This is a summary of a longer report that shows:
- The partnership’s FFO metric includes “cashflow contributions” from companies that are financially impaired and cannot remit dividends
- NAV is inflated by overvaluing assets
- The units trade at an unjustifiably high premium
The full report is available at: https://dfresearch.substack.com/
Brookfield Infrastructure Partners L.P. (NYSE:BIP) is an infrastructure YieldCo that I believe does not cover its distributions and trades at an unjustifiably high multiple of NAV. Simply right-sizing the multiple implies approximately 65% downside. Penalizing the partnership for not covering distributions would imply a discount to that.
Q3 2023 hedge fund letters, conferences and more
BIP owns infrastructure assets largely through private funds managed by its sponsor, Brookfield Asset Management (NYSE:BAM). The LP is structured to avoid be regulated under the Investment Company Act of 1940. Part of the requirements for the regulatory exemption is that management present the partnership as an operating company. This is why BIP is referred to as a company rather than a fund or investment company.
Despite the structure and language, the sole value of the partnerships is its investments, which are carried on the balance sheet at what management believes to be fair value. As of 2Q23, I calculate that value was $11.40 per unit.
BIP uses FFO, a proprietary metric, as a proxy for cashflow to determine distributions to limited partners. I believe FFO significant overstates cash available to the partnership for distributions. I illustrate why below. BIP includes its proportion of FFO from equity accounted investments instead of dividends received from them.
The table shows the proportional contribution to FFO from consolidated and equity accounted investments along with BIP’s FFO payout ratio.
Over period shown, FFO from equity accounted investments has ranged from 42% to 44% of the total. The payout ratio has averaged 73% over the same period. BIP reports distributions received from equity accounted investments, so we can compare it with proportional FFO reported. The table below shows the comparison.
SEC filings indicate that over the period shown BIP has on average, collected dividends of only 34% of FFO recorded. I think 2022 was an outlier as it includes asset sales.
The math is this: for every $1 off FFO booked, BIP paid out $0.73, but only collected $0.34, creating a massive overpayment.
If we recreate BIP’s payout swapping distributions received for proportional FFO, the payout looks like this.
This is a more accurate representation, because it uses actual cash received rather than a conceptual proportion. It indicates that over the period shown, BIP paid out 100% of cash available, which I think is unsustainable.
Ideally, management would disclose distributions received from investments, but they do not. The next best thing is to use a proportional cashflow metric that accounts for distributions received from equity accounted investments, which is how most YieldCo distribution coverage models are construction. This metric is roughly equivalent to BIP’s FFO, though it includes movements in working capital.
Using proportionate cashflow, BIP has never covered distributions. My estimates show BIP’s average payout has been 144% over last 5-years. To put this in context, the table below shows the payout for several other YieldCo’s using the same metric.
The comparison shows that BIP’s payout is far in excess of other YieldCos, and presumably, what is sustainable. Moreover, two of the entities listed are owned by BIP. They have a 56% average payout.
Not only is BIP’s payout ratio far in excess of comparable companies, so is its valuation. BIP is a valuation anomaly with infrastructure investment vehicles. The table below shows a diverse group of comparable entities.
10 of 11 comparable entities shown trade at a discount to NAV. BIP clearly trades at the highest premium by a wide margin.
BIP investors have become accustomed to looking at yield and distribution growth to the exclusion of NAV. This was not always the case. Early in its history as a publicly traded entity, BIP was regularly valued on a basis of NAV.
My sense is that investors think about BIP as a safe dividend play, almost analogous to fixed income. That was understandable in the post-GFC as interest rates trended toward zero and asset values only seemed to increase. However, the world is different now. Investors have many more income choices than in the recent past. I believe that one consequence of that will be increased scrutiny of YieldCos and BIP is an anomaly hiding in plain sight.
