Brookfield Asset Management : Q2 Earnings Transcript

BROOKFIELD ASSET MANAGEMENT LTD

TRANSCRIPT: Q2 2023 CONFERENCE CALL / WEBCAST

August 9, 2023 at 11:00 am (ET)

Corporate Speakers:

• Suzanne Fleming, Managing Partner
• Bruce Flatt, Chief Executive Officer
• Connor Teskey, President
• Bahir Manios, Chief Financial Officer

PRESENTATION

Operator

Hello, and welcome to the Brookfield Asset Management Limited Second Quarter 2023 Conference Call and Webcast. At this time all participants are in listen only mode. (Operator Instructions). I would now like to hand the conference call over to our first speaker, Ms. Suzanne Fleming, Managing Partner. Please go ahead.

Suzanne Fleming, Managing Partner

Thank you, Operator, and good morning. Welcome to Brookfield Asset Management's second quarter 2023 conference call. On the call today are Bruce Flatt, our Chief Executive Officer; Connor Teskey, President of Brookfield Asset Management; and Bahir Manios, our Chief Financial Officer. Bruce will start the call today with opening remarks, followed by Connor, who will talk about some of the themes we're focused on; and finally, Bahir who will discuss our financial and operating results for the business.

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 ask questions, we ask that you refrain from asking more than two questions at one time. If you have additional questions, please re-join 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. law.

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 hand the call over to Bruce.

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Bruce Flatt, Chief Executive Officer

Thank you, Suzanne, and welcome everyone on the call. Results were strong in the second quarter. We generated fee related earnings of $548 million, and distributable earnings of $527 million. Fee related earnings were up 16% year over year, excluding performance fees on the back of 12% growth in fee-bearing capital to $440 billion, highlighting the significant fundraising that we've done over the past year, and the stable, predictable nature of the business with nearly 85% of our fee-bearing capital being long term or perpetual in nature.

We have been one of the most active managers so far this year demonstrating that our contrarian investment approach and established competitive advantages allow us to put significant sums of capital to work and to monetize assets for our clients, utilizing our competitive advantages.

To put some numbers around the first half of the year, we have committed to investments worth $50 billion, monetized $15 billion of assets and grown assets under management to $850 billion. These are large figures in any 6-month period but to achieve this in the current environment truly differentiates our franchise.

As we look ahead, we continue to see an attractive investment environment and have a very positive outlook for capital raising. This backdrop should lead to excellent returns for clients in our recently launched fund vintages and in turn should allow us to continue to raise significant amounts of capital.

Today, investors are more selective in who they choose to partner with, more and more they are choosing managers that offers scale funds, flexible co-investments, and access to deals across a diversified range of asset classes and market conditions. This fits perfectly with our competitive advantages of global scale, deep operating expertise, and diversity of products as well as significant benefits our clients get by being part of the broader Brookfield ecosystem.

Year-to-date, we have had strong capital inflows of $37 billion and expect an acceleration of fundraising in the back half of the year across our flagship and our complimentary strategies. These fundraising efforts alongside the $50 billion of insurance capital from the recently announced AEL transaction should allow us to raise a record of close to $150 billion of capital this year. And given the pace of activity in the first 6 months of the year, we continue to be able to deploy a large amount of capital that we are raising in this environment.

With our significant access to global scale capital, we can focus on investing in the asset classes where our franchise is strongly positioned, such as infrastructure, renewable power and transition, and private credit by leveraging our deep relationships with institutional investors and lenders.

These advantages are very powerful and in the current market are a differentiator. Before handing the call over to Connor, I'll spend a little time talking about the opportunity we see once again to acquire great real estate for value. We've been investing in real estate for over half a century in the company and investing on behalf of clients since the early 2000s.

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Over that period, in that series of funds we have acquired nearly $100 billion of properties on behalf of our clients across various economic cycles in every sector. And our track record is extremely strong with an average annualized gross return of over 20%. In the decades that we have invest in real estate, we have found that volatile markets often present the best opportunities to acquire high quality real estate at exceptional values.

Today, we're in an environment with higher interest rates, higher inflation, and tightening lender requirements, all of which create uncertainty and pockets of stress in real estate markets globally.

Particularly though in the U.S. As the current cycle is evolving, the story has become one of stress in the capital markets versus the fundamentals of most asset classes. This bodes well for experienced managers with strong access to capital like us. The strong will get stronger, and as always, the weak will go away. It is worth reminding everyone that fundamentals in most real estate asset classes are very strong.

Just a few points. Retail centers hit record sales in 2022, record sales in 2022. Premier office rents are at all-time highs in most cities. As an example, our South Korean, Dubai and Sao Paulo portfolios are 99% full, with all time high rents. Rents for logistics properties grew 11% in 2022. Multifamily rents in the U.S. went up 15% year over year. Hotel rooms are full almost everywhere, with ADRs ahead of pre-pandemic levels.

The strong fundamentals are coupled with a supply side that will provide very little new commercial real estate inventory in the short or even in the medium term. Land constraints, high material costs and limited financing will keep supply low for quite a while and allow for continued rent growth that should outpace inflation.

The combination of the pockets of stress in capital markets and strong underlying fundamentals with constraint and supply will lead to the best environment we've seen since 2009 to execute on our long-standing investment strategy for real estate, which is to buy high quality assets for value and drive upside through active asset management.

Buying great assets with compromised capital structures is always the easiest way to strong returns. I'm going to repeat that one more time. Buying great assets with compromised capital structures is always the easiest way to strong returns. So, acquiring great real estate for value is a good start to be able to repeatedly earn excellent returns over the longer term. One must also drive operational excellence in a portfolio.

Our operating expertise is based on having people on the ground across the world and decades of experience in all the major real estate sector. Our hands on approach gives us control over investment outcomes through cycles, and it's particularly well suited for today's environment.

We have the ability to leverage our global tenant relationships and the Brookfield ecosystem great value through our leasing, rental appreciation, refurbishment and redevelopment of properties, are nearly 30,000 people in 30 countries dedicated to real estate give us exceptional insights into the market and allow us to see virtually everything in the world.

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It is during periods of time like now, where opportunistic real estate flagship fund series is designed to take advantage of market turbulence, and we have seen the success of our strategy through multiple cycles. We think the latest vintage, which is our 5th fund will be an excellent vintage, maybe one of our best.

Thank you for your continued support and interest in Brookfield Asset Management. And I'll turn the call now over to Connor.

Connor Teskey, President

Thank you, Bruce, and good morning, everyone. As we've seen before, dislocated markets create fear among investors, and this uncertainty then creates opportunity for well prepared and well positioned market participants who are willing to think differently.

Our ability to be contrarian is only possible because of the competitive advantages and insights we derive from the broader Brookfield ecosystem. For example, insights we get from sitting at the table with leading global corporates on their needs for energy, data infrastructure, real estate, and capital. Secondly, the insights we get through the partnerships we've developed with the largest and most sophisticated investors, understanding their strategic objectives, and gaining visibility into where capital is flowing and where it is not.

And lastly, the insights we get by leveraging the talent of our over 1000 investment professionals who are sourcing opportunities and sharing feedback on a real time basis.

So when asset prices fall out of line with intrinsic value, we can act quickly and decisively. And given the recent market environment, this is exactly what we've been doing. This year, we've announced agreements to acquire high quality businesses and assets, worth $50 billion, making us one of the most active alternative asset managers in the world. But recognizing the value opportunity is only the start, having the ability to successfully deploy capital in this environment and at this scale stems from several competitive advantages.

Notably, we have the ability to raise large sums of capital across diverse sources, our private funds, our public affiliates, and Brookfield's balance sheet. In aggregate, we have $80 billion of uncalled fund commitments, or $100 billion of capital when including Brookfield affiliates, leaving us with ample dry powder to put to work.

We also have strong relationships with the largest lending institutions globally, built on a longstanding reputation for prudently funding our businesses, giving us deep access to debt capital to support our acquisition. This capital at scale enables us to invest in multibillion dollar opportunities, such as the Origin and Triton take private transactions we discussed during our first quarter call.

Our ecosystem also enables us to be early to identify changing trends in in the global macroeconomic environment and shifts in where capital is being directed. It is not an accident that the businesses in which we have built leading global platforms are very much in favor today. Digitalization is one of these key trends. Years ago, we recognized that data was the

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world's fastest growing commodity, and it would need significant infrastructure to be processed, transported, and stored.

Behind this growth in data, we have been building out our portfolio around fiber, transmission, and storage. Recent advancements in cloud computing and AI have only steepened this curve, increasing the demand for data usage going forward.

Today, we are well positioned to be a key enabler for the world's largest and fastest growing technology companies by both meeting their data center needs and also supplying the huge sums of clean power that are required for increasing levels of advanced computing. In just the second quarter, we committed to acquire businesses collectively valued at $12 billion to meet this digitalization trend. This includes Data4, a European datacenter operator at a value of $4 billion, Compass Datacenters at approximately $5 billion, and Network International, a digital payments leader in the Middle East at a value of $3 billion.

While we have been very active on the deal front, finding attractive opportunities for our clients. We have also been exploring prospects for strategic acquisitions to further expand our asset management platform.

Subsequent to the end of the quarter, Brookfield Reinsurance announced that it signed an agreement to acquire AEL one of the largest independent annuities providers in the United States. And while Brookfield Asset Management is not committing any capital to the transaction, we are set to benefit in several meaningful ways.

First, we expect to be named the manager for AEL's $50 billion of investable capital, which will triple our current insurance fee-bearing capital and puts us on track to reach the target of $225 billion of insurance capital that we laid out in our 5-year plan at last year's Investor Day.

Second, it significantly enhances our ability to organically grow our insurance assets under management in the future. American National is currently BNRE's main insurance platform with 4,000 agents today. Combined with AELs capabilities, Brookfield Reinsurance can expect comfortably right $10-12 billion of annuity policies per year. And with some operational and technological enhancement, and the support of Brookfield capital, we believe there is a clear path to get to $15-20 billion of annual annuity policies.

This is a very meaningful figure as it would signify then just a few short years since Brookfield Reinsurance first got involved in the business, it would likely be one of the top 3 annuity providers in the United States. That being said, in our growth targets, we foresee BNRE taking additional inorganic growth actions as well.

Further, by leveraging BAM's investment platform, we should be able to deliver premium risk adjusted returns to Brookfield Reinsurance, return can pass those benefits to policyholders which would only continue to drive more organic growth.

Now let us switch gears and talk about how we allocate insurance capital across BAM. Much of the allocation decision is dictated by understanding the regulatory regime in which each policy is

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