Brookfield Asset Management Inc (BAM)

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Brookfield Asset Management Inc. (BAM)

Q3 2007 Earnings Call

November 02, 2007, 11:00 AM ET

Executives

Robert J. Harding - Chairman

Brian D. Lawson - CFO

J. Bruce Flatt - Managing Partner and CEO

Analysts

Brendan Maiorana - Wachovia

Michael Goldberg - Desjardins Securities

Cherilyn Radbourne - Scotia Capital

Peter Sklar - BMO Capital Markets

Andrew Kuske - Credit Suisse

Rossa O'Reilly - CIBC World Markets

Ronald Redfield - Redfield Blonsky

Louis Sapir - Oppenheimer and Company

Neil Downey - RBC Capital Markets

Christopher Haley - Wachovia Securities

George Denninghoff - Vista Research Management

David Henley - DOH Capital Management

Michael Goldberg - Desjardins Securities

Presentation

Operator

Ladies and gentlemen, welcome to the Brookfield Asset Management Inc conference call and webcast to present the Company’s Third Quarter 2007 Results.

At this time, I would like to turn the conference over to Mr. Robert Harding, Chairman of the Board. Please go ahead.

Robert J. Harding - Chairman

Thank you very much. Good morning ladies and gentlemen and that you for joining us for our third 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 number of currently completed transactions and provide an update on some major initiatives currently underway, following the remarks, of course, we look forward to taking your questions and comments.

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 make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. For further information on known risk factors, I would encourage you to review our annual information Form and our report, which are available on our website.

With the done, I would like to turn the call over to Brian Lawson. Brian?

Brian D. Lawson - Chief Financial Officer

Thank you, Bob and good morning. We achieved our target in most of our operations during the quarter and exceeded expectations in a few. In particular, we continue to expand our assets under management and recorded increased revenues from these activities. We also realized meaningful gains in our investment activities. At the same time, our results were adversely impacted by lower generation levels within our power generation operation due to low leverage water condition, continued weakness in the U.S. housing market, and the strike in the Canadian coastal forest product sector.

Operating cash flow on a year-to-date basis was up substantially. On a comparable basis, which excludes realization and major disposition gains, our third quarter results were $342 million compared with $289 million last year, this represents an 18% increase. Including all these items, cash flow from operations for the third quarter was $321 million compared with $368 million last year, which included in particular a large fund formation gain. While we are disappointed with the negative components of our results, we recognized that they are largely as a result of expected cyclicality. The important thing to add is that in almost all areas of our operations, the businesses are performing well and the underlying fundamentals are strong. And looking-forward, we continue to be on target to record the highest cash flows in our history.

On a comparable basis, net income, prior to realization and disposition gains for the third quarter, was $175 million compared with $202 million last year. The increase in operating cash flows noted above were offset by depreciation on newly acquired assets, which reduced income by $76 million in the quarter.

The depreciation is significantly higher than projected annualized sustaining capital expenditures further assets, due to their high quality of long life and value appreciation potential. And this is why we focus on operating cash flow as a more appropriate measure in managing and measuring our operating performance.

Net income for the quarter, including all items, was $93 million. The decrease over last year represents… reflects the depreciation noted above as well as the lower level of realization and major disposition items recorded this year versus last. And in addition, it’s worth noting that $66 million of disposition gain that have been recorded in opening retained earnings whereas they otherwise would have been reported in the current period income and that’s due to a prescribed industry-wide change in accounting policies.

Turning to the individual areas. Our are fee revenues increased $90 million… to $96 million during the quarter from $64 million in the same quarter last year, due to higher asset management fees as well as an increase in property advisory fees. Base management fees on existing funds now totaled $90 million on an annualized basis.

As we discussed previously, our accounting policy differ the recognition of performance income, this includes performance fees and carried interest until the end of any claw back period. We estimate that accumulated performance fees at the end of the quarter that have not been recognized to date neither our operating cash flow or net income, totaled approximately $150 million, of which $80 million accumulated during the quarter. We will continue to update you on these fees on a quarterly basis, so you can better asses the value been created through these activities.

We continue to make progress investing funds that we have formed over past 12 months, including our second restructuring fund, with approximately $1 billion of committed capital, our $800 million Brazil retail fund, $1 billion follow-on bridge funds, and $450 million follow-on real estate finance fund. The Brazil retail fund is already half invested and we have a number of promising opportunities. In addition, we have also fully invested our real estate opportunity fund.

And finally, we are in the final stages of completing the necessary regulatory and organizational steps to form Brookfield infrastructure partners. We expect to complete this in early 2008. The process has taken longer than originally anticipated due to our objective of launching Brookfield infrastructure as a fully invested entity with a select group of operating businesses in United States, Canada, Brazil, and Chile. This resulted in a more complex formation process, but will enable shareholders to participate immediately in returns for these operations and provide greater visibility to the type of business that we are trying to build. In the long-term, we believe the time spend doing this will be well with the effort.

Our property operations, recorded a slightly higher level of cash for this quarter than the same quarter last year. Core properties increased due to the acquisition of a major portfolio around this time last year and we recorded continued growth from existing properties due to favorable leasing results.

Occupancy rates are at high levels across the portfolio and we continue to lease base at higher rates and the leases being replaced. Our residential businesses in Canada and Brazil recorded strong growth due to the favorable conditions in their respective markets. However, the weakened environment in the United States did lead to a negative contribution from these operations following a write-down in the values of some of the land holdings.

On the development side, we are continuing to advance a number of important projects in Huston, Toronto, New York, and Washington, as well as in Australia and U.K.

Now turning to our power generation operations. Low water flows resulted in generation that was 20% lower than long-term averages. This was offset in part by higher realized prices and the contributions from facilities that we acquired or built during the year. Fortunately, our storage levels for this time of the year are consistent with long-term averages and this should enable us to achieve our generation target for the balance of the year, assuming normal water inflow conditions prevail. We continue to expand our portfolio with a number of acquisitions during the year in new several development projects underway to expand our portfolio, particularly in Brazil. The contribution from our infrastructure operations was lower in the quarter.

Transmission results were inline with expectations. You might note that the topline cash flow results appear to be lower, but that is because we moved from full consolidation of the Chilean operations to an equity basis of accounting at the end of the last quarter. There has been no impact on the net contribution from these operations. The operating results in this business are typically very stable on a quarter-over-quarter basis and this quarter was no different. And we are exploring a number of opportunities to invest additional capital at attractive returns so as to expand the scale of our operations in this sector.

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