BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2005 Q3 法說會逐字稿

Welcome to Brookfield asset management third-quarter results month conference call. I would now like to turn the call over to Bob Harding. The chairman of Brookfield Asset Management. Mr. Harding, you may begin.

Thank you very much. Good afternoon everyone. Welcome to Brookfield Asset Management's third quarter conference call. Joining me today are Bruce Flatt our President and Chief Executive Officer, Brian Lawson our Chief Financial Officer, Brian Davis, our senior Vice President of finance, and Katharine Vyse who heads up our investor relations and communications group. Today Brian Lawson will begin our call by reviewing the third-quarter financial results, then Bruce Flatt will provide comments on our third quarter and current operating activities. Of course, following Bruce's comments we will open the call for your questions and comments. Just before turning the call over to Brian, I will make the customary warning statement that during the course of today's call we may make forward-looking statements. No reliance should be placed on these statements as many factors, both known and unknown, may impact the corporation's future operations and enhance financial results, and therefore our actual results may differ materially from those discussed here today. With that, I will turn things over to Brian. Brian?

Thanks, Bob. Good afternoon, as Bob mentioned, I'll provide a brief overall review of our financial results and the highlights within our operations during the third quarter. We reported net income for the quarter of $736 million or $2.73 a share compared with $133 million for the same period last year. This included a gain of $785 million on the sale of our remaining investment in Falconbridge, $636 million after tax provisions. Cash flow from operations for the quarter which excludes the Falconbridge gain totaled $286 million or $1.04 per share. And this represents a substantial increase over the 70 cents per share reported in the similar quarter last year.

The growth in cash flow was driven by increased contribution from our residential property business, our power generation operations, funds management, and also a dividend from our investment in Canary Wharf. And we believe that each of our operations is well positioned to achieve continued growth in the fourth quarter. Before reviewing our results in more detail, I would also like to confirm that we declared our regular quarterly dividend of 15 cents per share payable at the end of February to shareholders of record at the 1st that month. That's obviously in 2006.

So turning to our property operations, they generated $387 million of net operating income during the quarter, including a $110 million dividend on our Canary Wharf investment. This compares with $241 million in the same period last year. The Canary Wharf dividend represents the first distribution we received since our initial investment in 2003. It is a large dividend but is important to remember that it represents a 14% annual yield. So -- in the value of our investments has also continued to grow with the published net asset value for the company increasing by approximately 40% over our carried value.

We are seeing increased demand for high quality office space in the London market which has resulted in new leases and higher occupancy levels at the Canary Wharf estate now over 90%. The balance of our property operations generated a 15% increase in cash flow. Commercial property contribution was relatively unchanged quarter over quarter in line with our expectations. We leased a further 800 thousand square feet during the quarter, 2.9 million square feet year to date. And that's three times the contractual expirees during the period.

Goldman Sachs announced they will construct a two million square foot complex adjacent to our World Financial Center properties, which is a strong vote of confidence for lower Manhattan and should have a positive impact on the value of nearby properties. And the high quality of our portfolio has continued to serve us well through recent years. We remain well leased at 94% across the portfolio, 95% in our core markets. And so we are confident of continued strong returns from these operations. We've also been very active in the property sector with a number of growth initiatives. We successfully completed our bid to acquire a 10.8 million square foot office portfolio comprising 24 properties in five Canadian cities including first Canadian place in Toronto.

This portfolio forms the basis for our new Canadian core property fund in which we hold a 25% interest and manage on behalf of our institutional co-investors. Our real estate opportunity fund acquired a large portfolio of industrial properties, bringing the assets in this fund to $500 million, and positioning us to begin the process of raising additional capital from institutional investors. We're also close to finalizing funding for the Brookfield core office fund and our Brazilian retail fund. The core office fund which will be managed by Brookfield properties will be initially funded with $300 million from Brookfield and $550 million from institutional and large investors. The Brazil retail fund will be a $600 million fund which will be seeded with select properties currently owned by us.

Our home-building operations achieve continued increases in the quarter due to strong demand for new homes in California and Alberta. We currently have orders in place representing 100% of our projected 2005 closings, and we have continued to reduce our own lot inventory in favor of optioned lots in order to crystallize the appreciation in value and to reduce risk. And turning to our real estate finance fund, they committed over $270 million in new real estate loans and related investments during the quarter.

The fund also recently negotiated the sale of our investment in [Krimy May], a commercial mortgage [RIT] for a substantial gain that will accrue to us and our co-investors. Turning to our power generation operations, they contributed $98 million during the quarter compared with $68 million in the same quarter last year. This growth over last year is due principally to the impact of acquisition and development projects and improved pricing. And is offset by lower generation from existing facilities during the period. Our average contracted price at the end of the quarter was approximately $50 per megawatt hour, well below current prices which in our market exceed $70.

Currently 80% of our projected revenues for the next two years are subject to long-term arrangements. So the increase in price will increase revenues for our non-contracted power, and we stand to benefit further as existing contracts roll over. We provided a schedule outlining our contracted and uncontracted generation over the next five years in our supplemental information to give you a better sense of how this may unfold and Bruce will speak to this later on. We will also continue our efforts to secure long-term power sale agreements to lock in these higher prices for extended periods of time with credit-worthy counter-parties. Water levels at quarter end were consistent with long term averages and prices remain high which is positive for the balance of the year.

On our funds management area, we continued to make progress in these operations, and they include our timber and infrastructure operations, private equity, specialist funds, and public securities. In aggregate these operations generated $62 million of cash flow, up slightly from the $61 million generated last year. The amount of capital deployed by us in this area did decline during the quarter due to the sale of our investment in Falconbridge, although this was partially offset by the formation of our timberlands fund this year. The island timberland fund performed in line with expectations in its first full quarter of operations. Our timber operations in aggregate contributed $19 million of cash flow compared with $2 million in the same quarter last year.

Our bridge fund and our restructuring fund continued to be active. The bridge fund closed on $200 million of new loans in the new quarter and the restructuring fund continues to make progress in financing the restructuring of [Stelco]. Our public securities operations which expanded significantly with the addition of Hyperion capital management this year continued to grow their assets in management with the launch two of new listed funds in Canada and the private placement for the Crystal River mortgage [RIT] in the US.

Now finally turning to our liquidity and our capitalization. We are obviously in a very strong financial position. The strongest in our history following the sale of our investment in Falconbridge for average aggregate proceeds during the year of $2.7 billion. As a result, we hold $4 billion of current financial capacity and have annual free cash flow in excess of $800 million. This means we are well positioned to capitalize in the opportunities to expand our business base and to expand our asset management operations.

As we've stated previously, our intension is to deploy this liquidity to increase returns for shareholders as follows -- invest in our existing operations and develop new opportunities, repurchase common shares, and increase dividends over time. Our strategy of locking in long-term interest rates and duration wherever possible remains unchanged. We have completed several important long-term financings during the quarter.

In addition, we continue to maintain a strategy of further hedging the value of our long-term interest rate sensitive assets with additional financial contracts. And as we reported to you last quarter, these contracts are required to be mark-to-market in our current earnings even though the assets being hedged are not. The increasing rates during the last period had a positive impact on income, offsetting in part the revaluation charges recorded in the prior quarter and rates have continued to trend higher since then. We recognize this approach may lead to potential short-term earnings volatility but firmly believe this will result in more stable returns measured over the long term, and this is how we look at things. Bruce will speak further on this later on in the call.

Finally, with our offer to repurchase $500 million of our common shares at $41 per share, which we announced back in September, closes on November 9. We felt a substantial issue rebid was an appropriate way to proceed in buying back our stock, as we've done in the past through normal course issue bids because it allowed us to buy a significant quantity at one time, and at the same time also allowed any large blocks to final liquidity without disrupting the market. We remain committed to share buy-backs and not withstanding the outcome of this offer we will continue to have the ability to purchase shares in the open market following the expiring of the bid. So at that stage, this stage I'll turn the call over to Bruce, who will bring you up to date on recent developments and some of the important trends we see occurring in our business.

Thanks, Brian. Good afternoon to everyone who's joining the call. I'll deal with a few brief topics, and then Brian and I would be pleased to take your questions. Firstly maybe just dealing with our shares of Falconbridge which were finally disposed of in the quarter which really brings our process complete, and I think from now on we'll quit talking about our disposition program of resource assets, the only two things that we have remaining with respect to investment on a meaningful scale are preferred shares of the company which should there be a takeover of the company, they will be paid off in cash if the company's not taken over, we'll receive a solid dividend on those shares. And they're senior in the capital structure, so we're quite comfortable with those.

In addition, we continue to have a top upright on a bid should [Xtratta] make a bid for the company. With that I don't think I'll probably answer any other questions with respect to Falconbridge because obviously it's sensitive in the market with the transaction today. On interest rates as Brian mentioned, we continue to fix our long-term rates on the balance sheet. We see no utility in trying to float debt, and we have not for probably three years. But more specifically, over the last 12 months.

We continue to maintain our overlay position of almost $2 billion of treasury shorts to protect against rate increases. And corporately, we -- we generally believe that interest rates are heading higher but not dramatically. And that at some point in time we may change our view of this position. But it certainly isn't today. We -- we do believe longer term that we're in a low -- generally low interest rate environment.

With respect to property operations, just a couple of comments. Based partly off of our views of interest rates which I just made. We believe capitalization rates will continue to stay low. That the spreads between high-quality real estate and the bond market will continue to narrow. And what that means is that real estate values are probably going to hold on the commercial side.

In fact rental occupancies, as Brian said, are getting better across virtually all of the markets in North America. Specifically the ones we're in, other than a couple. And rental rates are starting to increase slowly. And as -- and in general, for example, in New York City when rates head under -- when vacancies head under 8%, you usually see significant escalation in rental rates. So we believe there's a high likelihood of increased rental rates over the next number of years as long as the economy stays strong, and this should be good for-- continued investing in commercial real estate for ourselves and for our clients.

On the power -- in our power business, it's clear today to us that fossil fuels have set a new benchmark in the marketplace. I don't think that we believe that fossil fuels will stay at the prices they're at today. We certainly never expected them to be where they are. Over the last five years we've acquired a sizable portfolio of hydroelectric power plants.

On a thesis we could earn 9% to 10% returns, lock them in and leverage them to 14% to 15%. We always believed that there was some extra appreciation in the back end of those values, as contracts rolled over. And it's clear to us today that if fossil fuels stay anywhere near the range where they are today or even quite a bit lower that the latter returns on the capital appreciation side should be more substantial than we probably expected when we were buying those assets.

On the infrastructure side, we're really focussed on two things today. That's our timber business and our utilities infrastructures business. There are further timber opportunities we continue to look at. Although we're very selective in this market. And we continue to look at transmission opportunities which may fit in our franchise area which we have in Ontario. But -- or uniquely in that area. So -- or in other adjacent markets to where we are with our generation assets.

In addition, we continue to look at other opportunities to add. One, I'll call it scalable infrastructure business to our operations in the next year or so. And, you know, we'll continue to report on that as we proceed going forward. With respect to housing in our land development business, we've been conservative for the last three, four years. But given results for this year and what we expect, we find it hard to believe results can get much better than today. Despite that there's no doubt the industry is in very solid shape.

Most of the companies and major companies out there, even mid-sized companies are close to debt free. And they have cash positions in them, very large market caps, and are earning substantial amounts of earnings. Today so the -- earnings today. So the business is very solid. And we believe that we can continue to benefit from that, and should there be dislocation in the markets over time, we're ideally set up with our balance sheet to take advantage of opportunities either in our public securities area or right in our land development and housing operations.

And lastly I'll just make a comment on 2004 and 2005, which has been two very exceptional years of value creation in our operations. I guess I just mentioned five thing. Metal prices went up which allowed us to monetize our Falconbridge investment. Property prices have increased because cap rates have gone down. Housing has been extremely strong. Energy prices have doubled in most markets. And institutions continue to look for fixed income supplements. And as a result that our asset management business has been getting traction.

And I guess I'd say two things. One, we continue to try to take risk out of the business to lock in some of that value that we have. But secondly, it's clear that these type of returns on the asset value side of the balance sheet are -- will be tough for us to replicate in the future. And we think that we can grow the business nicely over the next number of years, but the percentage growth in the underlying value of the business, and with that to some degree commensurate with the stock price increase, is probably been exception for the last couple of years. With that I turn it back to the operator and we would be pleased to take any questions.

Our first question comes from Andrew Kuske of UBS.

Good afternoon. Bruce, I'm wonder you how you really look at your progress and your fund management business. If we look at what some of the other private equity players have done, they've really gotten a lot of money in in the last, say, 12 months or so. In particular if we look at, say, KKR, Blackstone among others. Wondering how you benchmark yourself against those players and really where you are at this stage of the game.

You know, I'd say we -- obviously we have significant amounts of capital on the balance sheet and in the number of funds that we've raised. And I put it -- I take it in two parts, your question. The first one is the fund raising side. We believe that we will continue to be able to fund any of the activities that we bring to the marketplace and to our institutional clients. And there's a lot of capital out there seeking opportunities. And for managers such as ourselves and for lots of others there's a significant amount of capital out there.

So I'd say on the funding side, we're in very good shape. And with our recent acquisition in New York and integrating that in, I think we're getting more effective in our fund raising abilities and building out the franchise. So that's one side of it. On the investing side, I'd say the bottom line is we try to be value investors and be disciplined in what we do. We believe we've been able to put out, you know, over the last five years we've put out a substantial amount of capital on our own balance sheet. The last three years, for our own balance sheet and for other investors.

And as a result of that, we think we will continue to be able to put out money selectively where it makes sense and where we can get the returns. And so I -- you know, I say we observe everyone else out there and what they're doing, and we try to learn from all of them. Having said that we really don't benchmark ourselves against it. We're just trying to do our own thing. And I guess I'd say the overriding thing at the end of the day in this company is, you know, we have a plan, and we're trying to put assets under management, we're trying to build the business. But the overriding thesis is return on capital and return on equity, and how do we drive greater per share values of cash flow growth and cash flows to the bottom line.

So with that, I guess we're, you know, comfortable putting money out in some businesses. In others we're standing on the sidelines. But over time I think we can.

In terms of really the returns under the value investor, are you seeing dramatic compression in return on capital that's available in some of the opportunities that are out there?

Well, as you know, our -- one of the reasons that three years ago we started to build this business is we felt that we could not put 100% of our capital into opportunities and still get the returns that we felt are the shareholders of our company demanded. And I'd say that's still true today. But we think that we can find lots of assets to match the desires that the institutional investors have, and we're comfortable in putting capital beside them. And we can get the returns out of it with the fees and the things that we get along with them.

So but there's no doubt the world -- and you know I mentioned three or four of them in the comments I made, that the world has been increasing the asset values of most asset classes that are out there. And that goes from bonds to common stocks to real estate to most other assets that are out there. And therefore, you know, the return thresholds continue to be driven down.

Do you see yourselves as having a relative advantage because of essentially pension fund money over, say, some of the other private equity players who really have a lack of pension fund money alongside those investors?

You know, everyone has their own strategy, and I would not, you know be comment on anyone else's strategy. But we're not a private equity player, I guess is the first comment I'd make and we don't really compete against the private equity shops that are out there. And only one of -- one -- I guess two of our strategies are opportunistic-type returns. The rest of them are relatively low-risk, medium-term return assets. And there's lots of others that offer those products in addition to us. Therefore, you know, we have to continue to show them good transactions and a track record.

That's great. Thank you very much.

Next question comes from Rossa O'Reilly of CIBC world markets.

Thank you very much. Looking at the components of earning and cash flow, the reported earnings include the gain on the sale of Falconbridge and excluding the gain on the sale of Falconbridge, am I right in noting that the earnings would be about 41 cents?

Oh, gosh. On a per-share basis, that sounds roughly right. I was thinking of it more in terms of total dollars, Rossa. But that would make some sense.

And the -- in earnings, you only have the equity in the earnings of Canary Wharf, is that correct?

In earnings, no. We actually don't record any equity accounted earnings from Canary Wharf. It's treated on a cost accounted basis.

Would you include in the net earnings dividend, the $110 million dividend?

In some circumstances you would. I think given the magnitude of the -- the dividend in terms of the point in time payment compared to the reported earnings of Canary Wharf over the period, it was -- we didn't feel it was appropriate to include it in net income under current accounting guidelines. Having said that, in -- as you know how we've dealt with our long-term investments, we look at the cash dividend that we get from them. For example, Falconbridge, Norbord, we look at the dividends we actually receive as opposed to equity accounted earnings. We're taking a similar approach in Canary Wharf.

I think the important distinction there is unlike the other two investments that pay a dividend on a quarterly basis, Canary Wharf has not done that. The way that we look at that, it's a single point in time dividend. Having said that, as I said, represents about a 14% yield over the time that we've held the investment. That that is consistent -- well certainly our -- when we underwrote the investment, our total return would be looking to be in excess of that.

So is it cost accounted, though, and cost accounting usually means you record just the dividends received. How, then, under GAAP would it be treated?

It would be treated as a reduction in the carrying cost of our investment.

Oh, okay. And looking at the cash flow, that's where you include it on the $1.04 for the year. So if we excluded it from cash flow, I figure that cash flow would be about 64 cents. Am I right there, or were there some current tax implications?

I think it would be a little bit higher than that Rossa. Again in total dollars, it would be -- it would be --

That pretax or after current tax?

That would be after current tax.

Okay, I divide 110 by the number of shares outstanding. That would be about 40 -- 41 cents coming from that one source. And then, looking back at that Canary Wharf investment, the comment was made earlier that you felt that the value of it increased by about 40% from your book value. And does that mean that we should look at the book carrying value of property of $981 million at September 30 and add 40% to that for the -- the estimate of current value?

Yeah. Sorry, the 981 -- I think our carrying value in Canary is more like 450 --

That value included two things, which is the investment in 20 Canada square and the Canary Wharf investment your looking at Rossa.

So it's only the Canary Wharf investment we should apply the 40% to --

Yes, what that is a published nav of the company that was recently published.

Right. And of that 981, if you could just remind us what is the cost component of the Canary Wharf holding?

It's around $450 million.

450?

And the balance as Bruce mentioned is 20 Canada Square. That 450 would now be reduced. By 110.

So it has already been reduced by 110?

Yes, that's right.

So the 40% -- and is that nav, is that 40% should be applied after the 450 or to 560?

No, that would be -- sorry. The 450 would be reduced to the 340 --

To 340.

The 40% we spoke to doesn't double count that dividend. That would be on the -- that would be on our original carrying value.

Of 450?

Yeah.

Thanks so much.

Next question comes from Neil Downey of RBC Capital Markets.

Good afternoon. Brian, you briefly alluded to the Krimy May transaction. Does that have implications for fourth-quarter earning and cash flow, and if so, by perhaps what magnitude?

Yeah, that's not a -- a figure that we've concluded or published yet. I think it's around a $45 million investment for us. And that would be 100% of the investment. You know, it -- in terms of what's been published about -- about the sale price, it's around $20 a share. Our going-in price was well below that. But that should give you some order of magnitude.

Although, Neil, it's not meaningful to Brookfield asset management as a corporation as a flow through.

Okay, that is where I was going.

It's very important and it's a good thing to get done. But it's not meaningful to the overall organization.

And that will accrue to us but also 2/3 to our co-investors.

Right. In your discussion, in your supplemental package on your land and housing business, you noted, of course, that you've effectively are at the point where you got 100% of your business booked and deliverable at this point of the year which, I guess, is what we would clearly expect. You had a really big quarter, of course, in -- in Q4 of last year. I believe the contribution on a gross basis was in and around $160 million. Can you give us some additional help in terms of looking at the contribution to net operating income and net cash flow for the fouth quarter of this year.

Well, I don't think we're in a position to give you any specific guidance. But what we can confirm to you is that the fourth quarter is typically the biggest quarter. Both for the US business as well as for the Canadian business. Both are continuing to do exceedingly well. And so we would expect a -- I'll say a similar degree of growth in the cash flows for -- for the fourth quarter. So we're looking for very strong quarters out of both -- both the Canadian and the -- and the US businesses.

And Neil, maybe just one if you were interested -- Brookfield homes actually, I think, publishes guidance. So you could get a large component of that in looking at their guidance for the year.

Understood. Just to circle back to Canary Wharf for 15 seconds, that recently published net asset value was prior to the special dividend, correct?

That's correct. Yeah.

Okay, thank you.

Next question comes from [Chris Healy] of Wachovia Securities.

Good afternoon, it's Brandan Mayor in for Chris. I wanted to go back to the fund management business for a second. And looking at the investment fund, I think that line item included some of the funds that have the key generation that you're looking for going forward. If I try to impute the fee generation based on the $41 million of operating cash flow during the quarter, is that a decent run rate that we can use going forward, or would you expect these assets under management basis to ramp going forward?

Well, we would certainly expect them to ramp going forward Brandon as it guides. Important to keep in mind that several of the fund were launched over the last one, two, or three years. And so an important part of the earnings power does come through the performance fees. And those typically come in later on in the life of the funds. So that would be one important thing. What we -- what we do report in the supplemental is that our -- the net fees, so that's the fees and participations earned net of associated operating expenses were $14 million in the quarter, $39 million for the year to date. That would include both the investment funds and public securities business.

Right.

That should give you some idea of how we're tracking currently. We're obviously looking forward to growth this that regard. And I guess --

It's Bruce. A lot of these funds are still in their infancy. For example, under that category that you mentioned on page 12 of the -- of our information. The real estate opportunity fund is -- so we actually -- is we actually own 100% of the capital ourselves were earning no fees from anyone else. It's a startup fund by ourselves which we intend to ultimately bring in third-party investors and get -- receive fees from.

So we're still in the early phases of this. The timberland fund we just put on the books three months ago. And, you know, the o & y transaction just closed, and it will start contributing in the fourth quarter this year I guess. So, you know, a number of those things are just starting to contribute to going forward. And I think probably as we prepare our supplementary information with our fourth quarter information we'll have a much more fulsome layout to give you a run rate going forward.

Okay, that would be helpful. So if we were to sort of benchmark your performance I guess getting back to maybe an earlier comment, question, when -- when would you expect that, you know, the fees and -- incentive fees and base fees to sort of level out where we'd be at a decent run rate?

Well, I -- candidly, we wouldn't really look to them leveling out for some period of time because we are looking to continue to grow the business substantially. I -- I think what you should start to see is over time you'll get a sense for what the fee streams are looking like for the existing funds, and I think you'll be able to see the progression as the funds are introduced and as they mature and as the participation fees begin to start realized and be reflected in accounting earning. That will give you some sense for it. And as Bruce mentioned, we will be down the road providing enhanced disclosure around that -- that regard.

Okay, that's helpful. Yeah, I guess when I said fees ramping I meant on a percentage -- under management basis. [Muffled audio] Right. That's helpful. And then if we could -- on the power business, you guys have been aggressively buying assets for the past several years. But nothing this quarter, which, you know, is -- I mean, it's a small period. Are asset prices increasing such that you're finding it tough to meet the return threshold?

You know, I'd make this comment -- there's no doubt that fossil fuel prices being higher, meaning energy prices are higher, isn't probably helpful to our acquisition strategy. Having said that, our hydroelectric acquisition strategy, we've always been a very good buyer of these assets when people have them or when they finally decide to sell them. You can usually get our minds around paying a fair price to buy them. And we're interested in any of the assets that people have. They're more -- they just become -- it's when they become available.

So I don't -- I don't think there's any -- the fact that we didn't close anything in this quarter is not indicative that prices are higher and it's harder to find. It's just that we didn't close any this quarter. And I think they're -- just like everything we do, they're -- we work on many opportunities. And once in a while we -- we get one. And we just didn't get any in this quarter.

Okay, I'll get back in line. Thanks.

Thank you.

Next question comes from Michael Goldberg.

Thanks a lot. At your investor day you set the objective to get 1% to 2% base fees and 10% to 20% performance fees on funds. I'm wondering if you can tell us whether the fee arrangements on this Canadian core property fund comprising the o & y assets are consistent with this objective.

Yes, we think that they -- they fall in that range.

Okay. And also on some of the new funds that you talk about also, are the fee arrangements on those consistent with this objective?

The answer is in general yes. Some of them are higher than others. All of them are different, Michael. As you know, these are all very different groups of ashes sets and, therefore, they attract different fees. But -- and in fact, over the next 5 to 10 years, as we build this business, we're quite positive that they will be very different and varied. Having said that, they're in the range of that, and we think, you know, we'll continue to be able to do that.

Okay. Turning to a different topic, are there conditions under which it could make sense to have the commercial property assets that are now in Brookfield properties in some kind of core property funds rather than in the company itself?

You know, I probably shouldn't make too many comments on that because we own securities today of Brookfield properties which is a 50%-owned company and the balance are owned in the public. So I have to be careful about what I say about their operations. But, you know, clearly our -- our goal is to have assets under management where we have third-party capital that we get paid fees for managing assets. And over time, we're going to -- to trend toward owning assets in that form. And, you know, underneath I guess the -- the other comment I'd make is that if you look at Brookfield today, they've just closed the core fund underneath their Canadian operations, and they're launching a US core fund for their US operations. So in essence, the -- the tack that we've taken today is that really the properties company is adopting the same strategy that we have to the benefit of all shareholder.

Okay. That's great. Thanks a lot.

Next question comes from Peter Sklar of Nesbitt Burnes.

Bruce, could you reiterate what the previous caller discussed. The returns you're looking for in terms of management fees and participation fees. Could you just go through what you said in New York at your meeting.

You know, I think the slide that we've flashed up -- and that's in our materials, it's on our web site, is just that in general for -- for products that we offer on the infrastructure side call it real estate power, timberlands and other things, in general we are an administration fee or an annual fee of between -- on the low end it would be 50 basis points, on the high end it would be 200 basis points on assets. And then we usually earn other one-time fees which would be either promotes which generally would be 20% over a return which would be between 8% and 10%. And sometimes there's recurring or one-time fees that come with that or acquisition fees.

In addition on some of the assets that we have such as real estate, we are -- we earn asset leasing fees and proper management fees. And, you know, that's in general. The type of products that we have. Obviously some of the assets that we'll continue to put onto the balance sheet will be the lower end products which are bonds or other things. As we manage those kind of mandates for institutions. But our -- obviously the assets which we are targeting which will bring the biggest margins to us are these infrastructure assets that generate the higher fees.

So specifically what kind of assets will qualify for 200 basis points? Is managing funds with class-a real estate in it, is that going to qualify for the high end of the spectrum in terms of management fees?

I would say that would be the middle. If you manage funds you're at the bottom end. Probably core real estate is in the middle. And opportunistic property funds are in the high end. And they go anywhere from that spectrum of fees.

Okay. And on the fees, the fees you reported this quarter related to managing private equity funds, the $14 million of operating cash flow, was that mostly management fees, or would there have been some participation in that?

That's a -- that's a mix Peter. You know, I'm not sure I can give you a breakout of that sitting here right now.

Right. And the other thing, are you prepared to do this -- just to give us a specific example of how the fee structure works, for example? Can you disclose on the real estate opportunity fund what -- specifically what the fee structure would be for you on that?

You know, on that one, Peter, they are actually just going to be going out to -- to talk -- they're in the process of going out and talking to investors specifically to negotiate those -- those sorts of fees. I can give you one example. I think for example if you look at -- at something -- for example, there's Crystal River Mortgage REIT. And we file -- we've done a private placement for that. And there's a very similar entity out there called New Castle. And they have published their fees, and I think you can expect that ours would be similar. And so it's 1.5% on the -- on the book equity. Plus a -- a 20% participation of performance in excess of -- I think in the case of New Castle, it's around a 9% or 10% threshold.

Right, okay.

That's one public that's out there.

Okay. Now on these private equity funds, obviously Brasscan is going to be investing side by side with third parties. And that brings in the $4 billion of cash you have plus the $800 million of cash flow -- annual cash flow that you're talking about. And what I'm wondering about is obviously not all of the $4 billion is at the top level in terms of the Brascan group of companies. Some of it must be down in your subsidiaries that have minority interests. So I'm wondering of the $4 billion how much do you have access to so that you can deploy it, deploy capital in private equity funds?

Actually, a lot of that liquidity is at the BRASCAN level, Peter. And that's because of the -- that represents the proceeds we received on Falconbridge. So we received $2.7 billion of cash and liquid securities off of that investment this year. Plus, we have the $1 billion of undrawn credit facilities, plus we have the other financial assets and cash that we had prior to that. So a meaningful amount of that is directly at the -- I should see Brookfield management asset level.

What about the $800 million of cash flow? I mean, some of that you'd be restricted just by the fact that there's a minority of -- of Brookfield.

Yes, that's correct a portion of that cash flow does occurs at the Brookfield level. Approximately -- approximately for that is what we report as being our operating cash flow which reflects our prorata share of the underlying cash flow of those companies. Last year that was in the order of $600 million.

Right, right.

The last point I'd Mike that, Peter, while there is a $200 million difference between eight and six, firstly its still at $600 million. Secondly, we have absolute control over whether that dividend is higher or lower. And in fact most of our other investors in Brookfield properties would probably like to see a higher dividend. So, you know, it's not as if we do not have control over that whether that cash flow gets paid out or not because it is a 50%-owned subsidiary.

I understand. Lastly, an accounting question. Brian, how did you account for the Falconbridge interest? In terms of the income? Did you equity account it up until the day of closing?

That's correct.

Okay, that's all I have. Thanks.

Next question comes from Chris Haley of Wachovia.

Hi, follow-up. Would you give us a sense on the $3.5 million worth of cash. What is the -- the use in the short term regarding repurchase. And then what would be a reasonable assumption for use of that cash? And what is the amount that you would like to hold just for -- let's call it just operations?

Sure. Well perhaps I'll start with the last part of your question first. As you would A.O.L. -- as folks would know, we've typically held around $2 billion of liquidity over the past number of years. Roughly $1 billion in what I'd call cash, financial, highly liquid assets. And about $1 billion in undrawn credit facilities. And that has -- we've felt that's been a pretty good level. Whether that, you know -- as we go forward, whether that's the right level or not, I think you can assume that's a level we've been comfortable with.

Clearly we have more cash as we sit here today than -- you know, than is required for liquidity purposes. We can -- you know, if you go out and invest that [inaudible] or plus 50 if you want to take all the capital and interest rate risk out of it. And so I think it's safe to say that we're taking a pretty conservative approach. And -- and maintaining a high degree of liquidity and capital for those funds. And one of the big things that we look forward to in the company is reinvesting those funds at increasing returns as we roll out new funds and find further investment opportunities and -- and taking that return up from 4% to 6% to 8% to 12% to, you know, and you know our investment guidelines. We strive for high teens levered return. Does that help?

That helps. Thanks.

The next question comes from Shant Povian of Catagoric Capital.

Good afternoon, everyone. Just have a question on the power operations. I guess with the contracted price for next year at $65 a megawatt hour and where fossil fuel prices are today, it's fair to say that we should see decent growth in revenues from power next year?

Yeah, that would be a fair assumption now. You know, keep in mind that we do as a matter of policy have a forward contract of a fair degree that power. So as I mentioned earlier, we'll certainly receive that benefit through our uncontracted power. And so -- and to the degree that some of the shorter term contracts that we put in place -- and a number of them are more on the lines of 12, 18, 24 months. As though roll off and we rebook them at the -- at the higher price, you'll see that come through. So it's not as though you're going to see the revenues double simply because power prices have -- have doubled. But there will definitely be an upscale -- an uplift in the revenues.

Okay. But you had -- it was about, what, $50 this year for the contracted power?

That -- that would be the -- what we would see as the contracted -- the price for our contracted power as at the end of September.

Okay.

So that would include some recently booked contracts.

And than for '06 it would be 65 for the average for the year?

On the contracted power, as opposed to the uncontracted power.

Right.

And the uncontracted power as we mentioned in -- in the comments, we see that at, you know, today being north of 70.

Okay. What sort of expectations should we have for increases in the operating costs? And what component would be, you know, coming from the -- the [coje] implants?

Pretty small in the overall context of our business. The -- and in terms of the hydro facilities, there's basically nominal uptick in -- in cost as a result of -- of fossil fuels.

Okay. Thank you.

Next question comes from Carl Brown of Kramer Rosenthal.

Hi, I had a similar question on the power business. I was wondering specifically as it related to the New York assets. I think at the time you bought them a year ago, they really -- they were contracted for about a year. So I would have thought that they would be open generally for '06 and '07 prices. I was just wondering if -- where do those assets stand today in terms of their hedge profile for '06 and '07 given power prices north of $80 in New York?

Yeah. No, that's -- that's a -- definitely a bright spot. We -- we had -- shortly after we bought the assets and we picked them up fully uncontracted. So consistent with our policy, we did book probably about half the revenues out at over, I'll say an average 18-month period. So some of that stuff is -- is falling off. And we have been rebooking at the prices that you're talking about. So we've seen a tremendous increase in -- in where we see the revenues from that business going forward compared to what we underwrote it at.

And have today's high prices changed your philosophy at all in terms of how aggressive you want to be in laying on hedges -- it looks like in 2007 you're already fairly hedged? Could you go out and further hedge 08 at this point?

That depends on the liquidity and the forward market, and our ability to secure long-term contracts? And the financial markets which are, you know, they're highly liquid within about an 18-month period of time. Looking out beyond that, we haven't seen great liquidity. We are continuing to work to secure long-term power arrangements. And the philosophy is if we can get to something that we think is an attractive long-term price and we can lock it in for 10 or 20 years, we will definitely do that. You know, the landscape's clearly shifted a bit. So we're, you know, we're looking to do that at -- at the optimal price.

It's Bruce. The only other comment that I would make is that we just like all of you on the investment side, are looking at the dynamics of what increase -- I'll call it -- again, and I guess we do believe in an increased fossil fuel base. And we don't believe that $70 and $14 for gas is the right price. But it -- we're probably not going back to what we were basing our thesis of buying these assets on which was $4 gas and $25 oil. And depending on where you set that base, you'll have a view on what you'll forward sell power on. And I guess we continue to think through that.

And last question on New York. The higher revenue that you'll receive from those assets, that all drops to the bottom line. Your royalties aren't based on prices, it's volume driven?

Well, it's -- yes. That's right. On the -- yes, on the water licensing side, yes.

All right. Okay, thank you very much.

You're welcome.

Next question comes from Dominic Barker of Credit Suisse.

I have a clarification question on fees that are paid on the capital committed by your investment partners. Can I get an approximation of the equity they've invested. And is that amount mark to market? To calculate your -- your base fees for example.

It's very much -- it very much depends on -- vary from fund to fund, Dominique. So there are some funds where the base fees are paid on the market value. There are other ones where it's calculated on the -- you know, on the actual original amount of the capital commitment. So it -- it is -- each fund is different.

Okay, and is some of it mark to market?

Some of it is.

Okay. Moving to the power side, Ontario it looks like generated about 72% of your long-term average in Quebec, 62%. And I think it's hydrology driven. Were you required to purchase power in the open market?

No. No, we have a policy of doing our hedging based on a -- a very conservative threshold in terms of what our generation could be. And that's exactly one of the situations that we don't want to get into. So that's a very good question.

Okay. And just a philosophical question on the power side. I mean, are you in a unique position owning mostly hydro assets. I mean, why contract at all?

You know, that's actually a very good point. And we have been considering over time, and all this depends on how far -- and I guess the direct answer to you is how far higher today are the prices and what you expect to be the base over time. And if you think you're in exceptional times and prices for fossil fuels are going down you may contract. Other than that because we had the low-cost assets and they always sell, it's possible that over time you're giving something away by putting contracts in place because the cash flows will flow in anyway. And the amount that you lock in, that deferential may be too costly because you can capture the upside over what you'd contract. And I guess as we get smarter in the business, we can -- we continue to think about those things.

Appreciate it. I know it's a philosophical question. And -- and a question on your rental rates. Bruce, you mentioned rental rates are increasing in New York. Given your long-term contracting, can you participate the upside or is that simply a commentary on potentially increasing nav in that market?

It's really -- it was meant to be more just a broad comment, which is -- and I'd say that it underlies the fact that for four years the rental rate in most portfolios in companies and most properties have actually been going down. We haven't been hit by it very much because, in fact, ours were contracted long. But as you roll over rents -- and we do have -- you know, we do have 4% to 5% to 6% rolling over, even though we're contracted quite long, that -- that does get affected by the numbers. And as a result of that, rental rates moving higher is obviously a positive thing. In addition, it underpins the value of the portfolio obviously.

Okay. And one last question on Canary Wharf, with the dividend. Where -- where do you see that dividend going going forward? Is that just going to be one-time item as -- as the opportunity arises?

Yeah. We should be clear that we don't control Canary Wharf. We have a 16% interest or whatever our number is in the company. And while it's a meaningful investment for us, we're not in control of the investment. So we don't control the policy of dividends. But the company sits with substantial amounts of cash. It's probably north of $1 billion today after the dividend. And, therefore, certainly the company's certainly in a position to be able to pay further dividends unless it deploys it in the operations. And, in fact, we would be just as happy to continue to deploy it in the operations in London as we're doing other things in London. As well as pay it out in dividends. And -- and it will, you know, we'll have to see what happens with that.

Maybe ask you one final question because you touched on it. I mean, I can see how you would rather it be reinvested rather than get more cash. Assuming that your share price is high -- and that-- no one hits the bid on November 9 for your issuer bid, would you consider doing another one? Special issuer bid?

I guess I'd -- you know --

I just realized asking that question, I guess that's kind of -- you can't answer that.

Well, what I would say to you is we've been a believer that share re-purchases over the longer term, if you have a company that is doing well and growing, are a good investment for the common shareholder of any company. And that's a general thesis that our board believes in. And as a result of that, we -- from time to time as we look at it against other alternatives for investment, we will continue to buy securities back into the company. And whether we do that through normal course issuer bid, which we do have outstanding although it's not active while we have this substantial issuer bid outstanding, or wether it is in an issuer bid or a substantial issuer bid, we'll continue to look at all of those as -- as a method to deploy capital.

Thank you very much for your patience.

You're welcome.

Operator, I think we have time for maybe just one more question. And then we should conclude.

The next question comes from Rossa O'Reilly.

I was wondering the gains and other income line which showed a decline to $41 million to $67 million, that $26 million swing factor, what -- what does it relate to?

Last year, we had a -- in this quarter last year, we had a $63 million gain on Norbord, on the sale of 10 million shares of Norbord. This year we had a $28 million gain on the sale of the [royal appage]-- commercial property brokerage business in Canada.

Right. And the -- what were the gross proceeds from that sale?

The gross proceeds were around $50 -- I think $54 million.

And then of the -- the difference develop 28 and 41, what would have been the rest of it?

Oh, gosh. That's really -- that's a collection of -- of things. Various forms of other income. Gains and things. It wouldn't be associated with -- attributable to any specific business unit.

Transactal or recurring?

Well, probably a combination of both. And, Ross, I think as you know, there's -- there's always a recurring level of activity in the business.

Mr. O'Reilly: I see.

I would say there's nothing unique or special in that other -- in that other income.

Well, thank you.

You're welcome.

Thank you very much, operator. That concludes our call for the third quarter. We look forward to speaking with you again when we announce our fourth and final quarter for the year. Thank you all, good-bye for now.