Q3 2023 Brookfield Corporation Earnings Call
Okay.
Hello, and welcome to the Brookfield Corporation third quarter, 2023 conference call and webcast.
At this time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
It's a question during this session you will need to press star one on your telephone I would now like to hand, the conference call over to our first speaker Ms. Angela Yolo Vice President. Please go ahead.
Yeah.
Yeah.
Thank you operator, and good morning, welcome to Brookfield Corporation third quarter 2023 conference call.
On the call today are Bruce Flatt, our Chief Executive Officer, and Nick Goodman, President of Brookdale Corporation Bruce.
Bruce will start off by giving a business update followed by Nick who will discuss our financial and operating results for the quarter.
After our formal comments, we'll turn the call over to the operator and take analyst questions.
In order to accommodate all those who want to take questions. We ask that you refrain from asking more than two questions.
I would like to remind you that in today's call may include.
And responding to questions and then discussing new initiatives and our financial and operating performance. We may make forward looking statements, including forward looking statements within the meaning of the applicable Canadian and U S Securities law.
These statements reflect predictions of future events and trends and do not relate to historic events.
They are subject to known and unknown risks and future events and results may differ materially from such statements.
For further information on these risks and their potential impacts on our company. Please see our filings with the securities regulators in Canada, and the U S and the information available on our website.
With that I'll turn the call over to Bruce.
Thank you Angela and welcome everyone on the call.
Results for the third quarter were strong.
As our business continues to generate growing cash flows and resilient earnings.
Distributable earnings before realization were $1 1 billion in the quarter and four.
$4 2 billion for the last 12 months, representing an increase of 11% per share year over year.
On a comparable basis.
We continue to benefit from our leading position in the fastest growing asset management classes and alternatives today.
Across both our asset management business and are scaling insurance solutions business. The franchise is capturing increasing allocations from institutions pension plans sovereign and individuals' towards real assets in private credit.
And the increasing allocation alternatives is coinciding with our growing retail and wealth distribution channels, which today are raising approximately $800 million a month.
And should grow to 1 billion, one 5 billion.
Month by mid next year from retail and wealth distribution only.
Our asset management business had an active quarter overall and has now raised $61 billion of <unk>.
Total capital year to date with further close as expected on our flagship funds through the remainder of the year and early 'twenty four.
Our successful fundraising efforts include include the closing of our largest ever private equity fund in the quarter at 12 billion.
And the largest ever private infrastructure debt fund at 6 billion shortly after quarter end.
We expect to put the finishing touches on raising the market's largest ever closed end infrastructure fund.
And have large closes for next vintages of transition opportunistic credit and opportunistic real estate in the coming quarters.
And we remain on track achieving to achieve our $150 billion capital raising target.
Our insurance solutions business is also experiencing strong growth and is set to more than double its assets to over $100 billion, increasing annualized earnings to over $1 2 billion.
With the anticipated closings of the previously announced acquisition of Argo Group and American equity life.
Lastly, our operating businesses continued to deliver stable and growing cash flows supported by a resilient earnings and solid fundamentals of the underlying businesses.
Turning to markets Central banks have made good headway in lowering headline inflation.
While economic activity has been resilient and the labor market has remained tight.
<unk> in the U S. We expect rates to remain stable before going lower in the medium term.
Stability in interest rates has led to improved liquidity in capital markets and with significant sums of capital sitting on the sideline around the world. We expect that transaction activity will pick up significantly through the end of 'twenty four.
We do however, recognize the geopolitics as is often the case is a wildcard despite that we do not expect that this will impact the long term outlook for the global economy.
For us specifically.
We have found that in all markets owning businesses and assets that form the black backbone of the global economy economy.
Maintaining our high levels of liquidity and having a scale perpetual cash capital base is a safe place to be.
With that backdrop, the business has performed well over the past 12 months with strong operating results $65 billion of capital deployment in over 35 billion of monetization.
But we expect the next 12 months should even be better.
It is worth re emphasizing that underpinning our success is a significant levels of liquidity that we have across our business and our continued access to capital.
Our liquidity today is significant at nearly $120 billion and should grow to over a record of 150 billion around the end of the year and into next year.
Our access to capital also remained strong.
At a time when many are finding it harder for capital to find capital. Our franchise continues to successfully finance, our existing assets and businesses and raise fresh capital for growth Nick will speak to that in his remarks.
Our ability to access execute buyouts partner and land at scale across a wide wide range of real assets is differentiating aiding us now more than ever.
And as the economic picture becomes clearer and our significant liquidity grows even further we expect 2024 to be another strong investment year.
One of the areas, where we're seeing very exciting partnership opportunities surrounds artificial intelligence or AI.
Much of the broader discussion today on a is about how it is going to change the world and who will win and who will lose.
Last discussed are more important to us it's a significant impact that AI is having on the backbone of the global economy and the substantial amount of capital that is required to launch us into this next AI generation the.
The digitalization investment, which is all powered by renewables.
There's tens of trillions of dollars.
As AI increasingly becomes more vital growing and a valuable segment for many large corporates around the world.
Ability to execute global scale solutions for Green data centers is becoming more critical.
And we expected a few global solution providers.
Brookfield will emerge as winners.
By leveraging Brookfield ecosystem, we are providing turnkey solutions for green data centers on a global basis with a large portfolio today that can provide unique and flexible options for customers.
Our data center renewables and real estate businesses are leaders in their respective sectors. However, we believe that the big opportunity here lies in what we can achieve by having these businesses work together to provide unique integrated solutions to some of the largest global players.
Hi.
We believe that Brookfield is uniquely positioned as a partner of choice to capture the tremendous opportunities ahead in.
And expect AI to be highly additive for our business for many years to come.
For our pass the call to Nick I wanted to briefly talk about our infrastructure and renewables businesses, given the impact of interest rates and broader sector challenges have had on the trading prices of all dividend yield securities of late I wanted to reiterate that we expect to continue to earn very attractive returns on the capital we have invested in.
In our renewable security.
BP and our infrastructure security be IP for a very long time.
We have for over 20 years and our.
And our businesses are better positioned today.
Than they've ever been.
Today. These businesses are in excellent shape with a strong foundation for growth each are well positioned around global secular trends and benefit from being part of the broader Brookfield ecosystem.
Providing them with access to scale capital deep operating investment actor expertise.
Global proprietary deal flow makes them different.
So while many in the renewables and utilities sectors around the defensive and looking inward our businesses are well positioned with significant institutional capital along beside them.
To continue to strengthen their franchises.
We expect that the recent volatility in the markets will provide the opportunity to deploy significant amounts of capital for value and to these business to each emerge more dominant than they even are today.
Given the current trading prices of Brookfield.
Renewable partners and Brookfield infrastructure partners.
Alongside our strong conviction in the intrinsic value of the businesses, we have begun to allocating capital to buy further bep and VIP shares in the open market.
Similar to what we've been doing with.
Brookfield business partners earlier this year.
This use of capital will of course be weighed against buying back our own stock.
We've invested approximately $750 million over the past 12 months.
And also investing in some of the great investment opportunities, which we are seeing.
I will close by noting for you that are significant competitive advantages of scale capital global footprint and deep investment and operating expertise as well as our reputation as a superior partner continued to differentiate our franchise and are more important today than ever.
<unk>.
Thank you for your continued support and interest in Brookfield with that I'll turn it over to Nick to continue.
Thank you Bruce and good morning, everyone.
Financial results were strong in the third quarter distributable earnings or de before realizations were $1 1 billion for the quarter and $4 $2 billion over the last 12 months.
That's an 11% increase per share after adjusting for the distribution of 25% of our manager last December.
Total <unk> was $1 $2 billion for the quarter $5 billion over the last 12 months with net income of $213 million of our share or $35 million in total for the quarter and $2 billion over the last 12 months.
Starting with our operating performance as mentioned our positioning around the global demand for alternatives continues to be a key driver of our performance.
Our asset management business delivered strong results with distributable earnings of $634 million in the quarter and $2 $6 billion over the last 12 months.
Strong fund raising momentum has led to enforce a $61 billion. So far this year and $71 billion over the past 12 months.
Fee bearing capital at the end of the quarter was $440 billion driving growth in fee related earnings of 13% excluding performance fees compared to last year.
And we expect a further acceleration in fundraising through the end of this year and heading into 2020 for providing strong momentum for earnings.
Our insurance solutions business continues to deliver earnings growth generating distributable operating earnings of $182 million in the quarter with $657 million over the last 12 months, representing an increase of 14% compared to the prior year driven by our growing insurance asset base.
Strong investment performance.
During the quarter, our insurance solutions business originated over $2 billion of annuity premiums.
Redeployed approximately $1 billion of assets and then average investment yield in excess of 9% expanding the average yield on the investment portfolio by 10 basis points.
Today, we earn approximately five 5% on roughly $50 billion of assets, which is about 200 basis points higher than the average cost of capital.
Annualized.
The earnings for the business are now approximately $775 million and we continue to track towards $800 million by the end of the year.
The anticipated acquisitions of the Argo group on American equity life will grow insurance assets to over $100 billion.
And we will initially take annualized earnings to approximately $1 2 billion.
The run rate of annualized earnings should grow further to approximately $2 billion annually overtime as the investment portfolio is optimized.
As Bruce mentioned, we continued to increase our distribution to retail and wealth through various channels raising of the $800 million a month currently with $300 million of that coming through our wealth solutions platform and $500 million coming from the origination of annuities within our insurance solutions business.
This should increase to over $1 $5 billion a month in 2024.
Our operating businesses continued to deliver resilient and high quality earnings supporting cash distributions of $366 million in the quarter and $1 5 billion over the last 12 months.
The cash distributions from our renewable power and transition and infrastructure businesses were supported by a 14% increase in their operating funds from operations over the last 12 months prior.
Private equity business also contributed resilient earnings with approximately 7% growth in adjusted EBITDA over the prior year.
On our real estate business continues to achieve strong performance in its core portfolio, which has been outperforming the overall market with occupancy levels at 96% and growth in same store net operating income of 9% compared to the prior year quarter.
In our core retail portfolio flip traffic increased by 7% versus the comparative period and leasing spreads are 19% higher year to date.
In our office portfolio, our leasing activity remains robust.
With 800000 square feet completed in the quarter at an average net rents 15% higher than those expiring.
Which include 200000 square feet in New York, and Toronto 230000 square feet in Calgary.
100000 square feet across Houston, and Washington, D C and almost 100000 square feet across London and Dubai.
It's important to know our leasing numbers are not as large as some prior periods, because we have very limited space to lease and many buildings and markets.
Shifting to monetization activity our transaction activity remains robust we have signed <unk> completed approximately $25 billion of asset sales year to date, bringing our total monetization as to more than $35 billion over the last 12 months.
And most importantly substantially all of these recent sales were transacted at values higher than our <unk> carrying values and that's an important point to reiterate the sales have been completed at all is higher than <unk> supporting our balance sheet figures.
A couple of examples include the sale of our manufactured housing portfolio in the U S for approximately $390 million and the sale of a partial stake in our technology services business and an implied enterprise value of over $1 billion representing.
Representing a three five times multiple on our original investment.
Over the last 12 months, we have generated $2 2 billion of unrealized carried interest increasing our total accumulated unrealized carried interest to $9 9 billion was $8 7 billion of that directly owned by the Corporation.
And we remain on track to realize well over $500 million.
Of net realized carried interest into income this year.
Moving on to capital allocation since the end of the last quarter, we've returned over $400 million to shareholders through regular dividends and share buybacks with over $300 million of shares repurchased in the open market, taking the total buybacks over the past year to approximately $750 million.
The balance of our free cash flow generation was reinvested back into the business.
Moving forward, we will continue to Opportunistically opportunistically repurchase our shares and potentially those that MBV you weighed against the substantial investment and reinvestment opportunities we see ahead.
I would say of our financial results I also want to reiterate our significant liquidity strong balance sheet and core financing principles are serving us very well to date.
Over many decades and through various cycles, we have developed and implemented a simple set of principles to financing our business.
These principles, which are as follows still guide us to date.
First we always maintained significant and multiple sources of liquidity at the Corporation.
Second we finance investments using nonrecourse asset level debt with no cross Collateralization and lastly, we ensure our businesses and assets can be financed on a standalone basis, but we will support them as needed to create long term value.
At the end of the quarter, we had total deployable capital of nearly $120 billion.
Putting us in a very strong position.
At the Corporation, specifically in addition to adding $4 billion in cash and financial assets, we have approximately $60 billion of liquid securities on our balance sheet and seem to be over $100 billion of insurance assets, most of which was invested in cash and liquid assets.
We also have significant headroom in our current credit ratings, enabling us to access the debt markets should we choose and we generate approximately $5 billion of cash flows a year.
With this significant level of liquidity, we are in a very strong position to withstand market cycles, and we will have the ability to focus on growth at a time, when we expect to see excellent investment opportunities.
This should see us emerge from this cycle in a better place than when we entered it.
We have maintained a disciplined approach to financing our business raising debt at the asset or portfolio company level sizing the debt to be sustainable through cycles, and unfortunately, making sure that debt has no recourse to BN.
Our our perpetual affiliate balance sheets.
We pride ourselves on being a responsible borrower and a strong counterparty to those who lent to us.
But at the same time, we along with our lenders approach financings on an asset by asset basis.
This approach to financing our business along with our reputation and our relationships are core strengths, enabling us to have continued access to capital at a time when many others are finding it hard to raise financing.
To highlight this in just the past few months during market uncertainty, we have executed on approximately 25 billion of financings across the business increasing duration and in many cases tightening the spreads of the debt, thereby ending up with coupons broadly consistent with the previous financings.
A few notable highlights include a renewable power in transition and infrastructure businesses, raising approximately $2 $5 billion in the aggregate to support two of their portfolio companies.
And our private equity business, we have refinanced close to $15 billion of debt since the beginning of the year all done with effectively no increase to the overall cost of debt.
Within our real estate business, we have successfully refinanced our 2023 maturities across 131 individual loans benefiting from our diversity across sectors and geographies with no material impact to liquidity and we expect to refinance our upcoming maturities with similar success.
In our office portfolio alone, we have closed approximately $9 billion of financings year to date around our global portfolio.
These examples demonstrate our strong access to the capital markets across the business, allowing us to finance existing operations and support growth.
Overall, our positioning around the fastest growing segments in alternatives are vast liquidity and proven access to the capital markets positions us well to continue to deliver strong returns and create significant wealth for our stakeholders over the long term.
With that I am pleased to confirm that our board of directors has declared a quarterly dividend of <unk> <unk> per share payable at the end of December to shareholders of record at the close of business on November 30th 2023.
Thank you for your time and I'll now hand, the call back over to the operator for questions.
Thank you and as a reminder, if you have a question. Please press star one on your telephone is your question has been answered or you want to remove yourself from the queue. Please press star one again.
Our first question comes from the line of.
Mario <unk> with Scotiabank. Your line is now open.
Alright good.
Thank you for taking my question.
The first one is more of a general one in terms of just kind of the internal view on the broader U S economy.
There continues to be a lot of discussion.
Hard versus soft landing U S. I'm just curious about.
The internal view has evolved relating to the probability of each and how that may shape capital allocation in terms of asset classes or geographies.
Heading into 2024, if at all.
Hi, Mario its next.
And I think when we look at the broad economic situations as we've outlined I think one of the.
Hindrances to capital deployment more recently has been people, forming a view or certainty over the outlook for rates and I think if that stabilizes, we think people will gain more confidence in pricing risk and deploying capital and as more liquidity returns to the capital markets again that should support and transaction activity and I think for.
From our perspective, we try last to form a view on short term economic activity, we tend more to focus on looking for a very high quality businesses with good cash flow there'll be resilient through cycles and if there is opportunities to acquire them for value. Then we will look to deploy capital. So I would say that we have lots of capital, we're being selective and patient.
But we expect to see significant investment opportunities in the coming year.
Okay, and then just maybe on the.
Associated question coming back to the peak the rate cycle.
The transaction activity acceleration I, just wanted to focus specifically on real estate.
For the.
<unk> been fairly vocal in noting there's a significant bifurcation that exists between class a and class B C properties.
Based on your experience there.
Coming out of the GSE or the early nineties.
How would you characterize the acceleration and unexpected activity between the trophy assets.
And presumably kind of a more discounted value add assets.
I guess the question is when do you expect transaction activity to pick up to the types of trophy assets that you own.
Which would perhaps provide the market with more confidence in the underlying asset values.
Yes, I mean, Mario it's very hard to predict the future, but as you know when transaction activity returns the focus tends to be on the highest quality assets.
So yes, it's fair to assume that when transacting does pick up and it's hard to predict that more will be EBIT, maybe into the start of next year with stronger capital markets more support from liquidity Youll see transaction activity return as you state we own very high quality assets with very attractive cash flows that will offer very attractive long term returns. So we should expect to see.
That start.
Hard to say, but hopefully into start next year.
Okay, great. Thanks, guys.
Thank you. Our next question comes from the line of Ken Worthington with Jpmorgan. Your line is now open.
Hi, good morning, Thanks for taking the question.
In Investor Day, you're really reiterated plans to sell down a significant portion of the transition and development real estate portfolio over the next five years with focus sort of redirected towards insurance.
What portion of the transition and development portfolio is ready for sale today, if market conditions were accommodate us.
And if geopolitical actions don't see rail market conditions would you expect to.
Have more meaningful dispositions next year. Thank.
Thank you.
Hi, Ken it's Nick the first comment I would make is that and we've reiterated in the past the assets that we own on our balance sheet are backed by perpetual capital. So we are going to we can be patient where long term in our view.
These and our holder of these assets and desire to create value.
We're not.
Looking or needing to sell in the short term. So we will wait for the right market conditions to transact with these assets. They are all at various stages of their business plans. So it's hard to put an exact percentage, but there is a number of assets that when market conditions return that we can look to sell.
Around the world so diversified by market. So we're not specifically exposed to any one market and when conditions improve we can look to transact.
If market conditions strong next year, then we look to execute but as I said, we can be patient.
Okay. Okay. Thank you and then.
Brookfield is on track to generate $500 million of carry this year. It was a more challenging environment. This year and you still.
Generated quite a bit as we look to 2024.
I know you said you can't predict the future.
Would you expect realized carry to grow.
Which which businesses seem sort of best position to realized carry this year, given the sort of seasoning of the various portfolios.
Yes, that's a good question listen we do expect carrier to grow for sure. Because we are now working our way into larger funds and larger investments and they've all performed really well. So we should expect to see a girl. We're now working our way into the second vintage of the infrastructure fund getting close to realizing carry similar set convinced of the real estate fund and private equity to come in and as we've said in the past.
What's unique about these assets is that they are tend to be investment grade rated with portable debt, which makes them very transactional they've proven to be very resilient in their cash flows and their outlook and should we expect them to be very attractive when you bring them to market and we should continue to see cargo.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Cherilyn Radbourne with TD Cowen. Your line is now open.
So very much and good morning.
Just starting with the fundraising inflows from our retail wealth channel I was hoping you could talk about how you're managing those in the context.
Consumer demand versus what you think you can deploy manage employee on a quarterly or annual basis.
Hi, Sharon guests of the flows are fairly diversified across products mineral swing into one single product, they're flowing predominantly right now through credit and into infrastructure and I think we will be careful to moderate influence to make sure. We can match that against investments that match the return criteria.
<unk> of those products, but so far and we see a tremendous investment opportunity we can match those inflows with deployment opportunities.
Great and then separately.
As it relates to the core real estate portfolio and its potential to nicely matched the duration of your insurance liabilities will the ADL acquisition give you sufficient scale to contemplate a partial transfer to the insurance business.
Yes, so I think having more scale in the portfolio a larger asset base will allow us to look to execute transfers at the right price of.
Core assets over to the insurance portfolio.
Thank you. Thank you. Thanks. Thanks.
Thank you.
Our next question comes from the line of Sohrab <unk> with BMO capital markets. Your line is now open.
Okay. Thank you very much I think that's a good.
Where you left it off take I think it's a good spot for me to pick up you think in the supplemental you talk about insurance solutions business acquiring economic interest.
I'll start with 2 billion of real estate.
Sure.
Can you give us a little bit of indication as to.
The mix if that real estate I guess between office retail and alike.
Maybe core versus transition and.
And.
I suppose how.
The value was established for that transfer.
Yeah sure. So we're up so I think prior to this quarter, we transferred $700 million of equity value of interest in core.
Assets predominantly core office I think one retail, but those were done at fair value with independent <unk>.
<unk>, which obviously were all approved by the regulators before we transacted, what we actually transferred in this quarter was interest and <unk> interest in opportunistic real estate ownership of best Rep.
We're moved across as a more efficient way to own those assets for long term.
Capital base to the insurance business in North those were transacted at fair value and assets that our quarterly valued and reviewed by auditors.
Okay.
It's fair to say that.
Wasn't necessarily kind of observed market prices, because obviously there isn't much much transacting over there it would be consistent with your rich valuations of those is that fair to put it yes, but independently verified valuations.
Okay.
Okay and then so you did about 700 I guess, you said last quarter in some portfolios you did a couple of billion I guess, you've been to state this quarter.
Is there some sort of a quarterly transition right.
That I can see that we could think about it over here or is this just going to be a bit more opportunistic.
The latter sohrab as the business grows and the assets makes sense, then we will look to execute.
Thank you.
Thank you.
Our next question comes from the line of Mike Brown with <unk>. Your line is now open.
Okay great.
So you increased your share repurchases here in the third quarter and Thats continued into the fourth quarter.
I guess my question here is about about the balance sheet here it looks like your <unk>.
On the cash levels here and your liquidity profile. It declined I think about $1 billion quarter over quarter, and so if I exclude the proportion of dams cash from that level. It would actually be negative I guess why take your cash.
<unk> this quarter.
If you do keep the buybacks high which it certainly seems like you've done so far in the fourth quarter.
If I think through the various sources and uses of cash.
Is it possible for the cash to start to kind of grow back here in the fourth quarter or should it actually can actually decline a little bit a little bit more here.
Hey, Mike I think some of that is just timing, but remember we've got $2 6 billion of Undrawn lines. We've got significant liquidity at the corporate level. This was a very good use of cash and we have a lot of other sources of cash beyond as we said $5 billion of GE coming in the year carried interest monetization is in the pipeline. So yes, you can see cash build up.
We're in a very strong liquidity position and buybacks as an attractive use of capital at this point in time.
Okay, and then on Bep and VIP, we've seen those share prices start to come back and I know there was some read across from some other.
Assets in the market that weighed on this group this quarter and maybe the rate backdrop also kind of played out.
Kind of impacting the shares this quarter.
I guess first it.
When you think about what kind of dragged the stacks are kind of impacted the stock this quarter.
<unk>.
If some element of that valuation hit.
I guess the question here is it is there some element that will be kind of harder to get back just given the tough macro backdrop and you kind of confident the buyback activity will help reverse some of that discount.
And then too.
Would you ever consider changing the way that the management fees are calculated on the bond side, there's clearly some kind of mark to market noise here. So would you ever shift to keep doing our fee rate calculation on a NAV based calculation versus like a market cap calculation and if so what would that transition process kind of look like in practice.
Maybe taking the second one first the answer is no we have a well established fee structure for these businesses they've been public for a long time, well disclosed well understood by the market. So not contemplating any changes I think on the discount with bad debt of course, the higher rate environment has impacted people's views of yield stocks in the short term.
But I think what's different about both breadth and depth and what they've proven over a long period of time is there are not just owners of their own very very high quality assets, but they are real operating businesses and we buy assets and they really can grow and drive cash flow growth, which outperformed the broader market in terms of returns that they have proven over a long period of.
Turning to be able to deliver in their assets and whilst the macro if higher rates has impacted the sector. I think we fully expect that <unk> will continue to differentiate themselves and their earnings growth and then the value they generate in their investments and that will translate into share price performance overtime or.
Our buybacks in the short term and not necessarily intended to enhance their price is seeing a good opportunity to deploy capital for value.
We'll continue to look to do that if it persists.
Okay. Thank you for taking my questions.
Thank you I would now like to turn the call back over to MS. Angela <unk> for closing remarks.
Thank you everybody for joining us today and with that we'll end the call.
This concludes today's conference call. Thank you for participating and you may now disconnect.
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