Q2 2023 Transcript

TRANSCRIPT: Q2 2023 CONFERENCE CALL / WEBCAST

August 10, 2023 at 10.00 am (ET)

Corporate Speakers:

Angela Yulo, Vice President

Bruce Flatt, Chief Executive Officer

Nick Goodman, President

Jon Bayer, Managing Partner, Insurance Solutions

PRESENTATION

Operator

Hello, and welcome to the Brookfield Corporation Second Quarter 2023 Conference Call and Webcast. (Operator Instructions)

I would now like to hand the conference call over to our first speaker, Ms. Angela Yulo, Vice President. Please go ahead.

Angela Yulo, Vice President

Thank you, operator and good morning. Welcome to Brookfield Corporation's Second Quarter 2023 Conference Call. On the call today are Bruce Flatt, our Chief Executive Officer, Nick Goodman, President of Brookfield Corporation, and Jon Bayer, Managing Partner of our Insurance Solutions business.

Bruce will start off by getting a business update followed by Nick who will discuss our financial and operating results for the quarter. And finally, Jon will give an update on our insurance solutions business. After our formal comments, we will tuthe call over to the Operator and take analyst questions. In order to accommodate all those that want to ask questions, we ask that you refrain from asking more than two questions. I would like to remind you that in today's comments, including in responding to questions and discussing 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 law. These statements reflect predictions of future events and trends and do not relate to historic events. They are subjected 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 your filings with the securities regulators in Canada and the U.S. and the information available on our website.

And with that, I'll tuthe call over to Bruce.

Bruce Flatt, Chief Executive Officer

Thank you, Angela and welcome everyone on the call. We had a strong second quarter and first half of 2023 with our business performing well and generating strong cash flows. Nick will talk about this, but distributable earnings for realizations were a billion dollars in the quarter and $4.3 billion for the last 12 months, up 21% year over year on a comparable basis. Before I tuto a few business items, I'll make a few comments just on the market. The global economy has been very resilient during the first six months of '23 on the back of strong labor market and healthy corporate and household balance sheets. There were periods of volatility. But the resolution of the U.S. debt ceiling negotiations and the subsiding of the challenges for a few of the regional banks seems to have settled markets. The increase in short term interest rates is lowering inflation and slowing the economy, particularly in the U.S.

And so, as we look ahead, it seems likely that central banks will keep rates in their current range for a while. And so, we are reaching the end of the hiking cycles. And then they will lower them as conditions dictate.

With that backdrop, equity markets have been on a strong run of late and credit spreads for high quality borrowers have compressed back to early 2022 levels. Having said that, overall credit conditions remain relatively tight for many. And this is where our premier players like us stand to benefit.

Despite this more challenging environment, we were able to demonstrate what makes us different. We continue to access significant sums of capital in the first half to fund growth across multiple levels of the organization. We execute on number of monetizations showing that there is significant demand for high quality, cash generating assets that we own. And we delivered another strong quarter of operating results supported by underlying fundamentals across our businesses.

As an example, as an overall sponsor, we completed more financings than any other group to date this year. This is because of the quality of the businesses we own, our relatively low leverage levels and our sponsorship. Our Manager had a very strong quarter for the start of the year, delivering 16% growth in fee-related earnings excluding performance fees with a positive outlook for fundraising for the rest of 2023. I note a couple of things, which includes our latest flagship infrastructure private fund, which now stands at $27 billion, which is the largest drawdown infrastructure fund ever raised and is one of the largest private funds of any type ever completed.

In addition, for our third infrastructure debt fund, we have raised over $4 billion with more capital to come. Which all together when combined with our insurance flows, puts us on track to raise a record of upwards of $150 billion of capital in 2023. Our Insurance Solutions business is delivering strong results as we continue to increase the investment returns on our approximately $45 billion and growing float of insurance assets. During the quarter, we announced the acquisition of American Equity Life, which is one of the largest independent annuity platforms in the U.S. The transaction grows our insurance business to over $100 billion of assets, and we'll be highly additive to overall Brookfield. Jon Bayer is with us today and will cover our insurance business in more detail later in the call.

Third, our operating businesses continue to perform well and demonstrate their resilience, generating strong and growing cash flows, that compound their intrinsic value. We also had a very active first half of '23 on monetizations, where we transacted on approximately $15 billion of assets sales, which bring our total monetization over the last 12 months to $30 billion. Just a few examples. We sold a high-quality portfolio of office campuses in India for $1.4 billion, returning nearly four times our capital. I might note that high-quality,well-located office assets around the world continue to be attractive investments and trade at premium values. We sold our 50% ownership of our mobile network operator in New Zealand, generating an IRR of over 30% and a multiple, just over two and a half times in four years. We monetized a portion of our U.S. gas pipeline with an IRR of over 18% and a multiple of three times. We also sold wind and solar assets in Uruguay, a toll road in India, a freehold port in Australia, and some gas storage assets in the U.S. The diversity of this portfolio gives it resilience.

These recent sales were executed at levels in line with or higher than IFRS carrying values, providing strong support for accrued unrealized carried interest and potential future carry, which Nick will touch on in his remarks.

Before I hand the call off to Nick, I'll make a few brief comments on our wholly owned real estate business. Yesterday on our Manager call, we spoke on some of the opportunities for our Manager to put money to work for clients in our funds. I will not repeat these. But at Brookfield Corporation, we own an extremely high quality, global portfolio of office, residential, retail and mixed-use assets. What distinguishes this portfolio is its quality, and that it is owned with perpetual equity capital and backed by our vast liquidity and strong access to capital. As a consequence, our short and medium-term focus is on optimizing our assets and growing cash flows. We care less about the perceived short-term movements in price, and we are focusing on our best and making our best even better. We are undoubtedly in a period of change for some real estate owners or assets that were not prepared for higher interest rates or those who have that have not been able to keep the real estate relevant to the end consumer will undoubtedly feel some pain.

On the other hand, great real estate is still great and in fact will be a beneficiary of the current environment as it captures increasing demand for quality real estate and also the real increases in cash flow. What we own does generally not compete with commodity office, commodity retail or mixed-use market. Over time, great assets deliver very compelling inflation protected returns. Interest rates go up once, but the rental rates can go up for very, very long periods of time. We expect to push through this current environment and be in a very powerful position as we emerge from this cycle. In the meantime, we expect to see some excellent opportunities to acquire more real estate on a deep value basis through our funds from those owners without permanent capital, equity capital are those without capital structures that can withstand this environment.

Finally, and relating to overall Brookfield, we continue to see that our scale perpetual capital, our global operations, our deep investment and operating expertise puts us in a very strong position. We remain focused on delivering for you on our goal of building one of the world's largest pools of discretionary capital, because we believe that doing so will enable our clients and shareholders to eastrong returns over the long term in what we do, scale matters. Before I pass it over to Nick, I will mention that we all look forward to seeing many of you at our investor day, which is on September 12th in New York, additional details are available on the website. And thank you for your continued support and interest in Brookfield.

And with that, I'll tuit over to Nick.

Nick Goodman, President

Thank you, Bruce. And good morning, everyone. As Bruce mentioned financial results were very strong in the second quarter, as our franchise continues to showcase its significant competitive advantages. Distributable earnings or DE before realizations were $1 billion for the quarter, and $4.3 billion over the last 12 months. That's up 21% over the past year, adjusting for the distribution of 25% of our Manager last December. Total DE was $1.2 billion for the quarter, $5.2 billion over the last 12 months, with net income of $1.5 billion and $2.7 billion over those respective periods. Both DE and net income benefited from strong financial performance and the resilient nature of our underlying businesses.

Focusing first on operating performance, our asset management business delivered another quarter of strong results, with distributable earnings of $604 million in the quarter and $2.7 billion over the past year. Strong fundraising and significant capital deployment drove growth and fee- related earnings of 16% compared to last year, excluding performance fees. Fundraising momentum remains strong, with inflows of $37 billion to date this year and $74 billion over the past 12 months. We expect to reach over $100 billion of institutional and private wealth fundraising, which when combined with insurance inflows, we should raise a record of close to $150 billion of capital in 2023. And this should drive meaningful earnings growth in 2024 and beyond.

The growth of our Insurance Solutions business continues to accelerate. The business generated distributable operating earnings of $160 million in the quarter and $634 million over the last 12 months. That's significantly higher than the comparative periods. The substantial growth in earnings has been driven by our ability to grow our insurance asset base, and to use our deep investment expertise, particularly in credit to expand our spread earnings.

During the quarter, our insurance business originated over $3 billion of annuity premiums and redeployed approximately $1.5 billion of assets at an average yield in excess of 8%, expanding the earnings on our investment portfolio by 20 basis points. Today, we ea5.4% on approximately $45 billion of assets, which is now about 220 basis points higher than average cost of capital. Annualized earnings for the business today are now approximately $725 million. And we are confident that this will grow to $800 million by the end of the year.

Jon will speak to our Insurance Solutions business in more detail, but it is important to emphasize that with the expected closing of AEL and our goal, we anticipate a further step change in earnings from this business, initially adding over $500 million per year. But these earnings will grow as we optimize the investment portfolio, increasing annualized earnings from our insurance business towards approximately $2 billion.

Our operating businesses continue to generate stable and recurring cash flows. Distributions for operating businesses are $397 million in the quarter and $1.5 billion over the last 12 months. Stable and growing cash distributions from our renewable power in transition and infrastructure businesses are supported by the 23% increase in operating funds from operations over the last 12 months. Our private equity business continues to deliver resilient earnings with 15% growth in

adjusted EBITDA over the prior year. And our real estate business continues to deliver strong net operating income or NOI benefiting from high demand amongst tenants for our premium properties. Our core portfolio is 96% leased and through active leasing along with rental growth, NOI from the portfolio increased by 8%. And I'm going to mention that a second time for emphasis, NOI for the core portfolio increased by 8% compared to the prior year.

On the retail side, sales have record highs in 2022. And leasing spreads are up over 15% year over year so far this year. In our office portfolio, our leasing activity and pipeline are robust, with over

1.2 million square feet of leasing activity completing in the last quarter, at rents higher than those expiring. A few examples of our leasing activity includes a lease for 340,000 square feet in Denver, 230,000 square feet across Houston and Washington D.C., 340,000 square feet in Toronto in New York, almost 100,000 square feet in London. And we are 99% full in South Korea, Dubai, and Sao Paulo and leasing is very strong in Shanghai and Sydney. All these are leased at strong rents, and we have a solid pipeline for the rest of the year.

Also important for this business is that we continue to have strong access to the capital markets, to finance our high-quality real estate. Despite relatively tight credit conditions for some, we have successfully refinanced or extended all maturities for our real estate business so far this year, and we are well progressed in all remaining maturities this year with no expected material liquidity at the events.

Bruce touched on monetization activity earlier. However, it is important to note that almost all of these recent sales are transacted at values higher than our carrying values, providing strong support for our balance sheet values. And the significant carried interest of more than $20 billion that we project to realize over the next 10 years. Over the last 12 months we've generated $1.9 billion of unrealized carried interest, increasing our total accumulated unrealized carried interest to $9.5 billion, with $8.4 billion of that directly owned by the Corporation. And we continue to see a path to realize over $500 million of realized carried interest net into income this year.

Turning to capital allocation, we continue to weigh the use of our cash flow and excess capital between opportunistically buying back shares and executing on the exceptional investment opportunities that we see ahead. During the quarter, and over the last 12 months we've reinvested $1.7 billion and $5.4 billion respectively, of cash back into the business supporting various accretive growth initiatives. We also returned at $146 million to shareholders through regular dividends and share repurchases during the quarter, taking the total capital retuto shareholders over the last 12 months to $14 billion, inclusive of our special distribution of BAM shares last December.

Moving on to liquidity and the capital markets, we continue to see the strength of our conservatively financed balance sheet, high levels of liquidity and access to deep pools of public and private capital across our organization as significant competitive advantages for our business. And with capital harder to obtain for most those advantages differentiate us now more than ever. We we're very active in the first half of 2023, netting acquisitions of more than $50 billion. Our ability to execute at this scale is in large part due to our high levels of liquidity and strong access to capital from multiple sources across the organization. Today, our access to capital is distinctive and multifaceted.