Suzanne Fleming - Managing Partner, Branding & Communications Brian Lawson - Senior Managing Partner & CFO James Flatt - Senior Managing Partner, CEO & Director.

Cherilyn Radbourne - TD Securities Ann Dai - KBW Dean Wilkinson - CIBC Capital Markets Mario Saric - Scotiabank.

Thank you for standing by. This is the conference operator. Welcome to Brookfield Asset Management First Quarter of 2018 Conference Call and Webcast. [Operator Instructions]. I would like to turn the conference over to Suzanne Fleming, Managing Partner, Branding and Communications. Please go ahead, Ms. Fleming..

Thank you, operator, and good morning. Welcome to Brookfield's First Quarter 2018 Conference Call. On the call today are Bruce Flatt, our Chief Executive Officer; and Brian Lawson, our Chief Financial Officer.

Brian will start off by discussing the highlights of our financial and operating results, and Bruce will then give a business update for the quarter. After our formal comments, we'll turn the call over to the operator and take your questions. [Operator Instructions].

I'd like to remind you that in responding to questions and in talking about new initiatives in our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and U.S. securities law.

These statements reflect predictions of future events and trends and do not relate to historic events. They're subject to known and unknown risks, and future events may differ materially from such statements.

For further information on these risks and their potential impacts on our company, please see our filings with the securities regulators in Canada and the U.S. and the information available on our website. Thank you. And now I'll turn the call over to Brian..

Thank you, Suzanne, and good morning to all of you on the call.

So let me start out by saying that we're very pleased with the results for the quarter, in particular, they highlight continued fund growth and expanding product offering, a disciplined approach of recycling capital and strong growth in the FFO generated by our invested capital, and that represents a very good progress across the board.

We reported record FFO and net income over the last 12-month period. And looking at the most recent quarter in particular, funds from operations, or FFO, totaled $1.2 billion, $1.16 per share, and that's a 73% increase over last year.

Net income was $1.9 billion for the quarter, $0.84 per share attributable to Brookfield shareholders, and that's more than triple the amount of the last year. So both FFO and net income benefited from a significant increase in fee-related earnings as well as contributions from new investments and gains from asset sales in the quarter.

In addition, net income also reflects overall valuation gains within our real estate portfolios. So I'll now cover some of the highlights within FFO.

Fee-related earnings were $343 million in the current quarter, and that's double that of the prior year, due in large part to a higher level - to a large level of performance fee income and also continued growth in fee-bearing capital.

The fee-bearing capital now stands at $127 billion, and that represents growth from both our flagship private funds as well as newer product offerings, and an increase in the capitalization of our listed issuers.

Strong investment performance within our private funds increased the amount of unrealized carried interest by $337 million in the quarter, and this brings us to $2.4 billion of accumulated carried interests before costs, and we expect that to be realized in FFO over the next few years as these funds move further into the distribution phase, selling assets and distributing the proceeds to investors in the funds.

The carry that we generated to date is primarily from older vintage funds, and those tend to be smaller in size than the more recent funds that we've been raising, which are much larger.

And as they add to our product offering, our carry-eligible capital base will continue to increase, and so we expect to see meaningful growth in the amount of carried both being generated and realized. I'll now turn to invested capital. Excluding disposition gains, FFO from invested capital increased by 14% for the quarter.

They benefited from operational improvements, contributions from acquisitions, higher generation within our renewable power operations, particularly in Brazil, and higher pricing in some of the industrial business within our private equity operations.

In addition to that, disposition gains contributed nearly $500 million in the quarter as we completed several significant asset sales, including our Chilean electricity transmission business, roughly 4x our invested capital; and several core office buildings, including Bay Adelaide Centre west and east towers in Toronto.

One of the characteristics of our business that we've highlighted more recently is the significant free cash flow that we're generating in the business. The annual run rate for fee-related earnings is now roughly $1 billion, and we also received approximately $1.5 billion of annual cash distributions from our invested capital.

So after deducting roughly $500 million for interest expense preferred share dividends and corporate costs, we are generating approximately $2 billion of cash flow that is available for distribution as common share dividends or reinvestment, either in the business or to buy back stock.

And to remind you, we have very few capital requirements at the corporate level, and this positions us very well to use our cash flow to support larger fund transactions, providing bridge capital and seeding new fund products. We continue to maintain a high level of liquidity.

Our core liquidity stood at $32 billion, and that includes fund commitments, financial assets and credit lines, and this provides us with very substantial capital to pursue attractive opportunities at scale. Finally, I am pleased to confirm that our Board of Directors has declared a $0.15 per share quarterly dividend, payable at the end of June.

And with that, I will hand the call over to Bruce..

Good morning, and thank you, everyone, for joining. As Brian noted, our cash levels, our core liquidity and our dry powder in our funds were at their highest levels ever at our franchise.

Some of this, of course, is because our business is larger than it's ever been, but it also because we're continuing to harvest cash from investments while investing at a conservative pace.

Dry powder and core liquidity in the business is close to $30 billion and currently growing at all levels, being our funds, our partnerships and at corporate levels. Our asset management activities continue to expand at a rapid pace, resulting in a substantial and growing fees to BAM.

Total assets under management increased to just over $280 billion this quarter. I would point you to a chart in the quarterly letter, and we normally put this chart in, but the chart this quarter shows the powerful leverage of the franchise, which assets under management went up 10%, which resulted in fee-bearing capital going up 12%.

More importantly, in the sequential 12 months, has led to a rate of total fees being up 24%, and in fact, our fee-related earnings after costs, up 35%. So you can see us the funds get larger, the margin expansion to the bottom line is more significant.

Fee-related earnings just went - surpassed the $1 billion for the 12-month period, which was an increase of 56% over the prior last 12 months, and fee-bearing capital reached $127 billion at quarter-end and continues to grow.

As we continue to add funds without the commensurate return of the same amount of capital, the stacking effect on our earnings continues to increase. This growth in capital includes our new private fund fee-bearing capital from the first close of our latest real estate opportunity fund.

And we added $4 billion of fee-bearing capital in our public securities business with the acquisition of a small infrastructure manager. The business also added - this business purchase also added retail distribution capabilities and an experienced investment team.

We were also active in fundraising, and continue to see an expanding investor appetite for a number of other funds in addition to our flagship products, which are largely focused on adding income alternatives for clients. This is focused on Core Plus and credit products.

And during the quarter we raised additional capital for our Core Plus real estate open-ended fund, our real estate mezzanine lending open-end fund, and our infrastructure credit fund. We also launched fundraising for two additional perpetual fund products, a core infrastructure fund and an Australia core real estate fund.

In our flagship funds, which are the - are large private funds, we continue to invest and have $22 billion of uncalled third-party commitments available to deploy, positioning us well to respond to opportunities. And with fundraising still in the markets, that number should continue to grow.

We also continue to try to explain better to our shareholders how the value of the business grows. And over the last couple of quarters, as Brian mentioned, we've included economic net income, or referred to as ENI, as a performance measure in our asset management segment.

This measure is the sum of that fee-related earnings, which are cash paid to us and also the unrealized carried interest generated in a given period. And while we use FFO as a primary measure of performance, we do believe that ENI is a useful measure for investors to assess the total value created within our funds in a period.

And the potential for future FFO is that unrealized carry is converted into cash flow and realized. Both FFO and ENI include fee-related earnings, but FFO, of course, includes only the realized carried interest, whereas ENI has the unrealized carry in as well.

And as a reminder, we only recognize carry in the financial statements once we have a sufficient insurance that it's no longer subject to future investment performance, which usually means the sale of assets. And this is different than most alternative managers that mark-to-market carry within their income statement.

Unrealized carried interest represents the amount of carried interest based on investment performed to date, to the best of our - we can expect, and can be used to track progress towards future carried interest realizations, which then go into FFO.

And changes in carried - unrealized carried interests provide investors with an indication as to how we're tracking to the eventual realization, which typically of occur in the later years of funds. Lastly, as we raise more capital, our carry-eligible capital base is also increasing at a pretty fast pace.

We almost doubled the carry eligible capital, from $25 billion in '15 to $40 billion in '16, and this continued to grow, and that eventually gets captured in our ENI. So all in all, a pretty successful quarter, and we continue to track on our results. And operator, with those remarks, I'll turn it over to you.

And Brian or I would be pleased to take any questions, if there are..

[Operator Instructions]. Your first question comes from Cheril Radbourne with TD Securities..

Just in terms of the $2.4 billion of growth on recognized carry that you've got, could you talk about how you're tracking versus the expected realization profile that you've presented to us over the last couple of investor days?.

Sure, Cherilyn, it's Brian. So I think what you may be referring to is - we indicated that the amount of carry we would expect to generate in the funds over the next 8 or 10 years, and receive, would total in and around $8 billion to $9 billion, and that's based on the expected return profile of the funds.

And that still holds - in fact, the number has probably gotten a little larger. The - what we're talking about in terms of the $2.4 billion is what has actually generated within the funds based on investment pro forma to date. So if we wound up all the funds as of today, we would collect $2.4 billion of growth carry.

Based on the maturity profile of those funds, we would expect half of that to come in over the next three years. And that's probably realistically going to be more 18 to 36 months, but if we sell a few things, then it could come sooner. So that would be roughly $1.2 billion over the next three years..

But big picture, you're tracking somewhat ahead of that $8 billion to $9 billion cumulative carry that we've been talking about?.

Yes. That we would have posted - yes, in Investor Day last time, yes..

And then, a second question. I believe you've also recently launched a venture capital strategy. So I wonder if you could just talk about why you felt you needed a venture offering, and how BAM value-oriented investment strategy kind of overlays against the venture strategy..

So it's a relevant question because you wouldn't expect us to be doing venture investing within a real asset strategy. But we found two things. The first one is that there are many real assets that we have within the $300 billion of assets that we have, that are now can be advanced by new technologies that are coming into use.

And because of that, we can therefore offer our platforms that we have for companies to test in a much more effective fashion than they would otherwise have if they went out, because we have some very large businesses where technology can be deployed.

Secondly, there - and because of that, companies that are in their early stages - and we're not doing things that in the early, early stage, but in the earlier parts of their formation - well, accept investments from entities like our ourself, if we can bring them something more than just money.

There's many people that want to invest in venture things that just have money, what we have is something else.

So the idea of the pool of money that we put together is that it will only invest in venture strategies revolving around the real asset investment businesses that we have, where we can be advantaged, and the companies can be advantage by associating with us. The initial pool of capital is 100% Brookfield Asset Management capital.

Eventually, our intention will be to turn this into a business where we can bring our clients into this to be - to also benefit from the things that we're doing. But for the initial stages, we're working with the team and honing the strategy just with our own capital from Brookfield..

The next question comes from Ann Dai from KBW..

First, I have a question of for you about the partnership with GLP to create a solar grid using their industrial rooftop space.

I guess I'm just curious, how long term do you see this play? How big can it be over time? And do you feel like this type of partnership is replicable elsewhere geographically or in other asset classes? Or do you really feel like it's unique to this situation?.

I'll take the last portion of the question first, and just say that we have many partnerships around the world with different entities. And obviously, all of our sovereign and institutional partners are in a different form of partnerships. So where it makes sense, we partner with other people.

We felt it in the situation as did the - our partner felt that the two of us together could make a meaningful contribution to the business. And we have a lot of renewables experience. They happen to be experts in China. And therefore, we felt together, one plus one hopefully made three.

So we look for situations like that, where we bring - and we will do things with partnership if it makes sense. With respect to the size of the business, look, we think in the initial stages, it's probably $500 million to $1 billion of capital put to work.

But eventually, there are a lot of rooftops in China, and they need distributed generation on the East Coast because a lot of the power is away from the East Coast. And therefore, we think it could be larger longer term, but we'll have to see how the initial stages go.

That's where - what we've set out for the business plan for it in the first stages..

Okay. Appreciate the color. And also, earlier in your remarks, just moving on to the - the asset management side of things. You mentioned the new perpetual fund product, the core infrastructure in Australia real estate.

Can you just give us a little color around the potential for fundraising given the size of each of those markets? And then, are these kind of the first group of strategies that you're looking - you had look to roll out in the perpetual fund structure? Or is there more behind it?.

So as you know, we have - I think you probably know, we have a Core Plus open-ended real estate fund, where we're rebuying real estate assets in the U.S.

We've now launched a product for core infrastructure, which our assets - and what we found is there's many assets out there that our clients would love to own as an alternative to fix income but don't meet the thresholds of returns and - that we get in our more opportunistic funds. So the infrastructure fund will target that.

And many of the credit products we have can also be launched in open-ended structures. And behind those will be others, possibly as renewables, possibly adding other countries to it. So we did the first one in the United States. We're now doing an open-ended structure in Australia. We could eventually launch Europe, Asia and other countries.

So we'll play it as we go. We can only market so many things at once to our clients and only focus on so many things, but there's a big appetite for these type of products as fixed income alternatives..

[Operator Instructions]. Your next question comes from Dean Wilkinson with CIBC World Markets..

Just looking at the year carry-eligible capital and how that's going to pencil out over the next couple of years.

Would it be fair, Brian, to say that, that number, on an annualized basis, is likely to double into the $2 billion range?.

Sorry, in terms of the amount of unrealized carry that we generate each year?.

Yes..

Yes. Yes, over the next period of time, correct. Really for two reasons. One is the amount of eligible carry within the funds will grow with the larger funds.

But perhaps, just as importantly, particularly over the next few years as some of those larger funds that we've raised more recently get more fully invested and as they get further along into the investment period, then you really begin to see the capital being put to work and generating that investment performance that gives rise to unrealized carry.

So there's really two factors working there..

Okay.

And as you look to increase the amount of carry-eligible capital, would that be geared more towards the opportunistic or the credit? Or would it be sort of a 50-50 split, kind of like it is now?.

So you tend to get a larger carry component in the more opportunistic and value-add type funds, as opposed to the Core Plus and credit-type funds. So yes, it would be skewed a bit more towards those strategies..

[Operator Instructions]. We do have a question with Mario Saric, Scotiabank..

It was interesting to see the commentary in the letter or in your press release with respect to the composition of your LP base, it looks like you're gaining traction with pension fund and with LP investors outside of North America.

I was just wondering if you can maybe provide a bit of color in terms of what's driving kind of the increased pension fund participation in your funds.

And how much runway do you think you may have when you look at, let's say, your pension fund participation in your funds relative to a broader benchmark in the asset management business?.

So I'll try that. And I'll just say that, in general, when you look at our funds, they're - the private funds are largely sovereign funds, institutional pension funds and insurance companies globally. And I would say the underlying consideration are twofold.

One is, funds keep growing very significantly with the amount of capital that are in them, sovereign plans and pension funds, because they keep compounding away. And obviously, the last 6, 7 years have been good for that as their - the returns have been good, so the numbers are just getting larger and larger.

And secondly, the allocations are getting bigger to real assets. And the reason for that is that the returns on a risk-adjusted basis are good and that they can be more assured of having - meeting the return expectations with private real assets. And so we continue to see the allocations growing.

So there's two things that are happening, the total number is growing, but the allocation and percentages are growing. And that's really what's driving it across the board in almost all major institutional clients in the world. And initially, it was the largest institutions that were doing this.

The smaller - the mid-size and smaller ones have learned from the large ones, and they and their investment communities are now allocating to alternatives. So we think that'll keep going as long as we stay in low-ish interest rates, and we certainly seem to be - continue to be in that environment..

Okay. Great. And then I guess my second question is I know that there was a very small downtick in target returns within the opportunistic platforms. It was just about 200 basis points, I believe.

Does that have any implication in terms of the base fee that you we're able to charge LP investors? Or is it more predicated around the - on the carries going forward?.

No. It's really more question of composition of those funds, as a couple that had matured we distributed some capital out of them and we're just in the process of raising additional capital. So it'll get back - so that - we should probably pick that back up again..

Okay. Sorry, it doesn't paint a picture. It doesn't suggest anything in terms of what you're seeing..

No, no. In terms of....

From a valuation standpoint in the margin?.

Yes, correct. In terms of what you might - no, that's right, Mario..

This concludes the question-and-answer session. I will now hand the call back over to Suzanne Fleming for closing remarks..

And with that, we'll end the call. Thank you, everyone, for participating..

This concludes today's conference call. You may now disconnect..