-Distribution Yield: 5%
-Distribution Growth: 8%
-The partnership has operating units in North America, South America, Europe, Asia, and Australia.
-I think BIP is a bit expensive at nearly $25/unit, but worth picking up on potential dips if it goes down to $24 or even better at $23.
OverviewBrookfield Infrastructure Partners LP (BIP) is a publicly traded partnership that was spun off from Brookfield Asset Management (BAM). Brookfield Infrastructure’s businesses are, as you could have guessed by the name, all about infrastructure. They own (or hold a joint venture with) the following infrastructure:
Utilities:DBCT: Coal terminal that supplies port export services from Australia
Transelec: Electric transmission lines in Chile
Ontario Transmission- Electric transmission lines in Canada
Powerco: Electricity and gas distribution in New Zealand
Transportation:NGPL: Natural gas storage and pipeline in the US
WestNet Rail: Australian rail infrastructure
PD Ports: Collection of shipping ports in UK
Euroports: Ports in Europe and China
IEG: Electricity and natural gas connections in UK
TGN: The only natural gas distributor in Tasmania
Timber:Island Timberlands: timberland in British Columbia
Longview Timber: timberland in Northwestern US
Social Infrastructure:Peterborough Hospital: UK hospital
The advantage of a publicly traded partnership over a corporation is that a partnership is not subject to as much double taxation as corporations are. When a corporation makes a profit, they are heavily taxed on that profit. Then, out of their after-tax profit, they may pay dividends to shareholders, and the shareholders then have to pay taxes on those dividends. So each dollar of a dividend is taxed twice — once at the corporate level and once at the shareholder level.
Brookfield is a partnership and so is a flow-through entity. Unit-holders of a partnership pay taxes on their portion of the income. This way, earnings are only taxed once- at the individual level. It’s usually advantageous to be a partnership over a corporation, but the law only allows certain types of entities to become partnerships.
Since Brookfield is a partnership, it means you’ll receive tax advantages as a unitholder compared to a shareholder in a corporation. Your income will typically be taxed fairly modestly, and your taxes will be partially deferred (which is good, because you can use that money for compounding until you pay it).
The disadvantage is that a partnership potentially complicates your taxes because you need to file an additional form. This is the type of investment for which it is often prudent to seek advice from a tax or financial adviser.
DiversificationBrookfield is heavily diversified globally in numerous businesses on numerous continents, but due to 2010 investing activities, they have concentrated their operations a bit by focusing investments in key areas.
Cash Flow Stability
Transport and Energy: 42%
North America: 30%
South America: 11%
FinancialBrookfield was hit fairly hard in the financial crisis, but has rebounded nicely, and the more regulated and stable parts of its business act as a useful buffer for the more volatile and economy-dependent aspects.
Funds from Operations Growth
|Year||FFO Per Unit|
BIP’s 2009 FFO calculation excludes the sale of Brazilian assets. FFO (funds from operations) is defined as net income excluding several items such as depreciation, amortization, deferred taxes, and other items, and is the most meaningful metric for an asset-heavy partnership.
The current price per unit is approximately $25. Book value is $21.51.
Limited Partnership Capital Growth
BIP has been growing its size rapidly due to its acquisition activities. The company fuels these purchases with unit issuance along with a percentage of the FFO, but if performed at attractive valuations, results in increased per-unit performance including FFO and distributions.
As of May 2011, Brookfield has $8.325 billion in assets, $4.940 billion in debt, and $3.385 billion in partnership capital. The company has a $700 million credit facility (recently expanded from $500 million), which is largely untapped.
DistributionBrookfield currently pays cash distributions (similar to dividends) of $0.31 per unit per quarter, or $1.24 per unit per year. As of this writing, that is a 5% distribution yield. Management targets to grow the distribution by 3-7% going forward and pay out 60-70% of FFO.
BIP has grown distributions at an average of 8% pear year over these two years. The increase for 2010 was a bit under 4%, and the increase for 2011 was a bit under 13%. This has exceeded the high end of management’s 3-7% projected growth, and after their complete prime infrastructure acquisition in 2010, company management stated that they expect to meet or exceed the high end of this forecast for several years.
The FFO payout ratio was 60% in 2010, which is at the bottom end of the 60-70% range, and this ratio is even lower so far in 2011. Therefore, Brookfield has room to grow its distributions both through payout increases and through per-unit FFO growth.
Investing ThesisBrookfield represents a good opportunity to invest in high-quality, safe, cash-generating assets like utilities while also buying higher growth assets that are more sensitive to global economic trends. I particularly like their Australian infrastructure. Their coal export terminal, DCBT, in northeastern Australia serves Japan, Korea, China and India, so they have direct access to emerging economic powerhouses.
Brookfield management has made very prudent acquisitions and investments over the past two years, and has a very large backlog of current and potential future investments for organic growth of their operations. With a fairly low payout ratio, they preserve substantial capital for growth at lucrative rates of return.
A big acquisition year for Brookfield was 2009. In the year, Brookfield invested $941 million in a recapitalization of Prime Infrastructure, and so purchased big stakes in Prime Infrastructure, the above ports, and the Australian positions of DCBT and WestNet Rail.
In 2010, Brookfield continued this trend, and acquired the remainder of Prime Infrastructure and all of their attractive assets. This was done with an issuance of 50.7 million units, leading to a total of 157.4 million outstanding units. Brookfield’s market capitalization grew substantially, and distributions increased from $0.275 per quarter to $0.31 per quarter, which represents a nearly 13% distribution increase compared to management’s long-term target of 3-7%. This also led management to predict that long-term increases will be near the top of this 3-7% range.
Brookfield Management has stated that they have more than $900 million in near-term growth opportunities, mainly in Australia, and therefore are not dependent currently on external sources of growth.
Utilities: Brookfield management has a $291 million backlog in organic utility growth projects, including in areas of Texas, Chile and the UK. The Australian coal terminal facility could potentially sink billions in capital and organic growth if demand continues.
Transport and Energy: Brookfield has plans to potentially invest up to $600 million in their Australian railroad to increase transported tonnage by 50% and EBITDA by $150-200 million per year.
Timber: The timber segment was operating at a loss in 2009, and so far has picked up a bit. FFO from timber for the first quarter of 2011 was nearly equal to the full year timber FFO for 2010, and prices still have not fully risen. During 2010, the timberlands operated at 77% of long-term sustainable yield for preservation during the period of low log prices, and in Q1 of 2011, they operated at 99% long-term sustainable yield to take advantage of better log prices. Management expects to increase to 120% sustainable yield for 10 years when log prices are more fully recovered.
RiskBrookfield has elements of both risk and safety. On one hand, they hold necessary infrastructure like utilities, and they have long-term profitable contracts and giant economic moats around their businesses. On the other hand, they are rather leveraged like almost all asset-heavy businesses are, and some of their businesses such as timber, ports and terminals are very dependent on the global economy.
One thing I like is that their risk is so spread out on almost every continent and several countries. But much of their success is indirectly driven by China and other growth areas in Asia, and any major setback in these countries could have adverse affects on Brookfield (and particularly, their timber businesses and their Australian commodity infrastructure, which are some of their most attractive assets). In addition, entities like this that have attractive tax structures carry the risk of not meeting their requirements to remain a partnership, and are vulnerable to tax reform.
Brookfield has invested more heavily in Australia than previously projected, and now a full 46% of cash flow for the first quarter of 2011 came from Australia. In addition, several of the most attractive growth opportunities remain in Australia. To a certain extent, this concentrates risk to the region.
-Pricing risk (timber)
-Volume risk (ports, terminals)
-Regulation risk (electricity, other utilities)
-Tax Reform risk
-Australian weather risk, and Chinese economic risk
-other risks not insured
Conclusion and ValuationI published a very positive analysis of Brookfield 14 months ago when units were trading for about $18. Trading at $24.75 today in addition to $1.135 received in distributions, this turned out to be a roughly 45% gain during this time (and at a fairly low risk level as well). The market was even so kind as to allow a dip to under $16 at one point for patient investors.
Investing in Brookfield gives one tax advantages, a 5% distribution yield, high-caliber management, great infrastructure assets with elements of both stability and growth, and global exposure (especially to Asia). Unfortunately, the success of the partnership might have caught on, or general confidence in a global recovery as a whole has pushed the valuation up.
I think that the units are a solid hold right now, and would look to purchase on dips at under $24. The distribution yield isn’t nearly as high as it was last year (5% compared to nearly 6.5% from last year), so waiting for a good entry price is prudent. A combination of 5% distribution yield and 7% distribution growth is an attractive potential sum, especially considering it’s based on a combination of geographically and industry diverse set of stable cash generating assets and more economically-sensitive assets.
Full Disclosure: I own shares of BIP.