Brookfield Asset Management Incorporated Q4 2007 Earnings Call Transcript

Feb.12.08 | About: Brookfield Asset (BAM)

Brookfield Asset Management Incorporated (NYSE:BAM)

Q4 2007 Earnings Call

February 8, 2008 11:00 am ET

Executives

Robert J. Harding, Chairman

Brian Lawson, Managing Partner and Chief Financial Officer

Bruce Flatt, Managing Partner and Chief Executive Officer

Analysts

Michael Goldberg - Desjardins Securities

Cherilyn Radbourne - Scotia Capital

Andrew Kuske - Credit Suisse

Rossa O’Reilly - CIBC World Markets

Peter Sklar - BMO Capital Markets

Brendan Maiorana - Wachovia

Chris Haley - Wachovia

Lawrence Goldstein - Santa Monica Partners

Ronald Redfield - Redfield, Blonsky & Company

George Denninghoff - Vista Research and Management

Michael Smith - National Bank Financial

Operator

Welcome to the Brookfield Asset Management Incorporated conference call and webcast to present the company’s fourth quarter 2007 results to shareholders. (Operator Instructions)

At this time, I’d like to turn the conference over to Bob Harding, Chairman of the Corporation.

Robert J. Harding

Thank you, Operator, and good morning, ladies and gentlemen. Thank you all for joining us for our year end 2007 earnings announcement. Joining me today for this call is Brian Lawson, our Chief Financial Officer, who will discuss our fourth quarter and year end financial results. Following Brian’s remarks, Bruce Flatt, our Chief Executive Officer, will provide an operations update and comment on the current environment. Following the remarks, of course we look forward to taking your questions and comments.

At this time, I would like to 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 on known risk factors, I would encourage you to review our Annual Information Form or our Annual Report, which are available on our website.

With that done, I would like to turn the call over to Brian Lawson. Brian?

Brian Lawson

Thank you, Bob, and good morning. We reported our financial results this morning and posted our letter to shareholders and supplemental financial information on our website. I will go over the highlights, although we do encourage you to read the full contents of the materials.

We reported record operating cash flow of $1.9 billion during 2007. This is slightly higher than the $1.8 billion that we reported last year and more than double the $908 million that we recorded in 2005. Excluding realization gains, operating cash flow increased to $1.7 billion in 2007 and that’s up from $1.2 billion in 2006, representing an increase of $545 million or 45%.

This growth came from improved results across most of our operating platforms, particularly in our property and specialty fund groups, which generated solid investment returns for us and our co-investors.

We also experienced strong performance within our private equity and financial asset portfolios. These gains more than offset the impact of lower water levels on our power generation facilities and the impact of weakness in the U.S. housing markets.

Net income was $787 million in total for 2007 and that compares to $1.2 billion in 2006. Excluding realization items, net income was $941 million, compared to $624 million and that represents an increase of $317 million.

Net income on this comparable basis did not increase by the same amount as operating cash flow due to the impact of depreciation on recently acquired assets. And as you know, we focus more on operating cash flow, which is similar to FFO or Funds from Operations used in the real estate sector, because it removes the potentially distorting impact of depreciation.

We achieved a number of important initiatives during the year. We increased committed capital to establish funds by roughly $10 billion through the establishment of new funds, the expansion of existing funds and through acquisitions. We established Brookfield Infrastructure Partners, which was distributed to shareholders and listed on the New York Stock Exchange on January 31 of this year.

We acquired the Multiplex Group, which expanded our global property platform into Australia and the Middle East and added to our European operations. And we also acquired timber assets in the Pacific Northwest region of the United States, a well-respected real estate infrastructure equity manager with $6 billion of assets under management, a major retail property portfolio in Brazil, and continued to invest capital on behalf of ourselves and our clients throughout our operating platforms.

We recorded solid operating results in most of our operations, although there were a few exceptions. Our commercial office portfolios remain very well leased and contributed increased cash flows during the year. Bruce will comment further on these operations in his remarks.

The results from our power generating assets were lower than those recorded in 2006. This was due to water levels that were 10% below long term averages in contrast to the 2006 levels that were above average. Realized prices were higher than in 2006 and our new hydro and wind facilities performed well. Water levels at the beginning of 2008 have been good so that bodes well for the current quarter and hopefully for the balance of the year.

Transmission operations performed in line with expectations which should come as no surprise given the regulated nature of their cash flows. Results from our timber operations were impacted by the slowdown in the U.S. home building sector and a strike in Western Canada; nevertheless, the contribution did increase over 2006.

The U.S. slowdown impacted our home building operations, which led to reduce operating margins and a provision to reduce certain higher priced land positions in the United States. Our share of the provisions was approximately $30 million after taxes. Fortunately, our Canadian operations increased their contribution by more than 50% and our Brazilian operations also performed well.

Turning to our specialty funds, our bridge and real estate finance groups recorded growth by maintaining higher levels of invested capital and we also established new funds in both these groups during the year. Our restructuring group completed a major initiative with the sale of one investment position in particular for a gain of $231 million.

And we also recorded gains in excess of $300 million on the sale of exchangeable debentures held within our financial assets portfolio, and gains of approximately $150 million after taxes and transaction costs on the sale of exchange seats within our Brazilian operations. So, all in all, we are pleased with the financial and operating results, particularly given the economic environment that developed during the second half of the year.

I would now like to make some comments on our capital structure. We have consistently followed a very disciplined approach in financing our business. That is made possible by the high quality of our assets and our focus on long-term value creation on a relatively low risk basis. We maintained strong investment grade ratings as a result. We have a very large equity base, nearly $20 billion and we are prudent with our approach to stock buybacks and dividend payouts.

Our corporate debt is quite modest at only $2 billion and has an average term to maturity of 11 years. We maintain high levels of liquidity at the corporate level of the company, usually around $2 billion of cash, financial assets, and committed revolving credit facilities. We are currently at this level as a result of non-core collections of cash in the second half of last year.

We also generate between $1.5 and $2 billion of free cash each year, in addition to further cash proceeds through the ongoing turnover within our asset base.

We do use debt capital to finance our operations, but the vast majority of this debt is secured by individual assets on an investment grade basis with relatively non-restrictive covenants, and, this is a very important point, with no recourse to Brookfield. The duration of this debt is very long in nature.

It is also important to remember that most of our assets are very high quality long-life assets with visible long-term contractual cash flows and backed by high quality counterparties. This gives us a high level of confidence in the cash flow streams. This is in contrast to the financing strategies of some of the more aggressive participants in the capital markets who benefited from the easing of covenant patterns and the availability of higher loan to value debt, until the markets turned abruptly in August.

So it is worth noting that since August of 2007, we have completed approximately $5 billion in financings on terms that are not that are not that much different than the financings we entered into prior to that date.

I believe that our success in achieving this is because we provide our lenders with transparent financings backed by high quality tangible assets with visible and reliable cash flows at low loan to values. And we continue to have a success in accessing the capital markets in the ongoing execution of our business plans.

Before I hand the call over to Bruce, I would also comment that the Board of Directors approved an increase in our dividend from $0.12 per share to $0.13 per share for the dividend to be paid on May 31st. This represents an 8% increase.

I would also note that you received a share of Brookfield Infrastructure recently as a dividend. And should you have kept it, you are also receiving distributions on the newly issued units of Brookfield Infrastructure Partners, which brings the aggregate increase in distributions to you this year on a combined basis to 18% over last year.

So I now will turn it over to Bruce, who will make some comments on our operations and on the market environment.

Bruce Flatt

Thank you, Brian, and good morning. Prior to dealing with questions, we thought I would address two specific items today. The first is to discuss the type of assets that we own directly and through our funds and the type of assets really which back the fees, which we received from our co-investors. As an overview, they are very long life, low volatility assets and therefore highly stable in nature from a baseline cash flow perspective.

Second, we thought it was appropriate to make a few comments on the market environment and our approach to the markets as we look forward. To highlight some of the fundamentals of our businesses, we thought we’d give you just some high level points of interest at this point in each of those areas.

The first is office properties, and just for everyone’s benefit, we own one of the highest quality portfolios of office properties in the world. Today, in fact, our office properties are 96% leased. And in 20 years of us being in the office building business in a very substantial way, we have never been 96% occupied. So I’d say that’s point number one.

Point two is that about 4% of the space rolls over annually, so these are very long-term streams of cash. In fact, we continue to lease space at a significant pace, although admittedly there very well could be some pause given the market environment we are in as we look forward.

Third, rental rates at year-end were on average in the markets that we are in, 25% higher than rents in place. In fact, some places like Midtown Manhattan, the prevailing rents are greater than 50% higher than what the rents are in general within office buildings. And to give you just an example of that, there are leases still being signed in Midtown Manhattan in the $150 range whereas a traditional rent that’s locked into a building is in the $60 to $70 range.

We have been picking up this extra rent to the bottom-line as we roll over leases or as we take back space from tenants opportunistically and then re-lease it. But said differently, rents across the board could deteriorate by, if you take the statistic I used earlier, 25% on average and we would still be able to maintain the current cash flows within the portfolio and that’s if all the rents rolled over. But again, you need to remember that only 4% roll over every year. So these are very long term duration assets.

As to supply, which is the other worry with real estate, in general it’s well in check in virtually all major central business districts that we operate in and in fact, in most of the places across the world.

Finally, I guess we would make the comment that with respect to the office building portfolio, we’ve always attempted to build our portfolio for downturns in the market, both on the asset side and by the way, it’s financed. And as Brian mentioned in respect to financings, we largely have asset-specific non-recourse fixed rate financing throughout the portfolio and we don’t expect we’ll have any issues in this regard.

Secondly, our power plant business, and again just for background, we own one of the largest privately held renewable hydro power plant portfolios in the world. The value of this business has some very strong underlying fundamentals working for it.

The first is that with oil in excess of $90, the cost of virtually every other alternative fuel has increased. In contrast, our fuel, which is essentially water, costs the same no matter what the price of other fuels are or whether they go up. Our water costs don’t increase with the increasing fuel environment and therefore, our margins widen. This is contrary to virtually all other forms of energy generation, which we compete with.

Natural gas, which sets a lot of the marginal pricing for electricity in North America, is currently trading in the range of $7 to $8 per Mcf, and while lower than two years ago, it should be put into context that prices were only $4 approximately five years ago. And that’s where many of our long-term contracts were negotiated and as result, this has set new baseline revenue and cash-flow streams in our portfolio, which we should be able to achieve and increase our revenues as those contracts, roll over.

And as coal plants for electricity become more and more costly to build, because of green credits and the scrubbing and the other things that have to get added to them, and as people realize and come to the realization that nuclear takes forever to permit and to build, one of the only alternatives is to turn to gas-electricity plants to continue to generate the electricity that’s required in our most major market, which is North America.

And that really is the only choice to add to generation needs in the short-term. And as a result, this should continue to lead stronger fundamentals for natural gas as it is consumed and therefore higher power prices over the longer term, so both of these things work in favor of our assets.

Again though, we lease our assets very conservatively and only approximately 20% of the assets are sold at market prices, the balance of 80% are on long-term contracts and about 50% of that is still in place five years from now. So it allows us to benefit from these uplifts, but it takes time, again having said that, it gives us a much more conservative profile of our cash flows with respect to revenue certainty. This does lead us to confidence in being able to deliver strong tangible cash flows to shareholders over the longer term from these assets.

Lastly, I’d make one other comment on this group of assets, in that the business world is coming to the realization in fact, I was going to say quickly, but it didn’t come for a long time but it’s been very quickly in the last year, that green attributes are extremely valuable.

This form of generation that we own is one of the greenest forms of generation and therefore this portfolio that we have will benefit significantly, from what’s transpiring across the globe, where the world is beginning to price and to value green attributes in the marketplace. We expect to benefit in a number of ways from this in the future as we go forward.

Thirdly, and I’ll just make a couple of quick comments about our infrastructure business, as Brian said, our transmission assets are very stable in nature just because they are mostly rate-based focused. Our portfolio is conservatively financed and the cash flows are tangible, solid, and generally growing.

Our timber assets are very high margin assets. The margins have compressed a little, given the U.S. housing markets, but are still strong. In addition, the unique nature of these assets allows us to choose not to cut, should prices for timber in general or specific tree species not be satisfactory. And if we leave that tree in the ground, it will continue to grow and add value to the portfolio. As a result, it’s not a wasted resource as you have with many other types of products.

So all in all, we believe the assets, which back our funds for our co-investors and for ourselves, and the assets that we own directly with a few exceptions, are well protected in this environment. And as Brian mentioned, are conservatively financed with long-term maturities.

Turning to the current environment, I’ll just make a couple of comments. Fortunately, we have entered 2008 in a strong financial position. We also believe that the current volatile environment that is out there favors long term owners and operators of assets.

And our balance sheet strength and our long term investment horizon should as a result of this play to our advantage as owners of assets wishing to sell begin to place greater importance on certainty of closing. And as we typically finance our investments with substantial equity, often comprising up to 50% of the purchase price and the balance is usually fixed rate long term financing, we shouldn’t be as affected by as many other people who rely on the more volatile high yield markets to finance acquisitions.

And with credit costs more expensive and terms tighter, much of the drive behind the recent leveraged buyouts has dissipated. And I guess on the positive side, with the factors no longer driving prices, as we look to purchase things, we are more likely to be able to attain our long term investment goals going forward.

In the context of these views, we believe there will be great opportunities to put investment capital to work in our areas of focus over the next 12 or 18 months. And we look forward to that and to be able to achieve greater than average returns over the longer term from some of these acquisitions if we can achieve them.

Nonetheless, I make the comment that we do remain cautious in these uncertain times. And over the past six months, we have done a number of things to ensure that we mitigate risk and I will mention just four things to highlight the fact that we have been cognizant of this environment.

I guess the first one is that we’ve raised significant capital to ensure that we had resources sitting on the balance sheet to take advantage of opportunities that were out there, that came upon us and extended the duration of debt. In particular, we sold assets which weren’t core to our long term business. So we’ve been working on that.

Second, we ensured that our investment teams don’t commit to any significant investment opportunities without committed financing in place. We largely never did that in past but we certainly are ensuring that is in place today.

Third, we reduced the risk of all the short-term financial assets in our books through outright sale of a lot of them or other means.

And lastly, we did purchase credit protection on the portfolio of approximately $2 billion of notional corporate debt, essentially as a hedge against the rising cost of debt due to the widening in credit spreads. To date, this credit protection has generated some realized and also unrealized gains in excess of $100 million.

So I’ll conclude by just saying looking forward, we are cautious about the market environment in the short term, excited that our core operations are in solid shape, pleased that we are in excellent financial shape, and preparing to find ways to deploy capital in the future at what we hope to be highly attractive returns in opportunities that we find.

And with those comments, I will turn it over to the operator for any questions that people on the phone may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from Michael Goldberg - Desjardins Securities.

Michael Goldberg - Desjardins Securities

If I take out in the fourth quarter the gain on the BOVESPA seats, the U.S. housing provision and gain on the Calgary property, both at the BAM level and also exclude your share of the Stelco gain, I calculate that your FFO was in the neighborhood of about $0.30 a share rather than the $0.94 reported. What I’m wondering is if you could comment on the sectoral performance of operations causing that lower level of FFO in the fourth quarter?

Brian Lawson

I’d say in general, most of the things performed quite well during the fourth quarter. There were a few areas though that we referenced that we experienced some decline quarter-over-quarter.

And the ones we would have highlighted would be on the power generating side due to lower water levels and also on the home building side, in the United States, where we had a soft quarter and some provisions in the fourth quarter of this year. And notwithstanding the fact that, we did have some extremely strong results from the Canadian side, we do have some weakness there.

In terms of other areas, and these would be generally more around the margin, timber was generally better in the fourth quarter of last year than it was this year. We had quite a strong first half of the year in our timber operations and that tended to lag somewhat at the tail end, in part, because of the strike that occurred it does take you a little while.

We built up inventory in the early part of the year which enabled us to continue to work through that over the course of the strike and then it does take you a couple of months to build back up to the same normalized level once you come out of a strike. So those would be a few of the areas that I would point out to you.

Michael Goldberg - Desjardins Securities

If I could just follow up, when I look at in your supplemental, Page 45, the segmented results, cash flow from operations for the full year and compare that with the third quarter similar data, and looking specifically at power and infrastructure, I hope that these are on an apples-versus-apples basis.

But it looks like in the fourth quarter, the cash flow from operations contributions from these two segments were both negative, around $14 or $15 million. Are my numbers correct? Are they on an apples-versus-apples basis?

Brian Lawson

They should be on an apples-by-apples basis. I think as you know, Michael, we did change the pattern or structured the disclosure in the year end numbers to reflect a couple of changes that went on in the business during the course of the year. In terms of the infrastructure, we would have had a negative contribution there, once you’ll take into account all of the associated interest expense in the fourth quarter.

Operator

Our next question is from Cherilyn Radbourne - Scotia Capital.

Cherilyn Radbourne - Scotia Capital

My first question just relates to whether you could comment somewhat on the acquisition landscape as you see it. There have obviously been some high profile situations emerge in the commercial property side, so it seems clear that there will be opportunities in real estate. But what are you seeing in some of the other asset classes in which you are active or aspire to be active?

Bruce Flatt

And I’d made the comment that leaving aside any specifics of transactions, but just generally, there is no doubt that we are seeing many, many opportunities that we wouldn’t have seen 12 months ago. And I guess we are prioritizing all those opportunities and ensuring that we allocate capital to the ones that are going to create the most value over the longer term.

So, I guess I’d say that we have a lot just in general, we have a lot of opportunities that we are looking at and I would say capital allocation will be the name of the game over the next year to pick the ones that we should be investing into as opposed to every opportunity that comes along.

Specifically to businesses, what we’ve been doing so far is, I’d call it, we’ve been completing transactions that we might not have otherwise been able to purchase, but that other buyers dropped away within our core portfolios of business because of the markets. And we are just adding assets in at a cheaper price than we would have otherwise been able to buy them at. So that’s really all we have been doing so far. And that will be highly attractive to the business looking forward.

But now obviously we are assessing other, more major opportunities that we could put capital into. Specifically to each of those businesses, on the real estate side, I guess we don’t view that there is a lot of opportunities that are going to come from commercial buildings other than in some select circumstances, possibly where people have overleveraged their portfolio or their properties, and because the underlying fundamentals are actually still extremely solid in most of the properties that are out there.

So other than through financing issues, the commercial property business, there probably won’t be that many opportunities this time through, other than if events change on the fundamental side dramatically. We do see things in the home building industry that we can participate in. We have been assessing a number of those and we’ll have to see whether any of them come to fruition.

In the power business, as you know we are a pretty focused buyer of assets and we continue to just work away at buying assets as we see them. On the infrastructure side, I think there will be a lot of other opportunities that we will be able to add into the portfolio.

And lastly, I’d say our biggest area of focus is going to be in our restructuring fund, which we think there will be tremendous opportunities to be able to put capital to work in the next 12 to 18 months. And we expect to dedicate more capital and we are dedicating a lot more resources to that area.

Cherilyn Radbourne - Scotia Capital

Just with respect to your fund marketing capabilities, that’s been a key area of focus. You made some important additions from an HR perspective in 2007 and an acquisition of KG Redding towards the end of the year. Can you just speak about what you feel you accomplished in 2007 and speak about some specific goals for 2008?

Bruce Flatt

On the investment side, we are pretty open with our comments. Because of these rules in United States of marketing funds, we are always a little bit restricted on what we can say. So I apologize for that upfront. But we have many funds in the marketplace that we are working on today.

I would say that over the next 12 months, we expect to have completed a number of those funds and most of them will be larger in scale than we have had in the past. And they will allow us to deploy significant capital in this environment. So we’re looking forward to that, which is the culmination of a lot of work over the last five years. So we hope to be able to report more on that in the future and we’ve spent a lot of corporate resources on that as well.

Cherilyn Radbourne - Scotia Capital

Where are you at in terms of starting to penetrate the U.S institutional market more effectively and getting accredited with the U.S pension consultants?

Bruce Flatt

I think we are making great progress. We couldn’t penetrate a lot of those types of institutions without track records before. We are fully up to speed on that today after all the history we now have. And we are making, I think, great progress in that we will be able to achieve a number of things with them in the marketing of the funds we are in right now.

Operator

Our next question comes from Andrew Kuske - Credit Suisse.

Andrew Kuske - Credit Suisse

Just a bit more clarity on the direction of your fund model at this stage, do you see the fund model evolving into really larger, open ended funds with broader mandates or more precise and specific funds in multiple jurisdictions that might be closed to vary the initial financing and then that’s effectively it?

Brian Lawson

Andrew, I’d maybe make two comments. One, and just to be clear with what open ended means because that means a lot of different things to a lot of different people. We do not have any open-ended funds, meaning that people can take their money out. Nor do we ever intend to have any significant open-ended funds, because owning long duration assets, they would not be a fund, they would not be having – a characteristic in a fund that we would ever adopt.

So, if open ended meant that they are funds that people can come in and come out, we are not a significant participant in that market, whereas some have funds that are open-ended.

I’d say on the multi-strategy, some of our funds are very specific to strategies and some of it; we put more broad products together. A lot of that is driven by investors’ desires and taxation rules. And some of the issues of doing it on a global basis is that tax rules get into it and people want to be investing in a specific country.

So it all depends on the product and the type of fund. And I believe that in the future, we will have both. But we are probably heading towards more broad funds, where we can offer larger products to a group of people but it probably will strike a balance of both.

Andrew Kuske - Credit Suisse

Ric Clark made some comments on the BPO call yesterday as it related to a U.S. real estate fund and also the Canadian fund that they have been trying to do. And effectively the comment was, given the market declines in the overall capital markets, the weightings that a lot of institutions in the U.S. have are effectively probably too long real estate-type funds and real estate assets at this stage in time.

And so it’s causing a little bit of a delay on the real estate fund marketing. I’m just curious as to your thoughts on the U.S. market of that statement and then also just broadly, if we look at, say, APAC now with Multiplex and just in the other markets in Europe?

Bruce Flatt

Yes, I certainly won’t contrast what Ric said, but I generally make the comment, there may be a few institutions that have allocations that they’re not filling because of other things that have happened in their fund.

I guess we would make the general comment to infrastructure real estate products; these are low volatility, long duration, higher return than 3% long bond money. And I guess our belief is that many pension funds are going to be allocating to these types of products. So there may be a few institutions that aren’t buying those types of products, but we, I guess, believe that there is a big market for these types of products including real estate across the world.

And the other comment maybe just to your asking about other regions, is that United States right now they are either in a recession or they’re talking themselves into recession. And therefore, everyone in the United States is a little more glum than the rest of the world.

There are other spots in the world where things are actually doing very well and people are putting money to work, and the emerging economies and all those, there is significant GDP growth. So I would say the U.S. is probably the place where investors in general are

Operator

Our next question comes from Rossa O’Reilly - CIBC World Markets.

Rossa O’Reilly - CIBC World Markets

I noticed that at this time in the supplementary materials, you didn’t include the deconsolidated capitalization and trying to recreate that, I went to the reconciliation of segmented disclosure to consolidated financial statements on Page 44. And traditionally the corporate liabilities shown there don’t exactly match in all cases the corporate liabilities in the deconsolidated capitalization table.

Some of them are the same, the corporate borrowings and the preferreds and so on, but accounts payable and other liabilities and capital securities and so on, they are actually much bigger in the consolidation adjustment table than they were in the deconsolidated capitalization table that you used to provide. I am just wondering, why is that the case?

Brian Lawson

Just a couple of points there, first of all, we do actually have the deconsolidated table, we did move the location of it within the reports so if you are trying to it’s actually on Page 18, so I apologize for that and it’s in the same format as what you would have seen in previous quarters.

The reason for the difference between the two is because, as I think you are aware when we prepare what we would call our segmented or net invested capital basis of presentation, which is what we use throughout the MD&A and our supplemental information. We include Brookfield Properties on a consolidated basis within that, meaning that we integrate their operations with those of ours. And we do that to simplify matters because of the businesses that they conduct that line up with a number of businesses that we conduct.

We do not do that on the deconsolidated table. That’s there more really to present the credit metrics at the corporate level. So that’s a true deconsolidated statement so therefore it would exclude some of the capital securities, and some of the working capital of Brookfield properties.

Rossa O’Reilly - CIBC World Markets

And then the new table you’ve provided, the segmented operating results on Page 4, which divide things between asset management and operations. As you point out under asset management, you have taken a deemed component of your operating revenues and consistent with the fee that you charge for third parties and included that under asset management revenue.

And I am wondering though, if we wanted to try to calculate or estimate what the profitability of third party management was, what element of operating costs should we remove from that column, which shows asset management, $695 million in 2007?

Brian Lawson

Sure, and that is in fact the true challenge there, Rossa. And that’s why we have moved to reporting not just the third party fees, meaning the fees that we earn off of our established funds, but also to present the fees that we earn off of those funds as well as the fees that we would allocate to the assets that we own directly outside of funds.

And the real reason for that or one of the primary reasons for that, first of all, that is the way we actually look at the business internally and what we think it provides more clarity on is the margins. Because it is very difficult to allocate the operating cost for a given fund to what I would call or what we would call the third party fees simply based on the ownership of the fund.

You could have three funds with exactly the same operating cost structure. And your margins will look very different, whether we own 20% or 60% or 40%. So we presented it, what I will call “all in”, and I would suggest that it should really be done on a pro-rata basis, is probably the fairest way unless you want to start to talk about scalability of platforms and economies of scale and things like that and we have chosen not to do that at this stage.

Rossa O’Reilly - CIBC World Markets

Because last quarter you completed one of the most important acquisitions in the history of the company in the Multiplex transaction and I wondered if you might be able to give us some color now as to on how you see that your investment evolving. What the operating conditions are like and also on the financial front, when the acquisition loan comes due and what your plans are for refinancing it?

Bruce Flatt

Maybe I’ll just talk to the operations, I guess we committed largely a year ago to buy Multiplex and we have been extremely pleased with what we bought. Firstly, I would say the tangible assets we bought are very high quality assets and we have a great portfolio.

I think what we have in addition to that is a franchise that’s going to produce us deals for a very long period of time. And the development side of the business and the construction side of the business are very high quality operations. So and we’ve been very pleased with that.

So I’d say from that perspective and integration, it’s gone very well and we’ve got some excellent people out of it. In fact to give you an example, the senior fellow that runs the construction development business in Australia is now going to be the Chairman of Ric Clark’s construction and development peer group in North America, because he’s probably one of a highest quality construction development guys in the world. And therefore, we’re going to get a number of benefits like that out of it.

From the market’s perspective, Australia is doing extremely well. Recently with a few things, they finally got caught up in some of the same financial stuff that has been going on for six months in North America. But the economy is doing well. It’s kind of like Canada and Brazil. It’s a commodity based economy and therefore all three places are doing extremely well and so I think all of the leasing development, all the stuff that is going on, is doing very well.

We’re in the process of executing our business plan, which as you know was to buy the assets and ultimately sell off some assets into funds and create other structures. And we’re in that process today, which will play out over this year.

Brian Lawson

And then just turning to the financing part of it and I think as you probably would recall, we financed the acquisition in part with a $1.6 billion debt financing that was well placed in the global capital markets and was heavily oversubscribed when we completed it.

I think one of the important things to keep in mind with that financing, just before I get into the refinancing plans, is when we establish the level of financing, it is at a pretty conservative loan to value of roughly 60-65% if you take all of the obligations of the company together on a consolidated basis.

So we put it in place from the outset at a relatively conservative basis. That loan does not come due until well into 2009. So what we are doing with respect to the financing is executing a number of initiatives to raise capital within the entity through asset sales, other initiatives, and through putting specific financing on properties within Multiplex.

A lot of those initiatives were well underway just at the time that we got involved with the company and so it makes it quite easy for us to execute on those because of the fact that they are pretty well in hand to begin with. So we would expect to have the bulk of that work done throughout balance of this year.

Bruce Flatt

And Ross for example, there was a number of non-core assets that had triggers in them on, I think, change of control and one of them was a New Zealand fund that we owned. And the change of control was triggered and I think we end up this month with circa $150 million of cash by selling some properties to the partner, which has already been agreed to and it’s done and they have preempted us out of it.

So there is a number of things like that which were just non-core at the core business, which are being used to pay the financing down well in front as we do the other thing.

Rossa O’Reilly - CIBC World Markets

Did I read somewhere that Multiplex was going to be starting a new office building in Sydney?

Bruce Flatt

You probably did. I don’t know specifically but we have I think six buildings under construction in Multiplex today, we probably own half of them, the other half are under construction for others.

But we did just buy a site in downtown Sydney which will eventually be pulled down, kind of like the 300 Madison site that we built in New York, you would be familiar with, Rossa. It’s a site right in the heart of the city. We are going to tear the building down which currently is about 25 stories and put a brand new office complex up. And so we bought the land and we are in the process of doing that when we find the tenants for it.

Rossa O’Reilly - CIBC World Markets

How many feet will that be?

Bruce Flatt

I am guessing here, but I think the end complex retail and office is about 650,000 square feet, which is a good sized office building for downtown Sydney.

Operator

Our next question comes from Peter Sklar - BMO Capital Markets.

Peter Sklar - BMO Capital Markets

A couple of questions on some of the new disclosure you have in the package. On Page Six, at the top of Page Six of the supplemental information package, you have a table where I think what you are trying to do is to show the performance fees that have not been paid, but would be paid should you monetize all of the assets under management at current value.

And I am just wondering, all of these performance fees are based on valuation, how did you go through and value all these assets given that most of them would not be publicly traded entities?

Brian Lawson

What we do is at the each of quarter is we would go through each of the funds and you look at the fund as though it actually would get wound up in the fees paid at that time. And we do this as a regular exercise to track the performance in the funds internally and to get our own minds around how the performance fees are building up because obviously it’s a pretty integral part of the overall performance. Even if you cannot include it in your GAAP financial statements, which we have chosen to adopt policies that preclude us from doing that.

Your observation that some of the assets are privately held is definitely fair and we have I’ll call it, a framework of how we approach it and we can use either readily identifiable market comps. But what we would typically do is stick with a similar approach to the valuation and adjust it for things such as increases in cash flows. And but we would generally not, I would say, upgrade a multiple or something like that unless there was very good reason for it.

So most of the time we will look to external verifiable benchmarks. Some of our funds do get valued periodically and that’s a requirement of the governance of the fund and so we would have annual valuations for a number of our funds. It would go through the various assets and value them and so we can also use those as an important data point in assessing that.

Peter Sklar - BMO Capital Markets

And who is doing this work? Is the fund manager doing the valuation or are you are doing the valuation up at the corporate level?

Brian Lawson

Well in terms of, if there is a required valuation for the governance of the fund, in many cases that would be done by an external party to Brookfield. In a number of other cases, we would have our fund operations group perform the valuations. They would obviously have input from the management teams and then we would also review that within the financing control group.

Peter Sklar - BMO Capital Markets

Brian, what does the $29 million of direct expenses relate to?

Brian Lawson

That would typically be expenses that would be paid out upon the monetization of the fund, and a significant portion of that would be incentive performance for the management teams.

Peter Sklar - BMO Capital Markets

And then you have an average duration of, I believe it is six years.

Brian Lawson

Correct.

Peter Sklar - BMO Capital Markets

And it’s not clear to me how your funds work, because typically funds have a duration of 10 to 12 years or whatever. But the type of assets underlying the funds, as you point out, are the kinds of assets that Brookfield may choose to hold in perpetuity. So I am just wondering how this timeframe is derived, is that the average time remaining related to the wind up of the funds?

Brian Lawson

No, it’s not actually, Peter. Each fund has a defined period over which the performance is measured. In some cases, it might be one year. In some cases, it might be the life of the fund. In other cases, for example, we have a perpetual fund where the performance is measured over five year installments. And at the end of each and every five years, you measure the performance it’s locked in.

That’s what is paid out and there is no claw-back beyond that point. So based on the various contractual terms for each fund, that’s what drives that average of six years, not the life of the fund.

Peter Sklar - BMO Capital Markets

Right on the very last page of the package, in the column where you have the co-investors interest, which I believe is the third party capital that you have under management?

Brian Lawson

Correct.

Peter Sklar - BMO Capital Markets

I thought that Multiplex, they had about $2.5 billion or $2-3 billion of third party capital under management related to some of their real estate properties.

Brian Lawson

That is the assets in those various funds and so what you see in the last column that would be effectively the capital value. If it’s a listed fund, it would be the market cap of the third party interests in those funds. And of course, you would also note that we through Multiplex have an interest in those funds as well, which I think is around the 20% to 30% level.

Operator

Our next question comes from Chris Haley - Wachovia.

Brendan Maiorana - Wachovia

It’s Brendan Maiorana with Chris. Brian, first question just related to Peter’s earlier question. The $138 million of accrued performance fees, does that compare to the $153, that’s the third party fees on Page 6?

Brian Lawson

Yes, it does, though it is down a little bit during the quarter.

Brendan Maiorana - Wachovia

And then on the asset management business, just looking at the total in terms of the top line numbers and the direct operating costs which you guys broke out for this quarter, it looks like in ‘06 and ‘07 the margin on that business is both around 50%.

As you guys look forward and look to grow the business, would you expect the operating margin to increase, meaning that there would be operating leverage in that business or should we still kind of expect it to remain at that 50% level going forward?

Brian Lawson

We would like to think it would expand over time and we have invested a fair bit in expanding our business and building out the systems and the infrastructure within that group. So we would like to see that grow. But 50% is probably not too bad a number, all in all.

Brendan Maiorana - Wachovia

And then other than the increase in the operating costs associated with the asset management business and kind of building that platform out in ‘07, what else was driving up the increase in other unallocated corporate costs year-to-year, ‘07 versus ‘06?

Brian Lawson

Well, a big part of it is again, the expansion of the platform overall. We did incur transaction costs. We have been actively pursuing a number of different things over the course the year and have obviously been quite busy integrating a number of them. So it’s something we try and keep pretty focused on and tamp down. But we have grown the company significantly.

Chris Haley - Wachovia

So in relation to that, Bruce, when you think that there is a little bit of operating leverage on the asset management side, is 2008 a year in which we feel the full brunt of the build-out of the expense structure, and 2009, 2010, etc., where we can expect to see some leverage?

Bruce Flatt

I’d say we felt that a lot of the investments over the last two years, I think 2008, I would hope that we start to see leverage to the bottom-line. And maybe I would be more definitive than Brian on saying that we expect to get significant leverage as our funds build up and we can drive better fees and as we don’t have to spend the money that we have done to build the business up. And so I would be hopeful for a lot more operating leverage than what Brian said, but obviously on the conservative side, these numbers are good.

Brian Lawson

And there is a lag between when you build it out and when it comes in through the numbers.

Chris Haley - Wachovia

I think about your investment opportunities and how you like the pools that you do have money in, which are long duration assets that could be financed. It would appear to me that the opportunities today as you noted with a land venture that was created last quarter. That and in the financial markets on the debt side, that some of the investments that might be appealing today are in a shorter duration, not as easily finance-able assets.

And I would be interested in your comments in terms of the arbitrage opportunities between discounts to value that land and structured finance investments might offer relative to long duration assets, which may have not declined as much in market value.

Bruce Flatt

I guess I would say, maybe on the opportunity side, we see them as twofold. Number one, which are in industries that have gotten into a mess and that there is underlying fundamental problems. They are good businesses, but fundamentally, they are just in distress right now.

And those largely we’ll participate in through our restructuring fund. These will be operational and financial restructurings that we have one of the most capable teams around. We think of taking advantage of those opportunities. So that’s group one.

Group two, on long duration assets like we have, by nature, they are extremely solid assets and therefore they generally don’t go through the distress on the operational side or they shouldn’t go through the distress and I guess we don’t see it right now.

And therefore, the only opportunities that will come about on those are where people have mis-financed the assets and therefore there are in issues by virtue of financing difficulties. And in those situations, what we are looking for is great assets which have financing problems and we’ll try to capitalize on an opportunity in that perspective. So I’d say that is the second group.

The third thing maybe just to your comment on structured products, we’ve always stayed away from structured products. We’ve never really been a participant in the market, in the structured business. And we will look and observe and try to understand some of them and there may be an opportunity for us to do something.

But I’d put the probabilities of in the first two categories a lot more than the third. What we like are great assets that are mis-financed or just going through difficulties and we like to buy them and operationally and financially restructure them. As opposed to financial instruments that might be trading at a discount that, when you make your 20% return for three years, they are gone. The other assets get to a business for a long, long period of time.

Chris Haley - Wachovia

Last question related to Brazil, the capital deployed to Brazil over the last year and particularly during the last couple of months. I am not sure if it would characterize any distressed situation. But if you could offer a little bit more color in terms of the return profiles of the investments that have been bought and you’ve been allocating to Brazil, particularly with the retail side, the retail portfolio. What is the strategic or the value-add opportunity with that capital?

Bruce Flatt

Yes, I guess I would make the comment on the investment side for Brazil in that it is a commodity-based country. There is lots of other things and they built the country and they are doing well and all those kinds of things. But from the most basic sense, it’s an exporter, either number one or two of almost every commodity product in the world.

And therefore, it’s booming at this point in time. They are running surpluses of cash. And as a result of that, the country is doing extremely well. Their banks are liquid and lending probably is like very few places in the world, just because the country is in good shape and probably better than it has almost ever been.

And so we have continued to deploy capital there. Part of the reason is that we have a very unique offering for institutional investors. Very few global asset managers have the presence like we have in Brazil, and therefore, our story is highly attractive to investors.

To the specifics of the returns down there, Chris, I would say that we believe at the current time that the funds that we have created down there will well exceed the promised returns to our investors. And whether that all pans out at the end of the day, only time will tell. But we believe at the current time that will well exceed the returns we promised them.

Chris Haley - Wachovia

Do you believe that the initial rate of return difference versus the targeted IRR hold returns are wider in Brazil-type of investments, I would assume they would be, like your comments versus stabilized countries?

Bruce Flatt

They have been far higher because interest rates were higher down there, and a big part of our belief over the past three to four years is that interest rates were going to come down. And so far, that’s been right, and we will have to see whether that continues.

Operator

Our next question comes from Lawrence Goldstein - Santa Monica Partners.

Lawrence Goldstein - Santa Monica Partners

I hope you won’t think this question inappropriate, obviously, if it is, you won’t respond. But I am a U.S. citizen, and I am not talking myself into a depression. And I am optimistic. And I particularly appreciate your comment about seeking to leverage the company further in the future.

Does this imply that for BAM investments that you might also leverage further? And incidentally, I don’t recall on your press release regarding the dividend you are going to get. You are going to be buying some more Brookfield, could you indicate what that means for the balance sheet and the leverage?

Bruce Flatt

I think you are referring to the little public company that owns 10% of the shares of Brookfield that a number of us in management participate in. This is a Brookfield asset management call, and we probably shouldn’t talk about what that company may or may not do in purchasing shares. It has not been buying more shares, but it obviously owns a 10% position in Brookfield and obviously has a very significant piece of the company.

Operator

Our next question comes from Ronald Redfield - Redfield, Blonsky & Company.

Ronald Redfield - Redfield, Blonsky & Company

Regarding Brookfield Power, is there possibly a general rule of thumb how one can value power assets based on megawatt capacity, be it, I don’t know, anywhere from $1 million to $3 million per megawatt?

Bruce Flatt

The answer is, it’s not easy, because versus a coal plant or gas plant that always operates at X capacity. Hydropower plants can operate anywhere because of storage, or run of the river, can operate anywhere from 20 to 80%. And they have very, very different capacity factors, so one that has a 20% capacity factor could be worth X per megawatt and one that has 80% could be worth X times four, if it was in the same region. So, it’s very difficult to just use a megawatt and say a price.

I guess my recommendation to you and the way that we look at it is to look at the current cash flows, look at the contracted nature of what’s in place today. Consider a view as to how that might grow based on the cash flows that are in place if you think prices are going up or down, and then use a multiple on that on that for a discount rate. And that’s generally how we value those assets.

Ronald Redfield - Redfield, Blonsky & Company

And why would one be like 20% versus 80% usage, just from demand in the area?

Bruce Flatt

No, it’s not demand. Some plants have effect by other plants on a river system. Some have reservoirs. So, we can store up water and then sell at different times in the day or whichever. And some just have the water, they’re just overbuilt for their river system, because they came from a regulated entity or something like that. So, there is many different factors that would mean they would have the water level the capacity would be different.

Ronald Redfield - Redfield, Blonsky & Company

Would you please discuss if the current credit crunch has affected you or is affecting you right now, including all material subsidiaries? And in that would you discuss your cost of funds, has that changed, your future liquidity, commercial paper, and so forth? And also if you could touch upon if you have been speaking with the ratings agencies and as they are getting stricter, do you have any concerns that they might change your ratings? And if so, would your cost of capital go up further?

Bruce Flatt

Maybe I will deal with the first part of it and then Brian will just deal with the finance part and the rating agencies to answer your questions.

And I would say generally look, the bottom line is everyone has been affected by what’s going on in the capital markets and the availability of capital. I would say while most people didn’t recognize it, over the last four years everyone was affected by it, just in a different way. It was positive before and now it’s been negative.

I would say that we responded to it by ensuring that we put risk management strategies in place to ensure that we have a very solid business. The fortunate thing we have is a balance sheet that’s strong and probably even more importantly than that is that, we have assets which have long tangible sources of cash flow, which allows us to generate a lot of cash. And that’s big benefit to us as an organization.

So on an overall basis, I would say we are affected by it, but specifically just because of the company that we run, we haven’t been dramatically affected by it. And our two most major businesses being office properties and our power plant businesses, are in very good shape. We have been affected for example in our U.S. housing business even though Brazil and Canada are actually doing very well.

Brian Lawson

Specifically, you reference the cost of funds and rating agencies as well and remind us if we’ve missed one year point. But on the cost of funds, I think Bruce really covered that off. I think the observation I would make is we financed the business on a very long term basis and the average term and duration on our debt expenses is very long.

So we rollover a very small portion of it each year and therefore, if cost of funds change in one period for better or for worse, it tends to not have an overly pervasive impact on our overall cost of funds. It’s more around the margin and incrementally.

What we’ve observed in the two businesses that Bruce has referred to and elsewhere, is that, yes spreads have definitely widened somewhat. Having said that, as you would well be aware, the underlying Treasury rate has come in significantly. So all in, in fact, in a lot of cases, we’d be financing it at better rates.

And then just specifically on the rating agencies, we maintain a pretty open and active ongoing dialogue with them, and we will be meeting with them in the normal course following the release of these numbers and we think we maintain a very candid, constructive dialogue and don’t see anything changing in that regard.

Operator

Our next question comes from George Denninghoff - Vista Research and Management.

George Denninghoff - Vista Research and Management

I had a couple of quick questions for you and one of them comes from, it seems like it is the target annual rate of returns that you guys are looking for of about 12%. And, correct me if I am wrong on this, but with your positioning in the global infrastructure, timber, those types of areas and that seeming to be a growing area in the developing world, do you think that this number is a realistic number or do you think it should be a higher target?

Bruce Flatt

If you look, there is a page in our materials we put out and it shows the returns over the last five years, and it shows our target. We have exceeded the return of 12% growth over the last five years. It’s very possible that if the business turns out the way we believe it will and we hope it will, it will exceed those.

Having said that, we hate to put targets out that we won’t achieve. And those numbers over a very long duration period are probably the appropriate numbers for a corporation of this type. It’s possible that we are in a unique period of time where you can earn higher than what you’d normally earn and therefore, that return should be better. But, I guess we’d rather have conservative numbers out there and make sure that we don’t try to reach for higher returns and take higher risks.

George Denninghoff - Vista Research and Management

My next question is on the private equity portion of your business. With the amount of issues going on with the credit crunch and those types of things, are you guys expecting to get the same multiples or you having to adjust your multiples for your potential exits? Or have the dislocations in the market actually made up for those, the credit issues?

Bruce Flatt

Well, on the exit side, we don’t really operate a private equity business like a traditional private equity business, so we don’t sell a lot of things. The only place where we really have that is in our restructuring fund. And, it’s very possible that if you were trying to sell one of the investments that we have in our restructuring fund, which we are not today, but you might get a different exit multiple than you had before.

I’d say probably more important to the company is that as we are acquiring things, we were competing against people that had private equity money or were funded with financing which was private equity type-related, high leverage financing and that always pushed our multiples up. And therefore, it should be easier for us to achieve our long term return on investment goals in an environment where that capital isn’t available to others.

George Denninghoff - Vista Research and Management

And then on the spin-off of BIP, my question is would that be in a limited partnership? And the tax legislation still pending in Congress, are you seeing that going to have potential adverse effects on the profitability of that particular company?

Brian Lawson

No, we don’t expect that. That legislation is large part driven towards how carried interests are taxed. Brookfield Infrastructure Partners is an owner and operator of businesses, it’s an investor in those businesses, it does not have carried interest in it and so it would not be affected by that.

Operator

Our next question comes from Michael Goldberg of Desjardins Securities.

Michael Goldberg - Desjardins Securities

Do you see telecommunications as one of the infrastructure areas of interest to you? And if so are there any particular opportunities that you see now that you would care to discuss?

Bruce Flatt

The short answer is no, Michael.

Operator

Our next question comes from Chris Haley - Wachovia.

Chris Haley - Wachovia

Is there any update to the submissions that you made in Ontario for additional capacity expansion on the power side?

Bruce Flatt

I am not sure I can answer you, not because I don’t want to but I don’t know where the submissions are, Chris. I don’t think there is any change in the stature as to it has been over the last six months and I think they’re just still moving through the process.

Chris Haley - Wachovia

Just to follow-up related to that, when you think about your aggregate capacity, could you maybe provide a little bit of forward thoughts on additional expansion plans over the next, say, two to three years, how that portfolio for specifically hydro might look exclusive of wind activity?

Bruce Flatt

You are asking where we will go or how we think many more assets we would buy or?

Chris Haley - Wachovia

Not on the buy side, Bruce, but more so on the development side, with the net capacity expansions.

Bruce Flatt

Yes. On the development side of hydro, it’s difficult in North America. There is not very many sites and it’s not an easy thing to do and they take long periods of time. We actually have looked at a few things in British Columbia that are doing greenfield development in hydro. But we have nothing to report at this point in time in that regard.

Where we are doing, development is in Brazil. And we’re very positive on Brazil as a country to own hydro in and we continue to bring projects on. Construction and development, I think we have five under construction today and we’ll bring a few more on. We have a pipeline. We just keep bringing them on with our construction teams. And, so we’ll continue to do that.

Operator

Our next question comes from Michael Smith - National Bank Financial.

Michael Smith - National Bank Financial

I just wanted to circle back to raising funds. I would imagine that there is a lot of demand for restructuring funds and I wonder if you could just comment on that the demand for restructuring funds versus the demand for your core renewable power property infrastructure type funds, over the next year?

Bruce Flatt

We hope there is demand for all of our funds, Michael. I think every institutional investor has different groups. Each one of them identifies different products that they want to invest in and some of it comes down to where they have investments in currently and where they want to go with the risk-reward profile of their funds. So, every single one is different.

There is no doubt that, I guess, in my belief that on a global basis institutional managers, us being one of them, who have capabilities to put assets to work in a restructuring environment and can credibly show that to investors, will have an advantage in this period to raise further capital to put the work in that capacity. And we hope to be one of those in the marketplace.

Michael Smith - National Bank Financial

So when you were speaking earlier about, you were somewhat optimistic, I guess, that you are working on a number of funds and they will go through, then it will across strategies. Am I correct to assume that?

Bruce Flatt

We have many funds out in the marketplace which I would love to tell you about all of them and which ones they are, but we are prohibited from doing that.

Operator

Gentlemen, there are no further questions at this time.

Robert J. Harding

Thank you very much, and thank you for joining us this morning and we look forward to speaking to you again when we release our first quarter of 2008. Have a great weekend.

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