Brookfield has been transformed over the past few years from a hodgepodge of underperforming assets into a premier collection of high-quality assets in power generation and transmission, real estate, and timberlands. These assets are managed for strong cash flow generation and shareholder returns. In that respect, the company is similar to conglomerates like Tyco
Friday's third-quarter earnings report was similarly impressive, with operating cash flows up 29% year over year to $368 million. Net income for Brookfield is predictably lumpy depending on asset sales, with 2005's third-quarter results including a $652 million after-tax gain on the sale of its Falconbridge holdings (hence the focus on cash flow). Brookfield now manages about $58 billion in assets, largely distributed in managing fixed-income and real estate securities for clients like a traditional asset manager ($21 billion), as well as the aforementioned power generation/transmission ($8.5 billion) and real estate ($17 billion).
The power and real estate lines of business are the cash cows for the company this quarter. To address the real estate portfolio first: It is mostly made up of nearly $12 billion in commercial real estate concentrated in New York, Toronto, and Calgary. The company further expanded by getting into Houston this quarter, acquiring the 1.2 million-square-foot Four Allen Center, as well as forming a fund to invest in Brazilian real estate. While results for the company's $2 billion residential portfolio are leveling off as many have anticipated, commercial real estate is still performing well -- with higher occupancy rates and higher rents over last year -- reflecting Brookfield's penchant for picking up quality properties in supply-constrained markets.
The power generation and transmission business certainly seems to attract value types -- Warren Buffett has substantial holdings in the sector, for example. The power generation plants are located primarily in Ontario, Canada, and New York, while the transmission assets are located primarily in Chile. Both businesses generate stable long-term revenues and attractive returns, with more than 75% of the power generation locked into sales agreements through 2008, and both electricity demand and natural gas prices increasing. The Transelec asset, which was acquired for $2.5 billion, seems to be quite a find -- it serves roughly 99% of the Chilean population via its distributing network, and is expected to generate on the order of $200 million in net operating income.
Putting it all together, we have a high-quality collection of assets and management that has had considerable success in creating value for shareholders over the past few years. All indicators from management this quarter are that the underlying trends driving the businesses are strong, and look to continue to be strong for the foreseeable future. When we annualize the operating cash flow to about $1.4 billion, the company is only trading for about 12-13 times operating cash flow. At that valuation, these shares are worth owning.
More hodgepodge-type companies:
- Still Time to Tie Into Tyco
- United Technologies Still in Sweet Spot
- More Blocking and Tackling From Danaher