BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2005 Q4 法說會逐字稿

Welcome to the Brookfield Asset Management year-end conference call for February 10, 2006. I would now like to turn the call over to your host, Bruce Flatt, President and CEO. Mr. Flatt, please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to Brookfield Asset Management's fourth-quarter and year-end conference call. Joining me today are Brian Lawson, our Chief Financial Officer; Brian Davis, Senior Vice President Finance; and Richard Legault, Harry Goldgut, who head up our Power operations; and Katherine Vyse, who looks after our investor relations and communications.

I will make a few comments after Brian talks, and then Richard will provide us with an overview of the performance of our power operations, the market dynamics, and our priorities for 2006. As usual, after that we will open up the call for questions and comments.

Just before turning the call over the Brian on our financial results, 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 hence financial results; and therefore our actual results may differ materially from those discussed here today.

I encourage everyone to review quarter four supplemental information package, the annual information form, and our annual report for a detailed description of the relevant risks. With all of that, I will turn over to Brian.

Thank you, Bruce, and good afternoon. 2005 in summary was a successful year for Brookfield on a number of counts. First, we reported strong financial results. Net income totaled $1.7 billion or $6.12 per share, compared with $555 million last year. Operating cash flow totaled $908 million, representing $3.28 per share, compared with $626 million, again during 2004.

We also announced an increase in our quarterly dividend to $0.16 per share payble May 31, 2006, to shareholders of record as at the close of business on May 1.

So turning to our results, net income was bolstered by the gain on the sale of our investment in Falconbridge, which totaled $1.1 billion net of tax. Our operating cash flow benefited from nearly $200 million of distributions from our investment in Canary Wharf.

If you set aside these distributions and the impact of dispositions, our cash flow per share increased by 22% over last year. This exceeded our long-term objective of growing our cash flow to 12% annually; and obviously we are pleased with that.

Finally, we increase the net contribution from our fee generating businesses to nearly $100 million, which is indicative of the growth in our asset management activities.

Second, we also made good progress in expanding our operating base, increasing returns and advancing our asset management activities. I will touch on each of those areas.

We did provide a full report on our activities in the letter to shareholders and supplemental financial information which were posted on our website this morning. A number of you have read this material; so I will provide an overview for you on this call and then turn things over Bruce and Richard.

Within our core office property operations, we established a major Canadian core office property fund during the year with the purchase of a 10 million square foot portfolio. We extended our presence in Europe with the acquisition of a 550,000 square foot property in the Canary Wharf estate. We leased over 4.5 million square feet in our 59 million square foot North American portfolio.

I mentioned previously that we received $183 million of dividends from Canary Wharf over the course of the year. These are the first such distributions and so far represent a 20% cash yield on our investment since we acquired our initial position in 2003.

Apart from the Canary Wharf distributions, our core office properties continued to generate modest growth, including some acquisitions; and that is consistent with the stability of our tenant base and the long-term nature of our leases.

Our residential operations reported very good growth in the results. Conditions remain strong in all of our core markets, and the outlook for 2006 remains favorable. Volumes were up somewhat over 2004. However, the major boost to our earnings was expanded margins due to increased pricing and good cost control.

Alberta is one of our larger markets, so the continued strength in oil and gas sector and the promising outlook for the development of the oil sands suggest that the results from this business will continue to be very strong through 2006 and beyond. In the United States we have roughly 30% of our projected U.S. sales for 2006 already in hand.

In other areas of our property operations, we expanded our opportunity investments during the year, and now own more than $500 million of properties outside of our core office operations. We are in the final stages of transferring our Brazilian retail properties into an institutional fund with two partners.

Power generation produced $469 million of operating cash flow, up from $268 million last year, due to the impact of new power facilities acquired in 2005 and late 2004, as well as higher prices on our uncontracted output. We increased our total generation substantially, 24% over last year, and more than double our output from five years ago. Richard and Harry will have more to say on the power operations later in the call, so I will leave that to them.

We expanded our timber and infrastructure operations during 2005 with the formation of the Island Timberlands Fund earlier in the year, and more recently with the launch of the Acadian Timber Trust.

We also made good progress on an expansion of the capital and rate base of our Ontario transmission and distribution business. In total these operations provided a return of $64 million per year in total, compared with $26 million last year. That is in addition to the associated Asset Management fees.

The investment returns from our specialty fund were relatively unchanged from year-over-year, largely due to a somewhat lower level of invested capital towards year-end. But they were very fully invested over the course of the year.

These activities, which include bridge lending, real estate finance, and restructuring, as well as our public securities operations, have been very active on a number of new initiatives which we expect will lead to growth during 2006, not just in terms of investment and returns, but also in fee contributions.

Investment in other income increased year-over-year, but was relatively flat in the fourth quarter. This category includes our direct investments and accordingly benefited from the Norbord special dividend that we received in the second quarter. However the fourth-quarter results reflected weak results from some of our noncore operations.

I would note that we have added a new line to our operating statement, fees earned, in order to provide additional information on the revenues from our Asset Management and other fee generating businesses. Total fees during 2005 were $282 million, up from $199 million in 2004. The net contribution after direct expenses was $98 million, also up substantially.

We are encouraged by these results; and although the contribution still represents a fairly modest component our total operating cash flow, we believe that there is ample room to grow these earnings.

With respect to our expenses, interest expense increased year-over-year due to financings put in place on the assets acquired over the past 18 months, as well as our shift from a floating to a fixed-rate liability profile that reduced our exposure to rising interest rates.

We had an increase in our current income tax expense. That is attributable to the increased profitability of our U.S. homebuilding operations, which, because they are operated in a separate public company, cannot be sheltered with the tax shields that exist in the rest of our businesses. Operating costs, which we can control carefully, have increased with the expansion of our business platform.

So those are the principal components that make up our operating cash flow.

Turning to the following items which impacted net income for the year, the gain on the sale of our investment in Falconbridge, which we reported on last quarter, was $1.1 billion net of tax. That is included in our net income and not included in our operating cash flow.

As a result of the sale of Falconbridge and the monetization of a portion of our Norbord investment in 2004, that resulted in lower equity accounted earnings in the current year. We showed increased depreciation and amortization that was in line with the expansion of our operating assets.

Before concluding my remarks, I would like to revisit the progress made in expanding our fee generating assets under management this year. First of all, our existing funds continued to deploy capital successfully during the year.

Second, we launched a number of new funds, including two Timberland funds, Island Timberlands on the West Coast, and Acadian Timber Trust in the East. We established several new funds through our public securities operations including a $435 million mortgage REIT in the United States and several offerings in Canada. And we established a Canadian core office property fund with $1.75 billion of assets.

Third, we expanded our platform for managing real estate and fixed-income securities with the addition of a New York operation and added selectively to our professional staff throughout the organization.

Fourth, we have laid the groundwork for further progress in 2006 with several funds well in advance, including a $600 million retail property fund in Brazil.

So all in all, we made good progress during the year both in terms of our financial results and in building our business. On that note, I will hand the call over to Bruce.

Thank you, Brian. Given the changes recently in the power markets and the growth in our hydro business over the last five years, we felt that we would highlight these operations on the call today. Richard Legault has joined us and will make some comments on this which hopefully will explain to you a little more about the unique nature of these assets and our continued growth in the business, both organically and by acquisition that we hope to have in the future.

In general, we operate the power business in a risk-averse manner, like all of our other operations. We sign long-term contracts on an asset when we can achieve long-term returns we desire and , particularly, when we believe pricing is in excess of long-term normalized pricing, and when that can be achieved.

We have generally in the past purchased assets based off of $25 or $30 oil, $4 gas, and $40 per megawatt hour electricity. Today, while we don't believe $60 to $70 oil, $8 to $10 gas, and $80 to $90 electricity is a long-term norm, we do believe that a new base has been formed. As Richard will make some comments later on, this should generate greater cash flows as we roll over contracts in the near term.

Just prior to turning it over to Richard, I will make a couple of comments on two items we often get asked. The first is our continued buildout of our Asset Management platform, and the second is the state of the commercial property markets.

First, our continued evolution of the Company into an asset manager of choice for investors. As Brian noted and as detailed in the supplementary information, our fee revenues increased to $282 million this year and our net to $98 million, up around 34%.

Two items of note. The first is that we are still, as Brian said, in the early stages of our buildout. As a result, we are absorbing significant costs today on the expense line, which is being invested for the future. We have expanded our offices in New York, London, Toronto, and our South American offices quite substantially. We have added new property teams, acquisition teams, and infrastructure teams.

All this is to say that we are building for the future but the margins are not yet there, acceptable for long-term returns on the cash flows as of yet.

The second point to note, and as important, is for our fee revenues -- that many of the funds are in their infancy. They are not fully invested. They are not yet producing incentive fees. Some are not even covering their full costs, as we build them up.

The positive from all of that, this, is that we should be able to grow at a significant pace in the future, if we can execute our plans properly in the market.

The last item I wanted to mention is the commercial property markets. Most people know that capitalization rates for properties have been going down, and hence property values up for at least five years, probably more in the last 10 years you can say. This continues to happen as cap rates adjust to this low interest rate environment.

We believe this will continue, probably to a lesser degree. But we are also hedging our portfolio by locking in as much as we can on the financing side and with our rates.

Just as important, though, to returns as the capitalization rates is the underlying fundamentals of the office business. Office rents peaked in July 2001, and deteriorated in most markets we operate; in fact most of the markets across North America, in particular in New York, Boston, Toronto, and London, and most other markets where we are.

The exception has been, in the last couple of years, has been D.C. and Calgary, where government and defense spending continuing to ramp up has driven the Washington D.C. office market, and oil and natural gas has driven the Calgary market.

Virtually without exception, though, in the last six months, office markets have seen a turnaround. Vacancies are coming down. Rents have started to increase. Little construction is ongoing or even in some places contemplated. If the economic situation continues to be stable, we should see much higher rents 12 months from now than you see today.

For example, in New York, midtown vacancy is approximately 8% and rent $70 a foot solid, with some deals being done closer to $100. Calgary rents are double on a net basis what they were 24 months ago, and vacancy is close to zero in that market.

It should be noted that due to our risk adversity our cash flows held their own during the past four down years because of our long-term leases. But as rental rates increase, we cannot mark-to-market our cash flows as fast as some others. So while this is great underlying news for the operations, it doesn't mean a significant amount to the bottom-line operations in the immediate term.

With that, I will now turn it over to Richard; and upon his conclusion we would be pleased to answer any questions from you.

Thanks, Bruce. Brookfield comprises all of the power operations of Brookfield Asset Management and is one of the largest independent owners of hydroelectric facilities in North America. The power business has been a significant area of growth for Brookfield Asset Management and a strong contributor to its cash flows.

Today, I will spend some time describing our power business, reviewing our 2005 results and achievements, commenting on the current power markets, and finally, trying to provide some insight into our 2006 priorities.

Our business model is simple. First, we measure performance on a cash flow basis and own high-quality, long-life, and low-cost power generation facilities, which will generate strong cash margins in the markets in which they are located.

Second, our power generating operations are predominantly hydroelectric facilities, which have the ability to respond quickly to changes in demand and allows them to operate during high-priced, peak periods, which further enhances our cash margin.

Third, hydroelectric facilities are a unique asset class, and we have built an equally unique management team which is capable of optimizing the value of these facilities through its operating, marketing, and financing expertise.

Today, we own 131 hydropower generating facilities located on 43 river systems, primarily in North America, with generating capacity of close to 3,400 megawatts. We believe that these facilities will earn strong cash margins in virtually any market conditions.

In 2005, Brookfield Power achieved net operating income of $469 million from its generating business, which is a substantial increase year-over-year. This growth was the result of the acquisitions and development we added in 2004 and 2005, and the market and operating initiatives which were undertook to enhance revenues and returns.

However, this increase was somewhat offset by lower water conditions we experienced in 2005 compared to the expected long-term average. Our results reflect discipline in executing our business strategy and our commitment to high-quality assets capable of producing sustainable cash flows.

Our recent business highlights include acquisitions and developments, which will add over 1,000 megawatts of hydro and wind capacity to our operations. These additions include our recent acquisitions of 16 hydro facilities and include a 600 megawatt hydroelectric pump storage facility located in Massachusetts. Also included is the development of a 189 megawatt wind generation project in Northern Ontario near Sault Ste. Marie.

In addition, we are nearing the completion of a transmission project upgrade in our Northern Ontario transmission system, which will increase our 2006 regulated rate base of this business by approximately $100 million.

In 2005, we also successfully completed $800 million in property specific financings. We refinanced the acquisition bridge facility put in place to acquire the New York hydroelectric facilities in 2004.

We also benefited -- we are benefiting from the low-interest rate environment; and the average cost of interest of these loans is 5.7%, which have an average maturity of over 17 years.

Let me turn to the current market conditions and the impact this has had on our business. First, oil and gas prices have significantly increased in the past few years. Since January 2004, the five-year forward price of gas and oil has almost doubled, significantly increasing the marginal cost of production for gas or oil-fired generation facilities.

Because these generation technologies are dominant in several North American markets, this has significantly increased power prices in the markets in which Brookfield operates. We are often asked what the impact of this higher price environment will have on the revenues of our business.

With the information provided on page 19 of the supplemental information package, we outlined that as at December 31, 2005, our financial contracts totaled 3,684 gigawatt-hours. A significant part of these contracts were put in place in 2004 as part of our forward selling strategy to manage price risk, and to secure revenues of significant acquisitions such as the New York hydro transaction.

When we look at the pricing environment -- and as an example, the average all-hours price of electricity in New York has increased from $45 for the year 2004 to $65 in 2005, and is expected to have an average of $70 in 2006. If you assume a stable pricing environment for the future, then this would mean that the financial contract in place in 2006 could generate approximately $20 to $25 per megawatt-hour of additional revenues when these contracts roll off; and this would translate into 75 to $100 million in additional revenues.

We are well positioned to continue to capture these higher prices, given the unique nature of our hydro generation asset portfolio. Brookfield does not have any material exposure to rising gas or fuel costs. This means that we can capture higher electricity prices without any corresponding increase in production costs, since Brookfield's facilities have no fuel costs.

In addition, with substantial reservoirs to store water, our facilities can generate electricity during periods and times where demand and prices are at their highest point. We believe Brookfield has significant competitive advantages which provide strong and sustainable cash flow streams.

Let me finish by giving you some insight as to our priorities for 2006. In 2005, the impact of price increases has been somewhat muted by our policy of forward selling a significant amount of our production. In 2006, we expect to continue to achieve higher prices for a few reasons.

First, financial contracts put in place in 2005 and 2006 were at higher prices compared to those put in place in 2004, and this is consistent with the pricing environment I have just described. Second, our uncontracted generation will be sold at current market prices, which are substantially higher than 2005.

We have expanded our power operations significantly since 2001, at which time the book value was less than $1 billion and the capacity was less than 1,000 megawatts. Today, our generation portfolio is almost 3,400 megawatts with power assets of close to $5 billion.

Our mandate is to continue our efforts to expand the portfolio, and we are pursuing a number of opportunities in this regard, including the development and construction of wind power facilities in Northern Ontario as I have previously mentioned. We will also seek to increase and enhance the cash flow of our current operations by capturing market opportunities, optimizing our operations, and surfacing value for shareholders.

In summary, Brookfield power is a strong competitor and well positioned in the North American power sector, and particularly in renewables. We generate significant free cash flow from our operations, and have considerable liquidity, and nearly 100 years of operating experience to draw on as we continue to make investments in the power industry in a meaningful way.

I will now turn matters over to the operator for questions.

(OPERATOR INSTRUCTIONS) Neil Downey.

Brian, a question with regard to your Brazilian retail assets that will be transferred to the fund. Will Brookfield Asset Management be recognizing a gain on that transaction? Or will it have to be potentially deferred because the fund is viewed as a related party entity or something like that?

We haven't finished the analysis on that fully, Neil, and it does depend somewhat on the structure. So I think we would expect that we would recognize a gain to the extent that there is third-party money coming in, and would defer the gain that would relate to our continuing interest in the fund.

Okay, can you quantify that number at all?

Not at this time.

Okay, that's it. Thank you.

[Adam Starr].

You mentioned the substantial liquidity that you have built up and how a certain amount of that is necessary to seed new investments and funds and maintain flexibility. Is there a base level of liquid assets that are necessary for the ongoing business? How much would you consider excess today, if any?

Thanks for the question, Adam; it's Brian. I think if you look back over the past number of years, we have typically maintained around $2 billion of liquidity, and that would consist of around $1 billion in financial assets and cash and what I would call on balance sheet liquidity, and about $1 billion of undrawn credit facilities.

Naturally, what we see as being an optimal number will vary over time, depending on what the business outlook is and what we think the various commitments and opportunities we have going forward are.

I think it is fair to say that as we sit here today, we received a large inflow of cash and financial assets during the course of 2005 with the sale of Falconbridge, and we have been actively redeploying that.

We have a number of good opportunities in front of us. I guess our expectation is we will be able to get that fully deployed, whether it is through investing in our core operations; we have also indicated that we are keen on buying back the stock and have been doing that over time; and we also have indicated that we'd take some of our liquidity and apply it towards increasing the dividends over time. And of course, we announce a small dividend increase today, around 6%.

So the business has not become more capital intensive as you have been seeding new funds, then?

It has not become more capital intensive? Was that the question?

Yes, as you're seeding new funds, is that more or less capital intensive than the old business, where you really invested totally on your own account, but obviously in fewer opportunities?

Sure, I would say that it is less capital intensive in some ways, because we are putting up anywhere from 25% to 50% of the capital of a new fund. So to the extent it requires less capital for us to take on a particular new initiative. Of course we see that as being one of the advantages of this approach.

Having said that, we do need to make sure we have sufficient liquidity to ensure that we are in a position to commit to the new funds and to fulfill commitments we have made to existing funds, which are pretty modest today.

Thank you very much.

Andrew Kuske.

I'm not sure if Bruce or Brian would like to answer this one; but I do appreciate the fact you have now disclosed your invested capital on a book equity basis for your operations. But what was the rationale behind the disclosure changes -- and not restatements of financials, but really the reclassification of what you presented and how you presented it?

Then just from a comparability standpoint, if we could run through how you used to present things on an NOI basis, what would each of the sort of historic divisions look like? So there's sort of several questions wrapped in there.

Okay, it's Brian, I will take a shot at that. I'll tell you the thing that was driving the change in the format of the MD&A -- and to a certain degree the financial statements as well -- was as the business has evolved more into an Asset Management business, and we have interest in a number of different funds, some of which would be consolidated, some of which would be presented on an equity basis in our GAAP consolidated financials.

And that was, in our mind, creating an increasing amount of difficulty in being able to explain the business through the MD&A in a consistent fashion. So what we tried to achieve in the MD&A was to pick a consistent basis that we could apply across the board.

As you know, when we look at these funds, we look at it in terms of the total assets that we are acquiring. But these are assets that we can typically finance very effectively, so we may put out $1 billion to buy the assets; finance half of it with long-term nonrecourse debt; and then we would own some percentage of the remaining equity.

So the purpose of going to the net invested capital was really to show you how those three components all work together. So you can get a sense for what the unlevered returns, what the levered returns are, and what's the amount of capital we have invested in any particular business unit. That is frankly how we run the business.

I appreciate that, I think that has actually been very beneficial. Just on the issue of the -- not restatement, but the presentation of the financials versus what we have seen historically.

Yes. We tried to order things into what are the operating assets and what are the ones that are in specific funds that we manage and have a portion of the interest in; and distinguish that from some of the other investments and financial assets that we in essence have 100% direct interest in. So that is in part how the differentiation was done.

Again, we think that again reflects how the business is currently being managed. We are sensitive to the fact that this is a new format. So in order to try and help people with the comparability we did provide some fairly detailed schedules in the back of the supplemental information form, to help people go from the consolidated GAAP financials into the supplementals, the segmented information.

It is obviously not something we can walk through on the call; but obviously we'd be more than willing to make ourselves available to help you walk through the stuff.

Absolutely, I appreciate the numbers and the disclosure that you have provided. Just one quick question, just on fee income. In the Q3 disclosure you had net fee income of $39 million year-to-date. So for the nine months.

What you have got in this quarter, for the year you stated $98 million net fee income, versus 73 last year. I'm just wondering the breakdown of that and how they sort of compare. I know it is apples-to-oranges; but is there an easy answer, or should we just do that off-line?

It might be easier to do off-line. It is pretty -- most of the components are the same. There are some elements of what would have been contained in that third-quarter number that would not be contained in the fee income at year-end.

And there's a couple of things more on a property side of the business that we would not have necessarily included in that number at Q3, because it was focused more on what we historically called the funds management part of the business. But we can walk you through that.

Okay, so it's in part a shifting from the property over to what you are now classifying as fee income?

Correct.

It's Bruce. I just might make one comment. What we have been trying to do is, as the business evolves, make sure that we evolve the disclosure. So that when people are asking us questions, to make sure that our disclosure evolves so that we answer those questions and try to provide the best information.

We clearly understand that as we change that, it will take a little while for people to get used to it. But we think over the longer term, it is better disclosure and we will get used to it.

Okay, that's great. Thank you.

Chris Haley.

Chris Haley from Wachovia. Question for whomever would like to handle it. On the power business, you talked about your financial contracts, '05 to '06; your uncontracted business moving up, or at least in terms of repricing up; and then spending money on acquisitions. Could you give us a sense as to where you think you are regarding optimizing expenses and synergies as the portfolio grows? And give us your kind of same-store expense commentary?

Certainly. It is Richard Legault and I would be glad to handle that question. When you look at the operating cost of hydro facilities, which are primarily all of the assets we own, they operate at extremely low operating costs because they are fully automated. If you look at the total number of people we employ to operate this business, the way it stands today it's about 600 people. So obviously the operating costs of these facilities are very low.

And when we acquire them, our first and foremost goal is really to integrate these facilities and to not create cost infrastructure that is not required. So I would say from the acquisition date on, we try to automate all of the facilities and use as few people as possible.

So I would say about half of our costs are royalties, property taxes, things that we have certainly not a lot of control on. So again, a long way to explain to you that I doubt that there is a lot of synergies and certainly cost reductions in sight in the future, but mainly because it is such a small component of our business.

That can come through expense management but also revenue synergies, or managing your water or reserves, reservoirs. How would you characterize the revenue synergy potential?

That is an area of focus on a daily basis, because that is really where we actually capture the most value. An example of that is that we actually will, on the New York portfolio that we acquired, we're looking at -- even if it's a run of river facility -- trying to peak the system to capture higher priced periods of the day.

So the optimization of that is done on a daily basis. It is an expertise that I think that we have applied to all of the facilities. The growth and income that you see coming through, and if I recall, I think about 50 to $60 million in the last couple of years has come through not necessarily through cost reductions, but rather revenue improvements. And I think that we will continue to try and certainly capture as much of the peak periods. That is really, I think, an area that is important.

The second part of the equation is the contracts, which I think I tried to address during the presentation that I made. But again, we put contracts in place and we have again a fairly conservative way of running our business. When we acquired the New York portfolio, we put in place several contracts to actually secure revenues and reduce the risk profile of these facilities going forward, certainly in the first few years.

As these contracts, which are mainly financial contracts, roll off, we are positioned and certainly poised to take advantage of certainly the higher price environment. I really believe that what we outlined as an example, if you believe that power prices are going to remain above $65 or $70, that the amount that we mentioned is certainly, I think, mathematically correct.

I appreciate the detail.

Chris, it's Bruce. I might add one other thing. It is just on the, call it, synergy side. We have a significant fixed cost component to our marketing operations that sell the power. So probably one of the biggest synergies is that when we are doing acquisitions, we already have everything in place to add in a new system. Therefore, you have seen us [slide] plant by plant over the last number of years.

It's a very easy for us to add plant by plant in. Because we already have a significant fixed cost component that covers it. That is a significant advantage that we have over other people acquiring assets.

I guess people often ask us why you were able to buy these and not others. There's a number of reasons, but that is certainly one of them.

As you look at what a cash on cash, cash flow return in the first versus the third year or fifth year, on the acquisitions you have made, kind of give us a sense as to what you think the investment yields, the out of the box yields are today on your marginal invested capital, versus what you planned them to be?

Just on expense management improvements or revenue synergy improvements, how much of an improvement might there be?

Again, going into the acquisition of the York portfolio, we were looking at probably going in with a fairly conservative set of assumptions at something in the range of a 9% to 10% return on assets; meaning the whole investment should have yielded us about 9% to 10%.

Today, with certainly, I think with all of the things we're doing, we produced about 3,000 gigawatt-hours per year, and we feel that we are probably capturing a couple of dollars per megawatt-hour just through peaking the system every day.

Ultimately, we have held costs. As Bruce outlined, Reliant use to manage these facilities from Houston, and their trading operations was in Houston. If any other buyer would have looked at this, it had no administration and no marketing capabilities at all.

So again, implicit in the returns that we had, we felt that we could add value to that. Today, we are certainly substantially higher, if you do the math. With the investment capital we are probably in the range of about 12% to 13% from where we were.

And marginal rates of return today are?

If you look at making a new acquisition, your question is (technical difficulty) ?

'05 '06 capital returns.

In terms of a new acquisition, certainly, I think, there is a lot more capital chasing opportunities today. So I would say that the returns are certainly getting somewhat smaller. But in what we have actually been looking at, which is mainly uncontracted hydropower generation, typically there are fewer people looking at those opportunities than looking at the contract ones.

We have been more successful in trying to conserve and preserve the types of return thresholds that we have had in the past.

Thank you.

Peter Sklar.

Just relating to your new disclosure, when you talk about fees earned on page 7 of the supplemental information package, the $59 million of net operating cash flow that you have from property services, that source or that business is external to Brookfield Properties, is it not?

There's a few components to that, Peter. There's an element of that that is within Brookfield Properties. So for example, as we commented over on page 8, there are some leasing and project management fees included in that $59 million number; there is a $30 million fee, for example, included in there.

It also includes a number of the residential property businesses that we have run ourselves, and those are outside of Brookfield Properties. So it is a mix.

Do you have any idea roughly what the split would be? Would it be 50-50?

Peter, when you say external, do you mean fees coming from outside parties? Or do you mean within Brookfield Properties as a company?

The latter. Because what I want to make sure I don't do, Bruce, is double count the value of the fee stream.

Yes, and that would be wise. I would say if you take out the $30 million, for example, that was in Brookfield Properties, and we referenced that one specifically, then that leaves you around $29 million. That is probably around 50-50 between what is within Brookfield Properties and what -- the business that Brookfield Properties conducts; and the other 50% would be some of the businesses that we have conducted, especially on the residential side, for a number of years.

Okay. I know in a previous question this came up, but in the other two lines you have under fees earned, we have asset management and investment net operating cash flow; 20 million and 19 million respectively. Where were those items disclosed under the old disclosure?

A number of those would have been included with the number that we would have presented in the funds management section.

So that was the 14 million in the third quarter?

Correct.

Okay. Just moving on, moving to the power side of the business, is there any disclosure in the package what your operating income is from the transmission and distribution business?

Yes, that would be -- we have aggregated that with our timber and infrastructure section. So actually over on page 20. It would indicate to you that there is $24 million of net operating cash flow from the electrical transmission business.

Okay, I see it. On page 19 in the disclosure on the power business, top of the page, there is kind of a hypothetical operating cash flow calculation that gives you about $0.052 per kilowatt hour. What are the assumptions under the revenue line in terms of -- like what year of contracting are we talking about? How do you incorporate your spot sales of power?

That is basically looking at a price that we think you could achieve going out into -- at the current time looking out into 2006. Richard, do you want to add to that?

Yes, if you look at, for example, the all-hours pricing environment right now in New York, probably for '06 it is about $70; for Ontario it is about $65. Therefore, we felt that if you took a $72, if you want, $0.072 price, it would be representative of what we feel our facility should be able to generate. Not based on lower or higher than long-term average hydrological conditions, but based on the long-term average.

If you applied that to -- with the $0.02 per kilowatt cost, which corresponds to the cost of operating our hydro facilities, then ultimately, if you mathematically do the math, that translates into $557 million of net operating income.

Sorry; I'm just still a little confused. The $70 and the $65 you are referring to, that is a blend of contract and spot pricing?

It is really, I think, what the forward price environment is in these markets for 2006. Also, it includes probably the ability to peak the system; because ultimately, we typically get more than the average all-hours price.

So we felt that if you believe the pricing environment is $65 or $70, in that environment we should be able to achieve, including all of the other things that we do with hydro facilities, about a $72 price.

But really is a hypothetical case where we're trying to give you an indication using our generation, to actually say if you applied a price that ultimately would be a longer-term price, without considering the contracts, that you would get $557 million of cash flow.

Okay. Can you talk a little bit on your uncontracted power, what you are getting on average in Ontario and New York, say over the last quarter in terms of pricing?

I think if you -- without necessarily sort of -- I don't think we actually refer to the last quarter in terms of that, but --

It's hard for us to figure out, because we don't know -- because power prices vary so widely through the course of the day.

Yes, I understand. But I think that if you look at the last quarter, pricing would probably have been in the range of about $75 to $80, I believe, in the fourth quarter. But this is available from the Ontario or New York ISO.

I am not trying to avoid the question; I'm just saying if you take that price you can assume that we have done better than that price. Because typically we sell more on peak than we sell on an all-hours basis. So again, we would probably be north of that number.

Right, okay. The last thing I wanted to ask you is in your disclosure, you provide pricing for your contracted power sales going out to 2010. I believe you introduced that disclosure in the third quarter, and the pricing has come down a little bit from what you disclosed in the third quarter. Is that because you have some acquisitions with contracted power at slightly lower prices, or what is going on there?

No. Certainly, I will apologize because in the third quarter we included all of our contracted revenues, but inadvertently, we actually missed including are the volumes from our thermal plant. So actually, the same revenue divided by higher volume just has reduced that. So certainly we apologize, but we missed it.

Okay, that's all I have. Thank you.

Michael Goldberg.

Thanks, I had a few questions. First of all, do you have any feel for the capacity and intent of Canary Wharf group to pay more dividends, or longer-term, do you have any update on what you think the intention of the funds is?

Michael, it's Bruce, and I will maybe just make a couple of comments. As you know, we are not the controlling shareholder of Canary Wharf, so it's up to our partners to decide when we pay dividends or not. There is significant cash being generated in the Company, and the Company sits on substantial cash resources and resources to pay another dividend should Canary want to pay another dividend. In addition, there’s a few other asset sales that we believe they are working on.

So, in the future, there probably will be more dividends unless -- which we would be happy for the Company to do unless we can find acquisitions to put the money to work more productively in the Company, which we would be just as happy with.

Specifically, to Canary Wharf, similar to what's going on in North America, cap rates have been going down in London, and vacancies are getting lower and rental rates are starting to increase. So I would say the same fundamentals are at work in London as in New York today.

Okay, thanks. Another one, could you give us an update on the progress of getting higher value funds through Hyperion relationships?

I would say the acquisition of the New York business, early 2005, we view as a great success. We have integrated into our systems. We have attracted a number of funds to their fixed income product from institutions that we have dealt with, and we've started to market our higher-value products to some of the institutions that they have dealt with in past.

These things take time; they don't happen overnight, but we're very pleased with what has gone on so far.

Okay, there is nothing, though, you could specifically point out as far as specific sales that you have made to their relationships?

Michael, as you know, we generally don't disclose the institutional relationships and who buys into what fund, just because most of the institutions don't want that type of information disclosed publicly. But I can tell you that we are -- there are a number of things that we have done with the institutions.

Okay, also, in your new presentation, as I understand it you are consolidating commercial properties, largely Brookfield Properties, without netting out the minority interests. But you're presenting residential, which is largely Brookfield Homes, netting out the minority interests there from that specific segment. Can you explain why the difference in presentation?

Michael, it's Brian. It's probably as simple as that we felt we were making a fair bit of change to begin with; and that the disclosure would be further complicated as opposed to simplified if we have shown Brookfield Properties on a segmented basis as well.

Just give you one small example, the residential business that sits within Brookfield Properties and some of the fee generating businesses, and the fact that they have the Canadian core property fund that is within Brookfield Properties. So if we showed Brookfield Properties on a segmented basis, then we would have to say not only is it core office properties, but it's these other things as well.

So from our -- we felt in explaining the business that it would be more straightforward if we kept it on a fully consolidated basis.

Okay, my last question. I just wanted to make sure that I understand Richard's point. You've got 3,000 gigawatt-hours set to roll out of financial contract by 2008. Is what you were saying was that if these -- if this power was at current market rates, it would add about 75 to $100 million to annual cash flow?

I think that if the current market environment certainly stays exactly the way it is today, that is what it would mean, yes.

Thanks very much.

Riz Suleiman.

I do have a quick question with respect to the added disclosure. It seems like what used to be referred to in the supplemental information as commercial properties is now much more granular and is comprised of what I think are probably four different things -- core office properties, retail properties, and what is now called opportunity investments, and to a lesser extent developmental property or development properties.

My question is this, with respect to opportunity investments, could you expand a little bit as to what the strategy is there? What are the markets Brookfield plans on entering besides the U.S. and Canada? And what the holding period is expected to be? And whether you think that adds to Brookfield's risk profile, given where we are in the real estate cycle and the fact that these properties going to be financed with 70% to 80% debt.

Thanks for the question. It's Brian. I will just start in terms of how the disclosure is organized, and then I will pass it over to Bruce for the specific response to your question on the opportunity properties.

Your observation is partially correct. What we would have classified before in commercial properties would have included the retail properties that we spoke of during the call. The opportunity properties that we spoke to, those were previously included in our funds management section; so they were not included in that portfolio.

The development properties were also excluded from the list of commercial properties that you would have seen in our third quarter and earlier disclosure. So the retail and the core office, those were in that group where the other two were not.

Okay.

It is Bruce. Maybe just dealing specifically with your question, as you can see in our information and you well know, we have substantial real estate resources within the Company across a number of different things. The largest amount of capital is invested in our office building business. I guess looking forward, we believe it probably still will be for the foreseeable future.

Even though we may build other platforms, we think it is not probable that in the foreseeable future we would have a bigger business than our office building business as we continue to grow that.

With all of the people and acquisition staff that we have, we used to see many opportunities that came to us that we did not take advantage of, because we just were not set up to do it. A couple of years ago, we decided to set up an opportunistic business, which ultimately we will bring in other fund investors into. We think just with the platform that we have that we will be able to take advantage of significant opportunities.

As to risk, clearly they're probably higher risk than what buying well-leased, long-term office buildings is. But the returns are dramatically higher. As a component of the invested capital we have, they won't be a substantial portion of it in the foreseeable future.

As it does grow we will bring in third-party capital. To dates like many of our funds, we try to operate them ourselves, get them working, build investments, and then bring other investors into them.

I see, thank you.

Chris Haley.

As a follow-up, thinking about the run rate, recognizing that the assessment of your Company is more driven by the underlying assets and valuing those assets, in the short run creating somewhat of an earnings model, looking out into '06, reading your language in the press release, listening to Brookfield Properties, BPO, and then looking at your fourth-quarter results, which include the pro rata share of the termination fee from Goldman, include -- look at the BHS run rate, which is pretty healthy, and maybe looking at some of the other expense items, and the amount of cash on your balance sheet -- I'm just trying to look at the metric that you have historically provided of 12% operating cash flow per share growth off of a pretty high number that was recorded in 2005. Without giving guidance, are you giving guidance in terms of your thought, in terms of the words used in the press release?

Sure, Chris, it's Brian. What we have said is what we're trying to achieve is 12% growth on an annualized compound basis over a period of time. As you would have seen from our results, it tends to vary in terms of what our actual returns have been.

There are components of the business that are seasonal, and there are certainly some elements in our results that are harder to predict, whether they be disposition gains or special dividends and things like that.

Having said that, we tend to each year and each quarter we go through -- and there is always some of them. So there was a specific question of Bruce as to whether there will be a Canary Wharf dividend next year. The answer is we don't know. It is not within our control. Having said that, we will probably have some disposition gains from something; and there will be something else.

What I would say to you is, if you look through the various parts of our business, I think you can get a pretty decent sense of where there is growth coming through.

Specifically on the hydro side, Richard talked about the outlook in terms of pricing, which is favorable. We were definitely low on hydrology during the course of 2005. So assuming that hydrology returns to more normal levels and then would certainly appear to be going above normal levels thus far, than that would stand us in good stead on that front.

Homebuilding we're not suggesting we are going to get the same kind of growth necessarily, but the outlook looks good. So it may not be on a percentage growth basis the same amount, but we're looking for continued growth in the U.S. side; and Alberta is looking extremely strong.

On the commercial properties side, because of the long-term leases and you straight-line your rents, you don't tend to see the same -- the growth comes through more slowly. Having said that, they have a number of lines that they have been working on to continue to grow the business, whether it's the Canadian core property fund.

So there's a lot of areas that we can look to that will provide us with the good stable growth, but it is always going to be influenced somewhat by these more significant items.

So sitting here today, we're not going to say that we're going to grow the business by 12% in 2006. But what we're saying is that is our target for the longer term, and we think that the pieces are in place to achieve that.

(technical difficulty) the granularity. If I look at fourth quarter that was reported, if I back out -- I am backing out onetime items, at least on revenue or dividends, special dividends from affiliator investments, what would you say? Were there any expense items, over accruals, that may have occurred in the quarter that we should consider?

That is probably a level of detail that is a bit tough to get into. Obviously, we flagged the Canary Wharf dividend, as well as Brookfield Properties identified the fee that they earned in that regard. We have also I think indicated through the materials that we did have a bit of a tough time with some of our investments on the forest products side. But I think that is really about all I could say in that regard.

All right, thank you.

Peter Sklar.

Just an overall question on the model you are developing, which as I understand is effectively where Brookfield Asset Management is a sponsor and manager of a serious of funds where you invest not only your own capital but third-party capital and earn the associated fees. How do you bring that model to Brookfield Properties, BPO? Or is it possible that you could be acquiring assets from BPO in order to put them into the funds of these natures? I'm just wondering how you bring this model to Brookfield Properties.

Well, the answer to the second question is quite simple. We will not be buying assets from Brookfield Properties that we would be involved in buying. Just the related party nature of that, we probably would not ever entertain.

But the answer to the first question I think is more relevant. Essentially what we've been doing -- and we view that the Brookfield Properties operations are a very big component of our business, and we have some capital markets partners that happen to own 50% of the business with us -- and we have been deploying the same strategy within properties as we have been within the balance of Brookfield Asset Management.

Specifically within properties, the acquisition of the O&Y portfolio this year was three-quarters properties or 25% properties capital and 75% institutional capital, with significant fee component to drive their returns over time. They plan on closing core office funds in the U.S. to do their U.S. future acquisitions. So as a result of that, we are essentially driving the same model within Brookfield Properties.

Okay, I understand. Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Thank you, everyone, for joining the conference call today. If there are further questions, please contact Brian Lawson or Brian Davis or myself, and we would be happy to answer them for you. Thanks very much. Bye-bye.

This concludes today's call. Please disconnect your lines and have a wonderful day.