior quarter due to seasonality in our 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.

Q3 2018 INTERIM REPORT 26


CORPORATE DIVIDENDS
The dividends paid by Brookfield on outstanding securities during the first nine months of 2018 and the same period in 2017 and 2016 are summarized in the following table:
 
Distribution per Security
 
2018

 
2017

 
2016

Class A and B1 Limited Voting Shares (“Class A and B shares”)
$
0.45

 
$
0.42

 
$
0.39

Special distribution to Class A and Class B shares2,3

 
0.11

 
0.45

Class A Preferred Shares
 
 
 
 
 
Series 2
0.35

 
0.28

 
0.27

Series 4 + Series 7
0.35

 
0.28

 
0.27

Series 8
0.50

 
0.40

 
0.38

Series 9
0.40

 
0.39

 
0.54

Series 13
0.35

 
0.28

 
0.27

Series 144

 

 
0.11

Series 15
0.29

 
0.19

 
0.18

Series 17
0.69

 
0.68

 
0.68

Series 18
0.69

 
0.68

 
0.68

Series 245
0.44

 
0.43

 
0.65

Series 255
0.50

 
0.41

 
0.14

Series 266
0.51

 
0.55

 
0.64

Series 287
0.40

 
0.57

 
0.65

Series 30
0.68

 
0.69

 
0.68

Series 32
0.66

 
0.65

 
0.64

Series 34
0.61

 
0.60

 
0.60

Series 36
0.71

 
0.70

 
0.69

Series 37
0.71

 
0.70

 
0.69

Series 38
0.64

 
0.63

 
0.62

Series 40
0.66

 
0.65

 
0.64

Series 42
0.66

 
0.65

 
0.64

Series 44
0.73

 
0.72

 
0.71

Series 468
0.70

 
0.79

 

Series 489
0.46

 

 

1.
Class B Limited Voting Shares (“Class B shares”)
2.
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
3.
Distribution of a 20.7% interest in Brookfield Business Partners on June 20, 2016, based on IFRS values
4.
Redeemed March 1, 2016
5.
1,533,133 shares were converted from Series 24 to Series 25 on July 1, 2016
6.
Dividend rate reset commenced April 1, 2017
7.
Dividend rate reset commenced July 1, 2017
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. 

27 BROOKFIELD ASSET MANAGEMENT


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. Common equity relates to invested capital allocated to a particular business segment which we use interchangeably with segment common equity. To further assess operating performance for our Asset Management segment we also provide unrealized carried interest1 which represents carried interest generated on unrealized changes in value of our private fund investment portfolios.
Our operating segments are global in scope and are as follows:
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 fees1 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, LP investments 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, data infrastructure and sustainable resource assets.
v.
Private equity operations include a broad range of industries, and are mostly focused on business services, infrastructure 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 capitalization1, 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 gains1 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 beginning on page 56

Q3 2018 INTERIM REPORT 28


SUMMARY OF RESULTS BY OPERATING SEGMENT
The following table presents revenues, FFO and common equity by segment on a period-over-period basis for comparative purposes:
AS AT SEP. 30, 2018 AND DEC. 31, 2017
AND FOR THE THREE MONTHS ENDED SEP. 30
(MILLIONS)
Revenues1
 
FFO
 
Common Equity
2018

 
2017

 
Change 
 
2018

 
2017

 
Change 
 
2018

 
2017

 
Change 
Asset management
$
463

 
$
327

 
$
136

 
$
320

 
$
211

 
$
109

 
$
331

 
$
312

 
$
19

Real estate
2,039

 
1,671

 
368

 
464

 
382

 
82

 
16,971

 
16,725

 
246

Renewable power
933

 
612

 
321

 
48

 
45

 
3

 
4,331

 
4,944

 
(613
)
Infrastructure
1,257

 
1,016

 
241

 
80

 
87

 
(7
)
 
2,545

 
2,834

 
(289
)
Private equity
10,010

 
8,242

 
1,768

 
247

 
137

 
110

 
4,298

 
4,215

 
83

Residential development
640

 
698

 
(58
)
 
16

 
(24
)
 
40

 
2,578

 
2,915

 
(337
)
Corporate activities
54

 
103

 
(49
)
 
(90
)
 
(29
)
 
(61
)
 
(8,363
)
 
(7,893
)
 
(470
)
Total
$
15,396

 
$
12,669

 
$
2,727

 
$
1,085

 
$
809

 
$
276

 
$
22,691

 
$
24,052

 
$
(1,361
)
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 interim consolidated financial statements
Total revenues and FFO were $15.4 billion and $1.1 billion in the current quarter compared to $12.7 billion and $809 million, in the prior year quarter, respectively. FFO includes realized disposition gains of $401 million in the third quarter of 2018 compared to $220 million in the prior year quarter.
Revenues increased by $2.7 billion to $15.4 billion in the current period, primarily as a result of:
recent acquisitions across all business groups, including Westinghouse, as well as the step-up acquisitions of GGP and our marine energy services business; and
organic growth, including the impact of improved pricing in our graphite electrode manufacturing business; partially offset by
the absence of revenues from Norbord which was consolidated up until the fourth quarter of 2017 at which time we sold a partial interest and therefore no longer hold a controlling interest in the business.
FFO excluding disposition gains increased by $95 million from the prior year quarter primarily due to recent acquisitions and organic growth described above as well as higher base management and performance fees in our asset management business partially offset by the impact of decreasing foreign exchange rates.
In the third quarter of 2018, we realized disposition gains of $120 million in our Private Equity segment following the secondary offering of shares in our graphite electrode manufacturing business and a share buyback completed by the business. In our Real Estate segment, asset sales associated with the GGP privatization and the sale of a portfolio of self-storage properties resulted in realized gains of $281 million.
Common equity decreased by $1.4 billion to $22.7 billion as contributions from earnings across our businesses were more than offset by the impact of decreasing foreign exchange rates and ownership changes on the privatization of GGP.
Further details on segment revenues, FFO and common equity are discussed in the following sections.

29 BROOKFIELD ASSET MANAGEMENT


assetmgmt8a05.jpg
Fee Bearing Capital
The following table summarizes fee bearing capital:
AS AT SEP. 30, 2018 AND DEC. 31, 2017
(MILLIONS)
Listed 
Partnerships 

 
Private 
Funds 

 
Public 
Securities 

 
Total 2018

 
Total 2017

Real estate
$
25,646

 
$
31,267

 
$

 
$
56,913

 
$
41,636

Renewable power
15,854

 
7,814

 

 
23,668

 
23,930

Infrastructure
17,769

 
16,441

 

 
34,210

 
38,751

Private equity
4,957

 
5,630

 

 
10,587

 
8,618

Diversified

 

 
15,236

 
15,236

 
12,655

September 30, 2018
$
64,226

 
$
61,152

 
$
15,236

 
$
140,614

 
n/a

December 31, 2017
$
60,560

 
$
52,375

 
$
12,655

 
 n/a

 
$
125,590

Fee bearing capital increased by $11.3 billion during the quarter. The principal changes are set out in the following table and described in further detail below:
AS AT AND FOR THE THREE MONTHS ENDED SEP. 30, 2018
(MILLIONS)
Listed 
Partnerships 

 
Private 
Funds 

 
Public 
Securities 

 
Total 

Balance, June 30, 2018
$
55,829

 
$
57,035

 
$
16,438

 
$
129,302

Inflows
6,793

 
4,907

 
662

 
12,362

Outflows

 

 
(2,017
)
 
(2,017
)
Distributions
(1,108
)
 
(694
)
 

 
(1,802
)
Market valuation
2,690

 
69

 
151

 
2,910

Other
22

 
(165
)
 
2

 
(141
)
Change
8,397

 
4,117

 
(1,202
)
 
11,312

Balance, September 30, 2018
$
64,226

 
$
61,152

 
$
15,236

 
$
140,614

Listed partnership capital increased by $9.5 billion, excluding quarterly distributions, due to:
$6.8 billion of inflows, including $5.7 billion related to the BPY and BPR capital issued as a result of the GGP privatization (BAM is entitled to earn incentive distributions on the units issued as part of the transaction effective the closing date but has agreed to a one-year management fee holiday on this capital). Additional inflows included $0.8 billion of debt and/or preferred equity issued at BIP and BEP; and
$2.7 billion market valuation increase due to higher unit prices across each of the listed partnerships.
Private fund capital increased by $4.1 billion, primarily due to $4.9 billion of inflows, including $2.7 billion of co-investment capital related to the privatization of GGP, $1.1 billion of commitments to our third flagship real estate fund and additional commitments across our multifamily and open-end real estate funds.
Public securities capital decreased by $1.2 billion due to the redemption of a low margin managed account as well as positive net inflows to our energy infrastructure and real asset solutions funds that were offset by net outflows to our infrastructure and real asset debt funds.

Q3 2018 INTERIM REPORT 30


Carry Eligible Capital1 
Carry eligible capital increased $2.7 billion during the quarter to $49.6 billion as at September 30, 2018. This represents an increase of $1.4 billion relating to the GGP co-investment, $1.1 billion from commitments to our latest flagship real estate fund and additional capital from other funds raised in the quarter.
As at September 30, 2018, $29.5 billion of carry eligible capital has been deployed (December 31, 2017 – $24.2 billion). This capital is either currently earning carried interest or will begin earning carried interest once its related funds have reached their preferred return threshold. There is currently an additional $20.1 billion of uncalled fund commitments that will begin to earn carried interest once the capital is deployed and fund preferred returns are met (December 31, 2017 – $18.2 billion).
Operating Results
Asset management revenues include fee related earnings1 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, net1, and unrealized carried interest, net1, 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.
FOR THE THREE MONTHS ENDED SEP. 30
(MILLIONS)
 
 
Revenues
 
FFO
Ref.
 
2018

 
2017

 
2018

 
2017

Fee related earnings
i
 
$
463

 
$
302

 
$
320

 
$
186

Realized carried interest, net
ii
 

 
25

 

 
25

Asset management FFO
 
 
$
463

 
$
327

 
$
320

 
$
211

 
 
 
 
 
 
 
 
 
 
Unrealized carried interest
 
 


 


 
$
85

 
$
367

Less: direct costs
 
 
 
 
 
 
(25
)
 
(95
)
Unrealized carried interest, net
iii
 
 
 
 
 
$
60

 
$
272

i.    Fee Related Earnings
FOR THE THREE MONTHS ENDED SEP. 30
(MILLIONS)
2018

 
2017

Fee revenues1
 
 

Base management fees
$
313

 
$
262

Incentive distributions
52

 
38

Performance fees
94

 

Transaction and advisory fees
4

 
2

 
463

 
302

Direct costs and other
(143
)
 
(116
)
Fee related earnings
$
320

 
$
186

Fee related earnings increased by $134 million from the prior year quarter as a result of increased performance fees and continued growth in base management fees and incentive distributions.
Base management fees of $313 million in the quarter include fees earned from our listed partnerships, private funds and public securities businesses. The increase of $51 million is due to:
$36 million increase in private funds fees, including incremental catch-up fees of $5 million, primarily due to $8.5 billion of funds raised for our third flagship real estate fund. Catch-up fees are earned on commitments received in quarters subsequent to the initial close of a fund where base fees accrue from the initial close;
$10 million increase in public securities fee revenues due to the acquisition of an energy and infrastructure investment advisor acquired in the first quarter of 2018; and
1.
See definition in Glossary of Terms beginning on page 56

31 BROOKFIELD ASSET MANAGEMENT


$5 million increase in listed partnership fees as a result of taking over the management of TERP in the fourth quarter of 2017 and increased market valuation at BBU resulting from strong unit price appreciation over the last twelve months.
Incentive distributions from BIP, BEP and BPY increased by $14 million to $52 million, a 37% increase from 2017. The growth represents our share as manager of increases in per unit distributions by BIP, BEP and BPY of 8%, 5% and 7%, respectively, as well as the impact of equity issued by BIP, BEP and BPY.
Performance fees of $94 million represent fees earned from BBU and are calculated on an escalating threshold as 20% of the quarterly average unit price over the previous threshold. There was no performance fee recorded in the third quarter of 2017. In the third quarter of 2018, BBU’s volume weighted average unit price increased by 10%; following the fee earned in the quarter, the performance threshold was revised upwards to $41.96.
Direct costs and other consist primarily of employee compensation expenses and professional fees, as well as business related technology costs and other shared services. Direct costs increased by $27 million year-over-year as we continue to build out our organization to support current and future growth.
The margin on our fee related earnings, excluding the impact of the BBU performance fee, catch-up fees and transaction and advisory fees, was 60% in the current year period, compared with 61% in the prior year quarter.
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 no carried interest during the quarter (2017 $25 million).
iii.    Unrealized Carried Interest
The amounts of accumulated unrealized carried interest1 and associated costs are shown in the following table:
 
2018
 
2017
AS AT AND FOR THE THREE MONTHS ENDED SEP. 30
(MILLIONS)
Unrealized 
Carried 
Interest 

 
Direct 
Costs 

 
Net 

 
Unrealized 
Carried 
Interest 

 
Direct 
Costs 

 
Net 

Accumulated unrealized, beginning of period
$
2,527

 
$
(778
)
 
$
1,749

 
$
1,219

 
$
(384
)
 
$
835

In-period change
 
 
 
 
 
 
 
 
 
 
 
Unrealized in period1
113

 
(31
)
 
82

 
363

 
(93
)
 
270

Foreign currency revaluation
(28
)
 
6

 
(22
)
 
4

 
(2
)
 
2

 
85

 
(25
)
 
60

 
367

 
(95
)
 
272

Less: realized

 

 

 
(25
)
 

 
(25
)
 
85

 
(25
)
 
60