Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookfield Asset Management third quarter results conference call. All lines have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Suzanne Fleming, Managing Partner, you may begin your conference.
Thank you operator. Good morning, everyone. Welcome to Brookfield's third quarter 2018 conference call. On the call today are Bruce Flatt, our Chief Executive Officer, Brian Lawson, our Chief Financial Officer, and Nicholas Goodman, Global Treasurer. Brian will start off by discussing the highlights of our financial and operating results for the quarter. Nick will then give an update on capital markets. Finally, Bruce will give an update on our business. After our formal comments, we'll turn the call over to the operator and take analyst questions. In order to accommodate all those who want to ask questions, we ask that you refrain from asking multiple questions at one time in order to provide an opportunity for others in the queue. We'll be happy to respond to additional questions later in the call as time permits.
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. Future events may differ materially from such statements. For further information on these risks and their potential impact 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. Now I'll turn the call over to Brian.
Thanks, Suzanne. Good morning to all of you on the call. Let me start out by saying that we are pleased with the results for the quarter. We continue to grow our asset management franchise and execute on transactions globally across our businesses. Looking at the quarter, funds from operations or FFO totaled $1.1 billion or $1.07 per share. That's a 34% increase compared to last year. Net income was $941 million, or $0.11 per share attributable to shareholders. Both FFO and net income benefited from an increase in fee-related earnings as well as contributions from new investments. I'll now cover some of the highlights within our asset management business, including fee-related earnings and carried interests. Fee-related earnings were $320 million in the current quarter and $1.2 billion on a last 12 months basis.
These results are up significantly over the prior year, and that's due to growth both in fee-bearing capital as well as higher performance fee income. Our fee-bearing capital now stands at over $140 billion, and that reflects growth from new private fund capital, and that's both from flagship funds as well as newer product offerings, and also from capital issued to privatized GGP. Given that we are actively raising capital for all three of our flagship funds as well as a number of other strategies, we expect to see continued strong growth in both fee-bearing capital and the associated base fee revenues. The other major component of asset management earnings is carried interest. Unrealized carried interest now stands at $2.6 billion before cost, and that includes $85 million generated in the most recent quarter.
Half of that unrealized carried balance relates to funds and assets that should be monetized over the next few years, and that would allow us to recognize the associated carry in FFO as the potential for clawback diminishes. In the last 12 months, we generated $1.1 billion of carried interest before cost. This is well ahead of the target carry on the capital that's been deployed to date. Turning to invested capital, excluding disposition gains, FFO from invested capital was $364 million for the quarter, $1.6 billion on an LTM basis. That compares to $378 million and $1.5 billion, respectively, in the prior year. We benefited from organic growth in same property leasing, additional home closings in the North American residential business, and improved earnings performance by companies within our private equity operations.
These increases were offset by lower earnings on our financial asset portfolio compared to particularly strong performance last year. If you strip out all the noise relating to acquisitions and dispositions, financial assets and currency fluctuations, the earnings from our operating businesses increased approximately 15% across the board. Disposition gains in FFO contributed $401 million in the quarter. That includes the sale of a partial interest in our graphite electrode manufacturing operations and the sale of core retail assets as part of the GGP privatization. Core liquidity stands at $32 billion, of which $21 billion is from uncalled fund commitments, and this capital will be used towards funding several large transactions we've committed to over the past few months, such as Enercare and Forest City. The remaining $11 billion in liquidity includes our listed issuer liquidity and cash at the corporate level.
At the corporate level, Bruce will come back to this, we're now generating roughly $2 billion of annual free cash flow due to the growth in our asset management business as well as distributions from our invested capital. Finally, I'm pleased to confirm that our board of directors has declared a $0.15 quarterly dividend that'll be payable at the end of December. Again, this represents a 7% increase over the dividend rate in 2017. With that, I'm going to hand the call over to Nick Goodman. By way of background, Nick is our Global Treasurer. Prior to this, he was the CFO of Brookfield Renewable Partners, and before that, ran our financial and capital markets activities in Europe.
We spend a lot of time talking with investors about our financing activities and what we're seeing in the funding markets. We thought it would be timely to have Nick share some of our observations with you.
Nick?
Thanks, Brian, and good morning, everyone. I'm going to spend time talking about how we finance our business, focusing on why and how we use leverage. I'll briefly discuss our view on interest rates and our approach to managing interest rate and foreign currency exposure. We felt these areas were topical given where markets are. I hope it assists you in understanding our business a little better. Starting with leverage, without stating the obvious, we use leverage to enhance returns, but we do so in a way that doesn't add undue risk. As many of you know, we finance our business from the bottom up, raising non-recourse debt at the asset level. This is predominantly long-dated, fixed rate, local currency capital that is sized to be resilient through cycles and ultimately placed with institutions who share our long-dated investment horizon.
We're very focused on ensuring we limit potential liquidity events by resisting as much as possible financial maintenance covenants or other structural enhancements, such as guarantees or cross-collateralization. Sizing the operating level debt appropriately with the right covenant package ensures that cash can flow unrestricted from the project level up to the listed issuers and ultimately to BAM and our shareholders. We complement the asset level finance with a modest amount of investment-grade corporate debt at the listed issuers and BAM. Maintaining strong investment-grade ratings has allowed us to build a strong liquid following by institutions in the public debt markets, which enables those lenders get to know us better, which is beneficial, as ultimately, they are often the same lenders who buy our debt at the asset level.
In addition, each of the listed issuers and BAM have sizable revolving credit facilities that have term on them should we require it and provide liquidity to support the operations and growth of the business. These total upwards of $10 billion. They are mostly undrawn to date. We believe that approaching capitalization this way is beneficial and creates a lower risk profile for shareholders because it sets the business up to have strong levels of liquidity, ensures the business is resilient through cycles, restricts cash traps and the ability for any one financing to have a knock-on impact on the rest of the business, and prevents us from having to raise capital at inopportune times. We have extensive relationships with the major global banks who provide the core liquidity to our business and support our growth. From our standpoint, we continue to see a very strong bank market.
We've been able to successfully raise acquisition debt to support a number of bids and acquisitions in the last 12 months. TerraForm Power and GGP, Forest City, the Enbridge asset, Enercare, and Westinghouse would be some of the high-profile and good examples of where we were able to raise fully committed acquisition facilities that de-risked our market exposure on signing off on the transactions. This access to debt capital provides us a large strategic advantage versus most other buyers. To ensure we are most efficiently using bank balance sheets and that our debt is ultimately being placed with investors who have a like-minded investment horizon, our goal is to replace acquisition or bank capital with long-dated institutional debt. In the last 12 months, we've seen very strong liquidity in the U.S. debt capital markets despite the backdrop of rising rates.
In 2018, we were able to successfully raise $1 billion at BAM in the U.S. investment-grade market at 10 and 30 years. As we have continued to build out our long-dated profile of debt and broaden our investor base in the U.S. market, we've seen a very strong reception to our name and a high level of repeat participation. In Canada, we recently raised over CAD 1 billion across three of our partnership issuers, BIP, BEP, and BPY, predominantly at 10 and five years, and we continue to see strong demand for our issuances. We also successfully accessed the U.S. debt markets for our operating companies, issuing loans and bonds to support acquisitions, expansions, and to term out existing debt. This would range from single asset financings to more complex corporate debt, and we have seen strong demand across the spectrum of issuances.
We believe that our operating expertise and ability to articulate clear and achievable business plans has played a major role in us building a strong reputation in the market and attracting high-quality investors to our transactions. Outside of North America, we've continued to see strong liquidity, both in the bank and capital markets. We've successfully financed assets in the U.K., Continental Europe, India, Asia, and Australia, and as rates have declined in Brazil, we've taken the opportunity to put a modest amount of debt on some of our assets in the country. Moving on to interest rates. The current environment of rising rates is largely limited to the U.S. As broadly expected, the Fed hiked in September. Most people focus on the 10-year U.S. Treasury rate that's 70 basis points higher year to date and at its highest level since 2011, but it's still only at 3.2%.
Our expectations are largely unchanged in that we expect the U.S. 10-year to gradually increase further as U.S. growth remains strong and the Fed continues to reduce asset purchases. However, we think the increases will be modest as the appeal of higher U.S. yields will continue to attract global capital and late cycle market concerns will see a continued bid for the safe haven of U.S. Treasuries. Short-term rates around the world are likely to remain accommodative, particularly in Europe and Japan, where the growth and inflation outlooks remain challenged. Global inflationary pressures remain subdued, and the trade dynamic means long-end yields should be mostly contained. As we have highlighted in the past, we feel our business performs very strongly in a normalized interest rate environment. As rising rates are typically coupled with economic growth, our real return assets should benefit from growth in revenues and expanding margins.
The fixed rate, long-dated nature of our financings means our cash flows are protected and the conservative leverage protects the assets from any material refinance risk. Given our global presence, we operate in many countries and therefore generate cash flows in multiple currencies. By investing in long-term real assets, our cash flows often have inflation escalation that can serve to mitigate a portion of the foreign currency risk. That, coupled with the local currency debt we raise, reduces the net exposure that we have to any one currency. Our priority when we manage this residual exposure is to lock in the exchange rate on known near-term cash flows, allowing us to effectively manage short-term liquidity.
We also seek to protect invested capital where it's economic to do so, while at the same time paying attention to the potential liquidity impacts of the hedge itself. We believe that this, along with our approach to leverage and interest rate exposure, sets Brookfield up to be resilient through cycles and is the best model to support the ongoing operations and growth of the business. I'll now hand the call over to Bruce.
Thanks, Nick, good morning, everyone. We raised $12 billion of capital since our last quarter end and are now in the midst of raising capital across all of our three flagship funds. During the quarter, we committed or invested $25 billion into new investments, which included the privatization of our retail property company, the acquisition of a pipeline business, and the take private of both a US REIT and a Canadian infrastructure business. Global capital flowing into alternative assets continues to grow more or less across the board. Our strategies and funds themselves are seeing robust inflows. This included $12 billion to date into our next opportunistic real estate fund, $6.5 billion into the first close of our latest private equity fund, and we have now launched our next infrastructure fund, which should be meaningfully larger than our last $14 billion fund.
The investing environment, despite where we are in the cycle, is fertile due to, we believe, three things, which we often talk about. The first is our scale of capital, the second, our ability to operationally rework assets, and third, our ability to pick our spots globally. Total assets under management now exceed $330 billion as we continue to deploy the large amounts of capital across our businesses. As a result, as Brian mentioned, fee-bearing capital continues to grow across the franchise, which has led to greater growth in our free cash flows. More importantly, we are increasingly seeing that our scale access to capital is a significant differentiator and therefore, increasingly a competitive advantage. To put that into context, this round of flagship funds will raise circa $50 billion of equity capital, therefore enabling us to acquire approximately $125 billion of assets.
There are few investors with that scale of capital. We continue to increase our liquidity across the board to ensure we are always prepared for volatility. In the parent company, we currently generate $2 billion of free cash annually, and we expect this to continue to grow at a rapid pace. In addition, this does not include carried interest, which, we believe is currently accumulating at about $800 million annually. At this point, as we're only paying out $600 million in common share dividends, there is a significant amount of free cash flow, historically, that has been reinvested within the business. Over the next 10 years, we expect these numbers to continue to grow as our operations and asset management business expands. Our business plans call for roughly $60 billion of cash generation over the next 10 years.
While we will continue to invest into our business, we expect that these opportunities will increasingly be outstripped at the parent level by the amount of cash generated each year. Therefore, our current expectation for deployment of this cash into opportunities would be in the range of $10 billion, leaving approximately $50 billion to be returned to shareholders. Of course, if better alternatives present themselves, it may be less than this. This is the base case plan for the business. It is most likely that the return of capital to shareholders will be accomplished through share repurchases. Alternatively, the dividend could be increased. For many, the route of share repurchase is more tax effective. More importantly, it has the added benefit of enabling us to be selective about timing and possibly create additional intrinsic value by repurchasing opportunistically.
Before concluding, I will remark on a few of our investment markets. In the U.S., credit and equity markets continue to be strong. We believe Brazil will now slowly begin to recover with their elections over. Europe is in pause, in particular the U.K., until more is known politically. Although the U.K. has been remarkably resilient over the last period of time. Australia is generally steady as it goes. India corporates are under stress. Credit markets have taken a turn for the worse with a non-bank lender in India having credit issues. Those conditions should present even more opportunity for us. With China restraints on capital, we are seeing more value opportunities than we've ever seen before. All in all, I would say that it's a constructive global market for investing. That concludes my remarks. I'll turn it over to the operator at this point.
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from Cherilyn Radbourne with TD Securities. Please go ahead.
Thanks very much, and good morning. I had a couple of bigger picture questions for this morning. Firstly, as the franchise transitions to its next phase, I wondered if you could just talk about how you're scaling the risk management function to protect against reputational risks that might reside in the businesses themselves or might flow from counterparty relationships.
Look, it's Bruce. I'd just say that the franchise that we have and the reputation we have is probably the most important thing we have in the organization. Every day, we think about how do we enhance the brand and the reputation of the organization, and that includes the counterparties we deal with, the countries that we're in, and the ethics of all of our people. As you grow, that, of course, is always more difficult because you have more people within the organization. We've spent 25 years slowly building the business, and I think we're set up to do that. I wouldn't suggest it's ever easy, I do think we're in a situation where we have the controls and the culture to be able to accomplish it.
Secondly, as you raise the next tranche of flagship funds, just wondered if you could comment on how the ESG trend is starting to impact the private fundraising environment, and whether at some point that imposes restrictions on the types of businesses that you can invest in.
Sure. Hi, Cherilyn, it's Brian. There's no doubt that there are an increased number of investors that are focused on ESG and take it into consideration in who they place their funds with. I'd say we have a strong position to be working from in that regard. If you think of the overall nature of our business with the focus on whether it's on the power side, renewable power within the property side, a lot of LEED certified buildings, big focus in the retail business. I'd say the emphasis throughout our organization on long-term sustainable businesses definitely feeds right into that same line of thinking. That's probably talking more about the environmental side of things. On the social side of it, we've seen more focus from investors on matters such as gender diversification.
To one of the points there is that's been something we've been focused on for a number of years. We've always wanted to make sure we're drawing from the broadest base to ensure that we have the best talent. We think we're in pretty good shape in that regard. We got roughly 45% of the employee base is women. It's still something we're very focused on.
Great. Thanks. That's my two.
Thanks, Cherilyn.
Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from Neil Downey with RBC Capital Markets. Please go ahead.
Thank you. Good morning. Bruce, I think in your prepared remarks, one of the numbers you mentioned was roughly $50 billion of private fundraising this cycle or this vintage. Brian or Bruce, would you be able to build that number up for us in a little more detail by fund or by strategy?
It's Brian. We actually can't give you too much in the way of granularity on that front because these activities do get carried out in the private placement market. What I would say, and I think the best way to get your mind around it is if you think about most of that will be with the three flagship funds. If you look at the scale of them today with respect to the existing infra fund being at 14, property at 9, private equity at 4.5. What we have announced to date is that we're already through 10 on the real estate fund, and we see a lot of momentum there. On the private equity, we've already announced at roughly 7 on that one. The infra, which we've just started looking at, that one was 14.
We've seen competitor funds out there looking for 18 plus. That would give you some sense of what we think is achievable in the market. That would just be the next tranche, and then we'd expect to see further growth from there. That'll be a big chunk of it. What we do have starting to kick in and be a bit more impactful over the next 5 years is from the credit and the core plus funds, which we're starting to build a good base there. That'll have some contribution over the next 3 to 5 years. We think particularly once you get 3-plus years out, then we believe the specialist strategies are really kick in.
Okay. Thank you. As a follow-up, currently warehousing, or certainly on the September 30th balance sheet, you were warehousing a 27% interest in this New York office portfolio that was transferred from BPY. There's mention that you intend to syndicate that $1.4 billion of equity in the near term. What is precisely the near term? Will that still be on the balance sheet at year-end, or is that going to be a phased process over the next couple of quarters? How do we think about that?
Yeah. It's Brian again, Neil. We're not going to rush that. We obviously want to. The role is to syndicate it. We're in conversations with quite a wide swath of investors on that at this stage. We would hope to be able to get a fair amount of that done in the very near future, whether that's the fourth quarter, whether some of it slips into next year. It's really not possible to make a definitive call on that, nor would that probably be the best thing to do. We'll work it through with our clients over the next little while.
Okay.
In short.
Yeah.
In short, I guess what I should add, it is a stellar portfolio, and we're seeing a lot of interest. Yeah.
Okay, sounds like it might have been the last one in the queue. I'll go for number three. That $1.4 billion of equity, is Brookfield Asset Management taking the principal risk there? It was transferred or purchased, I guess, effectively back early in Q3. If the value changes prior to syndication, is that upside or downside? Is that accrued to BAM, or is there any make whole with BPY?
No, that accrues to BAM.
Okay. Thank you.
Your next question comes from Sohrab Movahedi with BMO Capital Markets. Please go ahead.
Thank you. I just wanted to get some commentary around how you see the gross margins and the fee rates at the asset management level evolving as you go through the fundraising in the various regions that you're talking about, and the deployment of that capital. Thank you.
Sure. Thanks, Sohrab. It's Brian again. I think as most of you would know, our margins are around the 60% level in terms of the base, the fee revenues less the costs that are directly associated with that. We retain about 60% of that. That margin has, over the last five years, widened out, increased from more the 40 range to the 60 range today. There are clearly some benefits of scale as we've increased. Having said that, there are also areas where we have expanded the scale of resources that we have in the organization. As you point out, when you move into some of these new regions, you want to make sure that you're putting in place the necessary infrastructure and resources to support that. That requires some cost.
We've tended to build that in a bit in anticipation of that. Now, when you talk about, maybe just breaking out the two points of your comments. When you talk about where we see fee revenues and things like that going, this has been quite a resilient business. In general, our fees, if anything, have strengthened over the past while, we don't see any risks on that side of it. When you talk about margins, there are different types of the business that do have different margin associated with it in terms of the level of fees. For example, if you're just talking raw dollars, where certain products will have a lower base fee on it to begin with, albeit they'll generally have lower costs associated with them as well. There's still good margin on it.
You'll see it evolve over time as the product mix shifts somewhat towards some of the other products that we're talking about.
Okay. Helpful. Very helpful. Just given your commentary around just broader outlook on the credit markets globally, and I think favorable outlook on the credit markets globally, does that have any bearing or implications around the opportunities that you had kind of highlighted from a fundraising perspective around credit in particular? Is that deferred until closer to the three-year mark, or is that still something that could be done sooner rather than later?
Yeah. I think you're referring to whether our credit, investing in credit strategies?
Correct.
I would just say we've always been very selective about what we've done in credit, and we will continue to be that. Our real focus has been on distressed and illiquid credit. Over time, as we find opportunities, we'll continue to expand that. So far, we've been pretty selective.
Thank you very much.
There are no further questions at this time.
All right. With that, we'll close the call. Thank you everyone for participating.
Thank you. This concludes today's conference call. You may now disconnect.