BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2006 Q3 法說會逐字稿

Good afternoon and welcome to the Brookfield Asset Management conference call for November 3, 2006. Your host for today will be Robert Harding. Mr. Harding, please go ahead.

Thank you very much, Operator and good afternoon, everyone and thank you for joining us today. I'd like to introduce the members of our Management team who will be participating in today's call. Brian Lawson, our Chief Financial Officer will cover our financial results; George Myhal, our Managing Partner and Chief Operating Officer will comment on our Latin America activities; and Bruce Flatt, our Chief Executive Officer will make a few comments in our recent quarter and current initiatives. Following the presentations we of course will open the call for your questions and comments.

Before turning the call over to Brian I would like to caution listeners that our presentations today may contain or refer to forward-looking information and may contain estimates or other predictions of or indications of future events or trends. As such our actual future results or performance may differ materially. These Risk Factors are more fully described in our annual information form under the heading business environment and risks which can be found on our website and in other published information. Thank you. Brian?

Thanks, Bob, and good afternoon. The third quarter was positive in terms of both our financial and operating results. We recorded $386 million of cash flow from operations and that's an increase of 29% over the the $286 million recorded in the third quarter of 2005. Our net income during the quarter was $245 million compared with $736 million in the same quarter last year, although it's important to remember that 2005 did include after-tax gains and equity earnings of $660 million from a major disposition.

We benefited from good performance and growth across nearly all of our operations. In particular, our Power operations experienced higher generation volumes which more than offset a lower price environment, our recently acquired Timber and Transmission businesses contributed in line with our expectations, and we experienced favorable outcomes with a number of smaller investment opportunities. We also made good progress in further building out our operating platform in a number of areas and achieved a number of key milestones. We completed the formation of a North American Real Estate opportunity fund and a Brazilian Retail Property fund with $1 billion of equity capital between them. We recently closed on the acquisition of the Trizec portfolio and we also completed a $500 million public offering for a portion of our Brazil residential business. And of course all of our Management teams continue to enhance the value of our existing operations through their ongoing focus on high quality performance.

Turning to our Property operations, they contributed $380 million of cash flow during the quarter. Equal to the contribution in the quarter last year, you will recall that the 2005 quarter included a a $110 million dividend from Canary Wharf while the current quarter includes a $79 million gain on the vend in of our retail properties into the Brazilian institutional retail fund that we established during the quarter. This gain represents a partial realization of the considerable value created in this portfolio over the past number of years.

Aside from these larger items we experienced growth of roughly 10% across the Property operations. The office portfolio continues to perform well. We're seeing increases in occupancy and rental rates across virtually all of our Markets. Rents in Calgary have doubled over the past year, Midtown Manhattan rents have increased substantially and we're also seeing increased leasing activity in downtown Manhattan. We leased 2.5 million square feet in our North American portfolio doing the quarter and that includes 1.3 million within development properties and that brings year-to-date leasing to 4.5 million square feet which is more than three times the amount contractually expiring. The occupancy rate in the portfolio stands at 96% which is up 200 basis points from the same time last year.

The London market is also performing strongly with property values benefiting from strong leasing fundamentals as well as the announcement of a REIT legislation. Capitalization rates and high quality property transactions are in the sub 5% range and the June 30 valuation of our Canary Wharf investment translates into a value for our stake of approximately $1 billion compared with our book value of of $267 million. We also believe the value of our Canada Square Property is also increased correspondingly.

The occupancy rate at Canary Wharf is now 95% compared with levels in the high 80s when we made our initial investment. More recently Canary Wharf announced a further dividend of $0.48, this translates into a dividend to us of nearly 100 million U.S. dollars that we will record in our fourth quarter.

The Trizec acquisition was completed on October 5, and significantly expands our portfolio and key markets. In addition we required 4 Allen Center a 1.2 million square foot high quality property in downtown Houston for approximately $120 million and immediately signed a lease with Chevron for the entire property. As a point of interest this is the largest new office lease in North America since 2000. And we are now the largest office owner in Houston with more than 7 million square feet of premier assets. We are also in the midst of developing two properties, Bankers Court in Calgary, 265,000 square foot, 15 story building adjacent to our Bankers Hall complex, and the 1.2 million square foot Bay Adelaide Center building in downtown Toronto and continue to make progress on several other development initiatives. Our residential operations were somewhat mixed but produced higher cash flow than in the same quarter last year. As expected our U.S. operations experienced slower home sales but this was more than offset by higher bulk lot sales and lower G&A expenses and our Canadian operations which continue to benefit from the red hot market in Alberta.

We have tried to position our U.S. operations to enable us to write out a deteriorating housing market through the use of option lots for example, and hopefully capitalize on opportunities which may arise. George will talk further about our Brazilian residential operations in a few minutes.

Finally, on the properties side, 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 $1 billion through a major portfolio acquisition at the end of the quarter. On the Power side, we experienced better water volumes at our existing operations, roughly in line with long term averages, and also benefited from generation at newly acquired facilities, overall we were up 27% in total generation over the same quarter last year. Power prices were lower in the quarter but the impact on us was mitigated through our use of contracts to hedge up much of the price risk in our portfolio. We continue to believe that fossil fuel prices particularly natural gas will continue to increase over time and that this will lead to sustained increases in electricity prices. This is borne out by the future prices for both natural gas and Power.

Our water storage levels are around average and with 77% of our power presold at 64 megawatts -- $64 per megawatt hour over the balance of the year we are confident of achieving our financial and operational goals. We completed the development of Phase I of our Northern Ontario wind energy project. We now have 99 megawatt hours of capacity up and running and performing in line with expectations. Phase II will be completed within the next few months and subsequent to quarter end, in October, we completed the purchase of two hydro facilities in the Eastern U.S. which will also contribute to cash flows in the fourth quarter and going forward.

Timberlands, our Timber operations performed well during the quarter, contributed cash flow of $24 million. Our Island Timber Fund on the West Coast was somewhat hindered by increased fire activity and higher cost due to the level of the Canadian dollar but that was mitigated by sales of ancillary land for development purposes and we expect to make up for the lost ground in the Fourth quarter.

Transmission, our newly acquired operations in Chile performed generally in line with expectations with a contribution of $48 for the quarter. To put that in context we expect an annual contribution from the existing operations of roughly $200 million a year before leverage and partner interest. We've been actively integrating these operations into the rest of our platform and are exploring opportunities to expand the capital deployed in this sector both in Chile and also in North America. We are quite active in our Specialty Funds operations during the quarter. Our Bridge Lending group issued nearly $1 billion in funding commitments and we had roughly $700 million of deployed capital at quarter end consistent with the second quarter and up significantly from the same quarter last year. We have been involved with a number of high profile mandates and are pleased with the increased profile with this group within the marketplace. Our Tricap Restructuring Group continues to move forward with a number of initiatives at Stelco, Western Forest Products and Concert Industries and our fixed income and real estate securities group continued to increase assets under management.

We also generated substantial investment income during the quarter from our other investment activities. As you would expect we frequently take positions in under valued companies that we feel are likely to be restructured and put up for sale, particularly if we believe we will have an opportunity to participate in the process. We have been fortunate during a number of quarters to have recorded gains on these activities that have generated incremental returns above what we might otherwise expect to generate from our financial assets although clearly this may not always be the case.

Turning to our financing activities we were quite active during the quarter and completed a number of long term financings. This is consistent with our strategy of financing our long term low volatility assets with long term fixed rate financings. These included asset specific financings secured by office properties as well as $300 million of unsecured investment grade debt with terms of 12 and 30 years issued during October by our power operations.

And given all of the discussion this week about the issue of income trust, we did feel it was appropriate to make a few comments about the impact of these changes on our business. First of all, to be clear, there's no direct impact on Brookfield or any of our major operations as none of these are conducted in a trust structure. We do own and manage three income trusts and manage income trusts securities within our Specialty Funds operations. Clearly, the trading values of the securities issued by these trusts have declined and this could negatively impact the fees earning, we earned from managing the securities, but those are pretty modest, and this would also be a negative for us to the extent we would hope to issue securities to finance growth but we had no major plans in that regard. Because of the deferred implementation for the existing trust, the announced tax changes will not impact our cash flows until 2011 which gives us plenty of time to consider alternatives. Second and perhaps more importantly, there has been speculation that these changes will make it easier and less expensive to make acquisitions. This may well prove to be true and if it is, then that is clearly a benefit to us, so all in all we do not see any material adverse impact on us and there could, in fact, be opportunities.

So to sum, up all in all, we feel it was a good quarter. We believe we're on track for a successful fourth quarter as well. And before I hand it over to George, I'll just confirm that the Board declared a $0.16 per share dividend on our class A shares that's payable at the end of February to shareholders of record at the beginning of that month. George?

Thank you, Brian. My colleagues have asked me to make a few comments on our activities in Latin America. This is a region that we've been giving significantly greater focus to over the course of the last few months and the reason for that is because this region is experiencing unprecedented growth in investor interest and we have some historical competitive strengths in this region which we feel position us well for the future but in a nutshell, Latin America, as many of now is anchored by Mexico, Brazil, and Chile. These are all politically stable democracies that have growing economies with the inclusion of Brazil as an investment grade country which we anticipate will happen in the course of the next few months or years. All three will be investment grade and as I mentioned we have some very important competitive advantages in this region. We have a long history and expertise of operations in this region. We have a strong local Management team and we maintain high government standards in everything we do which is attractive to many institutional investors looking to increase their exposure to this region, so in a nutshell, we're an ideal partner for institutions and other investors looking to invest in this region.

In 2006, we are seeing some of the best performance from our operating groups in this region that we have seen in our history. We're recording some of the highest cash flows from operations that we've ever had, and in 2006, we completed three very important initiatives which had the effect of greatly expanding the amount of assets that we have under Management by almost $2.5 billion of third party capital. The first large initiative that we announced earlier in the year was the acquisition of a large transmission network in Chile called HCI Trans-Elect, during the quarter and more recently we completed two other initiatives. One was the successful IPO of our Brazilian homebuilding business where we issued 66 million shares at a value of $16 per share and we also announced the formation of a fund dedicated to investing in shopping centers in Brazil where again, we raised a significant amount of capital in partnership with four institutional investors. So for us, that was, those three initiatives represented very important accomplishments and have really set us well down the road to expanding our activities in the region. Brian, in his comments and in our quarterly, has referenced some of the investment gains that we will record as a result of those activities.

Turning to Brazil, specifically, Brazil is the largest economy in the region. It's enjoyed five years of successive record in export growth. It's becoming a commodity and agri business powerhouse. The country is benefiting from declining interest rates, has now got inflation under control, politically stable and as I mentioned, we believe will soon be investment grade. There are many opportunities that we believe we can participate in Brazil. There is a growing middle class which obviously impacts consumer spending, housing demand. There's a critical need for new Infrastructure. The agri business boom has really had some profound implications in the countryside.

I think many of you have heard about Brazil becoming a major producer of ethanol for example, and the country generally is in need of additional power. So some of the initiatives that we are working on are first of all expanding our homebuilding business and because we're in a quiet period on our, on the IPO of our homebuilding business I have to limit my comments there but at some future time, we would be happy to give you considerably more information on our plans for homebuilding groups in Brazil. But turning to our shopping center fund, we closed our shopping center fund about a month and a half ago, and are now looking to acquire additional shopping centers in Brazil. As I mentioned, Brazil has a rapidly growing middle class. Shopping mall sales in that country are growing faster than general retail sales and we are seeing increased foreign investment into the country attracted by better pricing and returns and what many perceive to be an under valued market. There is also a highly fragmented ownership of shopping centers in Brazil which creates a consolidation opportunity. Some of our key advantages are that we have a very strong operating base. We own a major center in Rio which we have contributed to the fund and we also have a very efficient operating platform and a highly experienced acquisition team. Also, the investors that are in the fund for us represent patient capital that will give us time to be able to deploy the capital on attractive terms.

The other potential area for us that we are looking at is the agri business area. We own a number of large tracts of agricultural land today and we are looking to expand our land holdings in Brazil. A number of the lands that we own are being presently converted from agricultural crops to sugar cane production and as many of you know, Brazil is poised to soon become the world's largest ethanol producer overtaking the United States and I should add by a significant margin, Brazil is the lowest cost producer of ethanol in the world, so we are looking at a number of opportunities that flow out of that.

In the power sector, we have also identified a number of opportunities to expand our business there. Brazil is generally in need of more power to meet growing demand. This is a country that five years ago experienced brown outs and we have a solid pipeline of greenfield hydro development projects that we are actively working on. In addition to that, we've identified a number of acquisition opportunities as well, and we'll look to take advantage of those opportunities in the months ahead.

And finally, in the area of infrastructure, there's a number of things that we are looking at in Brazil. We're looking at the transmission sector and currently evaluating a number of investment opportunities. There are other companies that have recently gone public in Brazil that are in the transmission business and we believe there could be a future opportunities for us there. We're also looking at the whole area of transportation ports, toll roads, and things of that nature, and finally, in the area of timber, we are again considering opportunities to expand our activities in Brazil and in that area.

Turning to Chile, in Chile, as many of you know, this is an investment grade country that's stable, open and liberalized, has a prudent fiscal policy and is experiencing good GDP growth. Our major exposure to Chile today is our investment in this transmission company that I referred to earlier but we also believe that through that acquisition, we can pursue additional opportunities including transmission opportunities, opportunities to grow the network that Trans-Elect owns and in addition we are exploring untapped hydro development opportunities in that country which as you know is very mountainous and has a number of opportunities of that nature.

And lastly, just before I turn it over to questions, just a quick comment on Mexico. Mexico is also a large economy. It's roughly the same size as Brazil, and it is an investment grade country politically stable democracy, a member of NAFTA, low inflation, and low interest rates and a significant oil producer. We today have very little exposure to Mexico, but it is a country that we plan to do some more homework on and pursue any opportunities to expand our activities there. So, with that, I'd like to now turn it back to the Operator to see if there are any questions that my colleagues and I can hopefully answer.

Thank you. [OPERATOR INSTRUCTIONS] The first question is from Dominique Barker from Credit Suisse.

Hi, good afternoon. You have some disclosure with respect to your annualized base management fees and it sounds like they could could be 210 million if you sold stakes in all of your infrastructure assets. Currently, what assumptions are being made as to your retention of the percent ownership in the assets and is that pretax? Any information?

Sure, Dominique. It's Brian. What we were drying to achieve with that was to drive you some idea of what the fee generating potential could possibly be within the business and that's for a couple of reasons. One is because there are some of our assets and operations that we earn fees on and there are a number that we don't and those might ultimately migrate into a fee earning structure or perhaps they won't, but one of the things that we wanted to achieve was to show -- to illustrate the fees that are paid or payable and in particular with respect to funds that we only own a portion of, we only recognize fees to the extent that of the third party ownership of those funds. And one of the distortions that can come out of that is that while we only record a portion of the fees, we actually incur 100% of the operating expenses and so that ends up distorting the margins somewhat and while -- as we've made note of, we are building out that business and so it will take time for us to grow into the operating base and hence our margins are lower than they ought to be to date. Over time that will become more relevant, so that's why that disclosure appears there. The specific answer to your question, that's a pretax figure. It doesn't reflect any of the operating expenses and the thing we do note as well is that you have to remember that those fees would result in a reduction in the corresponding returns on the assets being managed.

Of course. And does that assume that Brookfield owns say 25% or 30%, for example, of the funds, for example?

We didn't make any assumptions in that regard. We just took it across the basically the Property in power assets.

Question on the power side. You've contracted around 2,300 gigawatt hours since the last quarter at prices below $70 which assumes gas prices or I don't know, around 6.50 according to your Investor Day information yet you're saying that you're bullish on gas prices. Maybe, I don't mean to challenge you on what you've said but I'm just wondering what that means with respect to your view on fossil fuel prices and gas in particular and why you've contracted to such a degree in this past quarter.

Sure, okay, Dominique, it's Brian again and on that front that falls into how we manage the risk in the business and our conviction towards locking in prices going forward, and so as a matter of policy, as we firm up generation for future periods of time, we then go and lock in those prices. For a portion of the generation that we expect to get in that year, and we do that pretty rigorously and so the marketing team would go out and do that at that time. What you also need to remember is that there's still a fair amount of the generation that we expect to receive in that period of time that we will deal with at a later date. We always are cognizant of hydrology risks so we will never lock in too much of it in advance, but as we get closer to the date and as we see opportunities, we will lock in at the higher prices, so we will go and lock it in at the price in place at that time and that's just consistent with the policy.

And, Dominique, it's Bruce, maybe I'd add just two other comments. The first one is that we're generally bullish on gas and oil prices over the next 25 years. What they will be in the next two months or six months or nine months or year and a half, we're not sure. Lots of things can affect that. We think there's a long term increase in fossil fuel price and therefore our facilities will be worth a lot more money but we're not willing to take the risk on the downside if you get caught and if you look out, the prices that we're getting today for the power far exceeds the returns that we bought these assets off of so we're comfortable in taking the risk out.

And just one very pedestrian question. Your long term average in Ontario was 569 gigawatt hours but 200 gigawatt hours lower than your long term average last year but as far as I understand your asset base hasn't changed. Why is the long term average changing and that's changed in New York as well a bit.

It would change to a degree just as either we true-up some of the engineering estimates as we do fix-ups with the stations whether it's returbine or other sort of enhancement opportunities, so that's a figure that we continually reassess within the context of what we observed and what we're doing with the facilities.

Okay. I'll get back in the queue. Thanks.

Thank you. The next question is from Chris Haley from Wachovia. Please go ahead.

Good afternoon. It's Brendan Maiorana with Chris. Bruce in your shareholder letter, you mentioned that the return for your assets on balance sheet is meeting your return threshold and therefore, you can be I guess less aggressive trying to monetize these assets via JV or a fund contribution, and redeploying that capital into other assets. Is this a change from 9 or 12 months ago?

I wouldn't say it's a change. In essence what we've always said is when we need capital we'll look to assets on balance sheet to be able to source capital, and for now, we've had the luxury that we've had significant financial resources not to have had to do that. In addition, I'd say, and maybe the one change is that the real estate business, in particular, the commercial real estate business, probably 18 to 24 months ago, the market looked like it had stalled and I'd say today we're much more positive on the commercial real estate industry and over the past six months and it looks like over the next period of time so unless we hit a recessionary period, that's probably the only change I'd say is that we're much more positive today about commercial real estate than we were 12, 18 months ago, but in general we'll continue to do that. We'll continue to look at putting assets into funds if we need capital or if we think we can earn greater returns somewhere else but a lot of the assets we have on our balance sheet today are just, these are in replaceable grade assets which are continuing to generate good returns for us.

Okay, so let's just say if you guys don't do any significant monetization of some of your on balance sheet assets based on the plans that you've got for some of the assets that you intend to purchase, I guess, fund alongside with the institutional investors, do you think you have the current equity capital available to do that without monetizing some on balance sheet assets?

Well, it all depends on how long a period you're talking about and how successful we are at finding assets that meet our return thresholds, and I guess I'd say to you is that we continuously look at every asset on the books and all the acquisitions and the right way to fund them, and in essence, we'll put assets, we'll find capital for acquisitions through different ways, and one of the ways we can find that is through taking assets off the balance sheet and I know Rick Clark in his conference call, I think earlier this week , had mentioned that properties he's looking at possibly creating some funds and we may do that.

Okay, thanks. And then Brian, just turning to your financial assets which you highlighted again had very strong returns in the quarter and a think it's been about three quarters in a row that's probably been above where you guys expected, can you just help us understand maybe some of the risks of those investments? I mean, is there a significant leverage on these investments?

Brian may make some comments but maybe, Brendan, I just answer and give a couple comments on that, because we often get asked about this and largely, that investment line of ours includes two things. Just a general run rate on cash and financial assets that we have awaiting deployment into other areas, but what we generally do is we put some of that capital into securities in the marketplace that generally are trading in the public markets that are in areas of our expertise, and most of the time, they are companies we would be prepared to buy in whole, should the price be right, and usually when we're buying the securities they are at a price which we would be willing to buy it at, and if the price of the securities goes down, we possibly look at buying the Company.

If the security prices go up, we might, and a process starts , we might participate in the process and that has turned into some of the situations that we purchased over the last number of years, and in addition to that if they go up and they go past the point where we believe even if our process hasn't started, past the point where we believe that we should own the Company, we'll sell them, and then we would have a realized gain, I guess in two ways. If they were taken over by someone else or if we sold them in the market for that, so I mean, in essence, we view that we're buying securities in assets or with assets in them identical to what we operate today. There is no more risk in the asset value as we believe than what we have on our balance sheet other than the fact they can possibly result in more volatility in our income statement, but we don't think there's more risk in them than other things.

And Brendan, just with respect to your comment on liabilities, in our financial disclosures, we show those assets on what I would say a total capital and a net capital basis and in terms of total capital, there's no leverage in those numbers and so assessing the risk, you can go through the table and we try and give a break out as opposed to government bonds versus common shares versus high yield bonds to give you some sense of risk weighting, you might want to apply or variability in terms of potential outcomes, and you can note from that that we do have some leverage in there in the form of broker liabilities and there's a small amount of securities that are sold short as well, so those would appear as liabilities in there. So I hope that answers your question.

It does. Thanks.

Thank you. The next question is from Andrew Kuske from UBS. Please go ahead.

Thank you, good afternoon. Just following on that question related to the investment income. Of that 180 million that you booked for this quarter and that's up from 84 in the previous quarter, I'm just curious to what degree was anything related to Atlas Cold storage because you were involved in that in sort of multiple ways. Can you talk about that?

Yes. Andrew, we don't comment on specific outcome with respect to a specific security. I think just to give you a bit of context following on Bruce 's comments, the total number was around $180 million and if you work your way through the MD&A what you'll see is about, it was around 30 some odd million dollars that comes from our investments, what we call our private equity investments and then the balance of that comes from just the general investment activities in that regard. And if you think, if you take into account that we've got about 1.5 billion of financial assets and you attribute a run rate to that, whether it's 6%, 10%, you can come up with a figure of anywhere from 25 to $35 million that we should be earning in a quarter and when you see figures above that, that taken together with the private equity investment returns, that really reflects the fact that we've generated net gains during the quarter for all sorts of outcomes of what Bruce has referred to, and there's been a couple of quarters when we have been shy of that and that's because the experience has been less favorable.

And Andrew, it's Bruce. I'd make the comment, leaving aside the exact specifics of Atlas Cold Storage, it's a good example of what I was talking about earlier as a general thesis in that we were very comfortable with the real estate owned by Atlas Cold Storage two and a half years ago. The security traded at a price we felt was good value so we ended up owning 9.9% of the stock which is publicly known today, and we, through our bridge fund lent capital to refinance the Company, assisted them to refinance that loan into the long term capital markets through our advisory group, helped them sell the Company when they were approached to sell it and at that point in time, we didn't believe that it was the same value that we purchased firstly and decided that we would sell our shares. So I guess we go through that process and we don't do all of those types of things with each one of the situations we get into. That one happens to be somewhat unique and fulsome but it's the same thesis. These are assets which we would be very comfortable to own because they were industrial warehouse space and we believe that we knew what price we could value that space at.

So is it fair to say that you would classify Atlas as a fairly typical transaction for that investment category?

Yes.

And then just following on that, an extension of what happened earlier this week with the change in the tax regime. How do you see that opportunity set with the valuations on some of those stocks coming off fairly dramatically?

Generally, a lot of the assets that are in the trust market, we would not look at as matching our business. The trust market obviously is quite varied, but -- and secondly, I guess the biggest component of the trust market that we might have been interested in is the REIT industry which was not affected because the REIT world's weren't touched in Canada. And I'd say third, if there are opportunities that come out of it, we'll be studying a number of things and there may be some that come about.

If I may one final question. On transmission and what happened in Chile, how happy are you with the return sort of the first quarter of that asset? Is that indicative of what we should see on a go forward basis?

All of our expectations so far have been met and we're quite pleased with what we see in the operation with the people, the Company, the assets, and we think there's a lot of opportunities to expand the business which will be positive for the results going forward.

And the next reevaluation period on the assets is four years from now?

I don't know.

I think it might be a little sooner than that. Yeah, actually I don't know the specific date either.

Okay. I'll just follow-up.

We'll get back to you on that.

Great. Thank you.

Thank you. The next question is from Rossa O'Reilly from CIBC World Markets.

Thanks very much. Just looking at some of the rather somewhat non-recurring transactions in the latest quarter on a pretax and after-tax basis, the gain on the retail assets in Brazil of 79 million , is that pretax and after-tax both?

That would be a pretax item.

What would it be after-tax?

We would not have recorded a cash tax liability in that regard. Having said that we have recorded a non-cash tax item in respect of it.

So it wouldn't have affected cash flow but it would have affected earnings?

Yes, that's correct.

So what would the earnings offset to the 79 be? How much would it be?

We would have done that at around a $12 million.

And then looking at at the 180 million of investment and other income in the period, of that say if 30 million or 35 million were sort of a run rate income and the rest was presumably transactional, were there taxes associated with that transactional income?

Again, Ross, generally not very much at all on a cash tax basis. As you know, really the only place where we pay significant current cash taxes is in our U.S. homebuilding operations. Having said that, there would be non-cash tax provisions that we would have established with respect to that and so to the extent that those occurred in North America where most of our activities are, those are generally subject to a rate of around 34, 35%.

About 34, 35% applied to the say 150 million?

Yes, and you have to factor that for capital gains.

Okay. So it's capital gains, so--?

Yes.

Great. And then looking at the interest expense, is it possible to trace how much of the interest expense relates to investment in other income?

I would say that's a difficult thing to do because those are generally corporate funds and so you'd really have to look at just our overall corporate capitalization.

And use a blended rate based on how much capital was allocated?

Yes. You can do a number of -- yes. I think really it's how you would choose to apply our weighted average cost of capital across our business.

And then so the 150 odd million that came in that quarter from transactional-type income, was it publicly traded securities or private?

Well, first of all the number would be less than that, Rossa, because you have to take out our private equity investment income as well so let's just say it's 30 from -- 30 of a normal run rate and 30 from private equity investments that would give you around 120, I suppose that we exceeded that by.

Yes. And would they be publicly traded securities?

If you go back to Bruce's comments that would tend to be where most of those gains would occur.

Okay. Well,l thanks very much.

Thank you. The next question is from Peter Sklar from BMO. Please go ahead.

Brian, just first a housekeeping question. In the package when you describe your development properties you talk about the 5 million square feet of residential development zoning that you have in Brazil. Would those entitlement rights be within the Company that you took public or is it something that you own outside of the Brazilian home builder?

It's Bruce, Peter. Most of it would be within the Company but some of it is outside. There are some assets we own in Brazil that are outside and some is related to our retail properties and some that are owned directly by us and some are in the residential Company.

That will become more clear after the quarter is done because obviously it's a fourth quarter item.

The other thing I wanted to ask about is the comments you made in your letter about the Canary Wharf and the $1 billion valuation. Is this based on the valuation work that the public company did in the normal course of providing it's six-month statement? Or is this some other valuation work?

No. In fact, UK real estate companies, not like North American companies how we report, actually do a valuation every six months and the net increase or decrease in value goes through the income statement essentially or a special line in the income statement so they actually do a valuation every six months so that's just public information.

Okay. And when you're saying the value that puts the value of your interest at a billion, I think I just want to make sure I understand that excludes your interest in Canada Square?

That's correct.

And do you have a view on what the value is -- of Canada Square is in the context of this valuation for the whole development?

Well, we don't do valuations on our private assets, but --

I'm just wondering if you were to extrapolate the value?

It's on the same estate that the Canary Wharf valuations were done on so you could probably do similar extrapolations.

Other than I guess we bought it a year later so maybe it's a little less but I think the point is we've seen some pretty favorable value appreciation which is obviously positive.

And lastly can you just update us on the status of the UK REIT legislation? I'm not up to speed there.

The legislation, the companies are essentially going to be -- some of them are converting as of first thing next year and it will be interesting to see because about five companies have proposed conversion into REIT's and they will be able to do that as of I think January 1. So companies will be trading as REIT's early next year in the UK .

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

Thank you. The next question is from Michael Goldberg from Desjardins Securities. Please go ahead.

Thanks. A couple of questions. First of all, in terms of the residential IPO in Brazil, is the gain that you're going to record there of the same order of magnitude as the retail property fund or is it totally different?

Michael, we're not in -- we don't make a practice of preannouncing our gains until we've closed the books on the quarter. I think it's fair to say we'll exceed that, but that's really about as much as we can tell you. It will be a good gain.

Okay. And also just coming back to the question on income trust. You said that the changes will make it easier and less expensive to make acquisitions. Are there any particular sectors that you'd like to explore, maybe even sectors that you're not now involved in?

Michael, I think it's well known the types of assets that we like to buy. We look at the Capital Markets and private transactions and assets owned by other public companies to find those assets and where we can find them for the cheapest price and they meet our long term ownership requirements, we'll buy them. So I think there may be opportunities out there but we don't know right now.

Thanks.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS] The next question is from Dominique Barker from Credit Suisse.

In your letter to shareholders you talk about with respect to your residential operations, you state we are positioning ourselves for growth in the current environment. Can you explain how?

Is that, I think if I recall the letter, the Canadian market, and I guess we have three businesses in residential just to be clear for everyone, in Brazil, we are expanding the business and just did this IPO and that I'd say is one separate business. Number two we have a Canadian business which is extremely strong given that it's largest base of assets is in Calgary, and Edmonton, so it's benefiting from the oil situation if you want to call it in Alberta and third in the U.S. business, we have spent the last four years being generally pretty negative on the housing markets and therefore, cleaned our balance sheet up, monetized positions, sold off lands to put the balance sheet and our management teams in a position that they can start to capitalize on the environment and we believe there will be opportunities for us to invest in land looking out over the next 12 to 18 months which we wouldn't have been able to do in the environment 12 months ago, so it's really just continuing to capitalize on the opportunities we have within the business.

And just strategically, because the homebuilding business is more cyclical and very different from the type of assets that you're targeting to get into. I'm just wondering what that means. I can see how it's opportunistic, but is it really a strategic part of your business or is it just being opportunistic given where valuations are right now?

You know -- it's Bruce, and I'd say I would admit that it doesn't perfectly match the balance of the assets that we have in the portfolio. That would be the first thing I'd say. Second we've been in the business a long time. We have very good management teams and a great franchise in the business, and we think over time there may be ways that we can convert the business into more of a fund model bringing institutional investors into own land with us and deploy our management teams like we've done with the other businesses, so over time we may be able to figure out how to do that. If not then it will fit into our basket clause which is assets that don't quite meet the portfolio, but earn us very very high returns and on a risk weighted basis, we think it's a pretty good return for shareholders.

Okay. And if I may, just ask a separate question. This is also in your letter to shareholders. You say that you believe the financial markets are going to continue to mature. This is with respect to Infrastructure assets and that asset values of many types of infrastructure will be positively affected. Can I imply that you think that Infrastructure assets generally are under valued at this time?

The comment is related to and I guess it's on--?

Top of page two.

Yes, top of page two, just talking about overall financing costs related to infrastructure and what that was really meant to talk about I guess is our belief in that the financial markets for infrastructure continue to evolve and as they evolve, the lending or lending in the capital markets continue to figure out ways to put higher lending values on these assets and as a result of it, you can either get higher equity returns for the owners of the assets or you can get the same return, but the assets are worth more, and a little bit of both of that happens and over time, essentially the returns come back to what you should earn on a risk adjusted basis but in the early stages, what tha usually mean is that the values of infrastructure will go up. And I would say today, some Infrastructure assets have been repriced and they are not under valued and others which are the ones that we would like to find or haven't been repriced and therefore, are the ones that you want to buy today and participate in the repricing of the value of it. And that's really all that comment was meant to be.

Thank you that clarifies it. Thank you.

Thank you. The next question is from Chris Haley from Wachovia. Please go ahead.

Hi, it's Brendan again. Just following-up on the Infrastructure point and thinking back to be the Investor Day in New York and some of the goals that you guys outlaid, can you just go over what your competitive advantage is in managing infrastructure assets that you historically haven't had operational experience with?

Brendan, it's Bruce, and I guess I would say that we believe there's a couple of things that are important to the type of assets that we buy and give any organization a competitive advantage is one is capital and the ability to do -- take on transactions and we generally have access to that. In size transactions, there's not too many in the world that can put out the size of checks that it takes for some of these Infrastructure assets that we and others buy so probably a handful of five or ten depending on different types of assets so that's the first thing. The second one is it takes the, I'd say the M&A and corporate execution capabilities to be able to purchase assets and it's one thing to say that something is up for sale, it's another to be able to have the credibility to participate in the process and close a transaction and operate it, and buy it, so I'd say that's the second thing is there are others like us but that's a second I could say competitive advantage that we've been building in the business. And the third which is related to your question, so those two things go across all asset classes and the third is a management team that can operate the assets afterwards and gives you a competitive advantage to out compete your peers if you want to put it in the most basic sense. And we believe that we can just like we have in four or five asset classes, we can build the management teams to be able to do that in other asset classes and we have done it in the four or five we operate today and we think we can do it in two or three others and I'd say the third one as we find a business or asset class, we think we can build that third component and I'd say those are the three really competitive advantages that anyone has that operates in this business.

Are there similarities that you see in managing timber or power assets or some transmission and distribution assets compared to managing some of these other infrastructure assets at ports or toll roads or whatever they may be?

I would say that the first two components, being the -- do you have the capital availability and do you have the M&A execution capabilities? They are identical to buy. The third one which is timber -- is managing a timber asset the same as managing transmission and power? No. They are different, although what they are is cash flowing assets that generally appreciate in value, and they have the same characteristics. It's not like buying a something that depletes very quickly or you're managing a brand with marketing or retail distribution or those type of assets and those are very different.

And Brendan, I might add a couple of things. It's Brian. First just to emphasize Bruce's point on developing the operating platforms. I think one of the things that we've been able to demonstrate over time is a strong stewardships over the development of strong operating platforms that are committed to managing these assets for the long term and really maximizing the value of them so I think we've got a very well established track record in that regard. The other thing which is perhaps a smaller point and there's lots of other folks that are good at this as well but I think we do bring a very strong financing discipline to match up with the long term nature of the assets and to the extent that you financed assets of this nature as effectively as you can, you can clearly maximize the cash flows over time and one of the things that we do strive to do is to take financing techniques that we have worked with for a long time in one industry and like others do but move those into other asset classes and then finally just in terms of the relationship with our investors. We are able to provide our clients with a increasingly broadened suite of investment opportunities that they can invest with us and particularly when you think about Brazil where we have a very long established presence there for 100 years, we can combine that local experience with a strong North American governance platform and those, well, I'll call client relationships, well established client relationships I think do position us well in future infrastructure opportunities.

That's very helpful. Thanks. So I guess this might be an unfair question, but do you find that, do you think that your customers are willing to pay you fees similar of a similar magnitude for assets that you've historically managed for a long time, so power, transmission, or transmission or timber versus assets that, new asset classes that you might be getting into given that you've established your track record over the past few years and proven yourself?

I would say that in general, what we do is have the ability to deliver assets to institutional investors and if they can find someone else that has more expertise, they may give them money. If we have a relationship with them and they trust that we can build a management team, they may give us money. I think that we will be able to do that and we'll be able to establish those relationships with new asset classes, but it takes time and we don't build it overnight and we're not expecting to, so I -- the answer is I think we will be able to.

Okay. Thanks, guys.

You're welcome.

Thank you. The next question is from Michael Goldberg from Desjardins Securities. Please go ahead.

Just to follow-up on that question I guess I would note that when you bought Trans-Elect it seems to me that you acquired a management team with expertise in transmission, not that you had established expertise in transmission in Chile to begin with, so the question is--If you are going to move into an area of infrastructure where you don't have this expertise now, is it reasonable that we should expect that one of the primary things you'd be looking for is a management team that could carry the ball for you in that business?

The answer is yes, and normally what we do is with respect to that business, we actually have been in the transmission business in Northern Ontario for years and the operations relatively small, but we understand the business. It's very related to our power operation, so we deal with transmission lines and systems all the time, so we had the expertise in house to a significant degree to underwrite the business and do the due diligence. In essence, what we normally do is either buy a management team of small -- with small dollars or relatively small dollars to give us the capabilities to be in one specific area like we did with our fixed income area in the Hyperion purchase or we actually just build it up from scratch like we did with timber, and we've been in the timber business for years but we had to put a new team together to be able to do it directly.

Can you also bring us up-to-date if there's anything to add since New York on further penetration that you've made with institutions in the U.S? I guess you're not going to name names but just if you could give us some anecdotal type descriptions of progress that's been made in penetrating that market?

Sure, Michael, it's Brian. Yes, we've continued to make progress and I'd say one of the areas that's been -- that has I'd say flown more directly out of Hyperion relationships as well as our own has been working through with the pension fund consultants and as you probably know, in America, that's a very important constituency when it comes down to distributing your product to pension funds, and so we could point to at least one or two specific example that we're not prepared to disclose the names of but where we have I'd say made considerable progress and gotten ourselves endorsed with some of these pension fund Advisors. Which is a very good step forward.

Do you feel that your key competition in that business is actually insurance companies and in the U.S. And how do you feel that they've reacted if at all to your presence?

Well, Michael, our competition really isn't insurance companies. They are our client, I guess I'd say. We have a number of insurance companies as clients. Our competition is different in each business but it's generally other private equity/infrastructure managers and they are in different asset classes such as real estate or power, timber, or whatever other infrastructure assets and there's different ones in each one and a few that do many.

Okay. Thanks a lot.

Thank you.

Thank you. There are no further questions registered at this time. I'll now turn the meeting back to Mr. Harding.

Thank you very much, Operator and thank you everyone for joining us this afternoon and your interest in Brookfield and we look forward to talking to you in the new year when we release our final fourth quarter results. Goodbye for now.

Thank you the conference has now ended. Please disconnect your lines at this time. Thank you for your participation and have a great day.