Brookfield Corporation
Overall positive Q3/23 results with some additional signs of stabilization in Real Estate FFO
Our view: We have an overall positive view on Q3/23 results: (1) Distributable Earnings/share was well ahead of our forecast, although our preferred metric of Operating FFO/share was a bit below our forecast; (2) while disposition gains helped Real Estate headline FFO, we think drilling down showed additional early evidence that FFO may be stabilizing, an important first step, but substantial improvements in Real Estate FFO are critical to significantly narrowing the discount to NAV; and (3) Insurance results continue to show it could be a key driver of BN’s growth in the coming years. BN’s shares trade at a 29% discount to NAV with the current share price still implying zero value for BN’s Real Estate investments and also a 1x book value for non-Real Estate private assets (e.g., Insurance). Increasing price target to $44/share (was $43) and maintaining Outperform rating.
Key points:
Q3/23 DE/share (before realized carried interest and disposition gains) of US$0.67 was well ahead of our US$0.54 forecast due to higher-than- forecast distributions from perpetual affiliates (Property and Insurance specifically) and Asset Management FRE attributable to BN and lower-than- forecast corporate expenses/taxes. Q3/23 DE/share (including realizations) of US$0.73 was also well ahead of our US$0.61 forecast.
Headline Q3/23 Real Estate FFO was +US$166MM, compared to negative -US$13MM Q/Q in Q2/23 and -US$2MM in Q1/23 and +US$83 MM Y/ Y in Q3/22. However, the significant improvement in FFO whether Y/Y or Q/Q was driven by FFO by Real Estate LP investments (e.g., investments in the BSREP flagship funds) and appears likely to have been helped by disposition gains in Q3/23. Q3/23 Operating FFO from Core plus Transition & Development was +US$7MM vs. +US$32MM in Q2/23 and -US$6MM in Q1/23, so it appears to show stabilization of OFFO in Core plus Transitional & Development.
We think it’s also important to be careful analyzing Real Estate FFO because the movement of trophy/high quality assets into Insurance not only reduces Real Estate FFO (and NAV), all else equal, but also increases FFO variability given the mix change with the generally more stable and better performing Trophy/Core assets comprising a lower percentage of FFO.
Insurance continued to see growth with DE increasing +14% Q/Q to US $182MM from US$160MM in Q2/23 and up +14% Y/Y from US$159MM in Q3/22. Annualized DE run-rate exiting Q2/23 increased to US$775MM, up from US$725MM at the end of Q2/23. BNRE acquired US$2.1B of Real Estate (e.g,. some of BN’s LP investments in the BSREP Flagship Real Estate funds) and other assets from BN in exchange for additional BNRE equity.
Distributable Earnings: Ahead of forecast
Q3/23 DE/share (before realized carried interest and disposition gains) of US$0.67 was well ahead of our US$0.54 forecast due to higher-than-forecast distributions from perpetual affiliates (Property and Insurance specifically) and Asset Management FRE attributable to BN and lower-than-forecast corporate expenses/taxes. Q3/23 DE/share (including realizations) of US$0.73 was also well ahead of our US$0.61 forecast.