Brookfield Asset Management Inc (BAM)

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Brookfield Asset Management Incorporated (BAM)

Q4 2007 Earnings Call

February 8, 2008 11:00 am ET


Robert J. Harding, Chairman

Brian Lawson, Managing Partner and Chief Financial Officer

Bruce Flatt, Managing Partner and Chief Executive Officer


Michael Goldberg - Desjardins Securities

Cherilyn Radbourne - Scotia Capital

Andrew Kuske - Credit Suisse

Rossa O’Reilly - CIBC World Markets

Peter Sklar - BMO Capital Markets

Brendan Maiorana - Wachovia

Chris Haley - Wachovia

Lawrence Goldstein - Santa Monica Partners

Ronald Redfield - Redfield, Blonsky & Company

George Denninghoff - Vista Research and Management

Michael Smith - National Bank Financial



Welcome to the Brookfield Asset Management Incorporated conference call and webcast to present the company’s fourth quarter 2007 results to shareholders. (Operator Instructions)

At this time, I’d like to turn the conference over to Bob Harding, Chairman of the Corporation.

Robert J. Harding

Thank you, Operator, and good morning, ladies and gentlemen. Thank you all for joining us for our year end 2007 earnings announcement. Joining me today for this call is Brian Lawson, our Chief Financial Officer, who will discuss our fourth quarter and year end financial results. Following Brian’s remarks, Bruce Flatt, our Chief Executive Officer, will provide an operations update and comment on the current environment. 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 our new initiatives and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. For further information on known risk factors, I would encourage you to review our Annual Information Form or our Annual Report, which are available on our website.

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

Brian Lawson

Thank you, Bob, and good morning. We reported our financial results this morning and posted our letter to shareholders and supplemental financial information on our website. I will go over the highlights, although we do encourage you to read the full contents of the materials.

We reported record operating cash flow of $1.9 billion during 2007. This is slightly higher than the $1.8 billion that we reported last year and more than double the $908 million that we recorded in 2005. Excluding realization gains, operating cash flow increased to $1.7 billion in 2007 and that’s up from $1.2 billion in 2006, representing an increase of $545 million or 45%.

This growth came from improved results across most of our operating platforms, particularly in our property and specialty fund groups, which generated solid investment returns for us and our co-investors.

We also experienced strong performance within our private equity and financial asset portfolios. These gains more than offset the impact of lower water levels on our power generation facilities and the impact of weakness in the U.S. housing markets.

Net income was $787 million in total for 2007 and that compares to $1.2 billion in 2006. Excluding realization items, net income was $941 million, compared to $624 million and that represents an increase of $317 million.

Net income on this comparable basis did not increase by the same amount as operating cash flow due to the impact of depreciation on recently acquired assets. And as you know, we focus more on operating cash flow, which is similar to FFO or Funds from Operations used in the real estate sector, because it removes the potentially distorting impact of depreciation.

We achieved a number of important initiatives during the year. We increased committed capital to establish funds by roughly $10 billion through the establishment of new funds, the expansion of existing funds and through acquisitions. We established Brookfield Infrastructure Partners, which was distributed to shareholders and listed on the New York Stock Exchange on January 31 of this year.

We acquired the Multiplex Group, which expanded our global property platform into Australia and the Middle East and added to our European operations. And we also acquired timber assets in the Pacific Northwest region of the United States, a well-respected real estate infrastructure equity manager with $6 billion of assets under management, a major retail property portfolio in Brazil, and continued to invest capital on behalf of ourselves and our clients throughout our operating platforms.

We recorded solid operating results in most of our operations, although there were a few exceptions. Our commercial office portfolios remain very well leased and contributed increased cash flows during the year. Bruce will comment further on these operations in his remarks.

The results from our power generating assets were lower than those recorded in 2006. This was due to water levels that were 10% below long term averages in contrast to the 2006 levels that were above average. Realized prices were higher than in 2006 and our new hydro and wind facilities performed well. Water levels at the beginning of 2008 have been good so that bodes well for the current quarter and hopefully for the balance of the year.

Transmission operations performed in line with expectations which should come as no surprise given the regulated nature of their cash flows. Results from our timber operations were impacted by the slowdown in the U.S. home building sector and a strike in Western Canada; nevertheless, the contribution did increase over 2006.

The U.S. slowdown impacted our home building operations, which led to reduce operating margins and a provision to reduce certain higher priced land positions in the United States. Our share of the provisions was approximately $30 million after taxes. Fortunately, our Canadian operations increased their contribution by more than 50% and our Brazilian operations also performed well.

Turning to our specialty funds, our bridge and real estate finance groups recorded growth by maintaining higher levels of invested capital and we also established new funds in both these groups during the year. Our restructuring group completed a major initiative with the sale of one investment position in particular for a gain of $231 million.

And we also recorded gains in excess of $300 million on the sale of exchangeable debentures held within our financial assets portfolio, and gains of approximately $150 million after taxes and transaction costs on the sale of exchange seats within our Brazilian operations. So, all in all, we are pleased with the financial and operating results, particularly given the economic environment that developed during the second half of the year.

I would now like to make some comments on our capital structure. We have consistently followed a very disciplined approach in financing our business. That is made possible by the high quality of our assets and our focus on long-term value creation on a relatively low risk basis. We maintained strong investment grade ratings as a result. We have a very large equity base, nearly $20 billion and we are prudent with our approach to stock buybacks and dividend payouts.

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