Brookfield Asset Management Inc.

Please see disclaimer at bottom of this document

Plenty of mistakes in these notes

The notes below print out to around 150 pages. I have noticed several errors. Yet, I have not noticed what I consider to be any type of material error. Nor has my thesis changed. Yet, I keep looking to pierce holes in our thesis. Again, please do your own due diligence. We are certainly not recommending an investment in BAM or affiliates, be it long or short. Please read our disclaimer. We may or may not update these notes in the future. We could eliminate our short position at any time. Of course we would have and have made that same statement, when we first shorted during August 2007. If you notice any mistakes, please email me at rredfield@rbcpa.com . We will look into and attempt to change any mistakes we find.

September 14, 2010 (27.60) 245 Park Avenue to receive $800M from China

We discussed 245 Park Ave in our notes below on August 28, 2009.

It is our understanding, and this has not been confirmed, that one of China’s State owned banks has agreed to provide 245 Park Ave with an $800M fixed rate loan. The 10 year loan was expected to go through a securitization program. Bank of China funded the entire balance without a securitization or without mezzanine debt. The rate is expected to be lower than potential securitization packages, with a senior loan with a rate just below 5% and a mezzanine loan with a rate of about 8%. Hence, the rate is probably somewhere between 5% and less than 8%. Insurers allegedly offered less than $700M for the loan. It was mentioned to us that the building is carrying a value of $1.3B. Hence, loan to value is approximately 61.5%. Interesting that Reis claims the building is 1.586M SF, whereas Brookfield claims on their web page it is 1.719M SF + parking of 68SF (See August 28, 2009 note below.) It is our understanding that JP Morgan leases 44% of the space through 2022. Brookfield Properties owns 51%, and NY State Teachers owns 49%. The proceeds will be used to pay down $431M of debt due in 2/2011. We expect that the building will retain $329M after fees.

Australia Office Transaction

It was announced on July 30, 2010, that “Brookfield Properties has agreed to enter into a transaction with Brookfield Asset Management whereby Brookfield Properties will pay Brookfield Asset Management A$1.6 billion (US$1.4 billion) for an interest in 16 premier Australian office properties comprising 8 million square feet in Sydney, Melbourne and Perth which are 99% leased. The properties have a total value of A$3.8 billion (US$3.4 billion).” http://brookfieldproperties.com/_Global/25/img/content//AUS_Transaction_Sup_Jul_30.pdf

As of now, it is our interpretation and gut feeling (and we could be wrong), that BPO is paying a great deal more for properties than current fair value, and that is not a real arms length transaction.

IFRS is reporting at the value that BAM interprets. Values of CRE in Australia have substantially declined since the market highs. BAM purchased these assets at the height of the market, with the Multiplex transaction.

During February of 2009 BAM was asked if they had concerns as it relates to mortgages or Multiplex. BAM responded, “I would say the quality of the assets gives us lot of comfort in that regard. So, we will work through that situation and fortunately we don’t have a whole heck of a lot of maturities staring us in the face there. And we will get — the quality of assets are such that we should have a pretty easy time refinancing them, we think.”
This is what BAM mentioned on their recent 2Q10 conference call:

“Dealing specifically with the valuation of the portfolio, as many of you know, we went through a lot of work, money, and risk over the last number of years assembling this Australian office portfolio. Second, we’re selling at our externally appraised IFRS values, which are the values in our accounting books. No gain, no loss.

For the record, we would not sell these properties at this low a price to a company which was not 50% owned and that was not strategic to us. Furthermore, BPO has been diligencing these assets for over 12 months, and therefore has little acquisition risk which would normally come along with a transaction.”

“Our tangible assets are generally held in public and private operating subsidiaries and various listed and unlisted funds. Assets held in funds often require annual revaluation based on third party appraisal. In these cases, we utilize the appraised third party values and assumptions as the basis of our IFRS carrying values with adjustments in accordance with IFRS rules, if necessary. Assets not otherwise valued for fund requirements are valued by management, and also valued by third party appraisers on a rotating basis so that each asset is revalued externally at least once every three years. A summary of our revaluation methodology is provided below:

Commercial Properties: Revalued quarterly by management and on a rotating basis by third party appraisers at least once every three years and more frequently if required for fund reporting or refinancing activity.”

BAM further indicated in the 2Q10 filing, that Commercial Properties had nil unrecognized IFRS value. To us, this means, that BAM considers Commercial Properties to be on their books at Fair Value.

Fitch Affirms Brookfield Renewable Power; Outlook to stable

“Fitch Ratings-New York-28 July 2010: Fitch Ratings has affirmed Brookfield Renewable Power, Inc.’s (BRPI) Issuer Default Rating (IDR) at ‘BBB-‘ and its senior unsecured debt ratings at ‘BBB’. At the same time, the Rating Outlook for BRPI’s long-term ratings is revised to Stable from Negative. Approximately $1 billion of BRPI corporate level debt is affected by this action.

The affirmation and Stable outlook reflect the predictability and stability of BRPI’s cash flows….”

“Due to hydrology risk, BRPI typically enters into long-term power sales agreements or intermediate-term financial derivatives for approximately 70% of its current year expected power output from average long-term water flows (using a 95% confidence factor). The uncontracted power is sold into the spot market resulting in some exposure to wholesale power prices over the short term. Over the longer term, if low spot power prices persist, as contracted revenues roll-off, BRPI could face a situation where contracts are reset at lower than existing contract power prices pressuring margins.

BRPI utilizes non-recourse project level debt to finance the bulk of its generating fleet; thus BRPI’s own corporate debt and cash flows are subordinated to the project structures. Parent cash flows are comprised primarily from distributions, and dividends from BRPI’s myriad of investments are expected to improve slightly over the near term based on a higher level of contracted revenues and the addition of new projects and investments.

Fitch estimates that the ratio of Adjusted Parent Operating Cash Flow (APOCF) to parent level debt, a non GAAP financial ratio used by Fitch, will remain at or above 36% over the next few years. Similarly, interest coverage, as measured by APOCF to corporate interest expense, is estimated to remain at or above at 5.3 times over the forecast period. APOCF is supported by the diversity of cash flow sources. In calculating APOCF, Fitch utilizes it low natural gas and low wholesale power price model to stress non-contracted, unhedged cash flows from the operating assets as well as certain distribution test assumptions to stress corporate cash flows. These credit metrics compare well to merchant generator and rating category peers.

Additional concerns relate to the complex organization structure with most of the assets held in project finance structures or in partially owned investment fund affiliates that make most of the cash flows to support BRPI’s approximate $1 billion in corporate level debt subordinate to the project level financings. BRPI is a wholly-owned subsidiary of Brookfield Asset Management, Inc. (BAM, ‘BBB’), an asset management company with investments in three primary areas: real estate; power generation; and infrastructure assets. BRPI and BAM have a sizable amount of inter-company advances and liabilities between themselves. Recently, BRPI purchased BAM’s holdings in Brookfield Infrastructure Partners and Transelec, S.A. (‘BBB-‘), Chile’s national transmission system; the investment represented another shift in BRPI’s strategic focus away from renewable power generation. ”

S&P reaffirms BAM at A- and Negative Outlook
June 30, 2010

“The affirmation reflects Brookfield’s continued adherence to its business strategy, diversified sources of remitted cash flow, and strong financial flexibility.

The negative outlook reflects our expectation that lower investment gains, challenging market conditions, and possible capital requirement from the General Growth Properties recapitalization plan and refinancing at Brookfield Properties Corp. could weaken the company’s own financial risk profile.”

“The company’s strategy, as we understand it, also emphasizes the use of asset-specific nonrecourse debt to finance its subsidiaries’ investments and
operating needs, financial flexibility (including a portion of capital in liquid listed investments), and a conservative capital structure at the company level.

Standard & Poor’s consider the company’s ability to generate remitted operating cash flow from multiple sources as a key strength supporting the ratings. Brookfield invests its underlying assets mainly in businesses with long-term contracts or regulated revenue, which are subject to different influencing factors and have demonstrated a track record of stable, albeit levered, returns.

The negative outlook reflects our expectation that lower investment gains, challenging market conditions, and possible capital requirement from General Growth Properties’ (GGP) recapitalization plan and refinancing at Brookfield Properties Corp. (BPO) could weaken Brookfield’s financial risk profile.

Standard & Poor’s could consider lowering the rating if BPO’s credit risk profiles deteriorate further. We could also lower the rating if remitted cash flows weaken further and result in remitted OCF interest coverage falling below 5x or OCF to total debt falling below 30% on a sustained basis. Conversely, we could revise the outlook to stable if the company creates a wider cushion in its financial measures (either through stronger OCF or a material reduction in company-level debt); and after we can ascertain that the size of Brookfield’s investments in GGP are within its means without material increase in company-level debt.”

S&P BPO + BCR ‘BBB’ Afmd; Outlk Neg

“We affirmed our ‘BBB’ corporate credit ratings on Brookfield Properties Corp. (Brookfield) and its Toronto-based affiliate, Brookfield Office Properties Canada, and maintained our negative outlook.

— Our ratings on Brookfield acknowledge the comparatively favorable performance of the company’s well-leased and high-quality office portfolio in first-quarter 2010, as well as its improved liquidity following the issuance of more than $1.5 billion of equity over the past year.

— However, our negative outlook reflects the sizable debt maturities in 2011 related to Brookfield’s highly leveraged U.S. office fund joint venture, as an equity infusion will be necessary to refinance this debt at a lower loan-to-value level. Additionally, the company faces the lease expiration of its largest tenant in 2013.”

“We would likely lower the rating one notch if debt coverage measures deteriorate from their current levels or liquidity becomes constrained. We would maintain the ratings if Brookfield’s management successfully addresses the longer-term recapitalization needs of its U.S. fund without compromising its current pro rata fixed-charge coverage measures. Although less likely in the near term, the ratings could improve in the longer term if the company additionally were to reduce its top tenant concentration and improve its pro rata fixed-charge coverage to levels that are comfortably in the mid-2x area.”

May 7, 2010 (24.76) DBRS Comments on Brookfield’s Investment in General Growth Properties

http://www.dbrs.com/research/232611?docId=232611

“DBRS notes that the proposal from Brookfield Asset Management Inc. (Brookfield or the Company) and related investors (collectively, the Brookfield Group) to recapitalize General Growth Properties, Inc. (GGP) has been accepted by the U.S. Bankruptcy Court. The offer by the Brookfield Group now becomes the stalking-horse bid, setting a floor that any competing offer must exceed.

As set out in the original offer, the Brookfield Group has agreed to invest approximately $2.5 billion in a recapitalization of GGP (and $125 million in General Growth Opportunities (GGO)). This is to be accomplished through its $5 billion Real Estate Turnaround Consortium (the Consortium). If successful, the Consortium would own approximately 26% of GGP, with Brookfield owning about 25% of the Consortium’s investment (about $700 million).

In a revision to the offer this week, Brookfield, Fairholme Capital Management, LLC and Pershing Square Capital Management LP (on a several basis) agreed to backstop an additional $2 billion in capital, which includes $1.5 billion of debt and a $500 million equity rights offering. The $1.5 billion is the same amount that had originally been proposed under a new credit facility. With this modification, Brookfield would backstop $600 million of the $1.5 billion in debt issuance and $350 million of the $500 million rights offering.”

April 20, 2010 (25.40) Standard and Poor’s upgrades Brookfield Renewable Power Inc.

The following is a press release from Standard & Poor’s:

“We are revising our outlook on Brookfield Renewable Power Inc. (BRPI) and Brookfield Renewable Power Fund (BRPF, 50% owned by BRPI) to stable from negative.

— We are affirming all the ratings on the companies, including our ‘BBB’ long-term corporate credit rating on BRPI and BRPF.

— The outlook revision reflects our view that, with increased business and geographic diversity and a higher level of contracted revenue, BRPI is now more resilient to its exposure to wholesale electricity prices and hydrological risk.

— The stable outlook reflects our view that BRPI’s strong diversity and financial flexibility support the ratings despite our concerns over the company’s high debt level and resulting weak coverage measures for the rating.”

“The company has, in our view, a satisfactory business risk profile supported by increased diversification of its investment portfolio and cost-competitive position of its hydroelectricity generation assets, with an increased proportion of contracted revenue. We also conclude that the company has an intermediate financial risk profile. Although financial measures (both consolidated and at the company level) are weak for the rating, we believe this is mitigated by strong financial flexibility, with the value of investments well exceeding company-level debt, and from its strategic relationship with its corporate parent, Brookfield Asset Management Inc. (Brookfield; A-/Negative/A-2).”

“The stable outlook reflects our view that BRPI’s improved business risk profile and strong financial flexibility support the rating despite our concerns over its high debt level and resulting weak coverage measures for the rating.”

“We believe that an upgrade is unlikely without substantial improvement in cash flow coverage measures with debt coverage exceeding 35% and interest coverage exceeding 5.5x on a sustained basis. We believe that, to achieve these targets, BRPI would need to have a more conservative use of overall and project-level leverage.”

Brookfield Properties, Inc. is selling Brookfield Place to a new soon to be public entity, Brookfield Office Properties Canada. (BCR-UN.TO)

Brookfield Properties is selling Brookfield Place at a 5.5% cap rate. The cap rate incorporates a 98+% occupancy. I think it is fair to say that Brookfield Place would not be able to sell in an independent open market at under a 6 cap. They are selling to a related property for $866M.

I guess the new investors of the property will think they are getting great property (and it is) at a fair price. My guess is that in years to come we will end up seeing what a great deal this was for Brookfield, and how the new investors of Brookfield Place will come to find what a terrible deal they got. Maybe BAM would then buy this trophy property back at foreclosure.

The purchase price for the Brookfield Place Interest will be satisfied by the payment of approximately $100.0 million in cash, the assumption of debt and the issuance of Class B LP Units. Debt at 9/30/09 was 332,835, matures in 4/2013.

Units Unit price
Cash $100
Debt $342
Brookfield Office Properties Canada $424 20.3 $20.90
Canada $866

Using above cap rate is 5.53%. If one was to use a 7% cap rate, value would be $684M ($182M less). Also, the transaction is based upon the price of Brookfield Office Properties Canada. Offering to the public.
1435 sf building owned interest, and 86 parking according to 4Q09 Brookfield Properties portfolio listing.

Rossa O’Reilly (CIBC) mentioned in a note after the conference call, “As part of the transaction, the REIT would acquire the Bay Wellington Tower office building and Brookfield Properties’ interest in adjacent retail and parking facilities at Brookfield Place in Toronto, adding 1.8 million sq. ft. of premium, quality space to its portfolio.”

Avery in a recent note mentioned, “The acquisition of the flagship 181 Bay Street office tower of Brookfield Place in Toronto (albeit at a low, but appropriate 5.5% initial cap rate/yield [per Altus Group (AIF.UN–SO)], resulting in some dilution to near-term FFO
and AFFO).”

NOI appears to be $47.9. Looks sustainable. Unaudited. Looks reasonable when you see 9 month NOI in BPO Properties circular.

“As part of the Transaction, Brookfield Office Properties Canada LP will acquire from BPO the Brookfield Place Interest. The subsidiary of BPO that owns the Brookfield Place Interest will amalgamate with substantially all of BPP’s existing subsidiary entities to form BPP Sub Amalco and BPO will receive shares of BPP Sub Amalco. BPP
Sub Amalco will then sell the Brookfield Place Interest to Brookfield Office Properties Canada LP for a purchase price equal to approximately $866 million to be satisfied by the payment of approximately $100 million in cash, the assumption of debt valued at approximately $342 million and the issuance of approximately 20.3 million Class B LP Units valued at approximately $20.90 per unit.”

“Given that approximately 20.3 million BCR Units (having an aggregate net equity value of $424 million) will be issued to BPO as part of the consideration for the Brookfield Place Interest and that the Excluded Assets and Liabilities will be retained by BPP in exchange for a reduction of approximately 12.1 million BCR Units (having an aggregate net equity value of $252 million), approximately 8.2 million BCR Units will be issued to BPO, on a net basis, which accounts for the increase in BPO’s aggregate equity interest from 89.7% in BPP to approximately 90.6% in BCR.”

“As a result of joint venture restrictions, BPP will retain its 25% undivided interest in the Canadian Office Fund properties, which consist of 7.6 million square feet of rentable commercial and parking space and 0.6 million square feet of development property. The Canadian Office Fund commercial properties include: First Canadian Place in Toronto, Ontario; 2 Queen St. E. in Toronto, Ontario; 151 Yonge St. in Toronto, Ontario; Altius Centre in 26 Calgary, Alberta; Place de Ville I and Place de Ville II in Ottawa, Ontario; Jean Edmonds Tower in Ottawa, Ontario; Canadian Western Bank Place in Edmonton, Alberta; and Enbridge Tower in Edmonton, Alberta. For purposes of the Transaction, BPP’s 25% undivided interest in the Canadian Office Fund has been valued at approximately $252 million.”

“In addition, BPP will retain 3.2 million square feet of development properties including: surface and air rights in respect of the Bay Adelaide Centre north and east parcels in Toronto, Ontario; the Yonge Adelaide parcel in Toronto, Ontario; the residential development density rights referred to as “Brookfield III” in Toronto, Ontario; the Herald site in Calgary, Alberta; and the unused density rights associated with the Bankers Hall complex in Calgary, Alberta. As is the case with many real estate investment trusts, management of BPP is of the view that the value of non-income producing development properties would not be appropriately reflected in the market price of Trust Units. For purposes of the Transaction, these development properties have been valued at approximately $126 million.”

“Excluded Assets and Liabilities, which have been valued at approximately $252 million for purposes of the Transaction, will be retained by BPP in exchange for a reduction in the number of BCR Units to be issued to BPO of approximately 12.1 million BCR Units valued at approximately $20.90 per unit.”

March 24, 2010 (24.92) Some BHS stuff
Looking at the 10-K 2009

1. No related party transactions mentioned. Yet, there are dealings together, such as unsecured credit facilities with BAM, as well as the services of CFO, Craig Laurie. See item 7. directly below.

2. Total Equity is $486.313M compared to $262.519M in 2008. When you subtract out preferred stock of $249.688, you get total equity of $236,625 in 2009. You have a Deferred Tax Asset of 40,112 on the balance sheet. I would suspect that will be reserved at some point, which would bring down stockholder’s equity. Also listed in Equity is Non-Controlling Interests of $7.317M.

3. Shares outstanding are 28,402,299 as of 1/18/10. Using market price today of $8.52, you have market cap of $241.988M.

4. Included in Payables is $14.192M of Swap Contracts. Not commenting, just noting. I previously asked BAM the following: “BAM has a bit of hedging in most of their consolidated entities. Are any of the hedging gains, losses, mark to markets, as well as transactions being done by BAM related entities?” BAM would not comment on that question. Since no Related Party Transactions are listed, you would think that BHS has no derivative positions with BAM. Yet, I have not confirmed that to be the case.

5. No subsequent events listed in the 10K.

Looking at DEF14A

6. Ian Cockwell received $2.130M in compensation in 2009.

7. Although Related Party Transactions have no mention in the K. They are mentioned in the Def14A. These include, but are not necessarily limited to the following:

A. BAM owns 82% of BHS. This includes an assumption of full preferred conversion. Without conversion ownership is 60%.

B. There is a related party debt facility of $100M. The covenant requires a minimum stockholders Equity of $300m. See my note above regarding Stockholders Equity. If Preferred Stock was not listed as Equity, the threshold of $300M would be in violation.

C. “The facility contains covenants requiring us to maintain minimum stockholders’ equity of $300 million and a consolidated net debt to book capitalization ratio of no greater than 70%.” FYI from the balance sheet, the following consolidated debt exists. Project Specific Financings $231.567M, Revolving and Other $150M. Total debt I listed was $382M, if you add Stockholders Equity Adjusted of $237M; you get total capital of $619. Hence the debt / Adjusted Capital Ratio is 62%. If Deferred Taxes were reserved, the ratio would increase to 66%.

D. “We sublease our administrative offices in Toronto, Ontario from Brookfield, which leases the space from Brookfield Properties. We are required to pay approximately $100,000 per year in rent under our Toronto sublease, which expires in 2011.”
Other stuff

8. There are SEC comment letters with BHS that are worth reading. I do not recall their contents. Here is one response to a comment letter http://rbcpa.com/companies/BHS_SEC_Comment_Letter_response_20090630.pdf I questioned BAM if there were any other comment letters for BAM, BHS or subsidiaries. BAM informed me that they would not respond to my question.

9. 8K filed 1/6/10,” “On December 31, 2009, Brookfield Homes Corporation (the “Corporation”) paid a semi-annual dividend of $10,000,000 to holders of record of its $250,000,000 8% Convertible Preferred Stock, Series A. At its election, this dividend was paid by the Corporation issuing 1,608,567 shares of Common Stock of the Corporation at the volume weighted closing price of the Common Stock over the five consecutive trading days preceding the dividend declaration date of December 16, 2009, or approximately $6.21.”

10. You can go to my old notes and then hit <control f> and search “Brookfield Homes” for other notes I took. My notes are here http://rbcpa.com/companies/BAM_notes.html

February 25, 2010 (BAM 23.25) (BPO 13.37)

February 16, 2010 Brookfield Properties Releases Earnings – Initial Reaction

One needs to read SEC filing to get a clearer picture of the business and operations. In the mean time, these notes are just some thoughts on the Brookfield Properties, February 5, 2010 earnings release.

1. I spoke with Bryan Davis, CFO. – Here are notes to discussion:

A. Page 19 of the 4Q09 supplement discusses Average In-Place Net Rent ($ per Sq. Ft.). The 2008 annual report indicates the following in regards to description of Net Rents. “Substantially all of our leases are net leases in which the lessee is required to pay their proportionate share of property operating expenses such as utilities, repairs, insurance and taxes. Consequently, leasing activity, which affects both occupancy and in place rental rates, is the principal contributor to the change in same property net operating income.” Bryan Davis CFO explained,” Brookfield typically collects Base Rent, and then all operating expenses. When you take the Base Rent Collected, less, Operating Expenses, you get Net Rent Reported.” He said risk was that tenants were late or do not pay either rent and/or expenses, and if so, that would show up in Net rent numbers. Bryan stated, “Rent is collected at the NOI level.”

B. Brookfield recently “monetized” 90% of their interest in 1625 Eye Street in Washington, D.C. On page 35 of 4Q09 supplement, they list $96M as a “Receivable and Other Asset.” According to Brookfield Properties, the offsetting amount is a loan payable of $92M and is a component of “Accounts Payable and Accrued Liabilities” on page 36. The remaining $4M represents their retention of 10% common equity interest.

C. I asked if either Brookfield Realty Capital Corp., (BRCC), or the $5B consortium would be buying any assets, or participating in the refinance of any of the Trizec, U.S. Office Fund, or other Brookfield Properties debt or assets. Bryan mentioned that is not why the entities are set up. He does not expect any of those types of transactions to occur.

D. We discussed Trizec and U.S. Office Fund. Blackstone and Brookfield Properties bought Trizec Properties for $7.6B. Blackstone owns 27%, and Brookfield owns 73%. Brookfield’s ownership is owned by the U.S. Office Fund. Brookfield currently owns effectively 47% of the Trizec purchase. This is where it gets tricky. Brookfield Properties records the entire Net Operating Income of Trizec into the Brookfield Properties Financial Statements. They label this as U.S. Office Fund. Even though the U.S. Office Fund only owns 73% of former Trizec, Brookfield Properties still call it U.S. Office Fund. Eventually, they net out to their 47% ownership. This is explained on page 11 of the 4Q09 supplement. The Total NOI for Trizec is $571.50 (454.8 + 116.7). On page 11 of the 4Q09 supplement, in note (2) it is indicated that total non-controlling share of NOI in the U.S. Office Fund is $303M. The Total NOI for Brookfield Properties would be $268.61. This nets close to the 47% effective ownership by Brookfield. The Total NOI is greater than the Cash NOI. Total Cash NOI is presented as $440.60M for Trizec ($351.4+$89.2.). According to Brookfield Properties, their proportionate share is $207M. The $207M is 47% of the entire Total Cash NOI. The Total Cash NOI of $320M,which Brookfield has referred to throughout this note, is approximately 73% of the Total Cash NOI of Trizec ($440.60 * 73%).

Bryan Davis explained, the total Cash NOI for Brookfield’s managed assets (73% of Trizec) was $270M at purchase, $320M currently, and expected to be $370M in 2011. This is Total Cash NOI, which according to Brookfield Properties, is expected to be less than Projected Total NOI. According to Brookfield Properties, this “was meant to illustrate the progress Brookfield has made in increasing rents and occupancy of the properties it manages for the benefit of Brookfield and its fund partners. As at the end of 2009 the amount was $350M but is inclusive of some lease termination income which may not repeat.” This was also discussed in the conference call. He explained the Total NOI and the Total Cash NOI is increasing because of higher rents and increased occupancies since purchase. He also mentioned, he felt this is the reason that Trizec has not lost as much value as traditional Commercial Real Estate bought during the same time period (end of 2006). Bryan Davis further explained, “the increase in Total Cash NOI of our managed portfolio, has helped offset the decline in value of commercial real estate, as a result of increasing cap rates and discount rates.” The supplemental schedule identifies “Intangible lease amortization,” and “Straight-line rental amortization,” as the accounts which reduce Total NOI to get to Total Cash NOI.

E. At NAREIT 2009, Ric Clark mentioned going in Cash NOI for Brookfield was $270M, and he projected $320M in 2011. Brookfield Properties explained, “Ric Clark mentioned at NAREIT that the Cash NOI when we took over our managed portfolio was $270M and based on leasing to date we expected that Cash NOI to grow to $320M by 2009 and to $370M by 2011.”

F. One is not able to reconstruct Trizec NOI’s prior to 2009. I had asked Brookfield the following. “Has your NOI reporting of Trizec stayed similar during the years? I would like to schedule the Total NOI’s and the Total Cash NOI’s since inception of US Office Fund. Yet, I am having difficulty since it appears that the reporting’s have changed. A supplement since inception, consistent with the reporting on page 11 in the 4Q09 Supplemental would be helpful. Is there a schedule you could supply that would put in a similar table, including the history of Trizec purchase, including the same information that you included in the 4Q09 supplement on pages 10 and 11? I would like to be able to break up the entire managed business, and the Brookfield ownership numbers. I am assuming the entire managed business includes the 27% Blackstone and the 73% Brookfield.” Brookfield Properties responded to this question with, “Please note that we are unable to provide any further information beyond what is included in our published supplemental information packets in relation to your request for analysis going back to 2006.” “Although we began disclosing managed versus non-managed US Office Fund NOI in Q4 2009, we will not be providing the same detail going back. So yes, you are correct: a history of Trizec NOI will not be made available to you or any other investor or analyst.”

G. Bryan Davis mentioned, “Non-managed assets are assets that are not managed by us, but instead managed by Blackstone, and in which Blackstone shares in the majority of the economics. Managed assets in the U.S. Fund include the assets that Brookfield Manages on behalf of itself and its fund partners.”

2. Guidance: EPS range of $1.25 – $1.33. Calculated under Canadian GAAP and IFRS. Assumptions are:

A. Rental rates similar to 2009.

B. Commercial NOI same store 1% growth.

C. Similar margins on Residential land sales.

D. Increased margins on home sales.

E. 2010 Sales of approximately 2,000 lots and 950 homes. In Conference call it was mentioned to break up by 10% in Q1, 10% in Q2, 25% in Q3, and 55% in Q4. Brookfield Properties subsequently mentioned, “This is the usual split for residential operations but not set in stone. Any change in the economy or large bulk sales could potentially swing these percentages.”

F. Exchange rate of $0.95USD to CDN. A strong CDN is positive for BPO, and visa versa.

G. LIBOR Rate of 1.50%

3. Conference Call highlights:

A. Ric Clark said, “I wouldn’t be surprised if we don’t refinance some things for next year toward the end of the year. It is definitely likely.” He was referring to refinances after it made economic sense to do so. That would be prior to note maturing, but after any early payment penalty clauses.

B. Strength in residential. Benefits from lower interest rates.

C. Rossa O’Reilly asked if $250M pay-down of residential revolver was available to non-residential liquidity. The conference call indicated it was available to Brookfield; yet, I reviewed the audio, and could not determine if the answer is whether it is or is not available to non-residential. The transcript does indicate inaudible during this section. Brookfield did clarify this, “We do have the ability to allocate capital out of our residential business and into our commercial operations.”

4. Liquidity of $2B: – The following table was confirmed correct by Brookfield Properties.

Cash $140
Deposit at BAM $648
Preferred Securities in January 2010 in CDN$275 $261
Revolver due 12/10 BAM $300
Corporate Revolver with BAM $438
Residential Revolver $250
Total $2037

We questioned the Affiliated Receivable on the books of BPO Properties, to Brookfield Properties of $85M. We asked if the $85M should be a reduction of liquidity, since it is showing up as Cash Equivalent on Brookfield Properties books, and as a receivable on BPO Properties books. Brookfield Properties responded, “We consolidate BPO Properties – so whatever cash they have at their level is included in the cash balances at our level and hence included in our liquidity. Whether BPO Properties has put the money on deposit with Brookfield Properties or with another financial institution, it is still $85 million of cash liquidity and gets reflected as such in our consolidated Brookfield Properties disclosure.” We need to ponder this further. Not material in dollars, yet the concept could be material in the future.

5. Observations:

A. Common Shares Outstanding – Fully Diluted Shares outstanding are 516,712,705. This is an increase of 115,876,049, since 12/31/08. Weighted Average Common Shares Outstanding – Fully Diluted are 504,809,300, this is an increase of 113,693,754 since 12/31/08.

B. On page 4 of the Supplemental Schedule there are several per share amounts. Here is a comment from Brookfield Properties in regards to the table. “Common equity market cap is basically our common shares outstanding multiplied by the respective closing NYSE share price on the same day. If you look at slide 2 in the supplemental you can see the components and make the calculation. Book Value per share is calculated on slide 43 – it shows the components calculating the per share amount.”

The following is from page 43 of Supplemental and indicates Book Value per share.  This may help in reconciling above.  I have not yet attempted to reconcile.

C. The Balance Sheet has the following line items.

1. Receivables and Other for $1,952. This includes a contra receivable and payable of around $96M from sale of Eye Street in DC. There is a contra payable on that of $92M. Also includes deposit of $648M with BAM (Per CC, BPO is receiving 100bps on this). Other Receivables are increasing. This is something to monitor. Also Prepaid Expenses and Other Assets have increased since 12/31/08 from $131M to $291M. This is something to watch for as a quality of earnings issue.

2. Restricted Cash and Deposits are not broken down.

D. Cashflow Statement (Don’t be confused with unsupplied “Statement of Cash Flows.”)

1. Changes in housing and land inventory. Watch this.

2. Debt is being paid back quicker than amount being arranged. I computed net pay-downs of $590M. Yet, there was common and preferred issuance in 2009 (not including CDN$275 in 1/10) of $1,273M, during 2009.

3. Affiliate receivables increased by $760M in 2009.

E. Back of envelope Cap Rates on Trizec properties.
Reported Gross Consolidated Total NOI                        $571.50

Trizec Consolidated Debt                                               $5,677.00

If Cap Rate is: Value w/b LTV w/b
5 $11,430 49.67%
6 $9,525 59.60%
7 $8,164 69.53%
8 $7,144 79.47%
9 $6,350 89.40%
10 $5,715 99.34%

If we use Gross NOI, a 60% LTV and a Cap rate of 7, the loan would be $4,898.40M. Hence, there would have to be cash infusion of $778.60M. One needs to seriously consider Cash NOI in the calculation of value.

Reported Gross Consolidated Total Cash NOI                        $440.60

Trizec Consolidated Debt                                                        $5,677.00

If Cap Rate is: Value w/b LTV w/b
5 $8,812 64.42%
6 $7,343 77.31%
7 $6,294 90.20%
8 $5,507 103.09%
9 $4,896 115.95%
10 $4,406 128.85%

If we use Cash NOI, a 60% LTV and a Cap rate of 7, the loan would be $3,776.40M. Hence, there would have to be cash infusion of $1.9B.

In regards to cap rates, this is what Brookfield Properties mentioned, “We have seen cap rates based on both NOI and cash NOI but analysts typically focus on cash NOI.”

F. Looks like easy maturities on Commercial Property Debt in 2010. $84M proportional, and $86M consolidated. This does not include the $100M Term facility or any of the other BAM revolvers. Revolvers of $300M and $413M are not tapped as of 12/31/09.

G. Corporate Capital Securities have increased to $1,099M at 12/31/09, from $882M at 12/31/08.

H. Preferred Subsidiary Preferred Shares have increased to $363M at 12/31/09, from $313M at 12/31/08.

I. Corporate Preferred Shares have increased to $304M at 12/31/09, from $45M at 12/31/08.

J. I still need to review and absorb page 44 of Supp:

Further Analysis and Data

Trizec Data at Purchase Date

Trizec Properties Full Portion US Office Fund Portion BAM Portion
73.00% 47.00%[RON1]
Original Purchase Price $7,600 $5,548 $3,572
Original Cash NOI $370 $270 $174
Going in Cap Rate 4.87% 4.87% 4.87%

Total NOI – Values and Loan to Values at December 31, 2009

Trizec Properties Full Portion US Office Fund Portion BAM Portion
100.00% 73.00% 47.00%
Total NOI 12/31/09 $572 $417 $269
Total Consolidated Debt $5,677 $4,144 $2,668

 

 

Value based on Cap Rate Value LTV Value LTV Value LTV
5.00% $11,430 50% $8,344 50% $5,372 50%
6.00% $9,525 60% $6,953 60% $4,477 60%
6.50% $8,792 65% $6,418 65% $4,132 65%
7.00% $8,164 70% $5,960 70% $3,837 70%
7.50% $7,620 75% $5,563 75% $3,581 75%
8.00% $7,144 79% $5,215 79% $3,358 79%
8.50% $6,724 84% $4,908 84% $3,160 84%
9.00% $6,350 89% $4,636 89% $2,985 89%
9.50% $6,016 94% $4,392 94% $2,827 94%
10.00% $5,715 99% $4,172 99% $2,686 99%

Total Cash NOI – Values and Loan to Values at December 31, 2009

Trizec Properties Full Portion US Office Fund Portion BAM Portion
100.00% 73.00% 47.00%
Total Cash NOI 12/31/09 $441 $322 $207
Total Consolidated Debt $5,677 $4,144 $2,668

 

Value based on Cap Rate Value LTV Value LTV Value LTV
5.00% $8,812 64% $6,433 64% $4,142 64%
6.00% $7,343 77% $5,361 77% $3,451 77%
6.50% $6,778 84% $4,948 84% $3,186 84%
7.00% $6,294 90% $4,595 90% $2,958 90%
7.50% $5,875 97% $4,289 97% $2,761 97%
8.00% $5,508 103% $4,020 103% $2,589 103%
8.50% $5,184 110% $3,784 110% $2,436 110%
9.00% $4,896 116% $3,574 116% $2,301 116%
9.50% $4,638 122% $3,386 122% $2,180 122%
10.00% $4,406 129% $3,216 129% $2,071 129%

The following is based on Brookfield’s projections of Cash NOI in 2011:

Total Cash NOI – Values and Loan to Values Projected by Brookfield
Properties at December 31, 2011

Trizec Properties Full Portion US Office Fund Portion BAM Portion
100.00% 73.00% 47.00%
Total Cash NOI $506 $369 $238
Total Consolidated Debt $5,677 $4,144 $2,668

 

Value based on Cap Rate Value LTV Value LTV Value LTV
5.00% $10,120 56% $7,388 56% $4,756 56%
6.00% $8,433 67% $6,156 67% $3,964 67%
6.50% $7,785 73% $5,683 73% $3,659 73%
7.00% $7,229 79% $5,277 79% $3,397 79%
7.50% $6,747 84% $4,925 84% $3,171 84%
8.00% $6,325 90% $4,617 90% $2,973 90%
8.50% $5,953 95% $4,346 95% $2,798 95%
9.00% $5,622 101% $4,104 101% $2,642 101%
9.50% $5,326 107% $3,888 107% $2,503 107%
10.00% $5,060 112% $3,694 112% $2,378 112%

Back of envelope of potential outcome at refinance of Trizec debt, using Brookfield Properties projected Total Cash NOI’s:

Assumptions used:

Debt Service Coverage Ratio (DSCR) 1.3
Loan To Value Maximum                      65%
Cap Rate                                                7
25 Year Amortization                             7%

Full Portion US Office Fund Portion BAM Portion
Value at Cap Rate of 7 $7,229 $5,277 $3,397
Loan To Value 65% $4,699,000,000 $3,430,000.000 $2,208,000,000
Monthly Loan Payment $33,211,550
Annual Debt Cost (ADC) 398,538,600
Total Cash NOI 506,000,000
DSCR (Cash NOI /ADC) 1.27X

The above does not impute a capex reserve. It is our understanding that this is typically $0.20 per square foot. Trizec has 30,902,000 square feet. The capex reserve at $0.20 would be $6.2M.

If Trizec was to be refinanced in full (not just 2011 maturities), and if the above assumptions were achieved, it looks as though creditors would need to put in just under $1B in 2011. Of course, perhaps LTV would be 70%, not 65%. Or LTV could be 50% or 60%. Cap rate could be 8.5%, or perhaps 6.5%. Interest rate could be 6% or 8.5%. DSCR amortization requirements could be 10 years, or could be 30 years.

The above is a quick back of envelope analysis. There could be errors. I will try to work on this in the future.
[RON1]BAM became 47% owner during F2009. Previously they were a 45% owner.

Here is one way to determine the amount Trizec might be able to refinance. Granted, the full $5.7B is not coming due in 2011. Over $3B is coming due.

The entire Trizec entity is put on the financials of BPO. Eventually BPO apportions out, all but their 47% ownership. BPO is projecting Cash NOI for Trizec in 2011 of $370 for the 73% managed assets, and $238 for their own ownership.

Here is one step I have worked on.

1. Interpret the projected Cash NOI in 2011 for the entire entity. BPO projects $506M. You could increase or decrease from there. I would use $450M, $475M and $506M.

2. Impute a capex reserve. I think that $0.20 per square foot is typical.

3. Determine what NOI you would like to use, or use a variety of NOI’s. I would use 6%, 7% and 8%.

4. Determine the interest rate and amortization period to be used. I would use both 25 year and 30 year. I would also use an interest rate assumption of 6.5%, 7% and 7.5%.

5. Determine expected minimum debt service coverage ratio. I would use 1.3, 1.5 and 1.75. Debt Service Coverage Ratio is NOI / Debt Service Costs (Principal and interest.)

6. The above will give you the maximum expected total loan.

We attended a Fitch CRE Conference in November 2009. Here they use a 1.25 DSCR, 8% financing and 30 year amortization. They did this as a default test. http://fitchratings.nyws.com/FileLib/PDFs/1146-et10007mcb_combined_final.pdf

Here is a quote, mentioning Trizec, from Blackstone (BX) 12/31/09 10-K.

Delloite is auditor for both BAM and BX. Hence, in theory we would expect the future and discussions should be consistent from both parties.

“Specifically, the decline in these funds was primarily driven by unrealized valuation reductions for Boca Resorts, Inc., Wyndham International, Inc., Equity Office Properties Trust, Trizec Properties, Inc. and Hilton Hotels Corporation.”

February 4, 2010 (20.80) Updates

Trizec Debt Update

BPO reported 2009 Cash NOI of $327 million through September for the US Fund, which annualizes to $436 million or a 5.9% cap rate based on the US Fund book value of $7,343 million at the end of 3Q09. Keep in mind that the NOI listed (from BPO report) includes all of Trizec, and is not merely BPO’s portion.

Hence, for BPO ownership allocation one needs to reduce to 47%.

On the P&L side, all of Trizec is included, including the income and expenses associated with the properties managed by Blackstone. 100% of BPO’s ownership in each property is reflected in Brookfield Properties NOI. Interest expense on all of the debt within the Fund is also reflected. The minority share of these items is reflected in the non-controlling interests expense line on the P&L. Bottom line is FFO reflects the approximate ownership interest in the US Fund.

The debt coming due in 2011 (not including 2010), as per 3Q09 Interim Report for Brookfield Properties only is:

$1,845 US Office Fund. This is not the consolidated debt, or US Office Fund debt, but the proportional debt to Brookfield Properties in 2011 only. (Remember there is 2010 debt and other property debt coming due as well.)

In relation to Trizec. US Office Fund has $426M of Redeemable equity interests for the Blackstone Put in 2011. This is only if Blackstone exercises the PUT. If so, Brookfield Properties will be responsible for 62% of that, or $264M.

Trizec was purchased for around $7.5B. Current Value is probably in the area of $4B (loss of 47%) to $5.5B (loss of 27%). Full Debt owed is $5.7B.

It is my understanding that much of the debt is non-amortizing at this point.

Using an annualized 2009 projected NOI of $436M.

If cap rate is 7%, the value would be $6.2B.
If cap rate is 8%, the value would be $5.5B.
If cap rate is 9%, the value would be $4.8B.

These assumptions include constant rent and occupancy. Even under a 7% cap rate scenario, I think a 92% LTV is remote, if not impossible.

In my notes I mentioned Ric Clark with a $270M NOI at purchase and then mentioned a $320M NOI.

Ric Clark (at NAREIT) was talking about the $270M NOI at purchase. He also was projecting forward the 2011 expected NOI of $320M. Both of these comments referred to the US Office Funds 73% ownership of Trizec. None of these statements included the NOI of the buildings managed by Blackstone (27%).

The ownership is now 47%, via subsequent changes between I think Blackstone and Brookfield. Here are some notes of mine from June 2009 (These notes refer to the then 45%).

1. Brookfield Properties through its US Office Fund acquired 73% of Trizec with Blackstone acquiring the remaining 27%. Brookfield owns a 62% interest in the US Office Fund with institutional partners owning the balance.

2. Brookfield’s effective interest in Trizec is 45% (62% * 73%)

3. Brookfield is required to consolidate the Trizec structure and as a result records 100% of the assets and debt on its balance sheet and nets down to its 45% effective interest through two balance sheet line items: “Non-controlling Interests – Fund Subsidiaries” and “Capital Securities – Fund Subsidiaries.”

4. The US Office fund square footage listed in BPO’s disclosure documents (1Q09) is inclusive of all assets at 100%.

5. Brookfield does not manage Blackstone’s assets (Midtown Manhattan and Los Angeles) and as a result has provided identified these assets in their disclosure documents in italics with a footnote describing them as “non-managed.”

6. The joint venture agreement with Blackstone provides for a put/call as well as a valuation and cash flow ‘true-up’ which are described on page 63 of BPO’s 2008 Annual Report.

7. The $270 million of NOI referred to (at NAREIT), represented the NOI from the buildings managed by Brookfield through its US Office Fund or 73% of total NOI at acquisition date. It did not refer to the NOI from the buildings managed by Blackstone (or 27%).

8. Applying a 5% cap rate to the NOI at inception would result in a value of $5.4 billion ($270 / 5%) for the assets managed by Brookfield through the US Office Fund (or 73%).

9. The $320 million of NOI referred to(at NAREIT) represented the NOI from the buildings managed by Brookfield through its US Office Fund or 73% of total NOI expected in 2011. It did not refer to the NOI from the buildings managed by Blackstone (or 27%).

I think the next round of CRE financings in might be “loan to owns.” Meaning, the lending entity, takes the burden off of the current lender, who is stretched and forced to extend or take back property. Many of these lenders or entities, do not want the property, or can not afford the property, and they have been using the philosophy of “pretend and extend.” The new lenders I foresee, will make sure monies are available, with plenty of cushion in a carefully constructed Loan to Value, and when the short term band aid comes due, it is my belief that the new entity will swiftly take control of such an asset.

I think this is where the new great investments will be. Brookfield, in my opinion, was once such a type of company, and in my opinion, it is possible, that they will lose material assets and equity, to this type of event.

Questions I asked BAM on February 2, 2010 (BAM indicated they will get back to me after February 19, 2010.)

1. Will any of the new consortiums be buying assets or monetizing assets of any BAM or BAM related investments. Are there any provisions the outside investors discussed or signed off on in regards to related party transactions?

2. Would you please explain in detail the related party sale, gain and contract amendment with Great Lakes Hydro from 3Q09? Was this amendment identified in the prospectus prior to the transactions? Specifically look at the contract amendment on Brookfield Renewable Power which seemed unexpected, and I think was paid to BAM for $349M, and see if that was part of the realization gain on BAM books for 3Q09. Interesting that BAM recorded 3 month net income of $112M. Would there have been a Net Loss had the related party realization gain of $346M not occurred? Was the $346M realization gain also part of the $349M contract amendment?

3. On page 7 of the Q3 / 2009 Supplemental Information you wrote the following, “We believe that our underlying values have increased by at least this much over the first nine months of the year with the result that our current deconsolidated debt to total capitalization ratio has improved from the 15% ratio at the beginning of 2009. Our proportionate debt-to-total-capitalization ratio was 44% at the beginning of the year and we believe that it also has improved as a result of increases in underlying values and lower debt levels.” Your stock price was at $15.27 on 12/31/08 and $22.71 on 9/30/09. Haven’t your ratios increased because of the stock price increase?

4. You have High-yield bonds and distressed debt of $411M on 9/30/09; this is up from $60M in June 2009. Are any of these assets related party assets? Does BAM categorize some related party purchases of investments to this section?

5. Please explain the Loans Receivable of $388M on 9/30/09. Again, is any of this from related parties?

6. Has the SEC or SEDAR issued comment letters to any of the consolidated entities other than Brookfield Homes?

7. It is my understanding that Trizec debt is partially owned by BAM. Please elaborate. What was cost and what is current carrying value? Are there any impairments? Is any of the Trizec of Brookfield Property consolidated debt in a special servicing situation, any delinquencies or delayed payments (even if accepted by lender)? You discussed CMBS financing in your shareholder letter, and that you primarily utilized “traditional mortgage financing.” Do you consider primarily interest only loans (i.e. 1 Liberty Plaza) as traditional? Does the ownership of Trizec paper at all conflict with your theory of leverage and excess liquidity offered to entities prior to the “crisis?”

8. Your 3Q09 shareholder letter stated, “Notwithstanding the challenging business environment, we recorded strong results for the quarter, generating cash flows from operations of $520 million, which compares favourably with $355 million last year. These results were assisted by our disposition of a portion of our investment in Canadian power plants.” Was any of this not a result of a related party transaction? Did any of this include the contract amendment of $349M?

9. BAM has a bit of hedging in most of their consolidated entities. Are any of the hedging gains, losses, mark to markets, as well as transactions being done by BAM related entities?

10. Why did Brookfield Properties buy certain assets from Western Forest Products (a consolidated BAM entity)? We know that Western Forest is distressed, and wondering if there were synergies as to why Brookfield Properties bought the interests?

11. You mentioned in your 3Q09 shareholder letter, “Unfortunately, many new investors entered the market over the past four years and made at least one of three fatal mistakes. They either: (1) paid too much; (2) had growth assumptions that were too high; or worst of all, (3) employed excessive debt leverage.” You wrote that in connection with Infrastructure Assets. Yet, please describe if you think that any of the large purchases by BAM over the last 4 years were also part of such a group. Multiplex and Trizec seem to fit that mold. Please explain.

12. You also mentioned in the 3Q09 letter, “And while the capital markets’ recovery has allowed a number of property companies to refloat themselves on their own, there are many other situations where the clock is ticking and where major deleveraging may be required. Those who have no credible sponsor with the necessary capital represent suitable opportunities for us to assist with their recapitalizations.” Please elaborate that in regards to Trizec. It seems as though the LTV and current conditions will not allow for a refinance. The LTV is generally known to be underwater.

13. I find it interesting that your 3Q09 shareholder letter mentioned, “simple-to-understand assets.” To me, the structure of BAM as an entity, with all her tentacles, seems hardly “simple-to-understand.” Please elaborate. BAM did answer this. Here is their response. “The Letter said the assets/businesses are simple to understand. That is the business, industries, etc. related to power, real estate and infrastructure are pretty straightforward. They are cash flow generating assets that tend to increase in value over time, require minimal capex with high barriers to entry. In many cases they are regulated businesses.

You are making a different point, in that the accounting may be complex. We do disagree with that.”

I responded with the following. I think the complexity is not in the accounting, but in the nature of your set up.

BAM answered this with, “I think we are saying same thing a little differently re: the complexity issue. The assets/businesses themselves are not complex. It is how we own them and account for them – through both public and private vehicles.”

14. Do you consider Capital Securities and Preferred Stock to be Equity or Liabilities?

BAM now owns 49.7% of Brookfield Properties

BAM filed a 13-G in respect to their ownership of Brookfield Properties on February 2, 2010. They previously owned 50.1%, and now own 49.7%.

I am not sure if they are still required to consolidate BPO into BAM now. As a general rule, if a company owns 50% or greater shares, they are required to consolidate.

Going from memory, I think BAM would still consolidate BPO for 2009, since they owned > 50% for most of the year. Obviously, BAM exercises control over BPO. I just don’t remember what happens with 49.7%.

The following is from The US GAAP GUIDE.

“In substance, a single economic or accounting entity exists when one company (investor) owns a controlling interest in another entity (investee). (FASB ASC 810-10-10-1) (formerly ARB 51, par. 1) In such cases, consolidated financial statements are presumed to be more meaningful than separate financial statements, and an investor should issue consolidated, rather than parent company financial statements, as its primary financial statements. (FASB ASC 810-10-45-11) (formerly ARB 51, par. 24)

Usually, a controlling financial interest is evidenced by ownership of a majority voting interest. Thus, as a general rule, when a company directly or indirectly owns more than fifty percent of the outstanding voting shares of another entity, it should account for its investment through consolidation unless—

a. control does not rest with the majority owners (for example, if an entity is in legal reorganization or operates under foreign exchange or governmental restrictions so severe that they cast significant doubt on the owners’ ability to control the entity) (FASB ASC 810-10-15-8 and 15-10) (formerly ARB 51, par. 2), or

b. noncontrolling shareholder(s) have certain approval or veto rights that allow the minority shareholder(s) to participate in significant decisions related to the investee’s ordinary course of business. (FASB ASC 810-10-15-10) (formerly EITF 96-16.

Consolidation also is required when the controlling financial interest is achieved through means other than ownership of a majority voting interest. In certain situations, an entity that has a variable interest in another entity is required to consolidate the variable interest entity (VIE). (See paragraph 12.228)”

I imagine this will be addressed if any changes from consolidation are made. Just something that caught my eye. I did question BAM on this, and here was their response. They did confirm to me that BAM will still consolidate BPO. Here was their reply. The confirmation was not sent till later that day, hence not included in their reply.

“The annual 13G filing reports BAM’s common share interest in BPO is 49.7%. What it does not show is that BAM has ownership of Redeemable Voting Preferred Shares, which give us control over the 50% level. For background, see the information on Redeemable Voting Preferred shares from BPO’s annual information form from last year.

VOTING SHARES

At March 17, 2009, Brookfield Properties had outstanding 391,118,440 common shares and 14,201,980 Class A Redeemable Voting
preferred shares. If you are a holder of common shares or Class A Redeemable Voting preferred shares of record at the close of business
on March 17, 2009, the record date established for the receipt of meeting materials and for voting in respect of the Meeting, you will be
entitled to one vote in respect of each such share held by you on all matters that come before the Meeting. For a description of the
procedures to be followed if you are a Non-Registered Holder to direct the voting of shares beneficially owned, see “Non-Registered
Holders” on page 1 of this Circular.

PRINCIPAL HOLDERS OF VOTING SHARES

To our knowledge, the only person or corporations beneficially owning, directly or indirectly, or exercising control or direction over,
securities of Brookfield Properties entitled to vote at the Meeting carrying more than 10% of the votes attached to any class of
outstanding securities of Brookfield Properties is Brookfield Asset Management Inc. (“BAM”), which, directly and indirectly, owns
197,383,928 common shares and 13,796,870 Class A Redeemable Voting preferred shares as of December 31, 2008, being
approximately 50.5% and 97.1%, respectively, of the outstanding shares of each such class. BAM is focused on property, power and
infrastructure assets and has approximately $80 billion of assets under management. BAM’s shares are listed on the New York and
Toronto stock exchanges (the “NYSE” and “TSX”, respectively) under the symbols BAM and BAM.A, respectively, and on Euronext
under the symbol BAMA.”

National Bank Financial issues report on Brookfield Properties 2/3/10

National Bank Financial has issued a report on Brookfield Properties. Their thesis is basically that BPO has world class assets, low relative valuation, great investment potential with new consortium, upside to Manhattan and residential businesses. They mention that BAM owns 50.5% of BPO. That is now adjusted (as of this morning) to 49.7%. They feel that the Merrill space coming due in 2013 is an opportunity and not a risk. Interesting take. Not saying it is wrong. I have heard this before. I don’t buy it, but certainly possible, and a lot can happen in 3 years. They identify other risks that all companies have. This includes cap rates, Merrill, economy etc.

What they did not surprisingly identify as a risk, is that they have over $3 BILLION coming due in less than 22 MONTHS.

Someone made the following statement in regards to our analysis. “Do you really think BAM/BPO would go through all the effort and exposure to announce a $5.5 billion real estate turnaround consortium if they weren’t totally confident in their ability to refinance the Trizec debt? Of course not!”

My response is as follows:

I disagree. I think if BAM/BPO could get commitments on $5.5B, take it , why not. Perhaps you are on the industry inside, and have more info then us. Very possible as well, that BPO could refinance Trizec. Perhaps there will be a “loan to own financing.” Maybe BPO puts in enough equity, to get loan refinanced for 1 – 5 years, and unlike a current lender, the future lender would have no issues foreclosing. On top of this, if things were so grand, why would ratings agencies be downgrading BPO credit, as they have. S&P ratings watch negative 5/09.

The same person mentioned, “At every CC throughout this credit crisis BPO has made it clear that they were going to be a buyer of distressed properties, not a seller. At the Q3 call Ric Clark stated that he hoped to announce more details on the Trizec refinancing plan in early 2010, although he was obviously reluctant to get into details as they are in the middle of negotiations. ”

Here are some mentions of possible sale options for Trizec (US Office Fund assets). I really did not see discussions of being a buyer of distressed properties.

3Q09 BPO CC

Ric Clark – Brookfield Properties – CEO

“Assets within the US fund, there is some structuring that needs to be done before we’re kind of in a position to sell them. So, it’s not likely that in the next couple of months we’ll be doing any transacting within the US office fund, though I will say there are a couple of assets within the fund that Dennis has been working on as possible sales options. So, it’s probable that at some time during 2010, we’ll have a couple of mature assets within the fund that we sell.”

2Q09 BPO CC

Dennis Friedrich – Brookfield Properties Corp – President, COO – US Commercial Operations

“Yeah, John, on terms of the sales of assets within the Trizec we can sell assets. There is, we have to pay release prices but there’s not constraints that prevent us from selling the assets.”

Steve Douglas – Brookfield Properties Corp – President

“Looking past 2009, we have no major maturities to deal with in 2010 and remain focused on the refinancing of our 2011 maturities including the US Office Funds mezzanine debt. Brookfield’s share of the debt on this US Office fund is $1.8 billion which is recourse only to the assets of the fund and matures in October 2011, and it was our intention to repay or refinance the facility through a combination of new asset level financing and to asset sales, following our efforts to increase the underlying cash flows of the assets through our leasing initiatives.”

Ric Clark – Brookfield Properties Corp – CEO

“Our first major refinancing comes in late 2011 relating to our US Office Fund. At this point it’s too early to give any specific update on the status of this, but I can assure you we’re actively working on this and expect to have a refinancing recapitalization solution in advance of the maturity.”

4Q08 BPO CC

Steve Douglas – Brookfield Properties Corp – Incoming President – Corporation

“Looking past 2009, we have minimal maturities to deal with. And we will turn our attention to refinancing our 2011 maturities including the US Office Fund Mezzanine debt.”

“Brookfield share the debt on the US office fund; approximately it’s $1.6 billion which is recourse only to the assets of the fund. It is our intention to repay this facility through a combination of new asset level financing and through asset sales, following on our efforts to increase the underlying cash flows of these assets through our leasing initiatives. We have been actively positioning these assets, some assets for sale commencing later this year. But we anticipate a more robust environment at 2010 for asset sales.

Our capital plan does not currently anticipate having to inject additional equity over and above what we have already invested as the Fund continues to generate positive cash flow.”

Issuance of Preferred Securities

BPO issues Series N Preferred Shares for $275M and 11M Shares.

On January 10, 2010, Brookfield Properties reported an issuance of Preferred Shares, Series N will be issued at a price of C$25.00 per share, for aggregate proceeds of C$150M.

It is my understanding, there might be another 2M share increase over the original 6M, bringing a total potential of C$200M to Brookfield.

Series N will be entitled to receive a cumulative quarterly fixed dividend yielding 6.15% annually for the initial 6
[1/2]-year period ending June 30, 2016. Thereafter, the dividend rate will be reset every five years at a rate equal to the five-year Government of Canada bond yield plus 3.07%.

General corporate purposes are stated as the use of the funds.

DBRS assigned a rating of Pfd-3 (high) with a Stable trend.

http://dbrs.com/about/ratingScales

“Pfd-3 – Preferred shares rated Pfd-3 are of adequate credit quality. While protection of dividends and principal is still considered acceptable, the issuing entity is more susceptible to adverse changes in financial and economic conditions, and there may be other adverse conditions present which detract from debt protection. Pfd-3 ratings generally correspond with companies whose senior bonds are rated in the higher end of the BBB category.”

Brookfield Homes pays preferred dividend in Shares.

“On December 31, 2009, Brookfield Homes Corporation (the “Corporation”) paid a semi-annual dividend of $10,000,000 to holders of record of its $250,000,000 8% Convertible Preferred Stock, Series A. At its election, this dividend was paid by the Corporation issuing 1,608,567 shares of Common Stock of the Corporation at the volume weighted closing price of the Common Stock over the five consecutive trading days preceding the dividend declaration date of December 16, 2009, or approximately $6.21.”

BAM to issue CDN $275M of preferred Shares

Brookfield Asset Management Inc. announced that as a result of strong investor demand for its previously announced public offering of Preferred Shares, Series 24, it has agreed to increase the size of the offering from CDN$150,000,000 to CDN$275,000,000 or from 6,000,000 Preferred Shares to 11,000,000 Preferred Shares. There will not be an underwriters’ option, as was previously granted.

Brookfield Asset Management Inc. (TSX:BAM.A)(NYSE:BAM)(EURONEXT:BAMA) announced today that it has agreed to issue to a syndicate of underwriters led by Scotia Capital Inc., CIBC, RBC Capital Markets, and TD Securities Inc. for distribution to the public 6,000,000 Preferred Shares, Series 24. The Preferred Shares, Series 24 will be issued at a price of $25.00 per share, for aggregate gross proceeds of CDN$150,000,000. Holders of the Preferred Shares, Series 24 will be entitled to receive a cumulative quarterly fixed dividend yielding 5.40% annually for the initial period ending June 30, 2016. Thereafter, the dividend rate will be reset every five years at a rate equal to the 5-year Government of Canada bond yield plus 2.30%.

Holders of Preferred Shares, Series 24 will have the right, at their option, to convert their shares into cumulative Preferred Shares, Series 25, subject to certain conditions, on June 30, 2016 and on June 30 every five years thereafter. Holders of the Preferred Shares, Series 25 will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 2.30%.

Brookfield Asset Management Inc. has granted the underwriters an option, exercisable in whole or in part at least two days prior to closing, to purchase an additional 2,000,000 Preferred Shares, Series 24 at the same offering price. The Preferred Shares will be offered by way of prospectus supplement under the short form base shelf prospectus of Brookfield Asset Management Inc. dated January 12, 2009. The prospectus supplement will be filed with securities regulatory authorities in all provinces of Canada.

The net proceeds of the issue will be added to the general funds of Brookfield Asset Management Inc. and be used for general corporate purposes. The offering is expected to close on or about January 14, 2010. The preferred shares may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from the registration requirements under the U.S. Securities Act.

BAM Sues AIG Over Interest-Rate Swap Pact (12/22/09)

“American International Group Inc. is asking a federal judge to throw out what the company calls a “lottery ticket” lawsuit filed by Brookfield Asset Management Inc., which alleges “certain bankruptcy events of default have been triggered under the parties’ standard-form swap agreement” about 20 years ago, according to court papers.

In a motion to dismiss filed in U.S. District Court for the Southern District of New York, AIG contends that if Brookfield’s allegations were true, “it would be inexplicable that not a single other counterparty has sought to assert the same position” as Brookfield, which claims the federal government’s bailout of AIG was tantamount to a bankruptcy default.

“Brookfield is desperately trying to evade a more than $1 billion obligation owed to AIG,” said spokesman Mark Herr. “We believe Brookfield’s position is without merit and should be rejected.”

In its lawsuit filed late September 2009, Brookfield said the swaps entered into in 1990 were automatically terminated “as a result of AIG’s recent financial collapse.” According to court records, Brookfield said several provisions within the swap deal, which was meant to protect each party from the other’s severe financial distress, were “plainly triggered.” AIG has refused to concede a default as outlined by the swap, Brookfield said in its suit.

AIG writes in court papers that Brookfield “purchased a litigation ‘lottery ticket’ and hopes to pull off a massive and inequitable $1.2 billion windfall, notwithstanding the fact that their claims lack a legal or factual basis.” Brookfield’s legal action “flies directly in the face of the federal government’s goal in deciding to provide financial assistance to AIG: to prevent AIG from triggering the very kinds of defaults that (Brookfield) now claims were nonetheless triggered” and under this theory, “the billions that the federal government has invested in AIG was for naught.”

December 17, 2009 (21.71) Error in our covenant and change of control provision analysis.

If you ‘Ctrl – F’ you can search terms “change of control” or “coven” Upon further research, we were made aware of an error. We thank that person for pointing out the error. A change of control is not triggered merely by a below investment grade rating. I think the correct answer is, if there is a change in ownership, over a specified percentage, and then , and only if the change of control happened, would there be a potential triggering event with a credit downgrade. Hence, if BAM or BRPI were brought below investment grade rating, the respective notes would not be affected in terms, calls, or anything like that.

October 21, 2009 (23.09) Value Line Comparisons 9/09 to 3/07

This was corrected on 10/22/09 as I inadvertently missed a 3 for 2 Stock Split on June 4, 2007.

Observations:

Greater maturities in 5 years. Greater Maturities to Capital. Increased Debt Levels. Lower coverage ratios. Greater Debt to Capital. Greater underfunded pension. Greater preferred stock. Share count has decreased. Revenues have increased 60%. Revenues Per Share have increased 67%. EPS has decreased 60% . Book Value has increased by 15%. Cash Flow per share has increased by 8%. Decrease in tax rate, which leads to higher NI. Yet, that could be a sign that higher NI is not sustainable. Negative Working Capital now. Lower returns on equity and capital. Higher ratio of Dividends to Profits. Increased Institutional Holders. Fitch IDR was BBB+ in 3/07, now BBB.

Data Gathered:

Sept 2009 March 2007 (12/06) Split Adjusted
Price 22.54 35.43
Total Debt 31,063 22,808
Debt Due in 5 Years 17,500 2,308
Total Interest Expense 1,770 1,100
Interest Coverage Ratio 1.1X 2.0X
Debt to Capital 82% 71%
Pension Assets 983 75
Pension Obligations 1,156 100
Common Stock O/S 571.91 598.98
Preferred Stock 1,144 689
Market Cap 12.9B 21.2B
Annual Revenues 11,000 est 6,897
EPS 0.75 est 1.90
Revs per share 19.20 est 11.51
Cash Flow Share 3.20 est 2.95
Book Value per Share 10.40 est 9.01
Operating Margin 36.0% est 54.8%
Depreciation 1,400 est 600
Net Profit 430 est 1,170
Tax Rate 8.0 % est 24.2%
Working Capital (2,000) est 1,500
Shareholder Equity 7,000 est 6,084
Return on Total Capital 3.5% est 6.5%
Return on Share Equity 6.0% est 19.2%
Retained to Common Equity 2.5% est 17.2%
All Dividends to Net Profit 69% est 21%
Analyst S. Abdou S. Abdou
5 Year Price Projection High 50 47
5 Year Price Projection Low 35 33
Institutional Holders Shares 318,487 312,020

September 30, 2009           Fitch Ratings has downgraded the ratings on Brookfield Asset Management

Fitch Ratings has downgraded the ratings on Brookfield Asset Management (NYSE and TSX: BAM) as follows:
–Issuer Default Rating (IDR) to ‘BBB’ from ‘BBB+’;
–Unsecured line of credit to ‘BBB’ from ‘BBB+’;
–Senior unsecured notes to ‘BBB’ from ‘BBB+’.

“The Rating Outlook is Stable.

“The lower ratings reflect Fitch’s concerns as to the overall sustainability of cash flows from BAM investments within its diversified business portfolio, particularly given its large exposure to commercial real estate and the wholesale power markets.”

“The complex corporate structure and sizable number of related-party transactions continue to be rating concerns.”

“BAM’s ratings continue to be supported by high cash flow coverage of its corporate debt service and low leverage at the BAM level. The ratings are further supported by a strong management track record, geographic diversification of investments, relative strength in cash flows from assets under management, and demonstrated access to third party capital at both the corporate and asset levels during a very challenging fundraising environment over the past year. In addition, BAM is relatively better positioned to weather the current economic challenges as it owns interests in premier portfolios of office buildings in major financial centers including New York, London, and Toronto with strong tenancy and manageable lease maturities. Similarly on the power side, BAM owns over 4,000MW of hydroelectric generation with a stable revenue stream as approximately 70% to 80% of output is contracted over the next two to 12 years. Hydroelectric generation benefits as the lowest cost generator of electricity, modest capital expenditure requirements, and is environmentally friendly.

Fitch also notes that BAM actively acquires and divests investments and the composition of its portfolio has shifted over time. BAM’s assets under management have grown materially in recent years, as the businesses that the company controls have added scale, and the company has actively sought partners for the bulk of its investments.”

“Fitch is comfortable that BAM has access to at least $1.06 billion of sustainable annual cash flow based on investments held on June 30, 2009.”

“Fitch estimates that current cash flows are ample to service its corporate obligations, which included $2.9 billion of term debt held directly or guaranteed by the company, $100 million of commercial paper and bank borrowings, and $600 million of convertible preferred securities at June 30, 2009. Additionally, BAM has the ability to monetize some investments as necessary to fund obligations.

BAM’s corporate debt maturity schedule is reasonable, with $200 million of corporate maturities over the next two years and minimal exposure to variable-rate debt.

BAM maintains a strong liquidity position and financial flexibility with access to a wide variety of global capital sources. On June 30, 2009, BAM had $536 million in cash on hand and approximately $1.3 billion in unused capacity through committed, unsecured credit facilities. Additionally, BAM maintains a pool of highly liquid marketable securities that could be liquidated in a relatively short period of time.”

Septermber 18, 2009                    Songbird increases ownership of Canary Wharf Group
If they purchased 8.45% for ~$185M USD, then full value would extrapolate to $2.1B. If I recall BAM owns 15% of Canary Wharf. BAM sold their interest in Canary Wharf on 12/3/08 to Brookfield Europe LP in exchange for an approximately 42% limited partnership interest in Brookfield Europe LP with a fair market value of £333,800,000 and cash proceeds in the amount of £107,600,000.”

If I interpret the above correctly, BAM sold their 15% interest in Canary Wharf for £441M. I think that equated to $524 USD on 12/03/08.

That looks as though BAM valued Canary Wharf in full for $3.5B.

Perhaps I made an error. Of course valuations may differ based on time, needs of seller, needs of buyer, etc. Here are questions or comments I would have in respect to above.

1. Are my assumptions, givens and interpretations correct?

2. Account for the difference of entire valuation of $2.1B valuation in todays sale, versus $3.5B using BAM’s metrics in sale.

3. Via the sale to a related party, was a gain recorded? BAM has preveiously claimed the following: “The sale was by Brookfield Investments Corp., a 100% owned subsidiary. Therefore there is no income recognition on the transaction.” Hence, I have no reason to believe that any gain was recorded.

4. Were there a step of assets on the GAAP balance sheet due to this? BAM affirmed on page 43 of 1Q09,that Canary Wharf is being reported at Historical Cost. I can not verify that since Canary Wharf was sold to a related party. I do not know if the asset was marked up in a similar fashion that Pingston Power and Prince Wind was, when Sold to Great Lakes (related and consolidated subsidiary). What value is being used for IFRS?

5. Would BAM have been able to generate such a sale to an unrelated party for simialr proceeds?

6. Were the proceeds of this sale reflected in the increased liquidity and monetizations that BAM has been discussing this year, and at 2009 Investor Day?

August 31, 2009

Brookfield Prop to raise C$250M via preferreds.

“NEW YORK, August 31, 2009 – Brookfield Properties Corporation (BPO: NYSE, TSX) announced today that it has agreed to issue to a syndicate of underwriters led by CIBC and Scotia Capital Inc. for distribution to the public, 6.0 million 6.75% Preferred Shares, Series L. The Preferred Shares, Series L will be issued at a price of C$25.00 per share, for aggregate gross proceeds of C$150 million. Holders of the Preferred Shares, Series L will be entitled to receive a cumulative quarterly fixed dividend yielding 6.75% annually for the initial five year period ending September 30, 2014. The dividend rate will be reset on September 30, 2014 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 4.17%.

Holders of Preferred Shares, Series L will have the right, at their option, to convert their shares into cumulative Preferred Shares, Series M, subject to certain conditions, on September 30, 2014 and on September 30 every five years thereafter. Holders of the Preferred Shares, Series M will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 4.17%.

Brookfield Properties Corporation has granted the underwriters an over-allotment option, exercisable in whole or in part anytime up to 30 days following closing, to purchase an additional 900,000 Preferred Shares, Series L at the same offering price. Should the over-allotment option be fully exercised, the total gross proceeds of the financing will be C$172.5 million.

The Preferred Shares, Series L will be offered by way of a short-form prospectus filed with securities regulatory authorities in all provinces of Canada.

The net proceeds of the issue will be added to the general funds of Brookfield Properties Corporation and be used for general corporate purposes. The offering is expected to close on or about September 24, 2009.”

The following is a press release from Standard & Poor’s:

OVERVIEW
— We assigned our ‘BB+’ global scale rating and our ‘P-3 (High)’ Canadian national scale rating to Brookfield Properties Corp.’s new C$250 million preferred share issue (series L).

— The preferred shares will be listed on the Toronto Stock Exchange.

— Our ratings on Brookfield acknowledge the comparatively favorable second-quarter performance for the company’s well-leased and high-quality office portfolio, as well as its currently reduced exposure to development
activity.

— However, our negative outlook continues to reflect our concerns regarding very challenging and competitive office market fundamentals, an above-average leverage profile that results in weak fixed-charge coverage metrics, and sizable debt maturities in 2011 related to joint ventures.

August 28, 2009 (20.61) Notes to 2Q09 Filing

1. During 2009, BAM purchased 3,200 residential lots in Riverside County, California through two court foreclosure proceedings. I need to find out if any of these purchases were via related parties, instruments or joint venture partners. I am assuming not, but would like verification.

2. In the BAM 2Q09 report they discussed the sale of substantially all of their Canadian Hydroelectric generation assets to a Great Lakes Hydro Income Fund. Great Lakes is consolidated into BAM. I found it interesting that they mentioned the following. “…as we purchase a substantial part of the electricity generated by the Fund on a fixed price basis and then re-sell it along with the electricity produced by the balance of our operations.” I find it interesting to see if they will be selling electricity, in materiality, to other related parties.

3. BAM is using a capitalization rate of 7.6% to value their power generation portfolio. A 100- basis point change in the discount rate and a 10% change in long-term power prices is claimed to change the valuation by $0.9 billion. I find a 7.6% capitalization rate for an operating entity to be low by at least 2.4% (or 240 basis points.)

4. During 2Q09 BAM recognized a gain and earnings of $65M for the exchange of debt into common shares. This seems to be a regular type situation for BAM with other subsidiaries as well.

August 28, 2009 Fitch Rates Brookfield Incorporacoes’ First Debentures Issuance ‘A+(bra)’

http://www.marketwatch.com/story/fitch-rates-brookfield-incorporacoes-first-debentures-issuance-abra-2009-08-28

“SAO PAULO & RIO DE JANEIRO, Aug 28, 2009 (BUSINESS WIRE) — Fitch Ratings has assigned the national long-term debt rating of ‘A+(bra)’ to the proposed first simple debentures issuance, not convertible into shares, of Brookfield Incorporacoes S.A. (Brookfield Incorporacoes), in the total amount of BRL100 million, with final maturity on Sept. 1, 2013. The proceeds will be used for company general purposes. Fitch has already rated Brookfield Incorporacoes’ foreign and local currency Issuer Default Ratings (IDRs) ‘BB-‘, and national long-term rating ‘A+(bra)’. The Rating Outlook of the corporate ratings is Negative.

Brookfield Incorporacoes’ ratings reflect the integration of the company’s operations, which include a solid and geographically diversified land bank (Potential Sales Value (PSV) of BRL14.4 billion in June 2009); the strong shareholders structure and the capital support of the controlling group; and its operating scale expansion through strategic acquisitions carried out in 2008, which led the company to rank among the country’s four largest real estate developers. The ratings also consider Brookfield Incorporacoes’ satisfactory liquidity position and financial flexibility, resulting from the robust reserve of receivables of completed units not linked to debt, among other factors. The ratings further factor in the fact that Brookfield Incorporacoes should gradually return to more conservative credit measures, compatible with its ratings, after the significant impact on these measures from the merger of the formerly Company S.A. in October 2008, which had its name changed to Brookfield Sao Paulo Empreendimentos Imobiliarios S.A. The company also has as a major challenge the management of its consolidated operations in a scenario of weaker operating margins as a result of its greater focus on residential projects for the medium-low income segment, with lower margins.

Brookfield Incorporacoes’ Negative Outlook is consistent with the rating action taken by Fitch for the overall homebuilding sector on Jan. 21, 2009, reflecting the expectation that homebuilders in Brazil will face a challenging operating environment as well as significant financial pressures in 2009 and 2010.

The ratings incorporate the negative impact that the merger of the formerly Company S.A. had on the Brookfield Incorporacoes’ financial profile. For the last 12 months (LTM) ending June 30, 2009, adjusted consolidated EBITDA margin was 20.3%, well below Brookfield Incorporacoes’ 39.1% stand-alone margin in LTM ending Sept. 30, 2008, before the incorporation of the formerly Company S.A. This result, however, remains compatible with the sector average. Despite the uncertainties created by a weaker macroeconomic environment and the retracted demand for residential properties in the last quarter of 2008, the volume of pre sales remained high. The consolidated results also reflect the negative accounting effects deriving from Law 11.638. The expectation is that the expansion of operations of Brookfield Incorporacoes in the medium-low and economic income segments, with higher growth potential and demand stimulated by the federal government measures, should increase EBITDA in 2009 and 2010, with operating margins remaining, however, at lower levels.

The merger with the formerly Company S.A. and expansion of project launches increased Brookfield Incorporacoes’ leverage. As of June 30, 2009, total consolidated debt reached BRL1,148 million, compared to BRL473 million of Brookfield Incorporacoes, on a stand-alone basis, at end-September 2008. This increase resulted from Brookfield Incorporacoes’ strategy to maintain its project launching goals, notwithstanding the global crisis, in the fourth quarter of 2008, raising BRL549 million of working capital lines in the period. Leverage, measured by total debt/adjusted EBITDA and net debt/adjusted EBITDA ratios, increased to 4.6 times (x) and 3.7x at end-June 2009, respectively, from 1.8x and 1.0x in September 2008, considering only Brookfield Incorporacoes. Such ratios are weak for the rating category, and Fitch’s expectation is that the EBITDA increase expected for 2009 and 2010 and the future transfer of receivables contribute to reduce leverage ratios to levels more compatible with the ratings. The BRL251 million EBITDA in LTM ending in June 2009 considers BRL25 million of interest allocated to costs.”

Capex Discussion – Not necessarily related to BAM

If capex is funded via debt, it will not show up in Statement of Cash Flows.

“Information about Noncash Investing and Financing Activities

FAS95, Par. 32

32. Information about all investing and financing activities of an enterprise during a period that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in the period shall be reported in related disclosures. Those disclosures may be either narrative or summarized in a schedule, and they shall clearly relate the cash and noncash aspects of transactions involving similar items. Examples of noncash investing and financing transactions are converting debt to equity; acquiring assets by assuming directly related liabilities, such as purchasing a building by incurring a mortgage to the seller; obtaining an asset by entering into a capital lease; and exchanging noncash assets or liabilities for other noncash assets or liabilities. Some transactions are part cash and part noncash; only the cash portion shall be reported in the statement of cash flows.”

When a capital expenditure or equipment purchase or any asset purchase is financed, it will never show up on the statement of cash flows as capex. It will be recorded as an asset on the balance sheet, the debt will be recorded and of course depreciation and interest expense will show up on Statement of Cash Flows and Income Statement. You will also see the principal repayments show up.

This is an area that can be manipulated. A company could make capex look a lot less than it really is. Just another area to look at.

I mentioned previously with BAM, that now that assets are coming out of development, you could see expenses go up, since formerly capitalized costs will be immediately expensed, and past costs will now be depreciated, when the asset is placed in service.

Capex is a place where accounting games can be played. One example is equipment could be bought via a note payable. That will not be reflected in cash flow statement as capex. Yet, in future cash flow statement would be adjusted for the depreciation on such equipment, as well as debt pay-downs on the note. That is also why interest only and other exotics are interesting to watch.

Third Avenue Value and BAM

On June 30, 2008 Third Ave Funds owned 24,473,987 shares.

On June 30, 2009 Third Ave Funds owned 21,032,601 shares.

This is a decrease in owned shares of 3,441,386 shares.
This is a reduction of 14.06%.

At current price of $20.85 this is a reduction of $71,752,898.

BAM, Beer etc.

http://beerzology.blogspot.com/2009/08/history-of-beer-timeline.html

“1971
Peter Bronfman (1929-1996) and his brother Edward Bronfman co-owned the Montreal Canadiens hockey team. Their uncle, Samuel, was the founder of the liquor company, Seagram Co. Ltd. The brothers acquired holdings in Brascan Ltd., a property mgmt. company, Noranda Inc., a natural resource company, and John Labatt Ltd., one of Canada’s 2 biggest brewers.”

“2005 Apr 4
In Canada Edward Bronfman, Canadian businessman, died. Bronfman and his brother, Peter, built Edper Investments Ltd. into a business with interests ranging from forestry and mining to banking, beer and hockey to form the core of what is today Brascan Corp.”

Someone who is fluent in BAM wrote the following. I have not verified its accuracy.

“Yeah it goes something like this. Samuel Bronfman was a bootlegger who rolled his fortune into the Seagram company. At one point the Bronfman family was one of the wealthiest, if not the wealthiest, families in Canada.

Two of his kids, Peter and Edward, inherited a small portion of the family fortune, and at one point hired Jack L. Cockwell from accounting firm Edper to advise them. This led to a business partnership between Cockwell and the Bronfmans, with Edper as the investment vehicle. Cockwell also controlled a company named Hees International that provided merchant banking and financing services. Two of the early investments were the Labatt brewing company and mining company Noranda. They were also involved in Trizec Properties. This was ~30 years ago.

They effected a takeover of Brascan, and (summarizing a lot of history here), Hees, Edper, and Brascan were eventually amalgamated into the Brascan of the late 1990’s, which was renamed to Brookfield Asset Management. Jack L. Cockwell is still the “group chairman” of BAM.

Labatt’s was sold by Brascan in 1993. This included a bunch of other businesses including sports teams and real estate.

The Bronfman brothers are both dead (Peter in 1996 and Edward in 2005). All of these people had connections to Trizec which has ranked as one of the largest real estate companies in Canada for much of its history. I have wondered if Edward Bronfman’s death was a catalyst to BPO’s acquisition of Trizec. I don’t know how active of a role he played at Trizec at the time of his death. But Trizec and what-is-now-BAM have been affiliated with one another for decades.”

245 Park Avenue Revisited

On 4/8/08 Flatt told an Syracuse University Audience, “We Purchased 245 park ave for $250 sq foot or $500M in 1995. property now worth $2B. havent purhcased a property in NYC in 2 years because prices are high.”

245 Park Ave is reported by Reis to be 1,586,000 SF. Hence, BAM seems to have paid around $317 SF.

Using Flatt’s $2B number, that comes out to $1,261 per square foot.

Here would be the value of 245 Park Avenue if using various values. Keep in mind that Brookfield Properties reports the square footage without parking to be 1,719,000 SF. Hence, I adjusted the computations below for the 1,719M SF.

Hypothetical Value per SF $350 SF $500SF $700SF $1,000 SF $1,163 SF
Building Value $602M $860M $1,203M $1,719M $2,000M

Here is an article which discussed current prices and valuations for Class A buildings in NYC. http://www.observer.com/2009/real-estate/10-most-expensive-buildings-revisited

Here are snippets from that article:

“The 2007 most expensive list included, along with the GM Building: 9 West 57th Street; Rockefeller Center; 200 Park Avenue; the Seagram Building; 4 Times Square; One Bryant Park; 245 Park Avenue; 277 Park Avenue; and the one non-midtown entry, 7 World Trade Center. Based on interviews with real estate professionals, their values have declined anywhere between 25 and 60 percent.”

“The big picture is that most properties that transferred in the last five years are worth less than the debt,” wrote Cushman & Wakefield sales guru Yoron Cohen in an email. “The markets provided huge leverage to buyers which were based on extremely optimistic future growth of rents. It was out of control. Buildings like 885 Third (the Lipstick Building) were sold for $1,000 per square foot, and it is worth about a third of that number.”

“You’re like the grim reaper,” chided Howard Michaels, chairman of the Carlton Group, before acknowledging, “All the buildings that were bought were bought on the expectation of increasing rents and that hasn’t happened. You combine that with higher cost of capital on financing, and buildings are worth less.”

“The big picture is that most properties that transferred in the last five years are worth less than the debt,” wrote Cushman & Wakefield sales guru Yoron Cohen in an email. “

“If we’re talking about better-quality buildings, we’re seeing price ranges in $350 to $600 a square foot,” he said. “And the super-premium buildings, such as 9 West [57th], the GM Building, 450 Park, etc., that handful or two of buildings, none of them have traded. So what they’re worth is pure conjecture. Based upon the rental premiums they achieve, they’re probably worth $800 a foot, but given their scarcity value, who’s to say what someone wouldn’t pay for them?”

Rumors of 9665 Wilshire Blvd being sold?

Word is that 171K SF is being sold by Brookfield and Blackstone. CBRE looks to be agent. Early talk is $83M. Supposedly excellent location. I think the building was acquired as part of the Trizec purchase. I think the Trizec deal valued the building at $92.3M. This would be a price of 11% less than 2006 purchase. Don’t forget, BPO and BAM stepped up basis on purchase of Trizec. Hence, all in cost is being reflected at a larger amount on GAAP financials.

Grace Building signs a lease

http://www.observer.com/2009/real-estate/good-news-lawyers-lease-1350-broadway-debt-dealer-1114-sixth

“Brookfield Properties’ Grace Building at 1114 Avenue of the Americas, debt restructuring specialist Zolfo Cooper has signed a new 14-year, 26,000-square-foot lease on the 41st floor. Zolfo will relocate from about 17,000 square feet at Edward J. Minskoff Equities’ 1166 Avenue of the Americas.”

“They’re a consulting firm that does a lot of debt restructuring,” said Mr. Amrich, who also represented Zolfo. “So, obviously, in this environment, they’re very busy.”

“The asking rent was about $85 a square foot for the space, which Brookfield is building out. The taking rent was likely much lower. Patrice Hayden and Mr. Urrutia worked with Mr. Amrich in representing Zolfo in negotiations with Brookfield’s David Cheikin.”

Brookfield Properties reports average in-place rent in midtown Manhattan was $37.34 at the end of 2008.

I think that Grace building hopes for and currently gets a lot more than $37.34 SF.

1114 Ave of Americas is the location. This is part of what is called “Grand Central Sub Market” in NYC. According to a NYC CRE industry insider, this property has the following information.

The asking rent of this class A builing was $134 SF. I think that is a AAA net lease. Size of building reported at 1,380,330 SF.

Some comps:

Description***********************asking rent SF

1133 Avenue of the Americas**********$76.55
1095 Avenue of the Americas********$$129.98
1166 Avenue of the Americas**********$78.27
1185 Avenue of the Americas**********$91.41
1211 Avenue of the Americas**********$72.12
101 Park Ave************************$120.39
245 Park Ave************************$144.36

Just using Grace Building as an example, I would think its current value is $300 – $700 SF. If you are okay with that raw and generic valuation, the value of the property would be around $414M to $1B.

July 27, 2009 Western Forest released earnings

Here are some notes.

1. Going concern opinion – Interesting to see such in an unaudited report. Things of course are difficult. Covenants could be affected.

2. Credit Line with CIT Business Credit Canada (CITBCC). CITBCC is jointly owned by CIT and CIBC. Hence, CIT liquidity issues do not at this point seem to trickle down to CITBCC.

3. Western had a $50M rights subscription in January 2009, which was primarily funded by Tricap (wholly owned by BAM).

4. March 2009 entered into a foreign exchange facility with BAM. Facility expires in March 2010 and has a notional amount of US$80M. Company does not think credit risk is material. Just noting that this is probably a derivative type contract. Lot’s of derivatives in the BAM web.

5. June 30, 2009 company under foreign exchange facility recognized a gain of $0.7M, which was included in sales. Hence, on consolidation with BAM, one needs to consider potential of non-recurring income and quality of earnings for both Western and BAM. I don’t think this income would never be identified in BAM financials, and would probably be impossible to decipher, unless you studied Western Forest Products. Not material of course, but you could see how this usage could spread or be used (or has been continually used) within BAM financials. (A little bit here and a little bit there.)

Here is what BAM wrote about Western Forest in their 2007 AR.

“Two principal investments in Tricap I are Western Forest Products and Concert Industries. Western Forest Products experienced a difficult year due in part to a major industry strike which has since been resolved. Concert Industries, a leading producer of air-laid woven fabric, continues to perform well and we continue to make progress expanding its revenue and operating base.”

“Our specialty funds’ revenues increased due to the consolidation of revenues from Western Forest Products and Concert Industries and increased yields from loans issued during the year. Similarly, investment income and other includes revenues from operations consolidated during 2007 that were accounted for on the equity method during 2006.”

Here are notes I had on a Western Rights Offering in December 2008.

Western Forest Products has a rights offering:

“The shares acquired by Tricap include an aggregate of 236,500,018 shares of Western that are beneficially owned by Brookfield Asset Management Inc. (“Brookfield Asset Management”) and its affiliates and associates on a consolidated basis (“Brookfield”). Following the rights offering, Brookfield beneficially owns 49,124,547 common shares and 300,028,286 non-voting shares representing approximately 38% and 89% of the issued and outstanding common shares and non-voting shares of Western.

Tricap holds the shares for investment purposes. Tricap will continue to review its investment alternatives and may acquire additional shares of Western or may, subject to applicable securities laws, sell the shares it now holds in the open market or in privately negotiated transactions to one or more persons.

Tricap acquired the shares pursuant to the exercise of rights issued by Western in connection with a rights offering made by Western pursuant to a prospectus dated December 1, 2008. Although Tricap entered into a standby agreement with Western dated December 1, 2008 pursuant to which Tricap had agreed to purchase all shares which were not subscribed for under the rights offering, due to the exercise of the additional subscription privilege by rightholders, including Tricap, it was not necessary for Tricap to purchase shares pursuant to the terms of the standby purchase agreement.

Tricap will exercise control and direction over the shares acquired pursuant to the terms of a co-investment agreement entered into between Tricap Management Limited and each of the investors in the Tricap Restructuring Fund.”

August 7, 2009 (20.26) Historical Cost Discussion after release of 2Q09 earnings. This is prior to release of SEC and SEDAR filings for BAM and all subs.

BAM historically discusses that traditional GAAP and historical cost financial statements are not relevant to BAM. Their reasoning is their claim that they generally hold assets for long periods of time and their consolidated statements utilize GAAP accounting, which reflects historical book values for most of their assets. To address this, they are adopting International Financial Reporting Standards (“IFRS”) reporting at the beginning of next year. They claim, under IFRS, the carrying values of assets are adjusted to reflect underlying values as opposed to utilizing their historical cost.

As long as one understands IFRS and the various methods and so forth, that is a generically typical proper argument. One must understand that IFRS is subjective, and is merely a guide. IFRS standards are evolving daily and there will be changes. IFRS by BAM so far, has not been subjected to external auditors of theirs (Deloitte). But, for a company that reports old typically revenue generating assets (think Commercial Real Estate or Power Plants), that of course IFRS disclosure is incredibly helpful.

In BAM’s case and I have tried to ask them this, there seems to be a potential flaw. For example, BAM sold Pingston Power and Prince Wind in 1Q09 to Great Lakes Hydro Inc. (a 50.1% owned consolidated and related entity). The transaction essentially between Great Lakes Hydro and Brookfield Asset Management involved the sale of 49.9% of Pingston Hydro and 50% of Prince Wind. The sale was done via a conduit called Great Lakes Power Trust. The balances of the assets at December 31, 2008 were $348,483 for Prince Wind and $35,362 for Pingston Hydro. This totals 383,845. The difference between Power Generating Assets at transfer of $515,155 and the Net Book Value at 12/31/08 of $383,845 was $131,310. I think (but could be wrong) that Great Lakes Hydro stepped up the basis. I think the stepped up basis flowed through to BAM. Hence BAM gets to use a much greater than historical cost presentation in their GAAP financials. If that is correct, wouldn’t GAAP then be closer to fair value (IFRS)? Bringing this further, what occurred when other assets over the last decade or so were sold to consolidated entities? If these assets were stepped up in basis, then the argument of historical cost presentation would be pierced, since the assets already may have received a stepped up basis upon the sale to related party.

I have mentioned this here before, and I don’t think it has been discussed. I once asked BAM this question in relation to CRE and prior to Great Lakes purchases, and BAM claimed that no step up occurred. Yet, when I read the 1Q09 SEC and SEDAR filings, it certainly looked like step up did occur. This could be quite material. On another level, if you look at the assets on BAM financials, you will see that total Assets increased from $20,007 in 2004 to $55,972 in 2009. Historical cost assets have increased (via purchases of course) by $35,965 during this period. Wouldn’t one argue that perhaps historical cost might over-state asset value, since some of these assets could be or should I say, probably are currently carrying values less than purchase price? I cite Trizec and Multiplex as two examples.
“Our book value of $5.8 billion reflects the depreciated historical cost of many assets, such as office properties and hydroelectric facilities, which were acquired many years ago for values significantly below what they are worth today.” I find it quite interesting that so many of their assets were purchased post 2004, and there is a good chance that many of those assets have a fair value at less than historical cost. Two examples could be Trizec and Multiplex. Again, BAM includes Goodwill as well in their book value mentions.

BAM values Renewable Power (going from memory) at $6.2B.

Based on that, here is a very quick work up, that just builds a framework (very early stage) and very back of envelope, and without any conclusion whatsover.

We know that Great Lakes currently has a Market Cap of around $3.0B, hence BAM value could be $1.5B.

BRP values.

Great Lakes Hydro $1.5B
cash received Net .7B (very estimated, net of Great Lakes Subscription)

You would want to add value of BRP US and Brazil operations, add the cash, subtract the debt, to find value of BRP. Would that come close to $6B. Time will tell.

I think quite a material amount of US operations were purchased post 2005. Also, I think some of Brazil operations were sold to BRP, from BAM in related party transaction in 2008.

I found it interesting in GLH prospectus that BRP “maintains a strong balance sheet and currently holds…. S&P rating of BBB,” with no mention of recent outlook negative. Remember, in recent BAM financing, there was a material change of control provision. The change of control provision, if enacted, (via debt downgrades) could be potentially financially stressful to BAM. Hence, I think the document should have mentioned such.

SEDAR filings this Q and next, will be real interesting.

BAM is certainly getting, what appear to be great prices on recent sales (at least the sales to related entities.)

And, then we have Brookfield Energy Marketing, Inc.

June 18, 2009 (17.75)                                           Quick Thoughts on BAM

1. Quick thought…… One could consider (inverting) that Net Income (NI) and Cash Flow (CF) of BAM and subsidiaries, are elevated, due to sales and transactions with related companies. If this is the case, one should consider whether NI and CF are sustainable. Not only should one consider convenience of activities with related parties, but also perhaps prices that would not be available elsewhere. Possible examples of this could be, demand note lending in the past from BPO Properties, to Brookfield Properties, as attractive levels. Another example could be sales of Prince Wind and Pingston Hydro, from Brookfield Renewable to Great Lakes.

2. It will be interesting to see future NI, now that cost of capital has certainly increased via loan extensions and new loans as well. On the positive side, BAM has been able to secure funding in this difficult credit environment.

More Trizec Ramblings

On June 3, 2009 Ric Clark said the following in relation to Trizec. “We bought this company probably on a 5 cap going in when the portfolio was 88 — and this was our part of the venture, was 88% leased and had a $270 million NOI. As of today, we’ve raised the NOI by $50 million. The portfolio is 93% leased. And we expect that the NOI will go up meaningfully between now and the time that that debt matures, just based on in-place leases.”

It is my understanding that BAM has a 45% economic interest in Trizec. Yet, the 2006 AR of Brookfield Properties mentions, “To that end, during 2006, we launched and fully invested our first U.S. office fund in the $7.6 billion acquisition of Trizec. This transaction was completed in a partnership with the Blackstone Group with our fund owning 73% of the investment.”

According to Brookfield Properties 2006 Annual Report, Trizec was purchased at a Purchase Price Book Value of $7,591M. It was also listed that the purchase was for 29M SF. Hence, if BPO owns effectively 73% of the investment, a cap rate of 5, would tie into the initial purchase price of $7,591. Here is calculation for showing that.

Value = ?
NOI = $369M ($270M/73% = $369) (from Rick Clark NAREIT presentation June 3, 2009)
Cap rate = 5% (mentioned by Rick Clark, NAREIT presentation June 3, 2009 )

Value = NOI/Cap rate

$7,380 = $369/.05

If NOI was $270M, and purchase price was $7,591, then the going in cap rate would have been 3.56%. Yet, the question becomes, was the $270M NOI, Brookfield’s share or the full NOI? I don’t know the answer.

Let me repeat what BPO said on June 3, 2009…”We bought this company probably on a 5 cap going in when the portfolio was 88 — and this was our part of the venture, was 88% leased and had a $270 million NOI. As of today, we’ve raised the NOI by $50 million. The portfolio is — let’s see, it’s 93% leased. And we expect that the NOI will go up meaningfully between now and the time that that debt matures, just based on in-place leases.”

I spoke with an industry insider in regards to the above quote, and here is what that person mentioned. “A 5% cap rate, using $270M of NOI, would give a value of $5.4B. They claim that NOI is now $320M, so that would be a 5.9% cap rate to get what they paid. It seems like they would be hard-pressed to get 5.9% today. They also had to put in additional capital to grow the NOI, which is offset by cash flow, depreciation, etc.

As far as growing the NOI…rents have been up for some time and definitely down now with maybe further to fall….so I would not be convinced that they can grow NOI meaningfully without further investigation. Especially with office where tenants usually don’t fully reimburse LL for operating expenses, real estate taxes, etc.”

Price per square foot would be $262. If I am not mistaken, 11% of the properties was for parking, and I think some was sold off as well.

With that said, if we use the book value of $7,591, and use BPO’s stated NOI of $320M, and ignore the issues the industry insider said, we would get a current cap rate of 4.22%.

Look at the values of NOI of $320M with various cap rates. Compare that to cost of $7,591. The debt is currently $5,724M, of which $3.1B comes due in 2011. Interesting that the balance as per 2006 AR was $5,800. Does that mean in 3 years $76M or 1.3% of the principal has been paid down?

Back of Envelope Value of NOI $320M on Trizec

Cap Rate Value if NOI was 100% Value if NOI was $439 (73%)
5% $6.4B $8.8B
6% $5.3B $7.3B
7% $4.6B $6.3B
8% $4.0B $5.5B
9% $3.6B $4.9B
10% $3.2B $4.3B

From the 2006 AR “Equity offering In December, 2006, we entered into agreements for the issuance of 33 million of our common shares. Under the agreements, the underwriters purchased 20.625 million of our common shares at a price of $38 per share. Concurrently, Brookfield Asset Management purchased, directly or indirectly, 12.375 million of our common shares at a price of $38 per share. The gross proceeds from the combined share issuances totaled approximately $1.25 billion. Following the offering, Brookfield Asset Management owns, directly and indirectly, approximately 50.1% of our voting interest. The proceeds from this offering were used to repay outstanding indebtedness taken on to finance the company’s $857 million equity investment in its U.S. Office Fund created to invest in the acquisition of Trizec and the repayment of lines of credit to ensure the company is in a position to acquire further assets should opportunities of interest become available.”

Interesting , they were borrowing to buy the minimum required equity for the Trizec company. Then BPO floated $1.3B , of which BAM bought $784M of the equity offering.

The annual report also indicated, “Our 45% economic interest in the Trizec portfolio was purchased for $857 million, after the assumption of debt and acquisition financing totaling $5.7 billion, and comprises 29 million square feet in New York, Washington, D.C., Houston and Los Angeles.”

Does BPO own 73% or 45% of Trizec portfolio?

This was presented to me by a colleague as a possible answer, “I think the way it works is that BPO bought 73% of Trizec, and Blackstone the remaining 27%. Of that 73%, a further 28% was hived off to third party investors, leaving BPO’s ownership interest at 45%.”

Brookfield Properties and World Financial Center

The following is a summary of some of the World Financial Center Holdings. These were gathered from the 2006 and the 1Q09 Commercial Debt Listings

 

Property Loan Description Ownership Interest Debt owed 12/31/06 Debt owed 3/31/09 Maturity Date
One World Financial Center Floating rate, Recourse 100% $300M 6.32% $0 2009
Two World Financial Center 6.91% Fixed, Non- Recourse 100% $607M $370M 2013
Four World Financial Center 6.95% Fixed, Non- Recourse 51% (100% of debt) $306M $220M 2013
Two World Financial Center Floating Rate, Non- Recourse 100% $0 $114M 10.80% 2014
One World Financial Center 5.83% Fixed, Non- Recourse 100% $0 $309M 2017
Total Direct Ownership $1,213M $1,013M

In 27 months, there was debt reduction of $200M. Merrill fully occupies, Four World Financial Center, and partially occupies Two World Financial Center . BAM claims this debt will self-amortize to zero by year 2013.

BPO refinances $370M of debt

http://brookfieldproperties.com/news/detail.cfm?articleID=197

“TORONTO–(BUSINESS WIRE)–Jun. 9, 2009– Brookfield Properties Corporation (BPO: NYSE, TSX) and its Canadian-based subsidiary, BPO Properties Ltd. (BPP: TSX) today announced the completion of the refinancing of Petro-Canada Centre in Calgary with $370 million, five-year first mortgage bonds, issued by one of BPO’s subsidiary companies, PCC Properties (Calgary) Ltd., along with its joint-venture partner.
The financing was completed at a fixed rate of 6.379%, repaying an existing $300 million bridge facility which was previously completed in October 2008. Brookfield’s share of the refinancing was $220 million, consisting of $185 million from the issuance of the first mortgage bonds and $35 million from a subsequent transaction with an affiliate of the company’s joint-venture partner.

Resulting net proceeds to Brookfield are $70 million, which will be used for general corporate purposes. The bonds have been assigned a rating of A2 by Moody’s. RBC Dominion Securities Inc. and Brookfield Financial Corp. acted as agents on the transaction.

“This transaction demonstrates Brookfield’s ability to execute on a large refinancing in a difficult market at an attractive rate,” said Tom Farley, President & CEO of Brookfield’s Canadian Commercial Operations. “At the same time, we have repatriated equity out of this premier property to be redeployed.”

Petro-Canada Centre is a two-tower, 1.73-million-square-foot class “AA” office complex located in the heart of Calgary’s central business district and a dominant feature of the Calgary skyline. The property is 100% leased. Petro-Canada occupies 58% of the complex, and has been a tenant since the property opened in 1984. In October 2008, Petro-Canada renewed its 945,000-square-foot lease through November 2028 and expanded its premises by an additional 70,000 square feet.”

Observations:

 

Looks like this previously was a 3.15% non-recourse loan, that was due 10/09. Now it looks to be secured for 5 years at 6.379%.

1. Loan appears to be secured. I imagine this loan, like the previous loan is non-recourse.

2. Interest rate has gone from 6.43% to 6.379%. The prior loan matured during 2008, and BPO used a bridge loan with LIBOR + 225.

3. No details released on amortization of loan.

4. Appears to be CAD$370M

5. Previously announced by BPO Properties. (Don’t confuse with Brookfield Properties. Brookfield Properties owns 89% of BPO Properties.)

6. Brookfield Properties had debt listed on 3/31/09 filing as, $118, their interest from US Office Fund. I think they own 45% of the Fund. Just thinking out loud, and this is some quick analysis, since news was just released, but total debt would have been $262M (118/.45)? Maybe other debt was some pooled debt? Maybe CDN to USD conversion?

7. Looks like cash was extracted. I think BPO Properties owns this property, it will be interesting to see if $$$$ can flow through to BAM. Keep in mind that BPO Properties is the owner of Petro Canada. Brookfield Properties owns 89% of BPO Properties. It will be interesting to see if Brookfield Properties will be able to extract funds from BPO Properties. (search ‘BPO’ below for previous discussions.)

8. I think JV might be ARCI LTD. I think BPO Properties and ARCI each own 50%. BPO 2008 RAIF mentions, “Petro-Canada Centre consists of a two-tower office-retail complex and underground parking garage. The office towers are 52-story west tower and the 32-story east tower. The property is located in the Calgary Central Business District (“CBD”) and is connected to the above-ground pedestrian walkway system. The property was constructed in 1983 and is one of the top three office complexes in Calgary.”

Notes on Brookfield Properties Corp 6-K for 3/31/09 (1Q09)

1. Consider doing a property analysis on all listed properties. Gather LTV’s etc.

2. Looking at commercial property debt, there appears to be very little amortization. Looks to be amortizing at around 1% of loan balances per year.

3. Interesting that the REIT election became effective January 2008, yet was announced in 4Q08.

4. Bank Credit Facility of $388M matures on 6/2011, and balance drawn on 3/31/09 is $312M.

5. BAM offers Credit Facility of $300M, which extends to 2010, and balance drawn on 3/31/09 is $48M.

6. Commercial Property Debt which is floating rate is 38%, and was 45% at 12/31/08.

7. Claims to have Indebtedness which is 65% of Book Value. They feel this is conservative, because of Fair Value. If you match this up to earlier Annual Reports, you will notice that Brookfield Properties looks to achieve Debt to Market Cap of less than 50%. Current Debt (not including Preferred Securities, or the $454M development debt, buried in Accounts Payable) is $11,598. Current Market Cap using $8 per share and 391M shares O/S is $3.2B. Hence, Debt / Market Cap is 371%.

8. Page 47 of Interim Report mentions insurance coverage’s. Their US Properties have coverage from ‘Liberty IC Casualty, LLC. I think that this is a wholly owned entity of BAM. I could be incorrect on that. They used to use another Wholly Owned Entity, ‘Realrisk Insurance Corporation.’ Realrisk still provides protection for what are hopefully rare events.

9. Derivatives are discussed on page 49. They had a total return swap, under which they receive the returns on a notional number of Brookfield Properties Common Shares of 1,001,665. The Fair Value of the swap was a loss of $8M at March 31, 2009. $2M of losses were recorded as G&A at 3/31/09. A $1 increase or decrease in share price, would result in a $1M gain or loss, and be reported in G&A.

10. Accounts Payable of $1,137M, includes $454M ($434M 12/31/08) of land development debt. This is interesting, as the debt is not included in standard debt ratios.

June 4, 2009 (18.28)                                                                     Updated Thesis

Brookfield Asset Management is a diversified conglomerate. Their main areas are Commercial Real Estate, Hydro Energy, Asset Management and Infrastructure.

Quick Thesis:

High leverage, greater costs of capital, potential if not probably refinancing issues, Tangible Book Value of $2.2B, > $12B of debt coming due in less than 3 years, and $32B of debt in total, Incestual sales and potentially unusual uses of related parties, which I think lead to a Quality of earnings and balance sheet issue, slowdown in most areas of their business (because of leverage I believe extreme stress is possible), great capex requirements (i.e. South American Transmission), higher cap rates with commercial real estate. I believe major assets were bought at historically low cap rates and that we will never see cap rates like that ever again and potentially aggressive accounting usage, especially via inter-companies.

We feel that over the years investors have embraced BAM and their efforts, without really peeling the onion. Interesting to see the value investors who embraced BAM when we first started looking at it in August of 2007, and how there are fewer traditional value investors now. Third Ave Value (TAV) is the largest holder, yet has been reducing their Common Stock position. I think Brookfield Asset Management was misunderstood by many value investors, including legendary Whitman and Jensen, from TAV. I think that Whitman let his guard down with his admiration of Bruce Flatt. I used to speak to analysts in late 2007, that had no idea that Brookfield Renewable issued Financial Statements. These analysts took for face value what BAM wrote in their reports. Yet, if one looked into Brookfield Renewable’s financials (then they were called Brookfield Power Inc.) one could see a potentially different story. A few years ago, I spoke with quite a few analysts that had no idea that Brookfield Power segment filed their own financial statements. I think that BAM is over-leveraged. They have been extending financings, and have over $12B coming due in less than 3 years. They have tangible equity of < $2.5B.

Expanded Thesis:

Please not this paragraph was added on December 17, 2009. Upon further research, we were made aware of an error. We thank that person for pointing out the error. A change of control is not triggered merely by a below investment grade rating. I think the correct answer is, if there is a change in ownership, over a specified percentage, and then , and only if the change of control happened, would there be a potential triggering event with a credit downgrade. Hence, if BAM or BRPI were brought below investment grade rating, the respective notes would not be affected in terms, calls, or anything like that. This clearly affects our thesis mentioned below in part of (1.) Please keep in mind, that as of December 17, 2009, our BAM aggregate thesis has not changed with discovery of this error.

(1.) I think they are over leveraged and that increased credit costs, costs of capital, lower loan to values, could continue to stress BAM. BAM floated CAD$500M on June 2, 2009. In this market, they were able to secure the funds. Yet, they are paying 8.95% and the covenants are tighter than they have ever seen. The debt is 5 year debt. If BAM is downgraded to below investment grade by 3 of the 4 Ratings Agencies, the debt is immediately due. There were also comments in the note in regards to subsidiary payments. Within the last 30 days, Brookfield Renewable, BPO Properties and Brookfield Properties, were put on Outlook Negative by Standard & Poors.

(2.) BAM has quite a few Joint Ventures or minority interests. On projects they have co-investors. Both Co-Investor and BAM commit capital. I would watch if JV’s start failing to meet capital contribution requirements. I think, but am not certain, that BAM has commitments promised on various ventures, that are not showing up as liabilities in their Balance Sheet.

(3.) Incestual sales and potentially unusual uses of related parties. These include related party sales. Related party fundings, which include potential below market loans. Related party dividends, which are not necessarily in the best interest of the entity distributing dividends. Potential use of subsidiaries as a funding source, which might not be considered arms-length in nature. Various recent examples of subsidiaries funding include Brascan Residential in Brazil, Great Lakes Hydro, Brookfield Homes, Norbord, Fraser Papers, and Canary Wharf. BAM could have a quality of earnings issue, as they record inter-company gains, without eliminating on the consolidated parent. These gains include sale of Pingston Hydro and Prince Wind to a conduit owned by both BAM and consolidated subsidiary, and public Fund, Great Lakes Hydro, gains on conversion of debentures to common for various companies owned by Consolidated subsidiary Brookfield Investments Corporation.
Here are some examples of Related Party Usage:

The following is quoted from a SEDAR filing on December 9, 2008 for Brookfield Investments Corporation.

“On December 3, 2008, the board of directors of the Company approved the sale of its 15% interest in The Canary Wharf Group plc (“CWG”) to Brookfield Europe LP in exchange for an approximately 42% limited partnership interest in Brookfield Europe LP with a fair market value of £333,800,000 and cash proceeds in the amount of £107,600,000.”

Brookfield Infrastructure Partners – Acquiring Public Private Partnerships (PPP) from Brookfield Multiplex. Purchase price of $20M. I asked if this was discount from BAM’s original purchase price, but presenter was not sure. Properties include 2 hospitals. Anticipated close is November / December 2008 (even though presentation was in December 2008.)

Longview and BIP – Invested in Longview to maintain 30% ownership level. This further investment of $103M was completed in November 2008.

(4.) Slowdown in Alberta CN real estate. (BPO). I previously had this as potential. Slowdown in Calgary. On 3/3/09 this was in the news, “Canada’s Economy Shrinks 3.4%” http://online.wsj.com/article/SB12360230…

(5.) High occupancy rates in metro areas deteriorating because of reliance on financial service industry. Interestingly enough, BPO Properties in recent CC, claimed “business as usual.”

(6.) Previous access to low cost capital with excess cash based on NAV, no longer available to BAM. Again, they just floated CAD$500M, five year paper at 8.95%. This rate does not appear to be consistent with other S&P A- companies. Notes were priced at 8.95% for 5 year paper. This is 5 year UST (2.45) +~ 650 BPS. I would think that A- paper would be issued at less of a yield than that. Something to watch. I checked Egan Jones, and the BAM issue seems to be priced much higher than other similar credit rating issues. Egan Jones is showing several A- similar rated and duration issues to be yielding in the mid 5.50%’s. Here is another issue I pulled up from Finra with similar characteristics. This bond comes due 6 months prior and has a call provision. Hence, not apples to apples.

(7.) Industry credit tightness, and BAM’s high leverage, could cause stress. Noting that > $12B comes due on or before 2011. BAM has $32B of total debt.

(8.) Lower values of assets, which were bought at potentially elevated prices, with concerns that loans that are no longer available to such assets. This potential lack of credit is not just industry specific, but what I believe to be company specific. We have read on several occasions, and as recently as June 3, 2009 in the Commercial Real Estate Alert (www.realalert.com ) that NYC CRE is back to 2004 prices.

Brookfield Properties has $5.6B of debt coming due on a consolidated level in less than 3 years. Most of this is from Trizec purchase in October 2006, which I think is now US Office Fund.

On June 3, 2009 Ric Clark, Brookfield Properties CEO said, “We bought this company probably on a 5 cap going in when the portfolio was 88 — and this was our part of the venture, was 88% leased and had a $270 million NOI. As of today, we’ve raised the NOI by $50 million. The portfolio is — let’s see, it’s 93% leased. And we expect that the
NOI will go up meaningfully between now and the time that that debt matures, just based on in-place leases.”

I spoke with an industry insider in regards to the above quote, and here is what that person mentioned. “A 5% cap rate, using $270M of NOI, would give a value of $5.4B. They claim that NOI is now $320M, so that would be a 5.9% cap rate to get what they paid. It seems like they would be hard-pressed to get 5.9% today. They also had to put in additional capital to grow the NOI, which is offset by cash flow, depreciation, etc.

As far as growing the NOI…rents have been up for some time and definitely down now with maybe further to fall….so I would not be convinced that they can grow NOI meaningfully without further investigation. Especially with office where tenants usually don’t fully reimburse LL for operating expenses, real estate taxes, etc.”

Looking at it another way…..

Again, Clark said, “bought this company probably on a 5 cap going in when the portfolio was 88 — and this was our part of the venture, was 88% leased and had a $270 million NOI…”

So, was that full NOI for Trizec, or just Brookfield’s portion? If just Brookfield’s, what is the total NOI?

If that was there part of the deal, I think cap rate would compute too much > than 5%.

Let’s see, I think Brookfield owns 73%, if the $270 was there end, then full NOI would be $370. That would trail into the historical cost of $7.6B ($7,400 using 5% cap rate).

At $320, the full NOI would be $438. This would be 5.8% cap rate using value of $7.6B

I am fairly certain that the entire amount is put on consolidated books, and then minority interests are backed out. The question is, did he mean total NOI, or BPO’s % of the (see 2006 AR 73 %?) of total NOI.

Either way, I think going to be tuff to eventually refinance $5.6B, of which $3.0B comes due in less than 3 years.

This is heavy stuff.

Trizec and Multiplex are just two items that make up almost $7B of debt coming due in less than 3 years.

In total on consolidated basis, BAM has over $12B coming due within three years.

Here is what BAM mentioned in their 4Q08 supplemental report in regards to non-recourse commercial property debt.

“Commercial property financings are secured by high quality office buildings. Many of the financings which mature in the next three years were arranged a number of years ago and, accordingly, represent a low loan to value. As a result, we expect to refinance these maturities in the normal course at the same or a higher level. Maturities in our North American, European and Brazilian operations, are extremely low relative to the scale of these operations, reflecting the long-term nature of the financing. The Australian property market typically utilizes shorter duration financing, which we are rolling over in the normal course and seeking to extend on a long-term basis where possible.”

From above, not only does BAM expect to be able to refinance, they are expecting to refinance for the same amount of debt or greater. Yet, as JPM said today, it is a new ball game for lending. Cap rates, use of lending guidelines , loan to values have all changed. BAM has alluded long term ownership of assets, when indeed, they have $7B due before 2011 on assets that at the earliest were purchased in October of 2006.

If you review BAM and subsidiaries interest coverage ratios they are quite low and have been decreasing over the last few years. In the recent supplemental schedule BAM reported Interest Coverages on Operating Cash Flows, not on Net Income from Operations.

When looking at BAM remember to consider asset sales, debenture conversions and so forth, as non-recurring as well as being sold in most cases to related parties.
(9.) Funds that BAM manage are not performing within expectations. These include Crystal River, Some Hyperion’s, Brascan, Multiplex, Brookfield Properties (projected) and Brookfield Homes (projected).

Here is an example on Multiplex Funds on 3/2/09

On 3/2/09 MULTIPLEX ACUMEN PROPERTY FUND (MPF) closed at $0.03. This has lost 98% of its value since 12/31/07, and 77% of its value since 12/22/08. MULTIPLEX ACUMEN PROPERTY FUND (MPF) at 12/31/07 was priced at $1.25. It closed at $0.29 on 10/31/08, $0.20 on 11/24/08 and $0.10 on 12/22/08.

On 3/2/09 MULTIPLEX EUROPEAN PROPERTY FUND (MUE)closed at $0.12. This has lost 87% of its value since 12/31/07, and 30% of its value since 12/22/08.

MULTIPLEX EUROPEAN PROPERTY FUND (MUE)at 12/31/07 was priced at $0.90. It closed at $0.27 on 10/31/08, $0.20 on 11/24/08 and $0.17 on 12/22/08.

Here are some notes I had on potential debt breaches by a Multiplex fund.

Brookfield’s Multiplex Acumen Fund May Breach Debt Agreements

Dec. 17 (Bloomberg) — Multiplex Acumen Property Fund, a A$342 million ($238 million) money manager controlled by Brookfield Asset Management Inc.’s Australian unit, said sliding property values may force it to breach debt covenants on Dec. 31.

The fund started its yearly review with lenders and would have 90 days to rectify any breach, Multiplex Acumen said today in a statement to the Australian stock exchange.

“The deterioration in the asset value of a number of the fund’s underlying investments, together with a sector-wide reduction in distribution income, is expected to have a negative impact on the net tangible assets,” Multiplex Acumen said.

Brookfield, the Toronto-based manager of $90 billion in assets including real estate, paid A$5.7 billion last year to acquire Multiplex Group. Brookfield last month said it agreed to refinance $800 million of Australia-related debt.

Credit Suisse, a long time bull on BAM commented the following on 12/17/08.

A. Potential breach of covenants is a minor near-term negative for BAM. CS does not believe that BAM has significant exposure to the fund.

B. The poor market performance for the related funds presents “significant restructuring opportunities.”

C. Concern over potential cash funding needs for some of the funds and concern over BAM’s ability to raise new money for asset management because of poor performance.

D. Historically CS claims that BAM does well in these funds. I say, historically in depressed economic conditions BAM did not have the excess leverage and pending increases in costs of capital as in the past.

(10.) Previous business conditions with wind at tail no longer exist. Closer eye on Corporate responsibility.

(11.) It seems as though their IFRS reporting could be potentially aggressive. They are using discount rates and other DCF techniques. All legal, all subject to interpretation. I think the discount rates could be raised, which in turn would bring down asset values. Higher the cap rate, lower the asset value. Higher the discount rate assumption, lower the asset value.

(12) Use of cash via buy-backs

June 3, 2009 (18.73) Review and Discussion of BAM 8.95% Notes Due June 2, 2014 CAD$500M

Here is a link to the Prospectus Supplement companies/BAM_8.950_notes_due_2014.pdf

This filing is a supplement to the Short Form Base Shelf Prospectus US$1B, filed on January 12, 2009. Here is a link to that filing companies/BAM_Short_Form_Prospectus_Filed_20090112.pdf

Cusip 112585AF1, issued 6/2/09

Not TRACE Reportable and not Disseminated

Canada Issue and currency

Underwriters:

TD SECURITIES INC
SCOTIA CAPITAL INC
BMO NESBITT BURNS INC
CIBC WORLD MARKETS INC
RBC CAPITAL MARKETS INC
NATIONAL BANK FINANCIAL INC
HSBC SECURITIES (CANADA) INC

Proceeds used for general corporate purposes, including repayment of “certain bank and other indebtedness.”

Change of Control Provisions, require 101% of their principal amount, plus accrued interest.  The debt would have to be repaid no later than 90 days after a triggering event.  The most interesting of the Change of Control Provisions are “Below Investment Grade Rating Event.”   If 3 of 4 Ratings Agencies rate the notes below Investment Grade, there will be deemed a change of control.  If only one Ratings Agency reduces the rating to below Investment Grade,  there is no  Change of Control.   The notes would be  put on an “Extension Period” if a number of the Ratings Agencies have placed the notes on “publicly announced consideration for possible downgrade….” and at the same time a number of Ratings Agencies downgraded below investment grade.  The Extension Period would terminate when two of the Ratings Agencies or one of the Ratings Agencies have confirmed that the notes are not subject to consideration for a possible downgrade, and have not downgraded the notes, to below an Investment Grade Rating.

 

Agency Current Credit Rating Minimum Credit Rating Allowed
Fitch BBB+ BBB-
S&P A- BBB-
Moody’s Baa2 Baa3
DBRS A (low) BBB (low)

Covenants – could restrict BAM’s ability to create certain liens; declare or pay dividends or acquire capital stock or debt of the Company; consolidate or merge, and incur certain payment restrictions that third parties may impose. The covenants will be discussed below, and are crucial to understand for this issue.

Earnings Coverage Ratios – Includes all preferred shares, and is adjusted to a before tax equivalent using an effective tax rate of 28%. Coverage including Series 22 (announced just prior to this filing) on a pro-forma basis was 1.2X on December 31, 2008 and 1.1X on March 31, 2009.

Restricted Payments – Company must maintain a Consolidated Net Worth (GAAP Stockholder’s Equity) of > or = to US$2B. This could limit the company from paying dividends, paying distributions or for various other subsidiary payments in kind or cash. This would have to be re-reviewed if such an event were to occur.

Observations:

Please not this paragraph was added on December 17, 2009. Upon further research, we were made aware of an error. We thank that person for pointing out the error. A change of control is not triggered merely by a below investment grade rating. I think the correct answer is, if there is a change in ownership, over a specified percentage, and then , and only if the change of control happened, would there be a potential triggering event with a credit downgrade. Hence, if BAM or BRPI were brought below investment grade rating, the respective notes would not be affected in terms, calls, or anything like that. This clearly affects our thesis mentioned below. Please keep in mind, that as of December 17, 2009, our BAM aggregate thesis has not changed with discovery of this error.

1. Notes were priced at 8.95% for 5 year paper. This is 5 year UST (2.45) +~ 650 BPS. I would think that A- paper would be issued at less of a yield than that. Something to watch. I checked Egan Jones, and the BAM issue seems to be priced much higher than other similar credit rating issues. Egan Jones is showing several A- similar rated and duration issues to be yielding in the mid 5.50%’s. Here is another issue I pulled up from Finra with similar characteristics. This bond comes due 6 months prior and has a call provision. Hence, not apples to apples.

Issuer Name          Coupon                                                     Maturity      Callable Moody’s S&P Fitch        Price                     Yield
D.GC          DOMINION RESOURCES INCORPORATED VA      6.63                 12/01/2013 No                Baa2 A- BBB+    106.605 4.999

2. I do not ever recall seeing such strict covenants with BAM in prior offerings. I could be incorrect on that.

3. The Short Form Base Shelf Prospectus filed on January 12, 2009 had no mention of credit rating assurances or events. I only mention this, as this CAD$500M has such Investment Credit Rating requirements. This is the first time, I have seen BAM to be credit rating reliant.

4. Fairly impressive that they were able to raise CAD$500M in capital. If I am not mistaken, BPO outlook from S&P being negative was post the recent announcement of $800M + on fundings.

Notes on review of 1Q09 BAM

1. There is no mention of RiskCorp. BAM sold their insurance companies last year. Now they seem to self insure for billions of dollars, via a wholly owned insurance company called Riskcorp. Anyone have info on that. I imagine they are reinsuring elsewhere, as I would be surprised if lenders would allow a type of self insurance. Here is a quote from Brookfield Renewable’s recent filing, “In the normal course of operations, Riskcorp Inc., an insurance broker related through common control, entered into transactions with the Company to provide insurance. These transactions are measured at exchange value. The total cost incurred in 2008 for these services was $11 million (2007 – $15 million) and is included in operations, maintenance and administration expenses. For 2008, no amount has been included in revenues for hydrological insurance claims (2007 – $nil).”
2. In the shareholder letter, BAM discusses unrealistic expectations and the industry purchasing with cap rates of 3% to 4%. We have casually seen cap rates allegedly used between 5% to 6.5% for the Trizec purchase. We have not seen for the Multiplex portfolio. Considering these assets were bought in 2006 and 2007, we think it is common knowledge, and believed by many, except the BAM cult and their friendly sell-side analysts, that both of these mega transactions are priced much less than when they bought these. As a follow up, On June 3, 2009 Ric Clark, Brookfield Properties CEO said, “We bought this company probably on a 5 cap going in when the portfolio was 88 — and this was our part of the venture, was 88% leased and had a $270 million NOI. As of today, we’ve raised the NOI by $50 million. The portfolio is — let’s see, it’s 93% leased. And we expect that the NOI will go up meaningfully between now and the time that that debt matures, just based on in-place leases.”

3. On page 10 of the BAM 1Q09, they mention the monetization gain of $29M. One has to really know the company and history to realize that this was a related party transaction. When analyzing BAM, it is a good idea to read as many related party filings as possible. Here is a link to some of those filings http://www.rbcpa.com/companies/BAM_Related_party_filings.html

4. In regards to 3 above, I am fairly certain that because of this “monetization” the historical cost assets were given a stepped up basis on Great Lakes Hydro, and hence that basis increase flowed to an increase of assets on BAM’s balance sheet. Interesting, as BAM condemns the benefit of historical cost balance sheets, as they bring in their own version of the Holy Grail with IFRS reporting. Of course, IFRS is not audited.

5. BAM claims their consolidated debt to equity ratio is 44%. They use the IFRS numbers at 12/31/08 to come up with that. The true debt/Equity when using the Balance Sheet is 86.25%. On page 38 of the report, BAM mentions Debt to Capitalization of 57%, yet they fail to include Preferred Securities of $870M as debt in the calculation. Also, there is debt included in accounts payable for land development in progress on Brookfield Properties books of $454M. I haven’t looked to see if it is brought over to BAM. Excluding that of course deflates the debt to equity ratios. This is discussed in paragraph 2 on page 11. BAM writes, “The ratios are based on the underlying value of our equity as at December 31, 2008.”

6. On page 14 BAM mentions the consolidated carrying value of North American properties is $249 per square foot. They mention it is below replacement cost. I don’t know if the carrying value is Book value of Fair Value. I am thinking Book Value because of the term usage. I think the $249 does not sound so low to me, in regards to buildings intrinsic value. One could look at each property listed in Brookfield Properties filings and compute a square footage value, compare it to comparables via a service and then compute loan to values (LTV) and possibly cap rates as well. Again on page 14 BAM writes, “The debt to capitalization based on the underlying values as at December 31, 2008 is approximately 61%.”

7. Total Debt / Net Income for F2008 is an interesting ratio.

Total Debt *(including preferred equity ) 32,570
Net Income 649
50.18 years

If you get rid of the tax benefit in NI of 461, you would have had NI of $188. The ratio would then be 173 years.

8. “Consolidated assets and net invested capital are largely unchanged from the end of 2008. Borrowings include $121 million of debt, which is guaranteed on a several basis by the obligations of ourselves and our partners to subscribe for capital in the applicable fund equal to the outstanding balance.” I listed this just as something to keep an eye on going forward.

9. On page 15 BAM indicates the following: “The underlying values of the consolidated assets and net equity of our commercial portfolio were determined to be $23.9 billion and $7.8 billion, respectively, as at December 31, 2008.” They also wrote, “The underlying value of our combined commercial office and retail portfolio represents a 7.2% “going in” capitalization rate based on the 2008 total operating cash flows, excluding gains. The valuations are most sensitive to changes in the discount rate. A 100 basis point change in the discount rate results in a $1.4 billion change in our common equity value after reflecting the interests of minority shareholders.”

I used a back of envelope and cap rate formula. (Value = NOI/Cap rate). Numerically this would be V=$31.70 (7.8+23.9), cap rate 7.2% (given) and NOI needs to be calculated. NOI computes to $228.2M. This seems like a high NOI, yet we did not use DCF and other metrics, hence our back of envelope, could be error filled and irrelevant.

10. During the quarter, BAM, via affiliate BIP was awarded a $500M transmission system in the State of Texas. This is something we would like to monitor. They are partnered with Spain’s “Isolux Corsan Concesiones.”

11. Concert Industries last filed with SEDAR in 2004.

12. On page 25, there was mention of a bridge lending fund which includes a “CAN$67M commitment from Brookfield.”

13. On page 35 they wrote, “We generate substantial liquidity within our operations on an ongoing basis through our operating cash flow, which typically exceeds $1.5 billion on an annual basis, as well as from the turnover of assets with shorter investment horizons and periodic monetization of our longer-dated assets through sales, refinancings or co-investor participations. Accordingly, we believe we have the necessary liquidity to manage our financial commitments and to capitalize on opportunities to invest capital at attractive returns. Nevertheless, we are cognizant of the current instability in the capital markets and continue to place a premium on liquidity and allocate capital in a cautious manner.” Just something else to watch.

14. On page 37 they wrote, “Commercial property financings are secured by high quality office buildings on an individual or, in certain circumstances, pooled basis. Many of the financings which mature in the next three years were arranged a number of years ago and, accordingly, represent a low loan to value. As a result, we expect to refinance most of these maturities in the normal course at the same or a higher level.” We note that for several reasons. One, on May 29, 2009 S&P reduced the outlook on Commercial Properties to negative. We also debate the low loan to value, especially via the billions of dollars coming due on Trizec during 2011. BAM also hints at extracting greater amounts of monies in their refinancing endeavors. The cash- out extraction was common place in the past. Yet, credit issuance was more liquid, BAM’s debt levels were not as leveraged, and we believe that extractions will not happen. We are certainly of the mind set that refinancings, if possible will be more costly, greater covenants and would not be surprised to see failed attempts at refinancing. At this point, extensions are occurring, as the lending industry has tabled foreclosures. In 6 months to 2 years time, we expect to see more visibility in this area.

15. On page 38, BAM indicates that Debt to capitalization on a consolidated basis is 57%. We would argue that the number is much higher, as one should include Preferred Stock and Capital Securities in the debt calculation. We would also use Tangible Book Value rather than Stockholder’s Equity.

We would also refer to these sections on page 38 for potential further scrutiny, “The Corporation has $1,445 million of committed corporate two-year and three-year revolving term credit facilities which are utilized principally as back-up credit lines to support commercial paper issuance. At March 31, 2009, $676 million of these facilities were drawn or allocated as back-up to outstanding commercial paper, and approximately $98 million (December 31, 2008 – $104 million) of the facilities were utilized for letters of credit issued to support various business initiatives.” And, “Subsidiary borrowings have no recourse to the Corporation with only a limited number of exceptions. As at March 31, 2009, subsidiary borrowings included $730 million (December 31, 2008 – $733 million) of financial obligations that are either guaranteed by the Corporation or are issued by direct corporate subsidiaries.”

16. On page 40 BAM made what we consider to be an interesting statement. “Preferred equity consists of perpetual preferred shares that represent an attractive form of leverage for common shareholders, and was unchanged during the quarter. The average dividend rate at March 31, 2009 was 4%. Further details on the components of our equity and related distributions can be found on page 45 of this MD&A.

We repurchased 1.5 million common shares during the quarter at an average price of $12.09 per share representing a meaningful discount to the underlying values as at December 31, 2008. Common equity also declined as a result of the impact of lower foreign currency exchange rates on non-U.S. operations.”

Why would they state those are “an attractive form of leverage?” Also interesting that they bought back 1.5M shares at $12.09, whereas price as I write this is $18.19. Yet, I find the use of the following words to be speculative in nature, “average price of $12.09 per share representing a meaningful discount to the underlying values as at December 31, 2008.”

“Our book value of $5.8 billion reflects the depreciated historical cost of many assets, such as office properties and hydroelectric facilities, which were acquired many years ago for values significantly below what they are worth today.” I find it quite interesting that so many of their assets were purchased post 2004, and there is a good chance that many of those assets have a fair value at less than historical cost. Two examples could be Trizec and Multiplex. Again, BAM includes Goodwill as well in their book value mentions.

16. The Balance sheet includes $464M in Deferred Tax Assets (page 41). We often will reduce this number. BAM does not pay a lot of Corporate Income Tax. Analysts have claimed that is due to heavy depreciation and non-cash charges. We are wary of companies that never pay tax. Perhaps their operations are not as fertile as they claim.

17. The consolidated Balance Sheets have some accounts that should be watched for a quality of earnings issue. These would include Investments ($897M), Accounts Receivable and Other ($7,484M) and Loans and Notes Receivable (2,101M), Restricted Cash ($800M). These were presented on page 42.

18. BAM affirmed on page 43 that Canary Wharf is being reported at Historical Cost. We can not verify that since Canary Wharf was sold to a related party. I do not know if the asset was marked up in a similar fashion that Pingston Power and Prince Wind was, when Sold to Great Lakes (related and consolidated subsidiary).

19. Just to note a mention on page 47, “Our 2008 Annual Report contains a table and description of our contractual obligations, which consist largely of long-term financial obligations, as well as commitments to provide bridge financing, capital subscriptions, and letters of credit and guarantees provided in respect of power sales contracts and reinsurance obligations in the normal course of business.”

20. Page 49, we computed that Interest Coverage is 1.22X. This is what we would consider to be an incredibly weak number, especially in light of what is considered to be a decent quarter.

21. In regards to book value, BAM presents an interesting and logical discussion in regards to fully diluted shares on page 50, “In calculating our book value per common share, the cash value of our unexercised options of $549 million as at March 31, 2009 (December 31, 2008 –$446 million) is added to the book value of our common share equity of $4,976 million as at March 31, 2009 (December 31, 2008 – $4,911 million) prior to dividing by the total diluted common shares presented above.”

22. On page 51 BAM lists Assets Under Management (AUM). I added up all assets purchased 2003 and after. I also included Core Office North America, Europe and Australia. This totaled $35,602M. There are other items that probably should be included, such as some Power Generation and others. We certainly see that the asset base, using historical cost, has certainly expanded a great deal since 2002.

23. Page 57, just something to note in relation to Stock Based Compensation, “During the three months ended March 31, 2009, the company granted 9.7 million stock options at an average exercise price of $14.10 per share, which was equal to the market price at the close of business on the day prior to the grant date.”

May 29, 2009 (17.59)                   S&P revises outlook on Brookfield Properties and BPO Properties to Negative

Rating has been affirmed. They cite the following:

* Property Valuation declines.
* Stricter lending underwriting. tougher refinancing environment.
* above average leverage and concerns of “ability to meet a large 2011 debt maturity…”
* BPO Properties also had outlook reduced to negative from stable.

Affirmed for both companies, ‘BBB’ long-term corporate credit rating and ‘BB+’ ” preferred stock rating on the companies. The affirmation affects roughly C$900 million of preferred stock and US$110 million of preferred stock issued by Brookfield, and C$382 million of preferred stock issued by BPP.”

*ratings acknowledge long-term leases to high quality tenants, and exposure to “healthier Canada markets.” Yet, they discuss risk of tenant defaults due to economic downturn.

* “Brookfield is reliant upon asset monetization proceeds and equity issuance to bolster its liquidity position and reduce overall leverage. The current environment of weak operating fundamentals, lower office property valuations, and more-restrictive lender underwriting in the U.S. will pose challenges to the company’s efforts to recapitalize its highly leveraged U.S. property fund (debt is due in late 2011). We would lower the rating one notch if the company does not meaningfully improve its liquidity position this year or if fixed-charge coverage measures were to decline from their current level (1.6x). We would consider revising the outlook to stable if Brookfield’s management successfully addresses the longer-term recapitalization needs of its U.S. fund while strengthening overall consolidated fixed-charge coverage measures.”

So, now we have 3 subs with credit ratings revisions.

May 15, 2009 (17.18)             Standard & Poor’s Ratings Services affirmed its rating Brookfield Asset Management Inc.

Standard & Poor’s Ratings Services affirmed its ratings, including its ‘A-‘ long-term corporate credit rating, on Brookfield Asset Management Inc. The outlook is stable.

“Standard & Poor’s consider the company’s ability to generate remitted operating cash flow from multiple sources as a key strength supporting the ratings,” said Standard & Poor’s credit analyst Greg Pau. “The ratings on Brookfield reflect our expectation of the company’s continued adherence to its clearly stated strategy based on three main principles: owning assets that generate steady cash flow; managing partially owned funds; and maintaining financial separation and flexibility among the holding company, subsidiaries, funds, and assets,” added Greg Pau.

“In our view, coverage measures have weakened and we estimate that OCF coverage of company-level interest payments was 5.8x in 2008 and coverage of company-level debt was 38%. Despite the deterioration, these measures were still in line with those in 2006 and, in our opinion, still consistent with the rating on Brookfield.”

“The stable outlook reflects what Standard & Poor’s sees as Brookfield’s focused and consistent investment strategy, the strong business fundamentals of its core portfolio in targeted segments, the steady improvement in cash flow coverage, and ample financial flexibility. We expect deterioration in cash flow coverages to be modest in the coming year as steady OCF from core investments should partially mitigate the decline in that from opportunistic investments.”

“To maintain the current rating, we also expect Brookfield to remain committed to its investment strategy and abstain from providing material support to the servicing of subsidiary-level nonrecourse debt. We could revise the outlook on Brookfield to negative if the company deviates from this investment strategy or in any way materially weakens its company-level cash flow coverage and liquidity. This could happen if Brookfield’s net OCF interest coverage falls below 4x or if its net OCF debt coverage falls below 25% on a sustained basis.”

“As we expect OCF from opportunistic investments to remain subdued in 2009, we believe that revising the outlook to positive in the near-term is unlikely. In our view, this could happen if Brookfield reduces its company-level debt, resulting in material improvement of coverage measures, or significantly reduces the proportion of OCF from the more volatile investment businesses.”

May 14, 2009 (17.58)             S&P revised its outlook on Brookfield Renewable Power Inc. (BRP) to negative from stable.

S&P revised its outlook on Brookfield Renewable Power Inc. (BRP) to negative from stable. At the same time, Standard & Poor’s lowered its commercial paper rating on the company to ‘A-3’ from ‘A-2’. Standard & Poor’s also affirmed its ‘BBB’ long-term corporate credit and senior unsecured debt ratings on the company. The feel that BRP has “aggressive leverage.” Concerned with Interest Coverage ratios and free cash flow. Concerned with the depth of the balance sheet, and the ability to withstand sustained lower natural gas prices.

“The negative outlook comes despite better-than-expected financial performance in 2008 related to very strong hydrology and strong prices for its spot market exposure. “We are concerned that a return to average generation levels and continued weakness in the power prices of its key markets could lead to a weaker financial risk profile,” said Standard & Poor’s credit analyst Kenton Freitag. We recognize that BRP’s production is highly contracted and that near-term financial metrics are somewhat immune from short-run price volatility. “However, a sustained period of low power prices would ultimately expose the company to lower levels of free cash flow and lower interest coverage levels,” Mr. Freitag added.

“In our view, the ratings on BRP reflect the company’s diversified mix of predominantly hydroelectric generation assets; these assets’ excellent competitive position; and the financial flexibility provided by its strategic relationship with its corporate parent, Brookfield Asset Management Inc. (BAM; A-/Stable/–). We believe BRP’s exposure to hydrological risk, partial exposure to wholesale power market risk, and aggressive leverage offset these strengths.”

“BRP owns 4,145 megawatts (MW) of total generation capacity. We believe its generation portfolio is well-diversified, both geographically and by the number of plants and offtakers. The company’s primary focus is low-risk, low-cost, long-life hydroelectric generating stations, which are spread across several river systems in Canada, the U.S., and Brazil. It also owns two natural gas-fired cogeneration plants (215 MW) and a 189 MW wind farm in Ontario.”

“The negative outlook reflects our belief that there is little resilience in the balance sheet to withstand sustained lower natural gas prices (and therefore lower electricity prices) and average hydrology. We could lower the ratings if weak power prices in key markets (Ontario and northeast U.S.) are sustained and lead to a material deterioration in its financial risk profile.”

“Conversely, a sustainable rebound in power prices, efforts to contain financial risk through pursuing a higher proportion of contracted production, or debt reduction could lead to a stable outlook.”

May 12, 2009 (17.79)                           Review of Brookfield Renewable Power Inc 1Q09 Financials

BRP reported NI of $100M.

Included in that NI was Investment Income and Other of $38M and Derivative Gains of $36M.

Hence adjusted Net Income would be $26M.

BRP also paid a $1.1B dividend to BAM. Stockholder’s Equity actually went up to $1,494 from $1,373, even with the paid dividend. This occurred via reducing loan balances owed by BRP to BAM, as well as by an issuance of Preferred Shares to BAM during February 2009. BRP issued 24,705,200 Class A shares in exchange for $1.1B owed to BAM.

Here is a breakdown of Stockholder’s Equity:

 

Preferred Shares $2,491
Common Shares $622
Accumulated Deficit ( 1,550)
Contributed Surplus (Stock Options) 2
Accumulated Other Comprehensive Income (Loss) (71)
Shareholder’s Equity (as presented) $1,494

We typically remove Preferred Shares from Book Value computation, and consider it a form of debt. BRP appears to have negative common equity.

During the quarter BRP advance BAM $283M. This was done via the Series 5 Note Issuance.

Preferred Shares during the quarter increased by $1.1B.

Company indicated they will spend ~$72m in Capex for remainder of year ($93M in 2008). Looks like they have spent $43M so far, primarily on Brazil construction projects. I do not know if the $72M mentioned above is from 4/1/09 forward, or for all of 2009. Another $53M was placed in escrow at their Louisiana facility. This was classified as “Other Assets” in the Statement of Cash Flows.

Company has Short Term Debt of $600M.
Company has Cash and equivalents of $133M.
Net Loan Receivable from BAM to BRP is $860M ($581 at 12/31/08). I think $629M of that is due upon demand.

Formed a new entity called ‘Great Lakes Power Holding Corporation (“GLPHC)” a subsidiary of Great Lakes Hydro Income Fund. This will still be consolidated into BAM, since BAM owns 50.1% of Great Lakes Hydro.

BAM shows an independent report of why they got a fair price in this document

Brookfield_Renewable_Power_20090507_Pingston_and_Prince_Wind_Acquistion_report.pdf

Transaction is complicated (for me) and I still have to interpret monies coming into BAM (if any) for the sale (Pingston and Prince) as well as the monies going out (if any) for the continued holding of 50.1% of Great Lakes Hydro.

“On February 4, 2009, the Company completed the previously announced sale of a 49.9% interest in a newly formed holding company, Great Lakes Power Holding Corporation (“GLPHC”) to a subsidiary, Great Lakes Hydro Income Fund (“GLHIF” or “the Fund”). GLPHC’s financial position and results of operations will be consolidated by the Fund as GLPHC is a variable interest entity and the Fund is GLPHC’s primary beneficiary. GLPHC now owns the 189 MW Prince Wind farm in Ontario and the 50% joint venture interest in the 45 MW Pingston Hydro station in British Columbia. Consideration for the transaction was CDN$135 million, including a CDN$5 million working capital adjustment. The transaction was financed through the issuance of CDN$65 million of Fund units to the public, as well as subscription by the Company for CDN$65 million of GLPHC shares that are exchangeable into 4,062,500 units of the Fund. Following the close of the sale, the Company owns a 50.01% interest in the Fund on a fully exchanged basis. The transaction also includes a ten year agreement between the Company and the Fund in which any generation in excess of 506 GWh annually from the Prince Wind farm is to the benefit of the Company, however any shortfall of generation in relation to the 506 GWh annually must be compensated to the Fund by the Company. The Company‘s gain of $29 million as a result of the transactions has been recorded as investment and other income in the consolidated statement of income.”

BRP has $600M of short term debt coming due. Some of that was reduced via a debt offering during April 2009. The new debts carry a rate of 8.75%. BRP claims “a portion of this offering was used to retire CDN$105M of Series 1 Canadian Corporate Indentures due in December 2009. The remaining balance of Series 1 Canadian corporate debentures was CDN $345M at 3/31/09. In April 2009, there was another financing of CDN$100M, costing BRP 8.75%. Of that CDN$100M, CDN$65M was used to pay down the CDN$345M mentioned a few sentences above. Balance of these debentures is now CDN$280M. With all that said, I am not sure what the short term Debt balance now is. Perhaps it is CDN$535M, which would reduce by the CDN$65M. I think, but am not certain, that the series 1 facility was CDN$450M. Hence, I guess (and could be wrong) that short term debt is at CDN$430.

Powell River Energy ( a sub of BRP) obtained a bridge facility of CDN$75M. They can only access this facility for refinancing the first mortgage bonds that come due on 7/24/09. Rate is Prime + 200bps or Canada Deposit Offering Rate + 300BPS. Bridge must be used by 7/24/09 or no longer available.

In the MD&A BRP mentioned the following, “Net income for the first quarter of 2009 was $100 million compared to net income of $47 million during the
same period in 2008, an increase of $53 million. The increase in net income is mainly due to unrealized gains on derivatives and a decrease in interest expense on capital securities. These increases were partially offset by higher tax expense associated with the increased net income during the first quarter of 2009 compared to the same period in 2008 and increased expense associated with non-controlling interests.” They did not mention the following:

  1. Net Income for 3/31/09 was increased by $29M, due to gain on  sale of assets to related party.
  2. Net Income for 3/31/09 was increased by $9M, due to “other income.”
  3. Tax expense at 3/31/08 was a tax recovery of $19M,  an addition to earnings, not a subtraction.

BRP indicates that Operating Cash Flow (OCF) (a non-GAAP measure) was $21.1M. BRP defines OCF as , “revenues from the Company’s power operations, net of operating and maintenance costs, fuel purchases for its cogeneration plants, power purchases, marketing and administration expenses and municipal and other generation taxes on its facilities.”

BRP claims to have over $900M in liquidity. This includes $133M of cash, $142M of Short Term Investments, balances on hand with BAM (629M), undrawn credit facilities ($195m), and “operating assets that have the ability to generate steady operating cash flows.” Not only is this greater than the stated “over $900M,” it is actually $1.1B.

Interest Coverage Ratios for Brookfield Renewable Power

From our website: favorite ratiosand formulas.html

Times Interest Earned (Interest Coverage Ratio) – This evaluates the ability of a company to meet required interest payments.
Times Interest Earned = pretax income + total interest expense / total interest expense.
We like to see interest coverage at > 4 (or 25% on the inverse). We consider 6 (or inverse 16.67%) as a conservative number.

When we look at BRP as of 3/31/09, we arrive at the following. The following agrees with BRP’s 3/31/09 Interest Coverage Ratio filing.

12 Months
ended 3/31/09
Net Income 330
Taxes 104
Interest Expense (not including capital securities) 320
Investment Income and Other Income 56
Derivative Gains (Losses) 179
Net Income After Taxes and Interest Expense 754
Coverage Ratio as presented 2.36

If you remove the Investment Income and Derivative Gains, you get the following:

Coverage Ratio if related party gains, Investment Income                         1.62
and Derivative Gains were eliminated

Of course 1.62X interest coverage is less healthy than the already low coverage of 2.36X.

Review of Acquisition of Pingston Hydro and Prince Wind to a related entity.

The transaction essentially between Great Lakes Hydro and Brookfield Asset Management involved the sale of 49.9% of Pingston Hydro and 50% of Prince Wind. The sale was done via a conduit called Great Lakes Power Trust.

The independent valuation advisor was Blair Franklin Capital Partners, Inc. http://www.blairfranklin.com 

Consideration was CDN$130M, of which CDN$65M was paid in cash, the remainder in shares exchanged so that BRPI owns 50.1% of the fund.

The combined entities have Power Generating Assets of $515,155T.

Wind Generation Equipment 424,414
Hydro Stations 90,236
Vehicles 19
Work in Progress 486
Total 515,155

The balances of the assets at December 31, 2008 were $348,483 for Prince Wind and $35,362 for Pingston Hydro. This totals 383,845.

The difference between Power Generating Assets at transfer of $515,155 and the Net Book Value at 12/31/08 of $383,845 was $131,310. I will know more after full financials are released, but it looks like the new entity will get a step-up of Book Value. I could be wrong on that.

Interesting that the general Brookfield Theme is that book value understates asset value. Yet, if I am correct, we have the potential via step up of assets stated over historical cost.

One of the Royalty owners is a related JV. Keating and Co. Design and Fabrication Inc. I could not locate a web site.

RiskCorp was paid $35,000 for insurance. Riskcorp is wholly owned by Brookfield Asset Management. I would like to find out if Riskcorp has any regulatory filings. I have not been able to find any. Riskcorp seems to insure a great deal for BAM.

In 2008 Prince Wind had Revenues of $42,852, a net loss of ($5,156) and Unrealized Losses on Derivatives of ($22.870).

Great Lakes Power Holding Corp is 50.1% owned by BRPI and 49.9% owned by Great Lakes Hydro Income Fund. “GLP is an equal participant with ‘Canadian Hydro Developers, Inc.’

The following are questions I would have asked on the Great Lakes Hydro Conference Call. It appears that Brookfield and their subsidiaries have chosen to no longer let me ask questions on their conference calls.

1. BAM bought Prince Wind in November 2006. I think most utilities have lost market value since then. Hence, what was your thinking in paying over 3X book value for Prince Wind and Pingston Hydro?

2. Please comment on the derivative situation at Prince Wind. Prince wind had 2008 Revenues of $43M (2008 was $46M), a net operating loss of ($5.8M) (2008 was ($3.9M). In addition to a continuation of Net losses, Prince wind in 2008 had a Derivative Loss of ($23M). Please explain how that was handled in the valuation and if you have any derivative concerns going forward.

3. You indicated that you have a bridge facility in place for the $75M due on Powell River in July. Yet, Broofield Renewable Power (your parent) indicated that there is a bridge facility of up to $75M, yet if refinancing of $75m Powell River debt can not be refinanced, the bridge facility would expire on July 24, 2009. Has anything changed since the filing of BRPI financials?

4. Are there any specific loan covenants in place, with you or with BRPI, which if failed, would prevent dollars required for Great Lakes Hydro Operating to stop coming in from the parent (BRPI or BAM)?

5. Do you plan on buying other properties from Brookfield Asset Management, Brookfield Renewable Power or any other related companies?

6. Please explain the due diligence you have done on Riskcorp. I think Riskcorp is wholly owned by Brookfield Asset Management. How secure are you that they have the ability to pay major claims? What procedures have you performed to ensure that the related party is a viable source, even if the parent developed cash flow concerns?

Hodge Podge of Notes for BAM

1. Tangible Book Value at F2008 was $2,166. Total Equity is $4.9B At F2007 it was $4,202. Consolidated Debt at F2008 is 30,275M ($30 Billion). At F2007 it was $30,768M. Total Tangible Assets is $50B. Total Assets / Equity is 17.7X. Total Tangible Assets / Tangible Equity is 23.1X. Market Cap is $11B (using $18 per share and 600 common shares o/s. Price to Tangible Book is 5.08X

2. CRE has going in cap rate of 7.2%. I think too low and their calculations I suspect would be on the aggressive side. I would like to see their calculation of “going in.” What are occupancy rates, have they assumed rental increases, continuing leases, constant costs?

3. On the other hand, when preparing IFRS, BRP off the cuff, looks like they used conservative cap and discount rates. Yet, one needs to disect the Power division, take out one time items, related parties, etc etc and with BAM you have more than your typical company (at least the ones I have ever followed, except for Enron.)

4. You have Tricap companies that seem to be bleeding cash, yet I think still listed as havign Operating Cash Flow.

5. Net Income was $649M, when you remove gain on Norbord debentures (they merely converted) and the tax gain of converting to REIT, you end up with Net Income of $346M.

6. On page 42 of AR, BAM describes how they will deploy capital from new funds. My question is, “what if new capital does not come in?” Several analysts have been concerned with the lack of third party announcements.

7. Page 42 also discusses a deleveraging process at BAM. Paying down debts etc. Yet, on page 45 they indicate that they expect to extract cash from refinancings. All through the leveraged balance sheet build, BAM was able to extract cash. What happens when and if it stops?

8. Coverage ratios and debt ratios as reported seem low. BAM uses deconsolidated reporting for all but Brookfield Properties. I think this distorts things. You can run the ratios as they did on a deconsolidated basis. Also run like they did on an IFRS basis. But, also, very important to run it on the as presented GAAP financials.

9. I ask myself, why did BAM spend 3.3% on transaction costs for their $150M offering. That sounds like a lot to pay for a company with such allegedly strong liquidity. Yet, they do only pay 5%. So, just a question and something to document.

10. There are letter of credit committments in excess of $1B not on liability section of balance sheet. This is GAAP and acceptable, but all should know that BAM has contractually committed to over $1B of LOC’s that are not (yet) showing as liabilities on balance sheet. I imagine that if BAM was asked or told to commit funds, that stress could be felt.

11. Around 50% of Flatt’s options are under-water.

12. What is free cash flow? Is there free cash flow? What would cash flow be if BAM was not able to sell assets to related parties.
13. Bonds are still acting weak, and not pricing as to the current credit ratings that BAM holds. BAM has over $14B coming due in less than 3 years. BAM is generous with options to officers and directors IMO.

14. There has not been a single CMBS issuance reported since July 1, 2007 through 3/31/08. This has been attributed to increased credit tightness (see my BAM thesis), deterioration in commercial real estate (see my BAM thesis), decreased rents, increased vacancies, decreased property values, increased cap rates and requirement to be more conservative in calculation of cap rates. Delinquencies will start to rise, especially when extensions are due. I think properties with claim to lower stated LTV will be susceptible, as a lender would rather take that back, than one of a mortgage that is under-water. Yet, industry insiders have felt that lower loan to values will have greater refinancings, citing the lenders having more comfort with the collateral. All that said, there are expectations that market will open up again, just with wider spreads, greater restrictions, recourses, etc. CRE CMBS delinquencies are increasing. I read a report that showed delinquencies rose from 0.40% in 3Q08 to 1.12% in 1Q09. Later vintage loans are also experiencing unexpectedly higher default rates. These were allegedly issued with greater standards, and hence the surprise of default rate. Interest Only loans have almost disappeared (I think this will obviously affect BAM cash flow).

15. Bruce Flatt’s 2007 compensation (including options) , Brookfield Asset Management Inc. $27,164,707.

16. In a recent BusinessWeek interview, Sam Zell said the following in regards to Commercial Real Estate. “We all drank too much Kool-Aid. Between 2003 and 2007, 50% of all commercial real estate traded. It ended up being over-leveraged. All cash buyers like Calpers played the leverage game instead of buying for cash. Very few who bought from 2003 to 2007 are above water. You can call it credit crunch, seller’s strike, buyer’s strike, either way you have more debt than you have value. We won’t see new equity players until the banks foreclose. It’s going to be a couple to three years before the ownership structure changes. Prices are down 25% to 30% on what’s sold. The reality is there ain’t much trading. One of the great lessons of Confucius is bankruptcy courts don’t respect maturities. That’s your General Growth (Properties) story. Sales occur when there are prospects. Tell me where the prospects are? I’m happy to buy a hotel when you can tell me the President will stop pissing on conventions. If owners have no equity, owners have no incentive to do anything. Who’s going to put up tenant improvement money? Publicly held REITs have gone down 65%, arguably too far. That’s real daily pricing. You have a lot of loans at floating rate, you don’t miss payments at 1-2%.”

17. DBRS reduces credit rating on Norbord. “DBRS has today assigned an Issuer Rating to Norbord Inc. (Norbord or the Company) of BB with a Negative trend, meaning that our opinion on the default rating of Norbord has declined from BB (high) to BB.” “The lower default rating reflects the negative impact of depressed oriented strandboard (OSB) markets on Norbord’s financial structure and a longer-than-expected time frame for the Company to significantly repair its financial profile. In addition, Norbord’s financial profile is no longer appropriate for a higher rating, following weak Q1 2009 financial performance and continued high leverage.” “The current rating is supported by the implied support of Brookfield Asset Management Inc. as evidenced by the successful execution of the standby purchase agreement in connection with the recent rights offering.”

Here is what I would have liked to ask, had I been selected to participate in the BPO Properties conference call.

You mentioned that you are not buying back shares to preserve cash. Very understandable. You mentioned that you are looking at ways to combat the future tax that will be generated from BPO Properties profits. I imagine your desire to preserve cash would include the $218M of debt coming due within the next 9 months. The $218M coming due includes Petro Canada 3.15% loan, which you claim to be in gear to refinance. Of course, the refinanced loan, which you claim to be for a 5 year period will be at less preferential rate than the current 3.15%.

Based on the above, my question is two-fold.

1. You stated that the loan will be via a corporate issue. Will the loan remain as a non-recourse loan? Will it be for the full $150M? Will you be able to extract cash from it? If you extract cash, will you use it for opportunities, or will you pay it out as a dividend? If a dividend, do you have any concerns that Brookfield Properties owns 89% of your company and would be the recipient of most dividends you pay?

2. As you are looking to preserve cash, why would you pay out an extra dividend of $140M? Was this because your parent Brookfield Properties would have better use of the money than you would? If so, aren’t your fiduciary interests focused solely on BPO Properties and not a parent? If you recall, you were previously loaning money to Brookfield Properties at rates well below what they would have received from non-related parties, as well as the dividend paid last year by you to Brookfield Properties of $250M.

It seems like any extra funds could be used to purchase assets from distressed sellers, as opposed to paying out a total of $390M in dividends to your shareholders of which $347M went to your parent (Brookfield Properties). If I am not mistaken, that $390M paid was all done within the last 15 months.

Heck, you only had Net Income of $81M during the last 5 quarters, yet you declare dividends of $390M? As a matter of fact, you had net income for the year ended 2008 of $65.5M and $138.8M in 2007. So, you have had total net income of $204M in the last two fiscal years, and you pay out $390M in dividends.

Purchasing assets would generate depreciation, which WOULD benefit any desire to combat taxes. As you know, depreciation is a non-cash charge.

I’m not at all insinuating you should be buying assets. I’m just thinking that there is way better use of that money than to pay a dividend, of which a claim that “shareholders benefit” would sound funny. Since the 89% shareholder is the parent (Brookfield Properties). It just seems different if it were an independent 89% shareholder. If full independence, would that dividend be paid? I just think that all allegiances and fiduciary duties belong to BPO Properties, and none other.
3. In light of preserving cash, and dealing with a future tax situation, are Dividends in Canada tax deductible? In USA corporate dividends are not tax deductible, yet they are includible as income for the recipient.

***************************************************** *******

Truth of the matter is, putting aside parental pressures on BPO Properties, this is the best of the organizations that I have come across within the BAM organization. Debt levels are fine. Assets look great. Implied cap rates incredibly attractive, true cash generator. Yet, if a parent drains a company that is public and certainly has a fiduciary responsibility to all shareholders, then I would have a concern.

Tom Farley is very well respected. He is President & CEO of BPO Properties and President and Chief Executive Officer, Canadian Commercial Operations of Brookfield Properties (which is an 89% shareholder of BPO Properties).

I didn’t realize that Moody’s issued a rating on BPO Properties. I searched and couldn’t find that. Perhaps I misinterpretted the statement.

In the CC, Tom Farley said, “we have a rating from Moody’s that you would see that Moody’s has announced
that they’ve underwritten it at CAD370 million. So we’re expecting to get that amount.” “That’s just the full amount. So our half of that would be CAD185 million and our half of the existing bridge is CAD150 million.
So, so when we’re successful, that would mean incremental CAD35 million.”

I was able to find a $52.5M loan to Exchange Tower Ltd(this is a subsidiary of BPO Properties Inc). That loan was issued 9/8/08, comes due in 2011.
I guess this is their CRE in Thailand? http://www.property-report.com/thailand-property-magazine.php?id=1549&date=0808

Farley of BPO (et al) recently discussed…..

1. Brookfield claims to be constitutionally conservative in the way they e manage their business. They claim to rarely take debt that is greater than 60% loan to value. They claim to be focused on preserving capital. This is based on a 96% USA occupancy rate, and 99% in CN.

2. Thinks that TD Canada Trust Tower would now trade at a cap rate below 5% and $723 SF (not sure if he was talking CDN or USD.) This was considered “too rich” by Cadillac Fairview Corp. Kimco thought cap rates will accelerate quickly in Canada. Kimco thinks some caprates have already reached 8 in Canada.

3. Thinks macro-deleveraging process will last longer than April 2010.

Back of Envelope Brookfield Properties Valuation:

Back of envelope BPO valuation:

NOI estimated rbcpa $1,200

Value via 10% cap rate $12,000
value via 8% cap rate $15,000

Cash $ 315
Debt $11,598

Capital Securities and preferred equity $2,177.

Enterprise Value at 10% cap rate (not reducing for $2,177 above) is $717M.

Enterprise Value at 8% cap rate (not reducing for $2,177 above) is $3,717M

Shares outstanding 407,153,160 (note for eps, weighted average of 391M shares used. That will hit eps going forward.)

Market Cap using $7.47 per share (closing 4/30/09) is $3.04B

Market Cap using $8.22 per share (closing 3/31/09) is $3.35B

Of course above is vague and incomplete. One must fully analyse intercompany transactions, debt conditions, debt status and rates, debt extensions, status of developments (including Reston Crescent), leasing assumptions, rental per square foot and covenants, and other items, which may become available with eventual quarterly filings (10-Q equivalent).

BAM has assigned a value of $7,798M on Commercial Properties. BAM did this via their “IFRS” methods.

Market cap for entire interest of Brookfield Properties is $3.1B (share price $7.55). Granted , IFRS may have Multiplex and Canary Wharf included in the $7.8B. Yet, Brookfield Properties also has a percentage of residential value in their valuation.

Remember, BAM owns 51% of Brookfield Properties.

Hence, they value at $7.8B, whereas half the market value of Brookfield Properties is $1.55B.

One could argue that true enterprise value of Brookfield Properties is zero based on a 10% cap rate and including Capital Securities and preferred equity of $2,177.

The following are questions I would have asked on the Brookfield Properties 1Q09  Conference Call.  It appears that Brookfield and their subsidiaries have chosen to no longer let me ask questions on their conference calls.

To bad critics are not allowed to ask questions. Easier to deal with the sheep of Wall Street. Yet, best questions I have heard in a long time. Analysts are not as lovey dovey as they used to be on the calls. It seems like the chronie wall streeters and chummy buddies in Toronto Finance district do not want to ask the difficult questions. Maybe they are concerned about their investment banking profits.

1. In discussing their IFRS valuation methods, BAM mentioned a going in cap rate of 7.2%. Would you elaborate on your calculation of “going in.” What are the primary assumptions of cap rate, including occupancy rates, have they assumed rental increases, continuing leases, constant costs?

Tom recently mentioned, Thinks that TD Canada Trust Tower would now trade at a cap rate below 5% and $723 SF (not sure if he was talking CDN or USD.) This was considered “too rich” by Cadillac Fairview Corp. Kimco thought cap rates will accelerate quickly in Canada. Kimco thinks some cap rates have already reached 8 in Canada.

What do you expect Class A cap rates to level at. It seems like a cap rate less than 5% is optimistic?

2. Would you please identify loan balances and related party activities with BAM and any subsidiaries?

3. What is status of 2 Reston Crescent? Is more development slated for that area? I thought I noticed increased square footage potential in the supplemental filing today.

4. What are your expectations on refinancing in general? Do you envision greater monies down? What rates are you seeing? covenant requirements? You have been focusing on loans that are back ended with heavier payment requirements. Have you modeled the lack of that being available going forward in your cash flow projections. Also, have you included the requirement of more money down, as well as the probable inability to extract cash from refinancings as you had in the past?

5. Any derivative gains or losses?

6. Any gains or losses via intercompany or related party transactions.

7. Any expectations of rights offerings or any type of equity dilution in ways to raise cash?

Quick Thoughts on BAM earning release 1Q09

1. I think that many of the entities insure via an insurance company owned by BAM. Anyone know if there are regulatory filings for that company. What kind of capital does it have, if claims were made?

2. BAM mentioned they are under review by ratings agencies. Should be interesting.

3. Looks like third party asset generation is difficult. No surprise, as that is the case for most of the Asset Management Industry.

4. BAM admitted that cash extractions via refinancings are not likely to occur.

5. BAM mentioned borrowing sweet spot is < $100M.

6. It will be interesting to see derivative gains/losses in regulatory filing.

7. In regards to the shareholder letter.

  • A very good letter. Not surprising at all.In the CRE section, Flatt mentioned that BAM has already lived through a worse real estate market. Which market was that? Most of the long time CRE companies claim this is the worst market they have seen since the depression.Flatt cited 9/11/01 and the challenges. And it was. Yet, CRE has since boomed big time and now has propably started a bust cycle.Flatt discussed “non-recourse long-term financing.” He discussed securing investment grade debt at 60% to 70% loan to value and that over time the ratio gets less because of increasing rents, amortization and value appreciation. I am under the impression that much of BAM’s CRE debt is interest only or with minor principal amortizations. We are also in a period of price devaluation.It will be interesting to see how Trizec and Multiplex play out, as they were bought when typical CRE was priced at the top of the market.Flatt expressed “Concern #5 – Financing.” He explained how the problems of CRE are caused by refinancing issues. He feels those who put “far too much leverage on their assets” to be the ones with issues, as those who have “prudent amounts of financing.”Once again, why wouldn’t Trizec and Multiplex be included in that problem area?
BAM bond update on May 4, 2009

BAM is currently rated S&P A-

Due Date*******Current Yield

3/2010********* 9.5%
6/2012*********11.0%
4/2017*********12.4%
3/2033*********11.8%

I looked at a list of available A/A- rated bonds and here are the results.

I have stated here, that I believe BAM bonds are not priced as though they are A- rated. Perhaps this is indicating a downgrade on the way, or perhaps it is mispricing. TAV believes mispricing. I suspect ratings pressure.

Due in 3/2010 or earlier as follows:

Chrysler 6.5%
All others less than 6.5%
BAM clearly showing stress at 9.5%

Due in 6/2012 or earlier as follows:

HSBC Bank, MBNA and Prudential, yielding b/w 6.3 – 9.9%.
BAM maybe showing stress at 11%

Due in 4/2017 or earlier as follows:

Morgan Stanley at 7%, Goldman at 6.4%, most others under 10%
BAM clearly showing stress at 12.4%

Due in 3/2033 or earlier as follows:

Citi, Allstate, Dominion Resources, Science Applications yielding b/w 7.4 and 10%
BAM maybe showing stress at 12.8%

May 5, 2009  Noticed that the 2012’s had pricing stress today. The 2017’s dropped only slightly.

BAM is currently rated S&P A-

Due Date*******Current Yield

3/2010********* 9.5%
6/2012*********13.5%
4/2017*********12.6%
3/2033*********11.8%

It will be very interesting to see the ratings agencies discussions soon.

1. BNN.GF cusip 10549PAE1 Maturity June 2012. Coupon 7.125%.

Traded 4/30/09 6MM+ shares, last sale 90.00 to yield 11.001%.

Traded 3/4/09 6MM+ shares, last sale 81.00 to yield 14.636%.

Traded 2/27/09 3.66MM shares, last trade 81.25 to yield 14.495%.

Traded 1/7/09 Over 10MM shares, last trade 67.75 to yield 20.73%.

Traded 12/30/08 2.5M shares at $60 to yield 25.101%.

This bond traded in October 2008 at 74 yielding 10.51%, July 2008 at 99.512 yielding 7.268%, in May 2008 at 103.7 with a yield of 6.086%.

2. BAM.GA Description: BROOKFIELD ASSET MANAGEMENT INC Coupon Rate: 5.800 Maturity Date: 04/25/2017.

Traded 4/21/09 <1MM shares, last sale 66.95 to yield 12.4375%.

Traded 3/3 /09 5MM shares, last sale 67.375 to yield 12.241%.

Traded 2/27 /09 3.9MM+ shares, last trade 65.875 to yield 12.624%.

Traded 1/6/09 3MM shares, last trade 40.75 to yield 21.31%.

Traded on 12/30/08 1.2M shares at $40, yielding 21.66%.

Traded on 10/30/08 65,000 shares at $74, yielding 10.505%. Last trade before that, I forget the date was 87.17.

3. Issue: BNN.GH 10549PAF8 Description: BRASCAN CORPORATION Coupon Rate: 5.750 Maturity Date: 03/01/2010

Traded 4/06/09 < 1M shares, last sale 96.875 to yield 9.462%.

Traded 1/20 /09 5MM+ shares, last sale 89.00 to yield 17.06%.

These bonds are due to mature in 14 months. They last traded until today in May of 2008 then were yielding 5.6%.

Traded 12/10/07 5MM+ shares, last sale 102.43 to yield 4.58%.

4. Issue: BNN.GG cusip 10549PAG6 Description: BRASCAN CORPORATION Coupon Rate: 7.375 Maturity Date: 03/01/2033

Traded 4/24/09 410K shares, last sale 64.75 to yield 11.830%.

Traded 2/27 /09 5MM+ shares, last sale 60.00 to yield 12.752%.

Traded on 2/28/08 150K shares at $90.79, yielding 8.249%.

Traded on 11/6/07 100K shares at $102.566, yielding 7.152%.

March 31, 2009 (13.77)                         Brookfield Properties Review of 2008 Annual Report

1. Owns 28M SF interest of US CRE. Side note, JPM owns 13M of CRE.

2. Liquidity consists of $157M in Cash and $388M (subsequent to year end) of un-drawn capacity. This totals to $545M, yet we do not know current cash balance.

3. Cost of capital based on 12% ROE was 5.30%. This was 7.19% in F2007.

4. Reduction of future tax expense of $498M. This increased earnings. Interesting, US operations went REIT. Why would a company forfeit future NOL’s to become a REIT. I need to look further into that. I am fairly certain that NOL’s become frozen when REIT become effective.

5. $24M foreign exchange gain on BPO dividend. If you recall the BPO dividend to Brookfield Properties really lacked a business purpose for BPO Properties. Similar to the low cost financing that BPO Properties previously extended to Brookfield Properties Inc.

6. Received $23M of fees from Brookfield Residential and Brookfield LePage Johnson Controls. This was $20M in F2007 and $16M in F2006.

7. Gain of $27M in sale of Gulf Canada Square.

8. Gain of $164M on sale of TD Canada Trust Tower Toronto to Omers.

9. 45% of the Commercial Property Debt outstanding is floating rate debt. This was 39% in F2007.

10. Claims Current indebtedness is 64% of Book Value.

11. Seems to insure under a wholly owned entity formed in October 2008 called, “Liberty IC Casualty, LLC.” Liberty provides $2.5B of TRIA coverage (terrorism).

12. Blackstone has a put option commencing in 2011 in Trizec. Entity is called “TRZ Holdings LLC.” In 2013 , if Blackstone does not exercise option, Brookfield has option to Call Blackstone’s interest.

13. US Office Fund (12 above as well) has an institutional investor. Certain of the contributions by this investor are in the form of an unsecured debenture. This year the change in future estimated cash flows of this obligation, included a gain of $38M (nil in F2007.)

14. Related Party Insurance Expense was $1M.

15. Common Shareholder Equity is $3,382M, in F2007 was $3,033.

16. OCF is $459M. I would consider reducing the OCF by $394M of development and redevelopment ($332 construction and $62 Interest Expense) and by $106M of Tenant Improvements and $77M of Capex. This would lead to FCF (negative) of ($118M).

17. Claims BPO Properties operations are self sustaining.

18. 94% of Commercial Debt is non-recourse. Weighted Average interest rate is 5.07% (6.65% in F2007). Total commercial property debt is $10.24 Billion.

19. Land Development debt is $434M (residential) and secured by underlying properties. $379M comes due in 2009.

20. 9,793,216 option shares outstanding with weighted average price of $16.29. 1,054,590 DSU’s are outstanding. These can not be converted to cash until cessation of employment.

21. Merrill rental revenue was 11% of total US Revenues.

22. Guarantees via LOC’s of $99M. Not reflected in financials. $6M of guarantees tied to performance and milestones issued to municipality of Denver.

23. Contingently liable for obligations of Joint Ventures in residential development of
$12M ($8M in F2007).

24. Commercial Property debt are typically structured at 55% to 65% LTV (when market permits.) Claims that current debt at 64% of Book Value is within its target. Book Value is $8.80 per share.

25. Covenants include a “total and secured leverage ratio”, an “interest and fixed charge ratio”, a “fixed charge ratio” and a “recourse debt requirement.” Company claims to be in compliance with all covenants at 12/31/08 and claims there is a quarterly review. Company does not disclose covenant requirements.

26. Company has following debt levels. The following does NOT include discontinued operations.

Commercial Property debt $11,505
Residential Development 434
Capital Securities – Corporate 882
Capital Securities – fund subs 240

Total $13,061

Of the $13,061, $6,680,000,000 comes due in less than 3 years (2011).

27. Company appears to carry derivatives with Notional amount of $4B. This is also tied into common shares of 1,001,665. These shares are part of a total return swap. A $1 gain or loss in share price results in a $1M gain or loss. Hence there is Equity Price Risk. This would be reflected in company’s G&A. I think derivatives are too opaque and will leave it at that.

28. No money drawn on $300M credit facility from BAM.

29. Cash Taxes paid were $18M in F2008 and $35M in F2007. Cash interest paid was $762M (not including dividends on capital securities.)

30. Average occupancy % if 94.9%, 95.6% in F2007.

Commercial Real Estate Notes

Here are my notes of the following clip.

http://www.cnbc.com/id/15840232?video=1074990842&play=1

Real estate storm brewing. category 5 hurricane coming. Aggressive underwriting 2005 – 2008. too much optimism in projections. deteriorating market conditions. Real estate market is collapsing. Distaste for real estate capital. He is more concerned today than ever before, because of economic conditions. failure of demand in system. Higher vacancies in office market. (see WSJ as 1 World Financial Center is offering nearly 300K SF available.) CRE is lagging indicator, last to get in trouble, last to get out. As investor he says “his hands are in his pockets.” You can keep fingers crossed. Look at employment picture, and if improvement could help.

Unlike BPO properties has stated, I dont think Lefrak sees “business as usual.”
The following is an excellent CRE presentation by DB and some quotes that were pertinent to me.

http://online.wsj.com/documents/CREOutlook20090325.pdf

“Price declines of 35-45% (or more) expected, exceeding those of early 1990s”

“Rent declines and vacancy rates may approach those of the early 1990s”

“Conduit collateral performance deteriorating at historically fast pace”

“Large percentage of CMBS loans made in 2005-2008 will not qualify for refinancing without substantial equity injections”

“Aggregate delinquency rate ready to surpass the peak of the previous recession”

“Since October, monthly delinquency rate increases have accelerated sharply to the 17-25bp range, a pace of deterioration that is without precedence”

“Deterioration far more severe in 2006, 2007 and 2008 vintages”

“Historically, larger loans exhibited performance that was far superior to that of smaller loans. This is unlikely to be the case going forward, as underwriting weakened most for larger loans”

“Given the deterioration in employment rates in general, and office employment rates in particular, we expect office to be one of the hardest hit property segments. At 103bp, total office delinquency rates remain low.”

“Many of the riskiest pro forma loans from 2005-2007 were structured as 5Y IO loans”

“Declining property prices pose a significant threat to loans needing to refinance over the next decade. CRE prices peaked in October 2007 after appreciating of 30% since 2005 and 90% from 2001.”

“The 1540 Broadway experience… Represents almost 63% price decline over past 24 months”

We have written extensively about 1540 Broadway See March 12, 2009 below
“Required ROE for levered CRE investors suggests price declines of 45% or more”

see excellent tables on pdf pages 31, 40 and 49 http://online.wsj.com/documents/CREOutlook20090325.pdf

“Cap rates increasing to 7% imply a 14% price decline, increasing to 8% a 25% price decline, increasing to 9% a 33% decline and increasing to 10% a 40% decline. We expect price declines of 35-45%, and possibly more.”

“The number of conduit loans passing their maturity date without refinancing is growing rapidly”

“For loans maturing through 2012, even lenient underwriting requirements imply the majority (56.8%) of loans will not qualify. Out of $154.5 billion of maturing loans, $87.7 billion do not qualify. Office and multifamily are most severely impacted segments.”

“In our view, much of these losses are unavoidable, even in a mass extension environment.”

“Some argue that CRE markets are likely recover quickly as the economy begins to recover, which will resolve much of the refinancing problem. We disagree – even if rents and vacancy rates improve, the vast majority of the price declines reflected changes in underwriting regimes, not depressed cash flows.”

Brookfield Renewable Power – back of envelope continued

I was trying to find a price to cash flow metric. Very difficult to do, as there are items that to me are not real clear.

There are two items in the statement of cash flows, that could lead to potential accounting aggressiveness. One item is Non-Controlling interests. There is so much fluctuation, year to year, that perhaps it is best to ignore when working with cash flow reconstruction for the future. There is also potential confusion and cash flow issues with inter-company fundings and frequent related party transactions that occur throughout the BAM organization.

Add back of taxes should be noted. Okay to add back for cash flow adjustments. One must be cognizant that taxes are future taxes, and that BRP is incurring less taxable income than reported income. There are many reasons this could occur. BRP paid $13m of taxes in 2008. I don’t know if there are statutory Revenue tax or if they are reporting some taxable net income. I can’t tell by the wording in financials on note 21, if there is an equivalent of a net operating loss carryforward in Canada.

Other line items on the statement of cash flows that I have ignored for now are “other” of $38M and “Net change in Working Capital” for $55M. I have ignored these, for now, because of the potential of aggressiveness within intercompany and related party usage.

Here is a back of envelope reconstruction of cash flows. My example does not include any debt repayment, principal reduction or dividends. Any and all of the above would reduce free cash flow.

Net Income 277
Add or (deduct)

Depreciation 169
Derivative Gain (96)
Future Taxes 40

Cash flow from ops 390

capital expenditures (148)

Free Cash flow 242M

Various multiples for valuation based on FCF adjusted

5X = $1.2B
10X = $2.42B
15X = $3.63B

One could add back the “non-controlling interests”, “other” and “Net Change in WC” for an additional $170M in Cash flow. If that were done Adjusted Valuation would be FCF of $412M:

5X = $2.1B
10X = $4.1B
15X = $6.2B

Yet, if one were to add back those items, then they should also consider subtracting debt repayments. Again, I would refrain from that, or I would go with a lesser multiple due to potential “related party manipulation risk”.

Of course you need to determine if 2009 is going to be better NI and CF than banner year 2008. Keeping in mind that 2009 will not include full operations (only consolidated) of Pingston, South American Transmission and Prince Wind.

At this point, for my purposes, I feel comfortable with a valuation of $2 – $4B for BRP. Potentially even less than $2B.

I think that BAM has placed an interim valuation of Renewable at $6.5B via their supplemental information (as originally reported).

Debate welcome. This is back of envelope, BAM has not yet released financials for 2008, hence margin of error and interpretation is greater than if all was filed.

As always, watch the debt and the credit agencies.

Items noted from Brookfield Renewable Power Annual Information Form

“In early 2009, Brookfield Renewable declared and paid a special one-time dividend to its common shareholder in the amount of $1,100 million. This dividend was applied by Brookfield Asset Management to reduce its outstanding indebtedness with the Company. For further information, please see “Dividend Policy”.

Also in early 2009, the Company issued 54,669,200 additional Class A Preference Shares in exchange for a reduction of $1,100 million of two promissory notes totaling $1,210 million outstanding to Brookfield Asset Management.”

“The authorized capital of Brookfield Renewable consists of an unlimited number of Class A Preference Shares and an unlimited number of Common Shares. On December 31, 2008, there were 2,488,278 Common Shares and 57,077,111.87 Class A Preference Shares issued and outstanding. On February 25, 2009, Brookfield Renewable paid a portion of its outstanding promissory notes in Class A Preference Shares by issuing an additional 54,669,200 Class A Preference Shares to Brookfield Asset Management, bringing the total number of Class A Preference Shares outstanding as of that date to be 111,746,311.87. See “Capital
Structure – Promissory Notes” for further details.”

“On February 24, 2009, the Company authorized the payment through the issuance of Class A Preference Shares of one of the promissory notes in full and a portion of the other promissory note. The payment aggregated $1,100 million and was paid through the issuance of 54,669,200 Class A Preference Shares calculated at an issue price of Cdn$25 per Class A Preference Share. While the promissory notes specified that payment could be made in Common Shares, both the Company and Brookfield Asset Management agreed to payment in Class A Preference Shares in substitution therefor. The payment of the $1,100 million in Class A Preference Shares to Brookfield Asset Management on February 25, 2009 reduced our intercompany debt with Brookfield Asset Management to $110 million on the remaining promissory note.”

March 13, 2009 (13.77)                                                 Brookfield Renewable Power

Back of the envelope – Brookfield Renewable Power

Here is a link to their 2008 Financial Statements Brookfield_Renewable_Power_20081231_Financial_Statements.pdf

BAM shows IFRS value of hydro at $6.5B. Below I came up with various back of envelope valuations that range between $1.4B and $3.2B. Again, perhaps the annual filing of BAM when released will give greater detail.

Consolidated Statements of Income

 

 

YE 2008 % of Revs 3 months
12/31/2008 % of Revs
3 months
9/30/2008 % of Revs
3 months
6/30/2008 % of Revs
3 months
3/31/2008 % of Revs
Revenues 1184 100.00% 238 100.00% 289 100.00% 336 100.00% 321 100.00%
Operating Expenses (excluding depreciation and amortization)
Operations, Maintenance and Administration 226 19.09% 68 28.57% 57 19.72% 52 15.48% 49 15.26%
Fuel and Power Purchases 78 6.59% 11 4.62% 23 7.96% 25 7.44% 19 5.92%
Property, Capital and other Generation Taxes 73 6.17% 11 4.62% 24 8.30% 22 6.55% 16 4.98%
Operating Expenses (excluding depreciation and amortization 377 31.84% 90 37.82% 104 35.99% 99 29.46% 84 26.17%
Net Operating Income (excluding depreciation and amortization) 807 68.16% 148 62.18% 185 64.01% 237 70.54% 237 73.83%
Investment and Other Income 20 1.69% 10 4.20% 11 3.81% -3 -0.89% 2 0.62%
Unrealized Derivative Gain (loss) 96 8.11% 46 19.33% 136 47.06% -39 -11.61% -47 -14.64%
Net Income before Interest, Depreciation, Taxes and Non-Controlling Interests 923 77.96% 204 85.71% 332 114.88% 195 58.04% 192 59.81%
Expenses
Interest and Financing Fees 316 26.69% 80 33.61% 79 27.34% 79 23.51% 78 24.30%
Interest on Capital Securities 31 2.62% 0 0.00% 0 0.00% 0 0.00% 31 9.66%
Depreciation and Amortization 169 14.27% 42 17.65% 42 14.53% 44 13.10% 41 12.77%
Non-Controlling Interests 77 6.50% 12 5.04% 11 3.81% 40 11.90% 14 4.36%
Provision for (recovery of ) Income Taxes 53 4.48% 11 4.62% 52 17.99% 9 2.68% -19 -5.92%
Total Expenses 646 54.56% 145 60.92% 184 63.67% 172 51.19% 145 45.17%
Net Income (Loss) 277 23.40% 59 24.79% 148 51.21% 23 6.85% 47 14.64%
Notes from 4Q08 Financial Statements

1. Other Assets are $1,033. These include (see note 15) Costs to be amortized (future expense), FERC licences (also amortized), Goodwill (27) and Derivative Assets (Fair Value of $88).

2. Short Term Investments are $146 and are demand promissory notes issued to BAM. Promissory notes are at CDN prime rate. I think, but am not certain that 2008 CDN prime rate was 3%.

3. Derivatives used for interest rates, currency, hydrology levels and prices of electricity.

4. Company claims that 99% of the $150M accounts receivable are current. They are reserving $3M or 2% of A/R.

5. $697M of debt coming due within one year.

6. Acquisitions in 2008

A. Hydroelectric Facility in Minnesota, 18MW run-of-the-river for $48M.
B. Various facilities or shares of various South American utilities for $393M
C. Purchase of 100% of Common Shares of BAM subsidiary Brascan Energetica S.A. (BESA) for $490M. Completed 11/28/08.

7. Related Party Transactions

A. Supplies Katahdin Paper Company with energy at a fixed rate. There is a receivable of $1M. There is a profit sharing arrangement, which I think was allocated to BRP.
B. Supplies Fraser Papers with energy at a fixed rate. There is a receivable of $1M.
C. Has demand deposit of $346M with BAM, as well as a $25M promissory note with BAM. Earned $1M on interest income for the Demand Deposits.
D. Note Payable with a sub of BAM of $95M.
E. Riskcorp Inc., is an insurance broker “related by common control” and provides insurance to BRP. Total cost was $11M and is included in G&A. This company provides Hydrological insurance.
F. March 12, 2008, transferred electricity transmission operations located in Northern Ontario to Brookfield Infrastructure Partners (BIP) for CDN$211M. There was a $45M gain which was recorded to Contributed Surplus. This allegedly flows through to Shareholder’s Equity.
G. Purchase of 100% of Common Shares of BAM subsidiary Brascan Energetica S.A. (BESA) for $490M. Completed 11/28/08.

8. Although provision for taxes was $53M, only $13M was paid.

9. Projects $399M of principal repayments in 2009.

10. Benefit Plans are 60% equities and 40% debt. I do not recall if they are invested in any of BAM or related Debts or Equity.

11. The discount rates on Benefit Obligations was raised to 5.50% – 6.32% in 2008, from 5.25% to 5.85% in 2007. The discount rates for Benefit Expense was raised to 6.28% – 7.50% in 2008, from 5.50% to 6.32% in 2007. I do not know the expense amount, but the higher the discount rate assumptions, the lower the expense.

11. Non-Controlling Interests

Catalyst Old River Hydroelectric Partnership $ 40
Powell River Energy and sub 33
Great Lakes Hydro Income Fund 146
Bear Swamp Power 2
Subsidiaries of BESA 18
Total $239

12. Parental Guarantees detailed on page 33. Nominal value of CDN$358M ( 12/31/07 was CDN$286M). Covenants require mark-to-market of PGs issued to be lower than CDN$350M. As of 12/31/08 mark to market was CDN$63M. “Historically , the Company has not been obligated to make significant payments for these guarantees.” No amount was included in the balance sheet for these guarantees.

13. Subsequent Events – “On February 25, 2009, the Company declared a $1,100 million dividend payable to its common shareholder. Payment of the dividend was effected by reducing the amount receivable from the Company’s common shareholder. Immediately prior to declaring the dividend, the Company issued preferred shares to Brookfield in the amount of $1,100 million with proceeds being a reduction in the balance owing to Brookfield.”

14. Earnings Coverage Ratios – BRP indicated that “earnings before interest and taxes” for 2008 was $677M. Included in that is $96M of Derivative Gains and $20M of Investment Income. BRP states that the Interest coverage ratio is 2.14 in 2008, and 1.30 in 2007. Keep in mind that Interest expense on Capital Securities was eliminated in 2008, after incurring $31M in expense during 1Q08. The coverage ratio when not including the other income is 2.62. Certainly an improvement over 2007. Still lower than we like to see as indicated at this link item 3.

15.    I redid the interest coverage ratio by eliminating the Other Income and Derivative Gain.  Here are the results.

 

Interest Coverage Ratio
Net Operating Income (excluding depreciation and amortization) 807
Subtract:
Depreciation and Amortization 169
Non-Controlling Interests 77
Unrealized Derivative Gain (loss) 96
Investment and Other Income 20
Net Income Before Taxes 445
Add:
Interest and Financing Fees 316
Interest on Capital Securities 31
Interest Coverage Ratio
Net Income Before Taxes 445
Add:
Interest and Financing Fees 316
Interest on Capital Securities 31
Net Income Before Taxes and Interest Expenses 792
Divided by Interest Expenses 347
Interest coverage Ratio 2.28

16. On 1/6/09 BRP purchased 627,500 units of Great Lakes Hydro Income Fund for CDN$16.00 for total price of $CDN10M.

17. On 2/4/09 BRP sold its entire interest of Prince Wind Farm and a 50% interest in the 45MW Pingston Hydro Station to Great Lakes Hydro Income Fund. “Total proceeds of CDN$130 million, comprised of CDN$65 million cash and exchangeable shares in the corporation that owns the two projects. The exchangeable shares can be converted into Fund units at any time. On a fully exchangeable basis, the Company maintains its 50.01% ownership interest in the Fund.” Wind generation in 2008 generated Revenues of $40M in 2008 (3.4% of Revenues and 4.6% of reported Operating Cash Flow). I do not know how much Revenue and OCF Pingston Hydro is responsible for.

18. On 2/3/09 BRP issued notes in the amount of CDN$300M. Assigned a ratings of BBB (high) by DBRS, and BBB by S&P and Fitch. With the proceeds they bought back a portion of their Series 1 Corporate Bonds for $105M. The series 1 bonds are expected to mature in December 2009. The remaining balance is to be used for “general corporate purposes.” CDN$345M is still owed.

19. “On October 30, 2008, the Ontario Energy Board (“OEB”) issued its decision in the distribution rate application of Great Lakes Power Limited (“GLPL”), a subsidiary of the Company. As part of its decision, the OEB approved the Company’s request for an annual revenue requirement of approximately CDN$17 million, which the OEB made effective as of September 1, 2007. In another part of the decision, the OEB denied GLPL the recovery of approximately CDN$15 million related to amounts that GLPL accrued since 2002 in respect of its distribution rate mitigation plan and associated revenue deferrals that were not recovered through its approved distribution rates. GLPL has appealed this portion of the decision, and has accordingly not reversed these accruals.” I listed this, only to see eventual outcome.

20. “In March 2008, we sold our transmission business to a Brookfield affiliate. We do not expect this disposition to materially impact our future results given that the operating cash flows from the transmission business in 2007 were $26 million, representing less than 5% of our consolidated operating cash flow.”

21. Outlook: “In 2009, we intend to refinance our CDN$75 million Powell River Energy Inc. property specific debt that matures in July 2009. We also intend to refinance our $120 million Itiquira term loan and R$165 million Itiquira credit facility, as well as our corporate debentures in the amount of CDN$450 million, all of which mature in December 2009. We have taken the first step toward raising the funds necessary for these refinancing activities, with the issuance of medium-term notes in the amount of CDN$300 million in early February 2009.”

22. Capital Asset additions were $148M. This includes the construction of projects in their development pipeline.

23. Note on Credit Ratings: “We continue to maintain investment grade unsecured issuer ratings from DBRS (BBB (High)), Standard and Poor’s (BBB) and Fitch (BBB), which are influenced by a prudent level of low-cost asset financing and modest levels of corporate debt. The long-life nature of our assets has allowed us to finance with non-recourse debt and minimal near-term maturities, minimizing risks associated with liquidity and refinancing.”

March 12, 2009 (13.51) Update on NYC Commercial Real Estate and 1540 Broadway

1. You can see prior writings on 1540 Broadway by clicking any part of this line.

2. On 4/8/08 Flatt told an Syracuse University Audience, “We Purchased 245 park ave for $250 sq foot or $500M in 1995. property now worth $2B. haven’t purhcased a property in NYC in 2 years because prices are high.”

245 Park Ave is 1,586,000 SF. Hence, they seem to have paid around $317 SF.

Using Flatt’s $2B number, that comes out to $1,261 per square foot.

1540 Broadway is selling for around $400 SF. http://www.observer.com/2009/real-estate/cbre-investors-set-close-macklowes-old-1540-broadway#

If using 400 SF as the value for 245 Park, the value would no longer be $2B, but $634M.

Here is link to most recent 1540 article that I have found http://www.observer.com/2009/real-estate/cbre-investors-set-close-macklowes-old-1540-broadway#

“CB Richard Ellis Investors, the investment fund run by mega-brokerage CB Richard Ellis, is set to close as early as Thursday on 1540 Broadway, one of the last remnants of Harry Macklowe’s once mighty midtown empire, sources say.

The price is said to be around $355 million. Macklowe Properties purchased the tower in February 2007 in a deal that valued it at $950 million, or $1,079.55 per square foot of office space, according to The Wall Street Journal. The new sales price would translate into just over $403 per square foot.

Despite the 44-story tower’s prime location in Times Square, it has more than 200,000 square feet of vacant space, according to CoStar.

Mr. Macklowe acquired 1540 Broadway as part of an epic $7 billion, seven-tower shopping spree in the early days of 2007. A year—and a universe in the real estate market—later, Mr. Macklowe was forced to turn over the properties to one of his creditors, Deutsche Bank. The bank has since managed to sell all but two of those towers, 1540 Broadway and Worldwide Plaza.

The sale of 1540 Broadway would leave Deutsche Bank with only one.”

http://www.observer.com/2009/real-estate/1540-broadway-sale-gift-comp

“Twenty feet, nine inches from the southeast corner of Broadway and 46th Street rises a building known as 1540 Broadway, 1.1 million square feet of pure, honest-to-goodness office space in one of Manhattan’s most coveted commercial markets: Times Square.”

“Deutsche Bank sold the office condo portion of the building last week to CB Richard Ellis Investors for $355 million, marking the first important building transaction in 2009, and giving a market made murky by instability some sense of perspective. To use industry jargon, it gave the market a “comp.””

“Deutsche Bank, the seller that acquired the building last year from Harry Macklowe after he could no longer pay his mortgage, financed the transaction at a loan-to-value of less than 68 percent.”

“It says to me that to sell a building today of that scale you need a seller financing,” said Peter Riguardi, the president of New York operations for Jones Lang LaSalle. “And I think that without that, the deal probably doesn’t happen.”

Meanwhile, the $355 million sale price puts the value per office square foot at about $392. “People will take those $350 or $400 a square foot as the new pricing for this type of properties,” Mr. Sierra said. “This is virtually half of what they would have cost a year ago.”

“The last time prices for midtown space were in the mid-$300s was 2004, according to Real Capital Analytics’ Pete Culliney. And the vacant office space in the building, which is only 78 percent leased, was valued at around zero.””

“A real estate executive, who would only speak anonymously, described some of those realities. In addition to the quality of the building, which he described as “A minus minus minus,” or maybe a “B,” he said that the most important metric to note was the returns.

“It traded at our view at a 12 percent levered return, and 9.5 unlevered return,” he said. “The price per foot is deceptive.”

General Electric Comments on Commercial Real Estate

http://www.business-standard.com/india/news/general-electric-pays-price-for-real-estate-debt-investments/351278/

“Our conservative underwriting of properties for which a valid value-add strategy (improve the building, re-lease, raise rents) was appropriate makes us comfortable with our portfolio,” GE spokesman Russell Wilkerson said in a statement on Saturday. “We have business plans in place to improve properties where necessary. Many of these properties still carry below-market rents, providing us with protection and some upside.”

“Today, I wish we had less exposure to commercial real estate and UK mortgages.”

“They spent a huge amount of money in real estate,” Corl said. “They paid a full price for what ends up being a lot of mediocre real estate.”

“General Electric’s real estate earnings are likely to fall further as occupancies and rents drop in a US recession that’s now in its second year, said James S Corl, who oversees distressed real estate investments at Siguler Guff & Co in New York.”

Here are some comments Buffett made on 3/9/09, which I think are relevant to BAM and potential inflation.

“Mr. BUFFETT: It was–it was not a house of cards, but it was an economy that was benefiting from leverage–leveraging up.

And when you leverage up, it’s very pleasant. I mean, you can build more houses than people are buying, you know, and–or the natural demand is for and you’ll get people speculating in them and you’ll get people lying in order to get into houses they can’t afford. And so the percentage of people besides the American households that lived in their own house went a little bit and it went up a little bit because those people really didn’t have the income to do it. Now it has to go down. But it was not a house of cards at all. I mean, we have an economy that really works.”

“-we are going–we are doing things that are going to put a lot of inflationary pressure on at some later date and we’re going to do more things like that and that’s the right thing to do, actually. I wish we didn’t have to do it, but it’s the right thing to do and–but in economics, you can never just do one thing. I mean, if you do something, it has consequences and that’s why they always say you never get a free lunch. But it’s better to have the lunch we’re having now even if we pay later than have no lunch at all.”

“So the best–well, the best assets you can have during inflation is your abilities. I mean, because if you’re the best doctor in town or the best lawyer in town or the best broadcaster in town or whatever it may be, you will always command a certain percentage of the resources of society. So your own talents are the most important thing. But if you don’t have any talent like I do, you try to buy into other people’s talents. And you know, this is the best candy. This is the best soft drink, as far as I’m concerned, and it will be that way 10 years from now. And whatever the value currency is, we’ll get our share in that–in terms of that value at that time.”

You can see his stance on mark to market accounting and perhaps extrapolate to BAM with IFRS early reporting.

“I’ve always been theological on mark-to-market accounting, because I’ve seen so much of what people do when they’re allowed to use their imagination on balance sheets or income statements. And frankly, American business misbehaved in a big way, particularly in the ’90s. But people did play games with numbers. And they probably still do. But it–there was–it was almost accepted as a way of doing business. So I’ve always been suspicious when you give a CEO a pen and tell him it’s the honor system. And anything other than mark-to-market works in that direction. Now, it’s true, I think, that mark-to-market has had a–it’s been some gasoline on the fire in terms of financial institutions. The markets are, on certain things, are pretty unrealistic, which is why I said just a little while ago that I would like to–I would rather buy the toxic assets at market from a bank than their good–than their best assets. There’s more money to be made in those and they’ve been marked to a level where there’s a lot of–you know, where they’re probably below fair value, in my opinion. So I’m sympathetic. I think the best way to handle that, though, probably still, is to have the mark-to-market figures, but not have the regulators say, `We’re going to force you to put a lot more capital based in on these mark-to-market figures.’ I say in our annual report, I mark some–we mark everything to market. I say I don’t agree with it in certain cases, and I explain my reasons and shareholders can decide whether they think the reasons are valid or not. I hate to give it up.”

“QUICK: Starting off with this, there’s a question that came in from Greg Martin in Roswell, Georgia. He says, “How do we best prepare for the inflation that will result from the stimulus, and how severe do you expect it to be?”

Mr. BUFFETT: It’s hard to tell how severe it’ll be. There will be things that government and Federal Reserve can do years from now that will try to counteract it. But we are certainly doing things that could lead to a lot of inflation, and the best asset during inflation is your own earning power. Anything you do to improve your own talents and make yourself more valuable will get paid off in terms of appropriate real purchasing power. If you do something well, whether you’re a major league baseball player, you know, whatever it may be, if you’re a good assistant, whatever it may be, that’s the best asset. The–in my view, the second best asset is a good business. And you might own one yourself, but you might own it through equities.”

“would say in 2008 it’s been re-emphasized to me the dangers of extreme leverage, whether it’s on an individual basis or whether it’s societal. And leverage is a lot of fun on the way up, and what it produces on the way down when carried to extremes, whether individual–I mean–I mean the tragedy of somebody on a credit card, which is leverage, what it does to marriages, all kinds of things. Now, when you get where the entire economy, or much of the economy leverages up in a way that embodies societal dangers when it has to de-leverage, I think we should have learned a lesson on that. And if you’re–if you’re dealing–there are a lot of things in life where you don’t know whether it’s just a little too much or a little too little, but I think we’ve learned that we want to err on the side, next time, of not allowing people to go on–or big institutions to get as unchecked on leverage as we have allowed them to do here recently.”

I was reading an article this morning, linked below. Here is a quote. Not saying CRE would follow the same path, just thought of current CRE and discussion when I read it.

“The Dow touched down at 608 in 1974, 40% below its peak and yielding more than 5%, and then took eight years to climb above 1972 heights. In the meantime, commercial real estate values fell off the page and the country suffered vicious inflation in everything but stocks and real estate.”

http://www.forbes.com/fdc/welcome_mjx.shtml

No one knows when inflation will re-emerge. You just can’t time these things. I do think that if inflation comes sooner than later, I would expect that CRE will not be a benefactor. There still seems to be a lot of overhang, vacancies increasing, rents dropping, affordability of tenant has changed. I think cap rates will continue to rise. I think published cap rates are based on trailing numbers or on optimistic assumptions. These would include occupancy percentages, projected rental increases, etc.

BAM and IFRS

BAM has assigned a value of $7,798M on Commercial Properties. I think BPO is the only entity that would be consolidated and included in the $7,798M. The $7.8B does not seem to include Residential Properties owned by Brookfield Properties. The financial statements are not yet filed. When they are filed, perhaps we will get greater clarity into what is included in Commercial Properties. I imagine that the $7.8B includes the values of Multiplex and Canary Wharf.

Brookfield Properties has a market cap of $1.8B when using a share price of $4.60.

BAM owns 51% of BPO.

Erin Caddell, analyst, asked on the Conferecne call, “And then maybe going back to your underlying value calculation and specifically for commercial properties, you value that at $7.8 billion. You do have kind of an outside valuation of Brookfield Properties, in the market cap of Brookfield Properties.

Just based on my calculation, you’re 51% stake in that would be valued at $1.3 billion. I’m sure you feel that number is too low. But essentially do you resolve in any way the kind of market value of any of your publicly traded entities with the underlying value? So for instance, what percentage of the $7.8 billion is the North American commercial properties that is represented by Brookfield Properties?”

Bruce Flatt (BAM) responded, “We don’t specifically comment on how that relates to Brookfield Properties and the market value of a company isn’t particularly relevant in preparing underlying values certainly for the purposes of IFRS. You look at the underlying assets and apply the values there.”

I forget what % of BPO is residential operations, but even including it, you get such a vast difference of stated value.

On one hand the market has clearly placed a value on BPO of around $1.8B. Granted, in theory, there could possibly be an argument that market value is not intrinsic value. Yet, and I must be making an error, for BPO to be worth $7.9B, it would carry a share price of around $20.

Items of Interest from the 4Q08 Conference Call on February 13, 2009

“In our office property business, it performed as expected, as Brian noted. Although this probably is the least understood or where people worry more about this with respect to our Company.”

“There’s no doubt though that the office property business is a lagging indicator of the economy and that overall statistics will deteriorate over the next year or two and that financing issues for some borrowers will cause disruptions in the markets. But the long-term supply and demand balance in most markets was very solid entering into this period. And with respect to us, our long-duration leases, like many times before, should allow us to see through to the other side of an otherwise softer period.”

Below, I found the wording of promising returns to be interesting.

“One should remember, like our shareholders, our institutional investors pay us to invest wisely in assets which will earn them the returns we promise them.”

“We have few legacy issues which are draining our management time. And by and large, we have no major underperforming funds which have tainted our investment reputation.”

“One was we redeemed a $300 million corporate bond. And second, we did retire the debt associated with our European operations, which was probably another [$300 some-odd million]. So those were two fairly significant cash outflows in the fourth quarter.

And we have been investing in our businesses as well. We mentioned $1.5 billion over the course of the year that we have put into the assets. Those would be some of the principal things that would — where the liquidity that is flowing into the business would be deployed.”

” I will make a couple of comments and Bruce may want to follow on. The game plan, frankly, is to — on the one hand, we believe we are investing the capital as I mentioned in my comments earlier, at very attractive valuations and then we would expect to achieve very strong returns from these investments over time.

Second, it does assist in deleveraging and paying down the debt in some of those businesses. And in some cases, that was an appropriate thing — we felt that was an appropriate thing to do. We have I’d say in aggregate committed roughly $500 million or so to rights offerings and that was the two largest ones would be with respect to Brookfield Homes and Norbord.”

“It varies by country, but interestingly where you would think many institutions are not out lending, the fact is they are and even on commercial real estate which today people if you read all the papers, you would say people weren’t funding commercial real estate. But in fact, in many places they are. So I think it depends on country and asset type. The assets that are less affected by this environment are highly financeable.”

“Okay, in terms of the tax profile at the corporate level, and obviously it’s a pretty complex area to delve into. But in general, we have, I would say, a very long runway before we will be in a position that our tax pools would be depleted and we would be in a cash taxable position. All things being equal, it would be at least six or seven years, absent some very significant realizations between now and then.”

BAM was asked if they had concerns as it relates to mortgages or Multiplex. BAM responded, “I would say the quality of the assets gives us lot of comfort in that regard. So, we will work through that situation and fortunately we don’t have a whole heck of a lot of maturities staring us in the face there. And we will get — the quality of assets are such that we should have a pretty easy time refinancing them, we think.”

March 5, 2009 (11.69)                                                    Updated Thesis

(1. ) I think they are over leveraged and that increased credit costs, costs of capital, lower loan to values, could continue to stress BAM.

(2.) BAM has quite a few Joint Ventures or minority interests. On projects they have co-investors. Both Co-Investor and BAM commit capital. I would watch if JV’s start failing to meet capital contribution requirements.

(3.) Incestual sales and potentially unusual uses of related parties. These include related party sales. Related party fundings, which include potential below market loans. Related party dividends, which are not necessarily in the best interest of the entity distributing dividends. Potential use of subsidiaries as a funding source, which might not be considered arms-length in nature. Recent items of such could be:

A. BHS rights offering $250M, will be used to pay off BAM loan. Speculation is that BAM will backstop nearly entire offering. On March 4, 2009 BHS(1.92) announced that they received a $25M commitment from BAM.

B. Norbord – In the CC they discussed that the $240M CDN rights offering was essentially fully paid for (at least most of it) by BAM. They took that money and paid back BAM. I forget the amount, but I think in the $90M range (I could be wrong.) They amended their credit line with BAM and brought it down to $50M from $100M. They stated that nothing is currently owed on the line.

C. Fraser Papers and Brookfield Paper LLC – Fraser Papers Inc. (“Fraser Papers” or the “Company”) (TSX:FPS – News) announced today that it has agreed to sell approximately 10,500 tons of specialty printing, packaging and ground wood papers to Brookfield Paper LLC (“BPLLC”) for proceeds of approximately $11.7 million, which will be used to repay amounts outstanding under the Company’s working capital facility. In addition, the Company has agreed to supply paper to BPLLC through July 31, 2009, at market prices. The net proceeds to Fraser Papers reflect a customary merchant’s discount of 3.5% to end user selling prices. As part of the transaction, Fraser Papers will provide sales and administrative support to BPLLC. BPLLC is a wholly-owned subsidiary of Brookfield Asset Management Inc. (“Brookfield”) (TSX:BAM – News; NYSE:BAM – News; AEX:BAMA), the Company’s majority shareholder.

D. Brascan Residential SA has a R$200M Rights Offering – I think, but am not certain that BAM backstopped this. “Rio de Janeiro, January 15, 2009 – Brascan Residential Properties S.A. (“Brascan” – Bovespa: BISA3), one of the largest integrated developers in Brazil, announced today that its Board of Directors has approved a rights issue of 100 million new common shares, within the limits of the authorized capital established by the EGM of November 24th, 2008, providing a capital increase of R$ 200 million.”

”In addition, one of the controlling shareholders, Brookfield Asset Management, an international asset management firm with approximately US$90 billion under management (of which around US$38 billion is in real estate assets), has committed to subscribe, through Brascan Brasil Ltda, any rights not taken up by the minority shareholders, thereby ensuring full subscription of the R$200 million offering. “This underlines the controlling shareholders’ commitment to the Brazilian real estate business, and their determination to strengthen Brascan’s position as one of the leading companies in the industry,” declared Nicholas Reade, Brascan’s CEO.”

E. Canary Wharf – On a separate issue BAM indicated to me that the sale of Canary Wharf Group to Brookfield Europe LP with the following: ” The sale was by Brookfield Investments Corp., a 100% owned subsidiary. Therefore there is no income recognition on the transaction. ”

The following is quoted from a SEDAR filing on December 9, 2008 for Brookfield Investments Corporation.

“On December 3, 2008, the board of directors of the Company approved the sale of its 15% interest in The Canary Wharf Group plc (“CWG”) to Brookfield Europe LP in exchange for an approximately 42% limited partnership interest in Brookfield Europe LP with a fair market value of £333,800,000 and cash proceeds in the amount of £107,600,000.”
F. Brookfield Infrastructure Partners – Acquiring Public Private Partnerships (PPP) from Brookfield Multiplex. Purchase price of $20M. I asked if this was discount from BAM’s original purchase price, but presenter was not sure. Properties include 2 hospitals. Anticipated close is November / December 2008 (even though presentation was in December 2008.)

G. Longview and BIP – Invested in Longview to maintain 30% ownership level. This further investment of $103M was completed in November 2008.

(4.) Slowdown in Alberta CN real estate. (BPO). I previously had this as potential. Slowdown in Calgary. On 3/3/09 this was in the news, “Canada’s Economy Shrinks 3.4%” http://online.wsj.com/article/SB12360230…

(5.) High occupancy rates in metro areas deteriorating because of reliance on financial service industry. Interestingly enough, BPO Properties in recent CC, claimed “business as usual.”

(6.) Previous access to low cost capital with excess cash based on NAV, no longer available to BAM.

(7.) Industry credit tightness, and BAM’s high leverage, could cause stress. Noting that $14 – $18B comes due on or before 2011. BAM has $32B of total debt.

(8.) Lower values of assets, which were bought at potentially elevated prices, with concerns that loans that are no longer available to such assets. This potential lack of credit is not just industry specific, but what I believe to be company specific.

Brookfield Properties has $5.6B of debt coming due on a consolidated level in less than 3 years. Most of this is from Trizec purchase in October 2006, which I think is now US Office Fund.

Those are just two items that make up almost $7B in less than 3 years.

In total on consolidated basis, BAM has over $14B coming due within three years.

Here is what BAM mentioned in their 4Q08 supplemental report in regards to non-recourse commercial property debt.

“Commercial property financings are secured by high quality office buildings. Many of the financings which mature in the next three years were arranged a number of years ago and, accordingly, represent a low loan to value. As a result, we expect to refinance these maturities in the normal course at the same or a higher level. Maturities in our North American, European and Brazilian operations, are extremely low relative to the scale of these operations, reflecting the long-term nature of the financing. The Australian property market typically utilizes shorter duration financing, which we are rolling over in the normal course and seeking to extend on a long-term basis where possible.”

From above, not only does BAM expect to be able to refinance, they are expecting to refinance for the same amount of debt or greater. Yet, as JPM said today, it is a new ball game for lending. Cap rates, use of lending guidelines , loan to values have all changed. BAM has alluded long term ownership of assets, when indeed, they have $7B due before 2011 on assets that at the earliest were purchased in October of 2006.

If you review BAM and subsidiaries interest coverage ratios they are quite low and have been decreasing over the last few years. In the recent supplemental schedule BAM reported Interest Coverages on Operating Cash Flows, not on Net Income from Operations.

When looking at BAM remember to consider asset sales, debenture conversions and so forth, as non-recurring as well as being sold in most cases to related parties.
(9.) Funds that BAM manage are not performing within expectations. These include Crystal River, Some Hyperions, Brascan, Multiplex, Brookfield Properties (projected) and Brookfield Homes (projected).

Here is an example on Multiplex Funds on 3/2/09

On 3/2/09 MULTIPLEX ACUMEN PROPERTY FUND (MPF) closed at $0.03. This has lost 98% of its value since 12/31/07, and 77% of its value since 12/22/08. MULTIPLEX ACUMEN PROPERTY FUND (MPF) at 12/31/07 was priced at $1.25. It closed at $0.29 on 10/31/08, $0.20 on 11/24/08 and $0.10 on 12/22/08.

On 3/2/09 MULTIPLEX EUROPEAN PROPERTY FUND (MUE)closed at $0.12. This has lost 87% of its value since 12/31/07, and 30% of its value since 12/22/08.

MULTIPLEX EUROPEAN PROPERTY FUND (MUE)at 12/31/07 was priced at $0.90. It closed at $0.27 on 10/31/08, $0.20 on 11/24/08 and $0.17 on 12/22/08.

Here are some notes I had on potential debt breaches.

Brookfield’s Multiplex Acumen Fund May Breach Debt Agreements

Dec. 17 (Bloomberg) — Multiplex Acumen Property Fund, a A$342 million ($238 million) money manager controlled by Brookfield Asset Management Inc.’s Australian unit, said sliding property values may force it to breach debt covenants on Dec. 31.

The fund started its yearly review with lenders and would have 90 days to rectify any breach, Multiplex Acumen said today in a statement to the Australian stock exchange.

“The deterioration in the asset value of a number of the fund’s underlying investments, together with a sector-wide reduction in distribution income, is expected to have a negative impact on the net tangible assets,” Multiplex Acumen said.

Brookfield, the Toronto-based manager of $90 billion in assets including real estate, paid A$5.7 billion last year to acquire Multiplex Group. Brookfield last month said it agreed to refinance $800 million of Australia-related debt.

Credit Suisse, a long time bull on BAM commented the following on 12/17/08.

A. Potential breach of covenants is a minor near-term negative for BAM. CS does not believe that BAM has significant exposure to the fund.

B. The poor market performance for the related funds presents “significant restructuring opportunities.”

C. Concern over potential cash funding needs for some of the funds and concern over BAM’s ability to raise new money for asset management because of poor performance.

D. Historically CS claims that BAM does well in these funds. I say, historically in depressed economic conditions BAM did not have the excess leverage and pending increases in costs of capital as in the past.

(10.) Previous business conditions with wind at tail no longer exist. Closer eye on Corporate responsibility.

(11.) I am reviewing a bunch of data. It seems as though their IFRS reporting could be potentially aggressive. They are using discount rates and other DCF techniques. All legal, all subject to interpretation. I only quickly glanced and need to further review, but I think the discount rates could be raised, which in turn would bring down asset values. Higher the cap rate, lower the asset value. Higher the discount rate assumption, lower the asset value.

(12) Use of cash via buy-backs – It will be interesting to see the Annual Report and 10K, when filed on 3/31/09. On one hand, going from memory, BAM has received money from employees exercising options. Then BAM spends the money on buybacks. At 12/31/07 they had ‘Common shares and common share equivalents” of 599M shares, at 12/31/08 they had 592M shares. These numbers can not be determined until Annual or SEC filing. BAM repurchased per their supplemental 12/31/08 filing 14.2M shares. They spent $286.4M in 2008 at an average price of $20.17

Brookfield Renewable Power pays a $1.1B Dividend (PIK?)

“On February 25, 2009, the Company declared a $1,100 million dividend payable to its common shareholder. Payment of the dividend was effected by reducing the amount receivable from the Company’s common shareholder. Immediately prior to declaring the dividend, the Company issued preferred shares to Brookfield in the amount of $1,100 million with proceeds being a reduction in the balance owing to Brookfield.”

Tower completes purchase of BAM Hermitage Insurance 3/9/09

“NEW YORK–(BUSINESS WIRE)–Tower Group, Inc. ( Tower ; NASDAQ: TWGP) announced today that it has completed the acquisition of HIG, Inc. (“Hermitage”), a specialty property and casualty insurance holding company, from a subsidiary of Brookfield Asset Management Inc. for $130 million. This transaction was previously announced on August 27, 2008.”

“Through its insurance subsidiaries, Hermitage Insurance Company and Kodiak Insurance Company, Hermitage offers products both on an admitted and a non-admitted basis to commercial customers throughout the United States. The company produced $107 million in gross premiums written during 2008 through its distribution network of approximately 150 retail agents in the Southeast and key wholesale relationships throughout the East Coast. Hermitage writes business in 29 states and the District of Columbia on a non-admitted basis and in 14 states on an admitted basis.”

This is what BAM wrote in 4Q08 Supplemental.

“Hermitage Insurance Company (“Hermitage”), a property and casualty insurer which operates principally in the Northeast United States; and Trisura Guarantee Insurance Company, a surety company based in Toronto. We manage the securities portfolios of these companies, which totalled $1.0 billion and consist primarily of highly rated Government and corporate bonds, through our public securities operations. We completed the sale of the United Kingdom reinsurance business within Imagine, thereby recovering capital of $200 million, and negotiated the sale of Hermitage for proceeds of $125 million, which is expected to close in the first quarter of 2009. We intend to recover the balance of the capital from the Imagine business over time through an orderly run-off of the business.”

Interesting Article on Conference with Commercial Real Estate Heavyweights during March 2009

http://www.costar.com/News/Article.aspx?id=A932F6EF6456DBE68F8F84C83EDBB358

Here are some selected quotes from the article:

“Stalled transaction activity is inhibiting the market’s ability to establish reliable property values, and vice versa. Occupancies, absorption, rents and other property fundamentals are weakening in tandem with the declining job market and shaky consumer confidence. REITs seek to preserve capital by cutting dividends,
writing down investments, trimming costs and canceling development projects. And perhaps most urgently, highly leveraged firms are still trying, with limited success, to navigate the frozen flows of capital markets, refinance or retire debt — and at the same time, try to predict when to make a well-timed reentry
into the acquisitions arena.”

“Even so, it was challenging to detect hope among the veteran CEOs in attendance. Interest rate spreads are still way too high for the economy to recover quickly and property prices are at a 10-year low, stated Steven Roth, CEO of Vornado Realty Trust (NYSE: VNO), owner of a diverse mix of New York City office
buildings and retail properties in the Northeast.

“We’re in a period where asset values are deflated, and that has driven out all normal-course lending because nobody wants to make a loan; nobody knows the value of the collateral of what they’re lending against,” he said. “We say frequently, one of the things that makes a bottom is stupid, stupid, stupid low
[implied] asset values, and we’re getting to at least the first or second ‘stupid.’” Still, Roth predicts the “greatest opportunity in our lifetime to buy things extraordinarily cheap” will soon be within sight.”

“If people have the liquidity and the smarts and intelligence to navigate, I think there are going to be some incredible buys whether in the public or private markets.”

“Office Sector: NYC Hammered by Financial Meltdown”

“Brookfield Properties (NYSE: BPO) – were in agreement that midtown and downtown market fundamentals continue to erode, marked by declining rents and midtown vacancies up as much as 4% over last year.”

“In a bit of news that would dump more space onto the Lower Manhattan if it comes to fruition, SL Green Chief Executive Officer Marc Holliday told the conference this week “it is our understanding that Merrill [Lynch] will be moving much of its banking, sales and trading” later this year from the World Financial
Center — adjacent to the “Ground Zero” site where the World Trade Center buildings stood — to fill available space in new ML owner Bank of America Corp.’s new $1 billion tower at 1 Bryant Park, among other Midtown locations.”

“But as you look forward to 2011 or 2012, one thing is certain: there will be a shortage of new product in this country,” Blair said. “There is virtually nothing being permitted or financed today, and little that will be started in ’09 or ’10. For those companies with a capacity from a balance sheet point of view to keep
their organization and development in place, I have no doubt there will be rewards for those who can deliver into that time period.”

Bond Info Updated

Improvement has shown up here. Maybe TAV buying more, other institution, BAM or sub? Improvement has shown up in spreads in the high yield market since 1/20/09. BAM continues to trade as a high yield, although it is rated Investment Grade.
1. BNN.GF cusip 10549PAE1 Maturity June 2012. Coupon 7.125%.

Traded3/4/09 6MM+ shares, last sale 81.00 to yield 14.636%.

Traded 2/27/09 3.66MM shares, last trade 81.25 to yield 14.495%.

Traded 1/7/09 Over 10MM shares, last trade 67.75 to yield 20.73%.

Traded 12/30/08 2.5M shares at $60 to yield 25.101%.

This bond traded in October 2008 at 74 yielding 10.51%, July 2008 at 99.512 yielding 7.268%, in May 2008 at 103.7 with a yield of 6.086%.

2. BAM.GA Description: BROOKFIELD ASSET MANAGEMENT INC Coupon Rate: 5.800 Maturity Date: 04/25/2017.

Traded 3/3 /09 5MM shares, last sale 67.375 to yield 12.241%.

Traded 2/27 /09 3.9MM+ shares, last trade 65.875 to yield 12.624%.

Traded 1/6/09 3MM shares, last trade 40.75 to yield 21.31%.

Traded on 12/30/08 1.2M shares at $40, yielding 21.66%.

Traded on 10/30/08 65,000 shares at $74, yielding 10.505%. Last trade before that, I forget the date was 87.17.

3. Issue: BNN.GH 10549PAF8 Description: BRASCAN CORPORATION Coupon Rate: 5.750 Maturity Date: 03/01/2010

Still haven’t traded since 1/20/09.

Traded 1/20 /09 5MM+ shares, last sale 89.00 to yield 17.06%.

These bonds are due to mature in 14 months. They last traded until today in May of 2008 then were yielding 5.6%.

Traded 12/10/07 5MM+ shares, last sale 102.43 to yield 4.58%.

4. Issue: BNN.GG cusip 10549PAG6 Description: BRASCAN CORPORATION Coupon Rate: 7.375 Maturity Date: 03/01/2033

Traded 2/27 /09 5MM+ shares, last sale 60.00 to yield 12.752%.

Traded on 2/28/08 150K shares at $90.79, yielding 8.249%.

Traded on 11/6/07 100K shares at $102.566, yielding 7.152%.

February 27, 2009 (13.39)

The following was presented to me today. The source has proven to have a fairly decent track record of information.

1. 2010 Office Vacancy expected to be similar to 1992, nearing 18%.

2. 2008 YE Mean Cap Rate nearing 6.8%. I don’t think this has been adjusted for projected 2009 rents and vacancies.

3. Annual Percentage Change of SQ F Price decreased by 16.2% in North East.

4. CRE loans coming due in 2009 are $271 Billion.

5. 2009 projected CRE default rate for CMBS loans 8.8%.

6. Credit conditions not expected to change as economic downturn expected to be drawn out.

7. Unlike in the past, potential delinquencies can not be resolved via asset sales, since potential buyers do not exist. if credit restrictions ease, the spike-up could be less pronounced.

8. Fourth Quarter of 2008 showed an acceleration of deterioration.

9. Raising capital via debt or equity is tough, but pockets of possibilities exist. (did not elaborate) There are lenders who are well capitalized waiting for conditions to change.

10. Easy lending of the past will change permanently. No longer are pro-forma rents and increases being accepted. Vacancy rates if they don’t exist are being imputed. Property fundamentals are being totally reasessed.

11. Credit standards have tightened dramatically.

12. NOI is coming in less than projected and less than modeled by lenders.

13. LTV’s between 2Q05 and 3Q07 were around 71%. They were 62% at 2Q08. This is expected to continue a downward trend, and has not yet been updated. Yet, loan originations have been sparse.

14. Debt Service Coverage ratios have been decreasing since 2003. At 2Q08 stood at 1.36X. This link gives an explanation of DSC and its use

http://www.commercialbanc.com/commercial-loan-underwriting.html

JPM at Analyst Day on 2/26/09

“6% cap rate is not reasonable.

properties are not leasing at same rates.

cash flows are dropping

CRE is a revaluation of what these properties worth.

Still great real estate out there, but wont be worth what cap rates were.”

I missed notes and will wait for transcript on what they mentioned on lending.

BPO Properties on 2/10/09

I asked BPO Properties the following questions on their conference call. Tom Farley is also high level employee at Brookfield Properties and Brookfield Asset Management. I have been reading that Calgary is having some setbacks, and I was surprised that BPO sees things “business as usual.”

Q: Good afternoon. We have heard from those in the business that the fourth quarter of ’08 was the worst they’ve ever experienced. And some of those companies are greater than 50 years old. Have you seen that it way, although your results show differently? And how are the first six weeks of 2009 looking in that question?

A: Tom Farley – BPO Properties – CEO

It’s Tom Farley here. When you look at that time Canadian markets, we haven’t seen that dramatic of a negative impact in the fourth quarter. As I mentioned, our occupancy rates actually went up, and our overall occupancy for our portfolio was close to 99%. There’s no question that leasing demand — the pace of leasing demand has slowed down. Several tenants are not making substantive decisions or just taking a wait-and-see approach. I think that that’s typical in these times, but we haven’t seen those kinds of negative consequences — negative occurrences in Canada.

Q: Even the first six weeks of 2009, it’s business as usual?

A: Tom Farley – BPO Properties – CEO

Business as usual. As I mentioned, the pace of activity is down, but we haven’t seen those types of cracks.

February 24, 2009 (14.25)

BAM Earnings release notes, thoughts, etc.

From the Conference call. “A follow-up to a previous question on the IFRS value of the commercial property operations as it relates to Brookfield Properties specifically. I believe the current value is ascribed at about $1.8 million which would apply a roughly $9 per share value for BPO versus the current value in the marketplace which is approximately $6 per share.

You’ve clearly not taken any impairment charge on your carrying value of BPO. So I guess that implies that you think BPO is implicitly worth more than the current market price.”

Bruce Flatt – Brookfield Asset Management – CEO

”The underlying values that would come up would — yes — would translate into something that would be well in excess of the current market price.”

Comparing February 2009 BAM presentations to September 2008 presentations.

1. Throughout 2008 BAM claimed to have “over $95B of AUM” (Investor Day 9/16/08)

2. Renewable Energy had “over $13B AUM” in 9/08, now “+/- $12B.”

3. Infrastructure stayed the same.

4. Specialty Funds had “$6BB committed Capital” in 9/08, now “+/- $5B.”

5. Advisory Services had “Approx $26B in Total Assets” in 9/08, now “+/- $20B.”

6. Global Property had “over $40B AUM” in 9/08, now “+/- $35B.”

Perhaps there were reclassifications, and I did not include all.

As I read further I see the following:

 

 

Description 9/08 Value in Billions 2/09 Value in Billions
Office $26 $24
Retail 2 1
Development 7 5
Residential 4 4
Services 1 1
Specialty Funds 6 5
Advisory 26 18

Since 2003 has purchased 45.70M shares for $741M. Averages to $16.21 per share.

September 2008 wrote “generate +/-2B cash annually.” Feb 2009 writes, “Free Cash Flow +/-1.5B annually.”

Claims in Feb 2009 15% debt to capital at corporate level and 44% on affiliated. I need to test those numbers, using high/lows and pricing out preferreds rather than par.

Feb 2009 – properly identifies “solid credit ratings.” Need to watch this.

Wash DC CRE perspective

Washington Real Estate Investment Trust (WRE)

selected snips..

“Having said that, the good news is that the Washington region continues to add jobs, albeit not at the rate of the past five years. The unemployment rate is low at 4.7%; the overall vacancy rate is manageable at 10.5%; and we believe the Washington region will lead the nation in recovery as the newly appointed financial capital of the world, and as a major beneficiary of the financial stimulus plan.”

“In addition, we purchased $16 million of our convertible debt at a discount of 25%, reducing our exposure to 2011 refinancing and achieving an attractive return on investment.”

“This quarter, WRIT acquired 2445 M Street, a Class A office building with a two-level parking garage in downtown Washington D.C., for $181.4 million. 2445 M Street is located in the established West End neighborhood between Georgetown and the Central Business District. The property measures 290,000 square feet and is 100% leased to the Advisory Board Company, and Patton Boggs, LLP under long-term leases.

We have assumed the $101.9 million loan with an interest rate of 5.619%, and the remaining balance was funded with proceeds from the sales of Sullyfield Commerce Center and Earhart Building, and the balance from our credit lines. WRIT expects to achieve a first-year leverage yield of 6.7% on the cash basis and 7.2% on a GAAP basis. 2445 M Street is an excellent downtown asset that will provide WRIT a stable long-term cash flow.”

February 18, 2009 (14.50)         1540 Broadway NYC http://www.1540bway.com/
The note below discusses a potential sale in the $375M – $390M square foot range. On February 18, 2009 it was reported as follows:

Word on street is now this is being negotiated at the $360M to $365M range.

There has been debate in New York City CRE that prices are down 50% from the peak. The argument to this would be that sellers are distressed and prices are not showing true intrinsic value.

Another article in the WSJ mentioned, that a deal hasn’t closed, but a person familiar with the matter said CBRE Investors, the asset-management unit of CB Richard Ellis Group Inc., would pay as little as $355 million, a major drop in value.

“That’s a harsh price for a very well located building,” said Dan Fasulo, managing director of property-tracking firm Real Capital Analytics.

According to city records and loan-marketing documents, Mr. Macklowe attributed the value of the office building to over $950 million when he bought it in February 2007 as part of a $7 billion skyscraper spending spree. The tower’s 880,000 square feet of office space had sold in 2006 for $525 million.”

Yet, I would think if you have debt to refinance, you do not necessarily have the leisure to wait for stabilized markets and return to alleged intrinsic value.

With BAM, I think there is excess leverage. They have over $14B coming due in less than 3 years. Refinancing if possible, will require greater amounts of costs. greater covenants, more difficult terms and more skin in the game.

We have considered lower amounts available for refinance. This could be caused by reduced availability of funds as well as lower LTV’s. Also, higher cap rate assumptions by any lenders, and less proforma use of forward rents and so forth.

Non-recourse = BAM can theoretically walk away and stick the creditors with the office building if they don’t want to pay the loan on it anymore. Clever gimmick no?

If they do that they might have a tough time borrowing in the future though. At least cheaply. That’s the downside.

A creditor might rather have someone paying some sort of mortgage instead of getting stuck with another foreclosed empty office building. One of those “if you owe the bank $100 you’re in trouble but if you owe the bank $100 billion the bank is in trouble” deals.

BPO claims the following, “The majority of these facilities are attached to high-quality well-leased assets with solid debt service coverage levels and relatively low loan to value ratios. Approximately 40% loan to value or so on average with debt service coverage ratio approximating two times leaving as on solid footing to refinance these facilities. Our discussion with lenders to this point having very constructive and we believe that these maturities will be refinanced at or near current financing levels with reasonable pricing.”

If a bank can take over an asset they believe to be worth much more than current value, then maybe not such a great gimmick as you wrote. The whole world of CRE and Utilities was non-recourse. That is no longer the case. We are in a different ball game. If BAM were to lose an asset, one would think that there could be valuation impairment. BPO discussed Trizec and said, if worst case scenario they lost the asset. Here are some quotes from the recent CC..

“Looking past 2009, we have minimal maturities to deal with. And we will turn our attention to refinancing our 2011 maturities including the US Office Fund Mezzanine debt. Brookfield share the debt on the US office fund; approximately it’s $1.6 billion which is recourse only to the assets of the fund. It is our intention to repay this facility through a combination of new asset level financing and through asset sales, following on our efforts to increase the underlying cash flows of these assets through our leasing initiatives. We have been actively positioning these assets, some assets for sale commencing later this year. But we anticipate a more robust environment at 2010 for asset sales.”

“But I did want to go through one thing that is troubling us when it comes to our view of common share price. And I will taking through sort of a hypothetical situation and I will start by saying this is absolutely not our view. But let’s assume for a second that the US Office Fund and residential businesses go away and again this isn’t our view. At our closing common share price yesterday of $5.16 per share, this would mean that our remaining assets are trading at an implied cap rate of about 9.5%, based on last year’s net operating income. And 2009 NOI is projected to be even higher. This makes no sense to us. If you wanted to explore this further, I would encourage you to call Bryan Davis at some point and he can taking through our analysis on this situation.”

What if 2008 was peak ROI? In this environment, is a 9.5% cap rate absurd?

Lots of parts here.

Here is a note I put together on January 21, 2009

1540 Broadway in NYC was purchased in 2007 for $830M. It is 906,000 SF. It looks like it will sell for $375M and is set to close next month. This comes out to $390 SF. Macklowe building and now DB. This is in the heart of NYC Midtown West. My understanding is this is a prime location.

http://www.1540bway.com/

We recently heard of the potential of the deal falling through. Apparently that has been worked out and a contract is expected.

Here is an article from 1/6/09 on the building.

http://www.nypost.com/seven/01062009/business/deal_for_1540_bway_147352.htm

“Sources said a deal is looming to sell the office portion of the former Bertelsmann Building at 1540 Broadway – some 880,000 square feet – to an unidentified suitor, possibly by the end of the month.

Although no contract is signed yet, different sources valued the mostly cash deal at between $375-$450 a square foot – peanuts compared to what the property might have fetched in early 2008.

But Studley investment sale specialist Woody Heller, who is not involved at 1540 Broadway, noted, “If a deal is indeed concluded, while it would clearly reflect prices that are a dramatic departure from a short period ago, it will be very encouraging to see a transaction of this size completed in the current market.”

“Major office tenants include Viacom and several law firms. Retailer Forever 21 recently signed a lease to take over Vornado’s Virgin Megastore space. ”

Here are some details I have on 1540 Broadway NYC:

Class A building
Built in 1989
SF 889,092 – 906,000
Asking Rent $72.53
Vacancy 0.4%

Previously Midtown West had SF prices of $540 – $1045 per SF. This sale changes that bar. Perhaps this sets a precedent on CRE in Midtown West.

If < $400 is the new benchmark, consider Loan To Values for upcoming refinancings. I have a theory that CRE purchased between 2003 – 2005 is at best break even. Real Estate purchased 2006 – 2007 could have material devaluations.

Brookfield Properties increased their assets via purchases (Trizec for one) by $11B in 2006 and 2007. During the same period debt increased by $7B.

Some Information compiled from Brookfield Properties Annual Reports

 

Maintenance Capex Forward guidance of Capex from previous year AR % Fixed debt Average Interest Rate Total Assets Total Debt Total Equity Equity / Asset Ratio Portfolio Size in Square Feet in Millions
2007 $49M not disclosed 61% 6.65% $20,473 $12,125 $3,033 14.81% 73
2006 $25M not disclosed 56% 6.8% $19,314 $11,185 $3,067 15.88% 76
2005 $21M not disclosed 81% 6.5% 9 years $9,513 $5,216 $1,898 19.95% 48
2004 $26M not disclosed “primarily” 6.5% 12 years $8,491 $4,550 $2,027 23.87% 46
2003 $16M $6 – $10M “primarily” 6.6% 12 years $8,097 $4,537 $1,915 23.65% 46
2002 $16M $6 – $10M “primarily” 7.0% 10 years $8,329 $4,588 $2,093 25.13% 46
2001 $14M $6 – $10M 96% 7.0% $8,076 $4,606 $2,642 32.71% 45
2000 $12M $6M 91% 7.3% $8,624 $4,702 $1.787 20.72% 46

Here are some interesting and occasionally conflicting cap rate discussion by Brookfield Asset Management and Brookfield Properties. Notice how cap rate assumptions seem to jump around a bit.

Cap rate Assumptions by Brookfield Asset Management. A history of discussion by BAM and BPO.

At investor day, Bruce Flatt mentioned that he models using a 6.5% long term cap rate assumption. Ric Clark on the October 20, 2008 conference call mentioned he used a 6.5% to 7% cap rate to determine Loan to Values (LTV’s).

With that said, in Brascan 2001 AR on page 19 mentions, “The underlying value of our commercial properties is based on a 7.75% capitalization rate applied to estimated 2002 net operating income, prior to lease termination income and other property gains, which is projected to be $1,025 million.”

On Investor Day September 20, 2007 The following was written by BAM.

*Speculative building remains well under control.

* Demand for space remains strong

* Escalation in rental rates occurring in most markets.

* Cap rates will remain in LOW SINGLE DIGITS for as long as interest rates are benign and the projection is for higher rental rollovers.

February 2, 2009 (15.66)

BHS suggests BAM will backup rights offering – Quotes from CC.

“Looking forward to 2009, the Company plans to further strengthen its balance sheet with the previously announced $250 million proposed rights offering to its common stockholders of up to 10 million shares of 8% convertible preferred stock. Proceeds from the rights offering will be used for general corporate purposes, including repayment on the credit facilities and Brookfield asset management. Further details are provided in the Company’s year-end press release. “

Analyst asks, “Now, as it pertain to the rights offerings, I guess I’m kind of curious. It sounds like you guys are counting on that money to come in. I mean, when is that supposed to close and what happens if you don’t get enough people that participate at the 250 level?”

BHS responds, “ Well, in terms of closing, there’s obviously an entire process that we laid out in the press release, including proxy has to be reviewed by the SEC and then there has to be the mailing and the appropriate record dates and all those different things. So, to some extent, I couldn’t give you a specific time frame but the goal would be the end of the first quarter or the beginning part of the second quarter.

If you went to the press release on the second page, the second last paragraph where we say that Brookfield Asset Management indicates the intention to exercise in full its subscription rights as well as any oversubscription rights to which it may be entitled.”

Analyst responds, “Okay. So you mean they are going to complete anything that’s not done by other investors?”

BHS responds, “That’s what they indicated so far.”

Analyst says, “Okay. So it’s just basically like a recap then. They would swap the debt for equity?”

BHS responds, “ It’s two separate things. They would participate within the rights offering. It’s just our intention that we would utilize that rights offering to pay general corporate purposes including paying down that line.”

Another Analyst asks, “. I guess just on the rights offering, thinking from a logical point of view. If you were BAM, why would you pay more for assets actually rather than if you took your line away the lender of last resort and pick up the assets cheaper? Trying to think through this out loud and just wondering if you could give me color on that, why would that benefit them?

If none of the other shareholders actually went had the offering or subscribed for the rights offering, did BAM, have they indicated they would take the entire 250 million?”

BHS responds, “I don’t think we could speak specifically for BAM but I will say obviously they have been a very supportive major shareholder along the way supported by the BAM line and such.

As we mentioned, there is very specific language within the press release. I won’t read it, but they had indicated — I wont read it again, but there is language within the press release that describes what their intention would be.”

Analyst asks ” I know for part of it , but I was just — scenario where they are the only ones if they would just flip the entire 250?”

BHS responds, “I think they indicated they would oversubscribe as well.”

We asked Brookfield Homes the following questions, without response on several occasions.

“I was hoping to hear back from you on my questions from the other day. Please let me know when I will be hearing back. Here are my questions.

1. How much was owed to Brookfield Asset Management on 12/31/08? How much is now owed?

2. Are there any other related or controlled entities of BAM which have debt with BHS?

3. We discussed the rights offering. I am familiar with the press release indicating that the proceeds will be used to reduce debt and general corporate purposes. How much of the $250M would be used to pay back BAM. Would it be all of it, a substantial part of it? Please quantify your expectations if you could.

4. I had asked a hypothetical question in regards to the rights offering. Even though the intended purpose of the proceeds was to pay down debt and general corporate purposes. If BHS happened to see an unusually excellent opportunity in buying a distressed situation for pennies on the dollar, could the rights offerings proceeds ever be used for something like that, since it is not typically “general corporate purposes.”

I hope to hear from you soon. I hope I am acknowledged on conference calls in the future, as my questions above would have been asked, had BHS not ignored me in the Que.”

 

Xstrata PLC and BAM

“DBRS has today placed the ratings for Xstrata plc and its related entities (Xstrata or the Company) Under Review with Developing Implications following the Company’s announcement that it intends to (1) acquire Glencore International AG’s (Glencore) Prodeco thermal coal operations in Colombia for approximately $2 billion and (2) execute a rights issue, which is expected to raise approximately $5.9 billion to fully finance the coal acquisition, with the remainder to be used to pay down debt. Glencore (the owner of approximately 34.5% of Xstrata) has provided irrevocable undertakings to take up its rights in full and Xstrata has arranged for the remainder of the rights issue to be fully underwritten.”

2008 BAM AR indicates a $331M debenture gain with Xstrata. I don’t recall how that affected eps. Off the cuff sounds like earnings without sustainability or any cash impact. BAM seems to have much of these non cash converted debt earnings (ie Norbord, Fraser).

2007 Xstrata AR said, “In 2007, all of the remaining outstanding 3.95% convertible bonds due in 2010 were converted into Xstrata shares by 4 April, resulting in a $202 million reduction in debt. A further tranche of $375 million of 4% convertible bonds due in 2017 remain outstanding and relate to the convertible bond issued to Brookfield in part payment for a 20% stake in Falconbridge in August 2005.”

2006 BAM AR Page 39 discusses Financial Assets, market value of $2.1B and cost of $1.7B. Includes Xstrata Convertibles of $375M. 13.6M shares convertible at £15.27. Claims to have “substantially higher value than our book value.”
Fitch affirms Transelec’s IDR at ‘BBB-

“Feb 2 – Fitch Ratings has affirmed the following ratings for Transelec
S.A. (Transelec):

–Foreign currency Issuer Default Rating (IDR) at ‘BBB-‘;
–Local currency IDR at ‘BBB-‘;
–Yankee bonds due 2011 at ‘BBB-‘;
–National scale rating at ‘A(Chl)’;
–Local bonds series B,C,D at ‘A(Chl)’.

The Rating Outlook is Stable.

Transelec’s investment grade ratings reflect the company’s low business risk profile as an electric transmission utility. The company’s revenues and cash
flow are extremely stable and are concentrated in financially solid generation companies with investment grade ratings. Most of its revenues are under
long-term contracts (approximately 60%), with the remaining coming from regulated tariffs. As contract revenues roll-off they will be replaced with
regulated tariffs. The regulatory environment is consolidated and provides certainty in the determination of regulated transmission revenues and returns
on future investments. The majority of the revenues are not exposed to market based risk such as price and volume. The ratings are constrained by the
company’s high leverage.”

Brookfield Renewable Power Announces C$300 Million Notes Issue

Brookfield Renewable Power Inc. (“Brookfield Renewable”) today announced an offering of C$300 million of medium-term notes due February 3, 2012.

The notes will bear interest at an annual rate of 8.75% and will be issued pursuant to Brookfield Renewable’s Short Form Base Shelf Prospectus dated July 28, 2008 and a related Prospectus Supplement to be filed before February 3, 2009. The offering is expected to close on February 3, 2009, subject to customary closing conditions.

Brookfield Renewable intends to use the net proceeds of the offering to repay indebtedness and for general corporate purposes.

The notes have been assigned a rating of BBB (high) with a Stable trend by Dominion Bond Rating Service Limited, a rating of BBB with a Stable outlook by Standard & Poor’s Rating Services, and BBB with a Stable outlook by Fitch Ratings Ltd.

The notes are being offered through a syndicate of agents led by CIBC World Markets Inc. and Scotia Capital Inc.

“Fitch Ratings-New York-02 February 2009: Fitch Ratings has assigned a ‘BBB’ rating to Brookfield Renewable Power’s (BRP; current Fitch Issuer Default Rating of ‘BBB-‘) issuance of CAN$300 million medium-term notes due Feb. 3, 2012. This issue will rank equally with BRP’s existing senior unsecured obligations. The proceeds of the issuance will be used to repay indebtedness and for general corporate purposes. The Rating Outlook is Stable.

BRP’s ratings reflect the company’s stable cash flow as a result of hedging, the low business risk of its unique portfolio of largely hydroelectric generation assets, limited debt at the parent company level, and strong parent-level credit metrics. Approximately 50% of BRP’s generation is hedged under long-term power purchase agreements with an average life of more than 10 years. Another portion of generation is hedged under fixed-price financial contracts up to three years forward. The Stable Outlook reflects Fitch’s expectation that credit metrics will remain adequate for the current rating category. While consolidated leverage is relatively high for the ratings category, BRP’s current cash flow credit measures (such as cash flow interest coverage and debt to funds from operations) are strong and supportive of the ratings level even under stress scenarios.

BRP is a holding company for electricity assets, primarily located in the Northeast (Quebec, Ontario, New England, New York and PJM-Interconnection). BRP also owns a large portfolio of hydro plants in Brazil. BRP is owned by parent Brookfield Asset Management (rated ‘BBB+’ with a Stable Rating Outlook by Fitch).”

DBRS Rates Brookfield Renewable Power Unsecured Notes at BBB (high)

DBRS has today assigned a rating of BBB (high) with a Stable trend to Brookfield Renewable Power Inc.’s (BRP) prospective issue $300 million of 8.75% Medium Term Notes (unsecured) due February 3, 2012 (the Notes). The Notes are expected to close on February 3, 2009.

The Notes are being offered pursuant to a Prospectus Supplement to BRP’s Short Form Base Shelf Prospectus dated July 28, 2008, and will rank equally with all other unsecured indebtedness of BRP which is not subordinated. Proceeds from the offering will be used to repay indebtedness and for general corporate purposes.

DBRS notes that on September 8, 2008, a BBB (high) rating was assigned to a prospective BRP issue of up to $250 million of Medium Term Notes that did not close. The current up-sized Notes issue takes the place of that offering.

Norbord reports and discusses BAM in CC

In the CC they discussed that the $240M CDN rights offering was essentially fully paid for (at least most of it) by BAM. They took that money and paid back BAM. I forget the amount, but I think in the $90M range (I could be wrong.)

They amended their credit line with BAM and brought it down to $50M from $100M. They stated that nothing is currently owed on the line.

They commented on the CC, “We have the support of our major shareholder.”

They did not supply a balance sheet with the 27 page release.

Western Forest Products has a rights offering:

“The shares acquired by Tricap include an aggregate of 236,500,018 shares of Western that are beneficially owned by Brookfield Asset Management Inc.
(“Brookfield Asset Management”) and its affiliates and associates on a consolidated basis (“Brookfield”). Following the rights offering, Brookfield
beneficially owns 49,124,547 common shares and 300,028,286 non-voting shares representing approximately 38% and 89% of the issued and outstanding common
shares and non-voting shares of Western.

Tricap holds the shares for investment purposes. Tricap will continue to review its investment alternatives and may acquire additional shares of
Western or may, subject to applicable securities laws, sell the shares it now holds in the open market or in privately negotiated transactions to one or
more persons.

Tricap acquired the shares pursuant to the exercise of rights issued by Western in connection with a rights offering made by Western pursuant to a
prospectus dated December 1, 2008. Although Tricap entered into a standby agreement with Western dated December 1, 2008 pursuant to which Tricap had
agreed to purchase all shares which were not subscribed for under the rights offering, due to the exercise of the additional subscription privilege by rightholders, including Tricap, it was not necessary for Tricap to purchase shares pursuant to the terms of the standby purchase agreement.

Tricap will exercise control and direction over the shares acquired pursuant to the terms of a co-investment agreement entered into between Tricap Management Limited and each of the investors in the Tricap Restructuring Fund.”

Longview sold some tracts via auction for $682 per Acre:

http://wenatcheeworld.com/article/20090131/NEWS04/701319965

“Records show Robert and Nancy Johnson, owners of the Enzian Inn in Leavenworth, bought two of the tracts, grouped together as 1,224 acres, for $835,000.

The tracts are near the Alpine Lakes Wilderness, also near Leavenworth. Robert Johnson said the family already owned property nearby and bought the tracts to maintain the property’s aesthetic value.

He says he has no immediate plans for the property — aside from hikes and family enjoyment.

Monitor resident George Reinhart bought an approximately 85-acre tract near Derby Canyon near Leavenworth. The sale became official Jan. 25.

Both Reinhart’s and the Johnson’s tracts are in Chelan County.

Longview Timberlands spokesman Mike Volk said a third Chelan County tract — approximately 648 acres, 12 miles south of Leavenworth off Highway 97 and Ingalls Road — also sold.

A county assessor’s official says Longview Timberlands still appears as the tract’s owner. He said the latest sale documents may not yet have reached the office for recording.

In Okanogan County, the Confederated Tribes of the Colville Reservation bought an approximately 160-acre tract near Haden Creek County Road and Lyman Lakes-Moses Mountain Road, some 18 miles east of Omak.

A tribal official didn’t immediately return a phone message for comment. The property lies within the boundaries of the Colville reservation, according to information in the auction catalog published by Portland-based auctioneer Realty Marketing Northwest.

The November auction included commercial and remote properties in Washington, Oregon, Idaho and California.

Longview Fibre operated Chelan County’s last remaining sawmill in the town of Winton, north of Leavenworth. The company closed the mill in December 2006.

“Anytime you sell anything, it’s successful,” Volk said in a phone interview. “Obviously, we’d have liked to sell more properties.”

Volk said the company is considering another auction sale this year.”

BAM converts Katahdin to Acadian

“Acadian Timber Income Fund (“Acadian” or the “Fund”) (TSX:ADN.UN – News) today reported that Brookfield Asset Management Inc. together with its affiliates (“Brookfield”), has converted its 4,507,030 Class B Interests of Katahdin Forest Management LLC (“KFM LLC”) into Units of Acadian on February 3, 2009 on a one-for-one basis.

Subsequent to this conversion, the Fund has 16,571,453 Units issued and outstanding, of which 7,513,262 or 45.3% are held by Brookfield. Brookfield’s ownership of Acadian on a fully diluted basis remains unchanged.

Acadian Timber Income Fund is a leading supplier of primary forest products in Eastern Canada and the Northeastern U.S. With a total of 2.4 million acres of land under management, Acadian is the second largest timberland operator in New Brunswick and Maine.

Acadian owns and manages approximately 1.1 million acres of freehold timberlands in New Brunswick and Maine, and provides management services relating to approximately 1.3 million acres of Crown licensed timberlands. Acadian also owns and operates a forest nursery in Second Falls, New Brunswick. Acadian’s products include softwood and hardwood sawlogs, pulpwood and biomass by-products, sold to over 110 regional customers.

Acadian’s units are listed for trading on the Toronto Stock Exchange under the symbol ADN.UN.”

January 29, 2009 (16.25)

BHS BOD Fallon resigns

Brookfield Homes Corporation is disclosing that Joan H. Fallon resigned from the Board of Directors of the company effective January 26, 2009.

Fraser Papers and Brookfield Paper LLC

Fraser Papers Inc. (“Fraser Papers” or the “Company”) (TSX:FPS – News) announced today that it has agreed to sell approximately 10,500 tons of specialty printing, packaging and ground wood papers to Brookfield Paper LLC (“BPLLC”) for proceeds of approximately $11.7 million, which will be used to repay amounts outstanding under the Company’s working capital facility. In addition, the Company has agreed to supply paper to BPLLC through July 31, 2009, at market prices. The net proceeds to Fraser Papers reflect a customary merchant’s discount of 3.5% to end user selling prices. As part of the transaction, Fraser Papers will provide sales and administrative support to BPLLC. BPLLC is a wholly-owned subsidiary of Brookfield Asset Management Inc. (“Brookfield”) (TSX:BAM – News; NYSE:BAM – News; AEX:BAMA), the Company’s majority shareholder

January 20, 2009 (14.66)

BAM bonds are trading at greater than 17% yields

Issue: BNN.GH Description: BRASCAN CORPORATION Coupon Rate: 5.750 Maturity Date: 03/01/2010

These bonds are due to mature in 14 months. They last traded until today in May of 2008 then were yielding 5.6%.

So far today they have traded 5MM+ bonds, with a price of $89. and a yield of 17.06%.

We now have 3 Brookfield Asset Management bonds trading at 1500+bps over 10 year treasuries. This is typical of junk bonds and not of currently A- rated Brookfield Asset Management. You have 2010’s, 2012’s and 2017’s yielding between 17% to 21%. I think the bonds are pricing a potential expectation of ratings downgrade.

January 17, 2009 (15.92)

Multiplex funds getting destroyed

Multiplex Acumen Property Fund

52 week high 1.19, 52 week low .07 current price .10

Multiplex European Property Fund

52 week high 0.84, 52 week low .11 current price .11

January 16, 2009 (15.92)

BAM looking for money summary

Don’t know if I missed anything. Here are the open items I have on BAM looking for funds.

1. Brascan Residential Properties S.A. R$200M rights offering.

2. BAM preferred filing December 2008 $1.0B

3. Brookfield Renewable , August 2008 Shelf Filing $750M

4. Brookfield Homes December 2008, $250M

5. Norbord December 2008 $240M ( I think this may have been partially completed via BAM subscribing to these).

January 15, 2009 (15.97)

Brascan Residential SA has a R$200M Rights Offering

“Rio de Janeiro, January 15, 2009 – Brascan Residential Properties S.A. (“Brascan” – Bovespa: BISA3), one of the largest integrated developers in Brazil, announced today that its Board of Directors has approved a rights issue of 100 million new common shares, within the limits of the authorized capital established by the EGM of November 24th, 2008, providing a capital increase of R$ 200 million.”

”The issue price of the offering, R$2.00 per share, was established with reference to the market price. In view of the high volatility currently prevailing in the Brazilian stock market, and in order to provide an incentive for minority shareholders to subscribe their rights, Brascan decided to issue the shares at a discount to market. Relative to the volume weighted average closing price of BISA3 in the last thirty business days (from Nov. 28, 2008 to Jan. 14, 2009), the price of R$2,00 represents a discount of approximately 12%.”

”In addition, one of the controlling shareholders, Brookfield Asset Management, an international asset management firm with approximately US$90 billion under management (of which around US$38 billion is in real estate assets), has committed to subscribe, through Brascan Brasil Ltda, any rights not taken up by the minority shareholders, thereby ensuring full subscription of the R$200 million offering. “This underlines the controlling shareholders’ commitment to the Brazilian real estate business, and their determination to strengthen Brascan’s position as one of the leading companies in the ndustry,” declared Nicholas Reade, Brascan’s CEO.”

“The real estate market will continue to offer opportunities, but the recent international crisis has resulted in a shortening of loan maturities, which is not compatible with the company’s strategy to have long-term financing with staggered maturities over the entire business cycle. In response, we are raising capital to strengthen our financial position and provide us with a competitive advantage in the market,” concluded Reade.”

January 14, 2009 (15.88)

BAM bonds are not priced as high grade

BAM has two bonds that trade every few days. The 2012’s yielding 20.6% and 2017’s have regained some price to yield 18.0%. Both have been fairly active lately. At least active for BAM.

The 10 year is yielding 2.20%. High grade spreads are 557.0 and speculative grade spreads are 1682.0 bps.

Here are some of today’s issues as an example.

Campbell Soup (A ) will sell $300M of 10-yr notes at an expected 237.5 to 250 basis points.

Pepsi Bottling will sell $750M of 10-yr notes at an expected 300 to 312.5 bps.

RR Donnelly (Baa2) went off at 11.25% today on 10 years.

BAM bonds are trading as speculative grade. Yet, BAM is currently rated A- by S&P. I think the bonds are pricing a potential expectation of ratings downgrade.

January 7, 2009 (16.99)

BAM Bonds

For whatever reason, BAM bonds do NOT seem to be trading as though they are an A- rated company. A- companies do not typically have bonds coming due in 3 and 8 years trading at Yields of 20+%. Perhaps it is merely the illiquidity of the bonds and forced hedge fund selling.

1. BNN.GF cusip 10549PAE1 Maturity June 2012. Coupon 7.125%.

Traded 1/7/09 Over 10MM shares, last trade 67.75 to yield 20.73%.

Traded 12/30/08 2.5M shares at $60 to yield 25.101%.

This bond traded in October 2008 at 74 yielding 10.51%, July 2008 at 99.512 yielding 7.268%, in May 2008 at 103.7 with a yield of 6.086%.

2. BAM.GA Description: BROOKFIELD ASSET MANAGEMENT INC Coupon Rate: 5.800 Maturity Date: 04/25/2017.
Traded 1/6/09 3MM shares, last trade 40.75 to yield 21.31%.
Traded on 12/30/08 1.2M shares at $40, yielding 21.66%.

Traded on 10/30/08 65,000 shares at $74, yielding 10.505%. Last trade before that, I forget the date was 87.17.

December 23, 2008 (14.12)

Updated Raw Thesis:

This is a real rough draft for starters. This thesis has evolved slightly since November 2008.

(1. ) I think they are over leveraged and that increased credit costs, costs of capital, lower loan to values, could start stressing BAM.

(2.) BAM has quite a few Joint Ventures or minority interests. On projects they have co-investors. Both Co-Investor and BAM commit capital. I would watch if JV’s start failing to meet capital contribution requirements.

(3.) Incestual sales and potentially unusual uses of related parties. These include related party sales. Related party fundings, which include potential below market loans. Related party dividends, which are not necessarily in the best interest of the entity distributing dividends. Potential use of subsidiaries as a funding source, which might not be considered arms-length in nature.

(4.) Slowdown in Alberta CN real estate. (BPO). I previously had this as potential. Slowdown in Calgary.

(5.) High occupancy rates in metro areas deteriorating because of reliance on financial service industry.

(6.) Previous access to low cost capital with excess cash based on NAV, no longer available to BAM.

(7.) Industry credit tightness, and BAM’s high leverage, could cause stress. Noting that $14 – $18B comes due on or before 2011. BAM has $32B of total debt.

(8.) Lower values of assets, which were bought at potentially elevated prices, with concerns that loans that are no longer available to such assets. This potential lack of credit is not just industry specific, but what I believe to be company specific.

(9.) Funds that BAM manage are not performing within expectations. These include Crystal River, Some Hyperions, Brascan, Multiplex, Brookfield Properties (projected) and Brookfield Homes (projected).

10.) Previous business conditions with wind at tail no longer exist. Closer eye on Corporate responsibility.

Multiplex Funds have crashed:

These BAM managed funds have crashed. I only listed the Multiplex Funds that have crashed, and not any of the other investments that Brookfield spun-off or manages that have crashed
MULTIPLEX ACUMEN PROPERTY FUND (MPF) at 12/31/07 was priced at $1.25. It closed at $0.29 on 10/31/08, $0.20 on 11/24/08 and $0.10 on 12/22/08.

MULTIPLEX EUROPEAN PROPERTY FUND (MUE)at 12/31/07 was priced at $0.90. It closed at $0.27 on 10/31/08, $0.20 on 11/24/08 and $0.17 on 12/22/08.

These funds have not dropped in relation to the market. These funds have dropped YTD 92% and 81% respectively.

My disagreement with the Multiplex investment is that BAM has possibly taken on a type of leverage that could make their operations less secure than it once was. Make no mistake about it, BAM is leveraged in a way they probably now wish they weren’t. They are trying to deleverage. They were a big borrower and buyer during a time period that the same asset classes have depreciated in value. These would include timberlands and commercial real estate, and a major business in Australia (Multiplex).

On December 3, 2008, Brookfield Investments sold Canary Wharf to a division of Multiplex.

Again, because of huge amounts of debt coming due by BAM over the next 3 years, continued leverage is essential. Question becomes will borrowing be available? If so, at what costs? What will new paradigm of LTV be?” Brookfield found a buyer on December 3, 2008 for their 15% interest in Canary Wharf. The buyer of course was a related entity. I think the conversion of the deal ends up being $601.1M USD. I think most analysts had Canary Wharf valued in the $1B range.

I guess in time we will find out why they sold to a related buyer. Did they need liquidity?

I am not so sure how easy it will be for Multiplex to refinance their recently extended debt. Then again, I was not projecting the sale of some Multiplex assets to Brookfield Infrastructure Partners.

On December 17, 2008, Bloomberg News reported the following.

Brookfield’s Multiplex Acumen Fund May Breach Debt Agreements

Dec. 17 (Bloomberg) — Multiplex Acumen Property Fund, a A$342 million ($238 million) money manager controlled by Brookfield Asset Management Inc.’s Australian unit, said sliding property values may force it to breach debt covenants on Dec. 31.

The fund started its yearly review with lenders and would have 90 days to rectify any breach, Multiplex Acumen said today in a statement to the Australian stock exchange.

“The deterioration in the asset value of a number of the fund’s underlying investments, together with a sector-wide reduction in distribution income, is expected to have a negative impact on the net tangible assets,” Multiplex Acumen said.

Brookfield, the Toronto-based manager of $90 billion in assets including real estate, paid A$5.7 billion last year to acquire Multiplex Group. Brookfield last month said it agreed to refinance $800 million of Australia-related debt.

Credit Suisse, a long time bull on BAM commented the following on 12/17/08.

A. Potential breach of covenants is a minor near-term negative for BAM. CS does not believe that BAM has significant exposure to the fund.

B. The poor market performance for the related funds presents “significant restructuring opportunities.”

C. Concern over potential cash funding needs for some of the funds and concern over BAM’s ability to raise new money for asset management because of poor performance.

D. Historically CS claims that BAM does well in these funds. I say, historically in depressed economic conditions BAM did not have the excess leverage and pending increases in costs of capital as in the past.

Brookfield Homes to issue preferred stock

BHS which is down 72% this year (15.80 to 4.50) is going to try and offer to the public, preferred shares for $250M. If they are able to do this, it would be yet another major opportunistic coup for Brookfield Asset Management. The use of proceeds will be used to pay back Brookfield Asset Management unsecured debt.

“Assuming full participation, the proceeds from the rights offering are expected to be $250,000,000, before deducting estimated expenses of $ relating to the rights offering. The proceeds from the rights offering will be used for general corporate purposes, including repayment on the credit facility of an affiliate of our largest beneficial stockholder, Brookfield Asset Management Inc.”
BAM seems to be getting some awesome prices IMO on the recent sales of Longview, Canary Wharf, Pingston and Prince Wind. Of course related parties bought all of these parties.
CFO of BHS is Craig Laurie. He has a nice track record of generating funds in creative ways. If you recall he was previously with now delisted Crystal River. Another BAM managed fund that crashed and burned. If you recall, you called Crystal River as “strong” in the beginning of the year.

Craig Laurie was quoted in Brascan 2001 Annual Report. “We strengthened our financial position during the year with the completion of several major initiatives, including the issue of $450m of term notes and $375m of preferred securities.” Craig Laurie 2001AR.
Not only has BAM created liquidity from sales of assets at what I consider great prices to RELATED COMPANIES for Longview, Canary Wharf, Pingston and Prince Wind.

But they also are looking to raise HALF A BILLION DOLLARS or so, via the rights offerings of Norbord and now BHS.

December 18, 2008 (15.11)

SL Green Notes of 12/8/08 Conference Call

1. “The concerns we highlighted last year at the Investor Meeting had begun to evidence themselves as illiquidity, sublets, falling rents and increasing cap rates now define the market that we operate in on a day-to-day basis.”

2. “It’s a market that tests ones resolve and shocks us regularly with new accounts of incredibly rapid shifts of fortunes, and events. It’s a market that will be unmerciful to those companies that have not prepared themselves for this moment or that are in markets that are going to fall too far for too long, but will reward those who have a feasible plan to meet the challenges confronting us today and to capitalize on the opportunities that will appear over the next 24 to 36 months.”

3. “We also took what was previously an unencumbered asset at 28 West 44th Street and went ahead and mortgaged that asset, which provided $125 million of additional liquidity. So, $410 million of new financings which netted us $160 million of new liquidity took care of all of our remaining maturities for 2008. But I think more importantly demonstrated that even in a challenging environment where there is debt capital available it does make its way into the New York market and does follow long-term credit leases.”

4. “More importantly there is a very, very big difference between an undrawn credit facility and an available credit facility because, of course, you need to demonstrate that you’re in covenanting compliance after drawing down all of your funds, and that’s, of course, dependent upon what type of covenant package you have.”

5. “Steve spoke earlier in welcoming everyone about the city, its resiliency, and his long-term views and the company’s long-term views about what we still believe today is the best commercial market. Over the long run it’s obviously going through serious, painful contraction right now.”

6. “I think looking forward there’s no construction on the horizon that’s yet to be calculated in everybody’s availability rates. Consequently when you see a 12% anticipated vacancy in 2010 that’s driven primarily by anticipated sublease space from our perspective we think it’s going to land somewhere between 10% and 12%.”

7. “if you go back in time to ’90/’91 where the market peaked at 17% availability that was a point in time driven by tremendous new construction and oversupply. And also to give a little bit of perspective the highest amount, proportionate share of sublease space ever to come onto the market relative to overall availability was 45% of the overall availability rates. So, I think we expect the availability rate in sublease to double over the next year, year and a half, and then at that point it will trail off when growth comes back into the market.”

8. “..the worst credit environment that we’ve seen in 30 years and probably more likely 80 years…”

9. “…those are probably the more challenging to refinance in today’s market, we have roughly $650 million of corporate obligations that come due over the next three years, and we have roughly $990 million of secured financings that come due over the next three years. So, how are we going to deal with those — how are we going to deal with those pending maturities assuming that the credit markets don’t come back over the next three years?” “…”So, for those corporate credit obligations, we have $858 million of cash on hand to address those. And in fact, as we’ve mentioned before, the $282 million of the 2010 notes which is a $930 million balance, we’ve already started to chip away at those obligations, so $225 million of cash on hand in excess of the corporate obligations that come due over the next three-year period.”

10. “We are cognizant of the fact that the credit markets are virtually shut down.”

Boston Properties Notes of 10/29/08 Conference Call

1. “At the moment, many of the life insurance company lenders have moved to the sidelines, when they are presented with new, secured financing opportunities. They just can’t understand or rationalize pricing. So the real estate industry finds itself with very limited access to long-term funding, though this is clearly not just a real estate related industry problem.”

2. “This is Mort Zuckerman speaking. Well, we have been in a period of extraordinary turmoil, really unprecedented in anybody’s lifetime on this telephone call, and probably the most dramatic financial collapse, or at least collapse of wealth the history of this country. I would say that the financial collapse in this period of time is and will be greater than what happened during the Great Depression, but the actual decline in the real economy, the Main Street part of the economy in my judgment will be considerably less, for all kinds of reasons. I’ll just mention a couple of them. One is that, we forget in that 1929 when the market crashed, nothing really happened until the beginning of 1933, when in March FDR became the President, and things like Federal Deposit insurance and Social Security all happened in 1934 and 1935, and that’s what began to improve the economy, but in that interim period 40% of America’s banks failed and we had a 1/3 decline in the money supply, which turned to what could have been a serious recession into a major depression.”

3. “Having said all of that, it does seem to me that we have not yet fully experienced what the decline will be in the Main Street or in the real economy, as a result of what has happened in the world of finance, because we did not have the kind of total freeze-up of the credit system any time since the end of World War II that is comparable to what has been going on today and continues. As you heard Doug and Mike describe, we were really very cautious in our financing, and we’re fortunate to have decided to take advantage of the real estate values in the commercial side in the first six months of 2007 and the last six months of 2006, and to do some refinancing, and to do this wonderful financing on August 19 of this year, frankly because we had made a policy that we would try and raise money when we could raise it and not when we needed it. And who knew in September the entire financial world would freeze up,. But we have had an extraordinary freeze in the credit system, and what is going to take considerable time to recover in that world, and in the business world in general, is a breakdown of confidence, which has really been extraordinary. There is a wonderful story that was told of an economist who was walking by and he sees a $100.00 bill on the ground, and his friend said to him as he walked by, he said why don’t you pick it up, he said, well, if it was still there, it probably wasn’t worth anything since nobody else picked it up. All of that goes to the point that credit comes out of the latin word [cridare], which means to believe, and people have stopped believing.”

4. “And of course, the fundamental advantage that we have we believe embedded in our strategy has been repeated so many times, is we do believe that having the highest quality buildings in the markets that we are in really is a help. These are all supply constrained markets. If you look in New York alone, it is amazing and really stunning how the supply constraint is going to be demonstrated. Because in Midtown, basically you virtually have no space coming out over the next four years. At the most there will be two buildings, one of which will be ours, and we’re looking at, therefore, a situation which there is not going to be a lot of additional supply coming on the markets, particularly at the highest end of the markets.”

5. “We really, we sold a lot of buildings, as you know, almost $4.3 billion worth the last half of 2006, first half of 2007. There isn’t a building that we own at this stage of the game that we really sort of wouldn’t want to hold for the longer term. So we’re going to look to whatever it takes to maintain the ownership of these buildings. We think, unless we get a very, very attractive offer, which we certainly would be open to, at least on a partnership basis, I don’t think we want to sell any of our buildings, I think we’re just going to work with that assumption.”

6. “The good news is that you can take a number of major buildings that we have, where the financing is in very low percentages in relation to value, and when I say low, I’m talking about 25%, 30%, 35%. So you have all kinds of chances if that is the easiest and most cost efficient way to raise additional money, we would look at that. We would prefer to do that it that way quite frankly. We don’t want to dilute the equity in the Company, we don’t want to dilute the equity in our buildings, because we think we have a fabulous portfolio of assets, that over time are going to show us tremendous profits over and above where they are doing now, and we want to be able to maintain these.”

7. “We don’t know what is going to happen over the next year or two in terms of what sourcing in terms of money and funding and financing will be available. If you can tell us that we would be very happy to respond it to, but I don’t think anybody really can know. We’re in the very first innings of what has been an extraordinarily tumultuous and unprecedented time in the world of finance, so we are where we are, and we’ll just have to wait and see. It’s a going to settle down. It will take, in my judgment, a few more months before it settles down, and then we’ll see what the best option.”

8. “I would say that the strongest market is Boston, followed by Washington, D.C., followed by San Francisco, and followed by New York. If you’re talking about the suburban markets, the Boston markets are clearly the strongest, Cambridge and the Waltham market, followed by northern Virginia in the Reston marketplace, not the overall market, and then followed by the greater Peninsula. Just because we haven’t talked about it, we’ve actually signed 70,000 square feet of new leases in our Mountain View properties down in Silicon Valley in the last two or three days. So, there is activity in the suburban markets that people really aren’t talking about and people aren’t reading about. So, that would be my quick and dirty viewpoint.”

Forest City Enterprises Notes of 12/10/08 Conference Call

1. “Let me begin by saying that I’ve been in our business for 42 years. During that time we’ve been through a lot as a Company including some very challenging times. But I must confess that I have never experienced anything quite like this. As you have heard us say before, we believe conditions will worsen before they get better. We have also heard from a number of investors that we’re more pessimistic than some of our peers. But frankly this is the way we see it and this is how we’ve planned. It’s all about ensuring survival and anyone who is not doing anything possible to deal with that fact isn’t being realistic. When Bob and (Mike Lonswick) came back from the recent (Mayreed) Annual Convention two weeks ago, this was clearly the tone that they heard almost to a person.”

2. “The significant disruption in the debt capital markets has increased investors focused on near term debt maturity. It’s important for me to emphasis we closed on more than $1.9 billion in project loans through the third quarter and closed on an additional $100 million since the end of the quarter.”

3. “On the permanent financing side, smaller loans are a little bit easier. There’s a few people you can talk to, but loans over $100 million, very difficult. So it’s a challenge. There aren’t a lot of players out there. People are, you heard on our call, playing defense and keeping liquidity.”

December 15, 2008 (13.67) Reading some old annual reports

Some Information compiled from Brookfield Properties Annual Reports

Maintenance Capex Forward guidance of Capex from previous year AR % Fixed debt Average Interest Rate Total Assets Total Debt Total Equity Equity / Asset Ratio Portfolio Size in Square Feet in Millions
2007 $49M not disclosed 61% 6.65% $20,473 $12,125 $3,033 14.81% 73
2006 $25M not disclosed 56% 6.8% $19,314 $11,185 $3,067 15.88% 76
2005 $21M not disclosed 81% 6.5% 9 years $9,513 $5,216 $1,898 19.95% 48
2004 $26M not disclosed “primarily” 6.5% 12 years $8,491 $4,550 $2,027 23.87% 46
2003 $16M $6 – $10M “primarily” 6.6% 12 years $8,097 $4,537 $1,915 23.65% 46
2002 $16M $6 – $10M “primarily” 7.0% 10 years $8,329 $4,588 $2,093 25.13% 46
2001 $14M $6 – $10M 96% 7.0% $8,076 $4,606 $2,642 32.71% 45
2000 $12M $6M 91% 7.3% $8,624 $4,702 $1.787 20.72% 46

 

Brascan 2001 Annual Report

“Brascan and its operating businesses endeavor to maintain sufficient financial liquidity at all times in order to participate in attractive investment opportunities as they arise, as well as to withstand sudden adverse changes in economic circumstances.”

“We finance our operations through diversified sources of capital. “Attractive low-risk financial leverage for common shares is achieved through the use of property specific mortgages that have no recourse to Brascan and the issuance of low-rate permanent non-participating securities such as preferred shares.”

Brookfield Properties 2003 Annual Report

“Debt Management Strategy from Brookfield Properties 2003 Annual Report

• Maintain debt to market capitalization of 50% or less.
• Move toward long-term goal of 95% non-recourse debt.
• Maintain interest expense coverage of 2.3x or greater.
• Match the duration of our commercial debt portfolio with that of our lease portfolio.”

During October 2003 BPO sold 49% of 245 Park Avenue NYC for Gross Proceeds of $438M. This was $195M net of debt. BPO wrote, “The disposition of partial interests reflects Brookfield’s strategy to acquire undervalued assets in its core markets, enhance the value through re-leasing and financing initiatives, and sell partial interests in stable, long-term leased properties to institutional investors seeking consistent yields. Capital generated through the sale of these interests is targeted for reinvestment in office properties, share repurchases or repayment of debt.”

2005 Brookfield Properties Annual Report –

Our financing targets are as follows:

1. Maintain debt to total market capitalization of 50% or less
2. Move toward long-term goal of 95% non-recourse debt
3. Maintain interest expense coverage of 2.3x or greater
4. In addition, we attempt to match the maturity of our commercial property debt portfolio with the average lease term of our properties.
At December 31, 2005, both the average term to maturity of our commercial property debt and our average lease term was nine years.

2006 Brookfield Properties Annual Report

“On October 5, 2006, we, together with our partner in this transaction, The Blackstone Group, completed the acquisition of all of the shares
of Trizec Properties, Inc. (“Trizec”), a publicly-traded U.S. Office REIT. We also completed the acquisition of Trizec Canada Inc. (“Trizec
Canada”), a Canadian company that held, among other assets, an approximate 38% stake in Trizec. The outstanding shares of common
stock of Trizec not already owned by Trizec Canada were acquired at $29.0209 per share in cash. All of the outstanding subordinate voting
shares and multiple voting shares of Trizec Canada were acquired at $30.9809 per share in cash. The total purchase price, including
transaction costs, was $5.7 billion. Our share of the transaction’s equity following syndication to institutional partners was $857 million.

The portfolio, acquired in our U.S. Office Fund, consists of approximately 29 million square feet in New York, Washington, D.C., Los
Angeles and Houston. These markets are consistent with Brookfield Properties’ strategy to invest in cities with strong financial services,
government and energy sector tenants.”

“Our acquisition of the Trizec portfolio accounts for the majority of the increase in book value of commercial properties from December 31,
2005. The total value assigned to the Trizec commercial property assets was $7.5 billion at December 31, 2006. Our 45% economic
interest in the Trizec portfolio was purchased for $857 million, after the assumption of debt and acquisition financing totaling $5.7 billion,
and comprises 29 million square feet in New York, Washington, D.C., Houston and Los Angeles.”

“Interest expense relating to commercial property debt increased to $424 million in 2006, from $273 million in 2005 and $258 million in
2004. These increases relate to additional interest carry on the Trizec portfolio and Washington, D.C. acquisitions and the cessation of
interest capitalization on Three World Financial Center in the first quarter of 2005.”

2007 Brookfield Properties Annual Report

“Interest expense relating to commercial property debt increased to $697 million in 2007 from $422 million in 2006. This increase is
related to additional interest carry on the debt associated with the Trizec portfolio as well as the acquisitions in Washington, D.C. in 2006
and in Houston in 2007 and various upward refinancings that took place during 2007, including One Liberty Plaza.”

December 15, 2008 (13.67)                             Multiplex Debt According to BAM is in AUD not USD

I had asked BAM the following question in regards to what I thought was a US$1.6B bridge loan which was recently both paid down, intent to pay down, and extended:

Is the Multiplex loan in AUD or USD? I was thinking the balance was $1.6B USD, prior to recent changes. Either way, would you please send me a quick reconciliation of the loan. I think that Wachovia wrote a piece that mentioned the loan was in AUD. I was trying to reconcile the $1.6B. Here it is quickly below.

Loan Extension                              $800
Pay Down in April 2009                  $140
Pay down in Nov/Dec 2008            $335

Total                                              $1,275

Hence, I am having difficulty reconciling the difference between $1.6B and $1.275B of $325.

I responded with the following: Is most of the difference in the currency? Can you estimate how much of the $325M difference is currency and how much is pay-down. Also, I seem to recall seeing the $1.6B liability being disclosed in USD in your filings. Is there a section in any of the filings that mentions the debt in AUD? Is there a source I could find that indicates what currency each of the identified loans are in? I was incorrectly assuming that most loans were denominated in USD. This assumption I think (would have to check my files) include Brookfield Renewable, etc.

BAM responded with the following response: “The loan is denominated in AUD, so currency fluctuations relative to the USD would represent some of the difference in your reconciliation. There were also some relatively modest pay-downs arising from asset sales. ” “The currency for loans is disclosed in the notes to our annual financial statements on an aggregate basis.”

In essence, this is not a very material situation, yet I have read the annual reports and never recall seeing the $1.6B being denominated in anything other than USD. I could be incorrect.

The following quote was from the 40-F/A. “Property-specific mortgages and other debt secured by our commercial property interests includes $1.6 billion of debt associated with the Multiplex acquisition in 2007 and $2.7 billion of assumed debt. The loan to value for the Multiplex acquisition debt and assumed debt represents a relatively conservative loan to value of less than 65%.”

The following quote was from the 6-K filed with the SEC on March 27, 2008. “The second is a $1.6 billion loan secured by our Multiplex operations, which we acquired during 2007. This loan does not mature until March 2009 and represents a loan-to-value of less than 60%. We plan to repay a portion of this loan with asset sales and refinance the balance on a traditional long-term financing basis during 2008 and early 2009.”

The same 6-K had the following, which might clear up some of the questions. “Commercial property debt includes $2.8 billion of mortgage financing assumed with our acquisition of Multiplex which has no recourse to the Corporation.”

Again, this is not incredibly material and very confusing.

Canary Wharf Question on Sale

On a separate issue BAM indicated to me that the sale of Canary Wharf Group to Brookfield Europe LP with the following: ” The sale was by Brookfield Investments Corp., a 100% owned subsidiary. Therefore there is no income recognition on the transaction. ”

The following is quoted from a SEDAR filing on December 9, 2008 for Brookfield Investments Corporation.

“On December 3, 2008, the board of directors of the Company approved the sale of its 15% interest in The Canary Wharf Group plc (“CWG”) to Brookfield Europe LP in exchange for an approximately 42% limited partnership interest in Brookfield Europe LP with a fair market value of £333,800,000 and cash proceeds in the amount of £107,600,000.”

“On December 3, 2008, the board of directors of the Company approved the sale of its 15% interest in CWG to Brookfield Europe LP. CWG owns a complex of commercial properties in the United Kingdom. As consideration, the Company will receive an approximately 42% limited partnership interest in Brookfield Europe LP with a fair market value of £333,800,000 and cash proceeds in the amount of £107,600,000. Brookfield Europe LP is being formed as part of an initiative by the Company’s parent, Brookfield Asset Management Inc. (“Brookfield”), to combine all of its European operations into a single operating platform in the commercial office property, property development and asset management sectors. The sale of the CWG interest is expected to close on or about December 5, 2008. The Company is expected to significantly increase its available liquidity and diversify its real estate portfolio as a result of the sale.”

“The Independent Committee retained Koger Valuations Inc., an independent financial advisor and qualified valuator, to provide a valuation of the CWG interest and the approximately 42% limited partnership interest in Brookfield Europe LP. Koger Valuations Inc. concluded that the value of the CWG interest is between £430,000,000 and £450,000,000, and that the terms of the sale of the CWG interest are fair to the Company from a financial point of view.”

December 15, 2008 (13.67)                      BAM shares bought back through December 5, 2008

Through 12/05/08 BAM has bought back YTD 13,558,600 shares at an average price of $20.45 per share. Hence they spent $277,273,370 on buy-backs YTD through 12/05/08. The value of those shares right now using current price of $13.56 is $183,854,616. BAM bought back 181,500 shares at an average price of $13.46 from 12/01 – 12/05/08.

Here are specifics on purchase from http://www.sedi.ca

 

Date Shares USD per Share
12/01/08 31,500 $13.995
12/03/08 80,000 $12.9656
12/03/08 20,000 $16.67
12/05/08 50,000 $12.6489

December 15, 2008 (13.67)

I previously presented this on December 11, 2008, using 583M shares outstanding. The fully diluted common shares outstanding as of September 30, 2008 is 620,312,975 Shares. The following are some updated share calculations. I used same price of $14.14, even though current price as I write this is $13.58.

Price To Tangible Book Value
Common Equity or book value $5,821M
subtract: intangibles and goodwill (3,649)
add: Intangible liabilities 963
Adjusted Tangible Book Value $3,135
Current Market Cap of Common using $14.14 per share and 620.3M shares $8,771M

If you had a price to tangible book of 1.8X you would have market cap of $5,643 or $9.09 per share.

Various price to tangible book calculations

Share Price using 620.3M shares at adjusted tangible book Values:

Price To Book Assumptions Share Price if based on Price to Book Assumption
0.75X $ 3.79
1.00X $ 5.05
1.50X $ 7.58
1.80X $ 9.09
2.00X $10.11
2.50X $12.64
3.00X $15.16

Keep in mind the above does not account for any potential future impairments. Potential impairments could include the following:

A. Sales of assets below cost.
B. Loss of specific assets due to non-recourse defaults.
C. Future losses on operations.
D. Write downs of financial assets
E. Derivative losses
F. higher operating costs, lower occupancy rates, higher debt servicing costs.

December 11, 2008 (14.20)

Cap rate Assumptions by Brookfield Asset Management. A history of discussion by BAM and BPO.

At investor day, Bruce Flatt mentioned that he models using a 6.5% long term cap rate assumption. Ric Clark on the October 20, 2008 conference call mentioned he used a 6.5% to 7% cap rate to determine Loan to Values (LTV’s).

With that said, in Brascan 2001 AR on page 19 mentions, “The underlying value of our commercial properties is based on a 7.75% capitalization rate applied to estimated 2002 net operating income, prior to lease termination income and other property gains, which is projected to be $1,025 million.”

On Investor Day September 20, 2007 The following was written by BAM.

*Speculative building remains well under control.

* Demand for space remains strong

* Escalation in rental rates occurring in most markets.

* Cap rates will remain in LOW SINGLE DIGITS for as long as interest rates are benign and the projection is for higher rental rollovers.

Notes from Wachovia Commercial Real Estate (CRE) Conference 12/9/08

1. Financing trends for all of CRE include lower LTV’s, Fully covered reserves, non-reliance on pro-forma assumptions (unless contractual), floaters and extensions. Cap rate assumptions certainly rising. Non-recourse loans no longer available. Spreads of course have widened.

2. The mood was dire. Most analysts seemed to be talking about the numbness has worn off. Unlike past conferences, most analysts and participants were discussing potential jobs and using the conference as a networking opportunity.

3. Mark Vitner , Senior Economist Wachovia, stated, “Currently we have only seen 20,000 jobs lost in NYC, yet 50,000+ have been announced.

Discussion of Transactions and Financing in 2009

4. “If you think things are bad now, you haven’t even felt it yet.” I was looking over at Bill Powell from Brookfield Asset Management as that was said, and he certainly raised his eyebrows.

5. The key to commercial property valuations is based on if large number of forced sellers. Watch foreclosure sales. If those increase, we may have a large valuation downturn. Consensus was that this is worse than the early 1990’s.

6. Credit markets not normally functioning, as most of the deals are extensions. Consensus is that things will not normalize anytime soon. We have to wait for results of extensions, and if pay-offs or refinancings will be able to be obtained.

7. Barry Blattman, Senior Managing Director of Brookfield Asset Management had to cancel as he had Jury Duty on 12/9/08. Ric Clark of Brookfield Properties was “tentatively supposed to present.” Brookfield Properties did not present. Wachovia clearly stated it was not a cancellation by Brookfield Properties.

8. Watch the jobs numbers. These are most important.

9. Consensus projected 2 years of rent deflation, greater haircuts on loans to value, lenders being “ultra-conservative.” Not accepting stated vacancy rates, imputing there own vacancy rates. “Cap rates need to be higher. Expect to see normalized cap rates of 8%. Expect to see current cap rates increase by 100 – 200 bps.”

10. “Cap rates of 5% are dead forever.”

Brookfield Infrastructure Partners

11. Acquiring Public Private Partnerships (PPP) from Brookfield Multiplex. Purchase price of $20M. I asked if this was discount from BAM’s original purchase price, but presenter was not sure. Properties include 2 hospitals. Anticipated close is November / December 2008 (even though presentation was in December 2008.)

12. Described how Transelec will be doing a $1B capex project over next five years. “Of which $200M has already been approved by regulators, and will certainly qualify for 10% regulated return by Chile.” Claimed that another $100M will be approved as regulated going forward. $700M not yet approved. They have both regulated and unregulated assets. There is a regulated return on replacement cost. These should be pre-approved according to BIP in response to my question.

13. Invested in Longview to maintain 30% ownership level. This further investment of $103M was completed in November 2008.

14. BIP claimed they were looking at North American Utilities to invest in. I asked if those would be Hydro plants. BIP claimed, “no, they will not be in the renewable energy arena.”

15. I asked if they have ever bought an investment from an entity not related to BAM. They claimed “No, but we have and are looking at some.”

16. BIP claims estimated liquidity of $821M, broken down as follows at 9/30/08:

Cash $ 31
Citigroup Credit Facility 100
Credit Suisse Credit Facility 100
RBC Credit Facility 100
HSBC Credit Facility 100
RBS Credit Facility 50
Proceeds from Sale of TBE (est) 270
Longview Investment (103)
BAM equity commitment 200
Total Estimated Liquidity $821

17. Interesting that BIP has only bought assets from Parent BAM.

Vornado Realty Trust – Presented by CFO Joe MacNow

18. As I have experienced with occasional meetings with, and word on the street descriptions of typical VNO officers, Joe MacNow seems to live up to the exemplary descriptions given to the chiefs of Vornado. He seems honest and filled with great knowledge. Very cool presentation. I am only writing down parts that interest me, and ones I took notes on. My notes will do VNO no justice. Yet, these should be of interest nevertheless.

19. As of 12/05/08 VNO has a market cap of $9.9B and an enterprise value of $26.2B. Has 16.1M SF of Office in NYC, 17.6M SF of Office in DC, 21.8M SF of Retail Properties, 8.9M SF Merchandise Mart (Chicago), and 32.7% ownership of Toys “R” Us.

20. 1/3rd of NYC business is financial services related. Yet, NYC is a market within itself and over the long-term it will thrive.

21. Merrill was about to sign lease prior to Thain. They were to build massive trading floor at Pennsylvania Hotel (across from Madison Square Garden.) Thain’s tenure halted that process. Thain is from Wall Street, and has a preference for Wall Street locations, yet is not married to Wall Street location. I asked where Joe thinks Merrill will end up going once 2013 lease at World Financial Center expires. He explained that new Bank of America Tower is not big enough for both Merrill and Bank of America. Joe said, ‘I don’t know where they will go, it won’t be at World Financial Center, and I suspect they will go to mid-town.”

22. No acquisitions planned for 2008 and 2009. Looking to preserve a war chest of capital and be prepared for any financial climate when debts of $2.7B and $2.7B respectively come due in 2011 and 2012. He feels that cash flows and current war chest will cover that, even using draconian scenarios, yet they want to be prepared to meet those debts under all circumstances. He indicated, and by no means expects a stock dividend to occur, but if need be, that could save $600M annually. As a REIT they would still have to pay 20% of the required dividend in cash. It is being discussed by NAREIT to change that to 5%, but Joe does not expect that reduction to occur.

23. NYC CRE rents have decreased substantially. He is seeing a general trend of rents decreasing by as much as 43%. He has seen the higher rents of say $200 square feet go down to $125 per square foot.

24. Also saving capital for bargain acquisitions in future. Will commit capital to a franchise in the future. They will stay in the areas they know, which is Class A real estate in Washington DC and NYC. He said, don’t expect us to be buying in Chicago. “We will stick with what we know.” I specifically asked if he would consider the purchase of Brookfield Properties. He said, he doesn’t want to discuss a fellow known landlord, but also offered that the debt attached to BPO creates an enterprise value that they are not interested in. He saw no bargain in Brookfield Properties, as the current debts are attached to any purchase price.

25. He discussed current and future lending environment. He sees no easing over next few years. He said 50% to 60% LTV is very do able, as long as total required is $250M or less. If one is looking for greater than $250M it is “either difficult or impossible.” He used the NYC Palace hotel as an example. He described, “let’s say this building has no debt, yet a conservative value of $1B to $2B. They will not get a loan of greater than $250M. Perhaps they could go to a series of lenders to each put up portions, but again that is difficult if not impossible. That is why a war chest of cash is needed.” Also expect to see Joint Ventures in the future to help funding.

26. If a company has unsecured bonds, they will not be replaceable for at least two years.

27. Typical loans are 50 – 55% Loan To Value, and not exceeding $250M, no matter what the value is. 25 to 3o year amortizations. Easy schedules of last 5 years do not exist. The historical spread of CRE loans to treasuries has been 6.9% over a 46-year period, and 7 % to 10% if you take out boom years. Expect long-term debt rates to eventually settling in at 8.5%, yet that could be after rates shoot up even greater. Don’t be surprised to see interest rates of 10% or greater.

28. Cap rates will be greater than their constants. Constant on a mortgage is total debt service payment/loan amount including principal and interest. If interest rate is 10%, the constant annual payment on a fixed rate loan will be higher because it includes amortization.

29. So if interest rate is 7%…the constant annual payment on a fixed rate loan will be higher because it includes amortization.

30. AAA CMBS should not be 1000 bps over UST.

31. Loves retailers as tenants. They look to make sure that ultimate rent payments is not in great percentage to revenues. Claims retailers can survive when rents as a percentage of sales goes to 18%. Look at sales per square foot.

December 11, 2008 (14.66)

Investor Day Notes from September 16, 2008

Bruce Flatt:

1. Mentioned that all 10,000 employees carry a business card with Brookfield Asset Management on it. Gives them a lot of exposure. That is a lot different than say Berkshire Hathaway. I went to several Dairy Queens, where the manager did not know that Berkshire was the parent company.

2. They focus on putting $$$ right along with clients.

3. Goal is growth in intrinsic value.

4. Focused on appreciation of assets. I wonder how simple that might be. One will always know cash flows and spending (within a range). Yet appreciation is a function of markets, profitability, cap rates, replacement costs, etc.

5. Claims to finance activities on a “conservative long-term basis.” All financed separately and typically non-recourse. I still question how $14B – $18B coming due within 3.5 years can be considered “conservative long-term basis.”

6. Claims to have completed $9b of financing since August ’07. It was asked how much financed since 6/30/08. Lawson wasn’t exactly sure, said something like, ” 500? 800? I don’t remember off hand.” Flatt chimed in, “there you have it, about a billion.

Brian Lawson:

7. Right now liquidity is about $2B or less. This is made up of Cash, financial assets and credit facilities. There is $500M in cash or credit in infrastructure and property.

Bruce Flatt:

8. They value properties and businesses uses a long term cap rate. Usually modeling 20 years. They then use Discounted Cash Flow with a final cap rate. Upon questioning Flatt mentioned cap rates differ per business, but 6.5% is typical.

9. Hydro prices are reliant on energy prices. Higher gas prices = higher hydro prices and visa versa. Costs stay the same.

10. Flatt mentioned that counter party CDS had none with AIG. He did not disclose who counterparty cds was with.

11. Since June, BAM has seen credit spreads widen. Covenant patterns have tightened up. Interest only is no longer offered.

12. Flatt mentioned that BIP was a trial of sorts. They started smaller ($700M) to see how perception of market would be.

Brookfield Investments Corporation – a quick look at 9/30/08 report.

1. other income was $28m for the 3 months ended 9/30/08. Included $20M revaluation gain from an exchangeable debenture and $8M of “dividend and other income.”

2. Foreign exchange gain of $5M for nine months.

3. I think there is a loan receivable from BAM for $210M at prime rate and payable on demand. Once again BAM gets awesome financing terms.

4. They recorded other income of $132M, their profit including the other income was $58M. The $132M was $31M from Canary Wharf and income from exchangeable Norbord debentures (ownership % went down to 35%).

Stronger USD is worse for Brookfield Investments earnings. Watch Loonie and British Pound.

I need to flow through and see how BAM identified the other income. It appears to be non-recurring.

On December 3, 2008, Brookfield Investments sold Canary Wharf to a division of Multiplex.

“TORONTO, ONTARIO–(Marketwire – Dec. 3, 2008) – The board of directors of Brookfield Investments Corporation (the company) (TSX:BRN.PR.A) today approved the sale of its indirect 15% interest in The Canary Wharf Group plc (“CWG”) to Brookfield Europe LP. CWG owns a complex of commercial properties in the United Kingdom. As consideration, the company will receive an approximately 42% limited partnership interest in Brookfield Europe LP with a fair market value of GBP 333,800,000 and cash proceeds in the amount of GBP 107,600,000. Brookfield Europe LP is being formed as part of an initiative by the company’s parent, Brookfield Asset Management Inc., to combine all of its European operations into a single operating platform in the commercial office property, property development and asset management sectors. The sale of the CWG interest is expected to close on or about December 5, 2008.”

Brookfield Homes gets a new CEO December 4, 2008

“Craig J. Laurie, age 37, was appointed Chief Financial Officer (“CFO”) of the Corporation effective November 28, 2008. Mr. Laurie has been the Chief Financial Officer and Treasurer of Crystal River, since April 2007. Crystal River is a specialty finance REIT that invests in commercial real estate, real estate loans, and real estate-related securities, such as commercial and residential mortgage-backed securities. Prior to joining Crystal River, Mr. Laurie served from June 2003 until March 2007 as Chief Financial Officer for Brookfield Properties Corporation,
an office property company and an affiliate of our largest stockholder, Brookfield Asset Management Inc. (“Brookfield”). Mr. Laurie was Senior Vice President, Finance for Brookfield and Senior Vice President and Chief Financial Officer for Brookfield Power Corporation, from 1999 to June 2003. Mr. Laurie will be eligible to receive from the Corporation an annual bonus award and to participate and receive awards under the Corporation’s stock option and deferred share unit plans applicable to certain officers, directors and employees of the corporation. No such awards have been made to Mr. Laurie to-date. Salary arrangements for Mr. Laurie in his role as CFO of the Corporation had not been finalized at the time of filing.”

Craig Laurie was quoted in Brascan 2001 Annual Report. “We strengthened our financial position during the year with the completion of several major initiatives, including the issue of $450m of term notes and $375m of preferred securities.” Craig Laurie 2001AR

BAM shares bought back through November 24, 2008

Through 11/24/08, BAM has bought back YTD 13,377,100 shares at an average price of $20.55 per share. Hence they spent $274,899,405 on buy-backs YTD through 11/24/08. The value of those shares right now using current price of $14.47 is $193,566,637. BAM bought back 2.4 million shares at an average price of $14.12 from 11/17 – 11/24/08.

Price To Tangible Book Value

Common Equity or book value is $5,821

subtract intangibles and goodwill (3,649)

add Intangible liabilities 963

Adjusted Tangible Book Value $3,135

Current Market Cap of Common using 14.14 per share $8,250.

If you had a price to tangible book of 1.8X you would have market cap of $5,643 or $9.67 per share.

Various price to tangible book

Share Price using 583M shares at adjusted tangible book Values:

0.75X $ 4.03
1.00X $ 5.38
1.80X $ 9.67
2.00X $10.75
2.63X $14.14
3.00X $16.13

Keep in mind the above does not account for any potential future impairments. Potential impairments could include the following:

A. Sales of assets below cost.
B. Loss of specific assets due to non-recourse defaults.
C. Future losses on operations.
D. Write downs of financial assets
E. Derivative losses
F. higher operating costs, lower occupancy rates, higher debt servicing costs.

Keep in mind the above does not account for book value not being relevant to market. This could include:

A. Canary Wharf holdings (not including 20 Canada Square) being reported at cost. Fair Value is probably higher by $500M to $1,000M.

B. Various Power operation holdings. Various metrics can be used to value power.

Brookfield Renewable (BRP) 9/30/08 some notes

A. Tangible Equity $1,430. Fairly close to Book Value. $590M of Book value is loan receivable from BAM.

B. Net Income for 3 months ended 9/30/08 was $148M.

Net Income*****************$148

Less: Derivative gain******(136)
Add: Tax on above**********21

Net Income Adjusted*********33

This would annualize to $132M.

C. Interest Coverage Ratio excluding capital securities, as filed by BRP is 1.87X.

Interest Coverage for the quarter using adjusted Net Income from above would be (NI33+IE79)/IE79 = 1.42X

D. OCI includes $68M in unrealized currency loss for 3 months.

E. Powell River debt comes due in two tiers in 2009, July and December.

F. Twin Cities Finance LP, a subsidiary of the company (BAM), issued $25M notes, due in 2012 and bear interest at 6.01%. Secured by power generating assets of Twin Cities Hydro LLC.

G. Interesting and for me (my fault) are the covenant discussions for Parental Guarantees (PGs). Looks potentially immaterial.

H. Ontario Energy Board on October 30, 2008 (OEB) approved Great Lakes Power an annual revenue requirement of CDN$17m. OEB also denied a recovery of CDN$15m. Company claims to be appealing this, and has not “reversed these accruals.”

I. Brascan Energetica S.A. (“BESA”).

J. Power Marketing – This is the optimizing the value of their generating assets through a Power Marketing Strategy (PMS) that uses a combination of long-term contracts, etc. Plans to capture rising prices over time and maximize their revenue power.

K. 92% of the quarterly net income ($136M) was generated from a net unrealized gain on a commodity derivative.

L. Has funds on deposit with BAM of $240M.

M. Investment Grade ratings are important to BRP. DBRS (BBB (High)), S&P (BBB) and Fitch (BBB-). BRP states that ratings agencies “are influenced by a prudent level of low-cost asset financing and modest levels of corporate debt. The long life nature of our assets allows us to finance with non-recourse debt and minimal near term maturities, minimizing risks associated with liquidity and refinancing.”

N. Related Parties – looked immaterial in the footnotes. Of course, this needs to be monitored on every filing.

O. $673M of debt coming due in 2009.

Brookfield Homes – Debt to market cap

At $2.59, and 26.7M shares outstanding, BHS has a market cap of $69.1M. BHS owed BAM as of October 20th $280M. BHS has an unsecured line of $300M from BAM.

BHS ratio of BAM debt to market cap is 10.5X.

Desjardins (Goldberg) put out the report upon review of the quarterly filing on 11/17/08.

1. Calls BAM a “prolific profit generator of cash.”

2. For the past 7 quarters “BAM has been pulling rabbits out of their hats.” Rabbits primarily being Gain on Sale of Assets. Reiterating the belief by many BAM investors that assets have been on the books for “several years at a very low cost.” Goldberg writes that these should be included as normal operations, but recognize the lumpiness. Personally, I can see their point, but I think tracking historically and prospectively is a good idea. He supplies an awesome table for the past 7 quarters separating and identifying the gains.

3. They praised the Power Operations and growth of production. Reiterated that BAM thought the fair value of net invested capital of Power Operations is $8.1B. As I write that, interesting as BAM market cap is less than $8.1B. I would have to refer to my Analyst Day notes, but I assume debt has to be taken off of the $8.1B figure.

4. Thinks commercial real estate remains stable and pockets of weakness in residential.

5. Thinks BAM will benefit from CDS holding as widening occurred post 9/30 (~40%).

6. Mentioned $3.7B of liquidity, but did not identify the liquidity in total. Agrees with BAM that it generates ~1.5B of FCF annually.

7. Mentions that “BAM has US$20B of permanent capital and only $2.3B of debt at parent level. “An analyst brought up the question of permanent capital. I don’t know the answer to that good question. I wonder if Michael G. knows the answer.

8. They concur that low LTV’s exist and that interest rate coverage’s are healthy and “very manageable.”

9. Thinks that BAM is evaluating distress opportunities, and praises BAM for “the ability of BAM to generate this liquidity speaks volumes about its skill in generating a consistently high level of cash flow, which it continues to add to existing liquidity.”

10. Claims BAM has benefited from economic climate in Brazil. I have been reading a great deal that Brazil is certainly feeling the economic pain, just like every other nation and person. They identify the 100 year old presence in Brazil.

11. Claims that earnings should not be used as a metric for BAM because BAM’s total return should include “current earnings and APPRECIATION of value over time.” They reminded the reader that earnings include DEPRECIATION. Pass the kool aid please.

12. Feels stock price decline is not stock specific and is reflective of the times and deleveraging. “The value of BAM’s assets has fallen.” They hint that when assets drop in price and highly leveraged companies are threatened with solvency, that companies like BAM will thrive. They write, “This is the time for BAM to thrive.” Then they whisper to JB Flat, “May we please have the next investment banking deal, or spin-off on the next monetization of one of your grand old assets. If you do, we will add the missing “t” to your last name in the previous sentence.”

13. They express concern with commercial properties. They specifically identify NYC real estate. Yet, they correctly identify the longer term leases and years before Merrill makes a decision.

14. Their targets are now, Optimistic $34 (40% probability); neutral $16.25 (40% probability) and pessimistic $9.70 (20% probability). They regard BAM as “deep value and maintain our Buy….”

BAM managed Multiplex funds are getting destroyed

There is no debate. These have crashed. Yet, BAM claims to be able to refinance $1.6B because of low LTV’s. I don’t get it. Let’s see if when liquidity is generated if it is via SALES TO RELATED PARTIES.

MULTIPLEX ACUMEN PROPERTY FUND (MPF) at 12/31/07 was priced at $1.25. It closed at $0.29 on 10/31/08 and $0.20 on 11/24/08.

MULTIPLEX EUROPEAN PROPERTY FUND (MUE)at 12/31/07 was priced at $0.90. It closed at $0.27 on 10/31/08 and $0.20 on 11/24/08.

These funds have not dropped in relation to the market. These funds have dropped YTD 84% and 78% respectively.

I think these funds are somewhat reflective of the real estate market of which Multiplex $1.6B loan is related to. You seem to disagree and that’s cool. I don’t think either of us are anywhere near experts on this section of BAM.

My disagreement with the Multiplex investment is that BAM has possibly taken on a type of leverage that could make their operations less secure than it once was. Make no mistake about it, BAM is leveraged in a way they probably now wish they weren’t. They are trying to deleverage. They were a big borrower and buyer during a time period that the same asset classes have depreciated in value. These would include timberlands and commercial real estate, and a major business in Australia (Multiplex).

Just some Ramblings

Firms like Blackrock do not buy and sell funds to those they are related to. Makes for great cash flow and earnings recognition for the seller (BAM). Yet, the buyer (BIP) needs to possibly sleep with one eye open and watch their wallet.

As you know BPO has nice cost of capital, yet some of the basis for that is now being reviewed by analysts as there is concern that all is not arms length.

As a general rule of thumb commercial real estate is valued by either cap rates or replacement cost. During the last few years cap rates went to historic lows and replacement costs went to historic highs. That now appears to be reversing itself. Without being specific at this point on Trizec portfolio, I suspect that values of Trizec came down with the rest of the commercial real estate world.

There was an excellent article in 11/5/08 FT on commercial property and how cap rates are related to interest rates. subscription required, but on page 12.

“Certain “markets” – the word is from the Latin America , to trade – are not living up to their name. Determining if the US commercial property market is bad, worse or simply terrible is hampered by the virtual absence of deals since September. With only top-notch property drawing interest for much of this year – forced sales by stricken investor Harry Macklowe, for example, account for nearly a third of business district office sales to date – transactional values were already skewed, masking the maelstrom in bricks and mortar.

Beyond frozen credit, there remains a yawning gulf between would-be buyers and reluctant sellers. Capitalization rates – a property’s operating income divided by its value – have yet to rise sufficiently to tempt buyers asked to stump up more equity and pay vast spreads even on senior debt. Those relying on price appreciation and a quick sale have departed. With tenancy demand set to weaken, buyers can no longer rely on surging rents to help make the sums add up.”

Here is a note I wrote to someone who is involved in commercial real estate.

“FT article mention of cap rates and long term rates being historically correlated. As I mentioned we have been modeling 5.77% since 2001. Before that we were using 7%. We recently went to 8% and now use 8% and 10%. I have no idea if cap rates are correlated, but just our intrinsic value uses an interest rate assumption.”

I will give you an example. Using XYZ, and only identifying several assumptions, but you will get the gist.

Using 8% interest rate and a 5 year average earnings growth rate of 5% we project possible value in 2013 of $27.00.

Using 10% interest rate and a 5 year average earnings growth rate of 5% we project possible value in 2013 of $21.50.

I imagine same would be with cap rates, and perhaps this article has some validity. This is merely one of many methods we use and certainly not fool proof in results, etc.”

Again, because of huge amounts of debt coming due by BAM over the next 3 years, continued leverage is essential. Question becomes will borrowing be available? If so, at what costs? What will new paradigm of LTV be?”
I am not so sure how easy it will be for Multiplex to refinance. Then again, I was not projecting the sale of some Multiplex assets to BIP. This was mentioned today, but probably old news.

Many commercial real estate operators are finding that the value of their assets purchased in 2006, are no longer worth what they were paid for.

Today on the BPO call, it was discussed at length (and by many more than I) the awesome financing that Brookfield Properties gets. Many on the call seemed surprised that BPO Properties would loan on demand $125M to Brookfield Properties, a ‘BBB credit’, and only get a rate from that demand loan of “Canadian overnight + 100 BPS). For Brookfield Properties that is awesome financing. For BPO Properties, one could perceive that the loan to a parent at such a low rate to a company that would not typically in arms length transaction get such a rate.

My main point was that if the property funds have crashed 80%, then logic might tell you that assets that BAM purchased in Fall of 2007 might have taken a material valuation hit as well. We have discussed this. I have personally discussed this with Flatt. I certainly see this as a possible stress scenario. If I didn’t see the possibility of further stress, I would certainly no longer have my short position.

Again, I can’t think of a company with such a fine set of assets as BAM has. Yet, I think the debt levels, reliance on financing, inter company sales and recordings of gains etc, will start to impair BAM. As far as we can see, this has not happened yet. Might not ever happen. If it were to happen, it might be delayed, because required re-financings are being extended.

Tuff to find a buyer of assets in this market. Brookfield found a buyer on December 3, 2008 for their 15% interest in Canary Wharf. The buyer of course was a related entity. I think the conversion of the deal ends up being $601.1M USD. I think most analysts had Canary Wharf valued in the $1B range.

I guess in time we will find out why they sold to a related buyer. Did they need liquidity? Were there covenant breakages or near broken? Will they record gains on sale? Interesting stuff.

ROI speaking, this appears to be an awesome ROI for BAM. Canary Wharf is carried at cost on BAM books. I do not think the sale includes 20 Canada Square, as that is unrelated to their 15% interest.

Just thinking here…..If you find the value that others were placing on Canary Wharf as of 12/31/07.(or maybe review investor packet and notes to see if this was discussed under IFRS.)

Then compare to selling price. Take the difference, maybe reduce it for the related party benefit (meaning could they have done this on the regular market?) and find the percentage loss. Compare that to SongBird and London Land (or something like that as I am going from memory). So, you have a percentage of YTD reduction. What is the % loss? And perhaps extrapolate to Multiplex and get a better determination of LTV.

Whatever the answer to above would just be another tool, and very possibly not relevant. Might be real flawed too. Especially since no real details are out.

More Brookfield Properties Ramblings and Cap rate

Of course the debt is unsecured. If the LTV’s are as low as you say they are, then the lenders have less of a concern in taking back the assets. Many say the LTV’s are ample, yet I am not convinced of that. You claim the debt is supported by $11.4B of property. Do you have any detailed info on that? It seems to me, so much of the assets were bought 2003 onward, and that typical commercial real estate has gone through a valuation contraction , and speculate that severity could accelerate.

We really have no measure as to when the crisis will end, and more importantly when it does end, I think it doubtful that capital will be available in any way shape or form as it once was.

If I am not mistaken, BPO was able to borrow using high occupancy rates, lower debt service costs and 6.5% ( I seem to remember that) cap rates. I think the norm is 100bps north of the 6.5% cap rate and seems to be growing. Keep in mind that cap rates today are not allowing for the same rental assumptions in relation to occupancy and increases as they did only a few years ago. NOI ain’t what it used to be. Lenders are using “in-place income and reducing assumptions with higher credit loss expectations.”

In 2002 I think cap rates rose 538BPS, which indicates the possibility that cap rates of BPO type properties could exceed 7.50% in the future. We have not seen dispositions of commercial assets in mass yet. When and if that occurs, we could see a material adjustment of commercial real estate prices.

The current market has severe pricing determination difficulties. There is a lack of comps for one thing. Lenders are expected to be more diligent in their need for worst case valuation. I think lenders will err towards conservatism. Lenders are beefing up foreclosure departments and work-out groups. They will be better prepared to meet the task of re-financings not being met by borrowers.

They are focused on service industry, but I think tenant quality is certainly a big plus.

Like you said, I do focus on the debt, as I see the potential for potential stress. You have always mentioned asset values, but to me, so many of these assets of this 100+ year old company are less than 5 years old. We are in an era where so many of the worlds assets that are less than 60 months old are deflating, while the debt is constant or higher. You have often claimed that BAM is NOT highly leveraged, where I think it is leveraged to a point of valuation concern.

I was just told by a friend in NYC commercial that as of 9/30/08 the property is 91.9% leased. I could be real wrong. I have nothing to show you to support my comment. The building was built in 1967, square footage is 1,586,860 and asking rent is allegedly $150. This might be flawed as the asking rent per 12/07 was $104. At 12/31/07 the vacancy rate was near zero. I wonder if you are using older info? I looked further and BPO reports it as 95.4% leased on 9/30/08. They also assign a square footage of 1.8M square feet, which is 11% higher than my source. I would certainly use BPO reporting and not my source (although mine might just include office and not retail).

The following is just guess work: The low value might be $500 per sq ft, the middle value might be $700 per sq ft and the high value might be $1000 per square Foot. Hence the 100% value of 245 Park might be between $900M and $1.8B. Lets call the mean $1.4B.

If you look at page 42 of Brookfield Properties 9/30/08 report you will see the debt schedules with dates on the US Office Fund Properties. The bulk of those maturities occur in less than 3 years, and carry current interest rates of less than 5%.

The further question could also be, at what price is 245 Park Ave with improvements being shown on BAM financials. I would have to review old reports, but I don’t know how the flow through from BAM to BPO affected the financials and costing etc, when the asset was spun to Brookfield Properties.

I can tell you hands down that property presentation on the balance sheet has no basis adjustment or carrying value adjustment for Balance Sheet purposes. The transfer and partially sold, I too do not know.

Ratings Agency Discussion

Taking it a touch further… If an event as you described were to happen, then I would gather there would be ratings agencies concerns, and if there were a downgrade, you would think BAM would be adversely affected. Also, we are not familiar with covenants if such an event were to occur.

But to clearly answer your question if that were to occur my biggest thought would be valuation hurt. Yet, as I write this and we just talk about a fictitious scenario, I gather there would be the other concerns as well.

First level concern would be valuation .
Potential residual concern would be potential credit rating downgrades. I have previously asked BAM for copies of covenants, but they informed me they are not publicly available.

If one property fell, I would agree, a handful, I would say wait and see. S&P emphasizes and bases their rating on cash flow. Should that cash flow change materially because of a default, I think downgrades could happen. Keep in mind that Properties are 26% of BAM’s net invested capital at 12/31/07 per S&P report dated 5/6/08. Nevertheless, I think we both agreed that would be a minor issue.

S&P in their 5/6/08 report stated, “Brookfield’s core operating subsidiaries, Brookfield Power and Brookfield Properties, have strong competitive positions and benefit from good geographic and asset diversity. Hence, the impact of a disruption in any particular asset or geographic location on its operations should be manageable. Although almost all subsidiary-level debt does not have recourse to Brookfield, the company intends to ensure that these key subsidiaries are financially healthy and maintain investment-grade ratings.”

In regards to Brookfield Homes S&P wrote, “Brookfield’s relatively low invested capital of US$250 million in the residential development business ensures that any adverse impact from weak market conditions is capped and manageable.”
Now I wonder if the $300M is looked at in the same light by S&P as the $250M.

Furthermore they wrote and I think something to watch , the following: “Standard & Poor’s bases its rating approach on our belief that Brookfield will maintain its policy of not providing financial support to these non- recourse debts. Deviation from this policy through increased use of recourse debt, increased use of guarantees to its subsidiaries, or other measures that would amplify the financial ties between the parent and its subsidiaries, could prompt us to view the company’s leverage on a consolidated basis, which in turn
would likely lead to a material rating downgrade.”

Something else to watch and even calculate now is another bullet point by S&P, “Brookfield’s company-level financial targets include maintaining the market value of investments in listed companies to the company-level debt of more than 2x and the total debt-to-market value of total assets within 20%. These targets are consistent with our expectation for the current rating level.”

November 12, 2008 (17.00)

Notes on Economic Trends and how they might relate to BAM

1. Weakness in labor market will show an increase in sublet space. This will increase over time.

2. Financial centers such as NYC are hard hit by consolidation and recent turmoil. Unlike in the past, this is not expected to be a temporary event.

3. Current 0ffice vacancy rents (through 9/30/08) are 6.2% in NYC, unchanged year over year. DC is at 8.1%, and increase YoY of 140BPS.

4. National cap rates have increased from 5.7% in 3Q07 to 6.5% in 3Q08.

5. Conditions in both domestic and global economies have deteriorated sharply during October. Labor markets have also weakened considerably.

6. Demand for space has weakened for properties of all types. There are still pockets of strength.

Brookfield Properties

Brookfield Properties debt workups from Supplemental Information. Quarterly financials not yet filed. The following is a difficult task without the benefit of consolidated financial statements.

Total commercial debt maturities at Ownership Level Through 2011

2008 remainder $ 16
2009 920
2010 53
2011 2,111
Total $3,100

Of course one needs to be mindful of the consolidated commercial property debt.

 

Total commercial debt maturities at Consolidated Level Through 2011

2008 remainder $ 26
2009 1,017
2010 53
2011 4,474
Total $5,570

2. I think but am not certain that Brookfield Properties has a $181M bank facility that comes due in 2009.

We know that Brookfield Properties owes $125M to BPO Properties, on demand, yet at very preferential rates and almost unrealistic rates. Remembering that Brookfield Properties is rated BBB by S&P. Here is how S&P defines ‘BBB.’

“An obligor rated ‘BBB’ has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.”

The rate that BPO Properties is loaning money to Brookfield Properties is Canadian Overnight rate + 100BPS. The rate is currently 2.24%. Hence, BBB rated, Brookfield Properties gets to borrow money on demand at 3.25%. In today’s market, that is a crazy good deal.

On top of that, Brookfield Investments has a $210M demand loan to Brookfield Asset Management at Prime rate. Prime rate is now 4%.

These are excellent rates for the parent.

The reason I discuss this, and the reason so many of the analysts discussed this at BPO Properties conference call, is there is at a minimum an appearance of potential lack of Arms Length Transactions.

As you know, a section of my thesis is based on related party dealings. This includes inter-company loans (Brookfield Renewable Power Inc and its amalgamation, BPO, Brookfield Properties, Brookfield Homes, etc.).

Norbord Inc. Update

1. Rights offering update – Brookfield Asset Management will get a standby fee of 1% of the gross proceeds of the offering. Catalyst Paper was a standby purchaser earlier in the year and received 2%. Yet, BAM owns 41% of Norbord and terms were different.

2. Proceeds will be used to repay all amounts owed to Brookfield Asset Management’s existing $100M debt facility. Other revolvers will be paid off with additional monies.

3. Bank lines will be extended from 2010 to May 2011. Covenants will be amended to include $250m of Tangible Net Worth. This was previously $300m. Maximum debt to capital on book value basis will be 70% from 65%.

4. Aggregate bank line commitment will be reduced from $235M to $205m.

5. Brookfield commitment reduced to $50M from $100M and extended to June 2011 from 2010.

November 11, 2008 (17.97)

1. Norbord Inc. – Has a $100M unsecured credit facility with BAM. This was instituted January 2008. The following discusses events that have occurred in November in respect to a $240M rights offering by Norbord. The offering will be supported by BAM if not fully sold. Norbord closed yesterday at $1.06 per share. This is down 88% Year to date.

A. From their 3Q08 Financials. “In the first quarter, the Company concluded a $100 million unsecured term debt facility with its major shareholder at an interest rate equal to the greater of 8% and US base rate plus ½%. The facility matures in 2010 and is subordinated to the Company’s committed unsecured revolving bank lines. Any
drawings under the facility are treated as equity and included in the determination of tangible net worth for bank line covenant purposes. At September 27, 2008, $25 million was unutilized under this facility with $75 million drawn.

In addition to the term debt facility, the Company has cash and cash equivalents of $9 million, and $235 million of committed unsecured revolving bank lines to support short-term liquidity requirements. At September 27, 2008, $147 million of the revolving bank lines was unutilized and $88 million was utilized – $84 million drawn as cash and $4 million utilized for letters of credit. These committed bank lines mature in 2010, bear interest at money market rates plus a margin that varies with the Company’s credit rating, and contain the following financial covenants which the Company must comply with on a quarterly basis: minimum tangible net worth of $300 million; and maximum net debt to total capitalization, book basis of 65%. At quarter-end, the Company’s tangible net worth was $317 million and net debt to total capitalization, book basis was 62%.”

Subsequent to above, Norbord filed a rights offering for $240M. According to an article in the Globe and Mail on November 11th, “The cash raised from this rights offering will be used to knock back debt, and the financing is being backstopped by Brookfield Asset Management, Norbord’s largest shareholder. Existing owners will have an opportunity to buy units consisting of an additional share, and a warrant to purchase another share. If the new equity arrives as planned, Norbord’s banks will extend $205-million of credit lines through to 2011.”

Bloomberg on November 11th wrote, “Norbord said it plans to sell about C$240 million worth of stock to its shareholders through an issue of rights to buy shares and warrants. Brookfield Asset Management Inc., Norbord’s biggest shareholder, has agreed to take up its rights fully and purchase any stock not bought by other investors, Norbord said in a statement distributed by Canada Newswire.

Norbord will use proceeds to pay a fee to Brookfield and repay a loan to the Toronto-based asset manager. It also said that it renewed a lower amount of bank loans, with certain new conditions. Suspending the 10 cents a share quarterly dividend will save the company C$56 million annually, while repaying the Brookfield loan will cut interest costs by about C$8 million, Norbord said. Brookfield fell 2.9 percent to C$20.97.”

B. A tangible net worth of $300M is required for one of the bank lines. The net worth at 3Q08 was $317M. ($242M Equity, and $75M drawn from debt facility.)

C. Company is securitizing Accounts Receivable. Company must carry a tangible net worth of $300M and a maximum net debt to total capitalization, book basis of 65%, for such program. The Net worth at quarter end was $317M and the debt to total capitalization ratio was 62%.

2. Fraser Papers – On November 11, 2008 Fraser Papers closed at $0.91, this is down approximately 67% YTD (2.72 12/31/07). BAM and affiliates has provided guarantees to lenders in support of the credit facilities. BAM has guaranteed up to $50M. Fraser in turn has guaranteed to BAM that it will repay all lenders. This guarantee to BAM is secured by a fixed charge on certain of Fraser’s PP&E. Norbord has also guaranteed a maximum of $3.2M to Fraser. During the 9 months ended 9/30/08 Fraser has purchased $4.4M of electricity from Brookfield Renewable Power. As of 9/30/08 $1.1M is still owed to Brookfield Renewable Power. Fraser also has management fees coming in from Katahdin Paper (a wholly owned subsidiary of BAM). There is an accrual due from Katahdin of $600K as of 9/30/08. Katahdin owes cumulative distributions to Fraser of $2.5M at 9/30/08. Fraser is owed $300K in Accounts Receivable from Katahdin at 9/30/08. Fraser entered a 20 year supply agreement with Acadian Timber. Year to date Fraser has purchased $15.2M from Acadian. BAM owns a part of Acadian, hence this is a related party transaction. BAM paid $54.6M CAD to acquire 18,813,241 shares of Fraser. This gave BAM a 70.50% ownership interest in Fraser. The cost per share computes to $2.90 CAD.

The following are quotes from the 3Q08 financial statements filed on November 10, 2008.

A. “In April 2008, we increased the maximum borrowings under our working capital facility to $115.0 million and extended the term to April 2011. In June 2008, we finalized a six-and-a-half-year CAD$40 million term loan facility with the province of New Brunswick to support our investment plans in the province. In September 2008, we finalized a one-year, $25 million term facility with a Canadian chartered bank. Each of these transactions was completed with the support of our largest shareholder.”

B. “The Company maintains a conservative net debt to net debt plus equity ratio while maintaining adequate liquidity to achieve its business plans. During the first quarter of 2008, the Company issued 20,656,913 common shares under a rights offering for net proceeds of $59.7 million. The proceeds from the offering were used to repay outstanding debt, including $50.0 million which was due on January 31, 2008.

During the second quarter, the Company amended its revolving credit facility to increase the maximum borrowings under the facility to $115.0 million and extend the term of the facility through April, 2011. The increased borrowing capacity will provide the Company with the liquidity it needs to execute its 2008 business plan.

In addition, the Company secured a CAD$40.0 million term loan facility from the province of New Brunswick to support its capital investment plan in the province (see “Liquidity and Capital Resources”).

During the third quarter, the Company entered into a $25.0 million one-year term credit facility with Canadian Imperial Bank of Commerce, which bears interest at prevailing market rates.”

C. “Brookfield has provided guarantees to the Company’s lenders in support of its revolving credit facility and one-year term loan. The maximum amount of the guarantees is $50.0 million. The Company agreed to pay Brookfield a guarantee fee equal to an annualized rate of 2% of the maximum amount of the guarantee and provided Brookfield with a guarantee that it will repay Brookfield any amounts paid by Brookfield to the Company’s lenders. As security, the Company has provided Brookfield with a fixed charge on certain of its property, plant and equipment.

Norbord Inc. (the former parent company of Fraser Papers) has provided guarantees for certain obligations of Fraser Papers under a financial commitments agreement. At September 27, 2008, the maximum potential amount of the obligations guaranteed was estimated to be $3.2 million. These guarantees have not been included in the table above.”

D. “In April 2008, the Company amended its existing revolving credit facility to extend the term of the facility and increase the maximum borrowings under the facility to $115.0. The amended facility bears interest at market rates and is due in April 2011. Borrowings under the facility are secured by a first charge against accounts receivable and inventory of Fraser Papers. At September 27, 2008, $63.6 (2007 − $123.9) of the facility was utilized, $22.3 (2007 – $31.6) for operating bank loans and the balance in support of letters of credit.

In June 2008, the Company entered into a term loan facility with the province of New Brunswick for up to CAD$40.0. The facility bears interest at a fixed rate of 4.7% and is due in December 2014. Borrowings under the facility will be used to fund capital expenditures at the Company’s operations in New Brunswick and are secured by a first charge on property, plant and equipment located in New Brunswick. Principal payments under the loan will be made in quarterly installments over the term of the loan with a lump sum payment on maturity. The first principal repayment is due no later than March, 2010. At September 27, 2008, $14.5 (CAD$15.0) had been drawn under this facility.

In September 2008, the Company entered into a term credit facility for $25.0. The facility bears interest at market rates and is due in September 2009. At September 27, 2008, the facility was fully drawn.

During the third quarter of 2007, the Company closed its tender offer to repay all of its 8.75% senior, unsecured notes (“Notes”) of $84.0. The Company repaid $68.5 of Notes to the public and cancelled $15.5 of Notes held by Fraser Papers.

The effective interest rate on long-term debt was 4.9% at September 27, 2008 (2007 – 6.8%).”

E. “Brookfield has provided the Company with a facility with a notional amount of $200.0 to enter into forward foreign exchange contracts as part of the Company’s hedging activities. At September 27, 2008, the Company had entered into forward foreign exchange contracts of $43.5 (2007 –$30.2) as a hedge against certain Canadian dollar-denominated net monetary liabilities and $25.1 (2007 – $35.2) as a hedge of anticipated future Canadian dollar cash outflows, under this facility.

The Company has agreed to pay guarantee fees to Brookfield in connection with guarantees to Fraser Papers’ lenders in support of Fraser Papers’ credit facilities. The fees are equal to an annualized rate of approximately 2.0% of the maximum amount of the guarantee of $50.0 (or $1.0 per year).”

November 11, 2008 (17.97) All of the following was written prior to any of the subsidiary and Parent financial Statements were filed.

1. Earnings released last week. Series of price downgrades followed by the following firms.

A. Tgt Cut To $25 From $32.50 By CIBC
B. Tgt Cut To $25 From $39 By Natl Bank
C. Tgt Cut To $25 From $30 By C Suisse
D. Tgt Cut To $26 From $40 By RBC
E. Tgt Cut To $21 From $33 By BMO (this was prior to earnings release).
F. Tgt Cut To $19 From $2 By S&P (this was prior to earnings release).

2. Quotes from Shareholder 3Q08 Letter and comments of ours:

“During the last three months, we have continued to execute our business plans resulting in strong third quarter cash flows of $355 million, and approximately $1.2 billion to date this year. Furthermore, we increased our overall free liquidity to more than $3.5 billion, substantially higher than it has been for more than two years. This was accomplished despite the difficult market environment over the past few months which, in our view, validates our strategy of owning high quality assets and conservatively financing them on a long-term basis. Over the year, we have received outstanding support from our global banking relationships and institutional clients, for which we are grateful.”

“First and foremost, we have ±$20 billion of permanent capital. In today’s environment where many companies are without access to financing, this is a tremendous advantage. This capital does not come due, it has no margin calls, and whether it trades for less in the market due to external factors has very little effect on it.

Second, excluding institutional client funds, we currently have over $3.5 billion of cash, financial equivalents and undrawn committed lines of credit to help ensure that we are able to withstand even extreme events should something occur, and if not, hopefully use this capital to pursue some great opportunities. For the past 18 months we have been able to generate more cash than we have invested or utilized in our operations to pay down liabilities that came due, or were pre-financed. As a result, our capital availability today is greater than it was two years ago when the credit turbulence started to unfold.

Third, we generate ±$1.5 billion of free cash flow annually. This can be used largely in whatever fashion we choose. In addition, we traditionally turn over 10% of our invested capital annually, leading to a further ±$2 billion to deploy. During the last four months, we generated close to $1.5 billion of net cash in addition to our regular cash flows, and while this was exceptional, it shows the flexibility within our operations to generate cash should we require it, or desire it.

Fourth, we have only $2.3 billion of debt at the parent company and, with few exceptions, do not guarantee our subsidiaries’ debts. Our parent company debt-to-market capitalization is therefore only ±14%. As you also know, most of the debt within our businesses is recourse only to specific properties. If you proportionately consolidate all of our interests in assets, the debt to capitalization is ±43%, well within investment grade. We would point out that sometimes these facts are not easily visible in our financial statements because of the requirement to consolidate debt within partially owned funds that is, in reality, attributable to our institutional partners. Please have a look at our supplemental disclosures should you wish to review this further.

Fifth, with respect to opportunities, we think there will be many, and some great transactions are starting to surface in sectors where we have expertise. To date, we have chosen to be patient on the belief that better situations are still coming.”

3. Our comments are, and they will be explored further as filings by BAM are made. Keep in mind the Quarterly filing has not yet been made.

A. BAM stated that core liquidity increased to $3.7B. The following is a cut and paste from the “supplemental information.” I need to study this, as I do not fully understand where the information is coming from. I am looking to trace back into financials and/or supplemental announcements. “We have increased our core liquidity to $3.7 billion, which includes $740 million received during October, from $2.8 billion at June 30, 2008, and completed a number of financings to extend the maturity of our debt profile. This included the sale of our U.S. Pacific Northwest timberlands to a newly formed investment fund managed by us, that generated $590 million of net cash proceeds, a modest gain that will be reflected in our fourth quarter results, and a $700 million increase in third party capital commitments.”

B. The “newly formed investment fund” has not been identified? What are the details of that fund? Time will tell. Still sounds like a related party transaction.

C. Investment Grade ratings are mentioned several times in the letter and supplemental Information. As always, this needs to be tracked.

D. Mentioned to have completed or will shortly generate $1.2B of cash proceeds after repayment of associated debt. I am gathering that this $1.2B is part of the liquidity of $3.7B mentioned above.

Millions Gross Net
Sale of Timber in North West USA $1,200 $ 590
Sale of 50% Canada Trust Office $ 425 $ 190
Sale to CEMIG for BZL Transmission Lines $ 275 $ 275
Sale of Hermitage and Imagine Insurance London $ 310 $ 150
Total $2,210 $1,205

E. Completed ~$1.0B of refinancings in Quarter ended 9/30/08.

Corp debt issues with 4.5 year term and 6.5% coupon $ 150M
“financing in Power Operations” $ 225M
“Property Refinancings” $ 425M
Unidentified in Information $ 200M
Total $1,000

F. Core Liquidity – Identified in Supplemental Information.

Corporate Level Liquidity

Corporate Level Cash and Financial Assets $1,100
Corporate Level Undrawn Capacity $ 870
Sale of Timber in North West USA $ 590
Corp debt issues with 4.5 year term and 6.5% coupon $ 150
Total Corporate Level Liquidity $2,710

Operating Level Liquidity

Operating Units Undrawn Credit Facilities $ 875
Operating Units Cash and Financial Assets $ 125
Total Operating Level Liquidity $1,000

Breakdown of Operating Level Activity

Operation Committed Bank Facility Used Undrawn
North American Property $500M $293 $207
Renewable Power $378M $161 $217
Infrastructure $450M $000 $450
Total $1,328 $454 $874

Total Liquidity

Total Corporate Level Liquidity $2,710
Total Operating Level Liquidity $1,000
Total Liquidity $3,710

4.         Items to watch as Financial Statements are released:

  • Make sure borrowing liquidity for subsidiaries is not double counting Brookfield Asset Management guarantees.
  • Make sure no double counting of assets.
  • Debt Maturities from Supplemental Information
 Corporate Maturities
Balance 2008 2009 2010 2011 and after
Term Debt $300 Nil $200 $1,350
CP and Bank Borrowings Nil Nil Nil 498
Corporate Maturities $300 Nil $200 $1,848
Subsidiary Maturities
Balance 2008 2009 2010 2011 and after
Brookfield Renewable Term Debt Nil 373 Nil 449
Australia Europe (reflects anticipated rescheduling) (1) 335 302 496 Nil
Brookfield Properties Bank Facilities Nil 181 Nil Nil
Retractable Preferred Shares 100 Nil Nil Nil
Other Subsidiary Borrowings 147 178 105 1,255
Subsidiary Maturities $582 $1,034 $601 $1,704

1) –   “We are in the process of finalizing an agreement to extend the final maturity for $798 million of the Australia/Europe term bank facility until 2010. The loan represents a loan-to-value ratio of less than 50% and the portfolio is well leased with 98.6% occupancy and an average lease term of seven years. We intend to permanently finance the business with asset-specific mortgages on the properties prior to the 2010 maturity.

We intend to repay $335 million of the term facility in November 2008, merge the associated European business units with the balance of our European operations, refinance the combined operations on an interim basis in the local market and, when markets normalize, permanently finance them with long-term debt financing placed in the European capital markets.”

Property-Specific Borrowing Maturities
Balance 2008 2009 2010 2011 and after
Commercial Properties (2) (5) $503 $390 $856 $4,387
Power Generation (3) 94 218 175 2,739
Infrastructure Nil 18 Nil 1,245
Development and other Properties (4) 162 996 763 533
Specialty Funds 16 8 264 144
Property-Specific Borrowing Maturities $ 775 $ 1,630 $2,058 $9,048

(2) – Includes Office North America, Australia and Europe and Retail in Brazil.
(3) – Includes North America and Brazil
(4) – Includes North American Opportunity Funds, Residential investing and Working Capital in North America and Property Development and Construction.

(5) –  “The 2008 maturities include $335 million which is secured by seven properties within our Australian portfolio that have an occupancy rate of 99.7%, an average lease term of 8.3 years and a 55% loan-to-value.  We are in the final stages of renewing the financing for these properties.”

Total Debt Maturities

Balance 2008 2009 2010 2011 and after Total Debt
Corporate Maturities $300 Nil $200 $1,848 $ 2,348
Subsidiary Maturities $582 $1,034 $601 $1,704 $ 3,921
Property-Specific Borrowing Maturities $ 775 $ 1,630 $2,058 $9,048 $13,511
Total Debt Maturities (1) $1,657 $2,664 $2,859 $12,600 $19,780

(1)  – “reflects anticipated rescheduling” of Multiplex.

Consolidated Debt Not included in Total Debt Maturities Above
as of 9/30/08
Property Specific Borrowings $10,656
Subidiary Borrowings $ 1,295
Total Debt Maturities from Above $19,780
Total Agrees to Balance Sheet $31,731

5.      Conference Call Notes and Quotes 11/07/08

A.     “It should be noted that during October, our cash position increased by nearly $750 million in what has been reported as one of the worst financial periods in history. This statement says a lot for our franchise and our relationships and we are grateful for these. It also shows the type of assets that we own and the ability of them to hold their value and be financed, and even sold in tough markets. In our view, this validates our strategy of owning high quality assets and conservatively financing them on a long term basis.. I will next make a few points on why we believe we can thrive in this environment.”  If I am looking at the presentations correctly we need to be reminded that $590M will be collected (or was collected?) from a related entity.  BAM sold some Northwest Timberlands to a new fund which BAM will manage.

B.      We have a large balance sheet and investment grade ratings. This is a unique attribute today which many do not share.”

C.       “Specifically in the quarter, with respect to opportunities and investment of capital, we focused our capital largely internally investing in what we know best. This included repurchasing close to — or approximately 7.5 million shares of Brookfield Asset Management at prices from between $16 and $22 with an average price of around $20. We believe this to be a substantial discount for the long term intrinsic value and it is clear that we know value of this security probably better than anything else we could purchase in the market place.

Our North American office company Brookfield Properties al repurchased a million-and-a-half shares back to the treasury and furthermore we have been buying shares in and pieces of our other assets and investments and selectively providing capital to our subsidiaries to repay debt to insure that we can be in a position to withstand any of the extreme events that could occur, and capitalize on opportunities.

Looking to the future, we will continue to balance this deployment of capital between keeping it available for potential external opportunities, and buying back our own assets in the Stock Market, through share repurchases, for what we see as an immediate low risk creation of value to the company. In this regard, external opportunities because of the perceived risks increase will today need to substantially exceed the returns on repurchasing our own security to meet our investment requirements as the inherent risk is higher. Inevitably like all things with us we will probably end up doing some of both.”

D.     “Lastly with respect to strategic advantages, we have access to substantial resources through our institutional relationships both in the form of commitments to current funds, and in their ongoing interests in funds we’re raising as well as co-investment opportunities. Relatively few people have this access on a global basis, and as we continue to build these relationships and demonstrate how our approach to investments, operations and financing, has weathered the recent turmoil, we think these relationships should get better. In the current year to date, we have closed approximately $2.1 billion of capital commitments to our core value and opportunity funds. A large number of that was in the last quarter.”

E.     “As the subsidiary level we’re in the process of finalizing an agreement to extend the maturity of the Australian bank financing. We will pay down $335 million of the debt in November. Which will then enable us to merge the European operations into our other European operations, and then refinance a combined operations on a longer term basis in the European markets. Maturity dates for the remaining $800 million will extend through into 2010 and our strategy there is to permanently finance the business with assets specific mortgages on the properties prior to the maturities.”

F.     “As I mentioned we generated nearly $750 million of cash at the end September 30. This includes $600 million generated from the sale of the interest in our timber operations. And we also have $275 million coming to us from the sale of the Brazilian transmission lines that I mentioned earlier and $150 million from the sale of two of our insurance businesses which will also ultimately free up $400 million of liquidity in the business. A high level of our current liquidity, the additional cash coming into the business through operations and monetizations and the long term nature of our capitalizations gives us a high level of comfort in our ability to continue to execute our business strategies.”  I thought, but could be wrong that the timber operations were to be recorded in 4Q08.

G.    Question as to  give us a little bit better indication as to — I guess the status of the term financing market in — in Australia? What sort of loan to value ratios are available there? And what the — I guess nominal cost of debt would be for a 5-plus year fixed rate investment grade financing? “So they’re definitely through 200 basis points and in some cases around 300 basis points. And in the interest rates, the underlying interest rate which was a lot higher, a lot of the financing there was done on a floating rate basis, one of the trends that has occurred of late is the — the underlying base rate has come down substantially in recent months. Which has made financing and funding the cash flows much more achievable for many people.”

H.    “On property assets, people always talk about do the cap rates change. What they are really referring to are the cash flows or the rates that would be put on next year’s cash flow. And in our view long term property values haven’t really changed at all. Over the last 12 months. And they won’t be changing over the next 12 months. That sounds very different than what most people would say. But when we value properties, just like we value them for our institutional clients, we value them using 10-20 year discounted cash flow models with future rental rates in them.  And during the up markets we tend to value them lower than we would otherwise — they would otherwise be valued in the current cash market. And in the down market, our view on a discounted basis is — is different than what other people may perceive. And — but the intrinsic valve of it hasn’t changed very much. And that essentially comes through in valuations on a term basis. And so I’d say, these type of assets, should and have held their value, dramatically compared to what they have in equity portfolios or private equity or other things.”  My question would be what variables are being used for Cap rates?  What interest rate assumptions, occupancy level assumptions and rent increase assumptions?

I.       “Well, I think another way of looking at it, because you’re really getting at to a certain agree the proportional side of the debt which as we mentioned on a book value basis is around 40 some-odd percent. That, if you think about how we finance most of the properties, which is typically, you might be doing it at 60%, going in, 70%, sometimes it amortizes down the property values typically appreciate over time.  You really do end up at — at around that 50%, or less level, on a property, over a portfolio over the longer term. And so — I think that is absolutely a — a solid sustainable level. That provides the right risk profile while at the same time providing good leverage for the common shareholders.”

J. “The Brazilian markets actually had been tremendously resilient to everything going on in the world. Up until the last month.

The banking system in Brazil is — very healthy compared to the rest of the world. They — our local banks are basically retail corporate banks, they didn’t have a lot of exposure anywhere else in the world. And these are $40, $50, $60 billion equity banks. The largest ones in Brazil so they are very successful banks. So the financial system has been good. They are running surpluses in the country. And — commodities have been very strong for them. So the actual environment has been good.

And the last month, the markets obviously have hit almost — well, they hit everyone. And, Brazil is no exception to that. The currency is backed up. I am — it is a lot on a relative basis but in our view it is a small amount in the — if you look at it in the fullness of time. And the currency used to be 3.6-to-1 and we own a lot of assets when it was 3.6-to-1. It went all the way to 1.6 and it is hovering around 2.10 or 2.15 today. So the currency has changed a bit. Obviously if you look at that that has changed the values of some of our assets down there. But we think there is tremendous opportunity still to keep putting money to work in Brazil.

Retail sales in the first nine months I think were up by 12%, within our shopping malls. So the — the retail market is extremely positive. That is compared to a negative growth in most developed markets. And the economies are in pretty good shape. So, you can never be sure of yourself but the — but the economy and the things that we’re doing now down there seem to be pretty positive.”  I have been hearing the opposite of Brazil economy.  The Real has depreciated a great deal during July there was a USD exchange rate of 0.63.  It is 0.45 as of today.  At the NYSSA Brazil conference on October 29th, the theme was certainly a slowdown in Brazil.  The participants were optimistic that recent would be avoided, but that growth dropped noticably during the quarter and continued into October.

K.  “First of all, with respect to the cost of capital. There is no doubt that as we are meeting financings in the current environment our spread has obviously widened. Off of what we would have been doing stuff out a couple years ago. And it is probably a little wider than what we would have done over the fullness of time.

Having said that we’re benefiting certainly today from very low base rates whether it is in the form of the US Treasury or otherwise. And so we’re able to complete financings with a — all-in cost of capital. The private placement we just did at 6.4%, which is, in the fullness of time a pretty darn good rate. And the same would apply for financings at the subsidiary level and off the property level. So on a spread basis it is wider but the other observation I would make is because of the nature of our capitalization this really goes back to the comment on the — on the leasing. Is it rolls over at a pretty slow pace. And — so it — our costs of capital doesn’t typically move a lot in terms of the overall cost of capital of the organization.

Now, if you’re talking specifically about acquisition, opportunities, often, the cost of capital, will tend to — go in a similar — or I guess it would be an opposite direction in terms of the pricing of the opportunity — the cost capital might be a little more expensive. But you can — you can typically get much better value, for what you are acquiring particularly if it is in part due to the increase in the cost of capital. It’s triggering that opportunity. And — that is a — we have seen situations like that, in — in all of the — all of the markets. I’ll just make a comment on the currencies and then Bruce may want to add to the comments.

We do conduct business in a number of different — different geographies. We principally focus on how things translate back to the US dollar. But we would certainly take into consideration, how we would see a currency from a value perspective, recognizing that the capital that is already within that sector, can — is rolled over in that currency. And we tend to take a pretty long term view with respect to how the currency values apply to those long term physical assets. Particularly with regard to what the cost of any hedging might be.”

November 6, 2008 (17.12)

1.                              Updated Thesis and discussions.

 Main thesis remains:

(1. )     I think they are over leveraged and that increased credit costs, costs of capital, lower loan to values, could start stressing BAM.

(2.)      BAM has quite a few Joint Ventures or minority interests. On projects they have co-investors. Both Co-Investor and BAM commit capital. I would watch if JV’s start failing to meet capital contribution requirements.

(3.)       Incestual sales and potentially unusual uses of related parties.

(4.)      Potential slowdown in Alberta CN real estate. (BPO)

(5.)      High occupancy rates in metro areas, possibly deteriorating because of reliance on financial service industry as well as potentially unusually high.

(6.)      Recent exotic financings. One would be 1 Liberty Plaza NYC.

I think the whole loan is $850M (350 + 500), 6.139% interest, Interest only till 7/2011 and then amorts over 360M, no prepayments until 4/2017 and maturity date is 8/2017. If I amortized correctly pay off balance on 8/2017 will be $777M.

Certainly BAM received a lot of dollars, and via near interest only, BAM certainly has the lowest maximum payment at 6.139% for 10 years (2017). Then they balloon.

(7.) Industry credit tightness, and BAM’s high leverage, could cause stress. Noting that $14 – $18B comes due on or before 2011. BAM has $33B of total debt.

1. Did BPO Properties have a business purpose, need and arms length transaction in distributing a $250M special dividend when the 89% recipient of the dividend would then pay off a low interest demand loan with the proceeds (or prior as Tom Farley key member of both companies describes.)

2. Is BPO Properties being properly renumerated in interest at Canadian Treasuries + 100bps, when the company they are lending to is only BBB rated. Can other BBB rated companies go out and borrow $125M on demand at such a low rate? Keep in mind at the beginning of the thread BPO Properties was paid 5% by Brookfield Properties. Now the times are different, credit is much more expensive than it was in December 2007, yet the rate Brookfield Properties is appreciably and materially less than 5% of the past. This occurs at the same time that all other companies have an increased cost of capital.

D.        It seems as though a key thesis for a BAM long has been that the BAM investor thinks BAM has availability of low cost credit and on top of that has current debt that is very manageable because of thinking the debt with BAM and subsidiaries is one of operationally long-term in nature and primarily fixed rate financing. Historically that has been the case with BAM.

It is my contention that this alleged long term fixed rate financing with ample liquidity for further leverage or refinancing is no longer as easy as it was.

THE FOLLOWING IS AN IMPORTANT CONCEPT (IMO)

BAM has total debt of $33B. On or before 2011, BAM has $14B – $18B of debt coming due.

Included in the $33B is $1.6B due March 2009 for the purchase of Multiplex. BAM claims the debt has a LTV of less than 55%. One would wonder if other entities would question that LTV. An asset bought and negotiated from say March 2007 till October 2007 may have lost a bit of value. Has Multiplex lost any value, and if so, is that loss of value included in their estimation of LTV? If you look at the Multiplex Funds.

You can see how something has happened to values in Australia. I do not know if Multiplex has followed the same path downwards, but one needs to really consider whether values have decreased for BAM and if so, will refinancing of $1.6B be difficult. Maybe not, but certainly something to watch.

http://www.brookfieldmultiplexcapital.com
Look at chart at end of page 1. Looks like price peaked when brookfield took over. I wonder if the price on this fund and other brookfield multiplex funds are just market driven. if so, I wonder if multiplex investment has gone down in value. If so, I wonder if financing needed will become at all difficult.

I think there is one obvious thing that is going on in the markets. I also don’t recall as many extensions on debt as opposed to recasting debt. That has been a trend on the street.

Brookfield Properties has $6B coming due on or before 2011. This is included in the total BAM debt I referred to above. They have extended $89M this year, as opposed to refinanced. The extended is included in the $6B mentioned above. I did not include the debt due on discontinued operations.

I do NOT consider $6B coming due on or before 2011 to be “long-term fixed-rate financing?” Much of the debt is interest only or with minor amortizations.
E.         If debt of a sub goes bad, and BAM had no recourse, then BAM would not be responsible for the debt of course, but would lose the intrinsic value of the subsidiary asset or its impairment.
Recourse or not recourse, it is of my opinion that BAM benefitted via leverage of easy credit. And now the potential that the pendulum swings the other way to tight and costly credit (if available.)
I have been told that lenders for less than Class A commercial property are demanding LTV of 50%, with principal payments required, guarantees and much increased from previous cost of credit. I know of a situation that was 65% LTV with interest only and Libor +100 bp. Now it is 50% LTV, with a lower valuation to boot and Libor + 500 with principal amortization and parent level guarantees. I have not verified the accuracy of that and it is my understanding that it is not Class A building.

2. Some Debt discussions:

1. BNN.GF cusip 10549PAE1 Maturity June 2012. Coupon 7.125%.

Traded 10/30/08 80,000 shares at $92.375 to yield 9.664%.

I noticed a variety of A- 4 year duration companies trading at yields of around 5.6% (PNC) or Keyspan at 7.6% on the higher side.

This bond traded in July 2008 at 99.512 yielding 7.268%, in May 2008 at 103.7 with a yield of 6.086%.

2. BAM.GA Description: BROOKFIELD ASSET MANAGEMENT INC Coupon Rate: 5.800 Maturity Date: 04/25/2017

traded on 10/30/08 65,000 shares at $74, yielding 10.505%. Last trade before that, I forget the date was 87.17.

I noticed a variety of A- 9 year duration companies trading at yields of around 6.4% (BNI) or hartford financial at 10% and Verizon at 8.7%.

What does this possibly tell us? Perhaps BAM bonds are not pricing in relation to the current credit rating. Meaning the possibility exists that the current credit rating is not reflective of current status. I mentioned the CDSW of 5 year BAM to be 580. That might be reflective of same. Or another possibility could be that BAM bonds are so lightly traded, not even listed CDSW on Bloomberg, that recent trades are not relevant data, and seller of bonds could have been distressed.

An Analyst wrote in response to above:

“PNC has two issues of debt maturing 2012 currently yielding 9.3% (PNC.HL) and 6.8% (PNC.HS), much higher than your 5.6%. These are rated A+ by S&P, not A-, so aren’t good comps to BAM’s A- rated debt, though it’s interesting that PNC’s A+ rated debt yields the same as BAM’s A- rated debt, implying that BAM’s debt is more credit worthy than their rating shows.

FINRA only shows one issue of debt by PNC rated A- which yield 11.4%. In any event, PNC is not a good comp to BAM since PNC is a financial services company and BAM is an asset manager.

>>> I noticed a variety of A- 9 year duration companies trading at yields of around 6.4% (BNI) or hartford financial at 10% and Verizon at 8.7%. <<<

Doing a search in FINRA for debt maturing in 2017 rated A- by S&P shows yields of 18-24% (CIT group), 12% (Simon Property Group), 10% (Enbridge Corp), 10.5% (BAM), 9.3% (Merrill), 22% (AIG), 9% (UNH), etc. BAM seems to be in the middle of the pack, and much better than distressed issuers (CIT and AIG).

BAM’s bonds are priced “at market” for a company that is sound and unimpaired.”

I responded:

FINRA only shows one issue of debt by PNC rated A-<<

You are correct. I errored. I used Egan-Jones rating.

>> it’s interesting that PNC’s A+ rated debt yields the same as BAM’s A- rated debt, implying that BAM’s debt is more credit worthy than their rating shows. <<

Egan-Jones opinion on PNC is that although it is rated A+ S&P, they feel it is worthy of an A-. They are two steps below S&P according to Egan-Jones. Egan-Jones downgraded from A on 9/30/08.

Good points on the other issues. I looked at Egan-jones only, yet yours makes sense.
I would just argue that companies rated A- by both Egan-Jones and S&P would not yield as you have shown.

Here are some companies for you to verify. These are all bonds listed at Egan-Jones that carry both an Egan-Jones and S&P rating of A-.

LMT 5/1/16 7.15%
MKC 12/15/17 5.41%
EOG 9/15/17 5.35%
HSC 5/15/18 5.79%

I think these numbers contradict your comment. The highest is LMT at 7.15%. The mid-range is 5.93%. Whereas BAM 4/25/17 traded again today to yield 10.51%.

>>BAM’s bonds are priced “at market” for a company that is sound and unimpaired. <<

I would disagree. I think one can start to question whether or not BAM is worthy of her S&P A- credit rating. We have spreads of 450 bps over similar rated issues. Granted I have only used a few bonds. But I have used the only companies in Egan-Jones universe which carry identical ratings of A-.

In time we will see. Not by stock price, but by availability of credit, and if credit is available, at what price.

The other day you were discussing cost of credit to be substantially less than 10%. I am not indicating that the current rate is permanent in nature. Yet, I suspect that if all stays similar that BAM will have to pay rates that are more commensurate with ratings. I also would not be surprised to see changes in the credit ratings or tone.

Question is the following:

1. Is seller distressed or forced to sell.

If not:

2. Are bond prices telling us something about the potential liquidity of Brookfield Asset Management and is their rating worthy of an S&P A-.

B. My argument is that cap rates are going up, bringing down valuation. As well as vacancy’s potentially not being substainable in NYC Class A at less than 2%. I also discussed that Brookfield Properties has $6B of debt coming due on or before 2011. Brookfield Properties also seems to have a sweetheart financing deal with BPO Properties. They currently owe I forget the amount, either $100M or $200M to BPO Properties, at a very low interest rate. Brookfield Properties valuation, of course is integral to BAM valuation.

C. BAM has total debt of $33B. On or before 2011, BAM has $14B – $18B of debt coming due.   Included in the $33B is $1.6B due March 2009 for the purchase of Multiplex. BAM claims the debt has a LTV of less than 55%. One would wonder if other entities would question that LTV. An asset bought and negotiated from say March 2007 till October 2007 may have lost a bit of value. Has Multiplex lost any value, and if so, is that loss of value included in their estimation of LTV? If you look at the Multiplex Funds.  You can see how something has happened to values in Australia. I do not know if Multiplex has followed the same path downwards, but one needs to really consider whether values have decreased for BAM and if so, will refinancing of $1.6B be difficult. Maybe not, but certainly something to watch.

3. The following is a chronology of the CC’s in relation to BPO Properties demand loan to Brookfield Properties. Brookfield Properties consolidates into Brookfield Asset Management. BPO Properties is 89% owned by Brookfield Properties. BPO Properties is consolidated into Brookfield Properties. Earlier in the year BPO Properties declared a special dividend of nearly $250+Mil. Brookfield Properties was able to pay back much of the demand loan from that dividend since they own 89% of BPO Properties. Now we see that BPO Properties is running out of tax sheltering of income. I never understood the fiduciary business purpose of BPO Properties paying such a dividend. It seemed very preferential to the parent, but not to the company declaring the dividend. Remember, Dividends are cash paid and not tax deductible. The following is quite long. I tried to put all items mentioned about the demand loan to Brookfield Properties from BPO Properties.

2/12/08

“At the end of the year, we did place on deposit with Brookfield properties the net proceeds received from the refinancing of the Royal Centre and the sale of Gulf Canada Square at a rate in excess of our short-term reinvestment rate.”

“Bryan Davis, BPO Properties – SVP, CFO

We put $220 million on deposit with Brookfield Properties. That effectively represented the excess proceeds that we had towards the end of December. We put it on deposit at a rate that was in excess of what we could have invested on an overnight basis.

Bryan Davis, BPO Properties – SVP, CFO

I don’t know what the all-in rate was, but it was 5%, approximately 5%.

Rossa O’Reilly, CIBC World Markets – Analyst
What is the policy in regard to non-arms-length loans like that to the controlling shareholder? Is this going to be a part of ongoing cash management, or is this a very temporary issue? I ask it only because this was a contentious issue in the Company’s financial affairs in the early 2000s.

Bryan Davis, BPO Properties – SVP, CFO

Oh, yes and we are aware of that, Rossa.

What we do do in situations like this is we present the opportunity to invest with our parent company to our government committee, which consists of our independent directors, for approval. In this case and because we sort of came into the cash at the end of the year, there were really two compelling reasons for BPO Properties to do this. One was we were able to achieve a rate that was in excess of what we could have invested overnight. The second was we were able to save capital tax associated with carrying cash balances on your financial statements over our year-end, which for tax purposes we’re a December 31 filer. So in this case, it was temporary (multiple speakers).

Rossa O’Reilly, CIBC World Markets – Analyst

How long is it expected to the cash advance will be outstanding to Brookfield Properties?

Bryan Davis, BPO Properties – SVP, CFO

Well, right now, it’s a demand deposit. I think it will remain there until probably we can find an opportunity to reinvest the capital, we can find the opportunity to invest it into something that can yield us a greater return. But it the stage in the game, I think it makes economic sense that we keep it there for the short-term.

Rossa O’Reilly, CIBC World Markets – Analyst

Of course, these are the same issues that were discussed at length years ago, and of course the issues will include the fundamental issue of conflict of interest. People regard, I think, Brookfield Properties as being a very sound and well-managed company, but if anything should go wrong in business, and businesses always have the risk of the completely unexpected, it is a conflict of interest which stands out. That loan of course had never been offered to other shareholders, and therein lies a philosophical issue.

But one would think that there would be substantial opportunities for Brookfield Properties to invest those funds in real estate, either acquisitions or developments, or else the other alternative that’s frequently raised relates to distribution. So, the level of distributions from the Company is extremely low in relation to other real estate equities out there. Earning 5% is not something that real estate investors typically regard as being an attractive rate of return.

Bryan Davis, BPO Properties – SVP, CFO

Those are all points well taken, Rossa. I think one of the things that we considered coming into the end of 2007, in light of some of the turmoil in the credit markets, was we wanted to take the opportunity to raise some liquidity, so we opportunistically refinanced Royal Centre on that basis, particularly in light of some maturities that we have over the course of 2008 and in light of potential opportunities to reinvest into real estate in the Canadian market to the extent that any of those do arise. So our objective is this sort of deposit is a temporary one and that we will be able to utilize the cash in some capacity or another, ideally into reinvestment into real estate, reinvestment into our development pipeline. To the extent that we exhaust those resources, we will definitely consider the appropriateness of our dividend rate along with our Board of Directors.

4/29/08 No references to Brookfield Properties.

8/5/08

“Ending the quarter BPO Properties has approximately $175 million of liquidity of which $125 million was placed on deposit with Brookfield Properties, bearing interest at overnight rates plus 100 basis points.”

Sam Damiani, TD Newcrest – Analyst

All right. And is there any reason the — I guess the amount outstanding at Brookfield is still $125 million. With the special dividend I would have thought that would have been reduced by more than that?

Bryan Davis, BPO Properties – SVP, CFO

So what happened, Sam, is the original deposit at the end of the first quarter was paid back and that was used to fund the special dividend. We were successful in some new financings during the quarter, the ones that I referred to on 2 Queens Street, Altius Centre and Canadian Western Bank, as well as collecting a mortgage receivable that put BPO in a cash rich position at the end of the quarter in which case we put on deposit to get an extra 100 basis points over overnight rates and we will likely leave it liquid until we can get clarity on the status of our financing or our maturity at the end of — or the maturity in the fourth quarter.

Sam Damiani, TD Newcrest – Analyst

So essentially the parent has I guess marginally better use for that liquidity today and is willing to pay the extra 100 basis points.

Bryan Davis, BPO Properties – SVP, CFO

Exactly. We felt it made sense for BPO Properties.

Sam Damiani, TD Newcrest – Analyst

Do you expect that to come back to you in due course or is that going to sit there because you have more money coming in in the fall?

Bryan Davis, BPO Properties – SVP, CFO

No. I think to the extent that we have opportunities to reinvest in development, opportunities to pursue acquisitions or if the Board so chooses to consider another special dividend, then it is on demand and to the extent that we require the proceeds we will be asking for it back.

Bryan Davis, BPO Properties – SVP, CFO

Yes, I’m just trying to remember what the December 31, balance was. But I believe it was $220 million that was on deposit at the end of the fourth quarter and at the end of the first quarter. That deposit was paid back in full to fund the $207 million special dividend that was paid out in the second quarter. And then $125 million was placed on deposit at the end of the second quarter effectively to get 100 extra basis points until we figure out the use of proceeds.

Bryan Davis, BPO Properties – SVP, CFO

It’s overnights, which are approximately 2.6%, plus 100 basis points.

Ronald Redfield, Redfield, Blonsky – Analyst

Because it’s a parent, how do you work with credit tests and so forth to assure the liquidity of Brookfield Properties, that the money will be there on demand if needed?

Bryan Davis, BPO Properties – SVP, CFO

We would deal with — well, we have a long history of dealing with Brookfield Properties so we do have the benefit of experience from credit exposure but we do also consider the credit of our parent. We have the benefit of having inside knowledge of our parent’s balance sheet and its cash flow situation and at this point in time it represents to us a great opportunity to park our excess liquidity until we can finalize the Q4 financings and also determine the use of proceeds for an amount over and above what we could get with a government or a bank.

Ronald Redfield, Redfield, Blonsky – Analyst

Has that been discussed, it would be available to you if you could not get preferential financing on your refinancing?

If for some reason you could not get preferential rates or a decent cost of capital on your refinancing coming due, has it been made clear that that Brookfield Properties money would be available to you under all circumstances.

Bryan Davis, BPO Properties – SVP, CFO

The Brookfield Properties money is on demand so absolutely. It’s available to us like a deposit would be with a bank.

11/4/08

“Ending the quarter, BPO Properties has approximately C$185 million of liquidity, of which C$125 million continues to be placed on deposit with Brookfield Properties bearing interest at government of Canada overnight rates plus 100 basis points much the balance of C$60 million is bearing interest at overnight rates.”

Marvin Carslee, Ad Saver Investment – Analyst

Well, I have certainly supported the stock as well. However, it seems that the appointed market maker is not doing their job and doing it properly because when you look and see several hundred shares traded and the stock keeps dropping 10%, 20% with such thin trading obviously somebody is not doing the job. Right.

The second question I would like to ask is with regards to the loan to the parent company at a favorable rate of Canada treasuries plus 100 basis points. With the parent company’s credit rating being what it is, don’t you think that the rates charged is rather low?

Brian Davis, BPO Properties – CFO

No, we don’t feel that the rate charged is rather low. In fact, that rate is negotiated slightly higher than it had been in the past. We think the 100 basis points spread counts for any counter party risk that may be associated with a loan up to the parent company.

Marvin Carslee, Ad Saver Investment – Analyst

But if you take what banks are paying for intercompany money today and what you yourself paid to refinance the one year refinancing just recently announced, if you take that and compare it to the rates that you are charging the parent company for substantial amount of money, isn’t that giving a favorable treatment to the parent?

Brian Davis, BPO Properties – CFO

We are effectively receiving 100 basis points more than if we were to deposit the same amount of cash with the financial institutions.

Marvin Carslee, Ad Saver Investment – Analyst

You said over treasuries, you didn’t say financial institutions rates.

Brian Davis, BPO Properties – CFO

I apologize but the rate that you would get on an overnight deposits with the bank equate to a government of Canada treasury rate.

Marvin Carslee, Ad Saver Investment – Analyst

Are we equating then Brookfield Properties to Canada treasuries?

Brian Davis, BPO Properties – CFO

No. And that’s why we have 100 basis points spread.

Marvin Carslee, Ad Saver Investment – Analyst

And you feel it’s adequate?

Brian Davis, BPO Properties – CFO

Yes.

Rossa O’Reilly, CIBC World Markets – Analyst

Thanks very much. On that point with regard to the loan to the parent, of course it’s at times like this that the potential for that conflict of interest to have consequences greatest. And I think everyone would agree that Brookfield Properties is a credit worth company, but arguably on BPO Properties is a more credit worthy company based on its ratios and if it needs the funds, isn’t it more appropriate to the money to be kept in a cash equivalent basis within BPO Properties? And if it doesn’t need the funds then isn’t it more appropriate to use the money to either repurchase BPO Properties stock or to pay out a dividend?

Brian Davis, BPO Properties – CFO

Rossa, it’s Brian. You know, I think the position we took is with respect to these proceeds. We look toe achieve I think the greatest return that we could while maintaining this liquidity position until we were able to achieve success on certain of our initiatives, mainly our refinancing initiatives. And so the opportunity to place on deposit with our parents company with an incross incremental 100 basis points spread was attractive to us. With respect to whether or not we need the money, I think and sort of what I tried to allude to in my comments is we feel that it is good to have alike width cash position. We would have viewed the deposit with Brookfield properties of being alike width cash position. In fact they’ve demonstrate the paying back of a deposit that we had early in the year to fund the payment of a dividend. We view keeping that liquidity position as being a defensive position in light of the risks, the more challenging environment to refinance underlying properties. And in light of our success input ago one year bridge in place to funds the maturity of Petro Canada center we evaluated our liquidity process but there is still some risk associated with that and that’s the take out financing that we are looking to execute in 2009. And I think once we can achieve certainty on success of that then we will of course think about the use of those, that liquidity. And as we’ve talked about in the past it could include funding development initiatives, it could include acquisition opportunities and it could include buying back stock or it could also include paying out another special dividend like we had during the year.

Rossa O’Reilly, CIBC World Markets – Analyst

Last quarter or perhaps the quarter before you said, as I understood it anyway, was that the liquidity needed to be held in one form or another until the debt maturities at the coming to you before the ends of 2008, coming due, had been dealt with and then in early 2009, depending also on the proceeds from asset sales, some thought might be given to using the excess liquidity as a special distribution. However, I guess to the 2008 refinancings have now been done. But only on an interim basis. And on a short-term basis. 2008. No doubt in 2009 you’ll be looking for a permanent financing for the two construction financing on the leased up projects which (inaudible) will be available but I’m not sure when you’re thinking of putting the pen and paper to refinance that. But it would seem that there will be a continuing series of refinancing that liquid, would have the potential for perpetuating the current conflict of interest loan to the controller shareholder. Am I picking this up incorrectly?

Tom Farley, BPO Properties – President & CEO

It’s Tom, I agree that that was our strategy for the balance of ’08 and we have had success in refinancing the maturities in ’08, the one area that we have not been successful in as yet is the disposition of those assets which we are still relatively confident that we are going to be able to conclude a transaction in 2009. However, we will be looking to optimize value and retain a piece of those assets and to the extent that there’s insufficient demands for us to accomplish that objective then we will back away and we will continue to own the asset. We also have the maturities in 2009 to consider. We will be evaluating our permanent financing on the construction projects, development projects as they convert into long-term holding assets. So we have a variety of initiatives that we have to focus in on over the next 12 months and so we’ll just continue on today’s path.

Rossa O’Reilly, CIBC World Markets – Analyst

During the next 12 months we can expect that the deposit with Brookfield in the amount of C$150 million

The next 12 months the deposit of C$150 million with Brookfield properties at calendar plus 100 basis points would continue?

Brian Davis, BPO Properties – CFO

I would say that we are unsure that over the next 12 months that deposit will continue. I think it’s based on achieving success in these initiatives that we’ve both myself and Tom have talked about and to the extent that there’s certainty about our liquidity position in light of the credit markets and there’s no use for the proceeds, then we’ll have to evaluate whether or not a special dividends at that time is appropriate and that’s the same process that we went through when we declared the C$7.25 special dividend earlier or the mid-part of this year .

Ronald Redfield, Redfield, Blonsky & Company – Analyst

And then I guess the last question would be, as we covered quite a bit on this call, had you mentioned that you — I guess I never fully understood the business purpose of the dividend as a dividend, the special dividend seemed to have went to Brookfield Properties primarily and then in turn they had the ability to pay their demands movement I didn’t see the business purpose of that, if you could elaborate on that again, and I guess I asked this last quarter if you feel very comfortable that they could immediately pay this on demand and have you considered it? Have you looked at what AAA, not Triple B company’s would give you on overnight demand paper? It seems like it would be a rate that might even be higher than you have now.

Brian Davis, BPO Properties – CFO

So the special dividend is sort of a separate analysis. I mean the special dividend that was paid out mid of the year was paid out as a result of excess liquidity within BPO Properties that we couldn’t otherwise invest in the near term.

Ronald Redfield, Redfield, Blonsky & Company – Analyst

You write BPO Brookfield Properties as had a major shareholder.

Brian Davis, BPO Properties – CFO

89%.

Ronald Redfield, Redfield, Blonsky & Company – Analyst

Almost an entire shareholder.

Brian Davis, BPO Properties – CFO

In order to pay it out they do have to refunds the money to us and then we pay out a special dividends. In terms of liquidity, of course we analyze the liquidity of Brookfield Properties corporation. They reported their Q3 results last week. Have approximately 220 million of cash on deposit with financial institutions and in excess of C$550 million or C$600 million of liquidity available to them. So we feel comfortable with the deposit that we have and we feel comfortable that if we had asked, if we ask for the money, that we would receive it.

Ronald Redfield, Redfield, Blonsky & Company – Analyst

And the C$500 million of liquidity, are you including Brookfield Properties $300 million credit facility that’s on at that point with Brookfield Asset Management?

Brian Davis, BPO Properties – CFO

Correct.

Ronald Redfield, Redfield, Blonsky & Company – Analyst

Untapped.

Brian Davis, BPO Properties – CFO

Correct.

Marvin Carslee, Ad Saver Investment – Analyst

Gentlemen, further to the amount on deposit with the parent company, and also the amount that you’ve placed with institutions, could you give us the actual rate over the last 30 days received from the parent company? And does the rate that you receive from the parent company differ in any way from the rate you receive from the financial institutions such as banks?

Brian Davis, BPO Properties – CFO

Yes, the rate that we are receiving from financial institution is approximately 2.2%. And the rate that we received on our loan with, on our deposit with Brookfield Properties is 3.95%.

Marvin Carslee, Ad Saver Investment – Analyst

So the treasury rate is 2.95, plus 100 basis points?

Brian Davis, BPO Properties – CFO

Correct.

Marvin Carslee, Ad Saver Investment – Analyst

And the financial institutions are paying you less than treasury rates.

Brian Davis, BPO Properties – CFO

Our most recent role of our deposit with them were at a 2.2% rate.

Marvin Carslee, Ad Saver Investment – Analyst

Well, I mean I know that recently rates have dropped significantly. But we are talking let’s say over the period of the last 30 to 60 days. Were those the rates that the 2.2% that you were receiving when the arrangement was made with the parent company to pay you treasuries plus 100 basis points? Because it seems odd that banks would be paying you less than treasuries.

Brian Davis, BPO Properties – CFO

Yes, sorry, I’m only, I’m sorry, I was armed with the information that you had asked for the quarter; the average rate that we received on our deposit with Brookfield Properties. I only have available at this stage what we currently are rolling the C$60 million that we have on deposit with financial institutions at and I know just based off of our most recent rolling that it was at 2.2%. So – –

Marvin Carslee, Ad Saver Investment – Analyst

Wouldn’t you think it more prudent and safer if there wasn’t this conflict of interest and the excess funds were either placed with third parties rather than intercompany and or dividended out to the shareholders and thereby allow the parent company to get 89% of it for capital use?

Brian Davis, BPO Properties – CFO

I think based off of the feedback that we’ve received on this call today we will have to take that into consideration.

***********************************************

My comments:

I think the analyst community is obviously concerned that there are tradings of monies at rates that would not typically be available in an arms length transaction. Shareholders of BPO Properties (the 11% minority shareholders) have to wonder if fiduciary responsibility of the corporation is being strictly followed. In this day and age, it seems that a credit of BBB status (Brookfield Properties) would not typically get a demand loan at Canadian Treasury + 100 BPS.

Keep in mind that BPO Properties President and CEO Tom Farley is also President, COO, Canadian Commercial Operations of Brookfield Properties.

I think you can see all the calls mentioned at seeking alpha. BPO Properties, symbol BPP.TO, not to be confused with Brookfield Properties symbol BPO.

To summarize I have two areas of skepticism here.

1. Did BPO Properties have a business purpose, need and arms length transaction in distributing a $250M special dividend when the 89% recipient of the dividend would then pay off a low interest demand loan with the proceeds (or prior as Tom Farley key member of both companies describes.)

2. Is BPO Properties being properly renumerated in interest at Canadian Treasuries + 100bps, when the company they are lending to is only BBB rated. Can other BBB rated companies go out and borrow $125M on demand at such a low rate? Keep in mind at the beginning of the thread BPO Properties was paid 5% by Brookfield Properties. Now the times are different, credit is much more expensive than it was in December 2007, yet the rate Brookfield Properties is appreciably and materially less than 5% of the past. This occurs at the same time that all other companies have an increased cost of capital.

D. It seems as though a key thesis for a BAM long has been that the BAM investor thinks BAM has availability of low cost credit and on top of that has current debt that is very manageable because of thinking the debt with BAM and subsidiaries is one of operationally long-term in nature and primarily fixed rate financing. Historically that has been the case with BAM.

It is my contention that this alleged long term fixed rate financing with ample liquidity for further leverage or refinancing is no longer as easy as it was.

THE FOLLOWING IS AN IMPORTANT CONCEPT (IMO)

BAM has total debt of $33B. On or before 2011, BAM has $14B – $18B of debt coming due.

Included in the $33B is $1.6B due March 2009 for the purchase of Multiplex. BAM claims the debt has a LTV of less than 55%. One would wonder if other entities would question that LTV. An asset bought and negotiated from say March 2007 till October 2007 may have lost a bit of value. Has Multiplex lost any value, and if so, is that loss of value included in their estimation of LTV? If you look at the Multiplex Funds.

You can see how something has happened to values in Australia. I do not know if Multiplex has followed the same path downwards, but one needs to really consider whether values have decreased for BAM and if so, will refinancing of $1.6B be difficult. Maybe not, but certainly something to watch.

http://www.brookfieldmultiplexcapital.com

Look at chart at end of page 1. Looks like price peaked when brookfield took over. I wonder if the price on this fund and other brookfield multiplex funds are just market driven. if so, I wonder if multiplex investment has gone down in value. If so, I wonder if financing needed will become at all difficult.

I think there is one obvious thing that is going on in the markets. I also don’t recall as many extensions on debt as opposed to recasting debt. That has been a trend on the street.

Brookfield Properties has $6B coming due on or before 2011. This is included in the total BAM debt I referred to above. They have extended $89M this year, as opposed to refinanced. The extended is included in the $6B mentioned above. I did not include the debt due on discontinued operations.

I do NOT consider $6B coming due on or before 2011 to be “long-term fixed-rate financing?” Much of the debt is interest only or with minor amortizations.

E. If debt of a sub goes bad, and BAM had no recourse, then BAM would not be responsible for the debt of course, but would lose the intrinsic value of the subsidiary asset or its impairment.

Recourse or not recourse, it is of my opinion that BAM benefitted via leverage of easy credit. And now the potential that the pendulum swings the other way to tight and costly credit (if available.)

I have been told that lenders for less than Class A commercial property are demanding LTV of 50%, with principal payments required, guarantees and much increased from previous cost of credit. I know of a situation that was 65% LTV with interest only and Libor +100 bp. Now it is 50% LTV, with a lower valuation to boot and Libor + 500 with principal amortization and parent level guarantees. I have not verified the accuracy of that and it is my understanding that it is not Class A building.

4.  Brookfield Homes has on several occassions recently had changes made to their unsecured credit line with Brookfield Asset Management.  Here are some examples.

A. “July was absolutely awful,” said Steve Doyle, president of the San Diego division of Brookfield Homes. “It was the worst month I’ve ever seen.”

At his six projects in three communities in the county, he said only one home out of 30 offered was sold last month.

In response to the slow market, he has cut his staff from 150 to 72 and begun to think about better times, which some analysts say will not arrive for at least two years.

“We’re a little more optimistic,” Doyle said. “We think things will start to turn around visibly by the middle of ’09. That doesn’t necessarily mean prices will move up quickly. It’ll probably be 2010 before we see price appreciation.”

New-housing market analyst Sharon Hanley reported 193 sales at 1,090 projects in the county in July, off substantially from the July 2007 count of 639. Just three years ago, the all-time July peak sales total was 1,578. Early indications are that sales in August were up a bit but not much better.

Hanley’s other findings for July: a cancellation rate of 43.1 percent, up from 27.4 percent in July 2007; weekly traffic to sales offices down to an average 22 visitors per tract, a record low for July; and 84.6 weeks of unsold inventory, more than double the 35.3-week level a year earlier.

“What’s hurting right now is builders can’t sell when there are foreclosures only 10 blocks away that are two or three years old,” Hanley said. “So, I think we’re going to have to see some clear out of this foreclosure market before these builders can come back.”

B. July 23, 2008 – “Brookfield Homes Corporation (the “Company”) is disclosing information under this Item as a result of entering into a definitive agreement with an affiliate of the Company. On July 23, 2008, the Company amended its unsecured revolving credit facility in the form of a promissory note with a subsidiary of its major stockholder, Brookfield Asset Management Inc., in order to provide for an increase in the aggregate principal amount to an amount not to exceed $275,000,000. All other terms and conditions of the promissory note, as amended, remain in force and effect.”
C.  Brookfield Homes on On October 10, 2008 discussed change once again of unsecured line with BAM.  “Brookfield Homes Corporation (the “Company”) is disclosing information under this Item as a result of entering into a definitive agreement with an affiliate of the Company. On October 8, 2008, the Company amended its unsecured revolving credit facility in the form of a promissory note with a subsidiary of its major stockholder, Brookfield Asset Management Inc., in order to provide for an increase in the aggregate principal amount to an amount not to exceed $300,000,000. All other terms and conditions of the promissory note, as amended, remain in force and effect.”  According to Brookfield Homes, balance as of October 20, 2008 was $280M.

2. Brookfield Properties

A.  S&P rates Brookfield Properties and BPO Properties BBB

“TORONTO (Standard & Poor’s) Oct. 31, 2008–Standard & Poor’s Ratings Services
today said it affirmed its ratings, including the ‘BBB’ long-term corporate
credit rating, on New York-based Brookfield Properties Corp. (Brookfield) its
Toronto-based affiliate, BPO Properties Ltd. (BPO), continuing our analytical
view of these two related companies as one rated entity. The affirmation
affects C$900 million of preferred stock and US$110 million of preferred stock
issued by Brookfield, and C$382 million of preferred stock issued by BPO.
“The ratings reflect both companies’ strong asset quality, long-term
leases to good quality tenants, a debt maturity schedule that matches the
long-term nature of the lease schedule, and adequate financial flexibility,”
said Standard & Poor’s credit analyst Christian Green. Brookfield retains an
89% equity stake composed of about 55% of common shares and 100% of the
nonvoting equity shares in BPO Properties. As Brookfield’s results fully
consolidate the results of BPO Properties, the rating on Brookfield is
supported by a more conservatively capitalized BPO Properties.
Brookfield’s exposure to the financial services sector in the New York
market presents near-term challenges to occupancy levels and future rental
growth. Pressures in the sector could also surface in the company’s largest
Canadian market, Toronto, if consolidation or cutbacks become more pronounced.
Furthermore, medium-term supply pressures in the western Canadian markets
could prove difficult if energy prices remain well below recent peak levels.
The Calgary market in particular is exposed to sizable supply risks that could
reduce market rents and result in dramatically higher vacancy rates. Expansion
and rental increases could also be difficult to achieve in the Houston market
if energy markets remain depressed.
Brookfield’s financial profile remains aggressive for the current rating.
However, management’s continued steps to reduce leverage and prospects for
some organic growth within the core portfolio provide some support for modest
improvement to these measures.
The outlook is stable. Predictable and stable cash flow from the
high-quality core portfolio support the ratings. In addition, we anticipate
that Brookfield will continue to de-lever the balance sheet when the
opportunity presents itself through additional asset sales, and bring its
financial profile more in line with those of rated peers. The stable outlook
for Brookfield depends on its ability to maintain and over time improve
coverage metrics. The ratings would come under pressure if fixed coverage
metrics drop below 1.5x perhaps as the result of deterioration in asset level
performance, aggressive investments, or share repurchase activity. Positive
ratings momentum is precluded at this time due to higher leverage levels and
longer-term refinancing risk.”

Conference Call notes from October 20, 2008

B.  1. Benefitted from falling libor, which averaged 2.6% for quarter, which was down from 5.4% same time last year. LIBOR trended up at end of September and still rather high. For each 25bps increase in Libor on the $2.4B floating rate credit they have, will have a bottom line effect of $6M reduction in FFO annually. I guess one has to calculate average libor increase. Divide that by 25bps and multiply the difference by $6M annually. That sounds like it could be a decent sized number in 4Q08 if things dont change drastically from the current lIBor levels. Most Libor is claimed to be based on 30 day. If libor rates settle (and they appear to be per bpo) then we might expect a 50 to 50 bps change on average.

2. Only a small impact in depreciation of Canadian Dollar.On September 30th Canadian Dollar was 0.9394 and now it is 0.7953. They cite a rule of thumb that for every .01 change, the resulting annual impact on FFO will be $2M to $3M. They have increased CDN liability positions to offset some of that.

3. Liquidity is now $220M in Cash and $534M in available credit facilities.

4. Claims debt maturity profile remains “challenging.” Yet they refinanced debt maturities in the quarter, and took cash out of petro-canada centre during October.

5. sees a definite change in psychology in NYC. Vacancy and sublease space as % of overall availability has increased. Tenant activity down significantly. They are anticipating some downward pressure on rents, which “will become more apparent in 2009.” In questions Clark mentioned that occupancies would still be in the 95 to 96% range.

6. Houston demand remains strong.

7. Through 9/30/08 guidance was achieved and maybe slightly exceeded. BPO mentioned concern for quarter so far, and does not yet know if 4th quarter will be impacted. They
have several transactions waiting to close, that should be in December or January. This
accounts for revenue of about $60M.

8. They have extended or refinanced over 1.1B of debt during 2008.

9. $300M credit facility with BAM is contractual and completely undrawn.

10. Approx $700M of debt rolling over the next 2 years, which is $600M of their ownership percentage. Average LTV is 40% and average debt service ratio is 1.8X. Majority of debt is with banks and life insurance companies. Clark claimed he used a 6.5% to 7% cap rate to determine that.

11. On liquidity front they believe they are in “very good shape.”

12. BPO guesstimates that 5% of Downtown Manhattan property of theirs is being sublet.

C.   During August CB Richard Ellis recently published a report on various conditions and markets.:

(1.) Indicates Commercial Mortgage delinquencies are a fraction of residential. Perhaps the reason is looser covenants, Paid in Kind (PIK) and extensions. These would delay delinquencies.

(2.) Indicates that the trend of new loans are no longer interest only, but have 30 year amortizations. This is in relation to commercial loans.

(3.) Cap rates – Office Cap rates were 8.4% in 1985, 9.2% in 1991, seems to have been in range of 8.4% to 9.0% from 1985 till 2001, then the slide started. I would think a reversion to 9% ish would make sense. The fuel of funding has started to dry up? I would love to see cap rates from say 1800 till present. Is that possible to get?

(4.) They had a table on what is “what’s in and what’s out for commercial property. They indicated that 65-75% leverag is in, whereas 90-95% is out. Balance Sheets in CDO’s out. Skin in the game in, option equity out. Trailing cash flow in, pro forma out. Rising cap rates in. Equity in the Deal in, cash out is out. sponsor equity in, syndicated equity out.

(5). Cost of capital, coverage ratios and amortization cut deep, even when value and cash flow stays constant. Hence assuming same asset value and cash flow, the available for borrowing is much less because of amortizations, required coverage ratios and cost of capital has gone up.

(6.) In 2007, Australia had $32B of commercial real estate sales. I think BAM bought Multiplex for around $7B, maybe more to get 100%. Big chunk of that %.

(7. )Historic Vacancy rates for commercial were 9% to 17% over the last 23 years.

B.  July 29, 2008 – It is my understanding that Brookfield Properties has hired Cassidy & Pinkard to sell Potomac Tower in Arlington VA. I think the expectations are $145M, $615 per sq foot. This would give an intial buyer yield of 5.75%. Potomac Tower is said to be 92% occupied. Friedman Billings Ramsey occupies 65% of the building with a lease that expires 2014. ‘Strategic Investment’ leases 14% and expires in 2012.

In place rents are $40 sq ft, which is below current asking rate of $55. Buyer would be able to assume a $75M interest only loan, with a 4.72% coupon. It matures in 2012. Existing leases supposedly have scheduled increases.

BPO bought in 2004 for $106M from Deutche Immibilefonds. 19Years old and 3miles west of Wash. Building is next to The Waterview complex, Hotel Palomar, and is one block from Metro (Rosslyn).

C.  Marc  Holliday of SLG said the following in a July 2008 conference call.

” Other remaining vacancy beyond the 100 Park tends to be scattered throughout the portfolio and we have again made some forward progress with our leasing in July, a typically slow summer month where we have already signed 82,000 square feet of leases. Highlighted in our press release are the five largest lease deals that we transacted in the quarter which notably excludes any financial service tenants. While this demonstrates the vibrancy and diversity of Manhattan space users it also foreshadows lower rents in the future due to lack of demand for Manhattan’s largest business sector. While this softening is not evident in our year-to-date performance, we are still anticipating a 10% to 15% across the board drop in net effective rents as businesses continue to work they way through the current economic environment.”

“The companies that have either put sublease space into the market or indicated an intention to do to consists of Banc of America, Citigroup and JPMorgan Chase. Others, such as Lehman Brothers and UBS are rumored to be weighing their options but not made space available.”

“We expect to announce shortly the terms of our refinancing at 717 5th Avenue which represents our only remaining maturity this year. As we look out to 2009, we have only one scheduled maturity of note which is a $200 million unsecured bond obligation we assumed in connection with the Reckson transaction. As we have stated before, the company remains very financially flexible with over $3.8 billion of unincumbered assets. These assets are eminently financable even in a difficult credit environment, so we believe the balance sheet is sound and very liquid for any opportunity.”

“The average rent of $65.89 during the quarter was the highest ever recorded by the company during any one quarter. Tenant concessions average $17.70 and free rent approximately two months which once again remained relatively modest.”

“As I mentioned, we expect to see a reduction in FFO contributions from Gramercy for the balance of the year and this will also translate in to substantial reductions in the incentive fees received from them. ”

My understanding is that NYC Class A still has lending going on. Much fewer lenders, higher costs, tighter covenants and lower loan to values. I think 60% LTV is accurate. Also, loan extensions are being made to a greater extent.

On June 24th Holliday had this to say,

“But this is a very significant credit crisis that has been ongoing really for 18 months, the way I define it, from February ’07. When spreads and swaps first started to gap out, obviously it was much more pronounced in August-September of last year, but really we kind of define it as February of ’07, so we are well into that. So the cause, the cause of this current climate has been there for quite a while. The effects lag, and the effects I think were very benign over that period of time, but I think those effects will get more pronounced over the next 12 to 18 months. But as those effects are getting more pronounced the further you get into it, the cause will start to dissipate, hopefully, as liquidity reenters the market. That will eventually pull it back to more normal level. But I would define it as a pretty significant credit.”

“Well, I think a lot of the aggressive lending done on old metrics were done predominantly in ’06 and ’07, early ’07, so those at least short to medium-term loans will start to roll over and reprice themselves in ’09 and ’10. I think it will take pretty much into ’09 and ’10 to really have vetted a lot of those loans onto the new underwriting metrics, the new underwriting parameters. So I think really you’re looking at a solid 18-24 months more before you’ll see some real liquidity come back into the market. That doesn’t mean it will be like it is now. I think that liquidity will build over time in ’09 and into ’10. It can’t get much worse than it is now because right now there is no liquidity, so you know, but I do think it will improve into ’09 and certainly into ’10 as we — as everything reprices itself.”

“There are situations around New York where individual owners may be mis-capitalized, and the fact that an individual owner is mis-capitalized may be problems for that owner, but actually that doesn’t mean the assets would trade at distressed prices. I think that’s a big distinction to make.”

“I think, over the next 12 to 18 months, strictly due to the sublet space that will be contributed to the market, it’s almost [math] that I think there will be some pressure on net effective rents. I have quantified that to my shareholders and otherwise in the 10% to 15% range downward pressure on net effective rents.
You know, generally, I think the bias is more optimistic than that. I tend to be on the low side with that view but we do see sublet space coming on the market.”

“Construction costs are through the roof.”

D.   On September 22, 2008 S&P mentioned the following in regards to Brookfield Properties, “BPO shares have fallen about 20% this morning.We think concerns have intensified with regard to the company’s exposure to the lower Manhattan office market, which accounts for close to 40% of BPO’s total office space. In our view, Merrill Lynch (MER 28.4***), BPO’s largest tenant, is likely to scale back its need for space following its merger with Bank of America (BAC 35.3****).We also see downside risk from Canadian home building and land development businesses. As a result, we are keeping our 12-month target price at $17 and maintaining our sell recommendation.”

E. Ric Clark mentioned, “…A year ago, several companies bought portfolios at the top of the market at high prices, and financed them with short term debt, said Clark.”

This was discussed at investor day. BAM does not feel that multiplex fits into that category. They said because although they bought a little more than a year ago, that they got a great deal, because of Wembley and such. Since markets have contracted, Flatt said something like, Multiplex is now say at “par.” He said they bought at a bargain, and now it is valued at what they paid for it. They said their debt comes due in March, “late March” they emphasized. Around 1.6b coming due, but $500M from UK situation which is being reorganized or something like that. It will be interesting to watch the Multiplex debt situation.

F. On September 24, 2008 The Observer wrote, “Brookfield Properties has yet to begin “substantial” construction of a platform necessary to construct its two planned Ninth Avenue skyscrapers, despite earlier statements that the work would begin this past summer, according to Real Estate Weekly.

In February, Brookfield, led by hunky CEO Ric Clark, said work would begin on the platform over the railyard in June, according to The New York Times:

“Despite a flagging economy, Brookfield Properties says it will start work in June on a $600 million platform over railroad tracks near Ninth Avenue, where it plans to build two towering office buildings.”

The railyard comprises half of Brookfield’s five-acre lot, bounded by Ninth and Dyer avenues, 31st and 33rd streets. Brookfield plans to erect two very tall, SOM-designed towers, one of which will soar to 66 stories, just 34 feet shy of the Empire State Building’s 1,250-foot pinnacle. Tthe other will rise to 60 stories, according to an earlier Observer.”

On the same date this was written by REW.  “Brookfield Properties hasn’t yet begun any substantial work on a platform along Ninth Avenue that will allow it to develop millions of square feet of commercial space on the far West Side despite stating earlier in the year that the construction project would begin by the summer.

While the company said that it likely wouldn’t build a commercial development on the site until it had lined up a substantial space commitment from an anchor tenant, Brookfield’s chief executive Ric Clark said during a first quarter conference call that the platform would start sometime during the summer so that the firm could move more quickly to build one or more office towers on the site when demand for the space arose.

A report in today’s New York Post indicated that Conde Nast was currently considering the site.

A platform needs to be constructed because Brookfield’s site sits along Ninth Avenue above working railroad tracks that lead from Penn Station to the West Side rail yards.

A spokesman for Brookfield, Matthew Cherry, wouldn’t characterize the situation as a delay and said that the company wasn’t backing away from building on the site because of the uncertain economy and tumult in the financial sector. He said that work was going on to ready the site but wouldn’t give a timeframe for when the project could begin.”

On the same date NY Post wrote, “Since then, sources said, Condé Nast has been talking both to Related about a move to the yards and to Brookfield Properties about its own development site on Ninth Avenue in the 30s.

Since the rest of 4 Times Square will be occupied by law firm Skadden Arps even after 2019, it wasn’t immediately clear how Condé Nast could stay there and expand at the same time.   But a source pointed out that both the Related and Brookfield projects face public review and engineering challenges that raise questions about delivery schedules.

“Si is getting on and he wants a decision to be made soon, rather than wait until 10 years from now,” the insider said.  Condé Nast’s broker, CB Richard Ellis tristate CEO Mary Ann Tighe, declined comment, and calls to the offices of Durst and Brookfield were not immediately returned.  Related Cos. Chairman Stephen M. Ross politely said yesterday, “I’d rather not answer” when we asked him if Related was talking to Condé Nast.”

G.  In a report from September 2008 Grubb and Ellis mentioned the following:

“Lehman Brothers’ bankruptcy filing and Bank of America’s buy-out of Merrill Lynch will not only permanently alter the global banking landscape, it will also have implications for the New York office market. The biggest impact will come in the form of available sublease space, since the two firms occupy approximately 6 million square feet in Manhattan. In addition, the struggles at AIG need to be closely monitored, since the firm owns and leases close to 3.5 million square feet of office space in Manhattan. Although the Federal Reserve bailed out the world’s largest insurer, AIG, the company’s Manhattan portfolio could be restructured since the U.S. government is now in charge.

The additional sublease space will increase options for tenants and inevitably drive vacancy higher. At 5.7 percent, the Manhattan vacancy rate is already up 120 basis points since 2007. Since the start of 2008, 2.1 million square feet of sublease space has been placed on the market, and that number is expected to grow as the fall-out from the credit market turmoil continues. The growing sublease inventory will likely cause asking rents to decrease in the last quarter of this year and into 2009. As landlords begin to price direct space more competitively with discounted subleases, expect overall average asking rents to decline by approximately 7 percent over the next 12 months.

In August, the increase in marketed subleases altered the ratio of direct versus sublet available space. Sublease space now accounts for 25 percent of the market’s availability rate, compared to the 22 percent market share averaged over the last 19 months.

The financial services sector has already shed between an estimated 22,000 and 25,000 jobs this year. However, after the Lehman and Merrill announcements, New York Governor David Paterson, stated that an additional 40,000 Wall Street job cuts could occur. These projected job losses translate into approximately nine to ten million square feet of occupied office space, which if placed on the market would increase the vacancy level to 8.5 to 9.0 percent. In New York, this vacancy range is accepted as market equilibrium, or a healthy market balance. Although an increase in vacancy would give tenants more space options, the additional inventory will keep negotiations between landlords and tenants on an even playing field.”

H. Trizec revolver, matures 10/31/08 for $750M. Current Rate is LIBOR +105. I do not know status of loan. That sounds like an awesome rate. I don’t know if the rate is negotiable by lender. I imagine it is.

Two other revolvers. one is General Purpose, matures 9/28/10 for $150M, LIBOR +135. Another is 1/5/09 Bridge Loan for 121,828,690m LIBOR + 150.

Here is an analyst response to above:

“BPO has a fair amount of debt that is based on LIBOR, most of that was acquired along with the Trizec deal. At $3.7B, an unhedged 100 bps increase in LIBOR leads to a $37M per year or $9.25M per quarter increase in interest expense.

I suspect that most of this is the ~$3.0 billion mezzanine debt that financed the Trizec acquisition in conjunction with Blackstone, which is floating rate. That tranche of debt is really the red herring in their debt profile. It is also cross-collateralized with Blackstone’s assets.

However, they hedged this interest rate risk when they entered the deal. From BPO’s Q2:

“In 2006, we entered into a series of interest rate cap contracts that are designated as hedges of interest rate exposure associated with variable rate debt issued in October 2006 in connection with the acquisition of Trizec. At March 31, 2008, there were contracts outstanding to cap the interest rate on a notional $3.1 billion of variable rate debt at 6.0% and $600 million of variable rate debt at 7.0% for a period of two years.”

So I don’t think they have much exposure to rising LIBOR.

Elsewhere at BAM, you will find that a majority of other floating-rate debt issuances are hedged into fixed rates in the 5-7% range. They refinanced Longview with three tranches of debt, one of which was floating, but it was hedged. Some of the renewable power debt is tied to LIBOR, but also hedged.

BAM also has CDS insurance to insure against expanding credit spreads, which has afforded them substantial protection in the first half of 2008, and will probably provide more protection in Q3.

Probably their primary unhedged exposure is in their undrawn credit lines, which can’t be hedged until they’re drawn. For example, BIP recently finalized a $450M credit facility intended for acquisitions which carries a rate of LIBOR+275. Drawing that down today is considerably more expensive than a few months ago because of the spike in LIBOR. This won’t cost them anything unless they draw it down, but they’re on the prowl for deals so it will make those deals more expensive as long as they’re financed on the credit line (i.e. before they’re refinanced to longer term financing).”

I.  Some debt  stuff:

Commercial Property debt at 6/30/08 was $12B. Looking at Note 10 in 2Q08 report looks like total coming due is

2008 412M
2009 1,055M
less (302)M

Coming due in 18 months $1,165M.

That looks like 10% of debt. Am I wrong, or is your comment on 5% maturities coming due incorrect?

I think you pointed out previously that Brookfield Properties has$3.1B as a mezz loan coming due in 2011 and another $1.5B coming due in 2011. So total debt coming due in 2011 is $4.6B.

Debt summary:

due 2009 1,165
2010 238
2011 4,681

Debt coming due in 3.5 years or less $6,084. In less than 3.5 years they have 50% of their debt coming due. That is so much different in size than your claim of less than 5% maturities of total debt over the next 2 years.

3.  Brookfield Renewable Power

A.

B. Brookfield Renewable filed a shelf registration for $750M.  This was identified as a subsequent event in the June 30, 2008 financials. “The company filed a base shelf prospectus for up to $750M of debt securities.”

4. Changes in various personell as of late.

A.  August 2008 –  Sydney – Monday – August 25: (RWE Aust Business News) – Multiplex European Property Fund (ASX:MUE) has noted the resignation of Rob Rayner, the director and chief executive – funds management of Brookfield Multiplex Capital Management, the responsible entity of the fund.   Mark Wilson has been appointed to the role with effect from August 22.

B.  Brookfield Europe’s managing partner Scott Parsons has resigned.
Parsons has worked for global infrastructure, power and property group Brookfield Asset Management, which has around $90bn (£49bn) of global assets under management, for three years. He oversaw its takeover of Australian development company Multiplex when it bought the founding Roberts family’s 25.6% stake in a A$5.05-a-share all-cash offer, which represented a multiple of 20.7 times Multiplex’s net profit for 2006 before the £87m writedown at Wembley stadium.

Multiplex has since been rebranded Brookfield Europe and Parsons oversaw the integration programme. The takeover gave Brookfield an entry into the Australian market and boosted Brookfield’s UK and European assets.

Before Brookfield, Parsons spent three years at Land Securities and 10 years at GE Real Estate.

5. Debt  Changes:

A.  Fraser Papers during September 2009. “Fraser Papers Inc. (“Fraser Papers” or the “Company”)(TSX:FPS – News) announced today that it has secured a $25 million term loan with Canadian Imperial Bank of Commerce Inc. The term of the loan is one year and will be repayable in September, 2009. Interest rates on the loan are the same as interest rates on the Company’s existing revolving credit facility. Proceeds of the loan will be used to repay existing indebtedness under the Company’s revolving credit facility.

In support of the increased credit facility, the Company’s principal shareholder, Brookfield Asset Management Inc. (“Brookfield”) (TSX:BAM – News; NYSE:BAM – News; EURONEXT:BAMA) has agreed to guarantee the Company’s borrowings under the facility. The Company has agreed to pay a guarantee fee and to provide Brookfield with a fixed first charge over certain of the Company’s property, plant and equipment while the guarantee is outstanding.”
B.   Brookfield Homes –  “July 23, 2008 – “Brookfield Homes Corporation (the “Company”) is disclosing information under this Item as a result of entering into a definitive agreement with an affiliate of the Company. On July 23, 2008, the Company amended its unsecured revolving credit facility in the form of a promissory note with a subsidiary of its major stockholder, Brookfield Asset Management Inc., in order to provide for an increase in the aggregate principal amount to an amount not to exceed $275,000,000. All other terms and conditions of the promissory note, as amended, remain in force and effect.”
C.  Brookfield Homes on On October 10, 2008 discussed change once again of unsecured line with BAM.  “Brookfield Homes Corporation (the “Company”) is disclosing information under this Item as a result of entering into a definitive agreement with an affiliate of the Company. On October 8, 2008, the Company amended its unsecured revolving credit facility in the form of a promissory note with a subsidiary of its major stockholder, Brookfield Asset Management Inc., in order to provide for an increase in the aggregate principal amount to an amount not to exceed $300,000,000. All other terms and conditions of the promissory note, as amended, remain in force and effect.”  According to Brookfield Homes, balance as of October 20, 2008 was $280M.

June 9, 2008   (34.40)                     Brookfield Multiplex

  1. http://www.brookfieldmultiplexcapital.com/
  2. http://www.asx.com.au/index.htm
Last Price % Change Volume Est price 12/31/07
MULTIPLEX ACUMEN PROPERTY FUND (MPF) 0.89 0.00% 75,381 $1.25
MULTIPLEX EUROPEAN PROPERTY FUND (MUE) 0.605 4.31% 137,788 0.90
MULTIPLEX PRIME PROPERTY FUND (couldn’t fully locate) 0.52 ? ? ?
Unlisted Unit Prices
Multiplex Development & Opportunity Fund $0.9800
Multiplex Diversified Property Fund – Direct $0.8546
Multiplex Diversified Property Fund – Indirect $0.8209
Multiplex Diversified Property Fund – Withdrawal $0.8128
Multiplex Property Income Fund $1.0012
NTA Per Unit
Multiplex New Zealand Property Fund (Unaudited NTA at 31.03.08) $1.3700

May 20, 2008                     Canary Wharf Quick mention

1.   If I am not  mistaken most analysts value Canary Wharf for BAM at $900M to $1B.  BAM owns 15% of Canary Wharf.

2. An article came out today on London Land from The Times Online

http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article3967319.ece

“British Land, Britain’s second largest commercial property company, has written down the value of its shops and offices by £1.9 billion as it slumped to a £1.6 billion loss and gave warning of a further decline in property values for the year ahead.”

“British Land’s heavy exposure to the troubled City offices market – it owns the Broadgate Estate – resulted in its value declines being far more severe than those suffered last week by rival Land Securities, the UK’s largest commercial property company, which fell to an £888 million loss after £1.28 billion of write-downs.”

“British Land also has a 10.8 per cent per cent stake in Canary Wharf, the Docklands developer, which it was forced to write down by 27.5 per cent to £185 million.”

So British Land values 10.8% at £185 million.  The current exchange rate is 1.9681 to the USD.  Hence a 10.8% ownership is valued at $364M, so a 15% ownership might be valued at $505M and not $1B.  I really do not know the particulars, and maybe this is being shown net of debt for British Land.  I’m trying to work the numbers here and am having difficulty.  Canary Wharf fair Value at 12/31/07 was £3,206.9m (see 5. below).  Hence 10.8% would be £346M.  Hence a 27.5% write down would bring the value to £250.85.
3.   Looking at British Land website http://www.britishland.com ,  they mentioned in a March 2008 presentation – “UK Property Values down 14% since June 2007.”

4.   Canary Wharf mentioned in their 2007 Annual Report, “The market value of the property portfolio at 31 December 2007 was £7,274.3m against £6,737.4m at 31 December 2006 and £7,465.0m at 30 June 2007.”  This would equate to $14.3B in total, and 15% would be $2.1B.

5. Canary Wharf mentioned in their 2007 Annual Report, “The net assets of the group, as stated in its consolidated balance sheet at 31 December 2007, were £3,206.9m”  This would equate to $6.37B in total, and 15% would be $955M.  This is consistent with how BAM is valuing it.  Valuation seems to have  become impaired on a fair value basis during first 5 months of 2008.  I have not verified this, other than British Land reporting.

6.  Bloomberg news reported the following on 5/22/08,   “Canary Wharf Group Plc, the Docklands developer, may have to write down several hundred million pounds to reflect the declining value of its skyscraper properties, the London-based Times reported. The possible writedowns on the office values of Canary Wharf emerged from a trading outlook from Stephen Hester, chief executive officer of British Land Co. Plc, which is one of Canary Wharf’s largest investors, the Times said.”  This was also reported in Times Online.

May 15, 2008                       Further Random Notes

1. Perhaps look into this.  In June 2007, Brookfield Homes formed a joint venture with California State Teachers Retirement System (CalSTRS), this was for land development.  There is apparently $450M of committed capital and managed by Brookfield Homes.  Should get a status report on that.

2.   Brookfield Financial supposedly BAM’s investment bank.  Get more info.

3. Brookfield Soundvest supposedly manages $700M and is 50% owned by BAM.  Try and determine what sum of the parts that I worth.

4.  BAM owns 80% of Imagine Insurance.  Read 2007 financials.  I am fairly certain I read 2006, and they appeared to be a well respected and prudent firm.

5. BAM I think owns 100% of Hermitage Insurance.  Their website mentions this, “Our current A.M. Best Company is “B++”. Hermitage Insurance Company is domiciled in the State of New York and is a wholly-owned subsidiary of Brookfield Asset Management Company, (NYSE:BAM).”  The site is http://www.hermitageins.com/  There is really nothing on the site at all.

6.  I saw an interesting table in regards to Brookfield Properties Inc.  The report was from Genuity and dated March 3, 2008.  The report claims that “utilized cap rate” for BPO is 6.05%.  Midtown was listed as 5% and lower Manhattan at 6%, DC 6%.

7. Same Genuity Report has excellent pages on 86 in regards to Cap rate Value.  Page 87 gives an item by item valuation.  Page 93 gives a nice view of NAV as well.

8.  Timberlands – At some point I need to review Grant’s Interest Rate Observer’s generic Timberland formula.

9. BAM owns 50.1% of Brookfield Properties.  Does that include the 5% that Brookfield Investments Corp owns of Brookfield Properties Inc.

10.  Bulls argue that historical cost offers no reflection on Brookfield Properties Value.  One would have to decipher the recent purchases such as TRICAP to see if that statement is as relevant anyway.  Looks like it all comes down to Cap Rates and Replacement Cost multiples anyway.

11. Remember to look at Tangible Book Value.  My notes show Tangible Book Value of 3033 and intangibles of 759.  I have to look what company that is.

12. Interesting site for Hydro Power  http://www.waterpowermagazine.com

BPO Properties:

1.  Total Loans Receivable at December 31, 2007 and 2006 were  $283.5M and $100.2M respectively.   Included in loans receivable is $220.3 million (compared with nil in 2006) demand loan receivable issued to the Company’s parent, Brookfield Properties Corporation (“BPC”) on December 24, 2007. The loan bears interest at 5%, or higher than what the Company would earn on short-term deposits. Interest income related to this loan of $0.2 million was recorded during 2007 (compared with nil in 2006).

2.   Do Cap Rate and valuation ROTs on BPO Properties.

May 15, 2008   Looking at Vornado for some potential future insight to BAM

1.         Except from Vornado’s 2007 annual report comments:

“I have always believed that, over the long term, real estate values closely correlate with replacement cost, the number at which new supply enters the market. That number in Washington is $700-800 in the District of Columbia and $450 per square foot in the suburbs. In Manhattan, replacement cost is, say, $900 per square foot for outlying sites and much more if one can find a Sixth Avenue to Lexington Avenue site. All this becomes even more interesting when one considers, as I do, that Vornado’s current share price values our Manhattan towers at about $500 per square foot.”  Steve Roth CEO Vornado Realty Trust 2007 Annual Letter.

An industry insider wrote to me,  “Looks like replacement cost is a metric that he looks at in valuing real estate. It’s a good metric because if someone can build a brand new competing building that has similar rent structure as your building then you are at risk of losing your tenants to the new building.   If replacement costs are very high than developers need very high net rents in order to make their returns.”

Another industry insider wrote, “Building value correlate with building cost that correlate to a strong local economy with low vacancy rates (under 10% and decline). Consequently one can skip over building costs and look to the local economy, rents and vacancy rates. The cost to build a skyscraper in Jersey City may be slightly lower than to build it in Manhattan, but their rents and consequently values would surely be significantly different. Washington will remain strong due to the heavy government presence. NYC may not fare as well if Wall St and Banking continue to layoff employees.”

Steve Roth discussed replacement cost  as eventual fair value.  Says it has always been that way.  Extrapolating that further, he also feels that Cap  rate would be a good cross check for that.  So my questions are as follows:

1.    Does that replacement cost include land?  I would imagine it does.  So if we were in a commercial bubble, wouldn’t replacement cost be artificially adjusted upwards for the high land price?  How much of the $900 per square foot would you think includes land.

An industry insider wrote, “Replacement cost does include land value.  I think land value is typically 20 pct or so.”

2.    In the near future, if Cap rates are low to begin with, how could a cap rate ever approximate a price of say $900 per square foot (Class A NYC)? Do you see valuations like that?  Knowing you don’t see much class A in NYC.

An industry insider wrote, “That being said, I’m not sure I understand the $900 number.  I think replacement cost for class A office in suburban Maryland is in the $250-300 range.  Unless the land and construction costs are that much higher in NYC than Roth’s number seems high although the land cost for prime real estate could be super high in NY…much more than 20pct.

Cap rates are based on income which is derived from rents.  I think rents in Class A NYC buildings are getting up to $100psf gross.  Assuming expenses of $20 psf, net rent are $80.  That level of net rent would justify $900 psf values.”

    I attended the Shareholder’s meeting on May 15, 2008.  According to Steve Roth, it was the 49th Shareholder Meeting as a public company.

A.    Asked about cross checking valuation of NYC Class A commercial Real Estate.  (See Notes above.)  I asked if he uses a Cap rate cross check and compares to Rule of Thumb Valuation method of using Replacement Cost.  He mentioned that Cap rates certainly do matter; yet “I am not in the business of valuing Vornado.”  I spoke with an influential Company person and the views were that long term expected cap rates in this interest rate environment, should be around 7%.  Claims they are now 5%, apples to apples.  Claims normalized occupancy to be in the area of 95%.  Feels that interest rates and debt costs are only rising.  That is interesting for me based on Cap rate discussions.

B.     Mentioned that long term and typical Loan To Values are in the 60 – 65% range.  I spoke with an influential Company person and the views were that leverage amongst companies like Vornado would be coming down.  We discussed a situation where financing needs were immediate, and there was specific mention that certain companies will suffer. The remainder of our conversation is off the record.

C.    I asked about the “prevalence of interest only loans used in this market.  Is it a sign of the times?  It seems as though leverage is created by smaller monthly payments as opposed to say 10 years ago.”  Steve Roth claimed it is a sign of the times, lower than normal cost of capital.

D.    I didn’t ask about Mezzanine Loans and composition, but those were kind of immaterial to the financials, and need not bring those up.  I wanted to know if they held any Brookfield loans in those investments, but didn’t have the cajones to ask.

May 12, 2008                                                 Interesting Blurbs from Kiplinger Letter 5/9/08

“Credit markets are finally showing some hints of a thaw.  Banks are repairing their balance sheets, raising $212 billion this year. And spreads between Tiffany-quality Treasuries and other bonds are narrowing, a good sign that investors believe lending is less risky.”

“Mortgage woes are taking a toll on commercial real estate, with deals falling to $40 billion in the first quarter, from $137 billion a year ago. The biggest problem: A freeze on buying and selling mortgage-backed bonds.  The market won’t pick up until well into 2009.  The weak economy will push up office vacancies.  The vacancy rate will rise from 13% to 14.5% by year-end and 16.3% next year. All markets will feel it, even the strong, such as Boston, Houston, Seattle, NYC and San Francisco.  Hit hardest: Detroit, Phoenix and Las Vegas.  Rents will go up just 2% this year, with no hike next year. Expect landlords to entice tenants with offers of a free month or renovations.”

Brookfield Investments Corp DBRS Rating as of 4/29/08

1.  PFD-2 (low) with a Stable trend for the Senior Preferred Shares.

2. “Despite disappointing results and declines in share prices across its forest products investments.”  Claims they still generate sufficient cash flows and asset coverage to support the rating.

3. According to http://www.dbrs.com “Preferred shares rated Pfd-2 are of satisfactory credit quality. Protection of dividends and principal is still substantial, but earnings, the balance sheet, and coverage ratios are not as strong as Pfd-1 rated companies. Generally, Pfd-2 ratings correspond with companies whose senior bonds are rated in the “A” category.”

4.  Discusses Loan Receivable and cash given to Brookfield Investments as support of Norbord asset coverage.  They cite the continued Norbord dividend.  Claims a higher appraised value at December 2007 of Canary Wharf, yet citing that Brookfield Properties has lost some value in 2007.

5. Overall dividend income from the portfolio was higher than expected.  Dividend increases came from Great Lakes Holdings and Canadian Dollars of Norbord and Fraser.  Now the sustainability of dividend is at risk due to Norbord weakness.

6. They claim that Common share holdings include:

Norbord 41% Interest
Canary Wharf 15% Interest
Brookfield Properties 5% Interest
BPO Properties Preferred Shares 7.3% of Total Brookfield Investments Market Value
Brookfield Asset Mananagement Preferred Shares 8.3% of Total Brookfield Investments Market Value

7.  The ratings are supported by a variety of conditions.  These conditions include but are not limited to:

A.   Asset Coverage – Market Value of Brookfield Investments portfolio of investments minus the accrued expenses then divided by the sum of the par value of the Senior Preferred Shares would be at least 3X.

B.  Company senior debt not exceeding 10% of the market value of Investment Portfolio.

C.  Asset Coverage must be 3X before common share dividends can be paid.

DBRS acknowledges that 50% of underlying portfolio is unlisted and may be illiquid, and that market conditions and lack of restrictions could cause significant reductions on the NAV.

Stock symbol is BRN.PR.A-T.  Here is link for quote:  http://investdb.theglobeandmail.com/invest/investSQL/gx.show_chart?iaction=Generate&pl_period=12D&pl_primary_listing=BRN.PR.A-T

May 9, 2008

1.   At some point fully review Zephyr document from 20080502.

2.   Brookfield Infrastructure Partners bought assets from Great Lakes Power LTD.  I need to determine if LTD is related to Brookfield Power Inc. or Great Lakes Hydro Income Fund.

Here are some questions asked to BAM in regards to Brookfield Renewable Power Inc.:

1.     Note 23 of BPI 2007 financials.  I was able to trace all amounts in the schedule except for “Contributed Surplus.”  The amounts for 2007 and 2006 were $204 and $199 respectively.  Would you please detail and explain that. [“I am still waiting for that answer” Denis Couture 5/1/08] .  “These were intercompany assets, and rather than record a gain, not allowable for GAAP.”  Related party assets and amounts are now eliminated per Sachin Shah on May 22, 2008. ( 416 369 8268 sshah@brookfield.com)

2.    Where would the funding to Brookfield Renewable Energy ($200M) and to Brookfield Homes be located in the supplemental info?    When was the last time that BAM injected material capital into power operations in the past?  Per Sachin on 5/22/08, this money was not really injected, it was more of accounting entry and helped with the almagamation of Power Corp. into Power Inc.

3.  You mentioned to me “From time to time, it happens that we need to raise capital to meet covenants.”  Would you please explain what the covenants were? Are covenant requirements listed anywhere for reading?  I spoke with Sachin Shah on 5/22/08, and did not bring this up.

4. Based on my conversation with Sachin Shah on 5/22/08, he mentioned that the recharacterization of Renewable Power shareholders equity, basically just made things easier.  The debt on capital securities was there as a GAAP requirement because of convertible preferred’s.  The preferreds according to Sachin were converted to actual equity, and since BAM owns 100% of Power, it does not show up on BAM consolidated level.  Interest expense on capital securities will be non-existent going forward.  There is still a loan receivable on the books for $646M and a payable of $104M.  These are shown seperately as required by GAAP according to Sachin.  At any time BAM can have Power declare a dividend and reduce that amount according to Sachin.  Sachin mentioned that on a consolidated level of Power, the interest coverages are low, yet on a deconsolidated balance they are quite high, sometimes 10X.

Questions Previously answered by BAM:

1.    Can you give any more detail on $200M contribution?  On one hand Brookfield Power pays interest expense to BAM of $125M in 2007, and in 2008 BAM gives Power $200M. [because the assets have been depreciated over a long period of time, the book value of equity does not necessarily reflect the fair value of the equity. From time to time, it happens that we need to raise capital to meet covenants]2.    Note 23 of BPI 2007 financials.  I was able to trace all amounts in the schedule except for “Contributed Surplus.”  The amounts for 2007 and 2006 were $204 and $199 respectively.  Would you please detail and explain that. [I am still waiting for that answer]3.    I was rereading the annual report for Power Inc.  I thought that BAM owned 100% of BPI (now Renewable Energy).  With that said this part of the statement is not making sense to me.

“29. SUBSEQUENT EVENTS
On January 24, 2008, Brookfield injected $200 million of capital into the Company in order to provide additional liquidity to the Company. In return, Brookfield received 6,827,118 common shares in the Company.”

If BAM already owns 100%, what difference would it make how many shares they are given.  Perhaps I am misreading or just missing a concept. [Yes BAM owns 100% but when we inject capital in a company, we do it in accordance with the capital structure of the company not on the basis of ownership – which could vary]

Cap Rate Discussion:

I asked an industry insider in commercial real estate the following (answers are italicized with quotes.)

Typically what would class A cap rate be in major metro area?  The answer was, “I would say 6-6.5% for Class A in Strong markets.”

What would you expect in future?  “I think cap rates will be remain relatively static on quality stuff.”

Is there a metric of “proper debt to value (value based on assumed cap rate)?”

“As far as the proper debt to value, it depends to some extent on the Buyer.  I think REITS typically leverage around 40% and pension funds may be around 60-65% while private guys tend to take on as much leverage as they can get including higher interest mezzanine (2nd position) financing. If I had to pick a proper range, I would say proper debt to value for private buyers is 65-75%.”  “Also, most loans are based on LTV (loan to value).  Value is typically determined by an appraisal (need $10MM appraisal to get $7.5M loan if 75% LTV).  The appraisal typically looks at going in cap rate (income approach) but also looks at sale comps as well as discounted cash flow assuming a hold over some period and than a sale.

My point is that cap rate is just one of the parameters used to come up with value.  Also, appraisals typically get to the value that Lender’s want them to get to.”
I asked if 75% LTV is still used by lenders.  Response was, “Today, I would say more like 60-65%.”

Most of BAM debt appears to be IO. Any thoughts? Generic thoughts if not familiar with BAM?   “I think the IO loans will be tough to replace with new I/O loans. Will likely need to amortize over 30 years from most of the term”

In your example would you define NOI?

”NOI being income less operating expenses (excluding cap ex, dep, debt service, straight line of rents, etc). “

“As far as the straight line rent depends on the Buyer. Straight line rent  is basically average rent over the term of the lease….so if tenant has  10-year lease with rent increase in year 6 than the year 1 NOI is higher if  you take the average rent as opposed to the actual year 1 rent. REITs  looks  at straight line.”

I asked, So quality cap rates have nevr been consistently greater than say 8%?   If rents go down, and vacancy rates go up? Brookfield in commercial has  less than 4% vacancy rates, and maybe costs go up (inflation). Maybe cap rates go up to say 10%? Or never happen?  Response was, “I have not seen cap rates higher than say 8% on core properties but I  imagine if debt rates increased significantly cap rates would have to follow.”

If you had $1000 in NOI and assume a 6% cap rate. You would have value of  $16,000?  If you had $10,000 of debt and no cash, net value would be $6,000.

Brookfield Homes Notes from CC 5/1/08

“Our net loss before taxes for the three months ended March 31, 2008, was $20 million, compared to income of $5 million for the same period in ’07.”

“And, lastly, the company entered into interest rate swap contracts during the period 2004 to 2007 totaling $260 million, which effectively fixed the rate on the company’s floating-rate debt at 6.8%. And as a result of a further decline during this quarter in short-term interest rates, the fair value of these derivatives declined and the company recorded a mark-to-market loss of $9.3 million, compared to a loss of $0.7 million in the same period last year.”

“In terms of cash flow, during the first quarter we used $32 million in our operations. However, given our inventory levels coming down, we are targeting at least $100 million in cash flow from operations in 2008 as we monetize this inventory.”

“if we close 117 homes in the first quarter and our target is, say, 800 to 850, we’ve got 700 homes to close, as you say. If you say the average selling price is $550,000 or $600,000 — let’s say $600,000 — that’s $420 million of future receipts that we have coming in over the next nine months, right? And because — like I said in my notes — our inventory levels are elevated, and they continue to be elevated, but we are selling well, and if we achieve these 700 home closings of $400 million of revenue, we don’t have a lot of cost to put in the ground because, quite frankly, a lot of these homes are built.”

“Our relationship with Brookfield Asset Management is on the facility that we have — the credit facility that we have with them, and we have drawn $18 million Since March 31.”

At 4/30/08 it appears that BHS owes BAM $220M (3/31/08 of $208M + $18M funded per BHS).

At 12/31/07 the amount appears to be $90M. See Amended 10K/A Note 4.

Subsequent to December 31, 2007, the BAM facility was increased from $150 million to $250 million. (as of April 30 was at $220M)

The revolving credit facility with BAM requires BHS to maintain minimum stockholders’ equity of $300 million and a consolidated net debt to book capitalization ratio of no greater than 70%.

BPO Properties Conference Call 4/29/08

“In addition, we are pleased to report the declaration of a special common share dividend of $7.25 per share totaling approximately $207 million. The dividend will be funded from the Company’s cash and deposits, which  total approximately $270 million at the end of the quarter and will also be paid on June 30, 2008 to shareholders of record at the close of business June 2, 2008.”

Q: “Just on that special dividend, should we assume that the parent will use the full proceeds to repay that portion of the loan?”

A: “Yes. It’s safe to assume that we’ve included as part of BPO properties liquid cash, that deposit, plus our available cash balances so in order for us to fund the dividend we will be collecting on our deposit.”

Q: “Just looking beyond this special dividend which we all applaud, it certainly seems that you will have substantial liquidity even after that is paid for the balance of the year, early ’09. Was wondering if you could react to that and give us sense as to whether or not a follow on special dividend could be in the offering.”

A: “We certainly have a variety of initiatives that could very well result in additional cash for the Company. As we achieve and complete those milestones they have have to evaluate the alternatives that are available to us at that time. That could be further developments, additional acquisitions, paying down debts, buying back shares and possibly further dividends. We have many choices. We will have to evaluate them as the opportunities and the cash is available.”

BPO Properties declared a $207M dividend today. Brookfield Properties Corp (BPC), I think owns 89% of BPO Properties. I think the funding is coming from the demand note given to BPC by BPO in 4Q07 .

This was slightly discussed in the CC if I remember correctly. I do not recall Tom Farley specifically mentioning the demand note. Yet in BPO CC today, I think it was referred to. I am not certain of this, but fairly positive.

If I am not mistaken. BPO Properties limitted claims to have a demand note from Brookfield Properties for $200Million ish. I am fairly certain they BPO Properties is expecting payment of that money before dividend is due on June 30, 2008 for $207M.

I looked on Brookfield Properties 40F and saw no mention. Perhaps because of consolidation.

You see alot when you read the subsidiary’s financials.

BPO was up big after this news. It had stopped trading for a bit prior.
“On the debt capital side, money remains the most challenging part of our business overall right now. Arranging a long-term  fixed rate mortgage in a substantial amount is difficult. That would not be news to anybody on the call. It can be done but  covenant requirements are less flexible and often basically you have to call on relationships to get it done. This isn’t all bad for us and we have been refinancing our rolling loans as Bryan mentioned. We started the year with about $1 billion of loans rolling in 2008. The largest being $160 million. We’ve put about $300 million of these away and are confident that the rest can be concluded in short order. The LIBOR rate is down thanks to thorough money policy which is benefiting us at the moment. I think Bryan mentioned the interest rate savings that we’ve experienced as a result of this.”

DBRS Comments on the BPO Properties Dividen”

DBRS commented today on the announcement by BPO Properties Ltd. (BPO) that it will pay a special dividend of $7.25 per BPO share or approximately $207 million on June 30, 2008. BPO’s major shareholder, Brookfield Properties Corporation (Brookfield), with an 89% equity interest, will receive approximately $184 million of the dividend, with minority shareholders receiving approximately $23 million. BPO will not distribute any cash to Brookfield since the dividend will be used by Brookfield to repay a portion of a demand loan of $220 million from BPO in late 2007.

The special dividend will result in BPO’s EBITDA on a pro forma basis being approximately 4% lower than previously expected for 2008, due to the lost income from the loan to Brookfield. As well, DBRS expects debt-to-gross book value to increase to about 51% by the end of 2008 from a previous estimate of 47% and EBITDA interest coverage to be just over 2.5 times from a previously estimated 2.7 times for 2008 (this includes the negative impact of capitalized interest from ongoing developments). These estimates include some additional debt to fund ongoing construction of Bay Adelaide Centre in Toronto and Bankers Court in Calgary.

Despite the modestly negative impact, DBRS notes that BPO remains reasonably leveraged relative to its peers and interest coverage levels are still strong, especially given continued solid fundamentals across its office portfolio, including high occupancy levels of 98.4% and positive same property net operating income growth of 8% year over year in Q1 2008.”

Quick Review of BAM Investments Corp.

There balance sheet changed big time in year 2000. Total Assets went from $423M in 2006 to $2.2B in 2007. Note 10 discusses 50M preferred shares being issued, and then an entry called “Accumulated other comprehensive income” for $1.2B. This is identified as a “Transition Adjustment 1/1/07” for $1.376B

The “Investment of Brookfield Asset Management” went from $416M in 2006 to $2.15B in 2007. Leads you to Note 5. BAM Investment Corp has pledged 5.3M of their 60.8M Class A shares. The 5.3M are marked to market as they are called “Held for Trading.” I might be getting this wrong, its late.

I would like to learn more about the debenture. Debenture pays out BAM dividends and a “specified amount.”

Brookfield Investments Corp. Quick Review:

Brookfield Investments holds investments in the forest products and property sectors, as well as a portfolio of preferred shares issued by companies within the Brookfield Asset Management group.

The Company owns approximately 29.5 million common shares of Fraser Papers, which represents a 49% equity interest in Fraser Papers.

The Company owns approximately 96.1 million ordinary shares of Canary Wharf, representing a 15% interest in Canary Warf.

The Company owns approximately 18.6 million common shares Brookfield Properties, which represents a 5% equity interest in Brookfield Properties.

The Company’s preferred share portfolio consists of the following: 170 Series K preferred shares of BPO Properties Ltd. (“BPO Properties”); 350,000 Class A Series 14 preferred shares of Brookfield; 850,000 Class A Series 15 preferred shares of Brookfield; and 8,000,000 Class B shares of Great Lakes Holdings Inc. (“GLHI”).

The company owns a large interest in Norbord Inc.

Brookfield Power Inc Some notes from 12/31/07 Financials:

1. On Note 23 “Shareholders Equity.” I was able to trace all amounts in the schedule except for “Contributed Surplus.” The amounts for 2007 and 2006 were $204 and $199 respectively.

2. BPI’s guidance for Capex is $23M for 2008. Seems low. I need to trace back to Great Lakes Hydro guidance and to BAM AR mentions.

3. Balance Sheet has $176M of assets that I think are being marked to market. Just something to watch.

4. Derivatives need to be watched as time goes on.

5. BPI had an unrealized loss of $79M. Consider treating this as an unusual event without punishing BPI. Conider the possibility of adjusting for valuation purposes $19M reported net loss to NI of $164M. (-19+125 (interest to parent) + 79 derivative loss – 21 tax benefit.

6. Some Metrics:

A. Long Term Debt to Equity Ratio
Total Assets $6,891
Total Equity $349
Total LTD $5,479

Assets / Equity is 19.71

LTD / Equity is 15.7X

B. Interest Coverage Ratio
Net Income Before Tax $(40)loss
Interest Expense $411

NIBT and Before IE 371

Interest Coverage Ratio (NIBT + Interest Expense)/Interest Expense

-40+411/411= 0.9X

Incidentally, on pg 321 of hardcover 1951 edition of Security Analysis, Benjamin Graham suggests a utility company have Interest Coverage of 4X or above. Hence, not in great shape there. Yet, isolating merely one metric.
In 2006 the coverage ratio was 1.31X.

C. Cash flow :

CFO 150

less capex 140

FCF 10

Using the same metrics as directly above, I have eliminated the $125M paid to BAM from Power (BRPI) for Interest on Capital Securities. Yet, lets remember that BRPI paid $125M in 2007 to BAM, yet recieved $200M from BAM in January 2008. For that $200M , BAM received more shares of a company (BRPI) which they wholly own.

A. Long Term Debt to Equity Ratio

Total Assets $6,891
Total Equity $349
Total LTD $5,479

Assets / Equity is 19.71

LTD / Equity is 15.7X

B. Interest Coverage Ratio

Net Income Before Tax $85M (-40+125)
Interest Expense $286

NIBT and Before IE 371

Interest Coverage Ratio (NIBT + Interest Expense)/Interest Expense

371/286= 1.3X

Incidentally, on pg 321 of hardcover 1951 edition of Security Analysis, Benjamin Graham suggests a utility company have Interest Coverage of 4X or above. Hence, we are not in great shape there. Yet, isolating merely one metric.

In 2006 the coverage ratio was 1.98X.

C. Cash flow :

CFO 150

add interest on cap securities 125

less capex 140

FCF 135

The above does not include debt repayments, dividends paid, acquisitions or Great lakes hydro distributions.

Also, Investments to Long Term Investments of $189M was primarily paid to a related party (Brascan Brazil).

7. Ben Graham in 3rd edition of Security Analysis suggests to also use a computation of “market cap to debt.” If we assign market cap to BPI of $6.4B (CSFB 2/11/08) and debt is $4,376 without Capital securities due to BAM, or $5,479
with it. We get ratio of 1.46X and 1.17X respectively. If I am not mistaken, he liked to see a ratio of 2.3X to 2.7X for Utilities. He liked to see a margin of error. I will try and dive deeper at a later time. One should also use Stockholders Equity as opposed to Market Cap, which makes things more difficult for BPI valuation IMO.
8. Shareholders Equity is 5.1% of total assets. In 2006 percentage was healthier at 7.0%. both years, lots of leverage.

9. Book Value is $349M, yet Tangible Book is $316M. In 2006 BV was $409 annd Tangible Book was $382M.

10. Revenues of $904M included $12M of currency.

11. Graham identified on page 326 of SA 3rd edition that a “debt to tangible asset ratio” of 65%. BAM’s ratio is 80% (55+2691+1630+1103)/(6891-33).

12. On page 317 of 3rd edition Graham indicated to include parent preferred debt in subsidiaries coverage and funding ratios.

13. As I have stated previously, I think that dam depreciation of 40 – 60 years is agressive. Hence, perhaps years should be 40 years. I have seen this discussed in regards to Hydro, and need to revisit. If i am not mistaken, Graham suggested 30 years for non hydro and 40 years for hydro.

14. Note 6 in Financials have quite a few related party transactions. These include recievables from Fraser, Katahdin, and long term investments.

15. Note 16 “property specific borrowings” show us that most of the payments on the debt of BPI is interest only.

16. I need to search purchase of Itiquira Energetica SA from NRG Energy Inc. Has this closed. Note claims expected to close 1Q08.

Updated Short thesis from March 16, 2008

BAM has quite a few Joint Ventures or minority interests. On projects they have co-investors. Both Co-Investor and BAM commit capital. I have always been trying to figure out (unsuccessfuly) what BAM’s future committed capital requirements are, and the required timeline of such.

In this environment we have been hearing that JV’s of Toll Brothers are failing to meet capital contribution requirements. IMO, that is something to watch for BAM.

1. We think they are over leveraged and that increased credit costs, costs of capital, lower loan to values, will start stressing BAM.

2. We think potential for credit downgrades.

3. Concerns with reliance on commercial paper markets for liquidity.

4. Incestual sales and potentially unusual uses of related parties. In relation to CRZ, it is an interesting concept of BAM getting paid via shares. Is it liquidity? What is the reason? Time will answer that.

BAM could in theory search for liquidity in CRZ. Any BAM subsidiary could find liquidity in a managed entities whose purpose is to invest in ” opportunistic vehicles.” For me, this is something to watch, especially as credit markets have frozen.

I kind of remember, but am not certain that CSFB and Scotia have partaken in material investment banking with BAM. Nothing wrong with that, just want to be careful that “independent research” is not blurred by a seperate financial arrangement. I kind of recall a former Scotia Analyst joining BAM recently, but can not find the news article.

5. Severe over-valuation of power division. How do you get a book value of $349M, Free Cash flow of $10M, operating at a net loss, into a valuation of $6.5B?

I disagree with several of the sell side interprestations of Power Division.

Scotia Capital present an NAV of Power at various ranges. The range is $12,246M on the high, $11,526 on Base, and $10,805 on the low.

I do not know if they include GLH as power or specialty funds.

BPI has debt of $4.321M not including capital securities payable to BAM of $1,103M.

Hence if you take NAV less Debt you get the following:

High value $7.9B
Base value $7.2B
Low value $6.4B

CSFB on their most recent report assigns a value of $6.4B including GLH. They base their valuation on 12x of 2007E OCF.

At the same time CSFB has a forward NAV of power of $8.4B, based on 12x of 2008E OCF.

6. Slowdown in Alberta CN real estate. (BPO)

7. High occupancy rates in metro areas, possibly deteriorating because of reliance on financial service industry as well as potentially unusually high.

8. Recent exotic financings. One would be 1 Liberty Plaza NYC.

I think the whole loan is $850M (350 + 500), 6.139% interest, Interest only till 7/2011 and then amorts over 360M, no prepayments until 4/2017 and maturity date is 8/2017. If I amortized correctly pay off balance on 8/2017 will be $777M.

Certainly BAM received a lot of dollars, and via near interest only, BAM certainly has the lowest maximum payment at 6.139% for 10 years (2017). Then they balloon.

9. Credit tightness.

10. Recession potential and pain on levered companies.

11. Stock price fueled by blind following of value investing community, who bought the idea and didn’t dig deep into financials. Perhaps that has ended and mass liquidation could occur. Are any covenants reliant on stock price?

12. Potential aggressive accounting procedures. Consideration that potential of over capitalization in past increased earnings, yet now they potentially use the crutch of depreciation on those previous capital expenditures not being considered in valuation.

13. $4B of debt coming due in 2008. Can they manage to refinance. Again, this is where excess leverage can become painful.
14. Reminds me of Enron with all their spin-offs and shuffling of assets. Not so sure institutional investors will embrace for continuing investments.

15. Integration concerns of multiplex. CEO UK already left.

16. Is BAM the glib helper and also a member of Buffett’s Gotrocks family?

Buffett recently discussed fantasy returns of equities when projected in excess of 10%. CRZ in November 2007 presentation projects blended returns at 16 – 18%. CRZ being fixed income, and I imagine Buffett would think a fixed income allocation of 100% would command even lower returns. Of course the answer is leverage for CRZ. Leverage as we see via CRZ margin calls, works in both directions.

http://www.berkshirehathaway.com/letters/2007ltr.pdf

” I should mention that people who expect to earn 10% annually from equities during this century – envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about doubledigit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.”

Here are notes I took in regards to Berkshire Power Subsidiaries.

The filings of MEHC and MEHCo and subs are not as simple as Berkshires.
Two, even might Berkshire has been affected by credit crisis. They have an amount of existing Auction Market Securities, and granted they are buying more as we speak. Nothing bad, just noting.

Here are some quick snips I took note of during my very quick review.

A. Long Term Debt to Equity Ratio

Total Assets $7,251
Total Equity $2,288
Total LTD $2,470

Assets / Equity is 3.17X

LTD / Equity is 1.08X
B. Interest Coverage Ratio

Net Income Before Tax $456
Interest Expense $131

NIBT and Before IE $587

Interest Coverage Ratio (NIBT + Interest Expense)/Interest Expense

456+131/131 = 4.4X

Incidentally, on pg 321 of hardcover 1951 edition of Security Analysis, Benjamin Graham suggests a utility company have Interest Coverage of 4X or above. Hence, we are in good shape there. Yet, isolating merely one metric.

In 2006 and 2005 the coverage ratio was 4.66X and 4.78X respectively.
C. Cash Flows:

If you subtract Capex from Net cash Provided by Operations you get the following.

CFO 599
less: Capex 1,298

FCF (699). We have seen free cash flow as a negative during the last 3 years.

They explain the use of funds is going through an expansion, “MidAmerican Energy’s primary need for capital is utility construction expenditures, which totaled $1,220 million for 2007. MidAmerican Energy’s utility construction expenditures for 2008, excluding the non-cash allowance for equity funds used during construction, are estimated to be approximately $1,141 million, which includes $645 million for the wind-powered generation projects discussed below, $90 million for emissions control equipment to address current and anticipated air quality regulations, and $406 million for ongoing operational projects, including asset replacements, connections for new customers and facilities to accommodate load growth. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of such reviews. MidAmerican Energy expects to meet these capital expenditures with cash flows from operations and the issuance of long-term debt. ”
“As of January 31, 2008, MidAmerican Energy’s senior unsecured debt credit ratings were as follows: Fitch Ratings, “A/stable;” Moody’s Investor Service, “A2/stable;” and Standard and Poor’s, “A-/stable.”
Financials are available for Pacificorp. pacificorp consolidates into MEHC.
Here are some quick snips I took note of during my very quick review.

A. Long Term Debt to Equity Ratio

Total Assets $14,907
Total Equity $5,080
Total LTD $4,753.

Assets / Equity is 2.93X

LTD / Equity is 0.94X

B. Interest Coverage Ratio
Net Income Before Tax $659
Interest Expense $314

NIBT and Before IE $973

Interest Coverage Ratio (NIBT + Interest Expense)/Interest Expense

659+314/314 = 3.10X

In 2006 and 2005 the coverage ratio was 2.15X and 3.0X respectively. Let’s see if better coverage ratio is a trend or not.

C. Cash Flows:

If you subtract Capex from Net cash Provided by Operations you get the following.

CFO 824
less: Capex 1,519
FCF (695). We have seen free cash flow as a negative during the last 3 years.
lets wait and see if the expansion program and stable parent leads to growth of cash flow as years go by
7. Ben Graham in 3rd edition of Security Analysis suggests to also use a computation of “market cap to debt.” If we assign market cap to BPI of $6.4B (CSFB 2/11/08) and debt is $4,376 without Capital securities due to BAM, or $5,479 with it. We get ratio of 1.46X and 1.17X respectively. If I am not mistaken, he liked to see a ratio of 2.3X to 2.7X
for Utilities. He liked to see a margin of error. I will try and dive deeper at a later time. One should also use Stockholders Equity as opposed to Market Cap, which makes things more difficult for BPI valuation IMO.

8. Shareholders Equity is 5.1% of total assets. In 2006 percentage was healthier at 7.0%. both years, lots of leverage.

9. Book Value is $349M, yet Tangible Book is $316M. In 2006 BV was $409 annd Tangible Book was $382M.

10. Revenues of $904M included $12M of currency.

11. Graham identified on page 326 of SA 3rd edition that a “debt to tangible asset ratio” of 65%. BAM’s ratio is 80%

(55+2691+1630+1103)/(6891-33).

12. On page 317 of 3rd edition Graham indicated to include parent preferred debt in subsidiaries coverage and funding ratios.

13. As I have stated previously, I think that dam depreciation of 40 – 60 years is agressive. Hence, perhaps years should be 40 years. I have seen this discussed in regards to Hydro, and need to revisit. If i am not mistaken, Graham suggested 30 years for non hydro and 40 years for hydro.

14. Note 6 in Financials have quite a few related party transactions. These include recievables from Fraser, Katahdin, and long term investments.

15. Note 16 “property specific borrowings” show us that most of the payments on the debt of BPI is interest only.

16. I need to search purchase of Itiquira Energetica SA from NRG Energy Inc. Has this closed. Note claims expected to close 1Q08.

17. Hydrology conditions improved in January 2008. Flatt told SU students that Hydrology in North East is now excellent.

Various Brookfield Asset Management Ratios I worked on:

A. Times Interest Earned (Interest Coverage Ratio) – This evaluates the ability of a company to meet required interest payments.

Times Interest Earned = pretax income + total interest expense / total interest expense.

We like to see interest coverage at > 4 (or 25% on the inverse). We consider 6 (or inverse 16.67%) as a conservative number.
Net Income 787

Interest Expense 1786

(NI + IE ) / IE

(787+1786)/1786

Interest Coverage = 1.44X

Last year the coverage was 1.99X

B. Debt to Net Income Ratio

Simple formula to determine years it will take to pay debt is discussed on page 445 of Graham’s Security Analysis (5th edition).

Total debt / net income

total debt 32,725

total net income 787

41.58X

C. BAM Debt to Equity – David Dreman feels that debt should be less than 20% of Equity.

total debt 32,725
total equity 7514
debt to equity % 435%

Flatt spoke recently at Syracuse University Marty Whitman Day:

notes… quotes might not be exact, but fairly close.

ahh, havent seen a SU speaker since Alexander Haig spoke at my SU graduation.

He is an excellent speaker. I have seen him quite a few times.

Brookfield has an 85-employeee office in Liverpool that oversees its more than 70 power plants throughout the Northeast, including a cogeneration plant in East Syracuse. “All of Northeast power operations are run out of Syracuse.”

“things extremely negative this past month.” “Greatest in my lifetime, maybe Marty’s”

“we have 25 buildings under construction in Dubai.”

“credit conditions worst we have seen in post war.”

“world gdp growth is extremely strong.”

hydro conditions are excellent in north east. lots of snow and rain.

“company’s must see the other side of a liquidity problem when buying assets.” “Properly leveraged quality assets on appreciable assets”

“prudently finance your assets.” “Companies often misfinance their portfolios.”

“When we buy assets we use long term financing at prudent levels and investment grade. It lowers risk and ensures where we never get caught refinancing their assets. Companies are learning the hard way about leverage. “Must not avoid the rule of prudent borrowing. Even the best assets are worthless if you can’t hold them to see another day.”

“invest against the common trend.”

says dont go into short term mortgages, or short term solutions. consequences could be difficult.

Purchased 245 park ave for $250 sq foot or $500M in 1995. property now worth $2B. havent purhcased a property in NYC in 2 years because prices are high.

In early 2000’s power business went through distress. bought 60 facilities for $900M and now are probably worth double that. Believe we are compounding strong returns and cash flows keep rising.

“don’t be all things to all people.”

“hydro asset with barriers of entry, low cost provider and has an advantage over other means.”

“likes share repurchases. likes it better than buying assets, since they know their value.”

‘largest independent owner of hydro plants in the world.”

“wind facilities more economic every day, especially with oil at $100. I think $70 – $100 oil is here to stay.”

ethanol is the future, especially via sugar cane, which is efficient. Probably 10 years out.” BAM owns sugar fields in Brazil.

“if you dont understand something dont invest in them . if you cant understand them, dont hire them.”

believes will have substantial upside in next 5 years or so in hydro because of carbon factor.

very good speech. any bam investor should watch.

Brookfield Properties Inc Ric Clark spoke at CSFB 9-Apr-08 – BPO said the following:

“setting aside New York City for a minute, so far, everything that we’re seeing, the markets are fine. We have seen, in our experience, no meaningful negative pressure on rental rates; no meaningful reduction inactivity”

“no major change in deal economics.”

“activity, I’d say, in the financial services market, specifically New York City, is way down. I think we had a very active fourth quarter of last year. The first quarter this year, we’re still tallying the results, but activity, both within the portfolio and throughout the New York City market is very meaningfully down. We’ll probably even see market vacancies creep up just a little bit.”

“Financial services firms, it’s no secret — lots of layoffs. That’s sort of the bad news. They’re not in the market — growing, also bad news, but so far we’ve seen no signs of financial services firms putting sublease space on the market, except for one or two small exceptions. And believe it or not, we continue to have consolidation discussions with some financial services firms regarding our potential new developments.”

“On the capital market side, borrowing money is — to use a real estate term of ours, is just a major bummer right now. We have probably $1 billion worth of debt rolling throughout the year, also in small loans, $50 million here, $100 million there, $25 million over there. And just the amount of effort that we put into refinancing these little loans are major. You generally have to pull on relationships to get things done. Banks are not really in the market of loaning on a fixed-rate basis. We are talking to insurance companies basically to provide fixed-rate product.

Spreads seemed to have widened to about 300 basis points over treasury, give or take. And obviously, covenant-like kind of transactions are gone. Lenders are looking for real covenants, not negotiating much off their foreign documents. And a novel idea, looking for really sort of good old-fashioned standard debt service coverage ratios and leverage levels probably around 55% or 60%.

So, it’s not fun right now borrowing money. The good news for us is if you’re a big organization with a good track record and a good balance sheet, you can actually get it done. And we are getting it done, but it’s not fun.”

“On the valuation side, in our properties and actually throughout the market, we’re seeing that cash flows are generally up in most properties. Buyer’s expectations, though, have gone down as far as valuations and cap rates have gone up, in our case. When we’re looking to invest money, we probably raised our cap rate expectations by 200 basis points. There’s a disconnect still between seller’s expectations and buyer’s expectations. We expect at some point as the year progresses to see some narrowing of that gap. At the moment, there’s really no data points, there’s not a whole lot of assets trading hands, but we think that there are enough of the high leverage buyers of the past who are based with debt maturities that they’ll have to start to
move real estate. And we may well see sort of a narrowing of the gap.”

Asked about how $1B in refinancing this year is going.

“Well, as far as — so, the $1 billion has long sort of scattered throughout the year, I think the biggest one is $150 million, which matures in about 60 days. We’re — we’ve been working on that and hoped to button that down in the next few weeks. We’ll get all this done. Some of them, we’ll have to do on a variable rate basis, just because we won’t like the terms of a fixed rate debt, which — we run with very little variable rate exposure, so we’re comfortable doing that until the market clears up a bit.”

Tom Farley, Prez & COO of Brookfield Properties said the following on 4/2/08.

“We are seeing strength in every single market in Canada. Ottawa is a great market. We think it is running at a 4% vacancy rate. Toronto, as I mentioned, downtown is sub 4. Now when I say downtown, that is College and South. It is phenomenal. Downtown Toronto in the financial core, you look at the top nine buildings and there is 1.7% vacancy. So that equates to about 180,000 square feet of available space. A year ago that was close to 600,000, so there is not a lot of space here.

Calgary, I’m very bullish in Calgary. In the long run we are going to see new product delivered to the market over the next six years. But I think the fundamentals will continue to be very good there and it will be consistently strong.

Vancouver has very low vacancy rate; it is at 3%. There is only one small project coming onto the market, and that is another great market. The frustrating thing for us to buy in Canada is in our segment of the market, there is about seven entities that control the ownership of all of the top-end office buildings. It’s ourselves and six pension funds. So we don’t see a lot of acquisition
opportunities where we have to focus on. Growth is organic through rising rents and through our development projects.”

“Well, there is still available debt. Obviously, the conditions and terms are a little more onerous from a borrower’s perspective than where they were six months ago.”

“Well, we may want to come to the markets for a couple of things, though I hope it gets better. But no, there is certainly a pullback. And we have been successful in a couple of debt facilities that we put together, but there is fewer players. There is more onerous terms.”

Crains article Large firms start to dump office space 20-Mar-08

http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20080316/FREE/510404333/1008

“As the economy cools, tenants are starting to shed Manhattan office space—a development that could lead to lower rents and signify the end of the robust leasing market that landlords have enjoyed over the past few years.”

“The amount of space represents only a fraction of the 350 million-square-foot market. But the activity is causing a stir in real estate circles, because some fear that what is now a trickle could turn into a flood. Ominous indicators of a possible recession—such as imploding hedge funds, faltering investment banks and wild stock market gyrations—lead some to believe that increasing amounts of space will hit the market in coming months.”

“A decline in rents would fly in the face of the conventional wisdom that a lack of inventory in the real estate market will enable landlords to keep lease prices steady.

The supply-and-demand ratio still favors landlords, so rents remain high. But that could change as more space comes on the market.”

“Another factor adding inventory to the market is the completion of new buildings. Goldman Sachs is preparing to sublease about 500,000 square feet at 77 Water St. that it won’t need when it moves into its new world headquarters next year. Bank of America is expected to shed a significant portion of the roughly 500,000 square feet it has at 114 W. 47th St. once its new tower opens.”

“However, New York remains a landlord’s market. The vacancy rate in February was 5.8%. A lack of space drove rents up 29% in the 12 months ended in February, to an average of $66.95 a square foot in Manhattan, according to Cushman & Wakefield Inc. And leasing activity remains brisk.

Experts say there is a balance between supply and demand when the vacancy rate is 8%. To spur a surge of sublease space, experts say, companies would have to eliminate about 40,000 jobs. In the 2001-02 recession, about 187,000 jobs were lost in Manhattan.

Some brokers are speculating that the market is already slipping. Deals take months to close; some of the recent leases now being reported actually originated last year. Financial firms, which account for one-third of the leases in Manhattan and which have been driving up rents, are beginning to relinquish space as the economy weakens. Some brokers say that their phones are ringing less often, and that tenants are skittish about committing to space.”

“SLIMMING DOWN
Companies are unloading hundreds of thousands of square feet of office space on the Manhattan market (all square footage numbers are approximate).

GOLDMAN SACHS 500,000 square feet at 77 Water St.
CITIGROUP 140,000 square feet at Citigroup Center, 153. E. 53rd St.
100,000 square feet at 399 Park Ave.
NOMURA HOLDING AMERICA 110,000 square feet at 2 World Trade Center
iSTAR FINANCIAL 110,000 square feet at 1095 Sixth Ave.
BEAR STEARNS 70,000 square feet at 230 Park Ave.”

Seth Klarman said the following in OID in its February 29, 2008 issue:

“Commercial Mortgages and securitizations wil certainly experience their share of difficulties now that financing spreads have widened ,property prices have stalled out and vacancies in certain asset classes are starting to rise.”

“Higher borrowing costs, tighter lending standards, and more cautious investor behavior could further slow economic activity, with a resultant fall in security prices.”

Crystal River has Brookfield Asset Management credit facility ammended on March 7, 2008

http://secfilings.nasdaq.com/filingFrameset.asp?FileName=0001047469%2D08%2D002634%2Etxt&FilePath=%5C2008%5C03%5C13%5C&CoName=CRYSTAL+RIVER+CAPITAL%2C+INC%2E&FormType=10%2DK&RcvdDate=3%2F13%2F2008&pdf=

I wonder if this relates to the margin calls, payment of fees to BAM in stock, etc. Would like to find the covenants on this.

“In August 2007, we entered into a $100.0 million unsecured 364-day credit facility with Brookfield US Corporation, an affiliate of our Manager. Indebtedness outstanding under the unsecured credit facility bore interest at LIBOR + 4.00%. In November 2007, we and Brookfield US Corporation amended the terms of the facility, effective as of September 30, 2007, to convert the facility to a secured revolving credit facility that provides for borrowings of up to $100.0 million in the aggregate and expires in May 2009. On March 7, 2008, we and Brookfield US Corporation amended the terms of the facility, effective as of December 31, 2007, to extend the term of the facility from November 2008 to May 2009, to revise the financial covenant relating to minimum net worth and to eliminate the financial covenants relating to minimum net income (as defined in the facility), a maximum leverage ratio and interest rate sensitivity. The secured facility bears interest at LIBOR + 2.50%. The credit facility and the amendments were approved by the independent members of our board of directors. As of December 31, 2007, we owed $67.3 million under this facility.”

BHS issues a 10K/A for 2007 12-Mar-08

“We are filing this Form 10-K/A to report the following corrections to clerical errors contained in the Form 10-K: (1) Part II, Item 8, “Note 2. Housing and Land Inventory” has been amended to report the correct acres of longer term land of 6,067, the correct non-refundable deposits and other entitlements costs of $9.1 million, and the correct aggregate exercise price of $194.9 million;”

On the original 10K, they had 1,012 acres of land and other entitlement costs of $4.0M, exercise price of $76M.

“(2) Part II, Item 8, “Note 3. Investments in Housing and Land Joint Ventures” has been amended to report the correct limited maintenance guarantees of $76.1 million in 2007 and $89.4 million in 2006;”

In the original 10K, this was written, “The Company and/or its joint venture partners have provided varying levels of guarantees of debt in its joint ventures. At December 31, 2007, the Company had recourse guarantees of $8.5 million (2006 — $12.7 million) and limited maintenance guarantees of $12.0 million (2006 — $12.7 million) with respect to debt in its joint ventures. As of December 31, 2007, the fair market value of the recourse guarantees was insignificant.”

Now it reads in the 10K/A, “The Company and/or its joint venture partners have provided varying levels of guarantees of debt in its joint ventures. At December 31, 2007, the Company had recourse guarantees of $8.5 million (2006 — $12.7 million) and limited maintenance guarantees of $76.1 million (2006 — $89.4 million) with respect to debt in its joint ventures. As of December 31, 2007, the fair market value of the recourse guarantees was insignificant.”

“(3) Part II, Item 8, “Note 11. Commitments, Contingent Liabilities and Other (e)” has been amended to report the correct rental expense of $4.5 million for 2007 and $3.8 million in 2006 and to report the correct future minimum rent payments under operating leases of $3.7 million for 2008, $2.3 million for 2009, $1.2 million for 2010, $0.4 million for 2011 and $0.4 million thereafter.”

In the original 10K, this was written, “(e) The Company leases certain facilities under non-cancelable operating leases. Rental expense incurred by the Company amounted to $2.5 million for 2007 (2006 — $2.1 million). At December 31, 2007, future minimum rent payments under these operating leases were $1.8 million for 2008, $0.4 million for 2009, and $0.2 million for 2010.”

Now it reads in the 10K/A, “(e) The Company leases certain facilities under non-cancelable operating leases. Rental expense incurred by the Company amounted to $4.5 million for 2007 (2006 — $3.8 million). At December 31, 2007, future minimum rent payments under these operating leases were $3.7 million for 2008, $2.3 million for 2009, $1.2 million for 2010, $0.4 million for 2011 and $0.4 million thereafter.”

May 5, 2008

Brookfield Power and Emera entered a joint venture. Here are some items I collected in relation to Emera and their Annual report from 2007.

http://www.snl.com/Cache/5892166.PDF?FID=5892166&O=PDF&T=&Y=&D=&IID=4072693&OSID=9

“Our investment in the pumped storage hydro-electric facility Bear Swamp also resulted in a strong year. Earnings before interest and taxes were $24.6 million compared with $1.4 million a year earlier. These earnings include $15.7 million in mark-to-market accounting gains. The new capacity agreement with the Long Island Power Authority (LIPA) fulfilled the Company’s goal of securing a long-term contract for a significant portion of its output. Bear Swamp will provide LIPA with 345 MW of capacity until 2010 and 100 MW for the rest of the 14-year term. Bear Swamp will also provide LIPA with 12,000 MWH of peak energy a week at an escalating fixed price. This represents approximately 35% of Bear Swamp’s available energy. The introduction of the Forward Capacity Market in New England provides further opportunities for Bear Swamp.”

“Bear Swamp, a 50/50 joint venture in a 600 megawatt pumped storage hydro-electric facility in northern Massachusetts.”

“Bear Swamp – As part of its long-term energy and capacity supply agreement with the Long Island Power Authority (“LIPA”), Bear Swamp has contracted with its parents, Emera and Brookfield Power Corporation (“Brookfield”), to provide the power necessary to produce the
requirements of the LIPA contract. A contract with Brookfield is marked-to-market through earnings as it does not meet the stringent accounting requirements of hedge accounting. As at December 31, 2007, the fair value of the net derivative asset was $14.8 million (2006–$nil), is subject to market volatility of power prices, and will reverse over the life of the derivative, which expires in 2021. The mark-to-market adjustment to Q4 2007 earnings was a gain of $5.9 million ($3.5 million after-tax) and to Q4 2006 was nil. For the year ended December 31, 2007, the mark-to-market adjustment to earnings was a gain of $15.7 million ($9.4 million after-tax) and
for 2006 was nil.”

Operat ional:

Bear Swamp EBIT – operational increased quarter over quarter to $3.6 million in Q4 2007 compared to $(0.8) million in Q4 2006;
and to $8.9 million in 2007 compared to $1.4 million in 2006 and $4.2 million in 2005. In 2005 Bear Swamp’s margins were strong, because peak prices rose as a result of the impact of an active hurricane season. During 2006, margins were weaker than 2005 due to milder weather patterns. A hedging program was implemented in 2006 to provide more consistent margins and resulted in a markto- market loss, which reversed in 2007.

During Q1 2007, Bear Swamp finalized a long-term agreement with the Long Island Power Authority, providing LIPA with 345 MW of capacity to May 31, 2010 (approximately 55% of Bear Swamp’s total capacity); and 100 MW thereafter, to April 30, 2021. In addition, Bear Swamp will provide LIPA with 12,200 MWh of super-peak and peak energy weekly (approximately 35% of the plant’s available energy) at a fixed price, with an annual increase, over the 15 year term of the agreement. Bear Swamp has contracted with its parent companies, Emera and Brookfield, for the power supply necessary to produce the requirements of the LIPA agreement.

Mark – to – market:

As mentioned above, Bear Swamp has contracted with its parents, Emera and Brookfield, to provide the power necessary to produce the requirements of the LIPA contract. A certain contract with Brookfield is marked-to-market through earnings as it does not meet the stringent accounting requirements of hedge accounting. As at December 31, 2007, the fair value of the derivative asset was $14.8 million (2006 – nil), is subject to market volatility of power prices, and will reverse over the life of the derivative, which expires in 2021. The effect on 2007 net earnings was an increase of $9.4 million after-tax. Absent this mark-to-market adjustment, Emera’s earnings per share would have been $1.28.

Debt Management:

During Q2 2007, Bear Swamp completed a $125 million USD financing using a senior secured non-revolving credit facility. The fiveyear credit facility bears interest at a LIBOR-based facility rate, is secured by the assets of Bear Swamp, and is due in May 2012. Proceeds of the financing were distributed equally to Emera and Brookfield Power. Emera has established the following credit facilities outside its regulated electric utilities:

Short-term Maximum millions of dollars Maturity amount Operating and acquisition credit facility 1 Year Revolving $ 600.0

The ratings issued by Dominion Bond Rating Service, Standard & Poor’s and Moody’s Investor Services are unchanged.

In October 2005, Moody’s rating agency revised Emera and NSPI’s rating outlooks to negative from stable, citing Nova Scotia Power fuel cost recovery concerns and regulatory uncertainty. In December 2007 Moody’s stated that NSPI’s ability to achieve a negotiated settlement in respect of its 2007 rate case and the progress toward implementation of a FAM are positive developments. In the event that during 2008 NSPI is able to demonstrate progress toward the satisfaction of the UARB’s FAM conditions, then all else being equal, Moody’s expects that the negative outlook of Emera and NSPI could be stabilized.

Emera has the following available credit ratings:

Long-term corporate

DBRS – BBB (high)
S&P – BBB
Moody’s – Baa2

On a consolidated basis, Emera’s target percentage of debt to total capitalization is 50%–55%, of which 10%–25% would be exposed to short-term rates. The company manages long-term debt terms such that the average is not less than ten years.

Bear Swamp (issued and payable in USD) Senior non-revolving credit facility secured by the assets of Bear Swamp 5.63 – 2012 61.7

Acquisition of 50% of Accor Brazil Ticket Services from Brookfield Asset Management.

The following was collected from Accor Brazil annual report.

“At the beginning of December 2006, Accor acquired from Brookfield Asset Management Inc., and Espirito Santo Resources, Ltd., the two companies’ combined 50% stake in Brazil’s Ticket Serviços for €197 million. Jointly held by Accor (50%), Brookfield Asset Management Inc. (40%) and Espirito Santo Resources, Ltd. (10%), Ticket Serviçios manages service vouchers and hotels in Brazil under Accor brands and food catering services under a local brand. Once the transaction has been completed, Accor will hold a 100% stake in the company’s service vouchers and hotel operations and a 50% stake in its food services operations, with Compass owning the other 50%. The business combination was accounted for by the purchase method, leading to the recognition of goodwill for €163 million. Ticket Serviçios reported 2006 revenue of €365 million and net profit of €24.4 million.”

Tricap:

From BAM 2007 Annual Report:

“Two principal investments in Tricap I are Western Forest Products and Concert Industries. Western Forest Products experienced a difficult year due in part to a major industry strike which has since been resolved. Concert Industries, a leading producer of air-laid woven fabric, continues to perform well and we continue to make progress expanding its revenue and operating base.”

“Our specialty funds’ revenues increased due to the consolidation of revenues from Western Forest Products and Concert Industries and increased yields from loans issued during the year. Similarly, investment income and other includes revenues from operations consolidated during 2007 that were accounted for on the equity method during 2006.”

From Western Forest 1Q08 News Release:

http://www.westernforest.com/domans/download/Q1%202008.pdf

“Two principal investments in Tricap I are Western Forest Products and Concert Industries. Western Forest Products experienced a difficult year due in part to a major industry strike which has since been resolved. Concert Industries, a leading producer of air-laid woven fabric, continues to perform well and we continue to make progress expanding its revenue and operating base.”

“Our specialty funds’ revenues increased due to the consolidation of revenues from Western Forest Products and Concert Industries and increased yields from loans issued during the year. Similarly, investment income and other includes revenues from operations consolidated during 2007 that were accounted for on the equity method during 2006.”

“Tricap Management Limited (“Tricap”) owns 49% of the Company’s Common Shares and 100% of the Non-Voting Shares.

As of May 7, 2008, there were 119,842,359 Common Shares and 84,571,206 Non-Voting Shares issued and outstanding.

In addition, the Company has 569,373 Tranche 1 Class C Warrants, 854,146 Tranche 2 Class C Warrants, and 1,423,743 Tranche 3 Class C Warrants (collectively, the “Class C Warrants”) outstanding. The Company has reserved up to 2,847,262 Common Shares for issuance upon the exercise of the Class C Warrants. Western has also reserved 10,000,000 Common Shares for issuance upon the exercise of options granted under the Company’s incentive stock option plan. In March 2008, 275,000 options were cancelled. As of May 7, 2008, 3,958,060 options were outstanding under the Company’s incentive stock option plan.”

Canary Wharf

http://www.thisismoney.co.uk/investing-and-markets/article.html?in_article_id=441334&in_page_id=3

Article mentioned 20,000 UK jobs will be lost over next 3 years. “”London will lose nearly 20,000 financial services jobs over the next three years, a report predicts today. The City will bear the brunt, with 10,000 jobs set to be axed, while another 9000 will go in Tower Hamlets – home to Canary Wharf – and Westminster, which hosts scores of hedge funds in Mayfair and St James’s as well as thousands of media and marketing firms, lawyers and corporate headquarters.”

March 7, 2008                                                 Crystal River Reports and CC notes (28.51)

Ronald Redfield – Redfield, Blonsky & Co. – Analyst
Would you elaborate as much as possible about your partnership with the manager of Brookfield Asset Management? Also, would you discuss if there’s any cross-pollinization, if you invest in any of their debts or their deals, if you fund any of their ongoing efforts, refinancings and so forth? And if you do, what is your allocation or total dollar value in percent of your assets that are related to Brookfield Asset Management?

Clifford Lai – Crystal River Capital, Inc. – President and CEO
Sure. This is Cliff. Brookfield Asset Management has been a great sponsor for us. They show us a lot of deal flow information, have supplied us with a secured bank facility. So the current assets that are on the books that are attributable to their, quote, deal flow generally is we have an investment in what’s called the Brookfield Real Estate Investment Fund, which is a B note and
mezz loan fund. It’s about $37 million or so on the books. It consists of primarily B notes and mezz loans; that’s pretty well funded up.

The Triple Net Properties that we have on the books, which is somewhere around $230 million or $240 million, all came from Brookfield. We’ve had other assets on the books from time to time that we have originated with them. So there’s a fair amount of activity going on between the companies. I would say, from an allocation point of view, I think the good thing about rookfield
Asset Management generally is that Bruce Flatt there has really kind of identified which parts of his companies, which parts of his investment pools get which types of assets. So, for example, Brookfield Properties, big Class A office properties in 24/7 types cities are kind of — that’s where a lot of those assets go. Crystal River is the designated Triple Net-type target for Brookfield Asset Management, and we’re able to participate in some of the Brookfield-sponsored funds, to the extent that they make sense for us. Now, I will say that because there is that affiliate
relationship there, that all of the affiliate transactions go through the independent Board of Directors and are valued that. So everything is pretty much done on an arm’s-length sort of basis.

Ronald Redfield – Redfield, Blonsky & Co. – Analyst
Can you say if you — do you disclose that? I haven’t seen it. Just like what percentage of your fundings, let’s say, in the fourth quarter, or actually in the second half of 2007, were related to Brookfield Asset Management-related and -owned-type situations?

Clifford Lai – Crystal River Capital, Inc. – President and CEO
The only investment we made, which was sourced jointly with Brookfield and ourselves, in the second half of the year – and I’m just going off the top of my head here — was a Triple Net property that we purchased down in Texas for $26 million.

Ronald Redfield – Redfield, Blonsky & Co. – Analyst
And if in theory, and this is purely in theory, I guess that they could always rely on you as some type of liquidity arm for Brookfield Asset Management, if one were to look at things skeptically. Is that correct?

Clifford Lai – Crystal River Capital, Inc. – President and CEO
I wouldn’t say rely at all. Again, we’re an independent company, so we have looked — I would say we have looked at more than what we have originated with them. So they’ve shown us a lot more product than what we’ve actually taken, either because it didn’t fit our profile, didn’t like it, a number of reasons.

Ronald Redfield – Redfield, Blonsky & Co. – Analyst
For the 2008 dividend, do you have any liquidity concerns because of REIT requirements to distribute dividends and so forth, and what your thought are on the dividend going forward in 2008?

Clifford Lai – Crystal River Capital, Inc. – President and CEO
Yes. We don’t and have not in the past, don’t comment on dividends going forward. But I will tell you that the Board does take into account a number of factors. But we do understand that it is an important element to the shareholders of the Company, and generally, it is our goal to continue to maintain a stable and predictable dividend. Having said that, like I said in my prepared comments, there are a number of things that are working for and against the dividend,
for being lower financing costs generally in our book, so lower interest rates on LIBOR helps, generally. That will potentially offset some of the negative earnings pressure that we may get from — to the extent we have to deleverage the balance sheet and/or mature some of the higher-yielding investments that we made in the portfolio that are starting to mature. So those are
all the factors that are coming in.

Ronald Redfield – Redfield, Blonsky & Co. – Analyst
But no comment on the — I guess, in one sense, you could, if you have net income and you are required to pay it out, yet at the same time, if you had liquidity concerns for the margin calls, if they continued over the midterm and so forth, I guess you have a situation there where it required distribution of dividend, yet liquidity doesn’t allow for such.

Clifford Lai – Crystal River Capital, Inc. – President and CEO
Right. And again, I think with respect to our liquidity, we’re comfortable where we are at right now. We continue to make moves around the portfolio to manage that liquidity. We’ve got marketable securities, we’ve got credit lines unpledged, collateral, cash, things like that.

Ronald Redfield – Redfield, Blonsky & Co. – Analyst
I guess what I’m getting at is it’s tough enough in your industry right now with just general market liquidity concerns. Add to that requirements of distributing dividends, that compounds it. Is that accurate or no? Am I missing it?

Clifford Lai – Crystal River Capital, Inc. – President and CEO

That’s all part of the balancing act that’s going on in the industry, yes.

Here are various sections from their 8K released today
“The net loss for the quarter ended December 31, 2007 totaled $250.4 million, or $10.10 per share.”

“Due to the general widening of yield spreads and the resulting market value adjustments to the carrying value of the Company’s available for sale securities, GAAP common equity book value per share declined to $4.48 at December 31, 2007 from $12.29 at September 30, 2007.”
“The net loss for the year ended December 31, 2007 totaled $345.9 million, or $13.86 per share, compared to net income of $46.9 million, or $2.27 per share, for the year ended December 31, 2006.”

“Starting in the second half of 2007, managing liquidity became – and continues to be – our main priority.”
“As asset values declined, margin calls and lower loan amounts placed demands on the Company’s cash and other liquidity sources.”

Word on the street is if you ask the margin broker to extend margin, you should use the term “pretty please.” (my notes)

“While it was our intention to capitalize on a stock that we felt was trading below our enterprise value, we had to balance the repurchase with increased demands on liquidity from our short-term collateralized borrowings. To date, we have purchased 299,300 shares, and, while we agree that a stock repurchase program continues to be attractive, we also believe that it is important for us to preserve cash in light of the volatile financing markets.”

Assorted Notes:
1. AAA Vacancy Rates in NYC

http://www.observer.com/2008/stat-day-more-vacancies-manhattans-top-towers

“The vacancy rate for Manhattan’s top-flight, Class A office towers increased for the second month in a row in February, according a report this week from brokerage Colliers ABR. The rate was up 5.8 percent from 5.6 percent in January. In midtown, specifically–where most of these Class A towers loom–the vacancy rate was up as well, from 6.2 percent in January to 6.4 percent last month.”

2. NY Observer writes that Wall Street Journal will be moving from Brookfield’s World Financial Center. “Rupert Murdoch is planning to move his newly acquired Wall Street Journal to his News Corp. headquarters at 1211 Avenue of the Americas, plucking the broadsheet’s newsroom from its home at Brookfield Properties’ World Financial Center in Battery Park City. The Observer first reported the news on its media blog on Monday.

At first glance, at least, the act seems to speak more to Mr. Murdoch’s desire to keep his offices close to those of his new prize than it does to any real estate trends in Lower Manhattan.”

March 3, 2008 Third Ave Real Estate Value Fund (29.56)

Run by Michael Winer has reduced holdings of BAM by 371,225 as of January 31, 2008. This may or may not have been reported on the 12/31 Form 13F. (one could find this by comparing last 2 reports from the Winer and compare to 13F.) I’m going to guess that most of reduction was done in November and December 2007. I could be wrong though. During that period TAV reduced BAM by 307,352 shares, whereas TRAV reduced by 371,225 during Q ending January 2008.

http://www.thirdavenuefunds.com/taf/documents/pdf/TAF_1Q_ShareholderLetters.pdf

Winer goes onto discuss his concerns with Commercial Property. He cites cap rates specifically. Also mentions availability of financing and a concern of CMBS via “conduit lenders” freezing the borrowers of the last 15 years. Talks about widening spreads.

Here are some key takeaways:

“Commercial property valuations – particularly in the United States and Europe – have declined as the result of uncertainties regarding availability of financing and how an economic slowdown may impact future rental growth.”

“Property valuations are most often determined by applying a market-determined capitalization rate (cap rate) to net operating income. A cap rate converts income into value. Typically, a cap rate reflects the anticipated unleveraged yield for the succeeding year. The unleveraged yield is determined by dividing the net operating income (cash flow before debt service and capital expenditures) by the purchase price. A property expected to generate net operating income of $900,000 would be valued at $15 million using a 6% cap rate. Unfortunately, capitalizing first-year net operating income is not always an accurate measure of value. For example, a fully occupied office building leased to a single high-credit-quality tenant would seemingly warrant a lower cap rate than a similar building leased to multiple, lower-quality tenants. However, if the lease on the single-tenant building is set to expire in two years, and the contract rent exceeds current market rents in the area, then a higher cap rate (lower value) is warranted to compensate for the uncertainty of future cash flows. Similarly, if the contract rents on the multi-tenant building are substantially below current market rents, and there will be near-term opportunities to increase contract rents, then a lower cap rate (higher value) is warranted.”

“To determine an appropriate cap rate, several factors must be considered – including property specific and general market. Property specific factors include age, physical condition, location, credit quality of tenants, occupancy levels, in-place rents versus current market rents, lease expirations and local supply and demand. General market factors include interest rates, availability of long-term financing, unemployment rates, inflation and macro-economic conditions. Simply put, a cap rate (required yield) should indicate the “risk premium” over the “risk-free” return (e.g., U.S. government securities).”

“Each of the aforementioned factors must be taken into account when evaluating the risk premium. Cap rates are heavily affected by interest rates and the availability of long-term financing. A primary source of long-term financing for commercial properties over the last fifteen years has been “conduit lenders” that underwrite and originate loans that ultimately get packaged into commercial mortgage-backed securities (“CMBS”). The recent global credit crunch has had minimal impact on interest rates, but a dramatic impact on availability of financing. Demand for CMBS has weakened globally since banks and institutional investors began suffering mark-to-market losses on investmentgrade, subprime mortgage-backed securities. Despite strong credit fundamentals, especially high up in the CMBS capital structure, spreads on super senior CMBS have widened over 150 basis points (1.5%) since last summer. The decoupling of spreads and credit fundamentals is apparently due to uncertainty about potential economic fallout from the downturn in the U.S. housing and mortgage markets. U.S. 10-year Treasury yields have declined from about 5% last July to under 4% as of January 31st. Therefore, even though spreads have widened, actual yields on AAA-rated CMBS have not increased dramatically. (Note: the fact that the “risk-free” returns are lower, while required yields are higher, illustrates investors’ demand for higher “risk premium.”) The lack of liquidity and demand for CMBS has dramatically curtailed new loan originations by conduit lenders. This lack of financing has, in turn, resulted in a dramatic slowdown in commercial property transactions. Buyers and borrowers seeking refinancing have been forced to seek financing from “portfolio lenders” such as insurance companies and pension funds, that tend to have more conservative underwriting standards. These more conservative standards generally require more equity and more experienced and creditworthy borrowers.”

“Like any other investment, real estate must generate fair, risk-adjusted returns on equity to be attractive. If an investor can obtain 75% leverage at 6% interest on an investment property that yields 7%, the investor’s firstyear return on equity is 10%. (The equity return is higher due to the positive spread between the 7% property yield and 6% cost of debt.) However, if the investor could only obtain 60% leverage at 6% interest, the first-year return on equity would be only 8.5%. In order to achieve a 10% first-year return on equity, the investment property would have to yield 7.6%. This example illustrates the effect tighter credit has on cap rates (required yields) and, thus, commercial property values. Simply reducing the amount of leverage from 75% to 60% can force cap rates to increase (in this example, from 7% to 7.6%, or an 8.6% decrease in property value). Tighter credit, coupled with economic uncertainty and wider spreads (increased risk premiums) has resulted in downward revaluations for all property types.”

March 1, 2008 Ramblings, thesis, Brookfield Power (29.65)

We have been short BAM at various increments, with an average cost of around $38ish.

Our short thesis is based on the following concerns.

1. We think they are over leveraged and that increased credit costs, costs of capital, lower loan to values, will start stressing BAM.

2. We think potential for credit downgrades.

3. Concerns with reliance on commercial paper markets for liquidity.

4. Incestual sales and potentially unusual uses of related parties.

5. Severe over-valuation of power division. How do you get a book value of $349M, Free Cash flow of $10M, operating at a net loss, into a valuation of $6.5B?

6. Slowdown in Alberta CN real estate. (BPO)

7. High occupancy rates in metro areas, possibly deteriorating because of reliance on financial service industry as well as potentially unusually high.

8. Recent exotic financings. One would be 1 Liberty Plaza NYC.

9. Credit tightness.

10. Recession potential and pain on levered companies.

11. Stock price fueled by blind following of value investing community, who bought the idea and didn’t dig deep into financials. Perhaps that has ended and mass liquidation could occur. Are any covenants reliant on stock price?

12. Potential aggressive accounting procedures. Consideration that potential of over capitalization in past increased earnings, yet now they potentially use the crutch of depreciation on those previous capital expenditures not being considered in valuation.

13. $4B of debt coming due in 2008. Can they manage to refinance. Again, this is where excess leverage can become painful.

14. Reminds me of Enron with all their spin-offs and shuffling of assets. Not so sure institutional investors will embrace for continuing investments.

15. Integration concerns of multiplex. CEO UK already left.

16. Is BAM the glib helper and also a member of Buffett’s Gotrocks family?

Brookfield Power Corp. reports annual financials:

www.sedar.com

1. Brookfield Power Inc restated Sept and June financials. I think a non-cash restatement of taxes due to currency translation. I think favorable to book value. Non-Cash working capital went up $27M.

2. Brookfield Power Corp reported its audited financials. (BPC is wholly owned by BPI and consolidated into BAM). Company is financing facility for BPI.

a. Shareholders deficit went up to $3.6B from $2.5B in 2006.

b. Long term debt went down $6M.

c. Changed accounting methods in 2007 for deferred financing fees.

d. $450M of debt coming due 12/09.

e. Credit facility expires 4/09, has $350M avail. Has letters of credit out of $135M.

f. Annual net loss was only $1.2B compared to last year of $2.5B

g. Will be combining with BPI 1Q08.

h. The total assets of $802M consist of notes receivable from BPI.

3. BPC issued Earnings Coverage Ratio was .96 in F07 and .92 in F07 (an improvement). Yet, excluding capital securities interest coverage was 1.30 in F07 and 1.98 in F06 (not an improvement). We wonder how ratings agencies will work with this.

4. Note to myself… Restatement and accounting change…. in textbook forensic accounting, these are two warning signs of potentially aggressive accounting. We are not saying they are doing anything wrong. We are just saying we have two potential red flags. To put this into context, a heavy person who is a smoker who does not exercise has a higher risk of heart attack then does a person who eats healthy and exercises regularly. Yet, the heavy guy could live a lot longer. Just in the stats.

Brookfield Power Inc (operating company and consolidates great lake hydro):

1. Consider the potential of Book Value to be currently inflated because of potentially aggressive capex policies in prior years. This could be cause for rising depreciation as well.

2. Watch the bond ratings closely.

3. Review related party transactions.

4. Compare to last years annual. Look for prior debt discussions and compare.

5. Company has coml. paper, rated R-1 (low) by DBRS. Same last year1

6. $451M of debt coming due in 2009. I think I mentioned in my last Brookfield Power note.

7. Debt went up $1B.

8. Page 24 – new debt instrument to be issued, not yet known, this is based on the amalgamation of BPC.

9. Shareholders equity is now $349M, from $409M in 2006.

10. Track the bonds of Power Operating Companies:

Great Lakes Power
Pontiac Power
Brookfield Power NY
BPUS NewFinance
Beaver Power
Serpent River
Cameron Falls
Algonquin Power
Powell First River Mortgage Bonds
Lake Superior Power Senior Secured
Lievre Power
Valerie Falls
Mississagi Power
Pingston Power
Great Lakes Hydro America
Hydro Kennebec
Carmichael Falls
Bear Swamp
Rumford Falls
Valemount
Prince Wind

11. Capital Securities, being paid in cash or conversion shares?

12. On January 24, 2008 BAM INJECTED Power with $200M to provide liquidity. I kind of recall, and will have to look into my notes, the ratings agencies frowning on such, and would consider such a financial movement as a possible downgrade trigger.

Notes to Management Discussion &Analysis

13. Page 7 of MD&A describes the “Low environmental impact of Hydro.” Verify this, as I thought there were environmental concerns with water flow, temperature, carbon factor and wildlife.

14. Company of course sold assets to BIP. Netted cash of $90M.

15. Page 10 discussed financing in December 2007. Find the terms and the actual note.

16. Company benefited by $12M for CDN to USD currency gains.

17. Derivative commodity loss of $79M. $16M of that loss is related party. The other $65M is from the LIPA contract.

18. Net loss of ($19M) includes a tax recovery of $21M; hence one could argue Adjusted Loss was closer to $40M

19. “We continue to maintain investment grade unsecured issuer ratings from DBRS (BBB High)), Standard and Poor’s (BBB) and Fitch (BBB-), which are influenced by a prudent level of low-cost asset financing and modest levels of corporate debt. The long-life nature of our assets allows us to finance with non-recourse debt and minimal near-term maturities, minimizing risks associated with liquidity and refinancing.”

20. Hydrology levels at normal or above normal in January 2008.

The following is just one quick exercise on my first quick read.

Free Cash Flow off the cuff:

Net Income after adding back non-cash items was $150. Subtract capex of $140. You would have free cash flow of $10M. That does not take into account use of cash in investments, such as Brascan Brazil Ltd., debt repayments and those various related party transactions, which are not already included in income statement.

So you have FCF of say $10. Apply a multiple of 15X and you have a valuation of $150M.

In CSFB’s 9/30/07 report, they assign a value to Brookfield Power of $6.5B. I am including $454M for Great Lakes Hydro.

How do you get a book value of $349M, Free Cash flow of $10M, operating at a net loss, into a valuation of $6.5B?

Beware the glib helper.

Warren said in his 2007 Annual report, “Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.”

He was referring to those that sell investors based on the hair brain idea that they will generate 10% or greater returns each year.

Brascan Properties SA achieves guidance

Highlights – For the three months and twelve months ended December 31, 2007

• The Company achieved its 2007 Guidance regarding launches (R$900 million to R$1 billion)
And contracted sales (R$600 million to R$700 million).

• Developments launched in the fourth quarter amounted R$303.0 million, while the total
Amount for the year was R$1 billion. Respectively, these figures represent an increase of 68%
and 165% compared to the same periods of 2006.

• Contracted sales reached R$390.8 million in the fourth quarter and R$713.1 million in the
year, which is the equivalent to an increase of 151% and 96%, respectively.

• The PSV (Potential Sales Value) of the land bank under Brascan’s control increased from R$5.6 billion in the end of 2006 to R$10.4 billion in the end of 2007, representing an 85.7% growth.

• Gross profit amounted to R$85.9 million in the fourth quarter and R$221.5 million in 2007, the
equivalent of a 71% and 24% growth, respectively.

• EBITDA reached R$66.6 million in the fourth quarter and R$171.9 in the year, which
corresponds to a growth of 77% and 56% compared to the same periods of 2006 (adjusted for
IPO expenses and partnership sales).

• EBITDA margin in 2007 achieved 41.1%, an increase of 5.2 pp from the previous year
(adjusted for IPO expenses and partnership sales).

• Net earnings were R$76.8 million in the fourth quarter and R$154.6 million in 2007,
representing a 99% and 60% increase, respectively.
• Cash and cash equivalents as of December 31, 2007 totaled R$466.6 million.

• Year-end gross debt totaled R$238.2 million, compared to R$465.5 million in the same period
of the previous year.

BAM bonds showing some price deterioration 27-Feb-08 07:04 am

We always watch the bonds. We have mentioned previously that the BAM bonds have held up very well. This holding up is contrary to our thesis, and certainly a potential indicator that our short thesis is incorrect.

The bonds trade very infrequently, and have been priced at par or above.

BAM.GA 2017 5.80% have been priced at 100ish for quite a while. Most recent sale was at 87.791 yielding 7.678%, last trade 2/21/08. I have to look further, as this yield may be telling us that the bond although rated A- S&P is not trading as such.

BNN.GF 2012 7.125% have been priced at 105ish for quite a while. Most recent sale was at 98.5 yielding 7.535%, last trade 2/26/08.

BNN.GH hasn’t traded since December 2007.

BNN.GA 2008 8.125% have been priced at 103ish for quite a while. Most recent sale was at 101.164 yielding 6.581%, last trade 2/25/08.

This is merely one thing we look at, long or short. The bond market maybe telling us something here. On the other hand, the bond market is acting funny lately, and recent trades could be the exception and nothing to concern oneself with. Something we watch though. Often in an issue that is trading at yields greater than their rating, means that the price of the bond has already priced in a ratings cut (or increase).

As a comparison average bond rates are as follows

2 year A yielding 3.16% on average

5 year A yielding 4.49% on average

10 year A yielding 5.61% on average

BAM Cash Flow Multiple – Back of envelope 2006 26-Feb-08 09:33 pm

Cash Flow from Operations $689M
less: shareholder distributions (258)
less: capex Power Ops only (801)
Cash Deficit Possibly  Understated (370)
OR you can use
Net Income $1,170M
Add:Depreiciation     600
Less: Capex (Power only being generous)   (801)
Free Cash Flow with capex generosity $   969M

Need to see capital expenditures from other segments, required funding of other segments (such as Norbord and Fraser this year), preferred dividends, debt repayments required

Lets be generous and say that 2006 true free cash flow was $500M, then using a multiple of 15X would be a market cap of $7.5B.

market cap of $7.5B, using 584M shares o/s would be a share price of $12.84 per share.

If price adjusted to $12.84 a share, would Bam Split and Bam investments cause concern? Would financing be obtainable at a reasonable cost? Would financing even be available?

Don’t forget average sell side analyst is incestually tied to BAM via deals, rentals, sales of assets, buyings of assets, share of the pie and investment banking. So, “believe little of what you hear and less of what you see”. (Springsteen 2007, Magic)

BAM – Notes to myself 26-Feb-08 08:51 pm

1. I have had difficulty figuring out what is committed capital, versus already funded capital. If there is committed, and not yet funded, is a receivable set up. I don’t think so. It would be important to see that committed versus funded, so that one could figure out potential cash outlays.

2. On the same token, I wonder if co-ventures have had difficulty coming up with committed and required capital. In this environment, it would be expected that some funds (not BAM of course) might have liquidity concerns.

3. I wonder if BAM has been affected by the lock of Auction Market Preferreds and overnight commercial paper. Judging from BAM bond prices, I think all is cool, but something to think about.

4. I need to refresh. I could have sworn that Brookfield Power and Brookfield Homes have consolidated in the past. Yet, on page 40 of Supplemental Information FYE 12/31/07, BAM discusses that BPO is consolidated in the segment basis, whereas other operations are not. I gather on consolidated financials they are all consolidated, unless something has changed, or unless I have been mistaken.

5. Page 43 indicates debt schedules coming due. 2008 is a big year for refinancing. This is where the credit profile is crucial. It is unarguable that credit costs have increased, loan to values have gone down, which in turn spells more expensive credit for all. Not to mention that liquidity is no longer a plenty. Lets see what happens on the new financings. One thing to watch is BIP’s discussion last week, and how they will refi $1ish Billion by end of March. Just a lot tougher nowadays. Looks like $4.3B is coming due in 2008, again if I didn’t look at the schedule incorrectly. $4.3B is 58% of current stockholders equity.

6. Companies to review, if possible. Concert Industries and Western Forest Products. These are owned by Tricap.

7. BAM made $100M using derivatives and credit protection. What was the cost of such. Will be interesting to see that unwind in 2008. Future profits or losses? Any guesses? My guess is we will see costs or losses from this in First half of ’08.

8. I look forward to really trying to determine free cash flows. BAM reduces free cash flow by sustainable capex. they don’t reduce by other real costs of maintenance capex. yet, maint and sustaining shows up in Statement of Cash Flows (when issued). Hence, why would maint capex not be an integral part of Free Cash Flow?

9. When do warehouses and credit lines come due for renegotiation?

10. It will be interesting to dissect the balance sheet. We will find out for sure what the “Financial Assets” of $1.5B are, why Accounts Receivable increased by $2.0B, goodwill increased by $800M, and Accounts Payable Increasing $2.8B.

11. Interest expense has increased dramatically. It will be fun to run the interest coverage ratios.

More to write, looking forward to the financials

October 23, 2007 Questions for BAM

1. Where is Great Lakes Hydro ownership reflected in BPI financials? According to BAM, they are consolidated. BPI makes up most of BAM Power Generations. There are a few immaterial addbacks and so forth at consolidated level, but one could tear apart BPI and realize that probably greater than 90% of BAM power is BPI. I didnt realize that GLH.UN is consolidated into BPI.

Brascan Power is the new BPI. They were the old company. Brazil and Chile have nothing to do with BPI, nor are they reported under Power Operations with BAM.

I think one could look at BPI, project future cash flows, and try to determine various pricing metrics.

2. What assets on BPI are marked to market? None per BAM.

3. Is Brascan Power still a subsidiary? I don’t think so, but just checking. No, Brascan became BPI.

4. Are there any potential operational or financial stresses that could be caused or relieved because of stock price changes? Are any of the loans outstanding at all predicated by minimum BAM stock prices? No, per BAM.

5. Why does BAM not indicate on page 19 of 2Q07 Interim Shareholder Report that BPI debt is ‘BBB-‘ as opposed to reported ‘BBB’? They will get back to me. They also offered to send me all ratings reports, giving full detail. Interest on Capital securities is eliminated in consolidation. Nevertheless, I guess I would have to look into including it as a real expense for BPI, and maybe as real income for BAM. Remember, BPI has an IDR rating of ‘BBB-‘ by Fitch.

As I mention Fitch, and ratings. I see that BAM debt on the 2017’s are yielding around 6.01%. If you compare to like rated debt , you will see others (disney, Schering and Kraft), are yielding 5.40%. One could theorize that BAM debt is not trading like other S&P A- companies.

Issue coupon    YTM
BAM.GA 5.80% 6.01%
KFT.GQ 6.50% 5.65%
SCP.GC 6.00% 5.68%
DIS.HV 5.88% 5.43%

6. BAM discusses in 2Q07 report on page 4, “And as we discussed in our letter of February 10, 2006, we are generally inclined to hold assets indefinitely, preferring to monetize the accrued value by refinancing the asset, as opposed to an outright sale.” What assets would qualify for being held a long time? World Financial Centers have according to discussion, owned since early 1990’s. North American timber, which was spun off to Acadian Timber has been owned for almost 40 years, some of the Power operations as well.

7. BAM indicated to me that BPI has a deferred tax asset. I asked where it was on the financials, and they mentioned they would get back to me.

8. In BPI , what is “interest on capital securities?” Interest paid to parent.

9. Brookfield Properties, Brookfield Homes and Great Lakes Hydro are all consolidated, per BAM into BAM. They claim these are reduced via “non –controlling interests.” This is itemized on Page 43 or BAM AR 2006.

10. Longview Fiber operations, I think with value of $300M is listed as “financial asset – common shares section.” Longview Fiber shows up in 2007. BAM mentioned that they do not disclose components of these assets for competitive reasons.

11. Pages 16 and 17 of AR, list Total AUM, net invested capital for total and BAM. Committed Capital is listed in total, not for BAM. BAM told me this is being shown effective 3Q07 filings.

12. “We don’t concern ourselves with revenue. We concern ourselves with the net cash flow of the businesses.”

13. Maintaining capex is different than improvement and acquisition capex, according to BAM. I could see this to a point, but a serial acquirer could have this backfire. BAM claimed their sustaining basis capex is approximately $45M annually going forward.

14. If you go to sedar, again select “brookfield Power corp”, look at filing on April 23, 2007. called other and is the document with 29K of info.

It discusses interest coverage. I didnt fully understand. I spoke to several people at BAM, and they also were not familiar.

It is interesting how this document both includes and excludes interest on capital securities. Also, you can look at link on march 28, 2007, there is a “prospectus supplement.” In that supplement they discuss interest coverage ratio as well.

My quick, back of the envelope analysis on BPI, has me thinking that “Brookfield Asset Management Power Operations” should carry a market cap between, $1B to $4B, and as far as I can see, I see no reasonable business explanation to a value of $6B. with all that, be reminded that I have been short GOOG since $450ish.

Thesis:
1. Assets to Equity is 6.7X. Leverage.

2. High occupancy rates, low current interest rates, priced for perfection.

3. sometimes, marks to market. Companies that mark to market, have been on my radar.

4. Will financing costs remain low? Is access to capital already hindered? I am hearing that capital markets have really siezed up.

Are investors still yearning for these types of investments? Are cash flows as predictable as claimed? What percentage of their market cap is related to an asset greater than 10 years? Could BAM be the “Gotrocks” Berkshire has referred to?

5. Certain assets have been given long lives, which limits depreciation. Gas Generation assets prior to 2006 were written off over 5 – 60 years. Now , it is 10 – 60 years.

Dams 40 to 60 years
Gas cogeneration stations(2005 listed as 5 to 40 years) 10 to 40
Hydro Generating stations 19 to 60
Wind Turbines 20 to 25
Buildings 5 to 60
Transmission and Distribution 5 to 50
Equipment 5 to 60
Water Rights 2.50 % per year (I think 40 years?)

15. Some metrics below.

6 months ended
June 30, 2007 December 31, 2006 December 31, 2005
Net Income as reported BPI $25 $106 $60
          Depreciation $74 $124 $102
          Non-Controlling Interests $4 $24 $16
         Tax and Other $67 ($4) ($4)
          Change In Working Capital ($27) $20 $9
Adjusted Cash flow from operations $143 $270 $183
additions to power assets ($44) ($382) ($224)
Temporarily Disregard the following:
        Debt repayments
        Acquisitions
Adjusted free Cash flow  from BPI financials $99 ($112) ($41)
Total Operating Cash Flow as reported BAM $358 $620 $469
Less:  Interest ($133) ($235) ($215)
Less:  Current Income Taxes ($5)
Less: Non-Controlling Interests ($32) ($48) ($24)
Net  Operating Cash Flow as reported BAM $188 $337 $230
Price to Book Value BAM June 30, 2007 2006 2005 2004
Consolidated Assets $44,029 $40,708 $26,058 $20,007
Common Equity – Book Value $6,337 $5,395 $4,514 $3,277
Common Equity – Market Value $24,926 $19,947 $13,870 $9,976
Market / Book Value 3.93 3.70 3.07 3.04
6 mos ended
June 30, 2007 F2006 % change F2005 % change
Asset Management income and fees $130 $84 33.33% $63 270.59%
Property Service Fees $85 $155 -5.49% $164 28.13%
Investment Fees $12 $18 -5.26% $19 -17.39%
Total $227 $257 4.47% $246 46.43%

 Interest Coverage Ratio (or Times Interest Earned) = NIBT + IE (interest expense) / IE

Interest Coverage Ratio
BPI
6 months ended
6/30/2007
6 months ended
6/30/2006
2006 2005
Net Income After Taxes $25 $92 $106 $60
add Taxes $28 $10 $8 -$17
Net Income Before Taxes -$3 $82 $98 $77
add: Interest Expense $137 $118 $244 $228
EBIT $134 $200 $342 $305
Interest Coverage Ratio 0.98 1.69 1.40 1.34
Interest Coverage Ratio
BPI
6 months ended
6/30/2007
6 months ended
6/30/2006
2006 2005
Net Income After Taxes $348 $314 $1170 $1662
add Taxes $46 $51 $142 $162
Net Income Before Taxes $302 $263 $1028 $1500
add: Interest Expense $822 $474 $1185 $881
EBIT $1124 $737 $2213 $2381
Interest Coverage Ratio 1.37 1.55 1.87 2.70
Balance Sheet Differences BAM and BPI        2006 2005
Total Assets Per BAM $5,390 $4,752
Total Assets Per BPI $5,872 $5,368
Difference ($482) ($616)
Total Equity Per BAM $1,368 $1,197
Total Equity Per BPI $409 $356
Difference $959 $841
2006 2005
Asset To Equity Ratio BAM 3.94 3.97
Asset To Equity Ratio BPI 14.36 15.08

16. Brascan Residential Properties look here http://www.brascanimobiliaria.com.br/english/corporate_profile.htm

17. When I start Canary Wharf, look here http://www.canarywharfinvestorrelations.com/

18. I would watch the financial assets, the mark to market will be interesting to see this quarter. Will they mark using level 3 allowances (mark to nearer the ask or modeled ask) or will they mark to model on the low side? I still need to find out if their fee business is based on marks to market. I imagine that it is.

19. I need to relook at capitalized interest expense.

20. Assets to Equity is 6.7X. Leverage.

21. High occupancy rates, low current interest rates, priced for perfection.

22. Sometimes, marks to market. Companies that mark to market, have been on my radar.

23. Will financing costs remain low? Is access to capital already hindered? I am hearing that capital markets have really siezed up.

24. Are investors still yearning for these types of investments? Are cash flows as predictable as claimed? What percentage of their market cap is related to an asset greater than 10 years? Could BAM be the “Gotrocks” Berkshire has referred to?

25. Certain assets have been given long lives, which limits depreciation. Gas Generation assets prior to 2006 were written off over 5 – 60 years. Now , it is 10 – 60 years.

October 22, 2007

1. Are there any potential operational or financial stresses that could be caused or relieved because of stock price changes. Are any of the loans outstanding at all predicated by minimum BAM stock prices?

2. Page 16 of the 2006 AR of BAM lists total assets under management. They use columns, “Assets”, “Net Invested Capital” and “Committed Capital.” Yet they don’t seem to list Brookfield Share of Committed Capital. Does this mean more funding is required in the future? “The tables also present our share of the assets and net invested capital, which includes the capital that we have invested alongside our clients as well as assets owned by us that do not form part of a fund. Within total assets under management, we present total assets, the amount of investment capital (i.e. net of debt) and the amount of capital that we and others have committed to invest in the funds.”

3. I need to track BAM and Co. bonds and determine if they trade relative to their credit rating. If they are trading better than credit rating, then perhaps they are perceived as a higher credit. If they trade lower than rating, then perhaps street is speculating ratings adjustment. With that said, I seem to recall most recent ratings discussion was positive. Why did Fitch give BPI a BBB- rating.

4. Page 10 of AR, “We define operating cash flow as net income prior to items such as depreciation and amortization, future income tax expense and certain non-cash items that in our view are not reflective of the actual underlying operations.”

5. Page 11 of AR discusses “Return on Invested Capital.” “We define cash return on capital as the operating cash flow per share as a percentage of the average book value per common share during the period, and for an individual operation as the operating cash flow as a percentage of net invested capital.” I need to figure out why OCF in this case is such a relevant number. BAM has high debt and if they were to over leverage OCF by BAM definition would not reflect anything negative. Interest Coverage ratio decreased from 2.70 in F2005 to 1.87 in F2006.

6. How could one monitor value of Canary Warf? Any public documents, debentures etc.

7. List asset values in size order. Do parts valuations after I finish BPI.

8. Page 13 of AR indicated hydrology was largely to credit the increase of “Net Operating Cash Flow” from 2005 to 2006. Projecting forward in 2007, I could be wrong, but I think North American river levels are down. Here is an article I found which mentioned this, http://www.timesanddemocrat.com/articles/2007/10/21/opinion/12788842.txt
“Many areas in upstate New York reported record low reservoir levels and dried-up wells and farm ponds“

9. Page 13 or AR indicated that Specialty Investment Funds increased by $54M from 2005, “due to increased activity, higher levels of investment capital and monetization gains.” What part were monetization gains? These are probably non-recurring. Brazil had Monetization Gain on sale of “non-core service in Brazil” of $126M.

10. Page 14 discusses “Current Tax Expense” being higher in 2006. One question I have is, “Could tax be higher because of mark to market on financial assets and ownership of investing entities. For example, would a higher value (marked to market) of a fee asset, result in higher fees and hence higher tax. Yet, since a “mark to market”, and potentially reversible, the tax expense could be a “ghost” item.

11. Price to Book Value

Price to Book Value
Consolidated Assets $40,708 $26,058 $20,007
Common Equity – Book Value $5,395 $4,514 $3,277
Common Equity – Market Value $19,947 $13,870 $9,976
Market / Book Value 3.70 3.07 3.04

12.     Page 18 in AR has what I consider to be an odd statement.  “Asset management fees represent an important area of growth for our company and will increase as we expand our assets under management.”  I find it odd, because they speak of growth of assets as though it is a given.  The following is a chart of fees collected.  Asset management fees appear to be growing, but potentially slowing.  Something to watch and table as well for 2007. I also wonder what the fee income effect would be on a higher or more aggressive “mark to market” on Assets Under Management.

2006 % change 2005 % change 2004
Asset Management income and fees $84 33.33% $63 270.59% $17
Property Service Fees $155 -5.49% $164 28.13% $128
Investment Fees $18 -5.26% $19 -17.39% $23
Total $257 4.47% $246 46.43% $168

13. Page 22 in 2006 AR indicated property sales in Calgary and Denver resulted in $44M of disposition gains.

14. Any expected future dividends from Canary Wharf? Dividends were $87M in 2006 and $183M in 2005.

15. Page 23 of AR mentions the Brookfield Properties equity issue of $1.3B. This gave rise to a gain of $110M.

16. Interesting that Brookfield Properties directs special attention to strong credit of tenants. “On average, the tenant profile exceeds an “A” credit rating. Here is a list of tenants they refer to.

Tenant Moodys S&P Fitch
Merrill Lynch Aa3 AA- AA-
Government of Canada DNF DNF DNF
Wachovia Aa3 AA- AA-
CIBC 67″>Aa2 A+ AA-
Bank of Montreal DNF DNF DNF
JPMorgan Chase Aa3 AA- AA-
Goldman Sachs Aa3 AA- AA-
RBC Financial Group DNF DNF DNF
Petro-Canada Baa2 BBB NR
Target Corporation. A1 A+ A+
Continental Airlines Caa2 B CCC
Imperial Oil AAA DNF DNF
Brookfield Power DNF BBB BBB-

17. Brookfield Homes mentioned on page 24 of AR, had a market cap of $1B. Currently that market cap is $428M (usng $16.07 per share).

18. Page 25 of 2006 AR, recorded a gain of $269M, as Brascan Residential Properties S.A. went public.

19. Page 28 or AR in regards to “Power Operations,” discuss storage reservoirs. “Our storage reservoirs contain sufficient water to produce approximately 20% of our total annual generation and provide partial protection against short term changes in water supply. The reservoirs also enable us to optimize selling prices by generating and selling power during higher – priced peak periods.” I need to review 2007, but was wondering if recent Bear Swamp long term deal, with Long Island Power Authority would affect reservoir levels, potential generation of electricity, fixed in prices, etc.

20. Page 31 of 2006 AR, “We believe the intrinsic value of our power assets is much higher than book value because the assets have either been held for many years and therefore depreciated for accounting purposes which , in our view, is inconsistent with the nature of hydroelectric generating assets. In addition, we have been successful in acquiring, developing and upgrading many of our facilities on an attractive basis.” From this I need to look at evolution of company, long held assets, and compare to AES.

From Brookfield Power Corportation Renewal Annual Information Return dated March 23, 2007. Page 29, “Brookfield Power is currently rated BBB (high) with a stable trend by DBRS, BBB with a stable outlook by S&P and BBB- by Fitch with a stable outlook.” Per Fitch (2/12/07) approx $680M of debt is affected. Fitch ratings on this date included, “Fitch has affirmed the Issuer Default Rating (IDR) of Brookfield Power Inc. (BPI) at ‘BBB-‘ and the senior unsecured rating at ‘BBB.’

October 16, 2007

Brookfield Asset Management Various Credit Ratings.

Agency (Scope) Rating Date
S&P’s Short-term Issuer Credit Rating (Foreign)  (1) A-2 05/15/96
S&P’s Short-term Issuer Credit Rating (Domestic)  (1) A-2 05/15/96
S&P’s Long-term Issuer Rating (Foreign)  (1) A- >08/20/01
S&P’s Long-term Issuer Rating (Domestic)  (1) A- 08/20/01
S&P’s Commercial Paper (Foreign)  (3) A-2 09/25/01
Fitch’s Long-term Issuer Default Rating (Foreign)  (1) BBB+ 02/16/07

1. Article in today’s FT. “Macquarie chief hits back at critics over leverage.” Article discussed that all is cool with Macquarie. Claims debt to equity is less than 60%. Claims debt is conservative for “very high quality assets with very reliable income streams.” James Chanos has claimed that eh Macquarie model works only in an era of cheap debt and rising asset prices.

Macquarie has 31 infrastructure funds, and is the world’s biggest owner of infrastructure assets. Including Thames Water, airports in Sydney and Brussels, toll roads in USA, Canada and Japan. Assets under management of US $202B.

Macquarie claims they have “been able to refinance without difficulty on very good terms and conditions.”

October 13, 2007 Brookfield Power Inc.

When reviewing Brookfield Power Inc,. make sure you look for “Brookfield Power Inc” (BPI) and not “Brookfield Power Corp.

It is my understanding that BPI is being valued at about $6B – $8B. I saw that in a CSFB report dated September 14, 2007. In their report, CSFB wrote, “…., sometimes challenging financial disclosures…..”

We follow AES Corporation, and they are the nearest competitor. If I remember correctly, AES is primarily in coal driven fuel, whereas BPI is more hydro.

I should look to construct table below:

Metric BPI AES – August 2007 Fact Sheet
Revenues 12/31/06 $874M $11,564M
Total Capacity 11,150+ GWh (from M&A BPI 2006) 42,556
Storage Capacity in reservoirs 2,300 GWh

Some 10K notes from BAM

1. “Property-specific and subsidiary debt increased to $3.4 billion from $2.8 billion at the beginning of 2006 due to new debt secured by acquired facilities and 30-year unsecured bonds issued by Brookfield Power during the fourth quarter that have no recourse to the Corporation. Property-specific debt totalled $2.7 billion at year end (2005 – $2.4 billion) and corporate unsecured notes issued by our power generating operations totalled $0.7 billion (2005 – $0.4 billion). Property-specific debt has an average interest rate of 8% and an average term of 16 years and is all investment grade quality. The corporate unsecured notes bear interest at an average rate of 5%, have an average term of 10 years and are rated BBB by S&P and BBB (high) by DBRS and BBB by Fitch.

Non-controlling interests represent the 49% interest in the Great Lakes Hydro Income Fund that is held by other shareholders.”

2. “Contract Profile – We endeavour to maximize the stability and predictability of our power generating revenues by contracting future power sales to minimize the impact of price fluctuations, by diversifying watersheds, and by utilizing water storage reservoirs to minimize
fluctuations in annual generation levels.

Approximately 80% of our projected 2007 and 2008 revenues are currently subject to long-term bilateral power sales agreements or shorter-term financial contracts. The remaining revenue is generated through the sale of power in wholesale electricity markets. Our long-term sales contracts, which cover approximately 55% of projected revenues during this period, have an average term of 13 years and the counterparties are almost exclusively customers with long-standing favourable credit histories or have investment grade ratings. The financial contracts typically have a term of between one and three years.

All power that is produced and not otherwise sold under a contract is sold in wholesale electricity markets, and due to the low variable cost of hydroelectric power and the ability to concentrate generation during peak pricing periods, we are often able to generate highly attractive margins on power which is otherwise uncontracted. This approach provides an appropriate level of revenue stability, without exposing the company to undue risk of contractual shortfalls, and also provides the flexibility to enhance profitability through the production of power during peak price periods.”

Notes from BPI 2006 Report

1. Uses Net Operating Income as their metric.

2006 2005 2004
Revenues $874M $774M $667M
Net Operating Income $605M $461M $365M
NOI as % of Revenues 69% 60% 55%
Net Income $106M $ 60M $ 76M
Shareholder Equity $409M $356M $305M
Total Assets $5,872 $5,368 $5,136
Depreciation and Amort. $124M $102M $74M
Power Generating Assets $3,623M $2,992 $2,765
Borrowings $598 $916 $1,102

List of Power Assets:

Date Capacity Consideration Paid Net Asset Acquired
February 17, 2006 50 MW (subsequently sold 20MW for CDN$56M 7/1/06) $86M CDN $75M
June 8, 2006 39MW $147M $147M
October 6, 2006 102 MW $122M $122M

2. Short term investments include promissory notes from BAM. Carried at Lower of Cost or Market.

3. Financial Instruments are carried at Market, yet I don’t see them listed.

4. Depreciation rates are interesting .

Dams 40 to 60 years
Gas cogeneration stations  (2005 listed as 5 to 40 years) 10 to 40
Hydro Generating stations 19 to 60
Wind Turbines 20 to 25
Buildings  5 to 60
Transmission and Distribution  5 to 50
Equipment  5 to 60
Water Rights 2.50 % per year (I think 40 years?)

5. In 2006 sold interest in “Carmichael LTD PTSP (CLP)” for CDN $56M. This was part of the February 2006 transaction. Sale of 20 MW.

October 3, 2007

Would be interesting to know how much of the space seller leased back to Brookfield and at what rental rates vs market…but seems like a solid tenant.

http://www.bloomberg.com/apps/news?pid=20601082&sid=a2vhPU.iKlpo&refer=canada

“Brookfield Buys 52 U.S. Properties for $300 Million – “Brookfield Asset Management Inc.’s real estate unit bought 52 U.S. office buildings and bank branches from JPMorgan Chase & Co. for $300 million, adding to the 33 properties it bought from the U.S. bank last year.

The latest properties have 3.6 million square feet and are located in 14 states, Toronto-based Brookfield said today in a statement distributed by Marketwire.

They include the Elgin Card Services Building in suburban Chicago, the Sky Harbour Operations Center and two contiguous buildings in downtown Tempe, Arizona, and office buildings on Long Island and in Brooklyn, New York, Brookfield said.

Today’s acquisition adds to the 5.3 million square feet of properties that Brookfield bought from JPMorgan Chase and affiliates last year for $460 million. The New York-based bank signed long-term leaseback agreements for “significant” portions of the space sold, Brookfield said.

The sale allowed New York-based JPMorgan Chase to get rid of vacant space it accumulated through mergers during the past several years and remove the responsibility of building ownership”

September 12, 2007

1. Still need to review Brookfield Infrastructure Partner’s (BIP) prospectus. It is my understanding that this is merely a rearranging of BAM assets. I think electricity transmission assets and timber assets will be included. They want to be seen as the leader in infrastructure assets.

2. BAM claims that debt financing is all investment grade and all tied to specific hard assets, with low cash flow volatility, from highly rated counter parties.

3. Current debt difficulties have had an affect on BAM. BAM considers the difficulty to be small. I have read speculation that the difficulty could turn into opportunities, as assets could be bought cheaply.

4. BAM via TriCap owns 6.2M shares of Stelco. Stelco looks like it is being bought out by US Steel. BAM expects to realize a gain of $225M. I have read that income taxes are not expected on sale because of other accumulated losses. I have not verified this tax statement.

September 11, 2007

BAM Investments Corp.

1. BAM is an investment holding company. Its principal business mandate is to provide its holders of Common shares with an appropriate related investment of Brookfield Asset Management.

2. BAM Investments holds 6.98 Brookfield Class A shares for every 10 common shares of BAM Investments. The net asset value per common share does not take into account tax and transaction costs on disposition.

3. The investent in Brookfield Asset Management Inc. consists of 60.8 million Class A Limited Voting shares of Brookfield less the value of debentures that are exchangeable into 5.3 million Brookfield Class A shares. The net investment of 55.5 million shares had a market value of $42.49 per share as at June 30, 2007.

4. Key Personell

a. Frank N.C. Lochan has been Executive Vice-President, Taxation of Brascan Corporation (an asset management company). Mr. Lochan is a shareholder of Partners Limited and owns securities representing a 0.9% equity interest in Partners Limited. Mr. Lochan is also Chairman and a director of MICC Investments Ltd. and West Street Capital Corporation. Mr. Lochan retired as an officer of Brookfield in September, 2005.

b. Brian D. Lawson is the President of the BAM Investment Corporation and Chief Financial Officer of Brookfield Asset Management, Inc. Mr. Lawson is a shareholder of Partners Limited and owns securities representing a 4.1% equity interest in Partners Limited. Mr. Lawson is also Chairman and a director of BAM Split Corp., and President and a director of West Street Capital Corporation and Wilmington Capital Management Inc.

c. Mr. Shah has been the Vice-President, Finance and Treasury of Brookfield Asset Management Inc.

d. Loretta M Corso is an Assistant Secretary, Brookfield Asset Management Inc. and Secretary of BNN Investments Ltd.

e. R. Frank Lewarne is a Director of BAM Investment Corp. Mr. Lewarne is also a director of BAM Split Corp., a subsidiary of the Corporation.

f. Ralph Zarboni has been Chairman and Chief Executive Officer, The EM Group Inc. (a plastics and electric products distribution company).

g. Howard Driman has been Director of Finance of UIA Federations Canada (a national fundraising and community planning organization).

BAM Split Corp.

1. “The company commenced operations on September 5, 2001 with the objective of investing in Class A Limited shares of Brookfield Asset Management Inc. (“Brookfield”, formerly Brascan Corporation) in order to generate preferential cumulative quarterly dividends for the holders of the company’s preferred shares and to enable holders of the company’s capital shares to participate in any capital appreciation in the Brookfield shares.”

2. “The net asset value of the company will vary according to the value of the BAM shares and may be influenced by factors not within the control of the company, including the financial performance of the BAM shares which may result in a decline in value of the investment portfolio and/or in dividend income from the investment, interest rates and other financial market conditions.”

3. “As at September 30, 2006, the Net Asset Value per unit was $137.04 as compared to $100.11 as at September 30,2005, representing an increase of 37% reflecting appreciation in the market value of the BAM shares. Net asset value is calculated as the differential between total assets and total liabilities (not including preferred shares).”

4. “The company’s operations are managed by Brookfield, which is entitled to a fee of up to 10% of ordinary expenses of the company. For the year ended September 30, 2006, Brookfield charged a fee of $20,000 (2005 – $20,000).”

5. Owns 26,481 shares of Brookfield Asset Management, as of 9/30/06, with a cost of $354,829 and a fair value of $1,308,706.

a. I am not sure if this is reflected in USD or CAD.

b. I am not sure if Brookfield picks up the preferred dividends received from split corp as cash flows.

6. As of 3/31/07 Split now owns 30,015 shares with a cost of $548,068 and a fair value of $1,811,123.

Hyperion Strategic Mortgage Income Fund (HSM)

1. Managed by Hyperion Brookfield Asset Management http://www.hyperionbrookfield.com/

2. March 8, 2007 – reported no exposure to sub-prime MBS. “As of January 31,2007, less than 2.0% of HTR’s $400 million total market value was allocated to sub-prime MBS. The Fund has no exposure to 2006 sub-prime mortgages, which have been largely responsible for the recent negative headlines due to unusually high delinquencies. The Fund’s sub-prime MBS holdings were originated between 1998 and 2005.”

3. As of 8/27/07, price was $10.97 and discount was 10.62%

4. As of 9/11/07 52 week high was $14.33 and 52 week low was $8.50.

5. Asset makeup not real high quality, yet does that matter for this fund. I think only interested in management fees.

Hyperion Total Return Fund (HTR)

1. Rights offering announced filing for rights offering on 8/28/07. “The Fund believes that the current market environment may offer an excellent opportunity to deploy additional capital to take advantage of attractive investment opportunities.” I am just guessing here, but increased assets would lower expense ratio, but at same time, increase fees to BAM.

2. March 8, 2007 – reported no exposure to sub-prime MBS. “As of January 31,2007, less than 2.0% of HTR’s $400 million total market value was allocated to sub-prime MBS. The Fund has no exposure to 2006 sub-prime mortgages, which have been largely responsible for the recent negative headlines due to unusually high delinquencies. The Fund’s sub-prime MBS holdings were originated between 1998 and 2005.”

3. As of 8/27/07, price was $7.79 and discount was 6.59%

4. As of 9/11/07 52 week high was $9.33 and 52 week low was $6.00.

5. Asset makeup not real high quality, yet does that matter for this fund. I think only interested in management fees.

September 4, 2007

1. Interesting article I came across in the Herald Sun of Australia. http://www.news.com.au/heraldsun/story/0,21985,22357075-664,00.html

“BROOKFIELD’S $5.7 billion takeover of construction firm Multiplex suffered a setback yesterday as it revealed it had double-counted about 123 million shares.

“The listed North American property giant, Brookfield Asset Management, assumed it possessed 61.7 per cent acceptance.

But in a statement yesterday Brookfield BidCo – the company making the formal takeover – said it had “overstated” the number of Multiplex securities it had accepted by about 14.75 per cent.

The error means Brookfield’s acceptances are less than 50.1 per cent.

On August 30 Brookfield said it had acquired a 47.08 per cent interest in Multiplex securities and a further 14.64 per cent held under an “institutional acceptance facility” taking its share to 61.72 per cent.

It is still not clear exactly how many shares were double-counted and how the error was made.

Analysts said the stuff-up was embarrassing – but unlikely to derail the takeover.

Recent market volatility means hedge funds, who are believed to hold between 10 per cent and 15 per cent of Multiplex, have lost their appetite for risk, one analyst said.

Initially set to end on August 30, the takeover offer period had already been extended to September 28.

Brookfield confirmed its bid to buy Multiplex back in June at $5.05 a share after months of negotiations with Multiplex’s founders, the Roberts family.

Brookfield bought the Roberts family’s 26 per cent stake via a put-and-call option worth $1.1 billion.

The first instalment of that deal was a 14.99 per cent stake – possibly the tranche which was double-counted. Brookfield – an $87 billion company – is cashed up, holding an acquisition facility of $2.1 billion and cash and undrawn debt of $2.5 billion.

Multiplex closed up 1 yesterday to $5.”

August 28, 2007 (34.15)

1. Shorted today. Thesis is potential of leverage, re-pricing of world assets, need for financing, marked to market, etc. The company is a long time friend of Value Investors. Shorting was very premature to research. Just getting feet wet.

Potential risks and short thesis

a. Assets bought at high prices, from 2005 till present.

b. Commercial assets anticipating greater than normal occupancy rates.

c. Constricted financing, and decrease of debt to equity levels in future financings .

d. Potential of what Gary Shilling calls, “Deleveraging of Global Finance.” Money became so hot and liquidity everywhere, what if it just goes away.

e. I have been asking myself if BAM is the “Gotrocks” whom Buffett has referred to in 2005 Annual Report.

f. Concern that world liquidity has caused a huge capital spending in infrastructure, in a way that may not work economically.

g. Low concern for global and political risks.

h. Perhaps low risk business BAM speaks of, is not so low risk?
The following is what was recently explained to me by a commercial real estate insider. I dont think it is BAM relevant, but certainly interesting to hear from the trenches.

“Generally debt is much tougher to get and the debt available is at lower proceeds with wider spreads. Also, most lenders requiring amortization vs interest only that was readily available a few months ago. Many Lenders just not quoting debt. This is impacting pricing of assets with 5-10 pct price reductions being asked by Buyers. Most Sellers taking a wait and see approach to see if capital markets settle down.”

2. I searched Grants. Grants summarized a speech given by BAM at Spring 2007 conference. This was 2nd time I saw BAM speak. It seems like a cult following, and perhaps I could take advantage of exit of value investors. With that said, this is an under-covered stock, hence if covered by Wall Street, it could sky rocket.

3. Bonds: BAM.GA BROOKFIELD ASSET MANAGEMENT INC 5.80 04/25/2017 are rated A- S&P (lower rung of Upper Medium Grade), no Moody’s rating, and Fitch BBB+ (Upper rung of Lower Medium Grade). Last sale was 6/11/07, with a price of 93.71 and Yield of 6.68%. I need to look to see why this is no longer sold. I think Cusip is 112585AB0.

BNN.GF BRASCAN CORPORATION 7.125 06/15/2012 are rated Baa2 Moody’s (Middle rung of Lower Medium Grade), A- S&P (lower rung of Upper Medium Grade), no Fitch rating. Last sale was 8/2/07, with a price of 100.49 and Yield of 7.00%. I need to look to see why this is no longer sold. I think cusip is 10549PAE1.

4. Here are my notes from the Grant’s Spring 2007 conference, “The second speaker was introduced as a nice guy as well, “as he is from Canada.” Bruce Flatt from Brookfield Asset Management (BAM)(38.04). I really don’t have much to say on this. I have seen him speak once before, and just wasn’t swayed to investing in his company. Granted the last time I saw his presentation was at some point in the Spring of 2005, and the price has risen almost 200% since then. BAM is loved by many a value investor. Last year, Adam Weiss from Scout Capital spoke at Grant’s conference. Scout Capital has a large position in BAM. They apparently love the company. I really have nothing to add on BAM.”
6. Tiddman from Motley Fool wrote quite a bit on BAM. Randall Tidd is an investment manager with Tidd Capital www.tiddcapital.com . He is a very nice guy and seems to be incredibly smart.

May 2007

“I think that Brookfield has three key advantages, 1) a low cost of capital, 2) expertise in operating these kinds of assets, and 3) skill in opportunistically buying assets when they are available at attractive prices.

In terms of why a company would sell its assets to Brookfield, it could be that Brookfield can finance them cheaper and thus derive better returns from the same asset, or that Brookfield can operate them more efficiently.

Brookfield has definitely proven to be skilled at opportunistically buying and selling assets. I don’t know who sold them their hydro power plants, but the seller didn’t get a very good deal, because they sold them at a cyclical low. Similarly, the folks that bought the Falconbridge assets from Brookfield bought at a cyclical high. These results benefit Brookfield, but who knows why the party on the other side of the table is doing what they are doing.

Many institutions buy and sell assets because of an “institutional imperative”, or changes in the strategic focus of the company. Some don’t have the same kind of return goals as BAM, and others may simply make poor capital decisions…”

“Look at the cost of their debt — they locked in a bunch of debt at the parent company level when rates were low, and it is still within 100-150bp of treasuries.

This access to cheap financing is a core advantage for them. Here are some quotes from Marty Whitman from Q2 2004 (at the time this company was called Brascan):

“From the point of view of skilled managements of companies with extremely strong financial positions and who have a three to five year view, periodic access to capital markets is an extremely attractive way to create wealth for the corporation itself and for its grandfathered buy-and-hold shareholders such as the Fund. Here, the management controls the timing of access to capital markets. The companies will access the capital markets only when the business can obtain super attractive prices either for credits or equity. These managements believe strongly that over any five-year period, the capital markets are likely to be capricious, allowing them either to market credit instruments at ultra low fixed rates, usually on a non-recourse basis (Forest City Enterprises, Brascan, Catellus)…”

” look at it primarily based on operating cash flows. Book value is skewed for a few different reasons.

First, the asset base that they hold on balance sheet depreciates (i.e. real estate, power plants, other heavy assets, etc), so it declines in book value over time even though the assets themselves are probably increasing in value.

Second, they derive a lot of fee income from assets that aren’t on the balance sheet, because they have spun them off, yet retain some influence or control over them. This partial divesture seems to be a strategy for them — they diveset 50-75% of an asset but continue to get fee income from it, so it doesn’t weigh down the balance sheet yet provides then with high-margin recurring earnings. I think this is part of what is driving the infrastructure spin-off.

Third, they generally have cheap leverage on each asset and then apply non-recourse leverage to the whole package, so they can achieve a pretty high level of leverage — high compared to say a utility company, but low compared to say a bank. This allows a much greater return on equity, which probably deserves some premium to book.

Also note that the company pays very little in the way of income tax — the depreciation from their asset basis sees to that. This needs to be taken into account when considering their earnings.

I base my valuation on the operation cash flows exclusive of one-time items such as asset sales. Like Berkshire and other conglomerates, there is a question of how to value the irregular items. Even though they are irregular, they do happen a lot, and are a central part of the company’s investment thesis. I feel that it is pretty safe to assume that reinvested equity capital will achieve returns in line with their historical ROE, which is pretty high at 15-25%.”

“Yes, it is important to remember that a key part of Brookfield’s business strategy is access to cheap capital, and the capital markets have been very friendly over the past few years (both debt and equity), which has given them a big tailwind. They may not enjoy such a benefit in the future.

If interest rates were to go up, I’d expect them to issue less debt financing. Note however that most of their debt is at long-term fixed rates — they seem to anticipate that rates will go up. So at least the debt financing they have would be unaffected. Also note that they have access to debt in several countries, and it is possible that rates will go up in one area but not another, so they may be able to maintain their access to the capital markets even if rates in the US go up.

Higher rates may also decrease the value of some of their assets, such as real estate. However, other assets such as renewable resources will probably not be affected and may become more valuable. Generally speaking, I think that infrastructure type assets are pretty resillient economically — they are pretty well insulated against for example inflation and rising energy prices.”

“The costs to operate e.g. timberlands and hydro power plants is largely fixed, and they were acquired primarily with equity and fixed-cost (and low-cost) debt.

If interest rates increase, whatever drives that increase may include higher energy prices, which would serve to make these renewable assets more valuable.

While interest rates haven’t gone up much since the hydro power plants were acquired, energy prices have increased substantially, so BAM is already reaping some benefits here.”

February 2007

“The difficulty with valuing BAM is the same as with any investment-oriented conglomerate (i.e. Berkshire, Leucadia, etc) — each deal tends to be large relative to the capital base (which is intentionaly), and changes the landscape.

You might try to identify what portion of the growth is organic (i.e. expansion of existing investments) and what portion is from newly committed capital. This might give you a better picture of where the growth is coming from, and to what extent they are dependent on new deals to sustain growth. For example, Berkshire Hathaway generally buys companies that don’t grow very fast (with a few exceptions), so their growth is largely dependent upon making new deals, almost all of which are made by Buffett himself.

In the case of Brookfield, they are constantly making new deals, and Flatt is probably not personally involved in each one, so they must have institutionalized the deal-making and capital commitment.

Brookfield is very, very good at both obtaining cheap capital and investing it opportunistically. Their investments tend to provide a rate of return that is adequate initially and then “blooms” into a better return later. The investments in hydro power are a great example — they had access to cheap capital with low interest rates, and made major commitments to hydro power, just before both interest rates and energy prices went way up. Thus their cost of financing and operating the hydro power plants was fixed, while the revenues and profits were not.

It is hard to model this kind of thing going forward, but you can try to identify where it is coming from — i.e. key personnel or activities — and ensure that those pieces remain intact, and that management is incentivized to keep it up. In essense, it is a bet on management.

Something else you might look at is Brookfield’s incentive structure for management. Some executives and management are required to buy up to 5x their annual salary in company stock. That is a good way to keep their attention focused on shareholders.”

Tidd Capital – Q1 2005 Newsletter http://www.tiddcapital.com/newsletters/TiddCap-2005-Q1.pdf

“Brascan Corporation is a Canadian conglomerate run by CEO Bruce Flatt. Brascan has a long history of managing various classes of assets, including real estate, power generation, mineral mining,and timberlands. Brascan is not simply a real estate company, or a power generation company, or a mining company, but is what Marty Whitman calls a “wealth creation company”. That is, their business is generating capital and then redeploying that capital into new attractive investments. The

type of investments may change over time, but the goal does not. In this way they are similar to other investment-oriented conglomerates such as Warren Buffett’s Berkshire Hathaway.

While Brascan has many moving parts and a long history (one business unit goes back more than 100 years), the organization is run with a single purpose – to generate sustainable, low-risk cash flows and increase shareholder value. This vision statement certainly gets my attention. Few companies can actually generate low-risk recurring cash flows, and fewer still are run for the good of the shareholders. An analysis of Brascan’s deal history shows a value-oriented approach to buying and selling their investment – they bought low and sold high. They have the expertise to value and manage investments for the long term, and have been able to finance their acquisitions on very favorable terms.

Brascan used to own a hodge-podge of dissimilar assets, many of which were not of the best quality. Over the past 5 years, under excellent leadership from Bruce Flatt, they have transformed this into a collection of “best in class” assets.

For example Brascan now owns One and Two World Financial Center (the buildings adjacent to Ground Zero in lower Manhattan, which were remarkably unscathed), and recently closed a deal for 635,000 acres of timberland in British Colombia, considered to be the best in North America. They have also been acquiring hydroelectric power stations in the northeastern US and Canada over the past

3 years, with a current installed capacity of 2600 megawatts. All of these assets are high quality and provide sustainable, reliable cash flows for many years to come.

The result is several diverse streams of free cash flow. These assets were acquired at prices ranging from fair to good, and their quality ranges from good to excellent. These high quality assets will increase in value over time while requiring a minimum of additional capital expenditure, the canonical “cash cows”.

Brascan finances these purchases with a combination of debt and equity. The debt is generally at very low, fixed rates, with long maturities, and Brascan’s very low cost of borrowing is a key advantage. While maintaining a strong balance sheet, the debt financing allows Brascan to deliver excellent returns on equity with a minimum of risk.

Annual free cash flow – the all-important “owner earnings” – have been $510M, $582M, $710M, and $805M in 2001 through 2004, compounded growth of about 16%. These cash flows have been used to pay an increasing dividend, buy back a large number of shares (about 10% authorized in 2004), and make new investments, all of which substantially increase shareholder value.

So far, I have described a decent investment opportunity, though I have not mentioned price. An informed observer would expect Brascan to trade in the markets at a high price that would only deliver average performance to shareholders. However, that is the best part of this story.

When I first started buying shares of Brascan in late 2002, they were available at a 40-50% discount to fair value. There was no good reason for this discount, except perhaps that Brascan is not widely followed, or was misunderstood as a cyclical mining company. But “why ask why?” The result so far is a 280% increase in the value of these shares (from the original purchase prices), through the “win-win” combination of an appreciation from a discount value to fair value, and a substantial increase in fair value.

If only these opportunities were available more often, my job would be a whole lot easier.”

October 2006

“At Brookfield Asset Management (BAM), executives are required to buy shares worth 5 times their annual base salary within 3 years of their date of hire. That is one of the more inventive incentive programs I’ve heard of. The CEO (Bruce Flatt) reportedly owns 1000 times his base salary in shares, and he has never sold a share.”

Tidd Capital Q2 2007 Newsletter http://www.tiddcapital.com/newsletters/TiddCap-2007-Q2.pdf

“Long time holding Brookfield Asset Management in April surpassed all expectations with stunningly good 2006 results, including a hefty one-time gain from the disposal of non-core assets. The company followed up with announcing a repurchase of 10% of their stock. Brookfield has what I think is a unique (and wonderful) share ownership program, whereby top management is required to own stock valued at 5 times their annual salary. It is no wonder that the company is focused on

delivering value to shareholders.”

July 2007

“One of Brookfield’s ways of doing business is to partially spin off assets into operating companies and then derive “management fee” income from the entity. This serves to free up their balance sheet from asset-heavy or cyclical businesses, which allows them to achieve a higher level of financing and return on equity. They said they would retain a 40% interest in the new infrastructure entity, which is probably designed to meet certain balance sheet criteria.

This is somewhat analogous to what Coca-cola did with the bottling and distribution businesses some decades ago. They are separate companies and trade separately, but essentially controlled by KO since they distribute KO’s products. This leaves the highest-value and lowest-asset business in the parent company which provides the best returns and highest ROE.

I suspect that there are tax considerations too. BAM pays very little in the way of income taxes due to the nature of their asset base (i.e. lots of depreciation). There are rumors that some of the tax laws regarding deductibility of interest may change, and I wonder if they are going to put some of their unfavorable debt into the new entity. I talked to IR at the time of the announcement and while they were pretty sure what assets were going to be spun off into the new entity, they were not yet sure what financing was going to encumber those assets.

Another aspect is access to financing. One of BAM’s key advantages is excellent access to the capital markets, in many markets and of many varieties (debt, equity, convertibles, etc). I suspect that spinning off these assets will enable better access to capital markets for both entities.

Overall it isn’t a huge deal though, I think they announced that the new entity would have a value of $1 per share, which is around 2-3% of current market value. It is an interesting question of whether or not shareholders should hold units in the spin-off, sell them, or buy more. Of course we’ll have to see the specific terms of the deal before deciding.”

August 2007

“In one case, you buy an asset for $2.5 billion, funded with $1.5B of equity and $1.0B of debt. The asset produces about $195M of cash flow after debt costs so your return on equity is about 13%. Note, these are roughly the terms of the Chilean transmission deal.

In the other case, you put up just 30% of the equity, the other 70% of which comes from assets that you manage on behalf of other parties. You also charge a 1% of assets fee. Your equity investment is $450M (i.e. 30% of $1.5B), your 30% of the operating cash flow is $58.5M, and your management fee is $25M. Including management fees, your return on equity is now 18.6%, meanwhile your equity partners get about 11%.

I believe this illustrates BAM’s basic M.O., though the details vary with each deal. They tie up 42% as much equity and get a 43% higher return on it, and are able to achieve a sustained ROE in the 15-25% range.

As the assets grow, BAM’s management fee may grow, while their equity investment may not. Say that the above combination of assets and liabilities were spun off into a partnership entity and BAM retained an equity interest. Then if the partnership raised its own debt and equity financing to double its size, BAM’s management fee would double while their equity investment may remain about the same, so their ROE would be boosted further. In practice, they may have to chip some equity into each new deal, though perhaps less than 30%, and they obviously have a lot of control over the terms and percentages in each.

What arises is a totem pole of returns, with the institutional money at the bottom getting their 12-15%, the infrastructure partnership getting a few points above that, and BAM getting a few more points still. Meanwhile BAM’s balance sheet is relatively unencumbered, essentially they are deriving revenues from their skills in deal flow and management, the most value-add and asset-light piece of the deal.”

“The new partnership will share in BAM’s deal flow and management expertise — this is what BAM gives in exchange for the management fees. The new entity will be free to obtain its own debt and equity financing and can grow on its own.

BAM owns about 50% of both BHS and BPO which follow a rougly similar course. They are their own companies with their own financing and management.”

“In the CC where they originally announced the deal I seem to remember that they considered just selling off the assets, but decided that spinning them off was better since it gave them the option of monetizing them when they wanted. I can’t find my notes on that though. I doubt that they would liquidate their interest in the partnership though, considering the lucrative structure that they can create by holding it.”

“Actually, BAM’s current arrangement on the Chilean transmission assets is close to my second example (though I guessed on the management fees). Their equity interest is currently 30%, according to the quarterly report after the deal was done.

However, in general your point is taken, that simply moving the assets into the partnership on the same terms and spinning it off may not immediately change their economics. I don’t think anyone expected the spin-off to immediately create value, it is a matter of how this changes BAM’s economics going forward as the infrastructure partnership grows.

I suspect (but don’t know for sure) that the partially-owned partnership structure will allow BAM to collect a greater portion of its income in the future via management fees, which produces a higher ROE. BAM will also be able to help the partnership finance and monetize its assets with arm’s length transactions. It also allows BAM to adjust its ownership percentage in the partnership up and down fairly easily, which is not true if it is fully consolidated.

Also, I suspect that there are tax and accounting advantages to having the assets in a partially-owned partnership. For instance, the debt encumbering the assets in the partnership may now have less recourse to BAM, which may help BAM to meet some debt covenants and obtain better financing elsewhere in the organization. However, I’ll admit that I don’t know all the answers.

This partial-ownersihp approach is common at BAM, for instance they have roughly the same arrangement with Fraser Papers, which recently went from about 45% to 55% owned. Fraser has its own assets, liabilities, financing, management team, etc. and pays management fees to BAM. There have also been a lot of transactions between Fraser, BAM, and related entities such as Norbord. Again, I suspect the strategy here is for BAM to collect management fees and benefit from the financing at the subs without any recourse, but I’m not sure.”

“Actually this is a fairly obvious justification for the spin-off that I have not mentioned. There may simply be tremendous demand from large institutional investors for pure-plays in infrastructure. Perhaps BAM has been unable to attract those funds as long as the infrastructure is consolidated with their property and other assets, so spinning off the infrastructure part into a separate entity allows them to go after those assets while still reaping the economic benefit. Their 40% ownership may be calculated so that they can derive economic benefit while the institutional investors can meet their “infrastructure only” requirement.”

Review of 2006 Annual Report

2006 Annual report highlights low interest rate environment and the ability to gather “lower overall financing costs.”

The report identifies 4 trends that should enable BAM to grow their business:

a. Increased Demand – Because of low interest rate environment, investors will seek investments which generate predictable cash flows and returns over time.

b. Increased Supply – Governments and Corporations transfer ownership of infrastructure assets to private investors. As I type this, I think of Peter Lynch’s, Peter Principle # 21, “Whatever the Queen is selling, buy it. – When governments in democratic countries privatize public companies, they nearly always offer such attractive terms that shareholders are almost guaranteed to make great profits. All over the world, in Britain, Mexico, France, Greece, Chile, Hong Kong and even America (not as many in USA as you’d expect, all of their great companies are already private), IPO’s of major public corporations almost always pay off. Often these stocks are offered at well below book value, and with attractive installment payment plans. As we all know all about Telstra 1, I suppose I don’t need to elaborate do I?”

c. Lower Overall Financing Cost – SISA

d. Good Margins on a Scaleable Business

“Capital is abundant, interest rates are at the low end of recent historical averages, the economic environment in the developed world is solid, and many emerging market economies have growth rates which are advancing worldwide GDP at a rapid pace.”

It will be interesting to see how comments from 7 – 9 above are affected with today’s liquidity and interest rate environment.

“We believe that the best way to create long-term shareholder value is to generate increasing operating cash flows, measured on a per share basis, over a very long period of time.” They further discuss buying assets at value, and value meaning the projected cash flows and appreciation, provide proper risk adjusted returns. They also claim to be focused on proper financing and not too much (‘prudent leverage”) leverage.

When defining operating cash flow, they ask the investor to realize that GAAP depreciates assets which in fact BAM believes are appreciating.

Operating Cash Flow (according to BAM) = NI before depreciation and amortization, future tax expense and certain non-cash items. They also include dividends from investments, and exclude any equity accounted earnings for such assets.

Asset Management revenues and AUM also are claimed to be important metrics.

ROIC is 34%. BAM calculates ROIC as : Operating Cash Flow per share / Average Book Value of common stock. Or for a subsidiary ROIC = Operating Cash Flow / Net Invested Capital.

Looking at “Fee Bearing Assets”, it seems like assets purchased 2005 and 2006 have greater ownership by BAM/BPO.

Companies or funds to review in relation to BAM

Page number in Annual Report
Brookfield Properties (BPO) N/A
BPO PROPERTIES LTD (BPP.TO) N/A
Brazil Retail Property Fund 18
Acadian Timber Fund 18  (30% interest?)
US Core Office Fund 21
Canadian Core Office Fund 22 (no recourse debt?)
Brookfield Homes Corp. (BHS) 22
TRICAP 35 (Restructuring Group)
Brascan Residential Properties SA 25
Great Lakes Hydro Income Fund 31
Transelec 34
Cascadia Forest Products 36
Norbord Inc. 36
Fraser Papers Inc. 37
Katahdin Paper 38
Banco Brascan, S.A. 38
Stelco 36
BAM Split Corp. Search on Sedar.com
BAM Investments Corp[. Search on Sedar.com
Hyperion Brookfield Strategic Income HSM
Hyperion Brookfield Total Return HTR

 

On page 22 the following was written, “Our core office property debt is primarily fixed-rate and non-recourse. Reflect up to 70% Loan-to-Appraised-Value at the time mortgages are arranged. Core office property debt had an average interest rate of 7% and average maturity term of 8 years. I would like to find out if and what percentage of this debt (if any), is Interest Only (I/O).

When analyzing financials I need to remember to be cognizant of one time gains, via spin-offs, securitizations, equity issues, etc.

Occupancy levels are listed on page 23. Average occupancy is 95%, up from 94% in 2005.

Brookfield Homes is discussed on page 24. Claimed to have “some margin retracement during 2006.” They claimed to be confident of similar returns in 2007, and then increased margins “once the current supply and demand imbalance is worked through in 2007 and 2008.” I need to see if they have commented further in this year, as we know the environment has become much worse than most claimed to expect.

Discussion on page 26 of the following, “Our net invested capital at December 31, 2006 included a $23M bridge loan to facilitate the recent portfolio acquisition, which is expected to be repaid over the next 3 to 6 months.” Find out if this was repaid.

I found it interesting that on page 28, they cited the increase of ethanol consumption resulting in “a significant increase in the values of lands which are suitable for sugar cane growing.”

Page 39 discusses Financial Assets, market value of $2.1B and cost of $1.7B. Includes Xstrata Convertibles of $375M. 13.6M shares convertible at £15.27. Claims to have “substantially higher value than our book value.”

Further they discuss the cash flows on a “number of marketable equity security positions taken in undervalued companies.” It seems strange to read about “undervalued companies” in such a confident fashion. I could be wrong, but looks like these will be marked to market, starting in F2007.

Other Assets are listed on page 40. Interesting to see “Restricted cash’ increasing to $517M in F2006, from $367M in f2005, an increase of $150M. This relates primarily to commercial property financing arrangements.

Claims low cost of capital because of strength of capital structure and maintained liquidity. Use of prudent debt. Long term assets, use long term debt and “permanent equity.” They claim to be able to withstand adverse changes in economic conditions, and have the ability to react quickly when investment opportunities arise. Liquidity is described as “financial assets and committed bank term facilities.” Looks to maintain strong investment grade ratings.

“RATINGS

We endeavour to arrange our affairs to maintain investment grade ratings and to improve them further over time. The credit ratings for the Corporation as at the date of this Annual Information Form were as follows:

 

DBRS
Rating
Outlook Standars’s & Poor Ratings Outlook Moody’s
Rating
Outlook
Commercial paper R-1 (low) Stable A-1 (low) Stable Not rated Not rated
Senior notes and debentures A (low) Stable A- Stable Baa3 Stable
Subordinated notes and debentures BBB (high) Stable BBB Stable Not rated Not rated
Preferred shares Pfd-2 (low) Stable P-2 Stable Not rated Not rated

Credit ratings are intended to provide investors with an independent measure of the credit quality of an issue of securities. Each of the Corporation’s debt and preferred securities are rated by DBRS Limited (“DBRS”) and by Standard & Poor’s (“S&P”), and its senior notes and debentures are also rated by Moody’s Investor Service (“Moody’s”). The following is a brief description of each rating agency’s rating schedule.
DBRS rates commercial paper, long-term debt and preferred shares with ratings of “R-1”, “AAA” and “Pfd-1”, respectively, which represent the highest ratings, to “R-3”, “CCC” and “Pfd -5”, which represent the lowest, with “D” for issues in payment default. To show relative rankings with these rating categories, DBRS may modify them by the addition of “(high)” or “(low)”.
S&P rates commercial paper, long-term credit and preferred shares with ratings of “A-1”, “AAA” and “P-1”, respectively, which represent the highest ratings, to “C”, “CCC” and “P -5”, which represent the lowest, with “D” for issues in payment default. To show relative rankings with these rating categories, S&P may modify them by the addition of a plus “(+)” or minus “(-)”.

The credit ratings for the company at the time of the printing of this report were as follows:

DBRS S&P Moody’s Fitch
Commercial paper R-1 (low) A-1 (low)
Term debt A (low) A- Baa2 BBB+
Preferred shares Pfd-2 (low) P-2

Has almost $1B of un-drawn credit facilities at 12/06. Average maturity of long- term debt is 11 years, with an interest rate of 5.95%. That of course sounds very favorable.

Total assets increased substantially in F2006, looks to be from commercial real estate (US Core Office portfolio) and transmission. I will need to review if funding, prices, debt and so forth looks reasonable. I wouldn’t see why not, as these guys are exponentially smarter than me.

Most of the land holdings for residential properties was purchased in the mid 1990’s or earlier. BAM claims this to create a cost advantage.

Acquisitions in 2006
Trizec Properties $4.8B 58 high quality office properties.  29.2M square feet
Commercial Properties $460M 33 properties across USA, 5.3M sq feet.
2 Buildings in DC $230M Leased to US Government, headquarters of Transportation Security Administration.
JV Houston $120M 1.2M sq. feet, leased to Chevron
Chile Transmission Co. “Transelec” $2.5B 8000km and 51 sub stations (see accounting as they own 28% in Transelec, and consolidates it under VIE rules.  The other 72% held by institutional investors is reflected in non-controlling interests.
2 Hydro plants in Maine $146M 39 MW
4 Hydro in Ontario $197M 50 MW

I didn’t externally verify this, but found this written about BAM from a Grants in 2006. “To date, it has featured sound judgment, good luck and an exacting attention to risk. Professional investors sometimes forget to treat other people’s money as gently as they do their own. At Brookfield, the managers are dealing with significant sums of their own money, too. Each of the top five officers owns more than one million shares of BAM—not options but the real McCoy. At last count, which is now a year old, J. Bruce Flatt, president and CEO, owned nearly five million shares, with a value at today’s price of almost $250 million. The senior executives at Brookfield have three years in which to amass BAM shares equivalent to five times their base salary”

Further Grant likes the stock even though he disagrees with Flatt the trend in interest rates because, “Brookfield operates as if it expected to be surprised. For example, sanguine though it professes to be on interest rates, it locks in fixed-rate borrowing costs and hedges—partially—the value of its long-term interest-rate assets through short sales of Treasurys. And bullish though it professes to be on real estate, management is busily harvesting gains. Flatt et al. seem not so much bullish or bearish as measured and risk-averse.”

Observations

1. Residential properties, I would imagine will be negatively affected by mortgage rates and availability.

2. BAM is buying shares of BPO. Most recent filing on 8/31/07.

3. Watch commodity prices of lumber, pulp and paper. Remember what JD said about these being indicators of the future economy.

4. Dilution does not look like a concern.

5. Assets to Equity is 6.7X.

6. Quick back of envelope, I am guessing FCF at around $1b annually. Of course, I write that without finishing Annual Report, not looking yet at 2007, nor interpreting at all current environment.

7. Announced early August, it plans to spin off its electricity transmission and timberland assets into a new company called Brookfield Infrastructure Partners, said its net earnings – partly offset by higher depreciation on assets it bought last year – amounted to 24 cents per diluted share and compared with 20 cents a share in the prior-year period.

8. Initial concern of leverage and heavy real estate purchases does not seem warranted. Supposedly, and would have to verify that interest costs and such, not a concern because of supposed fixed longer term loans. I am assuming principal and interest.

9. Collection of related Stock , bond or other symbols:

BRASCAN ADJ RATE T TRUST UNITS BAO-UN.TO
BROOKFIELD HOMES BHS
BRASCAN RES -ON BISA3.SA
BAM SPLIT CORP 6.25% PRF CAD25 BNA-PA.TO
BAM SPLIT CORP PRF 25/3/09 CL’A BNA-PB.TO
BAM SPLIT CORP 4.35% PRF 10/01/ BNA-PC.TO
BAM INVESTMENTS CO COM NPV BNB.TO
BROOKFIELD PTYS CP BPO
BPO PROPERTIES LTD COM NPV BPP.TO
BRASCAN SOUNDVES.T TRUST UNITS BST-UN.TO
HYPERION STR MTG INC HSM
HYPERION TOTL RETURN HTR
Hyperion Brookfield Collateralized Securities Fund, Inc Couldn’t immediately locate

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