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Excerpts:

As we approach the end of 2023, and with a lot going on, we decided to take the opportunity to reflect on key highlights from the year and provide a summary of some recent notable achievements. We were very active during 2023 amidst a broader market slowdown. In total, we deployed $55 billion of capital into some of the largest and most attractive investment opportunities globally across a variety of sectors. At the same time, monetizations totaled over $30 billion, generating strong returns for investors and underlining the fact that high-quality assets that form the backbone of the global economy remain in strong demand. All told, almost $100 billion of financings were arranged across our businesses and access to capital continues to be very strong.

With all of our flagship funds in the market in 2023, we are set to achieve our goal of almost $150 billion of fundraising, including the close of American Equity Life (AEL) which we expect shortly.

Against the market backdrop in 2023, we have continued to differentiate our business by maintaining our conservatively capitalized balance sheet, high levels of liquidity and by consistently accessing the capital markets to support the financing of ongoing operations and growth. We have maintained nearly $120 billion of deployable capital while investing $55 billion. This allowed our businesses to invest with confidence, and combined with the close to $100 billion of financings, put us in excellent financial shape.

Our Brookfield Corporation (BN) credit rating was upgraded to A by DBRS, and on the back of the upgrade, earlier this month we issued $700 million of 10-year debt at 6.35%. BAM is in the midst of securing an indicative credit rating which is expected to be very strong given its annuity-like cash flows and pristine financial position. In our real estate business, our underlying operations continue to be strong, and we have proven our ability to finance and refinance our debt maturities, with over $30 billion of financings being completed this year. Despite this and the tailwind we expect from lower interest rates, our BPY rating was recently reduced to BB. However, as we look forward, we expect that the continued strong underlying performance of our assets, combined with improving credit markets and lower interest rates, sets us up well to grow cash flows and deal very comfortably with all debt maturities.

Bruce Flatt
Chief Executive Officer
December 22, 2023

Link to full letter
https://bn.brookfield.com/press-releases/brookfiel...

i must remark that i have very disappointed in the constructive bears that have gone into hibernation.
(even rational thinkers such as alex steinberg on SeekingAlpha)

its not that they owe brookfield stakeholders anything, but points on poor behavior and financial engineering should be most plausibly verifiable when BN and BAM are hitting highs and most disconnected from a 'broken' corporation.

bears should now be gorged on Q4 and whole year 2023 results, so let hear something new !

...have [been] very disappointed...
JIC

i must remark that i have very disappointed in the constructive bears that have gone into hibernation.

The term "bears" generally refers to people who think the market or a particular stock is likely to produce sub-standard returns in the near term. That's not what critics of Brookfield have generally argued, so its recent highs don't contradict their complaints. Not to compare them in any other way, but critics of Big Tobacco or Big Oil are not necessarily forecasting near-term stock performance; neither are critics of Brookfield. They are, I think it's fair to say, contending that unacknowledged risks might lead to bad consequences sometime in the future, but a rally in the short term doesn't affect those concerns one way or another.

Judging by his remarks in the comments section of one of his post-Keith Dalyrimple report pieces, Alexander Steinberg closed his Brookfield position as a result of concerns raised by that report, so I would not expect further analysis from him. I gather Apollo has supplanted Brookfield as his favorite alt manager. If I'm not mistaken, a couple of other Seeking Alpha analysts did the same, so there's currently a dearth of Brookfield analysis there. No doubt new bulls will emerge in due course. All the major alt managers are at or near their highs, so these analysts did not miss the rally if they shifted funds from Brookfield to Blackstone or Apollo or Ares or KKR or even Blue Owl.

The rally coincided with the perceived pivot by the Federal Reserve from raising interest rates to sitting tight in anticipation of lowering interest rates next year. That suggested much of the bear market in all these names was based on the high levels of leverage they employ, and particularly, in Brookfield's and Blackstone's cases, the effects of high interest rates on their commercial real estate portfolios. Even S&P Global lowering BPY's credit rating to junk status did not derail the rally.

Dalyrimple's report was his first truly independent analysis in my opinion, and the concerns it raised were not rendered moot or illegitimate by rallies in the stock prices. Instead, they reinforced the feeling that it is very difficult for an individual investor to know what's really going on inside Brookfield. The jarring example they tended to cite was the toll road operator whose revenue was reported by BIP as part of the predictable income stream it advertises as an operating company. Dalyrimple reported that the filings of the operator, by contrast, reported the capital costs of building and maintaining the road actually exceeded the toll revenues, meaning a net result that did not contribute to BIP earnings at all. The unsettling part was not so much this fact, but its omission from BIP's filings and the requirement to check the filings of other businesses to uncover it.

One doesn't have to make a value judgment about Brookfield's reporting, or decide if BIP is actually a holding company and not an operating company, as Dalyrimple suggests, to conclude that this is way more work than most of us are willing to do to stay on top of a stock investment. There are a lot of simpler, more transparent businesses in which one can invest, including alternative asset managers similar to Brookfield.

I still have a position in Brookfield, chiefly because I have to manage capital gains taxes, but it's smaller than it used to be. The smaller it gets, the less time I spend worrying about what I don't know.

Dalyrimple reported that the filings of the operator, by contrast, reported the capital costs of building and maintaining the road actually exceeded the toll revenues, meaning a net result that did not contribute to BIP earnings at all. The unsettling part was not so much this fact, but its omission from BIP's filings and the requirement to check the filings of other businesses to uncover it.

I have read these reports, and other derivative reports on the same subject, and you have hit the nail on the head that the overwhelmingly primary complaint is this single thing - that the capital expenditures exceeds the income streams, and because the dividend payout is covered by the income stream then the dividend really needs to be lowered to cover the true underlying cash stream available when viewing the dividend payment on sustained basis. Once subtracting the capital costs from the income available for the dividend, the true cash flow available for the dividend is insufficient. Calling it fraud accounting would be to strong, but fantasy accounting might, or "the paper world of Brookfield" are typical stances.

This sounds like a reasonable conclusion when skimming through the accounting.

The error in all of these "dividend not truly covered" reports is that the capital expenditures are viewed as maintenance cost and not improvement expenditures. The bulk of their capital expenditures are alterations, upgrades and other improvements - not simply maintenance.

Brookfield could very easily - and indeed it would be exceedingly easier to run the business in such away - just not apply any improvement capital investments, and instead invest the smallest amount possible to simply maintain their assets. This would make the accounting look wonderful and the dividend would be reported as easily recovered. But it would idiotic, or at least myopic, thinking only about the next few quarters just to make the books look as good as possible.

Let's use their office business as an example. If they have an ugly office building purchased for $130 million, that has $11 million, and $2 in maintenance, so $9 million net. They can each year just collect this $9 and all is well. After 15 years they have even paid back their initial investment!

But Brookfield purchased the particularly asset knowing that, whilst not seemingly all that cheap, does has interesting improvement potential; and they calculate that by spending $30 million on a high-tech looking glass facade, and some restaurants at the lower level, and super luxury apartment on the top two floors, they work out the their annual rent will rise to $15 million net. They go ahead.. and it takes 3 years. So they have this $30 million expense, or $10 million a year. So for these 3 years their cash flow moves from $9 million to -$1 million. Cash flow killed! Stop the dividend!

The value of the building is going up each year, despite the cash flow (after accounting for the capital costs) being negative, because their are putting real cash into a concrete (literally) purpose. The return on this capital costs is an extra *ongoing* cash flow of $6 million per year ($15 million - $9 million) from a one-off $30 million cost (a 20% return, after a 3-year lag). So it is overwhelmingly a good move, but it does make their accounting look bad because in the short-term, their dividend isn't covered by the rent minus capital cost calculation. But with a rent minus capital cost plus intrinsic value gain from higher future rent calculation, the dividend is even more easily covered than if they had done nothing, and just tried to make their books look good for some internet bloggers.

If they repeat these capital costs continuously, then their dividend coverage looks continuously bad. It would be solved instantly by adding a balance sheet item for capitalisation of capital improvements owing to rises in future income but they don't place that item anywhere. So we are always paying the hit now, for income gains later. For real investors, or workers closer to the situation, they don't think twice applying executing the capital improvement, knowing how much the income will immediately rise (relative to the expense, such as a 20% or 30% return) upon its completion. But when looking at the accounting, the future income isn't accounted for (yet) and we only see the expense. We are incorrectly comparing a stock with a flow - on the negative side, we have the stock (capital expense) and on the positive side we have a flow (the rent received). We are subtracting the stock from the flow, but not adding the stock back for the future higher income (a capitalisation of the higher future rent, which in the example about might be 15 x (additional rent) = 15 x $6 million = $90 million. This $90 million is far higher than the $30 capital cost ($10 million per year over 3 years), but Brookfield pretends for now that the $90 million doesn't exist, and will never exist, and the internet bloggers complaining about the dividend not covered therefor don't consider it.

It is much the same with their infrastructure projects. These are "projects", not "asset maintenance programmes", which means they are expanding infrastructure projects, or building the infrastructure out, similarly as they do with their buildings. The capital costs are, by definition, already capitalised - and so the figures look high when set against to the uncapitalised asset income today. But if they capitalized their additional income from the capital improvements and added that as income (which they *don't* do, as they assume investors can see the bigger picture) then this extra income from the added balance sheet item would utterly dwarf the capital expense.

What is sort of puzzlingly to me is that these reports, about the dividends not being covered, did not reconcile that Brookfield Infrastructure have been not only able to pay their dividend for many years, but also growing it. This would obviously be impossible if their dividend not covered. Sure, it is looking at the post, and maybe suddenly their business model has changed (hint: it hasn't) but that alone should send alarm bells for them as a heuristic that something is wrong with their report; at least they could be inspired to try to reconcile why their criticism couldn't have applied in the past, and conclude that the capital expenditures were not merely maintenance costs.

- Manlobbi

What is sort of puzzlingly to me is that these reports, about the dividends not being covered, did not reconcile that Brookfield Infrastructure have been not only able to pay their dividend for many years, but also growing it. This would obviously be impossible if their dividend not covered.

True enough. The payouts have obviously been covered somehow. The question is how.

My recollection of the Dalrymple report (apologies for misspelling his name in my previous post) is he's making a case that Brookfield tells a simple story -- revenues from long-term contracts for the use of infrastructure assets fund BIP's payouts, making it a boring, safe, predictable infrastructure operating company -- but the reality is more complicated. It's not just the question of whether wholly-owned assets are generating cash profits. There's also a large chunk of partially-owned assets accounted for with the equity method. BIP can take credit for its share of earnings from those assets, but it's not necessarily cash it can then pay out. It might be earnings retained by those independent entities and held on their balance sheets.

Which would still be fine, aside from the part about Brookfield allegedly attempting to mislead investors. Unfortunately, I lack both the motivation and the accounting chops to do a deep dive on debt, equity and dispositions dating to BIP's spinout in 2008 and including the issuance of shares in the BIPC spinout of 2020. It is too hard for me. Mr. Dalrymple concludes that payouts have exceeded 100% of cash flows from assets since 2015 and have been covered by issuing BIP units, BIPC shares and taking out recourse debt. He makes a case that BIP disclosures have gotten materially worse over the years, making the effort to understand its business more difficult. He also makes the case that because BAM management controls BIP investments and has no fiduciary responsibility to BIP unitholders, it has favored private fund investors over BIP unitholders in certain transactions.

When Alexander Steinberg made inquiries of Brookfield based on Mr. Dalrymple's report, Brookfield did not contest, apparently, the conclusion that dividends from portfolio companies do not cover its cash payouts -- incentive distributions to BN and preferred and unit/share dividends to investors. Instead, the company emphasized its excellent record in asset sales and capital recycling. Mr. Steinberg concluded this makes BIP more like a private equity company than an infrastructure operating company. Which might also be fine, but is a different and higher-risk business model than the boring, contractually-guaranteed revenue streams the company advertises. Mr. Steinberg concluded:

Scant disclosure is a bad sign once BPY comes to memory. Initially, after the spinoff, BPY's statements and supplementaries were possible to understand. Later on, they were becoming less and less transparent. In the end, I was not able to understand anything. Eventually, as we know, BN had to bail out BPY at a rather low price despite regular annual increases in BPY's distributions.

The recent rally suggests Mr. Market is not concerned. For readers who don't want to trudge through Mr. Dalrymple's 79-page report, here's a link to Mr. Steinberg's distillation. Investors can decide for themselves whether the issues raised matter to them:

https://seekingalpha.com/article/4644732-a-short-r...

good discussion.
am not so much interested in the brookfield subs, as these require more work, and moreso one may end up on the other side of BAM and BN insiders. somewhat similarly, i would not have much interest in the details of every little Berkshire entity regardless of historical reputation.

a few clarifications :
- dalrymple has been at it a awhile, and his bear (yes, i still feel that is a correct term) case is not on short-term price moves but some deeper flaw on the entire\larger complex. he went quiet for a few years, seemingly because his paid short research on brookfield failed to launch.
- alex steinberg is still commenting on brookfield regardless of his holdings. his latest on 21 Dec. puts all the surge on interest rate dynamics, but that could be applied to most of the market and not insightful specific to being bearish brookfield.

as i mentioned on another post, brookfield has every opportunity to pump what most would agree is a positive secular change in the nuclear industry regarding their internal ~50% retention of westinghouse. they were derided for this before sentiment changed, as only being able to 'ditch' half of the company. this may not convince bears that brookfield's primary product is not promotion; they have a long history of often cycling assets, after improvements, for gains and\or retained value much higher than predicted. its just sometimes it takes longer than predicted.

If they repeat these capital costs continuously, then their dividend coverage looks continuously bad. It would be solved instantly by adding a balance sheet item for capitalisation of capital improvements owing to rises in future income but they don't place that item anywhere. So we are always paying the hit now, for income gains later.


I guess where I have trouble with this argument is the idea that the earnings will ALWAYS look bad as long as they are investing a lot in improvements.

In your example, the first 3 years will look bad, but year 4+ will look fine. If they take on one of this kind of ‘fixer upper’ projects every year, with bad profits in years 1-3 more than made up for in years years 4-10, then by 10 years into this strategy, profits should be fine, unless the size of these projects is increasing enormously.

So surely they’ve been playing by this playbook for long enough to have a neutral effect on earnings? Or are the gains from this strategy mostly from lumpy capital gains?

I guess where I have trouble with this argument is the idea that the earnings will ALWAYS look bad as long as they are investing a lot in improvements.

The complaint as I understood was that there is not sufficient cash flow from (rent/income minus capital costs) to cover the dividends, rather than there isn’t enough available cash generally. Part of the income comes from rent/income and part comes from asset sales above purchase cost (capital gains). The articles didn’t want to take the capital gains a seriously.

The assertion that capital gains are speculative and cannot be relied on, beyond inflation, makes a lot of sense if the assets were not being improved; in other words the capital expenses (not increasing intrinsic value but just maintaining it) are merely maintenance, rather than actual improvements - including literally expanding solar farms, adding restaurants or preatigious facades to buildings that were not there before and so on.

It may be useful to look at it in the following way. Imagine that they perform no improvements and just maintain their assets. Now their cash flow from rent/income paid directly from the assets (rent, tolls, power purchased, etc) would exceed the dividend payment. All good. The phantom income articles would not have appeared. We have capital gains in line with inflation only, plus the rent, and the dividend is covered. Everyone is happy. Brookifeld have lower total returns but the books are easier to read.

Now imagine step 1 - they make further increments to improve the assets. Let’s say we build such that for each $1 and get $1 back in intrinsic value gain.

In this situation, we now have larger capital expenses, and the calculation of (rental/income - capital expense) may now not be enough to cover the dividend. However the capital gains will be higher, so if we add the extra income from capital gains back in, then we are back at the previous situation really and the dividend is still covered. We have just spent $1 to improve IV by $1 so there is no real change, both with cash coming out of the business over the long-term, nor the IV increase long-term. It will be lumpy but over time the IV gains match the extra capital expense.

We are back at the earlier situation - the dividend is still covered but we need to, and very reasonably, count our higher capital gains which are heightened by the higher improvement expense in the past. Still all good - but the improvements were almost useless in this case as we got back only $1 for each $1 spent.

Now imagine step 2 - adjust the strategy further to only make improvements when when we are, on average, sure that that we will get back $2 in IV gains for each $1 spent.

Now the rent minus capital expense still doesn’t cover the dividend, and the articles are coming out saying Brookfield is living in a fairy tale - but the extra capital gains not only offset the capital expense but now exceed it. So the dividend is not only covered but easily covered provided we sell improved (as they say, mature) assets occasionally to realize some of tbe IV gains.

The articles were looking at it simplistically as if the capital gains are just random fluff and should be ignored. They are accounting for the loss from improvement expense but not adding that back in the capital gains from substabtially improved (vs unchanged) asset sales.

- Manlobbi

Yes, if the capital investments are considered expenses, but gains on sale of properties are not considered ‘income’ (just lucky, unrepeatable windfalls), then they could be seen as not making enough income to sustainably cover the dividend.

But if the capital investments create higher income (e.g. higher rents) but the timing of the capital investments means those revenues are delayed for a few years, then after a few years, higher incomes on old projects should roughly match high costs in new investments.

So I take it you are attributing the apparent shortfall not to the latter ‘timing’ mechanism but rather to the former phenomenon, the failure to recognize that much of the capital expenses on assets are improvements that should be matched up with realized capital gains.

dtb

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