Earnings Call Transcript - BN Q3 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the Brookfield Asset Management Third Quarter 2022 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Suzanne Fleming. Please go ahead.

Suzanne Fleming, Speaker

Thank you, operator, and good morning. Welcome to Brookfield's third quarter 2022 conference call. On the call today are Bruce Flatt, our Chief Executive Officer; and Nick Goodman, our Chief Financial Officer, Brookfield Corporation; Bahir Manios, Chief Financial Officer of our Asset Management Business. Bruce will start off by giving a business update, followed by Bahir, who will walk you through the results of our asset management business. And finally, Nick will discuss our overall financial and operating results. After our formal remarks, we will turn the call over to the operator and take analyst questions. In order to accommodate those who want to ask questions, we ask that you refrain from asking more than two questions at one time. If you have additional questions, please rejoin the queue, and we'll be happy to take any additional questions at the end, if time permits. 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're 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. And with that, I'll turn the call over to Bruce.

Bruce Flatt, CEO

Thank you, Suzanne, and welcome everyone on the call. Our third-quarter results were strong, demonstrating the resilience and diversification of our franchise. We reported over $700 million of net income and $1.4 billion of distributable earnings. In addition to these strong results, we entered into a number of strategic partnerships where we will deploy significant amounts of capital alongside our partners. The economic backdrop has continued to create volatility in the capital markets with bonds and equities underperforming recently. On the contrary, private real assets have proven to be a safe haven, further enhancing their appeal to investors. Interest rates should peak in the next six months, and many major economies around the world seem set for a recession due to a central bank-induced slowdown. Rates are expected to stabilize and eventually decline. Dislocation in the financial markets and less access to capital have emerged for many. Fortunately, we are well-positioned to thrive in the current environment with a record level of investable capital of over $125 billion and, more importantly, the skills to navigate these types of markets and execute transactions. Our access to liquidity, combined with our deep operating expertise, sets us apart and makes us an extremely attractive partner for many companies. Our recently announced strategic partnerships are just the beginning of what we want to accomplish when we bring our competitive advantages to bear. Touching on a few of these recent partnerships: We agreed to fund half of a $30 billion chip manufacturing facility with Intel, with Brookfield funding $15 billion through our infrastructure business. This is just one chip manufacturing facility, and the trends towards de-globalization may result in similar opportunities going forward. We partnered with Deutsche Telekom to acquire part of half of a 51% interest in their $17.5 billion tower business. This is a marquee portfolio of 36,000 towers in Germany and includes a greenfield development portfolio of an additional over 5,000 towers. Our renewable power and transition business partnered with Cameco to acquire Westinghouse for $8 billion following an incredibly successful turnaround by our private equity group. We are very excited about this business going forward and the partnership with Cameco. Fundraising continues to go extremely well, with significant amounts of capital coming in for our flagship funds, as well as for our complementary strategies. We continue to see clients consolidate the number of managers they allocate capital to, and with our strong track record, focused client service, and wide breadth of product offerings, we have been successful at deepening our existing relationships and attracting new clients to our business. We also continue to focus on enhancing private wealth product offerings, but we will talk more about this later. Our Insurance Solutions business continues to make strides and is providing a natural hedge for us against interest rates. Having staged short in duration in our investment portfolio and largely sitting on cash since the acquisition of American National, we have started to invest in a variety of higher earning strategies. Additionally, with the direct origination capabilities obtained through the acquisition of American National, we have been writing new annuities directly and are actively deploying this capital. These efforts are steadily increasing the cash earnings from the business and to date have delivered very attractive returns on our equity beyond what we expected when we launched the business two years ago. Before I turn the call over, I wanted to highlight that yesterday at our special meeting, shareholders approved the distribution and listing of 25% of our asset management business. We remain on track to complete the distribution and listing by the end of this year.

Bahir Manios, CFO of Asset Management

Great. Thank you, Bruce, and good morning, everyone. I'm pleased to report that our asset management business had an excellent quarter and continues to prove its resiliency and ability to deliver strong profitability and growth through the cycle. As Bruce noted, the business had a strong fundraising quarter, progressed on several initiatives on the product innovation side, and delivered impressive financial results. I'll provide an update in my remarks on all three fronts. First, from a fundraising perspective, we remain on track to deliver our best fundraising year ever. Our clients continue to allocate large sums of capital to our real asset strategies that provide predominantly contracted and inflation-protected cash flows, which offer shelter during times of market volatility. Since the end of the last quarter, we had inflows of $33 billion, predominantly driven by first closes for our fifth flagship infrastructure fund and our sixth flagship private equity fund, which now stand at approximately $21 billion and $8.4 billion, respectively. We also finished fundraising for our fourth flagship real estate fund and raised $17 billion for the strategy. Additionally, we continue to raise capital across our other complementary strategies. Our third infrastructure debt fund had a first close of $2.8 billion, and our super core infrastructure fund raised $1 billion during the quarter. We recently launched fundraising for the next vintage of our opportunistic credit flagship fund. This strategy, along with the broader Oaktree franchise, specializes in investing capital during periods of capital scarcity and market volatility, and we expect this period to be no different. Our target for the next opportunistic credit fund is to be larger than the prior vintage, which stood at $16 billion. As a result of all these initiatives, we ended the quarter with $407 billion of fee-bearing capital, which was up almost 20% compared to the prior year. On the product innovation front, we continue to focus on solutions designed for private wealth, leveraging our strength in private real estate and private and public performing credit, as well as our newest strategy focused on infrastructure. We recently launched a private wealth product that will give investors the ability to invest alongside our institutional clients in our infrastructure funds, providing investors with exposure to a balanced portfolio of the highest quality debt and equity infrastructure investments. We believe there's significant potential for this product. From a financial results perspective, as I noted earlier, they were very strong. Fee-related earnings were $531 million in the quarter and $2.1 billion over the last 12 months, representing increases of 18% and 20%, respectively, compared to the prior period. Our fee-related earning margins were 59% over the last 12 months, unchanged from the prior year comparative period as we continue to focus on cost discipline as we scale up our business. In addition to our current fee-bearing capital, we have $39 billion of committed capital that when invested will translate to approximately $390 million of incremental annual fee revenues. This, in addition to the capital raised across our latest flagship series, will be a strong catalyst for continued growth in our fee-related earnings for years to come. Asset valuations across our managed strategies continue to be supported by the growing revenues as we benefit from higher same-store demand and the positive impact of inflation. That combined with our minimal exposure to public securities resulted in the business generating $379 million of carried interest during the quarter. We currently have total accumulated unrealized carried interest of $9 billion, which is up almost 30% from last year. Moving on to investment performance and monetization activity, we continue to execute on several monetizations of high-quality, de-risked assets. During the quarter, we agreed on the sale of Westinghouse in our private equity business, realizing approximately a 60% IRR and a six times multiple of capital. Our real estate business continues to recycle capital, including the sale of an office property in Melbourne. Although the pace of monetization in the broader market has slowed, our pipeline of capital recycling initiatives across our mature, high-quality assets remains strong. As we look forward, our growth profile remains very strong and highly visible as we continue to build on our position as the preeminent manager across renewable power, transition, infrastructure, and real estate assets. Furthermore, we'll continue to reap the benefits of synergies with the corporation and maintain significant access to capital to support growth, as well as benefit from capital allocation from our Insurance Solutions business, which should propel both fund size and fees going forward. So that was a recap of our activities for the quarter. Before I hand the call off to Nick, I thought I'd spend a few minutes speaking about the upcoming special distribution of our manager business. Yesterday, we received shareholder approval to proceed with the special contribution and the listing of a 25% interest in our asset management business before the end of the year. As a reminder, for every four shares you own of Brookfield today, you will receive one share of the newly listed manager company. Consequently, when the manager business begins to trade later this year, the share count of this company will be a quarter of the share count of Brookfield today. The manager will be called Brookfield Asset Management and trade under the symbol BAM, while the existing business today will be renamed to Brookfield Corporation and trade under the symbol BN. The manager is a market-leading global platform that is on track to more than double its fee-bearing capital from roughly $400 billion to $1 trillion over the next five years, translating directly to fee-related earnings, which are expected to grow from $2 billion annually today to over $4 billion five years from now. In addition to the management fees it generates, the manager will receive upside from two-thirds of gross carried interest on new funds. The manager will require a minimal amount of capital and will target a dividend payout ratio of approximately 90% of its distributable earnings. We anticipate being in a position to communicate to the market the dividend rate for the Company for fiscal 2023 before the start of trading in December. We strongly believe that this manager company will have one of the most attractive dividend profiles out there. We laid out the story on this at our Investor Day held in September, but as a brief recap, the dividend will be underpinned by a highly predictable cash flow profile as over 90% of our cash flows underpinning this dividend will be derived from fee-related earnings that are predominantly generated from long-dated and perpetual strategies. We will have a very strong growth trajectory as we expect to grow our fee-related earnings by 15% to 20% over the five-year plan period. And finally, this dividend will be anchored by a strong balance sheet that has no debt and a significant liquidity position right out of the gate with almost $3 billion of cash on the balance sheet. And so with that, thank you for your time and attention this morning, and I'll pass it on to Nick.

Nick Goodman, CFO

Thanks, Bahir, and good morning, everyone. To reiterate the previous comments, our financial results were excellent during the quarter. Distributable earnings or DE were $1.4 billion for the quarter and $5 billion over the last 12 months. DE before realizations were $1.2 billion for the quarter and $4.2 billion over the last 12 months, that's up 39% and 29% respectively compared to last year. FFO and net income for the quarter were $1.5 billion and $716 million respectively. The strength of these earnings is due to the high-quality and essential nature of our assets and businesses. They generate predominantly contracted inflation-protected cash flows, underpinned by conservative and stable capital structures. As a reminder, we always strive to minimize the risk of our capital structures by financing largely on an investment-grade fixed-rate basis, matching the currency of the debt to that of the underlying asset cash flows. We also seek to hedge the residual currency exposure of our equity, maintaining high hedge levels against developed market currencies, which have been most affected in the last 12 months. The result is a resilient asset portfolio that continues to perform well. As Bahir mentioned earlier, this model continues to benefit our clients as well as our own capital. Our investment portfolio, on the whole, continues to generate stable and growing cash flows, and the values of our investments are robust. It is worth noting that the performance of our Insurance Solutions business has also been very strong as it ramps up its investments. Operating FFO was $1.2 billion for the quarter, a 30% increase compared to the prior year period. The increase was largely driven by the continued growth in our asset management franchise, the benefit of same-store growth across our operating businesses, contributions from recent acquisitions, and substantial growth in our insurance solutions business. Distributions from our investments were $696 million, 23% higher than the prior year. These results are especially impressive when you consider the economic backdrop. Across the portfolio, we have seen growing demand for our essential services, whether it be for backbone infrastructure, renewable power contracts, premier office space, or to expand physical retail presence. The market-leading positions of many of the businesses we own also provide strong underlying growth, either through inflation indexation or our ability to pass on real pricing increases to consumers. While these strong underlying operating results were partially offset by the impact of higher rates for certain of our businesses, it is worth noting that a large percentage of our debt is fixed rate, and our insurance operations provide a natural hedge to interest rates, with the performance of that business to date being very strong. Our Insurance Solutions business had an excellent quarter, generating almost $160 million of distributable earnings, reflecting the first quarter where we saw the contribution from American National. This business, which has largely been sitting in cash until now, is very well positioned to benefit from the current rising rate environment with the ability to deploy a significant amount of insurance capital into our alternative strategies, thus earning strong returns. This business is beginning to demonstrate why we believe it has strong long-term growth potential. Since the end of the second quarter, we have bought back 136 million of shares. Over the last 12 months, our share buybacks totaled 626 million, and combined with our regular and special dividends, we've returned over $1.5 billion of capital to our shareholders. Furthermore, the manager distribution next month will return between $10 billion to $20 billion to shareholders depending on how you value what you receive. We ended the quarter with record liquidity of approximately $125 billion of deployable capital. This includes about $36 billion of core liquidity and $89 billion of uncalled fund commitments. As we look forward, we are very well positioned to leverage this liquidity, combined with our ability to source proprietary scale investment opportunities to do something large and interesting should that arise. Finally, I am pleased to confirm that our Board of Directors has declared a quarterly dividend of $0.14 a share, payable at the end of December to shareholders of record as of the close of business on November 30. I want to thank you for your time, and I would now like to pass the call back to the operator for questions.

Operator, Operator

Our first question will come from Cherilyn Radbourne from TD Securities. Your line is open.

Cherilyn Radbourne, Analyst

My first question is with respect to the secondary market, where there's clearly an expectation of more LP activity in the near term. Is it logical that more GP activity, where BAM is more focused, should follow that? And is that something you're preparing for?

Bruce Flatt, CEO

Yes, it's Bruce, Cherilyn. During times of less capital availability versus more capital availability, those with capital typically find greater opportunities. When GPs can't wind up a fund by selling assets outright, continuity vehicles make even more sense. I believe there will be significantly greater opportunities moving forward to expand our business, so I think it'll be a good time.

Cherilyn Radbourne, Analyst

In terms of the retail wealth channel, could you expand on how many platforms you're listed on and the receptivity you're seeing from advisors regarding alternative products, and how much was baked into your five-year plan in terms of retail inflows?

Nick Goodman, CFO

Hi, Cherilyn, it's Nick. We're advancing the initiatives we laid out, such as developing more products. Our non-traded REIT is on 13 platforms now and we're also expanding into the RIA channels. We have our Oaktree product, which recently launched through their BDC, and we are in the process of promoting our infrastructure product as well, providing retail and wealth access to the full suite of our capabilities and products. We think this will resonate well with the channel over time. The first stage of getting on the channels has been achieved, now it's about performance, which has been strong. Our non-traded REIT is performing well and scaling up. The growth goal for the next five years remains at about $50 billion to $60 billion, which we believe is achievable.

Operator, Operator

Thank you. One moment for our next question please. And our next question will come from Ken Worthington from JP Morgan. Your line is open.

Ken Worthington, Analyst

Hi, good morning, and thank you for taking my question. For Bruce, how do you characterize the real estate market in the U.S. at this point, both the corporate building and retail sectors? What do you see for Brookfield in real estate in 2023?

Bruce Flatt, CEO

That's a broad question. I could take a while, but I'll try to give you a couple of points. First, the real estate market is almost a tale of two cities. The gap has widened between premier assets and poor-quality ones. Poor-quality assets, whether residential, industrial, retail, or office, are not worth lower prices. Some are going to be handed back to lenders for recapitalization. The best-quality assets, generally, are performing well. High-quality assets in all real estate sectors are gaining higher rents. Retail sales broadly across the U.S. are up 30% in shopping centers from pre-COVID numbers, and high-quality centers are even performing better. Office space in major markets like New York is seeing rents up 50% from pre-COVID. The focus on premier quality prevails, and I believe this trend will persist into 2023.

Ken Worthington, Analyst

On the margin outlook, you're in a significant flagship fundraising cycle. This is expected to drive high incremental margin, but you're also investing in the business. How should we think about the margin outlook for Brookfield Asset Management and Brookfield Corp, in terms of differences and expense allocation going forward?

Nick Goodman, CFO

Thanks, Ken. The margin outlook hasn't changed over the long term. For Brookfield, we’ve guided to around 60%. When including Oaktree, we're in the 59%-60% range. You might see some short-term margin expansion as we approach the end of this flagship fundraising cycle since most costs have already been loaded upfront. As we start seeing revenues flow in, we expect ongoing revenue growth while continuing our investment in business growth, so long-term guidance remains consistent.

Operator, Operator

And our next question will come from Alexander Blostein from Goldman Sachs. Your line is open.

Alexander Blostein, Analyst

I want to dig into some of the fundraising dynamics outside of the flagship. Bruce, you mentioned $14 billion of capital raised outside of the flagship campaign, which is quite strong. Can you help unpack where that's coming from and how you think about the growth of the business in 2023 and beyond from these contributions?

Nick Goodman, CFO

Hey Alex, this is Nick. We've talked about flagships and scaling up, but the growth of these complementary strategies will propel the business going forward. They've proven to resonate with our clients. Strategies that focus on capital scarcity have seen strong demand and have performed well. We've observed strong inflows into our infrastructure debt strategy and perpetual real estate strategies. These funds are attracting both new clients and first-time investors considering our strategies.

Alexander Blostein, Analyst

Regarding the transition business, what are your thoughts on capital needs in this part of the market? What's the pace of deployment, and when should we think about a follow-up fund?

Bruce Flatt, CEO

Your observation regarding the deployment pace is correct, Alex. The fund is witnessing tremendous opportunities. The need for capital investment in the transition space is enormous. Our fund can make impactful investments where emissions are located, facilitating decarbonization efforts. The pace of deployment will be careful, targeting strong returns for our clients. Eventually, we will consider launching a second fund, but the timeline for that is yet to be determined.

Operator, Operator

Thank you. One moment for our next question please. And our next question will come from Geoff Kwan from RBC Capital Markets. Your line is open.

Geoff Kwan, Analyst

Is there any sensitivity regarding plan value to higher interest rates? I think the sensitivity would be related more to the principle investment in NAV rather than your fee-related earnings or carry.

Nick Goodman, CFO

Hi, Geoff. If interest rates were considered in isolation, you could speculate an impact, but combined with inflation, we believe valuations across our portfolio remain robust. The two factors appear closely linked at present. A decrease in inflation could lead to lower rates. We feel confident about investment valuations and our fundraising capability in the current environment.

Geoff Kwan, Analyst

On the American equity life situation, can you provide insights into the rationale for the decision made? Will BAM reinsurance fulfill the remaining new flow requirements under the regional agreements, and regarding the shares that you are not planning to sell initially, how long until those can be sold?

Bruce Flatt, CEO

It's Bruce. I can't add much context as it's a public company, but understand this is a small investment compared to the 300 other businesses we have. Small events occasionally attract media focus. This will resolve itself in due course. I recommend following public disclosures for further details.

Operator, Operator

Thank you. One moment for our next question please. And our next question will come from Sohrab Movahedi from BMO Capital Markets. Your line is open.

Sohrab Movahedi, Analyst

Can you provide more information regarding leveraging the manager to source investment opportunities? What areas are you targeting?

Bruce Flatt, CEO

First, our corporation will continue to invest alongside the funds sponsored by the manager. Occasionally, there may be an asset that doesn't fit within those funds or is substantial enough for the corporation to take a significant investment. When markets experience volatility, equities can drop significantly, creating more acquisition opportunities for us. The current environment is likely to yield more opportunities than we've seen recently. Many will present themselves daily, and some could be very interesting, driven by available liquidity and capital.

Sohrab Movahedi, Analyst

To fully leverage the manager, doubling fee-bearing capital and fee-related earnings, would you consider adding through acquisitions, or is your trajectory solely organic growth?

Bruce Flatt, CEO

Our plans are primarily focused on organic growth, aided by our existing product offerings. While we evaluate various opportunities that come our way, we do not require acquisitions for growth. We are building adjacent products continuously, ensuring we have a broad suite. However, we are open to reviewing prospective acquisitions.

Operator, Operator

Thank you. We will take our last question from Andrew Kuske from Credit Suisse. Your line is open.

Andrew Kuske, Analyst

Can you provide insights on your client coverage model and how it benchmarks against peers? What is the average ticket size?

Nick Goodman, CFO

Our client coverage model is global; we have teams building relationships with clients daily from the largest pension funds and sovereign wealth funds down to smaller institutional investors. Additionally, we have a dedicated team covering insurance clients leveraging our reinsurance business expertise. The average size of our investors is growing, currently around $175 million, and our engagement with existing clients is continually increasing.

Andrew Kuske, Analyst

Are there regions where you're growing coverage faster than others?

Bruce Flatt, CEO

The U.S. still presents a tremendous opportunity for us. We have strong relationships in Canada and are growing in the Middle East and Asia. Europe continues to grow with tailored products resonating well in that market. Thus, the U.S. remains a significant growth sector for us.

Operator, Operator

Thank you. And that concludes our question-and-answer session for today's conference. I'd like to turn the conference back over to Suzanne Fleming for any closing remarks.

Suzanne Fleming, Speaker

Thank you, operator. With that, we'll end today's call. Thank you everyone for joining us.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.