How much does Brookfield really make?
布鲁克菲尔德到底赚了多少钱？

In July last year, part of a Manhattan landmark changed hands. A stake in One Liberty Plaza, the ageing former US Steel building that looms over a park once occupied by anti-Wall Street activists, was quietly purchased by a Texas life insurer.

A rare transaction in a moribund market for office towers, it received little publicity because the building’s ultimate owner, Canada’s Brookfield Corporation, was both the buyer and the seller.

One of the world’s largest and most complex financial conglomerates, Brookfield sold property to itself like this dozens of times in 2024, using $1.4bn from its insurance arm to finance transactions that supported its “distributable earnings” — a non-standard measure of profit that underpins the corporation’s $90bn stock market valuation.

These earnings were then recycled back into the portfolio in a circular flow of cash that is attracting scrutiny of both the relative opacity of Brookfield’s accounting practices and how it juggles its vast global portfolio of real estate.

Dimitry Khmelnitsky, head of accounting at Veritas Investment Research, is critical of both the financing and the accounting. “Brookfield is using their own related party insurance companies as a vehicle to offload assets, during what seem to be challenging markets, and at relatively high valuations,” he says.

Such trades support an expansive but lossmaking portfolio of more than 200 malls and offices dotting skylines around the world, including London’s Canary Wharf, One Manhattan West and the Las Vegas Fashion Show mall. 

The transactions pose questions about the quality of Brookfield Corporation’s earnings, and the valuation of assets held to pay annuity policies at the Brookfield-owned insurance businesses that trade with other parts of the conglomerate. 

They also raise the question of whether Brookfield and chief executive Bruce Flatt are presenting a sufficiently transparent picture of the organisation — a labyrinth containing thousands of entities, the interconnected funds, partnerships, trusts and companies that control $1tn of assets.

Flatt, an accountant by training, owns a third of the Bermuda trust that appoints half the board of Brookfield Corporation in Toronto, the topmost of six listed companies operating in real estate, private equity, infrastructure, green energy, insurance and asset management. Brookfield also exercises control over a wide range of businesses and investment funds even though it often owns only a small part of them.

The complexity means shareholders and regulators rely on the group to convey where risks lie and how cash flows through its operations.

Such trust matters because Brookfield is a fiduciary that manages assets and money for public sector and union pension funds, annuity holders and investment funds. It runs critical infrastructure, is responsible for huge sums in long-term liabilities, and operates regulated businesses in many jurisdictions.

Viewed through the lens of disclosures by the corporation, that property empire is in robust health.

Real estate contributed a third of the “distributable earnings before realisations” reported for the first nine months of last year, the headline metric Flatt uses when writing to shareholders.

Brookfield tells investors to regard the figure like “free cash flow” when trying to understand the group’s complicated economics, and that last year those distributable earnings were “supported by the resilient earnings across our underlying businesses”.

Yet regulatory filings from Brookfield Property Partners, the Bermuda-based subsidiary that consolidates the lion’s share of Brookfield Corporation’s real estate, paint a different picture.

The partnership lost $2bn in the first nine months of 2024. Its net operating income did not cover its interest costs and the group has ceased payments on 4 per cent of non-recourse mortgages attached to buildings while it negotiates with lenders. During this challenging period, it raised funds by selling real estate to Brookfield’s insurance arm.

Bermuda filings also show the circular flow of cash. Brookfield Corporation injected another $1.4bn into the partnership as new equity, more than it reported as distributable earnings from its overall real estate operations in the same period.

Keith Dalrymple, an independent financial analyst and critic of Brookfield’s accounting practices, believes the circularity is deliberate. “They report the cash they receive in a very clear and definite way, but when it goes out the back door you have to spend a day looking through three different filings to find it, and that’s a very deceptive presentation [of the information].”

Brookfield responds: “There is nothing ‘deceptive’ whatsoever”, adding that “these claims wilfully mischaracterise our business and stand completely at odds with the facts”.

Scrutiny of the arrangements come at a moment when Brookfield is in the limelight. Mark Carney, the former central banker who chaired the company’s asset management arm for the past four years, is running to replace the outgoing Canadian prime minister, Justin Trudeau. 

The disclosures also reveal how Brookfield uses the two US life insurers it owns. State regulators in Texas and Iowa have granted the insurers an unusual degree of freedom to do business with other entities in the conglomerate.

Private capital giants like Brookfield and its rivals Apollo, Blackstone and KKR have made managing insurance assets the trade of the decade, shifting their reserves away from conservative investment-grade bonds into private loans and asset-backed debts that earn higher returns and attract more premiums.

Billionaire investor Bill Ackman’s Pershing Square last year bet nearly $2bn on Brookfield, in part because of his excitement about the growth of the company’s insurance business.

But Thomas Gober, a former insurance examiner and prominent critic of private equity in the industry, says “a life and annuity company, with its very long-term promises, should be prudent . . . with its clients’ money”. He and others question whether savings held on behalf of American widows, orphans and retirees should be turbocharging growth at asset managers. 

Brookfield says the property stakes it has transferred to its insurers are its very best buildings, including some of the most sought after office towers in New York and Canada and top-performing malls. It also has cleared the individual transfers with insurance regulators, winning their blessing in advance of the deals after a rigorous review of the valuation process.

It denies it is labyrinthine, and says “we disclose all relevant information on a transparent basis in our reporting, all of which very clearly demonstrate that these insurance businesses are better capitalised under [Brookfield’s] ownership, and that our real estate business is prudently managed for the long term”.

The imposing 54 storeys of Liberty Plaza were purchased from a bankrupt developer in 1996, before the Canadian conglomerate Brascan was renamed Brookfield Asset Management and a young accountant called Bruce Flatt became its chief executive. 

In the decades since he has ridden a wave of cheap debt to supersize the conglomerate, and for a long time, rising asset values made it appear that they could do little wrong. By the time a half-stake in Liberty Plaza was sold to Blackstone in 2017, the building’s value had more than tripled to $1.5bn. In early 2020, it was reported that Brookfield and Blackstone discussed offloading the tower for $1.6bn-$1.7bn. 

But the pandemic, remote work, online shopping and rising interest rates have hit Brookfield’s collection of towers and malls hard. In 2023 it repurchased Blackstone’s One Liberty stake at a much-reduced $1bn valuation using the insurance companies it owns.

The conglomerate had already bought out its public market real estate investors, taking Brookfield Property Partners private during the pandemic amid a share price slump and criticism that the unit did not generate enough cash to sustain its dividend payments.

Brookfield said the transaction reflected the stock market’s struggle to appropriately value a diverse property empire. 

Property has always been at the heart of the group’s business. It holds $133bn of assets, some of these the conglomerate owns outright and some it controls through Brookfield-badged investment funds in which the corporation is also an investor.

After being taken private, the property unit’s payouts now go up the ownership chain — rather than to outside shareholders — and contributed about $950mn of the $1.1bn distributable earnings from real estate Brookfield Corporation reported in the first nine months of 2024. Of that $950mn, just over a third came from the partnership directly, with the rest from Brookfield’s fund investments.

The partnership continued making these payouts up to the corporation last year at the same time as the corporation was sending $2.8bn back to the property operation, which it says was to “opportunistically repay debt”. In addition to the $1.4bn of new equity, the other half was raised in June and September from internal property sales: the partnership sold partial interests in a dozen North American office and retail assets to Brookfield Reinsurance. In a further example of the conglomerate’s shape-shifting, this entity was renamed Brookfield Wealth Solutions in the intervening months.

According to the company, the internal sales related only to properties Brookfield owned outright, not those housed in its investment funds. They were considered by an internal conflicts committee and conducted at the valuations used in the conglomerate’s audited accounts. 

Some argue, however, that those assessments are unusually optimistic. Khmelnitsky points out that “Brookfield’s property valuation assumptions have barely changed since 2019”, a time when borrowing costs were far lower and working from home was unusual rather than commonplace. He adds that “based on observable market evidence, our fair value estimate of Brookfield’s property assets is materially lower than management’s”.

As is the case at other large property owners, the valuation of those assets has long been flagged as a “critical audit matter”, what Deloitte calls those involving “especially challenging, subjective, or complex judgments”. The firm has audited the conglomerate since 1971, and received $118mn in fees in 2023.

In a US office market where there has been only thin trading since the pandemic, there is some evidence from genuine sales that helps to validate Brookfield’s valuations.

One deal that was done, in 2022, was the sale of a 49 per cent stake in One Manhattan West, a modern building poised to benefit from the planned multibillion-dollar reconstruction of Penn Station. Blackstone valued the building at 27 times its operating profit, more than a comparable building, Two Manhattan West, where Brookfield transferred equity stakes to its insurers the following year at about 20 times such profits, according to people briefed on the matter.

Brookfield says its internal valuations have historically matched prices it achieves when selling assets. Over the past two years, its funds have sold 192 real estate assets or portfolios to unrelated third parties for $27bn at an average 3 per cent premium to its accounting valuations.

However, as Khmelnitsky points out, it is largely the highest quality properties that have changed hands in recent years, which he says “are not representative of the company’s overall portfolio”.

The rest of the portfolio includes some assets that might still require cash infusions, similar to the way Brookfield injected capital into London’s Canary Wharf in 2023 — which it said was for “strategic repositioning” — before agreeing a further $900mn backstop last year as it negotiated with lenders.

Flatt’s conglomerate is far from the only institution playing for time in an uncertain commercial property market. Researchers at the New York Federal Reserve warned last year that “extend and pretend” tactics “expose banks (and all other holders of commercial real estate debt) to sudden large losses which can be exacerbated by fire sales dynamics and bankruptcy courts congestion”.

Nor is it uniquely vulnerable. The Federal Reserve’s Financial Stability Report flagged “a significant further deterioration of the commercial real estate market” among the “exposure to illiquid and risky assets [that] makes life insurers vulnerable to an array of adverse shocks”.

What sets Brookfield apart is its ability to shuffle assets among its many subsidiaries, potentially shifting risks from its own balance sheet to unwitting third parties such as the holders of annuity policies issued by its insurers.

Statutory filings for one of those insurers, American National in Texas which Brookfield purchased for $5.1bn in 2022, provide glimpses inside the labyrinth and show a transformation that some find concerning.

A key figure in those reports is the insurer’s “capital & surplus” — what is left when total liabilities to policyholders are deducted from the assets that back those liabilities.

American National’s has shrunk, from $4bn when acquired down to $2.3bn as of September, even as liabilities rose by more than half to $31bn.

The ratio of surplus to liabilities is 7.4 per cent, below the 9.7 per cent to 10.9 per cent range typical for annuity providers over the past five years according to research by AM Best, a credit-rating agency specialising in insurance.

A separate concern is the way that American National has been used to finance other parts of the conglomerate. It declares $7.7bn of so-called affiliated assets: investments in other Brookfield operations.

In some cases, they include unusual assets for an insurance company to hold, such as a large stake in Primary Wave, the music royalty business that owns the copyright to Whitney Houston’s “I Wanna Dance With Somebody (Who Loves Me)”.

The affiliated assets also include more than $500mn in direct lending to Brookfield’s property business and over $100mn in preferred lending to its private equity business. Its single largest affiliated asset is a $1.3bn loan to American National’s direct holding company in Delaware, made in May 2024.

Gober, the former insurance examiner, advises policyholders to consider their insurer’s surplus capital and affiliated assets, because they do not have recourse to the rest of the group. “By law, only the underwriting carrier on a standalone basis is responsible for the claims,” he says.

He was taught to pay close attention to such related-party transactions due to the potential conflicts of interest at play, as well as the risk that affiliated assets are hard to sell in any crisis: “Investments with each other inside the group is like an IOU from your sister,” he says.

Khmelnitsky, meanwhile, sees the risk that the Texas insurer, and another in Iowa purchased last year, are used to insulate the conglomerate: “Brookfield is trying to create a closed loop Brookfield economy by transacting with itself.”

Brookfield says “long-term commitment to policyholders is at the centre of everything [its insurance arm] does”. It says changes to American National’s capital reflect a reorganisation of the insurer and its subsidiaries which left that group of companies with $8bn of surplus capital available to protect policyholders.

The company notes its Texas and Iowa insurers have A-ratings from AM Best, signalling their “excellent” financial shape. Brookfield says all its insurance companies “maintain high quality investment portfolios” that “are subject to a robust internal review process, third party validation, and regulatory reporting and oversight”.

It also says that many insurers invest in commercial property and that the real estate it sold to itself “is objectively ideal for an insurance company portfolio”. It adds that it has openly discussed the strategy with shareholders and “any suggestion of impropriety in this process is demonstrably false”.

Propriety is essential because the conglomerate’s formal financial statements are, as even its supporters acknowledge, almost incomprehensible. The intricate trails of paperwork that bind businesses all over the world to the parent corporation in Toronto have created something that is part conglomerate, part hybrid investment company.

As a result its numbers are shaped by the flows of capital in and out of its funds and the impact of businesses that it controls but only partially owns.

For instance, while the group reported net income of $1.8bn in 2024, two-thirds of those profits were due to the outside owners. As a result, shareholders were entitled to earnings of just $641mn.

Brookfield’s stock market valuation has soared in recent years, even as that statutory measure of profits sharply declined, in part because distributable earnings, the guide to shareholders’ cash emerging from its multi-layered structure, have continued to rise.

Should Brookfield have included in those distributable earnings the portion from a lossmaking property business receiving much larger injections of cash?

The group says “the analysis of our dividends fails to properly represent the high levels of liquidity we maintain, and our conservative capitalisation”, and that at different times it uses cash flows, asset sales or debt to “maximise performance and value while maintaining highly stable dividends over the long term, through cycles”.

Ackman’s Pershing Square has invested heavily in Brookfield believing that its property is undervalued and stands to benefit from a recovery in real estate markets.

Morgan Stanley analyst Michael Cyprys says the flexibility of Brookfield’s balance sheet is one reason it is an attractive investment. “Given the diversity of earnings streams that [it] unlocks by leveraging internal balance sheet capital as well as client capital, we see this translating into much larger earnings relative to fee-bearing capital, as compared to peers that lack balance sheet resources,” he says.

Critics have a less benign view of the flexibility, and Brookfield’s power to set its own narrative. Dalrymple says for stakeholders to decide for themselves they need to know the full facts, which requires more than saying “we sent a billion dollars somewhere”.

The question for investors, regulators and policyholders then is perhaps what they value more — managed stability or greater clarity?