Brookfield Corporation (BN) Earnings Call Transcript & Summary

Great. Well, good morning, everybody. Thank you for joining. We're going to get started with our next session. It is my pleasure to welcome Bruce Flatt, CEO of Brookfield Asset Management. Brookfield is one of the leading global asset management firm specialized in real estate credit, private equity infrastructure, sustainable investing, just to name a few. At its recent Investor Day, the firm outlined plans to double fee-bearing capital over the next 5 years with an eye on many more new growth initiatives in private markets as that space continues to develop. So Bruce, lots to cover. Thank you for being in person. It's great to see you.

Thank you. Thanks for having us.

Great. So I want to start off with a question really just around priorities for '22. As I mentioned at your Investor Day, you outlined quite ambitious agenda across a lot of the existing products, but also some of the newer areas that you're looking to kind of branch out into. So what's going to be the key sort of focus for the organization over the next 12 to 18 months?

Look, as you well know and this whole conference, a big part of it is about the alternatives industry. Interest rates are really low and they're going to be low for a long period of time and money is piled up around the world, both in the institutional and retail accounts. And our specialty for 20 years has always been institutional. And now increasingly, that's going further down the spectrum to bring in wealth customers into alternatives. So I think and I'd say the big push of ours and our big global funds, flagship funds are $15 billion to $20 billion, but each. But increasingly, what's happening is that we need to create more products for clients, both institutional and retail wealth to deliver fixed income alternatives. And I'd say that the #1 thing that's changed over the past 2 years is that everyone's realized that interest rates are 0, it's very tough to earn a return, and therefore, you need replacement products. So many of the things that are spinning off as adjuncts or step outs to all of our businesses are related to fixed income replacement, and those are going to become very, very big over time.

Great. All right. Let's build on that a little bit. But before I want to touch base on the flagship products. It's -- you could say, a more mature part of the business, but still lots of growth, obviously, and you guys are in the middle of a fundraising cycle right now. You talked about raising $100 billion of capital, including about $70 billion of third-party capital in the flagship strategies that you have in the market. You talked recently about potential surpassing that number just given the demand you see in the marketplace. How are you thinking about rightsizing the products? How are you thinking about returns that you're underwriting to in the existing lineup of flagships? And maybe back to the point of exceeding the target, where is that incremental demand coming from?

Okay. If I forget 3 of those things, you remind me. I didn't know I would answer them.

As 1 of the prior speakers for me, I'm involved for asking many parts to the same question, so I'll keep that in mind.

Look, I would say our flagship funds, real estate private equity infrastructure transition and our credit opportunities with the Oaktree name on it is our broad, big, they're designed for institutional clients. We can take large sums of money from the biggest sovereigns and institutional clients in the world and they're meant to deliver opportunistic returns based on whatever opportunistic means in each sector. So private equity, obviously, is 20% and infrastructure is 14%. But these are -- there aren't that many people in the world that can take $15 billion to $25 billion for each of those strategies, put it to work over 2 to 4 years and earn those returns consistently over a long period of time, and we're 1 of them. And that's a great luxury. And I'd say, yes, it's more mature, but it's a great business and the increase -- and I'd say, increasingly for us, what the strategy is, is to partner with those institutions, both that come into our funds, the larger ones. Because of our balance sheet up top, it allows us to do transactions bigger than the funds, commit to them and lay it off to them as we go along. And it cements the relationship greater because of that. And so our franchise has been evolving with that. And yes, the funds get bigger, but a $20 billion fund can maybe be $25 billion or $30 billion, it's not going to be $50 billion. So that business, whereas some of our smaller funds in our super core infrastructure fund and our retail products and our real estate products are core are doubling, tripling, quadrupling will be 10x the size of each other. It's probably not possible that our large flagships are going from $20 billion to $100 billion, right? They may be go to $50 billion, but they're not going to go to $200 billion. So they're not quadrupling. So it is -- to your point, it is a more mature business for us.

Got it. And I think you answered the question. But as far as the returns that you're underwriting to, it doesn't sound like it sort of despite the multiples we're seeing in the marketplace, you're underwriting to any lower sort of set of returns that were seen...

Okay. The answer is no. We're not underwriting to lower returns. It's possible that returns will be slightly less. I haven't seen it for 20 years. Like even though when trades went from -- 20 years ago, they were 8% -- 8%, 7%, 6%, 5%, 4%, 3%, 2%, 1%, our returns have been as good as they were before. So we're not changing that. But what I would say is almost every -- this is why money both from institutions and now from wealth is coming to these products. Virtually every single product that we offer, in fact, every single product we offer, whether it's low risk or more higher risk or moderate risk, every single product earns hundreds, if not 10% or 12% or 15% more than a fixed income product. And even on our core plus, like our infrastructure fund that is an institutional core plus product, we call it super core, it earns 5% current cash, and it's targeted to earn 7% or 8%. But these are unbelievably consistent earning either utilities or regulated rate base assets that are perpetual and are going to last for 25, 50, 100 years. But that's what you're talking 500 basis points, 700 basis points more than what you can get in a government security. So these are very large returns. And that's why the money is coming. And so I guess the real point is, if you miss a couple of hundred basis points, it's still really lucrative to be in these products. And that's why money is flowing.

Right. That makes sense. Let's spend a couple of minutes on some of the newer initiatives, and I wanted to start with the Global Transition Fund. You guys have raised about $7 billion, I believe, in that product for the first series of these funds. You talked about this potentially being over $200 billion AEL opportunity over time. And given the market's focus on ESG and push towards net zero, I was hoping you could talk a little bit about the key areas of differentiation you see in this business for Brookfield. How you guys can sort of scale in that business and what are some of the areas we actually expect to deploy that capital?

So we will close by March, it will be upwards of $15 billion. It will only be capped by the fact that we are capping the size. It could have been more. That gives you an indication for a quasi first-time fund, it gives you an indication of the interest in transition investing. One of the great investment areas for the next 25 years will be the investment into the transition of energy in the stack and it just so happens that because of our renewables business and experience, our infrastructure experience and our industrial experience that we are very well set up to help companies transition to net 0. So we brought in an ex Goldman alumni, I might say, Mark Carney. He honed our strategy over the last year and I'd say we start -- when we started out, it wasn't exactly what it is today. But today, we know exactly what we're doing. And we've been investing forever into renewables deals, but half the fund will probably just be us building out renewables, solar, wind largely for industrial customers as they need to decarbonize. The easiest thing to do first is for us to take our corporate clients and build them renewables. So we're signing large deals with technology companies, industrials to build them out renewables. The other half is going to be us providing capital into utilities and industrial companies globally that need to decarbonize and they need money for it, and it's an enormous sum that has to go there. And our $15 billion isn't even going to scratch the surface. Look, it's the largest out there today and there's nobody else that has it close. And we can do things with that money that most can't do because remember, this is not just about green investing, right? It's about funding the transition, and there are 50 shades of green. So if we can take a company or help a company go from here to here, and become further in the spectrum of net zero, we've done a lot globally. So that's what the money is focused on. And we have -- we just happened to have had the experience to be able to do it. And we've got a number of our clients that are really excited about it.

Great. Sticking with a similar theme but pivoting to, I guess, slightly more established business that you guys have, which is infrastructure. You guys have a leading presence in infrastructure investing for many years. Curious to get your thoughts on how the recent passage of a $1 trillion package in D.C. will change at all investing in the infrastructure within private markets? What role do you guys see yourself playing in that and whether or not it's going to be a needle mover 1 way or another?

Look, our infrastructure business, we got lucky. We got in early. We're a category killer. Everybody invests with us. We have an excellent pipeline to invest. We're just in our -- we're coming on our fifth fund. It will be large. And we have a unique capability to assist infrastructure businesses around the world. Now everyone else is trying to get in the business. So there's never -- there's always competition. The good news is and I'd say, what's happened in tandem with money developing in the world and us building out our business, in tandem, what's happened is governments are -- have loaded up their balance sheets beyond comprehension of how much debt they have. And there is only 2 ways out: Tax or get rid of assets. And get rid of assets mostly means not sell assets because it's tough. Governments have a hard time selling assets. Some do it. But most of it means funding of infrastructure going forward, put into private hands. And I think that's where the infrastructure bill is going to be very helpful, pushing states towards that. And I don't -- it's not in itself that will drive transactions to us, but the -- what it's going to do is push states towards privatization. It's going to push countries towards privatization and the amount of infrastructure assets globally from that plus from data build-out, 5G build-out and just global backbone infrastructure build-out is going to be very significant. So this business is going to grow for a long time, and you will have noticed all -- virtually all of the other managers now trying to build an infrastructure business because it's 1 of the great businesses in the world, and it will be for a long time coming.

Yes. Let's shift gears a little bit and talk about another theme in private markets, which is kind of this development of core and like kind of the core private market solutions. To your point earlier, both institutional and retail investors are essentially trading off liquidity for higher returns. And depending on what the duration of the capital is that could really open up the addressable market of what private markets could invest into, so not just opportunistic, but core type of product as well. So in -- I believe at the Investor Day, you talked about building this part of the market for you to $60-plus billion in kind of core-related strategies. Can you just remind us kind of where that stands today, your path of getting there, the vehicles that you'll tend to use in order to kind of help you facilitate getting into that zone?

Yes. So just to give you or to talk about the addressable market or what's out there is, firstly, on the institutional side, as everybody here knows, 50% of portfolios of institutional clients used to be or are invested in fixed income. Fixed income, mostly government securities. And I was with an institutional client the other day $150 billion plan, call it, they liquidated over the last 6 months, $65 billion of fixed income securities. And that is all going into either alternatives or private credit and fixed income alternatives. And literally, -- and the reason is because you're not earning anything in what you have based on what you can sell it at today. And it's possible, it's highly probable, rates are going up from here. And if rates go up from here, they're going to lose money on their fixed income securities. So you may as well put it into -- remember, these products that we have, they generally adjust for inflation. Not all, not perfectly, but they generally adjust for some form of inflation. And therefore, they are hedged against inflation going forward, especially compared to fixed income. Okay. So I break the market out into 2 groups. Institutional clients are increasingly pushing money towards it and those -- the products that we're creating for them are Core Plus product which today is at circa $6 billion in our products and growing fast, our super core for infrastructure, we'll have 1 for renewables. These are all income products that replace fixed income. But then increasingly, the shift is towards the retail wealth systems because as you know, if you have money lying in your bank account, it earns nothing at the end of the month. And if you can provide a product, which is semi-liquid, and it earns 5% and then possibly earns 7% or 8% but it earns 5% cash on cash, that's a really good product. So we're creating products and will be creating more products, basically mimicking what we have for institutional clients and shifting it towards retail and wealth.

Great. So you mentioned retail and wealth. That's actually a nice pivot into my next set of questions. Let's talk a little bit about that. And starting maybe with the product first, and then we'll zoom out and talk about the retail strategy and the wealth management strategy broadly. But Brookfield REIT, it's something that you guys rebranded recently. It used to be a legacy Oaktree product. Now it's a nontraded REIT that you guys are managing. I think it has about $500 million in AUM or NAV rather or so kind of in that range. Can you walk us through what platforms this product is being distributed through currently? Are you on any of the wire houses, obviously, that tend to come with larger check sizes. And as I said earlier, kind of fuse them out a bit and talk to us about the types of products and distribution channels that you expect to be active in, in trying to address the wealth management market?

So Brookfield REIT is a private REIT, which will be distributed in the wealth systems globally, starting off in the United States mostly. And it's now $1 billion in size, it came across from Oaktree at $500 million. So we've added $500 million of assets to it. It will -- it is and will be now our signature product to distribute to wealth clients across the United States. And that product will earn, call it, 5% current, targeted at 7%, 8%, and it's going to be buying -- it is buying assets which are let -- have low risk and generate income. And I would say, our franchise is just because of the -- we have 1 of the, if not, the broadest and largest franchises in real estate in the world. Because of that, we can now bring that to wealth clients. And it just -- there wasn't the market really 5 years ago for that. And really what we're doing is we're just taking what we've been doing for institutional clients and now providing it for wealth. So we're now -- we've just literally just got the approvals. We -- to get it done quicker, we moved product we had in the Oaktree franchise up to Brookfield so we can use our whole platform, right, as opposed to just the Oaktree platform. It's on 1 or 2 systems today. It's going to be on all -- it hopefully will be on all of them. And we have a -- we set up a separate wealth group with 65, 70 people in it called Brookfield Oaktree Wealth, and they're going to be distributing this product and helping the financial advisers in the United States to distribute this product. So look, it's early days. I think the -- we're going to follow that with infrastructure renewables transition. These are the -- again, this is -- it's very easy for us to find product for it. We now just need to build out the distribution.

Right. Right. So similar flavors on the institutional side and to the wealths channel side, yes.

Yes, Look, the thing that's great about it is we're doing all of -- everything we're going to put in that we're doing for institutional clients today. There's nothing -- we don't have to create any magic to create the products. We just have to get the product into wealth hands, and we're very excited about it.

Great. All right. Another big topic is insurance. We've seen you guys make some strategic moves on that front this year as well. And similar to other parts of the -- of your growth initiatives, you see it as quite a substantial growth opportunity for Brookfield. So let's unpack it in a couple of ways. So you've completed 2 blocks $12 billion in annuity assets and depending, obviously, American National acquisition will add another $30 billion. So you're off to a good start there. As you're thinking about scaling the insurance initiatives from here, how much of the build do you expect to be organic originations versus additional blocks? And then secondly -- or rather additional acquisitions and reinsurance transactions? And then secondly, the business today is 100% on balance sheet. What are your plans longer term in terms of getting the third-party capital behind it or spinning it off?

So look, every business we start, and we always have mature businesses, mid-stage businesses, early-stage businesses. And many of these businesses we have that we started in the last 2, 3 years will not generate meaningful contributions to the company for 2, 3, 4, 5 years. But what it does is it extends the growth trajectory that we have in the business, and that's very significant. With reinsurance, look, I think the reason why we started now, we didn't start before is that int rates are 0. And the risk on the liability side is gone. We're just waiting annuities, it's either life and we're giving away the life risk and we're just -- we're basically creating annuities. It's just we're taking on fixed income obligations. And with interest rates very low, the risk is done on the liability side. And therefore, the risk in the business is, can you invest the capital properly and earn a return. And we feel highly confident that we can outearn the liabilities that we're taking on. So that's, I guess, is point number one. That's why we started into the business, and that's why we've been buying blocks of reinsurance, and we bought Eneco sizably last -- this year. And so our view now is how do we grow the business further? And I guess what I'd say first is our balance sheet allows us to make sure that we're right before we ever bring a wealth or institutional client into a product with us. So we -- and I'm going to -- maybe this isn't the right way to say it, but we never practice on with other people's money. And until we're absolutely sure that we can manage the risks, we can invest the money properly, we can earn 20% returns on our capital, we can do everything right, we will never introduce an institutional client or wealth private client into an asset class. So as we grow, and it looks like given where rates are and where the capital is needed by insurers, there should be a big growth for this business. We're going to have to assess where the rest of the money comes from. And it's likely we'll bring in other money into this business at some point in time. Probably it will be private money. We have a lot of institutional clients that have interest in this business with us. It may be portions of it. It may be into the reinsurance book, it may be a new insurance company, we're not sure. But I just -- the bottom line is, we've been funding the business ourselves. We have the luxury of being able to do that. But in due course, I think it will become very big and we're going to have to figure out some other way to fund it, which is -- the money is there, we just need to figure out what's the best and perfect source for that.

Great. So staying on the balance sheet topic maybe for a second, I have a question around just capital utilization. You guys will be generating a significant amount of free cash flows over the next several years, similar to many of your peers. You talked about funding a lot of the growth initiatives on balance sheet first and that will probably consume some of the capital. But curious to get your thoughts around buybacks, incremental M&A, obviously, dividends. How are you thinking of that in light of the increased cash flow opportunity?

Yes. Look, all of the above. I would say, from time to time, we do buybacks. We like to do it when there's a meaningful amount of deterioration in the share price. It's always tough. March 2020 was tough to buy anything in the market, but it was the right time to be buying it. We are incubating businesses all the time. The only thing I'd say is, on balance, if you can take capital on your balance sheet and build a business and it is successful, and you're successful at doing it, it's far, far more powerful than ever buying stock back. It's great to buy stock back. Do not get me wrong. When you trade at a discount, it's great to buy stock back. It's like free money. But it is far, far, and I can give you 25 years of history of even just this business, it's far, far more powerful. Like we have -- I was looking at 1 specific fund we had the other day, and the GP for that 1 fund. Remember, we have 40 of these. That 1 fund has 0 contribution to the bottom line today. 5 years, it should be worth $5 billion to us. 10 years to 15 years, it could be worth $50 billion. Like that's what the power of contribution of these things. That's not to say we're very hyper-focused on capital allocation in the business. And what I would also say is, and people always ask us about capital light, capital heavy, and we're more capital heavy than everyone. But just remember, and everyone should just remember, what we own is a capital heavy business, which happens to own a pure-play asset management business. So think of it as we have a capital, we have a bunch of assets and we have a manager just like the most asset-light company out there. And if we wanted, and it was the right thing to do, we can either spin all that capital out, we can float the manager. We can -- whatever -- we're in the business of making money for our shareholders in the asset management business and whatever makes the most money. Up until now, we have believed capital tied to this manager down here was the right strategy. It's possible someday those 2 separated or different are the right thing. But this today has been growing, I would argue, faster because of the capital. And because we've been able to seed it and do things with the -- for the manager that nobody else could accomplish. But remember, this can always be, if we so choose, given out to our shareholders, floated, separated, but for now, it's just 100% owned.

Yes. What -- I mean, just piggybacking on that, what's the key decision factor. Is that the share price at the end of the day, say, look, we're so discounted relative to your planned value or something along those lines where that might be the right decision? Like what would be the trigger for you to really consider that?

Yes. It's just it's -- I would -- firstly, I would say, 20 years ago, it wasn't the right time. 10 years ago, wasn't the right time. Today, I don't know, it's like, I would have -- 5 years ago, I wouldn't have thought that we could grow this size, scale of the business today is fast. Like I'd say, the opportunities to grow and the things we have going on today which will add to the business and grow it are better than they were 10 years ago and 5 years ago. And I wouldn't have said that before. So I'd say it's the -- the minute where the size of capital is either too much, and that was your question, look, when you're producing $5 billion a year of cash flow, you've got $75 billion of assets, cashable assets, if we want to resell them all. So there's $75 billion of cash up top. How much is too much? And some days, we think it's too much. Some days, there are so many opportunities coming in that we can't afford to give away the capital. So it's a -- what I'd say is there is no -- there is no black and white. It's -- there's a fine balance between capital allocation. But I -- we side mostly on the -- I guess, in this equation on the side of Mr. Buffett in Berkshire Hathaway that having excess capital in a business, even though it might affect the returns by percentages, creates far greater value over the longer term because you can be opportunistic at the right points in time, right? But we're -- look, bottom line, we're hyper focused on capital allocation. And at some point in time, there's arbitrages in the market and if our securities don't trade right, look, we have a -- we can do many other things, and we're totally within our power to do it, right? If all of our shareholders came and said we should do X or Y, we'll consider it.

Right. Right. Speaking of capital and balance sheet, you guys are 1 of the largest owners of real estate assets after the BPY transaction earlier this year. I was hoping we could hit on some of the fundamental activity you see real time in the real estate portfolio that you guys own. Obviously, we hear in person. Hopefully, that means good things for office at some point of time, but curious what you guys are seeing real time?

We can do 1.5 hours on this, but I'll say...

We have about 3 minutes.

Yes, you got 2 minutes. Industrial is hot, great sector. We're doing a lot of industrial globally. So there's growth businesses. Industrial is hot. Residential is hot. Single-family United States, hot. Life sciences, hot. These are growth sectors. On value, office, everyone is going back to the office, it's -- I'd say, it goes from east to west. We're 100% occupied, meaning 100% of the people are in the offices in Shanghai moving this way, 80% in Dubai, 60% in London, 40% in New York, 20% in L.A. That actually goes that way. I guess you could have gone the opposite way like this. But -- so it depends. It's different from places, but people are going back to the office. The thing that I'd point out and this maybe is the most important point of all of it, office buildings went into this cycle downturn, the most let, leased ever. Nobody went bankrupt and therefore, they are still the most let coming out of any recession ever. Nobody is building space and eventually, that's going to be very meaningful. And unless you believe that no one's going back to a city, and I don't believe that, but if you do, you should not be involved in real estate. But the business is, therefore, very healthy. And we're -- look, we're selling -- we just did a transaction to sell an office building at a very good price. You'll see it in due course. And we're starting to -- office buildings are starting to transact because the returns based on what I just talked about, interest rates are high. Last, hotels and retail were the most hit. Hotels are coming back. We just sold a hotel north of its pre-COVID price. And when I say that, I know what price was because we had a transaction, somebody dropped. So it's north of the pre-COVID price. And look, these things were shut down. Zero income for a year. So people expect the world to come back. And retail is amazingly strong. And I think what happened was, now people have realized you can't sell goods if you don't have stores. And so retail leasing is strong. Retail is strong. Like we're talking Simon's numbers, if you've seen them quoted, they're above -- I think their sales are above 2019, ours are too. So the numbers are extremely strong in retail. And I think more importantly than that is that the retailers, both online and offline, no, they have to have stores to sell goods. It's just not -- they just can't push out enough product, delivering to people's homes.

Great. Makes sense. Well, I have a few more questions, but unfortunately, we're out of time. So I see the clock clicking. So we're going to have to end it there. Thank you so much for doing this. Thanks for making the trip, and I appreciate it. I appreciate you being here. Thank you very much.

Thanks.