About this blog: I have been investing for 25 years, professionally and personally. I look for stocks that have a high probability of compounding at 15% for at least 5 years with limited downside. I write these stocks up on my blog. You can find more about me, my philosophy, my mental models, and my portfolio structure on my site.
I am writing a series of articles on the Brookfield universe. So far:
Plan Value - how I reorganise it and what it says about valuation.
Investor day review and how BN has done against prior investor day promises.
Discount to plan value and valuations of the underlying assets.
This 5th piece looks at BN’s preferred earnings metric, DEBR: should we trust it?
How BN makes money
Through Brookfield Asset Management (BAM), BN makes money by raising capital from third parties and investing it, charging management fees and earning carry on successful funds.
Through Brookfield Wealth Solutions (BWS), BN makes money by selling life insurance and annuities and investing the premiums to pay out claims and earn a profit (spread).
Through direct investments and four affiliates, BN makes money by owning and operating real assets that form the backbone of the global economy, such as roads, ports, pipelines, power plants, transmission lines, offices, and malls.
The Brookfield group is often criticised for complex accounting, but this is - at least in part - an unavoidable feature of the business. In total, through various affiliated entities and funds, BN owns majority and minority stakes in hundreds if not thousands of assets. As IFRS demands, these are captured on its financial statements using a mix of accounting methods: consolidated, joint operations, equity method, fair value through P&L, and fair value through other comprehensive income. In addition assets and stakes in assets are constantly being bought and sold, creating gains and losses on sale and significant non-operating cash flows.
To make things simpler BN publishes its preferred measure of recurring earnings: Distributable Earnings Before Realisations. DEBR is a deconsolidated measure, which makes things much clearer, but it is also heavily adjusted, so we need to understand exactly what it measures.
What DEBR is and isn’t
Over the last 12 months, BN’s net income attributable to shareholders was $1.4bn while its DEBR was $5.6bn. Most of the difference is caused by adding back fair value changes ($2.8bn) and depreciation and amortisation ($2.6bn), and subtracting realised carry and gains on sale ($0.7bn). The idea behind DEBR is to give a sense of BN’s underlying owner earnings, undisturbed by accounting marks and realisation gains. But is it actually a metric an owner would want to use? To understand that, we need to look at DEBR by subsidiary.
Note: the headline percentages describe each asset’s share of 2q26 annualised DEBR before corporate costs.
Brookfield Asset Management (BAM): 31%
BN includes its share of BAM’s Distributable Earnings (DE) in DEBR. The biggest difference between BAM’s net income and DE is that unrealised carry is not included in DE, which I think is conservative and brings DE closer to cash. However, realised carry is included in BAM’s DE and therefore in BN’s DEBR. This means that carry earned at BAM is treated differently to carry earned at BN: BAM’s carry is included in DEBR, BN’s carry is not. It also means that BN’s DE “Before Realisations” includes carry earned on some realisations. The amounts are not substantial but could become so.
Other differences between BAM’s net income and DE include the elimination of fair value marks and associated deferred tax related to BAM’s balance sheet investments, the replacement of net income with fee related earnings where BAM owns a stake in another manager, and the elimination of non-cash revenues where BN is liable for certain costs; I think all of these are fair adjustments to get to underlying owner earnings.
On balance I think DE is a fair representation of owner earnings at BAM, and BAM’s policy is to pay substantially all of its DE as a dividend, so it’s a genuine cash flow stream to BN.
Brookfield Wealth Solutions (BWS): 32%
Here things get more complex. BWS’s main business is selling annuities, investing the proceeds, and pocketing the spread. To get to DEBR, BN takes BWS net income and adds back:
depreciation, which is not significant;
mark-to-market effects on both the asset and liability sides of the balance sheet and the associated deferred tax, all of which are noncash;
breakage, which is a catch-all term for profits and losses caused by policyholder behaviour different from what was modelled; and
transaction costs, which are non-recurring.
This treatment seems reasonable with two caveats. The big one is that I need to understand breakage better. The other is that while mark-to-market investment gains and losses are excluded from DEBR, net income from equity-accounted investments and some fair value changes are included. The effect is to include unrealised investment gains and losses where they are smoothed, but to remove them when they are subject to market volatility, even if the underlying exposure is identical. I have no problem with this - it is a more accurate reflection of investment economics than only including income - but it does mean that a portion of BWS DEBR is non-cash until realisations happen. Another point to note is that in stark contrast to BAM, BWS retains all its DEBR to grow. It does not pay dividends to BN. However, this is a choice: BN controls BWS and could cause it to pay dividends if retaining earnings was not the best use of capital.
Affiliates: BIP, BEP, and BPG - 25%
BN only includes dividends from these entities in DEBR. In a way this is the cleanest component of DEBR, because it is pure cash. The question is whether the dividends are sustainable, and there are two major questions here.
The first question is concerns payout ratios. Brookfield’s preferred earnings metric for these entities is FFO. BIP pays out about 55% of FFO and BEP 75%, and these payout ratios are trending down because FFO is compounding faster than dividends. That suggests BIP and BEP dividends are sustainable. BPG is more complex: its dividend is about 6x higher than its FFO and is therefore part-funded from asset sales and up-financings. That’s alarming, but:
There is a lag built into the real estate P&L because lease duration appears to be longer than debt duration. When inflation and rates spike, as they did after covid, the higher cost of debt service hits the P&L quicker than the inflated rents. This is especially the case in Brookfield’s office portfolio, which is now signing new leases at fat spreads over existing ones. These new leases will slowly flow through the P&L over the next few years, driving FFO growth.
BPG splits its assets into 4 buckets. Supercore and North American Residential generate $500m of FFO and will mostly be retained long term. Core Plus and Value Add generate $525m of FFO. What depresses overall BPG FFO is $940m in corporate overheads, split roughly 50% between servicing liabilities and BAM fees/G&A. The plan is to sell Core Plus and Value Add as they complete their business plans. IFRS values the equity in these assets at $13bn, enough to retire the $8bn in corporate liabilities and have $5bn left over. Assuming these sales take 5 years to complete, BPG should be left with Supercore and NA Resi generating c.$600m of FFO (4% CAGR) and corporate overheads of c.$250m (assuming the BAM fee and G&A shrink with a smaller, simpler asset base). That gives net FFO of $350m. Actual dividends could be higher given asset values should at least track inflation and BPG can up-finance to extract some of this value. Looked at this way, the BPG dividend doesn’t seem quite so aggressive, and that’s before considering FFO from the reinvestment of up to $5bn in excess sales proceeds.
The second debate concerns depreciation, which is excluded from FFO. Is this aggressive? I would prefer some measure of maintenance capex be deducted, but I can live with depreciation excluded for two reasons:
BIP and BEP, where most of the depreciation sits, own the kinds of assets that can outlive their accounting lives. For example, hydro dam walls are depreciated over 50-100 years, yet some Roman dams are still standing. This does not justify excluding all depreciation - the accounting life for the electromechanical fittings in a dam are likely reasonable - but accounting earnings probably understate owner earnings for assets like these.
BIP, BEP, and BPG own assets that require large up-front investment and then last decades. In these cases, deducting depreciation clearly understates a finished asset’s cash flows - especially when it’s new and maintenance capex is low. Brookfield’s strategy is generally to build or upgrade assets and sell them. This means the costs of later-life maintenance and decommissioning are borne by the buyer. To the extent that these costs impact Brookfield they reduce gains on sale, not operating cash flows - and DEBR excludes gains on sale.
In short: BIP, BEP, and BPG FFO are probably a fair reflection of owner earnings during Brookfield’s ownership period and the payout ratios are reasonable, so I think dividends from affiliates are sustainable.
A couple of other observations regarding the affiliates:
The sharp-eyed amongst you will notice I omitted BBU. The majority of BN’s stake in BBU is now in BWS, where it is equity-accounted. The remaining directly-held stake pays a de minimis dividend so I have ignored it.
BN has actually put more cash into real estate than it has taken out recently - roughly $2.2bn more over the last 12 months. This cash has mostly been used to repay debt. This isn’t surprising - asset sales shouldn’t be driven by debt maturities, so there will always be timing mismatches - but it should be watched carefully.
Direct investments - 12%
The final contributor to DEBR is BN’s direct investments in funds run by BAM. These investments earn almost zero GAAP net income, but they do generate FFO and DEBR. FFO is defined as “return on capital from cash distributions received” (emphasis mine). DEBR is actual cash flows to BN. In any given quarter these numbers can be very different, but over the 2 year time period for which FFO has been reported on this basis they match to within about 5%. There are two important takeaways:
DEBR, being cash received, seems to include some return of capital (but not much since FFO is nearly as big).
FFO includes gains on sale and cash flows from up-financings. Since these are the main source of cash flows to BN, DEBR does too. BN says this fairly reflects the actual economics of owning the funds; I agree, but again it seems that DE “Before Realisations” includes some realisations.
Corporate costs
Finally, there’s $0.9bn in corporate costs (mainly debt interest and pref dividends) which gets us from c. $6.2bn of gross annualised DEBR to $5.3bn of net DEBR available to BN shareholders. One thing to flag is that stock based comp (SBC) at both BN and BAM is added back when calculating DEBR. I don’t mind this: the numbers are not huge, and anyway I have never thought that a noncash P&L charge is the best way to account for dilution. I prefer simply to assume that the share count excluding buybacks grows slowly over time.
Conclusion on DEBR, and DEBR per share
I think DEBR is a broadly reasonable measure of owner earnings at BN, with two caveats: 1) I need to do more work on BWS, and 2) BWS and direct investments include some valuation uplifts and realisation gains in DEBR, although these are quite small relative to overall DEBR.
Annualised DEBR is currently $5.3bn, or $2.26 per BN share, for a current multiple of 16.4x.
From DEBR to DE
DEBR represents the predictable/operating part of BN’s earnings, but BN also makes significant money by buying, improving, and selling assets. Successful asset sales produce two profit streams:
Where an asset is held directly on BN’s balance sheet, and is sold at a premium to carrying value, sales generate gains on sale.
Where an asset is held in a fund that earns carry, and that fund reaches its carry hurdle, sales generate realised carried interest.
We have very little visibility into gains on sale and I ignore them when analysing BN’s earnings.
Carry is different. It is unpredictable, and may never materialise. If it does materialise, it will be inconsistent. Nevertheless, it has the potential to be a genuinely valuable cash stream. To simplify slightly, after costs, BN keeps 2/3rds of any carry earned on funds raised before BAM was spun out, and 1/3rd of carry earned on funds raised afterwards. This is, in effect, a capital light royalty that pays out when BAM funds do well. If each carry-eligible fund met its target returns, BN would average $2.7bn in realised carry per year after costs. Assuming tax is 25%, this constitutes a contribution to DE equal to that of BAM and BWS. And this “target carry” should grow fast: BAM expects carry eligible capital to nearly triple over the next 5 years, giving BN’s royalty more shots on bigger goals.
Adding after-tax target carry to DEBR gives hypothetical DE of $3.13 per share, for a multiple of 11.8x.
DE mix changes
Given there are so many inputs to DE, it’s important to ask: how is the mix changing, and how does this impact earnings quality?
I think there are four key trends here.
The first is that BAM is growing its contribution to DE at 15-20%, much faster than the mid-single-digit growth from direct investments and affiliates. This trend has been running for 20 years, will continue, and is good, because BAM is the highest quality earnings stream within BN. It is a fairly simple, capital light business with substantial competitive advantages in raising capital and sourcing investments. The direct investments and affiliates, on the other hand, are both capital heavy and levered.
The second is that the quality of DEBR from the affiliates is improving as payout ratios come down at BIP and BEP, and as BPG sells assets to delever and focus on its Supercore portfolio.
The third is that carry is currently small, but could grow rapidly. If it does, BN’s DE composition improves markedly from the perspective of a long term, value-oriented investor: although carry will always be unpredictable and the market may never give it a high multiple, it is a capital light, high margin earnings stream.
The fourth and most important trend is that BWS is expected to be BN’s fastest-growing income stream - not because BWS self-funds rapid organic growth, but because BN keeps shoving capital into it. Don’t underestimate the possible magnitude of this shift. BN and BNT are merging to make it easier to shift investments from BN to BWS. Bruce Flatt recently said that with BN’s entire capital base at its disposal, BWS would still be overcapitalised with 5x its current level of assets. It’s quite possible that in 10 years, BN will only have 3 assets: BAM, BWS, and carry. If so, BWS will be the biggest, and will have absorbed all the direct investments and affiliate holdings. That could be good: the idea is that BWS is a more capital-efficient place to put investments than BN, so as investments get moved into BWS overall profits should rise. But there are a lot of unknowns. Can BWS grow assets fast without sacrificing underwriting quality? What are the operating and macro risks, in particular around changes in interest rates? Will BWS acquire well? (Acquisitions are an explicit part of the strategy, and in particular I think BN wants to put a big P&C insurer into BWS.) And how will the market value BWS? Brookfield’s principals, smart people who have a majority of their net worth not just in BN but levered to BN, are all-in on this strategic shift and think BWS can earn a 15% ROE. That is positive, but I have a lot more work to do before I really understand the business.
In short: mix changes include two positives, a free option, and something I need to do more work on.
Conclusion
Overall, DEBR seems to be a fair measure of owner earnings for BN. I also think DEBR is changing for the better, with BAM growing fast, rising dividend sustainability at the affiliates, and the potential for significant realised carry. My next focus is understanding BWS better, because BWS is both complex and increasingly important.
Thanks for reading - if you enjoyed reading this please like and restack, and do get in touch if you have questions.
Pete
Disclaimer: This post is for informational and educational purposes only. Building Arks is not licensed or regulated to provide any financial advisory service and nothing published by Building Arks should be taken as a recommendation to buy or sell securities, relied upon as financial advice, or treated as individual investment advice designed to meet your personal financial needs. You are advised to discuss your personal investment needs and options with qualified financial advisers. Building Arks uses information sources believed to be reliable, but does not guarantee the accuracy of the information in this post. The opinions expressed in this post are those of the publisher and are subject to change without notice. The publisher may or may not hold positions in the securities discussed in this post and may purchase or sell such positions without notice.