BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2010 Q2 法說會逐字稿

Welcome to the Brookfield Asset Management 2010 second quarter 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'd like to turn our conference over to Katherine Vyse, Senior Vice President, Investor Relations and Communications for Brookfield. Please go ahead.

Thank you, operator, and good morning, ladies and gentlemen. Thank you for joining us for our second quarter conference call. On the call with me today are Bruce Flatt, our Chief Executive Officer, and Brian Lawson, our Chief Financial Officer. Brian will first discuss the highlights of our operations and financial results. Bruce will then provide some comments on opportunities within the current investment environment, our recently announced global property reorganization, and an update on general growth.

I would, at this time, 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 for investors, 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 would like to turn the call over to Brian.

Thank you, Katherine. Good morning. Operating cash flow and gains for the second quarter totaled $327 million, $0.53 per share. That compares to $294 million in the second quarter of last year. And this brings our operating cash flow and gains for the first six months of 2010 to nearly $700 million, or $1.13 per share. In general, nearly all of our business groups are meeting or exceeding their operating targets.

We continue to see evidence of a firming economic and business environment, as well as the results of strategic operational and capital allocation initiatives that we've taken over the past two years. Furthermore, we continue to have favorable access to the capital markets, our liquidity and capitalization profile remain strong, and we are actively pursuing a number of value-enhancing opportunities with the objective of increasing returns to shareholders over the long run.

From a high level, the operating results for the quarter reflect the following. Continued stable performance of our commercial property platform, and that's driven by continued high occupancy levels and increases in same-property rental income. We received a good contribution from a global portfolio of a diversified infrastructure asset that we acquired through a restructuring in late 2009. We're seeing improved results and stronger operating fundamentals from some of our operations that are more sensitive to economic cycles. This would include our timber operations and some of the industrial businesses held within our restructuring operations.

On the other hand, we did experience low water levels in certain areas of our power generation operations. But this, fortunately, was more than offset by higher realized prices and a disposition gain related to our Canadian power fund. Had we achieved normalized water levels, our results would've been substantially higher.

Turning to a bit more detail on the foregoing, asset management fees and the contribution from our services businesses continued to increase in the quarter and on a year-to-date basis. In particular, long-term base management fees were higher, this is due to new funds and increased third-party capital commitments, our construction services business expanded its operating margins and activity levels, and it has been successful in new business procurement, benefiting from increased economic activity in Australia and the United Kingdom, in particular. Power generating operations contributed net operating cash flow during the quarter of $149 million. That includes a realization gain of $102 million, and compares to $106 million in total for the second quarter of last year.

As I noted, we did experience below-average hydrology levels in Ontario, Quebec, and New York. This reduced the volume of energy produced in the quarter. On the other hand, realized prices increased by 19% to $83 per megawatt hour. This partially offset the lower energy levels. This is due in large part to long-term contracts that we've secured in recent periods at higher prices.

The realization gain I mentioned arose on the sale of an interest in our Canadian renewable power fund into the capital markets, and that generated $170 million of cash proceeds.

Water levels have begun to normalize in our key markets, and we've locked in power prices for 80% of our expected generation over the next 18 months at favorable prices, so we are optimistic that our results will return to more normalized levels shortly.

Commercial property results were stable during the quarter, as I mentioned, this reflects the contractual nature of the underlying leases. Operating cash flow was $90 million for the quarter, similar to 2009. On a same-property basis, net rents increased by 4% over last year, measured in local currencies, and that reflects new leases signed at higher rents. We did sign four million square feet of new leases in the first half of the year, and leasing markets continue to be active and constructive, and we are in discussions on all of our major leasing initiatives.

We also did benefit from newly completed office developments, lease termination income and positive currency variances. The overall occupancy of our properties was 95% at quarter end. Average lease term was seven years, with high-quality tenants and average in-place rents that are approximately 8% below the comparable market rents, which positions us well for continued stable results.

Our infrastructure operations increased their contribution to $34 million in the second quarter. That compares to $15 million in 2009. Of note, our North American timber operations benefited from stronger domestic and, in particular, export markets. This resulted in higher prices and harvest levels. As you know, we are able -- we're well-positioned to react to improved markets by scaling up our harvest levels, and so we are well-positioned to take advantage of similar circumstances as the economic recovery continues to take hold.

In addition, the current period results from our infrastructure business includes cash flows from the global portfolio's infrastructure businesses that we acquired in the fourth quarter of last year. These assets are predominately rate regulated or contractual in nature, increasing the stability of cash flows, giving us a high level of visibility in respect to future earnings, and as I will come back to, gives us a strong platform from which to grow this business further.

The improvement in market conditions for many of our operations and the advancement of business development initiatives gave rise to an approximate $500 million increase in the net asset value of our common equity, and that's prior to common share dividends. This brings our net asset value to $29.69 per share. As a reminder, this reflects the tangible value of our assets, and does not reflect any value for our business franchise or asset management operations.

We continued to strengthen our balance sheet, liquidity, and capitalization during the quarter. We completed $1.7 billion of financings to supplement our liquidity and expand our maturity profile, and generated nearly $400 million of proceeds through asset monetizations.

Core liquidity, which represents cash and financial assets in undrawn credit facilities, both the Corporation and our principal operating subsidiaries, exceeds $4 billion at quarter end, and that's roughly in line with where we were at the end of 2009. And our deconsolidated and proportionate consolidated debt to capitalization ratios also were relatively unchanged over the period, and the average term of our corporate debt is eight years. All of this keeps us in a strong financial position to continue pursuing a number of investment initiatives, a number of which we advanced significantly during the quarter.

Bruce will comment more specifically on GGP, but we've been busy on a number of other fronts as well. For example, within our various property businesses, we acquired a loan secured by a number of high-quality office buildings in Washington, and we're in the process of foreclosing when we are paid out. And while we would've been delighted to have acquired the buildings, this did result in a gain of nearly $100 million for us and our clients.

It continues to be a market where, under the right circumstances, owners can realize good value for properties if they are well-positioned, well-leased, and well-financed. On the other hand, there continues to be good opportunities to purchase properties at substantial discounts if they are facing financing and/or leasing challenges. So, we have been in the -- we've been able to be both sellers and buyers, which enables us to rotate our capital into higher-yielding investments.

A smaller deployment of capital, but a good move forward for us, we think, is the purchase of a large, multi-family operating business called Fairfield Residential, which acquires, entitles, and develops multi-family properties in the United States on behalf of institutional clients. This acquisition will enable us to broaden our range of product offerings into this good asset class.

Within the renewable power business, we secured long-term power purchase agreements to build wind energy projects in Ontario and California, and continue to advance construction of a third wind project in Ontario. These are all 20-year contracts, and will add more than 300 megawatts of capacity at attractive returns.

And we continue to develop new hydroelectric facilities. We have roughly 350 megawatts of capacity at various stages of the development process in Brazil and in Canada.

And as I mentioned before, the acquisition of a global infrastructure portfolio late last year has provided us with a number of attractive opportunities to invest in expansion projects, and has also given us a much broader platform from which to pursue additional acquisitions. Current initiatives include the expansion and upgrade of our rail lines in western Australia, to carry iron ore from new mining projects that are located nearby, and also increasing the capacity of our UK port facility to support increased volume. This is the first phase of an expansion plan that will ultimately double the capacity of this facility.

And within our specialty funds, we continue to see debt secured by attractive assets trading at good discounts to intrinsic value, and we're pursuing a number of these opportunities through our restructuring and real estate finance groups. So, all in all, we feel it was a good quarter, with solid operating results and meaningful progress on our business developed initiatives. As a final note, the Board declared the normal quarterly dividend of $0.13 per share, payable at the end of November.

And with that, I will now pass the call over to Bruce.

Thank you, Brian, and good morning, everyone. I thought I'd start with just a few comments on the macroenvironment, and since we had the last conference call, much of the focus has been on the euro and the EU, and while that has created uncertainty in the markets, we're comforted that the issues are now in the open and being addressed. What this means for us, more importantly, is that in this uncertain and volatile environment, our business models -- we're able to execute on transactions at what we think are valuations which will result in strong long-term capital returns. And we find that we have been and are involved in some incredible transactions, which would have been not available in any other environment.

Our position is in contrast to a number of marginal or start-up entities, which in other times would have found capital but are finding it hard to find capital in this environment, and it results, essentially, in fewer sizable global asset managers to compete with us. The advantage that we have in this environment is full access to many forms of capital. The first is our public equity base, which totals over $30 billion, and that we've invested decades in building up. The second advantage is the institutional relationships which we have with sovereign pension and institutional clients. We've continued to build those relationships with a number of world-class institutional investors. And those relationships, the bottom line, have enabled to us to achieve a number of things in the past 24 months, which we could not have otherwise done. We continue to build on all of these and look for more.

And third, we feel very fortunate of the long-term relationships we have with a number of the great global financial institutions, and in many cases, these relationships we have allow us to do things which otherwise wouldn't be available. And we take great care to ensure that the transactions we sponsor are conservatively financed, so that all the constituents win in transactions. And this inevitably results in us having lower leverage. Consequently, we have had, as you know, few issues over the last number of years, and we think that that's allowed us to emerge stronger out of this as a sponsor than from before.

Secondly, I just thought I'd talk about our global property realignment. We recently announced a reorganization of our global office business, which will result in the transfer of most of our office assets owned outside of Brookfield Properties into our 50% owned affiliate Brookfield Properties. And I thought I would explain a few things related to this, and describe what Ric Clark and the Board of Brookfield Properties are trying to achieve. The goal in doing this is to have all of our premier property investments and operations conducted in one entity. The BPO office business as distinct from some others, some other businesses, is focused on providing high-quality space to global corporations in major gateway cities.

The strategic advantage that we have with respect to this is really twofold. It's the relationships we have with major corporations which are in our building, such as global financial firms, accounting firms, consultants, oil companies, but secondly, it's a reputation that we have for providing quality environments for them to house their people. Ric Clark and his team at BPO have done, in our view, an incredible job differentiating the Brookfield office brand in North America with our clients, and we believe that they will be able to earn outsized returns in other select markets across the globe by applying the same strategy.

We also believe that, over the next five years, as this strategy plays out, that BPO will be transformed into a global security or stock in the capital markets for those who wish to invest in the office building business. And as a result of BPO owning one of the premier office portfolios in the US, Canada, Australia, the genesis, today, of a business in the UK, and possibly other markets.

In simple terms, this transaction, we will sell our interests in a number of core long-term office properties in Australia to BPO for cash and the assumption of the existing debt on the properties. In the longer term, these assets may form the basis of a listed or unlisted entity in Australia under BPO, or may be funded by BPO through the sale of other interests and assets. We have further agreed that we will support BPO in disposing of its residential business to its shareholders, so that when the transactions are completed, BPO will have divested itself of its residential business, which no longer fits within the strategic direction of BPO, and I guess it's been 10 years that we've been working on that.

Our intention is to combine the BPO residential business into Brookfield Homes, which will then contain all of the North American residential businesses that we're involved in, and we're undertaking this transaction, secondly, to create what we hope to be a first-class North American master-planned developer and homebuilder. And our thesis is that when the markets improve over the next number of years, this combined entity will thrive. On the other hand, in the interim we will be able to integrate the businesses and benefit from best in class operating skills across the platform.

Lastly on this topic, and before I turn to other matters, I would acknowledge that announcing the transactions that we did a week ago, all at once in the middle of the Summer on a Friday afternoon on a long weekend in Canada, and in a hot Summer day in New York may have not have been the most astute communication strategy, and we've received a number of comments along these lines. But we do have many BPO shareholders who are excited about the strategy, and BPO intends to go to work hard to satisfy the concerns of all other shareholders by explaining the facts and the merits of the transaction to those who are not yet fully on-side.

Dealing specifically with the valuation of the portfolio, as many of you know, we went through a lot of work, money, and risk over the last number of years assembling this Australian office portfolio. Second, we're selling at our externally appraised IFRS values, which are the values in our accounting books. No gain, no loss.

For the record, we would not sell these properties at this low a price to a company which was not 50% owned and that was not strategic to us. Furthermore, BPO has been diligencing these assets for over 12 months, and therefore has little acquisition risk which would normally come along with a transaction.

Lastly, we are selling a portfolio which would be close to impossible to buy in its entirety, and if possible, likely a significant control premium would be paid to buy them. We also believe that based on the escalating lease structures in these properties, and because we are selling them based on an average 9% discount rate and a mid-7 terminal cap rate, that BPO will earn 12% to 15% plus on their equity investment.

Furthermore, this should enable BPO to build a great business in Australia like they have done in Canada and the US. And for BAM's shareholders, should you wonder why we might do this with substantial upside in the portfolio in the future, the answer is that we believe in the strategy that BPO has outlined, and that in the longer term, we will benefit very substantially by virtue of our 50% ownership interest in BPO, as they internationalize the company over the next five years.

Turning now to general growth, the Company expects to emerge from bankruptcy in October of this year, and as most of you know, we will own approximately 30% of the Company upon emergence from bankruptcy. In the shareholder letter, and a number of these comments are in the shareholder letter, but as we see it, GGP has a great retail franchise, it's 175 shopping malls, a very significant percentage of retail space in the United States, and some of the shopping malls are among the very best. As with all companies, there are some that are underperforming, and some of those were disposed of within the bankruptcy process, and the balance, the Company is going to work hard to reestablish them into the retail market place.

As far as we see it, our goal for GGP over the next 10 years is to achieve really four things. First and foremost is to stabilize the operations and re-energize GGP as the finest operating platform for retail shopping malls in the US. Second is to dispose of non-core assets for value, as opportunities arise, when the retail markets recover. Third is to possibly introduce institutional clients into partial interest into assets in order to leverage the returns like we've done in the balance of our business.

And lastly, excess cash that's produced in the Company will be used to reduce debt levels, and the balance will be retained to continue to intensify and redevelop the great assets the Company has repurchased shares and expand the franchise internationally. This should enable the Company to earn very attractive returns in even a stable to moderate retail environment, but should the US market normalize over the next 10 years, we think returns should be much stronger.

We thought we'd deal with two specific issues on GGP, which a number of shareholders of ours and of GGP have asked, which, and we thought it worthwhile to address. The first is the leverage levels of GGP upon emergence, and the second is the free flow to shares in the market after it emerges from bankruptcy. Dealing firstly with leverage, we believe that the bankruptcy process has established an exceptional capital structure, providing the benefits of appropriate leverage but with substantially diminished risk that is typically associated with financial leverage. The first point that is very important to note is that the majority of the debt has been established as property specific debt, and it's without recourse to the parent company. That means that any debt issues at a particular property will not impact the company as a whole, and that's, I guess, a tenet of our financing strategy across our whole business.

Second, the debt has been -- of GGP has been extended, but the GGP will have the longest dated maturity profile of any of its peers within the industry. Third, the cost of the debt will average 5.4%, and it is readily serviceable by the 175 retail malls that will remain in GGP upon emergence. And finally, because this company generates substantial excess cash flow, the debt will be paid down over time from internal resources, and merely by virtue of this fact, we believe GGP will turn into an investment-grade company within two to three years, well before any material amounts of debt mature.

The most important part of the reorganization is that very seldom can one raise approximately $20 billion of debt on a very low risk basis and on favorable terms to a borrower. This results from the fact that our capital infusion is being used to prepay the majority of GGP's corporate indebtedness, and post- bankruptcy GGP will emerge, we believe, with a very strong and stable capital structure, one that will both protect the equity investment, but create excess returns as the company continues to recover and the market for retail properties improve.

Secondly, and with respect to the free float, there will be a substantial number of shares in the market place to be purchased at regular trading multiples of similar companies in the market. The total size of the company is around $15 billion, and the float in the range of $8 billion plus. Larger than most REITs in the United States. We believe this entity will become highly attractive for investors who wish exposure to retail shopping mall industry, and we think it will find a spot in the capital market portfolios of many investors.

Turning to our performance in assets, generally our performance of our investment funds has been strong in the first half of 2010. This has enabled us to continue to attract capital from clients for most of our strategies, and in particular, for direct infrastructure and real estate mandates. We've continued to add assets under management in the first six months, and we believe we are on the preferred list of a number of other mandates to continue to establish ourselves as one of the global managers of choice for property, power and infrastructure asset classes.

We closed approximately $500 million of new private capital raising into various funds during the quarter, including the final close of our discretionary real estate fund at $600 million, which we'll invest alongside our $5 billion plus real estate protocol program. In total, the first six months of 2010, we closed approximately $1 billion of third-party commitments from institutional investors in Europe, the Middle East, and North and South America.

Lastly, I'll make a couple of changes -- couple of comments just on Board changes that were announced today. The first change involves our infrastructure operations, and the most important point is that we've grown this business a lot over the number of years, and we continue to put more resources towards it, because we see a lot of opportunities coming.

And as we integrate the global operations and pursue expansion opportunities, we felt it was important to bring in some best-in-class people to help us, and we've established a global infrastructure advisory board to assist us doing this. Bob Harding, who has been the Chairman of Brookfield for many years, has agreed to spearhead this important effort. And in order to accommodate that, Frank McKenna, who served as our lead independent director for a number of years, was yesterday, by the Board, appointed Chairman, and we feel fortunate to have Frank as our new Chairman. He's had a distinguished career that has included serving as the Canadian Ambassador to the United States and the Premier of the Province of Nova Scotia in Canada, and we think Frank will be able to assist us in many ways.

With those comments, operator, we will turn the call back to you, and we'll take any questions.

Thank you, sir. (Operator Instructions) The first question today comes from Linda Ezergailis of TD Newcrest. Please go ahead.

Thank you, good morning. I appreciate all the great disclosure on your IFRS values, and I did notice that the biggest single driver of change in your IFRS values in the quarter for your power and properties assets was foreign exchange, so I'm wondering if you could give us an aggregated net sensitivity on your IFRS NAV to changes in the value of the US dollar to each of the Canadian, Australian, and Brazilian currencies?

Okay, so I think the best way, this is Brian, Linda, thanks for that comment on the disclosure, in terms of the -- our currency profile, the best way to think about it is that roughly half of our equity is US dollar, and the other half is split roughly a third, a third, a third between Brazil, Australia, and Canada. So, if you get a 10% move in each of those currencies, and recently they tend to have been somewhat correlated, then that should give you a sense of what the sensitivity ought to be.

Great. Thanks. And just another question, I guess this one more related to your IFRS process, not values, the US ten-year bond yield has come down about 100 basis points since year end, and is this offset in your mind by higher risk premiums, or do you not review your discount rates quarterly in your commercial properties business, or how might we think about those changes that have been quite significant in terms of risk-free yields intra-year?

Sure. So, the move in a metric like that, Linda, will tend to work its way into our valuations in varying degrees. There are certain of our asset classes that would have a very immediate reaction to that. So, particularly financial assets. When it comes to things like discount rates, that tends to work its way in more slowly, in a more gradual basis, so that we typically don't see a basis point for basis point shift. Now, what we would believe is that, that means as long-term low interest rate environment continues, that the valuations of our cash flows and our assets should appreciate substantially.

Linda, I would add to Brian's comments, and to say that appraisals are usually backward-looking, and the fact is, they often take a long time to change their view on where values end up. I don't think they've really, valuations, taken into account the fact that we're in this environment. And people are slow to bring discount rates down and Cap rates down. What we can tell you is an indication, we have been selling small properties out of opportunity funds and different things, and, if you have a very well leased property that has income off of it, it's incredible what you can sell it for today. Because people in a zero interest rate environment are looking to earn a 6% or 7% solid return, and that, eventually, is going to, we think, if we stay in this lower interest rate environment, it's going to bring the discount rates and the Cap rates down dramatically, which means the values of a lot of the assets we have are going up, and it will all be determined, whether, "you stay in a low interest rate environment or not," but if what you said comes about, I think that's what happens to the values of assets like these.

So you're the using more market rates for FX and more levelized management based discount rates for interest rate assumptions and discount rates.

That is correct.

Okay. Now, just more of a high-level question, the realignment of your commercial office properties like BPO is an interesting move, and, I'm just wondering, what other markets over the next five, ten years might BPO get involved with, could we see a move into South America, into continental Europe, Asia, maybe you can comment on what that -- how that might unfold?

It's Bruce, Linda, and I don't know. I guess what I would say is, the brand that Brookfield has is dealing with global corporations and high-end financial services type institutions. And where Brookfield properties can utilize those relationships to get a competitive advantage on their capital, and where we can operate effectively without risk of worrying about rule of law and different things like that, we'll generally go to, but we're in a number of places today and we're not generally looking to expand that, but over the next ten years it could include other markets than we're in today, I guess, but it would be based off of those two fundamentals.

Great, thank you.

The next question comes from Mark Rothschild, of Cannacord Genuity. Please go ahead.

Hi, good morning. Bruce, in your letter to shareholders on the first page, you talked about if the markets were improved and the share price wouldn't, you'd go back to executing some share repurchases. Can you maybe quantify or talk more about what prices you'd be comfortable buying and where you think the market would have to go for you to get more aggressive on that? Or to get started again on that?

I'd make the comment that we, just like with anyone buying shares in any company, we're the same with our stock repurchases, and we weigh it against, it's a capital allocation decision, we weigh it against other opportunities that are out there. You might look at us and suggest that, given where the discounts are in the market, that you should be repurchasing shares. Having said that, we're seeing incredible opportunities to add to the franchise today, and just believe that using the capital within -- for those opportunities is a very special time to be doing it. I guess our view would change if we didn't see those type of opportunities to put money to work within the business, and the share price still traded at a discount to its long-term value, we would make repurchases. And I think that's the way we look at it from a management perspective.

So, from the fact that you're saying that you're seeing incredible opportunities, would it be fair for us to assume that we'll see some significant acquisitions over the next six to 12 months?

Well, we have been making, as you know, over the last 18 months, and we continue to do as much as we can, and I hope some of the ones that we're looking at today come about, but who knows. I can't really say if we will or won't.

Okay. And in regard to Brazil, I understand you have to report your income differently now, I believe under IFRS, so, contracted sales, now are, I think, at $700 million or so. Can you talk about when we should expect this income to come in, and what type of profits would we be looking at on the sales that you already have in place?

So the issue, Mark, that you're pointing there, is that we don't recognize the profits until there is completion of the buildings. Before, we used to report on a percentage of completion basis, so things would -- so the returns would work their way in over the -- as the buildings were actually being -- the units were being constructed and delivered. So, depends on the length of time that it takes for that project to be actually constructed and delivered from the time of launch, so depending on whether you're talking about a launch or a contracted sale, that could be anywhere from, let's say, 18 months to three years. Three years would be well on the outside. And the margins is going to depend, to a certain degree, on what category of property that they are working on, and Bruce, maybe you can add some color on this in terms of the types of margins that they typically report.

I guess I'd -- the comment I would make is, what is, for everyone's benefit is, essentially what it's done is, it's backed off sales and net income in short-term, and gives you a better higher growth rate in the future, within that business, and the margins depend on whether it's in -- which city it's in, and then whether we're building office or residential, and it varies in all the different categories.

Okay. And lastly, you spoke about merging the (inaudible) division that's in Brookfield Properties with, potentially with Brookfield Homes, and you spoke about a master plan community business. General growth has a large master plan community business. How closely are you going to be working with general growth on that, and does it make sense at any point to combine those operations?

Firstly, just for everyone's benefit, the master planned community business that's in general growth is being spun off into what's going to be called general growth -- I'm not sure what the name is, [Newco], or Spinoff Co, which was called General Growth Opportunities when we named it, so it will be the spinoff company so it will own development assets and the master planned community business. There will be a board set up by that company, I think we'll own approximately 12% of the company. Clearly there will be a board and a strategy put in place for that company, and it won't include anything related to our business, but we will have a relationship with it, and should a transaction in the future make sense, we might talk to them about something, but there's firstly, no intention to do anything today. And there may not be in the future, we'll have to see.

Okay, great. Thanks a lot.

The next question comes from Alex Avery of CIBC World Markets. Please go ahead.

Thank you. Just on all of the transactions and announcements that you've made recently, just to take it back to a little bit more theoretical or strategic perspective, can you just talk about how you look at where you draw the lines down your different businesses, so that we can get an understanding of how you want to see the company evolve in the future, global office platform, does that go -- would that strategy be the same for residential, perhaps merging homes with your Australian housing operations and renewable energy with the Canadian subsidiary?

That's a good question, and we always try to be very clear with our strategies, although sometimes it doesn't make sense to mix categories and things like that, so, I would say the office building business, we believe can -- and Ric's convinced us -- he believes we can take significant advantage of the relationships we have within BPO to expand in Gateway Premier office markets. I think, on the residential side, it's a development business, it's very localized. We have an excellent business in North America, and I'm not sure there's much -- too much sense to putting other jurisdictions into it, so we probably won't do that.

On general growth, which will be our retail business, we'll be involved in. They're in Brazil today and it's probable that they could utilize their franchise like Westfield has to continue to internationalize the business over time. And whether that happens or not, we'll have to see in the longer-term. And then our last, or fourth, area that we're in -- real estate is our opportunistic business, and it really is just a global opportunistic business, so we invest everywhere and it's private, and it's run with institutional and our money. So, I guess those are the four areas, and where it makes sense, we'll continue to try to help our companies internationalize themselves and have access to our global relationships and capital to be able to expand if they want to expand, and that's really what we view our -- we can bring to the table to assist them with.

Okay. Just on the Fairfield, is there a distinct line between that type of a business in Brookfield homes and the development business in your minds?

I knew you were going to ask that. The bottom line, it's a very separate business. Our homebuilding and master plan business is the development business of residential lots, let's call it, for single-family home building. Fairfield is an apartment developer, and it's an institutional asset class that many institutions are interested in, and we believe that we can utilize that platform to very profitably produce multi-family apartments for institutional clients. And so, that's a separate business line that fits beside, but related to but beside our master plan residential business.

Okay. And then, just lastly, on the renewable power with the largely Canadian assets held in the renewable power fund, but certainly lots of assets in other geographies, is that -- are you long-term satisfied with the structure of that business, or is that something that we could see evolve along the same lines as Brookfield Office Properties?

I wouldn't say -- I guess I'm not sure, we have no intention of doing anything today, we certainly should do one of these things at once and get it over with and make sure, and we'll learn from the experience, is basically what we're going to do. But if a number of those shareholders thought that that's where the opportunities were, I guess over time we could think of it, but we have no intention of doing anything today.

That's very helpful, thank you.

The next question comes from Brendan Maiorana, of Wells Fargo. Please go ahead.

Thanks. Good morning. Bruce, I just wanted to follow up on your comments about the Australian office transaction and, I guess if I maybe just sort of paraphrase your comments, it seems like, from the BAM level, you guys are maybe leaving a little bit of money on the table to give to in terms of what you're selling it for to BPO versus selling it to a third party, because you think the opportunity set and the value creation at BPO will, over time, more than offset what you're giving up, but is the opportunity set for BPO something that would not -- you wouldn't be able to create that value under the BAM flag? I guess, maybe that's just the first part of the question.

I'd answer that by saying that we're selling at IFRS values, there's no premiums for the type of portfolio we're selling, and that's really what my comments were, and we believe that we're able to do that, or we're happy in doing that because we own a big interest in the company. And so, I guess that's the first comment to it.

And whether we could achieve, I think what you're getting at, Brendan, is could we achieve, it's Brian, some of the same benefits with respect to leasing relationships by BAM and BPO working together on those sorts of -- with those relationships, and I guess in theory, you should be able to, in some ways, but I think the reality of it is that those types of opportunities are better capitalized on in this type of business, we think if it's within the same organization. And also, one of the things, too, is we do believe that this will create a truly special company with a security that should trade extremely well given the global profile of it.

Okay that's helpful. I guess, maybe to put it simply, is kind of the way I'm thinking about it, is from your perspective, from both of your perspectives, is this transaction something where BAM is doing this because, in part it creates a lot of value for all the organizations over time, but part of it -- is part of it driven by being a good corporate sponsor relative to the opportunity set of selling it to a third party, or do you think that this transaction in itself creates the most value for all of the parties over the long term?

When Ric approached us about this transaction and wanted to -- his vision is that we can create a global office company using the relationships of BPO, we were happy to do it. Whether we can get a better price or a lower price or a higher price, no one knows, because we're not going to try doing it, and we think that all shareholders over the longer term are going to benefit from doing this, and we're going to have a big upside in it, because we get 50% of it back, and we can take the money and invest it somewhere else and make a good return. So, we're pleased to do it, and we think it will create something very special five to ten years from now. And it's similar to what Westfield has been doing in the retail business, and we believe that that security will be a very different security than a lot of others in the marketplace from now, and we'll benefit from that.

Sure. Okay, that's helpful. And then, Bruce, as you're growing this asset management side of the business, you've got a lot of capital that -- right now you've got a lot of capital -- third party capital yet be deployed, and you seem to be getting a lot of new commitments. So, does it become more challenging for BAM to allocate capital to the various strategies for all the funds that you've raised? As I think about, it BAM has been a good allocator of capital between its asset classes and has done that pretty astutely over time. Does that aspect of it become more challenging because you've got investment partners and you've got a little bit of pressure to put capital out into all the different strategies?

Thank you for saying that we've astutely allocated our capital. Some days we think that and sometimes we don't. The comment I would make is that we do have significant capital of our own put to work and, of our institutional clients, our promise to them is that we'll only put their money into transactions that make sense and make them a lot of money over the longer term. It's often -- it's possible that we will make some mistakes, or, I'm sure we'll make some along the way, but, I guess, our promise is that we put a lot of money beside them and, as a result of that, should we not think it's a good environment to do it, we won't do it. And that's a very -- we believe -- an important point within the structure. So, if the question was more towards, are we going to be able to put our money to work, I think the answer is yes, and I don't think our asset management model impinges upon that ability, I guess.

So, you don't view that the long-term of your own capital in putting it to work in all of these various strategies, you don't think that the long-term just on BAM's capital return profile is reduced by maybe less of an ability to allocate capital to different asset classes over a long time period?

No, in fact, I think it's enhanced. And our belief today is that we have a very strategic advantage in size of transaction that we can do, and that's partly because we're a large company, but we augment that with substantial resources from institutional clients. And that allows us to do things which very few other people can do, and to do a number of things, which other people maybe couldn't do. And because of that, we think we will get outsized returns versus what we do with our own money. I guess we'll see over time whether that's true, but that's what we believe today.

Okay, that's helpful. And then just lastly for Brian, the unrecognized value now in your IFRS NAV is around $3 billion. That's up fairly significantly from Q1, but it's a value, as outsiders, I suppose it's difficult for us to evaluate where that's coming from. Over what time frame do you think that $3 billion works its way into the cash flows of your operations or something that we might be able to recognize in a more tangible way?

Sure, thanks for that, Brendan. It will depend very much on what is really contributing that additional value and will drive the timeframe in which it gets recognized. So, maybe just stepping back for a second, one of the things we love about IFRS is that it does enable us to put a more current value on, let's say, 80% of our assets. So, if we have $22 billion of invested capital, the vast majority of that gets appraised regularly and those values get recognized. There are, though, still some asset classes under IFRS that are carried at book value or they're not recognized at all, and so that's where this $3 billion comes up, that's really, I'll say, in addition to the $22 billion. And we've tried to highlight, in greater detail, the sources of this additional value, and we'll continue to refine that as we go forward, but I can give you a couple of examples, let's say. So, for example, if we are developing one of these wind projects. So as you go through the development process, very little of that -- that gets carried just at your historical cost, but then once it's all contracted, built, and operational, then it gets carried at appraised value, and so -- and will get fully recognized in our IFRS numbers. So, something like that, you should see work its way into the numbers over anywhere from a 12 to 18 month period of time.

Similarly, we may have situations where we have industrial businesses that, again, they get carried at book values, sometimes very low book values because we've acquire them through some form of restructuring, but that security trades in the market at a higher value, and so we will look at that market price in the stock market at assessing what our value is. So, for example, Norbord is a case in point where we would've had some of the unrecognized value would've represented the difference between the stock market price of Norbord and our book value, we monetize some of our Norbord position in the first quarter, that would've brought back gain and the full value of those proceeds into our books, so it would've come into our IFRS numbers, and we would've taken it out of these -- what we call the unrecognized values. So it will tend to work like that. There are going to be certain other areas, though, where that difference may persist over a period of time, because those are longer-term assets that are simply carried at book value under IFRS. So it'll be a bit of a mix, but most of it you should see work its way into IFRS over the short- to medium-term.

That's helpful. Maybe just a quick follow-up. Is, say, for instance, the wind project and ones similar to that, do you feel like the amount of capital invested in those projects today is higher than where it has been on a historical basis for BAM?

In wind projects--?

Or, just in projects that are building the business, but where you're not generating a current cash flow off of them.

It's probably not dissimilar to where it's been over the past period of time, but I'm just thinking about -- that's a pretty quick answer to your question. We do have a number of development projects underway. The bottom line, we have a lot of assets which don't produce a lot of current cash on the belief that they're getting built out, or, we're buying vacant office buildings, which will end up with lots of cash flow three years from now but have none today. So, it's probably more than it has been, but it's not that much more. And the only other thing I'd add, maybe just on the IFRS numbers, if we do our jobs right, and keep building the business, then these unrecognized amounts should -- some will come into our IFRS numbers, but others will be replaced, because we'll be creating new asset value on these projects as they get developed. And that process should occur and, while some will transfer out, you should be able to transfer more value in, and it'll be uneven, but it should occur like that over time.

Sure. That's helpful, thank you.

The next question from Michael Goldberg, of Desjardins Securities.

My question, Bruce, first I just want to acknowledge that I really appreciate your letter to shareholders, where you focus on what's really going on in your business and talk about strategy, rather than just talking about this number going up X% and that number going down Y%. I wish other companies would do the same thing. So, turning to my question, first of all, what was the increase in new leases replacing expiring leases in the rental rates?

Michael, it's Brian. I'm trying to remember that offhand. We had about 1.3 million square feet in the last quarter. It was probably somewhat in line with, in that case, with the leases that were in place. I think we had a bigger uplift in the first quarter. That very much depends on which markets we're dealing with, though, and it does tend to be a little bit lumpy. I think, one of the points that we always look to is what is the growth overall in the same-store rents.

Okay, well maybe you or (inaudible) can get back to me after.

We'll do that, Michael.

I think there's more visibility on that, specifically in the BPO, on the materials, for example, for North America.

We can get you the numbers though.

Thanks. Second, do you still see refinancing requirements in commercial mortgage-backed securities market as the biggest opportunity to acquire distressed assets for BAM? And, if so, can you quantify the size of refinancings over time that you look at? What have you done in advance of distress putting assets into play, and what gives you confidence that you'll get a significant share of these opportunities?

Okay, I didn't start writing down all the questions, so maybe I should have, Michael, but I'll try to answer them and then if I missed one, you can tell me. Because I think you had four parts to that.

I'll try to answer it this way -- our view of commercial real estate today is that well-leased properties, which have cash flows that are stable and long-term in nature, are highly attractive to investors and they're being bid for at good prices. Therefore, we're generally selling or trying to monetize some assets like that. On the other hand, there's a lot of properties that are in the market that people put 80% financing on at a time when values traded at 120% of the value, or the invalue today, and therefore, they're underwater, and they don't have equity to put into them, and that will result in the number of opportunities over time. It has resulted in it, and it will continue to.

We don't believe that there's an "issue" with -- massive issues with maturities of commercial mortgages coming. We think they're getting dealt with everyday judiciously by borrowers, and sometimes the borrower ends up with property, and sometimes he doesn't. And, it's not really relevant who owns the property, but they are getting purchased and they are getting refinanced. And over time, many of those issues are getting dealt with by borrowers extending out the loans by putting some equity in, or they're actually just refinancing property. So we don't think there's major issues coming, in the "market," but that it doesn't stop there being many borrowers who don't have the money to come up with it, and that's where the opportunities are. There has been a number of portfolios that we've been involved in, which you know about, and we think there are others in the future. We own some securities to position us in the capital structures of some of those, and we'll continue to look at others where we see opportunity. I don't know if it answered all the questions but hopefully that answered some of them.

I think it does. Thanks again.

And, Michael, thank you for your comments on the disclosures.

Next question comes from Andrew Kuske, of Credit Suisse. Please go ahead.

Thank you, good morning. I guess this question is for Bruce. You've had greater success in your fundraising initiatives in, really the last few quarters, and probably the last 12 months. You obviously have changed a few people, about 12 to 24 months ago you brought on some new people, but can you give us a bit of color on what's really changed with the fundraising? Has your strategy changed, your marketing plan, is it the fee structures? Just a bit more color on that would be appreciated.

I would say the following, we're -- probably the biggest change that's happened had nothing to do with us. We believe that there's been just a structural change in the market, where there was many managers out there chasing after capital. Our story didn't exactly tell as good before as it tells today. And the story of many others before was that they were going to earn 30% return, and we only promised -- we promised lower returns on a consistent basis and ensure that we protect capital, and that's always been our story. And that story tells a lot better today than it did 36 months ago.

Second, I would say that, in this environment, people who lived through the last three years and didn't get into much trouble, the story tells a lot better to institutional clients than it did before. And therefore, the differentiation we have is really threefold. It's one, we are still here with substantial capital, and we have a business that's operating and up and running. Two, we can look back, when we explain our track record, and didn't make that many mistakes. And three, there aren't that many others competing against us, because a lot of them aren't there today. And I'd say that's probably the biggest differentiation than 36 months ago. On top of that, we have another three years under our belt dealing with institutional clients, and that's positive too, we have some exceptional people working for us, and they've been able to reengage the relationships and take us to another level that we weren't at before, and that's a very positive thing. And I think it's just, time is -- I said it, I think, before -- is that everyone expects you to create something overnight. It just takes time, and business is tough, and we keep working at it, and I think it gets better every day.

Yes, that's very helpful. And I just have another question on a different track for Brian. Just, in the supplemental disclosures on page eight, in the Australasian net invested capital for properties, is listed at roughly $1.1 billion. Post the BPO transaction, what do you anticipate your invested capital being in Australasian properties?

Okay. So, I think perhaps the way to think about that is where the assets -- Okay. Let me address that from two areas. One angle of your question may be, in terms of the properties that are being sold between us and Brookfield properties, really that's dealing with the assets and liabilities that are within the Australasia section of our office properties, but then there's also the one asset that's in our development properties. In terms of our disclosures, Andrew, those numbers will continue to be consolidated onto our books. The only difference is we'll have a half interest in it. So, if you think about it, given the transaction side, it's roughly half of that transaction will become a minority interest on our books. So, that's the way I would think about it.

Okay, that's helpful. Thank you.

Thank you.

The next question comes from John Harris of Goodman and Company.

Hello. Bruce, the one thing that didn't come across with a good answer on the BPO call that I'm wondering about, if you're making a global office company, how come you're not including the Canary Wharf assets abundant at this point?

We just thought we should deal with things in successive order, and if the shareholders of BPO wanted to do that in the future, they could talk to us or the management and the Board could talk to us about it. We obviously put too many things all at once at the BPO shareholders, and we maybe should've done it a little slower in fashion. Probably if we threw Canary Wharf in there at the time, it would have even confused people more, so, your answer -- your question is very good, and we would be open to that discussion in the future, but there's no -- there have been no discussions at this point.

Okay thanks.

You're welcome.

That concludes time allotted for questions. I will now hand the conference back for any closing comments.

Thank you, everyone, for joining the call, and if there is anything specifically that you would like to address with anyone of management, please e-mail or call us. Otherwise, we look forward to communicating with you next quarter at the same time after our shareholder information release. Thank you very much.

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