BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2008 Q4 法說會逐字稿

Welcome to the Brookfield Asset Management 2008 fourth-quarter and year-end results conference call and webcast. 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.

Thank you operator and good morning ladies and gentlemen. Thank you all for joining us for our fourth-quarter and our 2008 earnings announcement.

Joining me today on the call are Bruce Flatt, our Chief Executive Officer, who will make some brief comments; and Brian Lawson, our Chief Financial Officer, who will discuss our financial results. I would also like to remind you that in responding to questions and in talking about our new initiatives and our financial and operating performance, we may make forward-looking statements.

These statements are subject to known and unknown risks and future results may differ materially. For further information on known risk factors, I would encourage you to review our annual information form or our annual report, both of which are available on our website.

With that done, I will now turn the call over to Brian Lawson.

Thank you Bob and good morning. I will begin with our 2008 financial results.

We reported $1.4 billion of operating cash flow for the year. Excluding major disposition gains, cash flow was $1.2 billion, which represents an 8% increase over the comparable 2007 results.

2008 was characterized by very solid performance from our two largest businesses, power generation and commercial office properties. This differs somewhat from 2007 and 2006 which were characterized by good operating performance, but also reflected some very meaningful transactional gains.

Our power generating operations had a record year, producing almost $900 million of net operating income compared with $600 million in 2007. Realized prices were 9% higher than last year and water levels were 10% above long-term averages.

Furthermore, our watersheds continued to have excellent levels going into 2009. Our commercial office properties produced $1.8 billion of net operating income. That is up from $1.5 billion last year.

We benefited from increased ramps on a same-property basis, a higher level of disposition gains and a solid contribution from recent acquisitions. We also had favorable results from our investment assets, realizing $500 million of income during the year, although this was $200 million less than the exceptional results in 2007.

We did experience weaker performance in a few areas, in almost all cases directly related to the US home-building sector. But fortunately, they represent a small component of our overall business. And in addition, we've taken the opportunity to reinvest in these businesses at very attractive valuations, which we think will provide us with outsized returns as the economy recovers.

Looking ahead, the characteristics of our core businesses position us very well going into 2009 and 2010, which Bruce will expand on in a few minutes. We have very high visibility on the revenue streams from our major business units which gives us confidence in our ability to continue to produce solid cash flows over the coming years.

We spent a lot of time this year focusing on our liquidity and capitalization for two reasons. First, we wanted to make sure that we were well positioned to deal with the unexpected and to protect the value of our existing operations. And second, we wanted to boost our resources to be able to react to the investment opportunities that we felt would inevitably arise.

To that end, we completed approximately $8 billion of financing, primarily to extend the term of existing financings and also to generate incremental liquidity. We also surfaced approximately $1.5 billion through a variety of asset monetizations.

We were able to reinvest roughly $1.5 billion of this liquidity back into our businesses at very favorable valuations and to reduce the debt levels in certain business units as appropriate. We currently hold approximately $3.5 billion of core liquidity.

This is our cash, financial assets and undrawn lines of credit as well as the proceeds from some transactions that are closed or are closing shortly. This is higher than the $2.8 billion that we finished 2007 with and one of the highest levels that we have ever maintained.

We have a combined equity capitalization of approximately $20 billion, a debt to capitalization level of 15% at the corporate level, 44% when you proportionately look across the organization at our assets, and no maturities at the corporate level at all during 2009. Some of you will have noticed we have included an analysis of underlying values for the Company in our supplemental materials in our press release.

These values were prepared on a preliminary basis using the procedures and assumptions that we expect to utilize in preparing our financial statements under international financial reporting standards. The underlying values reflect most but not all of our assets at fair value.

On this basis, our shareholders equity increased from $6 billion on a historical GAAP basis to $15 billion on a pretax basis. That is approximately $24 per share.

There are two items of notes. First, only our casual assets are revalued. There's no value attributed to our asset management business or other franchise value in the businesses. This is more or less an asset valuation, asset by asset only. In addition, we do not value any of our residential lot inventory [upwards], even though many of our holdings were acquired many years at extremely low prices by today's standards.

The second point to make is that a full IFRS balance sheet also includes an accounting provision in respect to the taxes that we would theoretically pay if we were to liquidate the Company immediately, which we obviously have no intention of doing. This provision would amount to approximately $2.2 billion based on current values, roughly $3.70 a share.

We believe the pretax value is more relevant, that is the $24 that I quoted, as this reflects the amount of capital that is actually at work for shareholders, similar in concept to the float in an insurance company. We intend to adopt IFRS reporting in 2010 and will provide you with supplemental information on an IFRS basis throughout the year and to assist in this transition.

And finally, before I hand the call over to Bruce, the Board of Directors has declared dividend on the Class A shares, $0.13 per share payable on May 31 to holders of record at the beginning of that month. Thank you. I'll hand the call over to Bruce.

Thank you, Brian, and good morning to everyone on the call. As Brian just outlined, 2008 turned out to be a solid year for Brookfield despite the turmoil and the chaos we all witnessed in the financial markets, which is now spreading through the economy.

We carried out our business plans, had a few positives and a few negatives as Brian mentioned. But generally 2008 was business as usual.

One of the reasons we avoided most of the investment mishaps experienced by a number of other people, were the type of long-duration real assets that we typically own within the business. Another reason, probably as important, is our investment-grade capital structure which helped us avoid the liquidity issues experienced by many others.

Our general view is that the worst of the capital market's distress is behind us and that while we're now in a tough recessionary period, the stimulus packages and overall government support in North America, Europe, Asia and other countries have helped avert the major systemic issues which could have caused permanent impairment to the economic system.

As a result, while many think otherwise and obviously everyone has their view, we believe that what we're experiencing today is merely a tough recession and a bear market brought on by obvious overinvestment and free-flowing capital from the years leading up to this period. And while we have no crystal ball and barring some unforeseen financial situation, we feel based on our dealings in the markets over the last while that the capital markets are slowly improving.

They should continue to do so into 2010 and we believe a year from now, the worst of this recessionary period should hopefully be behind us. As mentioned earlier, we're pleased that our operations have generally responded as expected to this type of market environment.

The assets we own are long-cycle assets and their value is only recognized in a difficult market. In addition, our capital structure has been built with asset-by-asset financing, very few guarantees between assets, investment-grade leverage, well-staggered maturities and significant excess free cash flow to either be used to deleverage further should that be needed as a buffer, or hopefully for new investment in this type of a market.

Our power business performed, as Brian said, exceptionally well with the highest cash flows ever. And despite power prices being lower today, in some markets, close to 80% of our revenues over the next two years are already locked in place. This clearly minimizes the volatility to the income statement.

In our office property business, it performed as expected, as Brian noted. Although this probably is the least understood or where people worry more about this with respect to our Company.

I would note in this regard that we are currently 96% leased across all of our properties, have very high-quality counterparties on most of these leases, that the leases are at in-place rents well below even current market rents, and only about 4% of the space each year comes up for renewal. Therefore these are very long-term and durable cash flows.

There's no doubt though that the office property business is a lagging indicator of the economy and that overall statistics will deteriorate over the next year or two and that financing issues for some borrowers will cause disruptions in the markets. But the long-term supply and demand balance in most markets was very solid entering into this period. And with respect to us, our long-duration leases, like many times before, should allow us to see through to the other side of an otherwise softer period.

From an asset management perspective, we believe we also have a positive story. One should remember, like our shareholders, our institutional investors pay us to invest wisely in assets which will earn them the returns we promise them. They also expect us to not invest when the odds favor poor returns.

This latter part is often difficult, particularly with respect to the pressures of competition. But in this regard, I'm pleased to report that we have few issues to deal with in this regard with our institutional partners. This hopefully sets us apart from many others and will allow us to gain franchise value over the next number of years.

Important selling feature of this franchise value today that we put in front of our investors are that we do have our own capital to invest beside them. We have few legacy issues which are draining our management time. And by and large, we have no major underperforming funds which have tainted our investment reputation.

Coming out of this market downturn, we believe this bodes well for us to gain our fair share of fundraising. That's not to say that raising funds in the last six months has been easy. It has not.

But we have been able to be successful with a number of our efforts and many of our clients are now back allocating capital to opportunities. We believe as institutions continue to realign their portfolios, our return targets, our low-risk investment strategy and our credentials should favor our story moving forward.

From an investment perspective, we continue to see many opportunities. We think that one of the most interesting prospective areas will continue to be the building on our solid relationships with financial and other institutions, as they need assistance with issues they have in their portfolios.

Some of them will require fresh capital to invest into opportunities they have or that they have become involved in. Others will need our operating expertise, and we believe this should put us in the front of the line to assist many institutions while they work out issues they are dealing with.

Our general view is that the odds favor that investments made in this period covering the last six months and the next 24 months will generate very attractive returns, well in excess of what would have been considered normal a few quarters ago or for these type of assets in general. We continue to selectively put money to work within our asset base at exceptional returns and when appropriate, we will continue to do this, either within our own asset base or elsewhere.

Thank you for your attention today. Operator, we could not take any questions if there are any.

(Operator Instructions) Neil Downey, RBC Capital Markets.

Bruce or Brian, could you maybe give us a little bit of assistance with the IFRS values? I think you talked about $15 billion approximately pretax. There is another number that you often refer to. I believe it is approximately $20 billion of invested capital in your business. Could you just reconcile those two numbers?

Sure Neil. When we talk about the total capital that's invested in our business, that would include obviously our shareholders equity base but also the other owners in our core assets. So for example, the minority shareholders of Brookfield properties, that would be the biggest difference between the two. But we have a lot -- what we're really getting at there is the amount of equity capital in our business overall.

So the way to think about that is the $15 billion IFRS equity value of Brookfield shareholders plus the similar market value that would be attributable to minority investors or partners?

Correct.

Turning to the power business for a second, I believe the renewable power business, there's a comment or some figures that show the cost of debt capital being give or take 6%. Yet this business I believe recently raised $300 million on a relatively short-term basis or closer to 9%. Could you comment on maybe why the cost was so high and perhaps with the use of those proceeds will be?

Sure, first of all, there's the most recent financing, that was a corporate unsecured financing. And frankly, we're not immune to some of the experience that people have widely seen in spreads in the public debt capital markets which are for all issuers a lot wider than they would historically be.

The 6% figure that you would be referring to would apply across our borrowings. And as you would be well aware, many of those are at the asset level in property-specific mortgages and project financings. And over the years, we have been able to establish a very low, fixed-rate cost of funding there.

And sometimes we will be able to raise funds a little bit more extensively and sometimes a little bit less expensive than that. The use of proceeds there is frankly general and corporate purposes and we do see a number of potentially attractive acquisition alternatives there, and so we will put the money to work.

Okay, just to finish up, this business does have a little bit of debt. I guess is it $300 million-ish coming due at the end of this year? But that recent capital raise was not specifically a pre-funding of that pending maturity which is at the asset level, correct?

Not entirely, although we did use some of the proceeds to buy in that issue really at a slight discount.

Neil, it's Bruce. I'd just make a general comment on the capital markets.

If you think of the markets in the third quarter -- or the end of the third quarter and during the fourth quarter last year, most corporations -- in fact, the highest quality corporations, even AA corporations, could not issue bonds into the market. The good news for the capital markets is that they have started to thaw and therefore quality issuers are able to issue debt into the market today and I think that continues to move the down market into other corporations.

The good news is I guess that we have access to capital. The bad news is spreads are wider and I guess our view is they will continue to come in as people take money out of treasuries and put it back into credit, and we just felt that you just have to keep doing things. And while we didn't necessarily like this spread, it's a small amount of money relatively speaking and it's a short term and that's the reason why -- it is a short term, so it's not for a long period of time.

Linda Ezergailis, TD Newcrest.

As you're looking to this growing list of opportunities on the acquisition front, I'm wondering if you could perhaps update us on your most recent thinking about appropriate risk premiums and returns in your various businesses versus your views in your September investor day, now that capital markets are stabilizing?

Linda, it's Bruce. I guess I would say that we generally look at risk and reward in a pretty matched fashion. And we try to take moderate risk within the assets we buy and earn decent returns, as a general thesis.

You know, we think today that the risk is far, far less than in virtually all times in the last 20 years of investing. And just because you're buying at much lower values in the marketplace and therefore while it's perceived to be higher risk because it's volatile and the markets are liquid, you know the prices you're getting are far lower on a replacement value or things like that.

So I guess our view on risk today is that money being put to work will earn very attractive returns in virtually all the sectors. You know, I don't think our views have changed what you should earn over the longer-term. Although today, I think odds favor it being much better than what we would expect.

So we can still reference your September hurdles when we're looking forward to some of the more competitive, still competitive priced acquisitions as a baseline hurdle?

Yes, I think so.

Further to some of Neil's questions on clarification on your IFRS underlying values, on pages 11 and 14 of the supplemental, you helpfully provide some underlying assumptions for your calculations. I just wanted to verify that the discount rates that you are showing, are those levered after tax? And are your terminal capitalization rates -- why are they different?

They are unlevered, to your first question. Your [terminal] cap rates will often vary from you discount rate. That is reflecting the cap rate that would be expected to be applicable to those cash flows (inaudible) that particular point in time.

Wouldn't you assume as your assets age that the cap rate would go up?

That's part of the point. Of the assets that we tend to own is -- you keep putting in the appropriate amount of sustaining capital, and they maintain their value and they're very, very long-life assets.

Okay, so let's talk about duration then. It seems that your power assets, you are assuming pretty much across the board 2028 exit date. And yet there's quite a degree of variance in your real estate, ranging from 2018 in Australia to a perpetuity in the United Kingdom. Can you just explain what the basis is of your exit timeline assumptions and why there might be such a difference in your real estate business?

Sure, so to begin with, the parameters that we use for the valuations generally track what is the accepted practice for the valuations in that particular market. So as we understand it and as we've observed, the practice for valuations in the UK is you assume the properties are held in perpetuity.

That would differ from North America where typically you would use, say, ten years of cash flow and a ten-year exit date for your terminal cap rate. Now you will vary that depending on if there's some specific plans that would suggest that it should be otherwise.

But otherwise in the commercial office building, typically you'd see ten years. On the power side, it is again based on how a typical valuation might approach it. We tend to use 20 years internally and the folks that we worked with to help us in betting those numbers also felt that that was an appropriate way to look at these assets. So it's valuation conventions.

Michael Goldberg, Desjardins Securities.

Given the free cash flow that you generate, I would expect to see a steady increase in the liquidity resources that you have. But for the past few quarters, you have characterized those as being in the neighborhood of 3 or a little over 3 or $3.5 billion and it doesn't sound like it's increasing, or at least increasing meaningfully. What am I missing?

I think the one thing -- Michael, it's Brian here. There were two specific I will call them paydowns in the fourth quarter that we had effectively pre-funded with that liquidity.

One was we redeemed a $300 million corporate bond. And second, we did retire the debt associated with our European operations, which was probably another [$300 some-odd million]. So those were two fairly significant cash outflows in the fourth quarter.

And we have been investing in our businesses as well. We mentioned $1.5 billion over the course of the year that we have put into the assets. Those would be some of the principal things that would -- where the liquidity that is flowing into the business would be deployed.

Okay and just following on one strand of this a little bit further, how much have you invested or do you expect to invest in underwritten rights issues of affiliates? What has been the impact on liquidity at the BAM level and what is your game plan in making these investments?

I will make a couple of comments and Bruce may want to follow on. The game plan, frankly, is to -- on the one hand, we believe we are investing the capital as I mentioned in my comments earlier, at very attractive valuations and then we would expect to achieve very strong returns from these investments over time.

Second, it does assist in deleveraging and paying down the debt in some of those businesses. And in some cases, that was an appropriate thing -- we felt that was an appropriate thing to do. We have I'd say in aggregate committed roughly $500 million or so to rights offerings and that was the two largest ones would be with respect to Brookfield Homes and Norbord.

Andrew Kuske, Credit Suisse.

I'm not sure if Bruce or Brian, which one wants to address the question. But when you look across your business lines, how do you look at the functionality of credit markets, comparing what you see in commercial real estate at this point in time compared to power compared to your forest products interests?

Andrew, I would maybe say a couple of comments and Brian may add to it. But I would say the credit markets are improving across the board in virtually all industries slowly.

The ones that have distress within the industry obviously are improving less, and to some degree, some of those industries have no access to capital in a conventional form which you would expect for those type of industries. What was more distressing in the third quarter of 2008 was that no companies had access to capital.

So that is improving. I would say for most of the things we do, we have access to financing. Our relationships are excellent. We finance on an asset-specific basis and in fact most of those markets where we're dealing with lenders and rolling over mortgages, we were doing it last year and we're doing it this year and it is getting done.

It varies by country, but interestingly where you would think many institutions are not out lending, the fact is they are and even on commercial real estate which today people if you read all the papers, you would say people weren't funding commercial real estate. But in fact, in many places they are. So I think it depends on country and asset type. The assets that are less affected by this environment are highly financeable.

I think if you look at $8 billion that we financed last year, very little of that would have actually been in the public markets. Most of it would have been in the asset-specific category as Bruce mentioned and then also within the banking market, we would have seen a lot of liquidity there as well.

And then just, if I may. As it relates to your real estate exposure, are you rethinking counterparty risk, just in part of what happened and predominantly in Q3? You had a lot of high-quality tenants with good strong credit ratings and all those credit ratings have substantially dropped and some players -- not your tenants -- but some players in the industry have just gone away.

The good news about a commercial office lease is that as long as the entity is in business, they pay your rent, then they have no ability to get out of the lease. That is a very positive thing.

I guess bankruptcies are the one issue. And clearly it was a worry that the financial system was going through a systemic meltdown and every company was going to go broke. That could've been a problem for us.

Clearly that has been averted, I think, and the world would be our observation and that's a good thing for office owners. I'm not sure that we -- I guess we still believe that highly-rated corporations in the office building business in very long-term leases is the right way to run a business and I think the financial system has learned that they can't have what happened last year and I think that won't happen for many, many years, if ever again.

And then just one final question. If I look at your underlying value calculations that you produced and compare your real estate versus your power operations, do you see some point in time in the future where the capitalization rates you are going to be using for power will start to drift down to the levels you see with real estate? There's quite a delta between the two and a case can be made that the cap rates should in fact be lower on the power side as opposed to the 11% rates you're using.

We would certainly ascribe to that view, Andrew. We believe that the power assets have some phenomenal attributes that should result in cap rates in line with or lower than the best commercial office properties. Certainly we have used what in our view are some pretty conservative cap rates in our underlying values that we put out. But we would subscribe to your view.

Brendan Maiorana, Wachovia Securities.

Chris Elliott's on the line with me as well. Last week Brookfield Properties announced that they would convert their wholly-owned North American property operations into an internal REIT structure and indicated that they may convert at a corporate level to a REIT structure in about two years which I think is down from a previous rolling estimate of a three-year outlook.

Can you provide us an update on how you view your cash tax outlook over the next three to five years, whether or not there will be any significant change and if changes at the corporate Brookfield Properties level would have any impact on the cash repatriation to the BAM level?

Okay, in terms of the tax profile at the corporate level, and obviously it's a pretty complex area to delve into. But in general, we have, I would say, a very long runway before we will be in a position that our tax pools would be depleted and we would be in a cash taxable position. All things being equal, it would be at least six or seven years, absent some very significant realizations between now and then.

So we feel we are in quite good shape in that regard. We structure a lot of our investments through partnerships with our institutional partners and those are generally non-taxable entities and we do conduct an increasing amount of our business internationally, which does enable us to avail ourselves of lower tax rates in some jurisdictions, although some of them are higher tax rates as well. Then you're really just -- you still focus on the after-tax return. But it is a pretty extended horizon before we would expect to incur meaningful cash tax liability at the Brookfield Asset Management level.

Brian, this is Chris. You guys have offered these third party views of valuations for your different pieces of the business and there has been a lower number that has been provided currently versus where you were before. Is it fair to say that you were offering a preliminary range a few months back and this is a conservative or a sharpened pencil view?

It's probably -- the pencil is probably a little sharper than what we would have provided back at our investor day. And you know frankly, rates have probably been pushed out somewhat in terms of what valuers would use. And obviously we're trying to be conservative. These will ultimately provide an input into our IFRS balance sheet.

I applaud you in the effort. We're encouraged to see it and I have one final question. Bruce, I always enjoy reading your letters. In your letter this morning, you had indicated that there were a variety of your institutional investor partners, pension funds, that are looking at lower rate of returns on fixed-income instruments, extraordinarily low versus the opportunities that might be coming over the next couple of years.

Is that -- I appreciate if you could expand upon that. Is that your belief or given that we're hearing a lot of denominator issues and movement between major asset class allocations, is that your belief or is that the feedback you're getting from your existing investors, your current investors or prospective investors?

Chris, I guess I would make the following comments. Our general view is that one of the highly risky investments today is to own treasury bonds because the yield is so low. I guess our second view is that pension funds are starting to take that view. And ultimately once they're comfortable with their own portfolios, will start buying credit again. And credit meaning they will either buy something which will produce a return greater than 2% or 3% in the long treasury.

And that is the positive thing that will happen over the next 18 months to bring the capital markets back. Our discussions with many global institutional investors running from sovereign funds to pension funds to institutional clients to super high net worth individuals is I guess varied.

Some are still in the process of trying to figure out what they should do. Some are dealing with the denominator effect and some are putting money back to work based on the fact that they think buying these type of assets is attractive at this point in time.

A lot of them weren't doing anything in the end of last year, but lots of them are now starting to look at things. And so I would say it's based off of A, our views; and B, off of our discussions which are really formed off of discussions we have had with many of these type of investors.

Here's a follow-up too. You are offering a quarterly conference call every 90 days, so things are -- providing a view on a regular basis versus the changes that may be occurring more slowly.

You are offering a more positive view largely because you've been avoiding some of the investments that have been made over the last couple of years that others have made. However, predicated upon some of these investments is partner money. So is it fair to say that you feel as though transactions that you can enter, the initial transaction that we might cover the next twelve months is not just on your behalf, your monies, but will be a co-investment from the start?

The answer is we're putting money to work as we're doing it with some of our own money and often still with other people's money in funds that we have outstanding. I guess in addition, I think some of the opportunities that are coming that we don't have capital already raised for, we will be able to raise capital from outside investors to come along with us whether it is for a specific opportunity or in one of our funds.

So, I do think we will continue to see -- in fact our view in the longer term is that enormous amounts of money are going to flow into the type of assets we own because they are a perfect match to institutional investors funds. And the risk reward on these type of products are far greater than what they generally find in either the equity markets of the treasury market. So I think money will keep flowing into this and obviously it doesn't happen -- markets don't change over night but over the next three to five years.

Cherilyn Radbourne, Scotia Capital.

First I wanted to say I really appreciate the detail that you have given in terms of how you came up with the underlying IFRS values. I wanted to ask you a question with respect to the average discount rates that you apply to your commercial office portfolio by geography.

So it was 8.2 in North America, 7 in Australia and 6.2 in the UK. And just wondering if you can give us a bit of color for how your assessment of the nature of your portfolio and the market conditions in each geography would have led you to select those as the most appropriate discount rates.

First all, it's not just us selecting them. We're working with local valuators as well to provide an independent view and external assessment of our own valuations, notwithstanding the fact that we obviously have a lot of very skilled people internally who do this a lot of the time.

So what you're trying to get at there is something that is consistent with the local market convention and is going to reflect cost of capital local markets, growth projections and things like that. In the case of the United Kingdom, it is a much smaller portfolio for us. So it's primarily driven off of one very high-quality asset, for example.

Although, Cheryl, I might add just one comment for Brian and I would say that generally market conventions on -- if you take office real estate -- are different within different countries. For example, we don't own any office buildings in Brazil but if we did, they would have a very high cap rate.

And the reason is because an office tenant in Brazil can break a lease. And in the UK, in the alternative which I would say is the best office market in the world from a leasing perspective, because they are term leases, usually 15 to 25 years and every five years they're upward-only adjustment to rents. So there's a minimum floor but they adjust upward if it happens to be higher in the market at the time.

So that's a very valuable lease and that's why cap rates in the UK have always been lower than, for example, North America where you usually sign a ten-year lease and it may have fixed incremental increases, but that's it. So it's almost a one-way option.

So the valuations that you pay for that on a discount rate, a cap, or valuation basis are different because the underlying leasing structures are different and that is just a market convention over the years that have developed and therefore people pay more for that in one country versus the other.

That's helpful. Thank you. With respect to the Australian market in particular, clearly that is a lease portfolio that you didn't originate and likewise, the underlying financing is not a structure that you put in place.

You have noted previously that it tends to be a market where the financing is of shorter duration and you've got a little bit less of a gap in terms of your in-place rent versus market rents there. So I wonder if you could just speak to the degree of comfort you have around that portfolio and the degree of cash flow visibility for '09?

Well the cash flow visibility there is extremely high in that 99% of the portfolio is fully let out and we actually have pretty good escalations in the rent going forward. I think they are around 3.4% a year or something like that.

So that side of it is very high. And on the financing side, your observations are correct. It tends to be a more concentrated, shorter duration financing market then we would see elsewhere in the world and certainly how we would typically fund our assets and our objective over time is to shift a lot of our financing into longer dated, more asset specific institutional mortgage money.

But you don't have any significant concerns as it relates to either mortgages or development financing against [multiplex]?

I would say the quality of the assets gives us lot of comfort in that regard. So, we will work through that situation and fortunately we don't have a whole heck of a lot of maturities staring us in the face there. And we will get -- the quality of assets are such that we should have a pretty easy time refinancing them, we think.

Just last question, on the fund-raising side, can you just remind us how many funds you're in the market with currently and the total capital raising value associated with them? And just give us some idea of what you think is a realistic goal in terms of 2009 fund closings in light of all of your comments about institutions starting slowly to put money to work again.

I will start off on that one and I will ask Bruce to finish off. I think the last time we would have reported on that front, we would have said there is around five or six funds in the market around $8 billion, something in that order.

You will have noted that we were successful in the fourth quarter in selling our timber assets to an investment fund which I think is evidence of some progress in that regard. Clearly, there has been a slowdown in the pace of activity there.

And while we still have the same objectives, the time that it takes us to achieve it is going to be longer than we would have initially seen. But I would take you back to Bruce's earlier comments in the call and his comments in the shareholders letter that we do believe that what has happened over the past period of time creates an even stronger case for the type of assets that we offer andthe operating platforms that we can open up to our co-investors.

I would just add that it takes longer. Usually the amounts of money we will get versus what you might have perceived two years ago are probably less. But you need a lot less money to do what you want to achieve today and that is a kind of across the world, broadly speaking. So I think we will achieve a number of things we set out to do. It may not be exactly what it was, but we will probably end up with maybe the same situation on what you could to.

Peter Sklar, BMO Capital Markets.

On the power generation business, I noticed that the contract pricing decline since your disclosure in the third quarter, is that specifically just due to the depreciation of the Canadian dollar that was experienced during the quarter?

That's correct, Peter.

There is no other factors involved?

No, there may have been a slight shift in the nominal value of the prices [of it]. But I think that would be almost entirely due to the Canadian dollar.

My last question -- back on the asset management business, as you know, many of the institutional clients that you would target as limited partner investors in your funds are having liquidity issues, and I'm just wondering if any of your current institutional partners, if anyone has requested if they could limit the capital commitments they had previously agreed or reneged on any capital commitments. Had you had any issues on that side?

The direct answer is no, to your question. No one has asked us for any of that. Having said that, if someone did, we would try to help them. Our business is about working with our clients to solve their needs and help them do things. And while we haven't been asked by anyone, we'd try to help them.

Rossa O'Reilly, CIBC World Markets.

The cap rates that I used for -- on average for the operating income from commercial property, I see you noted for 7.2 cap based on 2008 operating cash flow. How would that break down into the geographical components?

That's simply an arithmetical calculation that we provided to give you some context. Obviously there are some markets that we're in and some properties that would command a much lower cap rate and there frankly would be some that would warrant a higher cap rate. I would say you would see that evidenced by the range of discount cap rates that we provide in the table in the document.

Put another way -- looking at the terminal cap rates of 6.9 in North America, 8.9 in Australia and 6.2 in the UK, should we view those as being similar to the implied cap rate currently in those regions? Or have you chosen a terminal cap rate that's different from the current cap rate?

I may not have completely understood your question, so let me try. The 7.2% that I used is just as I mentioned a straight arithmetical calculation of our 2008 cash flows, excluding gains divided by the value of the combined commercial office and retail portfolio. That's how you get the 7.2 (multiple speakers)

My question phrased another way is what is the going-in cap rate by geographical region on average?

Oh, okay. I see what you're getting at (multiple speakers) don't know the off hand.

We don't have that number (multiple speakers)

We haven't broken out the values by region, for example. So we don't have that number for you.

Looking at the hydroelectric operating metrics, what would have been the trend in power production in the fourth quarter year over year and relative to normal?

For the fourth quarter was -- I think we were around LTA for the fourth quarter, which I think is about the same as where we were for the fourth quarter 2007. So we would have had more generation because we had more in-place capacity. But relative to long-term average, it was -- in both quarters I believe it was pretty much in line.

And the average price?

It was -- again, in terms of a realized price, it would be pretty similar in that a lot of our power is forward sold. And where we would have created some extra lift this year was in some of the excess water that we had available that we were able to sell at higher spot prices over the course of the year. We would not have had the same benefit there in the fourth quarter.

Erin Caddell, Hovde Capital Advisors.

Just want to go back to a couple things from your comments earlier. Did the sale of the (inaudible) in October show up in the financials in any way?

It would have been reflected in the financials in two ways, well three ways really, but probably what you would be most interested in would've been a $24 million gain on the transaction and we would have received around $600 million of cash liquidity on the transaction.

Got it. Okay, can you just remind us what the process is when you engage in a transaction with an affiliated fund? Is there kind of an outside -- a third party that evaluates it or is just because you have outside investors in the fund, they're driving the process? But how do you manage it when you're basically selling something to another part of the Company?

The governance would vary from fund to fund but first rule is they happen at market price and it will be supplemented by external valuations and appraisals if that is appropriate. Certainly there is (inaudible) independent oversight of it if it happens to be a fund.

There will be other parties -- the other parties will get represented. Frankly we don't have very many of those circumstances. In this case and when it's happened in the past, I would characterize it as as much an arms length negotiation with the other investor in the fund. (multiple speakers) interest in it.

And then maybe going back to your underlying value calculation and specifically for commercial properties, you value that at $7.8 billion. You do have kind of an outside valuation of Brookfield Properties, in the market cap of Brookfield Properties.

Just based on my calculation, you're 51% stake in that would be valued at $1.3 billion. I'm sure you feel that number is too low. But essentially do you resolve in any way the kind of market value of any of your publicly traded entities with the underlying value? So for instance, what percentage of the $7.8 billion is the North American commercial properties that is represented by Brookfield Properties?

We don't specifically comment on how that relates to Brookfield Properties and the market value of a company isn't particularly relevant in preparing underlying values certainly for the purposes of IFRS. You look at the underlying assets and apply the values there.

I know this will come out in some of your subsequent filings, but your cash earnings and GAAP earnings are positive and yet your book value declined by about $1.30 per share quarter on quarter. Was that due to just FX revaluation in comprehensive income?

The quarter over quarter would have been in FX, yes.

Last question. Can you just describe again in Page 32 of your supplement, the gain on -- the kind of tax related gain on the REIT conversion that occurred? This is the future income tax gain.

Sure, that was a transaction that was undertaken by Brookfield Properties. So I might encourage you to chat with them about it. But the high-level explanation of that is they took a number of their properties that were owned in a C corp. format and converted so that they were now owned by a REIT.

And what that does is gives you a lower effective tax rate on your timing differences for accounting purposes, and reduces the future amount of tax that you would expect to have to pay in that regard. And what the forward -- what that gain would relate to really is the value of those future tax savings for an accounting basis.

I will ask one more and that is what is your credit exposure, the credit lines that you have outstanding to Norbord and Brookfield Homes net of the recent transactions that they completed?

Our credit exposure to those companies?

Yes.

Post the rights offering would be negligible.

I thought you had a credit line at least outstanding to Brookfield Homes. I thought you had credit lines out to both of them but then they would have been repaid by the rights offering?

Yes, that's right. We might have a small amount of standing to Brookfield Homes after the rights offerings. But the amount outstanding to them or from them to us would be pretty minimal.

Horst Hueniken, Thomas Weisel Partners.

Just one clarification question. In your IFRS evaluation, I'm assuming you're not using any public valuations in your model, but rather it's all DCF based?

You use -- the only (inaudible) public valuations would be when you're valuing financial instruments which wouuld be the same as how we would have them valued in our Canadian GAAP statements.

Fair enough, thanks. My other questions have already been answered.

[Operator Instructions] ))Linda Ezergailis, TD Newcrest.

Just a clean-up question on the underlying value in IFRS assumptions. I realize that the discount rate is the key input and the key sensitivity. But can you give us a sense of what the sensitivities would be if you changed the exit date plus or minus five years or perhaps changed the terminal cap rate by 100 basis points?

They're very, very small. And that's basically because those events happened (inaudible) the future and so the present value of those swings is very small. But I think it would be less than 2%.

Less than 2% for each of those assumptions?

Yes.

Thank you. Just to clarify, this is both unlevered and after-tax discount rates?

That's correct.

Brendan Maiorana, Wachovia Securities.

Sorry, we are all done.

Operator?

Yes sir.

Do we have other questions?

Neil Downey, RBC Capital Markets.

A follow-up to a previous question on the IFRS value of the commercial property operations as it relates to Brookfield Properties specifically. I believe the current value is ascribed at about $1.8 million which would apply a roughly $9 per share value for BPO versus the current value in the marketplace which is approximately $6 per share.

You've clearly not taken any impairment charge on your carrying value of BPO. So I guess that implies that you think BPO is implicitly worth more than the current market price.

The underlying values that would come up would -- yes -- would translate into something that would be well in excess of the current market price.

And lastly just to finish up, as it relates to I guess the broad asset management platform of the enterprise, is it a trend that goes over the last three or four years whereby the overall cost of service related to the asset management platform have grown quite dramatically and obviously a big part of that is due to acquisitions. Do you think there is any opportunity or need to maybe right-size some of the costs in the asset management platform to maybe get a bit better flowthrough of revenue for the bottom line or do you think that the overall platform is sort of the right size in terms of number of offices, personnel, etc. and that really the opportunity is to grow the revenue?

I would say twofold, Neil. One, we do believe there is a great opportunity to grow revenue and we are doing that. Secondly though, I would say like everyone, we're taking a re-look at cost structures in many places and cutting where we can to make sure we are as profitable as we can based on the base we have and what we think going forward. We're not dissimilar to every organization in the world where we're looking at all of those things today.

Okay, so I guess I'll be very quick and finish up. In looking at the cost of service for 2008, should we expect any meaningful growth in 2009 or will they by and large really begin to flatline at this point?

They should flatline, to use your words. We wouldn't expect any meaningful growth whatsoever in 2009.

There are no further questions at this time.

Thank you everyone for joining the call today and we will look forward to talking to you next quarter or if you have other comments for us, please feel free to call us at Brookfield. Thank you.

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