BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2012 Q3 法說會逐字稿

Hello, this is the conference call operator. Welcome to the Brookfield Asset Management 2012 third-quarter results conference call and webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. (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.

Thank you, Brock, and good morning ladies and gentlemen. Thank you for joining us for our third-quarter webcast and conference call.

On the call with me today are Bruce Flatt, our Chief Executive Officer, and Brian Lawson, our Chief Financial Officer. Brian will start this morning discussing the highlights of our financial and operational results; Bruce will then discuss a number of our major growth initiatives during the quarter. At the end of our formal remarks, we will turn the call over to the operator to open up the line for questions.

In order to accommodate all who want to ask questions, can we please ask that you refrain from asking multiple questions at one time to provide an opportunity for others in the queue. We will be more than happy to respond to 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.

Thank you, and I'd like to turn the call over to Brian.

Great. Thanks, Katherine, and good morning.

We had a strong third quarter. We reported our results this morning and we are confident that the investments we are making across our platforms will increase our future cash flows and the intrinsic value of our business.

As evidence of that, funds from operation, or FFO, for shareholders was $282 million for the third quarter. That's up 17% over last year's results. Net income, which includes FFO as well as certain non-cash items, such as depreciation and fair value changes, increased by 32% to $334 million. And total return, a key metric for us, and that includes FFO as well as changes in the value of the business, totaled $578 million for the quarter, or $1.6 billion, $2.48 per share, on a year-to-date basis. That's for the first nine months.

So the first component of our total return is FFO. We achieved growth in this metric throughout most of our businesses, with the one exception of our renewable power operations. They were negatively impacted by unusually low water flows, and I'll come back to that.

Our asset management operations, this includes our construction and property services businesses, contributed $146 million of FFO. That's up 18% over the same period in 2011. Base management fees, an important metric, grew by 29% to [$53] million in the quarter. That reflects the continued growth of our fee-bearing capital.

We also earned $101 million of performance-based income from our listed entities and private funds, although recall that this is almost entirely deferred for financial statement purposes and is therefore not included in FFO, but is included in total return.

The fee-bearing capital within our public and private funds increased by nearly $6 billion so far this year through new client commitments and value increases, which far outpaced the $1 billion of client distributions and expiry of uninvested commitments. We are continuing to see strong interest from clients and investors in our real asset-based strategies that we believe will lead to continued expansion in fee-bearing capital.

Turning to the contribution from the capital invested in our primary real asset businesses, and this includes our property and renewable power and infrastructure businesses, that totaled $246 million for the quarter. This represents a 6% decline compared to 2011 as good increases from our property and infrastructure operations were offset by the lower renewable power FFO.

Our property operations, they increased their contribution by $40 million. Office properties FFO benefited from an increased distribution from UK property operations and a 2% increase in same-property net operating income.

We leased 1.8 million square feet of space in the third quarter. That brings the year-to-date total to 5.6 million square feet. The new lease rates were 33% higher than the expiry rents, and that increased overall rents by nearly 4% on a constant-currency basis and also reduced our five-year rollover exposure by 210 basis points.

Retail properties FFO growth reflected continued strength in the US operations. GGP's reported FFO increased by nearly 9%, driven by a 4% increase in net operating income for the regional mall portfolio. Initial rents for leases commencing occupation in 2012 increased by over 10% over the comparable expiring rents, and the lease percentage for the regional mall portfolio increased by 130 basis points during the quarter to 95.5%.

Our other property operations, the FFO there increased due to investment gains and operating income from recent acquisitions. We continued to be active in both investing and harvesting capital in these portfolios, as well as repositioning recently acquired assets. This has resulted in a number of disposition and valuation gains.

Our office property development initiatives are focused on five projects totaling approximately 9 million square feet, and that could add more than $7 billion in assets to our portfolios.

The contribution from our renewable power operations, as I mentioned, declined. Hydroelectric generation was 30% below long-term averages, and that resulted in a drop of $66 million. Conditions were abnormally dry in several of our North American regions, whereas generation in the third quarter of 2011 was only slightly below average.

FFO would've actually been higher compared to 2011 had we experienced long-term average flows, as the contribution from newly acquired or developed assets offset the impact of slightly lower prices. Notwithstanding the low water levels, we did benefit from newly developed and acquired facilities, as I mentioned, and have a future development pipeline of 2,000 megawatts of installed capacity that we are pursuing.

Infrastructure FFO increased by $9 million. The positive impact of acquisitions and capital expansions on our utility, transport, and energy businesses was partially offset by lower timber sales. We reduced volumes in the timber operations in response to lower pricing and demand from the Asia markets, although we are seeing increased demand from North American markets, which will benefit future periods.

We reached a major milestone with the completion of the expansion of our Australian rail operations. These will add $150 million of annualized net operating income and significantly increase the proportion of fully-contracted revenues in this part of the business. And we also completed the majority of construction on our Texas transmission network and expect it will contribute to cash flow next year.

Our capital expansion program in this part of the business includes over $2 billion of projects.

Private equity investment and other income -- this tends to be a bit more variable in nature -- contributed $72 million in the third quarter, compared to $34 million in the 2011 quarter. Private equity FFO increased by $46 million. This is largely due to the impact of improved pricing and volumes in our industrial and wood products operations. This reflects the recent improvement in the broader US economy, and particularly housing-related businesses, which we've been speaking more about lately, and it benefits the operations and values of a number of our businesses, and this may also lead to several monetization opportunities.

Investment and other income remained relatively constant; however, the current quarter did include a $34 million charge arising from a premium paid on the early redemption of June 2014 bonds that we refinanced with 4.55% notes due in 2023. This is part of our ongoing strategy to lower our financing costs going forward with the benefit of the current interest-rate environment and very liquid capital markets.

The prior period, I'll note, included $50 million of capital market portfolio valuation losses, which offset other investment income and gains in that period, so this did somewhat impact comparability between the two quarters.

So turning now to the other major components of our total return, which is valuation gains, those, as you will recall, are primarily driven by changes in the appraised value of our assets. Net gains in the quarter were $328 million. Appraisal gains were approximately $375 million. Nearly $200 million of these are due to the impact of lower capitalization rates and the higher cash flows within our commercial office and retail property portfolios, and $100 million relates to shorter-term opportunistic investments.

We also recorded $70 million of gains on investments within our private equity operations, due to the improving US residential market. And we also recorded $85 million of the accrued performance-based income that I referenced earlier.

These items were partially offset by the impact of the lower interest rates and electricity prices on some of our contractual arrangements, and as a reminder, the majority of our renewable power and infrastructure assets are revalued only at year-end.

So just turning to Brookfield Property Partners, we continue to work towards completing the distribution of units for year-end. We encourage you to read all the materials on Brookfield Property Partners, which we refer to BPY, its ticker symbol, so that you can make an informed decision before you decide to hold or sell your units. There is a prospectus filed with the SEC in the US and the OSC in Canada, and supplemental materials are available on our websites so you can further increase your knowledge of what we're doing here.

In the simplest terms, BPY is a spinoff to you of a direct interest in our very successful property business, which we have all benefited from over the past 20 years. This business has generated a compound annual growth rate of 15% since 1989. That's 23 years, and we see no reason why BPY should not continue to generate these types of returns in the future. In fact, with renewed access to pure-play capital and with our even more mature global franchise, we could probably make the argument that our returns should be even better.

Our property business today is large, but highly focused on using our competitive advantages of scale and operating expertise to opportunistically acquire and serve as value from high-quality real estate on a global basis. And we intend to use these advantages to make BPY one of the best property investments in the capital markets.

Until investors have time to share our vision of where we are going to take this business, we have decided to pay out a larger amount of the initial cash flow than we might normally distribute to shareholders. This should ensure that, even in the early stages of the launch of the company, we will find an attractive shareholder base.

We encourage you to retain your shares of BPY, and if you have some extra cash, you might want to add to your holdings. Management has a substantial ownership position in Brookfield and intend to keep our BPY shares, and depending on the trading price, we will add to these holdings.

The last comment I will make before handing the call over to Bruce is to confirm that the Board has declared the regular quarterly dividend of $0.14 per share at the end of February. Thank you very much. Bruce?

Good morning, everyone, and thank you for joining. I will start off by saying that we fared well over the last few weeks in the Northeast in all of our business, and our thoughts go out to those that were not as fortunate.

Our power plants, infrastructure assets, retail malls, and other businesses were essentially unaffected. Our office portfolio in New York City was affected, but our seawall at the World Financial Center, built to withstand a 500-year storm, withheld all of the water, and our separate power grid in Battery Park enabled us to be fully operational with full lights and power one day after the storm. Incidentally, that was the only complex south of 40th Street in that situation.

The only place where we were affected was one property on the Lower East Side of Manhattan, and that property should be fully operational within 10 days as our teams did a great amount of work to achieve this.

Turning to the investment environment, the amount of capital looking for property infrastructure assets is extremely high today, driven by low interest rates and attractive returns that investments -- these investments can generate. Most of you will know that during 2009 to 2011, we added a very significant number of assets to our business. We were able to do that because we were liquid going into 2008, and with the increase in values across many of the markets that we deal in, we have been selling or starting to sell nonstrategic assets and completing refinancings to ensure we're in a very highly liquid position.

We've also been extending the debt -- the term of the debt we have, thereby both derisking the balance sheet and, in addition, reducing interest costs, as our view is that holding liquidity generally creates opportunities because when volatility comes about, more opportunities come to you.

During the quarter, in that regard, we committed to a number of exciting opportunities made possible by volatility in the markets. Some of these businesses are incredible businesses, not only because we're buying some great assets at the current time, but many of the operations will be able to deploy very significant amounts of capital within their franchises at above-average returns over many years to come. And this is very exciting for the business.

Turning specifically to our businesses, in infrastructure we acquired a gas utility connections business in the UK, similar to the businesses we currently own in the UK, and agreed to terms for its recapitalization. We're investing approximately $500 million in our infrastructure business to deleverage the business, and expect to merge the company we're acquiring with our existing business and generate meaningful economies of scale.

We also continue to make progress in completing the acquisition of our South American toll road investments. In October, we closed the acquisition of the other half of a Chilean toll road and we've made significant progress on the acquisition of joint control of a just over 3,000 km toll road business in Brazil. And we hope to close prior to year-end.

We also closed the purchase of a business which provides heating and cooling to properties in downtown Toronto, which was purchased from the City of Toronto and an institutional partner. Total investment was about $500 million, with about $300 million of equity, and we believe that we will both be able to grow this business organically and use the franchise and people to seek opportunities in other markets.

In property, during the last six months I guess we'd generally characterize the market as capitalization rates have finally responded to the last two years of low interest rates, we believe partly pushed by the announcement of QEIII and the realization by people that low rates are generally here to stay for a while.

In that regard, capitalization rates for high-quality assets with long-term cash flows moved below 4% and, in our view, are probably moving towards 3%. More interesting is that despite these levels, spreads, the US treasuries are still very positive and financing can be obtained, even on a 10-year basis, for quality assets in the 3% to 4% range.

During the quarter, we also completed the acquisition of four office and development properties in London, and subsequent to quarter end, we closed a transaction to buy a public company in Australia with a $1 billion portfolio of office assets -- office, residential, and hotel assets in Australia, the main asset being a very prime site in central Sydney.

Lastly, one of our real estate funds committed to buy a private REIT in the United States with 18 million square feet of industrial space, and we intend to rationalize the portfolio and use the business that we acquired to grow within the industrial warehouse business in the United States.

In renewable power, we continue to move forward with a number of development projects. That includes just under a 50 megawatt plant that -- two plants in Brazil, just under 50 megawatts, and approximately 50 megawatts in a Canadian hydroelectric project. And our proposed acquisition of four plants from a US industrial company in the southeast US received regulatory approval in the quarter, and we expect to have that closed by year-end, adding 378 megawatts to our capacity.

In private equity, we recently closed our third private equity fund with $1 billion of committed capital. Our strategy in private equity is to invest in sectors which we know well from our other businesses and invest at a discount to the intrinsic value of the assets acquired. We recently expanded our private equity focus to include Europe, where a number of -- we believe a number of opportunities will come about over the next few years.

Secondly, we formed a partnership with Berkshire Hathaway where we have joined forces to operate our housing brokerage operations in the United States. This business will be rebranded Berkshire Hathaway Home Services and will benefit from both the Berkshire brand and what we see as a recovering US housing market.

And with respect to US housing, the good news is that housing recovery appears to be underway and continues, and our investments geared to housing should benefit disproportionately. We have many of these, as you know, and this includes our US and Canadian land development and housing operations, which trade as Brookfield Residential now in New York and Toronto, and which that company is unbelievably positioned with land coming out of this downturn. In addition, it includes two entities led by us which produce oriented strand board, a number of private equity investments which supply the industry, our timber operations, and, of course, the housing brokerage operations which I just mentioned.

Altogether, that's about $5 billion of total capital dedicated to these investments, with our proportionate share for Brookfield Asset Management being about $3 billion, and they today generate about $300 million of cash flow, which is far below what you would normally generate out of these type of investments.

Had we owned all of these in 2007, we estimate that the cash flows would have generated close to $1 billion of cash flow. And if you extract that and go to housing sales in America, we believe normalized sales are about 1.2 million units to 1.4 million units. Just for background, they were 2.2 million at the peak. If you extrapolate 70% of peak earnings, these businesses should generate $1.4 billion of cash flow. About 70% of that, or $1 billion, would accrue to us as investors, and the balance to our other partners and fund -- and investors.

This would increase the cash flows to us, being Brookfield, of about -- from about $300 million to that $1 billion range, which, of course, would be very meaningful to us. No doubt this recovery, we believe, will not occur overnight, but it will -- we expect it to advance towards these numbers over the next three to five years.

With those comments, Operator, I'd now turn it over or back to you, and Brian or I would be happy to take any questions from anyone on the phone.

(Operator Instructions). Michael Goldberg, Desjardins Securities.

Is SEC vetting of IFRS accounting for Brookfield Property Partners still the cause of the delay in the spinoff, or is there anything else that's causing the delay?

The discussions are, I'd say, almost entirely focused around IFRS accounting.

Okay, so that's really the key delaying factor?

Correct.

My other question, in connection with the transaction with Berkshire Hathaway, is how big a gain to FFO from this transaction will you record in the fourth quarter, and once you're selling two-thirds and control, why not the whole thing?

I'll speak to the first part, anyway, of that, and we have not made any determination or disclosure of what gain would be reported in our year-end results. We'll be back to you on that front. In terms of the retention of the one-third, I'll pass that one over to Bruce.

Yes, Michael, I'd just say the following. We have a number of these businesses, including a very large one in Canada, and all we were looking to do was to find a great brand and someone to assist us in the United States.

We think Berkshire Hathaway has been in this business for a long time. We think they'll be a great partner, and we retained an interest in the business because we think they're going to make a lot of money for themselves and for us. So that's why we retained the business and hope we can participate with them and help them out in some ways.

Brendan Maiorana, Wells Fargo.

Thanks, good morning. A question about the recovery and the housing and the cash flows, and how that relates to your valuation. So I guess if we look at it now, it is roughly a 10X multiple, $300 million of cash flow, $3 billion of equity value at the band level. If the cash flows ultimately move up to $1 billion, is there a corresponding increase in the value of the equity as you guys would put out your IFRS statements or are you capturing some of that forward anticipated growth in the DCF the way that you do the IFRS?

Some of that forward growth would be captured in that, Brendan. I think you can look at the capital market to see some of that is already baked into the trading levels of certain equities, and we would look to those, as well, in terms of determining our intrinsic values. So it won't be a straight linear correlation or won't be one correlation.

Yes, but is it fair to say that if you do capture that higher cash flow -- I mean, it's not all baked into the number, right? So it might not be three times, but it's up 1.5 or something like that?

It will be -- oh, sure, it will be up something. I mean, at a minimum, we're going to be -- these businesses will all be capturing a heck of a lot of cash flow.

Sure, and then, just related to that, I think there was commentary, and I forget if it was in the letter or in the supplemental, that there would be monetization of some businesses, and I thought they were some private equity businesses. Would you guys be looking to sell the housing-related businesses at this time or would you think that you'd like to capture the upside via the cash flows before you'd look to sell those assets?

That will be a bit of a balancing act. There are definitely some portfolio investments in the private equity funds and part of the business, and with respect to the residential businesses, we'll monitor those as we go forward. We've some pretty substantial ownership positions in them, but we love the prospects for the business as well, and it's always a question of capital allocation.

Yes, I would just add that we believe we're in the very early stages of the recovery of US housing, and therefore, while we may over time find small amounts of capital, we think there's a lot of time to run. And so, there's no intention of doing anything significant in the short term.

Okay, great. Thank you.

Mario Saric, Scotiabank.

Just wanted to focus a bit on the overall acquisition environment, given you're armed with additional third-party capital. Specifically focused on your -- Bruce, I'm wondering if you can just comment on the evolving situation there, and whether distressed companies are more willing to transact today relative to three months ago, and what the opportunities are there?

I guess our -- my general comment on acquisitions is as follows. And assets that are -- have very stable cash flows, very conservative risk profiles are highly sought after by many funding sources and are really not of interest to us for acquisitions because they're highly competitive situations and there's a lot of money chasing those types of assets today. And that's generally never been where we've looked for assets.

The things that we're doing across all of our businesses relate to where we can use, A, our capital advantage, meaning we have money to deploy, which is larger than many other people have; as a result, the competition is lower.

Two, where our operating businesses can give us an advantage, and an example would be the four plants we bought from a US industrial company in Tennessee recently and they're related to their business, and we have the delink the plants and link it up to the grid, and those are just time-consuming things to do, but it's natural for us to do it within our operating business.

And third, I guess our focus -- and this relates to your specific question on Europe, the third thing that we've been doing is working with major owners of assets to provide them capital into their situations, which usually are much more time-consuming to work with. And I'd put all of the infrastructure investments and all the things we've done in Europe recently in that category, and so they're just more complicated to work through, but because of the restructuring people we have and the operating expertise we have, we can generally do that.

So I'd say there are a lot less competition in that, and there's going to be, we think, a similar stream of opportunities over the next number of years as European companies work through recapitalizing themselves.

Okay, and I guess up to this point, have you been surprised at all with the velocity of, quote unquote, broken assets coming to the market in Europe, given kind of the economic deterioration arising from the austerity measures that are being put in place?

Meaning that there should have been more or there should have been less?

That there should have been more.

Yes, you know, I'd say our observation always is that it just takes time and people wait until they know where they're going to be, and they don't want to do anything rash and they try to wait it through.

And usually volatility in the markets, you know, if you observe that most of our things that we committed to were all announced during the last period of volatility in the capital markets, which was, I think, in July and August, and as a result of that many transactions we've been working on for a long time all came to -- bore fruit, and we were able to transact. I think generally that just occurs, and sometimes you hope lots of things come at you, but we don't see any issues for the size of our organization to be able to keep buying things over the next number of years.

Thank you.

You're welcome.

Neil Downey, RBC Capital Markets.

Thank you and good morning. I think my question would be best directed to Brian. It does relate to some of the fee income in the quarter. Really two components to my question, I suppose. The base fees running at $63 million from your client capital would seem to be annualizing, at least in this quarter, at $265 million, yet you only indicate a, I believe, $235 million run rate.

And the second question -- or component of my question on fee income relates to real estate services. If my numbers are correct, it looks like the FFO contribution was $33 million in the quarter. Is there something unusual in that item?

Sure. Okay, on the first one, the base management fees, we do have a bit of a catch-up that we record in certain quarters. It's not always just a straight sequential growth. As we have first and final closings for funds, we will get a lump sum catch-up payment, so that would be a contributor to that variance that you pointed out.

And then, with respect to the property services side of it, we certainly did have a good pickup. The $33 million figure you refer to is correct. And as you recall, we did a pretty substantial expansion in the US right at the end of last year, and so as we've integrated that business, we've seen a good pickup from that.

Thank you.

You're welcome.

Bert Powell, BMO Capital Markets.

Thanks. Brian, I'm just wondering. Can you speak to the change in cap rates or assumptions that drove the $263 million valuation gain in the property this quarter? I just want to triangulate against what you're doing with your assumptions versus comments in terms of where we are absolute and directionally on cap rates.

Sure, so the -- you know, in the US we saw, for example, a 10 basis-point compression in some of the terminal cap rates and discount rates that we saw there. So it's in and around that, order of magnitude, maybe 35 basis points in some of the other asset classes. I'd say, overall, it's probably around 50/50 cap rate, cash flows, which is typically the case.

Okay. And what would be -- if you kind of had to have one cap rate number to think about, what would that number be?

Oh, gosh, you know, that is a bit of it. I tell you what, I think the best way to think about that, particularly if you go to our annual statements, you need to keep in mind that we have a couple of different asset classes in several different regions, so you're going to see (multiple speakers) the US and Canada, so I don't think I could give you a fair answer for that.

And Bert, the only thing I would add to that and for everyone's benefit is IFRS are based off of appraisals or estimates of what appraisals would be on a rolling basis.

My comments were towards what people are paying for assets which generally would be far higher prices than that, meaning they'd be much lower cap rates. Now that's on one asset or groups of assets, not the whole portfolio, and it's also at a point in time as opposed to what an appraisal might be. But it just -- I think the two are sort of different.

Okay, and that probably speaks to a little bit of an ability to absorb higher rates in the IFRS values -- valuations on the statements than perhaps just looking at straight market rates?

I think that's fair. You've got going-in cap rates versus levelized and things like that, so it's hard to really just pin one number on it.

Okay, and then just higher level, Bruce, you know, in your letter you talked about theme investing, and in the past housing was one that you kind of said we're positioning ourselves for that recovery. And then, I guess, under the heading of current, you're being positioned to sort of participate in the recapitalization for European companies. And I guess, looking on the horizon, if you had to look out today, what would you see as another emerging theme that is either interesting to you or one you guys are starting to become more active in?

Yes, I'd say there's no doubt, as we noted in the letter, we've done six transactions in Europe, and having built up a bigger business in Europe, I think we'll be able to continue to participate in that, and that will last for a while.

North America, I guess our view is that natural gas continues to be low and has to go higher, and therefore while we've been -- it's been slow to come, it's inevitably going to come. So I'd say that is significant.

And then, the only other -- third thing I'd say, and this is further out, but many different people have different views of what's going on in Asia. We're generally not a momentum investor, so we've not had any significant investments in Asia. But it's possible longer term, depending on what occurs in Asia, that we could have more meaningful investments in Asia if at points in time they needed capital. We've looked at a lot more things, not done anything in the last year as the requirements for capital have been greater than they otherwise have been in the past, and I think that's something maybe on the horizon, but not now.

Okay, thank you.

Cherilyn Radbourne, TD Securities.

I wanted to ask a question on your unrecognized performance returns. I'm just noticing that you added almost $100 million in the quarter, which brings the gross total to around $650 million. What is the anticipated recognition period that's associated with that, and when do you think that might start flowing through your statements?

I think, Cherilyn, the best way to think about that is a lot of our funds have, say, 10-year lives. These have been accumulating over the past number of years, so it's fair to say that they would be most likely coming in over the next, let's say, two to five years.

Okay. And I did want to also ask about the natural gas investing theme and just your level of conviction there after kind of a tough year in that business, but I think Bruce just addressed that. Do you have an estimate available for how much capital you would have in your private equity business that would be exposed to that natural gas theme?

You know, I don't have an exact number. It's a good question, I'd say we are affected in one major business, which is our renewable power business, not directly, but indirectly, and a lot of our contracts now are based off of renewable attributes, not natural gas. But in an indirect way, we're certainly affected, and then, we do have a number of businesses -- if I took a guess, it's $300 million to $500 million today (multiple speakers) from our private equity.

(Multiple speakers) and maybe it might even be a little higher if you factor in some of the infrastructure-related investments as well.

Okay, that's helpful. Thank you.

Andrew Kuske, Credit Suisse.

Just on the dry powder, I believe the supplementary cited $5.6 billion of dry powder, and I'd just like to get into the weeds a little bit more on the dry powder and the infrastructure and timber side. I think the number was $1.8 billion. Do you have a breakdown of that? Especially with a lot of activities on the infrastructure side, you've got a lot of closings coming up. How much dry powder will be left on the infrastructure side? And then, does that really lead you into raising another infrastructure fund?

So it would be -- that $1.8 billion would be skewed more towards the infrastructure than the timber. You know, I'd say it's two thirds, a third, 75/25 kind of thing.

And you're right. We've made tremendous progress in investing that first fund, and typically once you get to a certain stage on the one fund, that sets you up to move onto the next one.

Is there any sort of guideline on timing on the next fund?

That -- you're getting into territory where we are --

Brian would love to be able to provide it to you, but can't.

Yes, we have those private placement rules we have to adhere to.

Fair enough, fair enough. I just want to ask a bigger, broader question on really the scalability of some of your businesses. The movement into Europe on the private equity side, is that partially a function of you've got some pretty big operations on the property side sitting in Europe, you've had exposure there for a number -- for quite a period of time, and you just feel that now's the time to really expand your PE business into the European market because maybe the opportunities aren't as good as North America, you see better opportunities there, or you just have scale across a series of asset classes now?

I'd say it's both. We tend to try to concentrate our resources in specific places and then allow all of our businesses to benefit from the operations that we have, to the extent they can do that.

So now that we have a lot more people there, it's much easier for them to get a presence and find deals, just given our presence. So that's the first thing.

But maybe as important is the fact that five years ago, there was no distress in Europe and today there is. And that accords to more opportunities than you'd otherwise find. So I'd say it's both.

So then, finally, if I may, would we anticipate seeing things like a dip-like fund that you had in North America or the old tri cap funds in Europe being launched in that kind of fashion?

So our intention today is to do all of our private equity investing out of the funds that we have. That's not to say in the future that we couldn't separate a mandate out and have a separate area of specific fund, but right now they're global.

And we tend to -- we find it just easier to run global funds as the country funds, and that's because we like to invest where the opportunities are, and when you have money for one specific place, you're forced to invest in one specific place.

So if we can garner larger amounts of money with global funds, that's our inclination is to be going to specific area funds, but over time, we have to deal with the market the way it is. But that's our general inclination.

That's very helpful. Thank you.

(Operator Instructions). Michael Smith, Macquarie Asset Management.

Thank you and good morning. I wonder if you could just give us an update on Brazil? I believe you have about 20% of your net investment capital. How do you view that country vis-a-vis other opportunities, such as Europe, and maybe you could just give us an update on the property and power business?

It's pretty broad, but I'll try to give a highlight of an answer. So thanks for the question, and I guess I'd start with saying that generally news reports capture part of the story, but not all.

And if you read most of the reports, what they say is that Brazil has slowed down and it's having issues with economic growth. And I'd say that's a story that probably is six months old, and they've done a number of things in the economy both related to stimulus and in lowering interest rates. In fact, real interest rates are the lowest they've ever been in Brazil today, having come from nominal rates of 12.5% down to in the low 7%s.

What that's done is that if you look on a -- we believe on a 12-month forward basis, they're back to between 4% and 5% growth. So when people talk -- what you have seen or will see very shortly is 1% to 1.5% growth for the quarter, but they are now running at a much higher level. So we think the economic situation is stabilizing and is coming back.

As to the fundamental story of the country, it has enormous surpluses. It's an agricultural superpower. It has an emerging middle class, and everything that has been written about Brazil is playing out and will continue to play out for the next 10 to 15 years, and we can't think of a better place to invest capital than in Brazil and we continue to put money into all of our businesses and add further businesses. The one most specifically was the toll road business that we just acquired. So we -- I guess I'd just say we're big believers in Brazil, and we'll continue to grow all of the businesses.

Specifically on the power side, our business is doing extremely well, and while the water levels were low in North America, they were not in Brazil. And the only thing that was announced in the quarter was some changes to the regimes for some power plants in Brazil, but that didn't affect any of our authorizations that we have because our renewable plants are under a different plan in Brazil. And as a result of that, it really didn't affect us, and we think that over time it will all get sorted through

In property, retail sales are still strong, and housing, while slowed down from what it was 18 months ago, is still very good. And so, that story continues to play out.

Thank you, that was quite helpful. Just last question, do you think -- what's your sense of when you revalue the power assets at the end of the year? I mean, interest rates are lower, but do you think you'll be adjusting your power -- long-term power assumptions down easily or changing them easily?

Yes, I think it's -- it would be premature for us to comment on that one. Michael, we'll obviously be diving into that over the next little while.

Michael Goldberg, Desjardins Securities.

Thank you. Can you remind me how you value your asset management franchise, $4.25 billion?

Okay, so that one is a mechanical calculation that we introduced a couple of years ago, and there is a narrative description of it in our annual report, the $4.25 billion.

But essentially what we did was we took the capital -- fee-bearing capital in place, we grew it at a -- compounded it up at a 10% clip. We assumed that we were generating around 150 basis points' gross margin by the end of the 10 years because some of that we were growing into in the earlier years, and then we PV'd it all back at a 15% discount rate. And we had around a 15 times multiple or a six cap on it at the -- for a terminal value. That's (multiple speakers) roughly what it is.

I would describe it, Michael, as -- we put it in place as it was -- while it was grounded, to a certain degree, in where the business was at the time. It is really a mechanical calculation intended to focus people on the fact that there is a value there for the management -- asset management business. I think we commented in the past that we expect to grow at a better clip than that, and we think there's actually tremendously -- a tremendous amount of value in the franchise, much more so than the $4.25 billion. But we wanted to get a placeholder in there to get people focused on it.

Okay, there was a time, I think, where you described it also as 15 times base fees?

Yes, 15 times multiple on the fees, yes.

Okay.

And that's a blend of base fees and carry.

Okay. So what I'm really getting at, is it -- is there anything in that number now that would include anything for Brookfield Property Partners, notwithstanding the fact that you would own the vast, vast majority of BPY at the outset?

It was done on -- that's done on a net to band basis, for one, so it's not done on what I would describe as a growth stock basis, which for a lot of -- especially for the listed issuers, I think, is a more appropriate way to think about it going forward. And it would have -- and it was simply a 10% compound. So we didn't specifically contemplate a BPY or different private equity funds. It was very much of a mechanical growth factor.

But for all of them, it's on the share of the fees that's generated by third-party ownership, not your share of --

That is correct.

Okay, thank you.

You're welcome.

Brendan Maiorana, Wells Fargo.

Thanks, I just had a couple of follow-ups. First for Bruce, you mentioned that cap rates are now sub-four; you think they're going to three. You mentioned that interest rates, you think, are likely to remain low for an extended period of time. How much do you think interest rates would need to rise before it would have an impact on either underlying asset values or on the cap rate as you would look at your hard assets?

So first, I'd start off by saying that we nor I am economic prognosticators. So I don't really have any -- we don't have much of a view on interest rates.

But trying to answer your question, I guess I would say that we believe that capitalization rates have not yet come down anywhere close to where -- to reflect where interest rates are today, being long rates are 1%, and if you looked at in the past, therefore when interest rates were 6%, probably a cap rate was at 6%. So what that should say is that interest rate cap rates should go down to 1%. They're probably not -- or 2%, and they're probably not, and the reason is that people expect interest rates to go back over time and we do believe that.

And I think I've said this in the past now, and I'll say it again, our general view is that there can be a -- if long interest rates are in the 3% range, they can go to 5% or 6% and not affect values of assets in the marketplace too much. Because probably you'll get some cash flow increases along the way and they're not going to affect it too much. If long rates go to 8% or more, or 7% to 8% or more, then clearly you're going to have effect on values of assets in the short term.

The only added point I'd make to that is there are -- is that these type of assets that we own and others own that buy them are adjusting cash flows over time, so eventually you will catch those asset values back up, whereas the bond market you permanently destroyed capital, and I guess that's the only added thing to think about on these assets.

Okay, that's helpful. And then, a question for Brian, when I look at the financial contracts in the power business, it looked like there was a drop-off in financial contracts that you guys have contacts now for both 2013 and 2014 in the current quarter, relative to what was in the supplemental disclosure in the second quarter. Was there something that happened to cause the financial contracts to drop sharply, sequentially?

Yes, we did take a number of them off the table and we will, I'll say, adjust those as our view changes with respect to the best value that can be created by putting contracts on or captured by taking them off, which is not to say that we're going to be doing that continuously, but we will adjust it over time.

So would it be -- I guess if I look at next year, you've got, I think, 74% of your expected generation contracted out. The following year is 71%. I think that's a little bit lower than where you've historically operated. Should we expect that you guys will contract out more, and do you think that provides an uplift relative to where your average rates are today or would that go down?

So there are two elements to that. I think you've been more focused on the financial contracts, and to the extent that we see there's more upside than downside in the shorter-term pricing, and really those do only go out a few years, generally no more than 24, maximum 36 months, then we'll stay, I'll call it, unhedged in that regard and capture the upside.

We do value the stability in the business, but at certain levels we think it's better to leave ourselves in a position to benefit from increasing power prices, which we do expect to see over time.

Okay, so you're -- for next year, that's probably likely, the game plan, if prices remain where they are?

Yes, we'll watch for it. In the meantime, we'll also continue to work a way of putting on the contracts. That's the bigger goal.

Okay, great. Thank you.

Mario Saric, Scotiabank.

Just following up on the discussion on cap rates and expected cash flow growth and interest rates going forward, does that necessarily mean that, from a capital allocation standpoint going forward within commercial property, that your preference or focus may be on shorter lease duration asset classes, like industrial or the multifamily sector?

Not necessarily. I guess our view is that there are -- we're a -- maybe put more succinctly, we're an investor in all of those types of assets, including office, retail, and industrial, and others, when it makes sense, when we can find opportunities on a value basis to buy. And it's less about duration of lease; it's just about the opportunity and what we think the return can be. So it's -- we aren't buying industrial in the United States; it's not for that reason. It's just based on the opportunity.

Thank you.

You're welcome.

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

So thank you to everyone for joining the call. We appreciate you being invested in Brookfield, and if there's anything that any of us can answer or help you with, please feel free to contract us. And until the next quarter, thank you for everything.

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