BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2008 Q2 法說會逐字稿

Hello, this is the Chorus Call conference operator. Welcome to Brookfield Asset Management conference call and webcast to present the Company's second quarter 2008 results to shareholders. As a reminder, all participants are in a listen only mode, and the conference is being record. 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, operator, and good morning, ladies and gentlemen. Thank you for joining us for our second quarter 2008 earnings announcement. Joining me today on the call is Brian Lawson, our Chief Financial Officer. Brian will discuss our financial results and provide an operating overview. Following Brian's remarks, the Head of our Latin American business, George Myhal, will provide a brief presentation on the unique features of our businesses in Brazil. And following that, Bruce Flatt, our Chief Executive Officer, will conclude with an overview of a number of recently completed transactions, and provide an update on major initiatives.

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 annual report which are available on our website. With that done, I will now turn the call over to Brian Lawson.

Thank you, Bob. Cash flow for the second quarter totaled $378 million or $0.62 per share. In the second quarter of 2007, we reported $340 million of cash flow on a comparable basis. This excludes a security disposition gain of $100 million, or $440 million including the gain. So on a purse year basis, including the gain cash flow increased by 13$ quarter-over-quarter.

On a year to date basis we have recorded $821 million of operating cash flow. We consider this to be a good performance for the company. In particular all of our major operating platforms are performing well. Our renewable power generating activities contributed the most significant increase in cash flows, up by $60 million on a net basis over to 2007 levels. And this is due to three factors, better water flows, higher realized prices, and an expanded operating base.

We generated approximately 4400 gigawatts during the period. That's up 28% over last year. Approximately three-quarters of this increase is due to improved hydrology levels, which returned to more normalized levels during the quarter. Last year you may recall we were 14% below long-term average, where as this year we were 5% above.

The balance of the increase is due to the contribution from newly acquired or developed facilities. Realized prices increased by 11% quarter-over-quarter from $71.00 per megawatt hour to $79.00, and that's due to the impact of higher fuel costs on competing forms of generation. In contrast, our costs were actually slightly lower on a per megawatt basis.

These are very encouraging results, and given that water levels continue to be maintained at normal levels, we hope to report record results for these operations should we achieve production in line with our long-term averages for the balance of the year, and power prices remain in line with our second quarter results.

We completed the acquisition of 156 megawatt hydro facility in Brazil during the quarter at a total cost of $400 million, and in addition to acquisition opportunities we also have a substantial development pipeline, with six hydro facilities under development, representing a further 137 megawatts of installed capacity, and nearly 600 megawatts of advanced stage hydro developments.

Commercial office properties also performed very well during the quarter. We achieved higher returns in almost all of our markets, and to emphasize this point I would highlight that we had growth of 5% in cash flows from existing North American properties during the quarter. And this is quite different from the impression one might get from a lot of the negative commentary about commercial real estate.

The increase that we reported is due in large part to higher rents. We leased 3 million square feet in our North American portfolio loan during the first six months, at an average rate of $29.00 per square foot, and in the second quarter, if you exclude one below market contractual renewal option, we achieved $31.00 per square foot.

Our occupancy rate remains very high at 96% in North America and even higher in Australia and the United Kingdom. Vacancy level in almost all of our markets are at record lows, and we are observing virtually no erosion in net effective rents and increases in some markets. And while the economic outlook does remain uncertain, we continue to believe that the quality of our properties and our tenants, the long-term nature of our leases, and the substantial excess market rents over our in place rents should enable us to continue to produce stable growth in our cash flows from this business.

In July, subsequent to the end of the quarter we completed the sale of our 50% interest in the TD Canada Trust Tower in Toronto to our partner for gross proceeds of $425 million, or $721.00 per square foot. That's a record high for Canada. The sale proceeds represent a significant premium over our carrying value and are indicative of the value that quality properties such as this and the rest of our portfolio continue to hold. The gain on this disposition will be recorded in our third quarter results.

And on the development side, we continue to advance a number of properties such as Bay Adelaide in Toronto, Bankers Court in Calgary, and numerous properties in Australia. Our residential operations performed largely as expected. The US market continues to face an excess inventory situation, and we basically broke even there during the quarter.

Our Canadian operations continue to be benefit from the strong fundamentals of the Alberta oil driven economy and generated favorable returns during the quarter, albeit lower than the record results of 2007. Our Brazil operations achieved further growth, representative of the expanding Brazilian economy, and further expanded their presence into the important mid to low segment of the market.

Now, turning to our infrastructure operations, our timber operations experienced lower margins during the quarter, which was to be expected given the weak US housing market. We curtailed production in response, preferring to let the trees grow on the stump and achieve better values that way, and have also adjusted our product mix and increased exports to Asia to achieve more favorable margins.

Not withstanding the current decline in earnings, the long-term fundamentals remain strong as evidenced by very high transaction values for timberlands. The devastation of forests in the interior of British Columbia due to the Western Pine Beetle, the impact of Russian export duties, and the recognition that the US housing market will recover at some stage continue to support a premium valuation for high quality timberlands owned for the long-term.

Our transmission operations achieved results as expected during the quarter and they were supplemented by the receipt of a rate based adjustment in revenues in respect to prior years, as well as a gain on the increase in the value of our Brazilian transmission interests. We continue to advance a number of capital investment opportunities in Chile and Ontario with the intention of continuing to expand the breadth of our transmission operations.

Within our specialty funds, our bridge lending results benefited from gains on convertible debentures held within our funds, leading to a $36 million increase in the cash flows. The real estate finance funds increased their contributions slightly, while the contribution from our restructuring funds declined slightly due to operating losses suffered by one of the investing companies, but all balanced portfolios are performing extremely well.

Our advisory fund business increased assets under management by $700 billion during the quarter as new inflows offset declines in the values of existing assets. Notably, the new assets are in many cases part of specialized mandates that warrant a higher level of fees. Our capitalization was relatively unchanged over the quarter. We completed a number of important financings within our operations, totaling approximately $3 billion so far this year. This includes a $1 billion financing of our US timber operations with a 7.3 year average life and a 5.17% coupon, and the number of project financings in our power and property operations.

We also completed the issuance of $150 million of preferred shares with a 5% coupon. Due to the relatively low loan to values on our assets, in conjunction with the financial flexibility provided by our conservative capital structure, we believe that we are well positioned looking forward. We continue to advance a number of institutional fund raising initiatives that are being executed by teams located in New York, Toronto, San Jose, London, Sydney, and Hong Kong.

We are currently working on a number of fund representing an aggregate capital target of approximately $9 billion. We added approximately $2.8 billion in new funds under management, including the close of real estate finance fund commitments in aggregate of $725 million, $1.8 billion of net new funds largely for distressed fixed income investing, and the $280 million Brazil timber fund.

Annualized base management fees from third parties, which is an important measure of growth in these activities increased to $130 million from $120 million at the beginning of the year. And lastly, the Board of Directors declared a dividend of $0.13 per share payable at the end of November to shareholders of record at the beginning of that month.

So thank you and I will now hand things over to George Myhal.

All right, thank you very much, Brian. I am going to make a few comments about our operations in Brazil. Just by way of background, Brookfield has a long history in Brazil as our company was founded there over 100 years ago in order to develop the transportation and utility infrastructure for the cities of Sao Paulo and Rio de Janeiro.

Our history in Brazil today works very much to our advantages. Over the last 5 years, the country has experienced an economic renaissance. This new awakening has been driven by three factors. First, the strength in commodities both mineral and agricultural. Brazil is today a leading exporter of a number of minerals such as iron ore and others, as well as a long list of agricultural commodities.

Secondly, financial discipline. The country has embarked on a prudent financial path over the last number of years and today that has been evidenced by record exports over the last five years. The country, on a net basis, is free of any external debt, and the progress that the country has made on the financial side has been recognized by the rating agencies who recently upgraded Brazil to investment grade credit ratings.

And thirdly, there is a political openness and dialogue in Brazil which supports the robustness of their democracy and strong rule of law, which again encourages foreign investment into the country. And Brazil has been a major beneficiary of that over the last five years.

Our activities today in Brazil mirror what we do globally. Our focus is in three areas, real estate, power, and infrastructure. And just to give you a sense of the scale of our operations, we, today, have about $6 billion of assets under management in the country. We employ about 2,500 people. We have offices in virtually all of the major cities in Brazil and today we're one of the largest global asset managers operating in that country.

We also enjoy a number of competitive advantages. Firstly, our people, we have some very experienced, qualified, knowledgeable, talented people working for our organization, all of whom are local. And secondly, we have a very strong risk management discipline. As a global company, Sarbanes-Oxley compliant, we operate with the same risk management disciplines in Brazil as we do elsewhere and that works very much to our advantage today.

Just to go over our operations briefly, in real estate we operate in two sectors. The first is in the area of shopping centers. We established a shopping business in Brazil many, many years ago and Brazil has been benefiting from a rapidly growing middle class. Consumer spending power has increased dramatically over the last five years, and we have taken advantage of this to grow our shopping center presence in the country.

Today we own 15 centers and among them, some of the best centers in the country as whole. These centers all demonstrate very high sales per square foot and revenue growth in excess even of some of the comparable statistics we might see here in North America. And that's a result of an incredibly high population density in Brazil. The major cities are much more dense than North American cities. This creates natural barriers to competition and enhances the value of the centers that we own.

And today there is an industry consolidation under way. The ownership of shopping centers in Brazil in the past has been highly fragmented, but that is quickly changing as a number of major shopping center operators, including ourselves, acquire centers and consolidate the ownership. And we believe that this opportunity for us will continue and are very excited about our shopping center operations in the country.

Moving to residential, similarly Brazil has a huge pent up demand for new homes. This is a country of some 180 million people, many of whom do not enjoy the same level of home ownership as we do here in North America. And with interest rates coming down, there has been a dramatic increase in demand for new homes across the country.

We, today, own approximately 61% of a publicly listed company called Brass Can Residential Properties. It's a publicly listed homebuilder and residential land developer. It owns one of the largest land banks of any of its peers and has among the strongest cash flows of any of the residential developers in Brazil. We're also a developer of office and mixed use properties. We have a number of very exciting office projects underway, which may give us an opportunity down the road to establish an office business.

Today we develop office buildings with the view of selling them, but in the future we may revisit that strategy and consider retaining the office properties that we develop. And in the last quarter, we acquired a company called MB Egenharia, which is another residential homebuilder and land developer, which operates in the interior. And this has helped us to expand our operations today, encompassing a major part of the country.

Moving onto the power sector, just by way of background, Brazil experienced very severe power shortages just five years ago. There were brownouts across the country as the demand strained the system and the country was unable to produce the amount of power that it needed. That triggered a number of responses to increased supply, which has put the supply-demand relationship back into balance. But nonetheless, there is a growing demand for electricity across the country, and the country has supported a number of initiatives to try to increase generation to meet the growing power demand.

There remain many transmission bottlenecks and other problems, but nonetheless, there is a very strong market for and growing market for power in Brazil today. We have a growing portfolio of small hydro projects across the country. Hydro is the predominant method of power generation in Brazil with some 75% to 80% of its power being produced by hydroelectricity. Today we own 500 megawatts comprising some 29 plants across Brazil. We have 16 more in our development pipeline are under construction today. So this is a business which we believe has great potential to grow in the future.

And the last area where we operate in Brazil is in the area of agricultural land and timberland. As I mentioned at the outset, there is an agricultural revolution going on in Brazil as much of the interior land is being opened up for agricultural production. Brazil enjoys among the best natural climates in the world and has the largest unused arable land position in the world. There is a large amount of land that can be converted agricultural production without displacing other crops, and creating some of the problems that we've seen in North America and elsewhere.

So in Brazil we've established a land position of some 350,000 acres, largely in the interior or moving towards the interior. And we've seen very strong capital appreciation in the land up until now, and we believe that the outlook for future appreciation remains very strong. Initiatives like ethanol are continuing to drive values upward in Brazil, as land is being used to grow sugarcane and that sugarcane is converted into the production ethanol and other biofuels.

And we also own 100,000 acres of timber in Brazil. Again, timber enjoys the same natural advantages that I referred to for agriculture earlier. Brazil also has a very strong local converting industry, furniture industry that uses the timber that's grown domestically. And timber is also used in Brazil as an energy source, and in fact there are now export opportunities along those lines emerging. So we're very positive about timber as an investment opportunity in Brazil.

And lastly, we are also looking at many new opportunities in the area of infrastructure. As I mentioned at the outset, there are many energy transmission bottlenecks in Brazil, and also enormous transportation bottlenecks. So there are many opportunities, whether they be pipelines, ports, roads, or airports for us to expand our activities across the country. And we are pursuing all of those initiatives wherever we can.

So Bruce, can I hand it back?

Thanks, George. Given Brian and George's comments, mine will be brief, followed by us taking some questions should there be any. I'll first make a couple comments on the capital markets. The markets today are working through, I guess in our view, or many people's view a difficult deleveraging of the financial system, which was caused by many factors, but largely emanated from low cost, high loan to value, minimal covenant financing. Most of it sold on a structured basis in the capital markets.

Thankfully for our shareholders, we had very little exposure to these products on our balance sheet and we did not utilize this type of financing to operate our business model. The capital markets are volatile today, but as always they will eventually settle down and we're positioning ourselves to be versatile in these markets.

To reiterate maybe what we said on a number of these calls before, but we though it was worth mentioning again, our business model is built on us simply acquiring, operating, and creating value, and building value in high quality assets, which have or will have within a reasonable period of time after we develop them, tangible, highly sustainable cash flow streams. These assets, which we own for ourselves and for our clients are largely financed with investment grade debt at relatively modest loan to values.

For years, we've negotiated these loans directly with lenders. For a brief period of time, most of those were put into the structured market. Now, we have been back directly negotiating those with lenders, and as Brian mentioned, we completed close to $3 billion of financings during the last period of time, most of these directly with insurance companies and institutional investors.

We also maintain significant liquidity in our overall group to ensure that we can deal with unforeseen circumstances and also invest opportunistically, and continue doing the business we do, like buying the power plants that we completed during this quarter and other things. And in particular, when the markets are mispricing long-term asset values.

We're continuing to stress test the operations and each of our businesses' capital plans, and fortifying our resources so that we are in a position to look at major investment opportunities should they arise over the next few years. A part of this on the opportunistic side is our institutional marketing where, as Brian said, we're raising a number of funds representing some pretty substantial amounts of capital to be able to be deployed on the opportunistic side.

But between our corporate cash resources at our operating businesses today, undrawn commitments at current funds, finds being marketed, and cash, both generated from the operations on a daily basis and from turning over assets on the balance sheet, we believe we can continue to keep building the business even in markets like these. In fact, possibly even more efficiently than we've been able to do for a long time, given we have always struggled to be able to compete with high leverage buyers in the marketplace for opportunities.

With those comments, operator, I'll turn the call back to you and any of us would be pleased to take questions from people on the line.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Neil Downey from RBC Capital Markets.

Good morning, everyone. One quick question for George. You guys often talk about your gross investment versus, perhaps, the equity value of particular businesses. I believe you referred to $6 billion of assets in Brazil.

Assets under management.

Assets under management, correct, in Brazil. What do you believe the equity value is that you have invested in that country?

Neil, actually it's Brian. I'll take that one. It's probably around $2 billion in terms of the net capital that we have deployed in our various operations there to date. So I'd put that figure out there for you.

Thank you.

Our next question comes from Andrew Kuske of Credit Suisse.

Thank you. Good morning. About a year ago at your investor day in the Fall of 2007, you really rolled out this idea of $80 billion of limited partnership capital. We're almost one year into that five year plan. We're seeing fund flows slow down for some of the alternative asset managers that are out there. If you could just give us a little bit more color on your strategy to get to that $80 billion number, really, four years from now.

Andrew, it's Bruce Flatt, and I guess I'd just make the comment that we put that number out there. It was a fifth year number and I'd say that we're very positive about the progress we've made in building the business up. And five years from now we'll see whether we get to the number, and in the interim there are lots of things as the world changes.

I'd say the two areas where we have substantial opportunities to raise a lot of capital, the first one is Brazil that George highlighted. There is a lot of opportunities as we are set up in Brazil in a significant way to take funds in, and not that many other people are. Secondly, our tradition has been investing -- our traditional areas have been investing on a value basis and in distress. And given the markets and where they have been heading, we think our distress areas of investing in many of our different funds, but in particular our restructuring funds will be able to raise large amounts of capital.

So I'd say we're pleased with the progress we're making and you're never as happy as you want to be, but we're certainly making progress on it.

Just on the issue of distress, what are your thoughts on the credit markets right now? How long will the distress go on for, and then really tying it back into BAM, what kind of deal flow have you seen if we look year-over-year, if you compared it to pre-credit crisis to now?

I'd say we don't have much of a view on how long the cycle lasts on the distress side. I guess there's no doubt there's significant distress in a number of areas out there. There are a lot of areas that in particular where we invest and a lot of the type of assets we have in our books that actually are in great shape today and aren't experience a lot of distress.

So the places where you're finding distress is where people had purchased assets at the wrong time in the market and had put 90% loan to value on assets. So that's I guess the place where there's significant distress. As to the amounts of things we're seeing, there's lots of things that everyone is seeing today. We are cautious in this environment, because usually the best opportunities come later in a cycle.

Longer term, we're extremely bullish about the capital markets and the fact that these types of markets crate great opportunities for long-term investors, and for, to get to your last part of the question, which is how does it affect us. For a company such as us who are well capitalized and aren't dealing with a lot of issues at this point in the cycle, and that gives us a lot of clear thought to be able to deal with situations if and when they come along.

Let me just ask one final question of Brian. On page 21 of the supplemental, if we look at cash and financial assets, there's a meaningful decline in that number on an operating cash flow basis, comparing Q2 of '07 to the current quarter. Have you dialed back your risk substantially? Or what's really happening there?

I wouldn't say that the risk profile has changed measurable quarter-over-quarter. I think if you, frankly if you look at what the implied rates of return would be on that, in the current quarter it'd be probably around let's say 10% return, and the previous quarter probably around a 20% return. So arguably, we've had some very good performance results out of our various natural assets over a period of time. And I think as we've commented in the past, we're not going to hit that every quarter. I think the results this quarter are good. It's probably just more that they were outstanding in some of the previous quarters, and just to reiterate, I wouldn't say that the risk profile has necessarily changed.

Although, Andrew, if you recall, probably 9 months ago we talked about that we had disposed of a lot of our long positions in our common stock portfolio other than our core investments. And we just felt that being long at 12 months -- 9 to 12 months ago wasn't the right thing in those portfolios. So that hasn't changed from nine months ago, but just because of the markets.

Thank you very much.

Our next question comes from Cherilyn Radbourne of Scotia Capital.

Thanks very much and good morning. Just wanted to dig in a little bit to the capital that you've got devoted to development opportunities across the company and just wondering if you can give us a big picture sense of how much capital you've got devoted to development opportunities in total, and how that would break down by geography and by asset class.

Okay, I'll take a first cut at that and then Bruce can elaborate somewhat on it. I would say that we have -- we segment our balance sheet out in the NDMA and the figure that we would have had in terms of net invested capital and what we described as developed in other properties at the end of the quarter was about $4 billion. And that includes our opportunity investments. So I don't think I'd consider that development in the way that you mean, and it also includes our residential business, which again I think is probably different than what you're referring to.

And that would leave about three point some billion dollars in what we call properties that are under development or held for development. It's probably two-thirds of the former and one-third of the latter, and that consists of commercial office and other property development in North America, and Australia, and the UK. And also would include some of our land positions as well that would be held for agricultural purposes in Brazil that George referenced in his comments.

We have a small amount of development capital also within our power segment, but that's much smaller. So that would really be the major components of it. So I hope that answers your question. Bruce may want to elaborate a little bit on that.

The only comment I guess I'd say is we don't view ourselves as a development company, per se. We take on development opportunities on a low risk basis, usually convert them to finished product when we have major tenants or projects that we can put in place on a risk adjusted basis that we can build out and get to the final stage of cash flows. Other than that, we just sit on them because we believe they're going up in value. It's an adjunct to our business to add projects in certain locations when it makes sense, but we don't specifically view ourselves that we'll ever have a major portion of our capital devoted to development opportunities.

Maybe if we could just drill into Brazil. Of the $2 billion of capital or thereabouts that you've got in Brazil, how does that break down approximately between the asset classes in which you're involved, the shopping centers, power, residential, and so on? And how much of that capital, again approximately, would be generating cash flow today versus invested in development opportunities.

It's probably -- I would say it's about a quarter to a third on the property side between retail and the residential side, a quarter to a third on the power side, probably closer to a third, and then the balance of that would be in some of the other initiatives that we are moving forward on, such as the timber and the transmission side.

And the only thing I'd add is to partly answer your second part of the question, which is how much is generating cash flow, we have a lot of our assets like that, that don't generate current cash flow. And obviously when we buy more of them, like we often do, you don't see returns in our current cash flows for a long period of time. And probably the one in Brazil, specifically, is our land business.

We've purchased $350,000 acres of agricultural land, which earns a minimal, very minimal return on a current cash basis until we convert the land into higher, better use. But the real value that's being created is the capital gain in the lands. And until we sell those lands or do something else with them, that doesn't come through the cash flow statement. And I guess there's a lot of those type of returns embedded in the company, in particular in the development portfolio.

Thanks very much. I wonder if I could just jump to a question on fundraising and then I'll pass it on to somebody else. Can you give us a feel for whether institutional appetite for core versus opportunistic strategies has changed as market conditions have evolved over the last 12 months?

It's Bruce and I'd maybe answer that. There is -- I guess we -- there's a very significant number of institutions who are still investing into infrastructure, property power, and other things. On the infrastructure side there's still a lot of interest and very low allocations in funds to these type of products. So they can -- new funds continue to be introduced to these type of funds all the time. And I'd say --

One of the trends we have noticed a bit over the past while, Cherilyn, is that there's, I'd say, an increased desire on behalf of some institutions to invest in core plus a development component within the core. And that's probably a little different than what you would have seen a year ago, which in many ways plays into our strengths because of the diversity of our portfolio and operations.

And do you have any theories as to why there's more interest in core plus development at this point in time?

I'd say if you wanted to look at, of all the things that we're involved in, the one that institutions are looking at because they have big allocations too, is real estate, and probably the biggest one they have allocations to is core properties. And when other things in their portfolio go down, so equities goes down, their core allocation goes up. So their allocations become weighted more to that, and I'd say that's probably the biggest factor that's weighing on them and vesting into further core funds, as opposed to other things in their portfolio. And infrastructure, on the other hand, is very small and it's all in an incremental amount coming into the portfolio.

Thanks very much. That's all from me.

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

Thanks very much. Just wondered in regard to the 16 more hydro development projects in Brazil, what were currently the assets and rights that had been secured in regard to them, and what cost? And what kinds of capital expenditures over what time frame did you anticipate being associated with those 16 more developments?

Rossa, maybe Brian can give you some of the specifics, but just in general we started the business five years ago. Most of the plants we have that are built today are as a result of -- about probably half of them are from acquisitions, but half of them were Greenfield sites that we went out, located, put the environmental approvals in place, put construction contracts in place and built them.

And the 16 we have are late stage developments which we believe we'll be able to build out over the next five years. So they have most of their approvals. Some of them have all of them and some of them are still awaiting for some approvals, but they're quire late stage approvals.

We have many other projects in a pipeline which we don't mention, which are at early stages of their development. Some of those assets were actually developed by us, therefore we paid very little other than just the cost of our people working on the projects. Some of them came along with acquisitions where we allocated some portion of the purchase price to them, but most of those, if there was anything allocated, are the later stage developments as opposed to early stage. Most of the very early stage, which we don't mention, all of the other pipeline that we have are projects that we've been working on, really, mostly just on our own with our own people.

Yes, they are relatively short or medium term projects?

Yes, there's six that are underway right now, and the balance of them would roll out over, I would say the next three to five years.

And in fact, of those 16 projects, our biggest issue is not the fact that we don't have the approvals to roll some of them out. It's the fact that we can only prudently construct and build a certain amount of projects every year, and we're building three to four a year. We're now building six a year. We maybe can take that up to ten, but it's just physically we don't believe it's prudent for us to take on that amount of construction at one point in time. We just need to make sure that we have the checks and balances in place.

The focus of my question which was to get a sense of the 16, how much money have you spent now? How much would you ultimately spend if you developed them all out? And what kind of rates of return could be anticipated on that?

Okay, sure. Well, the numbers that we put out there is in terms of the six plants that we have on the go right now, under construction, they'll add 140 megawatts, around $350 million. And then the balance of it is going to be another 500 megawatts. So it'll be around $1.5 billion or slightly less than that, and the types of returns that we're finding on development in Brazil in terms of a return on asset would be in the mid-teens.

And then what we've found is that you can put a relatively low level of leverage on them currently, but we see that situation improving over time, which should further enhance returns. And again, the timeframe is probably around a three to five year level to get that program taken care of. What we have found is that the environment in Brazil for the approval and construction of these facilities is very constructive, in the sense that it's a very prudent and appropriate framework, we believe, very responsible from the development perspective. But it also is not overly cumbersome, and in fact in a lot of ways runs more smoothly than what we've experienced in other parts of the world, which I think reflects a desire on behalf of the country to get more hydro generation in place.

And these pro forma returns, would they be based on long-term contracts with industrial users, or would you be looking to market the output from these plants into the major urban areas?

Yes, we've found that we can put -- there's a good contract framework in place there and virtually everything we do, we try and do on a long-term contracted basis, and we've generally been successful in that regard.

Would they be with industrial customers, or would you be looking to supply consumer electricity with these plants

It's a mix. For example, the last one we did, the acquisition we did with [Itacara] was with the state distribution company, but we have done some with industrial customers as well, knowing full well though, just as in North America where we would do deals with, power of sale agreements with an industrial company is that you have a fall back to a state body.

Are these negotiated rather than regulated returns in all cases?

It's a mix. There is a regulated element to it, but you can go off of that.

ore or less, we're an unregulated generator and therefore most of these contracts are just negotiated between ourselves and the counterparty which either could be a state regulated entity, which is doing distribution, or an industrial customer who sells -- uses the power in his operations.

And then finally if I may on something completely different. On page 17 of the MD&A under residential, you show the operating cash flow and then you cite the categories, US, Canada, Brazil. But they seem to be blank and I wondered if that was a misprint or if you just felt that you were only going to identify the bottom line.

No, we will do that later on. We don't provide the details until everybody's done all of their reporting, all the underlying companies.

The underlying operations, Rossa, come from public companies, and they haven't put that information out, so we can't disclose it yet. But it will go out when we do the full presentation in our MD&A, I guess.

Great. Thanks very much.

Our next question comes from Michael Goldberg of Desjardins Securities. Mr. Goldberg, please proceed with your question.

Sorry about that. Hello. I have a few questions. First, what gain are you going to record in the third quarter on the sale of the TDCT Tower at the BAM level?

That number has not been put out there. So Brookfield Properties has announced the gain will be basically one-half of the gain that they record.

Okay, that's why I asked the question. Okay, the second question, can you remind us what bridge financings in BAM are still awaiting replacement with permanent financing?

As I mentioned, we completed around $3 billion in financing in the last six months, and that's taken care of, I'd say, almost all of the shorter term maturities. The two large ones that we had were the ones on the timberlands which we completed back in April. We do have the loan we put on our Australian operations, which we think of as really being two loans. One's for around $500 million that's backed by the UK and the Middle East operations, and then there's about $1.1 billion that's backed by the Australian operations.

Those loans represent around 55% of long-term -- of the loan to value on our purchase price. So the way we think about that, it's financed roughly the same levels as the rest of our operations. We paid part of the Australian line down and that's with the proceeds of various sale transactions. So we would expect to have it around $800 million to $1 billion. As I mentioned, that's less than 60% loan to value.

So what we're doing there, Michael, is working to refinance that with longer term property debt similar to how we financed the rest of our operations. And we're doing the same thing in the United Kingdom. The one comment I'd make there is we are assisted in our efforts by the fact that the operations are performing very well, in fact better than our expectations, and the integration into the global platform of those operations is proceeding well.

So we would expect to refinance those businesses without tapping into our own liquidity in any meaningful way.

Okay, so it'll be largely longer term, property specific financings?

A combination of that and some asset sales.

My next couple of questions are for George. Welcome home, George. Do you expect the residential mortgage market to emerge in Brazil, and can BAM benefit?

The short answer is yes. As with a number of other emerging market countries like Mexico and others that I can think of, we believe that a flourishing residential mortgage market in Brazil will develop. Now, we saw very strong signs of that happening toward the end of last year. For the time being, I think some of the developments have been put on hold because Brazil, to its credit, has been at the forefront of being fiscally prudent, as I mentioned earlier. And with the creeping up in inflation rates, the central government has raised interest rates to try to head off any increases in inflation.

So in the last three months, interest rates in Brazil have actually been heading upward. The country today has positive real rates of interest, unlike some of the other emerging market countries which have negative rates of interest and have seen their equity markets correct as a result. And we believe it's a positive thing that's Brazil is doing, but it's sort of put the development of the residential mortgage market on hold for the time being.

And notwithstanding that, I think as the inflation pressures ease over time, we think rates have lots of room to move back downward, particularly with the new investment grade credit ratings that Brazil has. And we are studying how we might participate in a booming mortgage market in the future in Brazil.

And secondly, you anticipated at transmission opportunity also in Brazil. Would that go into a BIP and can you give us some idea of the timing?

That would be an asset class that would be owned by Brookfield Infrastructure Partners. Timing, as with all these things, it's really hard to tell.

Just going to the next line of questioning, can you talk about the commercial property opportunities in the US and Australia, in particular that you referred to among players that used high leverage? And I guess just in addition to that, do you feel like you're also getting closer to having another opportunity to get more of Canary Wharf?

Michael, it's Bruce and maybe I'll try to answer that question. The office building business on a fundamental basis in virtually all the markets that we participate in is actually in pretty good shape. So there's not a lot of distress in office building anywhere on a fundamental side, meaning rents are good, vacancies are low, cash flows are still generally strong. There's a few exceptions and even in the financial markets you haven't seen a lot of distress.

The only place, so I differentiate that's the fundamentals. The only place where there have been some opportunities, and there may be some opportunities looking forward, is where people were over-leveraged and they don't have the amount of capital to pay down the mortgage when the mortgage comes due, or their bridge financing comes due. And we've seen some of those. A few of those have been quite public in the marketplace across the world, and there may be some opportunities with respect to that.

But it's largely caused by financial engineering, not by underlying fundamentals. Where there is some distress in the commercial property business, it's not an office. It's in retail, but most of that distress on the fundamental side is in smaller neighborhood, food anchored and other type of retail shopping centers, which generally has not been our forte. And we're not really interested in it, although there may be some value opportunities that we might be able to participate in.

So we're watching all of them. There are a number of opportunities that I guess we've looked at, but we still haven't seen one that, all in value basis, met our return thresholds to put substantial amounts of capital into.

Okay, and with respect to Canary Wharf, I ask because you noted that Morgan Stanley is building their new European headquarters in the estate. And I'm just wondering how that -- I guess indirectly with your equity interest, it affects you. But otherwise, is there any other benefit?

Well, it's actually JPMorgan that's announced a preliminary agreement to put their headquarters there. It's one of the last major sites at Canary Wharf. The estate is highly leased. There's not a lot of vacancies, and while London is undergoing the same issues that New York is undergoing let's say with the financial institutions, Canary Wharf is in good shape. We own our position in the entity. Obviously these times often create opportunities and we'll have to see going forward whether it does or not.

We like what we have at Canary Wharf and we'll have to see in the future, but there may be other opportunities in Europe that we can look at equally as appealing.

Thanks, Bruce.

Our next question comes from Brendan Maiorana of Wachovia.

Good morning. George, Brazil, you talked about the improvement in the country's financial standing. Country debt is now at investment grade. How would you say that that improvement has impacted your competitive position, if at all, with respect to garnering third party institutional capital, and also your ability to acquire assets that meet your long-term return objectives.

Well, Brendan, that's a good question. I would say the upgrading of the country to investment grade has certainly stimulated interest among investors around the world, and if anything has increased the demand for managers who have experience in the country, ourselves included. But the flipside of that coin is you're right, it's also been reflected by a general rise in values inside the country as a result of that investment grade rating occurring.

But we're long-term, patient investors. We're not -- we've been there for a long, long time and we believe there will be many opportunities for us to deploy the capital, and at returns which meet our threshold. So we're not bothered by that. Net-net we believe all this is a positive and we'll continue to be a positive going forward.

Thank you. And then we noticed that there was an announcement, I think, not by you guys specifically but that there's a potential that you could have a small involvement in some power operations in India. Just wondering what the potential is over the next couple of years for power investment outside of your core markets in Brazil and North America.

Our business on the power side is focused on renewables, and so that really for us has meant in the past and probably in the foreseeable future is specifically hydro and some wind. We're very focused, as you know, on picking strategies. On the hydro side, there are very few countries in the world that have any meaningful amount of hydro capacity to participate in. The three that we picked first, which is Canada, the US, and Brazil happen to be three that we're in and happen to be three that have significant hydro capacity. The US is the smallest as a percentage, but it's quite large on an absolute basis, kind of like everything in the United States.

With respect to India, we were approached by a couple of groups to participate in with them to make a relatively small investment. There is a hydro business in India and we're walking slowly to see whether we can develop it into something in the future. It will not be meaningful in the next while to us, but again we're just starting out small to see whether, like other things we do, we can build it into a business over time. And we'll have to see over the next two or three years whether we can get comfortable with it, and whether we can deploy meaningful amounts of capital, or obviously it's not something we'd spend a lot of time in.

Thanks, Bruce. And then just last one for Brian. I think you guys have some different derivative instruments in some of your investments and some portfolios. Just given some of the changes in the financial market that we've seen over the past quarter, I thought we would have seen some GAAP gains in the quarter. I didn't notice any upon the initial review of the results, but is there anything material in the quarter from a derivative gain perspective?

No, Brendan. You could probably infer that from the relatively smaller amount of cash flow that we generated, $30 million in the quarter. And I think if you looked at the CDS, for example, in particular there's no doubt we captured significant value on those positions in the first quarter of 2008 and during 2007. Generally, in terms of the positions we put on pretty much flat over the second quarter. There was a lot volatility in the quarter and subsequent to the quarter, but pretty flat during the quarter.

Thank you.

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

First, a numbers question. I didn't catch, what was the amount of the gain on the exchange of the Norbord debentures?

It was in the order of around $60 million, Peter.

And is that a pre-tax or an after tax?

That would be pre-tax.

And there would be tax on that, I assume?

There would be no cash taxes associated with that.

Next, on your power generation options, if I look at the schedule that you put in the supplemental information package of your anticipated power production over the next few years, versus the last quarter your anticipated production has gone up. And if I've got all my zeros correct, I think it's about 1,000 gigawatt hours per year. Can all that be accounted for by the Brazilian acquisition, or is there production coming from elsewhere?

Yes, I think that is pretty much the Itacara facilities that we acquired. We also acquired a small facility in Minnesota as well.

And on your private equity asset management business, I believe you indicated that you did close some third party capital commitments during the quarter. But I noticed your disclosure of annualized fees that you anticipate, annualized management fees that you anticipate from third party capital has not gone up. It remains at $130 million, so I'm just wondering what I'm missing.

It's gone up from $130 million, from $120 million to $130 million over the first six months. So there's about a $10 million pickup.

And just lastly, on your discussions on your third party or on your capital raising initiatives where you indicated you're currently marketing funds that could result in $9 billion of capital, is all that third party capital? Or is that a gross capital amount including the contribution from Brookfield?

I would say that that's a gross number and obviously if we exceed our expectations that will become a net number, but I take that as a gross number.

So what is your plan? Would Brookfield on average contribute about 25% of the capital?

That's probably a good number.

And have there been any initial closings on that capital raising exercise?

Now you're getting into territory that we can't specifically comment on. We did mention that there were a couple of closings that we did do in the first part, and that would have been some of the targets that we had set out for, for the year. But I can't comment specifically on any initial closings with respect tot the $9 billion. What I can tell you is that there has certainly been a lot of work done with investors in terms of firming up of commitments and getting to pretty much the specific stages of proceeding doors closing, but that's as far as I can go on that one.

Okay, and lastly, Brian, what would management consider to be a reasonable timeframe for you to close those capital commitments? Is that something you would anticipate doing over the next 12 months?

Oh, yes. Absolutely. We'd like to do it faster than that, but absolutely.

That's all I have. Thank you.

Our next question comes from Mark Rothschild of Genuity Capital.

Thank you. I see you did some of these -- transferred some or sold some of the social infrastructure partnerships to BIP. Is there an opportunity to do something like this with the real estate business to combine some of your Australian operations with the North American operations?

You mean into Brookfield Properties?

Or any of your other companies that you have, if there are other public real estate companies or private funds.

It's possible. It's not, I guess that isn't our plan. We've never, with respect to both Brookfield Homes and Brookfield Properties, which are the two US companies or North American companies that we have, we've generally kept them to North American investing. If the other shareholders of those companies said to us that they wanted to have a more wider mandate, I guess that's something we could look at.

It has not been our plan. Our plan, rather, has been to create funds specific to countries. We've just found that investors either want to invest in a global fund, or specifically to a fund in a country when they're going into core assets. And that's generally where we've been heading.

And I know this is a very small part of your operation, of your business, but Crystal River's share price has declined quite a bit. I was wondering if you have any comment on their business and what the prospects are for it.

The only comment I would make is it is quite small to BAM as a balance sheet investment. Whatever shares we have, have largely been written down along with I guess everyone else in it. Unfortunately, it had some structured real estate paper in that company and along with everyone else, we didn't fare great with the market.

I guess we are looking at the company. We've given it some assistance over the period and we're working with the Board to see if there is an opportunity to relaunch it in the environment of fixed income investing. And we'll have to see over the next six months if we can do that.

And lastly, it appears the cap rates for your types of properties may have moved slightly over the past year. I was wondering how you view the sale of the TD Tower in Toronto? How does that impact your view on cap rates and what is your view on cap rates in the current market?

I don't know. There hasn't been a lot of transactions in the last 6 to 12 months and therefore there's not a lot of visibility as to cap rates. Clearly, the returns that we received on the Canada Trust Tower were attractive to us, so we decided to sell. I'd say there's no doubt that there were people predicting very high rents in the future during 2007, and therefore the initial yields on properties were very flow, and probably unduly low versus what you'd look at a on long-term, intrinsic basis to the company. And you would have seen that we didn't participate in any of those purchases.

So there's no doubt initial numbers are down. In the longer term, as long as someone can hold those properties and they brought great properties, I suspect they're going to make a lot of money. Where the difficulties came in is people that bought them, that put 90% short-term financing in place and that created problems. But in the longer term, I'd say cap rates move around, but it's really, or short-term cap rates moved around. It's really the long-term DCF based off of the fundamental rents in the market that affect the value of properties.

Thanks.

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

Thank you. Bruce, with the power business doing so well and the development opportunities you have in Brazil, and your 5-year goal of transitioning into getting more third party assets under management, what is your current thinking about putting those into a fund? I'm sure there must be lots of demand for those assets.

Michael, it's Brian. It's certainly something that's on the list of things to do and over the longer term, absolutely. I think that's where we have to get to. Obviously, what's been transpiring over the recent period of time and the increased focus on renewables, and carbon credits, and increasing energy costs is helpful to us in that regard.

But I think your observations are correct. That would certainly increase or provide us with capital to grow all of our businesses and develop and acquire further assets, and build up a platform, and obviously would further our asset management strategy significantly. And we think it's something that institutional investors would find extremely interesting and would be a very unique opportunity for them.

Thank you.

Our next question comes from Phillip Acinapuro of Scott's Cove Capital.

Thank you, my question has been answered.

Our next question comes from [Don Anderson] of [Felto and Company]. I apologize, it appears that his line is on hold. We do have a follow up question from Michael Goldberg of Desjardins Securities.

Thanks. Just following up on the question about the $9 billion new funds, where you said that it's reasonable to estimate that 25% could be committed by BAM. Is it reasonable, also, to assume that your share of the commitment would come from assets ceded into the funds rather than net new money from BAM?

There would be an element of that, Michael. Obviously, the timber fund that we announced, the logical thing would be to have that. We built up a portfolio there already, and there are other funds that we're working on that would make a lot of sense. Because we do have assets on our balance sheet that are very well suited, and we would target our funds accordingly.

It's a combination of both, Michael. It just depends on the situation.

Can you quantify what we should think of in terms of assets that are sitting on your -- that you do own now that could potentially be ceded into funds?

Well, Michael, I suppose over the longer term it could be virtually anything and everything on our balance sheet. But it's probably say that there's $1 billion plus of things that we have on our balance sheet that would be well suited for some of the funds that you would expect us to be thinking about in the near term, but we cannot get any more specific on that with you. And as all these things are, they are a little bit fluid.

Thank you.

There are now no further questions. I'll hand the call back over for any closing comments.

Thanks very much for joining us today and we look forward to speaking to you again during our third quarter release. Bye for now.

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