BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2011 Q1 法說會逐字稿

Hello, this is the Chorus Call conference operator. Welcome to the Brookfield Asset Management 2011 First-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 the conference over to Katherine Vyse, Senior Vice President Investor Relations for Brookfield Asset Management. Please go ahead.

Good afternoon, ladies and gentlemen. Thank you for joining us for our first-quarter conference call. On the call with me today are Bruce Flatt, our CEO; Brian Lawson, our Chief Financial Officer; and Derek Gorgi, VP Finance.

At the end of the comments, we will turn the call over to the operator to open it up for questions. But in order to accommodate all who want to ask questions, can we ask that you limit any questions to 1 or 2? We'll be happy to follow up with anyone after the conference call for additional questions, or you may feel free to rejoin the queue.

I would like, at this time, to remind you in responding to questions about our initiatives and 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. Thank you.

I'd like to now turn the call over to Bruce.

Thanks, Katherine, and good afternoon to everybody. We put our shareholder letter out today, and we had an annual meeting this morning, which is available or was available by webcast and is available on our website should anybody want to hear the full presentations by Brian Lawson and myself. So based on that, we thought that we wouldn't go through all of those materials again, and I'd just cover a couple items and then we'd take questions. But that information is all available to everyone.

Just starting off, I'd say that generally, and we tried to say this in our letter, but maybe I'll give a few more details, is that we generally see that all of our businesses, or virtually all of our businesses, are recovering at the grassroots level. And that spans from office leasing being up significantly on the transaction basis, plus rents in some markets; retail sales in our shopping malls being better; expansions by customers of ours globally in infrastructure; many of the markets recovering from either if they were hit hard in the recession, starting to recover, or if they didn't, continuing to become stronger.

Global shipping numbers are up, Brazil is strong, Australia is strong, Canada is very good, and the developed markets, US and Europe, I'd say are slowly getting better in virtually all the businesses. So our view fundamentally is that the economies are recovering, and most of our businesses are acting consistent with that.

With that, I'd say we're operating in a good environment for us as a business. Momentum is pretty positive, and the only issue out there is all these macroeconomic issues that we have no control over, and they seem to be, for our businesses, a lot of noise but not that fundamentally affecting the business yet, if ever. As you know, we completed a number of major initiatives over the last year to expand our business, both on the relationship side and adding assets into the business and people. We continue to market a number of funds, and have launched a number this year, and will raise them through 2011 and 2012.

We've streamlined our operations with a number of transactions, the most recent being the office simplification where Brookfield office properties will be solely office properties, and on the residential side where we have a North American business and a Brazilian business, solely dedicated to residential land development. Our client relationships continue to grow, and I think our reputation is getting better in the business, and we continue to strive towards a goal of being the leading asset manager for infrastructure and other real assets.

On the liquidity front, we have significant liquidity, both provided by clients and on our balance sheet, and we generate $4 billion of cash flow a year within the business to redeploy in organic opportunities. And we continue to do that, as well as look at acquisitions on a larger basis, which usually come in distressed situations, which for us mostly are focused on real estate in the United States as things come out of workout situations through banks and others which are starting to free up more and more. And in Europe, more on the infrastructure side where we're seeing distress in Spain and Portugal, producing opportunities. We have a number of things going on, which we tried to describe some of them in our shareholder letter, on organic growth and we continue to just expand each of the businesses we have.

Summed up, I would say or we would say that we're very positive about the future, and we are excited to move forward. There's a lot more than that, that we said in our annual meeting today, and just so we don't regurgitate it twice, we'd be happy to turn it back to the operator. And if there are any questions for Brian or for us or anything that was at the annual meeting, for those who listened to it, we'd be pleased to answer anything.

(Operator Instructions) Bert Powell, BMO Capital Markets.

Thanks, Bruce. Today at your AGM you said fundraising's easier than it was 5 years ago and you're at an inflection point. I'm just wondering, you're out with $4 billion in the market, would you raise more if you could? And do you have places to put it to work or is that a pace that you're comfortable with at this point?

I would say that, generally, the size of the funds that we have are sized to what we believe we can raise in the markets and prudently put to work. Having said that, I think at this point in time, if we had more capital, we probably could put more capital to work. We're seeing an enormous number of opportunities around the world. They may not be at some of the same distress levels that you might have seen in 2008, but there's much more transacting in the marketplace today than there was in 2008. It's because of 2 things -- the first 1 is that there are a lot of equity owners that did not have any equity before and now they do, so that there's something they're going to lose by not transacting, so they're cutting deals with people to work out their situation. And secondly, loans are starting to come due that had 5 years on them and therefore, lenders are starting to act to deal with their situations. So I'd say there are a number of situations going forward. Although, in addition to what we raise in our different funds, and I think the $4 billion you're speaking of is our real estate opportunity fund, and we have -- usually the institutions have co-investment rights, so we have substantial monies beside them which they enjoy having co-investment rights with us. So, we have co-investment rights, obviously, as the largest investor, but also many of our pension funds want to put further capital into transactions.

Okay. So, the $4 billion, at some level, is a bit of the tip of the iceberg?

Correct.

Perfect. Thank you.

You're welcome.

Mark Rothschild, Canaccord Genuity.

You guys are increasing your exposure to the US housing market, obviously, through the rights offering with BRP. And you have exposure through other ways, such as Brookfield homes with the timber business and the retail business has some overlap as far as improving fundamentals. Bruce, you've been saying for a little while that the US housing market has bottomed. Maybe you can update us with your views on the US housing market?

That's a good question and I would say the following -- we've said for a while the US housing market has bottomed, and I think it's bottoming and it's bottomed. It hasn't moved much off. But that's a general statement and I would make the following differentiation on a general statement -- many of the markets in the United States have not bottomed and some are still going down. Those are second home markets, and in fact, some markets that were overbuilt and possibly built to the extent where they shouldn't have been and those markets are still going down and some of them may still go down more. Many the of the markets, which are very good places to invest and that people want to be, actually housing has started to recover and has been increasing. So, it's, like usual, a tale of two cities and the averages don'ts really tell what's going on in the whole story.

For example, New York City rents are up significantly, apartment rents across the US are generally going up. In New York City, condominium prices are probably up 25% in the last year across the board. So I'd say there are differentiations in the markets, although we haven't seen a broad increase in single-family housing. A lot of that's just the fact we're working through inventories. But the only last comment I'd make is there is going to be a point in time where people will make a lot of money in residential, single-family land and real estate because the United States needs 1.5 million homes to replace inventory and to facilitate growth. Right now we're eating up inventory that was built before, but eventually you're going to need more and we're only building 300,000 to 400,000 homes today a year and that can't last forever and it's probably lasted longer than we thought. But at some point in time, here, it is going to change a lot and there will be a lot of money made in the business. I can't say when that will be. It's maybe years, but certainly we're not going down much from here.

Great. Thanks for the detail.

You're welcome.

Mario Saric, Scotia.

Bruce, you made a comment during the AGM this morning that I found pretty interesting, speaking specifically on your infrastructure platform. You mentioned that it could be the biggest business within BAM, within 10 years versus where it is today. So, 2 parts to the question -- first, what critical factors, whether they be external or internal, do you think need to transpire in order for BAM to achieve that goal? And then, secondly, does the goal eventually imply longer term capital reallocation at a property or power?

I think the question is really -- I think I heard the first part, although it was kind of unclear, but basically it's related to infrastructure and that I said this morning on the annual meeting that it could be the largest business we have. I'd say the following -- there's 2 fundamental things on the -- that favor finding more investments. The first 1 is the fact that there is a lot of product that we believe, both because private enterprise continues to take infrastructure assets off their balance sheet, but maybe even more importantly, governments are over-indebted. Therefore, just like corporations did do before when they were over-indebted, they are shedding assets to get their debts down. What that means is what governments shed is infrastructure-type assets, and therefore, we think that they ramp up in infrastructure privatizations across the globe because of, I'll call it the macroeconomic conditions of the world and the debt situations, has only started and is going to be getting better. So I'd say the backdrop is that there is substantial amounts of product to come to market.

Secondly, we think that, compared to many other areas that we invest in, and I'll just refer to real estate or private equity, there are a substantial number of players that we compete with, and it's not that there aren't people or not people that we do not compete with in infrastructure, but there are fewer of them and less -- there are a smaller number that actually have the historical background and operating presence that we have. So, we think we have a competitive advantage in that firstly, to deploy capital properly and secondly, to look after the assets and third, to be a good counter-party to governments and other institutions that want their assets privatized. So, we think we're a good home for those assets and there aren't that many people. The third thing that assists us is we have been in the business for a long time. We started raising capital 5 or 7 years ago. We didn't raise a lot prior to the market collapse, and we did raise a lot during the market collapse.

Those acquisitions we've done have been very positive for both our listed infrastructure entity called Brookfield Infrastructure Partners, and for our unlisted entity which is a private fund. We think those 2 entities will be successful and they'll give us the scale to raise a continue-to-grow Brookfield Infrastructure and secondly, once the fund we have today is invested, we'll raise a larger and bigger fund. I'd say we're set up to grow the business with the right forms of capital to maximize the value for our franchise. Secondly, we just think there is a big backdrop out there of privatizations that occur over the next 10 years. It's possible that we can grow this business to be as big or bigger than our real estate business.

Okay. The second part to the question was would the goal essentially imply longer-term capital reallocation out of property or power in order to achieve that goal or could you get there without reallocating capital?

The answer, I would say and maybe Brian could add to this, but generally, we think of -- we want to earn a decent return on all of the capital we have deployed and we reallocate capital when the returns are in the best places. If the returns are better in infrastructure than they are in property or we can't find anything to do in property, the answer is yes, we will be reallocating capital from property into infrastructure. That's not to say we will, but it's possible if that's where the returns are. The fact is, we put a lot more money into real estate over the last 36 months just because of the distress and probably 5 years ago, we wouldn't have said that's where our money would have been heading. It all depends on the opportunities we find and what the returns are.

Linda Ezergailis, TD Newcrest.

Thank you. This is a question for Bruce. I was wondering if you could perhaps expand on a comment you made in your letter where you mention you're planning to expand your listed strategies with a specific focus on infrastructure? I'm not sure where that might be geographically or what type of infrastructure and how might BIP fit into all of this?

I'm trying to think of what -- just so I'm clear with what we said, but maybe I'll try to answer your question and if I don't answer it specifically, you can follow up. We established Brookfield Infrastructure Partners as our main listed entity to participate in the infrastructure business. We think that we have been successful in growing that vehicle over the last 36 months, and today we view it as our main listed entity to grow in the infrastructure area and we have no intention of having any other listed entity which would be in there. I think what you -- just to be clear, what we have is in the -- in our public securities group, we have many listed strategies where we manage infrastructure assets for institutional clients, so these are like managing REIT securities for institutional clients. I think the reference in the letter actually was to managing listed securities for our infrastructure clients as opposed to 1 of our listed entities. I think that was just probably poor wording on our behalf when we wrote the letter.

No, it was probably too fast reading on my part. Thank you for the clarification. Maybe I'll ask a real question now. You've been quite successful in your fundraising and I'm wondering if perhaps you can comment on where the new money is coming from? Is it coming from your existing customers committing more or new customers in new geographies and shifting investor types?

Thank you for that. I would answer by saying that firstly, we love all money from all customers, whether they're old or new. Specifically, I would say it's both expanding the relationships we have with current clients and adding new clients into the business. We have probably, in the last major fund we raised, probably half the clients were new clients and the other ones were clients we've dealt with before and they were re-upping into new funds with us. So I think it's a healthy balance of both introducing new institutional sovereign wealth clients and satisfying the ones we have. We certainly haven't exhausted the clients we don't deal with, but we have some fantastic ones today that we continue to try to service and assist in what they want to do.

Great. Thank you.

You're welcome.

Brendan Maiorana, Wells Fargo Securities.

I had a question about a comment that was in the letter, I think it was in the supplemental also, with respect to securing new long-term contracts at attractive pricing on the renewable power side. Can you give us a sense of where that pricing is likely to be, rough numbers? And how pricing is attractive, given that natural gas prices remain pretty low and the natural gas tends to drive those markets? And your outlook on pricing relative to, I think where you guys were a couple years ago, which was maybe $80 to $90 long-term pricing outlook?

Yes. Brendan, it is Brian. Given that a number of these are under negotiation, I would probably get whacked pretty heavily by some of our folks involved in that process if I got too specific on pricing. What I would say is that we have observed with some of the contracts we've signed over the past little while and what we are seeing is that there is a significant premium or benefit or attractiveness to renewable sources of power, some of that is driven by specific government mandates. We are in the position of being able to provide that kind of power, so that's really what we're focusing on. I think I'd best leave it that we are in a position of getting a good premium to what you might otherwise see in the market for more traditional, less non-renewable forms of energy. Even if you just looked at the Ontario market, there was a good $30 or $40 plus premium being paid for things such as wind energy, for example, that at least we have been doing very good contracts in that regard, and that and the hydro gets some of the benefit of that as well.

I would just add to that saying that if you look at renewable pricing across America, it is anywhere between $90 and $140. Gas prices are low, on the spot pricing clearly changes the numbers on part of the business if you are competing against other quantities of power being sold at that pricing. But more and more, the renewable market is disengaging from the balance of the power market and the prices are being set for renewable power as differentiated from other forms of power.

That's helpful. Is it fair to say that you guys haven't lowered the floor in terms of the pricing that you expect to get over the next little while?

That is correct.

Okay. Great. Thank you.

Alex Avery, CIBC.

With the recent currency movements, the effect of currency on the equity value of BAM is certainly a topic of investor interest. In your letter to shareholders, you noted that about 50% of your assets are held in Australia, Canada and in Brazil. Didn't really see much of an impact in terms of the fair value that you reported. Can you just give us a little bit of an idea about how you think about the sensitivity of the equity value in your business to perhaps a basket of currencies including Australia, Canada and the real?

Sure, Alex. It's Brian, here. I'll start off on this one. In start, a lot of the move relative to year-end actually occurred post March 31. We were actually scratching our heads a little bit at that ourselves, but when you actually think about when the big moves occurred with the Aussie currency, for example, a lot of that relative to December 31 did happen subsequent. The numbers still hold that what we've communicated to you and so all things being equal, we should get a benefit of that proportion of our equity base going through -- resulting in an increase in our fair values in the IFRS statements and otherwise. We do put contracts on with respect to some of that, but it's generally been pretty small amount of hedges that we've had on and we'll obviously monitor that pretty carefully as we go forward. In terms of the more muted move during the quarter relative to where people see the currencies, that's largely a factor of the big run happen after the quarter end.

Okay. Because the way we were thinking about it was actually that there would be a little bit more than -- for a 10% move in that basket, you might see a little bit more than a 5% move in equity just based on corporate borrowings. Is that the wrong way to look at it?

Based on corporate borrowings?

In the specific -- in those markets, you would have local currency debt that would be something of a hedge to the asset value, but you've also got corporate borrowings in US dollars?

Yes, that's right. That would amplify it a little bit, but a number of our corporate borrowings are also in the Canadian dollar as well as would be some of our preferred share financings.

Okay. That's great. Thank you.

Andrew Kuske, Credit Suisse.

I guess my question's for Bruce. When you look across the world, as far as real estate goes, what asset classes are most interesting to you at this point in time from a regional basis? From an opportunity standpoint and also from a valuation standpoint for things that look attractive and would we see BAM look to expand into a new business line? As you significantly bulked up your retail exposure with GGP, could we expect something similar in the future in the industrial space or the hospitality sector, for example?

I'll answer the last 2 points first and then maybe I'll just comment generally. As to industrial space, we've looked at it many times and it's a good business, and if we find the right opportunity, we will invest in it. We have small amounts of industrial today, nothing major, but we could possibly end up with a large industrial business. As to hospitality, generally we've been an owner of a few assets at the bottom of the market, generally when we foreclosed on them, and worked them out. But we're not a believer in owning hospitality assets over the longer duration as, I'll call it, hold assets in a long-term portfolio. From time to time, there are traders, quote-unquote, but we don't believe that they fit a long-term portfolio like a retail multi-family or office product would.

As to opportunities, and I said a little bit about this before, but I'll expand, there are a lot of opportunities coming into the market. Some of them are more complicated situations where they're corporate borrowers, people need workouts, and we think there's going to be a bunch of those. They're in many different asset classes and in the United States, in particular where a lot of these situations are, we have the capabilities to buy virtually any type of real estate that's out there, so it could be in every asset class. In Europe, there's less of that distress because there was less structured paper in Europe. Secondly, our platform is not as broad and therefore, we're not as set up but there may be some corporate situations where we can be helpful to constituents. I'd say that's the two areas of focus for us, and it just depends on the market and the opportunity.

Is it fair to say that some of the CMB assets coming due in the next -- towards the latter portion of this year and into 2012 in the US market really that should be the focus of some of your opportunities or potential opportunities?

Yes. It is not CMBS per se, and just to differentiate so we all are talking about the same terms, CMBS paper is normally structured paper which is, you'd buy a tranche of paper and there's many mortgages on the other side. What our focus has been on is owning pieces of mortgages on properties where we can see our way through to foreclosure on a specific asset or pool of assets. Therefore, we're in the midst of possibly working through a recapitalization of a large portfolio of assets that were in a fund before we bought junior debt on a property which we then worked with the equity owner to recapitalize that office property. It's more situations like that as opposed to many people, and they've made money in it, and we just don't do it, buying structured paper where you can see the CMBS paper float to another price and then you can sell or hold it for a return on the capital as opposed to foreclosing on the asset. We buy CMBS paper for clients, but not really for our own account.

That's very helpful. Thank you.

You're welcome.

Michael Goldberg, Desjardins Securities.

I saw the long-term financings that were done by BIP on some Australian assets swapped into Australian dollars from US dollars, and the rates seemed quite high, but is this still the only way to get long-term Australian dollar financing? Is this why you use a higher cap rate for valuation of Australian assets? Is there any change in the prospect for development of less expensive long-term Australian dollar financing?

Hi, Michael. It's Brian. Thanks. Yes, so I think the answer to the first number of your questions was probably yes, yes and yes. So to elaborate on that, and by way of background for other folks on the call, what we did in refinancing our Australian coal terminal was that in order to tap a deeper investor base, we actually funded long-term, I think it was an average term of 13 or 14 years, into the US market. The rate in the US was actually -- would seem very attractive from a US context, sort of high fives. But when you go and swap that back into the Australian currency, if you look at the yield curve in Australia, it's generally a couple hundred basis points back of the US yield curve, if not a little bit more, and that is just reflective of the higher growth rates in Australia and that works its way into the yield curve there. So, yes, it looks a lot more expensive relative to a US financing.

Having said that, you get a much higher return on the asset as well, and it's all basically relative. The latter part of your question, and what are we trying to do about that, well, certainly one of the things that we did do was structure the financing this way. And we've been spending a lot of time working with the investment community in North America, for example, exposing and educating on some of the financing opportunities we have in Australia and Brazil and elsewhere around the world. Obviously it's an area -- an opportunity for folks to invest in those growing economies, which we think is attractive. Secondly, we will continue the missionary work of trying to develop longer term pools of capital within the Australian market as well, and we believe we will ultimately have success in that regard.

And, Michael, I might just add one other piece of information. It's possible in circumstances we could or would fund that type of product and just leave it that type of loan and just leave it in US dollars at the 5% rate. That one specifically had security, the asset is secured by the financing and therefore needs to be in Australian dollars so it matches the financings. So that wasn't possible to do it in that case because the lenders don't want to take a mismatch on the currency. So, it wasn't possible there, but in the future we could look at that and it is all -- part of it's just dependent on what your view of the currency is at the time.

Okay. Can I ask one other one? You talked about three initiatives under way in GGP, upgrading the leasing profile, rationalizing the portfolio, and refinancing, and I just want to blue sky a little bit. If GGP was successful in all of these objectives, how much could its FFO contribution increase by? What cap rate would you plan to use now on valuing GGP if you were going to do it that way? How much could that come down over time? Taking the combination of the three initiatives and lower cap rate ultimately, how much could it increase the value of your investment in GGP?

Okay, Michael. Maybe I shouldn't have let you ask another question. Here is what I say to you. I'm the Chairman of the Company, so obviously I have to be constrained as to what I can say about general growth. So I can't talk specifically about their numbers. And Sandeep did provide information on the conference call, who's the CEO of General Growth, his conference call when he talked about it, but not detailed 5 or ten-year numbers. The only thing I'd tell you is that -- or I'd tell everyone and I would -- and we've said this publicly is we think this company has a number of things in its favor to grow operating cash flows of the business at a healthy pace. In fact, what should be a greater pace than other retail companies in the business because of the distress that they went through over the past 3 years. They have higher vacancy than others, on a permanent basis, that are paying proper rents. They have many short-term vacancies that can be converted to proper rent paying vacancies. They have a number of anchor stores that aren't even counted in the numbers of vacancies because they've just been put aside.

Retail sales in America are going up, and everyone is experiencing that, but we just didn't have the money to spend on our malls before when the company was in bankruptcy, so ours should be a greater pace than what others would see. As a result of that, the NOIs in this company should grow and the good news is that the deduction out of this is fixed rate financing which we are rapidly trying to lock in as many mortgages as we can for as long as we can at circa 5% costs. So we're fixing the financing costs and therefore, the top line growth contributes to a much more significant bottom line growth as you do that. You might have observed or you might not have, but we just -- the Company just bought back $500 million of its own shares 5 months after bankruptcy because we've been generating a lot of cash out of the portfolio and from asset sales of non-core things. That probably is -- for a corporation, that's probably one of the great indications of a fact that you think that the future value of a company is greater than what it is today. I don't think I probably should say much more about specifics, but that's our general thesis on the business.

Thank you.

Thank you.

Donald Anderson, Anderson and Associates.

I have a question, just a simple question, about cash flow. Your cash flow over the last few years has been excellent, but it's also been more or less the same and now with your first quarter down a bit, I wanted to ask you just how should we look at cash flow? Were you disappointed in that quarter or how should we look at it in terms of lumpiness and smoothness and that kind of thing?

Sure. Thanks for that. It's Brian, here. In terms of the first quarter, we were not disappointed at all with the performance across the firm. I don't think it got, frankly, properly reflected in the headline number. If you looked at the cash flows over the past 3 years, and I made these comments at the AGM this morning, what we -- if you look into the numbers, what you would see is we have had good sequential growth in the property, energy, infrastructure, part of the business. And at the same time, we did see some sequential declines in the contribution from some of the more economically sensitive, more cyclical businesses, particularly on the, for example on the US housing side. What we've observed, as Bruce mentioned at the outset of the call, is that there's been a bottoming and a recovery that we're starting to see pretty much across the board.

If you look at the quarter-over-quarter results, what you would find is that the first quarter of last year had a pretty large number disposition gains. This quarter, which was a bit of an anomaly for us, we had virtually nil in the form of disposition gains. The other thing that happened this quarter was we had below average water levels in hydro, in the energy side, comparable quarter we actually had above average. So, what you had was an adverse swing in the results of the amount of generation in the hydro side that overshadowed a lot of the strong growth that we saw elsewhere. That's the one thing about the hydro business is in some quarters you will get more rain than others, but over the long-term it is incredibly stable. It's not something that concerns us at all. Unfortunately it did tend to overshadow a lot of the great performance we had elsewhere.

Okay. Thanks.

Michael Smith, Macquarie.

Bruce, I know you generally go where the opportunities are when it comes to external growth, but from comments you made on your AGM, I got the sense that there's more of a focus in Europe, particularly for infrastructure. Are you seeing a lot more opportunities there?

Firstly, the markets for infrastructure were much further privatized in Europe than virtually anywhere else on the planet, starting with the UK, I guess the Margaret Thatcher days, so there has been a significant amount of privatization of infrastructure in Europe. In addition, many of the construction infrastructure companies in Spain and Portugal were significant buyers of assets throughout the world. As a result of that, those companies that have significant assets, there's a number of opportunities to see if we can be helpful to them in reorganizing things that they have. We've spent a lot of time over the last 2 years with them, whether any of those will amount to anything we'll have to see, but we're quite excited about them and it's really just the fact that if you look in the United States, there's not a lot of traded companies that own infrastructure. They just happen to be an anomaly in the world where a lot of them were focused in Europe.

Thank you.

Brendan Maiorana, Wells Fargo Securities.

I had a question on investments in existing platforms versus development, because you guys have a big development pipeline across most of the commercial property platforms that you have, and it is large on the infrastructure side and it is also fairly significant on the power side. If you look at investments within those existing platforms, buying a commercial property versus doing development, do you think that it seems like development's accelerating? Do you think development is likely to be a bigger contributor to asset growth or do you think the acquisitions are in the existing platforms over the next couple of years? Can you give us a sense of return requirements on a ground-up development versus bolt-on acquisitions?

I'll try to answer that, and the first thing I'd say is that if you look at the scale of our organization, the amount of new development assets we have is actually quite small relative to the scale of the operation. When you look at it in compared to many other people out there or other companies, we're actually large, but our business is a very large business. So given just the scale of the Company, the development activities we have is relatively modest to the size of the business, so that's the first thing. The second one is that we do have development across all of our different operations and we use it, A, to be knowledgeable about the business and secondly, capture higher returns than we otherwise would get possibly from doing something in the market at an equivalent price. And I guess the bottom line is, new development is always more risky than buying something that's completed. You can always have cost overruns or something or miss on the leasing or something to that effect. Therefore, the returns better be higher than what you otherwise would buy in the marketplace, but there is a place in our mind for some development, on occasion, to add to the portfolio in the Company. I think it has to be selective and not too much in relation to the size of each of the businesses we have.

Okay. Fair enough. Thanks.

You're welcome.

(Operator Instructions) Scott Phillips, Lone Pine Capital.

I just had a capital allocation question for Bruce following up on an earlier one, and it's regarding office property and particularly high quality office assets in the US. As you've outlined in your letter and comments, rents have improved quite a lot and leasing is strong, but cap rates seem quite low again especially in a long-term interest rate environment that is uncertain. I was wondering how you think about value there and would you want to allocate more capital to these types of assets, either on a absolute basis or relative to other areas where you can invest? Thank you.

Thank you, and I would say our -- it is always the $64 billion question where are cap rates going, but cap rates are heading down, and you will see many things in the market, both in the resale business, in the office business and in multi-family apartments trading today, good quality assets trading in the 4% to 5.5% cap rate range. I would say the last -- when they were trading that last was mid-2007, and the difference then was that they were trading at 5% returns based on an expectation that rents were going up by 50% over the next 5 to 10 years, and the problem with that was they were very high rents at that point in time. What today you have is 5% cap rates, but you have rents at lower levels that have been taken down pegs over the past 4 years. Therefore, what you're really buying on is a expectation that rents will be higher 4 years from now and therefore, you're buying in on a 7% yield 4 years from now and at least you're earning 5% until then and instead of sitting on 1% in the bank. Our view generally is that cash flows in most commercial real estate, and there are exceptions to every rule, but in most commercial real estate are going to get significantly enhanced over the next 4 years as both office rents go up in good markets, retail rents recover because of the general economic situation and other things.

In fact, multi-family rents are going up at a rapid clip because people have decided just not to be in single-family housing and risk their net worth in housing for the time being. So we're seeing increases in cash flows and that cap rate is just the snapshot, as you know. I know you know this, Scott, a snapshot at a point in time. It's a reflection of a ten-year discounted cash flow analysis and we think the cash flows will be dramatically higher. So, that's a long way to say that we think commercial real estate prices are going higher from where they are today, not based on compression of cap rates, but based on the fact that cash flows are going up.

This concludes the time allotted for questions. I'll now turn the conference back over to Bruce Flatt.

Thank you, everyone, for joining today. If there are questions, please feel free to contact any of us. Otherwise, we look forward to talking to you on our conference call next quarter. Thank you for now. Bye.

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