Brookfield Corp (BN) 2004 Q4 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon. Welcome to the Brascan Corporation fourth quarter conference call for February 14, 2005. Your host for today will be Bob Harding, Chairman of the corporation Mr. Harding, please go ahead.

Thank you very much operator. Good afternoon, everyone. Thanking you for joining us on Valentine's Day. Joining us on the call this afternoon, Bruce Flatt, our President and Chief Executive Officer; Brian Lawson, our Chief Financial Officer; Brian Davis, Senior Vice President of Finance; and Katherine Vyse, our Senior Vice President, Investor Relations and Communications. Brian will begin the comments this afternoon by reviewing our fourth quarter and year-end results following that Bruce will discuss some of our operation and priorities. At the end of the formal presentations we will welcome questions you may have. Please note in responding to go questions and talking about 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 more information on known risks, factors, I encourage to you review our annual information form or annual report. I'll now turn the call over to Brian.

Thank you, Bob. I will begin with a overall review of our financial results for the year and then discuss the highlights within our operations during the fourth quarter. We posted our letter to shareholders and supplemental information on our website earlier today which has further details. We reported cash flow from operations for 2004 of $670 million, $2.34 per share, up from $577 million, or $2.14 per share during 2003. This represents an increase of 10%. More importantly the growth was 14% on an apples-to-apples comparison, which shows the growth in our core businesses. This excludes property and disposition gains, which while important to us and accrue fairly regularly, they are unpredictable and impact the comparability of the numbers somewhat. In this regard, the fourth quarter would appear to have decreased from the comparable fourth quarter last year. But it is important to remember that last year included over $100 million of cash flow from property and disposition gains. Excluding these items, our cash flow for the quarter was actually 23% higher. We recorded a similar level of gains last year but they -- or this year, but they occurred in the second and third quarters.

The continued growth in cash flow year over year was due to a number of factors but two in particular: Cash flows from our power generating operations increased by 65% due to an expanded operating base and a return to normal water levels and our homebuilding operations had gone a very strong year and increased their contribution significantly. And we believe that each of our operations is well-positioned to achieve continued growth in 2005.

Net income increased to $2.38 per share from $1.31 per share last year. And that increased due to the factors I just mentioned plus much significantly higher earnings from our resource investments. Just before reviewing our results in more detail, I would like to confirm that we increased our regular quarterly dividend by 7 percents to $0.15 per share and that will be payable on May 31, 2005 to shareholders of record on available to shareholders of record on May 1, 2005.

Turning to our property operations, they contributed $1 billion of net operating income during the year and that compares with $837 million last year. The fourth quarter contribution was $342 million, up nearly 50% over the same quarter last year. Much of this growth occurred within our homebuilding operations, which had an exceptional quarter. Commercial property operations continues to meet financial targets and have achieved good leasing results. It is clear the companies are once again expanding or making commitments to their future space requirements and as a result we are seeing increased leasing activity in all of our key markets. To that end we leased close to 4 million square feet of space during the year and this represents four times our contractual expirees.

We are benefiting from our expanded portfolio, which now includes the 1.2 million square foot 300 Madison Avenue of a property in New York and three properties in Washington, D.C. totaling 1.6 million square feet. All of which were added during the year or late in 2003. These developments and acquisitions have all been financed in part, as is our practice, by long-term highly rated commercial mortgages which reduces our funding costs and increases returns for shareholders. The high quality of our portfolio has served us well in recent years. We remained very well leased with 97% occupancy in our key markets and as a result we are confident of continued strong returns from these operations. Our owned buildings operation achieved record results in the fourth quarter due to strong demand for new homes and our principal residential markets, California and Virginia and Alberta. Demographic trends and favorable economic continues continue to stimulate home purchases. We have a backlog representing 40 percent of this year's projected closings and there does not appear to be any slow down as yet.

Our power generation operations contributed $283 million during the year. The substantial growth over last year is due to improved conditions over the dry water conditions in the first half of 2003 as well as the impact of acquisition and development projects and improved pricing. Generation during the year was equivalent to the long-term expected average and accordingly in line width our expectations. Included in our power operations are 70 new hydro-electric power stations in New York State with a capacity of 674 megawatts. These operations were successfully integrated into our existing operations during the fourth quarter. In addition, we signed agreements to purchase a further 13 stations with combined capacity of nearly 800 megawatts so far this year. Our annualized generation at year end was 10.5 terawatts, more than double our capacity of 5 years ago. Several important financings were completed during the quarter including $40 million of corporate bonds in our power operation issue at spreads of less than 100 basis points. We continue to secure long-term power sale agreements to ensure that a significant portion of our power sales are secured for extended periods with credit worried counter parties.

Currently, 70 percent of our projected revenues are subject to long-term arrangements and as we integrate our new facilities we will continue to add further long-term clo -- contracts to the cash flow streams. And at the same time the flexibility and low cost profile of our generation, including the ability to store water to provide generation during peak pricing periods, enables to us achieve strong prices from non-contracted power. Water levels are currently at levels consistent with long-term averages and this suggests that we will have another strong year of performance. Our fund management operations gathered a lot of momentum during 2004 and while the results did not fully reflect this, it will translate into strong growth and cash flow during 2005. We achieved a number of important milestones. Our bridge loan closed on commitments for approximately $1 billion, mainly in the latter part of the year. These included $200 million commitments to each of Atlas Cold Storage and Uniboard.

Our restructuring funds successfully recovered the capital previously invested in Wester Forest Products and holds an 18 percent continuing equ -- equity interest. We also acquired the indebtedness of Concert Industry, an air label and fabric producer, and converted it into a 100 percent equity interest. Our real estate finance fund completed a $600 million capital raise and launched an innovative $350 million collateralized debt obligation financing earlier in the year. We've deployed a significant amount of this capital to acquire real estate securities. The bank played an important role in several major real estate financings including acquisition of the Bank of America Center in San Francisco.

And lastly, turning to Noranda and Norbord, our two met equity -- major equity investments. Noranda reported significant growth in earnings, contributing $218 million to our pretax net income. This is in contrast to a contribution of $6 million last year. Improvement is due to higher product prices and volumes offset to some degree by higher costs such as energy. Prices continue at similar levels and so we are optimistic about Noranda's 2005 results. Norbord reported tremendous earnings during the year. Our share was $135 million compared with $54 million last year. As a reminder, these earnings, as well as those from Noranda are included in our net income but they only include cash dividends in our cash flows. Prices from Noranda's -- Norbord's principle product, OSB, were extremely strong during the year and continue to perform well so far this year. And you will recall we re -- monetize roughly half of our investment this year for proceeds of $300 million and $63 million gain.

In terms of our capital, we continue to build through our liquidity and capital position during the year and raised approximately $2.5 billion from a variety of long-term financings, capitalizing on st -- co -- continued strong markets for issuance and low interest rates. We remain in a very strong liquidity position with $2 billion of current financial capacity and annual cash flow in excess of $800 million. This means we are well-positioned to capitalize on the opportunities to expand our business base. I will now turn the call over to Bruce, who will speak on recent trends in our operations and a couple of specific business items.

Thank you Brian and good afternoon to everyone on our call. As Brian said today I'll make a few broad comments on the industries where we operate then I will deal with a couple of specific transactions. Thank you Brian, and good afternoon to everyone on our call. As Brian said today, I'll make a few broad comments on the industries where we operate and then I'll deal with a couple of specific transactions. As Brian mentioned we had put our letter to shareholders on our website today and the supplementary information and these comments should add some substance around those -- that material that's on our website and just some other interesting material to it. As -- as most of you know our largest operations are in the property sector, our -- our major commercial port -- portfolio, largely office, is in the United States and Canada and to a lesser extent in Brazil and the U.K. It continues to perform extremely well from an operating perspective, as Brian mentioned to you. And as the economy continues to recover, we are starting to see companies expanding and in fact taking on more space once again. It's important to note the properties has -- have increased in value every year for 5 years straight. In fact it's probably longer than that as evidenced by a very active property sales market. 2004 was no exception. In fact, starting into 2005 I'd say the trend continues and in fact probably it's accelerated.

Depending on your -- your views of major economic trends, which for many are quite divergent, we thought we would provide you some of our thoughts on based on where the property industry goes. The negative scenario is that long rates will move up substantially and then the economy will stall. In addition you could -- the people could take the view that there is too much cheap money out there looking for deals and that the market is therefore at its peak. And that's in essence the -- the negative view of real estate today. The positive view, I -- I guess is one that Gordon Arnell, the Chairman of our Property Operations, has talked about for -- to us for the past 7 to 10 years, is in fact, there's -- and there's probably more factors evident today of this than there has been for a number of years. And in fact it really comes down to three-points.

And the first point to note is that clearly we are poised for a cycle of increasing rents within markets. Last time rents escalated was between 1996 and 1999. Vacancies at that point started in most major market at between 15 and 20 percent vacant. Today we sit at 10 to 14 percent in most markets. Some markets closer to 10, with little new supply having been built and very few properties currently under construction. As a result we can expect to sea rents escalate significantly which generally occurs in a market when vacancies fall below 10 percent and overall this will positively affect the cash flows, the cash flow part of the equation in real estate properties. Investors as a result today are starting to look to increasing future rents in properties which they haven't been for year -- years. They've been looking at potentially decreasing rates in the future. And therefore it's possible that people start to pay a higher multiple, anticipating a increase in cash flows in the future.

The second point is that long bond rates have been continuing to move down. And even if they stay within the current range cap rates on an historical after tax basis despite being down over the last number of years from 8 percent to then 7 percent and then to 6 percent, which was generally accepted by people are still at one of the highest differentials compared to what you can earn on a long bond with virtually comparing it to any other point in history. And many people ask why all this money is flowing to property assets, and in fact in essence this is the reason, and it looks like that is not stopping. In this benign interest rate scenario cap rates for high quality products are clearly 6 percent, a rate which I know many thought was a low capitalization rate years ago. And in a positive scenario you could see cap rates heading towards the 5 percent rate or even lower. It should be noted that a 4 percent cap rate is a hi -- 1.5 percent , or 40 percent -- cent -- higher than the after tax yield of a treasury security. And in a benign interest rate environment this is a healthy premium return. And, I guess, that's -- that really is the equation that a lot of investor are looking at.

The last point which drives property values even higher is a significant allocation of funds to real estate and other yield products from institutions. These allocations continue to grow and this continues to affect property values in the industry. All of this said, we are pleased to own a lot of property assets and we will continue to capitalize on the franchise we have and to build it further.

The second strategy that we've been following based on this same thesis of yield compression is the expansion of our hydroelectric power business over the last number of years with long-term sustainable cash flows which are very similar to our office properties. The cash in these power assets generally does not get consumed as maintenance capital so most of it is free cash flow and the assets over time, just like real estate, should and will appreciate in value and hence our cash on cash return will be enhanced over time as opposed to if you own a depreciating asset. Today, based on this thesis, we own about $4 billion of hydroelectric assets which is clearly a niche business in the power industry and -- and as a result of that it's probably not well understood by many investors and in fact on the debt side. In fact we've successfully recently proven with the rating agencies that the cash flow streams from these type of assets are as value, and possibly more valuable, than co -- commercial properties. In essence, that's been proved out by us being able to put on the same form of non-recourse financings with A ratings like we do on our high-end office properties. As a result in this positive interest rate scenario a multiple much higher than we would have envisaged before could be put on these assets.

Third, we continue to expand our abilities to understand and acquire other similar types of assets, like our office and our power assets, and over time this will include either infrastructure type assets would perform similar to tho -- those assets we have today. Including timber assets, which we owned for a number of years and we believe that over the longer term they meet the investment criteria which we want to have in the company. As the owner of approximately the 1.5 million acres of timberland today we continue to look for opportunities to expands our presence in this asset group.

And fourth, and lastly, I guess the last part of our strategy is to continue to offer co-investments in our high quality assets when we by them and sometimes when it's off our balance sheet to institutional clients. We believe that institutional allocations for the type of assets which we have been buying and we will continue to buy and we specialize in have only begun. And then over the next 10 years as those allocations by institution increase we are situated to be a manager of choice alongside the capital that we put to work for those institutions. This enables to us complete larger transactions without introducing undue risk to the balance sheet and also enables to us increase our returns on capital in the company.

Moving just to three specific items which I thought people would be interested. First on Noranda, I won't say too much more than we said before. As you most of you have known, Noranda is a separate public company and therefore comments generally have to be limited to their publicly stated information. Noranda's special committee and we, being Brascan, have looked at many transactions including the Minmetals deal which I presume most of you know about. In the next month or so we believe we will be able to bring the process to an end one way or another. The great news is that Noranda is doing extremely well operationally and they just reported record financial results. For 2005, it looks like the industry is headed for the same outstanding performance, copper, nickel, zink and aluminum are all at or near their highs over the past long period of time. And all in all it's a very positive backdrop in which to be dealing with the type of situation that we and the Noranda board have been dealing with and we hope to be in a position to speak to you further on that in the months ahead.

Second, on Weyerhaeuser Coastal Assets, it has been rumored ported in a number of newspapers that we are interested in acquiring these assets. And while I will not specifically comment on these rumors, as we have always had a policy of not commenting on matters such as these, I will confirm that timber assets are of significant inter -- interest to us and to our institutional partners. We are currently looking at a number of transactions in this area and if and when we are successful on any one of them we will report that back to you.

Third, and with respect to Canary Wharf. The U.K. market which I didn't talk specifically of in our comments on commercial office properties, is playing out very similar to New York and as we expected vacancies are flat to starting to come down. More importantly with an inverted yield curve or close to it in the U.K., property assets continue to sell at low cap rates. In fact lower than they were 12 months ago, meaning properties are worth more.

Overall and -- and just ending, we have a few major priorities for this year. Number one is to finalize the situation to Noran -- on Noranda and report back that you. Two, we will continue to organically build and maximize value from each of the operations within the company. Three, we are looking at a number of significant transactions that continue to put our cash resources to work and our free cash flow to work on attractive yields in the areas where we've chosen to invest. And, force -- fourth, we will continue to be focused on delivering on our operational and our financial targets which we've laid out for you in the materials in which Brian has spoken of. In summary we think we're well-positioned to achieve our goals in '05 and with these comments I will turn it over to the operator and we would be pleased to take any questions that you might have .

Operator?

Thank you. We will now begin the question and answer session. To place yourself into the question queue, please press star 1 on your touchtone phone. If you are using a speakerphone please pick up your handset and then press star 1. To withdraw your request, press star 2. Please go ahead if you have any questions. Your first question comes from Neil Downey of RBC Capital Markets. Please go ahead.

Good afternoon, all. Can we turn to the -- the homebuilding business for a second? Brian, I believe your comments were that you are basically at 40 percent of your projected closings for 2005. What -- what are your projected closings or how -- how do you think that business is going to perform this year?

Well, Neil, we do -- we -- we aren't really putting out what our projected closings are just as yet. As you know Brookfield Homes will be reporting on Wednesday and we'll be waiting to put out any detailed information until they've done that. Having said that we are optimistic about the -- the sector. It certainly has performed, I -- I'd say candidly better than we would have thought over the last year or so. It -- it -- they had an exceptional year in 2004. What we've seen in terms of the -- of the -- of the markets in the areas where we're focused on, as I mentioned that was pr -- principally California, Virginia, Alberta, it is -- it is continuing to perform very well. And we're not seeing any sign of -- of abatement as yet.

Neil, maybe just an indication of the business. I don't think we've ever been booked forward and we're no different than the industry in general. 40 percent at this point in time of the year. And that's really just in -- gives an indication of the fact of your comfortability of knowing that 2005 will deliver the results that we expect them to deliver. But the industry is very positive and there shows no sign of, you know, really a slow down out there. And that's -- that's not to say that you will see increases in pricing as dramatic than they have been in some areas over the past 2 to 3 years. But, you know, the housing sales and the deliver -- deliver -- deliveries are at or about the same or even possibly even higher than they were before.

Right. Okay. Well, that business I believe contributed operating profit of 305 million in 2004.

That's correct.

How much of that falls to the bottom line in terms of Brascan's cash flow. Cause obviously there's a minority interest component and there's obviously a fairly substantial amount of cash taxes that are being paid in the business as well. So, Brian, could you walk me through the 305 million, what it translates to in terms of cash flow?

Sure. And I'll be a little bit guarded in my -- in my response here just because of homes not having been reported yet. But, ge -- generally a -- a fair chunk of that business, in fact other than our Brazilian operations, are held either through Brookfield Homes or -- or Brookfield Properties. And so we have roughly a 50 percent interest. So of the -- of the significant pick-up you saw in -- in the results from, you know, up to the $300 million level, roughly half of that, a little bit, just a little bit more than half of that would accrue to us. And you are correct in the -- in that, homes does pay us a pretty significant amount of -- of cash taxes. It's probably the only area within our consolidated group that does pay a significant amount of cash taxes, and that would be, you know, in the order of around, you know, 70 to $80 million.

And -- and Neil, one comment and i -- and it's a good one just to think through is that the numbers, the increase on the top line, is not the same as increase on the bottom line because that business we're actually paying significant cash taxes in. So that what gets down to the bottom line is a lot lower than what would you see on the top line.

Right. Well that's --

And as especially on a comparative basis because we paid no tax in -- or very little tax in 2003 and this year we would have paid significant tax within that business.

Right. Okay. That's exact where would I was going. One last question as it relates to the commercial property business. In your supplementary financial information, at the back of the pack is, I think -- I think you suggested that investors could look at a run rate for property net operating income of about $750 million. If I simply look at the fourth quarter contribution, I believe it was, fourth quarter of 2004 I believe it was 176 million, which is of course an annualized rate of really only a little over $700 million annualized. So what is -- what's the big differential between a $750 million run rate and something that is just over the $700 million number that was reported in Q4?

Sure. Well, part what have we are looking at there is that would be an annualized figure based upon the property in place, the portfolio in place at year end and would incorporate what we would see happening over the course of a -- of a full year. And I think you will have noticed that in Brookfield their -- their -- their growth was in fact a little bit higher in the first few quarters than in the -- in the last couple of quarters. So there's -- there's an element of that at -- at play there. So I'm not sure you can specifically take the fourth quarter and -- and straight-line it quite out in that manner. There's a little bit of variability that comes in through our Brazilian operations as well.

Okay. So that $750 million annualized figure, that presumably does not ex -- or presumably excludes Three World Financial Center?

It -- it would, yes.

Because that's an -- that's an '05 event, right? Yes. Okay. Thank you.

Thanks, Neil.

Thank you. Your next question comes from Andrew Kuske of UBS. Please go ahead.

Thank you. Good afternoon. Bruce, you made a comment, just relating to Noranda, that in the next month or so you expect the transaction to be brought to an end one way or the odd. If you could give a sense of what you're seeing in the marketplace as far as relative attractiveness of real estate assets, power assets or -- or timberlands. Where would you like to allocate capital and the I -- I might also might add where you see stock buybacks at this point in time in that priority?

Maybe I'll deal with share buybacks first cause it's a simple answer. We -- we -- as you know over the last 5 years been a significant repurchaser of our shares. And we still believe that a very good investment for the company over the longer term is to shrink the base of shares outstanding. Having said that we've not been active because we've been on a blackout period so we haven't been active in our issuer bid because of that with respect to the Noranda transaction. So, once that cleared up I -- I suspect it's possible you'll see us back in the market buying shares. On your first question just on potential attractiveness of things to purchase. I -- I guess we look at everything on a straight return on capital and return on equity after non-recourse financing that we can put on assets and we compare the -- we allocate capital on that basis and I think it's likely you will see purchases in all three of our -- all three of the areas you mentioned which is commercial properties, power -- further power assets and timber assets over the next 12 months. To handicap which one we will do more of I'm not sure I can. A lot of the transactions as you know are very large in size and therefore sometimes they happen and sometimes they go away and you have to -- you spend a lot of time working on something but we stick pretty close to our -- our numbers on return on capital and if they meet the returns we'll by and if we don't we will usually step away. So, you know, I think we will be able to find acquisitions but I -- I don't know specifically which area it will be.

Just on the power front if I may ask the question of your relationship in the joint venture with Amera (ph). How do you see that developing? Do you see yourself starting to stray away from hydroelectric assets and start to get into fossil fired assets? Cause you do have a couple on your portfolio right now being relatively nominal in interest but do you see yourself scaling up in that business area?

I -- I guess the first -- maybe I'll answer them in -- from last to first. We -- we've always viewed ourselves as buying a stream of cash and the best streams of cash to buy in the power industry are hydroelectric. As you know they are the lowest cost and lowest risk and -- and therefore the return we get is a much more solid return. So we -- we've always wanted to own that. From time to time when we buy assets the -- some gas plants have come along with them. And we're comfortable in operating them but it's not been the -- our preferred choice. In addition, when we've looked at portfolio transactions before there have been coal assets in some of those portfolios. And it would not -- it is not our preferred choice to go and buy coal assets but for the right price in a transaction if they came along with it we would not be shy to participate in a -- with -- on a coal assets. Usually when we do that, like in anything else we've done, or -- or that we do when we don't have the expertise ourself we find should someone in the market that operates that can help us. And to answer your last question, which is on Amera, we looked at a transaction together which had some coal assets in it and out of that we just continued to do a few things which resulted in the -- those purchases that you mentioned with them. So, there could be other things although we are not tied together on anything or have any obligations to do things together.

Okay. That's great. And if I may just one final question, I know it's more of a board policy but how do you see directionally the dividend policy of the company on a -- on a go forward basis?

The -- may -- just -- I'll just finish my que -- my answer on Amera. Cause probably -- what I probably should have also just added was that, in fact, they've been a great partner to work alongside. And -- and we've done a number of things with them. So the -- the relationship actually has been very good. On the dividend policy, I guess we've articulated in the past the policy that the board has stated is that over time we'll continue to increase the dividend with a portion of the cash flows that increase within the business. We've never specified as to what portion that would be. And, I guess, you know, we'll keep flexible as to that looking at the opportunities that are out there and obviously if we had substantial amounts of cash on the balance sheet, you know, the board will take that into consideration.

Okay. That's great. Thank you, Bruce.

You're welcome.

Thank you, your next question comes from Horst Hueniken of Westwind Partners. Please go ahead.

Good after noon. I have three questions. The first one, I just wanted to clarify on page 39 you're presenting your annualized cash flow or net operating income numbers and specifically relating to your residential number I see it's 300 million you've put in there. Is that a number that represents your best estimate of cash flow for 2005, or is this indicative of what you think this business can do through an industry cycle?

I would say, Horst, it's not a specific indicator for 2005. It is supposed to be, I think, more along the lines of what you spoke to as something that's indicative of the earnings capacity of the business. You know, it is continuing to grow and so it may well exceed that. Having said that, this is a -- an industry that, you know, does have some degree of cyclicality in it and so we have seen volumes, prices and revenues vary somewhat throughout a cycle. So it's-- it's more of a -- of an indicative figure that would be of assistance in describing some value -- value to the business.

And -- and Horst, the other point I -- I guess that you should take into context with that when we show a base case and a potential case on that same sheet,

Mm hmm.

you might notice that we put the same multiple in there.

Yes.

Because, you know, in essence what that means is that one of those things over time changes and I guess we're -- you're probably at -- for the industry as -- as a whole you're at a pretty good point in time.

Yes. I would -- I would agree with that. In fact it begs the question whether it's time to take some money off the table but I'll leave that for you guys to ponder. Secondly, in regards to the funds management business you make the statement in your supplemental that this business is producing cash flow growth, or you expect it to in future years. I'm wondering whether you could update us with regards to what you think sort of the timing and the shape of this growth profile of the funds management business might be?

Sure, well, I -- I'll make a couple of comments and then, Bruce, you may have a -- a couple of things to add. We -- as I -- as I mentioned in my remarks we've developed a lot of momentum in the business. And -- if you think about how that business has developed over the past couple of years what we've been doing is taking the bus -- taking a -- a business than in many cases, business that we've conducted for many years, and doing it much more in the form of a fund with partners. And handspringing additional capital, additional expertise to the table, and also giving ourselves the opportunity to manage the money and earn fees for doing that. So, we've spent a fair good of time over the past two years or so, two to three years, developing the funds, establishing the platform, raising the capital, and what we've been doing much more of over the past while has been putting that capital to work. And in particular over the last half of the year you would have seen that the balance is deployed in -- in a number of our funds has grown significantly. I'd say particularly on the bridge lending fund. And we've seen increased deal volumes. So a lot of the increase in cash flows that we would see would be from having more assets, more capital of our own capital in fact as wells our partner deployed in the business. So that's at the one level. Obviously what comes along with that is as that capital is deployed and generates results is we increase the fee streams associated with that business and so we would see growth coming from that -- from that side of it as well.

Now, I can see that what you are saying makes sense so long as you don't continue plowing in a bunch of new capital in the, say, first half of '05. It seems you've had a surge in investment in '04. If you go back to so-called normal in early '05 I -- I can see sort of sort of the cash flow picking up. I guess I'm trying to reconcile how aggressively you'll be investing.

You know, Horst, then, maybe I'd say this, when -- when we look at the business, we're looking, and when we make comments about it, it's a 5 to 10-year horizon.

Hmm.

Clear -- clearly we've had undue costs to the corporation over the past 3 years as we about built this business. We're -- we're absorbing significant amounts of G&A and hiring teams getting them to work right keeping the amount of capital we deploy to a minimum to ensure that we have everything working before we bring pension funds and institutional money in. And being very careful to make sure that our track record is very good in the things that we do. So, you know, that's been a 2.5 or three-year process. And I would say it's still -- we're still in the early-- we're still in the mid stages of that and I -- there's no doubt that we have a lot of momentum now in having done the work for two to three years. But it won't really start contributing in a major way until a couple of years from now, certainly the capital we have in outstanding will earn its return on our balance sheet from a -- from a fee perspective and a major growth perspective. It does take time for this to contribute.

Okay. That makes a lot of sense. Final question. I just wanted to drill down into one particular fund which a -- a number caught me by surprise. It's -- it's your private-equity fund. It had the lowest cash return on assets, 5 percent versus most of your others were in the double digits. The reason I'm surprised by this number is because it's the same fund that holds Norbord and Fraser Papers and you did quite well on those investments. So I would have thought that that particular fund would have had much better returns. Am I missing something?

No, I -- I don't think you -- well I -- I don't think you're necessarily missing anything in terms of what's in the fund. The key point there is that when we incorporate our results from Norbord and -- and Fraser, we're -- we're only including the dividends paid on those stocks.

Okay.

So Norbord, the equity accounting earnings as I mentioned before, those get included in our not -- net income.

Okay. So --

Not in our cash flow.

So the -- the capital gains are not in there?

And -- and the capital gain as well. There was a $63 million capital gain on Norbord. If we factored in those and if you looked at it on a price appreciation basis I would suspect you to see the returns were pretty compelling.

Okay, that makes more sense.

In fact that -- that return number that's there is somewhat of a mis -- it -- it's not the right number. Because it does include all those other things.

Yes. I -- I -- I did note that certain assets you are carrying at book and I guess who knows what they are really worth but presumably you're not -- you're not reflecting the actual market value of many of those assets.

Correct.

Okay. That's great. Thanks a lot.

Thank you. Your next question comes from Rossa O'Reilly of CIBC. Please go ahead.

Thanks very much. Just looking at that underlying value information range that -- that you provided at the back page of the supplementary material, I was wondering if you could share with us any -- any basis as you look to -- to -- to derive the upper end of that range. In fact, of those ranges in the various categories.

May -- maybe I'll try that, Rossa, and -- and just for clarity, we used to provide people with an underlying value calculation and we've essentially provided people with all the information in the report such that investors, analysts and people can do the calculations themselves and come up with their own assessment. We just felt that given the -- the environment today there was a better way to do it that was as opposed to us -- us putting a number on it. The base case numbers that are on that page are what we used to use ourselves and the potential numbers just give you what there are prop -- similar properties selling for, or views that we believe, that these type of assets could be sold for in the marketplace. And we're not suggesting to anyone that those are the values of our assets but, you know, in essence there are -- those are indications of what we think the marketplace under different scenarios. And -- and again as I -- when I spoke in my remarks, if you believe in one economic scenario or interest rate scenario versus another that that's what you would -- would lead you to one end of the spectrum or the other.

You -- you wouldn't be actually saying that -- that the upper end is currently achievable but it -- but it could be if the -- if recent rapid trends were to continue for some period of time.

Yes, I -- I think that's a fair statement, Rossa, and I don't think people have generally moved their valuation of high-end cap rates of office properties to a 5 percent return yet. But in a number of scenarios -- in fact there are some properties selling at that today but I think in a number of scenarios you could see them heading to that rate. Whether they do or don't is an idual -- any individuals assessment. They should make that and then they can put a value on the business at whatever value they want to put on it.

Okay. And then looking at the -- the asset management side of the business, which has been growing rapidly and getting involved in significant areas where you have expertise, I'm -- I'm wondering to what extent does growing the asset management business in natural resources compromise your ability to reduce or exit natural resource investments. Where you need to maintain the expertise in those sectors through -- through being a direct investor as well -- in -- in order to be an effective manager?

Rossa, you know, I -- I think we have enough expertise around at the end if we didn't have any major investments within those industries. I think we -- we have the expertise, either in-house or we know the people in the industry, that should we want to get involved in something that we- that we can get involved. And at the end of all of this we'll probably keep some key individuals who will stay on the staff of Brascan to ensure that when we want to enter into those things we can. And it's those key individuals that very rapidly we can put a team together if we choose to do it -- how we do it. So I don't think we need to stay invested in the industry and still keep that opportunistic ability if we want to.

And is it still the -- the strategy over the course of a -- of a cycle to very significantly reduce natural resource investments?

In fact it isn't really over a cycle, Rossa. In fact, I guess, our view is that the resource investments that we have we've decided they don't fit the type of asset that we want to own in the business and that's really what we've been undertaking with respect to our position in Noranda to monetize it.

Yes.

And -- and I guess the other stuff is small potatoes compared to the rest of the company.

Well, thank you.

You're welcome.

Your next question comes from Peter Sklar of BMO Nesbitt Burns. Please go ahead.

Thank you. On the -- your commercial real estate business, the kind of the outlook you have for operating cash flow of 750 million. That's up quite significantly from the number you had in the -- in the third quarter package of 711 million. And I'm just wondering what's caused your -- your outlook to become more positive over the space of a quarter versus some of the factors that you are talking about like vacancy rates when you made your preliminary comments or are there other things that play here?

Peter, it's Brian. I think it's a variety of things. We would sit down at the end of each quarter and -- and do a -- or certainly toward -- in the last quarter of the year and do a pretty detailed work through of our -- our portfolio with the -- with the respective business units and come up with a view as to what we think is the potential earnings capacity of -- of the portfolio. Again that's not to suggest that's what it's going to be for 2005. But what we are saying is that that's what we feel that the portfolio ought to earn on an annualized basis based on what we have in place and what we can achieve with -- with leasing and -- and -- and the market as we see it.

And -- and Peter, I think pr -- probably one of the things is -- is -- is that there are more assets working for us at -- for a full year now than there were when we put that information out for the third quarter.

Right.

That would also contribute to it.

Yes. Okay. On -- just on the commercial real estate, just -- just a question, in your supplementary information package on page 8, where you have disclosure on London, United Kingdom, I presume, that's obviously Canary Wharf, you'e not showing -- you're showing a book value of 450 million but you're not showing anything in the operating cash flow column. I'm just wondering what --what does that mean?

Right. Well, you're right in that is our equity interest in -- in Canary Wharf and that investment does not pay any dividends so there's no current operating cash flow coming out of it as -- as we sit today. So, hence, we have, we have -- there's been nothing recorded in that regard.

Okay. So you --

The -- the other way to say that, Peter, is that should we be actually accomplishing what we think we can accomplish there and you're going to earn 10 and 20 percent on your equity, which is any opportunity fund that goes in and buys there, that at the end of the wind up of this that you should -- we're not putting that 10 or 20 percent return through our current results. So you get that on a -- on a capital appreciation basis when you sell or when you ultimately monetize or deal with what you have.

Right. So your current accounting policy, and for Canary Wharf, using the cost method of accounting?

That's correct.

Okay. All these investments that -- that you previously disclosed as direct investments you're now disclosing them as part of a private-equity fund. Is -- is that true? Has the structure in -- in which your forest products assets and other assets, has that change from what it was in previous quarters?

No. In fact, Peter, all -- all we've really done and it's more just an indication of how we will work in the future is anything that we had leftover that's owned which is really priv -- call it private equity, we've just lump -- we've just grouped it all together and called it a private-equity fund. It's currently all owned by us. In the future, that may consist of a fund and we could actually have outside investors but today we've just grouped all the assets together and called it a private-equity fund.

Okay. I understand. And lastly on -- on the funds management business, one of the businesses you're involved with which you call structured products and capital markets, the amount of capital, that you -- you're showing a book value of 1.4 billion which is up significantly from the end of the third quarter. So you put a lot more capital into this business. I'm just wondering if you could explain what's going on there?

Sure, Peter, it's Brian again. We actually have -- where -- where the bulk of that increase has incurred from is in our reinsurance business which holds predominantly fixed income assets. As that business is continuing to grow they've increased the -- the -- the securities portfolio that they -- they hold and -- and hence there's been a -- an increase in the fixed income securities there.

And so what is the -- what is the other side of the -- the ledger when that happens with the reinsurance company?

The other side of it would be deposit liabilities and those would -- so you would have seen a commensurate increase in accounts payable and other liabilities.

Okay. I under -- I understand now.

So we bring on to the balance sheet government bonds and corporate bonds and then there's these other liabilities.

Right. Okay. That's all I have. Thank you.

Thanks, Peter.

Thank you. Your next question comes from Shant Poladian of Canaccord Capital. Please go ahead.

Good afternoon guys. Just with respect to Canary Wharf, specifically would you be having any active discussions with the Morgan Stanley consortium regarding things like asset transactions or developments and-- and maybe if you could just characterize what your relationship is with the group today?

Specifically on Canary Wharf I guess we continue to talk to our co-investors there about lots of -- a number of different things. Obviously there was a -- a time when when we were competing against each other and we've all -- I think reconciled ourselves to that we're partners together and ultimately, I think, we'll, you know, operate the asset in a very collegial fashion. As to specific transactions, their business plan, and I say their because they control it not us, has the sale of a number of assets and it's possible we, either on our own or with institutional investors, may bid on some of those assets when they come up for sale. And we'll -- there's not anything that we've purchased today but that may happen in the future.

Okay. And then just going to page 5 of your letter to shareholders you mention the acquisition of multi-family assets as a -- as a possibility. Just wondering is that -- is that just an example of something that you could do or is it more indicative of something you may have looked at.

It is something we have looked at for years. It's more indicative of something that we could look at and that we have no intentions of doing anything today. But it's really just taking our, it -- it was meant to illustrate the fact that taking our expertise in an industry and just moving to an adjunct area. So it doesn't -- it -- it shouldn't be taken that we're buying multi-family assets in the -- in the immediate term.

Okay. And just last question. In terms of your -- your performance metrics and, I know that you don't publish your own estimate of now, but do you still target at 12 to 15 percent annual growth in underlying value over the long-term.

Yes -- yes, we've --, we've kept with the 12 to 15 percent growth in -- in cash flows and -- which translate essentially into the same thing on underlying value and I guess we still believe we can do that. Whether over the very long-term you can achieve 15 I don't know but I sus -- but I think certainly the fundamentals of the business today should allow this -- that in the short to medium term.

Okay. Thanks very much.

Thank you. Your next question comes from Joe Prisciatta of Deutsche Bank. Please go ahead.

Yes, thank you. Good afternoon. I apologize if I missed this question, I got on the call very late. When you look at the metals business today, in Noranda, do you see the fundamentals and outlook any different, than say, how you looked at these business five to six months ago and might -- might there be room to think about these businesses as a keeper today?

You know,I thi -- I guess maybe I'd answer that, and I have to be quite careful with what I say about Noranda because it's a public company, but we -- we set out on a strategy in the company to own low volatility assets which produce cash and basically deliver that to our investors over the longer term. What that means is its tough to own Noranda, it doesn't really fit into that category so we haven't really changed in our mind about strategy. And there -- but there are different ways to get value out of an asset and I guess we continue to have an open mind as we sit today to transactions that could result with with respect to Noranda. And, really to your comments, and I -- and I guess that my comments earlier, the good news is that the fundamentals of the business are extremely positive and this environment allows you to think differently about the company than if it was not that situation.

Thank you.

You're welcome.

Thank you. Once again, if there are any questions please press star 1 on your touchtone phone. Mr. Harding, there are no further questions at this time, sir.

Great. Thank you very much, operator and thank you everyone for participating this afternoon. We look forward to visiting with you again when our first quarter results come out for 2005. Bye for now.

This concludes today's conference call. Please disconnect your lines and thank you again for your participation.