Brookfield Corporation (BN) Q2 2007 Earnings Report, Transcript and Summary

Hello, this is the Chorus Call conference operator. Welcome to the Brookfield Asset Management Incorporated conference call and webcast to present the Company's second quarter 2007 results to shareholders. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. [Operator Instructions]. At this time, I would like to turn the conference over to Bob Harding, Chairman.

Thank you, operator, and good morning, ladies and gentlemen. Thank you for joining us for our second quarter 2007 earnings announcement. Joining me today on the call is Brian Lawson, our Chief Financial Officer, who will discuss our financial results and provide an operating overview. Following Brian's remarks, Bruce Flatt, our Chief Executive Officer, will discuss the current market environment. He will be followed three of our executives who are leading the spin-off of our infrastructure business, Brookfield Infrastructure Partners to our shareholders. They will discuss various aspects of this strategic initiative. Aaron Regent and Sam Pollock, Brookfield managing partners and co-CEOs of the Brookfield Infrastructure and John Stinebaugh, Chief Financial Officer of the partnership, will be speaking to those issues. At this time I would like to remind you that in responding to questions and in talking about new initiatives and our financial and operating performance, we may be making forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. For further information on known risks factors I would encourage you to review our annual information form and our annual report, which are available on our website. With the formalities out of the way, I will now turn the call over to Brian Lawson.

Great, thanks, Bob. As Bob mentioned, we're going to take the opportunity of this call to have Aaron, Sam and John make some comments on Brookfield Infrastructure Partners. So, given the time we want to dedicate to that, I will keep my remarks on our financial operating results relatively brief. We did report strong results for the second quarter. Cash flow from operations was $440 million. That’s significantly higher than the $267 million we reported for the same quarter last year. And nearly all of our operations contributed to this growth. Our net income increased at a more modest pace, roughly 20% on a per share basis, as the growth in operating cash flow was offset to some degree by increased depreciation recorded in respect to the assets acquired last year. Some of the highlights of the quarter included the following. We continued to show growth in assets under management and fees. Total assets under management increased to around $77 billion at quarter end compared to $71 billion at year-end. And that’s due to new acquisitions and new funds from clients, both new and existing clients. We increased our client commitments through our second Restructuring Fund and received capital commitments for our second Bridge Lending Fund. We also increased assets under management within our fixed income securities operations. Fees earned during the quarter, increased to $95 million from $69 million last year. And importantly, the annualized level of base management fees has continued to increased and now stands at roughly $90 million. And I would also note that these fees do not include a number of accrued performance fees to which call-back provisions still apply. Our property operations recorded $513 million of operating cash flow, up significantly from the $337 million recorded in the same period last year. The increased contribution came mostly from our core office properties, and that was due to properties acquired since this time last year, a higher level of realization gains and increased rents on existing properties. Leasing activities remained strong in many of our markets. We leased 3.8 million square feet of space within our North American portfolio so far this year, at an average net rent of $29 per square foot, and that was replacing leases that averaged $20 per square foot. Occupancy across the North American portfolios stands at 95% and a little over 97% at Canary Wharf in the U.K. The diversification of our residential operations was quite apparent in or quarterly results as the weak U.S. market was offset by continued growth in our Canadian operations and solid results in Brazil. Our total cash flows were off by 15%. The contribution was virtually unchanged quarter-over-quarter after taking into account carrying costs, taxes and co-investor interests. Our power operations contributed $170 million of total cash for the quarter. That’s up from $156 million in the same period last year. Water levels were below average, and lower than that experienced at our facilities owned in the same quarter last year. But this was offset by higher realized prices. And we also benefited from the contribution from facilities acquired or constructed since this time last year. Roughly 80% of our power continues to be under contract for the period through the end of 2008 at an average price of roughly $67 per MW hour. There is two points I would like to make in that regard. First, these prices are below where we see prices trending over time and second, we typically realized prices in excess of these levels through ancillary revenues such as capacity payments, and also by capturing peak pricing opportunities. And turning to our infrastructure operations, our timber operations exceeded targets during the quarter. Favorable weather conditions enabled us to achieve higher harvest levels and prices were also favorable due to good demand in our markets. We closed the acquisition of Longview Fibers during the quarter which added 588,000 acres of very high quality timber in Washington State in Oregon. This brings us to 2.5 million acres of pre-hold timber and positions us as one of the top five owners and operators of private timberlands in North America. These operations contributed $22 million of operating cash flow during the quarter. Transmission systems, performance there was on target. That includes the Chilean operations acquired last year which contributed $50 million of cash flow during the quarter and that’s a significant increase over the same quarter last year, which we bought the operations at the end of June 2006. And we continue to benefit from having a good level of capital deployed between our Bridge and Restructuring activities and experience continued favorable results. The increase in cash flow was due largely to improved results within two of our restructuring investments. Investment in other income nearly doubled to $248 million in the quarter on a cash flow basis. The result included a gain of $126 million on the sales of exchangeable debentures during the quarter. Carrying charges increased during the quarter commensurate with the increase in our asset base and the amount of cash flow attributable to co-investors also increased and that’s both as a result of the increase in the assets held within partially owned funds as well as growth in cash flows within these funds. During the quarter we completed a number of important financings, both during the quarter and subsequent to the quarter, and this included signing commitments for the long term refinancing of our Longview acquisition, $1.2 billion with an average term in excess of 12 years and attractive pricing and an 18 month bridge loan to fund our Multiplex acquisition. Despite the recent turmoil in the credit markets which Bruce will address shortly, we are continuing to execute our financing plans on payable terms. Finally, we declared our regular quarterly dividend of $0.12 per share payable on November 30th to holders on record on November 1st. And on that note, I will turn the call over to Bruce.

Thanks, Brian. My comments today will deal simply with one issue, and that’s the state of the financial markets, and particularly the debt markets. After I talk Sam and Aaron will address our infrastructure activities and post that, I'd be pleased to answer any other items or questions which people want to address… or Brian and I would. There has been significant volatility recently in the capital markets. This has been in the stock market over the past couple of weeks. But prior to this over the past few months in the credit markets largely. As all of you know, this started with the sub prime residential mortgages being affected by the U.S. housing market and has spilled over into debt of virtually all types, but in particular high yield financings in leverage buy outs. The bad news I would say is everyone is affected in some way. The good news for us is that our exposure to this type of financing is quite limited, and the level of capital that we have at risk is minimal relative to our operations. Firstly, just keeping things into perspective we have approximately $20 billion at book value of real estate assets, obviously more at intrinsic value. Of that, 90% is invested in commercial properties, which to date have largely been unaffected by the issues that I just spoke of. Our net exposure to residential properties is about $1 billion at book. A lot of that, which is outside the United States, and is similarly unaffected by all of this. In fact, as Brian noted, our Canadian housing business is enjoying its best year ever with results up 50% over last year for the first six months. However, we are affected in our U.S. homebuilding business, our results this year-to-date are off substantially, even though you generally don’t… we generally don’t sell housing, where sub prime is relevant to the buyer. Essentially all home buyers have gone on strike at the current time. So there is a significant supply-demand imbalance in the markets in the U.S. You don’t see it as vividly in our numbers, as Brian mentioned, because of the strong performance of the Canadian operations and the stable performance in South America. But our sales in the U.S. are down. We had been worried for a long time about the U.S. residential business and therefore we largely quit buying land after 2004. As a result today some of our crude gains in our portfolio have deteriorated, but unlike others we have not had to take any write-downs as of yet, and barring unforeseen events, given the cost based we have in most of our lands, none of the significant issues of write-downs which the U.S. homebuilders are dealing with, should affect us, possibly relatively small amounts compared to our balance sheet. On the positive side, we are assessing this environment and considering alternatives to deploy capital in this sector at higher risk adjusted returns than we have seen for at least five years. And we are considering a number of opportunities. The second place, where this environment is affecting us, is in the capital we manage on behalf of clients in commercial and residential mortgage security mandates. Given the current environment, we believe our managers have done well by our clients. But extreme liquidity events can sometimes take good with the bad. We believe our performance for the year has been good given the circumstances. From a balance sheet perspective, we have very small exposure to any of these products. Our largest exposure is less than $50 million of shares, which we own in an entity called Crystal River REIT. We manage the entity which owns commercial mortgage backed and residential mortgage backed securities in addition to real estate. And while the sub prime exposure in Crystal River is relatively small, the margin ability of even quality paper has seen reductions, and therefore we are ensuring that Crystal River works through this environment in a prudent fashion. We don’t see any major issues, and hope we can identify opportunities again to utilize our capital in this environment, should asset come available at a great price. The third place where the environment touches us is the debt markets for highly leveraged transactions. Debt has become harder to obtain in the market. We do think this is temporary, as the markets will re-price debt and bring the market back in the balance, but it's likely that’s the covenants and terms recently available will not return. In the meantime, some of the debt that we've sold in the markets on transactions is trading at wide spreads from recent times, and this may again, present opportunities to us in asset classes where we haven’t been able to find value over the past couple of years. Finally, a comment on the last, on the "watches," I would say in the market on debt positions, which are often are referred to in the newspapers. And clearly there were many bad sub prime loans written in the market. In fact there were probably some bad LBO and entity loans made. But by and large, the underlying business climate remains very good. And the collateral backing most loans are… is very good. What is happening in the markets, is the spread widening is causing mark-to-market losses for financial institutions and borrowers, sometimes resulting in forced selling of loans because of margin reductions. I guess the important point here is the note that this is a “Wall Street” issue, not a main street issue. In fact the fundamental of most company and most property types, particularly commercial property assets are currently extremely good. And while we suppose these events could negatively impact a strong global economy and cause other events, this clearly has not happened to date. We are not happy to see credit issues in the marketplace because it does affect everyone. And as a result, this could become a more widespread issue. To end on an upbeat tone, before I turn it over to Aaron Regent, we believe we’re well positioned to take advantage of opportunities in the market, both with capital available and with knowledge of a number of these markets, should opportunities for great value purchases arise out of liquidity issues. With that I’ll turn the conference call over to Aaron.

Thanks, Bruce. I am going to begin and then will hand off to my two colleagues, Sam Pollock who is the other Co-CEO for Brookfield Infrastructure and John Stinebaugh, who is our CFO. As many of you know last quarter we announced that Brookfield would be spinning off a listed infrastructure entity called Brookfield Infrastructure Partners. Brookfield Infrastructure, as we refer to it will initially own interest in our high quality timberlands and transmission businesses and would become Brookfield’s primary vehicle for investing in infrastructure assets globally with the exclusion of property and renewable energy, meaning hydro and wind. We have just filed our prospectus in both the OSC and SEC… with the OSC and SEC, and I will encourage you to review this document for further details. It is available on both the SEDAR and EDAGR websites as well as by request from Brookfield. On this call, we’d like to discuss the rationale for the spin off, our strategy for Brookfield Infrastructure and address a few transaction mechanics. A key strategic thrust of Brookfield is to continue to build our infrastructure asset management business. We define infrastructure assets generally as long life, physical assets that are the back bone for provisions of essential products or sources for the global economy. It typically has strong competitive positions with high barriers to entry, strong margins and stable cash flows, and upside from economic growth or inflation. We believe that there will be enormous opportunities to deploy capital in this asset class due to the requirement worldwide to maintain and provide additional infrastructure to support and keep pace with economic growth. Governments are constantly challenged to find the financial resources to meet this demand and are increasingly looking to the private sector to bridge the gap. This is creating a large number of attractive investment opportunities. In addition, the corporate sector has recognized the value creation opportunity of separating their operating businesses from associated infrastructure assets, and are increasingly looking to monetize those infrastructure assets in order to service [ph] value and reduce their cost of capital. This will also create new opportunities. The demand for infrastructure investments has also grown substantially over the past few years as pension funds and insurance companies seek longer duration assets to offset their liabilities. The current portfolio of allocations to the new infrastructure asset class are relatively low, and only a fraction of real estate. However, this is changing rapidly. Allocations are increasing, which will dramatically add to the demand for these assets. As this demand increases, there is also a significant rise in interest in the services of infrastructure asset managers like Brookfield. We believe that we are well positioned to be a leader in this sector and can draw upon, and bring to bear our decades of hard asset management experience. So, the creation of Brookfield Infrastructure will allow us to achieve a number of strategic objectives. Providing investors with an opportunity to participate in a Brookfield sponsored infrastructure company that will be well positioned for future growth. This establishes a permanent source of capital to fund our infrastructure business that is consistent with our strategy of owning these assets on a long-term basis. And it will accelerate the build up of Brookfield’s asset management platform by establishing a company that we manage in one of our highest growth business lines. So, with that I’d now like to turn the call over to Sam who will discuss the strategy of Brookfield Infrastructure.

Thanks, Aaron. Brookfield Infrastructure is being launched with an excellent asset base which we will continue to optimize and grow. Specifically, it will have interest in electricity transmission and timber operations in the United States, Canada, Chile and Brazil, comprised of the following. And an 18.4% interest in Transelect, which owns over 8,000 kilometers of transmission lines in Chile. Our 7.5% to 25% interest in the TBE entities which collectively have over 2,100 kilometers of transmission lines in Brazil. Our 100% interest in Brookfield’s Ontario transmission operation, which has approximately 550 kilometers of transmission lines in Ontario. A 30% interest in Longview’s Pacific Northwest timberlands which has approximately 588,000 acres of freehold timberlands in Oregon and Washington. And a 37.5% interest in Island timberlands which has approximately 634,000 acres of freehold timberland located principally on Vancouver Island. Our goal is to be a leading owner and operator of high quality infrastructure assets. Our strategy is to optimize the value of our existing assets and to further diversify our investments on a global basis, into other sectors of the infrastructure market. Based on our assessment of the market, we believe that there are a number of opportunities in the transportation and utilities sectors. In the utilities sector, this includes special businesses such as pipeline, electricity and natural gas distribution and water distribution. In the transportation sector, investments would include toll roads, railroads, air and seaports. And in the telecommunications sector, this includes communications infrastructure such as transmission towers. One sector that was excluded from our mandate is renewable energy, meaning hydro and wind power generation. We believe we are uniquely positioned to successfully compete for assets on a global basis. Through the sponsorship and ongoing relationship with Brookfield, Brookfield Infrastructure will continue to have access and benefit from Brookfield's transaction and execution and structuring expertise. We have extensive experience in acquiring public and private companies and in arranging creative financial solutions to complete these acquisitions. In addition, Brookfield was able to pursue complex acquisitions of businesses that own infrastructure assets together with other assets that have a riskier cash flow profile. A good example of this is the acquisition of Longview which had both the timber business and an integrated converting business. Brookfield will separate these two businesses and contribute an interest in the timber assets to Brookfield Infrastructure, while offering our restructuring group the opportunity to create value from the converting businesses. Also, our focus will be on the acquisition of large assets, whose scale tend to naturally limit amount of competition. Brookfield has a strong history of leading investment consortiums to acquire such assets and Brookfield Infrastructure will be able to participate, as a result. Additionally, Brookfield Infrastructure will invest in Brookfield sponsored funds that target infrastructure investments. Our operations oriented approach to managing investments will also result in the optimization of investment returns. By proactively being involved in the day-to-day operation of investments, Brookfield ensures the maximization of returns through operational efficiencies and the capitalization of growth opportunities. We believe that together, these attributes will Brookfield Infrastructure to successfully acquire and build a high quality portfolio of infrastructure assets, which will result in superior risk adjusted returns for the partnership. I’d now like to turn the call over to John who will walk through a number of the specifics of the transaction.

Thanks, Sam. I‘d like to start by talking about the structure of the spin-off. The spin-off of Brookfield Infrastructure will be accomplished by a special dividend by BAM, to its shareholders of 50% of Brookfield Infrastructure’s units. Brookfield will retain the remaining 40% of the units. BAM shareholders will receive one Infrastructure unit for every 25 BAM shares held. This is roughly equivalent to $1 per BAM share. Brookfield Infrastructure will be a publicly traded partnership listed on New York Stock Exchange. This is managed by Brookfield. As Aaron mentioned, it’ll be Brookfield’s primary entity for the acquisition of Infrastructure assets on global basis. Going forward, our objective is to provide an attractive total return for our unit holders. Our distribution policy will be to make quarterly cash distributions at a level that is sustainable on a long term basis factoring in maintenance and capital expenditures. We believe that 65% to 75% of operating cash flow is an appropriate level. Through organic growth of our portfolio as well as acquisitions, we will seek to increase our operating cash flow per unit which should generate dividend growth and capital appreciation. Now I’d like to walk through some of Brookfield Infrastructure's financial highlights. As you look at our financial information in the prospectus, I would encourage you to focus on the pro forma financial statements. These include all of our operations as well as the impact of Brookfield Infrastructure's structure. Whereas the historical statements only include Island Timberlands and Transelect. On a pro forma basis, Brookfield Infrastructure's operating cash flow was $58 million in 2006 and $90 million in the first quarter of 2007. On a run rate basis for 2006, operating cash flow was $70 million, which factors in $15 million from increased harvest levels at our timber operation as well as $4 million of public company costs. As I mentioned Brookfield Infrastructure will be managed by Brookfield. We will provide services under our master services agreement. Under this agreement, Brookfield will receive a base fee which is approximately equal to 1.25% of Brookfield's market value which is in line with comparable entities. In addition, Brookfield will also be entitled to incentive distributions, which will be designed similar to those in the MLP industry which in our belief provide Brookfield interest with unit holders. Brookfield will only receive incentive distributions if distributions are increased to unit holders over certain thresholds. In terms of how Brookfield’s infrastructure will be taxed, first of all the spin-off will be treated as a taxable dividend, equal to the fair market value of the units that are received by BAM shareholders. The dividend should be treated as an eligible dividend for our Canadian investors and a qualified dividend for U.S. investors. For non-Canadian shareholders, BAM will withhold the portion of otherwise distributable units at the applicable rates based upon the residency and tax status to satisfy withholding taxes. Going forward, the tax characteristics of Brookfield infrastructure’s income will flow through to its unit holders since Brookfield infrastructure is a publicly traded partnership. Brookfield Infrastructure will own interest in its operation through holding companies in various jurisdictions. As a result, distributions will contain a combination of dividend, return of capital and interest income on inter-company loans from these jurisdictions. Unit holder taxes will be determined by the type of income that U.S. holders receive. Our objective is to withhold taxes based on the residence and tax status of unit holders. We are in the process of obtaining approval from tax authorities in Canada and the U.S. to enable us to do this. Prior to the close of the spin-off, we'll provide more tax information on the treatment to BIP unit holders and also I would encourage you to read the tax section in the prospectus, which contains quite a bit of information. Regarding the timing of the spin-off, as you know we filed the preliminary prospective with securities regulatory authorities on July 31st. We anticipate it’s going to take 10 to 12 weeks to finalize the prospectus and we expect to complete the spin-off in the beginning of the fourth quarter. Our record date will be after the effective date of the prospectus. Approximately three or four weeks before we anticipate being effective, we will establish the record date as well as the initial dividend level for Brookfield infrastructure. We expect to close shortly after the record date. That concludes our formal remarks on Brookfield infrastructure.

Operator, if there are any questions, we would… we'll take them now. Question and Answer

Yes sir. We will now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Neil Downey of RBC Capital Markets.

Hi good morning everyone. Maybe a question first Aaron or Sam. Could you address sort of strategically, how was determined the varying interests of Transelect, TBE, Island Timber et cetera, that are to be placed into the Infrastructure partnership?

This is John answering that. First of all, we took into account, agreements within our various consortium agreements with other shareholders. There were some constraints that we had to factor in. In addition, we also factored in tax considerations. And finally, we tried to balance the portfolio with an appropriate mix of timber versus transmission as well as geographically.

Okay. As it pertains to Multiplex and the funding for that transaction, I believe you commented on your financing commitments. The cash portion, I believe will be give or take $2 billion. Can you just talk about where precisely that cash will be funded from in terms of when I look at your consolidated balance sheet? What line items or bucket does it come out of?

Sure Neil, its Brian. First of all it’s little less than $2 billion because we already owned a chunk of the company, around 5% before we announced it. And that will come out of the combination of monetization of financial assets and just, I'll call it asset liquidity. And it will also come from utilizing in the near-term, some of our credit facilities, or issuing commercial paper into the market.

Okay. And the recent acquisition of Longview, again when I look at your balance sheet, am I correct in understanding that the manufacturing assets have effectively been segregated and put into the restructuring bucket.

No, you would actually find them within what we refer to as our private equity investments. And it's very similar Neil, to how we handled the Weyerhaeuser transaction, when we bought the Island Timberlands. What we did was we took, we bought the entire business, and then we separated… and we did that, I think by the end of May in the case of Longview, we separated the industrial from manufacturing operations from the Timberlands, so the Timberlands are set up discretely within our timber management operations. And then in the industrial assets, in our financial statements you will see within the investments category.

Okay. And actually just two quick additional questions. It looks like you have made some additional investments in Brazilian retail assets. Could you elaborate a little bit just on the dollar value of capital that was deployed, and the returns that you would expect to see from those investments?

Neil, it's Bruce. We, and just for background, we set up an $800 million equity fund, which we own 25% of the LP interests and manage and run the fund. Initially, it was about 25% invested with assets that we sold into the partnership with the agreement of our LP partners. Subsequent to then, we have committed to a number of purchase transactions in the market, and we are about… with all the transactions which we have either closed or are committed to close, we are approximately 60% invested of the capital. And I think that’s interest in five shopping centers which, in addition to the three that we put in originally. And we are very positive to the environment. In fact there is… the industry in Brazil is still in its infancy. There are, I would say three maybe four, us being one of them players who are accumulating retail centers in Brazil. And we would hope to be able to continue on, after raising... completing this fund, continue buying further centers through another fund, ultimately to create an industry in Brazil similar to what the industry looks like in Europe or North America. So, we are trying to be one of those players in the country.

Okay, that’s great. And lastly as it pertains to Estrada, you have monetized further debentures or exchangeable debenture position. It looks like there is still a modest investment sitting on the balance sheet, presumably there is a further contribution to cash flows at some in the future when that last piece is monetized, is that correct?

Yes, that’s correct, Neil. It would be… we have around 20% of the original stake left on our books at the end of the quarter.

Okay, great. That’s worked out pretty well. That’s everything. Thanks.

Thank you.

Our next question comes from Cherilyn Radbourne of Scotia Capital.

Good morning. First question, really it's just to echo something that your colleagues at Brookfield Properties were asked on their call last week. Just if you can provide any comments on what you believe has been the change in your cost of financing today, versus what you would have seen a month ago given all that’s taken place in the credit markets.

Okay, thanks, Cherilyn. I think a lot of it depends upon where the properties are located and where you are sourcing the funds from. And clearly, there has been a shrinkage in the amount of liquidity that’s available in some measures there. And, as you would expect that does lead naturally to some increase in the pricing. So we have definitely seen a, what I would describe a modest increase in pricing. But it's… it hasn’t been anything that frankly has significantly increased our cost of funds. I think a lot of it comes from the quality of the properties that we own and the strength of the cash flows. And there is a lot of liquidity in the market in certain places for those kind of assets. And we are finding that it is definitely possible to access those. Having said that those institutions are aware of generally what’s going on in the market. And so they will tend the price accordingly.

And Cherilyn, I'd make just maybe two quick comments. One is that, generally in this type of environment, as Brian mentioned, a little bit is applied to quality and that’s happening in two regards. One, for people who are looking for product other than treasury. They are going to assets of the type that we own and that’s actually a good thing for the financing… finance ability of each types of asset. The second one is, and just a comment to the actual amount of change in cost of financing, over the past month, treasuries have gone from where they were at 5.25% in the U.S. to 4.75%, so you have seen a 50-basis points downward movement in treasuries. I doubt you, on high quality assets, you have seen a 50-basis point spread widening. And therefore the absolute cost of financing versus a month ago to today, if you didn’t have hedges in place and you are just putting financing in place today, it's probably about the same. So I think you have to take both of those into account when you think about.

Okay, thank you for that. Your colleagues also made some quite strong statements about their appetite for buying back their own stock. Your stock has been off quite dramatically in the last few weeks. I wonder if you could just comment on, I guess, your liquidity available to fund buybacks and your appetite to do buybacks of your own stock.

Sure, Cherilyn, it's Brian. We certainly have a history of looking to buy back our stock, and we do have quite a substantial amount of liquidity. We have an issuer bid that’s up and running. I would say what we will do coming out of our blackout period, which obviously we are in, that will be coming out of shortly, is we will definitely be looking at the value that we can obtain by repurchasing our own stock. Having said that, we are going to look into a lot of various opportunities, some of which Bruce alluded to earlier in the call. So, as any time when we assess buying back our stock, we look at it in the context… we see it as an investment. And so we look at it in the context of pretty broad range of investment alternatives at any point in time.

Okay. And then just lastly on Longview, you have indicated that 30% of that will be syndicated into BIP. Do you plan to retain the remaining 70% on balance sheet or is there a plan to syndicate an additional portion to institutional investors?

I think the objective from the get-go was to sell down our interest from that. So, a portion of that is in the infrastructure partnership. And we'll look at alternatives with respect to the balance of it.

And when might we see something on that?

That’s really hard to say at this stage of the game, Cherilyn. But it's something we definitely would be looking to execute over the next six to 12 months.

Okay, thanks very much. That’s all my questions.

Our next question comes from Rossa O'Reilly of CIBC World Markets.

Thank you. I just wondered if you could take us through the financial components end of somewhat less than $2 billion that you would be paying for the Multiplex group acquisition, on the unused lines of credit component and the amounts that you would look to raise from selling some of the cash and financial assets on the balance sheet.

That’s something we would kind of monitor on a day-by-day basis depending on where our liquidity actually sits. But I tell you, you could probably piece it up with maybe about a $1 billion of un-drawn credit facilities. And so sitting here today, it wouldn’t be unreasonable to suggest that we'd say use $500 million or $600 million of our CP issued against our lines, and then the balance of that would come out of monetizing financial assets. And then of course we have pretty strong cash flow within the organization and pretty high velocity in terms of a lot of our other assets as well.

A million of common shares. And I was wondering if you could give us any color as to what is in that common share portfolio?

Sure. Bruce actually had some comments on that in the shareholders letter. And Bruce, do you want to speak to that?

Hey Rossa, I guess those investments which we often have on our balance sheet are highly liquid in nature, in their market traded positions. They’re concentrated in the areas where we participate, so that we have knowledge of the industries and the sectors. Some of them, again as Brian said to liquidity, from time to time, we use our excess liquidity to put it into those stakes. Often they turn into other situations that we may be involved in. For example, we owned 5% of Multiplex prior to getting involved in it. In a broader way as well we own just under 5% of Longview Fiber before we got involved in that. So, there are positions like that, but they’re highly liquid securities. In fact some of them as noted in the shareholder letter are in Asian property securities that we’ve spent a lot of time researching, and we think we’re buying at pretty good values. But again, there are similar types of assets that we own in the balance of the portfolio.

For accounting purposes, they will be accounted at cost?

No, those would typically be carried at market values, Rossa, and then they will either be mark-to-market through the P&L or mark-to-market through our equity, depending on whether they’re held for trading or held for sale.

So, will the fluctuations in that have an impact on reported earnings and cash flow, going forward?

To the extent that they are mark to market through the P&L, then yes, they would impact our net income and our cash flows. And then obviously, if they are held for sale, then any gains or mark-to-markets would reside in equity until such time as we actually dispose off the security, at which point in time they would be reflected in net income and cash flow.

Thanks. And then to Brookfield Infrastructure, will that be held in that portfolio or will that be somewhere else?

No, we expect that we will be fully consolidating Brookfield Infrastructure. So, in fact, the way that it would be reflected in our financial disclosures, you’ll really see the 60% owned by Brookfield shareholders as a minority interest within our financial statements.

Okay. If I may, when Brookfield's Infrastructure is spun off a lot of people are going to get odd lots in it and it would be listed in places other than in New York. And how do you intend to deal with the issue of a very large number of small shareholdings?

This is John. Initially we’re going to list on New York. Over time, we may consider other exchanges, but initially it’s going to be New York. Regarding odd lots for fractional shares, we’re going to settle them in cash.

Will there also be an opportunity to sell odd lots or just fractional shares?

Just fractional shares.

Although, Rossa, I guess we can... it’s a good point and we should think about that, whether there is an odd lot program we can put into facilitate smaller shareholders realizing value out of those shares. And we will do that. Thank you.

Our next question comes from Andrew Gus of Credit Suisse.

Good morning. There has been a considerable amount of political talk on changing the tax treatment for private equity players in the U.S. And just wondering, as a Canadian corporation, how do you look and think about your relative cost of capital changing versus some of your U.S. competitors?

Okay, it’s Brian, Andrew. And Bruce, you may want to make some comments as well. I think, in general, first of all the proposed changes do not have a direct impact on us. There is none that we can really see at this point in time because we operate in a corporate form as it stands today. And so that wouldn’t affect us. And we don’t believe that it would affect Brookfield Infrastructure in any way because it is owner and operator of assets as opposed to provider of services. Having said that, if these changes go through as proposed, it would seem as though it would increase the effective tax rate for some of… some companies operating in the United States. And so clearly, to the extent that it increases their effective tax rate relative to ours, then I suppose one might argue that that levels the playing field somewhat.

Levels the playing field, but tilted in your advantage a little bit.

Right.

And then just really a follow up on that, over the last 12 to 18 months or so we’ve seen fewer alternative asset manager plays coming to the market. How do you see the market… obviously you've competed against them and also done joint ventures with them over the years. But when you look at the market and the competition from a capital market standpoint and a stock market perspective, how do you see yourselves being different versus some of those players?

Andrew, it's Bruce. And I guess everyone would have their own view on this, so I won’t make presumptions. But probably the biggest difference we have today versus others is that we are a full scale operator of these businesses. And we have a lot of our own capital invested into them. And we don’t intend to be just a manager of assets. We intend always to have a substantial amount of capital, whether that’s 20% or 50% of the fund. We intend to have a substantial amount of capital invested into the strategies that we deploy. And that’s largely because we had capital base to be able to do that. I suspect, as these companies go public and they raise capital in the businesses, they will be able to take bigger limited partnership interest and hold them on the balance sheet, and they may do that. I won’t presume what any of them would do. But I think over time, to the earnings capability and sustainability of their cash flow statements, I think they may look at doing that.

And I think there is another element to that as well, Andrew. One of the, I'd say the challenges that we've tended to face over the years is, people would ask us for what comparables are for our company, and in terms of whether it's analyst following, investor following, where we would pop up on indexes and things like that. And so to the extent that there are an increasing number of public companies that, or listed entities that are to some degree or other similar or different along the same lines of business, then what we found is that in fact is helpful for us in terms of people looking at our company, and assessing the merits of it from an investment perspective, which ultimately feeds into our cost of capital as well.

And then if I may ask just one follow-up question on really the geographic scope of your business. Multiplex really takes you into a different world, that you haven't really been that much in Asia. But when you look at some of the commentary in the shareholders' letter, you clearly have a focus on Asia. If you go back, I think it was two, might have been one or two years ago at the Investor Day, you talked a lot about geographic scope between North America, Europe and Latin America and particularly, Brazil. How do you see the geographic scope on a go-forward basis? And what kind of balance between the regions around the world.

Andrew, it's Bruce. And I would say it all depends on opportunities. Clearly we have a much bigger presence in North America and South America. And if we could find the opportunities at the same returns and the same risks in those markets, we'll clearly burn capital to work those places. We'd like to… we think Multiplex is the unique opportunity for us to get a platform that has 50 years of history behind it, to be able to build off. And it's similar to what we have here. And that just gives us a great advantage to build the business off of in that part of the world. But essentially we look at, we don’t have any targets for countries, jurisdictions or places and we don’t generally have a diversification model like that. We are somewhat opportunistic in our strategy. And I think over time you will see us put money in a number of those markets just because we think there are significant opportunities available. But again, if a lot of opportunities come about in North America, at returns which are historically good, we may put more capital here.

Great, thank you.

Our next question comes from Chris Haley of Wachovia.

Hi, good morning. It's Brendan Maiorana with Chris. It's been a couple of years since you guys did the Hyperion transaction, and that deal from my recollection was largely done to get access to the rolodex of investors there? And it seems like a portion of the value from Multiplex is also to get access to some of their investors and to try to cross-sell some of your North American fund initiatives to possibly some of the investors, in legacy investors in multiplex. I am wondering how you would assess your performance in terms of taking some of the investors in Hyperion and cross-selling them into some of your North American products or just the regular investment products over the past couple of years, and how that performance is relative to your initial expectations, played into the value creation potentially you see from the Multiplex deal?

I would start off by saying that in general we're always we always think that we haven’t achieved what we should have achieved. Having said that, and we’ll make a presentation, Barry Wyman is going to make a presentation on the marketing side of our business at our September Investor Day. But over the past, in general, I think over the past number of years, we’ve raised $10 billion of fund capital. A lot of that has been cross-selling between a number of institutions. A lot of those investors are second time, third time, fourth time investors with us. And we continue to penetrate the institutional market with our funds. They're very, usually very large investors that have been with us. Today, where we’re heading is to diversify that down to smaller investments with more institutions. And we’re excited about that. We continue to play. And we just brought on a new person to help out our marketing efforts, who just joined us, who’s very well thought of in the industry. And we hope he’ll be able to do a lot in taking what we have and building on that.

Okay, thanks for that. In terms of, Bruce, you mentioned in the shareholder letter, the $4 billion of assets that you’ve got on balance sheet that really aren’t producing any meaningful cash flow, and I think particularly cited were some of the hydro development deals and the commercial property. Is the interest expense on the debt for those development deals, is that currently being capitalized or are you guys expensing that through your operating cash flows?

By and large it will be capitalized, Brendan. There would be a few exceptions to that but typically capitalized.

Okay, great, thank you. And then just thumbing through the Infrastructure Partners preliminary perspective, it seems like it's going to be a spin-out or a contribution of some of the assets initially and then over the proceeding, one to two quarters it seems like some more assets will come off of BAM into BIP. Can you just give us a sense of the magnitude in terms of the initial balance sheet and cash flow impact to BAM and then how that’s going to look over the proceeding one to two quarters?

Yes, it’s John. First of all in terms of background, we will initially close with Island Timber, Longview and Transelect. And the reason why we can’t close on the balance of the assets is they’re 100% owned by Brookfield. But in order to complete the transfer, we need to get regulatory approval. So that’s basically what is going to be required prior to closing. We think it's going to be some time in the fourth quarter. In terms of order of magnitude, if you take a look at… through the assets that are going to be coming in, TBE is roughly about $11 million of contribution. And Ontario Transmission, which is the other one, is roughly about $13.5 million. And that’s the operating cash flow. So if you then end up bridging to the pro forma which those assets are included in the pro forma, that gives you up to the $58 million of pro forma operating cash flow.

And one way, you may want to think about it, Brendan, it depends on how you… from a BAM perspective from Brookfield Asset Management, whether you want to look at it from a consolidated or deconsolidated perspective. But what… one way to think about it is that there will be a $600 million which is based on the bucket shares, minority interests that we will be distributing to our stakeholders in Brookfield Infrastructure. So if you look at it from a consolidated financial perspective, and then that $600 million of minority interest, 60% of it, what would be attributed to that 60% interest would be the 60% of the $58 million that John just referred to? And so that was… that is what would show up as being the interest of investors in our net assets and net cash flow. And then it will obviously be the similar kind of economics, if you view it on a deconsolidated basis as well. If you think about… if what you're trying to get at is what will be the decrease in Brookfield's cash flow, then it will be strictly speaking 60% of that $58 million. Having said that, coming back the other way, we will be earning asset management fees, as well.

Right. And just thinking about, so it seems like the initial, and that happens, I guess by the end of the third quarter and then some of the following contributions are likely to happen in the fourth quarter, so there's not going to be a major change in cash flows over, I guess it would just be a little bit of a change over the fourth quarter and then starting in '08, it would be static thereafter?

That's correct. We don't anticipate there is going to be a very big time lag between when we close the spin-off versus when those assets are transferred in.

Okay, great. And then last. Sam or Aaron, in terms of… at the BAM level, historically BAM has talked about levered returns of 12% to 15%. I'd be interested in your thoughts on what you think Infrastructure asset's IRRs are on both un-levered and levered basis?

Maybe I'll start off, and Aaron might jump in as well. We are typically targeting returns very similar to what Brookfield has for itself which is in the 12% to 15% range. Obviously, when we look at the various sectors, we do take into account the risk profile of the businesses. So for a utility asset, typically the returns we may earn on those kind of businesses, would be close to 12%, maybe even a little less at times, because they tend to be regulated and much more assured. And then the transportation sector we would target returns close to the 15%, so… and in some cases higher than that. So they would, on a blended basis come to 12% to 15%. And then on… I guess you also asked what would that be on a un-levered basis. Typically that would be in the range of anywhere from 8% to 10%. And we would have some… from a current cash flow perspective, we would usually earn somewhere in the 5% to 6% range with the balance coming from capital appreciation.

Got it. Thank you.

Our next question comes from Peter Sklar of BMO Capital.

Hi, good morning. On the… just going back to the Longview transaction, it's not clear to me why you're only ramping in your partial interest in Longview. Are you… do you have a certain capitalization of the spin-off in mind or long-term does Brookfield want to co-own assets along with the spin off. It's just not clear why all of Longview is not placed into the new entity.

Peter, it's Brian. John may want to add to this. But just harking back to his earlier comment. What we're… in establishing the Brookfield Infrastructure, as John mentioned, the objective was to try and achieve a certain balance amongst the various assets and operations, both from a industry segment and as well as geographic diversification. And so frankly if we put all of Longview in there, it would have created an imbalance with respect to the other operations. John, is there something you'd like to add to that?

That's absolutely right, Brian.

Okay. And also on the Infrastructures spin, in the corporate presentation that was on your website, I think you had something in there talking about, there was two numbers, there was book value of the assets and then there was something called intrinsic value. But as I recall there was total intrinsic value, about $1 billion. What is intrinsic value? Is that your assessment of market value?

Yes. The intrinsic value basically is how we would think about an approximate market value for those asserts. These assets because of the relationship between Brookfield Infrastructure and Brookfield are all transferred over to Brookfield infrastructure and basically are carrying balances on Brookfield’s books.

Okay. So I just want to make sure I understand the arithmetic then. So, if you have an intrinsic value of about $60 billion and the publicly traded entity is going to own 60% of the infrastructure partnership, are you anticipating that this entity is going to have a market cap of about $600 million?

The float would be about $600 million.

Right, float capital at $600 million.

And Peter, I wouldn’t get… it was important, we felt it was necessary for us to at least give some indication of the value. Obviously, it will trade in the market where it trades and but just for people to get a sense for how much the magnitude was of the distribution. So that enables us to basically say we are going to give you one share for every 25 shares. So that the billion dollars that John spoke to, will translate to about $1 per Brookfield share. Just so people can get their minds around it.

Right.

$10, not $0.10.

Right. And the publicly traded entity, will it have any corporate debt or will there only be project debt?

Well, the financing strategy on a going forward basis similar to Brookfield is going to be to use non-recourse project debt to finance investments. We will seek to establish credit lines prior to closing the spin-off. The credit lines will be for working capital purposes. Also, a component of that will be timing, because to the extent that we would have invested in equity in an investment, we will need to fund that through issuance of units. So, we may use credit facility to help balance out that timing difference as well.

Okay. And structurally how does… if Brookfield Asset Management wants to sell down its interest in the Infrastructure Partnership, how is that done? Is there an exchange? Do they just exchange their interest in the partnership into units of the publicly traded entity?

Yes, that’s what technically would occur, Peter, but we don’t have any intention of doing that at this time.

Right, okay. I just have a question now on the Asset Management business. I was looking at the quarterly management fee, which was $23 million versus $25 million in the first quarter. I thought… I'm left with the impression that assets under management are growing if the management fee is not growing. What's going on there?

There is a little bit of… I guess, it's not really seasonality but as we bring on new funds and as some of the earlier vintage funds mature, the base management fees in respect to the funds will tend to come down a bit with respect to some of the earlier funds as positions are liquidated and assets reduced, and then they step up in some of the newer funds. So you won't necessarily see a strict sequential growth in those fees. Obviously, as the business gets bigger, that’s what we should trend towards. But while we still have a smaller number of funds that have different levels of base fees, you will see a little bit of ebb and flow.

Okay. And on the carry fees, there is very little carry fees. And you have explained before that the funds are relatively new and you haven’t harvested investments. But I know Bruce has said before in presentations that there are certain milestones along the way, where even though you have not monetized the underlying assets, you can look at them relative to fair market value in order to realize on your carry fees? So I'm just wondering, when do those points in time arise? Is it five years or three years? Talk a little bit more about that, when we can anticipate seeing some carry fees?

Sure. It varies from fund to fund, as you might expect. But there is a difference between first of all when we can realize on it, in fact even get paid a fee or with respect to the terms of the funds, and when we can report it for accounting purposes. And our policy is, and this is a fairly typical policy, is that we defer the accrual of those fees until such time as they are no longer subject to call-backs. And so that call-back period in some cases may be for a seven year period of time i.e. the life of the fund. It may be on an investment-by-investment basis i.e. you realize on an investment, you get paid a fee, with respect to that particular income and that is not subject to call-back with respect to the performance of any other investments in that fund. And then in other periods of time, especially in some of our perpetual funds, there might be a five year period. So every five years, fees paid up until that point in time are subject to call back. So, bottom line to summarize that, you’ve seen some performance fees come through our books to date, and those have typically been, even ones where they've been realized… where it's more on an investment-by-investment basis. Otherwise they tend to get deferred until such time as you were there legally or practically no longer subject to a call back. And Peter, I would make one further comment, we need to, as this amount is growing on the balance sheet, we need to do a better job of showing investors what those number are and could be. So I think, we invest something in disclosure, we need to do better in future.

Yes, I agree. At least for a… to the extent that there is publicly traded investments where you can mark-to-market, you could show what, kind of what the accrued but not unrealized carry fees are.

Yes, and exactly. And we’ve observed, and we’ve been reviewing some of the disclosures that some of the other Fund Managers use, and we believe there is some stuff that we can pick up in that regard.

Okay. And then how do you compensate Managers then?

Again, it's on a fund-by-fund basis. But in many cases, their compensation would be deferred to the back-end as well.

Right, okay. Question on the power generation disclosure, on the supplemental information package on the contract profile. I noticed that the pricing is… like in that table you show on pricing, where you show price per megawatt, I noticed that the pricing on the contract profile was trending up since last quarter, even on the short-term stuff, the 20008. So I am just wondering why would 2008 contracted pricing change between this quarter and the previous quarter?

It would be for us either entering into new contracts for generation that had been firmed up and released to be contracted since that time. We generally hold back a certain amount of the generation until the water level become more secure, so to speak because as you might understand you never want to be cut short power. Short, the physical generation of power. And so to the extent that we have been able to do that we can achieve higher prices in that regard.

And in general, Peter, our business is about, just like our real estate business is, we lease long no matter what the price is. And generally our contract's over the longer term, if prices are going up or under-market. And therefore as you knock off more under-market contracts as they expire, the average goes up.

Right. Okay. Lastly, on your, I think one of the areas of interest for the infrastructure Fund is railways. And I am just wondering, are you in a position to comment at all about, I guess you never formally said about the alleged, BAM's alleged interest in CP?

I don’t think we are… we'll make any comment on it, Peter. We have not made any comments, we don’t plan on making any comments. There was some stuff publicly put out by Canadian Pacific, and I think that stands as it is. And I don’t think we should or it's appropriate for us to make any other comments.

Okay, great, thanks very much.

[Operator Instructions]. Our next question comes from the Michael Goldberg of Desjardins Securities.

Good morning. For the past several quarters, you’ve had a high level of recurring, if unpredictable levels of realized gains. And Bruce, in your letter today, you talk extensively about increases in value from core operations that may never be realized into either income or cash flow. And I am just wondering, if we should interpret, I guess from the composition of your assets, and also this commentary, that we might now be expecting, in the next little while at least, lower levels of realized gains coming into income and cash flow than you’ve achieved in the recent past?

Michael, it's Bruce and I don’t think you should interpret that from those comments. What those comments in the shareholder letter that we wrote, we are trying to do is just explain to people how the math works on the type of assets that we buy. And really all that is trying to explain is that we buy on yield, which are generally much lower than internal rate of return that we earn and the balance. Therefore a significant portion of the return is back-ended or in the future, it doesn’t show up in the short term. And that’s really all what it is was about. It wasn’t really meant to talk about the other.

Okay, the second thing, I think for the first time you talked about Mexico, where do you see particular opportunities in Mexico?

Maybe I'd answer it and Aaron or Sam may mention something just on the Infrastructure side. But we have, as you know a significant presence in Brazil and Chile. The other, the third market in South/Latin America of the scale-size and in a place where we feel comfortable to invest is Mexico. And we don’t have any, today any specific investments in Mexico. But we think it could be an attractive place for us to look at in a number of things, particularly in infrastructure. And I’m not sure if Aaron or Sam want to maybe add something.

I can just add a few comments. We have been looking at, in particular toll roads in Mexico. There are a number of concessions which are… have come to market and a number of others, which are expected to come to the market over the next couple of years. So, with respect to this first toll road concession we actually were part of the consortium which did a fair amount of due diligence on that asset and was hoping to bid. We weren’t successful there as another bidding group won that. But we think it is an interesting market. I think there are potentially a lot of opportunities to expand not only in toll roads but in other sectors, other infrastructure assets in the country. So, as Bruce highlighted when you look at Latin America, we seem to be anchored by Brazil, Chile and Mexico and then to a lesser extent in the surrounding regions. So, it is an area that we will continue to watch.

Thanks very much, Aaron.

Our next question comes from Ross Haberman of Haberman Funds.

Good morning, gentlemen. How are you?

Hi.

Just a quick question, you were referring to the pro forma cash flow of Brookfield Infrastructure. I didn’t catch the second number. You threw out the $58 million pro forma, I believe for 2006. You threw out a $70 million number, and I didn’t quite understand what that number was.

Okay, it’s John. $58 million is basically the pro forma operating cash flow, that is in the prospectus.

For calendar ’06?

For calendar ’06, that’s correct.

Okay.

And what the $70 million represents is more of a run rate type number. And there’s really two adjustments to get there. The first is, as we allude to in the outlook of our MD&A, in our timber business we’re increasing harvest levels. Based on stable margins or current margins, we think that will increase operating cash flow by roughly $15 million. And then, in addition to that in the pro forma, it’s in the footnotes, but we were not allowed to put it in the actual pro forma, there’s $4 million of public company costs. So, the net of those two will be $11 million, that’s how you get up to $70 million.

Oh, so it’s $70 million pro forma for calendar ’06, not your expectation for’07?

Yes, and I would call it more of a run rate 2006 number, but that’s correct, it’s a 2006 number.

Okay. And I think you had said that the first quarter in ’07 was $19 million. Do you have the second quarter for ’07 yet?

We do not have the second quarter for ’07. But before we finalize the prospectus given the timing, we will update the prospectus for Q2 numbers.

And I think you said that you hope to pay out 65% to 75% basically of those cash flow numbers?

That’s correct, 65% to 75% is kind of a range that we think is sustainable on a long-term basis.

Those dividends will be… how will they be taxed?

It’s going to be based upon the composition; they’ve mixed up the distribution. So, we anticipate it’s going to be a mix of some dividends from underlying holding companies, that return on capital and some interest expense. So, based on what that composition is, we'll determine what the taxes are to unit holders. And before we close the spin off, we’re going to definitely provide more detail regarding tax implications.

And just one final question, I think, I didn’t quite understand, someone might have asked it; will you plan to lever up that entity, the Infrastructure entity to any extent?

The primary financing strategy is to use non-recourse project level debt for each of the acquisitions that we bought.

Okay, so there's not any holding company debt to… I guess it's almost a double leverage.

Well, what we were planning on closing out some credit facilities for working capital purposes as well as also an acquisition facility to bridge, because we anticipate that investments in new assets will be funded primarily through issuance of equity of Brookfield Infrastructure. So the credit facility will help us bridge that timing difference. At this point in time, we don't anticipate a double levering at the holding company level, just on a permanent basis. But, then that's, things can change as the portfolio grows, and as we get greater diversification et cetera.

Will Infrastructure be allowed legally to buy assets directly from BAM or the acquisitions will be third party, as opposed to inter-company.

It will be. And for any sort of related party transaction like that, we have got basically a code of conduct that we must follow, whereby the independent directors will have to approve the transfer and the transfer price et cetera prior to a transfer from Brookfield to Brookfield Infrastructure.

Thank you, guys and best of luck.

Thank you.

There are no further questions. I'll turn the call over to Bob Harding for closing remarks.

Thank you, operator and thank you, everyone for your interest in Brookfield and we look forward to talking to you when we release our third quarter. Bye for now.

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