Brookfield Asset Management : Q4 22 Conference Call Transcript

TRANSCRIPT: Q4 2022 CONFERENCE CALL / WEBCAST

February 9 2022 at 10.00 am (ET)

Corporate Speakers:

Suzanne Fleming, Managing Partner

Bruce Flatt, Chief Executive Officer

Nick Goodman, President

PRESENTATION

Operator

Good day and thank you for standing by. Welcome to Brookfield Corporation's Fourth Quarter 2022 Results Conference Call. [Operator Instructions] It is now my pleasure to introduce Managing Partner, Suzanne Fleming.

Suzanne Fleming, Managing Partner

Thank you, Operator, and good morning. Welcome to Brookfield Corporation's Fourth Quarter and Full Year 2022 Conference Call. On the call today are Bruce Flatt, our Chief Executive Officer; and Nick Goodman, President and Chief Financial Officer of Brookfield Corporation. Bruce will start off by giving a business update, followed by Nick, who will discuss our financial and operating results for the quarter and the year. After our formal comments, we'll turn the call over to the operator and take analyst questions.

I'd like to remind you that in today's comments, including in responding to questions and in discussing new initiatives and our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. 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 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. And with that, I'll turn the call over to Bruce.

Bruce Flatt, Chief Executive Officer

Thank you, Suzanne, and welcome to everyone on the call. 2022 was a strong year for Brookfield, even though at times, market conditions were more challenging than some years. Our manager had a record year for fundraising and is now separately listed. Our operating businesses posted strong underlying results, and our Insurance Solutions business is beginning to meaningfully ramp up its earnings. We returned a record amount of capital to our shareholders in 2022 - approximately $15 billion, between our regular dividend, share repurchases and the special distribution of the BAM shares in December.

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Despite the market volatility in 2022 and the fact that a recession is likely taking place in many parts of the world. Real assets are demonstrating their resiliency and are benefiting from the higher levels of inflation than we have seen for many decades. With approximately $125 billion of capital to deploy, our large perpetual capital structure and our global scale and expertise in value investing. Now more than ever, the corporation is well positioned in the current environment to grow and widen its reach. While our underlying performance was excellent this past year, like everything in the markets, the performance of Brookfield Corporation's stock was not. General market conditions and the distribution of shares of our Manager caused some short-term pressure on our share price. This has started to dissipate and most importantly, the underlying value of the business continues to compound.

Our share performance has been strong on a longer-term basis, and we believe this will carry on. And with the net asset value per share that we estimate to be far higher than our current share trading price, we expect to continue to use our vast liquidity to repurchase shares in the market. And if the discount persists, we will consider other options, including tender offers, while balancing the addition of new businesses to increase returns and strategically position us for the future.

As we look forward, our objective remains the same: to deliver compound annual returns of 15% over the longer term. Each of our businesses, our manager, our insurance solutions business and our operating businesses on their own, generate very attractive returns. But when we leverage the synergies that exist between the broader Brookfield, the earnings potential becomes even greater.

Starting with our asset manager. We have a number of tailwinds that are accelerating for a highly differentiated asset management business, and we are set to continue to deliver strong earnings in 2023 and beyond. Our asset manager security now provides direct access to this business and provides us with optionality for strategic acquisitions, positioning this business to execute on its next phase of growth.

Our Insurance Solutions business continues to grow in scale and strategic importance to the organization. Financial results are strong as is our return on invested capital, and we continue to redeploy assets across the board. We have high goals for this business and are actively pursuing a number of investment opportunities to add further scale and diversity in line with our objectives laid out to you in past of surpassing $200 billion of insurance float in the next 5 years.

To that end, yesterday, we announced the acquisition through Brookfield reinsurance of Argo Group, a well-established specialty P&C business in the U.S., adding another platform and pool of assets to the franchise. Nick will speak to this later in more detail. But as a reminder, part of the capital of the corporation has also invested in a highly diversified, very high-quality portfolio of real estate assets in many of the best locations in the world.

This business has proven to be a great compounder of capital across economic cycles, delivering strong returns over the long term. We are seeing this today with demand for our assets continuing to be very strong, supporting valuations and our outlook for growth. As an aside, much of the high-quality real estate,

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which we own today, will eventually find its way into our insurance business due to its long duration nature, which will further support the growth of our insurance business.

Lastly, our remaining operating businesses continue to perform well and have a proven track record of delivering excellent long-term returns. The organic growth levers within each of these operating businesses, combined with the continued allocation of capital to funds from our asset management business should support growth at or above our targeted levels. With such strong and visible growth ahead for each of our businesses, the bar for new investments is very high.

Since it is hard to look past the opportunity to invest more capital into each of these businesses, or our repurchase of shares as they are undervalued. That being said, we continue to look at investment opportunities to further accelerate growth, which likely will fit into one of the following categories: first, investing excess capital into our Insurance Solutions business to continue to grow it; second, potentially a strategic acquisition that may be too large for any of our funds or in partnership with some of our funds. Third, investing into new businesses that are adjacent to what we do; and last, investing in sectors where we do not yet have full-scale teams. And in turn, these could lead to new businesses for us down the road.

In summary, holding Brookfield Corporation shares offers a unique opportunity to own a stake in our asset management franchise, our insurance solutions business and all of our operating business is benefiting from the earnings growth of each businesses, the resulting synergies between them and the ability to participate in the next chapter of what we are building. We believe the corporation is a very attractive proposition and is poised to deliver excellent returns over the long term. As always, thank you for your continued support and interest in Brookfield. I will now turn the call over to Nick.

Nick Goodman, President

Thank you, Bruce and good morning everyone. 2022 was another significant and very successful year for our business. Despite a more challenging economic backdrop, we delivered very strong financial results. And with a separate listing of our asset management business now complete, we are set up well to execute on our next phase of growth. Distributable earnings or DE, which continues to be the key performance metric for our business was $5.2 billion for the year, and DE before realizations were $4.3 billion, representing an increase of 24% compared to the prior year.

Operating FFO was $4.6 billion for the year, a 23% increase compared to the prior year, with total FFO and net income for the year of $6.3 billion and $5.2 billion, respectively. The strong financial performance from our existing businesses and the returns generated from the deployment of excess cash flow was a driving force behind our financial results in 2022.

Now taking each of our businesses in turn. First, we've talked about the importance of separately listing our asset management business. And yesterday, we released earnings for this business for the first time as a stand-alone public company, and the financial results were very strong. Fee-related earnings

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increased by 26% when excluding performance fees compared to 2022, driven by inflows of $93 billion, and that's a record fundraising year for us. With a number of funds currently in the market and the benefit of the full year effect of funds raised during 2022, we expect 2023 to be another strong year.

On a longer-term basis, we see a number of tailwinds accelerating in our favor, which should continue to support growth for some time, and we believe the best is yet to come for this business. Distributions from our operating businesses and investments were $2.6 billion in 2022, 20% higher than the prior year. These results are especially impressive when you consider the market environment. We continue to see strong demand for the essential services our businesses provide, be it for backbone infrastructure, renewable power, premier office space or to extend physical retail presence.

And the essential service businesses owned within private equity continued to deliver earnings growth and value creation. As an example, in 2022, our infrastructure business grew its FFO per share by 12% with our renewable and transition business also delivering strong growth. EBITDA from our private equity business increased by 33%, benefiting from the addition of some high-quality businesses and growth in the underlying earnings of existing investments. Underlying operating cash flow in real estate grew by 13% compared to the prior year. And while interest rates were higher for some of our floating rate debt in 2022, growth in cash flows did offset the impact of interest rates during the year.

With interest rates expected to peak in the coming months, we do believe that the NOI growth from the portfolio will offset the impact of interest rates in the medium term, ultimately driving FFO growth. Our real estate business is highly diverse by asset class and geography. And across the portfolio, we continue to see strong demand for our high-quality assets, and fundamentals remain strong in almost all of the markets in which we operate. The dynamic market in 2022 caused us to adjust the valuations of certain properties.

Overall, the impact of power discount rates was largely offset by improving market conditions and the strong performance and outlook for many of our assets, evident in the recent NOI growth. During the year, we had adjustments down of roughly $1.7 billion across certain assets, and that's more than offset by other assets that were adjusted upwards by $1.8 billion for the year.

While valuations were relatively flat for the year, the IFRS net asset value of our real estate business decreased, but that's predominantly due to the distributions of gains on asset sales, proceeds from asset refinancings and some FX. The net asset value for invested capital in real estate sits at $33 billion as at December 31.

Our equity can be broken down as follows: $8 billion of our capital in real estate is invested in our real estate private funds, which are highly diversified by both geography and by sector, and our asset management business has a proven track record of delivering returns of roughly 20% over the long term. These assets are turned into cash over a 5- to 10-year period. $15 billion of our capital is invested directly into our top 35 trophy office and retail complexes globally. These are amongst the best in the world and

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get better and better over time. This includes assets like Brookfield Place New York, which is 92% leased for an average of 8 years.

Manhattan West, which is 97% leased for an average of 12 years. Canary Wharf in London, where the office is 93% leased for an average of 10 years, and the retail was 96% leased for 7 years, and we have highly attractive and diverse development opportunities. On top of that, we own 19 of the best mall and urban retail properties in the United States, which are currently 97% leased on average. $3 billion of our capital is invested in our residential land and development business in the U.S. and Canada.

This business has delivered very strong financial results for decades in the region of 20%. Over time, these assets all turn into cash as we build out developments unless we choose to reinvest. And lastly, $7 billion of our capital is invested in other real estate assets, which, as we have discussed before, will be liquidated over time with proceeds reinvested to drive further growth across our various businesses.

Given the nature, quality and diversification of the real estate that we own, we have deep conviction that the underlying portfolio will continue to deliver strong returns for us for a long time. Our Insurance Solutions business continues to make an increasingly higher contribution to our earnings and is a really good example of how we are able to redeploy our free cash flow into an investment that in a very short period of time is delivering mid-teenscash-on-cash returns and excellent total returns on our invested capital.

This business generated distributable earnings of $388 million in 2022, up from $30 million in the prior year. With the growth in our insurance base over the last 12 months and significant liquid investments available to be redeployed into higher-yielding investments, our insurance earnings should continue to scale meaningfully in 2023. In the last 6 months, we have been actively redeploying capital, increasing the average investment book yield to 5% at year-end, supporting liabilities with an average cost of 3%.

During the fourth quarter alone, we redeployed over $2 billion across our portfolio at an approximate yield of 8%, increasing annualized earnings to approximately $650 million at year-end. And we expect annualized earnings to grow to roughly $800 million by the end of 2023. It should also be noted that the positive impact of higher interest rates in this business has acted as a significant natural interest rate hedge to the rest of our business.

It is clear from our results in 2022 that the earnings power of our business is incredibly strong. As we have stated, each business is expected to continue delivering strong growth and by leveraging the synergies they offer each other and reinvesting our annual free cash flow, we plan to grow our distributable earnings at a compound annual growth rate of approximately 25% over the next 5 years.

In addition to investing capital back into the business, we will also look to repurchase shares when they are undervalued, enhancing the return of capital to our shareholders. In 2022, our share buybacks totaled nearly $700 million. And when combined with our regular and special dividends, we returned almost $15 billion of capital to our shareholders. We ended the quarter with liquidity at approximately $125 billion

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