Brookfield posts record FFO in Q1 — but not because of real estate

Income boosted by $13B of asset sales; market “tone” for CRE still “negative”

A year ago, as the impact of the pandemic was just starting to sink in, Brookfield Asset Management reported funds from operations of $884 million.

For the first quarter of this year, the asset manager’s FFO more than tripled to $2.8 billion — a record high, and a promising sign for the company’s post-pandemic outlook.

“This was a result of strong operating performance, significant realized carried interest and gains generated from capital recycling initiatives,” chief financial officer Nick Goodman said in a statement Thursday. “The balance of the year looks strong, with planned asset sales, ongoing capital deployment, and the continued economic recovery all expected to bolster operating results.”

More than half of the quarter’s FFO came from the company’s private equity ($992 million) and asset management ($636 million) segments, which saw big year-over-year gains — 500 percent and 67 percent, respectively. Brookfield’s real estate segment produced FFO of $250 million, a 14 percent increase from the same period last year.

While the firm’s fundraising is booming, Brookfield executives acknowledged challenges facing the commercial real estate space — or at least the public’s perception of it.

“Real estate stocks have been trading as though no company will ever occupy an office again, no person will ever set foot in a store and nobody will ever travel again, for either business or leisure,” CEO Bruce Flatt wrote in his letter to shareholders, also published Thursday. “We do not believe that any of these will be the case, and so we are investing accordingly.”

This negative “tone in the market” is also driving the company to take its Covid-challenged real estate arm private. The $6.5 billion deal to acquire all of Brookfield Property Partners’ outstanding shares is expected to close around the end of the second quarter.

“We should be able to do more with BPY’s assets once they’re privately owned than BPY could do with them under the constraints affecting a public entity,” Flatt wrote.

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For its part, Brookfield Property Partners reported $125 million in FFO in the first quarter, less than half of the $309 million recorded in the same period last year.

“While we continue to experience challenges in certain of our operations and markets due to the ongoing consequences of the pandemic and global economic slowdown, we remain encouraged by a recovery in activity in select sectors within our business,” Brookfield Property Partners CEO Brian Kingston said in a statement last week.

Due to the pending privatization deal, BPY announced last month that it would not be hosting a conference call for the quarter.

In his investor letter, Flatt sought to make the case for the enduring importance of office space, by citing a self-help book that discusses how Roman emperors were able to manage a far-flung empire without modern technology: “Culture was the only way to make sure this happened.” And culture, Flatt’s argument goes, requires physical office space.

Looking at the broader economic recovery, Flatt also pointed to macroeconomic factors that would favor Brookfield’s business in the coming years: low or “lowish” interest rates continue to push institutional investors to alternative investments, while central bank stimulus has made it a good time to sell assets at favorable prices. Brookfield recorded $13 billion in asset sales in the past quarter.

Furthermore, the massive amounts of debt governments have taken on to battle the pandemic is likely to lead to greater privatization of infrastructure, Flatt argued. And the need for new infrastructure investment is huge, driven by trends like the rollout of new 5G technology and efforts to decarbonize coal-dependent economies worldwide.

“Even with an extremely positive backdrop, business is never easy; others have observed these same trends and are investing directly or raising third-party capital to invest into infrastructure,” Flatt wrote. “As a result, we have to be creative with our deals, but as always we will utilize our global reach and scale of operations to differentiate our capital from that of others. We think the odds favor a good decade ahead.