EX-99.1 2 a2019-q3ex991interimreport.htm EXHIBIT 99.1 Exhibit

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Interim Report Q3 2019
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Three Months Ended
 
Nine Months Ended
FOR THE PERIODS ENDED SEP. 30
2019

 
2018

 
2019

 
2018

TOTAL (MILLIONS)
 
 
 
 
 
 
 
Revenues
$
17,875

 
$
14,858

 
$
50,007

 
$
40,765

Net income
1,756

 
941

 
3,716

 
4,460

Funds from operations1
826

 
1,085

 
2,985

 
3,045

PER SHARE
 
 
 
 
 
 
 
Net income
$
0.91

 
$
0.11

 
$
1.85

 
$
1.53

Funds from operations1
0.80

 
1.07

 
2.94

 
3.00

Dividends2
 
 
 
 
 
 
 
Cash
0.16

 
0.15

 
0.48

 
0.45

 
 
 
 
 
 
 
 
AS AT SEP. 30, 2019 AND DEC. 31, 2018
 
 
 
 
2019

 
2018

TOTAL (MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
 
 
 
 
 
 
Assets under management1
 
 
 
 
$
510,565

 
$
354,736

Consolidated results
 
 
 
 
 
 
 
Balance sheet assets
 
 
 
 
291,408

 
256,281

Equity
 
 
 
 
107,601

 
97,150

Common equity
 
 
 
 
29,427

 
25,647

Diluted number of common shares outstanding
 
 
 
 
1,054

 
997

Market trading price – NYSE
 
 
 
 
$
53.09

 
$
38.35

1.
See definition in the MD&A Glossary of Terms beginning on page 54.
2.
See Corporate Dividends on page 27.
 
CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brookfield at a Glance
 
 
Letter to Shareholders
 
 
Management’s Discussion & Analysis
 
 
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
 
 
Glossary of Terms
 
 
Consolidated Financial Statements
 
 
Shareholder Information
 
 
Board of Directors and Officers
 
 
 
 
 
 
 
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
 

2 BROOKFIELD ASSET MANAGEMENT


Brookfield at a Glance
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OUR BUSINESS
We are a leading global alternative asset manager with over $500 billion of assets under management including $274 billion in fee bearing capital. We raise private and public capital from the world’s largest institutional investors, sovereign wealth funds and individuals, with a focus on generating attractive investment returns that will allow our investors and their stakeholders to meet their goals and protect their financial future.
Investment focus – real estate, infrastructure, renewable power and private equity
Diverse product offering – Core, value-add, opportunistic and credit strategies in both closed-end and long-life vehicles
Focused investment strategies – We invest where we have a competitive advantage, such as our strong capabilities as an owner-operator, our large scale capital and our global reach
Disciplined financing approach – Debt is carefully employed to enhance returns while preserving capital throughout business cycles
In addition to our asset management activities outlined above, we invest significant capital from our balance sheet in our managed entities alongside our investors as well as in other direct investments. This is intended to generate attractive financial returns and cash flows, support the growth of our asset management activities and create an important alignment of interests with our investors. We refer to this as our Invested Capital and it totals approximately $45 billion.

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Note: Excludes Residential Development and Corporate Activities which are distinct business segments for IFRS reporting purposes.

“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 partnerships” 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 54 which defines our key performance measures that we use to measure our business.

Q3 2019 INTERIM REPORT 3


Letter to Shareholders
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OVERVIEW
During the third quarter, markets were positive, liquidity was strong, and most of our businesses performed on plan. We moved forward on numerous strategic initiatives, advanced fundraising, closed our Oaktree transaction, and continued to invest capital.
The backdrop for investing capital into alternative assets continues to be very favorable, and the long-term trend appears to be even stronger. We continue to strengthen our position as a leading global alternative asset manager, enabling our investors to benefit from our scale, global reach and operating expertise.
Total assets under management now exceed $500 billion, and our total capital available for new investments increased to ±$65 billion. We are actively adding capital in virtually all areas across the business and while we are cautious about overall market conditions, we continue to find attractive opportunities to put capital to work.
MARKET ENVIRONMENT
The global business environment continues to be a tale of two cities. Business fundamentals in most markets are still good: slower than 2018, but still very constructive. On the other hand, politics dominate the headlines and continue to unsettle investors. Looking longer term, however, these conditions in themselves are creating opportunity for investors like us who have on-the-ground intelligence and can therefore differentiate between headline news, and news that actually affects business fundamentals.
Interest rates continued to settle back in at historic lows, with the potential for them to go even lower when a global slowdown occurs. With interest rates in Japan and Europe now negative for all maturities, we seem to be in a new phase with global rates in the range of -2% to +2% for the next five to seven years. This is particularly relevant for us and will positively impact on all asset values and businesses that generate cash.
Should this interest rate environment continue to prevail, and with institutional capital growing, we expect that capital will increasingly be allocated to alternatives. We think that institutional investors will continue a push towards 60% alternatives allocation in their portfolios—from a global estimate of 25% today.
PERFORMANCE IN THE QUARTER
Our asset management operations generated strong results as a result of both significant fundraising over the last twelve months and the increase in unit prices across our listed partnerships. Fee related earnings before performance fees increased 35% over the prior year quarter; and this excludes Oaktree’s fee related earnings as the acquisition closed at quarter end. In total, annualized fees and carried interest are now $5.4 billion—including annualized fee revenues of $2.8 billion, and annualized target carried interest of $2.6 billion.
AS AT AND FOR THE TWELVE MONTHS
ENDED SEPTEMBER 30 (MILLIONS)
2015

2016

2017

2018

2019

CAGR
Total assets under management1
$
220,383

$
238,015

$
268,987

$
331,622

$
510,565

23%
Gross annual run rate of fees plus target carry1
1,399

1,992

2,210

2,700

5,387

40%
Fee related earnings (before performance fees)
448

690

720

823

1,034

23%
Cash available for reinvestment or distribution to BAM shareholders
 
 
 
 
 
 
– Total
1,068

1,622

1,795

2,449

2,448

23%
– Per share
1.10

1.66

1.84

2.50

2.50

23%
1.
2019 includes 100% of Oaktree assets under management, annualized fee revenues and target carried interest.

4 BROOKFIELD ASSET MANAGEMENT


Our income over the last twelve months included $595 million of realized carried interest before costs, including $59 million in the current quarter from capital returned within our first flagship real estate fund. We expect continued realizations within this fund in the fourth quarter of 2019 and in the first half of 2020, as we sell the remaining investments and return capital to investors. As a result of our normal course fundraising and the Oaktree acquisition, total assets under management are over $500 billion, and we continue to raise and deploy additional capital across our businesses.
We raised $2 billion of private fund capital in the quarter, bringing the total third-party capital raised over the last twelve months to just short of $30 billion. This included $19 billion of fee bearing capital across our latest round of flagship fundraising, $3 billion in our long-life fund strategies, and $6 billion in other funds and co-investments. We also added $102 billion of private fund fee bearing capital as a result of the closing of Oaktree. Together with Oaktree, we now have ±$275 billion of total fee bearing capital, and our private fund investor base includes over 1,800 investors.
Subsequent to quarter end, we completed the final close of our fifth private equity flagship fund, raising $9 billion. We expect our latest flagship infrastructure fund to hold its final close by the end of 2019 or early in 2020, bringing to completion the latest round of flagship fundraising. Together with co-investment capital raised to date, this round of flagship fundraising will total approximately $50 billion. More importantly, with the growth of our strategies and our expanded credit franchise, we expect the next round of fundraising for our flagship funds to be ±$100 billion. Our latest flagship real estate, infrastructure and private equity funds are approximately 45% invested in aggregate, and we therefore anticipate that we will be back in the markets with our flagships in 2021/2022.
Our investment partnerships also continue to grow. Our listed partnerships have seen combined growth in their funds from operations (“FFO”) over the last twelve months of more than 13%. This growth came from strong transportation volumes and expansion projects within our infrastructure business, strong wind pricing within our renewable business, margin improvement within a number of our private equity businesses, and leasing and new developments coming online within our real estate business. We have deployed $33 billion of capital across our funds and listed partnerships over the last twelve months and expect to see this contribute to further growth in our invested capital and FFO going forward.
INVESTOR DAY
During the quarter we hosted our annual Investor Day at Brookfield Place in Manhattan. The event was webcast live and the materials are posted on our website. A quick summary is as follows:
Brookfield Asset Management’s outlook is strong; global interest rates appear likely to stay low for a while, causing institutional investors to allocate larger amounts of their capital to alternatives. Alternatives are therefore no longer ‘alternative,’ but rather mainstream, and we think they could reach a percentage of 60% of institutional funds in the next 10 years. In addition, asset values in this environment are increasing, as recourse only borrowing is cheaper, leveraged equity returns are higher, and investors’ choices are fewer. Our next round of funds, including credit, should reach $100 billion, and all of this positions us well for the coming several years. As our cash generation continues to grow, we will need to decide if, when, and how to return capital to shareholders.
Brookfield Property Partners has transformed itself over the past five years since its spin-off from BAM. In addition, NAV and cash flows have grown at a compound ±10% annually. For various reasons, similar to most real estate securities, this is not reflected (yet) in the stock price, enabling a buyer today to make an investment at an estimated 35% discount to the appraised IFRS value of its underlying assets and a going-in yield of over 6%. This is almost unprecedented for the quality of portfolio that this entity owns. As a result, BPY has been repurchasing units with extra cash while adding value through completion of its significant development program. The opportunities to redevelop retail centers into office, residential, hotel, and other uses are expected to continue for many years, and we have some incredible office projects coming online in the next few quarters. This should enable cash flows to grow at 7% to 9%, and NAV to compound at ±15% for years. At today’s trading price, this is a great opportunity to own this business at a 35% margin of safety to IFRS value.

Q3 2019 INTERIM REPORT 5


Brookfield Infrastructure Partners owns one of the highest quality, most diverse group of utility assets globally. In the 13 years since its spin-off, we have compounded the returns to investors at an annualized 18%. Going forward, with the critical mass to set us apart from most others, we believe we can continue to operate our assets well, dispose of mature ones, and acquire new ones opportunistically to drive 6% to 9% annual cash flow growth. In conjunction with a growing cash distribution, this should drive 12-15% in annualized returns to investors looking forward. These assets are the backbone of the global economy, many of which will continue to exist 100 years from now.
Brookfield Renewable Partners is one of the largest privately-owned renewable energy entities in the world and has produced a 16% annualized compound return over the past 20 years. We believe that the renewables industry is at an inflection point: wind and solar are now profitable without subsidies, and the push for decarbonization of the electricity grid is substantial. We believe we can continue to grow our cash flows at 5% to 9%—and with the cash distribution, this generates an all-in return to investors of ±15%. In addition, owning one of the largest renewable businesses ensures that we are on the right side of one of the dominant trends in the global economy today.
Brookfield Business Partners has now reached a critical mass and has acquired some exceptional businesses since its launch. An investor in this entity participates in all the private equity strategies in which we invest for our private clients. Recently we added Clarios, the largest battery provider to the automotive industry; Westinghouse, the leading infrastructure services provider to the nuclear industry; and Healthscope, a leader in private hospitals in Australia. We also sold a facilities management company and an industrial mining business for substantial gains. This entity is focused on achieving NAV growth of ±15% on an annualized basis over time, with substantial upside to the NAV if we successfully execute our plans for these exciting businesses.
OAKTREE
We completed the acquisition of approximately 61% of Oaktree, with the balance continuing to be owned by the current and former management partners. This is a very exciting partnership for us, and Oaktree continues to deploy capital into all of their primarily credit strategies, as well as raise capital for successor funds or adjacent strategies. In addition to this, we are working to help them scale up some of their strategies and are considering where we can jointly provide products to our clients.
We are thrilled to also benefit from the world-class expertise of the Oaktree team. Oaktree is the premier global credit franchise, and we intend to utilize this expertise to make us better investors in everything we do. This should enhance our ability to engage with our clients in more ways and help them achieve their investment objectives in a more responsive and all-encompassing fashion. It is still early days, but we are pleased by our progress to date.
Longer term, Oaktree will also help us prepare for the inevitable downturn in the markets. We are positioning ourselves to put our resources behind the Oaktree franchise to allow it to excel even more when, inevitably, the market turns.
DATA INFRASTRUCTURE
Over the last few years, we have focused on growing our data infrastructure business. Data has been one of the fastest growing commodities in the world, and we expect this to continue for the foreseeable future. This is being driven by several factors, including greater smartphone penetration, increasing video consumption, and the advent of 5G networks. It is also driven by more connected devices everywhere, greater use of artificial intelligence, and other applications that are being developed every day.
We believe strongly that as people, places and objects become increasingly interconnected, the importance and value of data infrastructure assets will continue to grow. Given the ongoing evolution and innovation taking place in the telecom sector, we are looking to partner with telecom owners by investing in and leasing back their infrastructure. The other factor that is helpful to this trend is that the capital required to build out this data infrastructure is far greater than the capital the traditional telecom owners typically have access to within their own financial resources.

6 BROOKFIELD ASSET MANAGEMENT


We own the leading independent telecom tower operator in France, with over 7,000 towers and active rooftop sites. More recently, we secured an exclusive agreement to invest into one of the largest privately-owned tower businesses in the world—130,000 telecom towers that support Reliance Jio in India. We have also been acquiring and building out fiber networks. Our U.K. regulated distribution business is deploying fiber-to-the-home networks in new housing developments as part of its multi-utility offering in response to customer demand for faster and more reliable broadband solutions. Meanwhile, our French telecommunications infrastructure business is rolling out four fiber networks to connect over 700,000 households in the next few years as part of the French government’s national broadband plan, and in New Zealand we are deploying 5G technology on our networks.
Lastly, we have been active in acquiring data centers, and now own businesses on three continents. We own a U.S. business that deals with large, blue-chip enterprise customers and the U.S. Federal Government, having acquired it as a carve-out from a major telecommunications company. In South America and Asia-Pacific, where cloud computing is at an earlier stage of adoption, we are building major cloud data centers that are leased to the global technology giants.
We think data infrastructure is an exciting area for us, and that it has many decades of growth ahead.
GLOBAL URBANIZATION
By 2050, another two billion people will move into cities globally. A great percentage of these are in emerging countries, but the past 20 years has seen increasing intensification in every large city in the world. This trend affects many businesses in our portfolio—including our office space, residential high-rise, and a number of our infrastructure businesses.
Office space globally has never been more fully occupied. Supply has been relatively constrained in most places, and due to residential demand in cities, many sites that would have been built as office were instead converted to residential use. More importantly, though, many companies that used to move to campuses in the suburbs are moving back into the city. This is for one simple reason: people, old and young, want to enjoy the vibrancy of a great city. As a small example, because of this phenomena, Sydney and Toronto have virtually zero percent commercial vacancy today. Very seldom does this happen in any major city.
Residential high-rise condominiums (owned by individuals) or apartments (multiple units owned by large investors and rented to individuals) have also increased in scale and value in all major cities. This started because young employees could live relatively inexpensively and close to their offices. Further, due to the success and the build-out of amenities (restaurants, bars, gyms) to service these young residents, older, wealthier people started moving into the city. Instead of downsizing to a small house and living in the suburbs, the empty nesters are now moving to the vibrancy of the cities, with all of their benefits—such as museums, galleries, sports arenas, theatres and concert halls. This trend is accelerating and making cities better, and land and apartments are increasingly valuable.
Within our infrastructure business, these factors are leading to increased opportunities for us. Our district cooling and heating business (an outsourced provider to a property) is a beneficiary of increased demand for and subsequent construction of properties. The combination of two mega-trends—environmental sustainability and urbanization—is at the heart of a number of our infrastructure businesses and should enable substantial growth for us in the coming years.
OPERATING STANDARDS
Recently, the Business Roundtable came out with what they deem to be new standards on how business should conduct itself. We thought it worthwhile to share our views on this with you. Our basic starting point has always been that to sustain a business over the longer term, one must operate with high governance standards, respect the environment, and operate in a socially responsible manner.

Q3 2019 INTERIM REPORT 7


As a result, we have always aimed to operate with strong governance standards in every country in which we operate. This is an expectation that, once understood across an organization, ensures employees “know how to act.” With respect to governance, as a fiduciary, we hold ourselves to very high standards. We have significant responsibilities to our stakeholders, including pensioners, countries, governments, investors, and employees. That does not mean we don’t face difficult decisions from time to time; it does, however, mean that we strive always to act with integrity and to be transparent about how we solve each situation.
We believe that being environmentally conscious is a requirement as a successful long-term investor, and our investments demonstrate this. Over the last few decades, we have assembled one of the largest privately-owned portfolio of renewable power facilities globally. We own ±$50 billion of hydro, wind and solar facilities—enough renewable power to serve the combined needs of Ireland and Denmark on an annual basis. In real estate, we have one of the largest portfolios of properties globally, a large percentage of which meet the highest standard of environmentally positive working environments. Our global tenants, many of whom are leading international companies, have been demanding this for decades, and we have worked with them for many years to ensure that we meet their advancing needs and expectations.
With respect to social responsibility, we believe in supporting the communities in which we operate. Our expertise in turnarounds means that we often save companies from liquidation—and in many cases, reinvigorate communities as a result. In infrastructure, for example, the companies we own deliver critical services to tens of millions of people around the world. One of these, BRK Ambiental, provides water distribution and wastewater treatment for 15 million people in Brazil, a country that still struggles to deliver these services. As another example, last year we purchased Westinghouse from bankruptcy and have now turned it into a healthy global leader in the servicing of the power industry. As we grow these businesses, we are providing critical services, as well as earning solid returns for our investors.
CLOSING
We remain committed to being a world-class alternative asset manager, and to 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, rising 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 14, 2019


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.

8 BROOKFIELD ASSET MANAGEMENT


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
Overview
Infrastructure
PART 2 – REVIEW OF CONSOLIDATED
 
Private Equity
FINANCIAL RESULTS

 
Residential Development
Overview
Corporate Activities
Income Statement Analysis
PART 4 – CAPITALIZATION AND LIQUIDITY
 
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 54 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.

Q3 2019 INTERIM REPORT 9


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. 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. 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 contained in this Report. The statements and information 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 Company 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: (i) investment returns that are lower than target; (ii) the impact or unanticipated impact of general economic, political and market factors in the countries in which we do business; (iii) the behavior of financial markets, including fluctuations in interest and foreign exchange rates; (iv) global equity and capital markets and the availability of equity and debt financing and refinancing within these markets; (v) strategic actions including dispositions; the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits; (vi) changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and estimates); (vii) the ability to appropriately manage human capital; (viii) the effect of applying future accounting changes; (ix) business competition; (x) operational and reputational risks; (xi) technological change; (xii) changes in government regulation and legislation within the countries in which we operate; (xiii) governmental investigations; (xiv) litigation; (xv) changes in tax laws; (xvi) ability to collect amounts owed; (xvii) catastrophic events, such as earthquakes and hurricanes; (xviii) the possible impact of international conflicts and other developments including terrorist acts and cyberterrorism; (xix) the introduction, withdrawal, success and timing of business initiatives and strategies; (xx) the failure of effective disclosure controls and procedures and internal controls over financial reporting and other risks; (xxi) health, safety and environmental risks; (xxii) the maintenance of adequate insurance coverage; (xxiii)  risks specific to our business segments including our real estate, renewable power, infrastructure, private equity, and residential development activities; (xxiv) 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
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”), as issued by the International Accounting Standards Board (“IASB”). 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 54 for all non-IFRS measures.



10 BROOKFIELD ASSET MANAGEMENT


PART 1 – OUR BUSINESS AND STRATEGY
OVERVIEW
We are a leading global alternative asset manager with a 120-year history and over $500 billion of assets under management across a broad portfolio of real estate, infrastructure, renewable power and private equity assets. Our $274 billion in fee bearing capital is invested on behalf of some of the world’s largest institutional investors, sovereign wealth funds and pension plans, along with thousands of individuals.
We provide a diverse product mix of flagship private funds and dedicated public vehicles, which allow investors to invest in our four key asset classes and participate in the strong performance of the underlying portfolio. We invest in a disciplined manner, targeting 12%-15% returns with strong downside protection, allowing our investors and their stakeholders to meet their goals and protect their financial futures.
ü
Investment focus
We predominantly invest in real assets across real estate, infrastructure, renewable power and private equity, and hold a significant investment in Oaktree Capital Management (“Oaktree”), which is a leading global alternative investment management firm with an expertise in credit.
ü
Diverse products offering
We offer public and private vehicles to invest across a number of product lines, including core, value-add, opportunistic and credit in both closed-end and long-life vehicles.
ü
Focused investment strategies
We invest where we can bring our competitive advantages to bear, such as our strong capabilities as an owner-operator, our large-scale capital and our global reach.
ü
Disciplined financing approach
We employ leverage in a prudent manner to enhance returns while preserving capital throughout business cycles. Underlying investments are typically funded on a standalone basis, providing a stable capitalization, with the vast majority of these borrowings done at investment-grade levels.
In addition, we maintain significant invested capital on the Corporation’s balance sheet where we invest alongside our investors. This capital generates annual cash flows that enhance the returns we earn as an asset manager, creates a strong alignment of interest, and allows us to bring the following strengths to bear on all our investments.
1.
Large-scale capital
We have over $500 billion in assets under management and $274 billion in fee bearing capital.
2.
Operating expertise
We have more than 130,000 operating employees worldwide who maximize value and cash flows from our operations.
3.
Global presence
We operate in more than 30 countries around the world.
Our financial returns are represented by the combination of the earnings of our asset manager as well as capital appreciation and distributions from our invested capital. Our primary performance measure is funds from operations (“FFO”)1 which we use to evaluate the performance of our segments.






1.
See definition in Glossary of Terms beginning on page 54.

Q3 2019 INTERIM REPORT 11


Asset Management
Our asset management activities encompass $274 billion of fee bearing capital across private funds, listed partnerships and public securities.
Private Funds – $187 billion fee bearing capital
We manage and earn fees on 40 private funds across real estate, renewable power, infrastructure and private equity. On September 30, 2019, we purchased approximately 61% of Oaktree, and broadened our product offering, particularly on credit strategies. Our fund strategies include core, credit, value-add and opportunistic, and we offer both closed-end and long-life vehicles. Together with our investment in Oaktree, we have over 1,800 unique institutional investors, who on average invest in two of our funds. On private fund capital we earn:
1.
Diversified and long-term base management fees1 which are based on closed-end and long-life fund capital. Closed-end fund capital is typically committed for 10 years with two one-year extension options, and our long-life funds are perpetual vehicles that can continually raise new capital.
2.
Carried interest1, which enables us to receive a portion of overall fund profits provided that investors receive a minimum prescribed preferred return. Carried interest is recognized once it is no longer subject to clawback.
Listed Partnerships – $72 billion fee bearing capital
We manage publicly listed perpetual-capital vehicles BPY1, BEP1, BIP1, BBU1, and TERP1 . On listed partnership capital, we earn:
1.
Long-term perpetual base management fees, which are based on our listed vehicles’ total capitalization.
2.
Stable incentive distribution fees1 which are linked to cash distributions (BPY, BEP and BIP). These cash distributions have exceeded pre-determined thresholds and have a historic annual growth rate of 5%-9%.
3.
Performance fees1 based on unit price performance (BBU).
Public Securities – $15 billion fee bearing capital
We manage public funds and separately managed accounts, focused on fixed income and equity securities within the real estate, infrastructure and natural resources asset classes. We earn management fees, which are based on committed capital and fund net asset value and performance income based on investment returns.
Invested Capital1 
We have approximately $45 billion of invested capital on the Corporation’s balance sheet as a result of our history as an owner and operator of real assets, which provides attractive financial returns and important flexibility to our asset management business.
Key attributes of our invested capital:
Transparent approximately 80% of our invested capital is in our listed partnerships (BPY, BEP, BIP, BBU) and other smaller publicly traded investments. The remaining is primarily held in a residential homebuilding business, and a few other directly held investments.
Diversified, long-term, stable cash flows received from our underlying public investments. These cash flows are underpinned by investments in real assets which should provide inflation protection and less volatility compared to traditional equities, and higher yields compared to fixed income.
Strong alignment of interests the Corporation is the largest investor into each of our listed partnerships, and in turn, the listed partnerships are typically the largest investor in each of our private funds.
Refer to Parts 2 and 3 of this MD&A for more information on our operations and performance.



1.
See definition in Glossary of Terms beginning on page 54.

12 BROOKFIELD ASSET MANAGEMENT


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. Refer to page 42 of our 2018 Annual Report for an overview of our fair value accounting across our business and why we believe it provides useful information for investors about our performance. We also provide an overview of our application of the control-based model under IFRS used to determine whether or not an investment should be consolidated.
OVERVIEW
Net income was $1.8 billion in the current quarter, with $947 million attributable to common shareholders ($0.91 per share) and $809 million attributable to non-controlling interests.
The $815 million increase in consolidated net income and the $784 million increase in net income attributable to common shareholders compared to the prior year quarter are primarily attributable to:
operating income from recently acquired businesses and same-store1 growth across our operations;
higher equity accounted income as a result of valuation gains on some of our core retail properties;
an income tax recovery of $180 million, compared to an income tax expense of $144 million, primarily due to deferred tax recoveries in the current period; and
appraisal gains from our investment properties; partially offset by
higher depreciation expense primarily as a result of recent acquisitions; and
interest expense related to recently issued corporate debt and the consolidation debt held within recently acquired investments.
On September 30, 2019, we purchased approximately 61% interest in Oaktree, resulting in an equity accounted investment of $5 billion through the use of $2.4 billion of cash on hand and the issuance of 52.8 million class A shares.
Additionally, our consolidated balance sheet was impacted by acquisitions and dispositions since the beginning of the year. We acquired $27.0 billion of assets through business combinations, including a global automotive battery business and an Australian based private healthcare provider acquired in the second quarter of the year. Corporate borrowings increased from the prior year-end due to the issuance of $1.0 billion of corporate debt in the first quarter, partially offset by the repayment of a $450 million (C$600 million) bond in the second quarter. We also sold a number of assets during the first nine months of 2019, including a global provider of facilities management services and an executive relocation services business in our Private Equity segment, as well as a residential management services company and various investment properties in our Real Estate segment.
Additionally, the adoption of IFRS 16 impacted our balance sheet as operating leases which were previously reported as off-balance sheet commitments are now capitalized. This has resulted in higher investment properties and property, plant and equipment balances, as well as offsetting lease liabilities within accounts payable and other recorded on our consolidated balance sheet. There was no impact to total equity from the adoption of the new standard. Refer to Note 2 for further information on the impact of IFRS 16 on our consolidated financial statements.







1.
See definition in Glossary of Terms beginning on page 54.

Q3 2019 INTERIM REPORT 13


INCOME STATEMENT ANALYSIS
The following table summarizes the financial results of the company for the three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended
 
Nine Months Ended
FOR THE PERIODS ENDED SEP. 30
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
2019

 
2018

 
Change

 
2019

 
2018

 
Change

Revenues
$
17,875

 
$
14,858

 
$
3,017

 
$
50,007

 
$
40,765

 
$
9,242

Direct costs
(13,910
)
 
(11,967
)
 
(1,943
)
 
(38,880
)
 
(32,839
)
 
(6,041
)
 
3,965

 
2,891

 
1,074

 
11,127

 
7,926

 
3,201

Other income and gains
51

 
144

 
(93
)
 
972

 
581

 
391

Equity accounted income
414

 
50

 
364

 
1,761

 
680

 
1,081

Expenses
 
 
 
 
 
 
 
 
 
 

Interest
(1,926
)
 
(1,274
)
 
(652
)
 
(5,375
)
 
(3,377
)
 
(1,998
)
Corporate costs
(23
)
 
(25
)
 
2

 
(72
)
 
(76
)
 
4

Fair value changes
394

 
132

 
262

 
(835
)
 
1,537

 
(2,372
)
Depreciation and amortization
(1,299
)
 
(833
)
 
(466
)
 
(3,567
)
 
(2,175
)
 
(1,392
)
Income tax recovery (expense)
180

 
(144
)
 
324

 
(295
)
 
(636
)
 
341

Net income
1,756

 
941

 
815

 
3,716

 
4,460

 
(744
)
Non-controlling interests
(809
)
 
(778
)
 
(31
)
 
(1,755
)
 
(2,760
)
 
1,005

Net income attributable to shareholders
$
947

 
$
163

 
$
784

 
$
1,961

 
$
1,700

 
$
261

Net income per share
$
0.91

 
$
0.11

 
$
0.80

 
$
1.85

 
$
1.53

 
$
0.32

Three Months Ended September 30
Revenues for the quarter were $17.9 billion, an increase of $3.0 billion compared to the third quarter of 2018, primarily due to:
$4.4 billion of additional revenues from acquisitions during the last twelve months; and
same-store growth attributable largely to the utilities and transport operations in our Infrastructure segment, strong leasing activity in our core office assets held by the Real Estate segment and higher realized pricing in our Renewable Power segment; partially offset by
unrealized mark-to-market losses in our financial asset portfolio; and
the absence of $749 million of revenues from businesses sold since the prior year quarter as well as the impact of foreign exchange.
A discussion of the impact on revenues and net income from recent acquisitions and dispositions can be found on page 16.
Direct costs increased by 16% or $1.9 billion compared to a 20% increase in revenues. The increase relates primarily to:
the recent acquisitions and growth initiatives; partially offset by
the impact of adopting IFRS 16, the new lease accounting standard, which reallocated operating lease expenses previously reported through direct costs to interest expense and depreciation and amortization. Please refer to Note 2 of the consolidated financial statements for further information on the impact of IFRS 16 on our financial results.
Other income and gains for the current quarter primarily relates to disposition gains on the sale of Acadian and the industrial assets at our wastewater and industrial water treatment business in Brazil.




1.
See definition in Glossary of Terms beginning on page 54.

14 BROOKFIELD ASSET MANAGEMENT


Equity accounted income increased from $50 million to $414 million primarily due to:
valuation gains in certain of our equity accounted investment properties; and
the absence of a maintenance adjustment within an equity accounted investment at our Infrastructure segment last year; partially offset by
decreases in Norbord’s1 earnings due to lower product pricing compared to the prior year quarter.
Interest expense increased by $652 million largely due to additional borrowings associated with acquisitions across our portfolio, debts assumed from acquired businesses, and additional interest expense from lease liabilities recognized on adoption of IFRS 16. We also issued additional debt in certain listed partnerships, increasing total interest expense.
We recorded fair value gains of $394 million, compared to gains of $132 million in the third quarter of 2018, primarily as a result of:
higher appraisal gains on investment properties in our Real Estate segment; partially offset by
transaction related expenses, primarily attributable to expenses incurred on our investment in Oaktree.
Refer to page 17 for discussion on fair value changes.
Depreciation and amortization expense increased by $466 million to $1.3 billion due to businesses acquired in the last twelve months as well as the impact of revaluation gains in the fourth quarter of 2018, which increased the carrying value of our property, plant and equipment (“PP&E”) from which depreciation is determined. The adoption of IFRS 16 also increased depreciation charges during the quarter.
We recorded an income tax recovery of $180 million this quarter compared to an income tax expense of $144 million in the prior period. This was primarily due to a deferred tax recovery on the recognition of previously unrecognized loss carryforwards that will offset future projected taxable income.
Nine Months Ended September 30
Revenues and direct costs for the first nine months of 2019 increased by $9.2 billion and $6.0 billion, respectively, compared to the same period in 2018 due primarily to the aforementioned acquisitions.
Equity accounted income in the first nine months of 2019 increased by $1.1 billion compared to the prior year period as a result of recent acquisitions, and the aforementioned gains at equity-accounted investment properties, partially offset by decreased earnings at Norbord.
Fair value losses were $835 million for the first nine months of 2019, compared to a $1.5 billion gain reported in the prior period. The current period deficit is largely driven by $1.4 billion of fair value losses recorded in the previous quarter, primarily attributable to valuation losses on investment properties in our core retail portfolio and LP investments as well as one-time charges at our service provider to the offshore oil production industry. The prior period included transaction-related gains as well as strong valuation gains within LP investments in our real estate business.







1.
See definition in Glossary of Terms beginning on page 54.

Q3 2019 INTERIM REPORT 15


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, 2019:
 
Three Months Ended
 
Nine Months Ended
 
Acquisitions
 
Dispositions
 
Acquisitions
 
Dispositions
FOR THE PERIODS ENDED
SEP. 30, 2019
(MILLIONS)
Revenue
 
Net Income
 
Revenue
 
Net Income
 
Revenue
 
Net Income
 
Revenue
 
Net Income
Real estate
$
629

 
$
222

 
$
(139
)
 
$
(148
)
 
$
2,171

 
$
698

 
$
(366
)
 
$
(364
)
Renewable power
21

 
4

 
(14
)
 
(9
)
 
231

 
76

 
(14
)
 
(9
)
Infrastructure
524

 
45

 
(27
)
 
(24
)
 
1,745

 
62

 
(27
)
 
(19
)
Private equity and other
3,238

 
(176
)
 
(569
)
 
(21
)
 
7,297

 
(586
)
 
(715
)
 
(29
)
 
$
4,412

 
$
95

 
$
(749
)
 
$
(202
)
 
$
11,444

 
$
250

 
$
(1,122
)
 
$
(421
)
Acquisitions
Real Estate
Recent acquisitions contributed incremental revenues and net income of $629 million and $222 million, respectively, in the third quarter of 2019. The most significant contributor was the consolidation of BPR1 towards the end of the third quarter of 2018, which added $289 million of revenues and $137 million of net income in the current quarter. Previously, we reported our 34% proportionate share of the core retail business’s results as equity accounted income.
The other recent acquisition with a significant impact on current period revenues and net income is a diversified U.S. REIT that we acquired in the fourth quarter of 2018, which added incremental revenues and net income of $256 million and $81 million in the current quarter, respectively. A number of other acquisitions in our LP investments’ portfolio during the last twelve months also contributed to our results.
Infrastructure
Revenues and net income increased by $524 million and $45 million, respectively, primarily from a number of acquisitions in our utilities, energy and data infrastructure businesses. The acquisitions that contributed the most revenues and net income in the current quarter include a North American provider of residential energy infrastructure services, a Canadian natural gas midstream business, a natural gas pipeline located in India and a portfolio of data centers in North America.
Private Equity
The current quarter’s results included impacts from a global automotive battery business and an Australian private healthcare provider acquired in the prior quarter. These two businesses together contributed $2.7 billion of revenue and $82 million of net losses for the three month period. Our results this quarter also benefited from a full quarter of contributions from a service provider to the power generation industry acquired during the third quarter of the prior year, which contributed additional revenues of $282 million and net income of $13 million.
Overall, revenues and net income for the nine months ended September 30, 2019, increased by $11.4 billion and $250 million, respectively, primarily due to the aforementioned acquisitions.
Further details relating to the significant acquisitions described above that were completed during the nine months ended September 30, 2019 are provided in Note 4 of this interim report.
Dispositions
Recent asset sales reduced revenues and net income by $749 million and $202 million in the current quarter, respectively. The assets sold that most significantly impacted our results this quarter were the sales of the global provider of facilities management services and the executive relocation services business in our Private Equity segment.
Overall, impacts of the dispositions to revenue and net income on a nine-month basis in 2019 were $1.1 billion and $421 million, respectively.

1.
See definition in Glossary of Terms beginning on page 54.

16 BROOKFIELD ASSET MANAGEMENT


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)
2019

 
2018

 
Change 

 
2019

 
2018

 
Change

Investment properties
$
780

 
$
409

 
$
371

 
$
681

 
$
1,273

 
$
(592
)
Transaction related gains, net of deal costs
(241
)
 
(133
)
 
(108
)
 
(487
)
 
844

 
(1,331
)
Financial contracts
85

 
103

 
(18
)
 
(140
)
 
86

 
(226
)
Impairment and provisions
(44
)
 
(214
)
 
170

 
(408
)
 
(265
)
 
(143
)
Other fair value changes
(186
)
 
(33
)
 
(153
)
 
(481
)
 
(401
)
 
(80
)
Total fair value changes
$
394

 
$
132

 
$
262

 
$
(835
)
 
$
1,537

 
$
(2,372
)
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)
2019

 
2018

 
Change 

 
2019

 
2018

 
Change

Core office
$
181

 
$
63

 
$
118

 
$
687

 
$
131

 
$
556

Core retail
(4
)
 

 
(4
)
 
(825
)
 

 
(825
)
LP investments and other
603

 
346

 
257

 
819

 
1,142

 
(323
)
 
$
780

 
$
409

 
$
371

 
$
681

 
$
1,273

 
$
(592
)
We discuss the key valuation inputs of our investment properties on page 52.
Core Office
Valuation gains in the current quarter totaled $181 million. The gains relate primarily to:
improved leasing assumptions on properties in U.K. as they near substantial completion, updated cash flow assumptions and compressed discount rates; and
rate compression from historical low interest rates and improved market outlook in Brazil and improved market conditions in Australia.
Valuation gains of $63 million in the prior year quarter were primarily attributable to discount rate compression at certain Australian properties that were nearing sale, along with higher rent growth assumptions for our Toronto properties.
The nine-month appraisal gains also include appraisal gains in Toronto and U.S. where we benefited from increased market rents and activity and changes in valuation metrics supported by external valuations.
Core Retail
The appraisal changes in the current quarter were nominal. There were no fair value changes in the prior year quarter as our core retail portfolio was an equity accounted investment prior to its privatization in the third quarter of the prior year, with changes in the fair value of the investment properties reported through equity accounted income.
The nine-month appraisal losses are mainly from updates to cash flow assumptions and valuation metrics recognized in the second quarter.

Q3 2019 INTERIM REPORT 17


LP Investments and Other
Valuation gains of $603 million relate primarily to rate compression as a result of historically low interest rates in Brazil and improved market conditions in Brazil and India, which benefited our real estate investments in those countries.
In the prior year quarter, valuation gains of $346 million were primarily related to strong leasing activity and the completion of several developments in the India office portfolio and strengthened conditions in several markets.
The nine-month gains are mainly due to the lower capitalization rate and interest rates mentioned above, as well as fair value gains in our U.K. student housing portfolio.
Transaction Related Expenses, Net of Gains
Transaction related expenses, net of gains in the current period of $241 million are primarily attributable to transaction related expenses from our investment in Oaktree, as well as other deal costs in our Real Estate and Private Equity segments.
The prior year expenses relate to the privatization of GGP and higher deal costs across the business due to greater number of transactions.
The year-to-date expenses are also mostly attributable to deal costs associated with transactions in our Real Estate and Private Equity segments.
Financial Contracts
Financial contracts include mark-to-market gains and losses on financial contracts related to foreign currency, interest rate and pricing exposures that are not designated as hedges.
Unrealized gains of $85 million in the quarter primarily relate to gains on foreign currency swaps; partially offset by losses on interest rate swaps.
The prior period gain relates 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 quality for hedge accounting.
Impairment and Provisions
Impairment expense for the three months ended September 30, 2019 of $44 million relates primarily to an investment included in our Real Estate segment.
Other Fair Value Changes
Other fair value changes in the quarter include reclassification of previously recognized OCI losses upon asset sales in our Infrastructure segment. Remaining amounts relate to one-time items across our operations.



18 BROOKFIELD ASSET MANAGEMENT


Income Taxes
We recorded an aggregate income tax recovery of $180 million in the third quarter of 2019, compared to a $144 million expense in the prior year quarter, including current tax expenses of $284 million (2018$119 million) and deferred tax recoveries of $464 million (2018 – $25 million expense).
The decrease in income tax expense relates primarily to the recognition of additional tax loss carryforwards as a result of higher projected taxable income that we expect to be able to offset with previously unrecognized loss carryforwards. This resulted in a deferred tax recovery of approximately $573 million which contributed to the 33% reduction to our effective income tax rate in the quarter.
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
2019

 
2018

 
Change 

 
2019

 
2018

 
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
)
 
2

 
(2
)
 
(4
)
 
2

Change in tax rates and new legislation

 

 

 
(1
)
 
(4
)
 
3

Taxable income attributed to non-controlling interests
(3
)
 
(8
)
 
5

 
(4
)
 
(6
)
 
2

International operations subject to different tax rates
(9
)
 
(14
)
 
5

 
(5
)
 
(3
)
 
(2
)
Derecognition / (recognition) of deferred tax assets
(33
)
 
8

 
(41
)
 
(14
)
 

 
(14
)
Non-recognition of the benefit of current year’s tax losses
5

 
2

 
3

 
5

 
2

 
3

Other
2

 

 
2

 
2

 
1

 
1

Effective income tax rate
(11
)%
 
13
%
 
(24
)%
 
7
%
 
12
%
 
(5
)%
Our income tax provision does not include a number of non-income taxes paid that are recorded elsewhere in our consolidated 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.
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 the associated tax provision of these entities. In other words, we are consolidating all of the net income, but only our share of the associated tax provision. This gave rise to a 3% and 8% reduction in the effective tax rate relative to the statutory tax rate in 2019 and 2018, 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 9% decrease in our effective tax rate in the current quarter, compared to a 14% decrease in the prior year quarter. The difference will vary from period to period depending on the relative proportion of income in each country.


Q3 2019 INTERIM REPORT 19


BALANCE SHEET ANALYSIS
The following table summarizes the statement of financial position of the company as at September 30, 2019 and December 312018:
AS AT SEP. 30, 2019 AND DEC. 31, 2018
(MILLIONS)
2019

 
2018

 
Change

Assets
 
 
 
 
 
Investment properties
$
85,993

 
$
84,309

 
$
1,684

Property, plant and equipment
77,413

 
67,294

 
10,119

Equity accounted investments
40,008

 
33,647

 
6,361

Cash and cash equivalents
7,595

 
8,390

 
(795
)
Accounts receivable and other
19,080

 
16,931

 
2,149

Intangible assets
24,599

 
18,762

 
5,837

Goodwill
11,594

 
8,815

 
2,779

Other assets
25,126

 
18,133

 
6,993

Total assets
$
291,408

 
$
256,281

 
$
35,127

Liabilities
 
 
 
 
 
Corporate borrowings
$
7,035

 
$
6,409

 
$
626

Non-recourse borrowings of managed entities
123,204

 
111,809

 
11,395

Other non-current financial liabilities
20,229

 
13,528

 
6,701

Other liabilities
33,339

 
27,385

 
5,954

Equity
 
 
 
 


Preferred equity
4,145

 
4,168

 
(23
)
Non-controlling interests
74,029

 
67,335

 
6,694

Common equity
29,427

 
25,647

 
3,780

Total equity
107,601

 
97,150

 
10,451

 
$
291,408

 
$
256,281

 
$
35,127

September 30, 2019 vs. December 31, 2018
Total assets increased by $35.1 billion since December 31, 2018 to $291.4 billion as at September 30, 2019. The increase is largely attributable to recently completed business combinations which added $27.0 billion of total assets. In addition, our investment in Oaktree added a further $5.3 billion of assets. The adoption of IFRS 16 increased our property, plant and equipment and investment properties through the recognition of right-of-use (“ROU”) assets. These increases were partially offset by assets sold during the quarter.
Investment properties consist primarily of the company’s real estate assets. The balance as at September 30, 2019 increased by $1.7 billion, primarily due to:
additions of $6.0 billion primarily through purchases of investment properties during the year and the enhancement or expansion of numerous properties through capital expenditures, including the acquisition of $211 million of investment properties through a business combination completed in our Infrastructure segment;
the recognition of $928 million of ROU investment properties, primarily land leases on which some of our investment properties are built, on the adoption of IFRS 16;
net valuation gains of $681 million, largely driven by revaluation of certain core office developments as they near completion and by our LP investments portfolios, where properties benefited from improved market conditions in Brazil and India. These gains were partially offset by losses in our core retail portfolio; partially offset by
the negative impact of foreign currency translation of $684 million; and
asset sales and reclassifications to assets held for sale of $5.4 billion, including multiple investment properties held within our diversified U.S. REIT, Australian and North American office properties and various multifamily assets.
We provide a continuity of investment properties in Note 9 of the consolidated financial statements.

20 BROOKFIELD ASSET MANAGEMENT


Property, plant and equipment increased by $10.1 billion primarily as a result of:
recognition of property, plant and equipment ROU assets which increased our balance by $3.4 billion upon adopting IFRS 16;
acquisitions of $10.1 billion, most notably the global automotive battery business, the Australian private healthcare provider and a Brazilian heavy equipment and light vehicle fleet management company in our Private Equity segment, a North American solar portfolio within our Renewable Power segment, and a natural gas pipeline in India within our Infrastructure segment; and
additions of $2.6 billion primarily related to growth capital expenditures across our operating segments; partially offset
dispositions of $1.8 billion related to assets that have been reclassified to held for sale;
the negative impact of foreign currency translation of $1.3 billion; and
depreciation of $2.8 billion in the period.
We provide a continuity of property, plant and equipment in Note 10 of the consolidated financial statements.
Equity accounted investments increased from $33.6 billion as at December 31, 2018 to $40.0 billion in the current quarter, mainly due to:
the $5.3 billion interest in Oaktree, as well as a Brazilian data center operation and an Australian telecommunications company in our Infrastructure segment and an equity accounted investment within the global automotive battery business in our Private Equity segment;
appraisal gains in our core retail equity accounted investment; and
our proportionate share of the comprehensive income reported by our investees; partially offset by
the sale of an office property in Boston within our Real Estate segment.
We provide a continuity of equity accounted investments in Note 8 of the consolidated financial statements.
Cash and cash equivalents decreased by $795 million as at September 30, 2019 compared to the prior year end primarily due to timing of cash flows and investing activities in the year. For further information, refer to our Consolidated Statements of Cash Flows and to the Review of Consolidated Statements of Cash Flows within Part 4 – Capitalization and Liquidity.
Increases of $5.8 billion and $2.8 billion in our intangible assets and goodwill balances, respectively, are related to the acquisitions completed in our Private Equity and Infrastructure segments, partially offset by the impact of depreciation and foreign exchange.
Other assets are comprised of inventory, deferred income tax assets, assets classified as held for sale and other financial assets. The increase of $7.0 billion is primarily a result of:
a $2.7 billion increase in inventory primarily due to acquisitions completed in our Private Equity segment;
an increase in assets held for sale of $1.6 billion, primarily attributable to the reclassification of investment properties within our diversified U.S. REIT and an Australian office property since year end, as well as a Colombian regulated distribution business and an Australian district energy operation within our Infrastructure segment, partially offset by assets sold during the period, including an equity accounted investment within the LP investments portfolio and core office properties within our Real Estate segment; and
a $1.7 billion increase in other financial assets due primarily to the additions and appreciation of financial asset portfolios as the stock market recovered since year end.
Corporate borrowings increased by $626 million due to a $1.0 billion 10-year note issuance during the first quarter, as well as the impact of strengthened foreign exchange rates. This was partially offset by a repayment of a $450 million (C$600 million) note in the prior quarter.

Q3 2019 INTERIM REPORT 21


Non-recourse borrowings increased by $11.4 billion as a result of:
borrowings raised and acquired for the acquisitions of the global automotive battery business, the Australia private healthcare provider and the Brazilian heavy equipment and light vehicle fleet management company in our Private Equity segment; partially offset by
the partial repayment of credit facilities within our Real Estate segment as well as dispositions and reclassification of businesses to held for sale.
Other non-current financial liabilities consist of our subsidiary equity obligations, non-current accounts payable and other long-term financial liabilities that are due after one year. Non-current accounts payable and other increased primarily due to the recognition of non-current lease liabilities on adoption of IFRS 16 and aforementioned acquisitions. Please see Note 6 of the consolidated financial statements for a further breakdown.
The increase of other liabilities of $6.0 billion is primarily attributable to liabilities assumed on acquisitions completed during the year, current lease liabilities recognized on adoption of IFRS 16, an increase in deferred income tax liabilities, primarily on the acquisition of the global automotive battery business, and liabilities associated with assets held for sale. Please see Note 7 of the consolidated financial statements for further information.
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 MD&A.
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 , 2019
(MILLIONS)
2019

Common equity, beginning of period
$
25,647

Changes in period
 
Net income to shareholders
1,961

Common dividends
(459
)
Preferred dividends
(113
)
Foreign currency translation
(488
)
Other comprehensive income
91

Share issuances, net of repurchases
2,610

Ownership changes and other
178

 
3,780

Common equity, end of period
$
29,427

Common equity increased by $3.8 billion to $29.4 billion during the nine-month period ended September 30, 2019. The change includes:
net income attributable to shareholders of $2.0 billion;
distributions of $572 million to shareholders as common and preferred share dividends;
foreign currency translation losses of $488 million;
other comprehensive income of $91 million relates primarily to gains on financial instruments held in our Corporate and Infrastructure segments. These gains were partially offset by losses on our cash flow hedges;
share issuances, net of repurchases, of $2.6 billion, which included $2.8 billion of common equity issued on the acquisition of Oaktree during the current quarter. This issuance was netted against the impact of share purchases for our escrowed stock plan, repurchases through our normal course issuer bid and our restricted share plans; and


22 BROOKFIELD ASSET MANAGEMENT


ownership changes and other primarily relate to:
dilution gain from BBU’s equity issuance, which new equity units were issued at a premium to our book value of BBU’s equity on a per unit basis;
a gain recorded directly in equity for the partial sale of our interest in a Chilean toll road operation which we are continuing to consolidate; in addition to
dilution gain from BPY’s repurchase of shares held by third parties other than the Corporation on the open market; this triggered a gain recorded directly to equity which accrued to Brookfield as the shares were purchased at a discount to book value.
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, 2019 AND DEC. 31, 2018
(MILLIONS)
2019

 
2018

Brookfield Property Partners L.P.
$
29,799

 
$
31,580

Brookfield Renewable Partners L.P.
12,078

 
12,457

Brookfield Infrastructure Partners L.P.
14,229

 
12,752

Brookfield Business Partners L.P.
7,029

 
4,477

Other participating interests
10,894

 
6,069

 
$
74,029

 
$
67,335

Non-controlling interests increased by $6.7 billion during the nine-month period to $74.0 billion, primarily due to:
net equity issuances to non-controlling interests totaling $10.3 billion; partially offset by
comprehensive income attributable to non-controlling interests which totaled $660 million; this is inclusive of foreign currency translation gains as average foreign currency rates in the jurisdictions where we hold the majority of our non-U.S. dollar investments strengthened relative to the U.S. dollar;
ownership changes attributable to non-controlling interests of $1.4 billion; and
$5.6 billion of distributions to non-controlling interests.
The increase in other participating interests relates primarily to our direct investment in the third flagship real estate fund, resulting in Brookfield consolidating the fund and investments that are controlled by the fund. The fund was previously consolidated by BPY.

Q3 2019 INTERIM REPORT 23


FOREIGN CURRENCY TRANSLATION
Approximately half of our capital is invested in non-U.S. currencies and the cash flows generated from these businesses, as well as our equity, are 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:
 
 
 
 
 
 
 
Average Rate
AS AT SEP. 30, 2019 AND DEC. 31, 2018 AND FOR THE PERIODS ENDED SEP. 30
Period-End Spot Rate
Three Months Ended
 
Nine Months Ended
2019

 
2018

 
Change

 
2019

 
2018

 
Change

 
2019

 
2018

 
Change

Australian dollar
0.6750

 
0.7050

 
(4
)%
 
0.6854

 
0.7315

 
(6
)%
 
0.6992

 
0.7579

 
(8
)%
Brazilian real1
4.1649

 
3.8745

 
(7
)%
 
3.9683

 
3.9510

 
 %
 
3.8880

 
3.6049

 
(7
)%
British pound
1.2292

 
1.2760

 
(4
)%
 
1.2325

 
1.3032

 
(5
)%
 
1.2730

 
1.3516

 
(6
)%
Canadian dollar
0.7553

 
0.7331

 
3
 %
 
0.7574

 
0.7652

 
(1
)%
 
0.7524

 
0.7769

 
(3
)%
1.
Using Brazilian real as the price currency.
As at September 30, 2019, our common equity of $29.4 billion was invested in the following currencies: United States dollars – 62% (December 31, 2018 – 56%); Brazilian reais – 12% (December 31, 2018 – 13%); British pounds – 11% (December 31, 2018 – 12%); Canadian dollars – 6% (December 31, 2018 – 7%); Australian dollars – 5% (December 31, 2018 – 6%); and other currencies – 4% (December 31, 2018 – 6%). Currency exchange rates relative to the U.S. dollar at the end of the third quarter were lower than December 31, 2018 for all of our significant non-U.S. dollar investments with the exception of the Canadian dollar.
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
2019

 
2018

 
2019

 
2018

Australian dollar
$
(246
)
 
$
(154
)
 
$
(281
)
 
$
(489
)
Brazilian real
(1,077
)
 
(436
)
 
(936
)
 
(2,563
)
British pound
(275
)
 
(131
)
 
(321
)
 
(342
)
Canadian dollar
(114
)
 
(133
)
 
181

 
(397
)
Other
(940
)
 
(199
)
 
(719
)
 
(277
)
Total cumulative translation adjustments
(2,652
)
 
(1,053
)
 
(2,076
)
 
(4,068
)
Currency hedges1
706

 
143

 
444

 
775

Total cumulative translation adjustments net of currency hedges
$
(1,946
)
 
$
(910
)
 
$
(1,632
)
 
$
(3,293
)
Attributable to:
 
 
 
 
 
 
 
Shareholders
$
(501
)
 
$
(437
)
 
$
(488
)
 
$
(1,176
)
Non-controlling interests
(1,445
)
 
(473
)
 
(1,144
)
 
(2,117
)
 
$
(1,946
)
 
$
(910
)
 
$
(1,632
)
 
$
(3,293
)
1.
Net of deferred income tax expense of $13 million for the three months ended September 30, 2019 and a deferred income tax expense of $10 million for the nine months ended September 30, 2019.
Lower period end rates for our non-U.S. dollar investments, particularly the Brazilian real and other currencies such as Colombian peso and European Euro, decreased our equity net of currency hedges for the three and nine months ended September 30, 2019 by $1.9 billion and $1.6 billion, respectively. During the nine months ended, gains on our hedges relate to those against the Canadian dollar, for which financial contracts and foreign currency debt are used to reduce exposures, partially offsetting the foreign currency translation losses.

24 BROOKFIELD ASSET MANAGEMENT


SUMMARY OF QUARTERLY RESULTS
In the past two years the quarterly variances in revenues are due primarily to acquisitions and dispositions. Variances in net income to shareholders relate primarily to the timing and amount of fair value changes and deferred tax provisions, 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.
Revenues and direct costs in our private equity operations vary from quarter to quarter primarily due to acquisitions and dispositions of businesses, fluctuations in foreign exchange rates, business and economic cycles and weather and seasonality in underlying operations. Broader economic factors and commodity market volatility may have a significant impact on a number of our businesses, in particular within our industrials segment. For example, seasonality affects our contract drilling and well-servicing operations as the ability to move heavy equipment safely and efficiently in western Canadian oil and gas fields is dependent on weather conditions. Within our infrastructure services, the core operating plants business of our service provider to the power generation industry generates the majority of its revenue during the fall and spring, when power plants go offline to perform maintenance and replenish their fuel. Some of our business services operations will typically have stronger performance in the latter half of the year whereas others, such as our fuel marketing and road fuel distribution businesses, will generate stronger performance in the second and third quarters. Net income is impacted by periodic gains and losses on acquisitions, monetization and impairments.
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:
 
2019
 
2018
 
2017
FOR THE PERIODS ENDED
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

 
Q4

Revenues1
$
17,875

 
$
16,924

 
$
15,208

 
$
16,006

 
$
14,858

 
$
13,276

 
$
12,631

 
$
13,065

Net income
1,756

 
704

 
1,256

 
3,028

 
941

 
1,664

 
1,855

 
2,083

Net income to shareholders
947

 
399

 
615

 
1,884

 
163

 
680

 
857

 
1,046

Per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
– diluted
$
0.91

 
$
0.36

 
$
0.58

 
$
1.87

 
$
0.11

 
$
0.62

 
$
0.84

 
$
1.02

– basic
0.93

 
0.37

 
0.59

 
1.91

 
0.11

 
0.64

 
0.85

 
1.05

1.
2017 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:
 
2019
 
2018
 
2017
FOR THE PERIODS ENDED
(MILLIONS)
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

 
Q4

Fair value changes
$
394

 
$
(1,398
)
 
$
169

 
$
257

 
$
132

 
$
833

 
$
572

 
$
280

Income taxes
180

 
(239
)
 
(236
)
 
884

 
(144
)
 
(339
)
 
(153
)
 
(110
)
Net impact
$
574

 
$
(1,637
)
 
$
(67
)
 
$
1,141

 
$
(12
)
 
$
494

 
$
419

 
$
170


Q3 2019 INTERIM REPORT 25


Over the last eight completed quarters, the factors discussed below caused variations in revenues and net income to shareholders on a quarterly basis:
In the third quarter of 2019, revenues increased from a full quarter contribution from our global automotive battery business and Australian private healthcare provider, which we acquired in the second quarter of 2019. In addition, net income increased from the prior quarter due to the recognition of deferred income tax recoveries and valuation gains in our core office and LP investment properties.
In the second quarter of 2019, revenues increased due to recent acquisitions across a number of segments, in particular industrials and infrastructure services in the Private Equity segment. The increase in revenue was offset by higher direct operating costs, interest expense from incremental borrowing, as well as valuation losses on some of our core retail properties and our service provider to the offshore oil production industry in the Private Equity segment.
In the first quarter of 2019, revenues decreased slightly from the prior quarter primarily due to seasonality at our residential homebuilding business and certain of our private equity operations as well as a decrease in sales volumes at our road fuel distribution business. In addition, the absence of a deferred tax recovery in our Corporate segment, as well as higher depreciation and amortization expenses due to the impact of revaluation gains reported in the fourth quarter contributed to the decrease in net income.
The increase in revenues in the fourth quarter of 2018 is due primarily to recent acquisitions, including a full quarter of revenues from GGP following the privatization, as well as the impact of same-store growth across the business. Consolidated net income is higher than prior period due to gains on sales of businesses, fair value valuation gains on investment properties and a deferred tax recovery in our Corporate segment. These increases were partially offset by higher interest expense from new borrowings to fund acquisitions and debts assumed from acquired businesses.
Revenues increased in the third quarter of 2018 primarily due to recent acquisitions across all segments, including the privatization of GGP, and same-store 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 acquisitions, additional home closings in our North American residential business and improved pricing at our graphite electrodes manufacturing business. Increases in direct costs offset these changes in revenue. While net income also benefited from strong performance at Norbord and valuation 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.
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.
The increase in revenues in the fourth quarter of 2017 is attributable to same-store growth in existing operations across our business and acquisitions throughout the year. Net income benefited from gains from the sale of the European logistics company and from a change in basis of accounting for Norbord.

26 BROOKFIELD ASSET MANAGEMENT


CORPORATE DIVIDENDS
The dividends paid by Brookfield on outstanding securities during the first nine months of 2019, 2018, and 2017 are summarized in the following table:
 
Distribution per Security
 
2019

 
2018

 
2017

Class A and B1 Limited Voting Shares (“Class A and B shares”)
$
0.48

 
$
0.45

 
$
0.42

Special distribution to Class A and B shares2

 

 
0.11

Class A Preferred Shares
 
 
 
 
 
Series 2
0.39

 
0.35

 
0.28

Series 4 + Series 7
0.39

 
0.35

 
0.28

Series 8
0.56

 
0.50

 
0.40

Series 9
0.39

 
0.40

 
0.39

Series 13
0.39

 
0.35

 
0.28

Series 15
0.35

 
0.29

 
0.19

Series 17
0.67

 
0.69

 
0.68

Series 18
0.67

 
0.69

 
0.68

Series 24
0.42

 
0.44

 
0.43

Series 253
0.56

 
0.50

 
0.41

Series 264
0.49

 
0.51

 
0.55

Series 285
0.38

 
0.40

 
0.57

Series 306
0.66

 
0.68

 
0.69

Series 327
0.71

 
0.66

 
0.65

Series 348
0.61

 
0.61

 
0.60

Series 36
0.68

 
0.71

 
0.70

Series 37
0.69

 
0.71

 
0.70

Series 38
0.62

 
0.64

 
0.63

Series 40
0.63

 
0.66

 
0.65

Series 42
0.63

 
0.66

 
0.65

Series 44
0.71

 
0.73

 
0.72

Series 469
0.68

 
0.70

 
0.79

Series 4810
0.67

 
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 on June 1, 2017.
3.
Dividend rate reset commenced the last day of each quarter.
4.
Dividend rate reset commenced March 31, 2017.
5.
Dividend rate reset commenced June 30, 2017.
6.
Dividend rate reset commenced December 31, 2017.
7.
Dividend rate reset commenced September 30, 2018.
8.
Dividend rate reset commenced March 31, 2019.
9.
Issued November 18, 2016.
10.
Issued September 13, 2017.
Dividends on the Class A and B shares are declared in U.S. dollars whereas Class A Preferred share dividends are declared in Canadian dollars.

Q3 2019 INTERIM REPORT 27


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, as well as our share of the asset management activities of Oaktree. We generate contractual base management fees for these activities as well as incentive distributions and performance income, including performance fees, transaction fees and carried interest.
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 and industrials.
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 leverage, 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 54.

28 BROOKFIELD ASSET MANAGEMENT


SUMMARY OF RESULTS BY OPERATING SEGMENT
The following table presents revenues, FFO and common equity by segment on a year-over-year basis for comparative purposes:
AS AT SEP. 30, 2019 AND DEC. 31, 2018 AND FOR THE THREE MONTHS ENDED SEP. 30
(MILLIONS)
Revenues1
 
FFO2
 
Common Equity
2019

 
2018

 
Change 
 
2019

 
2018

 
Change 
 
2019

 
2018

 
Change 
Asset Management
$
527

 
$
463

 
$
64

 
$
345

 
$
320

 
$
25

 
$
4,978

 
$
328

 
$
4,650

Real Estate
2,705

 
2,039

 
666

 
271

 
464

 
(193
)
 
17,482

 
17,423

 
59

Renewable Power
926

 
933

 
(7
)
 
44

 
48

 
(4
)
 
4,937

 
5,302

 
(365
)
Infrastructure
1,758

 
1,257

 
501

 
103

 
80

 
23

 
2,617

 
2,887

 
(270
)
Private Equity
12,021

 
10,010

 
2,011

 
154

 
247

 
(93
)
 
4,657

 
4,279

 
378

Residential Development
597

 
640

 
(43
)
 
42

 
16

 
26

 
2,703

 
2,606

 
97

Corporate Activities
(28
)
 
54

 
(82
)
 
(133
)
 
(90
)
 
(43
)
 
(7,947
)
 
(7,178
)
 
(769
)
Total segments
$
18,506

 
$
15,396

 
$
3,110

 
$
826

 
$
1,085

 
$
(259
)
 
$
29,427

 
$
25,647

 
$
3,780

Total revenues and FFO were $18.5 billion and $826 million in the current quarter compared to $15.4 billion and $1.1 billion in the prior year quarter, respectively. FFO includes realized disposition gains of $125 million in 2019, compared to $401 million in the prior year quarter. Excluding disposition gains, FFO increased by $17 million from the prior year quarter.
Revenues increased primarily from the impact of new acquisitions at our Private Equity segment and the consolidation of GGP’s results after privatizing the business during the prior year quarter. These increases were partially offset by sales of operating businesses since the prior quarter.
The increases to FFO is primarily as a result of:
strong performance in our Asset Management segment where we benefited from fees earned on new capital raised within the latest series of flagship fund closes and higher market capitalization of our listed partnerships. Our total fee related earnings increased by 35%, excluding the impact of a $94 million performance fee recognized in the prior year, to $306 million;
realized carried interest of $39 million, net of direct costs, recognized in the quarter. We did not recognize carry in the prior year period; and
same-store growth from higher pricing as we benefitted from inflation indexation at our Infrastructure segment, improved realized pricing and strong generation at BEP and increased sales volumes at our service provider to the power generation industry within our Private Equity segment; partially offset by
our reduced ownership interest in BPY following the privatization of GGP by the end of the third quarter in 2018; and
unrealized losses from our financial asset portfolio and lower product pricing from Norbord and our energy contracts.
In the quarter, we recognized $125 million of disposition gains primarily from the sale of Boston and Sydney core office properties within our Real Estate segment.
Common equity increased by $3.8 billion since year end to $29.4 billion primarily from a $2.8 billion equity issuance on our investment in Oaktree. The remaining $2.4 billion of consideration was funded primarily with cash on hand from our Corporate segment and did not have an impact on common equity. For segment reporting purposes, the value of Oaktree’s asset management business was allocated to our Asset Management segment while Oaktree’s balance sheet investments are allocated to our Corporate segment. Additionally, common equity increased from net income generated across our segments and gains recognized in equity from the sale of partial interests in consolidated businesses. The aforementioned contributions were partially offset by the impact of foreign exchange and dividends made by our listed investments.
Further details on segment revenues, FFO and common equity are discussed in the following sections.


1.
Revenues include inter-segment revenues which are adjusted to arrive at external revenues for IFRS purposes. Please refer to Note 3(c) of the consolidated financial statements.
2.
Total FFO is a non-IFRS measure – see definition in Glossary of Terms beginning on page 54.

Q3 2019 INTERIM REPORT 29


assetmgmt8a12.jpg
AS AT SEP. 30, 2019 AND DEC. 31, 2018
(MILLIONS)
Private Funds

 
Listed 
Partnerships 

 
Public 
Securities 

 
Total 2019

 
Total 2018

Real estate
$
33,928

 
$
24,132

 
$

 
$
58,060

 
$
53,653

Renewable power
12,400

 
19,696

 

 
32,096

 
21,419

Infrastructure
25,092

 
23,246

 

 
48,338

 
33,712

Private equity
13,685

 
4,596

 

 
18,281

 
15,367

Diversified
102,061

 

 
15,257

 
117,318

 
13,377

September 30, 2019
$
187,166

 
$
71,670

 
$
15,257

 
$
274,093

 
n/a

December 31, 2018
$
69,812

 
$
54,339

 
$
13,377

 
n/a

 
$
137,528

Fee bearing capital increased by $110.0 billion during the quarter. The principal changes are set out in the following table:
AS AT AND FOR THE THREE MONTHS ENDED SEP. 30, 2019
(MILLIONS)
Private Funds

 
Listed 
Partnerships 

 
Public 
Securities 

 
Total 

Balance, June 30, 2019
$
83,666

 
$
64,796

 
$
15,593

 
$
164,055

Inflows
1,507

 
1,637

 
908

 
4,052

Outflows

 

 
(1,537
)
 
(1,537
)
Distributions
(106
)
 
(879
)
 

 
(985
)
Market valuation
51

 
7,114

 
293

 
7,458

Other
102,048

 
(998
)
 

 
101,050

Change
103,500

 
6,874

 
(336
)
 
110,038

Balance, September 30, 2019
$
187,166

 
$
71,670

 
$
15,257

 
$
274,093

Private fund capital increased by $103.5 billion, primarily due to:
$102.1 billion relating to the privatization of Oaktree completed on September 30, 2019; and
$1.5 billion of inflows, including $760 million and $120 million of additional commitments to our fourth flagship infrastructure and fifth flagship private equity fund, respectively, as well as additional capital deployed in our long-life funds and co-investments.
Listed partnership capital increased by $6.9 billion, due to:
$7.1 billion increase in the market valuation of our listed partnerships as a result of increased unit prices; and
$1.6 billion of inflows, including $830 million of equity issued by BIP, preferred share issuances by BPY and a green bond issued by BEP; partially offset by
$0.9 billion of distributions, including quarterly distributions paid to unitholders and unit repurchases; and
$1.0 billion of decreased capitalization as a result of changes in net debt of the listed partnerships during the quarter.
Public securities capital decreased by $0.3 billion, due to:
$293 million increase in the net asset value of investments across our mutual funds and separately managed accounts; more than offset by
$629 million of net redemptions, primarily within our real estate public funds.

30 BROOKFIELD ASSET MANAGEMENT


Carry Eligible Capital
Carry eligible capital1 increased $43.3 billion during the quarter to $115.1 billion as at September 30, 2019 (June 30, 2019 – $71.8 billion). This increase is a result of the privatization of Oaktree on September 30, 2019, as well as additional capital raised in our flagship infrastructure and private equity strategies.
As at September 30, 2019, $65.5 billion of carry eligible capital was deployed (June 30, 2019 – $38.0 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 $49.7 billion of uncalled fund commitments that will begin to earn carried interest once the capital is deployed and fund preferred returns are met (June 30, 2019 – $33.8 billion).
Operating Results
Asset management FFO includes fee related earnings and realized carried interest earned by us in respect of capital managed for investors, including the capital invested by us in the listed partnerships. This is representative of how we manage the business and measure 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 and realized carried interest, net, as these are the measures that we use to analyze the performance of the Asset Management segment. We also analyze unrealized carried interest, net1, to provide insight into the value our investments have created in the period.
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.
 
2019

 
2018

 
2019

 
2018

Fee related earnings
i
 
$
468

 
$
463

 
$
306

 
$
320

Realized carried interest
ii
 
59

 

 
39

 

Asset management FFO
 
 
$
527

 
$
463

 
$
345

 
$
320

 
 
 
 
 
 
 
 
 
 
Unrealized carried interest
 
 
 
 
 
 
 
 
 
Generated
 
 
 
 
 
 
$
364

 
$
113

Foreign exchange
 
 
 
 
 
 
(64
)
 
(28
)
 
 
 
 
 
 
 
300

 
85

Less: direct costs
 
 
 
 
 
 
(68
)
 
(25
)
Unrealized carried interest, net
iii
 
 
 
 
 
$
232

 
$
60

i.    Fee Related Earnings
FOR THE THREE MONTHS ENDED SEP. 30
(MILLIONS)
2019

 
2018

Fee revenues
 
 

Base management fees
$
387

 
$
313

Incentive distributions
67

 
52

Performance fees

 
94

Transaction and advisory fees
14

 
4

 
468

 
463

Less: direct costs and other
(162
)
 
(143
)
Fee related earnings
$
306

 
$
320

Fee related earnings decreased by $14 million as a result of the absence of $94 million performance fees earned from BBU in the prior year quarter. Excluding performance fees, fee related earnings increased by $80 million, due to higher base management fees as a result of commitments to new private funds and higher listed partnership market capitalization, as well as higher incentive distributions.
1.
See definition in Glossary of Terms beginning on page 54.

Q3 2019 INTERIM REPORT 31


Base management fees earned from our private funds, listed partnerships and public securities businesses increased by $74 million to $387 million, a 24% increase from 2018. The increase is predominantly due to:
$51 million increase in private fund fees due to private fund capital raised, predominantly in our fourth flagship infrastructure fund and fifth flagship private equity fund; and
$26 million increase in listed partnership fees from higher capitalization across the listed partnerships as a result of unit price appreciation and capital markets activity.
Incentive distributions from BIP, BEP and BPY increased by $15 million to $67 million, a 29% increase from 2018. The growth represents our share as manager of increases in per unit distributions by BIP, BEP and BPY of 7%, 5% and 5%, respectively, as well as the impact of equity issued by BIP.
Performance fees in the prior year quarter were earned from BBU. The BBU fee is equal to 20% of the increase in the quarterly average unit price over the relevant threshold. The threshold is reset each time a fee is paid (e.g. a high water mark). The current threshold is $41.96 (September 30, 2018 – $41.96).
Direct costs and other consist primarily of employee expenses and professional fees, as well as business related technology costs and other shared services. Direct costs increased by $19 million year over year as we continue to build out our organization to support the aforementioned growth in fee bearing capital.
The margin on our fee related earnings was 65% in the current quarter, compared with 61% in the prior year quarter, excluding performance fees.
ii.    Realized Carried Interest
We realize carried interest when a fund’s cumulative returns are in excess of preferred returns and are no longer subject to future investment performance (e.g. subject to “clawback”). During the quarter, we realized $39 million of carried interest, net of direct costs (2018 $nil), primarily from the recapitalization of assets within our first real estate flagship fund.
We provide supplemental information and analysis below on the estimated amount of unrealized carried interest (see section iii) that has accumulated based on fund performance up to the date of the consolidated financial statements.
iii.    Unrealized Carried Interest
The amounts of accumulated unrealized carried interest and associated costs are not included in our Consolidated Balance Sheets or Consolidated Statements of Operations as they are still subject to clawback. These amounts are shown in the following table:
 
2019
 
2018
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
$
2,537

 
$
(765
)
 
$
1,772

 
$
2,527

 
$
(778
)
 
$
1,749

Oaktree acquisition1
1,346

 
(704
)
 
642