BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2011 Q2 法說會逐字稿

Hello, this is the Chorus Call conference operator. Welcome to the Brookfield Asset Management 2011 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 would like to turn the conference over to Katherine Vyse, Senior Vice President, Investor Relations for Brookfield Asset Management. 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, or Chief Executive Officer, and Brian Lawson, our Chief Financial Officer. Brian will first discuss the highlights of our operations and the financial results. Bruce will then provide some comments on the current investment environment and our investment teams and opportunities. At the end of our formal comments, we will turn the call over the operator to open it up for questions. In order to accommodate all who want to ask questions, can we please ask that you refrain from asking multiple questions at a time so as to provide an opportunity for others in the queue. We will be happy to respond additional questions later in the conference call as time permits at the end of the session or afterwards if you prefer.

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. And finally, before turning the call over to Brian, I would like to mention that we're hosting our seventh annual investor day on September 27 in New York. If you're interested, the event details and registration information are available on our home page at www.brookfield.com. Thank you and I'd like to turn the call over to Brian.

Great. Thanks Catherine and good morning everyone. Thanks for joining the call. We reported aggregate cash flow for the second quarter of $829 million, of which $342 million accrues to Brookfield shareholders and the balance accrues to our co-investors in our consolidated funds and subsidiaries. This compares very favorably to the $645 million and $327 million respectively reported the same quarter last year. The cash flows reflect improved results throughout our operations including a return to normalized hydrology in our renewable power generation business, offset by a lower level of disposition gains. Net income, which includes fair value changes, increased to $1.4 billion of which our share was $828 million. Valuation gains during the quarter were approximately $800 million. That relates primarily to our US office and retail properties and you will recall that most of our other asset classes are revalued only annually. Taken together, the operating cash flow and fair value changes resulted in total return to our common equity of $1.1 billion or $1.68 per share. We distributed $0.13 per share of that as common dividends and the balance will continue to compound in the business. As a result, our intrinsic value at the end of the quarter was $39.31 per share compared to $37.76 at the end of March.

Now turning to the operating results, our asset manager fees and the contribution from other services increased to $99 million. We also earned performance-based income during the quarter of $95 million, but this was entirely deferred, as is our practice, for accounting purposes until the relevant claw back periods expire. Base management fees increased to $47 million from $37 million over the 2010 quarter. This is due to new funds and increased third party capital under Management since that period, particularly in our infrastructure business. The net contribution from construction and property services increased by $15 million to $42 million. This more than offset a lower level of transaction and advisory fees. Our annualized base management fees stand at approximately $190 million, that's unchanged largely from the end of the first quarter of 2011. Capital under management was $53.4 billion at quarter end. That's up from $50 billion at the beginning of the year. We also have 7 funds that we are currently or expect to be raising during the year and that should enable us to continue to expand capital under management and the associated revenue streams.

In our power operations, they contributed net operating cash flow of $63 million. This represents a significantly improved result as the 2010 results included only for $47 million from operations and the balance of the contribution came from a large disposition gain. Generation levels returned to roughly normalized levels, which were 33% higher than the unusually low levels during the 2010 quarter. They were roughly 2% below expected long-term averages and that reflects better hydrology levels in Ontario, Quebec, and New York. The impact of better hydrology was partially offset by lower pricing on the sale of uncontracted power as a result of the reduced ownership level in our Canadian operations. We have locked in pricing for 95% of the expected generation over the balance of this year and 79% for 2012 at favorable pricing so we're well set up in that regard. The contribution from our commercial properties business increased by $20 million. We earned a $47 million contribution from our interest in general growth properties and that's offset by a lower contribution from our commercial office business. I will come back to that point. General growth continues to benefit from improving sales results and post-reorganization-restructuring initiatives, such as debt refinancing, cost reductions, and portfolio optimization.

Our office property business results reflect a lower interest in our Australian operations following the merger of this business into our 50% owned listed global office company, as well as lease expiries in our US operations in the end of 2010. We remain well-leased, though, with an occupancy rate of 93.4% at quarter-end with a 7.1 year average term. The average rent in the portfolio increased to $29 per share, which continues be approximately 14% below market rents. Bruce will comment on the very strong leasing activity during his remarks. The $800 million of valuation gains I referenced earlier, those were recorded net income and they relate to this segment and those reflect both increases in the contracted cash flows within the US retail portfolio as well as the impact of lower capitalization discount rates both for this portfolio and our US office properties.

Infrastructure cash flows totaled $56 million in the second quarter of 2011. That compares with $34 million for the same period 2010. Utilities business contributed $9 million more than the same period last year. That's due to increased ownership levels, as well as improved operating results. The timber business increased its contribution by $7 million due to continued strong demand from Asia. Utilities, transmission, transportation, and energy businesses are largely regulated or contractual in nature and this provides for stable operating results that increase with inflation and the investment of additional capital. Our development activities include residential real estate and opportunistic property investments. The combined contribution from these activities decreased to $24 million in the second quarter from $37 in the same quarter last year.

We continue to experience strong growth in Brazil, reflected in launches and contracted sales, however the number of project completions was below the normalized level and the level we would expect to see based on the strength in launches and contracted sales but that reflects the normal lag in following the project completion for financial reporting. We also did experience some delays in closing lot sales in Canada, but we believe this is simply going to result in the deferral of profit recognition into future quarters including later on this year. The private equity and finance cash flows were $122 million for the second quarter 2011. That includes $61 million of gains related to the partial monetization within our special situations fund of our investment in laundry fiber and $61 million represents our share of the operating earnings within the portfolio. This compares to $38 million of operating earnings for the same period last year. These results continue to improve at most of our portfolio companies and we also believe there are meaningful unrecognized gains to be reflected in our results in future periods based on the fundamental values.

Finally, investment and other income was lower than usual at $24 million in the second quarter of 2011. This compares to $42 million in 2010. It's simply result of lower investment gains in the current quarter than we received in 2010. Bruce will cover off some of the transactions we have been working on to expand the business in a moment, but I would add that in addition to these investment activities, we've continued to be very active in tapping the financing markets to take advantage of the low interest rate environment and to extend our maturity profile. We issued $4 billion of debt during the quarter and continued to lock in rates for future refinancings at advantageous levels. As a result, our liquidity levels remaining strong. Core liquidity continues to be in excess $4 billion on a combined basis and our capitalization profile is unchanged with a debt-to-cap ratio of 14% at the corporate level at 44% overall on a proportionate basis. We also have more than $8 billion of uninvested capital in our funds from our co-investors so we are very well-positioned to pursue opportunities to add value in the coming months. And with that, I will hand the call over to Bruce.

Thanks, Brian, and good morning everyone. Just make a few comments on the overall markets and then I will talk about some of our operations and what we've been doing in them. But, I guess, the overall comment we would make is that since we last had a call, the macro-economic events have consumed most of the news. There has been extreme volatility across stock, currency and interest-rate markets and that's taken up a lot of the mind share of news that is out there. I guess, the more important point that we would make is that in contrast to that and certainly more relevant to us is that at the grassroots level, credit -- and I would say in contrast to 2008 -- credit is available to well-capitalized companies at very reasonable rates. Overall business conditions, I'd say, continue to improve and we view this really as a natural evolution of what's gone on in the last 4 years in the economy and the capital market led by extremes of too much money and then extremes of no money. Today, we see no indication that any of these issues have changed the overall environment for companies. And, that, while we would openly admit that these are lagging indicators, we don't see any changes at the current time.

For companies such as ours who have strong balance sheets and have access to capital business is actually pretty good. Cash flow continue to improve, foreign rates are attractive. Furthermore, the lack of credit available to players who don't have access to that capital enables us to continue to expand the operations on a value basis and I'd specifically, I guess point out that entities that have the ability to acquire assets through the reorganization process or are able to deal with financial turmoil and the situations that come along with them probably have never seen more compelling opportunities on a risk-reward basis. We remain committed in the environment that we are in to continue to build the Company but using investment-grade leverage with the majority of the borrowing down at the asset level with no recourse to the Company and we believe that that strategy will stand us well in both these uncertain times but also in the up market.

Turning to operations, as Brian said, we continue to experience improved operating results and we have been selectively growing each of our businesses in the recent quarter, mostly organically and some development initiatives. With respect to power, numbers were good in the quarter. We closed 1 purchase of a 30 megawatt facility in Brazil. We have about 400 megawatts under construction with a cost of just over $1 billion and we are on budget and will commission those in late 2011 or '12. So we continue to grow that business organically and like we have always within each of the operations. On the commercial property side, property leasing in Canada has been excellent -- vacancies are low, surprisingly low impact. Australia, they're very stable and good. And, in the US, I'd say the major markets are good and the tertiary markets are average, but generally we continue to see progress towards higher occupancies and rental rates going up. New York in particular in the quarter was strong.

We leased 1.7 million square feet across the portfolio which brings us to just under 5 million square feet for the year and still think we will have a good year of leasing across the portfolio. We closed the purchase of a number of properties in the quarter including a 75% interest in a large property adjacent to our midtown development site that we have. We bought a 50% interest in a property in Perth just under 500,000 square feet and acquired another 50% interest in a property in Melbourne, which we own the other half in one of our major complexes there. We also have been active on selling more mature assets that have income streams on them to buyers who are looking for yield. We sold 100% interest in a 1.25 million square foot building in Houston and sold a number of things in our retail portfolio on the non-core side.

Last week, GGP announced it would distribute, I guess at the start of this week, would distribute shares of a new company called Rouse Properties which will own 30 shopping malls, which will require more intensive development over the next 5 years. We -- I guess, GGP, the Management, and us supporting it -- believe this spin-off will enable a new management team to focus entirely on this collection of malls and it will allow the GGP team to focus on its fortress asset portfolio which, just for interest, after spin-off, will have average sales per foot of close to $500 a foot. So we intend to keep our shares of Rouse once it's spun off and to support this entity on its launch into the capital market. One other comment, just on properties.

The GGP released their results during the week. I'd say it probably was not are ideal time to release results just given the volatility in the markets. And while they were on target in what we thought they should be and the Company is on track, unfortunately we probably didn't do as good a job communicating those results as we could have. So we will have to do a better job in this front. But the good news is, in our mind, is that the Company is doing extremely well. The story is playing out as it should. We are very pleased with the investment and believe it will pay shareholders extremely well over the longer term. And, we believe that leasing spreads and we are still working off things done during the reorganization period. But come the end of 2011 into 2012, we will start to see new leasing kicking into the cash flows and I just, to anybody that looks at GGP, I'd say that we believe a company is never built in a day and it takes a long time to turn a big ship but we are very positive over the longer term for the Company.

In our infrastructure business, shipping volumes are up. Timber had another very favorable quarter and our infrastructure operations, largely due to their nature were on budget, reflecting this stable nature of the cash flows. One very exciting component of the business is the rail expansion plans in Western Australia. We signed a major contract with a mining company which supports the investment of approximately $400 million into the rail lines that we own through Brookfield Infrastructure Partners and with a few other contracts and another $100 million or so invested. There should be a very substantial increase in cash flows over the next number of years and we believe this is an incredible project for us if it all comes together over the next 3 to 5 years. Lastly, in infrastructure, we received approval to begin construction of our Texas transmission project and with construction financing, which was just signed, and the total cost of $750 million, we will proceed with the project in the third quarter.

So, I guess summing up all of that, and the environment that we are in, we continue to see a vast number of opportunities to add assets to our principal operating businesses, many of these will just be day-by-day, organically growing the businesses. Most of them emanate from corporate or asset reorganizations, which are caused by businesses and entities largely having too much leverage and needing to deal with their situations, and I would say and make the comment that we are confident in the ability to continue to add assets to the business in the next number of years, although obviously we're never sure when something meaningful will show up. But with that, I will turn it over to the operator who would I would ask to take questions if there are any.

Thank you, sir. We will now begin the question and answer session.

(Operator Instructions)

Our first question today comes from Bert Powell of BMO Capital Markets. Please go ahead.

Thanks. Bruce, you're in the market with a number of funds. I'm wondering if you can give us an update just in terms of how that marketing is going? Have the competitive dynamics changed -- are the dynamics changed overall in that market? Either from a fee structure or a preference in terms of the types of funds that your perspective investors are interested in?

Sure. You know, I guess I would say, related to fundraising in general, we market funds which relate to our businesses, so often there are -- the new thing that can get marketed, but we generally stick to what we know and where we know how to do it. So all of our funds basically feed along the businesses that we operate globally. All of those funds that we are marketing today, they take time to raise. They always take longer than you think. But, I guess we've had a large success over the last number of years in continuing to attract global institutional investors to invest in the funds with us. So I'd say that you can't say this about every fund and everyone is different, but in general, global investors continue to put money into private equity like funds to earn higher returns than they can owning sovereign bonds. And, I'd say that as interest rates continue to go down, those economics become even more compelling to institutions and they have to shift more money to other forms of products, so our view is that going forward, private equity funds will continue to be a large and maybe even larger share of institutional investors' allocations. And we hope to get our share of that.

So, no change in the rate or the behavior of your prospective investors given what's going on currently?

Currently, so you mean in the last month?

Yes.

Or do you mean in the last 4 years?

I'm talking more recently. Last 4 months.

I don't think I can say, things don't happen over a month. You can't really tell. So I'm not sure I could reflect at the last month. I do think, though, that, based on our historical experience, volatility in the markets and as interest rates go down, you will see institutions want to allocate more money to private equity where they think they can earn decent returns and not have the volatility that's involved in owning capital market securities. And so I think it's a positive thing for allocating more money to alternatives and that's really the business that we are in.

Okay. Thank you.

Your welcome.

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

Thanks. Good morning. Question just on share repurchase outlook. If I look at where your IFRS value is today it's probably about 30%. Your shares trade at about a 30% discount to that IFRS value and if I think back to the NAV that you guys used to put out back in the beginning of the last decade, I think that when you were repurchasing shares at a much more significant clip, it was around that level of discount, as well. And Bruce, you mentioned that you see a lot of good new investment opportunities, but do you think that you will accelerate share repurchases given that there is a fairly significant discount today relative to where you've been over the past couple of years, which has been more to hold on to your capital for outside investment opportunity?

Yes, Brandon, it's Brian. Thanks for that. Our approach to the share buybacks remains the same and it really is balancing -- it's really looking at as an investment as a use of capital. And so we will be balancing that out against what we think we can put to work in -- I will call it external investments -- as opposed to in effect, increasing our interest in everything that we already own at attractive rates by buying back our stock at a discount to those values. So it really is measuring, balancing those 2 objectives and opportunities and as Bruce mentioned, there are a host of opportunities out there that we think we can at pretty spectacular returns. Look, having said that, obviously the share price is a little bit lower than it was, perhaps at some other times and it's certainly at a good discount to what we believe the intrinsic value of the firm is. And so we will take a good long hard look at that and we may start to dabble a little bit more into that, but again, it's just going to be a balancing between those 2 things and so we will gauge that going forward.

And just a follow up. Have you guys seen any back-off of investor appetite for the stabilized assets that generate reasonable yields that are low risk in some of the assets that you've monetized over the past s6 months or so?

That's a good question. I think, what you're going to see with the 10-year treasury yield heading under 2%, I guess our view is, and what we've continued to see, is cap rates continuing to move down. They went from 6% to 5%, they are going to head to 4% and I suspect you're going to see great assets selling under 4% cap rates. And with where interest rates are, the only alternative to earn income with any reasonable expectation that you will get increased cash flows in the future is to own income stream assets. So I guess our belief is that the type of assets that we have, and in fact, some of the non-core stuff that we've been selling, will continue to increase in value based on the interest-rate environment we're in. And the people for a while were worried that inflation was going to take the 10-year up a lot and that would change it, but that doesn't look like it's going to be the case for a while so I think our view is you'll continue to see cap rates come down over the next 6 months and correspondingly to what interest rates are. And I think that bodes well for all of the type of assets and streams of income that we own.

Sure. Thanks. That's helpful.

Mario Saric of Scotia Capital. Please go ahead.

Hello. Good morning. Just on the back of the share buyback versus external opportunities. Bruce, in your letter to shareholders, you seem quite positive on the potential types of risk adjusted returns that you can generate. We've seen cap rates compress, particularly in real estate, in the last 12 months. So, can you perhaps maybe add a bit of color as to why you think the adjusted returns are more compelling than they've been in the past even though we've seen pricing come down from a cap rate standpoint.

Yes, the only comment I'd make to you, and that comment I think in the letter refers to those that are buying through the reorganization process or from entities that are in financial turmoil. And I think the opportunity is split into a tale of 2 cities. The first component of opportunities are assets that are well leased with income on them and that are easier to buy, but they are bid by many people in the marketplace and those are selling at very low cap rates. On the opposite side, usually our form of acquisition is a relatively complex situation where we have to deal with a lot of constituencies and you have to understand, going into a corporate situation and cleaning up the affairs before you get to the assets. And we are able to do that. There are others able to do that, but everyone doesn't have that capability on a global basis to do that. And, I guess we just see that there is a lot of money for income stream type assets which will trade between 3% and 6%, but there's not a lot of income for distress or financial turmoil-type assets and that's where, I think, on a risk-adjusted basis, we believe that you can earn pretty compelling returns. That's not to say that given where stocks are trading and where stocks can trade given all the volatility, that some of our stocks -- BAM and all of our affiliates -- some of them are great opportunities and we will use the purchaser bids or issuer bids we have in place to ensure we buy shares back into the Company when it is attractive.

Okay. And then given the escalating debt uncertainty on a global scale, are you seeing more of those distress type opportunities today versus, perhaps, let's say 3 to 4 months ago?

Maybe I'll just reflect on 2008. 2008 and 2009, there were many of those opportunities out there but every 1 had its share of difficulties and the balance sheets of companies were not in great shape to take advantage of that many of them. We were fortunate enough to be able to take advantage of a few of them which, you know about. We got into a situation where everyone has been getting themselves back into fiscal shape but there's no doubt over the last 3 months -- for somebody that's in financial turmoil, there's less opportunities available. And, so more of those situations are coming about and I think the number 1 spot, where globally the focus is going to come on is in Europe and we believe there are going to be a number of opportunities that will come out of Europe because the European banks are going through now the same situation the banks in America went through in 2008 and 2009. And because of that, corporations are going to be stressed and therefore there should be a number of ways that we can help companies deal with some of their situations.

Okay. Great. Thank you.

The next question comes from Michael Goldberg, Desjardins Securities. Please go ahead.

Thanks. I just want to clarify one thing. Renewable power and Infrastructure are revalued only annually, is that correct?

For all intents and purposes, yes, Michael. There are some elements of the Infrastructure that get revalued on a quarterly basis, but it is relatively small in comparison.

Okay. So roughly speaking, f these operations were revalued more regularly, given the downtrend in cap rates that Bruce was talking about, how much might it potentially have added to your intrinsic value? Just to get some kind of idea of the sensitivity?

Well, we do give 1 metric out and that is that 100 basis point swing across the business -- when I say that I'm really meaning the Commercial Properties, the Power Generation, and then the Infrastructure, would be about $7.50 -- around $5 billion. And then, we provided some guidance periodically in terms of what 100 basis points would mean for power which I think is around the $2 billion level.

So, $2 billion for 100 basis points?

Yes. Now remember, we're talking about the assets there. And so then if you start to think about impact, what that is reflecting in growth rates and cash flows and interest expense and values of financing and things like that, it ends up being muted somewhat. But yes, those are the numbers -- those are the variables and those are the values when it's based on 100 basis point shift.

So would it be fair to say that the way things stand right now, there's a fair bit of revaluation in Renewable Power and Infrastructure that is awaiting year-end?

Yes. Absolutely. Now, having said that, there are other things that always get factored in and what I should say is as well though is that a chunk of our Infrastructure operations where the value is reflected in the regulatory rate base and things like that, those do not get revalued through the IFRS statements to the same extent because they show up as an intangible asset on the balance sheet.

Okay. And just turning another direction for a minute -- construction and property services contribution this quarter seemed to be higher than prior periods. Is the current level sustainable or was there anything unusual in those numbers?

No, construction was a pretty good quarter but no, we think if anything, the contributions you saw previously were on the light side. Both of those businesses we have been growing. The property services side, I think as you may recall, we did a pretty major acquisition there and that compressed margins for a bit. And then, also, on the construction side, they've had some tremendous momentum with winning some very major contracts and so we are very pleased with how that's developed and expect more from them.

Okay and finally, do you expect higher price realizations in Renewable Power in the second half?

Higher price, meaning, in terms of the shorter-term financial contracts?

That's right.

Yes. With some of the hot weather over the summer that's definitely enabled us to get some pretty good returns on some of the market-based power sales that we've done. Recall that we have a do have a fair amount of our power is contracted out but that still provides us with some flexibility to benefit from those price spikes. So yes, if everything holds, we should get a pick-up in the realized prices.

Thank you very much.

The next question comes from Linda Ezergailis of TD Securities. Please go ahead.

Thank you. I have another related question about allocation of capital. Don't want to dwell on this too much, but in Bruce's letter, there's a section discussing price versus value. I realize that the discussion was more about BAM's intrinsic value versus share price but I'm wondering if that would point to favoring, perhaps, corporate transactions versus assets over the next year even if they are not distressed?

Linda, I will try to answer your question but I'm not sure I got the thread of it. So when you said that, you mean whether we would buy --? Sorry I'm confused.

Corporate transactions versus assets. So, for example--

Versus single asset transactions.

Yes.

Yes, you know, I guess I would say we have a -- sorry, I understand now. I guess our growth of the business is twofold. At the business level, all the time, we work on either small amounts of developments to organically build the business or asset purchases which come along just because we are in the business and we have a large franchise -- you know, there's a half a property that a partner has and he wants to sell it or whatever that is. Is just because we are in the business and there happen to be a lot of that during the quarter, this quarter versus maybe other quarters. But that happens every day; it's irregular to some degree, but it happens every day and every year. On top of that, we allocate capital when we have extra capital or our excess capital to doing -- the way we like to expand on a major basis is to do it through the financial reorganization process when assets are in turmoil. And we just find that that's the easiest way to add larger groups of assets to the Company because you can buy them cheaper. It takes a lot of hard work to do it, which is why there are less competitors and we find more than ever before, there are fewer people with scale amounts of capital that can actually compete with us and therefore the opportunities are better for us because of it. And, so I would say, we will be doing all of the above if the opportunities comes along.

So, just to confirm then, a corporate transaction, not in a financially reorganized scenario, is unlikely at this point, even though market prices are potentially below intrinsic value for a number of companies in addition to yours?

Linda, I think I see where your getting at. We typically don't want to get into a public market auction for a company that's in play in the classic sense because that often ends up resulting in a pretty high price being paid. Corporate transactions for the ones we like to get involved with often are well-suited for us either because of the scale, the size of it that Bruce mentioned, or because of the complexity, things like that. And obviously, if you've got public capital markets that are underpricing the security, then that makes it easier. If you take away some of the complexity or financial distress of those sorts of things, then the competition for that security tends to increase and can result in a requirement for higher transaction values which reduces the value proposition to us. Is that getting at it?

Yes. That's very helpful. And maybe just help me understand as well, your latest thinking on your refinancing and financing of debt strategy. I noticed on page 11 of your supplemental, the average term of your new borrowings seem to be weighted towards more the 3, 4 years. Is that kind of explicitly because of your views of continued low interest rate? And, what sort of rates would those have been at if you would have termed it out more the debt in the 10-plus year range?

Yes, I think I would say the terms for those financings is below what you should expect to see us typically doing and it was really a reflection of the nature of the assets being refinanced and our expectations for either releasing or perhaps the disposition that drove us into putting on a shorter term than we otherwise would. There was other I think some bank financings, term financings involved there too, which tend to be shorter duration in the North American marketplace. We are definitely very focused on pushing out the term. And think there have been and will continue to be great opportunities for us to be doing 10-year financings, 20-year financings, obviously with what's been happening with the risk-free rates coming down significantly is of significant interest to us. We have been taking advantage of that by, as I mentioned, locking in rates and, aggressively pursuing financings as much as we can. So you should expect to see us doing that and even, prefinancing, calling future maturities and refinancing them early.

Great. That's helpful. Thank you.

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

Thank you. At the beginning of the year, Bruce, you'd highlighted Europe as an attractive and interesting area for incremental investments and you just alluded to it in one of your earlier comments. I'm just wondering how you look at the whole price versus value proposition when you're dealing with not just the price but also the cash flows are denominated in a euro currency and there seems to be a lot of uncertainty around that?

Yes. It's a good question. And obviously the risk of all of those things, if you are buying assets in Europe, have to be priced into what you do. And, there is a component of it that you may buy an asset in the country that may turn into another currency at some point in time. I don't think we believe that in the long term but it's possible and you need to understand that risk when you are going in. Our first choice is to assist European corporations, restructure affairs in particular if they have assets outside of Europe. That was our initial major focus. Along with that may come assets which are in Europe and obviously, if we do that, we'll have to take on those risks. But we consider those as we go along and I don't have any great answers for you other than you probably know well, well better than I do.

So you're not aggressively looking while there is blood in the streets, for lack of a better term?

No, I wouldn't say that. We are spending an enormous amount of time talking to many companies. We are glad, actually, we haven't done much so far. We continue to talk and work with people and I think we will see opportunities over the next while which we hope to be able to capitalize on. So, I wouldn't say that at all.

Okay. That's great. Thanks.

You're welcome.

Questioned Andrew Kuske of Credit Suisse. Please go ahead.

Thank you. Good morning. Bruce, you gave some comparison and contrast given the capital markets we see now versus 2008, 2009. You've been CEO for roughly 10 years, with Brookfield in various roles for, I guess, a little bit more than 2 decades. Could you just give us a sort of perspective over that time frame on how you think about investment opportunities today versus some of the other cycles we've seen? Whether it's the real estate collapse in the early 90s, multiple iterations over the forest products complex, the infrastructure has gone through a few gyrations in that period of time. Just give a perspective and then where you think about capital allocation in that context?

Well, that's a pretty broad question to ask. You make me sound old. 2 decades. Gee. I would try to answer your question by just saying, every cycle is different but they tend to repeat themselves. And, I think in 2007 and 2008 -- the markets cracked in mid-2007. And what happened was credit markets dried up dramatically and the companies had no access to capital and, by a year later, the equity markets collapsed on the back of Lehman Brothers. But that was a year coming. And I attribute a part of our confidence through the bottom of the market and the ability to do the things that we did to the fact that we saw what was coming because we dealt in the credit markets before that. I make that point because if you look at the situation today, credit is freely available to good corporations and people that need to borrow can borrow. Corporate balance sheets, in general, are in extremely good shape across America and, good companies are continuing to grow their businesses.

So we see a very different macro -- or a fundamental environment for companies today than in 2008 and a dramatically different situation. If I compare that back to other periods of time of distress that we've gone through, the only thing I can say is that every time it appears to be extremely bleak and the world always figures it out. And some people do it better than others, but it always seems to turn. And the only comment I would have to say is that Europe is going through today what America went through 3 years ago. Their banks are having some of the same difficulties and I think if we had major operations in Europe today, which we don't, then we might have a different view on the capital markets in the world and the environment.

And sometimes you see opportunities and risks through the spectrum where you sit,. We see it through Canada, Australia, and Brazil, which are in outstanding shape. And the United States, which is recovering in our view. We don't see it through Europe and I think if you saw it through Europe, you might have a different view. That's the only last comment I'd make.

And then if I just may ask a follow-up on that. Do you see a greater alignment of your fund business with new geographic regions or new business strategies over the next few years, like say for example, if Europe bottoms out a 1 point and you have greater confidence, would you launch specific a European infrastructure fund or a European turnaround fund?

The answer is possibly, although our inclination because of simplicity and because of, we view 1 of our great advantages we have over other to produce returns for our investors and we would like to do the same for our clients, is to allocate capital to opportunities when it makes sense to allocate it and not be forced into doing allocating capital where opportunities don't exist. And if you have global funds, it's a lot easier to do that than you have country-specific funds. So our inclination, if we can do it over the next 10 years as we build the business, is to continue to drive entities in the public market, like Brookfield Infrastructure Partners, which have a business standpoint and a global footprint and funds which have a global footprint beside it on the private side, as opposed to country-specific things. And that's not to say that we won't have specific country funds from time to time, but our inclination is to continue to make the funds bigger and more broad just because we think that avails ourselves the ability to earn higher returns for our customers.

Okay, that's very helpful. Thank you.

The next question comes from George Smith of Davenport Asset Management. Please go ahead.

Hello. Good morning. I was wondering if you could talk about residential land and housing in the context of all of the investment opportunities out there and maybe in the context of your ownership of Brookfield Residential and anything else that you may want to do on top of that?

Sure. It's Bruce and I guess I'd say the following on the residential business -- our business in Brazil is extremely robust driven by the middle income consumer and the country continues to build housing for it and we think there's a strong growth going forward. So, that's excellent. An excellent market. In Canada, the economy has been strong. They never went through the issues that the rest of North America went through and in particular, Western Canada, driven by oil, has been good and therefore that component of Brookfield Residential businesses is very positive. In the United States, I'd say, in the good markets, we believe it's bottomed, but I guess the only comment I would specifically make is that it appears that there's a lack of confidence in people to buy single-family housing and that will turn at some point in time, it's just we're just not sure when it will be. And, so some markets are poor but most of the markets we're in they've stabilized.

Housing does not have a lot of value to go on the downside but when you will see upside, we will all be about confidence in the economy and the employment figures. And that will be over the next number of years It probably isn't this year or in the early part of next year. But I think at some point in time, there's going to be a lot of money made in the residential business in the United States because this is a highly volatile product value hedged to the land. So now land is being valued for very little and in the future, small increases in value can give a lot of value into the land. So I think there will be some great money made. The only thing to opportunities is the residential land business isn't that large and therefore, for the size of the Company we have it's just aren't that many opportunities to actually participate in buying large tracts of land. So don't think that'll be a big component of our overall business, but for Brookfield Residential, we think they can continue to use excess cash they have in Canada and do things in the United States.

And you're comfortable with your current ownership there?

Yes. So after the merger and the rights offering, we own 72%, I think, or just over 70% and we're very pleased with that. We were pleased that others came into the rights offering and we hope that we can perform for everyone that's in the Company.

Okay. Thanks for the insight.

You're welcome.

The next question comes from Michael Smith of Macquarie Securities, please go ahead.

Thank you. I just wanted to return to the intrinsic value of the Renewable Power business. Brian, as I think you mentioned, 100 basis points would equate to about $2 billion. I guess the other side of the valuation equation is the assumptions for long-term power generation prices. I believe you adjusted them at year-end and I'm just wondering if at the current moment you're comfortable with those long-term projections or if you see them changing over the next little while?

Yes. Michael. That's one of those things that we'll sit down in the fourth quarter and take a view at. We can make a estimate today. I think there are certain elements that have been, I'll say, working in our favor, certainly our ability to enter into long-term contracts on the business. The premium that we see being paid for the renewable energy, the hydro and wind-generated electricity that we sell, all of that works in our favor to strengthen our pricing. If there is economic weakness, that may result in less demand for electricity. But one of the things we did note of late was that some of the markets we are hitting full capacity over the last little while. There was good hot weather, but that was still with, based on just what you read in the newspapers, the industrial complex of America still not firing on all cylinders. So, we'll sit down in the third or fourth quarter, and fourth quarter particularly, taking a good look at that, but like I say, there are a number of trends that are working in our favor in that regard. But we will have to see at that time.

Okay. Thank you.

(Operator Instructions)

We have a follow-up question from Michael Goldberg of Desjardins Securities. Please go ahead.

I know that it's hard to say, but if any opportunities were to develop in Europe, would it be most likely that they would be in Infrastructure or Property? Or could you see this creating a new platform for the group?

I would say the high likelihood is Infrastructure or Property, Michael. Because, we found that if you're going to go into a reorganization and if you're going to take the risks on that come with this, you better know the business extremely well. And the only time, I guess, in our view, you can make mistakes is if you try to do something in that process or in a complex situation in financial turmoil and you don't understand the business. So, odds favor highly that it will be in 1 of our specific businesses because we don't want to take all of the risks on -- both new business and new country, if you want to call it, in a financial turmoil situation.

Okay. And would it be reasonable for us to come away thinking that, as you did in the US, as it was going through its turmoil, that you are at this time in touch with parties, in a sense saying, if you need us, we'll be there for you?

Yes.

In other words, building an inventory of potential opportunities?

Yes, and hopefully they are all listening on the call today, Michael.

Thank you.

Thank you.

There are no further questions at this time. I will now turn the conference back over to Mr. Flatt for any closing comments.

We have no closing comments other than to say thank you for listening today. If there is anything that you would like to talk to us about, please call any of us or e-mail and we'd be pleased to answer your question. So, thank you very much for joining today.

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