BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2004 Q3 法說會逐字稿

Please be advised that this conference is being recorded. Good afternoon, and welcome to the Brascan Corporation third-quarter conference call for November 4, 2004. Your host for today will be Bob Harding, Chairman. Mr. Harding, please go ahead.

Thank you very much, Kathy, and welcome, everyone. And thank you for joining us for Brascan's third-quarter conference call.

Joining me this afternoon is Bruce Flatt, our President and Chief Executive Officer, who will cover our current activities, and Brian Lawson, our Chief Financial Officer, who will talk about our financial results for the quarter. Also with us is Katherine Vyse, our Senior Vice President of Investor Relations and Communications.

Following the remarks, as usual, we'd be pleased to answer any questions you may have. I will just comment, though, Bruce will provide an update on Noranda during his remarks. However, as you will appreciate given the nature of this transaction, beyond his formal remarks he will not be able to get very much into any further details on the transaction, and therefore, will be somewhat limited in terms of his ability to respond to your questions on this particular topic.

Now, I would like to turn the call over to Brian Lawson. Brian?

Thanks, Bob. I will begin with an overall review of our financial results and then discuss some of the highlights within our operations.

We reported cash flow from operations for the third quarter of $203 million, up from $138 million in the same quarter last year. Net income was similar -- $192 million, up from $100 million last year.

This substantial increase was due to a number of factors. Cash flow from our power generating operations nearly doubled. We recognized a substantial gain on the sale of our 15 percent of our investment in Norbord, and we recorded higher earnings from our resource investments. And we believe we are well-positioned to achieve continued strong performance in the fourth quarter.

Just before I review our results in more detail, I would like to confirm that we declared our regular quarterly dividend of 14 cents per share, payable on February 28, 2005 to shareholders of record on February 1.

Turning to our real estate operations, our commercial property operations continued to meet their financial target and have achieved good leasing results. We are seeing increased leasing activity in all of our key markets, and to that end, we leased 800,000 square feet of space during the quarter, representing -- bringing the total for the year to date to 2.4 million square feet. And this represents 4 times our scheduled lease expirees. We remain well-leased, with 96 percent occupancy in our key markets. And so we are confident of continued strong returns from these operations.

We continue to have strong demand for homes in our principal residential markets, California, Virginia, and Alberta. Net new orders are up 8 percent over last year. And we expect to have a backlog at year-end representing approximately 30 percent of next year's projected closings.

Results from the prior quarter included $18 million of income on the sale of residential development properties. And although we have completed no such sales thus far this year, we continue to pursue opportunities of this nature.

Brascan Real Estate Advisory Group continued to expand their operations and completed a number of major assignments during the quarter. Mandates (ph) thus far exceed $1 billion.

Our power generation results of the quarter were nearly double those of the same quarter last year, and year-to-date, represented an increase of 85 percent. The substantial growth year-to-date is due to improved conditions over the poor water conditions in the first half of last year as well as the impact of acquisition and development projects and other revenue enhancement activities. Generation during the quarter was equivalent to the expected long-term average and in line with our expectations.

Brascan completed the purchase of the $900 million New York generation portfolio, which will contribute to cash flows in the fourth quarter. We continue to work on securing long-term power sale agreements to ensure that a significant portion of our power sales are secured for extended periods with creditworthy counterparties. Currently, 70 percent of our projected revenues are subject to long-term arrangements. And at the same time, the flexibility of our generation, including the ability to store water to provide generation during peak pricing periods, enables us to achieve strong prices from noncontracted power.

Turning to our funds management operations, they did not show much in the way of growth over the same period last year, which also included a higher amount of fees and gains. However, there has been a considerable increase in activity that is leading to improved results. Our Bridge Lending Group generated over $500 million of new commitments in the quarter, including a $250 million loan facility to Atlas Cold Storage to enable that industrial cold storage company to refinance existing debt.

And our Restructuring Fund assisted Western Forest Products to emerge from court protection, realizing a significant gain on capital provided during the process and retaining significant upside through a continuing equity interest. The Restructuring Group advanced additional capital during the quarter which will lead to increased returns in the future. And our Real Estate Finance Fund continues to deploy the $600 million raised earlier this year.

Now turning to our investments. As Bob mentioned, Bruce will speak to our investments in Noranda in a few minutes, so I will limit my comments to the impact of the Norbord monetization on our financial results during the quarter.

As I think many of you know, during the quarter we did monetize roughly half of our investment in Norbord in 2 transactions. We sold 10 million shares by way of a public distribution, and issued debentures that are exchangeable into a further 20 million shares. As a result, we received total cash proceeds of approximately $300 million.

The sale of the 10 million shares resulted in a gain of $63 million (ph), roughly $52 million after taxes. And the issuance of the exchangable debentures does not give rise to any disposition gains, but will at such time as the exchange occurs.

We also received approximately $50 million by way of a special dividend, bringing total cash receipts from our Norbord investments to over $350 million during the quarter. However, we did not include the special dividend in our reported cash flow from operations.

In addition to the Norbord gain, we reported $86 million in earnings from Noranda and Norbord up from $31 million for the same quarter last year. Strong base metal prices and above average panel board prices continued to drive strong results from these operations.

And with respect to our capital, we continue to be in a very strong liquidity position, with $2 billion of current financial capacity and annual free cash flow in excess of $700 million. And we look to increase this liquidity even further.

I will now turn the call over to Bruce, who will bring you up-to-date on recent developments, as well as how we plan to deploy our substantial liquidity.

Good afternoon. I guess the 4 things -- and Brian mentioned a couple of them, but -- I plan on dealing with this afternoon -- firstly are just some acquisitions, putting money to work. Secondly, talk a little bit about the financings done in the quarter. Third, I will make a few comments on Noranda. And lastly, I will talk about just reinvestment of capital within the business.

On the acquisition side, I guess the biggest thing was we closed the acquisition that we had reported before -- a $900 million acquisition of power plants in upstate New York, which is 14 river systems at 71 plants. And it takes our installed capacity to approximately 2,600 megawatts, and now spreads us across 35 river systems, which is important for the diversification of the watersheds, and should ensure we have more stable cash flows in the future.

In addition, we should be able to operate these plants in conjunction with our other facilities in the same areas of New England, Ontario, and Québec. And that should give us more increased ability to generate higher cash flows over the longer-term. Starting off next year -- and we will have the results in the fourth quarter of this year -- but starting off next year on an annualized basis we expect the cash flows to be about $90 million, assuming average water levels.

On the real estate side, we continue to build our presence in our core markets, which -- just so everyone knows, is New York, Boston, Washington, San Francisco, London, Toronto and Calgary. And we continue to believe that these are good supply/demand markets. And over the longer-term, we want to increased our presence in those markets.

Particularly in Washington, we were successful in acquiring another property, which brings our presence there to 3 properties, 1.5 million square feet. And we added this quarter another property in Washington. So I guess it's really a focused strategy on office properties.

In that regard, we did put $70 million out into mezzanine tranches of a financing facility for the Banc of America Tower in San Francisco, which is clearly one of the finest office properties in the city, and we'll earn a current return on that mezzanine loan that we put in our business.

On the financing side, we did a number of things -- probably not our most active quarter, but quite active. We completed $500 million bridge financing on the New York power assets. It was a short-term financing. But as we put longer-term contracts, as Brian mentioned, on the assets over the next 18 months, we will probably go and fix that financing on non-recourse fixed-rate financing for the longer-term.

We completed a $300 million collateralized debt obligation issue with a number of institutional investors. And we kept the junior tranche unit of $32 million, and we will earn a significant return on that paper. And these are more mortgages that we had underwritten in our mezzanine fund. We completed about $300 million of nonrecourse property and financings and 1 preferred share financing in our commercial property business. And we did put a facility on our 1 gas plant that we own in northern Ontario on a 5-year basis which will get paid off out of gas sales and electricity generated. So it was a pretty good quarter, and with rates down, we still believe it's a good time to be fixing long-term financings.

Specifically, with respect to Noranda, as most of the people on the call know, Noranda has been in the process of working with China Minmetals regarding a proposal by China Minmetals to acquire 100 percent of Noranda. As indicated by Noranda this morning, the negotiations are continuing. And Noranda executives have made a number of comments on their conference call last week, which were widely reported. Derek Pannell has commented he expects the transaction to close in early 2005, although there could be no assurance that a deal will close.

The positive underlying news is that Noranda, both financially and operationally, as will have been seen in the last quarterly results, is doing extremely well. Prices for copper and nickel and high. Supplies are tight. Inventories are low. Demand is strong. And operationally, the company is doing quite well.

We do believe that we may be in a sustained upward movement for commodities, as we have said over the last -- probably 18 months. And we believe that may continue for a number of years. For us, while we believe these comments, the assets in Noranda don't match the characteristic of the type of assets which we want to have in the company. And as a result, we have been and continue to be supportive of the process at Noranda.

Lastly, I will just say that we've had some questions on 2 references in the press release that we put out this morning. We referred to U.S. $1.7 billion, and nearly U.S. $2 billion of cash proceeds with respect to Noranda in our press release. For Brascan, this is meant to really be a general indication of the net cash proceeds we expect to receive after tax and other items if the transaction closed.

I should also remind people that the original Noranda release indicated that consideration would be largely in the form of cash, but would also include the distribution to shareholders of other assets, primarily Noranda's aluminum business. The figure in our press release does not include the value of this noncash consideration. And in addition, and I guess I would say this number in our press release is only meant to indicate to Brascan shareholders, not other Noranda shareholders, an approximate figure so people will know the amount of cash that we approximately will have to reinvest for the future.

For an indication of the overall value for the Noranda transaction, Noranda shareholders should refer to the September 24 and November 4 Noranda press releases, which states that the proposal will be at a small premium to the recent trading level of Noranda common shares at that time.

Lastly, on the reinvestment of our cash balances within Noranda, which as Brian mentioned probably will head towards $4 billion, should that transaction with Noranda close -- we do believe we will be able to prudently put the capital to work in our cooperations, and continuing to build out the asset management platform. As we invest the capital back into our operations, repurchase common shares, increase dividends to shareholders over time, and expand our asset management platform, we will always ensure we remain vigilant to invest the capital that we have been entrusted with wisely.

Lastly, I guess, I would just say that in the short-term we look forward to being able to bring clarity to our investment in Noranda. And over the longer-term, we will continue to ensure that we build shareholder value in the company on a per-share basis.

And I guess, lastly, we thank everyone for joining us today. I will turn it back to the operator with that, and if there are any questions that we can answer for people, we would be happy to do that. Operator?

(OPERATOR INSTRUCTIONS) Andrew Kuske.

Bruce, if I could just get a bit of clarity as to some of your last comments as they relate to Noranda. You made the comment -- just paraphrasing you at this stage -- the amounts that appear in the Brascan press release were just a general indication of the amount that Brascan should expect to receive. And the total consideration is largely in the form of cash. You will have the stub component for the aluminum interest that you'll have, still. And 1.7 billion is after tax?

Yes, Andrew; that is correct.

And that 1.7 billion after-tax -- what tax rate are you applying to this, because you do have considerable tax loss of this out of (ph) Brascan.

I guess, Andrew, at this point in time, all we were trying to do is give an indication of approximate proceeds for Brascan to be reinvested and -- so we just used a figure when we did that. But I don't think we want to get into today talking about specific tax rates.

Okay. And then the statement that came out from Noranda earlier on today -- just that they still expect to see a modest premium to the trading price of the stock at, I believe, is the 24th of September. That's the perspective from which you have worked the numbers?

That is correct.

If I could just drill into a couple of specifics. I believe, if I'm correct on this one, that as far as the valuation of your commercial real estate operations for your underlying value calculation, you've actually lowered the cap rate from 740 bp's down 40 bp's to 7 percent on the cap rate. And if you could just sort of walk-through the logic on that?

In fact, what was done -- and Brian may mention this afterwards; I'll just make a couple of broad comments up front. What we tried to do in the information we put in our supplemental report is to give people an indication of where values are. And we didn't necessarily change the value significantly. We did on the commercial side reduce it from 7.4, which we used for the last couple of quarters, to 7 percent.

Clearly, in the marketplace there are properties of the quality that we own trading at between 5.75 and 7 percent. And I would say that you could pick anyone of those numbers, and whether you wanted to be aggressive or conservative in your valuation, you would pick in that range. Obviously, there's probably some that might pick 7.4. We just decided to use 7 percent to reflect that there clearly has been a compression of cap rates over the past six months, but let people use their own metrics when they want to look at the valuations.

And then aside from the transaction with the Potomac building, the fact that you have done the mezzanine financing in San Francisco -- is that more of an indication that you see the market on the commercial side as being pretty fairly valued and fully valued?

I would make the comment that we, in fact, over the past 36 months have seen cap rates continue to compress. And it's possible in a low interest rate environment, and if we're going to continue in that low interest rate environment, our view is that cap rates will continue to go down, and therefore property values will continue to go up.

Our view is that there are some properties that we will participate and buy. There are some places that it makes no sense for us to go to those values. And we view it that in that situation, if it makes sense, we'll put in his mezzanine money into some properties and otherwise we just will wait it out. And I guess we have continued to do all of those things over the last number of years.

If then if I may ask just one final question. If you have $4 billion of liquidity coming in on an on unlevered basis, over what time frame do you expect to redeploy that?

I guess, the last thing we would want to do is ever be in a rush to deploy it, because usually when companies do that, they make more mistakes that they otherwise would if they did it over the longer-term. So we don't really want to speculate as to how fast we could put that to work. I suspect if we're lucky, we could put it to work very quickly.

We have put together some sort of financial metrics of deploying it over a 5-year period afterwards, and think that we can do very well and grow the business quite prudently over a 5-year period if we put the money to work over that period. But obviously, it may be put to work much quicker than that.

Neil Downey.

Perhaps a question for Brian, or maybe for Bruce. Just focusing in on the operating cash flow for a moment. Can you talk about -- sort of philosophically, I guess, how you decide to either include or exclude an item from cash flow?

For instance, we know that the regular dividends from Noranda and Norbord, etc., are included in your operating cash flow. I believe you did specifically state that the special dividend from Norbord was excluded. But of course, we do, on the other hand, have the gain on sale included in cash flow. So could you just perhaps clarify a little bit as to how we decide which items are included versus excluded?

Sure, I will take a few moments to talk about that. Neil and Bruce may add something to it.

What we are really trying to do with our operating cash flow is to provide shareholders with a good sense of the cash generated by the business. And with respect to items such as special dividends, that is an element where there was a special cash distribution made. We have made a point of including the regular ongoing dividends in business, because frankly, that is one of the cash flow metrics that we could point to as recurring over a period of time irrespective of some of the volatility in earnings underlying those businesses.

I would say, as a technical point, you would not included a special dividend of that nature in your earnings calculation, either. It would be eliminated for that purpose, as was the case with the special dividend we received from Brookfield Homes earlier that year.

Whereas disposition gains -- again, as you'll know, we do highlight those gains within our reporting. But those are gains that we recognize both from a cash flow perspective as well as from an earnings perspective. And I think we have shown a track record of generating those gains. And although we do make the observation that they are somewhat difficult to predict, we do have a good history of generating gains of that nature on a pretty regular basis.

Okay. Just following up with respect to Norbord, we now have these exchangeable debentures in place. Presumably, there is going to be a GAAP net earnings impact going forward because there will be a requirement to mark those to market. Is that correct?

That is correct, Neil.

Okay. The interest expense on these exchangeable presumably will flow directly through the interest expense line in your income statement?

That is correct, as well.

And is that where effectively the marked-to-market is going to be, as well? Or how do we look at that?

The marked-to-market we wouldn't be running through our interest expense. That will tend to show up more in investments and other income.

And the mark-to-market will not affect your cash flows. Correct?

Actually, something like that we probably would run through our cash flow. But we would back it out in our reconciliation.

Jeremy Coleman (ph).

Good afternoon and congratulations on the results. Looking for clarity on Noranda. With regards to the announcement made by Noranda in September regarding the small premium to recent market trading levels, as you are well aware, there has been a significant divergence in the trading prices of Noranda on the Toronto exchange versus New York, reflecting currency changes.

Should one interpret the comment that was made to have been made with regards to the Canadian or with regards to the U.S. dollar trading levels of Noranda?

In fact, Jeremy, I can't answer that question, because it wasn't disclosed in Noranda's information. And therefore, it's going to have to be just left as a piece of information that investors in Noranda, I guess, will have to wait for until the Company clarifies it.

I can -- probably at the time, if Noranda would have known that the Canadian dollar was going to diverge like that, it might have been disclosed at the time. But it wasn't, and you'll have to wait just for that. I can't answer that question, unfortunately.

Horst Hueniken.

I have 2 questions. In your supplementary information, you disclosed that the rate of share repurchases has slowed to 800,000 for the 9-month period ending September 2004. This is down from 6.9 million for the previous full year. Why have you chosen to reduce your share repurchases when we know that Brascan has cash?

We have actually not been in the position to acquire shares under the issuer bid (ph) for some time now, because we have been blacked out as a result of the Noranda events.

Fair enough. That explains that.

Second question, our discussions with OPG suggests there are few opportunities to acquire power generating assets in Ontario. Given this is the case, in what provinces and states are you now looking in order to meet your goal of adding to your existing power generation and distribution assets?

Horst, I guess the 3 places that we have spent the last 5 years, or invested time in really the last 5 years, I guess, has been in Canada -- either in the West, in B.C., where we have done a little bit; in Ontario, where I guess we're hopeful over the longer-term we will be able to buy more assets from either companies that own facilities here or from OPG as they sort their affairs out over the longer-term.

A third being (ph) in Canada -- there are a number of still resource companies that own hydro assets, which we believe at the end of the day, we will be able to buy assets from, like we have in the past. So we continue to work with a number of parties like that. And while this is not an enormous industry, those acquisitions could be meaningful to us.

In the U.S., we focus largely on the Northeast for 2 reasons -- 1, because it fits into our integration of our facilities that are in Northeast Canada. And secondly, because we -- there are a lot of facilities in that region. And we continue to talk to both other owners -- larger power companies in the U.S. that have hydro assets which are small relative to their large scale, but could be meaningful to us, and other owners of assets that are out there.

And then we also -- I guess the fifth place probably is just assets in other spots in the United States where we don't necessarily have integrating capacity, but we could start to build a presence. And that could be the Northwest of the U.S. or other places, and we continue to look at deals in a number of places.

Great; that's good insight. Thank you very much.

Terrance Oreson (ph). Please go ahead; your line is open, Mr. Oreson. Rossa O'Reilly.

After the Noranda transaction closes, assuming it closes, what will be the available tax loss position in Brascan with respect to operating and capital losses?

Rossa, we have not disclosed anything of that nature to date. And I guess until the transaction is finalized and announced, we really aren't in a position to comment on that.

Looking at the possible areas for redeploying the 4 billion of financial capacity -- hydroelectric power, real estate, or asset management, is there a sense of which are more likely to be the direction to which the capital will go? In real estate, of course, I guess that's an industry that can absorb huge amounts of capital. But the cap rates that we see for the sorts of quality of asset that you typically invest in are so historically low at the moment, should we be tending not to think that real estate will be the area that's high on the list?

I would say a couple of things. I guess usually when we answer this question, we are normally wrong. So we end up doing something different.

But I guess -- and maybe I would step back and say what we're trying to own in this company is low-risk type assets which we can put contracts, generally contract in place, where we will produce meaningful cash every year. The assets won't consume all that cash. So we will get real free cash for shareholders each year. And in fact, the assets will also appreciate in value.

I guess 2 of the areas where we found that we could have groups of assets that met those characteristics were in the real estate area, largely our office property business, and in the power area, our hydroelectric business. And if we could continue to find assets in the markets which we like, we'll put the capital back into those areas.

Our asset management platform really wraps around those businesses and provides us the ability to do larger deals and other things, because we have institutional capital beside us. And we do not only larger things, but we can add to our returns by the capital -- the amount of what they pay us to manage their assets.

If there are other similar types of assets that we can find, and I guess the couple of things we have pointed out to people before are timber assets and other possible infrastructure type assets are possibilities, although we really haven't -- a, been able to find those groups of assets that fit into our strategy. And we haven't invested in them today. But we will continue to look at those.

But our preference is to keep doing what we know we can make money at and have in the past. And we'll have to see whether we can do that over the next number of years.

Looking beyond North America, are there international property markets that you're interested in -- other than, of course, London?

Yes, I guess we had identified London a long time ago as a market that met the characteristics that we liked for office property fundamentals. And over time, I suspect we'll put more capital into the London market if we can find assets which meet our profile. We're not rushing out to invest in a bunch of other foreign jurisdictions.

Having said that, there are other markets which we look at all the time. And if we can find assets in them and they meet the characteristics, we may invest in them. But we are certainly not rushing out to do that today.

Would new developments be a possible avenue?

Yes, although I would say we generally run this business as you know, Rossa, quite risk-averse. And our type of development we usually have done is more build-to-suit and developments with low risk and longer-term contracts already in place. So it will always form a part of our business. And we continued to develop assets on the real estate side and on the power side today. But it will be a small component of the business, and it will be additive to what we have.

Finally, if I may if you could provide us a snapshot of what is going on in Brazil, that would be very useful.

Just for investors, I'll make a couple of comments. Our business in Brazil is largely a real estate business, in which we have 3 areas, I guess, in the real estate side. A significant retail business -- shopping center business there. We develop condominiums for sale to residential customers. And we have rural land which we essentially run a development business on. And those 3 areas are probably 70 percent of the assets we have in Brazil. And in fact, the businesses are all operating well, and -- a number of years ago, the devaluation put interest rates up in the country. But they have continued to come down slowly over the past couple of years. And while they went through some tough times a couple of years ago, the country seems to be performing better today. And the sovereign debt rates for the country, which is sort of an indication of the health of the economy, have continued to compress over the last 18 to 24 months. So in general, our business is good, and we continued to operate there.

In those three areas, how are trends year-over-year -- in the retail condo (ph) and rural end?

We're probably about -- Brian may answer the specific question. But we disclosed the actual results of the Brazilian operation for real estate. Rossa, I think we're about bang-on where were last year; maybe a little bit up.

Pretty much so. We do actually provide a breakout of that on the commercial property side, Rossa, so that you can find -- and I think Bruce's comments are correct. We're pretty much on track of where we were last year and where we would expect to be over the course of the year. For the 3 months, we were around 5 million of NOI this year, 6 million of NOI last year.

Are the Brazilian operations really run in Brazil? Or is there a substantial amount of management time here in Toronto that's dedicated to that?

As you know, Rossa, we have had a team of people down there. We've been in the country for over 20 -- the company has been down there for 100 years. But our real estate people have been there -- the same people have been there for 25 years. We have a local management team. And just like every operation we have, we have oversight from people here. But it's run out of Rio.

I wondered if in the context of integrating it by division for reporting purposes, whether this meant that for management purposes, things were any different?

Well, I would say we clearly have a number of people that ensure that we bring best practices to the areas down there. And I think we benefit from that, bringing North American practices to some of the things they do down there. But we do have a local management team that runs the business, let's call it.

Michael Goldberg.

A couple of questions. First of all, I understand that you do monitor NOI in the power sector on a normalized basis and with a view to being able to distinguish between the growth in that normalized NOI because of increased capacity -- from the trend in hydrology, I'm wondering if you can tell us what your normalized power NOI would have been this quarter, last quarter, and last year in the third quarter.

I will start off and say I'm not sure we have those numbers specifically at hand, Michael. But I'm looking at Brian as he looks at his material.

I will give you one thing, Michael. First of all, in this quarter that just recently concluded, we were pretty much bang-on in terms of the generation that we expected to produce based on long-term averages. And we do provide a sense of where we were relative to the long-term hydrology in each of our quarters.

So if you went back into the same quarter last year, we were significantly below what the generation was -- certainly for the first half of the year. And that did go into the third quarter of last year, as well, although it did frankly start to pick up during that, and we had quite a strong fourth quarter last year, which you can -- we don't really break out to in terms of actual gigawatt-hours how many gigawatt-hours have been added on a long-term average basis through acquisition or development and in any given quarter. We do provide a bit of a reconciliation in terms of changes in NOI due to fluctuations in hydrology as opposed to variances in prices, as well as acquisitions during the period. And we provide that in our supplemental information.

But those variances are presented against the prior period comparison --

You know what, I think that those are actually good questions. And I think maybe next quarter, we should provide just a simple line that shows those three numbers so that you can refer to them. And we will actually put that into the information when we send it out. It's probably good information for everyone to have.

Helpful -- another question that I had. You recently put out an illustration of the potential impact of redeployment on your cash flow growth. And part of this illustration included an assumption of 8 percent growth in baseline cash flow.

I'm just wondering if you can talk about how you came up with the 8 percent assumption and what assumptions you would use if you were looking at this on a segmented basis between real estate, power, and fund management, keeping in mind that, again, we're talking about the baseline growth?

Michael, what we did in our corporate profile recently -- we had a lot of questions from investors as to where is the cash going to get reinvested, and what will you do with it?

So all we tried to do was articulate to all investors that there will be cash sitting on the balance sheet. It's earning 2 percent today. If you just took a mere assumption -- and anyone can take any other assumptions, and perform the arithmetical calculations differently. But we just took 2 assumptions and showed how it would work out if you used 8 percent on baseline cash flows, and then you reinvested cash at certain rates over the next 5 years and came out with what your growth on cash flows would be. And that's really what that schedule was meant to do.

Specifically to the 8 percent, it was really just so we could have an arithmetical calculation done. And we probably try to pick as conservative numbers as we can to ensure that we don't lead anyone to the wrong impression by using higher numbers. And that's why we picked 8 percent.

What we have said over the longer-term within the business is we're trying to build to grow the business at 12 to 15 percent. And that is our public statements. And I think we believe we can continue to do that within the company.

Okay, and I have one more question. A specific question with respect to fund management, if you could just refresh my memory.

Last year in the third quarter in the area that you call "other," you had $12 million of cash flow. I don't remember what the 12 million related to. So what was it?

And secondly, when you showed your NOI there being flat on a year-over-year basis, I don't think that it's conveying the message of the improvement in NOI taking place on the third-party management business that you have been growing. Would it be worthwhile to break that out in a little more detail?

Sure; I will address that, Michael. First of all, your first comment as to the 12 million of cash flow in the comparable quarter last year -- that arose from some gains and fees -- advisory fees, underwriting fees -- of that nature. We didn't have items that occurred of that nature this quarter. Those were not items that were specifically allocated to any particular fund activity. And as I ,said they simply didn't occur to the same extent this quarter.

In terms of your comment about reflecting the growth in the underlying NOI potential of the business, I would absolutely agree with you. And as I mentioned before, we have made substantial progress in building the operating base of this business. And the volumes have picked up significantly. And there was good activity during the quarter. And we have a very strong group of institutional co-investors with our business.

Now what you will see happen over time is the fee component of arising from this business will grow. There is a natural lag effect there. And also, some of the profit participations again will grow over time and begin to contribute much more meaningfully in the future. And I think your observation, similar to your earlier one, is a good one, in that that is an area at that we will put a bit more focus on in the future.

Just to follow-up on that -- in fact, if I look at the assets under management in those funds, it looks like they're about $3 billion in total currently, on which you generated about almost $20 million. What would you say would be your objective in relation to -- is there some number we could use in relation to assets under management of the cash flow that you would be hoping to generate based on the assets under management?

Sure -- well, there's really 2 parts to that question. One is the return on capital that we have invested in those funds ourselves. And that will vary on the nature of each fund. Our Restructuring Fund, our Real Estate Opportunity Fund -- we're looking for much higher returns, in the 20 percent plus area. The Bridge Fund is going to be a return of 10, 12, a little bit higher than..

The other side of that are the fees that we generate. And typically, you're talking about 100, 150 -- depends on the nature of the assets being managed, in terms of a base fee. And then on top of that, we would be earning performance and participation fees. Again, that will vary from fund to fund. But that's really were you should be expecting to see some significant growth over time. But it will vary with the amount of funds we have under management how they are deployed.

Shant Poladian.

Just wondering -- with respect to the cash taxes disclosed this quarter, which operating divisions are incurring those taxes?

Shant, that's almost entirely in our home building operations, Brookfield homes, which has just been, I think as you know, spectacularly profitable, and as a result, has begun to incur cash income taxes.

Are there any other divisions within the businesses that you would expect to start to see cash taxes coming out in the next few years?

Nothing of any consequence.

Okay. And lastly, just with respect to your ROE and unlevered return criterias, given that, I guess, a few months ago, the market had a different view about interest rates than it does today, has your view changed at all in terms of what you're willing to accept for these returns?

Shant, it's Bruce, and I guess I would say we operate, really, off of 2 metrics in all of our corporate development in our business unit activities. And we use unlevered returns, which lead us to a return on equity within the business. And I guess what we are attempting to do is to earn on fresh capital we put out over the longer-term on an IRR basis 20 percent ROE.

And depending upon the quality of the asset and the leverage that therefore can be put on it, that drives what to return on assets you require to drive that return. So in essence, we work back from a 20 percent return. And dependent upon the leverage we can put on nonrecourse fixed longer-term, that's what we buy assets on an unlevered basis at.

Just lastly, I remember seeing an article in the paper, I think they may have quoted you talking about looking at different 24-hour city markets. Are there other markets on the real estate side that you would look at?

That's a great question. And I guess we spend a lot of time looking and thinking about office markets which we would invest in. And I made some comments earlier on real estate, and I included the cities in there which we are invested in today, plus a couple of others.

In Washington, we were not invested in up until 18 months ago. And we finally started to invest in there. And over the longer-term, we'll probably invest more substantial amounts of capital, obviously depending on time, availability, and pricing.

We also include San Francisco in that list, where we don't have assets today. But an indication of our comfortability with the market is us being willing to put mezzanine capital into properties in that market.

Other than the markets that we're in today, which is Toronto, Calgary, Boston, New York, plus those 2 cities in North America, there isn't any other markets that we feel that we could put sizable amounts of capital into and meet our returns. If you have one to suggest to us, we would be happy to listen.

And outside of North America, I guess the one that clearly meets our characteristics is London. And we'll continue to put capital there. There are other places in the world that meets those characteristics. We just don't happen to have an operating platform or feel comfortable in putting capital in them today from our perspective.

Dexter Stewart (ph).

Gentlemen, first of all, I'd like to say thanks very much for an extremely impressive performance over the past several years for the stockholders. And I'd like you to comment on the buyback I thought you might have of the shares, and just confirm that that would be something that you would do after the close on Noranda.

And if you could make a comment about your valuation that appears in your supplemental (inaudible) shares, which I haven't seen (technical difficulty) comments that you would like to share with those issues

You know, sir, I caught the first one which was on share buybacks, but I was unclear as to what the second question was. So maybe you could just repeat the second question for me just so I have that first, and then I'll try to answer both of them.

If you can make any comment on the valuation calculation you would usually do on your capitalization rate for the share price, and any comments you might make on how you would be looking at the buyback once you are free to do that kind of thing again

I got it. On the share buybacks, as Brian said earlier, we have not been active this year in the share buyback, because we have been blacked out from buying shares back into the company for quite a while. Over the past 5 years, I guess, we have been consistent buyer of shares of the company, because we've just felt it was a good investment for the shareholders to do that.

Looking forward, I guess we continue to discuss all of these capital allocation decisions with our Board. And our Board has been supportive in past, and I believe will be supportive in future, basically, of share buybacks, because if you have a growing business and you know the assets which you have and the returns are getting better in the future, it's usually a very prudent thing to do to put capital to work in buying shares back.

So I guess I can't say whether we will or won't do buybacks. It will be dependent partly on where the share price is. But we are a strong believer in share buybacks and shrinking the base of shares that you have outstanding. So hopefully that answers the first question.

On the valuation metrics that are in the supplemental which we do every quarter, we just try to give people an indication of values from our own perspective. It's an arithmetical calculation. And anyone can re-perform the calculation with their own metrics.

What we do is put -- and what we did this quarter, specifically, and often we have talked about this to investors, but we put it in the materials, is we put a base group of assumptions that we used. And then we showed a number of other assumptions in there that -- similar assets are trading in the marketplace. And people can re-perform those calculations, should they wish to do it. But it's really just meant to on a current value basis, sitting here today for similar assets in the market, what would those trade at? And really doesn't look to the forward growth of cash flow within the business.

Mark Tibble (ph).

I was just wondering if you could talk a little bit more about the Canadian government's review of this transaction. There were discussions about the fact that they were going to review their own criteria. Is this something they may consider before reviewing the transaction, or do so afterwards?

I won't make too many comments. I guess the only thing I would say is that a special committee of Noranda was set up to look at what Noranda should do at company. We participated on the committee. And the special committee knew that the Investment Canada Act existed. There is a number of things that companies have to meet which really have a net benefit to Canada in a transaction for a foreign buyer to buy in the country. When the transaction was contemplated, and exclusivity was entered into, the special committee believed that the transaction could be completed. And that is the basis it went forward upon.

Obviously, the Canadian government and Investment Canada will review the transaction on those criteria. And we believe that, should the transaction come to that, and should a submission be made to Investment Canada, it would get approved.

Terrence Olson (ph).

Just on the power assets you acquired in New York state -- the Bridge loan is there because you had no time for fixing the terms -- sort of long-term financing? Was it a performance requirement, or you have a review on interest rates?

I guess I would say firstly, we usually buy assets. And it takes a while to just get contracts put in place, work the assets, get the marketing arrangements worked out, and operationally fix them up. Usually, it's not in the ideal time to do that when you've just purchased the assets. So we'll spend the next 18 months working on that and putting the assets into a situation where they can be financed very effectively for a long-term basis. So it really has no indication of our view as to whether we should go long or short on interest rates today. In fact, our view as a corporation is that we should match long-term assets with long-term financing.

Fair enough on that. There's other (ph) questions actually in Brazil that just triggers a thought -- 90 percent of the power in Brazil is hydro. And there are plenty of captive power plants for resource (ph) sector. What is wrong with the concept of getting involved in the power sector in Brazil?

It's a good question. And in fact, I said earlier to a question that about 60, 70 percent of our assets are in the real estate area. But we do have a small investment today which -- we started small in the power sector in Brazil. We own the 5 small hydroelectric facilities, just like we own here in North America. And we have started small because we just want to ensure that we understand the business before we do anything of a larger scale.

So we have about -- just under $100 million invested in the plants today. 3 of them we actually developed ourselves, and 2 we purchased. And it's about 100 megawatts of capacity. And I guess we continue to work out all of the details of operating in the power business down there. And should we think we can grow that effectively and prudently, we may increase that investment over time.

Fair enough. Last question to clarify on the recent letter sent by Noranda. The statement was -- the premium of late September has to be out (ph) of the deal. There are a bunch of outs in that letter in terms of what has to be approved, what has to be agreed upon. But just to emphasize -- that September period has to be part of the deal. Am I correct?

Sorry, I'm --

There a lot of outs in the letter in terms of approval by this government and financing requirements and all. But there is also the statement that the late September premium has to be there. So there is no negotiation on that for Noranda.

I guess the only thing I would say is the press release will be interpreted by different people. And I think it was relatively -- I guess, there's been different interpretations of what it means. I don't have their press release sitting specifically in front of me. And I probably don't want to get into speculating on what it says. But I guess I'm still missing the question.

Well, the Brascan agreement or Noranda agreement is subject -- it's inclusive of a small premium as of the end of September trading of Noranda shares. That will not change. That's what the question is (multiple speakers) --

I guess what the press release said was that exclusive negotiations were being undertaken, and they were on the basis that there was a small premium to that price at the time. And there were a number of approvals that could be required. And that no transaction could be guaranteed, and it may not go forward. And I guess that still stands today as it did on September 24.

So the 1.7 billion you have in your statement is on the basis of the small premium though, after the taxes?

The 1.7 to 2 billion and after taxes should not be interpreted, as I said earlier, for someone to figure out what they will receive from their Noranda shares. What it was meant to be is an indication of the value that we will have in the company, and cash in the company we will have to be able to redeploy. So people should not be extrapolating that to do anything else

All right -- so you can't work backwards.

Lawrence Smith. Mr. Smith, please go ahead. Paul Patrick.

I just wanted to ask a question on the power business. In your supplemental materials, you raised the average price and average cost. Now I assume some of that -- a large part of that is due to the New York acquisition. But I think there's other things behind it. You talked about variation and prices and operational improvements. If you could talk a little bit about what's going on in the power business and pricing and cost?

Why don't I start off, Paul, here with a couple of comments on the numbers in the supplemental?

You are correct. It has to do with the acquisition of the New York assets. And the prices there, we expect, are somewhat higher than in other areas of our operations, as well as some of the operating expenses are somewhat higher over there, as well. You will notice, though, that the spread and hence returns are similar. And so we obviously think it's quite a compelling acquisition from a return perspective.

So that is really -- that would be the principal factor between driving a higher revenue per unit value, as well as a higher cost per unit value.

As other matters (ph), I guess we continue to try to drive cost down in the operations, although the most significant cost is property taxes that we pay within the business. And that's a tough one to drive down.

And on the marketing side, we continue to try to put longer-term contracts in place and use the flex power that we have in our reservoirs to get the highest pricing available on peak periods. And we continue to operate that way. And this year has actually been quite a good year, given the water levels that we have had.

Michael Goldberg.

Just in looking through your supplemental on the traditional assets under management, funds management -- I noticed the addition this quarter of Brascan strategic asset management. What is that?

Michael, we have a group in New York that has been involved -- I guess it shows up on page 34 in the supplemental. They managed reinsurance assets that we have in Imagine, plus we have done a number of structured products that have been issued in the U.S. capital markets -- a couple, and we have a group of bond managers -- they're managing the bonds and other fixed-rate assets that we have on the balance sheet today with our excess cash. And over time, there may be other products we put in the U.S. market in this group. So they're essentially bond and other asset managers.

Is this primarily the asset management of Imagine?

It is for assets that are directly under the control of Imagine as well as they do provide us management services to other insurance companies. That would be one of their particular areas of expertise is on liability asset matching.

And over time, I guess we have separated that group out. And over time, we intend to broaden their mandate to have other institutional clients along with us as we give them capital with our excess cash.

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