BROOKFIELD ASSET MANAGEMENT LTD (BAM) 2012 Q4 法說會逐字稿

Welcome to the Brookfield Asset Management 2012 year-end results conference call and webcast. As a reminder, all participants are in 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, [Satchi], and good morning, ladies and gentlemen. Thank you for joining us for our year-end, fourth-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 operating results. Bruce will then discuss our views on the current investment and market environment as well as a number of our major growth initiatives in the quarter.

At the end of our formal comments, we'll turn the call back to you, Satchi, to open the call for questions. In order to accommodate all who want to ask questions, can we please ask once again that you refrain from asking multiple questions at one time to provide an opportunity for others in the queue. We'll be very happy to respond to additional questions later in the call as time permits, at the end of this session, or afterwards if you would 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 annual report, both which of are available on our website. Thank you, and I'd like to turn the call over to you, Brian.

Great. Thank you, Katherine, and good morning to all of you on the call. We reported net income for Brookfield shareholders of $1.4 billion during 2012. This compares to $1.9 billion in 2011. The variance is due to a reduction in the amount of valuation gains, which while very favorable, were not as large as 2011. Funds from operations, which includes disposition gains was $1.4 billion, a 12% increase over the $1.2 billion reported in 2011. Excluding disposition gains, FFO was up 10% or 11%. The remaining increase was due to improvements in all of our businesses, in particular, our property group and businesses that are linked to the US home building sector. This was offset partially by the impact of lower water flows on our renewable power business.

Total return, which includes both FFO and valuation gains, totaled $3.4 billion. This represents a 12.4% return on our intrinsic value, which ended the year at $44.93. We did make some changes to our presentation this year, and we apologize for the inconvenience it may have caused some of you, but we do believe they are better and will be more useful in the future. If we can help you in any way, please let us know.

So with that, I'll turn to each of the major business groups. Asset management and other services increased FFO by 31%, $84 million. Total asset management income, including carried interests, was $498 million compared to $226 million in 2011. This reflects the full amount of base management fees earned on our private and listed funds and our public securities portfolios, which totaled $352 million during the year. This really drove the 31% year-over-year increase, and it's due to new capital raised and increases in the market values of our listed entities. Annualized fees, including base fees and [extent] of distributions and transaction and advisory fees now stand at $470 million, annually.

Performance income was also a major contributor to the growth there, and this is primarily carried interests on our private funds, increased to $330 million net of direct costs. And, this compares to $107 million in 2011. The increase reflects strong investment performance within our funds. We crystallized $34 million of these fees during the year and deferred the recognition of the other $310 million in our financial statements and FFO into future years pending the termination of clawback periods.

We added $7 billion of fee-bearing capital to our private and listed funds through new commitments to private funds and new capital issued by our listed entities. Market appreciation added a further $3.3 billion. This more than offset the $2.5 billion of capital that we distributed to our clients during the year, and that increased the amount of fee-bearing capital in the private and listed funds to $45 billion and capital under management overall on a fee-bearing basis to $60 billion. Public securities capital did decline by $4 billion during the year to $15 billion, but that's in large part due to the termination of a joint venture and other mandates as we have refocused that part of our business on higher margin strategies.

The capital committed to or invested in our private funds totaled $23 billion of the $45 billion I mentioned just shortly, and included $5.2 billion of dry powder from clients that is available for investment. The capitalization of our listed issuers finished the year at more than $21 billion and is expected to increase by a further $12 billion with the launch of Brookfield Property Partners, based on the expected initial book value of that entity.

So, turning to our property operations, FFO within that group increased by 37%. Our share was $644 million, excluding the impact of dispositions. The increase reflects contribution from recently acquired properties and completed developments such as the 900,000 square foot Brookfield Place office tower in Perth. Investments included a $1 billion property Company in Australia; an 18 million square foot industrial portfolio located in the southern US and Mexico with a $900 million entity value; a 900 square foot portfolio of high-quality office properties with a further 860,000 square feet of development in the City of London; and a portfolio of 19 apartment communities with approximately 5,000 units. So, we've been very active on that front.

We increased, in addition, our interests in a number of retail malls and completed a number of smaller acquisitions throughout the various sectors -- office, industrial, and multi-res, and we also sold off a number of properties that were either non-core or where we completed our value-enhancement strategies. Operationally, same store rents in our office portfolio increased by 3% on a constant currency basis. We leased 7.3 million square feet for meaningful increases in net rents over the expiring leases, and we reduced the lease rollover of the portfolio during the 2013 to 2017 period by over 300 basis points. We signed up an anchor tenant to launch the development of Bay Adelaide in Toronto, advanced work on 6 million square feet of office development projects, and this includes the 5 million square foot Manhattan West project in New York City.

The FFO contribution from our retail operations increased by 18% to $251 million. That reflects strong growth in our US portfolio's FFO, and that in turn reflects increases in both net rents and occupancy. Initial rent -- net rents on a comparable basis increased by 10%, and regional mall occupancy increased to 96.1% at year-end. We remain particularly active within our opportunity investment and finance businesses, having made a number of acquisitions during the year, as I mentioned previously, and are continuing to examine a number of opportunities.

We also completed a number of financings across the portfolios at very attractive rates, reducing our cost of capital, extending term, and generating incremental capital. Our share of portfolio valuation gains totaled $1.1 billion during the year. That was split roughly one-third and two-thirds between office and retail, and in turn, reflected a decline in discount capitalization rates as well as increases in projected cash flows. But, two-thirds of the gains were due to lower rates, and about one-third of the gains were due to higher cash flows, reflecting the strong growth within the portfolios.

In our renewable power business, we recorded $313 million of FFO and gains in 2012 compared to $232 million in 2011. The 2012 results included $214 million gain on the sale of a partial interest in Brookfield Renewable Energy in the first quarter. We reduced our interest to 68% in this entity. Water flows were 13% below long-term average and 9% below 2011, and that led to the decrease in FFO from our existing facilities. This was partially offset by the contribution from recently acquired and commissioned facilities. We were quite active on that front during the year.

We announced the acquisition of nearly 1,000-megawatts of installed capacity, much of which was completed during the year, and we have a large portfolio that we expect to close in the first quarter. And, with this, we've been able to complete acquisitions on what we believe to be very attractive values given the current pricing environment. Our flagship renewable power entity, Brookfield Renewable Energy, performed well during the year, providing a total return to its unitholders of 13.5% and recently announced a 5% distribution increase, which is in line with its long-term target of annual increases in the range of 3% to 5%. Valuation gains in this part of the business were essentially flat as the effect of lower discount rates was largely offset by lower short-term power prices, although this does represent a recapture of all of the accounting depreciation recorded during the year.

We entered 2013 with improved water conditions and over 70% of our generation contracted on a long-term basis at attractive rates. We continue to pursue a number of hydro and wind acquisitions and continue to advance our development pipeline. As well, we are looking at opportunities to increase our long-term contract profile but will continue to be disciplined in anticipation of increased pricing that is fully reflective of the long-term value of low-cost, renewable power.

We were particularly active within our infrastructure operations completing a number of major acquisition and capital expansion projects that have added significant value in cash flows to our managed entities. Our flagship-listed entity, Brookfield Infrastructure Partners, provided unitholders with a total return of 33% during 2012 and recently announced the 15% distribution increase which reflects a substantial growth in its cash flows. Acquisitions included toll roads in Brazil and Chile, a district energy business in Toronto, and a highly complementary regulated distribution business in the UK, which we merged into our existing business there.

We also completed the $600 million expansion of our western Australian rail lines and continued the development of a $750 million electrical transmission system in Texas. We monetized a portion of our western Canadian timberlands at attractive values and completed a number of equity and debt capital raises across the business. Our share of FFO from these operations was $224 million, up from $172 million. One of the significant contributors to the growth increase was our expanded western Australia rail business as well as disposition gains on the western Canadian timberlands. And lastly, among the operating groups, our private equity and residential development business, these businesses benefited strongly from the recovering US homebuilding business, and did so in several ways.

First, our panel board businesses, which include Norbord Inc. and Ainsworth Lumber, recorded higher volumes and unit prices for oriented strand board. The prices more than doubled from $160 per unit to more than $350 million and have exceeded $400 since then. Second, we are seeing improved sales prices in backlogs in our US homebuilding business, which is supplementing continued strong results within our Canadian operations. And finally, we have a number of private equity investments that benefit from the strengthening housing market and its knock-on effect on the broader US economy. Excluding disposition gains, FFO increased from $165 million to $230 million. We recorded nearly $300 million of valuation gains, largely reflecting improvements in the valuations of our private equity investments.

So, at this point in time, I just wanted to take a few minutes to talk about how we report our results to you, in particular the role of International Financial Reporting Standards, or IFRS. It has been a couple of years, two years in fact, since we began reporting to you on this basis, and we just thought it would be appropriate to check back in and talk a bit about some of the -- what it means and some of the differences and some of the areas where there aren't differences. As you know, IFRS is the accounting standard in most developed countries around the world, virtually all the countries in which we operate with the exception of the United States. As a Canadian-domiciled Company, we are required to report under IFRS, and the US regulators have approved this basis for companies such as ours that are inter-listed on the New York Stock Exchange.

We recognize that a number of US investors -- a number of you who are on the call may not be that familiar with IFRS. There are some important differences from US GAAP that in our view are very beneficial and enable us to provide much better information to you. The most important difference that IFRS permits, and in some cases requires, is that there's much more fair value accounting than traditionally US GAAP. This means that our financial statements are more reflective of current values for our assets than our old GAAP statements, which recorded the same assets at depreciated historical book values that often bore no resemblance at all to current values. But, what it does mean is that we do have large valuation gains going through our income statement and other comprehensive income, and sometimes that may result in large variances in our net income.

The largest groups of assets that are fair-valued within our IFRS statements are our commercial property, renewable power, and infrastructure assets. The values of these assets are determined at least annually, and in many cases, quarterly, and are based on a combination of internal and external appraisals. The most common methodology that we use is discounted cash flow. The values are reviewed by our external auditors, and we ensure that a portion of these valuations are benchmarked against external appraisals or otherwise independently verified each year. So, it is important to remember that the fair value in our statements means, in most cases, that the value of the underlying assets, which as I mentioned, are derived from discounted cash flows and other fundamental analysis.

And, as a result, they are much more reflective of long-term or intrinsic value as opposed to stock market trading prices. So, for example, our investment in General Growth represents our proportionate share of the net assets of General Growth based on the appraised value of these assets. This may be or higher or lower than the stock market price. Or, said differently, the carrying values that we present are based on underlying asset values and not stock prices with the exception of our financial assets. As I mentioned, changes in values are reported in gains -- as gains or losses in our financial statements either in our statement of income or other comprehensive income depending on the asset class. So, you do need to be mindful of that distinction as well in looking for the changes.

But perhaps, talking just briefly about what hasn't changed, our funds from operation measure would be very similar under both US GAAP and IFRS as the components in our financial statements from which we derive FFO were relatively unaffected by the change. So, in our view, the balance sheet and comprehensive income under IFRS presents a much better picture of our performance than US GAAP. At the same time, we are able to report FFO on a relatively consistent basis as before, and at the same time, also provide information on the changes in the value of our assets, so that you have the benefit of both measures.

Now, IFRS also allows us to anchor two of our key performance metrics -- total return and intrinsic value to our audited financial statements although we do make several important adjustments to arrive at them. Intrinsic value is our assessment of the value of our common equity, and it starts with the values presented in our financial statements. We then do add amounts for assets that are not carried at fair value in the statements and for the franchise value of our asset management activities. Total return is the value added to the business and consists primarily, as I mentioned before at the outset of the call, of FFO and valuation changes.

We do note that a number of US asset managers use a similar measure which they call economic net income. We provide you with the various components of intrinsic value and total return on a regular basis, so that you have a more complete picture of how we perceive the value of our business and how it has changed. And, to help you make your own assessment of the value of our Company and our performance in creating value for you. And, of course, we provide complete reconciliations back to the IFRS statements in our published documents. Our impression is that investors have found this information to be helpful, and as always, we welcome any feedback that you may have for us.

So, finally, and before I hand the call over to Bruce, I am pleased to announce that the Board of Directors has approved an increase in the quarterly dividend of $0.15 per share. That's $0.60 on an annualized basis effective with the March 31 payment, and this represents a 7% increase over the current rate. The Board also approved a normal course issuer bid that permits us to repurchase approximately 55 million shares, and Bruce will speak further on this in his remarks. So, thank you very much, and I'll now hand the call over to Bruce.

Thank you, Brian. I hope anyone reading our results had the same view as us is that the last 12 months, a number of investments have started to pay off for the Company and the operations have performed well over the last year. This includes the many investments we made during the '08-'09 period, in particular both the Babcock and Brown and the General Growth acquisitions that we participated in.

In addition, all of our operations, as Brian noted, were active during 2012 with a number of acquisitions and add-on investments, which included renewable power facilities, toll roads in South America, our gas utility in the UK, office properties, and a district energy business in Canada. Probably as important is that, as Brian mentioned, the US housing recovery continues and many investments we have in our operating -- in our private equity business, but also related to some of our other assets, have operating leverage to increased housing. And, therefore, 2012 and beyond look good.

I guess during 2012 the fiscal issues in the United States and Europe dominated much of the financial news. Our view, though, probably more importantly for our business was that -- and is that our view is that the recovery did not stop in the underlying business fundamentals of most of our operations, and, in fact, most businesses out there. And, we expect this to continue in the current year. We've seen this across most of our businesses, but particular, in the United States. We advanced our brand internationally by doing many things during the year and continue to do that by adding new global clients, and we appreciate their support.

With respect to these global markets, 2012 saw them largely up, led by performance of the S&P 500. This, in our view, was because of a combination of aggressive reflationary policies, which you're all familiar with, the perceived lower risk of significant systemic events, and the continuation of the positive recovery, which I mentioned earlier. In the US, this was led by banks and capital markets making credit more freely available to businesses and consumers, and this has resulted in positive recoveries of housing and the auto sector, and consequently, rising employment levels.

In addition, the US banking system is healthy, and household formation is on the rise. And, with growing investments in the United States in housing, energy-related industries, i.e., shale gas and the manufacturing industries, the US economy, in our view, has a potential to surprise on the upside as the year progresses. Of course, the ongoing US fiscal debate and political issues have derailed for short periods of time this recovery over the last number of years, and they represent an issue -- a risk to this view. But, we expect -- or, we hope and expect common sense to prevail.

In Europe, our view is that the banking sector is still contracting. Most of the economies are still contracting, and this won't reverse until there's availability of credit in the markets and people can do business and start to expand with confidence. We expect, however, that there will be significant investment opportunities to continue out of Europe as we and others assist corporations in re-capitalizing their balance sheets and operations.

Our view on Asia is that it's almost finished its once-in-a-decade leadership change, and it's poised to continue its gradual transition to be less dependent on investment growth. Retail sales have grown in a strong and healthy fashion, and the positive trade balance has been maintained despite the challenges that China has had with many of its major trading partners being in recession. But, our expectation is that China will meet their economic objectives, and we think this is a positive development for both our Australasian business, particularly Australia, but also our South American investments, which are -- a lot are dependent upon food and commodity exports to Asia.

With respect to our overall view of the world, I guess there's three long-term trends that we'd point out to you that we think will continue to drive our future results. First, we believe global institutional investors will continue to allocate more funds to real assets, moving eventually to 25% to 40% of their portfolios contained in real assets. This bodes well for the continuing growth of assets under management in our business, and while it won't be consistent over the years, we believe that trend will -- continues and will continue for many years to come. Second, interest rates are unlikely to go much lower in our view, and while we can't predict timing of interest rates rising, we are doing two things. And, the first one is that we're avoiding any investments in long-term fixed income, and also we're locking in as much financing as we possibly can for as long as we can within our businesses.

And, third, we believe that equity markets look cheap compared to most alternatives. In particular, when you compare those to fixed income, and with many global companies in excellent shape and multiples quite low. And, as market fear dissipates, with all the things I mentioned earlier, we think, that in addition to that, capital will start to [rotate] from bonds back into equities, which was the opposite to what's occurred over the last number of years. And, the net income -- net impact will be that investors will move money into equities over the next number of years. As a result, we're positive on the current valuations and equity markets. In addition, increasing -- these increasing allocations to equities should provide upward strength over the foreseeable period of time.

With respect to our funding strategy, and Brian talked a little about this. Our funding strategy supports our operating businesses, and we virtually completed the establishment of what I'll call our family of flagship operating platforms, which will run our global businesses in the future. Our approach features a flagship, publicly-listed issuer and a major private fund in each of property, power, and infrastructure. Our private equity business is not as well suited to public markets, and consequently, is funded only with private capital.

In building our business, we have taken great pains to ensure alignment of interest between Brookfield and all of our investment partners and clients, including investing very significant amounts of capital alongside them. We have also carefully designed these entities over many years to ensure there are no conflicts between public and private investors. During the year, as Brian mentioned, we raised substantial capital both for our private funds and from institutional and high [net worth] investors and in our listed issuers. We continue to have $9 billion of investable capital within the franchise and currently are marketing six funds over the next 24 months. Lastly, I just note that we have been in -- during -- and, we generally invest with themes in our business, and I'd say that '08 and '09, we were trying to put as much capital work as we could pull together.

At the current time, we're in the midst of a phase in our business where we're harvesting substantial cash from sale of non-core assets and extra-large investments we made during the credit crisis. This reflects our goal to begin selling non-core assets as the equity markets and debt markets recover and liquefy overall assets. And, as we acquired a lot of assets during the period I mentioned, many of those have appreciated. We think it's time to start -- and we have started to monetize some, but we always start with tertiary assets and non-core assets in businesses. There is also substantial cash to be generated from the sales of assets as values recover. Cash, which we will store for future opportunities, should they be available. This has been our goal over the past nine months, which will continue as markets recover.

In addition, as a result of this cash generation, we will also likely use portions of this to repurchase common shares in the Company. Brian just mentioned the renewable of our common share issuer bid, which often we authorize but don't use. But, depending on price and other opportunities, we may use a large portion of this 50 million-plus share issuer bid over the next year to repurchase common shares with this excess cash. With those comments, Operator, we'll turn back the call to you, and take any questions if there are any.

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

(Operator Instructions)

Bert Powell of BMO Capital Markets.

Bruce, you've got a lot of value built up in the woods products business. Where do you think we are in terms of seeing disposition gains out of that? Do you think there's more to go or are you starting to get serious about raising capital from that segment?

So I'd make just two comments. The first comment is that we think there's a very long ramp road over the next five years for all housing-related investments, which I put the ones you just mentioned into that category. Because that's really -- that we don't think there's going to be a snap back from 700,000 houses to 1.5 million built every year. We think it's a slow and paced recovery in housing in the United States over the next five years and all of those businesses will recover along with it over time. So I guess I'd say underlying fundamentals of all those businesses are good today and they look like they will be good in the foreseeable future based on the facts that we have today in front of us.

On the second side, we have many investments which we put substantial amounts of money in at the bottom of the market with significant appreciation. From time to time, we consider just a reallocation of capital. It has nothing to do with our view of the future of those investments, but often, it just gets weighted where we want the capital either on the balance sheet just for new opportunities or for other things. Or in addition, it puts more liquidity into a stock that we have an investment in. So I'd say you may see us, over time, taking capital out of some of those businesses, but it probably has nothing to do with our view of the future. We've just -- we've done well from the bottom of the market and we're just looking for new opportunities.

Okay. And then just your comments with respect to the themes that you -- '08, '09, you put capital to work. Now you're in a harvest mode. How should we think about squaring that up against being in the market with six new funds and raising capital? Does that -- would that infer that those raised initiatives are going to be further out than today given maybe the opportunity set that you see? I'm just trying to square up that --.

Yes. No, it's a good question because I probably wasn't as clear as I should have been. We're -- we continue with all of our businesses to build them and grow them and put capital to work. But when you buy a lot of assets at the bottom of the market, what tends to happen is, A, you get more of it than you otherwise wanted because it grows in value, relative to other things within your portfolio. Secondly, over time as markets recover and values recover, what you tend to do, or what we tend to do, is to trim down to the great things as opposed to the tertiary assets you have in the portfolio.

With recovering debt and equity markets, what happens is the values of everything goes up, including assets, which may not necessarily fit with our long-term goal for our portfolio or for our Company. Therefore, there's a lot of cash that can be harvested out of assets which wasn't available to you at the bottom of the market, but now can be -- the balance sheets can be righted or excess cash can be taken out of the business and that's really the comment that I guess I was making.

Brendan Maiorana of Wells Fargo.

So, Brian, I would agree with you guys and Bruce, too, good year cash flows were moving up. Fundamentals seemed like they certainly got better. It was reflective in BAM's share -- at listed share price, but if I look at the total return, as you guys calculate it between FFO and then the valuation gains, I think, Brian, as you mentioned, it was about 12.5%.

It looks like you guys lowered your interest rates, which seems appropriate given that rates were down and so valuation gains made up, I think, 7% or 8% out of that number. It would strike me that in this year that number would be the 12% total return ought to have been higher, given that fundamentals were moving in the right direction and you had interest rates going down. So if we're in a rising rate environment, what's going to keep that number in line with your 12% to 15% target as we go forward?

Sure. That's a good point there, Brendan. On the 12%, first of all, 12.4%, just for the benefit of everyone on the call, that is based on our intrinsic value and as opposed to the stock price. The other comment I'd make on it is that these are valuations that are done, they're all generally 10- or 15-, or in the case of our timber assets, 73-year discounted cash flows. So while -- so they tend to be, as much as there have been some big moves in valuation gains, they tend to be a little bit more long tail, I'll say, in nature. They just take a little -- they just evolve over a longer period of time.

So having 5% out of cash flow and 8% out of gains this year is, I'd say, if anything, what we probably saw was cash flow that was still a bit on the light side in terms of the return, because, as I think you're well aware, we expect to see a lot of pick-up in cash flow coming from virtually anything tied to the US homebuilding sector. We see that benefiting us for a number of years, so we think we've got some tailwinds there.

Your comment on interest rates, absolutely. If interest rates rise, all things being equal, your valuations ought to come down. Having said that, all things are rarely equal and these are mostly real return assets, so rising interest rates should be indicative of a strengthening fundamental market. We should be seeing increases in the cash flows within those real return assets, either because we're getting larger increases in rate-based revenues, which are driven, in large part, by regulatory framework that incorporates interest rates, or because interest rates are increasing because there's inflation and that should be reflected in things like power prices and rents.

So what you would see is growth in the cash flow and also the impact of interest rates on our valuations would be mitigated by increases in the cash flows to which they are applied which is, of course, one of the fundamental concepts of real return assets. So I hope that's helpful in giving you some sense of how we would see things rolling out.

Yes. No, that's helpful. It sounds like the cash flow growth ought to pick up as we go into '13 and beyond. Then just a quick follow-up or related to that, I know we try to do this as analysts. I'm sure the investors all try to do this, too, but if we looked at the difference between where you guys have your IFRS values in the public-listed entities that are out there, you alluded to this in the letter a little bit, but is that number -- would your IFRS move up or would it move down or stay about the same?

So if we adjusted it to reflect stock prices?

Yes. For the listed entities that are out there, if you used their share prices as opposed to the internal estimates that you guys provide.

Yes. There's some puts and takes, but I -- on balance, it's probably about flat in terms of the impact of making those kinds of adjustments.

Michael Goldberg of Desjardins Securities.

Couple of questions. So you're not calling the spin-off of BPY imminent. Has anything actually changed? Did you get approval of the IFRS accounting from the SEC, or is there anything that's actually changed?

So, Michael, we are continuing to work with the SEC in getting the documents approved. We've addressed a number of things. They're having a very comprehensive look at it, as I suppose they ought to be, and we think we're making good progress on it. So we do -- we are hopeful of launching it in the near future.

But that's similar to what you would have said a quarter ago. Has anything actually changed?

Sure. We've had more back and forth with them and we've continued to address comments and so -- look, I can't give you a firm date. I'm not a -- or a firm date as to our expectation or anything like that. All I can tell you is we're making progress and we are very hopeful of having it out shortly. It has obviously been a long time. It took us a long time to get Brookfield Infrastructure Partners launched as well and, obviously, longer than we had originally anticipated, but we're making progress.

Okay. Bruce, in your letter, you again referred to your plan to assist companies in Europe in recapitalizing. What hurdles have to be cleared before something big might happen?

Nothing, Michael. I'd say we did a lot of things in Europe in 2012, most of them were assisting corporations in Europe, recapitalize assets or purchase assets from them that were outside of Europe. For us, just a lot of singles and doubles is good business. I think more of that will happen in 2013. In addition, we are getting much more comfortable with the way that we can acquire assets in Europe and probably will do some things this year in Europe.

Should we think of Brookfield Property Partners as being a vehicle to actually execute on something that might happen here?

I would say that you should think of Brookfield Infrastructure Partners, Renewable Energy Partners and Property Partners all as entities that could participate in transactions that, A, have been participating in the transactions, and will be.

Okay. You talked about unrealized -- unrecognized gains on assets that could potentially be harvested. Could you -- is there like a ballpark number you could give us as to what these might amount to in aggregate now? Does US residential landholding assets get included in what you think of as what could potentially be harvested?

Michael, it's Brian. You're at three questions, so -- but we'll just answer this one quickly. The short answer, Michael, is there are lots of potential candidates, I suppose, but we really feel it's not appropriate to give specific guidance as to what might or might not be on the sale, I think for reasons you can understand. But as Bruce mentioned, there are a lot of areas that we could harvest value for good gains.

Mario Saric of Scotiabank.

Bruce, just with respect to commentary in the shareholder letter with respect to viewing equities as cheap compared to alternatives, particularly fixed income. For the types of assets that Brookfield is looking at and currently owns, how do you look at public market valuation versus private market valuation for those assets today?

I think I understand your question, but if I answer it incorrectly, please -- you can clarify or I'll try to clarify for you. But our business is about buying assets that are more time-consuming to underwrite and more fluid to underwrite at times when owners have either too much debt on them or they want to achieve a goal that we can be helpful with because of our operating assistance or capital availability. It's not really buying assets in the market at the trading price. So our view is that we can continue to buy in this environment assets on a leverage basis to make us 12% to 15% returns on the asset. We'll continue to do that.

On the other hand, there are many assets in the market trading at higher valuations than what I just described and -- but I'd also say that those valuations are extremely good relative to what you could earn in a fixed income instrument and the risk you take with a long-term fixed income instrument. So I think people are going -- have been trending towards and putting more money towards real assets, property power infrastructure and other types of assets like we buy, merely because they can earn decent cash returns and they're not taking significant tail risk. Because ultimately, real return assets will earn back the return. I think that's who you're seeing and you'll continue to see more money going into them, both in the private and the public markets over time.

Okay. That's great color and then maybe switching gears to IFRS, maybe Brian, I think you indicated that about one-third of the appraisals, or about one-third of the assets, were externally appraised, roughly more than that if you include refinancing during the year. I'm just wondering, how would those appraisal evaluations compare to internally generated valuations?

It varies a bit. I'd say, generally, they're pretty much in line. We believe we're pretty good at underwriting and valuing these assets and certainly, in some asset classes, it's a relatively standard way of approaching it. For example, office properties, CBRE, or somebody like that is generally going to take a pretty similar approach to us. We might have a bit more specific view as to -- because we'll know what the actual lease stack is for building, but they'll lay in their views on market trends and things like that. So sometimes they're a little higher, a little lower and we take that into consideration. If it's financing appraisals, they are often done a bit more conservative basis for obvious reasons. So they are certainly a good indicator and they're something that we definitely factor in in terms of coming up with the valuations. Did I get that?

Yes. That's great. Thanks, Brian. So one last question, just with respect to the --.

Well, that's three.

A very quick one with respect to harvesting some of the non-core assets. Would these be assets generally that were acquired in distressed situations in the last four or five years? Or are we also looking at assets that have been held for a much longer period of time?

Could include all of the above.

Andrew Kuske of Credit Suisse.

I guess the question is for Bruce. You spent a lot of time in the last few years developing these public market vehicles, the LP vehicles, that really are a form of permanent capital. Do you feel you're missing any platforms at this point in time? Just really, it's -- when you look at a competitive dynamic versus the other alt managers around the globe, do you think you're missing anything?

We'd always like to do better in everything we do, but I would say our property business is large and extensive. We tend to grow it and build it and earn great returns over time. Our infrastructure business is a leader in global infrastructure management. Renewable energy is one of the largest portfolios in the world. Our private equity business, there's -- while it's where we started and it relates to a lot of the things that we do, it's smaller. I think it can grow extensively, because it is one of the largest businesses for institutional clients in the world. So I think we can grow that business and I think our -- but not in the public markets. That will be built privately and maybe the only business that we don't have a flagship entity in is in the timber business and we may consider it over time.

Okay. That's helpful and then just related to that, could you give a bit more color and commentary around the number of clients, or the client penetration, across multiple strategies?

So I don't have the exact numbers with me, but what I can tell you is our business is about high-end client management of a group of institutions which we take a lot of time with and we get a lot of repeat performance. So if you look at our client list, it's less than most large organizations with the scale of capital that we have. Many of them are larger institutions and many have multiple investments with us. So we pride ourselves on that and we try to do it. I think over time, it will continue to grow.

Cherilyn Radbourne of TD Securities.

I wanted to start by asking a question related to the new disclosure you provide in your Asset Management segment. Specifically, you reported a 40% gross margin on base fees for the year, which compares with the 50% steady state target that you articulated at your Investor Day. So I wondered if you could just give us a bit of a feel for the mix between fixed and variable costs within the $250 million of direct costs going against that business?

Sure. So I'd say a fair amount of that is fixed. There is some transactional stuff in there, but a fair amount is fixed, because a large -- a lot of it has to do with people and everything you do to support the people. What I would say, though, is -- and you would have seen this evidenced in some of the -- in the fact that the costs did increase year over year, we've put more money into building out our client management groups. We -- there was the growth on the infrastructure side. We've, obviously, got more people working there because there's been fantastic growth. And then there have been a couple of other parts of the business, more niche services that we provide where we've expanded, either into new regions.

What I would say to those is there so that the mix of some of the costs in there is anticipation of future revenues. In respect of growth that not only is directly tied to existing expansion of the business that will yield future growth in fees and revenues down the road, but also, we should be able to leverage those resources and hence, expand the margin. So, we're actually quite encouraged with how the margins are developing. The 50% is still the long-term target. Again, I would say one other thing in that regard, is our business is a little different in some sense because we do have large-listed entities. So the cost profile with us is perhaps a little different than some other managers. We've mingled those together between the two, between the listed and the private fund side.

Okay. That's helpful. I wanted to ask a bigger picture question. Just in your letter, you talk about interest rates not likely to go much lower, but it's difficult to predict the timing of when they eventually arrive. I don't want to ask you to play economist, but I was just hoping you could give us a bit of -- a bit more insight into your house view of interest rates? How much is left in terms of your ability to continue to lock-in long-term financing at attractive rates?

So maybe Brian will take the second one. I'll answer the first one. I'd just say that our general view, based on what we know from our businesses and just observations in the capital markets, is that interest rates aren't going up in the next short while, but eventually, they're going up. I think more importantly to this business and maybe to the point of also to the question earlier about appraisals and valuations, is that appraisals and what's important with appraisals under IFRS and things like that, is that these are done on long-term discounted cash flow analysis. They're not spot valuations based on a cash flow tomorrow morning. If you did that, you might benchmark it to current interest rates as opposed to looking over a long period of time.

So I think we should -- when people are looking at it, I'd encourage you to think that 200 to 300 basis points of interest rates going up really doesn't bother the business of Brookfield Asset Management and all the things it does within the franchise. What we said before and I'd state it again, if you believe that interest rates on the long end of the treasury are going to 10% in the foreseeable future, then there's no doubt, that for a period of time, our business will have headwinds against us. Eventually, after those headwinds, we have the greatest assets anyone can own in a highly inflationary environment, but there will be headwinds for a short period of time. We don't think either of those are going to happen in the short term, but certainly the first one, which is a slow and gradual increase of interest rates over time, we think, will come.

Yes. Cherilyn, on the second part of your question, I'd say we're still following very much the same approach as we followed for the last couple of years. In terms of thinking about how we might position ourselves with respect to the expected increase in interest rates, we're going at that by aggressively refinancing things as soon as we can and ideally, pre-financing, if the terms of the debt makes that economical. But we've also been making use of interest rate contracts, usually treasury locks or forward-starting swaps.

Generally, we've been locking in around half of the expected North American refinancing proceeds over the next three to four years. That's generally how it's rolled out, and there's probably about $4 billion of that and we've hedged about half of that. So that could give you some idea of where we see. Australia is another area we look at. It's a bit more of a floating rate, shorter dated market, so it's -- but we're doing things on that market as well to try and lock some of that in.

Okay. I think you had about $3.6 billion of those contracts outstanding at the end of last quarter. So it sounds like they're stable to up in terms of --.

Yes. I may have gotten -- given you a proportionate versus gross and things like that, so -- but it's around 50% is the main thing.

Michael Smith of Macquarie Securities.

Just wanted to talk about the share buyback. With the intrinsic value of the Company close to $45 and the outlook looking pretty good, and the stock trading at $38, or slightly below $38, is it fair for me to assume that, like at these levels, a noticeable amount of share buyback would be on the table?

Michael, these are all capital allocation decisions. To answer this question, one that was asked earlier, our business is about capital allocation at the most senior corporate level. All we do is decide whether we should take money out of one thing and put it into another. There's no doubt our shares are -- we believe are good investment compared to other things, some other things today and as we harvest cash, one of the places we'll look to is to put it into stock. I don't think we should specifically say whether we're going to be in the market, buying at these levels or not. But it's very possible over the next year that, as I said in my notes, that we'll use a portion, or a significant portion of our allotments.

Thank you.

There are no more questions at this time. I'll now turn the call back over to Mr. Flatt for closing comments.

Thank you to everyone for listening in on our conference call this quarter. We appreciate all your support. If you have any questions, please feel free to contact any of us. Thank you very much.

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