Thank you for standing by. This is the conference operator. Welcome to the Brookfield Asset Management Q3 2016 conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star and one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Suzanne Fleming, Senior Vice President, Communications. Please go ahead.
Thank you, operator. Good morning. Welcome to Brookfield's third quarter 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 for the quarter. Bruce will then give an overview of our market outlook and Brookfield's approach to investing. After our final comments, we'll turn the call over to the operator and take your questions. I'd like to remind you that in responding to questions and talking about both new initiatives and 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 are 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. I'll now turn the call over to Brian.
Thanks, Suzanne. Good morning. We had a good quarter across all of our major businesses. Funds from operation, or FFO, for the third quarter of 2016 was $883 million, or $0.87 per share. That compares with $501 million in the prior year quarter. This included $491 million of FFO from operating activities, an increase of 23%, which in turn was due to a 37% increase in fee-related earnings and a 17% increase in FFO from invested capital. A good pickup on both fronts. FFO for the quarter also included $392 million of realized disposition gains, compared with $88 million for the 2015 quarter, as we continue to be active in selling stabilized assets and redeploying the capital at higher yields elsewhere or returning it to investors. Some of the highlights in our asset management operations.
Fee-related earnings was $173 million in the quarter. That 37% pickup that I referenced earlier was largely due to the increase in our fee-bearing capital, which now stands at $111 billion. That's up 23% over the last 12 months. Importantly, this also gives rise to a higher level of steadily recurring base management fees going forward. As a result, our annualized run rate of recurring asset management revenues now stands at approximately $1.2 billion. In terms of carried interest, we increased the amount of deferred carry on existing funds to roughly $1 billion, based on performance to date. Furthermore, the continued growth in private fund fee-bearing capital in the last 12 months increased the amount of capital on which we are entitled to earn carried interest to $38 billion.
That translates into roughly $830 million of annualized target carry over the life of the funds annually, straight line based on targeted investment returns. Taken together, the annualized fee revenues and target carry now stand collectively at $2 billion. That's up from $1.4 billion this time last year. We continue to deploy private fund capital and execute significant transactions across our real asset strategies. Over the last 12 months, we announced or completed transactions and acquisitions that will deploy $20 billion of capital, including $10 billion in the most recent quarter. As a result, our most recent flagship funds in infrastructure and private equity are over 30% and 45% invested or committed, respectively. Our most recent flagship real estate opportunity fund is already 67% committed or invested.
With this much capital now deployed and given the substantial pipeline of new investment opportunities, we expect to begin launching successor funds beginning next year. As a result, we believe we are well positioned to continue expanding fee-bearing capital and asset management income at a strong pace. Turning now to our operating businesses. Operating FFO from the property group was $178 million, an increase from incremental earnings on capital deployed offset by the absence of FFO from core office and retail assets that were sold. FFO also benefited from big property growth due to lease commencements at Brookfield Place New York and the sale of merchant developments. We also sold a partial interest in a mall in Las Vegas, an Australian office tower, and those collectively gave rise to $367 million of the disposition gains I mentioned earlier. Our renewable power group produced FFO of $49 million.
FFO from new acquisitions offset below long-term average generation in the Northeastern U.S. Our energy marketing business benefited from an increase in the portion of generation in higher margin markets and higher capacity revenues. Infrastructure operations contributed FFO of $69 million. That's up 8% from the same period last year, benefiting from recent investments in the transport and energy sectors. Same-store FFO increased by 9% on a constant currency basis. This reflects inflationary increases in rates and the benefits of growth projects that were recently commissioned. In our private equity group, we had FFO of $107 million. Panelboard FFO grew by $33 million as a result of higher pricing and volumes. On the other hand, our share of FFO from Brookfield Business Partners decreased following the spin-off, hence the reduced ownership in those underlying businesses.
Our residential business saw lower margins on project deliveries in Brazil and Western Canada, but this was partially offset by higher volumes and pricing in Eastern Canada. Our liquidity position at quarter end remains strong. We have $19 billion of client commitments available to invest over the next three years, which, combined with our $7 billion of core balance sheet liquidity, provides us with substantial capital to execute transactions. Finally, the board of directors declared a quarterly dividend of $0.13 per share, payable at the end of December, that's unchanged from the prior quarter. That sums up my comments on the results for the quarter, and I will now hand the call over to Bruce.
Thank you, Brian, and good day, everyone. First, I will speak about real assets and interest rates. This is always a topic of conversation, it seems, for us, but I know it is of particular interest to many of you because of the recent U.S. election and the increase in the rates since the election. To sum up, firstly, I'd say our view is quite simple. We are hoping that short and long rates go up as they have been unduly low for too long. We do not, though, believe that the paradigm of lower rates has changed. As a result, we strongly believe that we're still going to be in a relatively low interest rate environment for this business cycle, and that our business model will work very well.
Stepping back from that, the US Federal Reserve has been attempting to increase short rates to, among other things, ensure that they have room to cut them when the U.S. economy needs extra stimulus in the future. If they accomplish this over the next while, that will be positive for the global economy and for all businesses. It is, however, very important to note that real asset values are affected by long rates, not short rates. While real assets are tangentially affected by short rates, they are virtually always compared to what can be earned on a long bond.
While we believe that both the short rates and the long rates will rise, and under this administration, maybe even a little more and faster than was previously expected, if they are successful with this discussed program, we do believe that long rates will stay relatively muted during the cycle due to a number of factors. As a result, we're not concerned about real asset values during this cycle because of the large spread that has existed between what we can earn and where treasury yields have traded down to. This has been caused by many factors, but the most important point is that the world continues to deleverage from an excess of credit that built up over the last number of decades, and as a result, the disinflationary pressures that persist and global economic activity that remains below trend.
One should also remember that the discussions of increased rates in the U.S. and well across the world that may follow in some effect, the disinflationary pressures still exist in many other places in the world, including Europe, Japan, China, and elsewhere. Despite the uncertainty that the QE programs have caused for markets, what remains clear is that this dynamic has created and continues to create an unprecedented environment for investment in real assets. With long bond yields being relatively low around the world, real assets continue to offer investors extremely attractive risk-adjusted yields, particularly for those seeking safe, long-duration exposures. As such, we believe we will continue to see substantial flows of capital into real assets, and our business remains well-positioned to support our investors in achieving these returns. In summary, there is significant capital to be invested in real assets. Comparable returns are anemic.
Business conditions are good, therefore they offer revenue growth. With low-ish inflation, this enables margin expansion. Our view is it appears the odds are currently and still stacked heavily in favor of lower than usual interest rates for the medium term, if not longer. With close to $50 trillion of savings in the world that need to earn a return, these savings are increasingly targeted at the returns and dependability that come from the investments in real assets. Second, I wanted to just make a couple comments on capital availability for our business. We continue to see substantial flows of capital to all alternative sectors unabated. This is due to a few factors. Among them, the growing size of institutions that are across the world. Second, the compounding of capital within these funds. Third, the expanding allocations to real assets, which is probably the most important.
We have grown our select group of clients to just under 500, and we'll likely grow that to over 1,000 over the next five years. Our relationships continue to get broader and deeper as we create products for smaller clients to assist them with their needs and co-invest with our larger ones. Few businesses have the opportunity to grow a business at the pace which the real asset alternative space is growing. We continue to work to be a leader in this space. In this regard, we are currently raising a number of real estate, infrastructure, and corporate credit funds with strong inflows in this environment. We're creating a number of real asset products for mid-size clients who do not have access to many of the areas where we invest.
Lastly, as Brian mentioned, we're getting ready to launch our next series of flagship funds as our pace of deployment has been ahead of projections. In summary, cash flows are growing, net income is growing, we continue to see inflows into our products, as well as find exceptional places to put this money to work. With that, operator, I'll turn it over to you to take any questions if there are any.
Thank you. We will now begin the question and answer session. To join the question queue, you may press star and one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We'll pause a moment as callers join the queue. The first question is from Cherilyn Radbourne of TD Securities. Please go ahead.
Thanks very much, good morning. Wanted to start by asking you something from your letter to shareholders, which talked about the value of cash. I guess on the surface that seemed maybe a little contradictory at first, because on the one hand, you're making good progress investing your latest round of flagship funds. On the other hand, it sounds like you're starting to accumulate cash at the margin. Maybe you can just expand on that thought.
Yeah. I just say, on the margin for our own balance sheet, as you know, most of our capital is used to either invest beside our fund clients or secondly, to assist our funds or our listed entities do things that they otherwise can't do. From time to time, we use the balance sheet to support or make investments because we think that things are extremely undervalued across the world. I go back to 2008 and 2009. There were so many opportunities, we stretched our balance sheet as much as we could to ensure that we could capitalize on as many of those as were available to us.
At this point in time, I guess our view is that the world is in a good place, valuations, while we continue to find things for our funds to do, there's no reason to have that on our own balance sheet. We continue to monetize assets on the margin, are under-invested just to be more conservative on the balance sheet. While that, in the short term, probably affects our capital returns than we otherwise would have, we think it's a good thing to have, especially when you're farther into a business cycle.
Okay. That's helpful. My second question is very different, and I think probably more for Brian. Just wonder if you could talk about how you present the FFO from realized carry in your results. This quarter, it's included as part of realized disposition gains. I'm just curious if that's your intention as realized carry begins to make a more regular and larger contribution to your results, or does it then become part of core FFO?
Yeah. I wouldn't say that we include it. I say we include it alongside realized disposition gains in the quarter. We wouldn't propose to be having the two included together. We did have a small disposition, a true disposition gain within our asset management results this year because we sold a small business within our public securities business. I'm not sure if that might have made a difference. Going forward, I think we do see the fee-related earnings being one important stream. Carry, which obviously as we suggested, is accumulating and will start to work its way into our reported FFO a little bit further down the road, would be a second very important and growing stream of earnings as well. Those two together would make up the bulk of the asset management returns.
We'll always have realized disposition gains representing our share of disposition activity throughout the business.
Great. Thank you. That's my two.
Yeah.
The next question is from Alex Avery of CIBC.
Thank you. Bruce, you had some discussions, or there was some discussion in your letter to shareholders about QE and I guess fiscal stimulus perhaps supplanting that as the tool to stimulate the economy. Are you seeing opportunities to participate as private capital in greenfield infrastructure projects? Have you had any discussions on this front, and are there any geographies in particular where you think governments might be more amenable to private participation in fiscal stimulus?
As you know, in most of our businesses, in fact, in all of our businesses, what we generally do is buy assets. Then the greenfield quote, unquote, are usually expansions of projects we have or new greenfield projects alongside other businesses or other projects that we have. I guess the most important thing to note is that where we have operations, those are usually the best ways to find opportunities to put new money to work in new projects. I would say the second thing in answer to the question is that the world today, everyone's talking about infrastructure. In the developed economies, there is not that much of it has been done. In the developing economies, there is significant infrastructure spending going on. There has been for many years, and there will be for many years going forward.
The toll roads that we're building in Brazil and transmission lines we're building in Brazil and toll roads we're building in Peru, and a number of places, and in India, and what's going on in China. There is significant greenfield and brownfield and expansions going on in those countries, both by us and by others. You haven't seen a lot in the developed economies. Both Canada has started to talk about it, and the U.S. obviously is now talking about it. The only caveat I say is these are very long duration projects, and they take long periods of time to bring to fruition. I wouldn't expect a lot of infrastructure projects to affect the economies within a very short period of time.
Would you expect any change in terms of the likelihood or the regulatory hurdles in terms of moving forward with projects that you might have in terms of expansions? Any change there?
Meaning, are you asking, sorry, about the United States or-
More broadly. You've got lots of expansion potential in Australia and other markets.
Yeah, look, I think the world where we believe both there's more money coming to private infrastructure and that money being available is going to push significant amounts of infrastructure into private hands. I think it's everywhere in the world, given the debt loads that are in countries, private infrastructure will be pushed into private hands. We believe every country in the world will eventually privatize most of the infrastructure that it has on its own balance sheets and will also push the new greenfield projects into private hands. When that occurs and how it occurs, every country is different. Eventually, I think that's the 20-year story for infrastructure, is this will become one of the biggest businesses in the world because this infrastructure is going to get pushed into private hands because it has to.
That's one way for the governments to fund themselves, and that's going to happen. On the regulatory side, some countries are doing better than others. I think everyone's going to have to get there, and they're getting there at their own pace.
Okay. In your remarks, you also talked about cash being particularly valuable when financial accidents happen. Beyond being eight years into an expansion, are you seeing anything else in the public or private markets that is causing you concern?
No, actually not. I'd say we see credit markets fully open and available to good corporations globally, with barring some of the countries that have had financial stress, but generally available everywhere. I see no real reason that there's any accidents coming. It's just when those times are available and you're eight years into a cycle and markets are higher than where they were before, one should just be a little more conservative. That's the time to be a little more conservative than at the bottom of the market.
Okay, that's great. Thank you.
The next question is from Ann Dai of KBW. Please go ahead.
Hi, good morning. Thank you. I had a question for you around the recently announced partnership with Macy's. Hoping you could give some color on that. Is it a partnership solely with them, or does it potentially involve some of the other listed partnerships? Is it more of an advisory relationship, or are you putting capital into redevelopment?
If people didn't see it, what's being referred to is that we announced, or Macy's announced yesterday that they had created a partnership with us to work on their real estate within Macy's. Maybe I'll step back and just make a couple comments first, then I'll try to specifically answer your questions. The reason for the partnership is that Macy's is a great retailer. Due to their remaking the business today, they have a substantial amount of excess real estate in the company. We've created a partnership where we will work with them to repurpose some of the real estate and redevelop that real estate. This is a situation where I would say, and not always you can say this in a circumstance, but I would say one plus one should equal three.
Because for us, what it does is it creates a pipeline of opportunities where we can go to work and see whether we can create value of a piece of real estate that is just land today or has some other use. For Macy's, they're in the retail business, and they're not in the real estate business, so we should be able to make them more money out of their real estate than they would otherwise receive. Specifically answering your question, the transaction and the agreement and partnership was signed with Brookfield Asset Management, and we, with our real estate teams and the manager, will be working on this effort with them. When the opportunities are identified and capital will go into them, then we will identify whichever entity that is most appropriate for that.
It may possibly go into a fund, may possibly go into one of our partnerships. At the time, we'll define each piece of real estate as we go along as to where it is most appropriate. As always, if it doesn't fit one of them, it would be done within Brookfield Asset Management, but that not often occurs. The expectation is that we will bring the significant amounts of capital to the table to be able to do these redevelopments with them.
I appreciate the color. For my second question, I just wanted to go back to the comment around the real asset products that you're creating targeted more towards mid-size clients. Could you elaborate on some of those?
Yeah. I'd just say, probably the most interesting thing that we found in the last while and what we're working towards is that the real asset space for many of our private clients, these are large transactions and large amounts of money that we put to work. Often people want to have exposure to a number of the areas. In private markets, there hasn't been a product that gives people exposure to all of the things that we do. We've been working on creating products that we can offer to our smaller to mid-size clients that would have all of the things that we do available to them.
It may have a multi-product, it may have multi-fund investments in it, so real estate, infrastructure, power, private equity, or it may have listed and unlisted securities in it, and it may have co-investments or other direct investments in it that are outside the fund. What we're trying to do is become a one-stop shop for both large institutional clients that can do investments with us, but also tailor these products for smaller institutions who don't have the resources that some of the larger ones do.
Are you about the early days into this type of product, or have you already had some mandates in that space?
We're just starting into a couple today.
Okay. Thanks so much.
The next question is from Andrew Kuske of Credit Suisse. Please go ahead. Pardon me. I do wish to remind anyone who wishes to join the question queue that they may press star then one to join the queue. Now the next question is from Andrew Kuske.
Thank you, and good morning, Bruce. I think you mentioned that the pace of deployment was really going ahead of schedule. Could you maybe give us a little bit of insight as to when you foresee the tipping point happening on your current funds hitting that mark when you'll be able to start to raise the successor funds?
Sure. It's Brian here, Andrew. Generally, it depends on each fund is a little bit different in terms of returns, but typically 70%-75%. If you think about the real estate fund being 67%, we are obviously very close to being able to get into marketing the next fund there. The other two flagship funds are a bit behind that. If the pace continues, arguably we could be getting into those ones next year as well. All in all, I think what it speaks to is us being able to maintain quite a rapid pace of raising the funds and given the breadth of opportunities to redeploy that capital and move on to the next one.
That's helpful. Related, we've seen a trend of the funds just getting bigger and bigger, and we've seen the growth in the funds. As the funds and maybe future funds get bigger, do you see greater opportunities for co-invest, meaning a larger number of clients will have co-invest opportunities? The final question is, do you expect to see ongoing margin expansion as the funds also get bigger? Because we did see quite good margin expansion on a year-over-year basis.
Yeah, sure. I'll start off on that one, Andrew. It's Brian again. I guess going in order there, yes, we would expect that the funds will continue to increase in size. We just look at the market, what some of the other alternative asset managers have in terms of the size of their funds. There is just that natural progression of the funds being larger, particularly as you're returning capital and then clients choosing to redeploy it with you. We would expect to see the next vintage being, again, higher. You probably get a larger step up in some of the smaller funds than you would in perhaps the largest ones. That should give rise, notwithstanding the size of the funds, given the size of the transactions we're seeing, we expect there'll still be a lot of good co-invest opportunities.
It's something that is important to clients. I think that comes down to really providing that range of alternatives that Bruce mentioned. Lastly on, if I've got the various components of the question, on the margin question, we do see those continuing to firm out at that sort of 60% level. Arguably, there's some room for further growth there. There's no doubt there's some efficiencies and scale in the business when it comes down to the nature of the resources that we're required to put to work to do this successfully.
Okay. That's very helpful. Thank you.
This concludes the question and answer session. I'd like to turn the conference back over to Mr. Flatt for closing remarks.
Hi. It's Suzanne. With that, we'll end the call. Thank you all for participating.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.