Brookfield Infrastructure Partners (BIP -0.47%) has grown in popularity over the years, due in part to the outstanding returns it has delivered to investors since forming in 2009. Overall, the company has produced an 18% annual return since inception, fueled by 22% compound annual growth in funds from operations (FFO) and a 12% compound annual increase in unitholder distributions. Those robust returns, when combined with the company's healthy 5% yield, continue to draw new investors.
While most investors probably know the basics, such as the fact that it owns a portfolio of high-quality infrastructure assets around the world, there are likely a few things that they don't yet know about the company. Here are three facts that every investor should know.
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1. It's not your average MLP
Most income investors are probably familiar with master limited partnerships (MLPs), which have special tax benefits. These companies pass everything through to partners, including taxes, which investors pay at their individual rate, though depreciation often eliminates the tax burden. However, these entities may still generate taxable income called unrelated business income tax (UBIT).
Brookfield Infrastructure Partners, however, produces income a bit differently than most MLPs, benefiting from returning capital to investors instead of from depreciation. Because of that, it doesn't generate UBIT or effectively collected income (ECI):
Image source: Brookfield Infrastructure Partners LP Investor Presentation.
As the slide above notes, there are a couple of other differences between Brookfield Infrastructure Partners and the average MLP. Among the most important is that it pays parent company Brookfield Asset Management (BN 0.40%) a lower incentive distribution that caps out at 25% versus the up to 50% paid by other MLPs to their general partners. Furthermore, Brookfield Infrastructure Partners typically only pays out 60% to 70% of cash flow, choosing to retain more money to reinvest in growth projects. Contrast that with most MLPs that pay out nearly all their cash flow and finance growth by issuing debt and equity, which can lead to a higher cost of capital, especially during down times.
2. It relies on its parent company for almost everything
One other thing most investors probably don't know about Brookfield Infrastructure Partners is the importance of its relationship with Brookfield Asset Management. Not only does its parent own 30% of the company's common units, as well as control its general partner and incentive distribution rights, but it provides management services to the company for a fee.
Furthermore, private equity funds managed by Brookfield Asset Management typically own the bulk of the assets operated by Brookfield Infrastructure. Because of that, Brookfield Infrastructure has access to larger pools of money to make acquisitions that would otherwise be beyond its grasp. For example, late last year the company and institutional clients of its parent company agreed to acquire a controlling stake in a Brazilian natural gas transmission business from beleaguered oil giant Petrobras (PBR -0.88%). The consortium consented to pay $5.2 billion for the 90% stake, which would have been much too large a transaction for the $13 billion Brookfield Infrastructure. However, by joining its parent, it will be able to participate in the deal as a minority investor by acquiring a 28% stake for just $1.2 billion.
3. It does debt differently
Because Brookfield Infrastructure is usually a minority owner of assets co-owned with its private equity funds, the company structures debt differently. As a rule, it primarily finances at the asset level and on a non-recourse basis. That allows the company to layer on leverage at levels that are appropriate for the asset type, with its regulated utilities having a higher leverage ratio than its energy assets, which have higher-volume risk. Overall, the company finances each business to investment-grade credit metrics.
This debt structure keeps the company's corporate debt to a minimal level. As a result, it has a strong investment-grade credit rating, giving it ample access to low-cost capital to make acquisitions. Currently, the company has $4 billion of total liquidity, including a $2 billion corporate credit facility.
Investor takeaway
Most investors know Brookfield Infrastructure Partners as the owner of a globally diversified infrastructure portfolio, one that throws off lots of cash flow that it distributes back to investors. However, the reason Brookfield Infrastructure Partners has had so much success in putting together this portfolio is that it does things differently than other companies. These differences enable it to pursue larger deals and maintain a stronger balance sheet, all while its unitholders pay lower taxes. In many ways, the things most investors don't know about the company are the secret to its success.
