EX-1 2 d622667dex1.htm EX-1 EX-1

Exhibit 1

Brookfield

Interim Report Q3 2013

 

     Three Months Ended Sep. 30      Nine Months Ended Sep. 30  
FOR THE PERIOD ENDED (MILLIONS, EXCEPT PER SHARE AMOUNTS)    2013      2012      2013      2012  

Consolidated net income3

   $ 1,495       $ 875       $ 2,994       $ 1,976   

Funds from operations1,2

     1,193         223         2,346         897   

Per Brookfield share

           

Funds from operations1,2

   $ 1.85       $ 0.30       $ 3.56       $ 1.27   

Net income1

     1.23         0.48         2.05         1.25   

 

1.

Excludes amounts attributable to non-controlling interests

2.

See Basis of Presentation on page 19

3.

Consolidated basis – includes amounts attributable to non-controlling interests

 

     As at  
TOTAL (MILLIONS)    Sep. 30, 2013      Dec. 31, 2012  

Total assets under management

   $ 183,954       $ 181,400   

Fee bearing capital

     80,453         60,069   

Diluted number of common shares outstanding

     651         658   

Market trading price per share – NYSE

   $ 37.40       $ 36.65   

 

Q3 2013 INTERIM REPORT  1


  LETTER TO SHAREHOLDERS

 

Dear shareholders,

Overview

Financial results for the third quarter were excellent, with FFO reaching $1.2 billion and consolidated net income $1.5 billion or $1.85 and $1.23 per common share, respectively. Our operations recorded strong results, and a number of one-time realization items closed during this period. In particular, our power results were ahead of target as we integrated newly acquired hydroelectric and wind facilities and our infrastructure operations continue to benefit from investments made over the past few years. Retail sales in the U.S. were strong, and while the macroeconomic picture is unsettled, we have not seen any signs of this affecting our business at the grass-roots level.

During the last few months, we have had a number of realizations which have resulted in ±$1.5 billion of gains. Some of these closed in the third quarter and the balance during the fourth. But while for reporting purposes these are recorded as one-time items, they in fact are far from one-time as the values have been built up over many years and are the result of both the timing of acquisitions and a lot of hard work over the ensuing period. The realization is merely the culmination of these activities and often occurs when capital markets are robust, as we generally only find exits at values acceptable to us during these periods of time.

We closed our latest Infrastructure Fund with $7 billion of capital commitments and a $1 billion Timberland Fund. This brings recent fundraising of private capital to approximately $16 billion, and we continue to raise capital for our investing strategies. Flows of capital into alternatives, but more specifically real estate and infrastructure, are very positive both in our private funds and listed entities. This bodes well for the continued high growth of our fee income.

Global Real Asset Allocations

During the quarter, we held our annual Investor Day. Thank you to all who could attend. For those who could not attend, the webcast and materials are posted on our website for your review.

The theme of our presentation was real assets; the new essential for institutional clients. We believe for many reasons that allocations by institutional clients to real assets will continue to increase. This is borne out by the success we have had of late in marketing our global funds. More importantly, we believe that this shift in allocations is still only in its early stages. Our goal has been to establish one of the global managers with the trust, relationships and scale to invest capital for global institutions into real assets across the world. We continue with this goal.

Furthermore, with instability everywhere in the world (Abenomics impacting the Japanese story; tapering and debt ceilings affecting the U.S.; banking and overall debt levels influencing the Eurozone; growth worries affecting China; and the Syrian situation muddling the Middle East), global institutions are placing greater amounts of capital into real assets as there is nowhere else to hide. Even the gold market has been volatile, and in any event is just too small to be meaningful, given the size of sovereign and institutional fund capital. All of these trends continue to fuel greater allocations to real assets. More importantly, we believe real assets provide a high quality and attractive real return that will continue to be ideal for institutional investors for many years to come.

During our Investor Day, we also provided an update on each of our business groups and our detailed five year growth plans. Business plans are never easy to achieve, but should we be able to accomplish our plans we believe all of our constituents will be pleased.

The Merger of Brookfield Property Partners (BPY) and Brookfield Office Properties (BPO)

During the quarter, we launched a merger of Brookfield Property Partners (BPY) and Brookfield Office Properties (BPO). The proposal is a one-for-one share offer, or cash equivalent, for any or all BPO shares not owned by BPY; with an aggregate value of approximately $5 billion. BPY has made available $1.7 billion of cash and $3.3 billion of shares (valued at announcement date) to provide flexibility to BPO shareholders.

We believe that this merger and a number of other exciting initiatives that we are working on in our property group will position BPY as the leading global real estate business. BPO shareholders were offered a 15% premium to the trading price per share before the transaction and an immediate 18% increase to the tangible IFRS value per share. Post transaction, BPO shareholders receive a 79% increase in the dividend per share, based on BPY’s current payout. BPO institutional shareholders, with 11% of the public float, committed to the transaction prior to announcement, and we have met with many BPO shareholders since launching the deal and received favourable feedback on the merger.

Post transaction, BPY will own one of the premier office and retail businesses in the world; and a growing multifamily and industrial business. In addition, through Brookfield’s institutional client relationships, the combined business will have almost unparalleled access to capital.

We expect to realize significant cost and other synergies which will also make this transaction positive to FFO in the short term.

 

2    BROOKFIELD ASSET MANAGEMENT


We intend to rationalize the BPY portfolio over the next 24 months, and utilize proceeds of asset sales to both pay off debt assumed in this transaction and invest in new assets.

The General Growth Properties (GGP) Consortium Reorganization

Earlier this month, we completed a transaction to provide liquidity to our consortium partners for their interests in GGP. This transaction allowed our institutional clients to realize on the value created in this investment.

We initially invested $2.3 billion and during the last three years, we realized $6.0 billion of value for BPY and our institutional clients. The total gain was just shy of $4 billion, resulting in a gross multiple of capital of 2.6 times, and a gross IRR of 38%. Our own investment in the consortium also compounded at a 38% return, and in addition our carried interest was over $550 million, which we received in the fourth quarter of this year.

The transaction also enabled BPY to invest a further $1.4 billion into GGP, and as a result, it now owns 32% of GGP on a fully diluted basis. Along with select institutional clients who retained their GGP investment with us, we own 40% of this high quality U.S. shopping mall portfolio, which we believe has significant unrealized potential. To finance the investment, we completed a $1.4 billion private placement in BPY, which included $1 billion from Brookfield (BAM) and $435 million from Investment Corporation of Dubai and another one of our sovereign wealth fund clients.

Following the BPO/BPY merger, and this transaction, BAM will own 68% of BPY and other shareholders will own 32% of BPY. The market capitalization of BPY will be ±$15 billion, based on IFRS values, with a ±$5 billion market float.

Our View on Emerging Markets

We invest along specific themes that complement our overall strategy of acquiring high quality assets at attractive valuations. Over the next year or two, we anticipate that one of our major investing themes will be putting capital to work in emerging markets. This is not the popular strategy today as there has been a great deal of negative news from regions such as Brazil, India and China. But this value based approach has served us well in the past, and at this time we thought it would be useful to outline our thoughts on emerging markets. There are three central factors shaping our thinking on this theme.

First, we have found that when capital becomes scarce in a sector or a region, there are opportunities to purchase great assets at prices which would not otherwise be available. This was the backdrop when we invested in U.S. shopping malls and Australian infrastructure during the financial crisis. For the better part of a decade, the BRIC nations were awash in foreign capital. That is no longer the case. In the past year, as economic growth slowed and local currencies dropped against the U.S. dollar and Euro, a number of institutions exited the emerging markets, or announced plans to unwind their portfolios. As these institutions retrench, and seek to dispose of assets or portfolios, we are often able to invest at values not usually available.

Secondly, we are investing in regions and sectors where we have considerable experience. Our roots in South America go back a hundred years, and we have built teams in China, the Middle East and India over the past ten years. We think and behave like locals, and our global outlook means we can be selective and deliberate in how we allocate capital. Furthermore, our local relationships also often translate into opportunities to acquire assets in the U.S. and Europe from large companies based in emerging markets that need access to capital.

Third, we believe in the long-term potential of emerging markets. Our century of exposure to Brazil has shown that countries with resources, improving rule of law and a well-educated and growing middle class can create extraordinary wealth. Economic growth can be uneven, and political shifts are occasionally dramatic. But by acquiring assets at less than their replacement cost, at a time when local currencies are at a discount to their historic averages, we believe we will be able to generate excellent returns on our capital over the longer term.

In Brazil, we have continued to allocate capital to virtually all of our businesses. During the quarter, we acquired a further 20% interest in Arteris, our toll road company which owns over 3,200 kilometres of toll roads and are continuing to build out our real estate, agriculture and power generation businesses organically and through acquisition.

In India, after five years of operating in the market with modest amounts of capital in a number of our service businesses, we are enthused about opportunities given the recent lack of capital. We raised one of the largest rupee denominated real estate funds in India (the equivalent of US$200 million) and intend to use it to provide senior loans on property developments. We also purchased approximately 17% of a UK listed entity which owns a first class group of technology focused office buildings in India that are largely leased to Western clients. Lastly, we believe our lower cost of capital can be of great advantage to some of the local companies as they look to fund growth.

In China, we recently committed to a strategic partnership with Shui On Land with respect to its commercial property business in Shanghai, one of the world’s most dynamic cities. We committed to provide up to $750 million to Shui On’s subsidiary China Xintiandi (CXTD), of which $500 million will be invested upon closing and $250 million at our option over the next three years. In addition, we plan to invest up to $500 million to fund additional future commercial property opportunities with CXTD. This investment will be made through Brookfield Property Partners and with our institutional clients, and the initial investment

 

Q3 2013 INTERIM REPORT  3


represents approximately 22% of CXTD. Upon closing, CXTD will own virtually all of the office and retail assets currently owned by Shui On in Shanghai’s iconic Xintiandi area, and their commercial assets around the new Shanghai inter-city train station in Hongqiao. We were also granted warrants in Shui On for 5% of the company and are very enthused about this new partnership with Shui On and its founder Vincent Lo.

Share Repurchases

During the quarter, we repurchased 2.4 million shares of Brookfield, bringing the number of shares repurchased this year to approximately 9 million. Over the last 15 years we have repurchased over 50 million common shares and only once issued common shares (45 million) for strategic reasons. We intend to continue with this strategy.

During the past three years, as we digested the substantial acquisitions made during the financial crisis to grow our business, we did not repurchase a large number of shares. With values of many assets now increasing and capital more freely available, we have completed a number of realizations. This has resulted in a substantial amount of liquidity at Brookfield and our major subsidiaries.

In addition, since we are close to completing the realignment of our listed flagship entities, and have significantly expanded our private funds, there is less of a burden on our corporate balance sheet to fund investments.

Our annual free cash flows, as well as our capital generated from realizations of investments are therefore increasingly being directed towards share repurchases when values are cheap, and to broadening the base of our asset management business globally. In addition, and once again depending on price, we intend to monetize assets on our balance sheet over time and use portions of this capital to repurchase shares.

Operations

Overall assets under management are approximately $184 billion with fee bearing capital increasing to $80 billion. The distribution is as follows:

 

US$ BILLIONS    Assets Under
Management
                         Managed
Capital
 

Property

   $ 105       $ 31   

Renewable Power

     20         12   

Infrastructure

     26         21   

Private equity and other

     33         16   
  

 

 

    

 

 

 
   $ 184       $ 80   
  

 

 

    

 

 

 

Brookfield Property Group

Results were on track with the highlight that retail FFO increased by over 20%. We continue to see corporations concentrate their operations into urban centres in order to better attract and retain talent, and this trend favours our high-quality office properties. In addition, our shopping centre portfolio continues to benefit from the U.S. economic rebound and growing consumer confidence. We announced the merger of BPY and BPO and increased BPY’s interest in GGP to 32% on a diluted basis, with our overall stake at 40%. GGP sold its interest in Aliansce Retail in Brazil for proceeds of ±$700 million, we purchased a $1 billion portfolio of industrial properties in the U.S., and are selling assets across our opportunity funds as the cash bid for assets is robust.

We also closed the merger of our Los Angeles properties into Maguire Properties and took the company private with institutional clients. We acquired two urban retail properties, an office property in San Francisco, and committed to acquire the 22% stake in China Xintiandi. Brookfield Place New York in lower Manhattan is now reconnected to the city’s public transit system and we are significantly enhancing the retail and dining experience in this landmark property.

Brookfield Renewable Power Group

We expanded our hydroelectric power business in New England and California by acquiring 85 megawatts of generation capacity that complements our existing facilities. We have integrated the Maine and Tennessee acquisitions completed earlier this year, and results on both these portfolios have far exceeded plan to date. Hydrology in North America matched historical averages, which meant results were much better than what we experienced last year. We are working on a number of opportunities to acquire high quality assets at attractive valuations in North and South America and Europe.

We continue to grow our renewable business at a time when the overall outlook for renewable energy is excellent. Globally, renewable generation is expected to increase substantially with $200 billion of annual new construction. This growth reflects both the positive environmental attributes of hydroelectric and wind power, and the increasing cost competiveness of these facilities.

 

4    BROOKFIELD ASSET MANAGEMENT


Brookfield Infrastructure Group

Results in our infrastructure group were approximately 20% higher than last year even though we sold some of the timber operations earlier this year, and have not redeployed the capital. This increase is largely the result of an increase in FFO from our transport and utility businesses, where we completed significant growth initiatives earlier this year.

We invested further capital in two of our operations, closing on a further $650 million purchase of equity in Arteris, our toll road business in Brazil, and acquiring two U.S. district energy systems, one in Houston and one in New Orleans. We were granted exclusivity to acquire a 25% interest in a rail logistics business in Brazil, and our Texas electrical transmission system, which carries power from wind farms to major cities, is expected to be fully commissioned by the end of the year.

Brookfield Private Equity Group

We realized capital invested in housing-related businesses, recycling it through our most recent Fund in attractive opportunities, including businesses focused on natural gas. We closed on the sale of Longview Fibre, which proved to be one of our best investments, sold another $150 million of Western Forest Products shares, and agreed to merge Ainsworth into Louisiana Pacific (LPX) in a 50/50 cash/stock deal. We are enthused to become a 9% shareholder of LPX upon closing, and will also receive $250 million in cash.

We expanded our coal bed methane (CBM) business in Alberta by acquiring assets for $210 million from a global energy company that was exiting the sector. In less than two years, we have built a North American CBM producer that is profitable at current natural gas prices. As prices are near historic lows, the business should generate excellent returns when gas prices increase.

Corporate

We settled a litigation during the quarter with a counterparty that had a long dated interest rate contract with us. We had accrued a liability in the amount of $1.4 billion based on the original terms and settled the contract for $905 million, resulting in a pre-tax gain of $525 million recorded in the third quarter. While we were confident in our case, the outcome of a jury trial is always uncertain, and so we negotiated a reasonable settlement. As a result, future interest costs that were accruing at over $100 million annually have been replaced with carry costs at half the previous rate, enhancing our net income by more than $50 million annually.

Summary

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

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

And, while I personally sign this letter, I respectfully do on behalf of all of the members of the Brookfield team, who collectively generate the results for you. Please do not hesitate to contact any of us, should you have suggestions, questions, comments, or ideas you wish to share with us.

J. Bruce Flatt

Chief Executive Officer

 

LOGO

November 8, 2013

 

Q3 2013 INTERIM REPORT  5


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS

Management’s Discussion and Analysis (“MD&A”) is provided to enable a reader to assess our results of operations and financial condition for the Interim fiscal period ended September 30, 2013. This MD&A should be read in conjunction with our 2012 Annual Report. Unless the context indicates otherwise, references in this Report to the “Corporation” refer to Brookfield Asset Management Inc., and references to “Brookfield,” “us,” “we,” “our” or “the company” refer to the Corporation and its direct and indirect subsidiaries and consolidated entities. All amounts are in U.S. dollars, and are based on financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board unless otherwise noted.

Additional information about the company, including our 2012 Annual Report and Annual Information Form, is available free of charge 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.

Organization of the MD&A

Our Interim MD&A is structured as follows:

 

PART 1 – Overview and Outlook

  

 

Our Business

     7   

 

Economic and Market Review and Outlook

     8   

 

PART 2 – Financial Performance Review

  

 

Selected Financial Information

     10   

 

Financial Profile

     15   

 

Corporate Dividends

     18   

PART 3 – Business Segment Results

  

 

Basis of Presentation

     19   

 

Results by Business Segment

     20   

 

Asset Management and Services

     25   

 

Property

     28   

 

Renewable Power

     32   

 

Infrastructure

     35   

 

Private Equity

     36   

PART 4 – Capitalization and Liquidity

  

 

Capitalization

     39   

 

Liquidity

     42   

 

PART 5 – Additional Information

  

 

Accounting Policies and Internal Controls

     45   

 

Management Representations and Internal Controls

     47   
 

 

We provide additional information on our basis of presentation of financial information contained in the MD&A and key financial measures on pages 19 to 24 of our Annual Report.

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND USE OF NON-IFRS MEASURES

This Report to Shareholders contains forward-looking information within the meaning of Canadian provincial securities laws and applicable regulations and “forward-looking statements” within the meaning of the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995. We may make such statements in the Report, in other filings with Canadian regulators or the U.S. Securities and Exchange Commission or in other communications. See “Cautionary Statement Regarding Forward-Looking Statements” on page 48.

We disclose a number of financial measures in this Report that are calculated and presented using methodologies other than in accordance with IFRS. We utilize these measures in managing the business, including performance measurement, capital allocation and valuation purposes and believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures may differ from the calculations disclosed by other businesses, and as a result, may not be comparable to similar measures presented by others. Reconciliations of these non-IFRS financial measures to this most directly comparable financial measures calculated and presented in accordance with IFRS, where applicable, are included within this MD&A.

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.

 

6    BROOKFIELD ASSET MANAGEMENT


PART 1 – OVERVIEW AND OUTLOOK

OUR BUSINESS

Brookfield is a global alternative asset manager with over $175 billion in assets under management and $80 billion of fee bearing capital. For more than 100 years we have owned and operated assets on behalf of shareholders and clients with a focus on property, renewable power, infrastructure and private equity.

Our business model is simple: utilize our global reach to identify and acquire high-quality real assets at favourable valuations, finance them on a long-term basis, and enhance the cash flows and values of these assets through our operating platforms to earn reliable, attractive long-term total returns for the benefit of our clients and shareholders.

We have a range of public and private investment products and services which allow investees and clients to benefit from our expertise and experience by investing alongside us. These include entities that are listed on major stock exchanges as well as private funds that are available to qualified investors, typically pension funds, endowments and other institutional investors. We also manage public securities through a series of segregated accounts and mutual funds.

Our strategy includes having a flagship listed entity within each of our property, renewable power and infrastructure segments, which serves as the primary vehicles through which we will invest in each respective segment. As well as owning assets directly, these entities serve as the cornerstone investors in our institutional private funds, alongside capital committed by institutional investors. We provide investors access to our real asset platforms through three flagship listed entities Brookfield Property Partners L.P. (“BPY”), Brookfield Infrastructure Partners L.P. (“BIP”) and Brookfield Renewable Energy Partners L.P. (“BREP”) which are intended to deliver income, growth and a portfolio of strongly performing private equity funds.

We are large investors in our own funds, holding substantial interests in each of our flagship listed entities as well as our private equity funds.

This approach enables us to provide a broad range of public and private investment products and the ability to match our various investment strategies with the most appropriate form of capital. It also permits us to invest our own capital primarily in listed entities which increases our flexibility in reallocating capital and provides greater transparency to investors as to the composition of our invested capital.

The following chart illustrates the strategy behind our organization structure:

 

LOGO

 

1.

Privately held

 

Q3 2013 INTERIM REPORT  7


ECONOMIC AND MARKET REVIEW AND OUTLOOK

(As at October 31, 2013)

Overview and Outlook

Although macroeconomic concerns and geopolitical uncertainty remained centre stage during the third quarter of 2013, the global economic recovery continued to advance. Volatility remained elevated, with several large swings in investor sentiment during the quarter, driven largely by the potential for the U.S. Federal Reserve to begin tapering its asset purchase program. However, the central bank’s decision in mid-September to maintain the current level of monetary stimulus led to considerable capital market strength. When combined with improving economic data-points in China and relative calm within European peripheral countries, this enhanced confidence led to renewed demand for risk assets, benefitting emerging market economies and commodity prices.

Within this environment, demand for income-producing assets with upside growth potential resumed its prior momentum. In particular, Real Assets continued to emerge as an attractive investment alternative, offering a unique combination of yield, stability and growth as well as an important hedge against future inflation. Notably, our property, infrastructure and renewable power assets generally experienced improving fundamentals during the quarter, due to their relatively stable cash flow streams and meaningful leverage to an improving economic environment. Ongoing recovery of the global economy should lead to further growth potential, particularly as many of our assets benefit from significant barriers to entry and limited competition from new supply.

United States

Real GDP expanded by approximately 2.0% in the third quarter, with growth expected to accelerate to 2.4% by the end of the year. Industrial production continued to improve, rising 2.1% year-over-year in the third quarter, while recent increases in the ISM Manufacturing index suggest that private investment and industrial production will expand further. Additionally, employment continued to grow during the first two months of the quarter, albeit at a decelerating pace, with the unemployment rate declining slightly to 7.3%. U.S. business and consumer confidence deteriorated slightly in late September and early October, as the federal government shutdown and the acrimonious debt ceiling debate in Washington were a source of concern. However, the shutdown was relatively short-lived and the impact on growth is expected to be limited. Additionally, the impact of the government shutdown has increased the likelihood that monetary policy will remain highly accommodative in the near term, particularly while inflation stands below 2.0% and unemployment persists above 6.5%. Looking ahead, we expect a stronger recovery of the U.S. economy to emerge, as the drag from higher taxes and government spending cuts begins to recede and private consumption and investment continue to accelerate.

Canada

In Canada, momentum is slowing as consumption and housing continue to weaken. The economy grew by 2.0% in the third quarter, with manufacturing sales generating subdued growth of only 0.2% year-over-year. Residential building activity also continued to slow, with average housing starts of 191,400 units in the third quarter representing a 14% drop from the level of starts during the same period in 2012. Growth in the employment market decelerated as well, as approximately 31,700 jobs were created over the quarter compared with 107,100 jobs in the previous quarter. While the unemployment rate declined to 6.9%, this was due largely to a decrease in the labour force. Going forward, we expect the Canadian economy to underperform the U.S. economy. Importantly, inflation continues to track below the Bank of Canada’s inflation target, suggesting that monetary policy will remain accommodative and short-term rates will remain low for the foreseeable future.

UK

Economic growth in the UK continued to accelerate in the third quarter, with real GDP increasing by 0.8%. Retail sales increased 2.2% on a year-over-year basis in September, as consumer confidence strengthened. Additionally, household borrowing has begun to expand and the housing sector appears to be rebounding. Activity in the industrial sector appears poised to accelerate, as the manufacturing PMI is now strongly in expansion territory, with the September reading at 56.7 points. However, these positive signals have yet to translate into stronger growth in industrial production, which declined 1.5% on a year-over-year basis in August. Business investment also continues to be weak, as significant slack remains in the economy. Additionally, while employment rose by 155,000 jobs in the three months to August, the unemployment rate remained elevated at 7.7%, causing the Bank of England to reaffirm their commitment to aggressive monetary stimulus. This continued accommodation should offset the drag from tighter fiscal policy going forward and help to support a fragile economic recovery. The UK economy is currently on track to grow by approximately 1.4% in 2013 and is projected to expand by a further 2.2% in 2014.

Europe

The Eurozone has emerged from recession, as growth in the core economies of Germany and France has turned positive and the pace of contraction in peripheral countries has slowed. In the third quarter, Eurozone real GDP grew by 0.2% over the previous quarter, which follows growth of 0.3% in the second quarter. The September Eurozone PMI continued to point to modest expansion, the third consecutive month of such an indication following nearly two years of contraction. However, the region

 

8    BROOKFIELD ASSET MANAGEMENT


continues to face a number of significant challenges. Unemployment remains very high in many Eurozone countries and GDP growth is uneven across member nations. Large private and public debts remain outstanding and future deleveraging will be a significant drag on domestic demand. Difficult political decisions will be required to ensure that the fragile economic recovery remains on track and that confidence in public finances can be restored.

Brazil

Near-term growth in Brazil continues to moderate as the economy faces a number of headwinds, including rising interest rates and currency volatility. Following a strong reading in the second quarter, Brazil’s real GDP growth slowed to 2.2% in the third quarter. This moderation in growth was due to weaker industrial production and the impact of rising interest rates, as monetary authorities shifted their focus from stimulating growth to fighting inflation. Positively, inflation has come down from a high of 6.7% in June to 5.8% in September, as food inflation eased. The BRL fell substantially during the third quarter, touching as low as 2.45 BRL/USD before recovering to levels near 2.20. Weakness in the currency was partially reversed following indications by the U.S. Federal Reserve that its asset purchase program would continue and actions by the Brazilian Central Bank by way of higher interest rates and market interventions. While near-term challenges persist, unemployment remains very low and retail sales continue to grow by 5% in real terms. Accordingly, we continue to expect that subdued growth in the short term will give way to longer term growth in the range of 3.0 to 4.0%.

China

Official real GDP growth in China rose to 7.8% in the third quarter, representing a modest acceleration from the 7.5% growth generated in the second quarter. Recent economic data points have relieved concerns that China will experience a significant economic slowdown in the near term. Accordingly, the local Chinese financial markets rebounded during the third quarter, with the Shanghai Composite Index rising over 9.0%. Over the period, inflation began to increase once again, as prices rose 3.1% in September. The Chinese central bank remains concerned over the pace of credit growth and is likely to be less accommodative moving forward, especially if economic growth re-accelerates and inflation remains elevated. Looking ahead, structural market reforms are expected to remain a priority, as the central government seeks to transition from an investment-based economy to a consumption-based economy. However, we expect subdued global export demand and lower fiscal stimulus will result in a more patient approach to rebalancing the economy away from hard asset investment.

Australia

The Australian economy has slowed in recent months due to flattening growth in mining investment, the key driver of economic growth over the past two years. While mining investment will continue to subside over the next few years as current projects move closer to operation, mining output will increase and enable Australia to export larger volumes of mineral and energy resources. On a relative basis, the Australian economy continues to produce solid results, with annualized real GDP growth of 2.6% in the second quarter. Growth is expected to remain around a similar level for the next 12 months and then revert to trend-line growth of 3.0% by the end of 2014. While the base interest rate stands at a historical low of 2.50%, the likelihood of further interest rate cuts has fallen, due to stabilized employment, strong house price growth in most capital cities and improving consumer and business confidence following government elections in September. The Australian dollar has rebounded since hitting lows in August, driven by a less dovish RBA, more optimistic sentiment around China and an expectation of continued accommodation in U.S. monetary policy. Moving forward, we believe recent lifts in consumer and business confidence will endure. When combined with low interest rates, this confidence should encourage business activity and provide an offset to slowing mining investment.

 

Q3 2013 INTERIM REPORT  9


PART 2 – FINANCIAL PERFORMANCE REVIEW

SELECTED FINANCIAL INFORMATION

 

     Three Months Ended     Nine Months Ended  
FOR THE PERIOD ENDED SEP. 30
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
   2013     2012     Change     2013     2012     Change  

CONDENSED STATEMENT OF OPERATIONS

            

Total revenues and other gains

   $     5,176      $     4,661      $ 515      $ 15,293      $ 13,125      $     2,168   

Direct costs

     (3,230     (3,420     190        (10,256     (9,568     (688

Other income

     525               525        525               525   

Equity accounted income

     194        254        (60     684        899        (215

Expenses

            

Interest

     (617     (593     (24     (1,940     (1,862     (78

Corporate costs

     (36     (41     5        (116     (118     2   

Valuation items

            

Fair value changes

     104        495        (391     630        738        (108

Depreciation and amortization

     (357     (327     (30     (1,095     (911     (184

Income taxes

     (264     (154     (110     (731     (327     (404
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,495        875        620        2,994        1,976        1,018   

Non-controlling interests

     (682     (541     (141     (1,591     (1,088     (503
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to shareholders

   $ 813      $ 334      $ 479      $ 1,403      $ 888      $ 515   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share

   $ 1.23      $ 0.48      $     0.75      $ 2.05      $ 1.25      $ 0.80   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
AS AT SEP. 30, 2013 AND DEC. 31, 2012
(MILLIONS)
                     2013     2012     Change  

BALANCE SHEET INFORMATION

            
Consolidated assets          $     108,120      $     108,862      $ (742
Borrowings and other long-term financial liabilities            50,220        51,887        (1,667
Equity            45,624        44,338        1,286   
        

 

 

   

 

 

   

 

 

 

Overview

Three Months Ended September 30

The overall increase in consolidated net income ($620 million) and the amount attributable to shareholders ($479 million) primarily reflects two large gains recorded during the quarter, net of associated deferred taxes, partially offset by a decrease in the amount of fair value changes when compared to the amount recognized in prior year. We recorded a $525 million gain on the settlement of a long dated interest rate swap contract and a $664 million gain on the disposition of a private equity investment for net gains of $983 million after taxes, of which $620 million was attributable to shareholders. This variance was partially offset by a $391 million reduction in fair value changes, of which $195 million was attributable to shareholders.

Total revenues and other gains and net income attributable to shareholders also benefitted from increased fee related earnings, from higher amounts of fee bearing capital, a return to long-term average hydrology levels, compared to the extremely dry levels seen in the prior year in our renewable power operations, as well as the contribution from recently acquired and completed expansion initiatives.

Nine Months Ended September 30

The increase in consolidated net income for the nine month period reflects the variances in the third quarter noted above, along with the contribution from acquired and developed assets, increased pricing and volumes on our industrial and residential operations driven by the U.S. housing recovery and increased generation within our renewable power operations. These positive variances were partially offset by increased depreciation on recently acquired and developed assets during the last twelve months and deferred taxes recognized on the formation of Brookfield Property Partners in the second quarter of 2013.

 

10    BROOKFIELD ASSET MANAGEMENT


Foreign Currency Exchange Rates

The relevant exchange rates that impact our business are shown in the following table:

 

      Spot Rate      Average Rate  
      Quarter End      Quarter-to-Date      Year-to-Date  
      2013      2012      Change      2013      2012      Change      2013      2012      Change  

Australian dollar

         0.9317              1.0395         (10.4)%              0.9161              1.0392         (11.8)%              0.9817              1.0348         (5.1)%   

Brazilian real

     2.2198         2.0435               8.6%         2.2852         2.0288             12.6%         2.1124         1.9127             10.4%   

Canadian dollar

     0.9705         1.0079         (3.7)%         0.9628         1.0043         (4.1)%         0.9774         0.9976         (2.0)%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Statement of Operations

The following section describes the key variances in the consolidated statement of operations for the three and nine months ended September 30, 2013 and 2012:

Total Revenues and Other Gains and Direct Costs

The following table presents total revenues and other gains and direct costs disaggregated into our operating segments in order to facilitate a review of year-over-year variances:

 

     Total Revenues and Other Gains      Direct Costs  

FOR THE THREE MONTHS ENDED SEP. 30

(MILLIONS)

   2013       2012       Change       2013       2012       Change   

Asset management and services

   $ 1,080        $ 1,205        $ (125)       $ 945        $ 1,090        $ (145)   

Property

     1,107          1,118          (11)         563          505          58    

Renewable power

     384          222          162          144          120          24    

Infrastructure

     503          509          (6)         227          257          (30)   

Private equity

     1,511          1,661          (150)         1,293          1,408          (115)   

Corporate/unallocated

     20          44          (24)         16          12            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     4,605          4,759          (154)         3,188          3,392          (204)   

Eliminations and adjustments1

     571          (98)         669          42          28          14    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues and other gains

   $     5,176        $     4,661        $ 515        $     3,230        $     3,420        $ (190)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1.

Adjustments to eliminate management fees and interest income earned on/from entities that we consolidate and to reclassify disposition gains recognized within total revenues and other gains on formation of our operating segments. See Note 3 to our Consolidated Financial Statements

 

     Total Revenues and Other Gains      Direct Costs  

FOR THE NINE MONTHS ENDED SEP. 30

(MILLIONS)

   2013       2012       Change       2013       2012       Change   

Asset management and services

   $ 3,236        $ 3,153        $ 83        $ 2,913        $ 2,918        $ (5)   

Property

     3,367          2,911          456          1,722          1,246          476    

Renewable power

     1,243          886          357          413          352          61    

Infrastructure

     1,811          1,521          290          879          798          81    

Private equity

     4,985          4,701          284          4,181          4,133          48    

Corporate/unallocated

     145          156          (11)         46          45            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     14,787          13,328          1,459          10,154          9,492          662    

Eliminations and adjustments1

     506          (203)         709          102          76          26    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues and other gains

   $     15,293        $     13,125        $     2,168        $     10,256        $     9,568        $     688    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1.

Adjustments to eliminate management fees and interest income earned on/from entities that we consolidate and to reclassify disposition gains recognized within total revenues and other gains on formation of our operating segments. See Note 3 to our Consolidated Financial Statements

Total revenues and other gains increased on a three month basis by $515 million (nine month basis – $2,168 million) while direct costs decreased by $190 million (nine month basis – increased by $688 million) over the same period in the prior year, respectively. The increase in total revenues and other gains in the current quarter is the result of the inclusion of a $664 million gain on the sale of a pulp and paper business in our private equity operations. Excluding the aforementioned gain, revenues decreased by $149 million, primarily due to the elimination of revenues associated with sold and deconsolidated assets and a negative impact from currency translation on non-U.S. dollar revenues, partially offset by the contribution from newly acquired and developed assets. The $149 million decrease in revenues was more than offset by the $190 million positive variance in direct costs, as lower margin disposed assets were replaced with higher margin new assets.

 

Q3 2013 INTERIM REPORT  11


Asset management and services: Revenues and direct costs decreased by $125 million and $145 million on a three month basis, respectively. This was due primarily to the sale of a U.S. brokerage business within our property service operations in the fourth quarter of 2012, which resulted in us deconsolidating their operations, and a corresponding reduction of revenues and direct costs. In addition, the continued expansion of our construction operations increased both revenues and direct costs on a constant current basis; however, the depreciation of the Australian dollar relative to the U.S. dollar resulted in lower U.S. dollar amounts being recognized. These negative variances were partially offset by a $68 million increase in asset management revenues reflecting increased levels of base fees earned on higher amounts of fee bearing capital. Revenues increased on a nine month basis primarily from the expansion of our construction operations and increased fee revenues.

Property: Revenues decreased by 1% since last year on a three month basis. Revenues in our office operations decreased from the prior year, as the 2012 results included a $31 million distribution from our investment in Canary Wharf, whereas no distribution was made in current quarter. Furthermore, a 3% increase in same store office rent, on a square foot basis, was offset by decreased occupancy levels and the impact of lower currency exchange rates on our non-U.S. operations. Direct costs increased primarily from the costs associated with newly acquired and developed assets. Multifamily, industrial and other property revenues increased by $44 million to $434 million primarily from revenues derived on the acquisition of a European industrial operation in the second quarter of 2013. Revenues and direct costs on a nine month basis reflect the contribution from a hotel resort which was acquired in April 2012, and therefore is not reflected in the first quarter of 2012.

Renewable power operations: Revenues increased by $162 million to $384 million for the third quarter. The return to long-term average hydrology levels resulted in higher generation from existing facilities and a $120 million increase in revenues. Generation in the 2012 quarter was 32% below long-term average levels. Newly acquired and developed facilities contributed 934 gigawatt hours or $58 million of revenue. In addition, higher merchant pricing resulted in an additional $13 million of revenue when compared to the prior year. These positive operational variances were partially offset by negative foreign currency exchange on non-U.S. operations. Revenues for the first nine months increased for similar reasons. The increase in direct costs in both the third quarter and first nine months reflects costs incurred within facilities acquired since the prior year as operating costs in this business are largely fixed and therefore were not proportionately impacted by the increased volumes.

Infrastructure: Revenues declined slightly compared to the same period in 2012. The sale of our Pacific Northwest timberland operations partway through the quarter reduced revenue by $82 million; however, this was partially offset by increased revenues in our transport and energy operations from recently completed capital expansions. These increases included a $20 million contribution from our Australian rail expansion, as well as contributions from acquisitions within the last twelve months, most notably the recent expansion of our UK regulated distribution business and our South American toll roads. Direct costs decreased $30 million compared to the same period in 2012 primarily due to the sale of our Pacific Northwest timberland operations. On a nine month basis revenues and direct costs increased as a result of acquisitions and capital expansion activities, partially offset by the timber operation sale at the beginning of the third quarter of 2013.

Private equity: We completed the sale of several operations since the 2012 quarter and as a result no longer include the revenues or direct costs from these businesses. This reduced revenue by $270 million in quarter relative to the prior year. This was partially offset by increased volumes and pricing in our operations benefitting from the continued U.S. housing recovery. Revenues and direct costs in our North American residential operations increased by $88 million and $62 million, respectively as we continued to see higher pricing and volumes in the U.S. market.

The contribution in corporate/unallocated decreased in both the three and nine month periods compared to the 2012 balances. The increase in eliminations and adjustments on a consolidated basis is the result of the inclusion of the previously discussed $664 million of revenue related to the sale of a pulp and paper business in our private equity operations that is included in total revenues and other gains but not in segment revenues.

Other Income

Other income includes a $525 million gain on the termination of a long dated interest rate swap contract, which originated in 1990. In August 2013, we paid $905 million to terminate the contract, which had accrued to a total liability of $1,440 million in our consolidated financial statements at the time of settlement. The gain was determined based on the difference between the accrued amount and termination payment, adjusted for associated transaction costs.

 

12    BROOKFIELD ASSET MANAGEMENT


Equity Accounted Income

Equity accounted earnings represent our share of the net income reported by equity accounted investments.

 

     Three Months Ended      Nine Months Ended  

FOR THE PERIOD ENDED SEP. 30

(MILLIONS)

   2013      2012      Change      2013      2012      Change  

General Growth Properties

   $ 92       $ 147       $ (55)       $ 317       $ 675       $ (358)   

Other property operations

     61         56                 268         197         71    

Infrastructure operations

     20         46         (26)         51         12         39    

Other

     21         5         16          48         15         33    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $     194       $     254       $ (60)       $     684       $     899       $ (215)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity accounted income from General Growth Properties Inc. (“GGP”) was lower in the third quarter of 2013 and on a year-to-date basis as the comparative 2012 results included a higher level of property appraisal gains on GGP’s retail properties.

Interest Expense

The following table presents interest expense organized by the balance sheet classification of the associated liability:

 

     Three Months Ended      Nine Months Ended  

FOR THE PERIOD ENDED SEP. 30

(MILLIONS)

   2013      2012      Change      2013      2012      Change  

Corporate borrowings

   $ 48       $ 53       $ (5)       $ 146       $ 158       $ (12)   

Non-recourse borrowings

                 

Property-specific mortgages

     459         419         40          1,414         1,352         62    

Subsidiary borrowings

     99         114         (15)         343         313         30    

Capital securities

     11         17         (6)         37         58         (21)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $     617       $     603       $ 14        $     1,940       $     1,881       $ 59    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The majority of our borrowings are fixed rate long-term financings. Accordingly, changes in interest rates generally have minimal short-term impact on our cash flows.

Interest expense on corporate borrowings decreased on both a three and nine month basis as a result of a lower cost of capital and outstanding borrowings following the refinance of higher coupon debt with a lower interest rate.

Interest expense on property-specific borrowings increased in aggregate as the interest expense on debt assumed on acquired assets was partially offset by the refinancing of existing debt at lower rates and the impact of lower foreign exchange rates on non-U.S. borrowings.

The increase in subsidiary borrowings interest expense on a year-to-date basis primarily reflects a $30 million increase within our property operations from interest incurred on acquisition facilities used to acquire industrial properties. On a three month basis, subsidiary borrowing’s interest expense decreased primarily from a $10 million reduction of interest following the termination of an interest rate swap contract in August of 2013.

We redeemed $350 million of capital securities since year end, eliminating the associated carrying charges.

Fair Value Changes

 

     Three Months Ended      Nine Months Ended  

FOR THE PERIOD ENDED SEP. 30

(MILLIONS)

   2013      2012      Change      2013      2012      Change  

Investment property

   $ 145        $ 492       $ (347)       $ 754        $ 999        $ (245)   

Investment in Canary Wharf

     57          15          42          103          20          83    

Power contracts

                             (69)         (19)         (50)   

Interest rate and inflation contracts

     (4)         (16)         12          (16)         (85)         69    

Private equity

     (37)         (32)         (5)         (131)         (133)           

Sustainable resources

     (1)         34          (35)         17          (36)         53    

Other

     (63)                 (64)         (28)         (8)         (20)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $     104        $ 495        $ (391)       $ 630        $ 738        $ (108)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Q3 2013 INTERIM REPORT  13


We recognized $145 million of fair value gains from investment properties held within our commercial property operations, approximately 55% of which was the result of increased cash flows from positive leasing activities, with the balance from a continued decline in capitalization and discount rates. The value of our investment in Canary Wharf benefitted from lower discount rates, increased rental income and higher appraised values associated with Canary’s expansion initiatives, resulting in a $57 million valuation gain during the current quarter.

Certain of our long-term power sales contracts are accounted for as derivatives with changes in fair value recorded in net income. These contracts generally relate to the future sale of electricity at fixed prices and therefore typically increase in value when prices decline, and vice versa. We recorded a mark-to-market gain of $7 million in the current quarter on these contracts, compared to a $69 million loss year-to-date.

Other fair value changes include a $20 million charge relating to financial contracts within our property operations and $21 million of negative valuation adjustments due to lower values of oil and gas reserves at an energy sector investee company in our private equity operations.

Fair value changes on a nine month basis reflect similar items as the three month variances.

Depreciation and Amortization

Depreciation and amortization is summarized in the following table:

 

     Three Months Ended      Nine Months Ended  

FOR THE PERIOD ENDED SEP. 30

(MILLIONS)

   2013      2012      Change      2013      2012      Change  

Renewable power

   $ 136       $ 119       $ 17        $ 411       $ 371       $ 40    

Infrastructure

     86         60         26          263         172         91    

Private equity

     57         61         (4)         184         191         (7)   

Property

     65         76         (11)         196         147         49    

Asset management and corporate

     13         11                 41         30         11    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $     357       $     327       $ 30        $     1,095       $     911       $ 184    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We record depreciation on property plant and equipment in our renewable power operations, infrastructure operations, industrial businesses held within our private equity operations, and resort properties included in property operations. We do not recognize depreciation or depletion on our commercial office and retail properties, standing timber, or other agricultural assets, as these assets are classified as investment properties or sustainable resources.

The increase in depreciation and amortization within both our infrastructure and renewable power operations on both an in-quarter and year-to-date basis is due to the commencement of depreciation on acquisitions and expansion projects completed within the last twelve months.

We acquired an Australian hotel operation in April 2012 within our property operations, resulting in increased depreciation on hotel and resort assets held on a year-to-date basis.

Income Taxes

The provision for income taxes in the statement of operations was $264 million, compared to $154 million in 2012. We recorded $134 million of deferred income tax expense associated with the $525 million gain recorded in other income on settlement of an interest rate swap contract and also recorded smaller provisions the sale of various private equity investments. In addition, in the current quarter we recorded a non-reoccurring tax recovery of $43 million related to the decrease in UK tax rates.

Non-Controlling Interests

Net income attributable to non-controlling interests increased by $141 million, which primarily reflects the gain on sale of a pulp and paper business within our private equity operations. This business was held in an institutional fund, of which we were a minority investor and accordingly, a large percentage of the gain is attributable to our investing partners. Additionally, we recognized a decreased amount of fair value changes recognized in the current period, relative to the prior year, in assets partially owned by non-controlling interests. This decrease was offset by the share of total revenues and other gains, net of direct costs and interest expenses of newly acquired assets, which also are partially owned by non-controlling interests.

 

14    BROOKFIELD ASSET MANAGEMENT


FINANCIAL PROFILE

Consolidated Assets

The following table disaggregates our consolidated balance sheet as at September 30, 2013 and December 31, 2012 into assets that are carried at fair value and those that are carried on another basis such as historical cost:

 

     Carried on
Fair Value Basis
     Carried on
Other Basis
     Total
Consolidated Assets
 

AS AT SEP. 30, 2013 AND DEC. 31, 2012

(MILLIONS)

   2013      2012      2013      2012      2013      2012  

Investment properties

   $ 33,858       $ 33,161       $       $       $ 33,858       $ 33,161   

Property, plant and equipment1

     28,186         28,202         2,751         2,946         30,937         31,148   

Sustainable resources

     502         3,516                         502         3,516   

Investments

     9,980         8,487         2,888         3,131         12,868         11,618   

Cash and cash equivalents

                     3,799         2,850         3,799         2,850   

Financial assets

     3,351         2,630         701         481         4,052         3,111   

Accounts receivable and other

     2,029         1,614         5,228         5,338         7,257         6,952   

Inventory

                     6,478         6,581         6,478         6,581   

Intangible assets

                     5,256         5,770         5,256         5,770   

Goodwill

                     1,688         2,490         1,688         2,490   

Deferred income tax assets

                     1,425         1,665         1,425         1,665   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $     77,906       $     77,610       $     30,214       $     31,252       $     108,120       $     108,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1.

Revalued on an annual basis following the revaluation method

Consolidated balance sheet assets totalled $108.1 billion at the end of the third quarter of 2013, which is largely unchanged since year end. We sold a number of assets, including the Pacific Northwest timberlands within our sustainable resources operations, a pulp and paper company within our private equity operations and numerous non-core investment properties within our property operations, which in aggregate, decreased consolidated assets by over $5.6 billion. In addition, negative foreign currency revaluation from a weighted average decrease in non-U.S. currencies relative to the U.S. dollar reduced the translated value of our non-U.S. assets. These amounts were largely offset by the addition and acquisition of $4.2 billion of investment properties and property, plant and equipment, primarily within our renewable power operations, and the acquisition of an additional $650 million interest in our South American toll roads within our infrastructure operations.

Investment Properties and Property, Plant and Equipment

The following table presents the major components of changes in the carrying values of our investment properties and property, plant and equipment balances since year end.

 

           Property, Plant and Equipment (“PP&E”)  

AS AT AND FOR THE NINE

MONTHS ENDED SEP. 30, 2013

(MILLIONS)

   Investment
Properties
    Renewable
Power
    Infrastructure     Property     Private Equity     Total
PP&E
 

Balance, beginning of year

   $ 33,161      $ 16,532      $ 8,736      $ 2,968      $ 2,912      $ 31,148   

Fair value changes

     754                             24        24   

Depreciation

            (411     (263     (196     (225     (1,095

Acquisitions and additions

     1,619        1,551        370        130        517        2,568   

Dispositions

     (978     (12     (647     (4     (270     (933

Foreign currency translation

     (698     (475     (407     33        74        (775
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease)

     697        653        (947     (37     120        (211
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 33,858      $ 17,185      $ 7,789      $ 2,931      $ 3,032      $     30,937   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our IFRS accounting policy is to fair value property, plant and equipment that is accounted for using the revaluation model on an annual basis; however, these assets are depreciated quarterly. This results in the year carrying values of these assets being reduced by the amount of depreciation we record.

We acquired 26 investment properties during the first nine months of 2013 for $1.5 billion and invested $0.1 billion in development opportunities. We also sold 16 investment properties with a gross asset value of $1.0 billion. Within our renewable power operations we acquired three assets, including the other half of a venture that we did not own and commenced consolidation of the underlying asset. This added $1.6 billion of assets to our consolidated balance sheet, and reduced investments.

 

Q3 2013 INTERIM REPORT  15


Sustainable Resources

We disposed of our Pacific Northwest timber operations during the year, resulting in a $3.0 billion decrease in sustainable resource assets since year end.

Investments

We record the results of our equity accounted investments based on our IFRS accounting policies and accordingly, certain of our investments include assets that are recorded at fair value. This includes, for example, our investment in General Growth Properties, in which we record GGP’s investment properties at fair value on a quarterly basis. We have separated investments into those in which the underlying assets are recorded at fair value or amortized cost in the table on the preceding page to assist users. Consolidated investments increased by $1,250 million year-to-date primarily from $746 million of comprehensive income derived from equity accounted investments and $650 million of capital invested, in our South American toll roads, which are equity accounted for.

Goodwill

Goodwill decreased by $802 million from December 31, 2012 to $1,688 million, primarily due to the elimination of $591 million of goodwill within our Pacific Northwest timberlands, which were sold during the quarter and a reduction in non-U.S. dollar balances from negative currency revaluation.

Borrowings and Other Long-term Financial Liabilities

We present our consolidated balance sheets on a non-classified basis, meaning that we do not separate balances between current and long-term assets or liabilities. We believe this classification is appropriate given the nature of our business strategy. We present the disaggregation of liabilities into current and long-term components in the notes to our consolidated financial statements.

 

AS AT SEP. 30, 2013 AND DEC. 31, 2012

(MILLIONS)

   2013      2012      Change  

Corporate borrowings

   $ 3,848       $ 3,526       $ 322   

Non-recourse borrowings

        

Property-specific mortgages

     33,329         33,720         (391

Subsidiary borrowings

     7,233         7,585         (352

Long-term accounts payable and other liabilities1

     4,515         5,440         (925

Capital securities

     812         1,191         (379

Other long-term financial liabilities

     483         425         58   
  

 

 

    

 

 

    

 

 

 
   $ 50,220       $ 51,887       $   (1,667
  

 

 

    

 

 

    

 

 

 

 

1.

Excludes accounts payable and other liabilities that are due within one year. See Note 6(d) to our Interim Consolidated Financial Statements

Corporate borrowing increased by $322 million in part from the payment of $905 million to terminate a long dated interest rate contract on favourable items, offset by proceeds received on asset sales.

Property-specific borrowings decreased by $0.4 billion during 2013. This reflects the sale and resultant deconsolidation of operations, including the associated borrowings, and the depreciation against the U.S. dollar of the foreign currencies in which many of these borrowings are denominated. This was partially offset by additional borrowings assumed on acquired assets or acquisition financings.

Subsidiary borrowings decreased from the removal of our $1.2 billion interest rate swap contract accrual, upon settlement of the arrangement, offset by an increased level of term debt issuances in our managed listed issuers and draws on their corporate facilities to fund expansion initiatives.

Accounts payable and other liabilities with a maturity greater than one year decreased from year end, primarily a result of the timing of payments and the completion of construction in our Brazilian residential operations, partially offset by foreign currency translation. We also eliminated a $213 million mark-to-market liability recorded in respect of the interest rate swap contract accrual upon settlement of the arrangement.

We redeemed C$350 million of capital securities since year end. Other long-term liabilities represent interests of others in consolidated funds that are classified as liabilities because they contain terms such as redemption features.

Equity

Consolidated equity increased by $1.3 billion since year end. This primarily reflects $3.0 billion of net income earned during the first nine months and $0.6 billion of net equity issuances offset by $1.0 billion of shareholder distributions and a $1.7 billion negative revaluation from foreign currency translation.

We paid a $906 million special dividend of a 7.6% interest in BPY resulting in a reduction in common equity and a corresponding increase in non-controlling interests. Non-controlling interests increased overall by $1.9 billion due to the BPY special dividend, the sale of units of Brookfield Renewable by us during the first quarter of 2013, offset by a $0.1 billion positive foreign currency translation revaluation.

 

16    BROOKFIELD ASSET MANAGEMENT


We record the impact of changes in foreign currencies on the carrying value of our net investment in non-U.S. operations in other comprehensive income. As at September 30, 2013, our IFRS common equity of $17.4 billion was invested in the following currencies, principally in the form of net investments which are revalued through other comprehensive income: United States – 46%; Australia – 15%; Brazil – 16%; Great Britain – 10%; Canada – 6%; and other – 7%. From time to time, we utilize financial contracts to adjust these exposures, which will typically reduce the impact of currency revaluations corporate borrowings increased with payment of $905 million to terminate interest rate swap contract offset by proceeds from asset sales included in subsidiary borrowings and other liabilities.

We provide a more detailed discussion of our capitalization in Part 4 of the MD&A.

Quarterly Results

 

     2013      2012      2011  

FOR THE THREE MONTHS ENDED

(MILLIONS EXCEPT PER SHARE AMOUNTS)

   Q3      Q2      Q1      Q4      Q3      Q2      Q1      Q4  

Total revenues and other gains

   $ 5,176        $ 5,166        $ 4,951        $ 5,641        $ 4,661        $ 4,425        $ 4,039        $ 4,122    

Direct costs

     (3,230)         (3,606)         (3,420)         (4,393)         (3,420)         (3,284)         (2,864)         (3,035)   

Other income

     525          –          –          –          –          –          –          –    

Equity accounted income

     194          224          266          338          254          257          388          584    

Expenses

                       

Interest

     (617)         (668)         (655)         (638)         (593)         (614)         (655)         (620)   

Corporate costs

     (36)         (36)         (44)         (40)         (41)         (35)         (42)         (40)   

Valuation items

                       

Fair value changes

     104          465          61          415          495          (100)         343          434    

Depreciation and amortization

     (357)         (373)         (365)         (352)         (327)         (287)         (297)         (228)   

Income taxes

     (264)         (370)         (97)         (192)         (154)         17          (190)         (257)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,495        $ 802        $ 697        $ 779        $ 875        $ 379        $ 722        $ 960    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income for shareholders

   $ 813        $ 230        $ 360        $ 492        $ 334        $ 138        $ 416        $ 588    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Per share

                       

– diluted

   $ 1.23        $ 0.31        $ 0.51        $ 0.72        $ 0.48        $ 0.17        $ 0.60        $ 0.86    

– basic

   $ 1.26        $ 0.31        $ 0.52        $ 0.74        $ 0.49        $ 0.17        $ 0.63        $ 0.90    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Summary of Quarterly Results

The company’s quarterly results vary primarily due to the impact of seasonality on our operations, fair value changes recognized on our consolidated assets as well as fair value changes recorded within equity accounted income, the impact of acquisitions or dispositions of assets or businesses, and fluctuations in foreign currency exchange rates on non-U.S. operations. The timing and amount of disposition gains and losses also impacts our consolidated results.

Fee revenues generated within our asset management operations are contractual in nature and have increased over the past eight quarters due to higher amounts of fee bearing capital. Our construction business line is seasonal in nature and revenues are typically higher in the third and fourth quarters compared to the first half of the year, as weather conditions are more favourable in the latter half of the year.

Our property operations 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.

Water flows and pricing within our renewable power operations are seasonal in nature. During the fall rainy season and spring thaw, water inflows tend to be the highest leading to higher generation; however prices tend not to be as strong as they are in the summer and winter seasons due to the more moderate weather conditions during the fall and spring and associated reductions in demand for electricity.

Our infrastructure operations are generally stable in nature, as a result of the long-term sales and volumes contracts which with our clients.

Our private equity operations include our North American and Brazilian residential developers, which tend to be seasonal in nature, with the fourth quarter typically the strongest as most of the construction is completed and homes are delivered. Our other private equity operations tend to fluctuate on a quarterly basis as a result of certain of the underlying investments having seasonal operations as well as the timing of acquisitions and dispositions of operations. We disposed of a pulp and paper business within our private equity operations during the third quarter of 2013 and recognized $664 million of revenue on disposition.

The third quarter of 2013 includes other income of $525 million on the settlement of a swap agreement.

 

Q3 2013 INTERIM REPORT  17


We generally finance our operations with long dated fixed rate borrowings which results in interest expense being relatively consistent on a quarterly basis.

The amount and timing of fair value changes vary on a quarterly basis depending on changes in the fair value of our assets which are recorded at fair value in net income. In the second quarter of 2013 we recorded $333 million of fair value changes in our office properties operations, and $87 million of mark-to-market gains on currency, interest rate and inflation hedges in our infrastructure operations. In the second quarter of 2012 we recorded $76 million of mark-to-market losses on power sales contracts. Equity accounted income also includes fair value changes, which in the fourth quarter of 2011, included $357 million of fair value changes on our equity accounted investment in General Growth Properties’ investment properties.

Depreciation and amortization increased in 2013 as a result of completion of capital expansion projects and new acquisitions in our renewable energy and infrastructure operations, and increased in 2012 as a result of a higher valuation on our renewable power assets and acquisitions in that year.

In the fourth quarter of 2012 we acquired and commenced consolidating a number of businesses within our property and infrastructure businesses resulting in increased revenues, direct costs and interest expense.

CORPORATE DIVIDENDS

The dividends paid by Brookfield on outstanding securities during the first nine months of 2013 and the same period in 2012 and 2011 are as follows:

 

     Distribution per Security  
     2013       2012       2011   

Class A and B Limited Voting Shares

   $ 0.44        $ 0.41        $ 0.39    

Special distribution to Class A and B Limited Voting Shares1

     1.47          –          –    

Class A Preferred Shares

        

Series 2

     0.38          0.39          0.40    

Series 4 + Series 7

     0.38          0.39          0.40    

Series 8

     0.55          0.56          0.57    

Series 9

     0.70          0.71          0.84    

Series 102

     –          0.37          1.10    

Series 113

     –          1.02          1.06    

Series 12

     0.99          1.01          1.03    

Series 13

     0.38          0.39          0.40    

Series 14

     1.39          1.41          1.45    

Series 15

     0.31          0.31          0.33    

Series 17

     0.87          0.89          0.91    

Series 18

     0.87          0.89          0.91    

Series 214

     0.62          0.93          0.96    

Series 22

     1.28          1.31          1.34    

Series 24

     0.99          1.01          1.03    

Series 26

     0.82          0.84          0.87    

Series 285

     0.84          0.86          0.75    

Series 306

     0.88          0.89          –    

Series 327

     0.82          0.61          –    

Series 348

     0.77          –          –    

Series 369

     1.00          –          –    

Series 3710

     0.35          –          –    

 

1.

Distribution of a 7.6% interest in Brookfield Property Partners based in IFRS values, paid April 15, 2013

2.

Redeemed April 5, 2012

3.

Redeemed October 1, 2012

4.

Redeemed July 2, 2013

5.

Issued February 8, 2011

6.

Issued November 2, 2011

7.

Issued March 13, 2012

8.

Issued September 12, 2012

9.

Initial distribution includes $0.11 for the period from November 27, 2012 to December 31, 2012

10.

Initial distribution includes $0.06 for the period from June 13, 2013 to June 30, 2013

Dividends on the Class A and B Limited Voting Shares are declared in U.S. dollars whereas Class A Preferred Share dividends are declared in Canadian dollars.

 

18    BROOKFIELD ASSET MANAGEMENT


PART 3 – BUSINESS SEGMENT RESULTS

BASIS OF PRESENTATION

How We Measure and Report Our Business Segments

For management purposes, we have organized our business into five segments in which we make operating and capital allocation decisions and assess performance.

 

i.

Asset Management and Services comprises our asset management, construction and property services businesses. These operations generate contractual service fees earned from consolidated entities included in our other segments and third parties for performing management services, including management of our institutional private funds and listed entities, public securities, management of construction projects and residential relocation, franchise and brokerage operations. These operations are also characterized by utilizing relatively low levels of tangible assets relative to our other business segments.

 

ii.

Property operations are predominantly office properties, retail properties, and multifamily, industrial & other properties located primarily in major North American, Australian, Brazilian and European cities. Income from property operations is primarily comprised of property rental income and, to a lesser degree, interest and dividend income. Virtually all of these operations are held through Brookfield Property Partners L.P., (“BPY”) in which we own a 93% interest.

 

iii.

Renewable Power operations consist primarily of hydroelectric power generating facilities on river systems in North America and Brazil and wind power generating facilities in North America. The company’s power operations are owned and operated through our 65% interest in Brookfield Renewable Energy Partners L.P. (“BREP”) and a wholly owned subsidiary of the company which engages in the purchase and sale of energy, primarily on behalf of BREP.

 

iv.

Infrastructure operations are predominantly utilities, transport and energy, timberland and agricultural development operations located in Australia, North America, Europe and South America, and are primarily owned and operated through a 28% interest in Brookfield Infrastructure Partners L.P. (“BIP”) and direct investments in certain of the company’s sustainable resources operations.

 

v.

Private Equity operations include the investments and activities overseen by our private equity group. These include direct investments as well as investments in our private equity funds. Our private equity funds have a mandate to invest in a broad range of industries, although currently the portfolios contain a number of investments whose performance is significantly impacted by the North American homebuilding industry. Direct investments include interests in Norbord Inc., a panel board manufacturer, and two publicly listed residential businesses, which are predominantly a North American homebuilder and land developer, Brookfield Residential Properties Inc., and a Brazilian condominium developer, Brookfield Incorporações S.A. The operations in this segment are generally characterized by an investment approach that is more opportunistic in nature. Furthermore, these businesses are not integrated into core operating platforms, unlike the assets within our property, renewable power or infrastructure operations.

All other company level activities that are not allocated to these five business segments are included within corporate operations, such as the company’s cash and financial assets, corporate borrowings, capital securities and preferred equity and net working capital.

We have presented the costs associated with conducting asset management activities in the asset management segment. These include an allocation of the costs of centralized activities as well as costs of asset management activities performed within other segments.

Certain corporate costs such as technology and operations are on behalf of the business segment and accordingly allocated to each business segment based on an internal pricing framework.

Segment Operating and Performance Measures

Funds from operations (“FFO”) is our key measure of our financial performance. We define FFO as net income attributable to shareholders prior to fair value changes, depreciation and amortization, and future income taxes, and including certain disposition gains that are not otherwise included in net income as determined under IFRS. When determining funds from operations, we include our proportionate share of the FFO of equity accounted investments and exclude transaction costs incurred on business combinations, which are required to be expensed as incurred under IFRS. We include disposition gains in FFO because we consider the purchase and sale of assets to be a normal part of the company’s business. We use FFO to assess operating results and our business. We do not use FFO as a measure of cash generated from our operations. We derive funds from operations for each segment and reconcile total FFO to net income in Note 3 of the consolidated financial statements.

Our definition of funds from operations may differ from the definition used by other organizations, as well as the definition of funds from operations used by the Real Property Association of Canada (“REALPAC”) and the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), in part because the NAREIT definition is based on U.S. GAAP, as opposed to IFRS. When reconciling our definition of funds from operations to the determination of funds from operations by REALPAC and/or

 

Q3 2013 INTERIM REPORT  19


NAREIT, key differences consist of the following inclusions in FFO: disposition gains or losses that occur as normal part of our business and cash taxes payable on those gains, if any; foreign exchange gains or losses on monetary items not forming part of our net investment in foreign operations; and gains or losses on the sale of an investment in a foreign operation.

The non-IFRS measures are reconciled to the most comparable financial statement component on pages 23 and 24.

SUMMARY OF RESULTS BY BUSINESS SEGMENT

Summary of Financial Results by Business Segment

The following table presents segment FFO on a year-over-year basis for comparison purposes:

 

     Funds from
Operations
 
     Three Months Ended      Nine Months Ended  

FOR THE PERIOD ENDED SEP. 30

(MILLIONS)

   2013       2012       Change       2013       2012       Change   

Operating segments

                 

Asset management and services

   $ 145        $ 115        $ 30        $ 344        $ 239        $ 105    

Property

     102          124          (22)         401          373          28    

Renewable power

     61          (6)         67          388          286          102    

Infrastructure

     216          44          172          384          150          234    

Private equity

     323          69          254          591          135          456    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating segments

     847          346          501          2,108          1,183          925    

Corporate/unallocated

     346          (123)         469          238          (286)         524    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $             1,193        $             223        $             970        $             2,346        $             897        $             1,449    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Asset management and services FFO increased by $30 million to $145 million, driven by a $47 million increase in fee related earnings from significantly higher levels of fee bearing capital. We also generated $49 million of performance fees (2012 – $97 million), of which $47 million is subject to clawback and accordingly only $2 million was included in FFO and the balance was deferred (2012 – $96 million deferred). Our construction and property services FFO decreased by $17 million to $49 million as a result of the partial sale of our U.S. brokerage business in 2012 and increased tender costs in our Australian construction operations during the current quarter.

Our property operations are primarily held through our 93% interest in BPY and contributed $102 million of FFO, a decrease of $22 million from the prior year. We paid a special dividend to our shareholders, distributing a 7.6% interest in BPY in April 2013, which resulted in a reduced ownership of BPY’s underlying businesses, decreasing the current quarters FFO by $14 million on a comparative basis along with an additional $12 million of expenses related to fees and costs paid by BPY. FFO in the prior year also included a $31 million dividend from BPY’s investment in Canary Wharf, whereas Canary did not pay a dividend this quarter. These negative variances were offset by a $42 million improvement in the impact of dispositions during the quarter, as we sold 17 properties and realized a loss of $19 million in the quarter, compared to $61 million of losses in 2012.

FFO from our renewable power operations increased by $67 million to $61 million for the quarter. Generation on a same store basis increased to 4,220 GWh, representing a 54% increase over the prior period and contributed $56 million of additional FFO. FFO in the current quarter also benefitted by $13 million from higher merchant pricing, as well as a $9 million contribution from newly acquired and commissioned assets. These increases were partially offset by higher levels of borrowings to fund expansion initiatives increasing interest paid and a reduction in our ownership interest in BREP, following our secondary offering in the first quarter of 2013.

Infrastructure FFO excluding gains was $53 million for the quarter, a 30% increase over the 2012 quarter. The increase over the prior year was primarily driven by an additional $4 million contribution from the expansion of our UK regulated distribution operations, $6 million from the completion of our rail expansion program, and the contribution from our recently acquired toll roads, both of which were not fully contributing to FFO in the prior period, added $6 million of FFO relative to the prior year. We completed the sale of our Pacific Northwest timberland operations in July, giving rise to a $163 million disposition gain.

FFO from our private equity operations increased by $8 million prior to $245 million of disposition gains, as overall increases in revenues from strong volumes in a number of our investee companies offset an $11 million reduction in FFO on a comparative basis from asset sales and reduced ownership levels. Disposition gains in the quarter include a $200 million gain on the monetization of a pulp and paper operation in our private equity fund and a $45 million gain on the partial disposition of our investment in Western Forest Products.

Corporate/unallocated FFO includes a $525 million gain on the settlement of a long dated interest rate contract and we benefitted from a reduced level of borrowings following the settlement, decreasing our unallocated costs. This was offset by a $72 million loss on interest rate and currency positions closed during the period FFO in the current quarter.

 

20    BROOKFIELD ASSET MANAGEMENT


Three Months Ended September 30

Total FFO for the third quarter of 2013 was $1,193 million, a $970 million increase over the $223 million recognized in the 2012 quarter. Excluding disposition gains, FFO was $342 million, 14% higher than the $300 million recorded on a comparable basis in the 2012 quarter.

Nine Months Ended September 30

FFO for the last nine months increased by $1,449 million to $2,346 million primarily driven by a larger amount of disposition gains ($1,106 million), higher fees on increased amounts of fee bearing capital, the impact of the U.S. housing recovery on our North American residential operations and industrial operations increasing the contribution from our private equity operations, and a return to long-term average hydrology levels within our renewable power business.

Summary of Financial Position by Business Segment

The following table presents segment equity on a comparative basis:

 

     Common Equity
by Segment
 

AS AT SEP. 30, 2013 AND DEC. 31, 2012

(MILLIONS)

   2013       2012       Change   

Operating segments

        

Asset management and services

   $ 1,530        $ 1,570        $ (40)   

Property

     12,374          12,958          (584)   

Renewable power

     4,575          4,976          (401)   

Infrastructure

     2,001          2,571          (570)   

Private equity

     2,665          2,574                    91    
  

 

 

    

 

 

    

 

 

 

Total operating segments

     23,145          24,649          (1,504)   

Corporate/unallocated

     (5,772)         (6,499)         727    
  

 

 

    

 

 

    

 

 

 

Common equity

   $     17,373        $     18,150        $ (777)   
  

 

 

    

 

 

    

 

 

 

Property segment common equity declined as a result of the spin-off of a 7.6% interest in BPY ($906 million) within our property operations. Our renewable power operations decreased by $401 million, which included a $233 million sale of 8.1 million units of BREP in the first quarter of 2013. The sale of our Pacific Northwest timberland operations in the third quarter of 2013 decreased our infrastructure common equity by segment by $600 million.

Our corporate/unallocated common equity increased by $727 million as we settled a long dated interest rate contract, decreasing our corporate capitalization by $525 million. We also repaid corporate borrowings with the proceeds generated from asset dispositions.

Overall, common equity decreased by $777 million since year end, primarily driven by $1,403 million of net income attributable to shareholders, the aforementioned $906 million special dividend of a 7.6% interest in BPY, the impact of foreign currency revaluation of non-U.S. dollar investments ($857 million) and the repurchase of 8.6 million shares for $310 million, 4.2 million of which were acquired in respect of long-term compensation plans and the remaining 4.4 million shares were cancelled, decreasing our shares outstanding.

Valuation Items

The following table presents segment valuation items on a year-over-year basis for comparison purposes. These include items recorded in both net income and other comprehensive income, and are presented net of non-controlling interests:

 

     Valuation Items1  
     Three Months Ended      Nine Months Ended  

FOR THE PERIOD ENDED SEP. 30

(MILLIONS)

   2013       2012       Change       2013       2012       Change   

Operating segments

                 

Asset management and services

   $ (10)       $ (8)       $ (2)       $ (11)       $ (36)       $ 25    

Property

     108          263          (155)         598          833          (235)   

Renewable power

     (88)         (127)         39          (295)         (263)         (32)   

Infrastructure

     (28)         (23)         (5)         (97)         (89)         (8)   

Private equity

     (62)         (46)         (16)         (139)         (150)         11    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating segments

     (80)         59          (139)         56          295         (239)   

Corporate/unallocated

     –          (9)                 82          (36)         118    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $             (80)       $             50        $             (130)       $             138        $             259        $             (121)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1.

Net of non-controlling interests

 

Q3 2013 INTERIM REPORT  21


Three Months Ended September 30

We recorded $80 million of valuation losses during the third quarter, compared to $50 million of valuation gains in the prior year. The decrease is primarily the result of the recognition of a lower amount of appraisal gains within our property operations compared to the 2012 quarter, compared to the current period, and increased depreciation in the current quarter from depreciation incurred on recently acquired and commissioned assets.

Our property operations contributed $108 million of valuation gains in the current quarter, $142 million less than the prior year, and included $143 million of appraisal gains, offset primarily by $19 million of deprecation. Office appraisal gains decreased from $286 million to $194 million, of which $83 million is attributable to Brookfield shareholders. The current quarter’s gains included a $53 million gain on our investment in Canary Wharf shares, which increased in value to £4.46 per share (2012 – $15 million gain) based on increased rental income and an increased value attributable to Canary Wharf’s expansion initiatives.

Renewable power and infrastructure valuation items were losses of $88 million and $28 million, compared to losses of $127 million and $23 million in the prior year, respectively. The majority of these losses relate to depreciation on our assets, $81 million (2012 – $75 million) within our renewable power operations and $26 million (2012 – $22 million) in our infrastructure business in the current quarter. Renewable power valuation items in the prior year included $49 million of valuation items as a result of mark-to-market losses on long-term power sales agreements.

We recorded $62 million of valuation losses in our private equity operations, a decrease of $16 million for 2012, the majority of which consists of depreciation. We also recognized $10 million net valuation charges on reserve levels held by oil and gas investee companies in the current quarter.

Nine Months Ended September 30

Valuation gains on a nine month basis were $138 million, $121 million lower than the $259 million recorded in the prior year, as we recognized increased levels of appraisal gains within our property operations in the prior year. Depreciation increased to $491 million, up from $421 million in the prior year, as a result of additional depreciation incurred on a larger asset base following acquisitions and valuation appraisal increases. We also recognized gains on interest rate swap contracts that lock-in the risk free rate of future debt refinancings, which represented an increase of $138 million within our corporate/unallocated operations.

Segmented Presentation

The information presented in the table below has been extracted from Note 3 to our interim consolidated financial statements and is reconciled to the most closely related financial statement line item on the following pages.

 

     Operating Segments                       
AS AT SEP. 30, 2013 AND DEC. 31,
2012 AND FOR THE THREE
MONTHS ENDED SEP. 30
(MILLIONS)
   Asset 
Management 
and 
Services 
     Property       Renewable 
Power 
     Infrastructure       Private 
Equity 
     Corporate/ 
Unallocated 
     Total 
2013 
     Total 
2012 
 

Financial results

                       

Revenues

   $ 1,080        $ 1,107        $ 384        $ 503        $ 1,511        $ 20        $ 4,605        $ 4,759    

Segment operating income

     145          734          253          625          774          467          2,998          1,442    

Funds from operations

     145          102          61          216          323          346          1,193          223    

Valuation items

     (10)         108          (88)         (28)         (62)         –          (80)         50    

Financial position

                       

Segment assets

   $ 1,674        $ 39,506        $ 14,981        $ 11,309        $ 9,555        $ 1,436        $ 78,461        $ 79,167    

Investments

     178          8,666          314          3,263          288          159          12,868          11,618    

Common equity by segment

     1,530          12,374          4,575          2,001          2,665          (5,772)         17,373          18,150    

 

22    BROOKFIELD ASSET MANAGEMENT


Reconciliation of Non-IFRS Measures

The following table reconciles funds from operations to consolidated net income:

 

     Three Months Ended      Nine Months Ended  
FOR THE PERIOD ENDED SEP. 30
(MILLIONS)
   2013       2012       2013       2012   

Funds from operations

           

Asset management and services

   $ 145        $ 115        $ 344        $ 239    

Property

     102          124          401          373    

Renewable power

     61          (6)         388          286    

Infrastructure

     216          44          384          150    

Private equity

     323          69          591          135    

Corporate/unallocated

     346          (123)         238          (286)   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,193          223          2,346          897    
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjustments

           

Less: FFO measures

           

Gains not recorded in net income

     (176)         62          (612)         (161)   

Equity accounted gains and other

     36          –          50          –    

Equity accounted FFO

     (222)         (152)         (626)         (435)   

Current income taxes

     35          31          107          100    

Non-controlling interests in FFO

     952          443          2,241          1,176    

Add: financial statement components not included in FFO

           

Equity accounted income

     194          254          684          899    

Fair value changes

     104          495          630          738    

Depreciation and amortization

     (357)         (327)         (1,095)         (911)   

Income taxes

     (264)         (154)         (731)         (327)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total adjustments

     302          652          648          1,079    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $     1,495        $     875        $     2,994        $     1,976    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Q3 2013 INTERIM REPORT  23


The following tables reconcile segment operating income to total revenues and other gains:

 

    Operating Segments                          
FOR THE THREE
MONTHS ENDED
SEP. 30, 2013
(MILLIONS)
  Asset
Management
and

Services
    Property     Renewable
Power
    Infrastructure     Private
Equity
    Corporate/
Unallocated
    Total
Reportable
Segments
    Adjustments     Consolidated  

Total revenues and other gains

  $ 1,080       $ 1,107       $ 384       $ 503       $ 1,511       $ 20       $ 4,605       $ 571       $ 5,176    

Direct costs

    (945)        (563)        (144)        (227)        (1,293)        (16)        (3,188)        (42)        (3,230)   

Other income1

    –         –         –         –         –         –         –         525         525    

Equity accounted FFO

    10         113                84                       222         (222)        –    

Disposition gains

    –         77                265         553         458         1,359         (1,359)        –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Segment operating income

  $ 145       $ 734       $ 253       $ 625       $ 774       $ 467       $ 2,998        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    Operating Segments                          
FOR THE THREE
MONTHS ENDED
SEP. 30, 2012
(MILLIONS)
  Asset
Management
and

Services
    Property     Renewable
Power
    Infrastructure     Private
Equity
    Corporate/
Unallocated
    Total
Reportable
Segments
    Adjustments     Consolidated  

Total revenues and other gains

  $ 1,205       $ 1,118       $ 222       $ 509       $ 1,661       $ 44       $ 4,759       $ (98)      $ 4,661    

Direct costs

    (1,090)        (505)        (120)        (257)        (1,408)        (12)        (3,392)        (28)        3,420    

Equity accounted FFO

    –         95                51         (4)               152         (152)        –    

Disposition gains

    –         (61)        –         –         (1)        (15)        (77)        77         –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Segment operating income

  $ 115       $ 647       $ 105       $ 303       $ 248       $ 24       $ 1,442        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    Operating Segments                          
FOR THE NINE
MONTHS ENDED
SEP. 30, 2013
(MILLIONS)
  Asset
Management
and

Services
    Property     Renewable
Power
    Infrastructure     Private
Equity
    Corporate/
Unallocated
    Total
Reportable
Segments
    Adjustments     Consolidated  

Total revenues and other gains

  $ 3,236       $ 3,367       $ 1,243       $ 1,811       $ 4,985       $ 145       $ 14,787       $ 506       $ 15,293    

Direct costs

    (2,913)        (1,722)        (413)        (879)        (4,181)        (46)        (10,154)        (102)        (10,256)   

Other income1

    –         –         –         –         –         –         –         525         525    

Equity accounted FFO

    21         330         19         235         12                625         (625)        –    

Disposition gains

    –         120         178         442         626         534         1,900         (1,900)        –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Segment operating income

  $ 344       $ 2,095       $ 1,027       $ 1,609       $ 1,442       $ 641       $ 7,158        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    Operating Segments                          
FOR THE NINE
MONTHS ENDED
SEP. 30, 2012
(MILLIONS)
  Asset
Management
and

Services
    Property     Renewable
Power
    Infrastructure     Private
Equity
    Corporate/
Unallocated
    Total
Reportable
Segments
    Adjustments     Consolidated  

Total revenues and other gains

  $ 3,153       $ 2,911       $ 886       $ 1,521       $ 4,701       $ 156       $ 13,328       $ (203)      $ 13,125    

Direct costs

    (2,918)        (1,246)        (352)        (798)        (4,133)        (45)        (9,492)        (76)        (9,568)   

Equity accounted FFO

           259         11         152         (6)        15         435         (435)        –    

Disposition gains

    –         (63)        214         11         (1)        23         184         (184)        –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Segment operating income

  $ 239       $ 1,861       $ 759       $ 886       $ 561       $ 149       $ 4,455        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

1.

Refer to Note 9 for details

The adjustments in the foregoing tables are described in Note 3 to our interim consolidated financial statements.

 

24    BROOKFIELD ASSET MANAGEMENT


ASSET MANAGEMENT AND SERVICES

 

     Asset
Management
     Construction and
Property Services
     Total
Segment
 
AS AT SEP. 30, 2013 AND DEC. 31, 2012 AND FOR
THE THREE MONTHS ENDED SEP. 30
(MILLIONS)
   2013       2012       2013       2012       2013       2012   

Segment financial results

                 

Revenues

   $ 175        $ 107        $ 905        $ 1,098        $ 1,080        $ 1,205    

Funds from operations

     96          49          49          66          145          115    

Valuation items

     (2)         –          (8)         (8)         (10)         (8)   

Segment financial position

                 

Segment assets

   $       225        $       245        $     1,449        $     1,610        $     1,674        $     1,855    

Common equity by segment

     225          245          1,305          1,325          1,530          1,570    

FFO increased by $30 million, representing a $47 million increase in asset management FFO and a $17 million decrease in FFO from construction and property services. The increase in asset management FFO reflects the continued growth in fee related earnings arising from the continued expansion of fee bearing capital.

Asset Management

Our asset management operations contributed the following during the quarter:

 

FOR THE THREE MONTHS ENDED SEP. 30
(MILLIONS)
   Annualized*       2013       2012   

Revenues

        

Base management fees

   $ 5301,2       $ 147        $ 90    

Incentive distributions

     323                     

Transaction and advisory fees

     554           18          12    
  

 

 

    

 

 

    

 

 

 
   $ 617            173          106    
  

 

 

       

Direct costs

        (78)         (58)   
     

 

 

    

 

 

 

Fee related earnings

        95          48    

Performance based income5

                  

Direct costs

        (1)         –    
     

 

 

    

 

 

 
                  
     

 

 

    

 

 

 

Funds from operations

      $             96        $             49    
     

 

 

    

 

 

 

 

1.

Based on capital committed or invested and contractual arrangements

2.

Includes $186 million of annualized base fees on Brookfield capital

3.

Based on Brookfield Infrastructure Partners L.P.’s annual distribution in the amount of $1.72 per unit

4.

Equal to simple average over two years

5.

Excludes performance based income subject to clawback

*

Annualized fees are a non-IFRS operational measure used to assess contractual base management fees at a point in time based on the current level of fee bearing capital

Fee related earnings nearly doubled from $48 million to $95 million in the current quarter with substantial increases in both base management fees as well as operating margins. Base management fees increased by 63% to $147 million over the 2012 quarter. This reflects the contribution from new funds, primarily in our property and infrastructure operations and includes fees earned on our recently launched Brookfield Property Partners listed entity as well as a $15 million “catch-up” base management fee arising from the final close of our flagship real estate private fund in the current quarter. Base fees in respect of Brookfield capital totalled $46 million (2012 – $15 million).

Annualized base management fees totalled approximately $530 million representing an increase of $5 million since June 30, 2013, which includes $18 million of base fees from additional capital raised during the quarter, primarily within our private funds, and public securities offset by the return of capital to our private fund investors upon disposing the funds assets and terminating the funds.

Base management fees do not include any contribution from approximately $2.0 billion of client capital in private funds on which our compensation is derived primarily from performance-based measures and carried interests and only minimal amounts from base management fees. The weighted average term of the commitments related to the annualized base fees is eight years.

 

Q3 2013 INTERIM REPORT  25


We continue to expand our transaction and advisory business for real estate and infrastructure transactions. FFO increased relative to the prior year as a result of a higher amount of transactional activity.

Direct costs consist primarily of employee expenses and professional fees, as well as technology costs and other shared services.

Our share of accumulated performance income totalled $812 million at September 30, 2013. This represents an increase of $47 million compared to last quarter and $123 million compared to year end. We estimate that direct expenses of approximately $96 million will arise on the realization of the income accumulated to date. We recognized $2 million of third party performance income in our financial statements and deferred the balance ($47 million) as our accounting policies defer recognition until the end of any determination or clawback period which is typically at or near the end of the fund’s term. The amount of unrealized performance based income net of associated costs was $716 million at quarter end (December 31, 2012 – $632 million).

Subsequent to quarter end, we reorganized the consortium that acquired our U.S. shopping business, allowing our clients and ourselves to realize a 38% gross IRR and 2.6x gross multiple of invested capital, and we realized $558 million of accumulated performance fees.

The remaining accumulated performance income totalled $158 million, net of direct costs and the associated funds have an average term to realization of four years.

Fee Bearing Capital

Fee bearing capital is determined in a manner consistent with the determination of the contractual asset management fees for fee bearing vehicles. The following table summarizes the fee bearing capital managed for clients, co-investors and ourselves:

 

AS AT SEP. 30, 2013 AND DEC. 31, 2012
(MILLIONS)
   Listed 
Issuers
1 
     Private 
Funds
1 
     Public 
Securities 
     Total       Total 
2012 
 

Property

   $ 13,643        $ 15,184        $ 2,633        $ 31,460        $ 18,133    

Renewable power

     9,390          2,169          –           11,559          10,559    

Infrastructure

     8,567          8,626          3,714          20,907          16,497    

Private equity

     –           2,760          13,767          16,527          14,880    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2013

   $ 31,600        $ 28,739        $ 20,114        $ 80,453        $ n/a    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2013

   $ 31,307        $ 28,497        $ 18,466        $ 78,270        $ n/a    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

   $ 21,301        $ 23,244        $ 15,524        $ 60,069        $ 60,069    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1.

Includes Brookfield capital of $18.8 billion in listed issuers at September 30, 2013 (December 31, 2012 – $10.3 billion) and $7.3 billion in private funds at September 30, 2013 (December 31, 2012 – $8.4 billion)

Fee bearing capital includes all capital on which we receive some form of asset management revenue, including capital committed or invested by us. For example, we include 100% of the market capitalization of listed issuers such as Brookfield Infrastructure Partners L.P. and private funds such as Brookfield Capital Partners II because we are entitled to earn fees on all of this capital, including our own. We do not, however, include the capital invested or committed by one Brookfield managed entity into another where the fees otherwise payable to us on this capital have been credited against the fees payable to us by the other.

Property capital increased during 2013 due to the formation of Brookfield Property Partners and new commitments to private property funds. The increase in infrastructure capital represents new commitments to private funds.

Fee bearing capital under management increased by $2 billion during the third quarter of 2013, resulting in a $5 million net increase in annualized base fees. The principal variances are set out in the following table:

 

FOR THE MONTHS ENDED SEP. 30, 2013

(MILLIONS)

   Listed
Issuers
     Private
Funds
     Public
Securities
     Total      Annualized
Base Fees
 

Balance, June 30, 2013

   $ 31,307        $ 28,497        $ 18,466        $ 78,270        $ 525    

Inflows, including commitments

     –           1,967          2,046          4,013          18    

Outflows, including distributions

     (199)         (1,774)         (814)         (2,787)         (14)   

Market appreciation (depreciation)

     (86)         –           416          330          –     

Foreign exchange and other

     578          49          –           627            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, September 30, 2013

   $ 31,600        $ 28,739        $ 20,114        $ 80,453        $ 530    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26    BROOKFIELD ASSET MANAGEMENT


Listed Issuers

Listed issuers fee bearing capital includes the market capitalization of our listed issuers: Brookfield Property Partners L.P., Brookfield Renewable Energy Partners L.P., Brookfield Infrastructure Partners L.P., Brookfield Canada Office Properties, Acadian Timber Corp. and several smaller listed entities. Capital also includes corporate debt and preferred shares issued by these entities to the extent these are included in determining management fees.

Private Funds

Private fund capital remained fairly consistent in aggregate during the quarter increasing to $28.7 billion. New fundraising of $2.0 billion was offset by the return of $1.8 billion to investors. We added further capital commitments during the quarter to our $1 billion Brookfield Timberlands Fund V, focused on core timberland investments and concluded our Brookfield Global Timber Fund, following the sale of our Pacific Northwest timberlands, returning fee bearing capital of $1.2 billion to investors. Fee bearing capital within our private funds has an average term of eight years. Private fund capital includes $9.8 billion of client capital that has not been invested to date, but which is available to pursue acquisitions within each fund’s specific mandate. Of the total uninvested capital, $3.3 billion relates to property funds, $5.6 billion relates to infrastructure funds and $0.9 billion relates to private equity funds. This uncalled capital has an average term during which it can be called of approximately four years.

Public Securities

In our public securities operations, we manage fixed income and equity securities with a particular focus on real estate and infrastructure, including high yield and distress securities. Capital under management in this business line increased by $1.6 billion during the quarter. Net inflows were $1.2 billion. We have continued to expand our range of higher margin mutual fund and similar products and have received strong interest from clients supported in part by the favourable performance in many of our funds.

Construction and Property Services

Construction revenues decreased relative to the prior year, primarily from foreign currency revaluations. Operating margins decreased from 8.2% to 7.0% in the current quarter as additional costs were incurred on the completion of contracts.

The remaining work-in-hand totalled $3.8 billion at the end of September 30, 2013, and represented approximately 1.3 years of scheduled activity. The following table summarizes the work-in-hand:

 

AS AT SEP. 30, 2013 AND DEC. 31, 2012

(MILLIONS)

   2013      2012  

Australasia

   $ 2,189       $ 2,626   

Middle East

     891         1,047   

United Kingdom

     469         606   

Canada

     239         44   
  

 

 

    

 

 

 
   $   3,788       $   4,323   
  

 

 

    

 

 

 

FFO from our property services operations decreased compared to the prior year as a result of our reduced ownership in our U.S. brokerage operations, following our merger with HomeServices Relocation Services in the fourth quarter of 2012.

 

Q3 2013 INTERIM REPORT  27


PROPERTY

Overview

We launched our flagship listed property entity, Brookfield Property Partners L.P. (“BPY”), on April 15, 2013, through a 7.6% special distribution to our shareholders and now hold virtually all of our property assets through this entity. BPY is listed on the New York and Toronto stock exchanges and has a market capitalization of $12.2 billion at quarter end, based on IFRS values. BPY holds our 50% owned Brookfield Office Properties (“BPO”), our 32% interest (on a diluted basis) in General Growth Properties (“GGP”) and most of our interest in privately held investments, including our capital invested in our various property funds.

The following table disaggregates the financial results of our property operations into our principal business lines:

 

    Office
Properties
    Retail
Properties
    Multifamily,
Industrial
and Other
    Corporate /
Unallocated
    Total
Segment
 

AS AT SEP. 30, 2013 AND DEC. 31, 2012

AND FOR THE THREE MONTHS ENDED SEP. 30

(MILLIONS)

  2013      2012      2013      2012      2013      2012      2013      2012      2013      2012   

Segment financial results

                   

Revenues

  $ 619       $ 670       $ 54       $ 58       $ 434       $ 390       $ –        $ –        $ 1,107       $ 1,118    

Segment operating income

    413         418         90         74         231         155         –          –          734         647    

Funds from operations

    34         58         50         41         41         25         (23)        –          102         124    

Valuation items

    64         140         40         130                (7)        (2)        –          108         263    

Segment financial position

                   

Segment assets

  $ 27,230       $ 26,337       $ 2,640       $ 3,094       $ 10,196       $ 8,191       $ (560)      $ –        $ 39,506       $ 37,622    

Investments

    2,583         2,596         5,736         5,212         347         335         –          –          8,666         8,143    

Common equity by segment

    6,446         6,475         5,754         5,812         933         671         (759)        –          12,374         12,958    

Property FFO excluding disposition gains was $121 million and decreased by $64 million from the prior year. The decrease in FFO was due in part to the formation of BPY in the first quarter of 2013 and subsequent spin-off which reduced our ownership in our property operations by 7.6%. This resulted in a $26 million reduction in FFO, of which $14 million was a result of our reduced ownership interest on a comparative basis and the remaining $12 million from additional expenses incurred related to fees paid and costs incurred by BPY. In addition, the prior year included a $31 million dividend from our investment in Canary Wharf. We disposed of 17 properties within our office, retail and multifamily and industrial portfolios for proceeds of $400 million net of associated liabilities and recognized $19 million of disposition losses in the current quarter, whereas the prior year included a $61 million loss on the disposition of non-core assets.

Our share of valuation items was $108 million compared to $263 million in 2012. We recorded increased appraisals across almost all of our portfolios, from positive leasing and continued discount rate compression, albeit a lower amount when compared to the amount recognized in the comparative period.

Corporate property operations in the current quarter represent BPY’s corporate expenses including, asset management fees, interest expense incurred on corporate borrowings and cash taxes paid in the quarter.

Office Properties

Our office properties include portfolios held through 50% owned BPO and our 22% investment in Canary Wharf Group, as well as office properties held through various private funds and other directly held assets in Australia and Europe. During the quarter, we announced a proposed merger of BPY and BPO. The proposal is a one-for-one share offer for any or all BPO shares not owned by BPY; with an aggregate value of approximately $5 billion. BPY has made available $1.7 billion of cash and $3.3 billion of shares (valued at announcement date) to provide flexibility to BPO shareholders.

In the third quarter of 2012 segment operating income from our office property portfolio included $31 million in dividend income from our investment in Canary Wharf Group. Whereas dividend was declared in the current quarter. Adjusting for this item, segment operating income increased by $26 million to $413 million. The variance was due to a 1% increase in net operating income (i.e. revenues loss direct costs) from existing properties, on a constant currency basis, reflecting a 3% increase in in-place rents offset by a lower occupancy levels. Additionally we had a lower level of disposition losses on sales of non-core office properties, which improved results by $12 million. These increases were partially offset by the decrease in net operating income associated with the assets sold, net of non-controlling interests.

Interest expenses were lower during the period due to the removal of borrowings on disposed of properties, lower short-term borrowing levels and lower borrowing costs on existing debt that we refinanced in this low interest rate environment.

 

28    BROOKFIELD ASSET MANAGEMENT


The following table presents an analysis of our FFO, including net operating income from existing properties based on current foreign currency exchange rates. Existing properties are those that the company owned and operated throughout both the current and prior reporting periods since the beginning of the comparable quarter. Normalizing existing property net operating income for foreign currency variations is a non-IFRS measure, which we utilize to present variances that arise from changes in occupancy levels or net rents without the impact of currency fluctuations.

 

     % Leased1      Average
In-place Net Rent
1
     Segment
Operating Income
 

FOR THE THREE MONTHS ENDED SEP. 30

(MILLIONS)

   2013       2012       2013       2012       2013       2012   

Existing properties

                 

United States

     87.4%          87.9%        $ 24.90        $ 24.31        $ 203        $ 198    

Canada

     96.8%          97.1%          26.12          25.58          69          69    

Australasia

     96.7%          97.7%          46.65          43.92          72          72    

Europe

     92.0%          85.3%          68.47          73.58                    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     91.1%          91.4%        $ 28.43        $ 27.59          351          346    
  

 

 

    

 

 

    

 

 

    

 

 

       

Currency variance

                 –          13    
              

 

 

    

 

 

 
                 351          359    

Equity accounted investments

                 34          26    

Acquired, developed and sold

                 11          23    

Canary Wharf dividend

                 –          31    

Investment and other income

                         11    

Disposition gains

                 14          (32)   
              

 

 

    

 

 

 

Segment operating income

                 413          418    

Interest expense

                 (186)         (210)   

Operating costs

                 (37)         (35)   

Non-controlling interests

                 (156)         (115)   
              

 

 

    

 

 

 

FFO

               $ 34        $ 58    
              

 

 

    

 

 

 

 

1.

Same store basis

Net operating income from existing properties in 2013 increased by 1% over 2012 on a constant currency basis and reflects the renewal of leases at rental rates that exceed the expiring leases, which increased average in-place net rents on existing properties to $28.43 from $27.59, offset by slightly lower occupancy which is primarily due to large expires in New York and Washington, D.C.

The contribution from properties acquired, developed and sold since the beginning of the comparative period reflects acquisitions in Los Angeles, Washington D.C. and London; and dispositions of properties in Washington D.C., Los Angeles, Minneapolis and Auckland.

Properties classified as redevelopment properties, when applicable, are excluded from existing properties, since they are not in operation for both of the reported periods. There were no office properties undergoing redevelopment during either the 2013 or 2012 quarters.

We use in-place net rents as a measure of leasing performance, and calculate this as the annualized amount of cash rent receivable from leases on a per square foot basis including tenant expense reimbursements, less operating expenses. This measure represents the amount of cash generated from leases in a given period and excludes the impact of concessions such as straight-line rent escalations and free rent amortization.

Valuation Items

Valuation items of $64 million include $194 million of appraisal gains, of which $83 million is attributable to Brookfield shareholders. Approximately 55% of the appraisal gains arose from lower discount rates and 45% arose from increases in future cash flows, in part due to increases in expected and contracted rents.

 

Q3 2013 INTERIM REPORT  29


The key valuation metrics of our commercial office properties are presented in the following table on a weighted average basis. The valuations are most sensitive to changes in the discount rate and terminal capitalization rates. It is important to note that changes in cash flows and discount/terminal capitalization rates are usually inversely correlated as the circumstances that typically give rise to increased interest rates (i.e., strong economic growth, inflation) also give rise to increased cash flows.

 

     United States      Canada      Australasia      Europe  
AS AT SEP. 30, 2013 AND DEC. 31, 2012    2013       2012       2013       2012       2013       2012       2013       2012   

Discount rate

     7.4%          7.3%          6.5%          6.4%          8.5%          8.8%          6.7%          6.7%    

Terminal capitalization rate

     6.4%          6.3%          5.7%          5.6%          7.3%          7.1%          5.5%          5.8%    

Investment horizon (years)

     11          11          11          11          10          10          10          10    

Leasing

The overall portfolio occupancy rate in our office properties at the end of the quarter was 90.6%, and our average remaining lease term is seven years. We leased 1.2 million square feet during the quarter at average in-place net rents that were 9% above expiring rates. This increased our overall portfolio’s average in-place rents by 4.1% to $31.11 per square foot and reduced the percentage of space maturing prior to 2018 by 480 basis points when compared to year end. Average in-place rents on a portfolio basis remain at 12.7% below market rents.

 

                                 Expiring Leases (000’s sq. ft.)  
AS AT SEP. 30, 2013   
Leased
1 
     Average 
Term 
     Net Rental 
Area 
     Currently 
Available 
     2013       2014       2015       2016       2017       2018       2019 & 
Beyond 
 

North America

                                

United States2

     86.7%          6.7          44,815          5,978          3,441          2,447          3,112          2,361          2,902          3,936          20,638    

Canada

     96.8%          7.9          16,714          543          1,308          326          1,300          1,633          632          739          10,233    

Australasia

     97.6%          5.8          10,258          247          98          776          1,153          1,096          990          1,024          4,874    

Europe

     94.5%          8.7          1,344          73          –           134                  71          88                  964    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total/Average

     90.6%          6.9          73,131          6,841          4,847          3,683          5,571          5,161          4,612          5,707          36,709    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Percentage of total

           100.0%          9.4%          6.6%          5.0%          7.6%          7.1%          6.3%          7.8%          50.2%    
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As at December 31, 2012

              8.9%          10.8%          6.0%          8.2%          7.1%          5.8%          6.2%          47.0%    
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1.

Occupancy was 91.1% at December 31, 2012 with the following breakdown by geography: United States 87.5%, Canada 96.9%, Australasia 97.7% and Europe 85.3%.

2.

Subsequent to quarter end, overall portfolio occupancy decreased by 385 bps or 2.8 million square feet as a result of the expiry of a large financial services tenant in our Brookfield Place New York office property.

In North America, average in-place net rents across our portfolio approximate $26.81 per square foot and represent a discount of approximately 15% to the average market rent of $31.66 per square foot. This gives us confidence that we will be able to maintain or increase our net rental income in the coming years and, together with our high overall occupancy, to exercise patience in signing new leases.

In Australasia, average in-place rents in our portfolio are $49.11 per square foot, which represents a 7% discount to market rents. The occupancy rate across the portfolio remains high at 98% and the weighted average lease term is approximately six years. Leases in Australia typically include annual escalations, with the result that in-place lease rates tend to increase along with long-term increases in market rents.

Office Development

During the quarter, we sold the second phase of Bay Adelaide Centre project in Toronto, which is currently under construction, to our 83% owned subsidiary Brookfield Canada Office Properties, on an “as-if-completed-and-stabilized basis.” The project is currently 60% leased with expected completion in late 2015. We have commenced development of Brookfield Place Tower 2 in Perth with tenant pre-commitments for approximately 40% of the 16-level, 366,000 square feet premium office tower and our 2.4 million square feet office development project in downtown Calgary to be named “Brookfield Place – Calgary.” The east tower development has signed 1.0 million of its 1.4 million square feet with an anchor tenant. In January, we commenced construction of the platform for the Manhattan West development site on Ninth Avenue between West 31st and West 33rd Streets in New York City. Construction is expected to be completed in 2014, positioning the project to receive tenants in 2016. We recently acquired an adjacent property to further expand this important development initiative.

With the exception of Manhattan West in New York, Bay Adelaide East in Toronto, Brookfield Place Tower 2 in Perth, Brookfield Place – Calgary and Giroflex towers in São Paulo, all of our development sites are in their planning stages. We will seek to monetize these sites through development only when we meet our risk-adjusted return hurdles and when we achieve our pre-leasing targets.

Retail Properties

Retail FFO of $50 million consists of $59 million (2012 – $58 million) from our share of GGP’s FFO, $13 million of disposition losses (2012 – $27 million) on the sale of non-core assets, and a $4 million contribution (2012 – $10 million) from other operations, including Rouse Properties.

 

30    BROOKFIELD ASSET MANAGEMENT


GGP reported 22.5% growth in its U.S. GAAP company FFO, which reflects increases in both net rents and occupancy as well as lower financing costs. Initial rental rates for leases commencing in 2013 on a suite-to-suite basis increased by 12.2% or $6.88 per square foot, to $63.32 per square foot when compared to the rental rate for expiring leases. Tenant sales were $562 per square foot on a trailing 12-month basis, representing a 3.8% increase on a comparable basis. These increases were offset by our lower percentage interests in GGP, as this investment is held through BPY.

The remaining FFO excluding gains of $4 million includes the results of Rouse Properties, returns from the capital invested in our Brazilian retail property fund and direct interests in Australian retail properties.

GGP’s mall leased percentage was 96.6% at quarter end, an increase of 110 basis points from September 30, 2012.

GGP issued $1.7 billion of mortgage notes during the quarter at a weighted average interest rate of 3.99% and average term of 9.4 years. The average interest rate of the original loans was 5.32% and the remaining term to maturity was 2.8 years. The transactions generated approximately $239 million of incremental proceeds. In addition, GGP amended its corporate credit facility to extend the maturity to October 2018. The spread to LIBOR was reduced by 50 to 75 basis points across the leverage grid and the unused facility fee was reduced to 20 basis points.

Subsequent to quarter end, we reorganized the consortium that acquired our U.S. shopping mall business, enabling BPY to invest a further $1.4 billion into GGP, and as a result, now owns 32% of GGP on a fully diluted basis. Along with select institutional clients who retained their GGP investment with us, we own 40% on a diluted basis. The transaction was completed through a $1.4 billion private placement in BPY, with BPY using the proceeds to acquire GGP shares. The private placement was funded by $1 billion from Brookfield and $435 million from two of our sovereign wealth fund clients.

Valuation Items

Valuation gains of $40 million include $22 million and $11 million of appraisal gains from GGP and Rouse, respectively, partially offset by valuation losses on investment properties within Brazil. Valuation gains were higher in the prior year primarily due to an increased level of appraisal gains recorded within GGP’s investment property portfolio.

The blended capitalization rate utilized on our U.S. portfolio on a direct capitalization method was approximately 5.5% (2012 – 5.7%).

Our Brazilian portfolio was valued on a discounted cash flow basis using a discount rate of 9.0% (2012 – 8.5%), a terminal capitalization rate of 7.2% (2012 – 7.2%) and an investment horizon of 10 years (2012 – 10 years).

Leasing Profile

 

                                 Expiring Leases (000’s sq. ft.)  
AS AT SEP. 30, 2013   
Leased
2 
     Average 
Term 
     Net Rental 
Area 
     Currently 
Available 
     2013       2014       2015       2016       2017       2018       2019 & 
Beyond 
 

United States1

     95.5%          6.0          60,077          2,725          929          6,827          6,373          6,169          6,023          5,965          25,066    

Brazil

     95.8%          6.8          2,848          121          464          329          434          278          305          175          742    

Australasia

     97.2%          2.9          1,101          31          32          45                  604          342          13          25    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total/Average

     95.5%          6.0          64,026          2,877          1,425          7,201          6,816          7,051          6,670          6,153          25,833