BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the Brookfield Asset Management second quarter conference call for Thursday, August 3, 2006. Your host today will be Katherine Vyse. Please go ahead.

Good afternoon and welcome to our second quarter conference call. On the call with me today are Bruce Flatt, Managing Partner and CEO, Brian Lawson, our Chief Financial Officer and Brian Davis, our Managing Partner of Finance. Brian Lawson will provide us with an overview of our financial results and highlights of our operations. Bruce will talk about our strategy and major developments, and then we'll throw the call open to questions.

Before handing things over to Brian I should just note that in responding to questions and talking about our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. For further information on known Risk Factors I would encourage you to review our annual information Form or our Annual Report which are available on our website.

Brian?

Thanks, Katherine. Good afternoon.

We achieved good growth in our financial results this quarter. A 23% increase in operating cash flow per share compared with the second quarter of last year, and in total our operating cash flow was was $267 million in the quarter, compared with $250 million in that same period last year. We benefited from strong performance across nearly all of our operations, in particular, our Power operations. They experienced higher generation volumes, and our Property operations benefited from the contributions from recently acquired properties and as well we disclosed of surplus land holdings and non-core office buildings we had recently purchased in a portfolio transaction.

We also made good progress in further building out our operating platform in a number of areas some of which Bruce will cover later and which we believe will lead to continued growth in our cash flow per share. Our office portfolio continues to perform well. We are seeing increases in occupancy and rental rates across virtually all of our markets. In particular, rents in Calgary have nearly doubled over the past year and gross rental rates in Midtown Manhattan have also increased substantially over the recent period. Furthermore we're seeing increased leasing activity in downtown Manhattan, which is important to us as well. The London UK market is performing strongly, property values there are benefiting from strong leasing fundamentals as well and also the announcement of pending REIT legislation in the UK.

Bruce will speak on the Transelec acquisition later but in addition to this transaction we closed on two more properties in Washington DC area, further expanding our presence in that market to six properties totaling 2.3 million square feet. And we recently launched the development of two properties, Bankers Court in Calgary, 265,000 square foot 15 story building which is adjacent to our Bankers Hall complex and the 1.2 million square foot Bay Adelaide Center West building in downtown Toronto. Our residential operations were mixed but produced higher cash flow than the same quarter last year.

As expected, our U.S. Operations experienced slower home sales but this was more than offset by higher bulk loss sales and lower G & A expenses. Our Canadian operations meanwhile continue to benefit from the red hot market in Alberta fueled primarily by the oil and gas industry, and the housing market in Brazil is also strong. We have tried to position our U.S. housing operations to enable us to ride as lower fundamentals and hopefully we will also be able to capitalize on opportunities which may arise. Finally in the Property area, we closed the funding for our Real Estate opportunity fund which has roughly $250 million in equity capital and increased the assets in this fund to $600 million during the quarter.

In our Power operations, we experienced better water volumes at our existing facilities, slightly below long term averages, and also benefited from generation at newly acquired facilities. Overall we are up 16% in generation over the same quarter last year. Although spot power prices were lower in the quarter, the impact on us was largely mitigated through the use of our contracts to hedge out much of the price risk in our portfolio.

And more lately, we've observed a meaningful increase in prices as a result of the recent heat wave and also note that the futures market suggests a return to higher natural gas prices in 2007. And this leads us to believe the Power prices will continue to strengthen in the future. Our water storage levels are above average and with 82% of our Power pre-sold at an average of $64 per megawatt over the balance of the year we are confident of achieving our financial and operational goals.

We completed the acquisition of two hydrostations in Maine during the quarter with 40 megawatts of capacity and have agreed to purchase two other facilities in the Eastern U.S. during the third quarter. Ontario wind development project is proceeding well. We now have 50 wind turbines in place and expect to have the full 126 turbines up and running by next spring. As you probably recall, the Power generated by these facilities will be sold under a long term contract with the Ontario Power Authority.

Turning to our Timberland, these operations completed a good first six months of the year contributed to operating cash flow of $23 million. This includes our Island Timber Fund on the West Coast, and the Acadian Timber Fund on the East Coast. We are quite active in our specialty fund operations. During the quarter, our Bridge Lending fund closed on approximately $700 million of financing and had in hand a further $500 million of commitments for the third quarter. On the restructuring side of things, Transelec continues to move forward with the turnaround of 37% on Stelco and the reorganization of Western Forest Products which merged with Cascadia during the quarter thereby creating a stronger coastal lumber Company.

Our fixed income and Real Estate securities group increased assets under Management by roughly $2 billion during the quarter as well so there's good progress there. From an overall perspective, virtually all of our businesses are continuing to generate increases in cash flow, and this also includes increases in fee income which is a major objective of ours. Annualized base Management fees now exceed $60 million and that's up from $55 million at the end of the preceding quarter and we expect to achieve meaningful contributions from performance fees and carried interest as our funds mature.

So all in all we feel it was quite a good quarter and just before I conclude my remarks I will confirm that the Board declared a $0.16 per share dividend on our Class A shares payable on November 30 of this year, to shareholders of record on the first day of that month so I will now turn it over to Bruce to cover a couple of specific topics.

Good afternoon and thank you to everyone for joining the call on this summer afternoon. As Brian noted, we did have an active quarter.

We're working on expanding many of our operations, both locally where we are active today and internationally in markets where we have chosen to operate. As Brian also noted in general, our asset groups where we have operations today and where we're focused have performed well over the past six months and I won't really spend any time talking about those because Brian spent a lot of time on it.

More importantly with small exceptions, it looks like the operations should perform well for the balance of the year. From a growth perspective, we added as our press release notes, about $10 billion of assets to the operations. Once all the transactions are closed, our assets under Management will be close to $60 billion. This did include two sizeable transactions in the quarter. The first one is $5 billion of property assets which are being added in our U.S. Core plus office fund. The transaction being completed for Transelec allows us to significantly increase our assets particularly in New York, Washington and in downtown Los Angeles and Houston to newer markets where we'll have a significant presence.

We currently as most of you will know have two public offers in the market, so other than what I just said, we probably won't be able to answer any questions or make any further comments on Trizec on this call. Secondly, our growth also included $2.5 billion of transmission systems. This adds substantially to the operations which we have in Ontario and is a big step in our plans to continue to expand our transmission operations.

Our website contains significant disclosure on this acquisition, but in summary it's about 8,000 miles of transmission lines so to make up the vast majority of the transmission lines in Chile. They are rate based assets which gives us stable long term returns and we closed the purchase in a transmission fund which includes three institutional investors. To our prior involvement in the Resource business in Chile and our extensive operations in Brazil, we are very comfortable with Chile as a country and believe that given the growth in the Chilean economy, we can play a substantial part in expanding this transmission Infrastructure in the country while also earning solid returns on the capital we've invested.

We added about $500 million of Power plants to the operations. In fact nothing significant, just continued organic acquisitions and developments, and we continue to look at other acquisitions, but as in every industry today, the availability of capital and the markets being quite free continues to push prices higher and make acquisitions more difficult to attract.

Overall, I'd say we had a solid second quarter as Brian had mentioned. We set the stage for expanding a number of our operating platforms. We continue to put work or capital to work at attractive returns and what we believe for shareholders for the longer term, and with those comments, I'd be, I'm pleased to turn it over to the Operator and we would answer any questions which shareholders or analysts may have.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Your first question comes from Neil Downey from RBC Capital Markets. Please go ahead.

Good afternoon, everyone. Bruce, the Chilean transaction was put on your balance sheet on June 30, I believe, yet there's nothing in the income statement from that investment. Now that you own those assets are you able to talk about the more specifically about the return on asset expectations from that $2.5 billion?

I'm not sure -- we put some disclosure on our website on them. It doesn't include returns. That's not -- it's not publicly disclosed so I'm not sure that we can do it on this conference call. Having said that, Infrastructure returns are today attractive rate-based assets which we think will generate with it these and everything we get along with it will meet our returns that we set for the Company. So I'm not sure that I can say anything more than that, Neil, but we'll think about whether we can further disclosure in the future on that acquisition.

Okay and the second question, your supplemental disclosure shows that you got about $1.1 billion of I guess net cash and financial assets, and in the quarter you earned close to $100 million of operating cash flow. That would seem to indicate a 30-40% return on those net assets. If I'm doing my math correctly, how was that generated? A $97 million return on $1.1 billion of net investments in those securities.

Sure, it's Brian. I think we should find that if you go back and look at our results from that particular segment over the years, we've been fortunate in a number of quarters to have some pretty, what I would call exceptional returns, and it's a mix of what I would characterize as a base carry on those instruments, and you'd see some of them are in the nature of high yield bonds and preferred shares and corporate bonds and so there's a certain amount, let's say that it's $40 million that off of those assets we should just get as a basic carry and then we've been fortunate and maybe it's been a little higher than that and we've been unfortunate in a couple quarters where we've had some things come to fruition where we've had realizations and capital gains and over the years those have varied from monetizing some of our high yield bonds that we had in the energy sector for high gains and other things, and then there have been a couple of quarters where frankly we've been well less than the the 100 million , and so there will be a little or tend to be a little bit of lumpiness in that excess over the base return.

Okay. Thank you.

Your next question comes from Chris Haley from Wachovia Securities. Please go ahead.

Good afternoon. It's Brendan Maiorana with Chris. I just wanted to spend a second on the Power. I think you guys added some language in your supplemental disclosure stating that you really weren't seeing the pricing on long term Power price contracts, such that you would be more willing to lock in a shorter pricing, lock in pricing on a shorter term financial contracts, but Brian, you mentioned that the forward curve suggests that prices are unlikely to go up into '07. Would you be more willing to lock in long term PPA pricing assuming that the forward pricing, the pricing of the forward markets goes up to what '07 levels are suggesting?

Well, I think the challenge there, Brendan and as you would recall our contract profile is somewhat of a barbell. We have a number of very long term PPAs as we would call them, power purchase agreements and we have a number of short term which are more financial contracts with financial counterparties, and the challenge is really that going out much further than 18 or 24 months in that area of contracting, there's not much liquidity and so it's difficult for us really to get good contracts at levels that we're comfortable to go and lock up a meaningful amount of our Power at.

I think the point of the clause of the sentence there was to say the point there was as we can identify opportunities to enter into longer term PPA's, such as ten, 15, 20 years, we will definitely do that as long as they are at the level where the folks feel that locking up that Power at that rate is such that you're going to get a sufficient return keeping in mind as well that you're taking risk out of the business, and obviously to the extent that we haven't done too much of that would suggest that we haven't been able to get comfortable with those prices as yet, but we'll hopefully get there and I think as the market stabilizes and matures there will be more opportunities in that regard.

Okay, thanks. And then just turning to the properties side of the business and the Property funds, thinking back to the detail that you guys laid out in your Investor Day last year, the U.S. core fund seems like it's probably assuming Trizec is classified as the U.S. core fund is probably a bit higher on the asset side than what you guys were expecting yet it seems like your assets to date for the Brazil retail fund and the opportunity fund are maybe a little bit less than what the target size that you guys were looking for? So I'm wondering if there's any difference in or if it's just that it's harder to find assets to purchase and the opportunity fund and the Brazil retail fund, if you could comment on that?

You know, I would make, I guess I'd respond to that by saying that in general, we generally set platforms up and look for opportunities and largely, what we've participated in is purchasing significant transactions where our capital gives us an advantage to closing a transaction, and scale gives that to us because there's less people that can compete for us. The Trizec transaction is an example of that, so I guess from time to time we'll have larger transactions.

The fact that we closed or we hope to close that transaction and we haven't bought as much of assets in the other two that you mentioned really has nothing to do with the -- what we think about the future. We're very positive about adding assets to our opportunistic funds and as well as our retail asset funds in Brazil. Having said that, the opportunities just haven't come along and they have a long duration investment period and I'm sure we'll be successful in filling the assets but we'll wait for the right opportunities.

Okay, great. Thanks a lot.

Your next question comes from Andrew Kuske from UBS.

Thank you, good afternoon. I'm not sure who wants to answer this question whether it's Bruce or Brian but if you could speak to your capital allocation, to your residential homes business, the capital that you're allocating to that business continues to increase on sequential quarters or year-over-year, and I just wondered if you can give us a bit of a break down by region for that capital allocation?

Maybe I'll give a general comment and Brian might be able to specifically answer your question, but just on the industry, in general, I guess we're a positive -- we're positive about the industry. I'd say our Canadian operations, as you know, or as you will have seen, are extremely positive right now.

Our U.S. Operations are, I guess, undergoing a little bit of a change, I'd say, for the negative from a year ago, but having said that it's not something that we haven't expected for a long period of time, and our operations in Brazil in fact are getting, are much more positive given reductions in interest rates in Brazil. So, in general I'd say we're positive about the business across-the-board and we hope actually in the U.S. To be or to look for further opportunities to put capital to work in the business.

And I'd say from time to time, we find opportunities to put money to work at very attractive long term returns and we do, and as to a sequential increase in assets over time, there may have been that but there's been no concerted effort to put a lot more money to work in the business. I think it's more just the fact that there were some small opportunities that increased the balance sheet.

Yes, an element of seasonality as you know, especially in the first six months of the year, and we did -- we have been putting more money into the operations naturally in Alberta just given the higher level of activity there and they've been expanding their operations somewhat as well.

And just on the Alberta market, how do you see that market from a sustainability standpoint? Do you believe your numbers will grow from that business? If I'm correct this is also the first quarter where you've broken out in your supplemental information, your residential business to the details of the U.S, Canada and Brazil.

Oh, I think we have had that in our interim. I think the last time we released our supplemental was before Brookfield Homes had released their results and so we compress it until such time as they've done that but I think for comparison purposes, if you go back and look at our interim, it would have been laid out in a similar format there.

To the actual business, and I'll just make a comment on it, we have been in the Calgary market for close to 20 years. It's been an extremely good business for us. We've made a very high returns in that business over the years. The returns we're earning today are exceptional. Your view on whether that will continue has a lot to do with what your view on oil and natural gas prices are.

The Alberta markets are being driven significantly by the oil and gas industry. Single family housing prices on average in the Calgary marketplace are up 50% in the last eight months, and you can well imagine what that means for land prices in the market, so I don't, as long as you believe that Power prices have a long term trending upward number, then I'd have to believe that we should be able to hold the numbers that we're generating there.

Great. If I may ask just one albeit quite different question on a tax loss. If you could give just an update on the tax losses that BAM possesses at this point in time?

I'd say the development there during the quarter, there hasn't been a significant change I would say in our tax losses since year-end and that's probably the last time we would have given specific information on the pools, but I think perhaps what you're referring to is the fact that they did change the effective tax rate in Canada which did cause us to adjust the values at which we carry those pools on our balance sheet. It doesn't affect the size of the pools and we would still expect to be in a position to shelter most of the operations from having a cash, a current cash tax liability for a number of years yet.

Okay that's great. Thank you very much.

Your next question comes from Peter Sklar from BMO Capital Markets. Please go ahead.

I noticed in your package that on your fees earned section that you've changed your disclosure, whereas I believe in previous quarters you were providing the growth fees and net fees after operating expenses and now you're just providing gross fees.

I had a little bit of a conversation about this earlier today with Brian Davis, but I'm just wondering if you could go through the reasons about why you've changed your disclosure and when you think you'd be able to restore the old disclosure because as you know, the fees that you're earning on third party capital that you're managing is part of the story that you, the Management team, have been telling so I think myself and other investors are very curious to know what the net contribution is from this fee stream and are monitoring it quite closely.

Sure, okay, Peter. That's certainly a fair question and a good observation. First of all, in terms of why and just for the benefit of other folks on the call, we did in a couple of our previous quarters identify what were expenses that we were attributing to the Asset Management fee generating side of the business and what we called corporate expenses or I guess unallocated and the challenge there, frankly, is that as the business overall has evolved into an Asset Management business and that becomes more and more of everything that we do, it becomes increasingly difficult for us to say that this expense is Asset Management and this isn't or this person is Asset Management and this person isn't, and really , at the end of the day, Brookfield is an Asset Management Company and we intend to do as much as we can in that model going forward, so it became increasingly challenging to allocate expenses between one category and the other and particularly some of the recent transactions where we've had folks at a number of different parts of the organization working on it and continuing to work across funds going forward.

So that really, unless we could clearly identify and clearly allocate those expenses, we felt it was not appropriate for us to distinguish numbers unless we could be very clear on that point. Now, having said that, we appreciate and we have received some feedback that it would be desirable for folks to get a sense for how the profitability of that business is going forward and so we're thinking through what we can do.

I don't think we would see ourselves going back to the old disclosure and having said that there may be certain elements of it that we can shed more light on to help you assess that and I think at the end of the day what I would be looking for is how are our fees growing and I made the comment the base fees now are through $60 million on an annualized run rate versus $55 million and so as we continue, as we bring forward a new initiative and build those base Management fees, how are we also managing things on the expense side, and ideally, we're doing this obviously there in a good gross margin on those fees and that should become evident in how those lines grow over the years. But we'll see what we can do in terms of shedding a bit more light on that.

Okay, thanks very much.

Your next question comes from Michael Goldberg from Desjardins Securities. Please go ahead.

Thanks. My question is sort of along the same lines, and perhaps I have a suggestion as to how you might be able to deal with this issue, and that would be if you could provide us with the amount of assets that are subject to earning performance fees. Do you have some idea of what that amount is at the end of the latest quarter, at the end of the first quarter and year ago?

Oh, gosh. I don't think I could rattle that off on the comparable basis like what you said. I mean one observation I would make is if we have 50 some odd assets under Management and we've got $30 billion capitalized on our balance sheet, then that would suggest that there's 20 some odd billion dollars that we're managing on behalf of other parties and those are subject to fees.

And some of those would be subject to annual fees and some would be subject to annual fees plus performance fees, and I think in the future we'll try to come up with a table but to disclose some of that information for you, Michael, and for others.

Can I conclude though that on a lot of the fixed income- type assets that you acquired with Hyperion, that you don't earn performance fees on those assets or if you do they're very very minimal?

I think on that basis, there is some element of performance, but I'd say on the fixed income business, it's safe to say they are definitely lower magnitude fees than what you'd see in some of the other parts of the business, certainly, where we're trying to achieve a two and 20 or one and ten.

So perhaps you might be able to split it out along those lines, the assets where there is more potential for performance fees just as a way of demonstrating the Asset Management, the progress in the Asset Management theme?

Sure. Last year when we had our Investor Day, we actually did sort of by fund by fund what the targeted or what the actual fee streams were, and I think in the future, we can probably do that on an actual basis and try to show in general.

The problem we sometimes have is that this specific funds and if it is just one fund or two funds are private arrangements with investors and there for we can't disclose them fund by fund. If things were in the public market as some of ours are, we're obviously happy to disclose those because they already are disclosed out in the public realm.

Yeah. That's fair.

Okay, thanks.

You're welcome.

Your next question comes from Alex Avery from CIBC World Markets. Please go ahead.

Good afternoon. I was just looking at the Bridge Lending and assets under Management increased substantially as well as the cash flow contribution. Can you just talk about what's behind that and I guess in the current M & A environment is that something you're focusing on more?

Yeah. We've had a bridge fund and just for everyone's benefit we have a bridge fund in Canada that lends I call it mezzanine and up capital on a transactional basis to companies that we can understand the investment industries that they're in.

A lot of the assets that are on the books are backed by Real Estate which we're very comfortable with as a tangible asset class, and in the last six to nine months, our Bridge Lending teams have been quite active on a number of transactions, and we think in the current environment there's a number of entities that we can assist them through transactions and generally, it's on a relative funding basis , quite a positive margin lending for us.

Okay, and can you just talk about the nature of the co-investors and if there's I guess further demand for that bridge fund or is that capped out?

No. The fund, the existing fund we had set up with about four different, four or five different institutional investors and they would range from I would describe them as government agencies, large financial institutions and that's really our target audience in terms of that type of business.

And in general, what we're attempting accomplish is the industries that we know very well, we think our teams are as knowledgeable and can lend up to a relatively high loan to value on a very quick basis and we're comfortable in taking those risks and there for, to put a plug in for our Bridge Lending team, if anyone is looking for capital in the industries we participate in, we think we are a very, we can be a very successful lender to entities that need capital quickly.

Okay, great. And then I guess with the largest portion of your net invested capital in Property investments and I guess with the view to continuing your progress towards the Asset Management platform, are you looking at bringing further co- investors into some of your current Property investments?

I'd say firstly, each of the two major acquisitions that we've done in the last two years have been done through institutional funds, so you can see that we're trending that business or those, that operation that we have towards the same model that we have in everything else. We've not yet taken a lot of the assets off our books believing that the capital depreciation from those assets as the leasing markets improve will give us a pretty solid return, but over time we could consider that although we don't have the intentions right now.

So I guess that isn't something you're looking at right now?

Well, for example, just to make a case in point, we are taking the retail assets we own in Brazil and putting them into a fund and then we're going to expand the business so in that situation we actually are doing what you're asking about.

Okay. That's great. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS].

Thank you, Operator. If there's nothing -- is there one other question?

There is is one other actually. This question comes from Riz Suleiman from Credit Suisse. Please go ahead.

Great thank you. Managed to sneak in there! Just thinking very very holistically about your business in general, I know you talked about the fact that you're all constantly looking for opportunities and putting capital to work. Are there specific opportunities that are let's say more available than others? Just given where Real Estate prices are and the properties business might be a little bit difficult but are you finding opportunities whether they be in Infrastructure or Power generation for that matter that you tend to or get most of your focus?

I'd make the comment this way. We generally like to have across the business a few different areas where we can put capital to work and have operating platforms that allow us to do that and the reason for that is that in any one point in time, transactions flow in different asset classes and I would say I can't tell you where or which of the asset classes we'll be adding over the next 12 months.

I'm quite sure that we'll be able to find our share of transactions to put capital to work, but the transactions happen as corporate events & Companies come about and in fact because the world operates the way it does, sometimes in the least expected places you can find transactions, and so the bottom line is that I couldn't tell you where specifically one of the areas where we'll be trying to put capital to work. Our identified areas where we're trying to put capital to work and we have a number of things in each of the areas we're working on.

That's fair enough. Thank you very much.

You're welcome.

We also have a follow-up question from Michael Goldberg from Desjardins Securities please go ahead.

Thanks. The Trizec transaction I guess pretty clearly demonstrates that institutional investors are prepared to pay more for REITs and REOCs than the market is prepared to pay given the appetite for income that these investors have. So in that light, why wouldn't you consider more strongly doing something like that with the core office assets that you own in Brookfield Properties?

Thanks for the comments, Michael, and we will take them as given. I guess I'd say that these are public securities we're dealing with; there for, I probably can't make any comments on it. That's not to be meant anything other than the fact that it's a security of the trade and marketplace and we're significant shareholders, so we generally don't make comments about those type of matters.

Okay.

[OPERATOR INSTRUCTIONS]. There are no further questions registered at this time.

Thank you, everyone, for joining us today, and if there are any questions for management, we're obviously available at any time to answer your questions and if nothing else, we'll see you at the next conference call. Thank you.

Thank you, Ladies and Gentlemen. This concludes today's conference call. Please disconnect your lines and thank you for your participation.