BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2007 Q4 法說會逐字稿

Hello. Welcome to the Brookfield Asset Management Incorporated conference call and webcast to present the company's fourth quarter 2007 results to shareholders. At this time, I would like to turn the call over to Bob Harding, Chairman of the Corporation. Please go ahead.

Thank you, operator and good morning, ladies and gentlemen. Thank you all for joining us for our year end 2007 earnings announcement. Joining me for the call is Brian Lawson, our Chief Financial Officer, who will discuss our fourth quarter and year end financial results. Following Brian's reports, Bruce Flatt, our Chief Executive Officer, will provide an operations update and comments on the current environment. Following their remarks, of course, we look forward to taking your questions and comments. At this time, I would like to remind you that in responding to questions and in talking about our new initiatives and 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. With that done, I would like to turn the call over to Brian Lawson. Brian?

Thank you, Bob, and good morning. We reported our financial results this morning and posted our letter to shareholders and supplemental financial information on our website. I will go over the highlights, although we do encourage to you read the full contents of the materials. We reported record operating cash flow of $1.9 billion during 2007. This is slightly higher than the $1.8 billion that we reported last year, and more than double the $908 million that we recorded in 2005. Excluding realization gains, operating cash flow increased to $1.7 billion in 2007, and that's up from $1.2 billion in 2006, representing an increase of $545 million, or 45%. This growth came from improved results across most of our operating platforms, particularly in our property and specialty fund groups, which generated solid investment returns for us and our co-investors. We also experienced strong performance within our private equity and financial asset portfolios. These gains more than offset the impact of lower water levels on our power generation facilities and the impact of weakness in the U.S. housing markets.

Net income was $787 million in total for 2007, and that compares to $1.2 billion in 2006. Excluding realization items, net income was $941 million, compared to $624 million and that represents an increase of $317 million. Net income on this comparable basis did not increase by the same amount as operating cash flow due to the impact of depreciation on recently acquired assets and as you know, we focus more on operating cash flow, which is similar to FFO or funds from operations used in the real estate sector because it removes the potentially distorting impact of depreciation.

We achieved a number of important initiatives during the year. We increased committed capital to established funds by roughly $10 billion through the establishment of new funds, the expansion of existing funds and through acquisitions. We establishes Brookfield Infrastructure Partners, which was distributed to shareholders and listed on the New York Stock Exchange on January 3rd, the first of this year. We acquired the Multiplex Group which expanded our global property platform into Australia and the Middle East and added to our European operations. And we also acquired timber assets in the Pacific Northwest region of the United States, a well- respected real estate and infrastructure equity manager with $6 billion of assets under management, a major retail property portfolio in Brazil, and continued to invest capital on behalf of ourselves and our clients throughout our operating platforms.

We recorded solid operating results in most of our operations, although there were a few exceptions. Our commercial office portfolios remain very well leased and contributed increased cash flow through the year. Bruce will comment further on these operations in his remarks. The results from our power generating assets were lower than those recorded in 2006. This was due to water levels that were 10% below long-term averages in contrast to the 2006 levels that were above average. Realized prices were higher than in 2006, and our new hydro and wind facilities performed well. Water levels at the beginning of 2008 have been good, so that bodes well for the current quarter and hopefully for the balance of the year.

Transmission operations performed in line with expectations, which should come as no surprise given the regulated nature of the cash flows. Results from our timber operations were impacted by the slowdown in the U.S. home building sector and a strike in western Canada. Nevertheless the contribution did increase over 2006.

The U.S. slowdown impacted our home building operations, which led to reduced operating margins and a provision to [reach] certain higher-priced land positions in the United States. Our share of the provisions was approximately $30 million after taxes. Fortunately, our Canadian operations increased their contribution by more than 50% and our Brazilian operations also performed well.

Turning to our specialty funds, our bridge and real estate finance groups recorded growth by maintaining higher levels of invested capital and we also established new funds in both of these groups during the year. Our restructuring group completed a major initiative with the sale of one investment position in particular for a gain of $231 million. And we also recorded gains in excess of $300 million on the sale of exchangeable debentures held within our financial assets portfolio and gains of approximately $150 million after taxes and transaction costs on the sale of exchange seats within our Brazilian operations. So all in all, we are pleased with the financial and operating results, particularly given the economic environment that developed during the second half of the year.

I would now like to make some comments on our capital structure. We have consistently followed a very disciplined approach in financing our business. That is made possible by the high quality of our assets and our focus on long-term value creation on a relatively low risk basis. We maintain strong investment-grade ratings as a result. We have a very large equity base, nearly $20 billion, and we are prudent with our approach to stock buybacks and dividend payouts. Our corporate debt is quite modest, at only $2 billion and has an average term of maturity of 11 years. We maintain high levels of liquidity at the corporate level of the company, usually around $2 billion of cash, financial assets and committed revolving credit facilities. We are currently at this level as a result of non-core [applications] of cash in the second half of the last year.

We also generate between $1.5 billion and $2 billion of free cash flow each year, in addition to further cash proceeds through the ongoing turnover within our asset base. We do use debt capital to finance our operations, but the vast majority of this debt is secured by individual assets on an investment-grade basis, with relatively known restrictive covenants and this is a very important point, with no recourse to Brookfield. The duration of this debt is very long in nature. It is also important to remember that most of our assets are very high quality long life assets with visible long-term contractual cash flows and are backed by high quality counterparts. This gives us a high level of confidence in the cash flow streams. This is in contrast to the financing strategies of some of the more aggressive participants in the capital markets who benefited from the easing of covenant patterns and the availability of high loan to value debt until the markets turned abruptly in August. So it is worth noting that since August of 2007, we have completed approximately $5 billion in financings on terms that are not that much different than the financings we entered into prior to that date. I believe that our success in achieving this is because we provide our lenders with transparent financing, backed by high quality tangible assets with visible and reliable cash flows at low loaned values and we continue to have the success in accessing the capital markets in the ongoing execution of our business plans.

So before I hand the call over to Bruce, I would also comment that the board of directors approved an increase in our dividend from $0.12 per share to $0.13 per share for the dividends we paid on May 31st. This represents an 8% increase. I would also note that you received a share of Brookfield Infrastructure recently as a dividend, and should you have kept it, you are also receiving distributions on the newly issued units of Brookfield Infrastructure Partners, which brings the aggregate increase distributions to you this year on a combined basis to 18% over last year. I will now turn it over to Bruce, who will make some comments on our operations and the market environment.

Thank you, Brian, and good morning. Prior to dealing with questions, I -- we thought I would address two specific items today. The first is to discuss the type of assets that we own directly and through our funds and the type of assets really which back the fees which we receive from our co-investors. As an overview, they are very long life, low volatility assets and therefore highly stable in nature from a baseline cash flow perspective. Second, we thought it was appropriate to make a few comments on the market environment and our approach to the markets as we look forward.

To highlight some of the fundamentals of the business, I will -- of our businesses, we thought we'd give you just some high level points of interest at this point in each of those areas. The first is office properties, and just for everyone's benefit, we own one of the highest quality portfolios of office properties in the world. Today, in fact, our office properties are 96% leased. And in 20 years of us being in the office building business in a very substantial way, we have never been 96% occupied. So I would say that's point number one. Point two is that about 4% of the space rolls over annually. So these are very long-term streams of cash. In fact, we continue to lease space at a significant pace, although admittedly, there very well could be some pause, given the market environment we are in, as we look forward.

Third, rental rates at year end were on average in the markets that we're in 25% higher than rent in place. In fact, in some places like midtown Manhattan, the prevailing rents are greater than 50% higher than what the rents are in general within office buildings. And to give you just an example of that, there are leases still being signed in midtown Manhattan in the $150 range, whereas a traditional rent that's locked into a building is in the $60 to $70 range. We have been picking up this extra rent to the bottom line as we roll over leases or as we take back space from tenants opportunistically and then release it. But said differently, rents across the board could deteriorate by -- if you take the statistic I used earlier, 25% on average, and we would still be able to maintain the current cash flows within the portfolio, and that's if all the rents rolled over, but, again, you need to remember that only 4% roll over every year. So these are very long-term duration assets. As for supply, which is the other worry about real estate, in general, as well as in virtually all major central business districts that we operate in, and, in fact, in most of the places across the world.

Finally, I guess we would make the comment that with respect to the office building portfolio, we have always attempted to build our portfolio for downturns in the market, both on the asset side, and by the way it's financed. And as Brian mentioned in respect to financings, we largely have asset specific nonrecourse fixed rate financing throughout the portfolio and we don't expect we'll have any issues in this regard.

Secondly, our power plant business, and, again, just for background, we own one of the largest privately held renewable hydro power plant portfolios in the world. The value of this business has some very strong underlying fundamentals working for it. The first is that with oil in excess of $90, the cost of virtually every other alternative fuel has increased. In contrast, our fuel, which is essentially water, costs the same, no matter what the price of other fuels are, or whether they go up. Our water costs don't increase with the increasing fuel environment and therefore our margins widen. This is contrary to virtually all over forms of energy generation, which we compete with. Natural gas, which sets a lot of the marginal pricing for electricity in North America is currently trading in the range of $7 to $8 per mcf, and while lower than two years ago, it should be put into context that prices were only $4 approximately five years ago. And where -- that's where many of our long-term contracts were negotiated. And as a result, this has set new baseline revenue and cash flow [steams] in our portfolio which we should be able to achieve and increase our revenues as those contracts roll over.

And as coal plants for electricity become more and more costly to build, because of green credits and the scrubbing and other things that have to get added to them, and as people realize and come to the realization that nuclear takes forever to permit and to build, one of the only alternatives is to turn to gas electricity plants to continue to generate the electricity that's required in our most major market which is North America and that really is the only choice to add to generation needs in the short term. As a result, this should continue to lead stronger fundamentals for natural gas, if it's consumed and therefore, higher power prices over the longer term. So both of these things work in favor of our assets.

Again, though, we lease our assets very conservatively and only approximately 20% of the assets are sold at market prices. The balance of 80% are on long-term contracts. And about 50% of that is still in place five years from now. So it allows us to benefit from these uplifts, but it takes time. Again, having said that, it gives us a much more conservative profile of our cash flows with respect to revenue certainty. This does lead us to confidence in being able to deliver a strong tangible cash flows to shareholders over the longer term from these assets.

Lastly, I would make one other comment on this group of assets in that the business world is coming to the realization -- in fact, I was going to say quickly, but it didn't come for a long time, but it's been very quickly in the last year that green attributes are extremely valuable. This form of generation that we own is one of the greenest forms of generation and therefore this portfolio that we have will benefit significantly from what's transpiring across the globe, where the world is beginning to price and to value green attributes in the marketplace. We expect to benefit in a number of ways from this in the future as we go forward.

Thirdly, and I will just make a couple of quick comments about our infrastructure business, as Brian said, our transmission assets are very stable in nature, just because they are mostly rate-based focused. Our portfolio is conservatively financed and the cash flows are tangible, solid and generally growing. Our timber assets are very high margin assets. The margins have compressed a little, given the U.S. housing markets but are still strong. In addition, the unique nature of these assets allows us to choose not to cut, should prices for timber in general or a specific tree species not be satisfactory. And if we leave that tree in the ground, it will continue to grow and add value to the portfolio. As a result, it's not a wasted resource as you have with many other types of products. So all in all, we believe the assets which back our funds for our co-investors and for ourselves and the assets we own directly, with a few exceptions are well productive in this environment and as Brian mentioned are conservatively financed with long-term maturities.

Turning to the current environment, I will just make a couple of comments. Fortunately, we have entered into '08 in a strong financial position. We also believe that the current volatile environment that's out there favors long-term owners and operators of assets. And our balance sheet strength and our long-term investment horizon should as a result of this play to our advantage as owners of assets wishing to sell begin to place greater importance on certainty of closing. And as we typically finance our investments with substantial equity, often comprising up to 50% of the purchase price, and the balance is usually fixed rate long-term financing, we shouldn't be as affected by -- as many other people who rely on the more volatile high yield markets to finance acquisitions. And with credit costs more expensive, and terms tighter, much of the drive behind the recent leveraged buyouts has dissipated, and I guess on the positive side, with the factors no longer driving prices, as we look to purchase things, we are more likely to be able to obtain our long-term investment goals going forward.

In the context of these views, we believe there will be great opportunities to put investment capital to work in our areas of focus over the next 12 to 18 months. And we look forward to that and to be able to achieve greater than average returns over the longer term from some of these acquisitions, if we can achieve them. Nonetheless, I make the comment that we do remain cautious in these uncertain times and over at past six months we have done a number of things to make sure that we mitigate risk and I will mention just four things to highlight the fact that we have been cognizant of this environment.

I guess first one is that we have raised significant capital to insure that we had resources sitting on the balance sheet to take advantage of opportunities that were out there that came upon us, and extended the duration of debt. In particular, we sold assets which weren't core to our long-term business. So we have been working on. Second, we insured that our investment teams don't commit to any significant investment opportunities without committed financing in place. We largely never did that in the past, but we certainly are ensuring that it is in place today. Third, we reduced the risk of all the short-term financial assets in our books through outright sale of a lot of them or other means, and lastly, we did purchase credit protection on a portfolio, approximately $2 billion of notional corporate debt, as a hedge against the rising cost of debt due to the widening in credit spreads. To date, this credit protection has generated some realized and also unrealized gains in excess of $100 million. So I will conclude by just saying, looking forward, we are cautious about the market environment in the short term, excited that our core operations are in solid shape, pleased that we are in excellent financial shape, and preparing to find ways to deploy capital in the future at what we hope to be highly attractive returns in opportunities that we find.

And with those comments, I will turn it over to the operator for any questions that people on the phone may have.

(OPERATOR INSTRUCTIONS) Our first question comes today from Michael Goldberg of Desjardins Securities.

Good morning. My question is this, if I take out -- in the fourth quarter, the gain on the Bovespa [seats], the U.S. housing provision and gain on the Calgary property, both at the BAM level and also exclude the -- your share of the Stelco gain, I calculate that your FFO was in the neighborhood of about $0.30 a share, rather than the $0.94 reported. What I'm wondering is if you could comment on the sectoral performance of operations causing the -- that lower level of FFO in the fourth quarter.

Sure, Michael. I will start off on that and Bruce may have a few comments to add. I would say in general most of the things performed quite well during the fourth quarter. There were a few areas, though, that we would reference that we experienced some decline quarter over quarter, and going through the highlights would be on the power generating side due to lower water levels and also on the home building side, where we -- in the United States where we had a soft quarter and some provisions in the fourth quarter this year. And notwithstanding the fact that we did have some extremely strong results from the Canadian side, we do have some -- some weakness there. In terms of other areas, and these would be generally more around the margin, timber was generally better in the fourth quarter of last year than it -- than it was this year. We had quite a strong first half of the season -- sorry, of the year in our timber operations and that tended to lag somewhat at the tail end, in part because of the strike that occurred. It does take you a little while. We built up inventory in the early part of the year which enabled us to continue to work through that over the course of the strike, and then it does take you a couple of months to build back up to the same normalized level, once you come out of the strike. So those would be a few of the areas that I would point out to you.

If I could just follow up, when I look at -- in your supplemental, page 45, the segmented results, cash flow from operations for the full year, and compare that with the third quarter similar data-- and looking specifically at power and infrastructure, I hope that these are on an apple versus apples basis. But it looks like in the fourth quarter, the cash flow from operations contributions from these two segments were both negative, around $14 million or $15 million. Are my numbers correct? Are they on an apples versus apples basis?

They should be on an apples by apples basis. As you know, we did change the pattern or the structure of the disclosure in the year-end numbers to reflect a couple of changes that went on in the business during the course of the year. In terms of the infrastructure, we did have -- we would have had a negative contribution there once you take into account all the associated interest expense in the fourth quarter.

Okay. I will follow up offline.

Great. Thanks, Michael.

Thanks.

Our next question is from Cherilyn Radbourne of Scotia Capital.

Thanks very much, and good morning. My first question just relates on whether you could comment on the acquisition landscape, as you see it. There's obviously been some high-profile situations emerging the commercial property side, so it seems clear that there will be opportunities in real estate, but what are you seeing in some of the other asset classes in which you are active, or aspire to be active?

Hi, Cherilyn, it's Bruce Flatt. I would make the comment that leaving aside any specifics of transactions, but just generally, there's no doubt that we're seeing many, many, opportunities that we wouldn't have seen 12 months ago. And I guess we're prioritizing all of those opportunities, and ensuring that we allocate capital to the ones that are going to make -- create the most value over the longer term. So I guess I say that we are -- we have a lot just in general, we have a lot of opportunities that we're looking at, and I would say capital allocation will be the name of the game over the next year or two. Pick the ones we should be investing into as opposed to every opportunity that comes along.

Specifically to businesses, what we have been doing so far is -- I call it -- we have been completing transactions that we might not have otherwise been able to purchase, but that other buyers dropped away within our core portfolio of the business, because of the markets. And we're just adding assets in at a cheaper price than we would have otherwise been able to buy them at. So that's really all we have been doing so far and that would be highly attractive to the business looking forward. Now obviously we are assessing other more major opportunities that we could put capital into. Specifically, to each of the businesses on the real estate side, I guess we don't view that there's a lot of opportunities that are going to come from commercial buildings, other than in some select circumstances, possibly where people have overleveraged their portfolio or their properties. And -- because the underlying fundamentals are actually still extremely solid in most of the properties that are out there.

So other than through financing issues, the commercial property business, there probably won't be that many opportunities this time through, other than if events change on the fundamental side dramatically. We do see things on the -- in the home building industry that we can participate in. We have been assessing a number of those and we have to see whether any of those come to fruition. In the power businesses, you know, we are pretty focused buyer of assets, and we continue to just work away at buying assets as we see them. On the infrastructure side, I think there will be a lot of other opportunities that we will be able to add into the portfolio. And lastly, I would say our biggest area of focus is going to be in our restructuring fund, which we think there will be tremendous opportunity to be able to put capital to work in the next 12 to 18 months. And we are dedicating -- we expect to dedicate more capital and we are dedicating our resources to that area.

Okay. Thanks very much. One other question from me, if I may, just with respect to your fund marketing capabilities, and a key area of focus. You made some important decisions from an HR perspective in 2007, and an acquisition of KG Redding towards the end of the year. Can you speak about what you feel you accomplished in 2007, and speak about some specific goals for 2008?

We're always -- on the investment side, we are pretty open with our comments. Because of these rules in the United States of marketing funds, we are always a little bit restricted on what we can say. So I apologize for that up front. But we have many funds in the market place that we're working on today. I would say that over the next 12 months, we expect to have completed a number of those funds, and they will be -- most of them will be larger in scale than we've had in the past, and they'll allow us to deploy significant capital in this environment. So we're looking forward to that, which is the culmination of a lot of work over the next five years. So we hope to be able to report more on that in the future and we have spent a lot of corporate resources on that in the last while.

Okay. And just last question, where are you at in terms of starting to penetrate the U.S. institutional market more effectively and getting accredited with the U.S. pension consultants?

I think we are making great progress. We -- we couldn't penetrate a lot of those type of institutions without track records before. We are fully up to speed on that today, after all the history we now have. And we are making, I think, great progress in that we will able to achieve a number of things in the marketing funds.

Okay. Great. That's all for me. Thank you.

Thank you.

Our next question comes from Andrew Kuske of Credit Suisse.

Good morning. Just a bit more clarity on the direction of your fund model at this stage. Do you see the fund model evolving into really larger open-ended funds with broader mandates or more precise and specific funds in multiple jurisdictions that might be closed to vary the initial financing and that's effectively it?

Andrew, I -- maybe make two comments. One, we do not -- and just to be clear with what open-ended means, because it is means a lot of different things to a lot of different people. We do not have any open-ended funds, meaning that people can take their money out, nor do we ever intend to have any significant open-ended funds because owning long duration assets, they would not be having a characteristic in a fund that we would ever adopt. So if open ended meant that they are funds that people can come in and come out, we're not a significant participant in that market, whereas some have funds that are open ended. I would say on the multistrategy, we are -- some of our funds are very specific to strategies, and some of it we're put more broad products together. A lot of that is driven by investors' desires and taxation rules. And some of the issues of doing it on a global basis is the tax rules get into it and people want to be invested in a specific country. So it all depends on the product and the type of fund and I would -- I believe in the future we will have both, but we're probably heading towards more broad funds where we can bring in -- where we can offer larger products to a group of people, but it probably will strike a balance of both.

And then just more specifically in the U.S., Rick Clark made some comments on the BPO call yesterday, as related to the U.S. real estate fund and also the Canadian fund that they have been trying to do. And respectively the comment was given the market declines and the overall capital markets, the weightings that a lot of institutions in the U.S. have are effectively probably too long real estate-type funds and real estate assets at this stage in time. And so it's causing a little bit of a delay on the real estate fund marketing. I'm just curious as to your thoughts on the U.S. market about that statement and then also just broadly if you look at APAC now with Multiplex and the other markets in Europe.

Yes, I would maybe -- I certainly won't contrast what Rick said, but I generally make the comment -- there may be a few institutions that have allocations that they are not filling because of other things that have happened in their funds. I would make the -- I guess we would make the general comment to infrastructure, real estate, products. These are low volatility, long duration, higher return than 3% long bond money, and I guess our belief is that many pension funds are going to be allocating to these type of products. So there may be a few institutions that aren't out buying those type of products but we, I guess, believe that there's a big market for these type of products, including real estate across the world. And the other comment, maybe just to your asking about other regions is that the United States right now is in a -- they are either in a recession or they are talking themselves into a recession, and therefore everyone in the United States is a little more glum than the rest of the world. There are other spots in the world where things are actually doing very well and people are putting money to work and the -- you know, the emerging economies and all of those are -- there is significant GDP growth. I would say the U.S. is probably the place where investors in general are more negative than in the rest of the world.

Okay. That's great. Thank you.

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

I noticed that at this time in the supplementary material, you didn't include the deconsolidated capitalization, and I'm trying to recreate that. I went to the reconciliation of segmented disclosure to consolidated financial statements on page 44, and traditionally this -- the corporate liabilities shown there don't exactly match in all cases the corporate liabilities in the deconsolidated capitalization table. Some are saying the corporate borrowings and the preferreds and so on, but accounts payable and other liabilities and capital securities and so on. They are actually much bigger in the consolidation adjustment table than they were on the deconsolidated capitalization table that they used to provide. I'm wondering why is that the case?

Sure. I guess I will make it -- this is Brian, Rossa, good morning. Good morning. Just a couple of points. We do actually have a deconsolidated table. We did move the location of it within the report, so if you are trying to -- it's actually on page 18. So I apologize for that and it's in the same format as you would have seen in previous quarters. The reason for the difference for the two, as I think you are aware, we prepare what we would call our segmented or net invested capital basis of presentation, which is what we use throughout the MD&A and supplemental information -- we include Brookfield Properties on a consolidated basis, meaning we integrate their operations with those of ours. We do that to simplify matters because of the businesses that they conduct that line up with the number of businesses that we conduct. We do not do that on the deconsolidated table. That's more really to present the credit metric at the corporate level. So that's a true deconsolidated statement. So therefore it would exclude some of the capital securities and some of the working capitals of Brookfield Properties.

Well, thank you. And then the new table you provided, the segmented operating results on page 4, which divides things between asset management and operations. As you point out, under asset management, you have taken a deemed component of your operating revenues and consistent with the fee you charge to third parties, and included that under asset management revenue, but -- I'm wondering, though, if we wanted to try to find out what the or calculate or estimate what the profitability of third-party management was, what element of operating costs should we remove from that column that shows asset management? [$695 million] in 2007.

Sure. Yes. And that is, in fact, the true challenge there, Rossa and that's why we moved to reporting not just the third-party fees that we are meaning, the fees that we earn off our established funds, but also to present the fees that we earn off of those funds as well as the fees we would allocate to assets we own directly outside the funds. One of the primary reasons for that -- first of all, that's the way we look at the business internally, and what we think provides it provides more clarity on is the margin -- it's difficult to allocate the operating cost between -- for a given fund to the -- what I would call or what we would call the third-party fees simply based on the ownership of the fund. You could have three funds with exactly the same operating cost structure and your margins would look very different, whether we own 20% or 60% or 40%. And so we presented it what I will call all in, and I would suggest that it should really be done on a pro rata basis. That's probably the fairest way unless you want to start to talk about scalability of platforms and economies of scale or things like that. We have chosen not to do that at this stage.

If I may, last quarter, you completed one of the most important acquisitions in the history of the company, in the Multiplex transaction. I was wondering if you might be able to give us some color now as to how you see your investment there, involving what the operating conditions are like and also on the financial front, when the acquisition loan comes due and what your plans are for refinancing it.

Maybe I will talk to the operations. I guess we committed largely a year ago to buy Multiplex, and we have been extremely pleased with what we bought, firstly. I would say the business we bought -- the tangible assets we bought are high quality assets and we have a great portfolio. I think what we have in addition to that is a franchise that's going to produce the deals for a very long period of time. And the development side of the business and the construction side of the business are very high quality operations. So we -- and we have been very pleased with that. So I would say from that perspective and integration, it's gone very well, and we got some excellent people out of it.

In fact, to give you an example, the senior fellow that runs the construction development business in Australia is now looking -- is going to be the chairman of Rick Clark's construction development peer group in North America, because he's probably one of the highest quality construction development guys in the world. And therefore, he -- we are going to get a number of benefits like that out of it. From the market's perspective, Australia is doing extremely well. Recently with a few things they finally got caught up in some of the same financial stuff that has been going on for six months in North America, but the economy is doing well. It's kind of like Canada and Brazil. It is a commodity-based economy and therefore all three places are doing extremely well. And so I think all of the -- the leasing, development, all the stuff that's going on is -- is doing very well. We are in the process of executing our business plan, which as you know was to buy the assets and ultimately sell off some assets into funds and create other structures and we're in that process today, which will play out over the next -- over this year.

And then just turning to the financing part of it, and I think as you probably would recall, we financed our -- the acquisition in part with a $1.6 billion debt financing that was well placed in the global capital markets and was heavily oversubscribed when we completed it. I think one of the important things to keep in mind with that financing just before I get into the refinancing plan was when we established the level of financing, it is at a pretty conservative loan to value of roughly 60 to 65%. If you take all of the obligations of the company together on a consolidated basis. So we put it in place from the outset at a relatively conservative basis. That loan doesn't come due until 2009. What we are doing with respect to the financing is executing a number of initiatives with -- to raise capital within the entity through asset sales, other initiatives and through putting specific financings on properties within the -- within Multiplex. A lot of those initiatives were underway just as the time we got involved with the company, and so it makes it quite easy for us to execute on those, because of the fact that they are pretty well in hand to begin with. So we would expect to have the bulk of that work done throughout the balance of this year.

And Rossa, for example, we had -- there was a number of non-core assets that had triggers in them on a change of control and one of them was a New Zealand fund that we owned, and it was -- the change of control was triggered and I think we end up this month with circa $150 million in cash by selling some properties to the partner which has already been agreed to and it's done and they preempted us out of it. There's a number of things which were just non-core to the core business which were being used to pay the financing down well in front of what -- as we do the other things.

Thank you. And just very quickly. Did I read somewhere that Multiplex was going to be starting a new office building in Sydney?

You probably did. I don't know specifically, but we have six buildings -- I think six buildings under construction in Multiplex today. We probably own half of them. The other half are under construction for others, but we did just buy a site in downtown Sydney, which will eventually be pulled down, kind of like the 300 Madison site that we built in New York that you are familiar with, Rossa. A site right in the heart of city. We will tear the building down which is currently 25 stories and put a brand new office complex up. So we bought the land and we're in the process of doing that when we find the tenants for it.

When will that be complete?

I'm guessing but I think the end complex retail and office is about 650,000 square feet, which is a good-sized office building for downtown Sydney.

Yes. Well, thanks very much.

Our next question comes from Peter Sklar of BMO Capital Markets.

A couple of questions on some of the new disclosure you have in the package. On page 6, at the top of page 6 of the supplemental information package, you have a table where I think what you are trying to do is to show the performance fees that have not been paid, but would be paid should you monetize all of the assets under management at current value. And I'm just wondering, how did you go -- I mean, all of these performance fees are based on valuation. How did you go through and value all of these assets, given that most of them would not be publicly traded entities?

Sure, Peter. It is Brian. I will deal with that. What we do is at the end of each quarter, is we would go through each of the funds and you look at the fund as though it actually would get wound up and the fees paid at that time. And we do this as a regular exercise to track the performance of the funds internally and to get our own minds around how the performance fees are building up. Obviously it's an integral part of the performance, even if you can't include it in your GAAP financial statements. At least, we've chosen to adopt policies that preclude us from doing that. Your observation that some of the assets are privately held is definitely fair and we have, I will call it, a framework of how we approach it, and we can use either readily identifiable market comps. But what we would typically do is stick with a similar approach to the valuation and adjust it for things such as increases in cash flows and -- but we would generally not, I would say, upgrade a multiple or something like that, unless this was a very good reason for it. Most of the time, we look to external verifiable benchmarks. Some of our funds do get valued periodically. And that's a requirement of the governance of the fund. So we would have annual valuations. For a number of our funds they would go through the various assets and value them. We would also use those as an important data point in assessing that.

Who is doing this work? Is the fund manager doing the valuation or are you doing the valuation up at the corporate level?

Well, in terms of a required valuation for the governance of the fund, in many cases, that would be done by an external party to Brookfield. In a number of other cases, we would have our fund operation group perform the valuations. They would obviously have inputs from the management team and then we would also review that within the finance and control group.

Okay. And Brian, what does the $29 million of direct expenses relate to?

That would typically be expenses that would be paid out upon the monetization of the fund. And a significant portion of that would be incentive performance for the management teams.

Okay. And then you have an average duration of I believe it is six years.

Correct.

And like, it's not clear to me how your funds work because typically funds have a duration of 10 to 12 years. But the type of assets underlying the funds as you point out are the kind of assets that Brookfield may hold in perpetuity. So I'm just wondering how this timeframe is derived. Is that the average time remaining related to the windup of the funds?

No, it's not, Peter. Each fund has a defined period over which performance is measured. In some cases it might be one year. In some cases it might be the life of the fund. In other cases we have a perpetual fund where the performance is measured over five year installments and at the end of every five years, you measure your performance. It's locked in. That's what's paid out. There's no fallback beyond that point. So based on the various contractual terms for each fund, that's what drives that average of six years.

Okay.

Not the life of the fund.

Right. I understand. And just one last question, Brian, if I could. Right on the very last page of the package, in the column where you have the co-investors' interest, which I believe is the third-party capital that you have under management --

Where?

I thought that Multiplex, there was about $2.5 billion of -- they had about $2.5 billion or $2 billion to $3 billion of third-party capital under management related to some of their real estate properties.

That is the assets in those various funds, and so what you see in the last column is the -- that would be effectively the capital value. If it is a listed fund, it would be the market cap of the third-party interests in those funds and, of course, you would also note that we, through Multiplex have an interest in those funds as well, which I think is around the 20 to 30% level.

Okay. Thank you.

You're welcome.

Our next question comes from Chris Haley of Wachovia.

Good morning, everybody.

Good morning.

It's Brendan Maiorano with Chris. Brian, first question is related to Peter's earlier question. The $138 million of accrued performance fees, does that compare to the $153 million? That's the third-party fees on page 6?

Yes, it does. Though it is down a little bit during the quarter.

Sure. And then on the asset management business, just looking at the total in terms of the top line numbers and the direct operating costs which you guys broke out for this quarter, it looks like in '06 and '07, the margin on that business is both around 50%. As you look forward and look to grow the business, would you expect operating margin to increase, meaning that there would be operating leverage in that business? Or should we still kind of expect it to remain at that 50% level going forward?

We would like to think that it would expand over time. We have invested a fair bit in expanding our business and building out the systems and the infrastructure within that group. So we would like to see that grow, but 50% is probably not too bad a number, all in all.

Okay. And then other than the increase in the operating costs associated with the asset management business and building that platform out in '07, what else was driving up the increase in other unallocated corporate costs year to year, '07 versus '06?

Well, a big part of it is, again, expansion of the platform overall. We did incur transaction costs. We have been actively pursuing a number of different things. Of course, we have obviously been quite busy integrating a number of them. So it's something we try and keep pretty focused on and tamp down. But we have grown the company significantly.

So Bruce, you think there's not -- there's a little bit of operating leverage on the asset management side, is 2008 a year in which we feel the full brunt of the buildout of the expense structure? And 2009 to 2010, et cetera, where we can expect to see some leverage?

I think we -- it's Bruce, Chris. I say we felt a lot of the investments over the last two years. I think 2008 I would hope that we start to see leverage to the bottom line. And maybe I would be more definitive than Brian on saying that we expect to get significant leverage as the funds build up and we can drive better fees, and as we don't have to spend the money that we have done to build the business up. And so I would be hopeful for a lot more operating leverage than what Brian said, but obviously on the conservative side, these numbers are good.

Yes.

And there's a lag between when you build it out and when it comes in through the numbers.

Some additional follow-up. I think about your investment opportunities and how you would like the pools that you do have money which are long duration assets when they are financed. It would appear to me that the opportunities today, as you noted with the land venture that was created in the last quarter, that -- and the financial markets on the debt side, that some of the investments that might be appealing today are in shorter duration, not as easily financable assets. And I would be interested in your comments in terms of the arbitrage opportunities between discounts to value, that land and structured financed investments might offer relative to long duration assets which may have not declined as much in market value.

I guess I say maybe on the opportunity side, we see them as two fold. Number one, which are in industries that have gotten into a mess, and that there's underlying fundamental problems in the -- they are good businesses but fundamentally, they are just in distress right now and those largely will participate in through our restructuring fund. These will be operational and financial restructures that we have one of the best -- one of the most capable teams around. We think of taking advantage of those opportunities. So that's group one. Group two, on long duration assets like we have, by nature they are extremely solid assets and therefore they generally don't go through the distress on the operational side or they shouldn't go through the distress and I guess we don't see it right now. And therefore the only opportunities that will come about on those is where people have misfinanced the assets and therefore there are issues by virtue of financing difficulties. And in those situations, what we are looking for is great assets which have financing problems and we'll try to capitalize on an opportunity in that perspective. So I would say that's the second group.

The third thing, maybe just to your comment on structured products, we have always stayed away from structured products. We have never really been a participant in the market, in the structured business, and we will look and observe and try to understand some of them, and there may be an opportunity for us to do something, but I would put the probabilities of -- in the first two categories a lot more than the third, which is, well, we like our great assets that are misfinanced or just going through difficulties and we like to buy them and operationally and financially restructure them, as opposed to financial instruments that might be trading at a discount. When you make your 20% return for three years, they are gone. The other assets, you get to a business for a long, long period of time.

Thank you.

You're welcome.

Last question related to Brazil. The capital deployed to Brazil over the last year, particularly during the last couple of months, I'm not sure if it would characterize any distress situation. If you could offer a little more color in terms of the return profile in terms of the investments that have been bought and we have been allocated to Brazil, particularly with the retail side, the retail portfolio of what is the strategic or value add opportunity with that capital.

Yes, I guess I think the comment on the investment side of -- for Brazil, in that it is a commodity-based country. There's lots of other things and they built the country and they are doing well and all of those things. In the basic sense, it's an exporter, either number one or number two of almost every commodity product in the world. And therefore it's booming at this point in time. The running surpluses of cash, and as a result of that, the country is doing extremely well. Their banks are liquid and lending probably like very few places in the world, just because the country is in good shape and probably better than it has almost ever been. So we have continued to deploy capital there. Part of the reason is, is that we have a very unique offering for institutional investors. Very few global asset managers have the presence like we have in Brazil. And therefore, our story is highly attractive to investors. To the specifics of the returns down there, Chris, I would say that we believe at the current time that the funds that we created down there will well exceed the promised returns to our investors. And whether that all pans out at the end of the day, only time will tell, but we believe at the current time that we'll well exceed the returns we promised them.

Do you believe that the initial rate of return difference versus the targeted IRR hold returns are wider in Brazil type of investments versus your -- I would assume they would be, but I would like your comments, versus stabilized country.

They have been far higher because interest rates were higher down there. A big part of our beliefs over the past three to four years was that interest rates were going to come down and that was -- so far, that's been right and we will have to see whether that continues.

Thank you.

Our next question comes from Lawrence Goldstein of Santa Monica partners.

Hi. I hope you won't think this question inappropriate, obviously if it is, you won't respond. But I am a U.S. citizen and I am not talking myself into a depression, and I am optimistic, and I particularly appreciate your comment about seeking to leverage the company further in the future. Does this imply that for BAM investments that you might also leverage further? And incidentally, I don't recall in your press release, regarding dividends you are going to get, you will be buying more Brookfield. Could you indicate what that means for the balance sheet and leverage?

I think you are referring to the little public company that owns 10% of the shares of Brookfield, that a number of us in management participate in. This is a Brookfield Asset Management call, and we probably shouldn't talk about what that company may or may not do in purchasing shares. It hasn't been buying more shares, but it obviously owns 10% position in Brookfield. And obviously it has a very significant piece of the company.

Okay.

Thank you.

Our next question comes from Ronald Redfield of Redfield, Blonsky and Company.

Hi, I have two quick questions. Two questions. The first one is very quick. Regarding Brookfield Power is there a general rule of thumb, how one can value power assets based on megawatt capacity? Be it -- I don't know, anywhere from $1 million to $3 million per megawatt?

The answer is it is not easy because -- versus a coal plant or a gas plant that always operates at X capacity, hydropower plants can operate anywhere because of storage or run of the river. It can operate anywhere from 20 to 80%. And they have very, very different capacity factors. So one that has a 20% capacity factor could be worth X for megawatt and one that has 80% could be X times four if it was in the same region. So it is very difficult to just use a megawatt and say a price. I guess my recommendation to you and the way that we look at it, is to look at the current cash flows, look at the contracted nature of what's in place today, consider a view as to how that might grow based on the cash flows that are in place, if you think prices are going up or down, and then use a multiple on that for a discount rate. And that's generally how we value those assets.

And why would one be 20% versus 80% usage, just from demands in the area?

No, it's not demand. It's -- some plants are -- have effects by other plants on a river system. Some have reservoirs so we can store up water and sell at different times of the day or whichever, and some just have the water -- they are just overbuilt for the river system because they came from a regulated entity or something like that. So it -- there's many different factors that would mean that they would have the water level -- the capacity would be different.

All right. Thanks. And my next question would be -- and if you discussed this already, I'm sorry. If you put it in your presentations. Would you please discuss if the -- if the current credit crunch has affected you, or is affecting you right now, including the subsidiaries, all material subsidiaries, and in that, would you discuss your cost of funds? Has that changed? Your future liquidity, commercial paper, and so forth. And also, if you could touch upon if you have been speaking with the ratings agencies and if they are getting stricter, do you have any concerns that they might change your ratings, and if so, would your cost of capital go up further?

Maybe I will deal with the first part of it and then Brian will just deal with the finance part and rating agencies to answer your questions. And I would say, generally, look, the bottom line is everyone has been affected by what's going on in the capital markets and the availability of capital. I would say while most people didn't recognize it, over the last four years, they were also -- everyone was affected by it, just in a different way. It was positive before and now it's negative. I would say that we responded to it by insuring that we put risk management strategies in place to insure that we have very solid business. The fortunate thing we have is a balance sheet that's strong and probably even more importantly than that is that we have assets which have long, tangible sources of cash flow, which allows to us generate a lot of cash. And that's a big benefit to us as an organization. So on an overall basis, I would say, we are affected by it, but specifically, just because of the company that we run, we haven't been dramatically affected by it, and our two most major businesses being office properties and our power plant businesses are in very good shape. We are -- we have been affected, for example, in our U.S. housing business, even though Brazil and Canada are actually doing very well.

So just further on that, specifically you reference the cost of funds and rating agencies as well, and remind us if we missed one of your points. But on the cost of funds, I think Bruce really covered that off. I think the observation I would make is we financed the business on a very long-term basis, and the average term and duration on our debt issuance is very long. So we roll over a very small portion of it each year. Therefore if cost of funds change in one period, for better or worse, it tends not have an overly pervasive impact on our overall cost of funds. It's more around the margin and incrementally. What we observed in the two businesses that Bruce is referring to and elsewhere, is that, yes, spreads have definitely widened somewhat. Having said that, as you will well be aware the underlying treasury rate has come in significantly. So all in, in fact in a lot of cases we would be financing at better rates. And then just specifically on the rating agencies, we maintain a pretty open and active ongoing dialogue with them, and we will be meeting with them in the normal course following the release of these numbers and we think we maintain a constructive dialogue and don't see anything changing in that regard.

Thank you, guys.

Thank you.

Our next question comes from George Denninghoff with Vista Research and Management.

Hi, gentlemen. How are you doing today?

Very good, thank you.

I wanted -- I had a couple of quick questions for you, and one of them comes from -- it seems like there is a target annual rate of return that you guys are looking for of about 12%. And correct me if I'm wrong on this, but with your positioning in the global infrastructure, timber, those types of areas and that seeming to be a growing area in the developing world, excuse me, do you think that this number is a realistic number or do you think it should be a higher target?

Well, there's a page in our materials that we put out and it shows the returns over the last five years and it shows our target. We exceeded the return of 12% over the last -- 12% growth over the last five years. It's very possible that if the business turns out the way we believe it will, and we hope it will, it will exceed those. Having said that, we hate to put targets out that we won't achieve, and those numbers over a very long duration period are probably the appropriate numbers for corporation of this type. It's possible that we are in a unique period of time where you can earn higher than what you would normally earn and therefore that return should be better, but I guess we would rather have conservative numbers out there, and make sure that we don't try to reach for higher returns and take higher risk.

Okay. My next question is on the private equity portion of your business. With the amount of issues going on with credit crunch and those types of things, are you guys expecting to get the same multiples or are you having to adjust your multiples for your potential exits? Or has the dislocations in the market, actually created -- made up for the credit issues?

Well, on the exit side, we don't really operate a private equity business like a traditional private equity business. So we don't sell a [lock] of things. The only place where we really have that is in our restructuring fund. And it is very possible that if you were trying to sell one of the investments that we have in our restructuring fund, which we are not today, you might get a different exit multiple than you had before. I would say more -- probably more important to the company is that as we're acquiring things, we were competing against people that had private equity money or were funded with financing, which was private equity type related, high leverage financing and that always pushed multiples up. And therefore, it should be easier for us to achieve our long-term return on investment goals in an environment where that capital isn't available to others.

And then on the spinoff of BIT, my question is, with that being a limited partnership, and the tax legislation still pending in Congress, are you seeing that is going to have potential adverse effects on the profitability of that particular company?

Sure. It is Brian. Thanks for that. No. We don't expect that. That's really -- that legislation is in large part driven towards how carried interests are taxed, Brookfield Infrastructure Partners is an owner and operator of businesses. It's an investor in those businesses. It does not have carried interests in it, and so it would not be affected by that.

Okay. Those are my primary questions, so thank you for your time.

Thank you.

Our next question comes from Michael Goldberg of Desjardins Securities.

Thanks. Do you see telecommunications as one of the infrastructure areas of interest to you, and if so, are there any particular opportunities that you see now that you would care to discuss?

The short answer is no, Michael.

Thank you.

Our next question comes from Chris Haley of Wachovia.

Thank you. Is there any update to the submissions that you made in Ontario for additional capacity expansion on the power side?

I'm not sure I can answer you, not because I don't want to, but I don't know where the submissions are, Chris. I don't think there's any change in the stature over the last six months and I think they are just still moving through process.

A follow-up related to that, when you think about your aggregate capacity, could you maybe provide a little bit of forward thoughts on additional expansion plans over the next, say, two to three years, how that portfolio for specifically hydro might look, exclusive of wind activity.

You're asking where we will go or how we think -- many more assets we would buy?

Not on the buy side, but more so on the development side, like capacity expansions.

On the development side of hydro, it's difficult in North America. There's not very many sites and it's -- it is not an easy thing to do. And they take long periods of time. We actually have looked at a few things in British Columbia that are doing greenfield development in hydro. But we have nothing to report at this point in time in that regard. Where we are doing development is in Brazil, and we are very positive on Brazil as a country to own hydro in. And we continue to bring projects on. Construction and development, I think we have five under construction today, and we will bring a few more on in the next -- we have a pipeline and we keep bringing them on with our construction team. We will continue to do that.

Okay. Thanks.

You're welcome.

Our next question comes from Michael Smith of National Bank Financial.

Thank you. I just wanted to circle back to raising funds. I would imagine that there's a lot of demand for restructuring funds versus the demand for your core renewable power property infrastructure type funds over the next year.

We hope there's demands for all of our funds, Michael.

I think every allocation has different groups. Every institutional investor has different groups. They all -- each one of them identifies different products that they want to invest in and some of it comes down to where they have investments in currently and where they want to go with the risk/reward profile of their fund. So every single one is different. There's no doubt that -- I guess in my belief, that on global basis, institutional managers, us being one of them, who have capabilities to put assets to work in a restructuring environment, and can credibly show that to investors will have an advantage in this period to raise further capital to put to work in that capacity. And we hope to be one of those in the marketplace.

So when you were speaking earlier about -- that you were somewhat optimistic, I guess, that you were working on a number of funds -- they would be cross strategies, am I correct to assume that?

We have many funds out in the market place of which I would love to tell you about all of them and which ones they are, but we are prohibited from doing that.

Okay. Thank you.

Thank you.

Gentlemen, there are no further questions at this time.

Thank you very much, and thank you for joining us this morning, and we look forward to speaking to you again when we release our first quarter of 2008. Have a great weekend.