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Brookfield Business Corporation (BBUC 5.17%)
Q2 2022 Earnings Call
Aug 05, 2022, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to the Brookfield Business Partners’ second quarter 2022 results conference call and webcast. [Operator instructions] The conference is being recorded. [Operator instructions] Now I’d like to turn the conference over to Alan Fleming, senior vice president of investor relations. Please go ahead, Mr.
Fleming.
Alan Fleming — Senior Vice President of Investor Relations
Thank you, operator, and good morning. Before we begin, I’d like to remind you that in responding to questions and talking about our growth initiatives and our financial operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information on known risk factors, I encourage you to review our filings with the securities regulators in Canada and the U.S., which are available on our website.
On the call with me today is Cyrus Madon, chief executive officer; Denis Turcotte, chief operating officer; and Jaspreet Dehl, chief financial officer. We’re also joined today by Stuart Levings, chief executive officer of Sagen, our Canadian residential mortgage insurer. I’ll turn the call over first to Cyrus to provide an update on our business, and then Stuart will talk about recent developments at Sagen. Jaspreet will finish with a discussion on our financial results.
We’ll then all be available to take your questions. And with that, I’ll pass the call over to Cyrus.
Cyrus Madon — Chief Executive Officer
Thanks, Alan. Good morning, everyone. Thanks for joining us today. We had a great quarter.
We generated over $540 million of adjusted EBITDA and continue to be very pleased with the resilience of our operations. We’re well positioned heading into the second half of the year, and we’re progressing initiatives to crystallize significant value. I thought I’d start with a few comments on the operating environment before turning to an update on our initiatives. Like most, we’re facing headwinds around inflation and supply chain challenges across our businesses, but the durability of our earnings has been a significant advantage for us.
With a few exceptions, volumes are holding up well across our operations. We continue to make progress to either pass through higher costs or increase prices to support margins. In fact, on a same-store basis, our EBITDA is up 10% over last year. It’s too soon to predict when these inflation headwinds will ease and some may not for a while, but we continue to work with our management teams to take appropriate action to support performance if the environment worsens.
Since our last update, we closed three of our recently announced acquisitions, including the $8.5 billion acquisition of CDK Global, our technology services and software solutions provider to the automotive dealer industry. This is a high-quality business with recurring contracted revenues, low ongoing capital requirements and high margin potential. Even with the recent widening of credit spreads, we were able to finance the transaction at favorable rates. We’re now implementing our value creation plans to grow margins and cash flows.
We also completed the acquisition of an Australian residential mortgage lender and a slate roofing products provider. Apart from growth, we’ve turned our attention to initiatives that should generate significant proceeds and crystallize value for our business. In May, we launched a process to sell Westinghouse, our nuclear technology services operation, which generated good interest from prospective buyers. Diligence is ongoing, and we’re optimistic this will result in us reaching an agreement to sell the business.
In the interim, we were able to complete a dividend recapitalization from this business that generated about $800 million in proceeds, of which BBU’s share was $315 million. We look forward to providing you an update as the sales process unfolds. There are other businesses we own today that could be candidates for monetization. The timing of any sale will depend on many factors, including market conditions.
Our water and wastewater operation in Brazil is one example. Since our acquisition five years ago, we’ve made significant progress to build value in the business. We’re now exploring options to monetize our investment. Like many of you, we’re disappointed in the trading price of our units and shares.
We’re confident, though, that as we execute on our plans and continue to build long-term value in our business, the trading discount will close over time. We’ve continued to repurchase our units given that they trade at levels materially below our view of intrinsic value. With that, I’m going to turn it over to Stuart, but I first wanted to just express our thanks to Stuart and his team at Sagen who have done a wonderful job for us. And I hope you take this opportunity to ask Stuart, any questions you might have about the business he’s running.
Thank you, Stuart.
Stuart Levings — Chief Executive Officer
Thank you, Cyrus, and good morning, everybody. Sagen had another strong quarter as it continues to produce solid operating results in a favorable economic environment. Our interest rates are rising and housing markets are slowing. Our proven business model, disciplined risk management and high-quality insurance portfolio position us well to manage through economic headwinds over the coming months.
Sagen is a market leader operating in a concentrated, highly regulated industry with natural barriers to entry. We provide insurance to mortgage lenders against homeowner default in exchange for an upfront non-refundable premium. Our business model produces an attractive financial profile, generating strong margins, earnings and cash flows that have proven to be resilient through prior housing and economic cycles. In Canada, mortgage insurance is mandatory for home purchases with a down payment of less than 20%.
Our product is limited to owner-occupied homes under CAD 1 million with a maximum loan-to-value of 95% and amortization of 25 years. We ensure predominantly first-time homebuyers with strong income and credit profiles, retained to purchase entry-level homes with an average price of approximately CAD 420,000. These buyers are often double-income families, 25 to 45 years old with growing household incomes. Our portfolio includes mortgages originated across the country, concentrated around large urban areas, leading to a regionally diversified mortgage insurance book, which limits exposure to correlated economic risks.
Our business has performed exceptionally well over the last few years, benefiting from record levels of new underwriting activity, strong home price appreciation and low mortgage default rates. Today, we have around CAD 2.8 billion of unearned premium reserves, representing cash premiums already collected but not yet recognized into earnings. These premiums will be amortized into earnings over the next five years, providing the business with predictable revenue and the ability to absorb higher default rates as the housing market and economy slow. Over the past two and a half years, we’ve worked together with the Brookfield team to execute on a value creation plan, including growing our market share, improving our expense ratio, enhancing the yield on our investment portfolio and optimizing our balance sheet and capital efficiency.
These enhancements have improved our return on equity to 20%, allowing the business to provide meaningful distributions to shareholders, including BBU. Looking ahead, we expect to see a more challenging environment with reduced levels of housing sales and some price softening. Rising interest rates, high consumer inflation and the expectation of slowing economic activity have led to a growing consensus for home prices in Canada to fall by 10% to 15% from their peak in the first quarter of 2022. This represents a modest pullback from the approximately 50% gain in home prices seen through the pandemic, and we believe that several factors, including continued undersupply of housing and positive immigration trends, including the target to welcome over 400,000 new immigrants per year to Canada will act as a floor to home prices.
The quality of our insurance portfolio is the strongest it has ever been. Increasingly stringent underwriting criteria have contributed to higher quality borrowers at an average credit score in excess of 750 across the portfolio. Approximately 80% of the insurance portfolio is backed by fixed-rate mortgages, providing borrowers with payment stability in a rising mortgage rate environment. The majority of the remaining variable rate mortgages have constant payments, where only the mix between principal and interest is impacted by fluctuations in rates, thereby providing a similar degree of payment stability.
In addition to the quality of our insurance portfolio, strong oversight and regulation, including mandatory loan amortization, full borrower recalls and debt service stress test for all insured borrowers served to mitigate the risk of borrower devil. For example, all insured borrowers in Canada are subject to a stress test that builds in a cushion for affordability in a rising rate environment. Borrowers must qualify for mortgage at a minimum qualifying rate, which is the higher of the benchmark rate, currently 5.25% or the rate offered by their lender plus 200 basis points. This means that all insured mortgages over the past few years have been qualified and approved at an interest rate of at least 5%.
Furthermore, insured borrowers facing financial hardship as a result of significantly higher payments at mortgage renewal can extend their amortizations under our loan modification program. Consequently, rising rates are not typically a driver of mortgage delinquencies. Unemployment, which sits at historical lows with the consensus forecast for moderate increases over the next few years typically has a more pronounced impact on mortgage delinquencies. While unemployment drives the frequency of delinquencies, changes in house prices influence the likelihood of claims and degree of loss given default.
That said, due to the significant level of house price appreciation over the past few years, our portfolio has an average loan-to-value of 60%, which means many borrowers today have significant embedded equity in their homes. This enables them to absorb a material correction in home prices and still sell their property without suffering a loss in the event of default. For example, even in house prices declined by 40% and unemployment reached 10%, both of which would be well beyond current consensus forecast, the business will continue to generate positive net operating income and cash flows. With that, I will hand it over to Jaspreet.
Jaspreet Dehl — Chief Financial Officer
Thanks, Stuart, and good morning, everyone. As Cyrus mentioned, we had an excellent second quarter, generating adjusted EBITDA of $543 million, compared to $381 million last year, with stronger results across all three operating segments. In Infrastructure Services, we generated adjusted EBITDA of $205 million, compared to $125 million last year. Adjusted EFO increased to $124 million.
Our nuclear technology services operations had a good quarter. Adjusted EBITDA of $58 million was in line with expected seasonality. The business is managing through disruption caused by the conflict in Ukraine and remains on track to generate strong full-year results. In May, the business completed the acquisition of BS Energy to enhance its outage and maintenance service capability.
It funded the transaction for the combination of committed debt financing and existing liquidity on her. In April, we completed the acquisition of our lottery services and technology operations, which contributed $25 million to adjusted EBITDA during the quarter. The business is benefiting from resilient demand despite some impacts from higher input costs and supply chain billing. We’ve also secured a few new customer wins since closing our acquisitions, including a 10-year contract to provide products and services to the operator of the U.K.
National Lottery. Modular building using services contributed adjusted EBITDA of $41 million. The overall demand environment remains stable, and we’re continuing to benefit from high utilization levels on existing units on the way. We’re also making progress on increasing the penetration of value-added products and services, which is helping to enhance margins.
Moving on to our industrial segment. Second-quarter adjusted EBITDA increased to $204 million and adjusted EFO was $101 million, compared to $216 million in the prior year. Adjusted EFO in the prior period included $148 million after-tax gain on the partial sale of our investment in common shares of our graphite electrode operation. Advanced energy storage operations generated adjusted EBITDA of $105 million.
Pricing in a favorable mix of increased margins on advanced battery sales contributed to results despite the impact of higher labor, commodity and transportation costs. Overall battery volumes continue to be impacted by the ongoing production challenges at auto manufacturers. Also, just as a reminder, prior-year results benefited from very strong aftermarket demand as global lockdowns and travel restrictions as eased. Our engineering components manufacturer generated adjusted EBITDA of $44 million.
Strong performance was driven by commercial pricing actions and contributions from recent acquisitions. We’re working closely with the management team on taking appropriate pricing and cost actions to support volumes and margins through the balance of the year. And finally, our business services segment generated second-quarter adjusted EBITDA of $166 million, compared to $145 million last year, and adjusted EFO of $151 million for the current quarter. While Australian Healthcare Services generated improved adjusted EBITDA of $21 million this quarter, the operating environment remains challenging.
Elevated labor cost and high COVID-19 infection rates of patients and staff are resulting in cancellations of planned surgical procedures, which are having an impact on overall performance. We are hopeful that activity levels in the business will improve as COVID-19 infection rates in Australia decline. Lastly, our Brazil fleet management operations continue to perform well. And in June agreed to acquire Unidas, a leading full-service rent of our platform in Brazil.
This platform became available because local regulators were demanding and still for antitrust purposes. We were able to acquire the business for value, which will double the size of our existing fleet management platform in Brazil and to support our growth plan. Moving on to liquidity. We ended the quarter with $3.1 billion of corporate liquidity.
As Cyrus mentioned, during the quarter, we generated a dividend from a nuclear technology services operation that was paid to all shareholders. This effectively accelerates some of the proceeds we would generate from any potential sales. Our share of the $800 million dividend was approximately $315 million. Pro forma liquidity is approximately $1.1 billion after we account for all of the announced and recently closed transactions.
With that, I’d like to close our comments and turn the call back over to the operator for questions.
Questions & Answers:
Operator
[Operator instructions] Our first question comes from the line of Geoff Kwan with RBC Capital Markets.
Geoff Kwan — RBC Capital Markets — Analyst
First question was on Westinghouse. So if you are able to come to an agreement on a deal, like who would be the key entities that would have to approve it? And would any of them have any more, call it, specific criteria that might influence to say the preference or the type of buyer for Westinghouse?
Cyrus Madon — Chief Executive Officer
Geoff, thanks for joining us today. Yes, Geoff, there’s nuclear regulatory bodies that would have to approve it. If it’s a foreign buyer, we have to go through a U.S. CFIUS process.
And then there would be a number of regulatory approvals required outside the U.S. as well. So the typical range of what we would deal with in any type of — such type of transaction. But on top of that U.S.
nuclear regulators would have to approve it as well.
Geoff Kwan — RBC Capital Markets — Analyst
OK. And then on the BRK Ambiental, you made reference and then there was that filing potentially taking it public. But is a sale also a possibility or is an IPO the more likely option for the –
Cyrus Madon — Chief Executive Officer
Look, it’s possible. We just wanted to be ready for when the capital markets are open, they will open at some point in time. We wanted to be ready to turn it into a public company because we think this type of business will garner a strong following for all sorts of reasons. So we think it’s just a good alternative to have and be ready.
Private sale is possible.
Geoff Kwan — RBC Capital Markets — Analyst
OK. And just if I can ask one last question for Stuart. Sagan, when you take a look at — going back to the 1990s sizing downturn, I think your combined ratio peaked around 90%. Today, we’re still at extremely low combined ratios, I mean, in Q2, you had a negative loss ratio.
But if we have this housing downturn that some people think that we’re going to have, like what kind of do you think like the ballpark range do you think that the combined ratio could look to get to? And what would be the key reasons that you would say it would differ from what was experienced back in the 1990s?
Stuart Levings — Chief Executive Officer
Yes, Geoff, thanks for that question. I think our expectation is that we see our performance head back toward our long-range expectations. So as you’ve heard us say before, in that $0.15 to $0.25 loss ratio range, which would imply sort of a 35% to 45% combined ratio range, which is still very, very profitable. The differences primarily are that our premium rates are much higher now and that’s because we hold more capital.
But we get a lot more pricing power and more margin because the premium rate has gone up so much since that prior downturn back in the ’90s and certainly even the global financial crisis and that’s the main difference. The other difference is, of course, on the portfolio quality. As you know, we had a lot of products back then that were riskier, drove a lot of our losses, and we just don’t underwrite those these days because we’re not — we can’t. We’re not allowed to and we certainly — we appreciate that because our portfolio quarter is much better.
Operator
Our next question comes from the line of Devin Dodge with BMO.
Devin Dodge — BMO Capital Markets — Analyst
All right. How should we reconcile the confidence in the Westinghouse sale process with the –
Jaspreet Dehl — Chief Financial Officer
Devin, you’re cut out. We can’t hear you.
Alan Fleming — Senior Vice President of Investor Relations
Operator, maybe we’ll move to the next question and then come back to Devin.
Operator
Our next question comes from the line of Nik Priebe with CIBC.
Nik Priebe — CIBC World Markets — Analyst
Yes. OK. Thanks. Because you incorporated a healthy discussion around Sagen, I wanted to ask a pair of questions about the end game for that investment.
I guess the first just being after three years of ownership, how far along do you feel you are with respect to the value creation plans there?
Stuart Levings — Chief Executive Officer
Yes. I mean the value creation is very much in range now. We’ve improved our ROE from 13% as a public company to consistently around 20% now, and our expectation is to be able to maintain that. And in terms of the sort of value over time, we’re now generating strong distributable cash with a 20% ROE, and we should be able to maintain that given the leverage we have in place and some of the other changes we made with Brookfield being on board as owners.
As far as the — any further plans, I think that will be back to Cyrus.
Cyrus Madon — Chief Executive Officer
Yes. So for Sage and specifically, this business is generating 20% cash return to us. There are very few investments we make that actually generate a 20% annual return to us. So we’re delighted to keep it.
So obviously, the things that would go through our mind are what could we sell it for if we wanted to sell for. If we can get a very large premium to our entry prices, then it might become attractive, what are alternative uses of capital, all the things we think about in capital allocation. It is a great company. The team has done a phenomenal job, and we think that these sorts of returns should be sustainable over a cycle.
There will be bumps in the road for sure because that is exposed to housing portrait industry and all that stuff. But otherwise, that’s the sort of thing we would think about.
Nik Priebe — CIBC World Markets — Analyst
Yes. OK. Fair enough. And it might be a little premature to be having this discussion anyway, but I always felt like public market investors, when Sagen was public, struggled to price in the left tail risk and have associated with an advertising shock and that’s why it really never attracted the multiple you might otherwise have expected it, too, just based on the level of underwriting margins that was able to achieve in a buoyant housing market environment.
I guess as you think about this a few years down the line, do you feel an outright sale to a sponsor or a strategic is more likely than kind of an IPO route? And again, this might be a little bit premature to be had in this discussion, but I just wanted to feel that out a little bit.
Cyrus Madon — Chief Executive Officer
I think if we can continue to demonstrate the high returns we’ve demonstrated, it’s possible this could be related in the public markets compared to where it was trading. You also need to reflect upon the fact that its previous controlling shareholder was in some form of, I’m going to say, financial stress, if not distress and I think that probably weighed quite heavily on the sale price of Sagen. So I do think all options are on the table if and when we get to that point.
Nik Priebe — CIBC World Markets — Analyst
Yes. Yes. That’s a good point. OK.
And then just last one for me. I noticed the equity check written for CDK was a little bit higher than initially expected. Just, given the crowded fundraising environment we’re seeing in private equity, are you finding it more difficult at all to source co-investments to syndicate some of these deals?
Jaspreet Dehl — Chief Financial Officer
Nik, it’s Jaspreet. Maybe I’ll start and then stars cannot. Look, our decision on CDK is really based on the fact that it’s a great business. We really like the business.
We’ve owned that now. We closed the transaction at the beginning of July. So we’ve had a chance to really get into the cuts we’re doing onboarding. And everything that we’re seeing is supporting kind of our initial due diligence and assessment.
And as we did — we talked about the fact that we did a dividend recap at Westinghouse, and that allowed us to free up some cash. So from, again, capital allocation perspective, we made the decision that it was a good idea to allocate a little bit of capital from BBU to CDK. I’d say kind of more broadly on your question on co-investment and syndication. So far, we’ve done a few deals this year, and the conversations have been constructive.
So we’re continuing to have people engage, talk people looking at the deals. And sort of co-investment interest is still there, maybe it’s taking a little bit longer, but we haven’t seen any kind of significant deterioration in that interest from LC.
Cyrus Madon — Chief Executive Officer
And I’ll just add that in the institutional world, on investment is sort of the holy grail of what institutions want. So there’s a lot of interest in co-investment. Yes, some institutions may have slowed down a little bit. But broadly speaking, there’s a very high level of interest for their co-investment.
Operator
Our next question comes from Devin Dodge with BMO.
Devin Dodge — BMO Capital Markets — Analyst
All right. Let’s talk again. Apologies for the technical difficulties. So I wanted to start with Cyrus, how we should reconcile the confidence at that Westinghouse sale process with the broader challenges in financial markets and that slowdown in private market transactions that was referenced in the letter.
Cyrus Madon — Chief Executive Officer
That’s a great question. We, on the one hand, are seeing a significant slowdown in financing for private equity transactions. Certainly, in North America and in Europe, the banks have just slowed down. The banks made a bunch of commitments.
They need to work through those commitments over time before they can free up capacity to do a set of new deals, and they’re not through that yet and as a result of that city to do a set of new deals, and they’re not through that yet. And as a result of that, I’d say, generally transaction activity or private equity for financial sponsors is slow generally across the board. On the other hand, for high-quality credits for investment-grade borrowers, for infrastructure buyers, there’s lots of financing available. So it really depends on what you’re buying and what kind of buyer you are and what level of financing you’re putting on.
Devin Dodge — BMO Capital Markets — Analyst
OK. That’s good color. After that, the dividend recap at Westinghouse and the recent bolt-on acquisition, can you remind us where leverage stands after those two transactions?
Jaspreet Dehl — Chief Financial Officer
Yes. So as the Westinghouse level, we’ve got about — the $3.7 billion, $3.6 billion of leverage and then plus the $100 million dividend recap.
Devin Dodge — BMO Capital Markets — Analyst
OK. OK. And then maybe a question for Stuart. Can you speak to the competitive environment for mortgage insurance in Canada, I think we saw CMHC loose some market share over the last few years.
And I’m wondering if you’ve seen them become a little bit more aggressive in intent to recapture at least some of that lost market share?
Stuart Levings — Chief Executive Officer
Yes. Thanks, Devin. It’s very apparent CMHC have decided to reverse course a little bit in terms of the underwriting changes that they made, and they are intent on recovering some market share. What they’re finding and admitting publicly is that is not at all easy.
We are a very competitive market. At Sagen, we’re very confident in our position in our offering in terms of customer service and differentiation. And the fact that their pulled back has allowed us to really move in and to demonstrate even more of the value we can bring to our customers. Right now, what they’re hearing, what the CMHC are hearing is that we’re not just going to revert back to levels of share we had with you before.
So I think they are trying. They certainly are keen, but they’re not finding it as easy. And frankly, we don’t think that they’ll ever go back to where they were. I think the landscape has changed now from a competitive dynamic, and we are confident that we can maintain our market share in that 36% to 38% range.
Operator
Our next question comes from the line of Jaeme Gloyn with National Bank.
Jaeme Gloyn — National Bank Financial — Analyst
Yes, thanks. And, Stuart, good to hear from you again. I’ll start with you, actually. Thinking about the ROE outlook, you mentioned 20% as being sustainable normalized periods.
I’m just trying to square that right actually with loss ratios that recently have been flat like 0% to negative that are driving 20% ROEs to a more normalized loss ratio environment of 15% to 25%. I would assume that the ROE would dip a little bit from there. Maybe just sort of talk through how your — what other factors are driving the sustainable 20% ROE in the business?
Stuart Levings — Chief Executive Officer
Yes, Jaeme, absolutely, and great to be talking with you again too. The reality is that I say we’ve achieved 20% consistently now 20% plus. But in actual fact, in a year like this and in last year’s environment, we’re probably frankly more like a 23%, 24% ROE. So there is some room for that to come down and still be in around 20 as loss ratios normalized.
The other factor is that on capital efficiency, we’ve got some room to go, right? Obviously, coming through the pandemic, you know us, we put in some moratoriums on dividends. They’ve moved past that, we’ve been able to get more dividends out. But at the same time, there is some room on that in terms of being a bit more capital efficient, and that will help to offset some of that increase in loss ratio as well.
Jaeme Gloyn — National Bank Financial — Analyst
OK. Understood. As we’re thinking about the Sagen business and Brookfield’s recent acquisition of Latrobe, are there any longer-term potential synergies for these two businesses tied to mortgage markets in different countries?
Cyrus Madon — Chief Executive Officer
We haven’t got any plans to tie those two together.
Jaeme Gloyn — National Bank Financial — Analyst
OK. And then last one on Sagen. Stuart, some of the headlines reading today is around trigger rates on variable rate mortgages. What’s your assessment of variable rate mortgages within the Sagen portfolio? How close would borrowers be to triggers? How is that process implemented from the banks and do the mortgage insurers have a say and how that is processed and managed?
Stuart Levings — Chief Executive Officer
Yes. So, Jaeme, first of all, majority of our portfolio is still fixed rate. We’re probably about 80% fixed rate. Of the remaining 20%, the lion’s share is uncapped variable, but payments don’t change, right, as the rate goes up until they hit a trigger rate or term renewal.
We’ve done some analysis. We think that we’re probably a good 100, 150 basis points out still before we start to hit some trigger rates. And even at that time, if those lenders have to reset payment, the fact of the matter is, as you know, perhaps some prior discussions, we are able to deploy some of our loan modification tools to address any payment shocks such as the extension, etc. So we don’t really view that as being a pressure point or a driver of near-term delinquencies.
Operator
Our next question comes from the line of Gary Ho with Desjardins.
Gary Ho — Desjardins Capital Markets — Analyst
First question for Cyrus. You chatted about Westinghouse and BRK. Maybe you can give us an update on Clarios and how that monetization initiative is progressing?
Cyrus Madon — Chief Executive Officer
So Clarios, it’s early days. We have filed a registration statement with the securities regulators, and we intend to keep that, I’ll say, fresh and alive in case market conditions have become positive. That’s going to be — that’s not going to be a near-term event for us as we said on last call, simply as we want to get the leverage down on the company before we can think about monetization. But we’re going to be ready for it or when the time –
Gary Ho — Desjardins Capital Markets — Analyst
OK. Perfect. And then second, maybe for Stuart. Can you provide a bit more, I guess, greater perspective in the hotter housing markets last few years, the GTA, Vancouver area, etc.
Any concerns there? And do you have kind of LTV specific for those regions?
Stuart Levings — Chief Executive Officer
Yes. So look, the markets have been at pretty much everywhere. Early enough, some of the more urban and suburban markets were even hotter than core centers like Toronto, Vancouver as the pandemic effect played out and people moved outlets — but ultimately, we’ve always played in the bottom end of that range, given our $1 million cap. So price sensitivity drives some of the softening in housing markets.
The more expensive homes are seeing bigger corrections or drops in prices now, lower-end properties in terms of price range. There’s always enough sideline demand that there’s a bit of a floor for those. So we are seeing prices soften, absolutely. We still have tremendous amounts of embedded equity in the portfolio.
So these will likely mean borrowers don’t have 50% of equity. Now they have 30% of equity still enough to get them out of trouble and having to sell. And our outlook is that, that is going to remain the case even as we go through the rest of this year and into next year. That is our base case.
Gary Ho — Desjardins Capital Markets — Analyst
OK. And then I want to talk a little bit about scientific rates. So my understanding of the business is that the government contracts are fairly kind of long-dated and predominantly fixed rate. So I want to get a bit more color on that kind of business being squeezed on the margin side, maybe whether you’ve been able to reprice some of those contracts, just given the spike in inflation?
Cyrus Madon — Chief Executive Officer
Maybe we’ll get Denis to answer that.
Denis Turcotte — Chief Operating Officer
Yes. Sorry, I’m just getting off. Denis Turcotte here. There’s no question we’re seeing a little bit of inflation, paper and ink being the primary drivers in this case.
But frankly, in both those situations, they are cyclical in nature, and we expect that will come off naturally. But we are also addressing with all our customers where we can to pass through those increases. So it’s early stages in this situation because we’re only three months into it but our 100-day plan is — has been executed exactly as expected. We’re working with the management team and driving — starting to drive those value creation levers.
So at this point, we’re actually optimistic and we’ve committed to Cyrus we’re going to beat our underwriting in this case.
Gary Ho — Desjardins Capital Markets — Analyst
OK. That’s great. And then maybe just if I can speak in one more just on BRK. Can you give us a bit more details on how much debt there is in that investment maybe in total or your proportionate share?
Jaspreet Dehl — Chief Financial Officer
I’m going to go off of memory and then we can circle back and give you a more precise, but I think we’ve got about BRL 3 billion of debt within BRK. And that’s on a total basis, not on a proportionate basis.
Operator
That concludes today’s question-and-answer session. I’d like to turn the call back to Cyrus Madon for closing remarks.
Cyrus Madon — Chief Executive Officer
Thanks, everyone, for joining us, and I look forward to speaking to you next quarter. Thank you.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Alan Fleming — Senior Vice President of Investor Relations
Cyrus Madon — Chief Executive Officer
Stuart Levings — Chief Executive Officer
Jaspreet Dehl — Chief Financial Officer
Geoff Kwan — RBC Capital Markets — Analyst
Devin Dodge — BMO Capital Markets — Analyst
Nik Priebe — CIBC World Markets — Analyst
Jaeme Gloyn — National Bank Financial — Analyst
Gary Ho — Desjardins Capital Markets — Analyst
Denis Turcotte — Chief Operating Officer
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