STOCK MARKET PERFORMANCE

Our underlying business performance was excellent in 2022, but like everything else, Brookfield Corporation stock performance was far from good. In addition to the general market malaise, the distribution of shares of our asset manager caused some short-term pressure on Brookfield Corporation’s shares. This has started to clear, and the underlying value of the business continues to compound away. Our performance has been strong on a longer-term basis, and we think this should continue. Results are shown in the chart below on a compound return basis to the end of last month.

THE MARKET ENVIRONMENT

Markets were extremely volatile in 2022. Most investments were down, at least on paper, as central banks acted decisively to bring inflation under control. The good news is that the measures taken appear to have been successful in tempering demand and moderating inflation in most countries, with interest rates expected to peak soon, inflation likely to already have peaked in most places, and the onset of a recession upon us.

Global markets are now offering much better opportunities. Bond yields are higher, equities are more fairly valued, and technology company valuations are more reasonable. In addition, growth businesses and crypto that had no rational reason for trading where they did have now come back down to earth. In the midst of all of this, most alternative assets and real businesses have performed, and are expected to continue to perform, extremely well.

The overall macro environment has moved strongly in favor of how we operate at Brookfield. This should bring great opportunity for us in the next few years. In general, the world has shifted:

• from an emphasis on growth to value (we are value investors).
• from a singular focus on technology to a more rounded investment focus, including strong interest in energy (this bodes well for us in many ways).
• from low inflation to greater inflation (this is very positive for most of what we own).
• from a low level of expenditures on the backbone of the global economy to high infrastructure investment, with emphasis on decarbonization, digitalization, and deglobalization (this is our sweet spot).
• from cash earning zero to cash being valuable. Having been very conservative with our capital structure and having acquired a substantial insurance float while sitting on cash earning nothing, this has now turned in our favor (this is very powerful for our earnings and new opportunistic investments).
• from returns being generated by financial engineering to returns resulting from operational excellence (this is our specialty).

While markets are always unpredictable, we believe we are well positioned for this environment, and that we will all soon be in another period of economic growth.

THE RESILIENCE OF OUR OPERATING RESULTS SHOWED THIS YEAR

Distributable earnings for the full year were $5.2 billion, with most of our businesses contributing strongly.

THE CORPORATION IS POSITIONED TO GROW AND WIDEN ITS REACH

For the last 25 years we have focused on building and scaling our operating and asset management businesses, culminating in the recent distribution and separate listing of the asset manager’s shares. Leveraging our large perpetual capital base, deep operating expertise, global presence, and value investing approach, we have consistently delivered strong investment performance and have grown this business into a pre-eminent and uniquely positioned global alternative asset manager.

Over this time, we have also used these same attributes to establish and grow global, market-leading businesses in renewable power (including a unique net-zero transition business), infrastructure, private equity, and real estate. We are also currently executing on our plans to build a leading global insurance business.

We have one of the largest discretionary pools of capital globally at approximately $175 billion, and we generate ±$20 billion of operating cash flow annually. With no restrictions on how we use most of this capital, our sole focus is on allocating capital among our existing operating businesses and new business initiatives, with a targeted total return of 15%+ for our shareholders over the long term.

The earnings power of what we have built and own today is incredibly strong. Each business on its own generates very attractive returns, but when we leverage the synergies that exist within the broader Brookfield ecosystem, the earnings potential becomes even greater. The organic growth levers within our existing businesses, combined with the continued allocation of capital to funds from our asset management business, should allow us to deliver strong internal growth. Over the next five years, we plan to grow our free cash flow (or distributable earnings, “DE”) at a compound annual growth rate of approximately 25%, which should generate over $30 billion of excess cash flow during that period to just our Corporation balance sheet.

Given our strong track record of investment returns from our current businesses, it is hard to look past the opportunity to invest more capital into those businesses and repurchase shares when they are undervalued. Furthermore, by fully leveraging the reach and expertise of our asset management business, our goal is to identify new investment opportunities that have both strategic value for overall Brookfield and the potential for attractive rates of return. The scale we can pursue is significant, given the various sources of capital available to us, and in this economic environment we feel it is very possible that something large and interesting will present itself, enabling us to further diversify our business and broaden our reach.

THE BEST IS YET TO COME FOR OUR ASSET MANAGEMENT BUSINESS

Our asset management business is one of the largest and fastest-growing alternative asset managers in the world. With operations spanning more than 30 countries across five continents, we have over 2,000 professionals in our asset manager who employ a disciplined investment approach to create value across a diverse set of public and private fund offerings.

The business has grown from its infancy 25 years ago to approximately $800 billion in assets under management and deep relationships with more than 2,000 clients, including most of the largest global institutional investors. We have a strong track record, having delivered solid investment returns for these clients over a long period of time.

REAL ESTATE IS CYCLICAL, BUT IT IS A GREAT LONG-TERM BUSINESS

Part of the Corporation’s capital is invested across a highly diversified, very high-quality portfolio of real estate assets in some of the best locations around the world. While we continue to dispose of non-core holdings, much of the high-quality real estate we own will eventually find its way into our insurance business due to its long duration nature, making these assets ideally suited to match the long-duration liabilities created by our insurance operations.

As a reminder:

• $8 billion of our capital is invested in our real estate private funds, which are highly diversified by both geography and by sector, and where our asset management business has a proven track record of delivering upwards of 20% returns over the long term. These assets are turned into cash in a 5 to 10-year period.
• $15 billion of our capital is invested directly in our top 35 trophy office and retail complexes globally. These are amongst the best in the world and get better and better over time.
• $3 billion of our capital is invested in our residential land development business in the U.S. and Canada. This business has delivered very strong financial results for decades. Over time, these assets all turn into cash as we build out developments (unless we choose to reinvest it).
• $7 billion of our capital is invested in other real estate assets which, as we have discussed before, will be liquidated over time.

The reason we focus on the highest-quality, best-located real estate assets is because we have found that these outperform over very long periods of time and through economic cycles. When office leasing demand slows, these prime buildings tend to remain full, as tenants take the opportunity to upgrade their premises. For example, with overall vacancy as high as 20% in some markets currently, our U.S. office portfolio remains 95% occupied, and our like-for-like NOI is forecast to grow 10% this year.

Similarly, our shopping centers benefit when retailers make decisions to consolidate their premises into the highest-productivity centers. Our top 20 shopping centers comprise more than 50% of the value of our retail portfolio. They are highly productive, with average tenant sales currently exceeding $1,100 per square foot, 20% above their sales prior to the pandemic. Occupancy in these malls has rebounded to 97%, roughly where it was before the pandemic, and we are renewing leases with rents at an 8 to 10% premium to the expiring terms.

Our real estate business provides critical infrastructure to our tenants. However, the nature of our tenants is constantly evolving and will continue to do so in the future. For example, 20 years ago our office portfolio was focused on financial services tenants and those that service them. These businesses were voracious consumers of office space, and our large-format, flexible office buildings in the world’s best cities attracted many of them as tenants. However, over the past decade regulatory changes have led to slower growth in financial services employment and, as a consequence, their demand for office space.

CLOSING

Thank you for your interest in Brookfield, and please do not hesitate to contact any of us should you have suggestions, questions, comments, or ideas you wish to share.

Sincerely,

— Bruce Flatt, Chief Executive Officer