BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2008 Q1 法說會逐字稿

Welcome to Brookfield Asset Management's conference call and webcast to present the Company's first quarter 2008 results to shareholders. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS) At this time, I would like to turn the conference over to Mr. Robert Harding, Chairman of Brookfield. Please go ahead, Mr. Harding.

Thank you very much, operator, and good afternoon, ladies and gentlemen. Thank you for joining us for our first quarter 2008 earnings announcement and conference call. Joining me today on the call is Brian Lawson, our Chief Financial Officer, who will discuss our financial results and provide an operating overview. Following Brian's remarks, Bruce Flatt, our Chief Executive Officer, will discuss a number of recently completed transactions and provide an update on major initiatives underway. The President and Co-CEO of our renewable power platform, Richard Legault, is with us today and will conclude with a brief presentation on the unique features of this business, which we highlighted at our annual general meeting this morning.

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 risk factors and future results may differ materially. For further information on known risk factors, I would encourage you to review our annual information form or annual report which are available on our website. With that done, I will now turn the call over to Brian Lawson.

Thank you, Bob. We published our first quarter results this morning and also held our annual shareholders meeting which was webcast. Accordingly, I will keep my comments somewhat shorter than usual to avoid reputation and to allow time, as Bob mentioned, for Richard to tell you more about our power business. In summary, the first quarter results were generally inline with our expectations and nearly all of our businesses are performing well. Power generation was particularly strong. We experienced good growth in commercial office and we also continue to expand the revenue base in our asset management activities. We recorded favorable gains in our financial asset and private equity portfolios. On the other hand, we did experience lower contributions from residential operations in Timberlands, both of which were expected.

This overall resulted in operating cash flow of $443 million for the three months ended March 31, 2008. That's $0.72 on a per share basis. Now, when comparing our results to the same period in 2007, it's useful to note that the prior period included a $165 million security disposition gain and that represents $0.26 per share. So our results in the first quarter of 2007 excluding the gain were $0.67 and including the gain cash flow was $0.93 per share. As I mentioned above, the results from our power up business were very strong. Generation was 12% above last year's results and 17% above long-term averages. Realized prices were 15% higher than last year. This led to a 34% increase in cash flows quarter over quarter. Our storage levels are at expected levels, which sets us up nicely to achieve long-term averages for the balance of the year, assuming normal hydrology conditions prevail and pricing continues to be favorable.

We recorded solid growth in the cash flows recorded by our commercial office activities, notably 9% in growth in cash flows from existing properties in our North American portfolio as opposed to the impact of acquisitions, which also contributed a meaningful increase. We also received a $31 million dividend from our interest in Canary Wharf. Occupancy levels remain at high levels, 95% in North America, 97% in the UK and 99% in Australia. And market rents continue to exceed in-place rents by a considerable margin, $36 per square foot market rents compared to $23 per square foot in-place. Asset management revenues from third parties totaled $114 million during the quarter, which compares favorable to the comparable period in 2007, considering that we earned $57 million in fees in that quarter alone from our efforts to establish a U.S. retail platform. Absent this particular item, fees increased by nearly 50% due to an expansion in capital under management and increased levels of activity.

We have a number of items that are in various stages of the capital raising process, representing roughly $10 billion in aggregate. These would add significantly to our future asset management revenues, as well as the capital at our disposal to invest. Annualized base management fees from third parties, which is an important benchmark for us, were $130 million at the end of the quarter, up from $120 million at year-end. On the negative side, we did record lower cash flows in our Canadian residential business and our timber operations, as I mentioned both of those were expected. Our residential operations do continue to benefit from diversification, as we receive positive contributions from our Brazilian and Canadian operations, while the U.S. operations do continue to face a particularly challenging environment. The margins in our timber business continue to be impacted by lower demand and pricing, however, we are mitigating this by increasing the portion of timber that we export to higher priced Asian markets and by deferring planned increases in harvest levels until margins recover.

On the capital side, we successfully completed the refinancing of our U.S. Pacific Northwest timber operations with the issuance of $1 billion of asset-specific debt with an average coupon of 5.17% and an average term of 7.3 years and completed a number of smaller office property and other financings. We maintained our core liquidity at approximately $2 billion, that's unchanged from year-end, and continue to maintain good access to the capital markets, both in terms of financing our assets and accessing institutional capital for our funds. We repurchased $2.1 million of our Class A shares during the quarter at an average price of $28.75 per share and the board declared the normal quarterly dividend of $0.13 per Class A share and that is payable at the end of August. And so with that, I will hand the call over to Bruce.

Good afternoon, everyone. My comments today, as Brian said, will be brief in order for us to allow Richard Legault to cover our power operations more extensively. We thought we would provide some extra detail on our renewables business at this time, as we, I guess, really three reasons. One, we get a lot of questions from shareholders on the power operations. Two, it's our largest investment area within the Company for our own capital. And three, I guess we think that probably of all of our asset groups, there's less knowledge in our shareholders of these assets and we wanted to just provide more detail about them to investors. As Brian mentioned, during the quarter we had, I guess, strong results in a number of areas and a couple were weak, but thankfully they were our smaller businesses.

Our power results were extremely positive, both because of pricing and because of water levels for the -- our river systems. And it looks like in-flows continue to be strong and prices are strong and therefore going into, anyway, the second quarter it looks like the same prevails. In the commercial property business, I guess I would just add to Brian's comments by saying that we see -- we have very long-term leased properties. The cash flows are therefore very sustainable and durable because -- and maybe to make the point, they don't increase a lot when rents go up a lot and they don't decrease a lot. It takes a long time, as the leases are very long-term in nature, to change the cash flows a large extent within the portfolio. Despite that, leasing is still going on. Vacancies are still extremely low within most of the markets we are in and the markets in general. And the business, in fact, gets confused a lot with the residential markets but it's still very positive.

I guess that could be changed by both financial markets over time in a significant way or overall recessionary conditions in a major way and that will affect all commercial real estate at some point in time. But in the interim, actually results are quite positive. Our smaller operations, as Brian said, timber, residential, and some of our infrastructure operations are right on plan, or as expected over the quarter. We continue to build out each of our businesses incrementally and I guess that means three things. We keep putting money to work to organically grow each of the businesses. We're making add-on acquisitions one by one and we continue to deploy capital where it can to create value within the asset. So we are doing that every day. On a major perspective, I guess we continue to look for asset, other asset groups or complimentary assets to the portfolios we have today that we can buy for value during times of mis-pricing in the marketplace.

And there isn't a lot of mis-pricing yet in the marketplace for outstanding assets for us to add to the portfolio, but we think there may be some opportunities over the next 12 to 18 months. So with that, those brief comments and we would be happy to take questions after Richard's set piece, but I will turn it over to Richard to talk specifically about the power business.

Thanks, Bruce, and good afternoon, everyone. I will focus my comments today on three themes -- First, the uniqueness of our renewable power business; second, how well we're positioned to capture the benefit from rising energy prices; and finally, how we intend to expand our footprint in the fastest growing segment in the power business. In business for over 100 years, we are a highly experienced owner, manager, operator and developer of renewable power generation facilities. Today we operate almost 3900 megawatts of renewable generation, comprised of 3,687 megawatts of hydroelectric facilities and 189 megawatts of wind generation. In addition, we have a high value development pipeline of approximately 6,700 megawatts, including greenfield hydro, wind and hydro pump storage projects throughout Canada, the United States and Brazil. We have approximately 1,000 employees who are highly focused on growing a unique renewable power business and creating long-term value.

We have a two-pronged operating strategy. First, plant operations are largely decentralized with the bulk of the operating staff at the plant level. This strengthens local stakeholder relations and provides greater focus on enhancing the reliability and efficiency of our facilities. Secondly, we centrally manage the marketing of our power output. Through a revenue focused generating strategy, we capture both short-term and long-term revenues and margin opportunities. We have largely automated the dispatch and control of our plants in order to allow a cost effective real time asset response to rapidly changing market conditions. We believe that Brookfield renewable power is ideally positioned in the power industry due to the characteristics of its generation portfolio. It's anchored by a significant portfolio of hydroelectric assets, which are a unique asset class.

Hydroelectric facilities operate with a proven and relatively simple technology that has been well established for over 100 years. As value and long-term investors, we find them very attractive for the following reasons. First, they have a sustainable, competitive position. Their cost of producing electricity is among the lowest in the industry and significantly lower than other technologies, due to the absence of fuel costs and the ability to automate operations. Second, hydro assets benefit from higher electricity prices when higher cost resources are required to meet growing demand and set the market clearing price, which is then paid to all generators. With their flexibility to store water, start and stop quickly, hydro assets are uniquely positioned to capture higher revenues by quickly responding to price signals. Third, hydroelectric power plants are very long life assets which require relatively low cost maintenance and build value over time.

With the proper and relatively low cost maintenance, their useful lives can be extended beyond timeframes generally expected for any other generating technology. Finally, hydroelectric facilities emit no carbon emissions while generating power and is therefore an environmentally preferred form of generation. As markets begin to value quote/unquote green assets with zero emission profiles, hydroelectric assets are well positioned to have their positive environmental attributes recognized through value appreciation. In addition to our unique asset class, we are in one of the fastest growing segments of the power generation industry. We think that continued strong growth in renewable power generation will be broadly supported in the future by the following fundamental drivers of the sector. First, recognition of climate change impact. No fewer than 64 countries have set national targets for renewable energy supply, as a result of greater levels of awareness of the impact of greenhouse gases.

Second, rising prices of fossil fuels. The operating cost of generating facilities using these fuels are rising and are also increasingly volatile as a result of declining productivity of reserves and increasing cost of supply. Third, renewable technologies, such as wind and biomass, have become more cost competitive through technological improvements and cost increases of competing fossil fuel technologies. Fourth, the growing energy security concerns worldwide and the desire for independence will inevitably lead to more local renewable generation. Finally, government policies and incentives are increasingly supportive through the establishment of renewable energy standards, tax incentives and subsidies, as well as carbon legislation and targets. We think that Brookfield is strategically positioned to capture additional value from these drivers in terms of its existing portfolio and the opportunity to build on its acquisition track record and extensive development pipeline.

I mentioned that one of the unique features of hydro facilities is that they benefit from rising electricity prices and therefore I would like to briefly comment on North America and Brazil energy markets and put into context our strong position in these regions. First, in North America, we believe that electricity prices in most of our markets are rising and we expect to benefit from these improving price trends. Prices are expected to increase as growing demand triggers the need for additional capacity. Demand growth is currently outpacing supply increases by at least 5,000 megawatts per year. We continue to believe that combined cycle natural gas facilities will be the new capacity of choice to satisfy the growing demand given the following attributes -- clean burning of natural gas fuels; relative ease to locate near load centers; short lead time to build; and less than half of the carbon emissions of a coal plant.

This, however, creates a growing reliance on imported and increasingly costly natural gas, which drives up electricity prices. In North America, we believe that electricity price levels must increase to cover the all-in cost of a new gas-fired facility. Now, switching to the Brazil electricity markets, prices are also expected to increase because demand growth is forecasted to remain strong and the supply response to continue lagging. We expect that Brazil will have to add 50,000 megawatts of capacity over the next ten years, a 50% increase over the existing capacity of 100,000 megawatts. Although hydro generation dominates supply in Brazil, near-term hydro expansion will not be sufficient to meet projected load growth. As a result, we believe at least 20,000 megawatts of new capacity will be satisfied through alternative generation technologies, such as oil-fired, coal, biomass, wind and natural gas.

And this supply mix is expected to increase prices in Brazil. Despite current uncertainties surrounding global carbon markets, we believe that recognition of the impact of carbon on climate change will lead to greater consensus on limiting CO2 emissions with the most likely pricing mechanism being a cap and trade program, similar in structure to the type of market already implemented by the European Union countries. We believe cap and trade regimes in the United States and Canada are likely in the future. As compliance costs for fossil fuel generators increase, they will result in additional costs for carbon-based generators, which in turn will lead to higher electricity prices to insure generators earn their cost of capital. As our electricity production is virtually 100% carbon neutral and one of the cleanest forms of commercially viable electricity generation today, we expect to capture higher market prices as carbon reduction measures are implemented in our traditional markets.

In summary, with respect to long-term prices, our view is electricity prices will continue to increase across the world as the impact of higher fossil fuel prices is fully reflected in the electricity markets. All fuel costs, oil, natural gas, coal and uranium have increased dramatically, as have construction costs for new power generating facilities using these fuels. In contrast, the facilities in our extensive hydro portfolio have no fuel costs and low operating expenses. Therefore, as overall electricity prices in the marketplace increase under cost pressures, our margins actually improve, subject to existing contracts in place. This favorable situation is further amplified over time by the fact that our hydro plants are long life facilities with minimal amounts of sustaining capital requirements.

As outlined earlier in the presentation, we have a unique business. It is well positioned to capture higher prices, which we believe are rising in all markets. Accordingly, we focused -- we are focused on expanding our footprint in this business. Having invested close to $2.5 billion in the renewable power sector over the last five years, we have a value focused operating platform with a strong track record of growth. We are confident that by leveraging our strength, namely the continuing -- by continuing to develop our sizable and valuable project pipeline and by pursuing select acquisitions for value, we will be able to deliver superior risk-adjusted returns. We are committed to our pipeline and our high value development pipeline and our development pipeline includes 148 development projects totaling up to 6,700 megawatts of potential capacity, of which 722 megawatts are under construction or in an advanced development stage.

The project portfolio consists of 2,500 megawatts of conventional hydro, 2200 megawatts of hydro pump storage and nearly 2,000 megawatts of wind. In Brazil, we have built a very strong organization and track record to develop hydro plants and today have the ability to undertake construction of at least six to eight new hydro plants per year. The current pipeline includes 52 projects which total approximately 900 megawatts. We are currently exploring pump storage opportunities, which in today's market have a new appeal giving their renewable nature. They are essentially closed loop systems and are usually considered peaking plants providing highly responsive capacity. Brookfield currently owns and operates one of only three of such facilities not owned by a regulated utility in North America, providing it a unique position to sponsor and develop these types of facilities.

Wind power capacity in the United States and Canada grew by 43% or 5,600 megawatts in 2007 and is expected to accelerate over the next decade to more than 7,000 megawatts of installation annually. The industry has also experienced a wave of consolidation by major energy companies and in light of this consolidation, we are executing a more targeted development strategy combined with a strong operating platform to position Brookfield to acquire operating wind facilities. We think that we have been successful in establishing ourselves as a market leader in the acquisition of hydroelectric facilities in both North America and Brazil, largely thanks to the following competitive strengths. First, our access to market intelligence through our marketing platform provides us with in-depth market knowledge and insights into the pricing of power in the near-term horizon, as well as revenue enhancement opportunities.

Secondly, our strong operating platform helps us in understanding key value drivers and identifying opportunities for enhancing asset returns post acquisition. And lastly, our strong balance sheet provides access to capital. In closing, I would like to say that Brookfield renewable is better positioned than ever. Not only do we have a unique portfolio that cannot be replicated by new entrants to the market, but we are also a well-established operator in the fastest growing segment in the power business. Further more, our business is expected to benefit from rising energy prices and as our margins and cash flows increase over time we will be able to pursue significant growth opportunities in a fast growing renewables industry. Thank you very much and I will now turn it back to Bruce.

Operator, if there are any questions, we would be pleased to take them now.

(OPERATOR INSTRUCTIONS) Our first question today comes from Cherilyn Radbourne of Scotia Capital.

Thanks very much and good afternoon. I wanted to ask a couple of questions about the capital you have devoted to assets under development. Most of that is in office property, but there's also some in retail and in power. And I wonder if you could just give us a sense of how and when we should expect those developments to proceed and begin to contribute to current cash flows.

Maybe I will talk just generally and then if Brian has any comments on specifics. Generally, there, I guess, there's three or each of our business areas has development assets in it, because as you know, we buy, generally buy completed assets and sometimes buy sites to be able to turn into completed assets. All of our businesses have operations which we are developing. And I guess generally, we would build out those assets and when they are completed they would come online and contribute to cash flows at that point in time. Given we've been developing a number of things, we have significant amounts of development ongoing right now. A lot of that is fully leased up. And we'll come onstream as the projects are completed. So that should add the cash flows out a year or two or three from now, as the developments are completed. Just off the top of my head, I think we have a building under construction in downtown Toronto called Bay Adelaide West. It is about 60% or plus that leased and it comes on in mid -- mid to end 2009.

We have a building in Calgary under construction, office building that will come in the end of 2009, I think. A couple of buildings in Washington that are in 2009/2010. Buildings in Perth and Sydney, which are under construction today, which will start contributing to cash flows call it early mid -- through 2009/2010. In addition, we have a major building which we are just starting into the ground in Perth, which is fully -- almost fully let to BHP Bulletin, which won't come probably on stream until 2011, maybe even '12. So a lot of this is future activities which adds cash flows in the future and you don't see it for a long period of time. And Richard's power plants that he mentioned in his presentation, I guess we generally add one or two plants every six to eight, six to nine months. We have three under construction today. I think we're starting three up shortly. We have six under construction today. He added another three in there. So we have six under construction and they generally we add them in as they complete. So we have got a lot of them under construction.

Okay and it sounds like a lot of the office stuff is weighted towards the '09/'10 time period.

Maybe, Cherilyn, just on the office side, we are, we are generally a group that tries to lease a lot of the properties or do them fully let buildings as opposed to building on spec. We didn't do a lot of building in the late '90s and early 2000s because there was not a lot of building going on. You could buy buildings and you could make a lot more money doing that. Only when vacancies got to the point where it made sense economically to actually construct your property and people would lease space from you on a forward-looking basis did we start properties and that's why a number of them are ongoing today.

Just with respect to the Brazil retail property fund specifically, that actually had a very small negative contribution in the quarter. And so I was just wondering if you could speak about the major portfolio acquisition that was done late in Q4 and how that was financed. I guess, just some qualitative comments on how much of the value was related to development opportunities as opposed to cash generating properties.

Sure, Cherilyn, it's Brian here. So the Malzoni portfolio, the major portfolio that we acquired. I think we closed it in December of last year. And we did finance it pretty well entirely with debt when we brought that on. So there was a fairly heavy interest load within the fund. The properties themselves, in terms of a split between operating and development, there's a fair amount of development activity within that portfolio. They are taking a couple of the malls and expanding them significantly. It's about one-third development and about two-thirds operational. In terms of the operating part of the portfolio, the results have been very good. I think the sales are up 12%, so it's a very strong market in that regard.

So what you are seeing in the near-term is the impact of really two things, the development side of the business is really not contributing anything. A number of the costs are capitalized but there still is some overhead drag and some financing drag against that. And the second thing is that we did finance it with a fair degree of debt because it is in a fund that's sponsored by our partners and that was the way that we all chose to capitalize it. So as over time, the development properties come onstream, the cash flows from the operating part of the business continue to grow, and the -- some of the debt either gets refinanced with capital or is paid down, then the returns in that particular business will increase substantially.

Cherilyn, maybe, it's Bruce, just one further comment to that. The fund we have was originally all the assets we purchased had virtually no debt on them, so it was all equity. So ultimately the fund will be about 50% debt, 50% equity. It was just that one purchase we made we used financing to do it, but it's secured in the fund. I guess the comment and maybe just one additional comment is this sort of highlights the complications we have for reporting results for shareholders. When we create a fund, we own 25% of it. We manage and run it for our partners. We buy all of these assets on an internal rate of return basis. So many of the things that we purchase in that fund are going to have, we believe, outstanding long-term internal rates of return, but the current cash flows are little because we have development assets or other things that we are doing. And it just -- that -- the reporting of the results clouds the long-term value creation in the business in some of those funds and that's just -- it's just a fact of life, I guess.

I will ask one last one and then just get back in the queue. Just jumping to your portfolio of financial assets, you have over the quarter increased your holdings of common equities and in the past that's often been a precursor to a future transaction. So that aside, I'm just curious whether you are seeing more opportunities now in the public versus the private market.

I won't make any comments to future transactions. The only thing I would say is that often the stock markets -- look at the values. The value versus price is two different things. And when the markets are volatile and people are more negative about the market, generally, they don't look at the discounted future positive cash flows. They look at the negative news that's in the marketplace and therefore often the marketplace presents opportunities to acquire assets at those times, negative times, much at a discount to what you would believe the long-term full values are. And we hope over the next 12 to 18 months, we have some opportunities to do that and one place to do it may or could be and hopefully will be in the stock market.

Okay. Thanks a lot. I will pass it off to somebody else.

Our next question comes from Mark Rothschild of Genuity Capital.

You spoke about the power business quite a bit. I was wondering if there was any plans or any thought in doing something with the business to increase the fees you earn from this business, which you obviously do for most of your businesses.

It's Bruce Flatt and I guess I would make the comment that we have been asked this consistently for five years every time we talk to people and it's an excellent question. All five years it's been asked as a question and it still is. I guess looking in hindsight, I think we have clearly made the right decision on behalf of shareholders to hold onto the assets and continue to enjoy the value increase from the assets. Having said that, this is becoming a very significant area for us within the Company and obviously with the many demands of capital and opportunistic things that we can put capital into, this would be a place where eventually if we decided to that we could harvest capital out of. And we'll have to make those decisions as we go along. Merely just in the realm of capital allocation, what I can tell you is we think these are still fantastic assets to own for us, or for another investor if they came in the portfolio with us, and we think that they are going to achieve very attractive returns looking forward.

Okay. And real estate securities in general have gone down, the prices have gone down over the past year or so. Do you think that there are discounts now to NAV and how does that relate to your view on cap rates?

Well, I -- maybe I guess in my mind they are two separate sort of questions. The first one is really where are the stocks in relationship to NAV and I guess our view is if you do not have an extremely negative view on the, the real estate commercial markets and I think if you had extremely negative view that would be developed because you viewed that you were heading into a deep recession. Or secondly, that the financing markets for real estate were going to be very disrupted over the next extended period of time. We don't believe either of those are the case and therefore I guess our view is that there are some exceptional real estate security purchases in the marketplace because you are buying underlying value at a significant discount. And in, I guess, in the fullness of time we will know whether that's right or wrong.

On the second comment, some of that would be driven, I guess, or linked into cap rates and there were extreme quotes of cap rates mid-2000, early to mid-2007 and I would say you are probably -- there's not a lot of trades happening today. You probably would be higher, but you are probably back to what should have been normal as opposed to the extreme nature that you saw on the positive side early to mid-2007 and I think longer term, as long as interest rates stay relatively low, cap rates will continue to be in a relatively low range.

And can I ask, what is your view of what is normal for Brookfield Properties?

For a property within Brookfield for a cap rate or for --

The types of properties that Brookfield owns.

Maybe just -- and there's many different properties in many different cities. I would say in general, cap rates were -- got down to 4% going in and that, I would say, was extreme, given the ability to grow cash flows on a risk-adjusted basis going forward and I think you have seen in hindsight probably that was true. I think if you look on a risk-adjusted basis and given the IRRs you can get out of a normalized stream of cash flow looking forward, probably somewhere, they will settle in if interest rates are here, they will settle in somewhere in the 5% to 6% range.

Okay. Thank you.

Our next question comes from Michael Goldberg of Desjardins Securities.

Thank you. I had a couple of questions, first of all, just a clarification. In your press release you mentioned strong underlying fundamentals with a few small exceptions. And just to confirm, are the exceptions the cyclical weakness in residential and timber or is it anything else that you are referring to?

That would basically be it, Michael.

Okay. Second, also in the letter to shareholders, you said that above average hydrology added almost $60 million to cash flow and is that to NOI, to FFO, or to both?

That was to NOI. And it would really be pretty much the same to FFO.

As you know, Michael, most of the margin widening in a power plant drops straight to the bottom-line, so as power prices go up or we get extra water or less water, for that matter, it hits your bottom-line directly. So it's very little of it would be in costs.

Okay. Also in the letter, you talk about positioning to add another platform that could be as significant as the office and renewable power platforms. Now, can I read into this that you actually have some real potential opportunities in your sights or is this a more general comment that market turmoil often creates opportunities?

I would read the latter into it, Michael. I guess, firstly, we have many things in our sights and we are always on the look for different areas of new business. The good news and the bad news is, I guess, that a lot of the things that we do are still extremely -- have good underlying fundamentals and they are well financed generally in the marketplace. There are some exceptions. There are some extremes, for example, in commercial real estate but not very many. And most as the companies are in solid shape. In addition, the other types of assets we buy, being cash flowing assets, or would buy are generally in pretty good shape. So I guess the point is, we would hope or we would like to see if we could find another area to our infrastructure, property, renewables, our business that we could add that could become as meaningful for investment for us and our clients, as we've -- as we have today. And we're always on the lookout for that.

Okay. Also in the letter, I guess one thing I'm sort of having difficulty understanding, you say average contract prices nearly 90% to below the level required to support new capacity. So I'm just confused, what does this mean? Are you saying that 90% of your contracts are below market prices? And if so, later on, under commercial office, you say that average rents are 30% below current market. So on power, how much are average contract prices below current market for power?

Michael, maybe I can sort of answer. It is Richard Legault. I can answer the first part of your question. When we say 90% of our contracts are below long-term values in the marketplace or the replacement value of power. Today current market prices are not at the level to justify a new plant, both in most of our markets in North America, particularly, and therefore when you look at our contracts today, they were signed at times where power prices were $30 or $40 and therefore when they run off, we should be able to renew these contracts or at least sign new ones at values that are at least in the range of a new entrant, which would be a, again as I've outlined in my presentation, based probably on a new combined cycle gas plant with $10 to $11 gas prices. So when we look at our portfolio of contracts, we'd say 90% of those contracts are all below that threshold and essentially only 10% would be slightly above that threshold.

Okay. And also related to the comments about power in the letter, you are saying that the average financing is 40% loan to value, I guess. You've got $3.5 billion of property-specific borrowing on power generation. So if I'm, just doing a little bit of arithmetic here, and I come up with about $8.8 billion of net asset value in relation to that. Would that include working capital or exclude working capital as you show it in the supplemental?

I think the -- Brian will maybe answer you specifically, Michael, but I think we tried to take a pretty conservative approach to just saying it's at least under 40%, just to give you a number. It's probably less than that if you looked at the true underlying value of the assets.

Yes and we would be talking referencing more the existing up and running facilities and for example, that would include development capital.

So it includes development. Well --

No, the 13 would -- would include development capital, whereas, what we are really talking about when we referencing them, the loan to value on the financing, as Bruce mentioned, is a conservative view and also it would not include development facilities in many cases.

Right. Well the $3.5 billion, isn't that property-specific just on capacity that's up and running?

Correct. That's the point.

Okay. Now, also you talk about 6.7 -- 6750 megawatts of renewable power capacity at some stage of development, far above the 715 megawatts discussed in the sup pack. What's the difference between the two numbers? And what's the time frame over which these developments might be expected to occur?

Michael, it's Richard Legault again. I think that our portfolio, again it is very difficult to outline to you the state of 148 projects, but maybe I can work from what we did explain in the package. We have about 722 megawatts today. 137 is in construction. I think that's pretty well we expect these projects to be commissioned sometime in 2009 and mostly by end of the year 2009. For the remainder of the 722 megawatts, they are in varying degrees of advanced stages of development, meaning they have to meet project finance type criteria in order to build them on a project-financed basis. So we are looking for site control. We are looking for permitting and licensing and all of the other areas that would essentially take most of the risk before start of construction out of the equation.

Okay. And --

The balance of the portfolio, when you look at the other projects that we have, are in the process of actually doing, again, various degrees of either -- we have site control for all of the 6700 megawatts but they are in various stages of development, either through fatal flaw analysis, pre-feasibility work, feasibility, et cetera. So, again, I can tell you that the process today is to actually bring projects to an advanced stage so that we can, again, begin to take risk out of that, those projects so we can construct them and ultimately control the risk during the construction stage.

Okay. And finally, your shareholder letter also has an interesting discussion around the potential for current capacity cash flow to increase based on repricing to current replacement costs and the potential if impact of carbon premiums is also added. Now, on top of this, what would be the further addition to cash flow if all your capacity now under development was added?

Well, that's a difficult call to make Michael. I think, like I say, the cost estimates are not finished on a lot of the 6700 megawatts, so, again, we can -- certainly, I think the estimate that you have on page 5 is clearly only for the operating and existing capacity and portfolio. And you just -- I guess you would have to risk weight, Michael.

An you could do it yourself. If you took 6700 megawatts -- you could take the 700 megawatts that are getting built and we may build these on a 12% or 14% return on average. If you take a financing cost of capital, you might say it's 8. So you are going to make 6% for the bottom-line on those assets. On the balance of the plants, being 6,000 megawatts, some of those will not get built. It's quite positive we won't get the approvals and they won't come in under the right costs and then you are just going to have to run a DCF on building those out and what return you will get on building them out. But I -- that's farther out in the future and it wasn't -- it's obviously additional cash flow if we can build it in the future.

Okay. Thanks very much. And great letter, by the way.

Thank you.

Our next question comes from Chris Haley of Wachovia.

Good afternoon. Congratulations on a good quarter. I would be interested, first thanks for all the detail, Richard, I would be interested in your description of the additional development projects of 2500 hydro, 2200 storage and 2,000 wind. What would be -- Bruce just kindly mentioned a return threshold 12% to 14%. I'm assuming that -- I'm assuming that's a levered return, that's different. What would be the return -- how far -- what's the variance between hydro, wind and storage turn thresholds, understanding that storage might be a little lower.

Maybe I can start answering the question by going in, depending on if when you start a project, we tend to use a higher threshold, understanding that as we refine the analysis, that we are probably going to, again, find things that will reduce the returns. And, again, starting in, we would look for 10% to 12% unlevered type returns in order to pursue a project. Because, again, when you -- returns may be better but returns may be worse and we don't really want to waste capital trying to pursue projects that were certainly thin to begin with. So going in we would start with probably closer to 12. As we progress towards essentially making a decision on construction, we would certainly look to, again, an unlevered type of return in the 10% range. Having said that, when you look at the three different technologies that you point to, first in conventional hydro, we have been doing this for a long time. We know these various facilities. They just take longer to actually develop and commission, but we would look for returns that I've just described to you.

In looking at wind projects, again, if you look at the wind projects that we are developing, we are doing very little that would actually involve a merchant type scenario for wind projects. So therefore we are doing with long-term contracts, preferably with, again, government-type credits, meaning Ontario and British Columbia and a few other Canadian provinces. So once we have actually confirmed the actual data for wind and also taken some of the risk out of the construction of them, because we have firm contracts to buy the equipment, and secondly, we have balance of plant firm contracts, we can probably do something less than 10% return on assets. But we would certainly look towards trying to get similar returns to what we have on hydro, recognizing that, again, we have a different sort of revenue profile for that type of facility. And, Chris, maybe just to crystallize that all into some -- a couple of numbers, if you think of wind projects, the ones that we built were probably around 10 unlevered and 16 to 18 levered.

Right.

Given you have long-term contracts, you can finance it quite effectively with a government credit.

Right.

And on hydro plants that we are building, which are predominantly in the last while, and the ones we have in our the construction (inaudible) in Brazil are unlevered returns are significantly higher, a, because of the risk perceived in Brazil and secondly just because of the --there's not many people doing it. So our returns would be significantly higher than those numbers on an un-leveraged basis.

Richard, on the -- thank you for that, Bruce. Richard, on the pump storage, your thresholds, where would they be?

Well, pump storage, again there has not been a pump storage development in a long time. And the reason why -- and they may probably take the longest to develop. We think a period of five to eight years is required to actually develop the next one. And a lot of it has to do with permitting because of what you are doing, essentially, is creating an artificial lake at the top of a mountain somewhere and ultimately a reservoir at the bottom. When we do that, however, and with the great -- particularly in the U.S. and some of the western provinces, have increased intermittent-type generation like wind and ultimately a lot of the utilities are looking for this type of asset. So we're really uniquely positioned here to actually promote and sponsor new projects going forward. And we have now, certainly, identified some sites.

We have actually secured some of those sites, which are included in our pipeline, but there are many others that we haven't sort of included, but we're pursuing those projects with utilities. We are not pursuing them on a, call it a merchant basis similar to what we would have with the Jack Cockwell facility we currently own. So in going forward, our return thresholds would probably be inline with wind because the fact that we are going to be contracting this for a long time with a utility. It's a natural -- it's a natural fit for a utility to have this type of facility to either be a sink for energy that it can not consume or to be a peaking facility when it needs power to service growing demand.

Okay. Thank you for that. To expand upon an earlier question, where of the projects or of the pipeline on hydro, Richard, how many megawatts are you currently in permitting process or approval process for?

I would say, again, the clear picture I can give you is the, again, the remainder of the 722. We have 568 megawatts or so that basically makes up the compliment between what we are building today and what is in advanced development stage. That 568 megawatts all have to be permitted before we move forward and they are in late stages of permitting. So I would say 568 would be a good number to give you.

Okay. That's helpful. Thank you. Bruce, I have one question for you. I appreciate your observations to see that your Brazilian residential operation has made a relatively large acquisition, potentially moving the consolid -- moving that market into the consolidation phase of its life cycle and we have seen a little bit in the U.S. but probably not as much. Enjoy your comments to why do you think -- why might the consolidation in Brazil make sense at this point versus additional consolidation or investment opportunities in the residential business, particularly in light of BAM's residential exposure in North America.

Yes, I'm not the, probably, the best expert on this but I will make a couple of comments. Firstly, the residential markets in Brazil. Housing markets in Brazil are dramatically different than North America. They are very undeveloped. They are growing at a very fast pace and the consumption of housing moving from people moving from low to mid and mid to high end use in Brazil is dramatic and we think it's like, refer to Americas in the '60s and '70s. So there is a -- it's very significant movement of product through the system and in its early stages of development, a number of companies went public last year in the stock market in Brazil, we were one of them.

We have a significant amount of cash on the balance sheet and we think that Company can grow and take advantage of the environment that we think will be very positive over the next number of years. On the contrary, in the United States the business is a very developed business and it's really just a manufacturing Company. The home builders are just manufacturers and we have never truly believed in the manufactured -- being in the manufacturing business in housing. We're a land developer in North America and we think there may be opportunities to buy specific pieces of land, but we have never wanted to be in the manufacturing business, therefore, we are probably not an accumulator of the very large housing companies in North America, although we may selectively buy land, because that's where we have always been in the business.

Thank you.

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

Thanks very much. I just wondered in that indicative potential cash flow generation for renewable power business table on page five of the letter to shareholders, in that operating cash flow number of $750 million, what have been the deductions from revenues other than straight operating costs.

These would be our total operating costs and G&A has been deducted from this. It is before interest, obviously, and, again, this is based on long-term average hydrology of our facilities and current contracts in place and current pricing environments.

What it doesn't include, Rossa, which your question may be towards is sustaining capital expenditures.

Yes.

Which we do, I think, indicate somewhere else in our annual report or something like that, what the sustaining capital expenditure for each of the type of assets we are in, but that number is a free cash flow prior to sustaining expenditures.

What would it be in rough terms for those power operations?

Well, again, when we look at the current operations, and there will be ups and downs to that, but we, as you know, we have a 20-year program which we execute on. The average of that particular capital program per year would be in the range of about $60 million.

And then the price for power that would relate to the current replacement cost generation, what would that average?

I think when you look at the total revenues of $1.5 billion that's on the page that we circulated and you divide by the total output of our total portfolio today, I think that number works out to about $105 to $110 per megawatt hour.

And then looking to the deconsolidated capitalization on page 24 of the MD&A. From the prospective of that balance sheet for which we see the liabilities side, what would be the corresponding net asset investment in Multiplex?

Oh, gosh. While -- maybe the best way to say that the amount of capital that we put into Multiplex equity capital would be in the range of $2 billion.

$2 billion. So the $1.5 billion of liabilities that is on the deconsolidated balance sheet that relates to your $3.5 billion investment or have you extracted?

No, that would be just stepping back the acquisition price for Multiplex in total was around $3.5 billion, of which $1.6 billion of that was funded by debt that has no resource back to Brookfield. It's within the Multiplex Group of companies and so that is not reflected in our deconsolidated capitalization. It would be reflected in our consolidated capitalization.

Got it. And then of course the --that $3.5 billion was almost as much as your equity in Brookfield Properties and yet for Brookfield Properties we have got a lot of very detailed disclosure of operating metrics and financial metrics and I'm wondering if you are planning on providing more information than the fairly short descriptions and summaries on Multiplex going forward.

I guess the short answer to that is absolutely yes, Rossa. Frankly, we have been working through integrating the businesses and the reporting cycles and historically they have reported semi annually and not on the quarter. So as we get them more integrated into our operations, then you will definitely see more information.

While we are on the topic of Australia, there's a lot going on in Multiplex. I wondered if the Centro situation in Australia was anything that Multiplex or Brookfield was spending any time on.

The only -- not to deal specifically with any opportunity in the marketplace, because we probably shouldn't comment on other companies' affairs, but the markets in Australia, I guess, have three things working for them. On the fundamental side, the positives of the commodity-based markets, kind of like western Canada, Rossa, are extremely positive. Vacancies are very, very low. The country is doing well, and it's -- it is quite robust as an economy. The problem with that is that they have jammed interest rates up to push back inflation. And that's caused some consternation in the market.

In addition to that, the financial markets have been affected just with the malaise of the rest of the world with the financial markets and I'd say it's been exacerbated there in the last three to four months because of interest rate increases as opposed to U.S. and Canada and, I guess, to a lesser extent the UK where they pushed rates down. So that's exacerbated the situation. [Centro is one that obviously got themselves caught with short-term financing and couldn't deal with the financing situation and I guess the positive thing for us is we have a lot of people and a lot of operations there and are aware of things that we wouldn't otherwise have been without them. So we are looking at many different things.

And then the $6 billion of construction projects that Multiplex is managing, do you feel completely comfortable that any exposure to cost overrun on costs or litigation is completely tied down?

I'd say the answer directly is yes, Rossa. The business that we bought is a 50-year-old, 45-year-old business that has been very effective. They have been profitable on -- for many, many years on most of their contracts. They made one mistake, which is why we were able to buy the Company in London. It was a classic mistake. But I think the operations we bought are outstanding and we are very positive about them being able to, A, being able to utilize this business to go into other areas of infrastructure. And secondly, to continue the program that they have and support it.

When you say a classic mistake, does that mean that their contract on that particular project was very different from the standard contract?

Well, firstly, it was a stadium. They built the Olympic Stadium in Sydney and they believed that they could build an Olympic -- an Olympic, quote, stadium, Wembley stadium in London, and they did it in a different market and it was a very complicated asset and it was a fixed-price contract. That was your -- probably it was unfortunate, but a number of errors occurred. And that cost them a lot of money.

But you don't have any fixed price contracts in that $6 billion?

Well, firstly, the business we run is mostly in Australia and this is a well-established business that's been operating for a long time. Secondly, the other big business we have is in Dubai and it's been operating for ten years and there's virtually not a contract we have ever lost money on in those two markets. Where they lost money was in the UK and we have a very small business today and it's -- it's restructured back to be what we have in Australia and in Dubai. There are some forms of fixed price that we do in the business but not a lot and we manage that risk.

Really the -- with the Wembley stadium, which I guess was well (inaudible) and related to the uniqueness of the design and labor problems?

Yes, it's a highly complicated answer, but I will say -- I will say, yes, and I guess we all learn from the mistakes we make over time. Thank you, Rossa.

Our next question comes from Andrew Kuske of Credit Suisse.

Thank you, good afternoon. Bruce, if you could just give us a bit of context on the evolution of your asset management business. Because if we look at this over time, traditionally you had some smaller funds for a specific purpose, like Tricap. And then you have done transactions where you swept things off your balance sheet into a fund model. You have done deals like Trizac and ONY where you bought others on board really for funding purposes, but we really haven't seen many standalone funds that some of the other sort of asset managers like Blackstone has done recently with their $11 billion fund. Could you just give us some color on where you see the model is today and where you want it to be?

Sure, Andrew. I think I will try to give you a couple of things and see if that answers it. I guess we have, and just for everyone's benefit about, I think we mentioned in our letter about $10 billion of fund-raising that we are doing now. Our operations are quite -- they are diverse and they are quite extensive. So for us just to raise one fund or two funds would be difficult. So ours are segmented by group and sometimes by country. And therefore, we've chosen so far to have more specific funds where institutions could choose where they want to be. For example, if they believe in our very refined strategy, which is buying shopping malls in Brazil to accumulate and become the largest owner of shopping malls and bring American and European stores to the country and bring all the standards of the developed markets to Brazil in shopping malls.

If they buy into that strategy, we have a fund for them. We have not raised very omnibus funds that would capture those things, but over time we are obviously trying to go to bigger funds and a little more diverse than specific strategies. But I'm not sure we will ever just have very -- just one fund or two funds like many of the opportunistic investment managers have, the private equity funds, because we are, I guess, a little bit different than private equity. Theirs is a business model, which you buy, reposition, and sell. Ours is more a strategy for long-term investment and therefore you need partners to select the strategy they want to be in for a longer period of time.

So is it fair to say then your focus is really increasing your operating platforms and your expertise among new lines of business as opposed to just going out and raising funds?

Yes. I guess we're not in the business of just raising funds. We like to find strategies where we can put capital to work for ourselves and others and we have a number of things today where we are operating in and we are doing those with partners and funds and we may be able to add other strategies where we can also raise funds for. Those are the two things that we are focused on.

I think the point is, Andrew, this is Brian here, the two really do go hand in hand for us. And there's definitely a strong buildout of the -- the whole capital raising process to accumulate the third party capital, which in turn assists us in growing the operating platforms and correspondingly the growth in the operating platforms and our ability to produce results there feeds right back into our ability to expand the asset management platform.

Brian, if I may ask you just one further question and it relates to the supplemental information on page 19. If you could just give us any color around the gain that you have on the sale of two investments where you had a net gain of $58 million.

Sure. That was -- what that related to, Andrew, were some businesses that we had in Brazil that we'd had for a reasonable period of time that we have been just growing and sorting out and optimizing the value for. One was in the wood products business and the other was a more of a services business.

Okay. That's great. Thank you very much.

Our next question comes from Horst Hueniken of Thomas Weisel Partners.

Good afternoon, gentlemen. You have disclosed in the text of your supplemental in that the acquisition of Multiplex did not meaningfully contribute to your Company's cash flow in the latest first quarter. This, of course, was expected. I'm sure you didn't acquire Multiplex to generate a nominal return. Can you comment on what needs to happen for this cash flow stream to become a positive and material to your overall results and perhaps comment on the timing of any inflection point if you are able to?

Sure. Horst, it's Brian on that one. I think what we were really focusing in on there in the comment you are referencing is the development business. The funds management side is contributing. The commercial properties is contributing at a good rate and the construction business generated a positive contribution, although I think as we commented, there were a couple of things that got pushed out a bit and so therefore the contribution in the first quarter was not what we would have expected it to be, but that would be a shorter term catchup in that regard. Coming back to the development business. First of all, I think as Bruce commented earlier in the call, there is a -- that's a longer cycle and it tends to be a little bit, I will say lumpy.

Notwithstanding the fact that there is a reasonable number of things they have on the go. But what is probably more relevant for us in the near-term, and this is just apologize to dive into accounting theory here, but when you complete an acquisition, what you end up doing is effectively capitalizing the profits that had been built in, in anything that's near term. So let's say within the first year. You mark those to market and so you get no profit, even though it might have been quite a profitable development. That's all been capitalized. So what you would see is after, let's say, the first year of our ownership, so meaning 2008, a lot of what we would otherwise see as profits have been capitalized. When you get into 2009, what we should be getting back to is more of a normalized profit margin for the development business. And at the same time, the other areas of business, as I mentioned, are all contributing.

Understood. That's helpful. Separately, in your asset management business, on page six of your supplemental, I see that the co-investor commitments have actually gone down in the past three months from 32, sorry, $34.2 billion to $33.7 billion. This is not the trend line I was exactly expecting. On the other hand, Bruce talked about the $10 billion of fund-raising going on. Can you first shed some light as to why there's been a bit of a pullback in the first quarter and perhaps what the timing of this capital raising might be to get you back on track?

Sure. Okay, so first of all, in just addressing the specific question as to the movement in the co-investor commitments, it's important to break that number into two pieces. And so if you will notice, there's roughly $25 billion that we have in advisory services. And so that's us managing fixed income and real estate equities on behalf of clients. We actually don't have any capital invested in that and that is -- and what has happened in that business is over the first quarter, the values of the assets that we're managing declined in line with the market. It -- we actually had, I think, around $600 million or so of new mandates that came in that actually would have increased assets under management, which I think speaks to the fact that the business is performing well on a relative basis. So the -- so the -- so there's a $1.1 billion decline in assets under management.

The second part of it, which is, I would say, the area that we are focusing on more from a strategic perspective, not that the advisory services business is not a good one, it's profitable for us and we will build that, continue to build that, but what a lot of what we are talking about is increasing the amount of, I will call it, private capital in our funds that are in the property infrastructure businesses and our specialty funds. And that actually went up roughly $600 million in the quarter, which really relates to the spin-out of Brookfield Infrastructure Partners and the establishment of a co-investment interest there. And the $10 billion that Bruce is referencing, that will then add to those numbers. You asked about the timing of it. We can't give you much in the way of specifics there, just because of the private placement rules. Having said that, there's obviously a lot of effort going on within the organization to move all of those initiatives forward and we would certainly be looking to come back with some meaningful news on a number of those throughout the balance of the year.

Good luck with that. I will be tracking.

Thank you.

We have an additional question from Michael Goldberg of Desjardins Securities.

Thanks. Again, I'm looking at page 19 of the supplementary package. Talking about the $127 million from cash and financial assets, which you note is well above normal. Can you give us some idea of what is normal here?

Well, if you just took a run rate on the amount of capital we have in there, that I think was about $1.7 billion, at the end of the quarter. And you can just put a normal run rate on that and if you put 4% on it or 5% on it, just in terms of a yield, you are obviously going to come up with a figure that's well less than the -- than what we generated in the quarter. That would be more like $85 million or $100 million on an annualized basis. So roughly a quarter of that, say $20 million, $25 million each quarter. So the difference is obviously we had some out performance with respect to some gains that we recognized during the quarter. I would say that we have been quite fortunate in a number of recent quarters to have had very strong performance in that regard. You may recall that hasn't been the case in every quarter and I am sure that there will be some quarters in the future where we will not have those kind of results and that's really what we are trying to flag for you.

Thanks a lot.

You are welcome, thanks for your question.

Our last question today comes from Chris Haley of Wachovia.

Yes, thank you for taking my question. I would appreciate any color you could offer on the three types of funds that are currently in the market with regard to what type of feedback you are hearing or time lines of commitment given capital market activity. We've heard from several of our property-based organizations that are in the market raising funds that either they have -- they have shelved those plans or the negotiations have changed and would be appreciative of any color you could offer regarding your alternative products, timber, the Brazilian opportunity and the property funds.

Chris, it's Bruce, and I guess I would just make a couple of broad comments and the first one is that in general, I would say we have some unique products that we offer. And not specifically talking to any fund, but Brazil is a unique place for us and we are a unique manager there and if people want to put money into Brazil, there's very few choices they have. The infrastructure people are still putting money into infrastructure, and -- which would include property or power and different types of infrastructure. Probably the one area where there is -- where there's lots of money going into, just your comment on property, there's lots of money going into opportunistic strategy, there is probably less going into core assets because people are just unsure of themselves right now. So as a broad comment, that's the one area probably where there's more pushback, but I don't want to get into any specific funds.

But with that, it's the rate of return expectations or the opportunity set that is viewed. You don't feel as though that there's any material change versus where you were targeting versus the opportunity set?

I'd tell you that I think there's probably an inverse correlation to the volatility in the stock market and to the -- to the environment that people put money in the private-type low volatility assets that we generally offer.

Yes.

And I think they will continue to put money into these areas, because it is a low volatility area.

So the risk then would be that the stock market starts going up again steadily?

Well, we none of us ever worry too much about that.

All right, thanks.

You're welcome.

There are now no further questions. I will turn it back to you gentlemen for any closing comments.

Thank you very much, operator, and thank you, everyone, for joining us this afternoon. We look forward to speaking to you again in early August when we release our mid-year results. Thank you and have a good afternoon.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.