September 22, 2023
Brookfield Infrastructure
Investor Day: Opportunities to drive strong returns
Our view: At its annual Investor Day, Brookfield highlighted its expectation for 12%+ FFO/unit growth as part of its 1- to 3-year outlook, partly driven by its sizeable organic capital backlog, particularly in its data center business. Further enhancing returns is an investment environment where a well- capitalized entity such as Brookfield has the potential to achieve returns above its 12–15% equity IRR target range. We believe that the unit price weakness is an attractive entry point based on a 5% current distribution yield with potential for double-digit underlying FFO/unit growth.
Key points:
Current environment is conducive to investing above its 12–15% equity IRR target range. The event featured a panel on “value investing”, which highlighted increasing capital constraints driven by a slowdown in fundraising activity (i.e., institutional investors not making new commitments). This dynamic has resulted in a bifurcation between sponsors that have access to capital (e.g., Brookfield) and those that do not, with Brookfield’s expectation that it can invest capital above its 12– 15% equity IRR target range.
Data center platform poised for significant organic growth, which could help underpin Brookfield’s expectation for 20%+ IRRs in that business. Brookfield highlighted its sizeable secured backlog of organic growth potential that is set to take its data center capacity from 485 MW today to roughly 1,700 MW by 2026 based on planned growth, and that the development potential could result in capacity rising to 2,300+ MW by 2028. Return-wise, Brookfield expects the buildout of its capacity to generate 15–17% IRRs, and if it can monetize operating assets at 9–12% IRRs, the data center business could realize a net IRR of 20%+.
Driving business improvement by using AI. Brookfield provided examples within its existing businesses, particularly at HomeServe and Enercare, where it is using artificial intelligence (AI) to improve margins via the automation of back-office functions, an improvement in call center productivity (e.g., lower call times; higher sales, upgrades, and retention rates), and the ability to leverage large amounts of customer data. Brookfield expects AI combined with other operational improvements at the businesses to add 1–3% return improvement.
Outlook for 12%+ FFO/unit growth as part of its 1- to 3-year outlook.
Brookfield expects to drive a 12%+ FFO/unit growth rate via its organic capital backlog, the ability to drive operational improvements at its existing businesses, and upside from the ongoing capital recycling strategy. With respect to its organic capital backlog, Brookfield anticipates strong EBITDA growth rates from utility metering, residential decarbonization, Australian last-mile fiber, and its North American and European data centers.
A favourable environment for value investing
Brookfield believes we are in a buyer’s market right now, specifically citing capital scarcity and lower fundraising as contributing factors. Brookfield still expects the “Three Ds” (i.e., digitalization, deglobalization and decarbonization), which it highlighted at its 2022 Investor Day, to continue driving opportunities for a heightened level of infrastructure investment. Further, Brookfield shared how the current investment environment (i.e., higher interest rates, elevated inflation, lower economic growth, scarcity of capital, potential for artificial intelligence, and high capital needs in the current infrastructure cycle) is impacting its business.
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Operational perspective. The partnership identified lower economic growth, elevated inflation, and enthusiasm for artificial intelligence as being the most impactful factors, with the partnership adapting by focusing on margin improvement and business optimization, as well as leveraging advancements in AI.
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Capital allocation. Brookfield noted higher interest rates, scarcity of capital, and how the large capital needs for current infrastructure development are enabling it to acquire high- growth platforms, which typically trade at a premium. Specifically, it identified its recent data center acquisitions, which have large development pipelines and high capital requirements, as businesses that it believes it acquired “on sale”, as many potential acquirors do not have the capital or the confidence to build out the platforms in the current environment. During the session, Brookfield highlighted the ability to generate similar returns from businesses with significant operating cash flows (i.e., “brownfield”) but more modest growth profiles and businesses that have lower up-front cash flow but significant future growth potential (i.e., “platform/greenfield”) as shown in Exhibits 1–3.
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Corporate finance. Brookfield identified how it believes higher interest rates, elevated inflation, lower economic growth, and scarcity of capital are creating a buyer’s market for assets. However, despite these factors, it believes that the size and diversity of its existing asset base will enable it to selectively maximize value when exiting businesses as part of its capital-recycling program. Specifically, as part of its 2024 capital-recycling plan, Brookfield has identified $2 billion of de-risked and mature assets across four sectors that it believes it can monetize for 9–11% exit IRRs. We believe that Brookfield’s having a diverse geographic footprint, multiple infrastructure asset classes, and the ability to sell both small and larger assets could result in stronger valuations than we have observed from recent M&A transactions.