Throughout our interim report, we use the following icons:

Brookfield at a Glance

OUR BUSINESS

We are a leading global alternative asset manager with over $500 billion of assets under management including $274 billion in fee bearing capital. We raise private and public capital from the world’s largest institutional investors, sovereign wealth funds and individuals, with a focus on generating attractive investment returns that will allow our investors and their stakeholders to meet their goals and protect their financial future.

In addition to our asset management activities outlined above, we invest significant capital from our balance sheet in our managed entities alongside our investors as well as in other direct investments. This is intended to generate attractive financial returns and cash flows, support the growth of our asset management activities and create an important alignment of interests with our investors. We refer to this as our Invested Capital and it totals approximately $45 billion.

Note: Excludes Residential Development and Corporate Activities which are distinct business segments for IFRS reporting purposes.

“Brookfield,” the “company,” “we,” “us” or “our” refers to Brookfield Asset Management Inc. and its consolidated subsidiaries. The “Corporation” refers to our asset management business which is comprised of our asset management and corporate business segments. Our “invested capital” or “listed partnerships” includes our subsidiaries, Brookfield Property Partners L.P., Brookfield Renewable Partners L.P., Brookfield Infrastructure Partners L.P. and Brookfield Business Partners L.P., which are separate public issuers included within our Real Estate, Renewable Power, Infrastructure and Private Equity segments, respectively. We use “private funds” to refer to our real estate funds, infrastructure funds and private equity funds. Please refer to the Glossary of Terms beginning on page 54 which defines our key performance measures that we use to measure our business.

Letter to Shareholders

OVERVIEW

During the third quarter, markets were positive, liquidity was strong, and most of our businesses performed on plan. We moved forward on numerous strategic initiatives, advanced fundraising, closed our Oaktree transaction, and continued to invest capital.

The backdrop for investing capital into alternative assets continues to be very favorable, and the long-term trend appears to be even stronger. We continue to strengthen our position as a leading global alternative asset manager, enabling our investors to benefit from our scale, global reach and operating expertise.

Total assets under management now exceed $500 billion, and our total capital available for new investments increased to ±$65 billion. We are actively adding capital in virtually all areas across the business and while we are cautious about overall market conditions, we continue to find attractive opportunities to put capital to work.

MARKET ENVIRONMENT

The global business environment continues to be a tale of two cities. Business fundamentals in most markets are still good: slower than 2018, but still very constructive. On the other hand, politics dominate the headlines and continue to unsettle investors. Looking longer term, however, these conditions in themselves are creating opportunity for investors like us who have on-the-ground intelligence and can therefore differentiate between headline news, and news that actually affects business fundamentals.

Interest rates continued to settle back in at historic lows, with the potential for them to go even lower when a global slowdown occurs. With interest rates in Japan and Europe now negative for all maturities, we seem to be in a new phase with global rates in the range of -2% to +2% for the next five to seven years. This is particularly relevant for us and will positively impact on all asset values and businesses that generate cash.

Should this interest rate environment continue to prevail, and with institutional capital growing, we expect that capital will increasingly be allocated to alternatives. We think that institutional investors will continue a push towards 60% alternatives allocation in their portfolios—from a global estimate of 25% today.

Our income over the last twelve months included $595 million of realized carried interest before costs, including $59 million in the current quarter from capital returned within our first flagship real estate fund. We expect continued realizations within this fund in the fourth quarter of 2019 and in the first half of 2020, as we sell the remaining investments and return capital to investors. As a result of our normal course fundraising and the Oaktree acquisition, total assets under management are over $500 billion, and we continue to raise and deploy additional capital across our businesses.

We raised $2 billion of private fund capital in the quarter, bringing the total third-party capital raised over the last twelve months to just short of $30 billion. This included $19 billion of fee bearing capital across our latest round of flagship fundraising, $3 billion in our long-life fund strategies, and $6 billion in other funds and co-investments. We also added $102 billion of private fund fee bearing capital as a result of the closing of Oaktree. Together with Oaktree, we now have ±$275 billion of total fee bearing capital, and our private fund investor base includes over 1,800 investors.

Subsequent to quarter end, we completed the final close of our fifth private equity flagship fund, raising $9 billion. We expect our latest flagship infrastructure fund to hold its final close by the end of 2019 or early in 2020, bringing to completion the latest round of flagship fundraising. Together with co-investment capital raised to date, this round of flagship fundraising will total approximately $50 billion. More importantly, with the growth of our strategies and our expanded credit franchise, we expect the next round of fundraising for our flagship funds to be ±$100 billion. Our latest flagship real estate, infrastructure and private equity funds are approximately 45% invested in aggregate, and we therefore anticipate that we will be back in the markets with our flagships in 2021/2022.

Our investment partnerships also continue to grow. Our listed partnerships have seen combined growth in their funds from operations (“FFO”) over the last twelve months of more than 13%. This growth came from strong transportation volumes and expansion projects within our infrastructure business, strong wind pricing within our renewable business, margin improvement within a number of our private equity businesses, and leasing and new developments coming online within our real estate business. We have deployed $33 billion of capital across our funds and listed partnerships over the last twelve months and expect to see this contribute to further growth in our invested capital and FFO going forward.

INVESTOR DAY

During the quarter we hosted our annual Investor Day at Brookfield Place in Manhattan. The event was webcast live and the materials are posted on our website. A quick summary is as follows:

Brookfield Asset Management’s outlook is strong; global interest rates appear likely to stay low for a while, causing institutional investors to allocate larger amounts of their capital to alternatives. Alternatives are therefore no longer ‘alternative,’ but rather mainstream, and we think they could reach a percentage of 60% of institutional funds in the next 10 years. In addition, asset values in this environment are increasing, as recourse only borrowing is cheaper, leveraged equity returns are higher, and investors’ choices are fewer. Our next round of funds, including credit, should reach $100 billion, and all of this positions us well for the coming several years. As our cash generation continues to grow, we will need to decide if, when, and how to return capital to shareholders.

Brookfield Property Partners has transformed itself over the past five years since its spin-off from BAM. In addition, NAV and cash flows have grown at a compound ±10% annually. For various reasons, similar to most real estate securities, this is not reflected (yet) in the stock price, enabling a buyer today to make an investment at an estimated 35% discount to the appraised IFRS value of its underlying assets and a going-in yield of over 6%. This is almost unprecedented for the quality of portfolio that this entity owns. As a result, BPY has been repurchasing units with extra cash while adding value through completion of its significant development program. The opportunities to redevelop retail centers into office, residential, hotel, and other uses are expected to continue for many years, and we have some incredible office projects coming online in the next few quarters. This should enable cash flows to grow at 7% to 9%, and NAV to compound at ±15% for years. At today’s trading price, this is a great opportunity to own this business at a 35% margin of safety to IFRS value.

Brookfield Infrastructure Partners owns one of the highest quality, most diverse group of utility assets globally. In the 13 years since its spin-off, we have compounded the returns to investors at an annualized 18%. Going forward, with the critical mass to set us apart from most others, we believe we can continue to operate our assets well, dispose of mature ones, and acquire new ones opportunistically to drive 6% to 9% annual cash flow growth. In conjunction with a growing cash distribution, this should drive 12-15% in annualized returns to investors looking forward. These assets are the backbone of the global economy, many of which will continue to exist 100 years from now.

Brookfield Renewable Partners is one of the largest privately-owned renewable energy entities in the world and has produced a 16% annualized compound return over the past 20 years. We believe that the renewables industry is at an inflection point: wind and solar are now profitable without subsidies, and the push for decarbonization of the electricity grid is substantial. We believe we can continue to grow our cash flows at 5% to 9%—and with the cash distribution, this generates an all-in return to investors of ±15%. In addition, owning one of the largest renewable businesses ensures that we are on the right side of one of the dominant trends in the global economy today.

Brookfield Business Partners has now reached a critical mass and has acquired some exceptional businesses since its launch. An investor in this entity participates in all the private equity strategies in which we invest for our private clients. Recently we added Clarios, the largest battery provider to the automotive industry; Westinghouse, the leading infrastructure services provider to the nuclear industry; and Healthscope, a leader in private hospitals in Australia. We also sold a facilities management company and an industrial mining business for substantial gains. This entity is focused on achieving NAV growth of ±15% on an annualized basis over time, with substantial upside to the NAV if we successfully execute our plans for these exciting businesses.

OAKTREE

We completed the acquisition of approximately 61% of Oaktree, with the balance continuing to be owned by the current and former management partners. This is a very exciting partnership for us, and Oaktree continues to deploy capital into all of their primarily credit strategies, as well as raise capital for successor funds or adjacent strategies. In addition to this, we are working to help them scale up some of their strategies and are considering where we can jointly provide products to our clients.

We are thrilled to also benefit from the world-class expertise of the Oaktree team. Oaktree is the premier global credit franchise, and we intend to utilize this expertise to make us better investors in everything we do. This should enhance our ability to engage with our clients in more ways and help them achieve their investment objectives in a more responsive and all-encompassing fashion. It is still early days, but we are pleased by our progress to date.

Longer term, Oaktree will also help us prepare for the inevitable downturn in the markets. We are positioning ourselves to put our resources behind the Oaktree franchise to allow it to excel even more when, inevitably, the market turns.

DATA INFRASTRUCTURE

Over the last few years, we have focused on growing our data infrastructure business. Data has been one of the fastest growing commodities in the world, and we expect this to continue for the foreseeable future. This is being driven by several factors, including greater smartphone penetration, increasing video consumption, and the advent of 5G networks. It is also driven by more connected devices everywhere, greater use of artificial intelligence, and other applications that are being developed every day.

We believe strongly that as people, places and objects become increasingly interconnected, the importance and value of data infrastructure assets will continue to grow. Given the ongoing evolution and innovation taking place in the telecom sector, we are looking to partner with telecom owners by investing in and leasing back their infrastructure. The other factor that is helpful to this trend is that the capital required to build out this data infrastructure is far greater than the capital the traditional telecom owners typically have access to within their own financial resources.

We own the leading independent telecom tower operator in France, with over 7,000 towers and active rooftop sites. More recently, we secured an exclusive agreement to invest into one of the largest privately-owned tower businesses in the world—130,000 telecom towers that support Reliance Jio in India. We have also been acquiring and building out fiber networks. Our U.K. regulated distribution business is deploying fiber-to-the-home networks in new housing developments as part of its multi-utility offering in response to customer demand for faster and more reliable broadband solutions. Meanwhile, our French telecommunications infrastructure business is rolling out four fiber networks to connect over 700,000 households in the next few years as part of the French government’s national broadband plan, and in New Zealand we are deploying 5G technology on our networks.

Lastly, we have been active in acquiring data centers, and now own businesses on three continents. We own a U.S. business that deals with large, blue-chip enterprise customers and the U.S. Federal Government, having acquired it as a carve-out from a major telecommunications company. In South America and Asia-Pacific, where cloud computing is at an earlier stage of adoption, we are building major cloud data centers that are leased to the global technology giants.

We think data infrastructure is an exciting area for us, and that it has many decades of growth ahead.

GLOBAL URBANIZATION

By 2050, another two billion people will move into cities globally. A great percentage of these are in emerging countries, but the past 20 years has seen increasing intensification in every large city in the world. This trend affects many businesses in our portfolio—including our office space, residential high-rise, and a number of our infrastructure businesses.

Office space globally has never been more fully occupied. Supply has been relatively constrained in most places, and due to residential demand in cities, many sites that would have been built as office were instead converted to residential use. More importantly, though, many companies that used to move to campuses in the suburbs are moving back into the city. This is for one simple reason: people, old and young, want to enjoy the vibrancy of a great city. As a small example, because of this phenomena, Sydney and Toronto have virtually zero percent commercial vacancy today. Very seldom does this happen in any major city.

Residential high-rise condominiums (owned by individuals) or apartments (multiple units owned by large investors and rented to individuals) have also increased in scale and value in all major cities. This started because young employees could live relatively inexpensively and close to their offices. Further, due to the success and the build-out of amenities (restaurants, bars, gyms) to service these young residents, older, wealthier people started moving into the city. Instead of downsizing to a small house and living in the suburbs, the empty nesters are now moving to the vibrancy of the cities, with all of their benefits—such as museums, galleries, sports arenas, theatres and concert halls. This trend is accelerating and making cities better, and land and apartments are increasingly valuable.

Within our infrastructure business, these factors are leading to increased opportunities for us. Our district cooling and heating business (an outsourced provider to a property) is a beneficiary of increased demand for and subsequent construction of properties. The combination of two mega-trends—environmental sustainability and urbanization—is at the heart of a number of our infrastructure businesses and should enable substantial growth for us in the coming years.

OPERATING STANDARDS

Recently, the Business Roundtable came out with what they deem to be new standards on how business should conduct itself. We thought it worthwhile to share our views on this with you. Our basic starting point has always been that to sustain a business over the longer term, one must operate with high governance standards, respect the environment, and operate in a socially responsible manner.

As a result, we have always aimed to operate with strong governance standards in every country in which we operate. This is an expectation that, once understood across an organization, ensures employees “know how to act.” With respect to governance, as a fiduciary, we hold ourselves to very high standards. We have significant responsibilities to our stakeholders, including pensioners, countries, governments, investors, and employees. That does not mean we don’t face difficult decisions from time to time; it does, however, mean that we strive always to act with integrity and to be transparent about how we solve each situation.

We believe that being environmentally conscious is a requirement as a successful long-term investor, and our investments demonstrate this. Over the last few decades, we have assembled one of the largest privately-owned portfolio of renewable power facilities globally. We own ±$50 billion of hydro, wind and solar facilities—enough renewable power to serve the combined needs of Ireland and Denmark on an annual basis. In real estate, we have one of the largest portfolios of properties globally, a large percentage of which meet the highest standard of environmentally positive working environments. Our global tenants, many of whom are leading international companies, have been demanding this for decades, and we have worked with them for many years to ensure that we meet their advancing needs and expectations.

With respect to social responsibility, we believe in supporting the communities in which we operate. Our expertise in turnarounds means that we often save companies from liquidation—and in many cases, reinvigorate communities as a result. In infrastructure, for example, the companies we own deliver critical services to tens of millions of people around the world. One of these, BRK Ambiental, provides water distribution and wastewater treatment for 15 million people in Brazil, a country that still struggles to deliver these services. As another example, last year we purchased Westinghouse from bankruptcy and have now turned it into a healthy global leader in the servicing of the power industry. As we grow these businesses, we are providing critical services, as well as earning solid returns for our investors.

CLOSING

We remain committed to being a world-class alternative asset manager, and to investing capital for you and our investment partners in high-quality assets that earn solid cash returns on equity, while emphasizing downside protection for the capital employed. The primary objective of the company continues to be generating increased cash flows on a per share basis and, as a result, rising intrinsic value per share over the longer term.

Please do not hesitate to contact any of us should you have suggestions, questions, comments, or ideas you wish to share with us.

Sincerely,

J. Bruce Flatt

Chief Executive Officer

November 14, 2019

Note: In addition to the disclosures set forth in the cautionary statements included elsewhere in this Report, there are other important disclosures that must be read in conjunction with, and that have been incorporated in, this letter as posted on our website at https://bam.brookfield.com/en/reports-and-filings.

Please refer to the Glossary of Terms beginning on page 54 which defines our key performance measures that we use to measure our business. Other businesses include Residential Development and Corporate.

Additional information about the company, including our Annual Information Form, is available on our website at www.brookfield.com, on the Canadian Securities Administrators’ website at www.sedar.com and on the EDGAR section of the U.S. Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.

We are incorporated in Ontario, Canada, and qualify as an eligible Canadian issuer under the Multijurisdictional Disclosure System and as a “foreign private issuer” as such term is defined in Rule 405 under the U.S. Securities Act of 1933, as amended, and Rule 3b-4 under the U.S. Securities Exchange Act of 1934, as amended. As a result, we comply with U.S. continuous reporting requirements by filing our Canadian disclosure documents with the SEC; our MD&A is filed under Form 40-F and we furnish our quarterly interim reports under Form 6-K.

Information contained in or otherwise accessible through the websites mentioned does not form part of this report. All references in this report to websites are inactive textual references and are not incorporated by reference.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

This Report contains “forward-looking information” within the meaning of Canadian provincial securities laws and “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. We may provide such information and make such statements in the Report, in other filings with Canadian regulators or the U.S. Securities and Exchange Commission or in other communications. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements regarding the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook of the Corporation and its subsidiaries, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”

Although we believe that our anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information contained in this Report. The statements and information involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements and information.

Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to: (i) investment returns that are lower than target; (ii) the impact or unanticipated impact of general economic, political and market factors in the countries in which we do business; (iii) the behavior of financial markets, including fluctuations in interest and foreign exchange rates; (iv) global equity and capital markets and the availability of equity and debt financing and refinancing within these markets; (v) strategic actions including dispositions; the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits; (vi) changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and estimates); (vii) the ability to appropriately manage human capital; (viii) the effect of applying future accounting changes; (ix) business competition; (x) operational and reputational risks; (xi) technological change; (xii) changes in government regulation and legislation within the countries in which we operate; (xiii) governmental investigations; (xiv) litigation; (xv) changes in tax laws; (xvi) ability to collect amounts owed; (xvii) catastrophic events, such as earthquakes and hurricanes; (xviii) the possible impact of international conflicts and other developments including terrorist acts and cyberterrorism; (xix) the introduction, withdrawal, success and timing of business initiatives and strategies; (xx) the failure of effective disclosure controls and procedures and internal controls over financial reporting and other risks; (xxi) health, safety and environmental risks; (xxii) the maintenance of adequate insurance coverage; (xxiii)  risks specific to our business segments including our real estate, renewable power, infrastructure, private equity, and residential development activities; (xxiv) and factors detailed from time to time in our documents filed with the securities regulators in Canada and the United States.

We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Except as required by law, the Corporation undertakes no obligation to publicly update or revise any forward-looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND USE OF NON-IFRS MEASURES

We disclose a number of financial measures in this Report that are calculated and presented using methodologies other than in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). We utilize these measures in managing the business, including for performance measurement, capital allocation and valuation purposes and believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses. These financial measures should not be considered as the sole measure of our performance and should not be considered in isolation from, or as a substitute for, similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures or other financial metrics may differ from the calculations disclosed by other businesses and, as a result, may not be comparable to similar measures presented by other issuers and entities. Reconciliations of these non-IFRS financial measures to the most directly comparable financial measures calculated and presented in accordance with IFRS, where applicable, are included within this Report. Please refer to our Glossary of Terms beginning on page 54 for all non-IFRS measures.

PART 1 – OUR BUSINESS AND STRATEGY

OVERVIEW

We are a leading global alternative asset manager with a 120-year history and over $500 billion of assets under management across a broad portfolio of real estate, infrastructure, renewable power and private equity assets. Our $274 billion in fee bearing capital is invested on behalf of some of the world’s largest institutional investors, sovereign wealth funds and pension plans, along with thousands of individuals.

We provide a diverse product mix of flagship private funds and dedicated public vehicles, which allow investors to invest in our four key asset classes and participate in the strong performance of the underlying portfolio. We invest in a disciplined manner, targeting 12%-15% returns with strong downside protection, allowing our investors and their stakeholders to meet their goals and protect their financial futures.

We predominantly invest in real assets across real estate, infrastructure, renewable power and private equity, and hold a significant investment in Oaktree Capital Management (“Oaktree”), which is a leading global alternative investment management firm with an expertise in credit.

We offer public and private vehicles to invest across a number of product lines, including core, value-add, opportunistic and credit in both closed-end and long-life vehicles.

We invest where we can bring our competitive advantages to bear, such as our strong capabilities as an owner-operator, our large-scale capital and our global reach.

We employ leverage in a prudent manner to enhance returns while preserving capital throughout business cycles. Underlying investments are typically funded on a standalone basis, providing a stable capitalization, with the vast majority of these borrowings done at investment-grade levels.

In addition, we maintain significant invested capital on the Corporation’s balance sheet where we invest alongside our investors. This capital generates annual cash flows that enhance the returns we earn as an asset manager, creates a strong alignment of interest, and allows us to bring the following strengths to bear on all our investments.

We have over $500 billion in assets under management and $274 billion in fee bearing capital.

We have more than 130,000 operating employees worldwide who maximize value and cash flows from our operations.

We operate in more than 30 countries around the world.

Our financial returns are represented by the combination of the earnings of our asset manager as well as capital appreciation and distributions from our invested capital. Our primary performance measure is funds from operations (“FFO”)¹ which we use to evaluate the performance of our segments.

Asset Management

Our asset management activities encompass $274 billion of fee bearing capital across private funds, listed partnerships and public securities.

Private Funds – $187 billion fee bearing capital

We manage and earn fees on 40 private funds across real estate, renewable power, infrastructure and private equity. On September 30, 2019, we purchased approximately 61% of Oaktree, and broadened our product offering, particularly on credit strategies. Our fund strategies include core, credit, value-add and opportunistic, and we offer both closed-end and long-life vehicles. Together with our investment in Oaktree, we have over 1,800 unique institutional investors, who on average invest in two of our funds. On private fund capital we earn:

Listed Partnerships – $72 billion fee bearing capital

We manage publicly listed perpetual-capital vehicles BPY¹, BEP¹, BIP¹, BBU¹, and TERP¹ . On listed partnership capital, we earn:

Public Securities – $15 billion fee bearing capital

We manage public funds and separately managed accounts, focused on fixed income and equity securities within the real estate, infrastructure and natural resources asset classes. We earn management fees, which are based on committed capital and fund net asset value and performance income based on investment returns.

Invested Capital¹ 

We have approximately $45 billion of invested capital on the Corporation’s balance sheet as a result of our history as an owner and operator of real assets, which provides attractive financial returns and important flexibility to our asset management business.

Key attributes of our invested capital:

Refer to Parts 2 and 3 of this MD&A for more information on our operations and performance.

PART 2 – REVIEW OF CONSOLIDATED FINANCIAL RESULTS

The following section contains a discussion and analysis of line items presented within our consolidated financial statements. The financial data in this section has been prepared in accordance with IFRS. Refer to page 42 of our 2018 Annual Report for an overview of our fair value accounting across our business and why we believe it provides useful information for investors about our performance. We also provide an overview of our application of the control-based model under IFRS used to determine whether or not an investment should be consolidated.

OVERVIEW

Net income was $1.8 billion in the current quarter, with $947 million attributable to common shareholders ($0.91 per share) and $809 million attributable to non-controlling interests.

The $815 million increase in consolidated net income and the $784 million increase in net income attributable to common shareholders compared to the prior year quarter are primarily attributable to:

On September 30, 2019, we purchased approximately 61% interest in Oaktree, resulting in an equity accounted investment of $5 billion through the use of $2.4 billion of cash on hand and the issuance of 52.8 million class A shares.

Additionally, our consolidated balance sheet was impacted by acquisitions and dispositions since the beginning of the year. We acquired $27.0 billion of assets through business combinations, including a global automotive battery business and an Australian based private healthcare provider acquired in the second quarter of the year. Corporate borrowings increased from the prior year-end due to the issuance of $1.0 billion of corporate debt in the first quarter, partially offset by the repayment of a $450 million (C$600 million) bond in the second quarter. We also sold a number of assets during the first nine months of 2019, including a global provider of facilities management services and an executive relocation services business in our Private Equity segment, as well as a residential management services company and various investment properties in our Real Estate segment.

Additionally, the adoption of IFRS 16 impacted our balance sheet as operating leases which were previously reported as off-balance sheet commitments are now capitalized. This has resulted in higher investment properties and property, plant and equipment balances, as well as offsetting lease liabilities within accounts payable and other recorded on our consolidated balance sheet. There was no impact to total equity from the adoption of the new standard. Refer to Note 2 for further information on the impact of IFRS 16 on our consolidated financial statements.

Three Months Ended September 30

Revenues for the quarter were $17.9 billion, an increase of $3.0 billion compared to the third quarter of 2018, primarily due to:

A discussion of the impact on revenues and net income from recent acquisitions and dispositions can be found on page 16.

Direct costs increased by 16% or $1.9 billion compared to a 20% increase in revenues. The increase relates primarily to:

Other income and gains for the current quarter primarily relates to disposition gains on the sale of Acadian and the industrial assets at our wastewater and industrial water treatment business in Brazil.

Equity accounted income increased from $50 million to $414 million primarily due to:

Interest expense increased by $652 million largely due to additional borrowings associated with acquisitions across our portfolio, debts assumed from acquired businesses, and additional interest expense from lease liabilities recognized on adoption of IFRS 16. We also issued additional debt in certain listed partnerships, increasing total interest expense.

We recorded fair value gains of $394 million, compared to gains of $132 million in the third quarter of 2018, primarily as a result of:

Refer to page 17 for discussion on fair value changes.

Depreciation and amortization expense increased by $466 million to $1.3 billion due to businesses acquired in the last twelve months as well as the impact of revaluation gains in the fourth quarter of 2018, which increased the carrying value of our property, plant and equipment (“PP&E”) from which depreciation is determined. The adoption of IFRS 16 also increased depreciation charges during the quarter.

We recorded an income tax recovery of $180 million this quarter compared to an income tax expense of $144 million in the prior period. This was primarily due to a deferred tax recovery on the recognition of previously unrecognized loss carryforwards that will offset future projected taxable income.

Nine Months Ended September 30

Revenues and direct costs for the first nine months of 2019 increased by $9.2 billion and $6.0 billion, respectively, compared to the same period in 2018 due primarily to the aforementioned acquisitions.

Equity accounted income in the first nine months of 2019 increased by $1.1 billion compared to the prior year period as a result of recent acquisitions, and the aforementioned gains at equity-accounted investment properties, partially offset by decreased earnings at Norbord.

Fair value losses were $835 million for the first nine months of 2019, compared to a $1.5 billion gain reported in the prior period. The current period deficit is largely driven by $1.4 billion of fair value losses recorded in the previous quarter, primarily attributable to valuation losses on investment properties in our core retail portfolio and LP investments as well as one-time charges at our service provider to the offshore oil production industry. The prior period included transaction-related gains as well as strong valuation gains within LP investments in our real estate business.

Significant Acquisitions and Dispositions

We have summarized below the impact of recent significant acquisitions and dispositions on our results for the three and nine months ended September 30, 2019:

Acquisitions

Real Estate

Recent acquisitions contributed incremental revenues and net income of $629 million and $222 million, respectively, in the third quarter of 2019. The most significant contributor was the consolidation of BPR¹ towards the end of the third quarter of 2018, which added $289 million of revenues and $137 million of net income in the current quarter. Previously, we reported our 34% proportionate share of the core retail business’s results as equity accounted income.

The other recent acquisition with a significant impact on current period revenues and net income is a diversified U.S. REIT that we acquired in the fourth quarter of 2018, which added incremental revenues and net income of $256 million and $81 million in the current quarter, respectively. A number of other acquisitions in our LP investments’ portfolio during the last twelve months also contributed to our results.

Infrastructure

Revenues and net income increased by $524 million and $45 million, respectively, primarily from a number of acquisitions in our utilities, energy and data infrastructure businesses. The acquisitions that contributed the most revenues and net income in the current quarter include a North American provider of residential energy infrastructure services, a Canadian natural gas midstream business, a natural gas pipeline located in India and a portfolio of data centers in North America.

Private Equity

The current quarter’s results included impacts from a global automotive battery business and an Australian private healthcare provider acquired in the prior quarter. These two businesses together contributed $2.7 billion of revenue and $82 million of net losses for the three month period. Our results this quarter also benefited from a full quarter of contributions from a service provider to the power generation industry acquired during the third quarter of the prior year, which contributed additional revenues of $282 million and net income of $13 million.

Overall, revenues and net income for the nine months ended September 30, 2019, increased by $11.4 billion and $250 million, respectively, primarily due to the aforementioned acquisitions.

Further details relating to the significant acquisitions described above that were completed during the nine months ended September 30, 2019 are provided in Note 4 of this interim report.

Dispositions

Recent asset sales reduced revenues and net income by $749 million and $202 million in the current quarter, respectively. The assets sold that most significantly impacted our results this quarter were the sales of the global provider of facilities management services and the executive relocation services business in our Private Equity segment.

Overall, impacts of the dispositions to revenue and net income on a nine-month basis in 2019 were $1.1 billion and $421 million, respectively.

Investment Properties

Investment properties are recorded at fair value with changes recorded in net income. The following table disaggregates investment property fair value changes by asset type:

We discuss the key valuation inputs of our investment properties on page 52.

Core Office

Valuation gains in the current quarter totaled $181 million. The gains relate primarily to:

Valuation gains of $63 million in the prior year quarter were primarily attributable to discount rate compression at certain Australian properties that were nearing sale, along with higher rent growth assumptions for our Toronto properties.

The nine-month appraisal gains also include appraisal gains in Toronto and U.S. where we benefited from increased market rents and activity and changes in valuation metrics supported by external valuations.

Core Retail

The appraisal changes in the current quarter were nominal. There were no fair value changes in the prior year quarter as our core retail portfolio was an equity accounted investment prior to its privatization in the third quarter of the prior year, with changes in the fair value of the investment properties reported through equity accounted income.

The nine-month appraisal losses are mainly from updates to cash flow assumptions and valuation metrics recognized in the second quarter.

LP Investments and Other

Valuation gains of $603 million relate primarily to rate compression as a result of historically low interest rates in Brazil and improved market conditions in Brazil and India, which benefited our real estate investments in those countries.

In the prior year quarter, valuation gains of $346 million were primarily related to strong leasing activity and the completion of several developments in the India office portfolio and strengthened conditions in several markets.

The nine-month gains are mainly due to the lower capitalization rate and interest rates mentioned above, as well as fair value gains in our U.K. student housing portfolio.

Transaction Related Expenses, Net of Gains

Transaction related expenses, net of gains in the current period of $241 million are primarily attributable to transaction related expenses from our investment in Oaktree, as well as other deal costs in our Real Estate and Private Equity segments.

The prior year expenses relate to the privatization of GGP and higher deal costs across the business due to greater number of transactions.

The year-to-date expenses are also mostly attributable to deal costs associated with transactions in our Real Estate and Private Equity segments.

Financial Contracts

Financial contracts include mark-to-market gains and losses on financial contracts related to foreign currency, interest rate and pricing exposures that are not designated as hedges.

Unrealized gains of $85 million in the quarter primarily relate to gains on foreign currency swaps; partially offset by losses on interest rate swaps.

The prior period gain relates primarily to the mark-to-market movements on our interest rate swaps, cross-currency swaps and commodity derivatives, as well as fair value changes on currency hedges which do not quality for hedge accounting.

Impairment and Provisions

Impairment expense for the three months ended September 30, 2019 of $44 million relates primarily to an investment included in our Real Estate segment.

Other Fair Value Changes

Other fair value changes in the quarter include reclassification of previously recognized OCI losses upon asset sales in our Infrastructure segment. Remaining amounts relate to one-time items across our operations.

Income Taxes

We recorded an aggregate income tax recovery of $180 million in the third quarter of 2019, compared to a $144 million expense in the prior year quarter, including current tax expenses of $284 million (2018 – $119 million) and deferred tax recoveries of $464 million (2018 – $25 million expense).

The decrease in income tax expense relates primarily to the recognition of additional tax loss carryforwards as a result of higher projected taxable income that we expect to be able to offset with previously unrecognized loss carryforwards. This resulted in a deferred tax recovery of approximately $573 million which contributed to the 33% reduction to our effective income tax rate in the quarter.

Our effective income tax rate is different from the Canadian domestic statutory income tax rate due to the following differences:

Our income tax provision does not include a number of non-income taxes paid that are recorded elsewhere in our consolidated financial statements. For example, a number of our operations in Brazil are required to pay non-recoverable taxes on revenue, which are included in direct costs as opposed to income taxes. In addition, we pay considerable property, payroll and other taxes that represent an important component of the tax base in the jurisdictions in which we operate, which are also predominantly recorded in direct costs.

As an asset manager, many of our operations are held in partially owned “flow through” entities, such as partnerships, and any tax liability is incurred by the investors as opposed to the entity. As a result, while our consolidated earnings includes income attributable to non-controlling ownership interests in these entities, our consolidated tax provision includes only our proportionate share of the associated tax provision of these entities. In other words, we are consolidating all of the net income, but only our share of the associated tax provision. This gave rise to a 3% and 8% reduction in the effective tax rate relative to the statutory tax rate in 2019 and 2018, respectively.

We operate in countries with different tax rates, most of which vary from our domestic statutory rate, and we also benefit from tax incentives introduced in various countries to encourage economic activity. Differences in global tax rates gave rise to a 9% decrease in our effective tax rate in the current quarter, compared to a 14% decrease in the prior year quarter. The difference will vary from period to period depending on the relative proportion of income in each country.

September 30, 2019 vs. December 31, 2018

Total assets increased by $35.1 billion since December 31, 2018 to $291.4 billion as at September 30, 2019. The increase is largely attributable to recently completed business combinations which added $27.0 billion of total assets. In addition, our investment in Oaktree added a further $5.3 billion of assets. The adoption of IFRS 16 increased our property, plant and equipment and investment properties through the recognition of right-of-use (“ROU”) assets. These increases were partially offset by assets sold during the quarter.

Investment properties consist primarily of the company’s real estate assets. The balance as at September 30, 2019 increased by $1.7 billion, primarily due to:

We provide a continuity of investment properties in Note 9 of the consolidated financial statements.

Property, plant and equipment increased by $10.1 billion primarily as a result of:

We provide a continuity of property, plant and equipment in Note 10 of the consolidated financial statements.

Equity accounted investments increased from $33.6 billion as at December 31, 2018 to $40.0 billion in the current quarter, mainly due to:

We provide a continuity of equity accounted investments in Note 8 of the consolidated financial statements.

Cash and cash equivalents decreased by $795 million as at September 30, 2019 compared to the prior year end primarily due to timing of cash flows and investing activities in the year. For further information, refer to our Consolidated Statements of Cash Flows and to the Review of Consolidated Statements of Cash Flows within Part 4 – Capitalization and Liquidity.

Increases of $5.8 billion and $2.8 billion in our intangible assets and goodwill balances, respectively, are related to the acquisitions completed in our Private Equity and Infrastructure segments, partially offset by the impact of depreciation and foreign exchange.

Other assets are comprised of inventory, deferred income tax assets, assets classified as held for sale and other financial assets. The increase of $7.0 billion is primarily a result of:

Corporate borrowings increased by $626 million due to a $1.0 billion 10-year note issuance during the first quarter, as well as the impact of strengthened foreign exchange rates. This was partially offset by a repayment of a $450 million (C$600 million) note in the prior quarter.

Non-recourse borrowings increased by $11.4 billion as a result of:

Other non-current financial liabilities consist of our subsidiary equity obligations, non-current accounts payable and other long-term financial liabilities that are due after one year. Non-current accounts payable and other increased primarily due to the recognition of non-current lease liabilities on adoption of IFRS 16 and aforementioned acquisitions. Please see Note 6 of the consolidated financial statements for a further breakdown.

The increase of other liabilities of $6.0 billion is primarily attributable to liabilities assumed on acquisitions completed during the year, current lease liabilities recognized on adoption of IFRS 16, an increase in deferred income tax liabilities, primarily on the acquisition of the global automotive battery business, and liabilities associated with assets held for sale. Please see Note 7 of the consolidated financial statements for further information.

Refer to Part 4 – Capitalization and Liquidity for more information.

Equity

The significant variances in common equity and non-controlling interests are discussed below. Preferred equity is discussed in Part 4 of this MD&A.

Common Equity

The following table presents the major contributors to the period-over-period variances for common equity:

Common equity increased by $3.8 billion to $29.4 billion during the nine-month period ended September 30, 2019. The change includes: