BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2005 Q2 法說會逐字稿

Welcome to the Brascan Corporation second quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session.

I would now like to turn the call over to Bob Harding. Mr. Harding you may begin.

Thank you very much, Operator. Good afternoon, everyone, and thank you for joining us for our second quarter conference call. With me today are Bruce Flatt, our President and Chief Executive Officer, Brian Lawson, Chief Financial Officer, Brian Davis, Sr. Vice President of Finance, and Katherine Vyse, Sr. Vice President of Investor Relations and Communications.

Today Brian Lawson will begin our presentation with a review of the second quarter financial results and will be followed by Bruce Flatt who will comment on the recent activities and some current initiatives. Following each of their remarks we'll open the call for questions and comments.

Just before turning the call over to Brian, I'd first like to caution our listeners that during the course of the presentations we may make certain statements that are forward looking in nature, and as such contain known and unknown risks and certainties and other factors which may cause the actual results of the Company to differ materially from anticipated future results. In addition the letter to shareholders and the Company's supplementary financial information for the 6 months ended June 30, 2005 which contain further information on the Company's strategy, operations and financial results are available on our website and I encourage listeners to refer to these documents also.

Brian Lawson will now review our financial results. Brian?

Thank you, Bob. I'll provide an overall review of our financial results and also discuss some of the highlights within our operations during the second quarter.

We reported net income for the quarter of $610 million, $2.26 per share, compared with $190 million for the same period last year. This included a gain of $448 million in respect of the reorganization and partial monetization of our investment in Falconbridge, which (indiscernible) taxes and other provisions. Cash flow from operations for the quarter, which includes the Falconbridge gain, totaled $229 million or $0.82 per share. This represents an increase of 28% over the similar quarter last year with each of our business units contributing to the growth. And we believe that our operations are well positioned to achieve continued growth in 2005.

Before reviewing our results in more detail, I would like to confirm that we declared our regular quarterly dividend of $0.15 per share payable on November 30, 2005 to shareholders of record on the first of that month.

So, turning to our property operations they contributed $264 million of net operating income during the quarter compared with $222 million in the same period last year. Commercial property NOI was up 6% quarter over quarter and residential property cash flow almost doubled reflecting the continued strength in our core markets. The commercial property operations continued to meet their financial targets and achieve good leasing results. We leased almost 1 million square feet during the quarter, bringing our occupancy rate to 94% across the entire portfolio and 95% within our core markets. We are benefiting from the additions to our portfolio in both Washington D.C. and London and will continue to look for other opportunities to expand our portfolio, particularly in these markets. The high quality of our portfolio has served us well in recent years, we remain well leased and so we are confidence of continued strong returns from these operations.

Our home building operations achieved continued strong results in the quarter as well, due to strong demand for new homes in our principal residential markets, California, Virginia, and Alberta. Demographic trends and favorable economic conditions continue to stimulate home purchases volumes and margins both increased over last year and there are no signs of abatement as yet. We currently have orders representing 100% of our projected 2005 closings, and we continued to reduce our own lot inventory in favor of option lots in order to crystallize the appreciation in value and to reduce risk.

Power generation contributed $122 million during the quarter. The substantial growth over last year is due principally to the impact of acquisition and development projects. Generation during the quarter was modestly below the expected long-term average although this was partially offset by improved pricing. The benefits of our continued diversification across different river systems and watersheds was reflected in the current quarter. As lower water levels in northern Ontario were offset in part by better conditions in New England and Quebec. The New York operations acquired last year continue to perform very well and are contributing at a higher level than originally projected due to higher pricing. We -- we closed on a further 9 hydroelectric facilities during the quarter, located in Pennsylvania, Maryland and Brazil, which brings our total capacity to 3300 megawatts.

We continue to secure long term power sale agreements to insure that a significant portion of our power sales are secured for extended periods with credit (indiscernible) counter parties. And, at the same time the flexibility and low cost profile of our generations, including the ability to store water to provide generation during peak pricing periods, enables us to achieve strong prices from non-contracted power. Water levels at quarter end were consistent with long-term averages, which was positive for the balance of the year.

Turning to funds management. We continue to make progress in these operations, assets under management increased significantly during the quarter, and we deployed more of our own capital in this area as well. Operating cash flows increased from $81 million to $148 million on a quarter over quarter basis, due to a higher level of invested capital, investment gains and a special dividend from Norbord. We completed the acquisition of Hyperion Asset Management during the quarter, increasing our traditional assets under management by $14 billion and this also expands our presence within US institutional investors.

We completed the acquisition of $775 million in private timberlands in partnership with two major institutional investors to establish the Island Timber Fund. And while the outcome is not known at this time we also formed a partnership with institutional investors to acquire O&Y Properties in O&Y Reef (indiscernible) major Canadian office building portfolio. Our bridge and restructuring funds continue to be active, both in surfacing value from existing investments, as well as pursuing new opportunities, and we also hope to launch several new funds shortly which will further expand our assets under management and increase our fee(ph) revenues.

The merger of Falconbridge and Noranda was completed during the period, which resulted in the repurchase of 48 million common shares from us, in exchange for 950 million of retractable preferred shares. In the process our interest in Falconbridge declined from 42% to 20% and we recorded a gain of $565 million in a growth basis. Falconbridge has announced a redemption of a portion of the preferred shares later this month, which will result in proceeds to us of approximately $400 million. Following these transactions, our remaining investment will consist of approximately $550 million in preferred shares, and 75 million common shares with a current book value of $943 million and a market value of approximately $1.6 billion.

Falconbridge contributed an additional $55 million to net income representing a pro rata share of their earnings as that company continues to benefit from strong metal prices and increased production volumes, and Bruce will comment further on Falconbridge following my remarks.

Our investment in Norbord contributed a $27 million special dividend to cash flow during the quarter and our pro rata share of their net income, which is what is reflected in our own net income of $21 million. That's down from the same quarter last year, which was particularly strong, and also reflected a reduction in our ownership interest. Noranda does continue, though, to benefit from high OFB prices and is reporting very strong results.

Interest and other expenses increased during the quarter, this reflected interest on debt secured by assets acquired since the second quarter of last year, as well as our continued shift to fix rates, which is higher than floating rates but more stable over the long term. We did incur a reevaluation charge in the current quarter of roughly $50 million net of tax in respect to long term fixed interest rate contracts that are in place to hedge the value of our interest rate sensitive assets, and Bruce will speak to this strategy in his remarks.

On the capital side, we continue to bolster our liquidity in capital position during the quarter. We completed a 30-year debt issue with coupon of 5.95% and are in the process of completing long term asset financing for our recently acquired timberlands and the New York power assets, which were acquired late last year. We remain in a very strong liquidity position, with $2 billion of current financial capacity, and annual free cash flow in excess of $800 million. This means we are well positioned to capitalize beyond the opportunities to expand our business base.

I will now turn the call over to Bruce who will bring you up to date on recent developments in some of the more important trends we see occuring in our business.

Good afternoon, I'll speak just on four brief items this afternoon. The first is Falconbridge. As Brian reported, a number of major milestones were achieved with respect to our investment in Falconbridge during the quarter. First, the merger was completed. Second, the issuer bid closed, and third, the new company was relaunched under the name of Falconbridge. We tendered approximately 40% of our common shares to facilitate the merger, this allowed us to monetize approximately $1 billion of capital, as Brian mentioned.

At this point in time we're very comfortable holding our remaining 20% position as the combined company has three fundamentals working for it. The first is prices. Prices are outstanding. Copper is over $1.70, that compares, I guess, to it's low around $0.65. Nickel is around $6.50, zinc is close to $0.60, and aluminum is near $0.85. These are generally 15-year highs and despite being highs in the last 15 years, in real terms compared to historical numbers, they are actually in the mid-range. New supply is largely non-existent, at least in the near in term, possibly in the medium term. Longer term projects are becoming harder to build, costlier to build and in more remote areas.

On the demand side, GEP(ph) growth is strong, virtually across the world, I guess with the exception of Europe. Inventories are exceptionally low in most of these commodities, Chinese demand is very strong, and barring a disruption in that demand, we see no price reductions in the short-term, and in fact possible further increases, particularly in copper and zinc. As a result of the earnings, or the E in the PE, should be strong for Falconbridge.

Second, with the merger just complete, results are now being reported from the strong prices. We believe that the events of the past year may have generally held Falconbridge back when compared to their peers, and as a result the Falconbridge multiples should trend to the peers over time. This could mean significant multiple expansion if this does occur.

Third there are an only a few companies of this scale and quality of Falconbridge based on -- with base metals, and as more investors decide to participate in the market to take advantage of these fundamentals, Falconbridge should benefit.

With respect to financial results, Falconbridge's results were outstanding for the quarter. Cash balances on the balance sheet are high. Operating cash flows are significant. Cash balances are more than $1.5 billion at quarter end. At current prices, operating cash flows are running over $500 million a quarter or $2 billion annually.

Despite all of the positive news we've not changed our mind and therefore are not planning on remaining long term investors in the mining sector, hence, I would reiterate what we said before, we do not expect to be in the metals business 5 years from now, when and how that happens we'll obviously report it on to you sometime in the future. Having reduced our common share investment though by $1 billion, having participated in completing the merger, we are thoroughly enjoying the benefits of the great work that the management of Falconbridge has done for us and all shareholders of Falconbridge over the past year.

Second, I thought I would just speak on interest rates, which Brian mentioned, and I guess on interest rates, we believe that -- as a corporate policy that we should take advantage of the low interest rate environment to lock in as much long-term financing as we can. Obviously, this costs us in our short-term earnings and cash flows because we are paying on the long end of the interest rate curve. As opposed to LIBOR, although that has been getting smaller every day, and it also has the effect of introducing more quarterly volatility into our non-cash earnings because some of these instruments are mark to market. But it does continue to lower the risk in our business, locks in rates for 10, 20, and 30-year terms, and lowers the overall long term cost of capital for the Company, which we think is extremely attractive. Most of our properties are financed 10 to 20 years. We've been pushing our power plants -- most of our properties are financed 10 to 20 years. We've been pushing our power financing to 20 years. We're in the process of closing a 10, 20 and 30-year (indiscernible) financing on the timber assets we recently purchased, and we just issued another 30-year corporate bond this quarter.

Lastly, we purchased swaps to hedge our forward financing in the next year, and some of our asset values, as Brian mentioned. These are mark to market quarterly, and we did take a revaluation loss in the quarter, but subsequent to the quarter end, we've made virtually all of that back with interest rates trending upward on the long end.

These actions that I just mentioned should actually not be interpreted but we believe long rates are going to increase dramatically or quickly. In fact our view generally is that we're at the lower part of the interest rate cycle, and that we'll see higher long term bond rates as the LIBOR rates are pushed up. Despite our view that this could be up to 100-basis point, we don't believe that the 100 basis points has generally been placed into asset value yet. And therefore this should not effect dramatically the markets which we participate on the asset side.

Our actions, though, are rather indicative of how we run our business, that is to try to eliminate as much risk as we possibly can. Looking at -- to lock in a low cost of capital, and to not try to stretch for returns, which sometimes -- for excess returns -- which sometimes come, but are achieved with too much -- taking too much excess risk.

Third, on Olympia & York, there's not much else that I can say that probably hasn't been reported in the newspapers. Brookfield and it's group of investors has until month end to decide which route they will proceed with. It's too early to tell what they will do and they're reviewing their options as we -- as we speak.

Last, with respect to our operations, and I'll be very brief and then we'll take questions, but we continue to put money to work within a number of our operations that we have, property power, our infrastructure, and timber assets, as and when we find further transactions which we believe will achieve our cost of capital over the longer term and give us our -- our -- the goals that we're trying to build for the business. We continue to build out the operating businesses we have, and when it makes sense, add assets into those platforms. And, we're quite positive about the businesses, or operations that we have today and also the ability to grow them over time. On that note, I'll turn it back to the operator and if there are any questions from people this afternoon, we'd be happy to take them.

Thank you. Ladies and gentlemen, I would like to remind you this portion of the teleconference is also being recorded. [OPERATOR INSTRUCTIONS] Our first question comes from Andrew Kuske of UBS. Please state your question.

Thank you. Good afternoon. I'd just like to follow up on some of your comments on interest rates, Bruce, and in light of the loads we have seen in interest rates and what you have done recently on the timber side, what type of debt would you like to lock in on timber assets, and what do you see as the appropriate leverage level for that type of asset class?

On -- specifically with the assets we just purchased, and Brian may add something here, but we're putting approximately 45, 50% leverage on those assets. Part of that is predicated by what our co-investors want as leverage on the assets, but we think that's an appropriate level for right now. And as opposed to using floating rate financing, which is obviously cheaper, we're in the market, and we'll put on three traunches of financing, and it will be 10, 20, and 30-year terms on that financing. And I guess -- we just believe that interest rates may go lower. But, we're certainly at a cost of capital that we can achieve pretty attractive returns, in fact, better than we would have expected, given both treasury and the credit spread, and as a result of it, we think locking in long-term financing, you might be able to get a better rate some other time, but it's pretty good and therefore we're putting as much term as we can with into our structure.

On that specific asset class what do you see your target return on those assets from an investor perspective, and also from a Brascan perspective running a fund.

Andrew, it's Brian. What we're looking there to achieve on the actual asset is going to be somewhere around the 9, 10% level that we would be then when you take the leverage we'll put it up into the low teens. With -- we will be earning fees for managing the assets back at -- up closer to the -- in around mid-teens, and then one of the things we'll be looking for as well with that particular class given the appreciation we have seen over the past number of years, and it's pretty well documented, but if you experience a 2 to 3% growth in the returns for the assets that translates into basically double that on a leverage basis, and so we would see that working us up into a return that's the high teens, ideally in the 20% area.

That's great. And then just finally on this whole -- whole line of conversation. International paper recently announced a pretty significant transformation. To what extent are you interested in their assets, the timberland specifically, and have you had conversations with them?

Andrew, it's Bruce. We've had conversations with a number of companies that own timberlands. We are interested, and we have a number of partners who are interested in buying more timber assets. I won't get into specifics on any one specific deal, but we clearly -- if we can achieve the returns that we're looking for and our partners are looking for, we will buy more timber assets. And in the last 3 months, there's been a number of things that have happened in the industry that are probably positive to being able to acquire more assets, and -- and possibly even will depress the pricing of some of the assets out there, just because more assets will come on at one period of time. And we see that as a positive.

And then, if I may just ask one final question. Is this the area you would like to allocate the most capital, given real estate valuations and valuations on the power side?

I guess I'd answer that question. Every deal is unique in itself, Andrew, and if we can find timber asset transactions that meet our returns, that's where the money will go. I suspect we still will be able to find power assets which meet our return thresholds and will keep putting money there, and in fact, even in this real estate environment, we're doing things which we're getting our returns out of. So, we're -- we'll keep putting money to areas where we can get our return thresholds and we don't do it if we can't. So I -- we never sort of pin ourselves down to targeting one specific area, but obviously some are more attractive at different points in time.

That's great. Thank you.

You're welcome. Our next question comes from Peter Sklar of BMO. Please state your question.

Good afternoon, a few questions here. One, Brian, just counting, I noticed that in your disclosure that -- the balance for property specific mortgages was up substantially about 600 million is that just the debt associated with acquisitions, in particular, I guess largely Washington?

Actually, the property specific mortgage, what you see there Peter, would have been on the timber side and on the property that we acquired in the UK.

The Canary Wharf property?

Yes. That's right.

We -- we -- when -- specifically we bought the one building there called 20 Candidate Square, which Brian just mentioned, we don't consolidate the debt of Canary Wharf, but this is on the one property we purchased.

Right I understand, on the Hydro acquisition, I believe in you disclosure you are saying that you, during the quarter you acquired 9 facilities which represents 730 megawatts, so, which one facility represented 610 megawatts, the implication then you have done eight smaller -- relatively small acquisitions. Is my arithmetic correct?

Yes, that is correct.

And so these -- these small acquisitions are quite small so my question is -- how do they -- how can these small acquisitions really be substantial enough to impact Brascan as a whole in terms of creating value? They -- they seem pretty small.

Maybe I'll try that Peter. In fact the big acquisition in the quarter that we closed was actually a pump storage facility. So it's a very low capacity usage, it only gets used parts of the time because you actually pump water up from down below up to the top and run it through. So it's like a big -- two big bathtubs that you run the water back and forth. And it acts like a battery almost. So it's a significant facility but very under utilized which gives you a lot of optionality especially in changing power markets. So, we think it's a very attractive asset.

On the specific deals, some of the deals we find are very small, and I guess our -- if we had a niche, an ability, which we think we're actually good at, which is in the five to seven markets which we operate, mostly in the northeast of North America, if anyone has a small, medium or large hydro plant we can pay them a very reasonable number for it, which can probably exceed what most others can't integrated into our systems, and earn a proper return and cost of capital off of it that probably most others can't, and therefore, we're using the best buyer for these assets, largely because we have a franchise that can take the assets.

And therefore, a 10 megawatt facility in itself may not mean anything to Brascan or us, but over the last 5 years we've been able to find 2500 megawatts, sometimes in a few of them in larger chunks, but a lot of them in 10s, 20s, 50s or 80s, and over time we've been able to integrate them and we've been effective at doing that. In essence our business is a small hydro business. Some of these assets we purchased in the quarter were down in Brazil and there are special incentives to run small hydros under 30 megawatts, and we get a very attractive returns out of those. And, therefore, that's our business. The bottom line is in each acquisition in their own is not meaningful to Brascan as over all, but over time we think it can be quite attractive, and it has been attractive.

Okay. And my last question is just, with respect to Hyperion, I believe it closed 435 million closed end funds during the quarter, and can you -- I'm trying to understand the economics and the implications for valuation on Brascan. Can you describe on this particular fund that they have closed what the free streams would be to -- to Brascan?

You know, I'm not sure -- I'm looking at Brian, but I'll maybe just start off and tell you what we actually did and then maybe we can try to answer your question, but we may not have the actual specifics, so we can maybe follow up with you once we talk to our guys. But, Hyperion is a manager of bonds and real estate products. And there's about 14 billion dollars in the system today, and we've added some in the last 3 months and believe we can keep increasing those assets.

One of the things that has happened in the United States is there is a market for externally managed mortgage reefs, which essentially, what we did was do a 144-A placement to private investors of which Brascan purchased 25 million, I believe, or 20 million of the actual 400+ million 144-A placement. Within -- probably by the end of the year we'll take that public as a mortgage reef in the United States. The -- our returns out of it will be obviously what -- just like every other investor what we earn on our $25 million of equity, but there's a management contract which is externally managed in place to give us returns off of the gross assets, which are in the trust, and a participation over a threshold return, which gives us the -- the extra returns if our -- if our -- if we exceed certain thresholds, and as a result of it, over time if we grow that vehicle it could be meaningful to us.

There are three others -- three or four others that are in existence. In fact KKR just took one public, and it has been very successful in the US capital markets. So it's the same structure as theirs. Which is actually trading today. So you can go have a look at it. And for us it's not -- again, just back to your hydro example, each one of these in themselves is not meaningful to Brascan, but as we build our franchise over time they can become very meaningful as they compound on each other.

Okay. That's all I have. Thank you.

You're welcome.

Our next question comes from Horst Hueniken of West Wind Partners. Please state your question.

Yes, thank you I have three questions. Two or Brian, one for Bruce. First a housekeeping question, Brian, you reported cash flow of 229 million, which you mentioned included the Falconbridge transaction. Can you tell us what the cash flow would have been out that transaction?

Sorry, Horst, that excluded.

Oh, excluded. Okay. Thank you. So that's clear. Secondly, you mentioned in our asset management business that part of the reason your cash flow went from 81 million to 148, which is an 83% increase, is because you have invested more capital in the business, the rest presumably from better operations and performance. Can you perhaps sort of break out how much of that increase was due to capital and how much due to other factors? Or -- or perhaps stated another way, how much more capital did you put to work?

I would say the biggest area where we put more capital work was on the timber side, and we did have a pretty significant increase in the contribution from the -- from the -- from the timber fund. In fact it was -- was around $50 million during -- during the quarter. And the Bridge Fund also contributed well during the quarter, roughly around 10 -- $10 million. So in terms of the increase in capital, I would say it was largely on the timber side. The Real Estate Opportunity Fund closed on some more acquisitions in and around probably the 80, $100 million net amount during the quarter as well. So that's -- those would be the big components on that side.

Okay. And then the rest is attributed to other factors in performance. Okay. That's -- that's clear there. My question for Bruce, relates to -- I guess O & Y, and there -- you were in a position where I thought you were going to acquire those assets, the shareholders didn't allow that to happen. Rikeman(ph) is now publicly saying that it's up to Brascan as to what happens next. What are you able to say at this juncture about what Brascan's position is?

In fact I'm not able to say anything. I think my -- I think I said earlier what -- in fact it's up to the Brookfield board what -- what we will do. Obviously, we have a participation on the board, and at this point in time, the agreements allows until August 31 to -- to decide what to do, and there's really -- we don't really have any other comments other than that.

Okay. That's --

Sorry, Horst, not to be more specific, but there obviously are a number of constituencies who will listen to whatever I say and interpret it some way so I would rather not get into it.

I understand. Thanks a lot and that's all for me.

Thank you.

Our next question comes from Michael Goldberg of Desjardins Securities . Please state your questions.

Thanks, good afternoon, everybody. I had a couple of questions about Hyperion, and maybe just, broadly speaking, I get the sense that you brought Hyperion not for the $14 billion of assets under management that -- that they have, but more for the relationships that -- that they have and the possibility that you may in the future be able to sell them higher margin assets under management. Is that a fair way of characterizing the objective with Hyperion?

I'd say all of that is true, Michael. I -- you should not -- we bought it partially because it had $14 billion of assets and earned a decent return on what we paid for it. The more exciting thing to us is that we were able to add in a very seasoned management team with relationship throughout the US markets with 100 institutional clients, which we believe we can assist them with our balance sheet and our history, and some of the things that we do on the alternative side, being our real estate activities and our power and our infrastructure, offer products to their clients so we can help them and they can help us manage and gather other assets.

So this was really not about the amount of money we paid for it or the return we got off front, it's about a 10-year strategy of how do we turn Brascan into a global asset manager, and it's moved us a lot further ahead by already managing money for 100 institutions as opposed to starting from scratch in the U.S. While we have been relatively successful in gathering assets up for our funds this did push us into a whole other places that would have taken us a lot more time to do otherwise.

Great. Given what you paid for Hyperion I also get the sense that the fee income that it currently generates is relatively low. Is this true?

Well, I think we bought it, and I think we mentioned the number before, we bought it for $50 million and we earned about $5 million on it, so it was a 10% return. That run rate in 2005 and certainly looking into 2006 is substantially higher, but again it's not a meaningful number yet to Brascan as a corporation.

Okay. How much asset management fee income was actually generated in Q2 overall by Brascan?

Well the -- the net fee income, just with respect to the funds management side of the business, Michael, was around $13 million net of expenses. $25 million year to date. Sort of around that 60 million annual run rate although it has been increasing.

And the one thing that we probably -- as we transform the Company, we have our fee income spread in different places, some of it is in our real estate business, some of it is in our power business, some in is our funds management. And we're looking at how we better articulate that to you so you can better understand those numbers.

One way that you -- at one time presented a way to value the fund management side of the business was the book value of your investments, plus a multiple of the fee income that you generate. Would you say that that's still a reasonable way of looking at the value of that business?

I would agree that Michael.

So, given the 100 relationships that you have in Hyperion, can you maybe do a little bit of blue sky and tell us what you think the potential is to increase distribution to Hyperion, and the potential to generate higher fee income, let's say looking out 2 or 3 years down the road?

Well, I guess I would say, Michael that our whole strategy is to transform this business into a global asset manager and part of the assets will be owned by us directly or in partnership with our pension fund and other clients, and as we do that, obviously our fees are going up. We think we can earn -- we can generate the returns we talked about in our annual reports and other things and a lot of that is about us, A, putting money to work in our businesses, but, B, increasing the fee income we generate off of these relationships.

Okay. I have another question, actually on the hydro side. I -- in any of the hydro assets that you acquired, is there potential to add storage capacity also?

The answer, in the most simplest form, is probably no. These are -- what we do have -- the good news is we have a very unique asset, which a lot of them have storage facilities, and therefore, we have the ability to store water, which most forms of electricity don't, and as a result of it we can pick and choose the times when we sell and therefore generate more per energy -- higher revenues per a unit of energy than anything else because we sell at those prices. The bad news -- and that's the good news. No one else can build these, and there isn't many other forms that you can get which have storage. The bad news is, it's very restrictive as to what you can build in -- because of environmental things and all -- all of the regulations on the storage side and also just on water -- power generation stations. So, the direct answer is probably not. Although, there are exceptions to that rule and we're always looking at that.

Okay. And I have one last question, also on the fund management side. I tried to do a segmentation of your FSO and when I do that, right now, I'm coming up with a fund management -- asset management contribution that's, like, triple any or more of any other quarter that you have ever had. Maybe I should speak to Brian off line after, but I'm just wondering if you can give some additional color as to what accounts for the -- this massive, massive increase in fund management FSO.

Yes, the -- there's no doubt we had good growth in that -- that area. How you come up with it -- anyway we could perhaps chat a little bit further about that. There were a couple of pretty significant things during the quarter, though I guess one in particular I'd point you to is we did receive a $27 million special dividend Norbord. That's included in there. So that might be one item. Anyway it may be easier if we chat about that later on.

Okay. Thanks a lot.

Thanks Michael.

Your next question comes from Rossa O'Reilly of CIBC World Markets.

Thanks very much. Just looking at the accounting net earnings, am I right in -- in calculating that from that 226 in the third quarter we should take out 163 to get about $0.63 if we wanted to remove the Falconbridge one time item?

Oh, gosh. Just trying to run that through my mind that seems a little --

(indiscernible) 448 million and divided it by the 274 million.

Yes, no, you're probably not too far off.

And then for last year, '71 in that would have been your share of half of the gain on the -- on the unusual leasing income in Brookfield, would it not?

That's correct.

I think that was 60 million so half would be 30. I'm just dividing 30 by 274 million. That suggests we should take $0.11 out for one-time items from last year so that would be 63 versus 60?

That's -- that's fair. You tax effects as well, but that's generally right.

Was there a tax effect on the -- on the -- on the net earnings basis relating to the -- the one-time leasing income that we should factor in?

Yes, there was, and I --

What sort of rate would it have been at?

I can't remember the effective rate offhand, Mike -- Rossa, sorry about that, but I'll say it's 20%.

Okay. Thank you. And then, looking at the investment and other income line which was 58 versus 77 year-over-year. What year-over-year factors would have influenced that?

Well, the -- you know, the 77 in the comparable figure that included the $60 million property --

So that's in there not in the property line?

Yes we -- we have combined those two lines.

And -- and so if we -- then in that case it would become an increase in investment income and other gains if we took that out from last year?

Yes, and then I think what you would find if -- which is in the supplemental is that we would have included a gain of around $30 million on the revaluation of our Norbord ventures, that's in the current period results.

So we should take 30 out there?

Yes.

So we should perhaps look at 58 minus 30 or 28 and then 77 minus 80% of 60 or 48?

77 minus 60 would be 17 compare to 58 minus 30 which would be 28 --

That hasn't been tax effected yet, right?

No. That's right and if you are wondering where the growth is, we did have the Falconbridge preferred shares, which we acquired during the quarter and we received around $9 million of dividends on those.

Okay. And then the investment in the Canary Wharf building that you purchased directly or yourselves, how -- how do you see that strategically evolving, with respect to your Canary Wharf and other property interests, direct or indirect?

Ross it's Bruce, and I guess I'd say that we bought it as a straight up asset purchase with Barclays Capital. We own 80% of it and they own 20% of it today. We just felt it was, firstly, a good purchase in the market. They had some unique attributes for us to be able to purchase it together, and get a return that met our thresholds. In addition, we are interested in Canary Wharf, and having another property on the estate. The way we viewed it is we own 20% of it, or just under 20% of it before, and this way we own 80%. If we wanted we could bring an institutional partner in and bring ourself back down to our 20, although we don't have any intention right now in do that, although we may do that in the future. So, it really was just, we felt, an attractive purchase, and it also assists us in building our presence in London.

Specifically, with respect to Canary Wharf, because you asked, I'd say that we have a good relationship with Morgan Stanley who is the operator of the Canary Wharf estate with the management team. They have been executing a business plan, which isn't far off the plan that we would have put in place had we been operating it, and I'd say the UK markets are similar to North America, vacancies have been trending downwards, occupancies are going up, and rental rates are firming, if not going higher, and cap rates are down. So, all of that is generally good news for the investment. Canary Wharf itself is sitting on over 1 billion pounds of cash, that at some point in time either be put to work in the company or distributed back it to's shareholder including us.

Canary Wharf are managing 20 (inaudible) for you?

Yes, they do. In fact they do the lease -- they do the -- the property management for us. We're looking after everything else ourselves.

Thanks very much.

Our last question comes from Neil Downey of RBC Capital Markets. Please state your question.

Hi, good afternoon, everyone. Going forward the investment in Falconbridge, will that continue to be equity accounted?

For the time being, based on our current ownership and board composition and things like that that's correct, Neal.

Okay. The new timber fund that you formed, was -- was the -- was the institutional investors brought in during the second quarter or subsequent to the second quarter? And the reason I ask is simply, when I look in the supplemental disclosure, we show timber management fund, assets under management at June 30, 898 million and the book value is 898 million. Or is -- is this being consolidated into your financial statements?

Yes. It -- it's that latter point, you're bang on. We consolidate the timber fund, so we put all of the assets on to your balance sheet.

Okay so that is unlike the bridge lending fund for instance?

That's right.

Okay. On the subject of trees, or paper, I guess more specifically, your investment in Katahdin, is that something that's likely to be monitized before the end of the year? And if so, is there any value in that asset in excess of book?

I would -- it's Bruce, Neal, -- Fraser Papers has an option to acquire that from us at our book plus a carry. And whether they exercise that for year end or not I don't know whether they will or not. Should they not, at some point -- should they not -- or should they not want to own that asset within the company, within Fraser, then we could sell that into the marketplace to season else. The industry is having a tough time today, and we're working through that both with Fraser and this Katahdin asset and we think we'll come out the other side, but it's not actually the -- it's not our best performing asset we have at this current point in time.

Okay.

The answer is, I wouldn't -- if you want to attribute value asset by asset I wouldn't put a lot of over book on this one just to be conservative.

Okay. So you effectively accrued no carry in that book value but presumably for the purposes of calculating the purchase option, you have been accruing some -- some accrued value there due to the carry?

We have accrued no carry on this book value. Brian is looking at me and nodding yes, and similar to our -- for example, our Canary Wharf investment where we presumably were earning a lot of money inside the investment but we get no return. So, we have a number of assets like that and we generally try to be as conservative as possible.

Okay. And just one other, perhaps, comment, in the income statement you do have this line item called future income taxes and other provisions, 151 million in the quarter. I sense there's a lot of stuff running through there, including, of course, your -- your tax provision at statutory rates plus some other provisions, plus the tax impact, specifically related to the large gain on the Falconbridge reorganization et cetera. I think that's one line item that certainly I would find it would be very useful if we had a little bit of added detail. Maybe it's there, maybe I'm just missing it. But, certainly some reconciliations in terms of what specifically tax -- versus what specifically is a provision, like an impairment provision or something like that --

Sure.

Would be useful.

Thanks for the comment, Neal. We actually -- there is some more color on that in the supplemental, which we appreciate is fairly lengthy, not everybody would have had a chance to get through it yet. And there will be -- also when we put our internal report I think you'll find the information there as well. Just to answer your question, it's probably around 50/50 future income taxes and other provisions, I mentioned the $50 million of after tax provisions in respect to the interest rates earlier in the call, and then we did also take a $20 million charge in respect of some intangibles and other assets during the quarter.

Yes, thanks. Brian. I was able to pick a lot of these numbers out of -- out of your -- out of the text. I guess I was suggesting that maybe a little table would actually help a little bit just to expand it. But, thank you very much.

We will take your advice. That's good advice. Thanks, Neal.

That's it, thank you.

At this time there are no further questions.

There are no further questions, Operator, we would just like to thank everyone for joining us this afternoon and we look forward to speaking to you at our third quarter conference call. Bye, for now.