Brookfield Infrastructure Partners (BIP)

BIP is a trust that invests in worldwide infrastructure and pays out the cashflows as dividends.

Business Model

They raise money through debt or equity, then form joint ventures as a minority (but controlling) partner to invest in ports, rail, roads, power transmission, gas lines and others.

Brookfield likes to buy distressed assets, for example:

• They bought a large chunk of assets from the over-leveraged Prime Infrastructure Group in the GFC.
• Last year they bought a loss-making Indian gas pipeline from the owner struggling with interest costs.
• They are looking to buy a natural gas pipeline from Abu Dhabi due to the oil crisis.

Financials

I want to check their long term financials to see how profitable successful their investment have been.  How do we do this?

Their consolidated financial results are meaningless because they hold small controlling stakes in many joint ventures  We need to look at their results on a proportionate basis instead (ie: their share of profits, debt, etc) from their supplemental information.  They key figures are below.

AFFO

What returns do their investments generate?

Look at cash generation rather than asset values, since cash is more objective.  'Adjusted Funds from Operations' is 'Funds from Operations' minus maintenance capex.  Its not an accounting (IFRS) number, just an estimate they give us.  But most accounting numbers are estimates anyway.

AFFO has risen nicely:

The maintenance capex estimates for their different segments are interesting.  eg: Road and Rail are high maintenance, Energy Transmission almost none.  Useful for when looking at other infrastructure trusts.

Debt

One source of funding for investments.

They have high debt, but 88% of it is non-recourse (at the project level only, the company is not liable for it).  The non-recourse debt seems to be fixed rate (F-75 to F-77).  The corporate level debt is tied to LIBOR.

Debt has risen in line with AFFO:

Non recourse debt means their debt is essentially unlimited.  Each project, if it is run well, supports its own debt (and equity too...?).

Equity

Along with debt, how much equity have they raised for their investments?

To simplify: they have two types of units: normal units and preferred shares.  Both pay dividends.  The 'normal units' are the majority: they pay around 95% of the dividends:

• The 'normal' unit pay distributions based on FFO.  The company targets 60-70% payout of FFO.  818m distributions were paid out in 2019
• Additional 'Incentive Distributions' are also paid out to Brookfield Asset Management based on the normal distributions above.  Generally, 25% of any additional distribution is paid as IDS - see page F-92 (eg: If next year's distribution/share is $1 higher, an additional 25c is paid to Brookfield).    158m Incentive Distributions were paid out in 2019.
• Preferred distributions pay out a fixed dividend for a certain period of time.  Currently issued units pay out 4.5-5.4%, expiring June 2020 to Dec 2023.   49m fixed dividends were paid out in 2019.

Putting it together

Most of their funding is from issuing equity.  From 2012 onwards, the cumulative money raised:

Since the preferred dividends are fixed, we deduct them from AFFO first.  They only make a small part of AFFO:

And since they issue a lot of 'normal' units, we want to look at this number (AFFO minus preferred dividends) on a per unit basis:

This is the key metric for measuring their performance.  Very impressive.

Asset Lifespan

Some of their assets have short lifespans, in particular:

• Their Brazilian regulated gas transmission operations (NTS) form around 30% of proportionate 2019 CFO, and expire in 20 years:

Source: Old Petrobas NTS Investment presentation (slide 7)

• DBCT has a remaining concession period of 30 years, and forms 8% of their CFO.
• Westrail has 29 years and forms 4% of their CFO.
• Their road tolls (Peru, Chile, India) form 4% of CFO and have an average of 15 years (p88). 

I estimate they lose an average of around 2-3% of their CFO (or AFFO) a year due to asset ownership expiry.  Over the next 30 years.

I am only looking at when legal ownership of the asset expires here.  I'm not looking at how much money they earn or when customer contracts are renegotiated.

Payout Ratio

How much FFO or AFFO is paid out as dividends?  The payout ratio has risen over the years:

At 94% in 2019, there is not much space for it to rise, especially when we account for the 2-3% every year needed to make up for expiring assets.  So long term dividend growth will be slower over the next ten years than the past ten.

This payout ratio covers all distributions, including preferred dividends and incentive distributions.

They say they target "retaining 15-20% of FFO", and a payout ratio of 60-70% FFO.  Maintenance capex is generally 20% of FFO.  Anyway, the payout ratio now looks sustainable, but I don't think they can raise it.

They note that their 2019 FFO "payout ratio exceeded our target range of 60-70% due to the time between raising and deploying the proceeds from the July equity issuance and the depreciation of the Brazilian real. Removing the impact of these two factors reduces the payout ratio to 70%".  And the 2018 ratio was affected by "the 2018 financing at our Brazilian regulated gas transmission business".

Risks

Some of their sectors, particularly ports and natural gas pipes/processing are market driven.  Others (eg: UK residential connections, toll roads) are regulated, but affected by the economy or volume.  Others, like electricity transmission have fixed revenues.  95% of their 1H 2019 cashflows are regulated or fixed.

Theres a chance that North American natural gas throughput drops a lot over the coming years, due to a shale oil production decline.  This forms about 7% of 2019's CFO.

Negative rates in Europe and Japan make more everyone willing to invest in infrastructure (or anything, for that matter).  Spoils the market.

They do not have direct exposure to China.  They have indirect exposure in some Australian operations (DBCT and Westrail).

Their financials are fucking impossible to understand due to consolidation.  Its hard enough to just list their assets.

Conclusion

This company has a good track record based on AFFO/unit.

I would probably be happy to buy at a 6% trailing yield, even before paying the 15% tax on dividends from a Canadian company.

They aim to increase dividends by 5-9%.  I would take the bottom range of this due to the currently high payout ratio.  5% growth is reasonable based on their track record.  They do not have gearing limitations like a REIT, so could grow forever.

There's a risk the dividend yield drops this year due to the economy.

Misc

Brookfield bails out Donald Trump's son?