Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Brookfield Asset Management 2015 second quarter results conference call and webcast. 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, simply press star and one on your touch-tone phone. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Andrew Willis, Senior Vice President, Communications for Brookfield Asset Management. Please go ahead.
Thank you, operator. Good morning. Welcome to Brookfield's second quarter webcast and conference call. On the call today are Bruce Flatt, our Chief Executive Officer, and Brian Lawson, our Chief Financial Officer. Brian will start this morning discussing the highlights of our financial and operating results. Bruce will discuss our views on the market environment and our investment strategy. At the end of our formal comments, we will turn the call over to the operator and open the call up for your 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 will be happy to respond to additional questions later in the call as time permits.
At this time, I would remind you that in responding to questions and in talking about our new initiatives and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information for investors, I would encourage you to review our annual information form and our annual report, both of which are available on our website. Thank you. I'll now turn the call over to Brian.
Thanks, Andy. Good morning. We had a solid quarter highlighted by strong growth in our asset management business. Our clients continued to commit capital to our private and public funds. We had net capital inflows of $9 billion in the quarter. That brings fee-bearing capital to nearly $100 billion, representing an 18% increase over the past year, and gave rise to a 44% increase in fee-related earnings. We deployed $4 billion of capital into new initiatives and advanced a number of key development projects, which Bruce will speak to in his remarks. Our funds from operations, or FFO, in the second quarter were $520 million. In addition to the pickup in fee-related earnings, we also had improved operating results at most of our businesses, including increased volumes, operational improvements, and the contribution from recently completed acquisitions and development projects.
On the other hand, we experienced below-average generation in our renewable energy business due to weak hydrology and a lower contribution from our residential property business. Net income in the quarter was $1.2 billion, and this compares to $1.6 billion of net income a year ago. As I mentioned, our fee-bearing assets are now at the $100 billion mark and increased by $15 billion over the last 12 months. There's several components of this growth, and if I just break down the expansion of the three major elements within this business to illustrate our ability to access different forms of the capital. First of all, we added more than $7 billion to our private funds over the past 12 months and are currently raising an additional $5 billion and expect to be in a position to launch an additional $10 billion-$15 billion of fundraising later this year.
We now have a well-established base of 320 investors globally and are well-positioned for continued growth. The second component of our growth in fee-bearing assets was a $6 billion increase in the capitalization of our flagship listed partnerships over the past year. These entities are listed on the New York Stock Exchange and the Toronto Stock Exchange and have aggregate market capitalization of $45 billion. Finally, we increased the assets in our public market securities business by $2 billion, bringing total equity and debt securities managed in this part of our business to $18 billion. We think this is a very good demonstration of how our strategy of offering a combination of listed securities and private funds gives us diversification in our fee-bearing assets and the ability to raise capital in a variety of markets. Now turning to our results.
We had $142 million in fee-related earnings for the quarter, compared to $88 million a year ago. The annualized fee base and target carried interest is now running at $1.4 billion, and that's up by 28% year-over-year, reflecting growth in fee-bearing capital. In our property business, we recorded FFO of $324 million, and that compares to $271 million in the same quarter a year ago. Disposition gains totaled $181 million as we proceeded and completed the sale of mature assets, including office buildings in Boston and Washington. Last year, we had $128 million of such gains. In the office portfolio, we're signing new leases at 36% above expiring rents, and in our retail business, new leases are being done at 10% above expiring rents. We've got good growth there as well. The renewable energy business generated FFO of $66 million.
This was down from the same period a year ago, and as I mentioned, reflects lower than normal water levels in Brazil and some of our North American hydro facilities. Overall generation levels were about 11% below long-term averages. At the end of the quarter, though, North American reservoir levels were back at their long-term average, which means we are well positioned to capture premium summer power pricing. At our infrastructure business, FFO was $61 million. This is up over the last year, and part of that increase comes from FFO generated by newly acquired businesses such as our telecom business operations in France and transportation business in Brazil. Importantly, we also had 11% year-over-year growth in same-store FFO, meaning the operations that we held both in the period last year and in this year if you hold currencies constant.
In our private equity business, we generated FFO of $12 million. This was below what we reported in the prior period for a few factors. First of all, we experienced lower prices in some of our more cyclical investments. We did not receive FFO from businesses that we sold last year, which also gave rise to some disposition gains in the prior year. Finally, in our residential housing business, which is now part of the private equity business, we are seeing strength in U.S. markets where we're selling more homes. However, in Brazil, economic growth, as I think you all know, has slowed, and consumer demand is down. As a result, we've delivered fewer projects, which impacted our results there. Lastly, our board declared a quarterly dividend of $0.12 per common share, payable on September 30th, 2015. Thank you.
With that, I will now turn the call over to Bruce.
Thanks, Brian, and good morning, everyone. I'd like to take a few minutes to speak about four items. First, the overall market environment. Second, interest rates. Third, some of our investment activity. Fourth, a few comments on our listed entities. First, on the economic environment. I guess our view is that none of the business events in the first half have given us any pause about the continued recovery of the U.S. economy. We see no indication in our businesses of a retracement. Despite this, though, we have been net sellers of assets in the U.S., merely given the robust amounts of capital available to investors. Oil and commodity prices have hurt economies like Australia and Canada. We're still seeing very good employment levels across those regions. We continue to pursue value investments in and around these markets.
Brazil is undergoing extreme pressure, but the country has a strong democracy with an emerging middle class. As a result, we are investing large sums of capital there and believe we are acquiring some incredible assets that will be great value investments over the longer term. In India, government reform continues, and we're pleased with the investments we've made over the last few years. Capital is starting to migrate back to the country. India is still recovering in many sectors. We hope to selectively put more money to work in opportunities in property, power, and possibly infrastructure. With Eurozone interest rates near zero and looking to stay that way versus the United States, our investments are focused on operating businesses where we can achieve some growing cash flows, but while locking in extremely attractive borrowing costs. Our telecom tower business in France is a good example of that.
Second, we often get asked about interest rates. Our view continues to be the same. We've been running our business with the expectation and belief that interest rates will increase, particularly in the U.S. We actually welcome this as interest rates only rise when the economy is improving, and that is positive for business. Our business is positioned to do well in a higher interest rate environment, and there's four simple reasons for that. The first is that, and most important reason is that we own real return assets that increase their cash flow generating capacity over time, either through one of three methods. The first is contractual rights. The second is our ability to operate them more efficiently or better. The third is an expansion of the operation where we can invest small amounts of capital and enhance the cash flow significantly.
These enhancements should far outpace any extra interest costs, in particular in a more inflationary environment. Second reason is we generally earn total returns on equity of 10% or 20%, and this is much greater than treasury yields. Therefore, a 1% or 2% increase in interest rates does not really impact the long-term returns of the assets that we purchase. Third, we finance approximately 50% of our investments with debt, and moving interest rates up by 1% impacts our returns by 1% or 2%, which is not that meaningful to returns. Fourth, most prudent property infrastructure investors have fixed rate debt. We have a lot of it, and therefore cash flows until maturity of that debt actually won't change at all over the period until that debt matures. Turning to our investments.
We continue to see many great value investments across our platform, capitalizing on our advantages, which are, as most of you know, but are worth repeating. Number 1, size. Number 2, operating strengths. Number 3, our global platform. Number 4, our ability to work on large corporate transactions. During the quarter, we committed, as Brian said, to $4 billion of new investments, which brings our total over the last 12 months to $16 billion, and we continue to invest the capital raised in our private and our listed funds. We've also been busy harvesting capital. We've generated significant proceeds across the franchise, including $3 billion from sales of mature assets across a number of our businesses.
In our property group, we committed to $2.5 billion of capital for property acquisitions during the quarter with clients, including the acquisition of the $3.5 billion resort operator called Center Parcs in the U.K., the Bloomberg headquarters building in London, and a portfolio of office properties in São Paulo and Rio. In power, we agreed to acquire over 1,000 MW early-stage portfolio of wind development projects in Scotland, adding these to our European development pipeline. We also continue to pursue numerous opportunities in Europe where the renewable build-out has caused significant disruption in the markets. In infrastructure, we've done a number of tuck-in acquisitions and have a number of significant acquisitions on the go. We recently added a further natural gas storage business to our operation, which now includes facilities in California, Texas, Oklahoma, and Alberta.
We also continue to add district energy systems in a number of cities in the U.S. and have started pursuing opportunities in both the U.K. and Australia. In private equity, we continue to expand by both scale and geography. As you know, that's been one of our priorities. During the quarter, we closed on just over a $2 billion acquisition with a partner of a mid-tier oil and gas company in Australia. We tendered to acquire a $900 million graphite electrode producer, which manufactures components that are used in steel mini mills, acquired an infrastructure products manufacturer, and purchased a palladium mine. It was a pretty active quarter. I'll end with one note, and that relates to our listed affiliates, which are Brookfield Property Partners, Infrastructure Partners, and Renewable Energy Partners that all trade on the NYSE and the TSX stock exchanges.
These entities are very important to our overall long-term franchise. To ensure the long-term success of these companies, we have, will, and will continue to use our own resources to support them where required. That's one of the reasons we maintain substantial liquidity at Brookfield Asset Management, as we always want to be in a position to enable our companies and funds to achieve transactions and build their businesses in a way that create value for all unit holders and clients. Two examples. At Brookfield Property Partners, since spin-off, we've been supporting their plans with lending to ensure that while they were reorganizing their company to have optimal ownership structure, they could also continue to grow the business and complete the major developments that they have in the pipeline.
BPY is well into achieving their goals in this regard, also coming close to completing a number of asset sales to repay bridge loans taken on to complete their office acquisition integration. In addition, given the private markets have very robust pricing for assets and the public markets have sold off with the interest rate items in the market, there is a great arbitrage for BPY to continue to sell interest in assets and repurchase its own units. Furthermore, as the major leasing and development projects start to contribute to bottom-line FFO over the next 2 years, the growth in FFO will be between 15%-20% annually for the next few years. Together, this should contribute to substantial value creation for all BPY unit holders, part of it was due to the contributions of us assisting BPY.
At Brookfield Infrastructure, we recently were required for regulatory purposes to announce that we're in negotiations to acquire Asciano, a major rail and port operator in Australia. This transaction requires significant capital to complete. Since the disclosure, the unit price of BIP has traded off from where it was prior to announcement. Given our positive outlook for BIP and its strong results, we believe the dip in unit price relates to concerns regarding the issuance of units to complete the transaction. I'll be very specific. We don't know at this stage if the transaction will proceed, but if it does, we are confident that this will be a solid long-term investment for BIP. In addition, fortunately, due to the scale of capital available on BIP's balance sheet today, client capital that we have and our own financial resources off our balance sheet.
We have the flexibility to negotiate and structure a transaction of this scale to maximize value for all BIP unit holders. We believe that as a manager of these entities, that one of our roles is to enable these companies and our other funds to be in a position to complete transactions that they might not otherwise be able to do on their own. We believe that this is key to our success as an asset manager, and we intend to continue using this advantage to support our companies. Operator, I'll now turn the call over to you. Those are my comments, and we welcome any questions from people on the line.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star and one on your touchtone phone. You'll hear a tone to indicate you're in queue. For participants using a speakerphone, it may be necessary to pick up your handset before pressing any keys. If you wish to remove yourself from the question queue, you may press star and two. There will be a brief moment while we pull for questions. The first question is from Cherilyn Radbourne of TD Securities. Please go ahead.
Thanks very much, and good morning. Fundraising was clearly a highlight of the quarter. I thought I'd ask a couple of questions around that side of the business. The first one is, your sheer number of clients has expanded quite a bit, and the average commitment is now $80 million versus $100 million a couple of years ago, which would say to me that you're starting to penetrate smaller and mid-size institutions. I wondered if you could just talk a little bit about the evolution of your client base.
Sure. No, it's Brian, Cherilyn, thanks. Your observation is bang on, and that's been an objective of ours. It's been really important for us to have strong relationships with all the very large global institutional investors, and we feel
That we have those. They're valuable in a lot of ways. It's also really important for us to broaden out that investor base into the smaller and mid-size pension funds. They're great solid clients with a strong tendency towards continuing in future funds. The economics and margins are good as well. It's a key part of our strategy.
Just as it relates to carry, you rebuilt the unrealized carry nicely since the big realization on General Growth. I was just wondering if you could offer some thoughts on how long it will be before carry starts to become a more regular contributor to your quarterly results.
It's a hard one to predict exactly. Having said that $600 million relates to funds that will be harvested or targeted to be harvested over the next 3 years. You should see that coming along with any additional carry that gets generated in those funds, over the next few years, which is really as they come to maturity, which is the typical pattern.
All right. That's my cue. Thank you.
Great. Thanks, Cherilyn.
The next question is from Mario Saric of Scotiabank. Please go ahead.
Hi. Thank you and good morning. Maybe sticking to the theme of the evolution of your asset management business. I've also noted that the percentage of investors that invest in multiple funds has really gone up in the last 12 months. Even in the past quarter, it's up about 6% to 40%. As that extra $10 trillion of incremental capital becomes available for the sector that you highlight in your letter to shareholders, is there a specific target that we can think about in terms of how high you can go in terms of the participation in the multiple funds by your clients?
Yeah. I'd start off maybe just a more broad comment on that. I think what the factor that's at work you're seeing, and maybe we'll try to come up with a specific figure for you, but the factor at work is really that, as you know, for investment managers, it's hard work to vet people that allocate money. It's hard work to vet managers. If you have both a strong number of funds that you can offer institutions and you have a global franchise to be able to put behind it's a lot easier for allocators of capital to vet a manager and then continue to, A, invest in follow-on funds, but B, it's even better if they can broaden out and do other things with those institutions.
What we've seen as something that what's happening is that more money, as opposed to if somebody walks in with one fund and it's just a specific fund in a specific country, they may or may not receive money from an institution, a large institution. It's a lot harder than if you have very broad relationships with institutions, and you can offer them multiple products. It's kind of just human nature that if you trust somebody and if they can do the work for you're going to go with that party. We continue to see that at work, and I think you will increasingly see that at work over the next decade as the industry consolidates and the number of allocations and accounts continues to come down.
Okay.
I guess specifically to the actual quantum, I think if you look around the industry with some of the larger managers, they're up at north of 75% in terms of clients within multiple funds. Obviously, there's no reason why we shouldn't be in the same category.
That's great. Maybe an associated question. It's probably not a coincidence that you're also seeing some pretty strong margin expansion within the business, both quarter-over-quarter and year-over-year. It's gravitating towards kind of some of the target margins that you've talked about in the past. Was there anything specific within the quarter that led to the roughly 300 basis point increase quarter-over-quarter, or should we use 55% as a pretty decent base going forward?
I think we've definitely built the margin up nicely. Part of it is, as you know, we put a lot into building out this business, I'll say, in anticipation of the growth in the fee-bearing capital and therefore the revenues. There will always be a little bit of evolution on that front, meaning that it's not always going to track completely in line. Having said that, I think that's a big part of it is that. The other part is on the incentive distributions as well because that's a good margin for us as well on that front.
Okay. Thank you.
The next question is from Brendan Maiorana of Wells Fargo. Please go ahead.
Thanks. Brian, if I could just ask a quick follow-up related to that question about the margins. On your incentive or the carried interest, it looks like the generated versus fees. It's about $100 million generated, $103 million of generated in the quarter, and associated fees was $34 million. It's about the same relationship for the last 12 months. Is kind of 65% margin on carried interest a fair target over the longer term?
Overall, yes.
Okay. Just a question for Bruce. I completely get everything you're saying about institutions moving towards real assets, you guys have highlighted that for a number of years, and certainly you've been proven correct in terms of where fund allocation is going. Do you feel like there's any risk that either valuations that are being paid today, not necessarily by Brookfield, but maybe by other asset managers that are in the field, make the risk that returns that have been delivered in the past or maybe that are promised in the future may not be realized for real assets overall? Is that a risk that institutions could sour on real assets if returns don't come out as expected?
Maybe I'll try two comments. First, I'd say the returns are so far in excess of their fixed income allocations that they'd be taking this from that unless people make large mistakes, it's tough to come near 2% returns. I think that if they thought they were going to get 15% returns and they only get nine, that's possible that that occurs. When they look back and say, "Well, compared to our we were going to be in fixed income," maybe it wasn't a bad decision, if that's what occurs. I think it's possible that there's some likelihood of that occurring with some assets being purchased. Secondly, I'd say that there really are two types of real estate and infrastructure, and we try to purchase or acquire assets in the first category. The first category is transactions which are acquired where it's corporate in nature.
It often has an operating angle to it, and it's large, and therefore we have competitive advantages to earn higher returns out of it. On the opposite side, if you buy 100% let office building for the next 30 years or a fully let transmission system on a fixed coupon for the next 20 years, those are assets which are closer to fixed income instruments than what we generally buy, and those could get harmed with increases in interest rates. Therefore, some of the returns out of infrastructure may not be as good as what people thought. That's not to say I think that that will ever disrupt the marketplace for real estate net infrastructure investing.
I think our view is that the trend continues, and it will continue other than in the one circumstance, which is if you think interest rates are going to 8% in the U.S. on the long-end treasury, then probably that's going to disrupt a number of things, including real asset investing.
Okay, great. Thanks.
As a reminder, it is star one to ask a question. The next question is from Andrew Kuske of Credit Suisse. Please go ahead.
Thank you. Good morning. Bruce, I appreciate the comments on supporting the underlying LPs, could you give us some perspective on just ownership levels and how you think about that over a period of time? Right now you've got 29% ownership of BIP, and this is aside from the GP interest, just on an LP basis. Then you're in the sixties on BEP and BPY. How do you think about a stabilized level, and what's the appropriate range around ownership for really a duration? How low would you go, and how high would you go?
On the low side, I'd say we've always thought that we wanted to own 20% of these entities at the lowest level because it enabled us to feel like we were a true owner of the business along with everybody that's there. I'm not sure that we're going to go below 20%, other than in some extreme circumstance. That isn't in our plans. On the high side, I would just say that we don't really have an expectation or what we should own in these companies. The companies are set up to grow and build their asset portfolio, and we'll be as supportive as we can to let them complete transactions which grow their business if it makes sense for all of the unit holders and adds value to the company. If there's transactions that means that we should support them, our percentage will increase.
If there's transactions which require them to issue shares and there's no opportunity for us to put capital up, then we may be diluted. We'll just work with the management teams to support the companies, and it's not really dependent on how much. The percentage of ours isn't that important. It's just about creating value for the unit holders.
Okay. That's helpful. I guess a somewhat related question, because a lot of the deals that the underlying LPs do is really in conjunction with your private funds business. There was some discussion earlier on about effectively tapping into a broader variety of funds and really the middle market clients. What's the ability to really tap the really large checks from some of the larger clients around the world? Because you've clearly had long-term relationships with very big funds around the world, the sovereign wealth funds. Has that ability been effectively enhanced for the $500 million commitments and above?
Yeah. The number goes down. Maybe I'll say it, is that the size of check on average goes down. That actually doesn't mean that the large investors are less in the funds. What's happening is our funds are getting larger, and therefore we still have very large commitments from big funds. In addition, we're bringing in a lot of other institutions of smaller numbers, therefore the average goes down.
Maybe more important than that, those institutions that are good clients of ours that are in our funds also are there because of what we can bring them as investments besides the funds that we have. When we complete transactions and when we're doing large transactions, we have very significant amounts of capital that we can choose to bring in an amount, and sometimes it's X, and it could be X times three. We have those, and many of them are interested in putting significant amounts of capital into transactions. We have that available to us when we're working on large transactions.
Yeah, that's very helpful. Thank you.
This concludes the question and answer session. I'll hand the call back over to Mr. Willis for any closing remarks.
Thank you, operator. Please feel free to follow up with us directly, and we look forward to updating you in the next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.