Brookfield Asset Management's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Brookfield Asset (BAM)

Brookfield Asset Management Inc. (NYSE:BAM)

Q4 2012 Earnings Call

February 15, 2013, 11:00 am ET

Executives

Katherine Vyse - SVP, Investor Relations

Bruce Flatt - CEO

Brian Lawson - CFO

Analysts

Bert Powell - BMO Capital Markets

Brendan Maiorana - Wells Fargo

Michael Goldberg - Desjardins Securities

Mario Saric - Scotia Bank

Andrew Kuske - Credit Suisse

Cherilyn Radbourne - TD Securities

Michael Smith - Macquarie Securities

Operator

Hello, this is the Chorus Call conference operator. Welcome to the Brookfield Asset Management 2012 Year-End Results Conference Call and Webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

At this time, I would like to turn the conference over to Katherine Vyse, Senior Vice President, Investor Relations for Brookfield Asset Management. Please go ahead.

Katherine Vyse

Thank you Saatchi and good morning, ladies and gentlemen. Thank you for joining us for our year-end fourth quarter webcast and conference call. On the call with me today are, Bruce Flatt, our Chief Executive Officer, and Brian Lawson, our Chief Financial Officer. Brian will start this morning discussing the highlights of our financial and operating results. Bruce will then discuss our views on the current investment and market environment as well as a number of our major growth initiatives in the quarter.

At the end of our formal comments, we will turn the call back to you Saatchi to open the call for questions. In order to accommodate all who want to ask questions, can we please ask once again that you refrain from asking multiple questions at one time to provide an opportunity for others in the queue. We will be very happy to respond to additional questions later in the call, as time permits, at the end of this session or afterwards, if you prefer.

I would at this time remind you that in responding to questions and in talking about our new initiatives and our financial and 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 for investors, I would encourage you to review our Annual Information Form or Annual Report, both of which are available on our website.

Thank you. And I would like to turn the call over to you Brian.

Brian Lawson

Great. Thank you Katherine and good morning to all of you on the call. We reported net income for Brookfield shareholders of $1.4 billion during 2012. This compares to $1.9 billion in 2011. The variance is due to a reduction in the amount of valuation gains which while very favorable were not as large as 2011.

Funds from operations which includes disposition gains was $1.4 billion, a 12% increase over the $1.2 billion reported in 2011. Excluding disposition gains, FFO was up between 10% and 11%. The remaining increase was due to improvements in all of our businesses in particular our property group and businesses that are linked to the US home building sector, this was offset partially by the impact of lower water flows on our renewable power business.

Total return which includes both FFO and valuation gains totaled $3.4 billion. This represents a 12.4% return on our intrinsic value which ended the year at $44.93. We did make some changes to our presentation this year and we apologize for the inconvenience that may have caused some of you, but we do believe they are better and will be more useful in the future if we can help you in anyway, please let us know.

So with that I will turn to each of the major business groups. Asset management and other services increased FFO by 31%, $84 million. Total asset management income, including carried interest was $498 million compared to $226 million in 2011. This reflects the full amount of base management fees earned on our private and listed funds and our public securities portfolios which totaled $352 million during the year. And this really drove the 31% year-over-year increase and it's due to new capital raised and increases in the market values of our listed entities.

Annualized fees including base fees and incentive distribution and transaction and advisory fees now stand at $470 million annually. Performance income was also a major contributor to the growth there and this is primarily carried interest on our private fund, increased to $330 million net of direct cost and this compares to $107 million in 2011. The increase reflects strong investment performance within our funds. We crystallized $34 million of these fees during the year and deferred the recognition of the other $310 million in our financial statement and FFO into future years pending the termination of call back periods.

We added $7 billion of fee bearing capital to our private and listed funds through new commitments to private funds and new capital issued by our listed entities. Market appreciation added a further $3.3 billion. This more than offset the $2.5 billion of capital that we distributed to our clients during the year and that increased the amount of fee bearing capital in the private, on listed funds to $45 billion and capital under management overall on a fee bearing basis to $60 billion.

Public securities capital did decline by $4 billion during the year to $15 billion, but that’s in large part due to the termination of a joint venture and other mandates as we focused that part of our business on higher margin strategies. The capital committed to or invested in our private funds totaled $23 billion of the $45 billion I mentioned just shortly and included $5.2 billion of dry powder from client that is available for investment. The capitalization of our listed issuers finished the year at more than $21 billion and is expected to increase by further $12 billion with the launch of Brookfield Property Partners based on the expected initial book value of that entity.

Now turning to our property operations, FFO within that group increased by 37%, our share was $644 million excluding the impact of dispositions. The increase reflects contribution from recently acquired properties and completed development such as the 900,000 square foot Brookfield Place Office Tower in Perth. Investments included $1 billion property company in Australia and 18 million square foot industrial portfolio located in Southern US Mexico with a $900 million entity value; 900 square foot portfolio of high quality office properties with a further 860,000 square feet of development in the City of London and a portfolio f 19 apartment communities with approximately 5,000 units, so we have been very active on that front; we increased in addition our interest in a number of retail malls and completed a number of smaller acquisitions throughout various sectors office, industrial multi-res. And we also sold off a number of properties that were either non-core or where we completed our value enhancement strategies.

Operationally, same store rents in our offices portfolio increased by 3% on a constant currency basis; we leased 7.3 million square feet, meaningful increases in net rents over the expiring leases and we reduced the lease rollover of the portfolio during the 2013 to 2017 period by over 300 basis points. We signed up an anchor tenant to launch the development of Bay Adelaide East in Toronto advance work on 6 million square feet of office development projects and this includes the 5 million square foot in Manhattan and West project in New York City.

The FFO contribution from our retail operations increased by 18% to $251 million; that reflects strong growth in our US portfolio’s FFO and that in turn reflects increases in both net rent and occupancy. Initial net rents on a comparable basis increased by 10% and regional mall occupancy increased to 96.1% at year end.

We remain particularly active within our opportunity investment and finance businesses having made a number of acquisitions during the year as I mentioned previously and examining a number of opportunities. We also completed a number of financing across the portfolios at very attractive rates reducing our cost of capital extending term and generating incremental capital.

Our share of portfolio valuation gains totaled $1.1 billion during the year; that was split roughly one-thirds, two-thirds between office and the retail and in turn reflected a decline in discount and capitalization rates as well as increases in projected cash flows; but two-thirds of the gains were due to lower rates and by one-third of the gains were due to higher cash flows reflecting the strong growth within the portfolios.

In our renewable power business, we recorded $313 million of FFO and gains in 2012 compared to $232 million in 2011. The 2012 results included $214 million gain on the sale of a partial interest in Brookfield renewable energy in the first quarter; we reduced our interest to 68% in this entity. Water flows were 13% below long-term average and 9% below 2011 and that led to the decrease in FFO from our existing facilities. This was partially offset by the contribution from recently acquired and commission facilities. We were quite active on that front during the year. We announced the acquisition of nearly 1,000 megawatts of installed capacity much of which was completed during the year and we have a large portfolio that we expect to close in the first quarter and with this we've been able to complete acquisitions on what we believe to be very attractive values given the current pricing environment.

Our flagship renewable power entity, Brookfield Renewable Energy performed well during the year providing a total return to its unitholders of 13.5% and recently announced 5% distribution increase which is in line with its long-term target of annual increases in the range of 3% to 5%.

Valuation gains in this part of the business were essentially flat as the effect of lower discount rates was largely offset by lower short-term power prices. Now all of this does represent a recapture of all of the economy depreciation recorded during the year.

We entered 2013 with improved water conditions and over 70% of our generation contrasted on a long-term basis at attractive rates and we continue to pursue a number of hydro and wind acquisitions and continue to advance our development pipeline. As well, we are looking at opportunities to increase our long-term contract profile but we will continue to be disciplined in anticipation of increased pricing that is fully reflective of the long-term value of low cost renewable power.

We were particularly active within our infrastructure operations completing a number of major acquisition and capital expansion projects that have added significant value and cash flows to our managed entities. Our flagship listed entity Brookfield Infrastructure Partners provided its unitholders with a total return of 33% during 2012 and recently announced the 15% distribution increase which reflects the substantial growth in its cash flows.

Acquisitions included toll roads in Brazil and Chile and district energy business in Toronto and a highly complementary regulated distribution business in the UK which we merged into our existing business there. We also completed the $600 million expansion of our Western Australian rail lines and continued the development of a $750 million electrical transmission system in Texas.

We monetized the portion of our western Canadian timberlands at attractive values and completed a number of equity and debt capital rates across the business. Our share of FFO from these operations was $224 million up from a $172 million; one of the significant contributors to the growth increase was our expanded Western Australia rail business as well as disposition gains on the western Canadian timberlands.

And lastly, among the operating groups our private equity and residential development business, these businesses benefited strongly from the recovery in US home building business and did so in several ways. First, our panel board businesses which include (inaudible) lumber recorded higher volumes and unit prices for oriented-strand board. The prices more than doubled from $160 per unit to more than $350 million and have exceeded to $400 since then.

Second, we are seeing improved sales, prices and backlogs in our US home building business which is supplementing continued strong results within our Canadian operations.

And finally, we have a number of private equity investments that benefit from the strengthening housing market and its not going to affect on the broadening US economy.

Excluding disposition gains, FFO increased from $165 million to $230 million. We recorded nearly $300 million of valuation gains largely reflecting improvements in the valuations of our private equity investments.

At this point in time, I just wanted to take a few minutes and talk about how we report our results to you in particular the role of International Financial Reporting Standards or IFRS. It has been a couple of years, two years in fact since we began reporting to you on this basis and we just thought it would be appropriate to check back in and talk a bit about some of the differences and some of the areas where there aren’t differences.

As you know, IFRS is the accounting standard in most developed countries around the world, virtually all the countries in which we operate with the exception of the United States.

As a Canadian domiciled company, we're required to report under IFRS and the US regulators have approved this basis for company such as ourselves at our listed on New York Stock Exchange. We recognize that a number of US investors, number of you who are on the call may not be that familiar with IFRS.

There are some important differences from United States GAAP that in our view are very beneficial and enable us to provide much better information to you. The most important difference that IFRS permits and in some cases requires that there is much more fair value accounting than traditional US GAAP.

This means that our financial statements are more reflective of current value per assets than our old GAAP statements which recorded the same assets at depreciated historical book values that often bore no resemblance in all the current values, but what it does means is that we do have a large valuation gains going through our income statement and other comprehensive income and sometime that may result in large variances in our net income.

The largest groups of assets are fair valued within our IFRS statements are commercial property, renewable power and infrastructure asset. The values of these assets are determined at least annually and in many cases quarterly and are based on a combination of internal and external appraisals. The most common methodology that we use is discounting cash flow. The values are reviewed by our external auditors and we ensure that a portion of these valuations are benchmarked against external appraisals or otherwise independently verify it each year.

So what is important to remember that the fair value in our statements means, in most cases that the value of the underlying assets which as I mentioned are derived from discounted cash flows in other fundamental analysis. And as a result, they are much more reflective of long-term or intrinsic value as opposed to stock market trading prices.

So for example, our investment in General Growth represents our proportion share of net assets of General Growth based on the appraised value of these assets. This may be higher or lower than the stock market price or said differently, the current values that we present are based on underlying asset values and not stock prices with the exception of our financial assets.

As I mentioned, changes in values are reported in gains as gains or losses in our financial statements either in our statement of income or other comprehensive income depending on the asset class. So you do need to be mindful of that distinction as well and looking for the changes.

But for our stock just briefly about what hasn’t changed our funds from operation measure would be similar under both US GAAP and IFRS as a components in our financial statements from which we drive FFO were relatively unaffected by the change. So in our view, the balance sheet and comprehensive income under IFRS present a much better picture of our performance in US GAAP.

At the same time, we are able to report FFO on a relatively consistent basis as before and at the same time also provide information on the changes in the value of our assets so that you have the benefit both measures. Now, IFRS also allows us to anchor two of our key performance metrics total return and intrinsic value to our audited financial statements, although, we do make several important adjustments to (inaudible) them.

Intrinsic value, it is our assessment of the value of our common equity and it starts with the values presented in our financial statements. We then do add amounts for assets that are not carried at fair value in the statements and for the franchise value of our asset management activities.

Total return is the value added to the business and consists primarily as I mentioned before at the start of the call of FFO and valuation changes.

We do note that the number of US adds that manager uses the similar measure which they call economic net income. We will provide with the various components of intrinsic value and total return on regular basis, so that you have a more complete picture of how we perceive the value of our business and how it is changed and to help you make your own assessment of the value of our company and our performance in creating value for you and of course we will provide complete reconciliations back to the IFRS statements in our published documents.

Our impression is that investors have found this information to be helpful and as always we welcome any feedback that you may have us. And finally, and before I hand the call over to Bruce, I am pleased to announce that the board of directors has approved an increase in the quarterly dividend to $0.15 per share that's $0.60 on an annualized basis effective with the March 31 payment, and this represents a 7% increase over the current rate and the board also approved a normal-course issuer bid that permits us to repurchase approximately 55 million shares and Bruce will speak further on this in his remarks.

Well, thank you very much and now I will hand the call over to Bruce.

Bruce Flatt

Thank you, Brian. I hope anyone reading our results have the same view as us that the last 12 months a number of investments have started to payout for the company and the operations have performed well over the last year. This includes many investments we made during the ’08-‘09 period and in particular both of that Babcock & Brown and the General Growth acquisitions that we participated in.

In addition, all our operations as Brian noted were active during 2012, with a number of acquisitions and add on investments which included renewable power facilities, toll roads in South America, gas utility in the UK, office properties and a district energy business in Canada.

Probably as important is that, as Brian mentioned, the US housing recovery continues and many investments we have in our operating, in our private equity business but also related to some of our other assets have operating leverage to increased housing, and therefore 2012 and beyond looks good.

During 2012 the fiscal issues in the United States and Europe dominated much of the financial news. Our view though probably more importantly for our business was that and is that our view is that the recovery did not stop in the underlying business fundamentals of most of our operations, and in fact most businesses out there and we expect this to continue in the current year. We've seen this across most of our businesses, but particular in the United States.

We advanced our brand internationally by doing many things during the year and continue to do that by adding new global clients and we appreciate their support. With respect to these global markets, 2012 saw them largely up led by performance of the S&P 500. This in our view was because of a combination of aggressive reflationary policies which you are all familiar with. There were perceived lower risk of significant systemic events and the continuation of the positive recovery which I mentioned earlier.

In the US, this was led by banks and capital markets making credit more freely available to businesses and consumers and this has resulted in positive recoveries at housing and the auto sector, and consequently rising employment levels. In addition, the US banking system is healthy and household information is on the rise and with growing investments in the United States and housing energy related industries i.e. Shale Gas and the manufacturing industries, the US economy in our view has a potential to surprise on the upside as the year progresses.

Of course the ongoing US fiscal debate and political issues have derailed for a short periods of time this recovery, although a last number of years and they represent a risk to this view, but we expect we hope and expect common sense to prevail.

In Europe our view is that the banking sector is still contracting, most of the economies are still contracting and this won't reverse until there's availability of credit in the markets and people can do business and start to expand with confidence. We expect however that there will be significant investment opportunities to continue out of Europe as we and others assist corporations in recapitalizing their balance sheet and operations.

Our view on Asia is that it’s almost finished it’s once in a decade leadership change and it’s poised to continue its gradual transition to be less dependent on investment growth. Retail sales have grown in a strong and healthy fashion and the positive trade balance has been maintained despite the challenges that China has had with many of its major trading partners being in recession.

But our expectation is that China will meet their economic objectives, and we think this is a positive development for both our Australia Asian businesses, particularly Australia but also our South American investments which a lot are dependent upon food and commodity exports to Asia

With respect to our overall view of the world, I guess there are three long-term trends that we point out to you, that we think will continue to drive our future results. First, we believe global institutional investors will continue to allocate more funds to real asset, moving eventually to 25% to 40% of their portfolios contained in real assets. This bodes well for the continuing growth of assets under management in our business, and while it won't be consistent over the years, we believe that trend will continues and will continue for many years to come.

Second, interest rates are unlikely to go much lower in our view, and while we can’t predict timing of interest rates rising, we are doing two things and the first one is that we're avoiding any investments in the long-term fixed income and also we're locking as much financing as we possibly can for as long as we can within our businesses.

And third we believe that equity markets look cheap compared to most alternatives, and in particular when you compare those to fixed income and with many global companies in excellent shape and multiples quite low. And as market fear dissipates with all the things I mentioned earlier, we think in addition to that capital will start to rotate from bonds back in to equities which was the opposite to what's occurred over the last number of years and the net income, net impact will be that investors will move money in to equities over the next number of years.

As a result, we are positive on the current valuations in equity markets. In addition, these increasing allocations to equity should provide upward strength over the foreseeable period of time. With respect to our funding strategy and Brian talked a little about this, but our funding strategy supports our operating businesses and we virtually completed the establishment of what I will call our family of flagship operating platforms, which will run our global businesses in the future.

Our approach features a flagship publicly listed issuer and a major private fund in each of property, power and infrastructure. Our private equity business is not as well suited for public markets, and consequently is funded only with private capital. In building our business we have taken great pains to ensure alignment of interest between Brookfield and all of our investment partners and clients, including investing very significant amounts of capital alongside them.

We have also carefully designed these entities over many years to ensure there are no conflicts between public and private investors. During the year, as Brian mentioned, we raise substantial capital both for our private funds and from institutional and (inaudible) worth investors and in our listed issuers. We continue to have $9 billion of investible capital within the franchise and currently are marketing six funds over the next 24 months.

Lastly, I’d just note that we have been in during and we generally invest with themes in our business, and I would say that ‘08 and ‘09 we were trying to put as much capital to work as we could pull together. At the current time, we are in the midst of a phase in our business where we are harvesting substantial cash from sale of non-core assets and extra large investments we made during the credit crisis.

This reflects our goal to begin selling non-core assets as the equity markets and debt markets recovered and liquefy overall assets, and as we acquired the lot of assets during the period, I mentioned many of those have appreciated, we think its time you can start and we have started to monetize some, but we always start with treasury assets and non core assets in businesses.

There is also substantial cash we generated from the sales of assets as values recover. Cash which we will store for future opportunities should maybe available. This has been our goal over the past nine months, which will continue as markets recover. In addition as a result of this cash generation, we will also likely use portions of it to repurchase common shares in the company.

Brian just mentioned the renewable of our common share issuer bid which often we authorized but don't use, but depending on price and other opportunities we may use a large portion of this 50 million plus share issuer bid over the next year to repurchase common shares with this excess cash.

With those comments, operator we will turn back the call to you and take any questions if there are any.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question comes from Bert Powell of BMO Capital Markets. Please go ahead.

Bert Powell - BMO Capital Markets

Bruce, you’ve got a lot of value built up in the woods product business, where do you think we are in terms of seeing disposition gains out of that. Do you think is more to go or you are starting it serious about raising capital from that segment?

Bruce Flatt

So I would make just two comments, the first comment is that we think there is a very long ramp road over the next five years for all housing related investments which I put the ones you just mentioned into that category and because that's really that we don't think there's going to be a snap back from 700,000 houses to 1.5 million built every year. We think it’s a slow and paced recovery in housing in the United States over the next five years and all of those businesses will recover along with it over time. So I guess I'd say underlying fundamentals of all those businesses are good today and they look like they will be good in the foreseeable future based on the facts that we have today in front of us.

On the second side, we have many investments which we put substantial amounts of money in at the bottom of the market with significant appreciation from time to time we consider just a reallocation of capital. It has nothing to do with our view of the future of those investments, but often it just gets weighted where we want the capital either on the balance sheet just for new opportunities or for other things or in addition it puts more liquidity into a stock that we have an investment in. So I'd say you may see us overtime taking capital out of some of those businesses, but it probably has nothing to do with our view of the future. We've done well from the bottom of the market and we are just looking for new opportunities.

Bert Powell - BMO Capital Markets

And then just your comments with respect to the themes that’08, ’09 you put capital to work and now you are in harvest mode, how should we think about squaring that up against being in the market with six new funds and raising capital. Would that infer that those raised initiatives are going to be further out than today given maybe the opportunities that you see I'm just trying to square up that?

Bruce Flatt

No I think a good question because I probably wasn't as clear as I should have been. We continue with all of our businesses to build them and grow them and put capital to work. But when you buy a lot of assets at the bottom of the market what tends to happen is A, you get more of it than you otherwise wanted because it grows in value, relative to other things within your portfolio and secondly overtime as markets recover and values recover what you tend to do or what we tend to do is to trim down to the great things as opposed to the tertiary assets you have in the portfolio.

And with the recovering in debt and equity markets what happens is the values of everything goes up including assets which may not necessarily fit with our long term goal for our portfolio or for our company and therefore there's a lot of cash that can be harvested out of assets which wasn’t available to you at the bottom of the market, but now the balance sheet is going to writed or excess cash can be taken out of the business and that's really the comment that I guess I was making.

Operator

Next question is from Brendan Maiorana of Wells Fargo. Please go ahead.

Brendan Maiorana - Wells Fargo

So Brian, I would agree with you guys and Bruce too, you know good year cash flows were moving up fundamentals, it seemed like they certainly got better, it was reflective in BAM’s listed share price. But if I look at the total return, as you guys calculated between FFO and the valuation gains and I think Brian as you mentioned it was about 12.5%, and it looks like you guys lowered your interest rates, so it seems appropriate given that rates were down and so valuation gains made up I think 7% or 8% out of that number. And it would strike me that in this year, that number would be the 12% sort of return ought have been the higher given that fundamentals are moving in the right direction and you had interest rates going down. So if we're in a rising rate environment, what's going to keep that number inline with your 12% to 15% target as we go forward?

Brian Lawson

Sure. That’s a good point there, Brendan. And on the 12%, first of all, 12.4%, just for the benefit of everyone on the call, that is based on our intrinsic value and as opposed to the stock price and the other comment I make on is that these are valuations that are done. They are all generally 10 or 15 or in the case of timber assets, 73 year discount in cash flows and so while they tend to be, it is much that there have been some big moves and valuation gains, they tend to be a little bit more long tail off in nature. They just evolve over a longer period of time.

And so having 5% out of cash flow and 8% out of gains this year is I would say, if anything, what we probably saw was cash flow that was still a bit on the light side in terms of the return because as we think you are well aware, we expect to see a lot pickup in cash flow coming from virtually anything tied to the US home building sector and we see that benefiting us for a number of years. So I think we got some tailwinds there.

Your comment on interest rates, absolutely. If interest rates rise, all things being equal, your valuations ought to come down. Having said that, all things are really equal and these are mostly real return assets. So rising interest rates should be indicative of the strengthening fundamental market we should be seeing increases in the cash flows within those return assets either because we are getting larger increases in rate based revenues which are driven in large part by regulatory framework that incorporates interest rates or because interest rates are increasing because of inflation and that should be reflected in things like power prices and rents.

So what you would see is growth in the cash flow and also the impact of interest rates on our valuations would be mitigated by increases in the cash flows to which they are applied, which is of course one of the fundamental concepts of real return assets. So I hope that’s helpful in giving you some sense of how we would see things rolling here.

Brendan Maiorana - Wells Fargo

Yeah, that’s helpful it sounds like the cash flow growth ought to pick up as we go into ‘13 and beyond. And then just quick sort of follow up or related to that, I know we tried to do this as analyst I am sure the investors all try to do this too, but if we looked at the difference between where you guys have your IFRS values and the public listed entities that are out there, you alluded to this in the letter a little bit, but is that number, would your IFRS move up or would it move down or stay about the same?

Brian Lawson

So if we adjusted it to reflect stock prices?

Brendan Maiorana - Wells Fargo

Yeah, for the listed entities that are out there if you use their share prices as opposed to the internal estimates that you guys provide?

Brian Lawson

There are some puts and takes, but on balance it’s probably about flat in terms of the impact of making those kinds of adjustments.

Operator

Next question is from Michael Goldberg of Desjardins Securities. Please go ahead.

Michael Goldberg - Desjardins Securities

A couple of questions; so you are not calling the spin off BPY imminent; has anything actually changed, you get approval of the IFRS accounting from the SEC or is there anything that's actually changed?

Brian Lawson

So Michael, we are continuing to work with the SEC in getting the documents approved. We have addressed a numbers of things. They are having a very comprehensive look at it as I suppose they ought to be, and we think we are making good progress on it, and so we are hopeful of launching it in the near future….

Michael Goldberg - Desjardins Securities

Is that similar to what you would have said a quarter ago, has anything actually changed?

Brian Lawson

Sure, we had more back and forth with them and we’ve continue to address comments and look, I can't give you affirmed date, affirmed date as to our expectation anything like that or I can tell you we are making progress and we are very hopeful of having it out shortly. It has obviously been a long time, it took us a long time to get Brookfield Infrastructure Partners launched as well and obviously longer than we do originally anticipated but we are making progress.

Michael Goldberg - Desjardins Securities

Okay and Bruce in your letter, you again referred to your plan to assist companies in Europe and recapitalizing, what hurdles have to be cleared before something big might happen?

Bruce Flatt

You know nothing Michael; I guess I would say, we did a lot of things in Europe in 2012. Most of them were assisting corporations in Europe, recapitalize assets or purchase assets from them that were outside of Europe and for us just a lot of singles and doubles, this is good business, and I think more of that will happen in 2013.

And in addition, I guess we are getting much more comfortable with the way that we can acquire assets in Europe and probably we'll do some things this year in Europe.

Michael Goldberg - Desjardins Securities

Should we think of Brookfield Property Partners as being a vehicle to factually execute on something that might happen here?

Bruce Flatt

I would say that you should think of Brookfield Infrastructure Partners, Renewable Energy Partners and Property Partners all as entities that could participate in transactions; they have been participating in the transactions and will be.

Michael Goldberg - Desjardins Securities

Okay and you talked about unrealized, unrecognized gains on assets that could potentially be harvested, but is there like a ballpark number you could give us as to what these might amount to in aggregate now and does US residential lands holding assets get included in what you think of as what could potentially be harvested?

Brian Lawson

Michael, its Brian. You are on three questions but we will just add to this one quickly. The short answer Michael is there are lots of potential candidates I suppose but we really feel it’s not appropriate to give specific guidance as to what might or might not be on the sell. I think for reasons you can understand, but as Bruce mentioned, there are a lot of areas that we could harvest value for good gains.

Operator

The next question is from Mario Saric of Scotia Bank. Please go ahead.

Mario Saric - Scotia Bank

Bruce, just with respect to commentary in the shareholder letter with respect to viewing equity that's cheap compared to alternatives particularly fixed income, for the types of assets that Brookfield is looking at and currently owns, how do you look at public market valuation versus private market valuation for those assets today?

Bruce Flatt

I think I understand your question but if I answer it incorrectly please you can clarify or I will try to clarify for you, but I guess our business is about buying assets that are more time consuming to underwrite and more fluid to underwrite at times when owners have either too much debt on them or they want to achieve a goal that we can be helpful with because of our operating assistance or capital availability.

It’s not really buying assets in the market at the trading price. So I guess our view is that we can continue to buy in this environment assets on a leverage basis to make us 12% to 15% returns on the asset and we will continue to do that. On the other hand, there are many assets in the market trading at higher valuations than what I just described and but I'd also say that those valuations are extremely good relative to what you could earn in a fixed income instrument and the risk you take with a long-term fixed income instrument.

So I think people have been trending towards and putting more money towards real assets Property, Power, Infrastructure and other types of assets like we buy, merely because they can earn decent cash returns and they are not taking significant tail risk because ultimately rail return assets will earn back the return, and I think that’s you are seeing and you will continue to see more money going into them both in the private and public markets overtime.

Mario Saric - Scotia Bank

And then maybe switching gears to IFRS, maybe Brian. I think you indicated that about a third of appraisals or about a third of the assets was extremely appraised actually more than as you include refinancing during the year. Just wondering how would those appraisal valuations compared to internally generated valuations?

Brian Lawson

You know, it varies a bit. I would say generally they are pretty much in line. We believe we're pretty good at underwriting and valuing these assets and it's certainly in some asset class, it's a relatively standard way of approaching it. For example, office properties, CBRE or something like that is generally going to take a pretty similar approach to us. We might have a bit more specific view as because you will know what the actual lease stock is we're building but they are laying their views on market trends and things like that.

So sometimes they are a little higher and a little lower and we take that into consideration. And if it's financing appraisals, they often done a bit more conservative basis for obvious reasons. So there is certainly a good indicator and there is something that we definitely factor in, in terms of coming up with the valuations.

Mario Saric - Scotia Bank

One last question just with respect to, a very quick one. With respect to harvesting some of the non-core assets, would these be assets generally that were acquired in the stress situations in the last four or five years or are we also looking at assets that have been held for much longer period of time?

Brian Lawson

It could include all of the above.

Operator

Next question is from Andrew Kuske of Credit Suisse. Please go ahead.

Andrew Kuske - Credit Suisse

I guess the question is for Bruce and you spent a lot of time in last few years developing these public market vehicles, the LPE vehicles that really are a form of permanent capital, do you feel you are missing any platforms at this point in time just really when you look at a competitive dynamic versus the other managers around the globe, do you think you are missing anything?

Bruce Flatt

We would always like to do better in everything we do, but I would say our property business is large and extensive and we intend to grow it and build it and earn great returns overtime. Our infrastructure business is a leader in global infrastructure management. Renewable Energy is one of the largest portfolios in the world.

Our private equity business, there is while it’s where we started and it relates to a lot of the things that we do. It’s smaller and I think can grow extensively because it is one of the largest businesses for institutional clients in the world. So I think we can grow that businesses and I think our but not in a public market that will be build privately and may be the only business that we don’t have a flagship entity in is in the timber business and we may consider it overtime.

Andrew Kuske - Credit Suisse

Okay that’s helpful. And then just related to that, could you give a bit more color and commentary around the number of clients sort of client penetration across multiple strategies?

Bruce Flatt

So I don’t have the exact numbers with me. But what I can tell you is our business is about high-end client management of a group of institutions which we take a lot of time with and we get a lot of repeat performance. So if you look at our client list its less then most large organizations with the scale of capital that we have and many of them are larger institutions and many have multiple investments with us.

So we pride ourselves on that and we try to do it and I think overtime it will continue to grow.

Operator

Next question is from Cherilyn Radbourne of TD Securities. Please go ahead.

Cherilyn Radbourne - TD Securities

I wanted to start by asking a question related to the new disclosure you provided in your asset management segment and specifically you reported the 40% gross margin on days [fees] for the year and which compares with this 50% that is state target that you articulated to investor day. So I wonder if you could just give us a bit of a feel for the mix between fixed and variable cost within the $250 million of direct cost going against that business?

Bruce Flatt

So I see a fair amount of that is fixed, there is some transactional stuff in that, but a fair amount is fixed because large a lot of it that has to do with people and everything you do to support the people. What I would say though is, and you would have seen this evidenced in the fact that the cost did increase year-over-year.

We put more money into building out our client management groups, there was the growth in the infrastructure side. We’ve obviously got more people working there, because there has been fantastic growth and then there has been a couple of other parts of the business more niche services that we provide where we have expanded either in the new regions.

And what I would say to those is so the mix of some of the cost in there is in anticipation of future revenues, and in respect of growth that not only is directly tied to existing expansion of business that will yield future growth in fees and revenues down the road, but also we should be able to leverage those resources and hence expand the margins.

So we are actually quite encouraged with how the margins are developing but 50% is still the long term target. Again I would say one other thing in that regard is, our business is a little different in some sense because we do have large listed entities and so the cost profile with us is perhaps a little different than some other managers and we mingle those together between the listed and the private fund side.

Cherilyn Radbourne - TD Securities

I wanted to ask a bigger picture question, just in your letter you talk about interest rates not likely to go much lower, but its difficult to predict the timing of when they eventually rise and I don't want to ask you to play economist. But we are just hoping you could give us a bit more insight into your view of interest rates and how much is less in terms of your ability to continue the lock in long term financing at attractive rates.

Bruce Flatt

Brian will take the second one, I'll answer the first one and I'd just say that our general view based on what we know from our businesses and just observations in the capital market is that interest rates aren't going up in the next short while. But eventually they are going up, and I think more importantly to this business and maybe to the point of also to the question earlier of appraisals and valuations is that appraisals and what's important with appraisals under IFRS and things like that is that these are done on long term discounted cash flow analysis and they are not spot valuations based on a cash flow tomorrow morning.

And if you did that you might benchmark it to current interest rates, as opposed to looking over a long period of time. So when people are looking at it, I'd encourage you to think that 200 to 300 basis points of interest rates going up really doesn't bother the business of Brookfield Asset Management and all the things it does within the franchise.

What we’ve said before and I stated again, if you believe that interest rates on the long end of the treasury are going to 10% in the foreseeable future, then there's no doubt that for a period of time our business will have headwinds against us. Eventually after those headwinds we have the greatest assets anyone can own in a highly inflationary environment, but there will be headwinds for a short term period of time.

I guess we don't think either of those are going to happen in the short term, but certainly the first one which is a slow and gradual increase of interest rates over time we think will come.

Brian Lawson

Yeah Cherilyn on the second part of your question, I'd say we are still following very much the same approach as we follow for the last couple of years. In terms of thinking about how we might position ourselves with respect to the expected increase in interest rates, we are going at that by aggressively refinancing things as soon as we can and ideally prefinancing if the terms of the debt makes it economical.

But we've also been making use of interest rate contracts usually treasury locks or forward starting swaps, and generally we've been locking in around half of the expected North American refinancing proceeds over the next three to four years. That’s generally household rolled out, and there is probably the 4 billion of that, and we've hedged about half of that. So that can give you some idea of where we see.

Australia is another area we look at. It's bit more of a floating rig [short] dated market. But we're doing things on that in that market as well to try and lock some of that in.

Cherilyn Radbourne - TD Securities

Okay, and I think you had about 3.6 billion of those contracts at the end of last quarter. So it sounds like they are stable to us in terms of

Brian Lawson

Yeah, I may have gotten (inaudible) given your proportionate versus the gross and things like that. But it's around 50% is the main thing.

Operator

The next question is from Michael Smith of Macquarie Securities. Please go ahead.

Michael Smith - Macquarie Securities

Just wanted to talk about the share buyback; what are the intrinsic value of the company close to $45 and the outlook is looking pretty good and the stock trading at 38 or slightly below 38. Is it fair for me to assume that like at these levels are noticeable amount of share buybacks would be on the table.

Bruce Flatt

I guess, Michael, these are all capital allocation decisions and to answer this question, and one that was asked earlier, our business is about capital allocation at the most senior corporate level and all we do is decide whether we should take money at a one thing and pulled in one another.

There is no doubt our shares we believe are good investments compared to other things. Some other things today and as we harvest cash, one of the places we look to is pull in stock. I don't think we should specifically say whether we're going to be in the market buying at these levels or not, but it's very possible over the next year that as I said in my notes that we will use a portion or a significant portion of the allotments.

Operator

There are no more questions at this time. I will now turn the call back over to Mr. Flatt for closing comments.

Bruce Flatt

Thank you to everyone for listening in on our conference call this quarter. We appreciate all your support, and if you have any questions please feel free to contact any of us. Thank you very much.

Operator

Ladies and gentlemen this concludes today’s conference call. You may disconnect your lines thank you participating and have a pleasant day.

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