Brookfi eld Asset Management
2008 Annual Report
Investment Principles
BUSINESS PHILOSOPHY
• Build the business and all relationships based on integrity
• Attract and retain high calibre individuals who will grow with us over the long-term
• Ensure our people think and act like owners in all their decisions
• Treat our clients’ money like it is our own
INVESTMENT GUIDELINES
• Invest where we possess competitive advantages
• Acquire assets on a value basis with a goal of maximizing return on capital
• Build sustainable cash flows to provide certainty, reduce risk and lower the cost of capital
• Recognize that superior returns often require contrarian thinking
MEASUREMENT OF OUR CORPORATE SUCCESS
• Measure success based on total return on capital over the long-term
• Encourage calculated risks, but compare returns with risk
• Sacrifice short-term profit, if necessary, to achieve long-term capital appreciation
• Seek profitability rather than growth, because size does not necessarily add value
Financial Highlights
AS AT AND FOR THE YEARS ENDED DECEMBER 31
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Per fully diluted common share
Cash flow from operations
Cash return on equity
Market trading price – NYSE
Net income
Dividends paid
Total
Assets under management
Consolidated balance sheet assets
Revenues
Operating income
Cash flow from operations
Net income
Diluted number of common shares outstanding
1
Includes Brookfield Infrastructure special dividend of $0.94
2008
2.33
23%
$
2007
3.11
30%
$
2006
2.95
34%
$
2005
1.46
21%
$
2004
1.03
19%
$
$
15.27
$
35.67
$
32.12
$
22.37
$
16.01
1.02
1.451
1.24
0.47
1.90
0.39
2.72
0.26
0.90
0.24
$ 78,697
$ 94,340
$ 71,121
$ 49,700
$ 27,146
53,611
12,868
4,809
1,423
649
600
55,597
40,708
26,058
9,343
4,509
1,907
787
611
6,897
3,776
1,801
1,170
611
5,220
2,319
908
1,662
608
20,007
3,867
1,793
626
555
611
CONTENTS
Letter to Shareholders
Management’s Discussion and Analysis of Financial Results
Internal Control Over Financial Reporting
Consolidated Financial Statements
Five Year Financial Review
Corporate Governance
Sustainable Development
Shareholder Information
Board of Directors and Officers
4
10
77
79
112
113
113
114
115
Brookfi eld Asset Management | 2008 Annual Report
1
A Global Asset Manager
We are a long-term, value-oriented investor with approximately $80 billion of assets under management.
Our primary objective is to generate attractive long-term returns through the ownership of assets producing sustainable cash fl ows in our
areas of expertise – property, power, infrastructure and specialty funds.
We have over 100 years of experience investing and operating and managing these high quality assets globally, and are uniquely
positioned to offer specialty investment products to our clients.
NORTH AMERICA – UNITED STATES
$48.9 billion of assets under management
2,000 employees
Properties
– 60 commercial properties
– 47.0 million sq. ft. of leasable space
– 13,084 residential lots owned directly, and 11,025
held under option (California and Virginia)
– 1,198 residential lots under development and 6,583 acres
held for development (Colorado, Texas, Missouri)
– 10.8 million sq. ft. of commercial development
Renewable Power
– 99 renewable power plants
– 1,303 megawatts of installed capacity
Timberlands
– 0.7 million acres
Electricity Transmission
– Approximately 490 kilometres under planning
Specialty Funds
– $2.8 billion of assets under management
Public Securities
– $18.2 billion of fixed income and equity securities under
management
NORTH AMERICA – CANADA
$13.3 billion of assets under management
3,500 employees
Properties
– 29 commercial properties
– 20.3 million sq. ft. of leasable space
– 8,054 acres of residential land held for development, and
3,140 residential lots under development (Alberta and Ontario)
– 5.7 million sq. ft. of commercial developments
Renewable Power
– 32 renewable power plants
– 1,314 megawatts of installed capacity
– 1 wind farm with 189 megawatts of installed capacity
Timberlands
– 1.7 million acres
Electricity Transmission
– 550 kilometres
Specialty Funds
– $2.0 billion under management
SOUTH AMERICA - BRAZIL AND CHILE
$7.9 billion of assets under management
5,000 employees
Properties
– 15 retail properties and 2 office properties
– 4 million sq. ft. retail and 78 thousand sq. ft. office properties
– 61 million sq. ft. of residential developments
Renewable Power
– 31 renewable power plants
– 512 megawatts of installed capacity
– 3 new plants under construction with 85 megawatts of capacity
– Approximately 900 megawatts in greenfield projects in the pipeline
Timberlands & Agrilands
– 160,000 acres of timberlands
– 372,000 acres of agrilands
Electricity Transmission
– 10,400 kilometres
2
Brookfi eld Asset Management | 2008 Annual Report
EUROPE AND MIDDLE EAST - UK, GERMANY, ABU DHABI, DUBAI
$1.3 billion of assets under management
2,000 employees
Properties
– 12.2 million sq. ft. of commercial properties under management
– 7.3 million sq. ft. of commercial and retail development in the UK
Real Estate Construction Business
– One of the leading construction companies in the Middle East with major contracts with third parties
– A construction workbook of $1.8 billion on 12 million sq. ft. in the Middle East
– A construction workbook of $0.7 billion with 1.7 million sq. ft. under construction in the UK
AUSTRALASIA - AUSTRALIA, NEW ZEALAND, INDIA, HONG KONG, SINGAPORE
$7.3 billion of assets under management
1,500 employees
Properties
– 17 office properties, and 10 retail and industrial properties
– 9.6 million sq. ft. of office, retail, industrial properties
– Over 5.4 million sq. ft. of commercial development with 2.7 million sq. ft. under construction
– Residential projects with over 17,000 residential lots and apartments
Facilities, Properties Management, Infrastructure and Construction Activities
– With 108 contracts under management
– A construction workbook of $2.3 billion comprising of 3 infrastructure projects and over 6.1 million sq. ft. of construction
Funds Management
– 3 listed and 4 unlisted investment funds
– $1.9 billion of equity securities and real estate assets under management
STOCK EXCHANGE
LISTINGS
NYSE, TSX, Euronext
Ticker: BAM, BAM.A, BAMA
RENEWABLE POWER
Hydroelectric and
Wind Energy
PROPERTY
Commercial Offi ce and Retail
Residential and Development
INFRASTRUCTURE
Timberlands,
Transmission and Social
SPECIALTY FUNDS
Restructuring, Real Estate,
Finance and Bridge Lending
PUBLIC SECURITIES
Fixed Income and
Equity Securities
SOLID RATINGS
A(low)
A-
DBRS:
S&P:
Moody’s: Baa2
BBB+
Fitch:
Brookfi eld Asset Management | 2008 Annual Report
3
Letter to Shareholders
OVERVIEW
2008 was unquestionably one of the most challenging years ever
to be involved in the investment business. While everyone was
affected, we avoided most of the investment mishaps experienced
by many others, largely due to the type of long-duration hard assets
we own. We also thankfully avoided the liquidity issues experienced
by many, owing to our long-term, asset-specifi c, investment grade
capital structure.
As a result, we were able to record strong cash fl ow from operations
of $1.4 billion or $2.33 per share in 2008. This was one of our
highest ever, although less than the total cash fl ows of the last few
years because of a number of one-time items in the recent past.
More importantly, these results display the sustainability of our core
operating cash fl ows at a time when stable long-term cash fl ows are
highly valued. The cash fl ow growth was due to solid performances
from most of our operations, an increased contribution from our
asset management activities and some realization gains. Net
income was approximately $649 million, and while not as relevant
a measure for our business, was a solid result.
We believe many businesses are currently undervalued by the
stock markets due to external factors, driven largely by liquidity
concerns not necessarily relevant to the businesses. In fact, as we
generate substantial free cash fl ow, the illiquidity of the markets is
presenting us with investment opportunities, which over the longer
term should enable us to earn returns far higher than we would
normally expect.
We believe we are well positioned to capitalize on these opportunities
as a result of our current cash position, available credit lines, the
type of assets we own, the institutional relationships we have, and
the contractual nature of the free cash fl ows we generate each
year. Short-term fl uctuations in our share price therefore have little
effect on our business, because over the past 15 years we have
seldom utilized our common shares to raise capital. Instead, we
have been repurchasing shares at well below what we believe to
be long-term net asset value.
And while some asset values in our operations have decreased
from last year, we believe the declines in the stock market are far
greater than the reductions in fundamental asset values. In this
regard, it is important to note that none of our major operations has
sustained irreparable harm to their businesses, no major dilutions
have occurred in the ownership of the company or our investments
(in fact the reverse occurred in some cases where we have been
able to invest our free cash at exceptional values), our cash fl ows in
our renewable power operations are at record highs, and our offi ce
property leases are stable and of very long duration.
Despite this, we recognize the performance of our share price in
the stock market was dismal, and as substantial shareholders
ourselves, we empathize with you. Our share price ended the year
down 56% which resulted in our worst share price performance
in 20 years. This reduced the compound 20-year return, inclusive
of dividends, to approximately 11% or approximately 3% higher
than the compound 20-year returns of the principal North American
stock indices.
Annualized Returns
Brookfield
S&P
TSX
YEARS
1
5
10
20
-56.4%
12.7%
17.2%
10.6%
-37.0%
-33.0%
2.2%
1.4%
8.4%
4.2%
5.3%
7.5%
Focusing more specifi cally on our future, we currently have six
operating priorities. These are similar to the priorities we have
had in place for close to two years, and depending on how soon
the world economic environment recovers, each may take on a
different relative importance:
• Protect our businesses and asset values by constantly working
our assets to enhance their value;
• Generate liquidity from non-strategic assets, and extend debt
maturities before they come due;
• Maintain maximum fi nancial and operating fl exibility in order to
be positioned for growth as markets turn;
• Repurchase interests held by others in our assets for less than
net asset value, as a result of others holding a different view of
long-term value;
• Position ourselves as a preferred sponsor of acquisition
transactions, based on our operating abilities, reputation with
institutional investors, and ability to commit capital; and
• Build client relationships with shared investment objectives.
MARKET ENVIRONMENT
Housing markets peaked in the U.S. in late 2005, the global credit
markets began to deteriorate in July 2007, and a severe liquidity
crisis manifested itself in September 2008. The global stimulus
packages injected into the monetary system since then have been
unprecedented and in time will lay the foundation for a recovery. As
4
Brookfi eld Asset Management | 2008 Annual Report
a result, we believe that we have experienced most of the equity
market correction likely to occur and that credit markets will continue
to improve through 2009 and substantially recover in 2010. We also
believe that while the recession will be deep, it will not get out of
hand and that within another year or so, the necessary corrections
will be behind us. Although our business plans are predicated on
these expectations, we remain cautious having taken a number of
actions and measures over the past 18 months to help strengthen
our management of risk in this changing environment.
We are heartened to note that many of our institutional clients are
now beginning to re-implement their investment strategies. The rush
to the treasury market has reduced risk-free returns to negligible
yields, and with most pension funds having earnings requirements
of 7% or more on their portfolios, they are starting to put funds
back to work. We believe that once they have fully reassessed their
strategies, they will look to increase their investment in moderate
risk, higher-yielding assets, such as the products we generally offer.
This bodes well for our asset management business.
Fortunately, we have entered 2009 in a strong fi nancial position. Our
balance sheet strength and long-term investment horizons should
play to our advantage as some owners of assets in need of capital
are required to accept substantially reduced prices. And, as we have
typically fi nanced our investments with signifi cant equity, usually
comprising 50% of the purchase price, and fi nanced the balance
with fi xed-rate, long-term investment grade fi nancing, we are not
as affected as many of our competitors who have relied on the
more volatile high-yield debt markets to fi nance their business.
As a result of all of these factors, we believe that our businesses
are, with few exceptions, well positioned to generate favourable
returns even during these diffi cult economic circumstances and
that they will continue to achieve our long-term objectives over the
coming years.
Furthermore, we believe the next 24 months will present us with a
very favourable period to invest capital in opportunities that should
generate long-term returns well in excess of those returns typically
expected on the low-risk type of assets which we prefer to own.
OPERATING PLATFORM AND BUSINESS STRENGTHS
We are fortunate that our businesses are, with only a few small
exceptions, performing well, our operating cash fl ows are strong,
and our capitalization and liquidity situation is good. It is in this
regard that we review some key facts regarding our fi nancial and
operating situation.
Permanent capital at our disposal – First and foremost, we have
approximately $20 billion of permanent capital to support our
overall operations. In today’s environment, where many companies
are without access to fi nancing, this is a tremendous advantage.
This capital does not come due and its trading price in the market
has little direct impact on our operations.
Strong liquidity – Excluding institutional client funds, we currently
have over $3 billion of cash, fi nancial equivalents and undrawn
committed lines of credit to pursue opportunities. In the past
24 months we have generated more cash than we have invested or
utilized in our operations. As a result, our capital availability today
is greater than it was two years ago when the credit turbulence
started to unfold, even though we have invested capital in a number
of attractive investments during this period.
Signifi cant annual free cash fl ow and capital turn-over – We
generate approximately $1.5 billion of free cash fl ow 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 or so to deploy. During the last six months, we
generated close to $1.5 billion of net cash from asset monetizations
alone, which shows the fl exibility within our operations to generate
cash should we desire it.
Low parent company debt – We have only $2.3 billion of debt at
the parent company and, with few exceptions, do not guarantee
our subsidiaries’ debts. Our deconsolidated debt-to-capitalization
ratio is 15%. As you also know, most of the debt within our
businesses has recourse only to specifi c properties. If you
proportionately consolidate all of our interests in assets, the debt
to capitalization is 44%, well within investment grade. We would
point out that sometimes these facts are not easily visible in our
fi nancial 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 and proportionate balance sheet should you wish to
review this further.
Durable, long-term cash fl ows – The majority of our operations
have durable cash fl ows and are long term in nature. To put this into
perspective, please review the following points concerning our two
largest operations:
Renewable Power Generation
• Average life of contracts – 12 years
• Average contract prices – nearly 90% are below the level required
to support new capacity
Brookfi eld Asset Management | 2008 Annual Report
5
• Average term of fi nancing – 12 years
• Average fi nancing ratio on asset values – 40%
• Average emissions of CO2 – virtually nil
• Diversity of facilities – 162 hydroelectric generating plants on
64 river systems
• Ability to store water – equivalent to 22% of average annual
MILLIONS
Sale of timberlands in the U.S. Northwest
Sale of 50% of Canada Trust Tower office property
Sale of Brazilian transmission lines
Sale of Hermitage and Image Insurance
Sale of 50% contracted wind facility and power plant
Gross
Net
$ 1,200
$ 590
400
275
350
120
190
275
350
60
$ 2,345
$ 1,465
generation output
Commercial Offi ce Properties
• Average occupancy today – 97%
• Average annual lease rollover over next three years – 4%
• Average lease duration – over 7 years
• Average tenant quality – “A” rated
• Average net rent – 30% below current market
• Average fi nancing on asset values – 50%
• Average duration of fi nancing – 7 years
Institutional relationships – We also have access to substantial
resources through our institutional relationships in the form of
commitments to our current funds, funds we are raising, and with
respect to co-investment opportunities. We feel fortunate to have
this access on a global basis and as we continue to build these
relationships, and demonstrate how our approach to investments
has weathered the recent turmoil, the relationships should only get
better.
Increasing number of opportunities to invest – We think there
will be many opportunities to invest in areas where we have
particular expertise. To date, we have chosen to be selective in the
belief that better opportunities are still coming and that the best use
of our cash in the meantime has been to repurchase interests in our
own assets at discounts to their underlying values.
CAPITAL RAISING INITIATIVES IN 2008 AND
FINANCING PROFILE
In furtherance of our strategy of recycling capital and pruning
non-strategic assets, we completed a number of initiatives during
2008 which will generate net cash proceeds, over and above
regular cash fl ows, of approximately $1.5 billion after repayment
of associated debt. The most notable of these transactions are as
follows:
• In October 2008, we sold part of our 588,000 acres of freehold
lands owned in the U.S. Northwest to an institutional investment
partnership that is managed by us and where we retain an
approximate 40% direct and indirect interest. Total proceeds
were $1.2 billion, generating net cash to us of approximately
$600 million.
• In July, we sold our 50% interest in the Canada Trust offi ce
property in Toronto for C$425 million. The sale generated net
cash proceeds of approximately $190 million, after repaying the
mortgage.
• In September, we sold our transmission lines in Brazil for
approximately $275 million of net cash proceeds. The transaction
is expected to close in the fi rst quarter of 2009.
• In September, we reached agreement to sell two non-core
insurance operations for $350 million in cash. Approximately
$200 million was received in the fourth quarter of 2008, and the
balance expected shortly.
• In December, we sold a wind facility and our interest in a small
hydro power plant to our 50% owned hydro income fund. Net
proceeds, after we subscribed for additional units of the fund,
were approximately $60 million.
In addition, we extended the terms of existing fi nancings and raised
new capital aggregating approximately $8.0 billion during the year,
largely in the form of asset-specifi c mortgages.
As noted earlier, we hold over $3 billion of cash, fi nancial equivalents
and undrawn committed lines of credit within Brookfi eld. This
includes approximately $2 billion at the corporate level and
approximately $1 billion in our principal operating subsidiaries.
Our only debt maturity at the corporate level before 2012 is a
$200 million bond which is due in late 2010, and our lines of credit
extend into 2012. Our subsidiaries’ debt is spread out among many
of our operating units with diversifi ed maturities and we believe
that most, if not all of the debt should be refi nanceable at current
levels, even in diffi cult markets.
6
Brookfi eld Asset Management | 2008 Annual Report
Our fi nancing profi le is based on asset-specifi c mortgages which,
on average, represent approximately 50% loan-to-value. These
mortgages have recourse only to our power plants, offi ce properties,
transmission lines and timber stands. We believe, based on our
experience of renewing mortgages, even over the past year, that
we should require very little further equity investment to extend the
terms of these mortgages and it is likely that some of the renewals
will generate opportunities for us to withdraw capital, particularly in
the case of fi nancings put in place a number of years ago.
Lastly, we think it is important for investors in Brookfi eld to
understand the quality and the type of debt which we have, and the
reason why Brookfi eld fi nances its affairs the way it does. First, our
assets have highly stable cash fl ows and therefore each asset, in
general, can support substantial non-recourse leverage and remain
investment grade. This capital structure allows us to maximize
returns on equity without taking on too much risk.
Our view is that the optimal leverage level for an asset or company
depends on the type of assets it is supported by, and that the
duration and covenants of the loan are as important as the amount
of leverage itself. Used appropriately, we believe leverage can be
positive; but as with everything, if utilized excessively or in the wrong
way, leverage can destabilize a fi nancial structure and amplify bad
outcomes. Thankfully, due to our experience in operating these
types of assets over many years, we have a healthy respect for
the cyclicality of markets and the level and type of leverage which
is appropriate. As a result, while the past 18 months have been
diffi cult for all investors, we have not had to face the major issues
which a number of others have had to, mainly because we chose a
different course as to the type and amount of leverage employed.
INVESTMENTS MADE DURING 2008
During 2008, we were cautious with the deployment of our capital.
However, we did make a number of investments where we believe
exceptional value will be earned in the long term. Most of these
were internal opportunities where we were, in a number of different
ways, increasing our interests in assets which we already own. The
balance of our capital resources is sitting in cash and fi nancial
assets, or has been utilized to reduce debt, either to lower the
leverage on some assets as we extended maturities or to repay
bank lines which are now available to be drawn for investment in
the future.
During the year, we invested approximately $1.7 billion of cash
in various ways. A good portion of this capital was invested in
assets and shares of companies which we know well, and which
we believe were made at very substantial discounts to long-term
underlying values.
MILLIONS
Brookfield and subsidiary common shares
$ 300
Hydroelectric power plants
Commercial office properties
U.S. residential assets
Brazilian residential assets
Value investment opportunities outside the above
350
300
250
100
400
$ 1,700
Brookfi eld and subsidiary common shares – We repurchased
14.2 million common shares of the company during the year at an
average price of $20.17. While we have been a substantial buyer
over the past 10 years, we had not repurchased signifi cant amounts
in the two years prior to 2008 because the shares were trading at a
price closer to intrinsic value and we believed our cash was better
invested elsewhere. The reduction in our share price during 2008
presented us with a great opportunity to repurchase shares. During
the year, we also invested approximately $50 million to increase
our interest in a number of our subsidiaries by repurchasing their
shares in the open market.
Hydroelectric power plants – We acquired additional power
plants for $350 million, including a 156 megawatt high capacity
facility in Brazil.
Commercial offi ce properties – We invested $300 million in
commercial real estate, mostly through add-on acquisitions in our
primary markets, by repurchasing interests held by partners in
our properties, and through selective development.
U.S. residential assets – We have committed to acquire the
majority of a $250 million rights offering for convertible preferred
of our U.S. residential operations. Our ultimate ownership interest,
depending on minority shareholders’ subscriptions, will be between
56% and 80%, on a fully-diluted basis.
Brazilian residential assets – We own approximately 42% of one
of the most profi table homebuilders in Brazil. We have underwritten
a rights offering to support the growth of this business which
continues to be robust. This should ensure these operations
maintain their competitive position as one of the top three builders
in Brazil.
Value investment opportunities – We invested approximately
$200 million in a variety of value investment opportunities, both
Brookfi eld Asset Management | 2008 Annual Report
7
SUMMARY
We remain committed to building a world-class asset manager, and
investing capital for you and our investment partners in high-quality,
simple-to-understand assets which earn a solid cash-on-cash
return on equity, while always emphasizing downside protection of
the capital employed.
The primary objective of the company continues to be generating
increased cash fl ows on a per share basis, and as a result, higher
intrinsic value over the longer term.
It is always important to remind ourselves that there may be
occasional periods of time, maybe years, when stock market
values, for various reasons, may not refl ect the intrinsic value of the
underlying business. This reality presents opportunities to acquire
assets in the public market at less than intrinsic value, but can
similarly affect your shareholdings in our company for periods of
time. This is particularly acute today, and while we are not pleased
with this, we hope to be able to capitalize on further opportunities
should this environment persist and therefore at least turn these
short-term market disruptions into long-term positives for you.
And, while I personally sign this letter, I respectfully do so on behalf
of all of the members of the Brookfi eld team, who collectively
generate the results for you. Please do not hesitate to contact
any of us, should you have suggestions, questions, comments, or
investment ideas.
J. Bruce Flatt
Senior Managing Partner and
Chief Executive Officer
February 13, 2009
directly and through our restructuring funds. We also subscribed for
approximately $200 million of shares in a Norbord rights offering
to strengthen their balance sheet. This increased our interest from
36% to 80% on a fully-diluted basis.
GOALS AND STRATEGY
While many investors are understandably focused on the events of
the next week or month, it is important to reiterate that our primary
long-term goal is to achieve a compound 12% annual growth in our
cash fl ows from operations measured on a per share basis. This
should lead to an overall return of in excess of the 12% growth in
cash fl ows after including the appreciation in the value of assets.
This increase will not occur consistently each year (and some
years will decrease), but we believe we can achieve this objective
over the longer term by continuing to focus on four key operating
strategies:
• Build a world-class asset management fi rm, offering a focused
group of products on a global basis for our investment partners.
• Differentiate our product offerings by utilizing our operating
experience and our extended investment horizons, to generate
greater returns over the long term for our partners.
• Focus our products on simple to understand, high quality,
long-life, cash-generating physical assets that require minimal
sustaining capital expenditures and have some form of barrier
to entry, characteristics which should lead to appreciation in the
value of these assets over time.
• Maximize the value of our operations by actively managing our
assets to create operating effi ciencies, lower our cost of capital
and enhance cash fl ows. Given that our assets generally require
a large initial capital investment, have relatively low variable
operating costs, and can be fi nanced on a long-term, low-risk
basis, even a small increase in the top-line performance typically
results in a much more meaningful contribution to the bottom
line.
We believe we can continue to successfully grow our global asset
management business, because underlying fundamentals for
asset management, particularly within the infrastructure and real
asset area, continue to be positive. In fact, in an uncertain world,
we believe our lower-risk, lower-volatility assets should become
even more appealing, especially as investors reprice risk in the
marketplace.
8
Brookfi eld Asset Management | 2008 Annual Report
Cautionary Statement regarding Forward-Looking StatementS
This Annual Report to Shareholders contains forward-looking information within the meaning of Canadian provincial securities laws and other “forward-looking statements” within the
meaning of certain securities laws including Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, “safe
harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. We may make such statements in this report,
in other filings with Canadian regulators or the SEC or in other communications. The words “bodes”, “presents”, “enable”, “enhance”, “maintain”, “traditionally”, “in time”, “objective”,
“growth”, “deploy”, “become”, “sustain”, “pursue”, “generate”, “think”, “raising”, “build”, “capitalize”, “beginning”, “create”, “largely”, “continue”, “believe”, “typically”, “expect”,
“potentially”, “encourage”, “tend”, “primarily”, “generally”, “represent”, “anticipate”, “position”, “goal”, “likely”, “pending”, “might”, “hope”, “intend”, “estimate”, “expand”, “scheduled”,
“endeavour”, “seeking”, “usually”, “often” derivations thereof and other expressions of similar import, or the negative variations thereof, and similar expressions of future or conditional
verbs such as “may”, “will”, “can”, “should”, “likely”, “would” or “could” are predictions of or indicate future events, trends or prospects and which do not relate to historical matters or
identify forward-looking statements. Forward-looking statements in this Annual Report include, among others, statements with respect to maximizing our returns on equity, maintaining
our operating flexibility, repurchasing our assets, generating long-term returns on assets, differentiating our product offering, building and improving client relationships, furthering our
goal of building a world class asset management firm, protecting our businesses and asset values, executing our business strategy, increasing our intrinsic value, positioning ourselves
as a preferred sponsor of acquisition transactions, the ability of our assets to support non-recourse leverage and remain investment grade, the ability of our Brazilian residential assets to
maintain a competitive position, the recovery of the monetary system and future market and economic environment, our ability to generate favourable returns during difficult economic
circumstances, our ownership interest in our U.S. residential operations, future investments of institutional clients, procedures and assumptions that we intend to follow in preparing our
pro forma opening balance sheet for our adoption of International Financial Reporting Standards (“IFRS”), the duration we intend to hold most of our assets, our financial and operating
objectives and strategies to achieve them, capital committed to our funds, potential growth of our asset management business and related revenue streams therefrom, our core liquidity
levels, the likelihood that our commercial property rents will be paid, the strength of our tenant relationships, commencement of commercial operations at our new hydroelectric facilities
in Brazil, changes in long-term power prices and the effect thereof on operating expenses and borrowing costs, the expected closings during the first quarter of 2009 of the sale of our
interest in transmission lines in Brazil and our United Kingdom reinsurance business within Imagine Insurance and recovery of capital from the balance of the Imagine business, residential
construction levels in relation to our Brazilian operations, residential construction margins in relation to our Australian operations, scheduled occupancy of the Bay Adelaide Centre in
Toronto, construction of commercial office space on Ninth Avenue in New York City, future growth of our residential development properties, the underlying value of our development
assets, expected returns from disposition gains in our restructuring funds, future income tax rates, future realization gains, planned expansion of our transmission operations, the impact
of the current downturn in the economy on operating margins and opportunities, our ability to create value for our shareholders and clients, enhance the long-term value of our existing
businesses, capitalize on future opportunities, achieve strong performance in our power generating operations, maintain or increase our net rental income, contract power into the future,
generate revenue and margin from our transmission operations, attract new tenants for our commercial properties, pre-lease our commercial office properties under development,
convert our rural development properties into residential and other purpose land, finance our assets and operations on a long-term basis and repay or refinance debt maturities, expand
our infrastructure activities into new sectors, maintain the necessary level of liquidity to manage our financial commitments and capitalize on opportunities, as well as the outlook for the
company’s businesses and other statements with respect to our beliefs, outlooks, plans, expectations and intentions.
Although Brookfield believes that the anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon
reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information because they involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance or achievements of the company to differ materially from anticipated future results, performance or
achievement expressed or implied by such forward-looking statements and information.
Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include: economic and financial conditions in the countries
in which we do business; the behaviour of financial markets, including fluctuations in interest and exchange rates; availability of equity and debt financing; strategic actions including
dispositions; the ability to effectively integrate acquisitions into existing operations and the ability to attain expected benefits; the company’s continued ability to attract institutional partners
to its specialty funds; adverse hydrology conditions; timber growth cycles; environmental matters; regulatory and political factors within the countries in which the company operates; acts
of God, such as earthquakes and hurricanes; the possible impact of international conflicts and other developments including terrorist acts; changes in accounting policies to be adopted
under IFRS; and other risks and factors detailed from time to time in the company’s form 40-F filed with the Securities and Exchange Commission and Management’s Discussion and
Analysis of Financial Results as well as other documents filed by the company with the securities regulators in Canada and the United States.
We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to
Brookfield, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Except as may be required by law, the company undertakes no
obligation to publicly update or revise any forward-looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.
Cautionary Statement regarding uSe oF non-gaaP aCCounting meaSureS
This Annual Report makes reference to cash flow from operations on a total and per share basis. Management uses cash flow from operations as a key measure to evaluate performance
and to determine the underlying value of its businesses. Brookfield’s consolidated statements of cash flow from operations provides a full reconciliation between this measure and net
income. Readers are encouraged to consider both measures in assessing Brookfield’s results. Operating cash flow is not a generally accepted accounting principle measure and differs
from net income, and may differ from definitions of operating cash flow used by other companies. We define operating cash flow as net income prior to such items as depreciation and
amortization, future income tax expense and certain non-cash items that in our view are not reflective of the underlying operations.
Brookfield Asset Management | 2008 Annual Report
9
management’s discussion and analysis of Financial results
ContentS
Part 1
Introduction
Part 2
Performance Review
Part 3
Capitalization and Liquidity
Part 4
Analysis of Consolidated Financial Statements
Part 5
Business Strategy, Environment and Risks
Part 6
International Financial Reporting Standards
Part 7
Supplemental Information
Page
10
12
43
50
56
66
71
Part 1 – introduCtion
The information in Management’s Discussion and Analysis of Financial Results (“MD&A”) should be read in conjunction with our
audited consolidated financial statements, which are included on pages 79 through 111 of this report. Additional information,
including the company’s Annual Information Form, is available on the Corporation’s web site at www.brookfield.com and on SEDAR’s
web site at www.sedar.com. For additional information on each of the five most recently completed financial years, please refer
to the table on page 112 of this report.
Business Overview
Brookfield is a global asset management company, with a primary focus on property, power and infrastructure assets. We have
established leading operating platforms in these sectors and, through them, own and manage a broad portfolio of high quality
assets that generate long-term cash flows and opportunities to create value for our shareholders and our clients. We create value
for shareholders by increasing, over time, the cash flows generated by these assets as well as income earned from managing the
capital invested by our clients alongside our own.
Basis Of PresentatiOn
We have organized the MD&A on a basis that is consistent with how we operate the business. We organize our activities into
individual Operating Platforms which focus on a specific business segment. These platforms include commercial properties, power
generation, infrastructure, development and other properties, specialty funds and public securities.
We use operating cash flow as a key measure of our financial performance. This is not a generally accepted accounting principle
(“GAAP”) measure and differs from net income, and may differ from definitions of operating cash flow used by other companies.
We define operating cash flow as net income prior to such items as depreciation and amortization, future income tax expense and
certain non-cash items that in our view are not reflective of the underlying operations. We provide this measure to investors as a
measurement tool which we believe assists in analysis of the company, in addition to other traditional measures, which we also
provide. We recognize the importance of net income as a GAAP measure to investors and provide a full reconciliation between
these measures.
We present invested capital and operating cash flows on both a “total” and “net” basis. The “total” basis is similar to our consolidated
financial statements with the exception that the assets and cash flows are organized by operating platforms. Total operating cash
flow includes revenues from our operating platforms less direct operating costs, together with fees earned and investment and
other income.
10
Brookfield Asset Management | 2008 Annual Report
Net invested capital and net operating cash flows represent our pro rata interest in the underlying net assets and cash flows. They
are, with the exception of the operations of Brookfield Properties Corporation, presented on a deconsolidated basis meaning that
assets are presented net of associated liabilities and non-controlling interests. Similarly, cash flows are represented net of carrying
charges associated with related liabilities and cash flow attributable to related non-controlling interests. Net invested capital and
net operating cash flow are therefore representative of the amount of capital invested by us in each operation or fund and the
operating cash flow that we are entitled to from the underlying activities. Furthermore, in our view, this presentation provides a
more consistently comparable basis of presentation than our consolidated financial statements which include our operations under
various methods, including equity accounting, proportionate consolidation and full consolidation.
We provide reconciliations between the basis of presentation in our MD&A and our consolidated financial statements in the tables
on pages 54 and 55 and the accompanying discussion. We specifically reconcile operating cash flow and net income on page 39.
Assets under management include assets managed by us on behalf of our clients, as well as our own assets. We invest capital
alongside our clients in many of our funds, and we continue to own a number of assets that we acquired prior to the formation of
our asset management operations and are therefore not part of any fund. Assets under management include the assets reflected in
our consolidated financial statements and, as a result, are based on book values that may differ materially from current market
values, particularly in the case of long-life assets that we have owned for many years. Assets under management also include
capital commitments that have not yet been drawn. Our calculation of assets under management may differ from that employed
by other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset
managers.
Co-investor commitments represent capital that has been committed to us to invest on behalf of the client. We typically earn base
management fees on this capital from the time that the commitment to the fund is effective, during the period of time until the
capital is invested (commonly referred to as the investment period) until such time as the investments are monetized and the capital
returned to the client. Committed capital includes invested capital and commitments that have not yet been invested. Uninvested
commitments represent capital available to us to invest and form part of our overall liquidity for these purposes.
Unless the context indicates otherwise, references in this MD&A to the “Corporation” refer to Brookfield Asset Management Inc.,
and references to “Brookfield” or “the company” refer to the Corporation and its direct and indirect subsidiaries and consolidated
entities. All financial data included in the MD&A has been prepared in accordance with Canadian GAAP and specified non-GAAP
measures unless otherwise noted. All figures are presented in U.S. dollars, unless otherwise noted.
Brian D. Lawson
Managing Partner and Chief Financial Officer
Sachin G. Shah
Senior Vice President, Finance
February 13, 2009
Brookfield Asset Management | 2008 Annual Report
11
Part 2 – PerFormanCe reView
summary
We achieved solid performance during 2008, notwithstanding the difficult economic environment, and undertook a number of
initiatives to protect and enhance the long-term value of our existing businesses and to better position the company to capitalize
on opportunities that we expect will arise in the coming years.
Our financial results reflected the strong performance from our two largest business units, renewable power generation and
commercial office properties. These results more than offset the lower cash flows generated from some of our smaller business
units.
Our conservative approach to financing enables us to concentrate on running our businesses and executing our business strategies.
We maintain substantial financial liquidity and finance our operations primarily at the asset level on a long-term, investment grade,
non-recourse basis. During the year, we were successful in refinancing many of our near-term maturities with longer-dated debt
to extend our maturity profile. Finally, the flexibility inherent in our asset base and our continued access to capital enabled us to
further enhance our liquidity position.
operating Cash Flow
Operating cash flow totalled $1.4 billion for the year compared with $1.9 billion in 2007 and $1.8 billion in 2006. On a more
comparable basis, which excludes major disposition gains, operating cash flow was $1.2 billion or $1.98 per share compared with
$1.1 billion or $1.79 per share in 2007, representing an 8% increase.
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS, exCePt Per ShAre
AMOuNtS)
2008
2007
2006
Operating cash flow
Total
– per share
Excluding major disposition gains
– per share
$ 1,423
2.33
1,214
1.98
$ 1,907
3.11
1,120
1.79
$ 1,801
2.95
1,191
1.93
Our power generating operations produced net operating income prior to debt service of $886 million, a record for this business and
a significant increase over the $611 million generated in 2007. This increase was due to increased water flows and higher realized
prices. We have locked in prices at attractive levels for approximately 75% of our power sales over the next two years and therefore
we expect to achieve continued strong performance, assuming water flows are consistent with long-term averages.
Our office properties produced solid and stable results during 2008. Net operating cash flow increased to $782 million from
$583 million due to increases in rental income from existing properties, the contribution from recently acquired properties and
disposition gains. The overall occupancy level of the properties was 97% at year end, with an average lease term of seven years
with high quality tenants and average in-place rents that are, by our estimation, 30% below comparable average market rents.
The strong performance of these two businesses provided significant stability to our results during the difficult economic environment
of 2008, and the stable contracted revenue profiles of these businesses provide us with a high level of visibility and confidence for
2009 and 2010, and confidence in our ability to achieve our long-term objectives in future years as well.
Balance Sheet, Liquidity and Capitalization
We undertook a number of measures to strengthen our liquidity and capitalization. In aggregate, we completed $8 billion of
financings during the year to extend existing maturities and provide liquidity to pursue business opportunities.
Our net invested capital is financed with a substantial equity base and only modest amounts of corporate borrowings.
AS At DeCeMBer 31, 2008 (MILLIONS, exCePt Per ShAre AMOuNtS)
Underlying value – excluding future taxes
Underlying value – including future taxes
Book value
Shareholders’ equity
total
$ 15,021
12,801
5,788
Per share
$ 24.32
20.62
8.93
12
Brookfield Asset Management | 2008 Annual Report
At the corporate level, we extended $1.2 billion of our revolving credit facilities until 2012, with the remaining $0.2 billion not due
until 2011. We also refinanced the one debt maturity that we had, of $300 million, with C$150 million of perpetual preferred shares
and a $150 million private placement of notes with an average term of 4.3 years. We have no maturities at the corporate level until
March 2010.
Our core liquidity is approximately $3.5 billion at the date of this report, up from $2.8 billion at the beginning of 2008, of which
$1.8 billion is at the corporate level, $1.0 billion is at our principal operating platforms and $0.7 billion is under contract or has
been received since year end.
The underlying values presented in this MD&A are prepared using the procedures and assumptions that we intend to follow
in preparing our pro forma opening balance sheet for our adoption of International Financial Reporting Standards (“IFRS”).
Accordingly, the underlying values reflect most of our tangible assets at fair value as of the balance sheet date, with corresponding
adjustments to minority interests and shareholders’ equity, but do not include any adjustments to reflect value attributable to our
asset management franchise and do not reflect any upward revaluation of inventories to reflect current value. We have not adjusted
the carrying values of our borrowings at this time. The underlying values are reduced by accounting provisions in respect of the
theoretical tax liability that might arise if we were to liquidate the business based on the underlying values at the balance sheet
date, consistent with IFRS accounting principles. Our intention, however, is to hold most of our assets for extended periods of time
or otherwise defer this liability. The deferred tax balance is similar in this sense to the float in an insurance company which is
available for investment for extended periods of time or even indefinitely. Accordingly, we also provide our underlying values on a
pre-tax basis because, in our opinion, these are more reflective of the capital that is actually deployed on behalf of shareholders.
net income
The following table presents net income for the past three years determined in accordance with Canadian GAAP. We do not utilize
net income as a key metric in assessing the performance of our business because, in our view, it contains measures that may
distort the ongoing performance and intrinsic value of the underlying operations. Nevertheless we recognize the importance of net
income as a key measure for many users and provide a discussion of net income and a reconciliation to operating cash flow in
this review.
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS, exCePt Per ShAre
AMOuNtS)
2008
2007
2006
Net income
Total
– per share
Excluding major disposition gains
– per share
$
649
1.02
525
0.81
$
787
1.24
349
0.51
$ 1,170
1.90
624
0.99
Net income excluding major disposition gains increased to $525 million from $349 million on a comparable basis. In total, after
taking major disposition gains into consideration, net income was lower than in 2007 due to a higher level of gains in prior years.
The increase on a comparable basis reflects the growth in operating cash flow discussed above, offset by a higher level of non-cash
items. In particular, we recorded increased depreciation relating to a large office property portfolio acquired in 2007 as well as the
revaluation for accounting purposes of certain hedging transactions. These items were partially offset by non-cash tax credits that
reflect the increased value of our tax assets and a reduction in anticipated future taxes payable.
Performance metrics
Annualized growth over the last five years was 16% excluding major disposition gains and 20% including such items, which
exceeds our long-term objective.
FOr the YeArS eNDeD DeCeMBer 31
Operating cash flow per share
– excluding major disposition gains
– total
Long-term
Five-Year
Annual results
Objective
results
2008
2007
2006
2005
2004
12%
12%
16%
20%
$ 1.98
$ 2.33
$ 1.79
$ 3.11
$ 1.93
$ 2.95
$ 1.46
$ 1.46
$ 1.03
$ 1.03
Brookfield Asset Management | 2008 Annual Report
13
The following table presents our cash return on equity, based on our operating cash flow as a percentage of average common
shareholders’ equity at book values:
FOr the YeArS eNDeD DeCeMBer 31
Cash return on book equity per share
Long-term
Five-Year
Objective
results
20%
26%
Annual results
2008
23%
2007
30%
2006
34%
2005
21%
2004
19%
We achieved a 23% cash return on equity during 2008 and a 26% average return over the past five years. We exceeded our target
by a considerable amount in 2007 and 2006 due to the higher level of disposition gains recorded in those years.
asset management activities
We continued to expand our asset management activities during the year, increasing the number of funds, third-party capital
under management and associated management fees. The following table presents key metrics relating to our asset management
activities over the past three years:
AS At AND FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Asset management revenues
Base management and performance returns
Third-party capital commitments
– Unlisted fund and specialty issuers
– Fixed income and real estate securities
$
2008
449
140
$
2007
415
112
9,174
18,040
7,996
26,237
$
2006
257
71
5,722
20,460
Asset management revenues increased by 8% due to a higher level of base management fees, which increased by $30 million or
29%. The increase in base management fees reflects the growth in higher margin funds and capital under management, which
offset the impact of lower fixed income and equity securities, which typically pay lower fees.
Capital committed by third-party clients to our unlisted funds and specialty issuers increased by $1.2 billion, however this was more
than offset by a reduction in the value of assets under management within our fixed income and real estate securities management
operations. Assets under management as measured in U.S. currency was also impacted by changes in foreign currency exchange
rates on non-U.S. assets under management.
14
Brookfield Asset Management | 2008 Annual Report
Summary of Financial results
The following table summarizes our underlying values, net invested capital and net operating cash flows from our operations over
the past two years:
AS At AND FOr the YeArS eNDeD DeCeMBer 31
(MILLIONS, exCePt Per ShAre AMOuNtS)
Asset management income
Operating platforms
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds
Investments
Cash and financial assets
Other assets
Liabilities
Corporate borrowings
Subsidiary borrowings
Capital securities
Other liabilities
Capitalization
Co-investor interests in consolidated operations
Preferred equity
Common equity
Per Share
– including future tax liability
– excluding future tax liability
underlying Value
Net Invested Capital
Net Operating Cash Flow
2008
2008
2007
2008
2007
$
449
$
415
$
$
$
$
$
$
7,798
6,639
974
3,313
903
701
1,073
2,650
24,051
2,284
733
1,425
3,267
7,709
3,541
870
11,931
16,342
24,051
20.62
24.32
$
4,575
1,215
761
3,334
870
702
1,073
2,568
$ 15,098
$
2,284
733
1,425
2,654
7,096
2,214
870
4,918
8,002
$ 15,098
$
4,598
1,425
1,645
3,464
1,112
1,336
892
3,013
$ 17,485
$
2,048
711
1,570
3,482
7,811
2,160
870
6,644
9,674
$ 17,485
763
466
141
205
126
180
487
—
$ 2,817
$
163
77
88
616
944
450
44
1,379
1,873
$ 2,817
602
261
102
301
341
312
693
—
$ 3,027
$
146
66
90
450
752
368
44
1,863
2,275
$ 3,027
$
8.93
$
11.64
$
2.33
$
3.11
The table above includes the assets, liabilities and operating results of our North American property company, Brookfield Properties
Corporation (“Brookfield Properties”), on a consolidated basis, with interests of minority shareholders in these operations presented
as “co-investor interests in consolidated operations”.
The common shareholders’ equity, on an underlying value basis, is presented in the following table prior to and after reflecting
accounting provisions for future tax liabilities.
AS At DeCeMBer 31, 2008
(MILLIONS, exCePt Per ShAre AMOuNtS)
Common equity – including future tax liability
Add back: future tax liability
Common equity – excluding future tax liability
total
11,931
2,220
14,151
$
$
Per Share
$
$
20.62
3.70
24.32
We provide a detailed review of the invested capital and operating cash flows on both a consolidated basis, as well as on a net basis
as presented above, in the balance of the Performance Review contained on the following pages. We also provide a reconciliation
between operating cash flows and net income beginning on page 39 and a reconciliation to our consolidated financial statements
beginning on pages 54 and 55.
Brookfield Asset Management | 2008 Annual Report
15
OPerating PlatfOrms
Commercial Properties
We own and operate high quality commercial office and retail properties on behalf of ourselves and our co-investors in
North America, Australasia, Europe and Brazil.
The following table summarizes the invested capital and operating cash flows contributed by our commercial property operations:
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Office properties
Retail properties
Underlying value
Invested Capital
Operating Cash Flow
Consolidated
Net Invested
total
Net
2008
$ 19,657
1,326
$ 20,983
$ 23,877
2007
$ 20,922
1,698
$ 22,620
2008
$ 4,485
90
$ 4,575
$ 7,798
2007
$ 4,495
103
$ 4,598
2008
$ 1,773
110
$ 1,883
2007
$ 1,518
48
$ 1,566
2008
782
(19)
763
$
$
2007
583
19
602
$
$
Office Properties
We own and manage one of the highest quality commercial office portfolios in the world located in major financial, energy and
government centre cities in North America, Australasia and Europe. Our strategy is to concentrate our operations in high growth,
supply-constrained markets that have high barriers to entry and attractive tenant bases. Our goal is to maintain a meaningful
presence in each of our primary markets so as to build on the strength of our tenant relationships.
AS At DeCeMBer 31, 2008
# of Properties
total Area (000’s Sq ft)
(000’s Sq ft)
Consolidated Owned Interest
North America
U.S.
Canada
Australasia
Europe
Canary Wharf, London U.K.
Direct
Total portfolio
79
29
108
27
16
2
18
153
54,177
20,258
74,435
9,581
7,900
732
8,632
92,648
46,975
20,258
67,233
6,829
1,185
644
1,829
75,891
Our North American operations are conducted through a 51%-owned subsidiary, Brookfield Properties, and our primary markets
are New York, Boston, Houston, Los Angeles, Washington D.C., Toronto, Calgary and Ottawa. We also own a high quality portfolio of
properties in Australia located primarily in Sydney, Brisbane, Melbourne and Perth. Our European operations are principally located
in London, U.K. The properties in each of these geographic areas are held directly as well as through funds which we manage on
behalf of ourselves and others on a contractual basis.
The following table sets out the consolidated assets and net capital invested in our office property operations by region:
AS At DeCeMBer 31 (MILLIONS)
Assets
Liabilities
Interests
Capital
Assets
Liabilities
Interests
Capital
Consolidated
Consolidated
Co-Investor
Net Invested
Consolidated
Consolidated
Co-Investor
Net Invested
2008
2007
Office properties
North America
U.S. Core Office Fund
Australasia
Europe
Working capital
$ 7,887
7,395
2,458
986
931
$ 19,657
$ 5,675
5,729
1,283
642
818
$ 14,147
$ —
923 1
102
—
—
$ 1,025
$ 2,212
743
1,073
344
113
$ 4,485
$ 8,737
7,247
2,927
796
1,215
$ 20,922
$ 6,297
5,502
2,077
561
908
$ —
955 1
127
—
—
$ 15,345
$ 1,082
$ 2,440
790
723
235
307
$ 4,495
1
Includes $711 million (2007 – $739 million) of co-investor interests that are classified as liabilities for accounting purposes
16
Brookfield Asset Management | 2008 Annual Report
Consolidated office property assets decreased from $20.9 billion to $19.7 billion. Consolidated assets and liabilities within our
Canadian and Australian operations declined due to lower currency exchange rates and property sales. Net invested capital in all
regions was relatively unchanged. The consolidated carrying value of our North American properties is approximately $221 per
square foot, substantially less than the estimated replacement cost of these assets.
During the year we completed $1.2 billion of financings to refinance existing properties. Core office property debt at
December 31, 2008 had an average interest rate of 5.6% and an average term to maturity of seven years.
Working capital assets include rents receivable as well as a portion of the purchase price of properties totalling $841 million that
has been attributed to items such as above-market leases and tenant relationships. Similarly, working capital liabilities include
$760 million in respect of items such as below-market tenant and land leases.
The following table shows the sources of operating cash flow by geographic region:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Total
Expense
Interests
2008
Interest
Co-investor
North America
Australasia
Europe
$ 1,485
213
75
$ 1,773
$
$
673
178
34
885
$
97 1
9
—
$
106
Operating Cash Flow
Net
$ 715
26
41
$ 782
total
$ 1,416
62
40
$ 1,518
2007
Interest
Co-investor
expense
Interests
$
$
718
57
34
809
$
125 1
—
1
$
126
Net
$ 573
5
5
$ 583
1
Includes $23 million (2007 – $55 million) attributable to co-investor interests classified as liabilities and interest expenses for accounting purposes
The following table sets out the variances in operating cash flows:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Same properties
Acquired properties
Dividend from Canary Wharf
Disposition gains
Other
total operating cash flow
Interest expense and co-investor interests
– Existing properties
– Acquired properties
net operating cash flow
2008
$ 1,323
268
31
164
(13)
1,773
(793)
(198)
total
2007
$ 1,301
62
—
145
10
1,518
(878)
(57)
Variance
$
22
206
31
19
(23)
255
85
(141)
$
782
$
583
$
199
We leased 6.4 million square feet in our North American portfolio during 2008 at an average net rent of $25.44 per square foot,
replacing expiring leases that averaged $17.80 per square foot, leading to increased rent. We continue to manage our portfolios and
tenant relationships on a proactive basis which can lead to opportunities to re-lease space for increased yields while minimizing
vacancies.
Property acquisitions were responsible for most of the increase in operating cash flows, which is to be expected given the stable nature
of our long-term lease portfolio and the high credit quality of our tenants. The increase was $65 million on a net basis after taking
incremental borrowing costs into consideration. The Australian portfolio contributed total operating cash flows of $213 million
(2007 – $62 million) and net operating cash flows of $26 million (2007 – $5 million).
The disposition gains occurred largely in our North American portfolio and in 2008 included $164 million from the sale of a
partial interest in the Canada Trust office property in Toronto while the 2007 results reflect the sale of non-core properties in
Washington D.C., Toronto and Ottawa.
Interest expense and co-investors’ interests decreased by $85 million over 2007 due largely to the impact of lower interest rates
on floating rate debt. Interest expense on borrowings associated with acquisitions increased by $141 million.
Brookfield Asset Management | 2008 Annual Report
17
Leasing Profile
Our total portfolio worldwide occupancy rate at the end of 2008 increased to 97% compared to 96% at December 31, 2007, and
the average term of the leases was seven years, unchanged from the prior year.
AS At DeCeMBer 31, 2008
Core North American markets
United States
Canada
Other North American
United Kingdom
Australasia
Total/Average
Percentage of Total
Current
Occupancy
Average
term
Net rental
Area
Currently
Available
expiring Leases (000’s Sq ft)
2009
2010
2011
2012
2013
2014
2015+
96%
99%
99%
92%
99%
97%
7.0
7.1
7.5
18.9
7.6
7.2
46,975
18,620
1,638
644
6,829
74,706
100%
2,002
179
21
53
46
2,301
3%
1,397
528
41
—
360
2,326
3%
1,650
933
181
—
367
3,131
4%
2,797
1,199
142
35
334
4,507
6%
3,432
1,230
90
—
279
5,031
7%
7,745
3,111
104
—
276
11,236
15%
3,141
400
45
—
343
3,929
5%
24,811
11,040
1,014
556
4,824
42,245
57%
As at December 31, 2008, the average term of our in-place leases in North America was seven years. Annual lease expiries
average 4% over the next four years with only 3% expiring in 2009. Average in-place net rents across the portfolio have remained
unchanged at $23 per square foot from the end of last year, and continue to be at a significant discount to the average market rent
of $32 per square foot. This discount provides greater assurance that we will be able to maintain or increase our net rental income
in the coming years, notwithstanding the present difficult economic environment.
Average in-place rents in our Australian portfolio are $34 per square foot, approximately 10% below market rents. During the year
we leased 1.3 million square feet of space at higher rates than the expiring leases. The occupancy rate across the portfolio remains
high at 99.3% and the weighted average lease term is approximately eight years. Our fifteen largest tenants have a weighted
average lease life of nine years and account for approximately 70% of our leaseable area. These tenants have an average rating
profile of A+.
The high quality of our properties has enabled us to sign long-term leases with high quality tenants that have strong credit profiles.
The contractual terms of these leases provide a high level of assurance that rents will be paid as expected unless a bankruptcy
event occurs. Notwithstanding the recent economic turmoil, only 400,000 square feet, representing less than 1% of our net rentable
area and annualized net operating income of $3.5 million, were returned to us as a result of credit events, and we subsequently
re-leased 110,000 square feet of this space at equivalent or better rents. Furthermore, the competitive positions of our properties
in their respective markets enable us to attract new tenants from lower quality buildings to fill any excess in vacant space and we
are in active negotiations to lease the remainder of the space returned.
Retail
Our Brascan Brasil Real Estate Partners Fund was formed in late 2006 and has $830 million of committed capital (Brookfield’s
share – 25%). The fund is almost fully invested with $1.3 billion of total assets representing one of the largest retail portfolios
in Brazil. The portfolio consists of interests in 15 shopping centres and associated office space totalling 4.1 million square feet
of net leasable area, located primarily in Rio de Janeiro and São Paulo as well as Curitiba, Belo Horizonte, Mogi das Cruzes and
Piracicaba.
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Retail properties
Working capital/operating costs
Borrowings/interest expense
Co-investor interests
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
$ 962
364
2007
$ 1,489
209
$ 1,326
$ 1,698
2008
$ 962
(136)
(614)
(122)
$
90
2007
$ 1,489
(662)
(462)
(262)
$ 103
2008
$ 110
2007
$
48
$ 110
$
48
2008
$ 110
(15)
(125)
11
$
(19)
$
2007
48
(10)
(6)
(13)
$
19
18
Brookfield Asset Management | 2008 Annual Report
Total operating cash flows increased to $110 million in 2008 compared to $48 million in 2007. The increase reflects the contribution
from properties acquired in late 2007 and higher sales within existing properties. Many of the properties were undergoing significant
redevelopment during the year, which reduced net rent and increased costs. Net operating cash flow also reflects integration and
borrowing costs associated with the acquired assets. The 2007 results reflect a disposition gain of $8 million.
The declines in consolidated assets and net invested capital are due primarily to the impact of lower currency exchange rates.
Borrowings also include $121 million of debt incurred by the fund to finance the purchase of the initial portfolio assets, which is
guaranteed by the obligations of ourselves and our partners to subscribe for capital in the fund equal to the outstanding balance.
Underlying Value
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. The key metrics used in each geographic region are set out in the following
table:
North America
Australia
united Kingdom
Minimum
Maximum
Average
Minimum
Maximum
Average
Minimum
Maximum
Average
Discount rate
Terminal capitalization rate
Exit date
1 u.K. valuations assume properties held in perpetuity
6.5%
5.7%
2010
13.0%
9.0%
2041
8.2%
6.9%
2017
6.3%
8.5%
2018
9.4%
11.0%
2018
7.0%
8.9%
2018
5.5%
5.5%
n/a 1
8.5%
8.5%
n/a 1
6.2%
6.2%
n/a 1
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, of $1.7 billion. 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.
renewable Power generation
We have assembled one of the largest privately owned hydroelectric power generating portfolios in the world. Our power
generating operations are predominantly hydroelectric facilities located on river systems in the U.S., Canada and Brazil. As at
December 31, 2008, we owned and managed 162 conventional hydroelectric generating stations with a combined generating
capacity of approximately 3,129 megawatts. Power stations are located in Ontario, Quebec, British Columbia, New York, New
England, Louisiana and Brazil. This geographic distribution provides diversification of water flows to minimize the overall impact of
hydrology fluctuations. Our storage reservoirs contain sufficient water to produce approximately 22% 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. We also own and operate two natural gas-fired plants, a
600 megawatt pumped storage facility and a 189 megawatt wind energy project. Overall, our assets represent 4,133 megawatts
of generating capacity.
AS At DeCeMBer 31
Hydroelectric generation
North America
United States
Canada
Brazil
Total hydroelectric generation
Wind energy
Co-generation and pump storage
Capacity (MW)
# of Stations
Long-term Average Generation (GWh)
2008
2007
2008
2007
2008
2007
1,303
1,314
512
3,129
189
815
4,133
1,284
1,308
295
2,887
189
815
3,891
99
32
31
162
1
3
166
98
32
26
156
1
3
160
6,072
4,971
2,152
13,195
534
1,264
14,993
5,927
4,931
1,257
12,115
534
1,168
13,817
Brookfield Asset Management | 2008 Annual Report
19
The following table summarizes our invested capital and the net operating cash flow generated by our power generating operations
during 2008 and 2007:
Invested Capital
Operating Cash Flow
total
Net
total
Net
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Hydroelectric generation
Wind, pump storage and cogeneration
Development
Cash and financial assets
Working capital
Unsecured corporate power borrowings
Property-specific debt/interest expense
Co-investor interests
2008
$ 4,223
479
253
4,955
357
1,161
2007
$ 4,299
602
236
5,137
784
881
Underlying value
$ 12,051
$ 6,473
$ 6,802
2008
$ 4,223
479
253
4,955
357
335
(653)
(3,587)
(192)
$ 1,215
$ 6,639
2007
$ 4,299
602
236
5,137
784
2
(797)
(3,488)
(213)
$ 1,425
$
2008
796
90
—
886
$
2007
531
80
—
611
$
$
886
$
611
$
2008
796
90
—
886
—
(21)
(40)
(273)
(86)
466
2007
531
80
—
611
—
(7)
(41)
(248)
(54)
261
$
$
Total assets in this segment decreased $0.3 billion to $6.5 billion from $6.8 billion during the year due to accounting depreciation
and the impact of translating non-U.S. dollar denominated assets at lower currency exchange rates, offset by the acquisition and
development of facilities in North America and Brazil. In aggregate, we invested $24 million in development and $372 million in
acquisitions during the year.
During 2008, we commenced commercial operations at three new hydroelectric facilities in Brazil that have a combined capacity
to generate 61 megawatts of electricity and we currently have three other projects under construction in the country, totalling
85 megawatts of installed capacity that are expected to commence commercial operations during 2009. The acquisitions completed
during 2008 added 156 megawatts in Brazil and 18 megawatts in the United States.
Property-specific debt has an average interest rate of 7%, an average term of 12 years and is all investment grade quality. The
corporate unsecured notes bear interest at an average rate of 5%, have an average term of eight years and are rated BBB by S&P,
BBB (high) by DBRS and BBB by Fitch.
The following table highlights the variances in operating cash flow between 2008 and 2007:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Hydroelectric generation
North America
United States
Canada
Brazil
Total hydroelectric generation
Other generation
Wind energy
Co-generation and pump storage
total operating cash flow
Cash taxes and other expenses
Interest expenses
Non-controlling interests
net operating cash flow
Net Operating Cash Flow
2008
2007
Variance
$
$
397
271
128
796
32
58
886
(21)
(313)
(86)
$
292
171
68
531
33
47
611
(7)
(289)
(54)
$
466
$
261
$
105
100
60
265
(1)
11
275
(14)
(24)
(32)
205
Total operating cash flows increased by $275 million to $886 million due to a 9% increase in realized prices and a 24% increase
in generation. Net operating cash flow increased by $205 million to $466 million, as the increase in total cash flows was partially
offset by increased financing costs, cash taxes and other expenses, and the interests of co-investors in the increased profitability.
20
Brookfield Asset Management | 2008 Annual Report
Realized Prices and Operating Margins
The following table illustrates revenues and operating costs for our hydroelectric facilities:
FOr the YeArS eNDeD DeCeMBer 31
(GIGAWAtt hOurS AND $ MILLIONS)
Actual
Production
Realized
Revenues
Operating
Operating
Costs Cash Flows
Actual
Production
realized
revenues
Operating
Costs
Operating
Cash Flows
2008
2007
Canada
United States
Brazil
Total
Per MWh
5,277
6,681
2,267
14,225
$
360
551
182
$ 1,093
$
77
$
$
$
89
154
54
297
21
$
$
$
271
397
128
796
56
3,892
5,673
1,326
10,891
$
$
$
250
420
105
775
71
$
$
$
79
128
37
244
22
$
$
$
171
292
68
531
49
Realized prices from our hydro portfolio increased by 9% to $77 per megawatt hour compared to 2007 levels, due to recontracting
power (including short-term financial contracts) at higher prices, higher volumes for capacity and other ancillary services and our
ability to surface higher revenue by generating power during peak price periods. The higher water levels provided us with a greater
amount of generation that had not been previously contracted, allowing us to benefit from the high energy price environment by
selling the additional energy generated at the higher spot prices. Our ability to capture peak pricing and sell other energy products,
such as capacity, also contributed to higher realized prices.
Operating costs declined slightly on a per unit basis. In Canada, higher generation levels reduced the per unit impact of fixed costs.
Costs in Brazil benefited from a lower currency exchange rate over the year although this also reduced the associated revenues.
Operating costs in the United States were relatively unchanged on a per unit basis.
Cash flows from our non-hydro facilities, as shown in the following table, increased due to higher realized prices, despite lower
generation levels. The higher realized price is a result of our ability to participate in the forward reserve market using our pump
storage facility, thereby receiving incremental cash payments in return for committing our generating capacity, in addition to the
revenues from actual generation.
FOr the YeArS eNDeD DeCeMBer 31
(GIGAWAtt hOurS AND $ MILLIONS)
Co-generation and pump storage
Wind energy
Total
Per MWh
2008
2007
Actual
Production
Realized
Revenues
Operating
Operating
Costs Cash Flows
Actual
Production
realized
revenues
Operating
Costs
Operating
Cash Flows
1,249
456
1,705
$
$
$
156
40
196
115
$
$
$
98
8
106
62
$
$
$
58
32
90
53
1,493
478
1,971
$
$
$
147
41
188
95
$
$
$
100
8
108
55
$
$
$
47
33
80
40
Generation
The following table summarizes generation over the past two years:
FOr the YeArS eNDeD DeCeMBer 31
(GIGAWAtt hOurS)
Existing capacity
Acquisitions – during 2007 and 2008
Total hydroelectric operations
Wind energy
Co-generation and pump storage
Total generation
Actual Production
Variance to
Long-term
Average
11,851
1,344
13,195
534
1,264
14,993
2008
12,921
1,304
14,225
456
1,249
15,930
2007
10,665
226
10,891
478
1,493
12,862
Long-term
Average
1,070
(40)
1,030
(78)
(15)
937
Actual
2007
2,256
1,078
3,334
(22)
(244)
3,068
Total hydroelectric generation increased by 3,334 gigawatt hours or 31% over 2007 due to increased generation from our
conventional hydroelectric facilities. Approximately two-thirds of the increase (2,256 additional gigawatt hours) came from existing
hydroelectric capacity owned throughout 2008 and 2007 (i.e. “same store” basis) due to higher water flows while approximately
one-third (1,078 gigawatt hours) came from recently acquired or developed facilities. Hydroelectric generation was 8% above
expected long-term averages, whereas the 2007 results were 10% below long-term averages. Our wind facilities generated 456
gigawatt hours, which was lower than the long-term average. However availability has averaged 97% since its commissioning in
Brookfield Asset Management | 2008 Annual Report
21
2006. With respect to 2009, our reservoirs are at normal levels for this time of year and, as a result, we believe that we are in a good
position to be able to operate our facilities at long-term average levels during the year, assuming normal water conditions prevail.
Contract Profile
Consistent with our strategy to establish lower volatility revenue streams, the prices for approximately 75% of our projected
generation for 2009 and 2010 are contracted pursuant to long-term bilateral power sales agreements or shorter-term financial
contracts. The remaining generation is sold into wholesale electricity markets when certainty of generation is confirmed.
Our long-term sales contracts, which account for more than 50% of total generation, have an average term of 12 years. The
majority of our counterparties are investment grade in nature, including a number of government agencies. The financial contracts
typically have a term of less than two years and are with high credit-worthy counterparties.
The following table sets out the profile of our contracts over the next five years from our existing facilities, assuming long-term
average hydrology:
Generation (GWh)
Contracted
Power sales agreements
Financial contracts
Uncontracted
Contracted generation
% of total
Revenue ($millions)
Price ($/MWh)
Years ended December 31
2009
2010
2011
2012
2013
7,566
4,366
2,954
14,886
80%
805
67
7,534
2,873
4,373
14,780
70%
733
70
7,065
—
7,721
14,786
48%
495
70
6,296
—
8,482
14,778
43%
466
74
6,061
—
8,717
14,778
41%
461
76
The average selling price for contracted power increases to $76 per megawatt hour from $67 per megawatt hour over the next
five years, reflecting contractual step-ups in long duration contracts with locked-in prices and the expiry of lower priced contracts
during the period. The decrease in these prices from those reported in prior quarters reflects the impact of lower currency exchange
rates on non-U.S. contracts which should also have a mitigating impact on operating expenses and borrowing costs.
underlying Value
The underlying value of our power generation portfolio was determined to be $6.6 billion as at December 31, 2008 in total after
deducting borrowings and minority interests. The key metrics are set out in the following table:
united States
Canada
Brazil
Minimum
Maximum
Average
Minimum
Maximum
Average
Minimum
Maximum
Average
Discount rate
Terminal capitalization rate
Exit date
9.0%
11.0%
2028
12.0%
12.0%
2028
10.5%
11.1%
2028
9.0%
11.0%
2014
12.0%
12.0%
2028
10.7%
11.0%
2027
13.0%
14.0%
2028
13.0%
14.0%
2028
13.0%
14.0%
2028
The total valuation of our hydroelectric facilities of $12.1 billion represents a “going-in” capitalization rate of 7.6% based on
2008 cash flows adjusted to reflect long-term average hydrology. The valuations are impacted primarily by the discount rate and
long-term power prices. A 100-basis point change in the discount rate and a 10% change in long-term power prices will each
impact the value of our net invested capital by $0.9 billion.
22
Brookfield Asset Management | 2008 Annual Report
infrastructure
Our infrastructure activities are currently concentrated in the timber and electricity transmission sectors, although we expect that,
over time, we will expand into new sectors that provide similar investment characteristics. Our operations are located in the United
States, Canada, Chile and Brazil and are primarily owned through managed funds. The invested capital and net operating cash
flows contributed by these operations are summarized in the following table:
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Timberlands
Transmission
Underlying value
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
$ 3,557
856
$ 4,413
$ 5,059
2007
$ 3,675
760
$ 4,435
2008
439
322
761
974
$
$
$
2007
$ 1,025
620
$ 1,645
2008
169
166
335
$
$
2007
158
160
318
$
$
2008
61
80
141
$
$
2007
40
62
102
$
$
timber
We manage 2.6 million acres of high quality private freehold timberlands with an aggregate underlying value of $4.2 billion. These
assets are held primarily through two private funds that currently hold operations located on the west coast of Canada and the
U.S. Pacific Northwest. We also manage a listed specialty issuer that operates in Eastern North America and a $280 million private
timber fund focused on Brazil, which is largely uninvested at this time, and hold direct interests in timber assets in Brazil.
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Timberlands
Western North America
Eastern North America
Brazil
Working capital/other expenses
Property-specific debt/interest expense
Co-investor interests
Underlying value
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
2007
2008
2007
2008
2007
2008
2007
$ 2,613
150
63
2,826
731
$ 3,557
$ 4,164
$ 2,708
185
66
2,959
716
$ 3,675
$ 2,826
158
(1,550)
(995)
439
$
$
613
$ 2,959
74
(1,691)
(317)
$ 1,025
$
146
15
8
169
$
130
20
8
158
$
$
169
$
158
$
169
(5)
(89)
(14)
61
$
$
158
—
(85)
(33)
40
Consolidated assets held within our timber operations and related borrowing levels were relatively unchanged during the year. Net
invested capital declined with the transfer of 30% of our U.S. Pacific Northwest operations and three-quarters of our interest in our
Western Canadian operations to 40%-owned Brookfield Infrastructure Partners L.P. (“Brookfield Infrastructure Partners”) as well
as the subsequent transfer of our remaining 70% interest in the U.S. Pacific Northwest operations to a global timber fund in which
we hold a 37% direct and indirect interest. This resulted in a corresponding increase in third-party interests and the receipt by us
of $590 million in cash proceeds.
Total operating cash flow increased to $169 million, reflecting a full year contribution from the U.S. Pacific Northwest operations,
which were acquired in April 2007, as well as a $24 million gain from the partial sale of these assets to our global timber fund.
These factors were offset by lower prices due to the slowdown in the U.S. homebuilding industry, which resulted in lower demand
and prices for premium species such as high quality Douglas fir. In response, we continue to exploit the flexibility inherent in timber
management which allows us to defer harvesting until prices recover and also allows the trees to continue to grow. Our Western
North American operations have also increased on exports to Asia, which provided higher margins.
Interest costs were in line with the prior year while co-investor interests in operating cash flows declined in line with the reduction
in operating margins and net operating cash flows. During the year we raised $1.0 billion of non-recourse debt secured by our
U.S. Pacific Northwest operations which has an average term of 7 years and a 5.2% interest rate to replace shorter-term debt that
was maturing later in the year. The overall duration of timber borrowings is 9 years, compared to 5 years at the end of 2007.
Brookfield Asset Management | 2008 Annual Report
23
The following table summarizes the operating results from our timber operations:
FOr the YeArS eNDeD DeCeMBer 31
Western North America
Douglas fir
Whitewood
Other species
Eastern North America and Brazil
2008
2007
Sales
(000’s m3)
Revenue
($ millions)
Sales
(000’s m3)
revenue
($ millions)
2,397
1,249
657
4,303
2,535
6,838
$
$
210
74
71
355
82
437
2,092
1,318
353
3,763
1,920
5,683
$
$
191
87
51
329
89
418
We sold 6.8 million cubic metres of timber during 2008, up 20% compared to 2007, reflecting a full year contribution from
the U.S. Pacific Northwest timberlands, partially offset by lower volumes of Douglas fir and Whitewood due to the slowdown in
the U.S. homebuilding industry. Sales volumes of other species increased as a result of better relative market conditions for pulp
logs and cedar. Eastern North America and Brazil volume increased relative to 2007 with higher volumes in Brazil being partly offset
by the lower volumes in Eastern North America.
Realized prices across our operations declined by approximately 13% while operating costs per unit were higher due to product
mix and to a lesser extent higher fuel costs. The average realized price for Douglas fir decreased by 4% compared to the prior year.
Declines in prices of products sold to the domestic market were offset by a higher percentage of high value appearance and export
grade products sold to off-shore markets. The average selling price for Whitewood decreased by 10% over 2007 reflecting North
American market conditions. The change in the average realized price for other species is mostly attributable to alternations in the
mix of products included in that category.
transmission
Our electricity transmission operations include the largest transmission system in Chile, a smaller transmission and distribution
system in Northern Ontario and interests in transmission lines in Brazil which have been sold in a transaction which is expected
to close in March 2009. Our direct and indirect interests in these operations, which are held through funds managed by us, are
as follows: 17% in the Chilean operations; 40% and 100% in the Northern Ontario transmission and distribution operations,
respectively; and 8% in the Brazilian operations.
Our transmission operations generate stable revenues that are largely governed by regulated frameworks and long-term contracts.
Accordingly, we expect this segment to produce consistent revenue and margins that should increase with inflation and other
factors such as operational improvements. We also expect to achieve continued growth in revenues and income by investing
additional capital into our existing operations.
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Transmission facilities and investments
Chile
North America
Brazil
Working capital/other expenses
Property-specific debt/interest expense
Co-investor interests
Underlying value
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
2007
2008
2007
2008
2007
2008
2007
$
$
$
324
158
207
689
167
856
856
895
$
330
193
205
728
32
760
$
760
$
$
$
689
116
(237)
568
(246)
322
361
$
$
728
6
(114)
620
—
620
$
$
37
37
91
165
1
—
166
—
166
$
$
114
31
15
160
—
—
160
—
160
$
$
165
(22)
(13)
130
(50)
80
$
$
160
(4)
(65)
91
(29)
62
24
Brookfield Asset Management | 2008 Annual Report
Consolidated assets held within our transmission operations were relatively unchanged during the year. Net invested capital declined
with the transfer of our Northern Ontario transmission operations, the majority of our interest in our Chilean operations, and our
interests in the Brazilian transmission lines to 40%-owned Brookfield Infrastructure Partners. This resulted in a corresponding
increase in co-investor interests.
Transmission operations contributed $80 million of net operating cash flow, after deducting carrying charges and co-investor
interests, compared with $62 million during 2007. Total operating cash flows in each year were $166 million and $160 million,
respectively.
The operating cash flows from our Chilean operations are recorded on an equity basis (i.e. our proportionate share of the net
operating cash flows after deducting interest expense and co-investor interests) for all of 2008 whereas they were fully consolidated
for the first six months of 2007. This resulted in an apparent decline in reported revenue, interest expenses and co-investor
interests. The contribution from these operations on a comparable basis (i.e. equity accounted), however, was $37 million in 2008
and $28 million in 2007. The increase reflects non-recurring revenue as a result of a retroactive rate base increase, as well as the
ongoing benefit of the rate base increase, inflation indexation and capital investments which is partially offset by a decrease in
our ownership interest. After adjusting for non-recurring items, the operating margins at our Chilean transmission operations were
82% which is in line with historical levels.
We exercised our rights to sell our Brazilian investment pursuant to our original purchase agreement for an inflation adjusted return
of 14.8%, giving rise to a revaluation gain of $71 million in 2008. We expect to receive total proceeds of approximately $274 million
inclusive of hedge proceeds. To date, we have received $68 million of proceeds, of which $41 million was received subsequent to
year end. We expect to receive the balance upon closing, which should occur during the first quarter of 2009, subject to receipt of
regulatory and other approvals.
underlying Value
The net asset value of our infrastructure operations was determined to be $0.4 billion as at December 31, 2008 after deducting
borrowings and minority interests.
The valuations of our timberlands are based on independent appraisals. Key assumptions include a weighted average discount and
terminal capitalization rate of 6.5% at a terminal valuation date of 72 years on average. Timber prices were based on a combination
of forward prices available in the market and the price forecasts of each appraisal firm.
The valuation of our transmission operations is based on the contractual sale price for our Brazilian interests, an independent
valuation of our Chilean transmission business, and an internal valuation of our Northern Ontario operations based on the regulated
rate base. In valuing our Chilean transmission business, key assumptions included a weighted average discount rate of 11.0%, a
terminal capitalization rate of 8.6% and an average terminal valuation date of 2023.
DevelOPment anD Other PrOPerties
Development and other properties include our opportunity investment funds, residential operations, properties under development
and held for development and construction activities.
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Opportunity investments
Residential
Under development
Held for development
Construction activities
Underlying value
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
$ 1,295
3,820
1,970
2,260
1,299
$ 10,644
$ 10,619
2007
$ 1,571
3,453
2,431
1,801
1,517
$ 10,773
2008
$
183
171
742
1,693
545
$ 3,334
$ 3,313
2007
$
225
548
734
1,355
602
$ 3,464
2008
2007
2008
2007
$
$
115
38
(25)
—
81
209
$
$
137
272
3
—
—
412
$
$
45
106
(27)
—
81
205
$
$
38
260
3
—
—
301
Brookfield Asset Management | 2008 Annual Report
25
opportunity investments
We manage niche real estate opportunity funds with $435 million of committed capital (Brookfield’s share – $247 million).
Total property assets within the funds were approximately $1.3 billion at year end, a decrease of $0.3 billion from the end of 2007,
due to asset sales. The portfolio of 99 properties is comprised predominantly of office properties in a number of cities across
North America as well as smaller investments in industrial, student housing, multi-family and other property asset classes.
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Properties
Disposition gains
Property-specific mortgages/interest expense
Co-investor interests
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
$ 1,295
—
—
—
$ 1,295
2007
$ 1,571
—
—
—
$ 1,571
2008
$ 1,082
—
(773)
(126)
$ 183
2007
$ 1,280
—
(934)
(121)
$ 225
2008
2007
2008
2007
$
72
43
—
—
$
67
70
—
—
$
72
23
(42)
(8)
$
$ 115
$ 137
$
45
$
67
28
(54)
(3)
38
Due to the focus on value enhancement and the relatively short hold period for properties, we expect that most of our returns will
come from disposition gains, as opposed to net rental income. Our first fund is fully invested and is continuing to sell properties that
have been successfully repositioned while we continue to invest the capital committed to our second fund.
residential
We conduct residential property operations in Canada, Brazil, Australia and the United States, in which we hold the following
interests: Canada – 51%; Brazil – 42%; Australia – 100%; and United States – 58%.
We benefited from the diversification of our residential operations as the impact of the slowdown in the U.S. was offset by profitable
contributions from our Canadian and Brazilian operations.
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Residential properties
Canada
Brazil
Australia
United States
Impairment charge – U.S. operations
Subsidiary borrowings/interest expense 1
Cash taxes
Co-investor interests
1
Portion of interest expensed through cost of sales
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
2007
2008
2007
2008
2007
2008
2007
$
478
1,878
486
978
$
516
1,009
544
1,384
3,820
3,453
$
$
478
735
486
821
2,520
(1,727)
—
(622)
$
516
612
98
1,224
2,450
(1,363)
—
(539)
$ 3,820
$ 3,453
$
171
$
548
$
144
69
(7)
(15)
(153)
38
—
—
—
38
$
$
237
92
—
46
(103)
272
—
—
—
272
$
38
(6)
73
1
$
272
(18)
18
(12)
$
106
$
260
Total assets, which include property assets as well as housing inventory, cash and cash equivalents and other working capital
balances, increased since 2007 reflecting expansion within our Brazil operations offset by lower levels of activities in the United
States. Subsidiary borrowings consist primarily of construction financings which are repaid with the proceeds received from
sales of building lots, single-family houses and condominiums, and are generally renewed on a rolling basis as new construction
commences.
26
Brookfield Asset Management | 2008 Annual Report
The net operating cash flows attributable to each of these business units are as follows:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Canada
Brazil
– Dilution loss
Australia
United States
Less: minority interests of Brookfield Properties in Canadian operations
2008
144
31
(18)
(7)
(44)
106
(71)
35
$
$
$
2007
237
44
—
—
(21)
260
(116)
Variance
$
(93)
(13)
(18)
(7)
(23)
(154)
45
$
144
$
(109)
Canada
We continue to benefit from our strong market position and low-cost land bank, particularly in Alberta where we hold a
23% market share in Calgary. We own approximately 15,538 acres (December 31, 2007 – 14,864 acres) of which approximately
901 acres (December 31, 2007 – 1,004 acres) were under active development at year end. The balance of 14,637 acres
(December 31, 2007 – 13,860 acres) is included in “Held for Development” because of the length of time that will likely pass
before they are actively developed.
The Canadian operations contributed $144 million of net operating cash flow for the year, compared to a record $237 million
in 2007. We share approximately 50% of the cash flows (and the changes therein) with the minority shareholders of Brookfield
Properties. The net contribution, reflecting these interests, was $73 million in 2008 and $121 million in 2007. The decrease in cash
flows is due primarily to lower lot sales, which declined from 2,089 in 2007 to 1,399 in 2008 as well as the impact of the lower
Canadian dollar. Operating margins decreased to 29% compared with the record high of 34% in 2007 and 31% margin in 2006.
Brazil
The strong financial position of our Brazilian operations, bolstered by an equity issue completed in late 2006, enabled us to expand
these operations through the acquisition of MB Engenharia and a merger with Company S.A. These transactions increased our
market position in São Paulo and Rio de Janeiro and also established a meaningful presence in the mid-west region of Brazil,
including Brasilia and Goiânia. The acquisitions also extended our product offerings into the important middle income segment,
thereby providing a strong complement to our existing presence in the higher income segment.
Combined launches totalled more than R$2.7 billion ($1.4 billion) of sales value, and contracted sales during 2008 totalled
R$1.1 billion ($600 million) representing gross sales revenues to be earned in current and future periods. The net operating cash
flow from the business during 2008 was $31 million compared with $44 million during 2007. The decline is due to a lower level
of construction, which reduced the amount of income recognized under the percentage-of-completion basis, however, the current
construction schedule should enable this business to increase returns in 2009. We recorded a dilution loss of $18 million for
accounting purposes on the merger with Company S.A.
Australia
Our Australian operations generated $4 million of operating cash flow during 2008, however these results were offset by an
impairment charge of $11 million. The carrying values of projects reflect our acquisition of this business in 2007 and therefore
already include much of the expected development profits. Accordingly, margins are expected to be lower in the first few years of
ownership.
United States
Our U.S. operations incurred $15 million of cash outflows before interest, taxes and non-controlling interests during 2008 as
demand for new homes slowed and margins narrowed, compared to $46 million of cash inflows during 2007. The operations also
recorded an impairment charge of $153 million to reduce the carrying value of higher cost land and option positions. Our share of
the net operating loss, after taking into consideration interest, taxes and non-controlling interests was $44 million, compared with
a net operating loss of $21 million during 2007. The gross margin from housing sales was approximately 13% compared with 17%
last year. We closed on 750 units during the year (2007 – 839 units) at an average selling price of $562,000 (2007 – $662,000).
The backlog at the end of 2008 was 134 units compared to 155 units in 2007. In aggregate, we own or control 24,100 lots through
direct ownership, options and joint ventures.
Brookfield Asset Management | 2008 Annual Report
27
under development
Properties under development include both active development projects as well as properties that we are redeveloping to enhance
their value. We are also developing a number of hydroelectric generating plants and retail properties which are included under
“Renewable Power Generation” and “Commercial Properties – Retail”, respectively.
AS At DeCeMBer 31 (MILLIONS)
Commercial properties
North America
– Bay Adelaide office tower
– Other
Australasia
– Macquarie Tower
– Others
United Kingdom
Brazil
Borrowings
Invested Capital
total
Net
2008
2007
2008
2007
$
510
324
230
496
102
308
—
$
416
465
195
660
533
162
—
$
510
324
$
416
465
230
496
102
308
(1,228)
195
660
533
162
(1,697)
$ 1,970
$ 2,431
$
742
$
734
Current development initiatives in North America are focused on the construction of a 1.2 million square foot premier office
property on the Bay Adelaide Centre site located in Toronto’s downtown financial district, representing a book value of $510 million
(2007 – $416 million), and properties in Washington, D.C. Bay Adelaide Centre is 72% leased and scheduled for occupancy in the
third quarter of 2009. We are also continuing the redevelopment of a 269,000 square foot property in Washington D.C.
We have 2.7 million square feet of commercial property space under development in Australia. Current developments include
a 350,000 square foot office project fully leased to Macquarie Bank in Sydney, representing a book value of $230 million
(2007 – $195 million), which is 86% complete, as well as three properties in Sydney, Melbourne, and Auckland, all of which are
substantially preleased to tenants such as Sydney Water, Australia Post and Deloitte, with a collective book value of $262 million.
We have also commenced the construction of a 900,000 square foot premier office property in Perth, which is 82% leased to BHP
Billiton, representing invested capital at year end of $94 million (2007 – $25 million).
In the United Kingdom, we own a proportionate share of approximately 7.9 million square feet of commercial space development
density at Canary Wharf in London of which 1.3 million is currently under active development, and substantially pre-leased.
Invested capital declined during the year with the completion of two projects that were then transferred to our active commercial
portfolios.
Property-specific financing includes debt secured by Bay Adelaide Centre in North America as well as debt associated with
developments in Australia and the United Kingdom.
Held for development
We acquire land and long-term rights on land, seek entitlements to construct, and then either sell the development once it has
been improved or build the project ourselves. We typically hold these developments directly, given that they do not generate current
cash flow until the project is completed, at which time it can be transferred to an existing portfolio or sold outright. Accordingly, we
do not typically record ongoing cash flow in respect of properties held for development and the associated development costs are
capitalized until this event occurs, at which time any disposition gain or loss is recognized.
28
Brookfield Asset Management | 2008 Annual Report
AS At DeCeMBer 31 (MILLIONS)
Commercial office properties
Ninth Avenue, New York
Other North America
Australia and U.K.
Residential lots
North America
Brazil
Australia and U.K.
Rural development lands
Brazil
Borrowings / working capital
Invested Capital
total
Net
2008
2007
2008
2007
$
269
122
310
718
352
353
136
—
$
207
105
195
712
92
300
190
—
$
269
122
310
718
352
353
136
(567)
$
207
105
195
712
92
300
190
(446)
$ 2,260
$ 1,801
$ 1,693
$ 1,355
Commercial Office Properties
We own well-positioned land on Ninth Avenue between 31st Street and 33rd Street in New York City which is entitled for 5.4 million
square feet of commercial office space. We will commence construction of this property once the necessary pre-leasing has
occurred, similar to our strategy with other commercial developments.
Residential Lots
Residential development properties include land, both owned and optioned, which is in the process of being developed for sale as
residential lots, but not expected to enter the homebuilding process for more than three years. We utilize options to control lots for
future years in our higher land cost markets in order to reduce risk. To that end, we hold options on approximately 11,000 lots which
are located predominantly in California and Virginia. We invested additional capital into development land in Alberta to maintain
our market position and hold 14,637 acres. We also hold approximately 17,000 residential lots, homes and condominium units in
our markets in Australia and New Zealand, which will provide the basis for continued growth. We increased our holdings in Brazil
through a corporate acquisition and a merger during the year.
Rural Development Lands
We own approximately 372,000 acres of prime agricultural development land in the Brazilian States of São Paulo, Minas Gerais,
Mato Grosso do Sul and Mato Grosso. These properties are being used for agricultural purposes, including the harvest of sugar
cane for its use in the production of ethanol, which is used largely as a gasoline substitute. We also hold 33,200 acres of potentially
higher and better use land adjacent to our Western North American timberlands, included within our Timberlands segment, which
we intend to convert into residential and other purpose land over time. The decrease in carrying values during 2008 reflects lower
currency exchange rates.
Construction Activities
The following table summarizes the operating results from our construction operations during the past two years:
Invested Capital
Operating Cash Flow
total
Net
total
Net
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Australia
Middle East
United Kingdom
Working capital
$
2008
1
49
74
124
1,175
2007
$ —
20
104
124
1,393
$ 1,299
$ 1,517
2008
2007
2008
$
32
48
1
81
2007
$ —
—
—
—
$
81
$ —
2008
2007
$
$
81
—
81
$ —
—
$ —
$
$
124
421
545
$
$
124
478
602
We conduct the majority of our construction activities in Australia and the Middle East with each region accounting for approximately
one-half of the outstanding backlog. Our construction activities are focused on large scale construction of real estate and
infrastructure assets.
Brookfield Asset Management | 2008 Annual Report
29
The revenue work book totalled $4.8 billion at the end of the year (December 31, 2007 – $6.0 billion) and represented 3.5 years of
scheduled activity. The decline reflects early completions and the impact of foreign exchange revaluation on Australian revenues.
The following table summarizes the work book at the end of the year:
AS At DeCeMBer 31 (MILLIONS)
Australia
Middle East
United Kingdom
$
2008
2,254
1,828
727
$
2007
3,143
1,693
1,177
$
4,809
$
6,013
underlying Value
The underlying value of our development assets after deducting borrowings and minority interests was $3.3 billion as at
December 31, 2008 equal to the net book value of our invested capital.
The valuation of residential development lots, which are considered inventory for these purposes, reflects the lower of the existing
carrying value and their expected net realizable value. Net realization value is determined as the value at the anticipated time of
sale less costs to complete, discounted at a rate of 12%-15%. Many of our land holdings, particularly those located in Alberta, were
acquired many years ago. Accordingly, while we believe the fair value of these lands significantly exceeds existing carrying value,
the carrying value for IFRS purposes will be the lower amount.
Values attributable to commercial office property developments reflect the estimated value at completion less the remaining capital
expenditures, all discounted to the current period using discount rates of 7%-9%.
sPecialty f unDs
We conduct bridge lending, restructuring and real estate finance activities. Although our primary focus throughout the broader
organization is property, power and infrastructure assets, our mandates within our bridge lending and restructuring funds also
include related industries which have tangible assets and visible cash flows, particularly where we have expertise as a result
of previous investment experience. As at December 31, 2008, we managed eight specialty funds with total committed capital
of $4.4 billion.
Specialty investment funds generated net operating cash flow of $126 million during 2008 compared with $341 million in 2007.
The 2007 results also included a $231 million gain on our restructuring of Stelco Inc. (“Stelco”).
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Restructuring
Real estate finance
Bridge lending
Stelco disposition gain
Underlying value
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
$ 1,625
2,045
269
3,939
$ 3,939
$ 4,023
2007
$ 1,538
685
488
2,711
$ 2,711
$
2008
384
298
188
870
$
$
870
903
$
$
2007
361
263
488
1,112
$
2008
82
128
97
307
—
$ 1,112
$
307
$
2007
54
26
70
150
231
381
$
$
2008
13
26
87
126
—
$
126
$
2007
16
24
70
110
231
341
restructuring
We operate two restructuring funds. Our first fund, Tricap Restructuring Fund (“Tricap I”) completed its investment period last year
and we continue to manage and harvest the remaining invested capital of $295 million. We also raised additional capital for Tricap
Partners II (“Tricap II”), which now has C$1 billion of committed capital.
30
Brookfield Asset Management | 2008 Annual Report
Our two most significant investments in Tricap I are Western Forest Products Inc. (“Western Forest Products”) and Concert Industries
Ltd. (“Concert Industries”). Western Forest Products experienced a difficult year due to the economic downturn and, in particular,
weakness in the U.S. homebuilding sector. Concert Industries, a leading producer of air-laid woven fabric, continues to perform well.
Investments in Tricap II include Ainsworth Lumber Company Ltd., which is a Canadian-based panelboard company, and several
investments in the oil and gas sector.
The following table summarizes the results from our restructuring operations:
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Assets/operating cash flow
Payables/other expenses
Borrowings/interest expense
Non-controlling interests
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
$ 1,625
2007
$ 1,538
2008
$ 1,625
(341)
(381)
(519)
2007
$ 1,538
(433)
(293)
(451)
2008
82
$
2007
$
54
$
$
2008
82
(1)
(29)
(39)
$ 1,625
$ 1,538
$
384
$
361
$
82
$
54
$
13
$
2007
54
(4)
(20)
(14)
16
Net operating cash flows were $13 million in 2008 compared to $16 million during 2007. In 2007, we completed the sale of Stelco,
an integrated steel company, for a net disposition gain of $231 million.
Similar to our opportunity property funds, we expect that the majority of our returns will come in the form of disposition gains as
cash flows during the restructuring period are often below normalized levels.
real estate Finance
We operate three real estate finance funds with total committed capital of approximately $1.9 billion, of which our share
is approximately $400 million. Our first fund, the $600 million Brookfield Real Estate Finance Partners (BREF I) completed its
investment period in 2007. We raised $275 million of additional capital for our second fund (BREF II) during the year, bringing the
total commitments to $727 million. We had $298 million of capital invested in these operations at year end (2007 – $263 million).
The real estate finance group increased the level of invested assets by originating a number of high quality investment opportunities
resulting in a greater contribution to operating cash flows. The portfolio continues to perform in line with expectations notwithstanding
difficult credit markets, and credit losses have been negligible. These activities contributed $26 million of net operating cash flow
during 2008 compared to $24 million in 2007.
Invested Capital
Operating Cash Flows
total Assets
Net Assets
total
Net
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Real estate finance investments
Less: borrowings
Less: co-investor interests
Real estate finance fund
Securities – directly held
Financial assets – Mortgage REIT
2008
2007
$ 2,023
$
650
2,023
21
1
$ 2,045
$
650
21
14
685
2008
$ 2,023
(1,130)
(617)
276
21
1
$
2007
650
(345)
(77)
228
21
14
2008
2007
2008
2007
$
126
$
21
$
$
126
(58)
(44)
24
1
1
21
(2)
—
19
2
3
24
126
1
1
128
21
2
3
26
$
$
298
$
263
$
$
26
$
Bridge Lending
We operate three bridge lending funds. Our first fund had commitments of C$700 million at the end of the year which have been
fully invested and the remaining loans will mature through 2011. We have raised C$940 million in commitments and pledges for
our two follow-on funds, consisting of a senior and junior fund, and including a C$240 million commitment from Brookfield.
The net capital invested by us in bridge loans declined to $188 million from $488 million due to collections and our adoption of a
more cautious approach to new loan commitments. Notwithstanding the difficult environment, we recorded net gains of $48 million
on convertible securities acquired through one of our financing mandates, which offset the reduction in interest income that arose
from the lower level of invested assets during the year.
Brookfield Asset Management | 2008 Annual Report
31
Our portfolio at year end was comprised of 11 loans, and our largest single exposure at that date was $68 million. Our share of the
portfolio at year end has an average term of 18 months excluding extension privileges and generates an average spread of 10%
over the relevant base rate.
underlying Value
The net asset value of our specialty fund operations was $0.9 billion as at December 31, 2008 for the purposes of preparing our
pro forma IFRS balance sheet. The values are based on publicly available share prices where available as well as comparable
valuations and internal calculations.
investments
We own a number of investments which will be sold once value has been maximized, integrated into our core operations or used
to seed new funds. Although not core to our broader strategy, we expect to continue to make new investments of this nature and
dispose of more mature assets.
The net operating cash flow generated by our investments declined to $115 million from $127 million in 2007, prior to disposition
gains. Disposition gains in 2007 arose on the sale of stock and commodity exchange seats and joint venture interests within
our Brazil operations. The gain in 2008 arose from the disposition of 10 million common shares of Norbord Inc. (“Norbord”) as
settlement for exchangeable debentures issued in September 2004.
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Forest products
Norbord Inc.
Fraser Papers Inc.
Privately held
Infrastructure
Coal lands
Business services
Insurance
Privately held
Publicly listed
Property
Privately held
Gain on sale of exchange seats
Invested Capital
Operating Cash Flow
total
Net
total
Net
Location
2008
2007
2008
2007
2008
2007
2008
2007
North America/U.K.
North America
North America
$ 1,024
415
126
$ 180
477
162
$ 179
118
91
$
Alberta
70
85
Various
Various
Canada
Brazil
Brazil
1,428
133
60
75
3,331
—
—
—
2,513
229
52
153
3,851
—
—
—
70
157
2
38
47
702
—
—
—
19
109
113
85
661
223
26
100
1,336
—
—
—
$
$
22
(40)
(26)
6
81
95
40
—
178
—
65
—
21
(15)
11
6
113
71
5
6
218
204
—
27
$
14
(33)
(26)
$
11
(22)
11
6
67
63
24
—
115
—
65
—
6
93
22
4
2
127
168
—
17
Norbord debenture exchange
North America/U.K.
Gain on sale of joint venture interests
Brazil
Net Investment
Underlying value
$ 3,331
$ 3,851
$ 702
$ 1,336
$ 243
$ 449
$ 180
$ 312
$ 3,549
$ 701
Consolidated assets and net invested capital decreased to $3.3 billion at the end of 2008 compared to $3.9 billion at the end
of 2007 due to the sale of a portion of the insurance business. The impact on consolidated assets was offset in part by the
consolidation of Norbord following the increase in our net beneficial interest to 57% at year end.
Forest Products
We own a net beneficial interest in approximately 152 million shares of Norbord representing a 57% interest. Norbord completed
a rights offering at the end of December 2008, through which we invested $72 million. This increased our net beneficial interest
from the 29% that we previously held. This also resulted in our commencing to account for this investment on a consolidated
basis whereas we had previously treated it as an equity-accounted investment. We further increased our net beneficial interest in
Norbord to 73% in early January through additional subscriptions to the same rights offering at an additional cost of $120 million.
32
Brookfield Asset Management | 2008 Annual Report
Our net beneficial interest and net invested capital are reduced by debentures issued by us that are exchangeable into 10 million
Norbord shares and which are recorded at the market value of the Norbord shares. The reduction in the value of debenture liability
resulted in a commensurate increase in our net carrying value. The 2008 operating cash flows from Norbord reflect only the
dividends received on our common shares.
Fraser Papers Inc. (“Fraser Papers”) and our privately held forest products operations faced a particularly difficult environment for
their products during 2008, which resulted in operating losses.
infrastructure
We own the coal rights under approximately 475,000 acres of freehold lands in central Alberta. These lands supply approximately
25% of Alberta’s total power generation through the production of approximately 13 million tonnes of coal annually. Royalties from
this production generate $6 million of operating cash flow and provide a stable source of income as they are free of crown royalties.
In addition, we own a 3.5% net profit interest in 75 million tonnes of proven reserves, and 34 million tonnes of potential reserves
of high quality metallurgical coal in British Columbia.
Business Services
Our insurance operations are conducted through 80%-owned Imagine Insurance (“Imagine”), a specialty reinsurance business
which operates internationally; 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.
underlying Value
The underlying values are determined by market values, actuarial valuations and internal calculations, and total $3.5 billion
compared to our carrying value of $3.3 billion.
cash anD f inancial a ssets
We hold a substantial amount of financial assets, cash and equivalents that are available to fund operating activities and investment
initiatives.
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Financial assets
Government bonds
Corporate bonds
Fixed income
High-yield bonds
Preferred shares
Common shares
Loans receivable
Total financial assets
Cash and cash equivalents
Deposits and other liabilities
Net investment
Underlying value
Invested Capital
Operating Cash Flow
total
Net
total
Net
2008
2007
2008
2007
2008
2007
2008
2007
$ 177
123
10
88
25
230
317
970
290
—
$ 1,260
$ 1,260
$ 420
286
22
112
40
51
101
1,032
360
—
$ 1,392
$ 177
123
10
88
25
230
317
970
290
(187)
$ 1,073
$ 1,073
$ 420
286
22
112
40
51
101
1,032
360
(500)
$ 892
$ 519
$ 709
$ 519
$ 709
$ 519
—
(32)
$ 487
$ 709
—
(16)
$ 693
Net cash and financial asset balances increased to $1.1 billion during 2008 from $0.9 billion at the end of 2007 due to the
sale of government and corporate bonds. We have selectively established a number of common share positions in undervalued
companies. In addition to the carrying values of financial assets, we hold common equity positions with a notional value of $nil
Brookfield Asset Management | 2008 Annual Report
33
(2007 – $70 million) through total return swaps and hold protection against widening credit spreads through credit default swaps
with a total notional value of $2.5 billion (2007 – $2.4 billion). The credit default swaps have limited downside and the market value
of the instruments reflected in our financial statements at December 31, 2008 was $30 million (2007 – $85 million).
Net invested capital includes liabilities such as broker deposits and a small number of borrowed securities that have been sold
short.
Operating cash flow in 2008 included a substantial amount of unrealized gains of which $134 million (2007 – $129 million)
were recognized in respect of credit default swaps that protected us against widening credit spreads. We also realized gains of
$119 million in respect of foreign currency positions. Operating cash flow in 2007 also included gains of $378 million from the sales
of our holdings of debentures exchangeable into common shares of a major natural resources company.
asset m anagement a ctivities
The following table summarizes asset management income for the past two years on a “total” basis, which includes income in
respect of our own capital invested in funds, as well as the income earned solely from third-party clients. The portion of the income
that is earned in respect of our own capital is eliminated in determining our financial results in accordance with GAAP. On the other
hand, our financial results reflect 100% of the operating costs that we incur in managing these funds. Accordingly, we present both
“total” income, which includes the income earned in respect of the capital we have invested in these funds, as well as “third-party”
income, which is the income earned from our clients. We believe the operating margins are more accurate if they are based on
100% of both the expenses and the associated income.
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Asset management
Base management fees
Performance returns
Transaction fees
Property services
Investment banking
Direct operating costs
1
Includes fees on Brookfield invested capital
total 1
third Party
2008
2007
2008
2007
$
178
10
18
301
18
525
(392)
$
137
12
116
184
34
483
(264)
$
133
$
219
$
$
134
6
15
277
17
449
$
$
104
8
103
166
34
415
asset management income
Asset management income is dependent on the amount of capital managed by us on behalf of our clients (base management fees)
and our investment performance (performance returns). Base management fees typically reflect a fixed percentage of assets or
capital, including committed but uninvested capital and therefore vary based on the level of such assets or capital. Performance
returns include contractual arrangements whereby we are entitled to a variable amount based on the relationship between actual
investment returns and a predetermined benchmark, as well as carried interests whereby we participate in investment returns
through an ownership interest in the assets being managed.
Base Management Fees
Base management fees include $134 million (2007 – $104 million) earned from third-party clients and $44 million (2007 – $33 million)
from the capital that we have invested in existing funds. The increase was due to new funds launched during the past two years and
an increase in capital committed to existing mandates, offset in part by the return of capital from more mature funds as investments
are realized as well as the decline in value of fixed income and equity portfolios under management. As at December 31, 2008,
annualized base management fees on existing funds and assets under management totalled $170 million (2007 – $160 million),
of which $130 million (2007 – $120 million) relates to client capital. Annualized base management fees are an important measure
of the expected contribution from these activities to our overall results and represent a stable source of cash flow that we believe
adds considerable value to our business.
34
Brookfield Asset Management | 2008 Annual Report
The following table presents the base management fees earned in respect of each of our operating platforms together with the
associated capital commitments:
Base Management Fees
Capital Commitments
total
third Party
total
third Party
AS At AND FOr the YeArS eNDeD
DeCeMBer 31 (MILLIONS)
Commercial properties
Infrastructure
Development properties
Specialty funds
Other
Public securities
2008
2007
2008
2007
$
30
14
3
44
6
97
40
$
27
21
4
26
6
84
50
$
16
11
2
31
6
66
38
2008
$ 4,591
3,818
818
4,411
84
13,722
18,040
2007
$ 4,540
1,801
817
5,269
84
12,511
26,237
2008
$ 2,869
2,736
388
3,118
63
9,174
18,040
2007
$ 2,898
1,192
359
3,488
59
7,996
26,237
$
137
$
134
$
104
$ 31,762
$ 38,748
$ 27,214
$ 34,233
$
$
41
31
7
41
6
126
52
178
Base management fees within our commercial property sector are earned in respect of two North American core office funds, our
Brazil retail property fund, and a number of smaller Australian and European property funds. Fees increased during the year due
primarily to the addition of the Australian and European funds.
The fees earned in respect of our infrastructure operations increased due to the launch of Brookfield Infrastructure Partners, an
infrastructure investment partnership listed on the New York Stock Exchange at the beginning of the year, as well as the contribution
from a global timber fund that commenced operations in October.
Specialty funds include the fees from our restructuring, real estate finance and bridge lending funds. The decrease during the year
is due to the impact of the higher U.S. dollar on Canadian dollar fee streams and capital commitments, notwithstanding the launch
of new funds in each of these areas and additional closings on third-party capital.
In our public securities group, we manage $18 billion of fixed income and equity securities on an advisory basis for a large number
of institutional and individual investors. These activities produced third-party revenues of $50 million, which consist largely of
base management fees. Management fees increased over 2007 levels due to a higher level of average assets under management
following the acquisition of a real estate and equities securities manager in late 2007. Average fees earned as a percentage of
assets under management also increased with the shift of our activities from traditional fixed income to equities and more value-
added services such as distress portfolio management.
Performance Returns
The level of performance returns recorded in our results continues to be modest because they tend to materialize later in the life cycle
of a fund and because we have elected to follow accounting guidelines that typically defer recognition in our financial statements.
The following table includes performance returns from third parties on established funds that we believe have accumulated, but
are not included in our reported results.
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Accumulated returns, beginning of year
Net accumulation/(reduction) during the year
Total accumulated performance returns
2008
$ 138
(73)
$
65
$
2007
54
84
$ 138
We estimate that approximately $9 million of direct expenses will arise on the realization of the returns that have accumulated to
date. The average period of time over which these accumulated returns may be realized is six years, based on the terms of the
relevant contracts. We expect that the ultimate receipt of these amounts will not result in any meaningful cash taxes.
other Fees and Services income
Transaction Fees
Transaction fees in 2007 include a fee of $71 million earned in connection with our efforts to establish a North American retail
property platform and an associated capital commitment. Transaction fees also include investment fees earned in respect of
financing activities and include commitment fees, work fees and exit fees.
Brookfield Asset Management | 2008 Annual Report
35
Property Services Income
Property services fees include property and facilities management, leasing and project management and a range of real estate
services. The increase reflects a higher level of activity within our facilities management operations and the expansion of our
operating base into Australia.
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Property services revenues
Direct operating costs
total
third Party
2008
$ 301
(234)
$
67
2007
$ 184
(153)
$
31
2008
$ 277
(234)
$
43
2007
$ 166
(153)
$
13
Investment Banking Fees
Our investment banking services are provided by teams located in Canada and Brazil and contributed $17 million of fees during
2008. The group advised on transactions totalling $9.3 billion in value during the year, and secured a number of prominent mandates.
The 2007 revenues reflect the higher level of activity reflective of the capital markets at that time.
assets under management
The following table summarizes total assets under management and net invested capital at the end of the past two years:
AS At DeCeMBer 31 (MILLIONS)
Unlisted funds and specialty issuers
Commercial properties
Infrastructure
Development properties
Specialty funds
Other
Public securities mandates
Total fee bearing assets/capital
Directly held
Operating assets
Other assets
total Assets under
Management
Brookfield’s Net
Invested Capital
third-Party Commitments
2008
2007
2008
2007
2008
2007
$ 11,960
6,201
2,273
4,817
140
25,391
18,161
43,552
31,525
3,620
$ 13,519
3,766
2,955
7,362
125
27,727
26,237
53,964
36,496
3,880
$ 1,290
696
366
870
$ 1,410
609
475
1,126
21
3,243
20
3,263
8,215
3,620
25
3,645
21
3,666
9,939
3,880
$ 2,869
2,736
388
3,118
63
9,174
18,040
27,214
$ 2,898
1,192
359
3,488
59
7,996
26,237
34,233
$ 78,697
$ 94,340
$ 15,098
$ 17,485
$ 27,214
$ 34,233
Total assets under management decreased by $15.6 billion during the year. Approximately 50% of the decline occurred within our
public securities operations and 33% of the decrease occurred within our directly held assets, which reflects the impact of the
higher U.S. dollar on assets in international regions as well as the transfer of timber and transmission assets into new unlisted funds
and specialty issuers during the year. The balance of the decline occurred within our unlisted funds and specialty issuers.
Unlisted Funds and Specialty Issuers
This segment includes the unlisted funds and specialty listed issuers through which we own and manage a number of property,
power, infrastructure and specialized investment strategies on behalf of our clients and ourselves. The funds are listed in more
detail on page 76 and elsewhere in this MD&A.
Third-party capital commitments to these funds increased by $1.2 billion during the year, reflecting commitments to the establishment
of Brookfield Infrastructure Partners, a global timber fund and a Brazil timber fund, as well as additional commitments to our
restructuring and real estate finance funds. These activities more than offset the impact of the higher U.S. dollar on international
funds and the return of capital to investors from more mature funds. The decline in total assets under management also reflects
the currency revaluations as well as a lower level of bridge loans and real estate securities, offset by the higher level of timber and
transmission assets under management.
36
Brookfield Asset Management | 2008 Annual Report
Public Securities
We specialize in fixed income and equity securities with a particular focus on distress real estate and infrastructure. Our fixed
income mandates are managed primarily by New York-based Brookfield Hyperion Asset Management Inc. Brookfield Redding LLC,
based in Chicago, which has a well-established record as a leading real estate equity securities manager with a wide variety
of clients throughout North America and Australasia. Brookfield Soundvest Capital Management Ltd., based in Ottawa, Canada,
manages fixed income and equity securities on behalf of a number of Canadian institutional investors.
The following table summarizes assets under management within these operations. We typically do not invest our own capital in
these strategies as the assets under management tend to be securities as opposed to physical assets.
AS At DeCeMBer 31 (MILLIONS)
Real estate and fixed income securities
Fixed income
Equity
total Assets under
Management
2008
2007
third-Party Commitments
2007
2008
$ 15,199
2,962
$ 20,210
6,027
$ 15,078
2,962
$ 20,210
6,027
$ 18,161
$ 26,237
$ 18,040
$ 26,237
Co-investor commitments declined by $8 billion during 2008 primarily due to a reduction in market prices of securities under
management. We secured $3.4 billion of new advisory mandates during the year offset by $4.2 billion of redemptions.
Directly Held
Operating assets and the associated net invested capital declined by $6.0 billion and $2.1 billion, respectively, reflecting the
transfer of infrastructure assets into Brookfield Infrastructure Partners and the global timber fund, as well as currency revaluations.
We hope to transfer more of the remaining operations into funds over time.
financing anD OPerating c Osts
interest
Interest costs include interest expense on corporate borrowings, certain subsidiary borrowings, property-specific borrowings and
capital securities as set out in the following table:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Corporate borrowings
Subsidiary borrowings 2
Property-specific borrowings
Capital securities
$
2008
163
384
1,349
88
total
$
2007
146
324
1,226
90
Variance
2008
$
17
60
123
(2)
$
163
77 1
—
88
Net
$
$
146
66 1
—
90
2007
Variance
1 relates to financial obligations that are guaranteed by the Corporation or issued by direct corporate subsidiaries
$ 1,984
$ 1,786
$
198
$
328
$
302
$
17
11
—
(2)
26
Interest on corporate borrowings and net interest expense both increased during the year due to a higher level of average balances.
The increase in interest on subsidiary and property-specific borrowings is related to financings incurred and assumed with the
acquisition of property assets in Australia, Europe, and Brazil as well as renewable power facilities in North America and Brazil.
Average borrowing costs during the past two years are as follows:
AS At AND FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Corporate borrowings
Subsidiary borrowings
Property-specific borrowings
Capital securities
Preferred equity
Average
Outstanding
$ 2,301
6,894
22,542
1,565
870
$ 34,172
2008
Interest
Expense
$
163
384
1,349
88
44
$ 2,028
Average
Average
Rate
Outstanding
7%
6%
6%
6%
5%
6%
$ 1,885
4,905
18,281
1,560
798
$ 27,429
2007
Interest
expense
$
146
324
1,226
90
44
$ 1,830
Average
rate
8%
7%
7%
6%
6%
7%
Brookfield Asset Management | 2008 Annual Report
37
The average rate declined from 7% to 6% due to lower rates on floating rate debt.
operating
Operating costs relate to our asset management and corporate activities.
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
2008
2007
Variance
2008
2007
Variance
total
Net
Asset management
Asset management activities
Property services
Corporate and other costs
$
$
158
234
392
248
640
$
$
111
153
264
200
464
$
$
47
81
128
48
176
$
$
152
234
386
220
606
$
$
111
153
264
180
444
$
$
41
81
122
40
162
Operating costs include those of Brookfield Properties, and reflect the costs of our asset management activities as well as costs
which are not directly attributable to specific business units. Asset management costs increased from $111 million in 2007 to
$152 million in 2008 on a net basis, reflecting the establishment of new funds and the continued increase in invested assets.
Property services expenses in 2008 reflect the addition of Australian operations to this business. The increase in corporate and
other costs from $180 million to $220 million reflects the continued growth of our business including expansion into new geographic
areas such as Australia and a number of major corporate initiatives.
We have continued to expand our resources as we grow our business which has resulted in higher operating costs, and we have
also incurred a number of transaction and other costs related to growth initiatives. We believe these investments will enable us to
expand our business without further commensurate increases in costs, thereby resulting in expanded margins.
interests of other investors in Consolidated operations
Co-investor interests relate primarily to the 49% minority equity interest held by others in our North American property subsidiary,
Brookfield Properties.
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
2008
2007
Variance
2008
2007
Variance
Operating Cash Flow
total
Net
Commercial properties
Brookfield Properties
Property funds and other
Renewable power generation
Infrastructure
Development and other properties
Specialty funds
Investments
$ 419
99
82
64
28
89
10
$ 791
$ 368
71
47
38
70
13
29
$ 636
$
51
28
35
26
(42)
76
(19)
$ 155
$ 419
31
—
—
—
—
—
$ 450
$ 368
—
—
—
—
—
—
$ 368
$
$
51
31
—
—
—
—
—
82
The increase in operating cash flows reflects increased returns and gains within our North American office property portfolios
offset by lower operating cash flows from our Canadian residential property business, both of which are owned through Brookfield
Properties. The decrease in cash flows related to development properties is due to lower returns in our U.S. homebuilding operations
and the increase in cash flows related to specialty funds is due in part to the consolidation of one of our real estate finance funds.
net i ncOme
Net income was $649 million in 2008, compared to $787 million in 2007. The higher results in 2007 reflected a larger amount
of disposition gains. Net income in 2008 also reflects depreciation and amortization with respect to assets purchased since the
beginning of 2007 offset by accounting income arising from changes in future tax balances.
38
Brookfield Asset Management | 2008 Annual Report
The following table reconciles net income and operating cash flow on a total basis and also by presenting the reconciling items on
a basis that is net of non-controlling and minority interests:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
operating cash flow and gains
Less: dividends from equity accounted investments
exchangeable debenture gain
Non-cash items
Depreciation and amortization
Equity accounted results
Revaluation and other items
Future income taxes
Non-controlling interests
net income
1 Net of non-controlling and minority interests
Total
Net 1
2008
$ 1,423
(22)
—
$ 1,401
(1,330)
(46)
(267)
461
430
2007
$ 1,907
(21)
(331)
$ 1,555
(1,034)
(72)
(112)
(88)
538
2008
2007
Variance
$ 1,401
$ 1,555
$
(154)
(773)
(46)
(207)
274
—
(553)
(72)
(95)
(48)
—
(220)
26
(112)
322
—
$
649
$
787
$
649
$
787
$
(138)
depreciation and amortization
Depreciation and amortization prior to non-controlling interests increased due to the acquisition of additional assets in a number
of segments during 2007 and 2008. Depreciation and amortization for each principal operating segment is summarized in the
following table:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
2008
2007
2008
2007
Variance
Total
Net 1
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds and investments
Other
1 Net of non-controlling and minority interests
$
$
765
191
137
94
137
6
$
572
164
138
65
89
6
$ 1,330
$ 1,034
$
362
168
94
55
88
6
773
$
$
212
141
102
33
59
6
553
$
150
27
(8)
22
29
—
$
220
The Australian property operations contributed $140 million of depreciation and amortization towards the increase in total and net
depreciation and amortization, of $296 million and $220 million, respectively.
equity accounted results
We recorded net equity accounted losses of $46 million during the year from our investment in Norbord. Norbord faced a weak price
environment for its principal products due to the weakness in the U.S. homebuilding sector, in addition to higher input costs. We
increased our interest in Norbord to 60% at year end and commenced accounting for this business on a consolidated basis at that
time. We also increased our interest in Fraser Papers to 56% during the third quarter of 2007 and began to consolidate our interest
at that time, and sold our interest in Stelco during the fourth quarter of 2007 for a gain of $231 million.
The following table summarizes the contribution from our equity accounted investments for the past two years:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Norbord
Fraser Papers
Stelco
2008
2007
$
$
(46)
—
—
(46)
$
$
(17)
(23)
(32)
(72)
Brookfield Asset Management | 2008 Annual Report
39
revaluation and other items
Revaluation and other items are comprised primarily of revaluation items which are non-cash accounting adjustments that we are
required to record under GAAP to reflect changes in the value of certain contractual arrangements.
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Norbord exchangeable debentures
Interest rate contracts
Power contracts
Commercial office revaluation
Other
1 Net of non-controlling and minority interests
total
Net 1
$
2008
65
(252)
94
(147)
(27)
$
2007
(9)
(64)
(63)
—
24
$
2008
65
(244)
70
(73)
(25)
$
$
(267)
$
(112)
$
(207)
$
2007
Variance
(9)
(64)
(48)
—
26
(95)
$
74
(180)
118
(73)
(51)
$
(112)
We recorded a $65 million accounting gain from the decline in value of debentures issued by us that are exchangeable into
Norbord common shares, and are valued based on the Norbord share price. We hold an equivalent number of shares into which the
debentures are exchangeable, but are not permitted under GAAP to mark the hedged investment to market.
We hold interest rate contracts to provide an economic hedge against the impact of possible higher interest rates on the value of
our long duration interest sensitive physical assets. The U.S. 10-year treasury rate moved from 4.02% to 2.21% during 2008, which
led to a $252 million decline in the net value of these contracts of which our share was $244 million. Accounting rules require that
we revalue these contracts each period even if the corresponding assets are not revalued.
In our power operations, we enter into long-term contracts to provide generation capacity, and are required to record changes in
the market value of these contracts through net income whereas we are not permitted to record the corresponding increase in the
value of the capacity and generation that we have pre-sold.
We adjusted the carrying value of commercial office properties located in Minneapolis based on our intention to restructure the
ownership of these properties. This led to a non-cash provision of $147 million, of which 49% is shared with the other owners of
our North American office property business.
Future income taxes
Future income taxes in 2008 reflected a gain of $479 million (our share – $238 million) arising from the conversion of the entity
owning a number of our U.S. office properties to an internal REIT, thereby lowering the applicable effective tax rate on future taxable
income from these properties. Previously the taxable income from these properties had been offset by tax depreciation and other
tax shelter carried forward from prior years. The tax provision also reflects the benefits from increases in tax loss pools, principally
in Canada, which increase the amount of taxable income that we will be able to offset in future years.
realization and disposition gains
Realization gains represent amounts recorded for accounting purposes that represent the appreciation in value that we expect
to achieve in many of our long-life assets and which along with current cash flows is included in assessing the expected total
return on our initial investment. This portion of the total return may not be recognized for many years, if ever, and a realization
event usually takes the form of gains on a direct or indirect disposition of the assets, including the transfer of assets to funds. This
appreciation in value represents an important component of our long-term investment returns, but is only recognized in our results
at irregular points in time.
We recognize disposition gains on investments held within our operating platforms that are not necessarily held for the long-term,
such as investments in our restructuring operations.
40
Brookfield Asset Management | 2008 Annual Report
The following table summarizes major realization and disposition items included in our operating results:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Realization gains/(losses), net of taxes and minority interest
Longview sale
Brazil Residential dilution loss
Core office properties – disposition
Private equity – other operations
Brazil exchange seats sale
Core office properties – debt breakage
Banco Brascan joint venture gain
Operating
Platform
Infrastructure
Development
Real Estate
Private Equity
Private Equity
Real Estate
Private Equity
Disposition gains/(losses), net of taxes and minority interest
Norbord exchangeable debenture
Office properties – disposition
Sale of Stelco
Disposition gains included in opening retained earnings
Private Equity
Real Estate
Specialty Funds
Cash and Financial Assets
Total
Cash Flow from Operations
Net Income
2008
2007
2008
2007
$
$
24
(18)
80
58
—
—
—
144
65
—
—
—
65
209
$ —
—
—
—
168
(14)
17
171
—
54
231
331
616
787
$
$
$
15
(18)
48
58
—
—
—
103
21
—
—
—
21
124
$ —
—
—
—
168
(8)
17
177
—
32
229
—
261
438
$
OutlOOk
The consequences of the current downturn in the economy, including a rise in unemployment, a drop in consumer and business
confidence and spending, and ongoing disruption and uncertainty within the capital markets are having an adverse effect on many
industries as a whole. While we are not immune to these factors, we attempt to organize our operations in a manner that provides
an important measure of stability, consistent with our long-term business strategy. In particular, we believe that our focus on
owning high quality assets, backing revenue streams with long-term contractual arrangements, match funding long life assets with
long-term financings and maintaining a high level of liquidity will benefit us during these difficult times.
Accordingly, while these events may constrain our ability to increase operating cash flows in the near term, we remain confident
in our ability to achieve our long-term objectives in that regard. Furthermore, we believe we will have the opportunity to make
investments during this period at very favourable values that will create attractive shareholder value in the future.
Our renewable power operations experienced higher water levels during 2008 which resulted in generation levels that were 8%
above long-term averages. We believe we are well positioned to achieve our targets of long-term average generation in 2009 based
on current storage levels if normal hydrology conditions prevail. The forecast for natural gas and electricity prices during 2009 is
lower than the spot prices realized by us in 2008, however, we have contracted pricing for approximately 75% of our generation
over the next two years at favourable prices, which significantly mitigates the impact of lower spot electricity prices.
In our office property sector, leasing demand in most of our markets has tempered and we are beginning to see increasing direct and
sublease availabilities and associated downward pressure on rents and economic fundamentals. Our occupancy levels, however,
are at 97% across our portfolio and only 3% of the space within our managed portfolio is scheduled to come off lease in 2009
of which a large portion is customarily renewed in the normal course. The high quality of our properties relative to others in our
markets should enable us to attract new tenants if we are unsuccessful in extending leases with the existing tenants. Furthermore,
we believe our in-place rents continue to be below market. In North America, the average expiring rates in 2009 are $19 per
square foot compared with an estimated average market rate of $32 per square foot, representing a substantial discount. A general
lack of development, especially in central business districts, has also created stability from a supply perspective. Nevertheless, a
prolonged economic downturn could lead to tenant bankruptcies and lower market rents which could reduce our cash flows. Our
strong tenant lease profile, low vacancies and rental rates that in most properties are substantially below current market rates give
us a high level of confidence that we can achieve our operating targets in 2009.
Within our infrastructure operations, we expect our transmission businesses to provide operating returns consistent with those
recorded in 2008. We expect our timber operations to continue to experience reduced demand and pricing due to weakness in the
U.S. homebuilding sector, which has caused us to reduce harvest levels in order to preserve value and increase exports to Asia.
Brookfield Asset Management | 2008 Annual Report
41
Residential markets remain difficult in our core markets. The current supply/demand imbalance in North American markets has
reduced operating margins and must be worked through before we experience margin improvements and volume growth. Most
of the land holdings within our Canadian land operations were purchased in the mid-1990s or earlier and as a result have an
embedded cost advantage today. This has led to favourable margins in this region. We expanded our Brazilian operations during
2008 which we expect will lead to an increased contribution from these markets during 2009.
We continue to expand our specialty funds operations by committing additional resources and launching new funds. We will focus
on maintaining a high level of invested capital by deploying the capital from new funds, which should lead to continued growth. We
expect that the current difficulties in credit markets will lead to a greater number of opportunities for our restructuring operations,
and more attractive pricing for our real estate finance group, although the same conditions will likely reduce opportunities to
monetize investments and the opportunity to recognize disposition gains.
Within our asset management activities, our goal is to expand our distribution capabilities, our client base and the amount of
capital committed to us, which should, over time, increase the capital available to invest and lead to growth in asset management
income. The current environment has made it more challenging to raise additional capital commitments and earn performance
income, however we expect to record a stable contribution from base management fees.
The increase in the value of the U.S. dollar against various currencies is likely to reduce the contribution from our operations that
are denominated in these other currencies, notably the Canadian dollar, the Brazilian real and the Australian dollar. The recent
reductions in interest rates in most economies has a beneficial impact on our results, although this is limited because most of our
financings are fixed rate in nature. Similarly, the long-term nature of our borrowing base and the relatively low proportion of annual
debt maturities lessens the impact of higher credit spreads on new financings.
The investment market has become less competitive and acquisition prices have declined due in large part to reduced availability
of capital for many owners and investors. The access to liquidity from our own balance sheet as well as from our clients, financial
partners and the capital markets has provided us with available funds to invest in our own operations and in new opportunities. We
believe the breadth of our operating platform and our disciplined approach should enable us to invest this capital on a favourable
basis.
We have endeavoured to extend debt maturities on a proactive basis and reduce near-term financing requirements. Although we
expect to renew or replace most of our existing financings at equivalent levels, we may reduce leverage in certain areas of our
business. While we expect that any deleveraging will likely have a limited impact on our short term operating results it would reduce
the capital available for investment. We maintain a high level of liquidity as further discussed in Part 3 of this MD&A, and regularly
replenish our liquidity through operating cash flow and asset monetizations.
There are many factors that could impact our performance in 2009, both positively and negatively. We describe the material aspects
of our business environment and risks in Part 5 of this MD&A.
Summary
In the short term, we recognize that the current economic environment will likely result in continued downward pressure on
operating margins and provide fewer opportunities to increase operating returns. We believe, however, that our approach to business,
which includes backing revenue streams with contractual obligations and the use of long-term fixed rate financings, among other
strategies, is an important mitigating factor and should provide considerable stability in our cash flows from year to year.
We also believe that there will be a number of opportunities over the next two years to invest capital in our existing operations as
well as in new assets and businesses on values that will generate increased cash flow per share and shareholder values over the
longer term.
As a result, we believe that our businesses are well positioned to not only withstand the difficult short term environment but to
invest and build for the future. This provides us with confidence that we will meet our long-term performance objectives with
respect to cash flow growth and value creation, and continue to build Brookfield as a world-class asset manager.
42
Brookfield Asset Management | 2008 Annual Report
Part 3 – CaPitaLization and Liquidity
The strength of our capital structure and the liquidity that we maintain enable us to achieve a low cost of capital for our shareholders
and at the same time provide us with the flexibility to react quickly to potential investment opportunities and adverse changes in
economic circumstances, such as we have witnessed over the past 18 months.
The following are the key elements of our capital strategy:
• Match fund our long-life assets with long-duration mortgage financings with a diversified maturity schedule;
• Provide recourse only to the specific assets being financed, with limited cross collateralization or parental guarantees;
• Limit borrowings to investment grade levels based on anticipated performance throughout a business cycle;
• Structure our affairs to facilitate access to capital and liquidity at multiple levels of the organization; and
• Maintain access to a broad range of financing markets.
As a result of the foregoing, most of our borrowings are in the form of long-term property-specific financings such as mortgages or
project financings secured only by the specific assets. The diversification of our maturity schedule means that financing requirements
in any given year are manageable. Limiting recourse to specific assets or business units ensures that weak performance by one
asset or business unit does not compromise our ability to finance the balance of the operations.
Our focus on structuring financings with investment grade characteristics ensures that debt levels on any particular asset or
business can typically be maintained throughout a business cycle, and also enables us to limit covenants and other performance
requirements, thereby reducing the risk of early payment requirements or restrictions on the distribution of cash from the assets
being financed. Furthermore, our ability to finance at the parent, operating unit, and asset level on a private or public basis means
that we are not overly dependent on any particular segment of the capital markets or the performance of any particular unit.
The sustainability of our capital strategy has been demonstrated by the $8 billion in debt financings raised during 2008 and
$10 billion since August 2007, with proceeds used largely to extend the term of existing obligations and renew financings in the
normal course.
To enable us to react to attractive investment opportunities and deal with contingencies when they arise, we typically maintain
a high level of liquidity at the corporate level and within our key operating platforms. Our primary sources of liquidity, which we
refer to as “core liquidity”, consist of our cash and financial assets, net of deposits and other associated liabilities, and undrawn
committed credit facilities.
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.
liquiDity
Core Liquidity
Our core liquidity was $2.8 billion as at December 31, 2008, supplemented by a further $0.7 billion of transactions that have closed
or are pending in early 2009. These transactions include the sale of an insurance subsidiary and Brazil transmission lines and
recently completed equity and debt financings.
Corporate level liquidity consists of $1.1 billion of cash and financial assets and $0.7 billion of undrawn capacity on committed
credit facilities as at December 31, 2008. We maintain $1.4 billion of committed four-year term credit facilities with a group
of major financial institutions. These facilities are typically renewed annually for the following four years. Facilities aggregating
$1.2 billion mature in 2012 and $0.2 billion mature in 2011.
Brookfield Asset Management | 2008 Annual Report
43
Core liquidity in our main operating units is approximately $1.0 billion, represented primarily by undrawn credit facilities, with the
balance being cash and financial assets. Our North American office property operations maintain $500 million of committed bank
facilities, of which $234 million was undrawn at year end. Similarly, our renewable power operations hold $357 million of cash
and financial assets and maintain $375 million of facilities to support forward power sales arrangements and general corporate
purposes of which $129 million was undrawn at year end. We also maintain $450 million of committed bank facilities within our
infrastructure operations, of which $311 million was undrawn at year end.
Corporate and Subsidiary debt maturities
This section summarizes our corporate and subsidiary debt maturities. Corporate maturities and our proportionate share of
subsidiary maturities prior to 2012 totalled $2.3 billion. We expect to refinance or roll over most, if not all, of this debt in the normal
course, and that we can fund reductions with our current liquidity.
As shown in the table below, we have no corporate maturities in 2009, a $200 million bond maturity in 2010 and borrowings under
a small number of bank facilities in 2011 that expire if not renewed earlier.
AS At DeCeMBer 31, 2008 (MILLIONS)
Term debt
Commercial paper and bank borrowings
Corporate maturities
2009
—
—
—
$
$
2010
200
—
200
$
$
2011
—
84
84
$
$
2012
and After
$ 1,435
565
$ 2,000
The following table presents our proportionate share of subsidiary borrowings, based on our ownership interest in the borrowing
entity, adjusted to reflect amortizations and repayments to the date of this report:
AS At DeCeMBer 31, 2008 (MILLIONS)
Brookfield Renewable Power term debt
Brookfield Australia/term bank facility
Brookfield Properties corporate bank facilities
Retractable preferred shares
Other subsidiary borrowings
2009
2010
2011
$
$
282
231
51
57
261
882
$
$
—
529
—
—
131
660
$
$
—
—
108
—
358
466
2012
and After
$
370
—
—
—
1,277
$ 1,647
Brookfield Renewable Power has $282 million of public term notes that mature in December 2009 which we expect to refinance
prior to maturity. The substantial cash flow generated within this business and the high quality of its asset base facilitates access
to capital markets notwithstanding current volatility and in that regard, we completed a public offering of C$300 million of 3-year
notes in February 2009. The remaining borrowings consist of public notes that mature in 2018 and 2036.
The Brookfield Australia bank facility represents a loan-to-value ratio of less than 50% and the portfolio is well leased with 99%
occupancy and an average lease term of seven years. We intend to permanently finance the business with asset-specific mortgages
on the properties and corporate facilities prior to 2010.
Brookfield Properties maintains term credit facilities of $500 million with a group of major financial institutions. The company
recently extended $388 million of the facilities until 2011 and is in discussions to extend the balance. The retractable preferred
shares have no mandatory redemption date, although holders have the right to have them redeemed at any time.
Property-specific debt maturities
Our debt capitalization is largely in the form of long-term property specific financings that represent low loan-to-value, have few
restrictive covenants, are secured by our high quality assets and have no recourse to either the Corporation or our subsidiaries.
The following table presents our proportionate share of maturities that occur prior to 2012. We believe these maturities should be
refinanceable at the current levels on an overall basis.
44
Brookfield Asset Management | 2008 Annual Report
AS At DeCeMBer 31, 2008 (MILLIONS)
Commercial properties
Office – North America
Office – Australia
Office – Europe
Retail – Brazil
Power generation
North America
Brazil
Infrastructure
Development and other properties
North American opportunity funds
Residential investing and working capital – Canada
Residential investing and working capital – United States
Property development – Australia
Specialty funds
2009
2010
2011
$
277
190
142
30
63
211
—
8
186
139
328
10
$
29
972
56
—
143
23
16
77
24
112
631
178
$ 1,028
4
7
—
58
23
14
126
3
17
—
—
2012
and After
$ 2,698
—
520
123
2,400
122
551
224
—
—
50
163
$ 1,584
$ 2,261
$ 1,280
$ 6,851
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. The average term of financings was seven years as at December 31, 2008. Financings in our North American, European and
Brazilian operations, exceeded the average. 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.
Within our power generating operations, our proportionate share of maturities for the following three years is modest in the context
of our overall portfolio and the facilities are expected to be refinanced at the same or at higher levels given the strong operating
margins and cash flows of these properties. The 2009 maturities include $120 million of acquisition financing put in place to fund
the recent purchase of a Brazilian power generating facility at a 42% loan-to-value ratio, which we expect to refinance at similar
levels during the second quarter of 2009.
Development and other properties include property-specific borrowings within our opportunity funds, of which only $211 million
are scheduled for repayment before 2012. Our share of residential property borrowings is $213 million within our Canadian-based
residential operations and $268 million within our U.S. residential business. These borrowings have been reduced substantially
over the past 18 months. The residential and property development borrowings are largely of a working capital nature, financing
the ongoing development and construction activities, and are typically repaid as the projects, lots or homes being financed are
completed and sold, and then re-drawn against any new projects that we elect to pursue.
caPitalizatiOn
The following table presents the components of our capitalization on a deconsolidated, proportionately consolidated and fully
consolidated basis. Our consolidated capitalization includes 100% of the debt of consolidated entities, even though in most cases
we only own a portion of the entity and therefore our pro rata exposure to this debt is much lower. Furthermore, with very few
exceptions, our subsidiary and property-specific borrowings have no recourse to the Corporation.
Accordingly, we believe that the two most meaningful bases of presentation are proportionate consolidation and deconsolidated set
out in the following table. In our opinion, the consolidated capitalization is less meaningful and can only be assessed in the context
of the overall asset base of the company and taking into consideration the full ownership base, including minority shareholders and
institutional fund investors, which can be difficult to assess in the context of historical cost consolidated financial statements.
Brookfield Asset Management | 2008 Annual Report
45
AS At DeCeMBer 31, 2008 (MILLIONS)
Corporate borrowings
Non-recourse borrowings
Property-specific mortgages
Subsidiary borrowings 1
Accounts payable and other
Capital securities
Non-controlling interests
Shareholders’ equity
Debt to capitalization
Deconsolidated
Proportionate
Consolidated
underlying
Value
Book
Value
underlying
Value
Book
Value
Book
Value
$
2,284
$
2,284
$
2,284
$
2,284
$
2,284
—
733
1,276
543
1
15,021 2
—
733
1,276
543
1
5,788
11,976
3,655
7,061
984
14
15,021 2
11,976
3,655
7,061
984
14
5,788
22,889
5,102
9,794
1,425
6,329
5,788
$ 19,858
$ 10,625
$ 40,995
$ 31,762
$ 53,611
15%
28%
44%
56%
56%
Includes $675 million of subsidiary obligations which are guaranteed by the Corporation
1
2 Based on fair values prepared for IFrS purposes
Our strategy of financing at the asset or operating unit level has resulted in us having a relatively low level of debt at the parent
company level, as shown in our deconsolidated capitalization. The debt to total capitalization at December 31, 2008 on a
deconsolidated basis was 15% based on pre-tax underlying values and 28% based on book values. On a proportionately consolidated
basis, the debt to pre-tax underlying value capitalization was 44%, which we believe is appropriate given the quality of our long-
term assets and the level of financing that assets of this nature typically support, as well as our liquidity profile. The higher ratio
on a book value basis reflects the impact of accounting depreciation on our long life assets as well as the relatively low acquisition
prices of assets purchased on an opportunistic basis over the years.
The strong level of cash flows generated within our operations provides favourable interest and fixed charge coverage ratios, as
shown in the following table:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Corporate borrowings
Subsidiary borrowings 1
Other liabilities
Capital securities
Non-controlling interests
Shareholders’ equity
Preferred equity
Common equity
Total cash flows
Interest coverage 2
Fixed charge coverage 3
Operating Cash Flow
underlying
remitted
$
2008
163
77
371
31
—
44
1,379
$
2007
146
66
329
32
2
44
1,863
$
2008
163
77
371
31
—
44
1,220
$
2007
146
66
329
32
2
44
1,661
$
2,065
$
2,482
$
1,906
$
2,280
9x
7x
12x
9x
8x
6x
11x
8x
1 Guaranteed by the Corporation or issued by corporate subsidiaries
2
3
total cash flows divided by interest on corporate and subsidiary borrowings
total cash flows divided by interest on corporate and subsidiary borrowings and distributions on capital securities and preferred equity
Corporate Borrowings
Our corporate borrowings have an average term of nine years (2007 – 11 years) and nearly 90% of the maturities extend into 2012
and beyond. The average interest rate on our corporate borrowings was 5% at year end, compared to 6% at the end of 2007.
AS At DeCeMBer 31 (MILLIONS)
Commercial paper and bank borrowings
Publicly traded term debt
Privately traded term debt
Total
Average term
3
12
4
9
Net Invested Capital
$
2008
649
1,485
150
$
2007
167
1,881
—
$ 2,284
$ 2,048
46
Brookfield Asset Management | 2008 Annual Report
Corporate debt levels increased by $236 million during the year to fund our investment activities. We increased our bank borrowings
by approximately $500 million as they represented an attractive and flexible source of capital. We redeemed $300 million of public
bonds upon maturity in December 2008 and replaced this financing with $150 million of private notes with a blended term and
coupon of 4.3 years and 6.5%, respectively, and C$150 million of 5% capital securities with an expected duration of 5 years.
The Corporation has $1,445 million of committed corporate three-year and four-year revolving term credit facilities which are utilized
principally as back-up credit lines to support commercial paper issuance. At December 31, 2008, $649 million of these facilities
were drawn or allocated as back-up to outstanding commercial paper, and approximately $104 million (2007 – $63 million) of the
facilities were utilized for letters of credit issued to support various business initiatives.
Subsidiary Borrowings
We capitalize our subsidiary entities to enable continuous access to the debt capital markets, usually on an investment grade basis,
thereby reducing the demand for capital from the Corporation and sharing the cost of financing equally among other equity holders
in partly owned subsidiaries.
Subsidiary borrowings have no recourse to the Corporation with only a limited number of exceptions. As at December 31, 2008,
subsidiary borrowings included $733 million (2007 – $711 million) of financial obligations that are either guaranteed by the
Corporation or are issued by direct corporate subsidiaries.
AS At DeCeMBer 31 (MILLIONS)
Subsidiary borrowings
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds
Investments and other
Corporate subsidiaries 1
Co-investor capital
Properties
Total
Deconsolidated
Proportionate
Interest
2008
$ —
—
—
—
—
—
733
—
Interest
2008
$
275
652
62
835
191
691
733
216
Consolidated
$
2008
441
652
146
1,097
386
936
733
711
2007
$ 1,058
797
8
2,337
640
763
711
762
$
733
$ 3,655
$ 5,102
$ 7,076
Average term
1
8
2
2
3
4
6
5
4
1
Includes $675 million of subsidiary obligations which are guaranteed by the Corporation
Property-specific Borrowings
As part of our financing strategy, we raise the majority of our debt capital in the form of property-specific mortgages that have
recourse only to the assets being financed and have no recourse to the Corporation.
AS At DeCeMBer 31 (MILLIONS)
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds
Total
Deconsolidated
Proportionate
Interest
2008
$ —
—
—
—
—
$ —
Interest
2008
$ 6,076
3,043
581
1,925
351
$ 11,976
Consolidated
2008
$ 13,870
3,588
1,642
2,677
1,112
$ 22,889
2007
$ 13,841
3,488
1,796
2,519
—
$ 21,644
Average term
7
12
9
2
4
7
We continue to be able to raise property-specific borrowing in the normal course of business notwithstanding the more challenging
credit environment, due to the quality of the assets and the sustainability of the cash flows being financed.
Capital Securities
Distributions paid on these securities, which are largely denominated in Canadian dollars, are recorded as interest expense, even
though the securities are preferred shares that are convertible into common equity at our option. The securities are classified as
liabilities for Canadian GAAP purposes because the holders of the preferred shares have the right, after a fixed date, to convert the
shares into common equity based on the market price of our common shares at that time unless previously redeemed by us.
Brookfield Asset Management | 2008 Annual Report
47
AS At DeCeMBer 31 (MILLIONS)
Issued by the Corporation
Issued by Brookfield Properties
$
2008
543
882
$
2007
517
1,053
$ 1,425
$ 1,570
During the year we issued C$150 million of 5% convertible preferred shares. The carrying values of existing capital securities
declined due to the lower Canadian dollar, in which most of these securities are denominated.
The average distribution yield on the capital securities at December 31, 2008 was 6% (2007 – 6%) and the average term to the
holders’ conversion date was six years (2007 – seven years).
interests of Co-investors
Interests of co-investors in net assets are comprised of two components: participating interests held by other holders in our funds
and subsidiary companies, and non-participating preferred equity issued by subsidiaries.
AS At DeCeMBer 31 (MILLIONS)
Participating interests
Commercial properties
Brookfield Properties Corporation
Property funds and other
Power generation
Infrastructure
Timberlands
Transmission
Development and other properties
Brookfield Homes Corporation
Other
Specialty funds
Investments
Non-participating interests
Brookfield Multiplex Group
Brookfield Properties Corporation
Number of Shares /
% Interest
Brookfield Invested Capital
total
Net
2008
2008
2007
2008
2007
196.6 / 49%
various
various
$ 1,768
437
192
$ 1,622
320
170
$ 1,768
—
—
$ 1,622
—
—
various
various
11.2 / 42%
various
various
995
246
176
573
1,186
310
5,883
324
122
446
314
—
245
650
565
346
—
—
—
—
—
—
—
—
—
—
—
—
4,232
1,768
1,622
387
151
538
324
122
446
387
151
538
$ 6,329
$ 4,770
$ 2,214
$ 2,160
We include Brookfield Properties on a fully consolidated basis in our segmented basis of presentation and accordingly the interests
of others in these operations are reflected in both the total and net results. The other entities shown above are presented on a
deconsolidated basis in our segmented analysis, and, as a result, the interests of other shareholders are presented in total invested
capital only.
Interests of others in our infrastructure operations increased with the distribution of a 60% interest in Brookfield Infrastructure
Partners to our shareholders as well as the transfer of our U.S. Pacific Northwest timber operations to a partially-owned timber fund.
Specialty fund interests increased as a result of us commencing reporting our first real estate finance fund on a consolidated basis
following a change in ownership during the year and raising additional third-party capital in our second such fund.
Shareholders’ equity
AS At DeCeMBer 31 (MILLIONS)
Preferred equity
Common equity
$
2008
870
4,918
$
2007
870
6,644
Preferred equity consists of perpetual preferred shares that represent an attractive form of leverage for common shareholders, and
was unchanged during the year. The average dividend rate at December 31, 2008 was 5%.
48
Brookfield Asset Management | 2008 Annual Report
We repurchased 14.2 million common shares during the year at prices ranging from $12.12 per share to $35.56 per share, with
an average price of $20.17 per share. Further details on the components of our equity and related distributions can be found on
page 54. Common equity also declined as a result of the distribution of a 60% interest in Brookfield Infrastructure by way of a
special dividend and the impact of lower foreign currency exchange rates on non-U.S. operations.
AS At DeCeMBer 31, 2008 (MILLIONS, exCePt Per ShAre AMOuNtS)
Shareholders’ equity
Underlying value – pre tax
Underlying value – after tax
Book value
total
Per Share
$ 15,021
12,801
5,788
$ 24.32
20.62
8.93
The underlying value of our equity is $15.0 billion ($24.32 per share) on a pre-tax basis and $12.8 billion ($20.62 per share) after
deducting an accounting provision in respect of the taxes we might theoretically pay if we liquidated the company on the balance
sheet date. The market capitalization of our equity, reflecting our share price at year end, was $10.5 billion. 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.
nOn-c ash w Orking c aPital
other assets
The following is a summary of other assets:
AS At DeCeMBer 31 (MILLIONS)
Accounts receivable
Restricted cash
Intangible assets
Prepaid and other assets
Deferred tax asset
Net Invested Capital
$
2008
678
294
83
1,105
408
$
2007
795
317
111
1,441
349
$ 2,568
$ 3,013
Other assets include working capital balances employed in our business that are not directly attributable to specific operating
units. The magnitude of these balances varies somewhat based on seasonal variances. The net balances include $1,161 million
(2007 – $985 million) associated with Brookfield Properties and $1,407 million (2007 – $2,028 million) associated with the
Corporation.
other Liabilities
AS At DeCeMBer 31 (MILLIONS)
Accounts payable
Insurance liabilities
Deferred tax liability
Other liabilities
Invested Capital
total
Net
2008
$ 3,487
1,132
1,461
3,714
$ 9,794
2007
$ 3,636
1,655
1,925
3,759
$ 10,975
2008
$ 1,101
—
365
1,188
$ 2,654
2007
$ 1,083
—
1,091
1,308
$ 3,482
Accounts payable and other liabilities include $1,073 million associated with Brookfield Properties (2007 – $1,398 million).
Deferred taxes represent future tax obligations that arise largely due to holding assets whose book value exceeds their value for
tax purposes.
Brookfield Asset Management | 2008 Annual Report
49
Part 4 – anaLySiS oF ConSoLidated FinanCiaL StatementS
The information in this section enables the reader to reconcile the basis of presentation in our consolidated financial statements
to that employed in the MD&A. We also provide additional information for certain items not covered within this section. The tables
presented on pages 54 and 55 provide a detailed reconciliation between our consolidated financial statements and the basis of
presentation throughout the balance of this MD&A.
cOnsOliDateD s tatements Of i ncOme
The following table summarizes our consolidated statements of net income:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Revenues
Net operating income
Expenses
Interest
Current income taxes
Asset management and other operating costs
Non-controlling interests in the foregoing
Other items, net of non-controlling interests
Net income
revenues
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds
Investment income and other
2008
$ 12,868
4,809
2007
$ 9,343
4,509
2006
$ 6,897
3,776
(1,984)
7
(640)
(791)
1,401
(752)
(1,786)
(68)
(464)
(636)
1,555
(768)
(1,185)
(142)
(333)
(468)
1,648
(478)
$
649
$
787
$ 1,170
$
2008
2,761
1,286
455
3,689
2,090
2,587
$
2007
2,331
960
599
2,169
1,246
2,038
$
2006
1,500
894
428
1,788
908
1,379
$ 12,868
$
9,343
$
6,897
Revenues from commercial properties increased due to the expansion of our operations including acquisitions. The increase in
power generation revenues reflects higher pricing, higher water flows and increased generating capacity offset by lower currency
exchange rates. Infrastructure revenues were higher in 2007 because we consolidated the results of the electricity transmission
system in Chile for the first six months of that year and on an equity accounted basis thereafter. Our specialty funds’ revenues
increased due to the consolidation of revenues from our real estate finance fund during the year.
net operating income
Net operating income includes the following items from our consolidated statements of income: fees earned; operating
revenues less direct operating expenses; and investment and other income. These items are described for each business unit in
Part 2 – Performance Review beginning on page 12 of this MD&A.
The following table reconciles net operating income to the total operating cash flow in the segmented basis of presentation and
net operating income:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Operating Platform
Net operating income
Add: dividends from equity accounted investments
exchangeable debenture gains
dividends from Canary Wharf
Total operating cash flow
Investments
Cash and Financial Assets
Commercial Properties
2008
$ 4,809
22
—
—
2007
$ 4,509
21
331
—
2006
$ 3,776
66
—
87
$ 4,831
$ 4,861
$ 3,929
50
Brookfield Asset Management | 2008 Annual Report
expenses and other items
Expenses and Other Items are discussed under Performance Review beginning on page 37 of this MD&A.
cOnsOliDateD Balance s heets
Total assets at book value decreased to $53.6 billion as at December 31, 2008 from $55.6 billion at the end of 2007 as shown in
the following table:
AS At DeCeMBer 31 (MILLIONS)
assets
Cash and cash equivalents and financial assets
Investments
Accounts receivable and other
Intangible assets
Goodwill
Operating assets
Property, plant and equipment
Securities
Loans and notes receivable
Book Value
2008
2007
2006
$
2,029
890
7,310
1,632
2,011
36,375
1,303
2,061
$
3,090
1,352
7,139
2,026
1,528
37,725
1,828
909
$
2,869
775
4,805
1,146
669
28,082
1,711
651
$ 53,611
$ 55,597
$ 40,708
The impact of lower currency exchange rates on the carrying values of assets located outside of the United States was a major
contributor to the decline in total assets. Carrying values of the associated liabilities also declined, mitigating the impact on our
equity.
We commenced accounting for our interests in one of our real estate finance funds and our investment in Norbord on a consolidated
basis, which reduced Investments and increased Property, Plant and Equipment as well as Loans and Notes Receivable.
investments
Investments represent equity accounted interests in partially owned companies as set forth in the following table, which are
discussed further within the relevant business segments in the Description of Operating Platforms.
AS At DeCeMBer 31 (MILLIONS)
Chile transmission
Property funds
Brazil transmission
Other
Norbord Inc.
Real Estate Finance Fund
Total
Business Segment
Transmission
Commercial Office
Transmission
Various
Investments
Specialty Funds
% of Investment
2008
17%
20-25%
3-10%
—
—
2007
28%
20-25%
7.5-25%
41%
27%
Book Value
2008
2007
$
324
233
207
126
—
—
$
330
382
205
107
180
148
$
890
$ 1,352
The carrying value of our property fund investments declined due to changes in carrying values and asset valuations. We began
accounting for our investments in Norbord and the Real Estate Finance Fund on a consolidated basis following an increase in our
ownership in each entity.
accounts receivable and other
AS At DeCeMBer 31 (MILLIONS)
Accounts receivable
Prepaid expenses and other assets
Restricted cash
Inventory
Book Value
$
2008
3,056
2,651
610
993
$
2007
2,892
2,813
627
807
$
7,310
$
7,139
Brookfield Asset Management | 2008 Annual Report
51
These balances include amounts receivable by the company in respect of contracted revenues owing but not yet collected, and
dividends, interest and fees owing to the company. Prepaid expenses and other assets include amounts accrued to reflect the
straight-lining of long-term contracted revenues and capitalized lease values in accordance with accounting guidelines. Restricted
cash represents cash balances placed on deposit in connection with financing arrangements and insurance contracts, including
the defeasement of long-term property-specific mortgages. The distribution of these assets among our business units is presented
in the tables on page 54.
goodwill
Goodwill represents purchase consideration that is not specifically allocated to the tangible and intangible assets being acquired.
The balance as at December 31, 2008 includes $799 million of goodwill allocated to our Australian, European and Middle East
operations and $591 million of goodwill incurred on the acquisition of U.S. Pacific Northwest timberlands.
Property, Plant and equipment
AS At DeCeMBer 31 (MILLIONS)
Commercial properties
Power generation
Infrastructure
Development and other properties
Other plant and equipment
Book Value
2008
$ 19,274
4,954
2,879
7,282
1,986
2007
$ 20,796
5,137
3,046
7,696
1,050
$ 36,375
$ 37,725
The changes in these balances are discussed within each of the relevant business units within the Operating Platforms section.
Commercial properties includes office and retail property assets. Development and other properties include opportunity investments,
residential properties, properties under development and properties held for development. The increase in other plant and equipment
is largely due to the consolidation of Norbord during 2008.
Securities
Securities include $1.0 billion (2007 – $1.6 billion) of largely fixed income securities held through our insurance operations, as well
as our $143 million (2007 – $182 million) common share investment in Canary Wharf Group, which is included in our commercial
office property operations in our segmented analysis, and is carried at historic cost, adjusted to reflect current exchange rates.
Loans and notes receivable
Loans and notes receivable consist largely of loans advanced by our bridge lending operations and real estate securities. The
balances increased during the year following the consolidation of our first real estate finance fund.
52
Brookfield Asset Management | 2008 Annual Report
cOnsOliDateD s tatements Of c ash f lOws
The following table summarizes the company’s cash flows on a consolidated basis:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Operating activities
Financing activities
Investing activities
(Decrease) Increase in cash and cash equivalents
$
2008
1,567
(1,121)
(765)
$
2007
3,284
4,471
(7,398)
$
(319)
$
357
We completed two major acquisitions in 2007, which resulted in a significantly higher level of aggregate financing and investment
activities in that year compared to 2008. The decline in cash flow from operations is due to a smaller change in working capital
balances.
operating activities
Cash flow from operating activities is reconciled to the operating cash flow measure utilized elsewhere in this report as follows:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Operating cash flow
Adjust for:
Net change in working capital balances and other
Realization gains
Undistributed non-controlling interests in cash flow
Cash flow from operating activities
2008
2007
$ 1,423
$ 1,907
(279)
(164)
587
1,141
(231)
467
$ 1,567
$ 3,284
Operating cash flow is discussed in detail elsewhere in this MD&A.
We retained $587 million (2007 – $467 million) of operating cash flow within our consolidated subsidiaries attributable to minority
interests in excess of that distributed by way of dividends.
Financing activities
We utilized $1.1 billion of cash within our financing activities during 2008, compared to the generation of $4.5 billion in 2007. The
2007 results reflected proceeds from financings completed in respect of acquisitions during that year, including a major property
business in Australia, retail properties in Brazil and timberlands in the US Pacific Northwest.
During 2008 we reduced the leverage in several of our operations in response to the deteriorating economic climate and through
the retirement of debt associated with assets sold during the year. We also purchased a larger amount of common shares of the
Corporation and our subsidiaries.
investing activities
We invested net capital of $0.8 billion on a consolidated basis during 2008, compared with a net investment of $7.4 billion
during 2007. We increased our investment in power generating facilities through the acquisition of a 156 megawatt facility in
Brazil, resulting in cash outflow of $0.5 billion and invested additional capital through the development of our commercial office
portfolio. In addition, we sold a partial interest in our U.S. Pacific Northwest timberlands for gross proceeds of $0.6 billion. The most
significant acquisitions in 2007 included that of Multiplex, a major retail property portfolio in Brazil and U.S. timberlands.
Brookfield Asset Management | 2008 Annual Report
53
recOnciliatiOn Of s egmenteD DisclOsure tO c OnsOliDateD f inancial s tatements
Balance Sheet
AS At DeCeMBer 31, 2008
Commercial
Properties
Power
Infrastructure
and Other
Funds
Investments
Development
Specialty
Cash and
Financial
Assets
Other
Assets
Corporate
Consolidated
(M IL LIONS)
assets
Operating assets
Property, plant and equipment
Commercial properties
$ 19,274
$ — $
— $
— $
— $ — $ — $ — $ — $ 19,274
Power generation
Infrastructure
Development and other properties
Other plant and equipment
Securities
Loans and notes receivable
Cash and cash equivalents
Financial assets
Investments
Accounts receivable and other
Goodwill
Intangible assets
total assets
Liabilities and shareholders’ equity
Corporate borrowings
Property-specific financing
Other debt of subsidiaries
Accounts payable and other liabilities
Capital securities
Non-controlling interests in net assets
Preferred equity
—
—
38
10
143
—
166
24
252
96
121
859
4,954
—
—
—
—
—
138
219
—
1,135
27
—
—
2,879
105
—
—
—
61
—
544
228
591
5
—
—
7,092
49
—
—
160
(305)
37
2,217
834
560
—
—
—
709
206
1,921
124
91
27
726
23
112
—
—
47
1,218
954
24
270
(35)
2
808
30
13
—
—
—
—
—
116
323
793
28
—
—
—
—
—
—
—
—
—
—
—
—
2,100
385
83
—
—
—
—
—
—
—
—
—
—
—
—
4,954
2,879
7,282
1,986
1,303
2,061
1,242
787
890
7,310
2,011
1,632
$ 20,983
$ 6,473
$
4,413
$ 10,644
$
3,939
$ 3,331
$ 1,260
$ 2,568
$ — $ 53,611
$ — $ — $
— $
— $
— $ — $ — $ — $ 2,284
$ 2,284
13,536
3,587
1,642
1,118
1,318
—
436
—
653
826
—
192
—
145
624
—
1,241
—
761
3,011
1,131
2,419
—
749
—
3,334
1,113
387
380
—
1,189
—
870
—
746
1,573
—
310
—
702
—
189
—
—
(2)
—
—
—
—
—
—
—
—
733
2,654
1,425
2,214
870
1,073
2,568
(10,180)
22,889
5,102
9,794
1,425
6,329
870
4,918
Common equity / net invested capital
4,575
1,215
total liabilities and shareholders’ equity
$ 20,983
$ 6,473
$
4,413
$ 10,644
$
3,939
$ 3,331
$ 1,260
$ 2,568
$ — $ 53,611
(M IL LIONS)
assets
Operating assets
Property, plant and equipment
Commercial properties
Power generation
Infrastructure
Development and other properties
Other plant and equipment
Securities
Loans and notes receivable
Cash and cash equivalents
Financial assets
Investments
Accounts receivable and other
Goodwill
Intangible assets
total assets
Liabilities and shareholders’ equity
Corporate borrowings
Property-specific financing
Other debt of subsidiaries
Accounts payable and other liabilities
Capital securities
Non-controlling interests in net assets
Preferred equity
Common equity / net invested capital
AS At DeCeMBer 31, 2007
Power
Infrastructure
and Other
Funds
Investments
Development
Specialty
Cash and
Financial
Assets
Other
Assets
Corporate
Consolidated
$ — $
5,137
—
—
—
—
—
77
707
—
848
33
—
— $
—
3,046
106
—
—
—
38
—
535
113
591
6
— $
—
—
7,512
10
—
—
447
(41)
30
1,426
521
868
— $ — $ — $ — $ — $ 20,796
5,137
—
3,046
—
7,696
—
1,050
632
1,828
—
909
856
1,561
74
1,529
180
1,352
169
7,139
794
—
—
78
398
1,646
53
237
—
194
1,186
—
—
—
—
—
—
182
—
—
2,373
—
—
—
2
—
—
360
683
42
305
—
—
—
—
—
—
—
—
—
—
—
6
36
23
—
—
347
111
—
—
1,528
2,026
Commercial
Properties
$ 20,796
—
—
—
8
182
—
146
—
382
94
—
1,012
$ 22,620
$ 6,802
$
4,435
$ 10,773
$
2,711
$ 3,851
$ 1,392
$ 3,013
$ — $ 55,597
$ — $ — $
— $
— $
13,841
1,820
1,779
—
582
—
4,598
3,488
797
879
—
213
—
1,425
1,796
9
668
—
317
—
1,645
2,519
2,337
1,791
—
662
—
3,464
— $ — $ — $ — $ 2,048
—
—
—
711
394
637
3,482
65
434
1,570
—
—
2,160
41
528
870
—
—
(10,841)
892
1,112
—
371
1,877
—
267
—
1,336
—
—
—
—
—
—
3,013
$ 2,048
21,644
7,076
10,975
1,570
4,770
870
6,644
total liabilities and shareholders’ equity
$ 22,620
$ 6,802
$
4,435
$ 10,773
$
2,711
$ 3,851
$ 1,392
$ 3,013
$ — $ 55,597
54
Brookfield Asset Management | 2008 Annual Report
results from operations
FOr the YeAr eNDeD DeCeMBer 31, 2008
Asset
Commercial
Development
Specialty
Investment
Income /
(MI LLIONS)
Management
Properties
Power
Infrastructure
and Other
Funds
Investments
Gains
Corporate
Consolidated
Fees earned
Revenues less direct operating costs
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds
Investment and other income
Expenses
Interest
Asset management and other operating costs
Current income taxes
Non-controlling interests
Dividends
$ 449
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 449
—
—
—
—
—
—
449
—
—
—
—
449
—
1,831
—
—
(1)
—
53
1,883
1,033
—
15
72
763
—
—
886
—
—
—
—
886
313
—
21
86
466
—
—
—
196
5
—
134
335
102
15
13
64
141
—
—
—
—
234
—
(25)
209
50
—
(73)
27
205
—
—
—
—
—
304
3
307
88
—
4
89
126
—
—
—
—
2
—
219
221
22
19
3
19
158
22
—
—
—
—
—
519
519
48
—
—
(16)
487
—
—
—
—
—
—
—
—
328
606
10
450
(1,394)
—
1,831
886
196
240
304
903
4,809
1,984
640
(7)
791
1,401
22
Cash flow from operations
$ 449
$ 763
$ 466
$ 141
$ 205
$ 126
$ 180
$ 487
$ (1,394)
$ 1,423
results from operations
FOr the YeAr eNDeD DeCeMBer 31, 2007
Asset
Commercial
Development
Specialty
Investment
Income /
(MI LLIONS)
Management
Properties
Power
Infrastructure
and Other
Funds
Investments
Gains
Corporate
Consolidated
Fees earned
Revenues less direct operating costs
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds
Investment and other income
Expenses
Interest
Asset management and other operating costs
Current income taxes
Non-controlling interests
Dividends
Xstrata debenture gain
$ 415
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ 415
—
—
—
—
—
—
415
—
—
—
—
415
—
—
1,548
—
—
—
—
18
1,566
870
—
10
84
602
—
—
—
611
—
—
—
—
611
289
—
7
54
261
—
—
—
—
290
7
—
21
318
174
—
4
38
102
—
—
—
—
—
419
—
(7)
412
72
—
(18)
57
301
—
—
—
—
—
—
370
11
381
22
—
4
14
341
—
—
—
—
—
(9)
—
437
428
44
23
49
21
291
21
—
—
—
—
1
—
377
378
13
—
3
—
362
—
331
—
—
—
—
—
—
—
302
441
9
368
(1,120)
—
—
1,548
611
290
418
370
857
4,509
1,786
464
68
636
1,555
21
331
Cash flow from operations
$ 415
$ 602
$ 261
$ 102
$ 301
$ 341
$ 312
$ 693
$ (1,120)
$ 1,907
Brookfield Asset Management | 2008 Annual Report
55
Part 5 – BuSineSS Strategy, enVironment and riSkS
In this section we discuss our business strategy, our capabilities as they relate to our ability to execute our strategy, the key
performance factors that form an integral part of this strategy and key financial measures that are indicative of our progress. This
section also contains a review of certain aspects of the business environment and risks that could affect our performance.
Business s trategy
We are a global asset management company focused on property, renewable power and infrastructure assets. Our goal is to
establish Brookfield as a global asset manager of choice for investment clients who wish to benefit from the ownership of these
types of assets. We have spent many years building high quality operating platforms that enable us to acquire, finance and optimize
the value of assets for our own benefit, and for our clients whose capital we manage.
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. Accordingly, we concentrate on high quality long-life assets that generate
sustainable cash flows, require minimal sustaining capital expenditures and tend to appreciate in value over time. Often these
assets will benefit from some form of barrier to entry due to regulatory, physical or cost structure factors. While high quality assets
may initially generate lower returns on capital, we believe that the sustainability and future growth of their cash flows are more
assured over the long term, and as a result, warrant higher valuation levels. We also believe that the high quality of our asset base
protects the company against future uncertainty and enables us to invest with confidence when opportunities arise.
Consistent with this focus, we own and operate large portfolios of core office properties, hydroelectric power generating stations,
private timberlands and regulated transmission systems that, in our opinion, share these common characteristics. These assets
represent important components of the infrastructure that supports the global economy.
We believe the demand from institutional investors to own assets of this nature is increasing as they seek to earn increasing
yields to meet their investment objectives. These assets, in our view, represent attractive alternatives to traditional fixed
income investments, providing in many cases a “real return” that increases over time, relatively low volatility and strong capital
protection. There is a substantial supply of investment opportunities in the form of existing assets as well as the need for
continued development in an ever expanding global economy. At the same time there are relatively few global organizations
focused on managing assets of this nature as a primary component of their strategy.
Accordingly, an important component of our long-term strategy for growth is centred around expanding our assets under
management, which should lead to increased fee revenues and long-term opportunities to earn performance returns. We plan to
achieve this within our existing operating platforms, through geographic expansion beyond our current focus in North America,
South America, Europe and Australia, and by developing and acquiring platforms to operate new asset classes that demonstrate
characteristics that are similar to our existing assets. We also plan to achieve growth by expanding our distribution capabilities
to access a broader range of investment partners, thereby increasing our access to capital. This increased capital, when coupled
with new investment opportunities, should increase our assets under management and the associated income as well as direct
investment returns, thereby increasing shareholder value.
Capabilities
We believe that we have the necessary capabilities to execute our business strategy and achieve our performance targets. We
focus on disciplined and active hands-on management of assets and capital. We strive for excellence and quality in each of our core
operating platforms in the belief that this approach will produce superior returns over the long term.
We endeavour to operate as a value investor and follow a disciplined investment approach. Our management team has considerable
capabilities in investment analysis, mergers and acquisitions, divestitures and corporate finance that enable us to acquire assets
for value, finance them effectively, and to ultimately realize value created during our ownership.
Our operating platforms and depth of experience in managing these assets differentiate us from some competitors that have
shorter investment horizons and more of a financial focus. Over time we have established a number of high quality operating
platforms that are fully integrated into our organization. This has required considerable investment in building the management
teams and the necessary resources; however, we believe these platforms enable us to optimize the cash returns and values of the
assets that we manage.
56
Brookfield Asset Management | 2008 Annual Report
We have established strong relationships with a number of leading institutions and believe we are well positioned to expand our
sources of co-investment capital and clients. In order to expand our assets under management, we are investing in our distribution
capabilities to encourage existing and potential clients to commit capital to our investment strategies. We are devoting expanded
resources to these activities, and our efforts continue to be assisted by strong investment performance.
The diversification within our operations allows us to offer a broad range of products and investment strategies to our clients.
We believe this is of considerable value to investors with large amounts of capital to deploy. In addition, our commitment to
transparency and governance as a well-capitalized public company listed on major North American and European stock exchanges
positions us as a desirable long-term partner for our clients.
Finally, our commitment to invest a meaningful amount of capital alongside our investors creates a strong alignment of interest
between us and our investment partners and also differentiates us from many of our competitors. Accordingly, our strategy calls for
us to maintain considerable surplus financial resources relative to other managers. This capital also supports our ability to commit
to investment opportunities on our own account when appropriate or in anticipation of future syndications.
key Performance Factors
Our ability to increase our operating cash flows is impacted by our ability to generate attractive returns on the capital invested on
behalf of ourselves and our clients, and our ability to increase the amount of the capital that we manage on behalf of our clients.
These two criteria are linked, in that the quality of our investment returns will encourage clients to commit capital to us, and our
access to this capital will enable us to pursue a broader range of investment opportunities.
Investment returns are influenced by a number of factors that are specific to each asset and industry segment. There are however,
four key objectives that we focus on across the organization.
•
•
•
•
Acquire assets “for value”: meaning that the projected cash flows and value appreciation of the asset represent an attractive
risk-adjusted return to ourselves and our co-investors.
Optimize the cash returns and value of the asset on an ongoing basis. In most cases, this is the responsibility of one of our
operating platforms, and is evidenced by the return on asset metrics and operating margins.
Finance assets effectively, using a prudent amount of leverage. We believe this is very important in maximizing the net returns to
investors from property and infrastructure assets, given the lower return on assets compared to a number of other businesses.
Fortunately, these assets are well suited to support a relatively high level of investment grade secured debt with long maturity
dates given the predictability of the cash flows and tendency of these assets to retain substantial value throughout economic
cycles. This is reflected in our return on net capital deployed, our overall return on capital and our cost of capital.
Have the ability to realize the maximum value of assets through a direct or indirect sale or monetization of the assets. Many
of our assets tend to appreciate in value over time and accordingly they may be held for very long periods of time. As a result,
this “back-end” appreciation may not be recognized in our financial results until there is a specific transaction.
Expanding our client relationships is impacted not only by our investment returns, as discussed above, but also by the quality
of our distribution capabilities and by maintaining a high level of ongoing client service. This involves transparent and timely
communication of results, ongoing engagement and responsiveness to client objectives and generation of attractive investment
opportunities.
key Financial measures
Our key performance measure is the long-term growth rate of operating cash flow on a per share basis. We also measure the
cash return on book equity, which demonstrates how effective we are at deploying the capital with which we have been entrusted
by shareholders. Our current targets are 12% and 20%, respectively. We revisit these targets periodically in light of the current
operating environment to ensure that they are realistic and can be achieved without exposing the organization to inappropriate
risk.
The amount of co-investor capital commitments is also an important measure. One of our most important objectives is to expand
the amount of capital committed to us by our clients because this provides us with capital to expand our business and also entitles
us to earn asset management income based on our ability to successfully invest this capital. “Third-Party” asset management
Brookfield Asset Management | 2008 Annual Report
57
income is an important measure in that it is indicative of the cash flow generated from our asset management activities, which is
an important source of potential growth in our operating cash flows.
We utilize operating cash flow as a key operating metric as opposed to net income, principally because operating cash flow does
not include certain items that we believe can distort operations results, such as depreciation and amortization expense, and future
income tax expense.
Depreciation as prescribed by GAAP, for example, implies these assets decline in value on a pre-determined basis over time,
whereas we believe that the value of most of our assets, as long as regular sustaining capital expenditures are made, will typically
increase over time. This increase in value will inevitably vary based on a number of market and other conditions that cannot be
determined in advance, and may sometimes be negative in a particular period. Future income tax expense, in our case, is derived
primarily from changes in the magnitude and quality of our tax losses and the differences between the tax values and book values
of our assets, as opposed to current cash liabilities. Brookfield has access to significant tax shields as a result of the nature of our
asset base, and we do not expect to incur any meaningful cash tax liability in the near future from ongoing operations.
Our operating cash flow is derived from two principal activities: operations and asset management. We invest our own capital in
most of the assets and capital that we manage for our clients, and accordingly participate in the operating cash flow produced by
these assets and businesses and the associated value appreciation. In addition, our clients compensate us for asset management
activities that we perform in respect of the capital and assets that we manage on their behalf. Accordingly, we distinguish operating
cash flows between those attributable to our asset management activities and those that represent investment returns from the
capital deployed in established funds and directly held assets. Asset management activities include strategic oversight, investment
analysis, capital allocation activities such as acquisitions, divestitures and financing, and the provision of specific services such as
investment banking, facilities management and leasing. While currently modest, we intend to significantly increase the contribution
from asset management as we continue to expand these activities.
Business e nvirOnment anD r isks
The following is a review of certain risks that could adversely impact our financial condition, results of operation and the value of
our common shares. Additional risks and uncertainties not previously known to the Corporation, or that the Corporation currently
deems immaterial, may also impact our operations and financial results.
general risks
We are exposed to the local, regional, national and international economic conditions and other events and occurrences that affect
the markets in which we own assets and operate businesses. In general, a protracted decline in economic conditions will result in
downward pressure on our operating margins and asset values as a result of lower demand for the services and products that we
provide. We believe that the long-life nature of our assets and, in many cases, the long-term nature of revenue contracts mitigates
this risk to some degree.
Each segment of our business is subject to competition in varying degrees. This can result in downward pressure on revenues which
can, in turn, reduce operating margins and thereby reduce operating cash flows and investment returns. In addition, competition
could result in scarcity of inputs which can impact certain of our businesses through higher costs. We believe that the high quality
and low operating costs of many of our assets and businesses provides some measure of protection in this regard.
A number of our long-life assets are interest rate sensitive: an increase in long-term interest rates will, absent all else, tend to
decrease the value of the assets. We mitigate this risk in part by financing assets with long-term fixed rate debt, which will typically
decrease in value as rates increase. In addition, we believe that many conditions that lead to higher interest rates, such as inflation,
can also give rise to higher revenues which will, absent all else, tend to increase values.
The trading price of our common shares in the open market cannot be predicted. The trading price could fluctuate significantly in
response to factors such as: variations in our quarterly or annual operating results and financial condition; changes in government
regulations affecting our business; the announcement of significant events by our competitors; market conditions and events
specific to the industries in which we operate; changes in general economic conditions; differences between our actual financial
and operating results and those expected by investors and analysts; changes in analysts’ recommendations or projections; the
depth and liquidity of the market for our common shares; investor perception of our business and industry; investment restrictions;
and our dividend policy. In addition, securities markets have experienced significant price and volume fluctuations in recent years
58
Brookfield Asset Management | 2008 Annual Report
that have often been unrelated or disproportionate to the operating performance of particular companies. These broad fluctuations
have, in the past, and may, in the future, adversely affect the trading price of our common shares.
execution of Strategy
Our strategy for building shareholder value is to acquire or develop high quality assets and businesses that generate sustainable
and increasing cash flows on behalf of ourselves and co-investors, with the objective of achieving higher returns on invested capital
and increasing asset management fees over the long term.
We consider effective capital allocation to be one of the most important components to achieving long-term investment success.
As a result, we apply a rigorous approach towards the allocation of capital among our operations. Capital is invested only when the
expected returns exceed pre-determined thresholds, taking into consideration both the degree and magnitude of the relative risks
and upside potential and, if appropriate, strategic considerations in the establishment of new business activities.
The successful execution of a value investment strategy requires careful timing and business judgment, as well as the resources to
complete asset purchases and restructure them as required, notwithstanding difficulties experienced in a particular industry. Our
diversified business base, liquidity and the sustainability of our cash flows provide important elements of strength.
We endeavour to maintain an appropriate level of liquidity in order to invest on a value basis when attractive opportunities arise.
Our approach to business entails adding assets to our existing businesses when the competition for assets is lowest, either due
to depressed economic conditions or when concerns exist relating to a particular industry. However, there is no certainty that
we will be able to acquire or develop additional high quality assets at attractive prices to supplement our growth. Conversely,
overly favourable economic conditions can limit the number of attractive investment opportunities and thereby restrict our ability
to increase assets under management and the related income streams. Competition from other well-capitalized investors may
significantly increase the purchase price or prevent us from completing an acquisition. We may be unable to finance acquisitions
on favourable terms, or newly acquired assets and businesses may fail to perform as expected. We may underestimate the costs
necessary to bring an acquisition up to standards established for its intended market position or may be unable to quickly and
efficiently integrate new acquisitions into our existing operations.
We develop property and power generation assets. In doing so, we must comply with extensive and complex regulations affecting
the development process. These regulations impose on us additional costs and delays, which may adversely affect our business
and results of operations. In particular, we are required to obtain the approval of numerous governmental authorities regulating
matters such as permitted land uses, levels of density, the installation of utility services, zoning and building standards. We must
comply with local, state and federal laws and regulations concerning the protection of health and the environment, including laws
and regulations with respect to hazardous or toxic substances. These environmental laws and regulations sometimes result in
delays, which cause us to incur additional costs, or severely restrict development activity in environmentally sensitive regions or
areas.
Our ability to successfully expand our asset management business is dependent on our reputation with our current and potential
investment partners. We believe that our track record and recent investments, as well as adherence to operating principles that
emphasize a constructive management culture, will enable us to continue to develop productive relationships with institutional
investors. However, competition for institutional capital, particularly in the asset classes on which we focus, is intense. Although we
seek to differentiate ourselves there is no assurance that we will be successful in doing so and this competition may reduce the
margins of our asset management business and may decrease the extent of institutional investor involvement in our activities.
The decline in market value of financial instruments and other investments has had an adverse effect on the investment portfolios
of the insurance companies, pension funds, endowments, sovereign wealth funds and other institutional investors that we seek to
partner with in our investments. In the long run, we believe that investors will be increasingly attracted to our approach to asset
management which focuses on high quality real assets, conservative financing and an operations-based approach to creating
value. In the nearer term, however, the financial market dynamics may reduce the ability of our investment partners to commit to
new investments unless they are pursuant to existing commitments. This has reduced our ability to expand our asset management
platform.
Our executive and other senior officers have a significant role in our success. Our ability to retain our management group or
attract suitable replacements should any members of the management group leave is dependent on the competitive nature of the
Brookfield Asset Management | 2008 Annual Report
59
employment market. The loss of services from key members of the management group or a limitation in their availability could
adversely impact our financial condition and cash flow. Further, such a loss could be negatively perceived in the capital markets.
The conduct of our business and the execution of our growth strategy rely heavily on teamwork. Co-operation amongst our
operations and our team-oriented management structure are essential to responding promptly to opportunities and challenges as
they arise. We believe that our hiring and compensation practices encourage retention and teamwork.
We participate in joint ventures, partnerships, co-tenancies and funds affecting many of our assets and businesses. Investments in
partnerships, joint ventures, co-tenancies or other entities may involve risks not present were a third-party not involved, including
the possibility that our partners, co-tenants or co-venturers might become bankrupt or otherwise fail to fund their share of required
capital contributions. Additionally, our partners, co-venturers or co-tenants might at any time have different economic or other
business interests or goals. In addition, we do not have sole control of certain major decisions relating to these assets and
businesses, including: decisions relating to the sale of the assets and businesses; refinancing; timing and amount of distributions
of cash from such entities to the Corporation; and capital expenditures.
Some of our management arrangements permit our partners to terminate the management agreement in limited circumstances
relating to enforcement of the managers’ obligations. In addition, the sale or transfer of interests in some of our entities is subject to
rights of first refusal or first offer and some agreements provide for buy-sell or similar arrangements. Such rights may be triggered
at a time when we may not want to sell but may be forced to do so because we may not have the financial resources at that time
to purchase the other party’s interest. Such rights may also inhibit our ability to sell our interest in an entity within our desired
time frame or on any other desired basis.
Financial and Liquidity risks
We employ debt and other forms of leverage in the ordinary course of our business in order to enhance returns to shareholders
and our co-investors. We attempt to match the profile of the leverage to the associated assets and accordingly typically fund
shorter-duration floating rate assets with shorter-term floating rate debt and fund long-term fixed rate and equity-like assets with
long-term fixed rate and equity capital. Most of the debt within our business has recourse only to the assets or subsidiary being
financed and has no recourse to the Corporation.
Accordingly, we are subject to the risks associated with debt financing. These risks, including the following, may adversely affect our
financial condition and results of operations: our cash flow may be insufficient to meet required payments of principal and interest;
payments of principal and interest on borrowings may leave us with insufficient cash resources to pay operating expenses; we
may not be able to refinance indebtedness on our assets at maturity due to company and market factors including: the estimated
cash flow of our assets; the value of our assets; liquidity in the debt markets; financial, competitive, business and other factors,
including factors beyond our control; and if refinanced, the terms of a refinancing may not be as favourable as the original terms of
the related indebtedness. We attempt to mitigate these risks through the use of long-term debt and by diversifying our maturities
over an extended period of time. We also strive to maintain adequate liquidity to refinance obligations.
The terms of our various credit agreements and other financing documents require us to comply with a number of customary
financial and other covenants, such as maintaining debt service coverage and leverage ratios, insurance coverage and, in limited
circumstances, rating levels. These covenants may limit our flexibility in our operations, and breaches of these covenants could
result in defaults under the instruments governing the applicable indebtedness even if we had satisfied our payment obligations.
If we are unable to refinance our indebtedness on acceptable terms, or at all, we may need to utilize available liquidity, which would
reduce our ability to pursue new investment opportunities, or dispose of one or more of our assets upon disadvantageous terms.
Moreover, prevailing interest rates or other factors at the time of refinancing could increase our interest expense, and if we pledge
assets to secure payment of indebtedness and are unable to make required payments, the creditor could foreclose upon such asset
or appoint a receiver to receive an assignment of the associated cash flows.
A large proportion of our capital is invested in physical assets which can be hard to sell, especially if local market conditions are
poor. Such liquidity could limit our ability to vary our portfolio or assets promptly in response to changing economic or investment
conditions. Additionally, financial or operating difficulties of other owners resulting in distress sales could depress asset values
in the markets in which we operate in times of illiquidity. These restrictions could reduce our ability to respond to changes
in the performance of our investments and market conditions and could adversely affect our financial condition and results of
operations.
60
Brookfield Asset Management | 2008 Annual Report
We periodically enter into agreements that commit us to acquire assets or securities. In some cases we may enter into such
agreements with the expectation that we will syndicate or assign all or a portion of our commitment to other investors prior to, at
the same time as, or subsequent to the anticipated closing. We may be unable to complete this syndication or assignment which
may increase the amount of capital that we are required to invest. These activities can have an adverse impact on our liquidity
which may reduce our ability to pursue further acquisitions or meet other financial commitments.
We periodically enter into joint venture, consortium or other arrangements that have contingent liquidity rights in our favour or in
favour of our counterparties that may have implications for us. These include buy-sell arrangements, put and call rights, en-bloc
sale rights, registration rights and other customary arrangements. A counterparty may seek to exercise these rights in response
to their own liquidity considerations or other reasons internal to the counterparty. Our agreements generally have embedded
protective terms that mitigate the risk to us. However, in some circumstances we may need to utilize some of our own liquidity in
order to preserve value or protect our interests.
We enter into financing commitments in the normal course of business and, as a result, may be required to fund these. Although we
do not typically do so, we from time to time guarantee the obligations of funds or other entities that we manage and/or invest in. If
we are unable to fulfill any of these commitments, this could result in damages being pursued against us or a loss of opportunity
through default of contracts that are otherwise to our benefit.
Our business is impacted by changes in currency rates, interest rates, commodity prices and other financial exposures. We selec-
tively utilize financial instruments to manage these exposures. The company’s risk management and derivative financial instru-
ments are more fully described in the notes to our Consolidated Financial Statements.
We have pursued and intend to continue to pursue growth opportunities in international markets and often invest in countries
where the U.S. dollar is not the notional currency. As a result, we are subject to foreign currency risk due to potential fluctuations
in exchange rates between foreign currencies and the U.S. dollar. A significant depreciation in the value of the foreign currency of
one or more countries where we have a significant investment may have a material adverse effect on our results of operations and
financial position. We attempt to mitigate adverse effects by borrowing under debt agreements denominated in foreign currencies
and through the use of financial contracts, however, there can be no assurance that those attempts to mitigate foreign currency
risk will be successful.
We typically finance assets that generate predictable long-term cash flows with long-term fixed rate debt in order to provide
stability in cash flows and protect returns in the event of changes in interest rates. We also make use of fixed rate preferred equity
financing as well as financial contracts to provide additional protection in this regard. Similarly, we typically finance shorter term
floating rate assets with floating rate debt.
As at December 31, 2008, our net floating rate liability position was $1.8 billion (2007 – asset of $0.2 billion). As a result, a 10 basis
point increase in interest rates would decrease operating cash flow by $18 million. We are required to record certain financial
instruments at market value and any changes in value recorded as current income, with the result that a 10 basis point increase
in long-term interest rates will result in a corresponding increase in income of $7 million before tax and vice versa, based on our
year end positions.
We selectively utilize credit default swaps and other derivatives to hedge financial positions and may establish unhedged positions
from time to time. These instruments are typically utilized as a hedge or an alternative to purchasing or selling the underlying
security when they are more effective from a capital employment perspective.
Commercial office Properties
Our strategy is to invest in high quality commercial office properties as defined by the physical characteristics of the assets
and, more importantly, the certainty of receiving rental payments from large corporate tenants which these properties attract.
Nonetheless, we remain exposed to certain risks inherent in the commercial office property business.
Commercial office property investments are generally subject to varying degrees of risk depending on the nature of the property.
These risks include changes in general economic conditions (such as the availability and cost of mortgage funds), local conditions
(such as an oversupply of space or a reduction in demand for real estate in markets in which we operate), the attractiveness of the
properties to tenants, competition from other landlords and our ability to provide adequate maintenance at an economical cost.
Brookfield Asset Management | 2008 Annual Report
61
Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related
charges, must be made regardless of whether or not a property is producing sufficient income to service these expenses. Our
commercial office properties are subject to mortgages which require substantial debt service payments. If we become unable or
unwilling to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its
rights of foreclosure or of sale. We believe the stability and long-term nature of our contractual revenues is an effective mitigant
to these risks.
Our commercial office properties generate a relatively stable source of income from contractual tenant rent payments. We endeavour
to stagger our lease expiry profile so that we are not faced with a disproportionate amount of space expiring in any one year.
Continued growth of rental income is dependent on strong leasing markets to ensure expiring leases are renewed and new tenants
are found promptly to fill vacancies. While we believe the long-term outlook for commercial office rents is positive, it is possible
that rental rates could decline, tenant bankruptcies could increase or that renewals may not be achieved particularly in an event of
a protracted disruption in the economy such as the onset of a recession. The company is, however, substantially protected against
short-term market conditions, since most of our leases are long-term in nature.
Our commercial office portfolio is concentrated in large metropolitan areas, some of which have been or may be perceived to be
subject to terrorist attacks. Furthermore, many of our properties consist of high-rise buildings, which may also be subject to this
actual or perceived threat, which could be heightened in the event that the United States continues to engage in armed conflict.
This could have an adverse effect on our ability to lease office space in our portfolio. Each of these factors could have an adverse
impact on our operating results and cash flows. Our commercial office property operations have insurance covering certain acts of
terrorism for up to $500 million of damage and business interruption costs. We continue to seek additional coverage equal to the
full replacement cost of our assets; however, until this type of coverage becomes commercially available on a reasonably economic
basis, any damage or business interruption costs as a result of uninsured acts of terrorism could result in a material cost to the
company.
Power generating operations
Our power generating operations, which are primarily hydroelectric generating facilities, are subject to changes in hydrology
and price, but also including equipment and dam failure, counterparty performance, water rental costs, changes in regulatory
requirements and other material disruptions.
The revenues generated by our power facilities are correlated to the amount of electricity generated, which in turn is dependent
upon available water flows. Hydrology has natural variation from year to year and may also change permanently because of climate
change or other factors, and a natural disaster could impact water flows within the watersheds in which we operate.
A significant portion of our power generating operation revenues are tied, either directly or indirectly, to the wholesale market price
for electricity in the markets in which we operate. Wholesale market electricity prices are impacted by a number of external factors.
As a result, we cannot accurately predict future electricity prices.
There is a risk of equipment failure or dam failure due to wear and tear, latent defect, design error or operator error, among other
things. The occurrence of such failures could result in a loss of generating capacity and repairing such failures could require the
expense of significant amounts of capital and other resources. Such failures could result also in exposure to significant liability for
damages.
A significant portion of the power we generate is sold under long-term power purchase agreements, as well as shorter-term financial
instruments and physical electricity and natural gas contracts that are above market. If for any reason any of the counterparties
are unable or unwilling to fulfill their contractual obligations, we may not be able to replace the agreement with an agreement on
equivalent terms and conditions.
We are required to make rental payments and pay property taxes for water rights or pay similar fees for use of water. Significant
increases in water rental costs or fees or changes in the way that governments regulate water supply could have a material adverse
effect on our financial condition.
The operation of our generation assets is subject to extensive regulation by various government agencies at the municipal, provincial,
state and federal level. As legal requirements frequently change and are subject to interpretation and discretion, we are unable to
predict the ultimate cost of compliance with these requirements or their effect on our operations. Any new law or regulation could
62
Brookfield Asset Management | 2008 Annual Report
require additional expenditure to achieve or maintain compliance. In addition, we may not be able to renew, maintain or obtain
all necessary licenses, permits and governmental approvals required for the continued operation or further development of our
projects.
Our power generation assets could be exposed to effects of significant events, such as severe weather conditions, natural disasters,
major accidents, action of malicious destruction, sabotage or terrorism, which could limit our ability to generate or sell power. In
certain cases, some events may not excuse us from performing our obligations pursuant to agreements with third parties and we
may be liable for damages or suffer further losses as a result. In addition, many of our generation assets are located in remote areas
which makes access for repair of damage difficult.
timberlands
The financial performance of our timberland operations depends on the state of the wood products and pulp and paper industries.
Decreases in the level of residential construction activity generally reduce demand for logs and wood products, resulting in lower
revenues, profits and cash flows for our customers. Depressed prices for wood products, pulp or paper or market irregularities may
cause mill operators to temporarily or permanently shut down their mills if their product prices fall to a level where mill operation
would be uneconomic. Any of these circumstances could significantly reduce the prices that we realize for our timber and the
amount of timber that such operators purchase from us.
Weather conditions, timber growth cycles, access limitations, aboriginal claims and regulatory requirements associated with
forestry practices, sale of logs and environmental matters, may restrict our harvesting, as may other factors, including damage by
fire, insect infestation, disease, prolonged drought and other natural and man-made disasters. Although management believes it
follows best practices with regard to forest sustainability and general forest management, there can be no assurance that our forest
management planning, including silviculture, will have the intended result of ensuring that our asset base appreciates in value
over time. If management’s estimates of merchantable inventory are incorrect, harvesting levels on our timberlands may result in
depletion of our timber assets.
transmission infrastructure
Our transmission operations are subject to regulation. The regulated rates are designed to recover allowed costs, including debt
financing costs, and permit earning a specified rate of return on assets or equity. Any changes in the rate structure for the
transmission assets or any reallocation or redetermination of allowed costs relating to the transmission assets, could have a
material adverse effect on our transmission revenues and operating margins.
residential Properties
We have residential land development and homebuilding operations located in the United States of America, Canada, Brazil and
Australia. These operations are concentrated in areas which we believe have positive long-term demographic and economic
characteristics. Despite this, 2008 was another challenging year for the U.S. housing industry, as the downturn in the housing
market intensified, further adversely affecting our operations.
The residential homebuilding and land development industry is cyclical and is significantly affected by changes in general and
local economic and industry conditions, such as consumer confidence, employment levels, availability of financing for homebuyers
and interest rates, levels of new and existing homes for sale, demographic trends and housing demand. Competition from rental
properties and resale homes, including homes held for sale by investors and foreclosed homes, may reduce our ability to sell
new homes, depress prices and reduce margins for the sale of new homes. Homebuilders are also subject to risks related to the
availability and cost overruns. Furthermore, the market value of undeveloped land, buildable lots and housing inventories held by
us can fluctuate significantly as a result of changing economic and real estate market conditions. If there are significant adverse
changes in economic or real estate market conditions, we may have to sell homes at a loss or hold land in inventory longer than
planned. Inventory carrying costs can be significant and can result in losses in a poorly performing project or market. Our residential
property operations may be particularly affected by changes in local market conditions in California, Virginia, Alberta and Brazil
where we derive a large proportion of our residential property revenue. During 2008, we recorded approximately $153 million of
charges against our U.S. revenues to reflect changing conditions.
Brookfield Asset Management | 2008 Annual Report
63
Virtually all of our customers finance their home acquisitions through lenders providing mortgage financing. Mortgage rates have
recently been at or near their lowest levels in many years. Despite this, and given the dramatic issues being experienced in the
mortgage markets in the U.S. and by many lenders, fewer loan products and tighter loan qualification requirements have made it
more difficult for borrowers to procure mortgages.
Even if potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them
to sell their homes to potential buyers who need financing, which in the U.S. has resulted in reduced demand for new homes. As a
result, rising mortgage rates could adversely affect our ability to sell new homes and the price at which we can sell them.
Specialty investment Funds
Our specialty funds operations are focused on the ownership and management of securities and businesses that are supported
by underlying tangible assets and cash flows. The principal risks in this business are potential loss of invested capital as well as
insufficient investment or fee income to cover operating expenses and cost of capital.
Unfavourable economic conditions could have a significant impact on the value and liquidity of our investments and the level of
investment income. Since most of our investments are in our areas of expertise and given that we strive to maintain adequate
supplemental liquidity at all times, we are well positioned to assume ownership of and operate most of the assets and businesses
that we finance. Furthermore, if this situation does arise, we typically acquire the assets at a discount to the underwritten value,
which protects us from loss.
other risks
As an owner and manager of real property, we are subject to various federal, provincial, state and municipal laws relating to
environmental matters. These laws could hold us liable for the costs of removal and remediation of certain hazardous substances
or wastes released or deposited on or in our properties or disposed of at other locations. The failure to remove or remediate such
substances, if any, could adversely affect our ability to sell our real estate or to borrow using real estate as collateral, and could
potentially result in claims or other proceedings against us. We are not aware of any material non-compliance with environmental
laws at any of our properties. We are also not aware of any material pending or threatened investigations or actions by environmental
regulatory authorities in connection with any of our properties or any material investigations or actions by environmental regulatory
authorities in connection with any of our properties or any material pending threatened claims relating to environmental conditions
at our properties. We have made and will continue to make the necessary capital expenditures for compliance with environmental
laws and regulations. Environmental laws and regulations can change rapidly and we may become subject to more stringent
environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have
an adverse effect on our business, financial condition or results of operation.
The ownership and operation of our assets carry varying degrees of inherent risk of liability related to worker health and safety and
the environment, including the risk of government imposed orders to remedy unsafe conditions and/or to contravention of health,
safety and environmental laws, licenses, permits and other approvals, and potential civil liability. Compliance with health, safety and
environmental laws (and any future laws or amendments enacted) and the requirements of licenses, permits and other approvals
will remain material to our business. We have incurred and will continue to incur significant capital and operating expenditures
to comply with health, safety and environmental laws and to obtain and comply with licenses, permits and other approvals and
to assess and manage potential liability exposure. Nevertheless, from time to time it is possible that we may be unsuccessful in
obtaining an important license, permit or other approval or become subject to government orders, investigations, inquiries or other
proceedings (including civil claims) relating to health, safety and environmental matters. The occurrence of any of these events
or any changes, additions to or more rigorous enforcement of, health, safety and environmental laws, licenses, permits or other
approvals could have a significant impact on operations and/or result in additional material expenditures. As a consequence,
no assurance can be given that additional environmental and workers’ health and safety issues relating to presently known or
unknown matters will not require unanticipated expenditures, or result in fines, penalties or other consequences (including changes
to operations) material to our business and operations.
We carry various insurance coverages that provide comprehensive protection for first-party and third-party losses to our properties.
These coverages contain policy specifications, limits and deductibles customarily carried for similar properties. We also self-insure
a portion of certain of these risks. We believe all of our properties are adequately insured.
64
Brookfield Asset Management | 2008 Annual Report
There are certain types of risks (generally of a catastrophic nature such as war or environmental contamination such as toxic
mold) which are either uninsurable or not economically insurable. Should any uninsured or underinsured loss occur, we could lose
our investment in, and anticipated profits and cash flows from, one or more of our assets or operations, and would continue to be
obligated to repay any recourse mortgage indebtedness on such properties.
In the normal course of our operations, we become involved in various legal actions, including claims relating to personal injuries,
property damage, property taxes, land rights and contract and other commercial disputes. We endeavour to maintain adequate
provisions for outstanding or pending claims. The final outcome with respect to outstanding, pending or future actions cannot
be predicted with certainty, and therefore there can be no assurance that their resolution will not have an adverse effect on our
financial position or results of our operations in a particular quarter or fiscal year. We believe that we are not currently involved
in any litigation, claims or proceedings in which an adverse outcome would have a material adverse effect on our consolidated
financial position or results.
Ongoing changes to the physical climate in which we operate may have an impact on our business. In particular, changes in
weather patterns may impact hydrology levels thereby influencing generation levels and power generation levels. Climate change
may also give rise to changes in regulations and consumer sentiment that could impact other areas of our business.
The U.S. Investment Company Act of 1940 (the “Act”) requires the registration of any company which holds itself out to the public
as being engaged primarily in the business of investing, reinvesting or trading in securities. In addition, the Act may also require
the registration of a company that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or
trading in securities and which owns or proposes to acquire investment securities with a value of more than 40% of the company’s
assets on an unconsolidated basis. We are not currently an investment company in accordance with the Act and we believe we
can continue to arrange our business operations in ways so as to avoid becoming an investment company within the meaning of
the Act. If we were required to register as an investment company under the Act, we would, among other things, be restricted from
engaging in certain businesses and issuing certain securities. In addition, certain of our contracts may become void.
There are many other laws and governmental regulations that apply to us, our assets and businesses. Changes in these laws and
governmental regulations, or their interpretation by agencies or the courts, could occur. Further, economic and political factors,
including civil unrest, governmental changes and restrictions on the ability to transfer capital across borders in the United States,
but primarily in the foreign countries in which we have invested, can have a major impact on us as a global company.
A portion of the workforce in our operations is unionized and if we are unable to negotiate acceptable contracts with any of our
unions as existing agreements expire, we could experience a significant disruption of the affected operations, higher ongoing
labour costs and restriction of its ability to maximize the efficiency of its operations, which could have an adverse effect on our
operations and financial results.
Brookfield Asset Management | 2008 Annual Report
65
Part 6 – internationaL FinanCiaL rePorting StandardS
international Financial reporting Standards
The Accounting Standards Board (“AcSB”) confirmed in February 2008 that International Financial Reporting Standards (“IFRS”)
will replace Canadian GAAP for publicly accountable enterprises for financial periods beginning on and after January 1, 2011. We
applied to the Canadian Securities Administrators (“CSA”) and were granted exemptive relief to prepare our financial statements in
accordance with IFRS earlier and intend to do so for periods beginning January 1, 2010 and prepare our first financial statements
in accordance with IFRS for the three month period ended March 31, 2010. These financial statements will include comparative
results for the periods commencing January 1, 2009.
The following discussion has been prepared on a basis consistent with the presentation under Canadian GAAP. The classification and
components of account balances under IFRS are expected to be different than under Canadian GAAP. Additionally, as we continue to
assess the impact of our transition to IFRS, additional differences may be identified which could impact the above amounts.
Impact of Adoption of IFRS
IFRS are premised on a conceptual framework similar to Canadian GAAP, however, significant differences exist in certain matters
of recognition, measurement and disclosure. While we believe that the adoption of IFRS will not have a material impact on our
reported cash flows, it will likely have a material impact on our consolidated balance sheets and statements of income. In particular,
our opening balance sheet will reflect the revaluation of substantially all property, plant and equipment to fair value, irrespective
of the accounting treatment on a prospective basis. In addition, a significant portion of our intangible assets and liabilities will no
longer be recognized. Finally, all changes to the opening balance sheet will require that a corresponding tax asset or liability be
established based on the resultant differences between the carried value of assets and liabilities and their associated tax bases.
Our initial estimate of the impact of all of these differences to common equity totals approximately $7.0 billion, resulting in common
equity to shareholders of $12.0 billion. The following disclosure highlights the initial adjustments required to be made on adoption
of IFRS in order to provide an opening balance sheet and the significant accounting policies, required or expected to be applied by
us subsequent to adoption that will be significantly different from our current accounting policies.
IFrS 1: First-time Adoption of International Financial reporting Standards
Our adoption of IFRS will require the application of IFRS 1 First-time Adoption of International Financial reporting Standards
(“IFRS 1”), which provides guidance for an entity’s initial adoption of IFRS. IFRS 1 generally requires that an entity apply all IFRS
effective at the end of its first IFRS reporting period retrospectively. However, IFRS 1 does require certain mandatory exceptions and
limited optional exemptions in specified areas of certain standards from this general requirement. The following are the optional
exemptions available under IFRS 1 significant to us that we expect to apply in preparing our first financial statements under IFRS.
Fair value of revaluation as deemed cost
IFRS 1 allows an entity to initially measure an item of property, plant and equipment upon transition to IFRS at fair value or under
certain circumstances using a previous GAAP revaluation, as opposed to recreating depreciated cost under IFRS. We will for items
of property, plant and equipment use either fair value or a previous GAAP revaluation as deemed cost. We expect to use fair value as
a measure of deemed cost for a significant portion of our property, plant and equipment, the cumulative effect of which is expected
to result in higher carrying values under IFRS compared to those under Canadian GAAP. This increase in carrying value is primarily
the result of the accounting depreciation taken under Canadian GAAP no longer attributed to the assets at transition, in addition to
the value appreciation of such assets in aggregate since acquisition.
Business combinations
IFRS 1 allows for the guidance under IFRS 3R Business Combinations (“IFRS 3R”) to be applied either retrospectively or prospectively.
Retrospective application would require that we restate all business combinations occurring before the date of our transition to
IFRS which is January 1, 2009. We expect to adopt IFRS 3R prospectively. Accordingly, all business combinations on or after
January 1, 2009 would be accounted for in accordance with IFRS 3R.
66
Brookfield Asset Management | 2008 Annual Report
Cumulative translation differences
IAS 21 the effects of Changes in Foreign exchange rates requires an entity to determine the translation differences in accordance
with IFRS from the date on which a subsidiary was formed or acquired. IFRS allows cumulative translation differences for all foreign
operations to be deemed zero at the date of transition to IFRS, with future gains or losses on subsequent disposal of any foreign
operations to exclude translation differences arising from periods prior to the date of transition to IFRS. We expect to deem all
cumulative translation differences to be zero on transition to IFRS.
IFRS 1 allows for certain other optional exemptions; however, we do not expect such exemptions to be significant to our adoption
of IFRS.
Impact of IFRS 1 on the Balance Sheet
The following paragraphs quantify and describe the expected impact of significant differences between our December 31, 2008
balance sheet under Canadian GAAP and our January 1, 2009 opening balance sheet under IFRS. This discussion has been
prepared using the standards and interpretations currently issued and expected to be effective at the end of our first annual IFRS
reporting period, which we intend to be December 31, 2010. Certain accounting policies expected to be adopted under IFRS may
not be adopted and the application of such policies to certain transactions or circumstances may be modified and as a result the
pro-forma January 1, 2009 underlying values prepared on a basis consistent with IFRS are subject to change. The amounts have
not been audited or subject to review by our external auditor.
Property, Plant and equipment
We expect the book value of our property, plant and equipment at January 1, 2009 to increase by approximately $9.7 billion under
IFRS compared to the book value as prepared in accordance with Canadian GAAP. This increase is primarily related to recording the
majority of property, plant and equipment at fair value for purposes of establishing deemed cost under IFRS. The following describes
the impact of this change on the major components of our property, plant and equipment.
Commercial Property
Our commercial properties are considered investment properties under IAS 40, Investment Property (“IAS 40”). Investment property
includes land and buildings held primarily to earn rental income or for capital appreciation or both, rather than for use in the
production or supply of goods or for sale in the ordinary course of business. Similar to Canadian GAAP, investment property is
initially measured at cost under IAS 40. However, subsequent to initial recognition, IFRS requires that an entity choose either the
cost or fair value model to account for its investment property. We will determine our policy upon adoption. At December 31, 2008,
we initially determined the deemed cost of our commercial property portfolio to be approximately $3.6 billion greater than the
carrying value under Canadian GAAP, net of intangible assets and straight-line rent recorded under Canadian GAAP. We determined
the fair value of each investment property based upon, among other things, rental income from current leases and assumptions
about rental income from future leases reflecting current conditions less future cash outflows in respect of such leases. Fair values
were primarily determined by discounting the expected future cash flows, generally over a term of 10 years and using weighted
average discount and terminal capitalization rates of 8.2% and 7.1%, respectively.
Power Generating Stations
We have chosen to measure certain property, plant and equipment of our power generation business at fair value for purposes of
establishing deemed cost as opposed to recreating depreciated cost using IFRS principles since inception. At December 31, 2008,
we initially determined the fair value of our power generation assets to be approximately $5.1 billion greater than their carrying
value under Canadian GAAP. These valuations were generally completed by discounting the expected future cash flows of each
station over a 20 year term and using a weighted average discount and terminal capitalization rate of 11.5%.
Timberlands
Under IFRS our timberlands are considered biological assets, recorded under IAS 41 Agriculture (“IAS 41”) are carried at fair value,
less estimated point-of-sale costs. Fair value has been determined as the future expected market price for similar species and
age of timberlands less costs to sell, discounted to the measurement date. At December 31, 2008, we have initially determined
the fair value of our timberland assets to be approximately $0.8 billion greater than their carrying value under Canadian GAAP, net
of Canadian GAAP depletion. Key assumptions include a weighted average discount and terminal capitalization rate of 6.5% at a
terminal valuation date of 72 years on average.
Brookfield Asset Management | 2008 Annual Report
67
Transmission
For purposes of establishing deemed cost, we have chosen to use the fair value of its transmission assets as opposed to recreating
depreciated cost under IFRS. At December 31, 2008, we had initially determined the fair value of our transmission assets to be
approximately equal to their carrying value under Canadian GAAP.
Development Properties and Residential Inventory
Inventories are carried at the lower of cost or net realizable value under both IFRS and Canadian GAAP. Under IFRS, however, net
realizable value is determined based on the discounted value of future cash flows whereas under Canadian GAAP such cash flows
are not discounted. Accordingly, this difference results in a lower determination of net realizable value under IFRS than Canadian
GAAP. Brookfield has assessed net realizable value for purposes of IFRS, generally using discount rates between 12% and 15%.
The net realizable value of most residential inventory was greater than cost, however this excess value was not reflected in the
IFRS carrying value. In certain cases, net realizable value, when determined on a discounted basis, was lower than cost resulting in
a $0.1 billion reduction in carrying value under IFRS when compared to the non-discounted basis under Canadian GAAP.
Other Property, Plant and Equipment
Additional differences also relate to the deconsolidation of certain property, plant and equipment related to entities that are
consolidated or proportionately consolidated under Canadian GAAP that are equity accounted under IFRS. This decrease in property,
plant and equipment is offset by increases in the carried value of certain property, plant and equipment of investee companies
initially recorded at fair value, for purposes of establishing deemed cost, in addition to other adjustments. In aggregate these
differences increase property, plant and equipment by an additional $0.4 billion.
Investments
We expect investments at January 1, 2009 to increase by approximately $1.6 billion under IFRS than as prepared in accordance
with Canadian GAAP. The increase primarily relates to entities that are consolidated or proportionately consolidated under Canadian
GAAP that will be equity accounted under IFRS and accordingly included in the investments account. The impact to net equity as a
result of corresponding minority interest after deferred taxes is $0.6 billion primarily related to initially measuring, for purposes of
IFRS, the property, plant and equipment of such entities at fair value to establish an initial carrying value.
Securities
We expect securities at January 1, 2009 to increase by approximately $0.3 billion under IFRS than as prepared in accordance with
Canadian GAAP. This increase primarily relates to securities held by us that are not traded in an active market but for which fair
value can be reliably determined. Under Canadian GAAP these securities are held at cost whereas under IFRS these securities are
measured at fair value.
Accounts receivable, Other and Intangible Assets and Liabilities
We expect accounts receivable, other and intangible assets and liabilities at January 1, 2009 to decrease on a net basis by
approximately $1.1 billion under IFRS than as prepared in accordance with Canadian GAAP. This decrease primarily relates to the
deconsolidation of assets held by entities that are consolidated or proportionately consolidated under Canadian GAAP that will be
equity accounted under IFRS and the removal of certain assets otherwise included in the fair value of commercial properties, such
as straight-line rent receivables and above-market leases that are separately accounted for under Canadian GAAP but are reflected
as part of the fair value of investment property for IFRS.
Accounts Payable and Other Liabilities
We expect accounts payable and other liabilities at January 1, 2009 to increase by approximately $3.3 billion under IFRS than as
prepared in accordance with Canadian GAAP. This change primarily relates to a $2.8 billion increase in future income tax liabilities
associated with the increased carrying values of assets within our commercial property, power generation and transmission
businesses. These items are offset by the removal of liabilities in respect of below market leases related to our commercial
properties and the deconsolidation of certain liabilities of entities consolidated or proportionately consolidated under Canadian
GAAP that will be equity accounted under IFRS in addition to other adjustments.
68
Brookfield Asset Management | 2008 Annual Report
Corporate Borrowings, Property Specific Mortgages, Subsidiary Borrowings, and Capital Securities
We expect property specific mortgages and subsidiary borrowings at January 1, 2009 to decrease by approximately $1.0 billion
under IFRS than as prepared in accordance with Canadian GAAP. The decrease primarily relates to the deconsolidation of debt held
by entities that are consolidated or proportionately consolidated under Canadian GAAP that will be equity accounted under IFRS.
We have not yet determined whether or not we will measure any of these liabilities at fair value.
Goodwill
We expect goodwill at January 1, 2009 to decrease by approximately $0.1 billion under IFRS than as prepared in accordance
with Canadian GAAP. This decrease primarily relates to the allocation of goodwill previously recorded on acquisition of investment
properties that under IFRS are recorded at fair value. As the investment properties to which goodwill relates are carried at fair value,
goodwill is reduced accordingly under IFRS.
Non-controlling Interests
We expect non-controlling interests at January 1, 2009 to increase by approximately $1.4 billion under IFRS than as prepared in
accordance with Canadian GAAP. The change in minority interests is primarily related to the recognition of others’ interests in the
increased asset values offset by deconsolidation of certain entities.
Ongoing IFRS to Canadian GAAP differences – Balance Sheet
Basis of Consolidation
Under Canadian GAAP we determine whether we should consolidate an entity using two different frameworks: the variable interest
entity (“VIE”) and voting control models. Under IFRS we will consolidate an entity if it is determined to be controlled by us. Control
is defined as the power to govern the financial and operating policies of an entity to obtain benefit. Control is presumed to exist
when the parent owns, directly or indirectly through subsidiaries, more than one half of an entity’s voting power, but also exists
when the parent owns half or less of the voting power but has legal or contractual rights to control, or de facto control. This change
in policy will result in certain entities being consolidated by us that were not consolidated under Canadian GAAP as a result of our
legal or contractual rights to control the entity, as defined by IFRS. This change will also result in certain entities that are currently
consolidated by us under the VIE model to be deconsolidated.
Joint Ventures
The International Accounting Standards Board (“IASB”) is currently considering Exposure Draft 9 Joint Arrangements (“ED 9”) which
is intended to modify IAS 31 Interests in Joint Ventures (“IAS 31”) which sets out the current requirements for the accounting for
interests in joint ventures under IFRS. The IASB has indicated that it expects to issue a new standard to replace IAS 31 in early
2009 and we expect to apply this new standard in its IFRS financial statements for 2010. Currently, under Canadian GAAP we
proportionately account for interests in joint ventures. ED 9 proposes to eliminate the option to proportionately consolidate interests
in jointly controlled entities and requires an entity to recognize its interest, which is considered its share of the outcome generated
by the activities of a group of assets and liabilities subject to joint control, using the equity method.
Biological Assets
Under IFRS timberlands are considered biological assets and recorded under IAS 41. Currently under Canadian GAAP our timberland
assets are recorded at cost, less accumulated depletion which is based upon harvested amounts. Depletion amounts are recorded
in cost of goods sold at the time of sale. Under IAS 41 timberland assets will be measured at the end of each reporting period at fair
value, less estimated point-of-sale costs. Fair value is determined based upon the future expected market price for similar species
and age of timberlands less costs to sell, discounted to the measurement date. Changes in fair value or point-of-sale costs after
initial recognition are recognized in income in the period in which the change arises.
Inventory
For both Canadian GAAP and IFRS, residential inventory is recorded at the lower of cost and net realizable value, however, under
IFRS net realizable value is determined based on the discounted value of future cash flows whereas under Canadian GAAP such
cash flows are not discounted.
Brookfield Asset Management | 2008 Annual Report
69
Ongoing IFRS to Canadian GAAP differences – Income Statement
Commercial Property
IFRS permits the measurement of investment property using the fair value model under IAS 40, which requires us to record a
gain or loss in income arising from a change in the fair value of investment property in the period of change. Income related to
commercial properties may be greater or less than as determined under Canadian GAAP depending on whether an increase or
decrease in fair value occurs during the period of measurement. Furthermore, if we were to choose, upon adoption, the fair value
model for investment property no depreciation would be recognized. Accordingly, net income would be greater under IFRS than
as determined under Canadian GAAP, to the extent there is no change in fair value of the underlying property, as no depreciation
will be recorded. Upon recognition of commercial property at fair value for IFRS, all intangible assets and liabilities recorded under
Canadian GAAP related to previous business combinations will be de-recognized and will no longer be amortized into income. In
2008 under Canadian GAAP approximately $0.8 billion is charged to income annually in respect of depreciation and amortization
of intangible assets, prior to minority interests, related to our commercial property portfolio.
use of Deemed Cost
We have chosen to initially measure certain property, plant and equipment upon transition to IFRS at fair value or under certain
circumstances using a previous GAAP revaluation, as opposed to recreating depreciated cost under IFRS. In most cases the resulting
carrying value under IFRS will be higher than the carrying value under Canadian GAAP. As a result, the amount of depreciation
recorded under IFRS related to such assets will be greater than what would be charged to income under Canadian GAAP. We expect
annual depreciation to be approximately $0.2 billion greater under IFRS than Canadian GAAP in aggregate for all property, plant and
equipment other than our commercial property portfolio.
timberlands
As described above under IFRS, our timberlands are considered biological assets and recorded under IAS 41. At each reporting
period our timberland assets will be measured at fair value, less estimated point-of-sale costs with changes in fair value recognized
in income in the period in which the change arises. Certain expenditures capitalized under Canadian GAAP, such as silviculture and
other conservation costs, will be expensed under IFRS. These amounts are approximately $0.1 billion annually. Depending on the
change in fair value of timberland assets during each reporting period, income could either be greater or less than under Canadian
GAAP.
70
Brookfield Asset Management | 2008 Annual Report
Part 7 – SuPPLementaL inFormation
This section contains information required by applicable continuous disclosure guidelines and to facilitate additional analysis.
cOntractual OBligatiOns
The following table presents the contractual obligations of the company by payment periods:
AS At DeCeMBer 31, 2008 (MILLIONS)
Long-term debt
Property-specific mortgages
Other debt of subsidiaries
Corporate borrowings
Capital securities
Lease obligations
Commitments
Interest expense 1
Long-term debt
Capital securities
Interest rate swaps
Less than
One Year
$ 2,424
1,423
—
—
5
1,269
1,633
89
256
Payments Due by Period
2 – 3
Years
4 – 5
Years
After 5
Years
$ 8,130
1,326
284
164
11
—
2,528
168
263
$ 3,779
1,117
1,065
574
7
—
1,604
123
52
$ 8,556
1,236
935
687
5
—
772
100
47
Total
$ 22,889
5,102
2,284
1,425
28
1,269
6,537
480
618
1 represents aggregate interest expense expected to be paid over the term of the obligations. Variable interest rate payments have been calculated based on current rates
Commitments of $1,269 million (2007 – $1,068 million) represent various contractual obligations of the company and its subsidiaries
assumed in the normal course of business, including commitments to provide bridge financing, and letters of credit and guarantees
provided in respect of power sales contracts and reinsurance obligations, of which $211 million (2007 – $95 million) is included as
liabilities in the consolidated balance sheets.
Off Balance s heet a rrangements
We conduct our operations primarily through entities that are fully or proportionately consolidated in our financial statements.
We do hold non-controlling interests in entities which are accounted for on an equity basis, as are interests in some of our funds,
however we do not guarantee any financial obligations of these entities other than our contractual commitments to provide capital
to a fund, which are limited to predetermined amounts.
We utilize various financial instruments in our business to manage risk and make better use of our capital. The fair values of these
instruments that are reflected on our balance sheets, are disclosed in Note 18 to our Consolidated Financial Statements and under
Financial and Liquidity Risks beginning on page 60.
relateD-Party t ransactiOns
In the normal course of operations, the company enters into various transactions on market terms with related parties, which have
been measured at exchange value and are recognized in the consolidated financial statements. There were no such transactions,
individually or in aggregate, that were material to our overall operations.
critical a ccOunting POlicies anD e stimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to select
appropriate accounting policies to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. In particular, critical accounting policies and estimates utilized in the normal course of
preparing the company’s financial statements require the determination of future cash flows utilized in assessing net recoverable
amounts and net realizable values; depreciation and amortization; value of goodwill and intangible assets; ability to utilize tax
losses; the determination of the primary beneficiary of variable interest entities; effectiveness of financial hedges for accounting
purposes; and fair values for recognition, measurement and disclosure purposes.
In making estimates, management relies on external information and observable conditions where possible, supplemented by
internal analysis as required. These estimates have been applied in a manner consistent with that in the prior year and there are no
Brookfield Asset Management | 2008 Annual Report
71
known trends, commitments, events or uncertainties that we believe will materially affect the methodology or assumptions utilized
in this report. The estimates are impacted by, among other things, movements in interest rates and other factors, some of which are
highly uncertain, as described in the analysis of Business Strategy, Environment and Risks beginning on page 56 and in the section
entitled Financial and Liquidity Risk beginning on page 60. The interrelated nature of these factors prevents us from quantifying the
overall impact of these movements on the company’s financial statements in a meaningful way. For further reference on critical
accounting policies, see our significant accounting policies contained in Note 1 and Changes in Accounting Policies as described
below.
changes in a ccOunting POlicies
Financial instruments – disclosures and Presentation
On December 1, 2006, the Canadian Institute of Chartered Accountants (“CICA”) issued two new accounting standards, Section
3862, Financial Instruments – Disclosures and Section 3863, Financial Instruments – Presentation. These standards replace Section
3861, Financial Instruments – Disclosure and Presentation and enhance the disclosure of the nature and extent of risks arising
from financial instruments and how the entity manages those risks. These new standards became effective for the company on
January 1, 2008 and the related disclosure is included as Note 1 to the consolidated financial statements in this report.
Capital disclosures
On December 1, 2006, the CICA issued Section 1535, Capital Disclosures. Section 1535 requires the disclosure of: (i) an entity’s
objectives, policies and process for managing capital; (ii) quantitative data about an entity’s managed capital; (iii) whether an entity
has complied with capital requirements; and (iv) if an entity has not complied with such capital requirements, the consequences
of such non-compliance. This new standard became effective for the company on January 1, 2008 and the related disclosure is
included as Note 20 to the consolidated financial statements in this report.
inventories
In June 2007, the CICA issued Section 3031, Inventories, replacing Section 3030, Inventories. This standard provides guidance
on the determination of the cost of inventories and the subsequent recognition as an expense, including any write-down to net
realizable value. This new standard became effective for the company on January 1, 2008. The impact of adopting this new
standard was a $4 million reduction of opening retained earnings.
future c hanges i n a ccOunting POlicies
Goodwill and Intangible Assets
In February 2008, the CICA issued Handbook Section 3064, Goodwill and Intangible Assets, replacing Handbook Sections 3062,
Goodwill and Other Intangible Assets and 3450, research and Development Costs. Various changes have been made to other
sections of the CICA Handbook for consistency purposes. The new section will be applicable to the financial statements relating to
fiscal years beginning January 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of
goodwill subsequent to its initial recognition of intangible assets by profit-oriented enterprises. The company is currently evaluating
the impact of Section 3064 on its financial statements.
International Financial Reporting Standards
The AcSB confirmed in February 2008 that IFRS will replace Canadian GAAP for publicly accountable enterprises for financial
periods beginning on and after January 1, 2011. The company applied to the CSA and was granted exemptive relief to prepare its
financial statements in accordance with IFRS earlier than required and intends to do so for periods beginning January 1, 2010,
preparing its first financial statements in accordance with IFRS for the three month period ended March 31, 2010. These financial
statements will include comparative results for the periods commencing January 1, 2009.
assessment anD c hanges in i nternal c OntrOl Over f inancial r ePOrting
Management has evaluated the effectiveness of the company’s internal control over financial reporting. Refer to Management’s
Report on Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting
during the year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect the internal
control over financial reporting.
72
Brookfield Asset Management | 2008 Annual Report
DisclOsure c OntrOls
Management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in the Canadian Securities Administrators National Instrument 52-109). Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and procedures were effective as
of December 31, 2008 in providing reasonable assurance that material information relating to the company and the consolidated
subsidiaries would be made known to them within those entities.
cOrPOrate DiviDenDs
The distributions paid by Brookfield on outstanding securities during the past three years are as follows:
Class A Common Shares
Class A Common Shares – special 1
Class A Preferred Shares
Series 2
Series 4 + Series 7
Series 8
Series 9
Series 10
Series 11
Series 12
Series 13
Series 14
Series 15
Series 17 2
Series 18 3
Series 21 4
Preferred Securities
Due 2050 5
Due 2051 6
1 represents the book value of Brookfield Infrastructure special dividend
Issued November 20, 2006
2
Issued May 9, 2007
3
4
Issued June 25, 2008
5 redeemed January 2, 2007
6 redeemed July 3, 2007
Distribution per Security
2007
2006
$
0.47
$
0.40
—
0.99
0.99
1.10
1.01
1.34
1.28
1.26
0.99
3.57
1.15
1.11
0.71
—
0.01
0.95
—
0.88
0.88
1.10
1.25
1.27
1.22
1.19
0.88
3.10
1.00
0.12
—
—
1.85
1.84
$
2008
0.51
0.94
0.83
0.83
1.18
1.02
1.35
1.29
1.27
0.83
3.06
0.99
1.12
1.12
0.58
—
—
Brookfield Asset Management | 2008 Annual Report
73
quarterly r esults
Net income and operating cash flows for the eight recently completed quarters are as follows:
(MILLIONS)
Total revenues
Fees earned
Revenues less direct operating costs
Commercial property
Power generation
Infrastructure
Development and other properties
Specialty funds
Investment and other income
Expenses
Interest
Asset management and other operating costs
Current income taxes
Non-controlling interest in net income before the following
net income before the following
Equity accounted income (loss) from investments
Depreciation and amortization
Revaluation and other items
Future income taxes
Non-controlling interests in the foregoing items
2008
2007
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
$ 3,006
$ 3,216
$ 3,436
$ 3,210
$ 3,158
$ 2,219
$ 2,125
$ 1,841
113
109
113
114
92
388
158
68
(5)
49
207
978
447
160
(47)
176
242
(12)
(355)
(262)
545
13
595
213
36
62
32
242
1,289
535
167
2
235
350
(6)
(333)
104
(105)
161
427
264
44
119
119
142
1,228
475
148
21
212
372
(15)
(328)
(46)
3
124
421
251
48
64
104
312
1,314
527
165
17
168
437
(13)
(314)
(63)
18
132
414
148
33
115
233
337
1,372
510
141
28
124
569
(4)
(294)
(95)
35
135
96
350
105
54
40
16
248
909
454
108
(6)
103
250
—
(250)
(33)
11
115
95
132
396
170
114
117
59
143
1,094
424
105
26
204
335
(29)
(267)
11
(69)
172
388
188
89
146
62
129
1,134
398
110
20
205
401
(39)
(223)
5
(65)
116
net income
$
171
$
171
$
110
$
197
$
346
$
93
$
153
$
195
Cash flow from operations for the last eight quarters are as follows:
(MILLIONS, exCePt Per ShAre AMOuNtS)
net income before the following
Dividends from equity accounted investments
Exchangeable debenture gain
Cash flow from operations and gains
Preferred share dividends
Cash flow to common shareholders
Common equity – book value
Common shares outstanding 1
Per common share 1
Cash flow from operations
Net income
Dividends
Book value
Market trading price (NYSE)
1
Adjusted to reflect three-for-two stock split
2008
2007
Q4
242
5
—
247
9
238
$
$
Q3
350
5
—
355
11
344
$
$
Q2
372
6
—
378
12
366
$
$
Q1
437
6
—
443
12
431
$
$
Q4
569
6
—
575
12
563
$
$
Q3
250
5
66
321
13
308
$
$
Q2
335
5
100
440
10
430
$
$
Q1
401
5
165
571
9
562
$
$
$ 4,918
572.6
$ 5,821
583.4
$ 6,284
583.8
$ 6,140
581.7
$ 6,644
583.6
$ 6,328
581.0
$ 6,337
583.6
$ 6,061
582.2
$ 0.41
0.27
0.13
8.93
15.27
$ 0.58
0.27
0.13
10.22
27.44
$ 0.62
0.17
0.13
11.15
32.54
$ 0.72
0.31
0.12
10.95
26.83
$ 0.94
0.56
0.12
11.64
35.67
$ 0.52
0.13
0.12
11.17
38.50
$ 0.72
0.24
0.12
11.07
39.90
$ 0.93
0.31
0.11
10.59
34.84
For the three months ended December 31, 2008, we reported net income of $171 million and $346 million for the same period in
2007. Operating cash flow was $247 million for the fourth quarter of 2008, compared to $575 million during the same period in
2007 as shown in the table on the following page. The results for the three months ended December 31, 2007 included a large
number of major disposition gains compared with the fourth quarter of 2008.
Commercial office property operations tend to produce consistent results throughout the year due to the long-term nature of the
contractual lease arrangements subject to the intermittent recognition of disposition gains. Quarterly seasonality does exist in our
power generation and residential property operations. With respect to our power generation operations, seasonality exists in water
inflows and pricing. During the fall rainy season and spring thaw, water inflows tend to be the highest leading to higher generation
during those periods; however prices tend not to be as strong as the summer and winter seasons due to the more moderate weather
74
Brookfield Asset Management | 2008 Annual Report
conditions during those periods and associated reductions in demand for electricity. With respect to our residential operations,
the fourth quarter tends to be the strongest as this is the period during which most of the construction is completed and homes
are delivered although in 2007 and 2008 the company has recorded provisions in respect of higher priced land positions. We
periodically record realization and other gains, special distributions, as well as gains and losses on unhedged financial positions
throughout our operations and, while the timing of these items is difficult to predict, the dynamic nature of our asset base tends to
result in these items occurring on a relatively frequent basis.
aDDitiOnal s hare Data
Basic and diluted earnings Per Share
The components of basic and diluted earnings per share are summarized in the following table:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Net income
Preferred share dividends
Net income available for common shareholders
Weighted average – common shares
Dilutive effect of the conversion of options using treasury stock method
Common shares and common share equivalents
issued and outstanding Common Shares
The number of issued and outstanding common shares changed as follows:
FOr the YeArS eNDeD DeCeMBer 31 (MILLIONS)
Outstanding at beginning of year
Issued (repurchased)
Dividend reinvestment plan
Management share option plan
Issuer bid purchases
Acquisition
Outstanding at end of year
Unexercised options
Total diluted common shares at end of year
2008
2007
$
$
649
(44)
605
581
11
592
$
$
787
(44)
743
582
17
599
2008
583.6
0.2
3.0
(14.2)
—
572.6
27.7
600.3
2007
581.8
0.1
4.9
(5.0)
1.8
583.6
27.4
611.0
In calculating our book value per common share, the cash value of our unexercised options of $446 million (2007 – $469 million) is
added to the book value of our common share equity of $4,918 million (2007 – $6,644 million) prior to dividing by the total diluted
common shares presented above.
As of March 13, 2009, the Corporation had outstanding 571,687,632 Class A Limited Voting Shares and 85,120 Class B Limited
Voting Shares.
Brookfield Asset Management | 2008 Annual Report
75
assets u nDer m anagement
The following tables set forth the assets, net invested capital and commitments managed by Brookfield, including the amounts
managed on behalf of co-investors:
AS At DeCeMBer 31, 2008 (MILLIONS)
Core and Value add
U.S. Core Office 2
Canadian Core Office 2
Multiplex Funds 3
West Coast Timberlands 4
East Coast Timber Fund
Global Timber Fund
Transmission – Chile 4
Transmission – Canada/Brazil 4
Bridge Loan I
Bridge Loan II
Real Estate Finance
Brookfield Real Estate Services Fund
opportunity and Private equity
Real Estate Opportunity
Real Estate Opportunity II
Brazil Retail Property
Brazil Timber Fund
Residential Properties – U.S. 5
Tricap Restructuring I
Tricap Restructuring II
Listed Securities and Fixed income
Equity Funds
Fixed Income Funds
Year
Formed
2006
2005
2007
2005
2006
2008
2006
2008
2003
2007
various
2003
2006
2007
2006
2008
2007
2002
2006/7
various
various
Total fee bearing assets/capital
directly Held non-Fee Bearing assets
Core Office – North America 2
Core Office – Europe
Core Office – Australia
Residential Properties – Canada 2/Brazil/Australia
Power Generation – North America
Timber – Brazil
Other
total Assets under Management
Net Invested
Capital
Assets
Committed
Capital 1
Co-investor Interests
Net Invested
Capital
Committed
Capital
Brookfield’s
Ownership
Level
62%
25%
various
28%
45%
37%
17%
various
39%
25%
4-51%
25%
52%
60%
25%
—
29%
48%
39%
3%
n/a
n/a
$
7,662
$
1,777
$
1,950
$
1,320
1,652
889
167
2,411
2,202
532
545
150
2,497
140
20,167
913
382
1,326
—
978
733
892
867
944
496
87
825
1,363
244
545
150
1,354
84
8,736
201
109
438
—
383
295
593
867
944
496
87
1,348
1,363
244
570
773
1,892
84
10,618
227
208
830
280
383
295
881
999
545
627
382
59
593
1,172
113
407
101
1,212
63
6,273
105
48
348
—
200
150
354
$
1,025
545
689
382
59
780
1,172
113
409
576
1,487
63
7,300
105
83
610
230
200
150
496
5,224
2,019
3,104
1,205
1,874
2,962
15,078
18,040
2,962
15,078
18,040
$ 25,518
$ 27,214
2,962
15,199
18,161
43,552
9,335
1,068
2,670
2,842
6,473
90
12,667
35,145
2,962
15,078
18,040
28,795
2,096
368
1,600
434
1,407
65
7,103
13,073
2,962
15,078
18,040
31,762
2,096
368
1,600
434
1,407
65
7,103
13,073
$ 78,697
$ 41,868
$ 44,835
1
Includes incremental co-investment capital
2 held by 51%-owned Brookfield Properties
3 Comprised of four funds with ownerships ranging from 20% to 25%
4 represents direct interests plus pro rata share of indirect interests held by 40%-owned Brookfield Infrastructure Partners
5 held by 58%-owned Brookfield homes
76
Brookfield Asset Management | 2008 Annual Report
internal control over financial reporting
ManageMent’s report on internal control over financial reporting
Management of Brookfield Asset Management Inc. (“Brookfield”) is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process
designed by, or under the supervision of, the Chief Executive Officer and the
Chief Financial Officer and effected by the Board of Directors, management
and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles as defined in Regulation 240.13a-15(f) or 240.15d-15(f).
Management’s assessment of the effectiveness of Brookfield’s internal
control over financial reporting as of December 31, 2008, has been audited
by Deloitte & Touche, LLP, Independent Registered Chartered Accountants,
who also audited Brookfield’s Consolidated Financial Statements for the
year ended December 31, 2008. As stated in the Report of Independent
Registered Chartered Accountants, Deloitte & Touche, LLP expressed an
unqualified opinion on Brookfield’s internal control over financial reporting
as of December 31, 2008.
Management assessed the effectiveness of Brookfield’s internal control
over financial reporting as of December 31, 2008, based on the criteria set
forth in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, management believes that, as of December 31, 2008,
Brookfield’s
is effective.
Management excluded from its assessment the internal control over
financial reporting at Norbord Inc. (“Norbord”), which was acquired during
2008, and whose total assets, net assets, total revenues, and net income
constitute approximately 2%, 1%, nil% and nil% respectively of the
consolidated financial statement amounts as of and for the year ended
December 31, 2008.
internal control over
financial reporting
Toronto, Canada
March 13, 2009
J. Bruce Flatt
Chief Executive Officer
Brian D. Lawson
Chief Financial Officer
Brookfield Asset Management | 2008 Annual Report
77
report of independent registered chartered accountants
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based
on the criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year ended December 31, 2008 of the
Company and our report dated March 13, 2009 expressed an unqualified
opinion on those financial statements.
Toronto, Canada
March 13, 2009
Deloitte & Touche, LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
To the Board of Directors and Shareholders of Brookfield Asset Management
Inc.
We have audited the
internal control over financial reporting of
Brookfield Asset Management Inc. and subsidiaries (the “Company”)
as of December 31, 2008, based on the criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Management’s
Report on Internal Control over Financial Reporting, management excluded
from its assessment the internal control over financial reporting at Norbord
Inc. (“Norbord”) which was acquired in 2008 and whose financial statements
constitute approximately 1% and 2% of net and total assets, respectively,
nil% of revenues, and nil% of net income of the consolidated financial
statement amounts as of and for the year ended December 31, 2008.
Accordingly, our audit did not include the internal control over financial
reporting at Norbord. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for
our opinion.
A company’s internal control over financial reporting is a process designed
by, or under the supervision of, the company’s principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable
78
Brookfield Asset Management | 2008 Annual Report
consolidated financial statements
ManageMent’s responsibility for the financial stateMents
The accompanying consolidated financial statements and other financial
information in this Annual Report have been prepared by the company’s
management which is responsible for their integrity, consistency, objectivity
and reliability. To fulfill this responsibility, the company maintains policies,
procedures and systems of internal control to ensure that its reporting practices
and accounting and administrative procedures are appropriate to provide a
high degree of assurance that relevant and reliable financial information is
produced and assets are safeguarded. These controls include the careful
selection and training of employees, the establishment of well-defined areas
of responsibility and accountability for performance and the communication of
policies and code of conduct throughout the company. In addition, the company
maintains an internal audit group that conducts periodic audits of all aspects
of the company’s operations. The Chief Internal Auditor has full access to the
Audit Committee.
These consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in Canada, and where appro priate,
reflect estimates based on management’s judgment. The financial information
presented throughout this Annual Report is generally con sistent with the
information contained in the accompanying consolidated financial statements.
Deloitte & Touche, LLP, the independent registered chartered accountants
appointed by the shareholders, have examined the consolidated financial
statements set out on pages 80 through 111 in accordance with auditing
standards generally accepted in Canada to enable them to express to the
shareholders their opinion on the consolidated financial statements. Their report
is set out below.
The consolidated financial statements have been further reviewed and
approved by the Board of Directors acting through its Audit Committee, which
is comprised of directors who are not officers or employees of the company.
The Audit Committee, which meets with the auditors and management to
review the activities of each and reports to the Board of Directors, oversees
management’s responsibilities for the financial reporting and internal control
systems. The auditors have full and direct access to the Audit Committee and
meet periodically with the committee both with and without management
present to discuss their audit and related findings.
Toronto, Canada
March 13, 2009
J. Bruce Flatt
Chief Executive Officer
Brian D. Lawson
Chief Financial Officer
report of independent registered chartered accountants
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control
over financial reporting as of December 31, 2008, based on the criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
March 13, 2009 expressed an unqualified opinion on the Company’s internal
control over financial reporting.
Toronto, Canada
March 13, 2009
Independent Registered Chartered Accountants
Licensed Public Accountants
To the Board of Directors and Shareholders of Brookfield Asset Management
Inc.
We have audited
the accompanying consolidated balance sheets of
Brookfield Asset Management Inc. and subsidiaries (the “Company”) as at
December 31, 2008 and 2007, and the related consolidated statements of
income, retained earnings, comprehensive (loss) income, accumulated other
comprehensive (loss) income and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards and the standards of the Public Company Oversight Board
(United States). These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2008
and 2007 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
Brookfield Asset Management | 2008 Annual Report
79
consolidated balance sheets
As At dEC EmbER 31 (mI LLI On s)
Assets
Cash and cash equivalents
Financial assets
Investments
Accounts receivable and other
Intangible assets
Goodwill
Operating assets
Property, plant and equipment
Securities
Loans and notes receivable
Liabilities and shareholders’ equity
Corporate borrowings
Non-recourse borrowings
Property-specific mortgages
Subsidiary borrowings
Accounts payable and other liabilities
Intangible liabilities
Capital securities
Non-controlling interests in net assets
Shareholders’ equity
Preferred equity
Common equity
On behalf of the Board:
note
2008
2007
3
4
5
6
2
7
8
9
10
11
11
12
13
14
15
16
17
$ 1,242
787
890
7,310
1,632
2,011
36,375
1,303
2,061
$ 53,611
$ 1,561
1,529
1,352
7,139
2,026
1,528
37,725
1,828
909
$ 55,597
$ 2,284
$ 2,048
22,889
5,102
8,903
891
1,425
6,329
21,644
7,076
9,863
1,112
1,570
4,770
870
4,918
$ 53,611
870
6,644
$ 55,597
Robert J. Harding, FCA, Director
Marcel R. Coutu, Director
80
Brookfield Asset Management | 2008 Annual Report
consolidated stateMents of incoMe
Y EARs EndEd dECEmbER 31 (m ILLI Ons, ExC EPt PER
Total revenues
Fees earned
Revenues less direct operating costs
shA RE AmOu nt s)
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds
Investment and other income
Expenses
Interest
Current income taxes
Asset management and other operating costs
Non-controlling interests in net income before the following
Other items
Equity accounted loss from investments
Depreciation and amortization
Provisions and other
Future income taxes
Non-controlling interests in the foregoing items
Net income
Net income per common share
Diluted
Basic
note
21
23
22
24
23
22
17
2008
$ 12,868
449
2007
$ 9,343
415
1,831
886
196
240
304
3,906
903
4,809
1,984
(7)
640
791
1,401
1,548
611
290
418
370
3,652
857
4,509
1,786
68
464
636
1,555
(46)
(1,330)
(267)
461
430
649
1.02
1.04
$
$
$
(72)
(1,034)
(112)
(88)
538
787
1.24
1.27
$
$
$
Brookfield Asset Management | 2008 Annual Report
81
2008
$ 4,867
(4)
649
—
(44)
(843)
2007
$ 4,222
292
787
(6)
(44)
(272)
(257)
$ 4,368
(112)
$ 4,867
2008
649
$
2007
787
$
410
(79)
(73)
44
302
$ 1,089
2007
$ —
143
302
445
$
consolidated stateMents of retained earnings
YEARs EndEd dECEmbER 31 (mILL I Ons )
Retained earnings, beginning of year
Change in accounting policy
Net income
Preferred equity issue costs
Shareholder distributions – preferred equity
– common equity
Amount paid in excess of book value
of common shares purchased for cancellation
consolidated stateMents of coMprehensive (loss) incoMe
note
YEARs EndEd dECEmbER 31 (m IL LIOn s)
Net income
Other comprehensive (loss) income
Foreign currency translation
Available-for-sale securities
Derivative instruments designated as cash flow hedges
Future income taxes on above items
Comprehensive (loss) income
3
(780)
(277)
(45)
(113)
(1,215)
(566)
$
consolidated stateMents of accuMulated other coMprehensive (loss) incoMe
2008
YEARs EndEd dECEmbER 31 (m IL LIOn s)
445
Balance, beginning of year
Transition adjustment – January 1, 2007
Other comprehensive (loss) income
Balance, end of year
(1,215)
(770)
$
—
$
82
Brookfield Asset Management | 2008 Annual Report
consolidated stateMents of cash flows
YEARs EndEd dEC EmbER 31 (mILL I Ons )
Operating activities
Net income
Adjusted for the following non-cash items
Depreciation and amortization
Future income taxes and other provisions
Realization gains
Non-controlling interest in non-cash items
Equity accounted loss and dividends received from investments
Net change in non-cash working capital balances and other
Undistributed non-controlling interests in cash flows
Financing activities
Corporate borrowings, net of repayments
Property-specific mortgages, net of issuances
Other debt of subsidiaries, net of issuances
Capital provided by non-controlling interests
Capital securities issuance/(redemption)
Corporate preferred equity issuance
Common shares repurchased, net of issuances
Common shares of subsidiaries repurchased, net of issuances
Shareholder distributions
Investing activities
Investment in or sale of operating assets, net
Commercial properties
Power generation
Infrastructure
Development and other properties
Securities and loans
Financial assets
Investments
Other property, plant and equipment
Cash and cash equivalents
(Decrease)/Increase
Balance, beginning of year
Balance, end of year
note
2008
2007
$
649
$
787
22
27
27
27
27
27
27
27
27
27
27
1,330
(194)
(164)
(430)
68
1,259
(279)
587
1,567
333
(1,022)
(500)
533
143
—
(249)
(17)
(342)
(1,121)
73
(529)
361
(699)
126
319
(187)
(229)
(765)
1,034
200
(231)
(538)
93
1,345
1,472
467
3,284
476
2,484
1,824
268
(225)
181
(121)
(100)
(316)
4,471
(5,140)
(452)
(1,330)
(658)
(528)
636
115
(41)
(7,398)
(319)
1,561
$ 1,242
357
1,204
$ 1,561
Brookfield Asset Management | 2008 Annual Report
83
notes to consolidated financial stateMents
suMMary of accounting policies
1.
These consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) as
prescribed by the Canadian Institute of Chartered Accountants (“CICA”).
basis of presentation
(a)
All currency amounts are in United States dollars (“U.S. dollars”) unless otherwise stated. The consolidated financial statements
include the accounts of Brookfield Asset Management Inc. (the “company”) and the entities over which it has voting control, as well
as Variable Interest Entities (“VIEs”) for which the company is considered to be the primary beneficiary.
The company accounts for investments over which it has significant influence using the equity basis. Interests in jointly controlled
partnerships and corporate joint ventures are proportionately consolidated. Measurement of investments in which the company
does not have a significant influence depends on the financial instrument classification.
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates are required in the determination of cash flows and probabilities in assessing net recoverable
amounts and net realizable values, tax and other provisions, hedge effectiveness, and fair values.
reporting currency
(b)
The U.S. dollar is the functional currency of the company’s head office operations and the U.S. dollar is the company’s reporting
currency.
The accounts of self-sustaining subsidiaries having a functional currency other than the U.S. dollar are translated using the current
rate method. Gains or losses on translation are deferred and included in other comprehensive income in the cumulative translation
adjustment account. Gains or losses on foreign currency denominated balances and transactions that are designated as hedges of
net investments in these subsidiaries are reported in the same manner.
Foreign currency denominated monetary assets and liabilities of the company and integrated subsidiaries are translated at the rate
of exchange prevailing at year end and revenues and expenses at average rates during the period. Gains or losses on translation
of these items are included in the Consolidated Statements of Income. Gains or losses on transactions which hedge these items
are also included in the Consolidated Statements of Income. Gains or losses on translation of foreign currency denominated
available-for-sale financial instruments are included in other comprehensive income.
cash and cash equivalents
(c)
Cash and cash equivalents include cash on hand, demand deposits and all highly liquid short-term investments with original
maturities less than 90 days.
(d)
operating assets
Commercial Properties
(i)
Commercial properties held for investment are carried at cost less accumulated depreciation. Depreciation on buildings is provided
during the year on a straight-line basis over the estimated useful lives of the properties to a maximum of 60 years. Depreciation is
determined with reference to the carried value, remaining estimated useful life and residual value of each rental property. Tenant
improvements and re-leasing costs are deferred and amortized over the lives of the leases to which they relate.
CICA Handbook EIC-140, Accounting for Operating Leases Acquired in either an Asset Acquisition or a business Combination and
CICA Handbook EIC-137, Recognition of Customer Relationships Acquired in a business Combination require that when a company
acquires real estate in either an asset acquisition or business combination, a portion of the purchase price should be allocated to
the in-place leases to reflect the intangible amounts of leasing costs, above or below market tenant and land leases, and tenant
relationship values, if any. These intangible costs are amortized over their respective lease terms.
84
Brookfield Asset Management | 2008 Annual Report
Power Generation
(ii)
Power generating facilities are recorded at cost, less accumulated depreciation. Depreciation on power generating facilities and
equipment is provided at various rates on a straight-line basis over the estimated service lives of the assets, which are up to
60 years for hydroelectric generation assets.
Power generating facilities under development are recorded at cost, including pre-development expenditures, unless impairment
is identified requiring a write-down to estimated fair value.
(iii)
Infrastructure
(a) Timberlands
Timber assets are carried at cost, less accumulated depletion. Depletion of timber assets is determined based on the number of
cubic metres of timber harvested annually at a fixed rate.
(b) Transmission Infrastructure
Transmission assets are carried at cost, less accumulated depreciation. Depreciation on transmission and distribution facilities is
provided at various rates on a straight-line basis over the estimated service lives of the assets, which is up to 40 years.
development and Other Properties
(iv)
Development and other properties consist of residential properties, properties for which a major repositioning program is being
conducted and properties which are under construction. These properties are recorded at cost, including pre-development
expenditures. Homes and other properties held for sale, which include properties subject to sale agreements, are recorded at the
lower of cost and estimated fair value. Income received relating to homes and other properties held for sale is applied against the
carried value of these properties. Costs are allocated to the saleable acreage of each project or subdivision in proportion to the
anticipated revenue.
Financial Assets, Investments and securities
(v)
Financial Assets include securities that are not an active component of the company’s asset management operations and are
designated as either held-for-trading or available-for-sale. Investments in securities that are actively deployed in the company’s
operations are classified as securities and are designated as either held-for-trading or available-for-sale. Financial Assets and
Securities are recorded at fair value, with changes in fair value accounted for in net income or other comprehensive income as
applicable. Equity instruments designated as available-for-sale financial assets and securities that do not have a quoted market
price from an active market are carried at cost.
Investments include investments in the securities of affiliates and are accounted for using the equity method of accounting.
Provisions are established in instances where, in the opinion of management, the carrying values of financial assets or securities
classified as available-for-sale have been other than temporarily impaired.
Loans and notes Receivable
(vi)
Loans and notes receivable are recorded initially at their fair value and, with the exception of receivables designated as
held-for-trading, are subsequently measured at amortized cost using the effective interest method, less any applicable provision
for impairment. Loans and notes receivable designated as held-for-trading are recorded at fair value with changes in fair value
accounted for in net income in the period in which they arise. A provision for impairment is established when there is objective
evidence that the company will not be able to collect all amounts due according to the original terms of the receivables.
(e) asset impairment
For assets other than securities and loans and notes receivable, a write-down to estimated fair value is recognized if the estimated
undiscounted future cash flows from an asset or group of assets are less than their carried value. The projections of future cash
flows take into account the relevant operating plans and management’s best estimate of the most probable set of economic
conditions anticipated to prevail in the market.
accounts receivable and other
(f)
Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest
method, less any provision for impairment. Included in accounts receivable and other are restricted cash and inventories which are
Brookfield Asset Management | 2008 Annual Report
85
carried at the lower of average cost and net realizable value and materials and supplies which are valued at the lower of average
cost and replacement cost.
intangible assets and liabilities
(g)
Intangible assets and liabilities with a finite life are amortized on a straight-line basis over their estimated useful lives, generally
not exceeding 20 years, and are tested for impairment when conditions exist which may indicate that the estimated undiscounted
future net cash flows from the asset are less than its carrying amount.
goodwill
(h)
Goodwill represents the excess of the price paid for the acquisition of a consolidated entity over the fair value of the net identifiable
tangible and intangible assets acquired.
Goodwill is evaluated for impairment annually or more often if events or circumstances indicate there may be an impairment. If
the carrying value of a subsidiary, including the allocated goodwill, exceeds its fair value, goodwill impairment is measured as the
excess of the carrying amount of the subsidiary’s allocated goodwill over the implied fair value of the goodwill, based on the fair
value of the assets and liabilities of the subsidiary. Any goodwill impairment is charged to income in the period in which the
impairment is identified.
(i)
revenue and expense recognition
Asset management Fee Income
(i)
Revenues from performance-based incentive fees are recorded on the accrual basis based upon the amount that would be due
under the incentive fee formula at the end of the measurement period established by the contract where it is no longer subject to
adjustment based on future events. In some cases this will require that the recognition of performance-based incentive fees be
deferred to the end, or towards the end of the contract at which point performance can be more accurately measured.
Commercial Property Operations
(ii)
Revenue from a commercial property is recognized upon the earlier of attaining a break-even point in cash flow after debt servicing,
or the expiration of a reasonable period of time following substantial completion, but no later than one year following substantial
completion. Prior to this, the property is categorized as a property under development, and related revenue is applied to reduce
development costs.
The company has retained substantially all of the risks and benefits of ownership of its rental properties and therefore accounts for
leases with its tenants as operating leases. The total amount of contractual rent to be received from operating leases is recognized
on a straight-line basis over the term of the lease; a straight-line or free rent receivable, as applicable is recorded for the difference
between the rental revenue recorded and the contractual amount received. Rental revenue includes percentage participating rents
and recoveries of operating expenses, including property, capital and similar taxes. Percentage participating rents are recognized
when tenants’ specified sales targets have been met. Operating expense recoveries are recognized in the period that recoverable
costs are chargeable to tenants.
Revenue from commercial land sales is recognized at the time that the risks and rewards of ownership have been transferred,
possession or title passes to the purchaser, all material conditions of the sales contract have been met, and a significant cash down
payment or appropriate security is received.
Power Generation
(iii)
Revenue from the sale of electricity is recorded at the time power is provided based upon output delivered and capacity provided
at rates specified under contract terms or prevailing market rates.
(iv)
Infrastructure
(a) Timberlands
Revenue from timberlands is derived from the sale of logs and related products. The company recognizes sales to external customers
when the product is shipped and title passes, and collectibility is reasonably assured.
86
Brookfield Asset Management | 2008 Annual Report
(b) Transmission Infrastructure
Revenue from transmission infrastructure assets is derived from the transmission and distribution of electricity to industrial and retail
customers. Revenue is recognized at contracted rates when the electricity is delivered, and collectibility is reasonably assured.
development and Other Properties
(v)
Revenue from residential land sales is recognized at the time that the risks and rewards of ownership have been transferred,
possession or title passes to the purchaser, all material conditions of the sales contract have been met, and a significant cash down
payment or appropriate security is received.
Revenue from the sale of homes is recognized when title passes to the purchaser upon closing and at which time all proceeds are
received or collectibility is assured.
Revenue from the sale of condominium units is recognized using the percentage-of-completion method at the time that construction
is beyond a preliminary stage, sufficient units are sold and all proceeds are received or collectability is assured.
Revenue from construction projects is recognized by the percentage-of-completion method at the time that construction is beyond
a preliminary stage, there are indications that the work will be completed according to plan and all proceeds are received or
collectibility is assured.
securities and Loans and notes Receivable
(vi)
Revenue from notes receivable, loans and securities, less a provision for uncollectible amounts, is recorded on the accrual basis.
(vii) Other
The net proceeds recorded under reinsurance contracts are accounted for as deposits until a reasonable possibility that the
company may realize a significant loss from the insurance risk does not exist.
derivative financial instruments
(j)
The company and its subsidiaries selectively utilize derivative financial instruments primarily to manage financial risks, including
interest rate, commodity and foreign exchange risks. Hedge accounting is applied when the derivative is designated as a hedge
of a specific exposure and there is reasonable assurance that it will continue to be effective as a hedge based on an expectation
of offsetting cash flows or fair value. Hedge accounting is discontinued prospectively when the derivative no longer qualifies as a
hedge or the hedging relationship is terminated. Once discontinued, the cumulative change in fair value of a derivative that was
previously deferred by the application of hedge accounting is recognized in income over the remaining term of the original hedging
relationship. Balances in respect of unrealized mark-to-market gains or losses on derivative financial instruments are recorded in
Accounts Receivables and Other or Accounts Payable and Other Liabilities.
Items designated as hedges
(i)
Realized and unrealized gains and losses on foreign exchange forward contracts and currency swap contracts designated as
hedges of currency risks are included in other comprehensive income when the currency risk relates to a net investment in a
self-sustaining subsidiary and are otherwise included in income in the same period as when the underlying asset, liability or
anticipated transaction affects income.
Unrealized gains and losses on interest rate forward and swap contracts designated as hedges of future interest payments are
included in other comprehensive income when the interest rate risk relates to an anticipated interest payments. Unrealized gains
and losses on interest rate swaps carried to offset corresponding changes in the values of assets and cash flow streams that
are not reflected in the consolidated financial statements at December 31, 2008 and 2007 are recorded in other comprehensive
income. The periodic exchanges of payments on interest rate swap contracts designated as hedges of debt are recorded on an
accrual basis as an adjustment to interest expense. The periodic exchanges of payments on interest rate contracts designated as
hedges of future interest payments are amortized into income over the term of the corresponding interest payments.
Unrealized gains and losses on electricity forward and swap contracts designated as hedges of future power generation revenue
are included in other comprehensive income. The periodic exchanges of payments on power generation commodity swap contracts
designated as hedges are recorded on a settlement basis as an adjustment to power generation revenue.
Brookfield Asset Management | 2008 Annual Report
87
Items not designated as hedges
(ii)
Derivative financial instruments that are not designated as hedges are carried at estimated fair value, and gains and losses arising
from changes in fair value are recognized in income in the period the changes occur. Realized and unrealized gains and losses
on equity derivatives used to offset the change in share prices in respect of vested Deferred Share Units and Restricted Share
Appreciation Units are recorded together with the corresponding compensation expense. Realized and unrealized gains or losses
on other derivatives not designated as hedges are recorded in investment and other income.
income taxes
(k)
The company uses the asset and liability method whereby future income tax assets and liabilities are determined based on
differences between the carrying amounts and tax bases of assets and liabilities, and measured using the tax rates and laws that
will be in effect when the differences are expected to reverse.
(l)
other items
Capitalized Costs
(i)
Capitalized costs on assets under development and redevelopment include all expenditures incurred in connection with the
acquisition, development and construction of the asset until it is available for its intended use. These expenditures consist of costs
and interest on debt that is related to these assets. Ancillary income relating specifically to such assets during the development
period is treated as a reduction of costs.
Pension benefits and Employee Future benefits
(ii)
The costs of retirement benefits for defined benefit plans and post-employment benefits are recognized as the benefits earned by
employees. The company uses the accrued benefit method pro-rated using the length of service and management’s best estimate
assumptions to value its pension and other retirement benefits. Assets are valued at fair value for purposes of calculating the
expected return on plan assets. For defined contribution plans, the company expenses amounts as paid.
Liabilities and Equity
(iii)
Financial instruments that must or could be settled by a variable number of the company’s common shares upon their conversion
by the holders as well as the related accrued distributions are classified as liabilities on the Consolidated Balance Sheets under
the caption “Capital Securities” and are translated into U.S. dollars at period end rates. Dividends and yield distributions on these
instruments are classified as Interest expense in the Consolidated Statements of Income.
Asset Retirement Obligations
(iv)
Obligations associated with the retirement of tangible long-lived assets are recorded as liabilities when those obligations are
incurred, with the amount of the liabilities initially measured at fair value. These obligations are capitalized to the book value of the
related long-lived assets and are depreciated over the useful life of the related asset.
stock-based Compensation
(v)
The company and most of its consolidated subsidiaries account for stock options using the fair value method. Under the fair value
method, compensation expense for stock options is determined based on the fair value at the grant date using an option pricing
model and charged to income over the vesting period. The company’s publicly traded U.S. and Brazilian homebuilding subsidiaries
record the liability and expense of stock options based on their intrinsic value using variable plan accounting, reflecting differences
in how these plans operate. Under this method, vested options are revalued each reporting period, and any change in value is
included in income.
(m) changes in accounting policies adopted during 2008
Financial Instruments – disclosures and Presentation
(i)
On December 1, 2006, the Canadian Institute of Chartered Accountants (“CICA”) issued two new accounting standards, Section
3862, Financial Instruments – disclosures and Section 3863, Financial Instruments – Presentation. These standards replace
Section 3861, Financial Instruments – disclosure and Presentation and enhance the disclosure of the nature and extent of risks
arising from financial instruments and how the entity manages those risks. These new standards became effective for the company
on January 1, 2008 and the related disclosures are included as Note 19 to the consolidated financial statements in this report.
88
Brookfield Asset Management | 2008 Annual Report
Capital disclosures
(ii)
On December 1, 2006, the CICA issued Section 1535, Capital disclosures. Section 1535 requires the disclosure of: (i) an entity’s
objectives, policies and process for managing capital; (ii) quantitative data about an entity’s managed capital; (iii) whether an entity
has complied with capital requirements; and (iv) if an entity has not complied with such capital requirements, the consequences
of such non-compliance. This new standard became effective for the company on January 1, 2008 and the related disclosures are
included as Note 20 to the consolidated financial statements in this report.
Inventories
(iii)
In June 2007, the CICA issued Section 3031, Inventories, replacing Section 3030, Inventories. This standard provides guidance on
the determination of the cost of inventories and subsequent recognition as an expense, including any write-down to net realizable
value. This new standard became effective for the company on January 1, 2008. The impact of adopting this new standard was a
$4 million reduction of opening retained earnings.
(n)
future changes in accounting policies
Goodwill and Intangible Assets
(i)
In February 2008, the CICA issued Handbook Section 3064, Goodwill and Intangible Assets, replacing Handbook Sections 3062,
Goodwill and Other Intangible Assets and 3450, Research and development Costs. Various changes have been made to other
sections of the CICA Handbook for consistency purposes. The new section will be applicable to the financial statements relating to
fiscal years beginning January 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of
goodwill subsequent to its initial recognition of intangible assets by profit-oriented enterprises. The company is currently evaluating
the impact of Section 3064 on its financial statements.
International Financial Reporting standards
(ii)
The Accounting Standards Board (“AcSB”) confirmed in February 2008 that International Financial Reporting Standards (“IFRS”)
will replace Canadian GAAP for publicly accountable enterprises for financial periods beginning on and after January 1, 2011.
The company applied to the Canadian Securities Administrators (“CSA”) and was granted exemptive relief to prepare its financial
statements in accordance with IFRS earlier than required and intends to do so for periods beginning January 1, 2010, preparing its
first financial statements in accordance with IFRS for the three month period ended March 31, 2010. These financial statements
will include comparative results for the periods commencing January 1, 2009.
acquisitions
2.
The company accounts for business combinations using the purchase method of accounting which establishes specific criteria for
the recognition of intangible assets separately from goodwill. The cost of acquiring a business is allocated to its identifiable tangible
and intangible assets and liabilities on the basis of the estimated fair values at the date of purchase with any excess allocated to
goodwill.
completed during 2008
(a)
During the first quarter of 2008, the company increased its ownership interest in Brookfield Real Estate Finance Partners
(“BREF I”) to 33%. As a result, the company consolidates BREF I under the VIE rules. BREF I originates high quality real estate
finance investments on a leveraged basis.
The company completed the acquisition of Itiquira Energetica S.A. (“Itiquira”) during the second quarter of 2008. Itiquira owns and
operates a 156 megawatt hydroelectric facility located on the Itiquira River in Mato Grosso, Brazil.
During the second quarter of 2008, the company acquired MB Engenharia S.A. (“MB”). MB’s operations focus on land development
and homebuilding in the middle and middle-low segments throughout Brazil.
In the fourth quarter of 2008, a subsidiary of the company merged with Company S.A. (“Company”), diluting Brookfield’s ownership
in the consolidated entity. Company’s operations focus on land development and residential.
In December 2008, the company increased its ownership interest in Norbord Inc. (“Norbord”) from 36% to 60% through the
purchase of 99 million common shares and 50 million warrants issued as a result of a rights offering. As a result of the increase in
Brookfield Asset Management | 2008 Annual Report
89
ownership, the company ceased equity accounting for its investment in Norbord and commenced consolidating Norbord. Norbord
is an international producer of wood-based panels and oriented strand board.
In addition, the company also acquired $222 million of net assets which primarily relate to its timber, residential, retail mall and
power generation operations.
The following table summarizes the balance sheet impact of significant acquisitions in 2008:
(mILLIOns)
Cash, accounts receivable and other
Intangible assets
Goodwill
Property, plant and equipment
Non-recourse and corporate borrowings
Accounts payable and other liabilities
Future income tax asset (liability)
Non-controlling interests in net assets
bREF I
$ 1,389
—
—
—
(977)
(134)
—
(246)
Itiquira
$
67
—
—
436
(44)
(7)
(59)
—
mb
$ 212
Company
$ 396
norbord
$ 127
$
—
57
246
(277)
(174)
6
(41)
29
—
172
181
(418)
(45)
—
(165)
—
—
791
(507)
(160)
(73)
(106)
Other
8
28
13
477
(108)
(21)
(4)
(171)
total
$ 2,199
28
242
2,131
(2,331)
(541)
(130)
(729)
$
32
$ 393
$
$ 121
$
72
$ 222
$ 869
completed during 2007
(b)
On April 20, 2007, the company completed the acquisition of Longview Fibre Company for approximately $2.3 billion including
assumed debt and recorded $593 million of goodwill. With this transaction, the company has acquired 588,000 acres of prime,
freehold timberlands in Washington and Oregon and an integrated manufacturing operation that produces specialty papers and
containers.
The company completed the acquisition of the Multiplex Group’s (“Multiplex”) stapled securities in the fourth quarter of 2007,
comprising the shares of Multiplex Limited and the units of Multiplex Property Trust for A$5.05 per stapled security and recorded
goodwill of $694 million. Multiplex is a diversified property business with operations throughout Australia, New Zealand, the
United Kingdom and the Middle East. The Multiplex portfolio consists of 24 commercial properties, in addition to construction,
development, facilities and funds management divisions.
In December 2007, the company completed the acquisition of a retail mall portfolio consisting of four properties in the São Paulo
area and one in Rio de Janeiro. The properties were acquired for approximately $950 million.
In addition, the company acquired $972 million of net assets including other commercial properties, hydro generation facilities, and
hydro generation developments, together with associated intangibles, working capital and borrowings. Included in this balance is
the acquisition of a real estate equity securities manager which resulted in the recording of goodwill of $55 million in 2007.
The following table summarizes the balance sheet impact of the significant acquisitions in 2007:
(mILLIOns)
Cash, accounts receivable and other
Intangible assets
Goodwill
Property, plant and equipment
Non-recourse and corporate borrowings
Accounts payable and other liabilities
Intangible liabilities
Future income tax asset (liability)
Non-controlling interests in net assets
Preferred equity
Longview
$
487
—
593
1,985
(1,350)
(160)
—
(593)
—
—
multiplex
$ 1,650
766
694
5,123
(4,325)
(1,379)
65
87
(514)
—
Retail malls
$
13
—
13
$
Other
56
32
57
1,070
1,777
(95)
(57)
—
6
—
—
(724)
(29)
(107)
(9)
(62)
(19)
total
$ 2,206
798
1,357
9,955
(6,494)
(1,625)
(42)
(509)
(576)
(19)
$
962
$ 2,167
$
950
$
972
$ 5,051
90
Brookfield Asset Management | 2008 Annual Report
fair value of financial instruMents
3.
The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm’s-length transaction
between knowledgeable, willing parties who are under no compulsion to act. Fair values are determined by reference to quoted bid
or ask prices, as appropriate, in the most advantageous active market for that instrument to which the company has immediate
access. Where bid and ask prices are unavailable, the closing price of the most recent transaction of that instrument is used. In the
absence of an active market, fair values are determined based on prevailing market rates (bid and ask prices, as appropriate) for
instruments with similar characteristics and risk profiles or internal or external valuation models, such as option pricing models and
discounted cash flow analysis, using observable market inputs.
Fair values determined using valuation models require the use of assumptions concerning the amount and timing of estimated
future cash flows and discount rates. In determining those assumptions, the company looks primarily to external readily observable
market inputs such as interest rate yield curves, currency rates, and price and rate volatilities as applicable. The fair value of
interest rate swap contracts which form part of financing arrangements is calculated by way of discounted cash flows using market
interest rates and applicable credit spreads. In limited circumstances, the company uses input parameters that are not based on
observable market data and believes that using alternative assumptions will not result in significantly different fair values.
fair value of financial instruments
Financial instruments classified or designated as held-for-trading or available-for-sale are typically carried at fair value on the
Consolidated Balance Sheets. Equity instruments designated as available-for-sale that do not have a quoted market price from an
active market are carried at cost. The carrying amount of available-for-sale financial assets that do not have a quoted market price
from an active market was $143 million at December 31, 2008 (2007 – $182 million). Any changes in the fair values of financial
instruments classified as held-for-trading or available-for-sale are recognized in Net Income or Other Comprehensive Income,
respectively. The cumulative changes in the fair values of available-for-sale securities previously recognized in Accumulated Other
Comprehensive Income are reclassified to Net Income when the underlying security is either sold or there is a decline in value
that is considered to be other than temporary. During the year ended December 31, 2008, $26 million of net deferred losses
previously recognized in Accumulated Other Comprehensive Income were reclassified to Net Income as a result of the sale of
available-for-sale securities and other than temporary impairment of securities.
Available-for-sale securities measured at fair value or cost are assessed for impairment at each reporting date. As at
December 31, 2008, unrealized gains and losses in the fair values of available-for-sale financial instruments measured at fair value
amounted to $25 million (2007 – $164 million) and $169 million (2007 – $243 million) respectively. Unrealized gains and losses
for debt and equity securities are primarily due to changing interest rates, market prices and foreign exchange movements. As at
December 31, 2008, the company did not consider any investments to be other than temporarily impaired.
Gains or losses arising from changes in the fair value of held-for-trading financial assets are presented in the Consolidated
Statements of Income, within investment and other income in the period in which they arise. Dividends on held-for-trading and
available-for-sale financial assets are recognized in the Consolidated Statements of Income as part of investment and other income
when the company’s right to receive payment is established. Interest on available-for-sale financial assets is calculated using the
effective interest method and recognized in the Consolidated Statements of Income as part of investment and other income.
Brookfield Asset Management | 2008 Annual Report
91
carrying value and fair value of selected financial instruments
The following table provides a comparison of the carrying values and fair values for selected financial instruments as at
December 31, 2008 and December 31, 2007.
Financial Instrument
Held-for-
Classification
Trading
Available-for-Sale
Loans
Receivable
and Other
Liabilities
Held-to-
Maturity
Total
total
measurement basis (mILLIOns)
(Fair Value)
(Fair Value)
(Cost)
(Amortized Cost)
(Carrying Value)
(Fair Value)
(Carrying Value)
(Fair Value)
December 31, 2008
december 31, 2007
financial assets
Cash and cash equivalents
$ 1,242
$ — $ — $
$
1,242
$ 1,242
$
1,561
$
1,561
Financial Assets
Government bonds
Corporate bonds
Fixed income securities
Common shares
Loans receivable
Accounts receivable and other
Securities
Government bonds
Corporate bonds
Fixed income securities
Common shares
Loans and notes receivable
financial liabilities
130
139
3
72
—
344
610
—
—
—
—
—
—
46
90
33
100
—
269
—
381
344
408
27
1,160
—
—
—
—
—
—
—
—
—
—
—
143
143
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,752
$
—
—
—
—
—
174
174
3,056
—
—
—
—
—
309
176
229
36
172
174
787
176
229
36
172
174
787
3,666
3,666
381
344
408
170
1,303
2,061
9,059
381
344
408
473
1,606
1,596
420
371
62
308
368
1,529
3,519
465
670
449
244
1,828
909
420
371
62
308
368
1,529
3,519
465
670
449
1,138
2,722
909
$ 2,196
$ 1,429
$ 143
$
1,752
$
3,539
$
$ 8,897
$
9,346
$ 10,240
Corporate borrowings
$ — $ — $ — $
Property-specific mortgages
Subsidiary borrowings
Accounts payable and other
liabilities
Capital securities
—
—
371
—
—
—
—
—
—
—
—
—
$
371
$ — $ — $
—
—
—
—
—
—
$
2,284
$
2,284
$ 2,144
$
2,048
$
2,068
22,889
5,102
7,070
22,889
5,102
7,441
22,376
4,863
7,441
21,253
21,253
7,463
8,051
7,470
8,051
1,425
1,425
1,293
1,570
1,561
$ 38,770
$ 39,141
$ 38,117
$ 40,385
$ 40,403
hedging activities
The company uses derivatives and non-derivative financial instruments to manage or maintain exposures to interest, currency,
credit and other market risks. When derivatives are used to manage exposures, the company determines for each derivative
whether hedge accounting can be applied. Where hedge accounting can be applied, a hedge relationship is designated as a fair
value hedge, a cash flow hedge or a hedge of foreign currency exposure of a net investment in a self-sustaining foreign operation.
To qualify for hedge accounting the derivative must be highly effective in accomplishing the objective of offsetting changes in the
fair value or cash flows attributable to the hedged risk both at inception and over the life of the hedge. If it is determined that the
derivative is not highly effective as a hedge, hedge accounting is discontinued prospectively.
cash flow hedges
The company uses energy derivative contracts primarily to hedge the sale of power, interest rate swaps to hedge the variability in
cash flows related to a variable rate asset or liability, and equity derivatives to hedge the long-term compensation arrangements.
All components of each derivative’s change in fair value have been included in the assessment of cash flow hedge effectiveness.
For the year ended December 31, 2008, pre-tax net unrealized gains of $3 million (2007 – loss of $73 million) were recorded in
Other Comprehensive Income for the effective portion of the cash flow hedges.
92
Brookfield Asset Management | 2008 Annual Report
net investment hedges
The company uses foreign exchange contracts and foreign currency denominated debt instruments to manage its foreign currency
exposures to net investments in self-sustaining foreign operations having a functional currency other than the U.S. dollar. For the
year ended December 31, 2008, unrealized pre-tax net gains of $285 million (2007 – loss of $208 million) were recorded in Other
Comprehensive Income for the effective portion of hedges of net investments in self-sustaining foreign operations.
investMents
4.
Equity accounted investments include the following:
(mILLIOns)
Chile Transmission
Property funds
Brazil Transmission
Norbord Inc.
Real Estate Finance Fund
Other
Total
% of Investment
2008
17%
20 - 25%
3 - 10%
—
—
2007
28%
20 - 25%
7.5 - 25%
41%
27%
2008
324
233
207
—
—
126
890
$
$
book Value
$
2007
330
382
205
180
148
107
$
1,352
On March 12, 2008, following a change in the ownership structure of the Real Estate Finance Fund, the company commenced
accounting for its investment on a consolidated basis. During the fourth quarter of 2008, the company increased its ownership
interest in Norbord Inc. and began accounting for its investment on a consolidated basis.
5.
accounts receivable and other
(mILLIOns)
Accounts receivable
Prepaid expenses and other assets
Restricted cash
Total
note
(a)
(b)
(c)
2008
$ 3,056
3,644
610
$ 7,310
2007
$ 2,892
3,620
627
$ 7,139
accounts receivable
(a)
Included in accounts receivable are loans receivable from employees of the company and consolidated subsidiaries of $6 million
(2007 – $4 million).
prepaid expenses and other assets
(b)
Prepaid expenses and other assets includes $778 million (2007 – $773 million) of levelized receivables arising from straight-line
revenue recognition for commercial property leases and power sales contracts. Also included is $711 million (2007 – $932 million)
of future income tax assets and $993 million (2007 – $807 million) of inventory primarily related to completed residential properties
and pulp and paper products.
restricted cash
(c)
Restricted cash relates primarily to commercial property and power generating financing arrangements including defeasement of
debt obligations, debt service accounts and deposits held by the company’s insurance operations.
intangible assets
6.
Intangible assets includes $1,470 million (2007 – $1,953 million) related to leases and tenant relationships allocated from
the purchase price on the acquisition of commercial properties which is presented net of $526 million (2007 – $275 million)
accumulated amortization.
Brookfield Asset Management | 2008 Annual Report
93
7.
property, plant and equipMent
(mILLIOns)
Commercial properties
Power generation
Infrastructure
Development and other properties
Other plant and equipment
Total
(a)
commercial properties
(mILLIOns)
Commercial properties
Less: accumulated depreciation
Total
note
(a)
(b)
(c)
(d)
(e)
2008
$ 19,274
4,954
2,879
7,282
1,986
2007
$ 20,796
5,137
3,046
7,696
1,050
$ 36,375
$ 37,725
2008
$ 20,711
1,437
$ 19,274
2007
$ 22,086
1,290
$ 20,796
Commercial properties carried at a net book value of approximately $3,934 million (2007 – $4,000 million) are situated on
land held under leases or other agreements largely expiring after the year 2099. Minimum rental payments on land leases are
approximately $29 million (2007 – $28 million) annually for the next five years and $3,298 million (2007 – $3,256 million) in total
on an undiscounted basis.
Construction costs of $103 million and interest costs of $46 million were capitalized to the commercial property portfolio for
properties undergoing redevelopment in 2008 (2007 – $40 million and $31 million respectively).
(b)
power generation
(mILLIOns)
Hydroelectric power facilities
Wind energy
Co-generation and pumped storage
Less: accumulated depreciation
Generating facilities under development
Total
2008
$
5,233
2007
$
5,095
326
313
5,872
1,018
4,854
100
393
362
5,850
949
4,901
236
$
4,954
$
5,137
Generation assets includes the cost of the company’s 162 hydroelectric generating stations, wind energy, pumped storage and two
natural gas-fired cogeneration facilities. The company’s hydroelectric power facilities operate under various agreements for water
rights which extend to or are renewable over terms through the years 2009 to 2046.
note
(i)
(ii)
(c)
infrastructure
(mILLIOns)
Timberlands
Transmission
Total
(i)
timberlands
(mILLIOns)
Timberlands
Other property, plant and equipment
Less: accumulated depletion and amortization
Total
94
Brookfield Asset Management | 2008 Annual Report
2008
$
2,721
158
$
2,879
2008
$
2,987
19
3,006
285
2007
$
2,853
193
$
3,046
2007
$
3,202
21
3,223
370
$
2,721
$
2,853
(ii)
transmission
(mILLIOns)
Transmission lines and infrastructure
Other property, plant and equipment
Less: accumulated depreciation
Total
2008
167
82
249
91
158
$
$
2007
186
90
276
83
193
$
$
The company’s transmission infrastructure assets are comprised of power transmission and distribution networks, which are
operated under regulated rate base arrangements that are applied to the company’s invested capital.
development and other properties
(d)
Development and other properties include properties relating to the company’s opportunity investments, residential properties,
properties under development and properties held for development, and construction operations.
note
(i)
(ii)
(iii)
(iii)
(mILLIOns)
Opportunity investments
Residential
Under development
Held for development
Construction
Total
(i)
Opportunity Investments
(mILLIOns)
Commercial and other properties
Less: accumulated depreciation
Total
(ii)
Residential
(mILLIOns)
Residential properties – owned
– optioned
Total
$
2008
850
1,927
2,141
2,240
124
$
2007
981
1,850
3,660
1,158
47
$
7,282
$
7,696
2008
926
76
850
$
$
2008
$
1,858
69
2007
$
1,017
36
981
$
2007
$
1,747
103
$
1,927
$
1,850
Residential properties include infrastructure, land (owned and under option), and construction in progress for single-family homes
and condominiums. During 2008, the company capitalized $148 million of interest (2007 – $85 million) of interest to its residential
land operations.
under development and held for development
(iii)
Properties that are currently under development or held for future development include commercial developments, residential land,
and rural lands held for future development in agricultural or residential areas. During 2008, the company capitalized construction
related costs of $298 million (2007 – $203 million) and interest costs of $99 million (2007 – $58 million) to its commercial
development sites.
other plant and equipment
(e)
Other plant and equipment includes capital assets associated primarily with the company’s investments in Fraser Papers, Norbord,
Western Forest Products, and restructuring funds.
Brookfield Asset Management | 2008 Annual Report
95
8.
securities
(mILLIOns)
Government bonds
Corporate bonds
Fixed income securities
Common shares
Canary Wharf Group common shares
Total
$
2008
381
344
408
27
143
$
2007
465
670
449
62
182
$
1,303
$
1,828
Securities represent holdings that are actively deployed in the company’s financial operations and include $954 million
(2007 – $1,638 million) owned through the company’s insurance operations.
Corporate bonds include fixed-rate securities totalling $340 million (2007 – $634 million) with an average yield of 6.1%
(2007 – 5.2%) and an average maturity of approximately three years. Government bonds and fixed-income securities include
predominantly fixed-rate securities.
During the fourth quarter of 2008, the company transferred its investment in Canary Wharf Group to a pound sterling self-sustaining
subsidiary.
9.
loans and notes receivable
Loans and notes receivable include corporate loans, bridge loans and other loans, either advanced directly or acquired in the
secondary market.
The fair value of the company’s loans and notes receivable at December 31, 2008 is below the carrying value by $465 million
(2007 – $nil million) based on expected future cash flows, discounted at market rates for assets with similar terms and investment
risks.
The loans and notes receivable mature over the next eight years (2007 – five years), with an average maturity of approximately
one year (2007 – two years) and include fixed rate loans totalling $107 million (2007 – $5 million) with an average yield of 7.4%
(2007 – 10.0%).
10. corporate borrowings
(mILLIOns)
Term debt
Term debt
Term debt
Term debt
Term debt
Term debt
Term debt
Term debt
Term debt
market
maturity
Annual Rate
Currency
Public – U.S.
December 12, 2008
Public – U.S.
Public – U.S.
Private – U.S.
Private – U.S.
Public – U.S.
Public – Canadian
Public – U.S.
Public – Canadian
March 1, 2010
June 15, 2012
October 23, 2012
October 23, 2013
April 25, 2017
April 25, 2017
March 1, 2033
June 14, 2035
8.13%
5.75%
7.13%
6.40%
6.65%
5.80%
5.29%
7.38%
5.95%
US$
US$
US$
US$
US$
US$
C$
US$
C$
Commercial paper and bank borrowings
L + 63 b.p.
US$/C$
Deferred financing costs 1
Total
2008
$ —
$
200
350
75
75
250
205
250
246
649
(16)
2007
300
200
350
—
—
250
250
250
300
167
(19)
$ 2,284
$ 2,048
1 deferred financing costs are amortized to interest expense over the term of the borrowing following the effective interest method
L – One month LIbOR b.p. – basis Points
Term debt borrowings have a weighted average interest rate of 6.3% (2007 – 6.6%), and include $451 million (2007 – $550 million)
repayable in Canadian dollars equivalent to C$550 million (2007 – C$550 million).
The fair value of corporate borrowings at December 31, 2008 was below the company’s carrying values by $140 million
(2007 – exceeded by $20 million), determined by way of discounted cash flows using market rates adjusted for the company’s
96
Brookfield Asset Management | 2008 Annual Report
credit spreads. Corporate borrowings are recorded initially at their fair value, net of transaction costs incurred, and are subsequently
reported at their amortized cost calculated using the effective interest method.
In October 2008, the company issued $150 million of unsecured private placement term debt comprising $75 million of 5 year, 6.65%
notes and $75 million of 4 year 6.4% notes. In December 2008, the company repaid a $300 million corporate debt maturity.
11. non-recourse borrowings
property-specific Mortgages
(a)
Principal repayments on property-specific mortgages due over the next five years and thereafter are as follows:
(mILLIOns)
Commercial Properties
Power Generation
Infrastructure
2009
2010
2011
2012
2013
Thereafter
Total – 2008
Total – 2007
$
1,109
1,315
4,487
264
1,925
4,770
$ 13,870
$ 13,314
$
$
$
329
199
182
639
103
2,136
3,588
3,488
$
$
$
—
34
32
—
424
1,152
1,642
1,796
development and
Other Properties
$
956
1,022
279
292
66
61
$
$
2,676
3,046
specialty Funds
total
Annual Repayments
$
$
$
30
580
—
66
—
437
1,113
—
$
2,424
3,150
4,980
1,261
2,518
8,556
$
$
22,889
21,644
Property-specific mortgages include $3,005 million (2007 – $3,211 million) repayable in Canadian dollars equivalent to
C$3,670 million (2007 – C$3,206 million); $846 million (2007 – $164 million) in Brazilian real equivalent to R$1,978 million
(2007 – R$291 million); $725 million (2007 – $561 million) in British pounds equivalent to £496 million (2007 – £283 million);
$101 million (2007 – $nil) in New Zealand dollars equivalent to NZ$171 million (2007 – NZ$nil); and $2,074 million
(2007 – $2,360 million) in Australian dollars equivalent to A$2,943 million (2007 – A$2,697 million). The weighted average interest
rate at December 31, 2008 was 5.8% per annum (2007 – 6.1%).
Property-specific mortgages are recorded initially at their fair value, net of transaction costs incurred, and are subsequently reported
at their amortized cost calculated using the effective interest method.
The fair value of property-specific mortgages was below the company’s carrying values by $513 million (2007 – $nil), determined
by way of discounted cash flows using market rates adjusted for credit spreads applicable to the debt.
subsidiary borrowings
(b)
Principal repayments on subsidiary borrowings over the next five years and thereafter are as follows:
(mILLIOns)
Commercial Properties
Power Generation
Infrastructure
development and
Other Properties
total
Annual Repayments
Other
2009
2010
2011
2012
2013
Thereafter
Total – 2008
Total – 2007
$
360
$
369
$
80
—
—
711
—
$ 1,151
$ 2,793
$
$
—
—
—
—
284
653
797
$
$
4
1
141
—
—
—
146
8
$
393
497
54
19
99
33
$
297
168
385
273
15
919
$ 1,095
$ 1,389
$ 2,057
$ 2,089
$ 1,423
746
580
292
825
1,236
$ 5,102
$ 7,076
The fair value of subsidiary borrowings was below the company’s carrying values by $239 million (2007 – exceeded by $7 million),
determined by way of discounted cash flows using market rates adjusted for applicable credit spreads.
Subsidiary borrowings include $1,034 million (2007 – $1,504 million) repayable in Canadian dollars equivalent to C$1,262 million
(2007 – C$1,502 million); $552 million (2007 – $820 million) in Brazilian real equivalent to R$1,290 million (2007 – R$1,455 million);
$9 million (2007 – $9 million) in British pounds equivalent to £6 million (2007 – £4 million); $47 million (2007 – $25 million)
in European euros equivalent to €33 million (2007 – €17 million); $760 million (2007 – $1,573 million) in Australian dollars
Brookfield Asset Management | 2008 Annual Report
97
equivalent to A$1,078 million (2007 – A$1,798 million); and $nil (2007 – $126 million) in Japanese yen equivalent to ¥nil
(2007 – ¥14,030 million). The weighted average interest rate at December 31, 2008 was 6.4% per annum (2007 – 9.3%).
Commercial properties includes $240 million (2007 – $257 million) invested by investment partners in the form of debt capital in
entities that are required to be consolidated into the company’s accounts.
Residential property debt represents amounts drawn under construction financing facilities which are typically established on
a project-by-project basis. Amounts drawn are repaid from the proceeds on the sale of building lots, single-family homes and
condominiums and redrawn to finance the construction of new homes.
Subsidiary borrowings include obligations pursuant to financial instruments which are recorded as liabilities. These amounts
include $675 million (2007 – $584 million) of subsidiary obligations relating to the company’s international operations that are
subject to credit rating provisions and which are supported by corporate guarantees.
Subsidiary borrowings are recorded initially at their fair value, net of transaction costs incurred, and are subsequently reported at
their amortized costs calculated using the effective interest method.
12. accounts payable and other liabilities
(mILLIOns)
Accounts payable
Other liabilities and future tax liabilities
Total
note
(a)
(b)
2008
$
4,494
4,409
$
8,903
2007
$
5,020
4,843
$
9,863
accounts payable
(a)
Accounts payable include $1,014 million (2007 – $1,560 million) of insurance deposits, claims and other liabilities incurred by the
company’s insurance subsidiaries.
other liabilities and future tax liabilities
(b)
Other liabilities include the fair value of the company’s obligations to deliver securities it did not own at the time of sale and obligations
pursuant to financial instruments. Future tax liabilities as at December 31, 2008 are $1,461 million (2007 – $1,925 million).
intangible liabilities
13.
Intangible liabilities represent below-market tenant leases and above-market ground leases assumed on acquisitions, net of
accumulated amortization. At December 31, 2008, $891 million (2007 – $1,112 million) of below market leases were recorded net
of $374 million amortization (2007 – $218 million).
14. capital securities
The company has the following capital securities outstanding:
(mILLIOns)
Corporate preferred shares
Subsidiary preferred shares
Total
note
(a)
(b)
$
2008
543
882
$ 1,425
2007
$
517
1,053
$ 1,570
98
Brookfield Asset Management | 2008 Annual Report
(a)
corporate preferred shares and preferred securities
(mILLIOns, ExCEPt shARE InFORmA tIOn)
Class A preferred shares
Deferred financing costs
Total
shares
Outstanding
10,000,000
4,032,401
7,000,000
6,000,000
Cumulative
distribution
Rate
5.75%
5.50%
5.40%
5.00%
description
Series 10
Series 11
Series 12
Series 21
Currency
2008
2007
C$
C$
C$
C$
$
$
205
83
143
123
(11)
543
$
$
251
101
175
—
(10)
517
On June 25, 2008, the company issued 6,000,000 Class A Series 21, 5% preferred shares for cash proceeds of C$150 million, and
incurred transaction costs of C$5 million.
Subject to approval of the Toronto Stock Exchange, the Series 10, 11, 12 and 21 shares, unless redeemed by the company for cash,
are convertible into Class A common shares at a price equal to the greater of 95% of the market price at the time of conversion and
C$2.00, at the option of either the company or the holder, at any time after the following dates:
Class A Preferred shares
Series 10
Series 11
Series 12
Series 21
(b)
subsidiary preferred shares
(mILLIOns, ExCEPt shARE InFORmA tIOn)
Class AAA preferred shares of
Brookfield Properties Corporation
Deferred financing costs
Total
Earliest Permitted
Redemption date
Company’s
Conversion Option
September 30, 2008
September 30, 2008
June 30, 2009
March 31, 2014
June 30, 2013
June 30, 2009
March 31, 2014
June 30, 2013
holder’s
Conversion Option
March 31, 2012
December 31, 2013
March 31, 2018
June 30, 2013
shares
Cumulative
Outstanding
description
dividend Rate
Currency
8,000,000
4,400,000
8,000,000
8,000,000
8,000,000
6,000,000
Series F
Series G
Series H
Series I
Series J
Series K
6.00%
5.25%
5.75%
5.20%
5.00%
5.20%
C$
US$
C$
C$
C$
C$
2008
$ 164
2007
$ 200
110
164
164
164
123
(7)
110
200
200
200
150
(7)
$ 882
$ 1,053
The subsidiary preferred shares are redeemable at the option of either the company or the holder, at any time after the following
dates:
Class AAA Preferred shares
Series F
Series G
Series H
Series I
Series J
Series K
Earliest Permitted
Redemption date
Company’s
Conversion Option
September 30, 2009
September 30, 2009
holder’s
Conversion Option
March 31, 2013
June 30, 2011
September 30, 2015
June 30, 2011
December 31, 2011
December 31, 2008
June 30, 2010
December 31, 2011
December 31, 2008
June 30, 2010
December 31, 2015
December 31, 2010
December 31, 2014
December 31, 2016
December 31, 2012
December 31, 2012
Brookfield Asset Management | 2008 Annual Report
99
15. non-controlling interests in net assets
Non-controlling interests in net assets represent the common and preferred equity in consolidated entities that is owned by other
shareholders.
(mILLIOns)
Common equity
Preferred equity
Total
preferred equity
16.
Preferred equity represents perpetual preferred shares.
2008
$
5,883
446
$
6,329
2007
$
4,232
538
$
4,770
(mILLIOns, ExCEPt shARE InFORmA tIOn)
Class A preferred shares
Series 2
Series 4
Series 8
Series 9
Series 13
Series 15
Series 17
Series 18
Total
Rate
70% P
70% P/8.5%
Variable up to P
4.35%
70% P
B.A. + 40 b.p. 1
4.75%
4.75%
Issued and Outstanding
term
2008
2007
2008
2007
Perpetual
Perpetual
Perpetual
Perpetual
Perpetual
Perpetual
Perpetual
Perpetual
10,465,100
10,465,100
$ 169
$ 169
2,800,000
1,805,948
2,194,052
9,297,700
2,000,000
8,000,000
8,000,000
2,800,000
1,805,948
2,194,052
9,297,700
2,000,000
8,000,000
8,000,000
45
29
35
195
42
174
181
45
29
35
195
42
174
181
$ 870
$ 870
1 Rate determined in a quarterly auction
P – Prime Rate b.A. – bankers’ Acceptance Rate b.p. – basis Points
The company is authorized to issue an unlimited number of Class A preferred shares and an unlimited number of Class AA preferred
shares, issuable in series. No Class AA preferred shares have been issued.
The Class A preferred shares have preference over the Class AA preferred shares, which in turn are entitled to preference over
the Class A and Class B common shares on the declaration of dividends and other distributions to shareholders. All series of the
outstanding preferred shares have a par value of C$25 per share.
17. coMMon equity
The company is authorized to issue an unlimited number of Class A Limited Voting Shares (“Class A common shares”) and
85,120 Class B Limited Voting Shares (“Class B common shares”), together referred to as common shares.
The company’s common shareholders’ equity is comprised of the following:
(mILLIOns)
Class A and B common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive (loss) income
Common equity
numbER OF shAREs
Class A common shares
Class B common shares
Unexercised options
Total diluted common shares
2008
$ 1,278
42
4,368
(770)
2007
$ 1,275
57
4,867
445
$ 4,918
$ 6,644
572,479,652
583,527,581
85,120
572,564,772
27,761,269
600,326,041
85,120
583,612,701
27,344,215
610,956,916
100
Brookfield Asset Management | 2008 Annual Report
class a and class b common shares
(a)
The company’s Class A common shares and its Class B common shares are each, as a separate class, entitled to elect one-half of
the company’s Board of Directors. Shareholder approvals for matters other than for the election of directors must be received from
the holders of the company’s Class A common shares as well as the Class B common shares, each voting as a separate class.
During 2008 and 2007, the number of issued and outstanding common shares changed as follows:
Outstanding at beginning of year
Shares issued (repurchased)
Dividend reinvestment plan
Management share option plan
Business acquisitions
Repurchases
Other
Outstanding at end of year
2008
2007
583,612,701
581,815,929
161,386
3,014,077
—
(14,224,303)
911
71,251
4,920,468
1,795,297
(4,985,802)
(4,442)
572,564,772
583,612,701
In 2008, the company repurchased 14,224,303 (2007 – 4,985,802) Class A common shares under normal course issuer bids at
a cost of $287 million (2007 – $163 million). Proceeds from the issuance of common shares pursuant to the company’s dividend
reinvestment plan and management share option plan (“MSOP”), totalled $33 million (2007 – $45 million).
On November 16, 2007, the company issued 1,795,297 Class A common shares to acquire a real estate securities manager
representing consideration of $66 million.
earnings per share
(b)
The components of basic and diluted earnings per share are summarized in the following table:
(mILLIOns)
Net income
Preferred share dividends
Net income available for common shareholders
Weighted average outstanding common shares
Dilutive effect of options using treasury stock method
Common shares and common share equivalents
$
$
2008
649
(44)
605
581.1
10.8
591.9
$
$
2007
787
(44)
743
582.4
17.1
599.5
The holders of Class A common shares and Class B common shares rank on parity with each other with respect to the payment
of dividends and the return of capital on the liquidation, dissolution or winding up of the company or any other distribution of the
assets of the company among its shareholders for the purpose of winding up its affairs. With respect to the Class A and Class B
common shares, there are no dilutive factors, material or otherwise, that would result in different diluted earnings per share. This
relationship holds true irrespective of the number of dilutive instruments issued in either one of the respective classes of common
stock, as both classes of common shares participate equally, on a pro rata basis in the dividends, earnings and net assets of the
company, whether taken before or after dilutive instruments, regardless of which class of common shares is diluted.
stock-based compensation
(c)
Options issued under the company’s MSOP typically vest proportionately over five years and expire 10 years after the grant date.
The exercise price is equal to the market price at the grant date. During 2008, the company granted 3,823,000 (2007 – 3,516,763)
options with an average exercise price of $31.21 (C$31.47) (2007 – C$38.67) per share. The cost of the options granted was
determined using the Black-Scholes model of valuation, assuming a 7.5 year term to exercise (2007 – 7.5 year), 27% volatility
(2007 – 22%), a weighted average expected annual dividend yield of 1.7% (2007 – 1.2%) and a risk-free rate of 3.9% (2007 – 4.0%).
The cost of $21 million (2007 – $26 million) is charged to employee compensation expense on an equal basis over the five-year
vesting period of the options granted.
Brookfield Asset Management | 2008 Annual Report
101
The changes in the number of options during 2008 and 2007 were as follows:
Outstanding at beginning of year
Granted
Exercised
Cancelled
Outstanding at end of year
Exercisable at end of year
2008
Weighted
Average
Exercise Price
c$ 17.12
31.47
10.18
34.54
c$ 19.61
Number of
Options
(000’s)
27,344
3,823
(3,014)
(392)
27,761
16,671
2007
Weighted
Average
Exercise Price
C$ 13.25
38.67
9.20
26.87
C$ 17.12
number of
Options
(000’s)
28,992
3,517
(4,921)
(244)
27,344
15,876
At December 31, 2008, the following options to purchase Class A common shares were outstanding:
number Outstanding
(000’s)
1,439
3,875
4,510
3,011
8,022
6,904
27,761
Exercise Price
C$4.90 – C$5.69
C$5.72 – C$8.56
C$8.71 – C$12.28
C$13.37 – C$16.63
C$19.71 – C$29.47
C$29.91 – C$46.59
Weighted
Average
Remaining Life
number
Exercisable
(000’s)
1.3 years
2.1 years
3.8 years
5.3 years
6.5 years
8.7 years
1,439
3,875
4,490
2,374
3,825
668
16,671
A Restricted Share Unit Plan provides for the issuance of Deferred Share Units (“DSUs”), as well as Restricted Share Appreciation
Units (“RSAUs”). Under this plan, qualifying employees and directors receive varying percentages of their annual incentive bonus
or directors’ fees in the form of DSUs. The DSUs and RSAUs vest over periods of up to five years, and DSUs accumulate additional
DSUs at the same rate as dividends on common shares based on the market value of the common shares at the time of the
dividend. Participants are not allowed to convert DSUs and RSAUs into cash until retirement or cessation of employment. The value
of the DSUs, when converted to cash, will be equivalent to the market value of the common shares at the time the conversion takes
place. The value of the RSAUs when converted into cash will be equivalent to the difference between the market price of equivalent
numbers of common shares at the time the conversion takes place, and the market price on the date the RSAUs are granted. The
company uses equity derivative contracts to offset its exposure to the change in share prices in respect of vested and unvested
DSUs and RSAUs. The value of the vested DSUs and RSAUs as at December 31, 2008 was $132 million (2007 – $372 million).
Employee compensation expense for these plans is charged against income over the vesting period of the DSUs and RSAUs. The
amount payable by the company in respect of vested DSUs and RSAUs changes as a result of dividends and share price movements.
All of the amounts attributable to changes in the amounts payable by the company are recorded as employee compensation
expense in the period of the change, and for the year ended December 31, 2008, including those of operating subsidiaries, totalled
$61 million (2007 – $48 million), net of the impact of hedging arrangements.
18. derivative financial instruMents
The company’s activities expose it to a variety of financial risks, including market risk (i.e. currency risk, interest rate risk, and other
price risk), credit risk and liquidity risk. The company and its subsidiaries selectively use derivative financial instruments principally
to manage these risks.
102
Brookfield Asset Management | 2008 Annual Report
The aggregate notional amount of the company’s derivative positions at the end of 2008 and 2007 are as follows:
(mILLIOns)
Foreign exchange
Interest rates
Credit default swaps
Equity derivatives
Commodity instruments (energy)
note
(a)
(b)
(c)
(d)
(e)
2008
$
3,607
8,085
2,465
417
198
2007
$
2,887
8,694
2,350
870
193
$ 14,772
$ 14,994
foreign exchange
(a)
At December 31, 2008, the company held foreign exchange contracts with a notional amount of $361 million (2007 – $1,562 million)
at an average exchange rate of $1.22 (2007 – $1.01) to manage its Canadian dollar exposure. At December 31, 2008, the company
held foreign exchange contracts with a notional amount of $960 million (2007 – $198 million) at an average exchange rate of
$1.48 (2007 – $1.99) to manage its British pound exposure. The company also held foreign exchange contracts with a notional
amount of $1,053 million (2007 – $nil) at an average exchange rate of 0.67 to manage its Australian dollar exposure. The company
held cross currency interest rate swap contracts with a notional amount of $864 million (2007 – $946 million), to manage its
Canadian dollar and Australian dollar exposure. The remaining foreign exchange contracts relate to the company’s Brazilian and
European operations.
Included in 2008 income, are net gains on foreign currency balances amounting to $37 million (2007 – net losses of $24 million)
and included in the cumulative translation adjustment account in other comprehensive income are gains in respect of foreign
currency contracts entered into for hedging purposes amounting to $139 million (2007 – net losses of $60 million), which are
offset by translation losses on the underlying net assets.
interest rates
(b)
At December 31, 2008, the company held interest rate swap contracts having an aggregate notional amount of $400 million
(2007 – $1,200 million). The company’s subsidiaries held interest rate swap contracts having an aggregate notional amount of
$3,292 million (2007 – $3,191 million) of which $400 million (2007 – $400 million) was guaranteed by the company. The company’s
subsidiaries held interest rate cap contracts with an aggregate notional amount of $4,393 million (2007 – $4,303 million).
credit default swaps
(c)
As at December 31, 2008, the company held credit default swap contracts with an aggregate notional amount of $2,465 million
(2007 – $2,350 million). Credit default swaps are contracts which are designed to compensate the purchaser for any change
in value of an underlying reference asset, based on measurement in credit spreads, upon the occurrence of predetermined
credit events. The company is entitled to receive payments in the event of a predetermined credit event for up to $2,407 million
(2007 – $2,334 million) of the notional amount and could be required to make payments in respect of $58 million (2007 – $16 million)
of the notional amount.
equity derivatives
(d)
At December 31, 2008, the company and its subsidiaries held equity derivatives with a notional amount of $417 million
(2007 – $870 million) recorded at an amount equal to fair value. A portion of the notional amount represents a hedge of long-term
compensation arrangements and the balance represents common equity positions established in connection with the company’s
investment activities. The fair value of these instruments was reflected in the company’s consolidated financial statements at year
end.
commodity instruments
(e)
The company has entered into energy derivative contracts primarily to hedge the sale of generated power. The company endeavours
to link forward electricity sale derivatives to specific periods in which it expects to generate electricity for sale. All energy derivative
contracts are recorded at an amount equal to fair value and are reflected in the company’s consolidated financial statements at
year end.
other information regarding derivative financial instruments
The following table classifies derivatives elected as either fair value hedges, cash flow hedges or net investment hedges, and
Brookfield Asset Management | 2008 Annual Report
103
presents the effective portion of the hedge recorded in either other comprehensive income or in income, depending on the hedge
classification and the ineffective portion of the hedge recorded in Net Income during the year:
(mILLIOns)
Fair value hedges
Cash flow hedges
Net investment hedges
net Gain (Losses)
notional
Effective Portion
Ineffective Portion
$
238
6,722
2,750
$ 9,710
$
$
(5)
21
136
152
$
$
(2)
(7)
—
(9)
The following table presents the notional amounts underlying the company’s derivative instruments by term to maturity, as at
December 31, 2008, for both derivatives that are held-for-trading and derivatives that qualify for hedge accounting:
(mILLIOns)
held-for-trading
Foreign exchange derivatives
Interest rate derivatives
Interest rate swaps
Interest rate caps
Credit default swaps
Equity derivatives
Commodity derivatives
elected for hedge accounting
Foreign exchange derivatives
Interest rate derivatives
Interest rate swaps
Interest rate caps
Equity derivatives
Commodity derivatives
Residual term to Contractual maturity
< 1 year
1 to 5 years
> 5 years
Amount
total notional
$
204
$
148
$
—
$
352
192
357
549
10
4
35
631
36
667
2,453
372
9
505
—
505
2
33
71
1,328
393
1,721
2,465
409
115
$
802
$
3,649
$
611
$ 5,062
$ 2,421
$
650
$
184
$ 3,255
964
—
964
—
13
1,375
4,000
5,375
8
70
$ 3,398
$ 4,200
$
$
6,103
9,752
$
$
25
—
25
—
—
209
820
2,364
4,000
6,364
8
83
$ 9,710
$ 14,772
The following table presents the change in fair values of the company’s derivative positions during the years ended
December 31, 2008 and 2007, for both derivatives that are held-for-trading and derivatives that qualify for hedge accounting:
(mILLIOns)
Foreign exchange derivatives
Interest rate derivatives
Interest rate swaps
Interest rate caps
Credit default swaps
Equity derivatives
Commodity derivatives
Unrealized Gains
During 2008
Unrealized Losses
During 2008
$ 218
$
(42)
Net Change
During 2008
$ 176
2007
net Change
$
(84)
195
2
197
47
19
304
(375)
—
(375)
(20)
(238)
(157)
(180)
2
(178)
27
(219)
147
(127)
—
(127)
98
(38)
(58)
$ 785
$ (832)
$
(47)
$ (209)
19. risK ManageMent
The company is exposed to the following risks as a result of holding financial instruments: market risk (i.e. interest rate risk,
currency risk and other price risks that impact the fair values of financial instruments); credit risk; and liquidity risk. The following
is a description of these risks and how they are managed:
104
Brookfield Asset Management | 2008 Annual Report
Market risk
a)
Market risk is defined for these purposes as the risk that the fair value or future cash flows of a financial instrument held by the
company will fluctuate because of changes in market prices. Market risk includes the risk of changes in interest rates, currency
exchange rates and changes in market prices due to factors other than interest rates or currency exchange rates such as equity
prices, commodity prices or credit spreads.
The company attempts to reduce market risk from foreign currency assets and liabilities and the impact at changes in interest
rates, floating rate assets and liabilities by funding assets with financial liabilities in the same currency and with similar interest
rate characteristics and holding financial contracts such as interest rate and foreign exchange derivatives to minimize residual
exposures. Financial instruments held by the company that are subject to market risk include securities and loans receivable,
borrowings, and derivative instruments such as interest rate, currency, equity and commodity contracts. The categories of financial
instruments that can potentially give rise to significant variability are described in the following paragraphs.
Interest rate risk
The observable impacts on the fair values and future cash flows of financial instruments that can be directly attributable to interest
rate risk include changes in the net income from financial instruments whose cash flows are determined with reference to floating
interest rates and changes in the value of financial instruments whose cash flows are fixed in nature.
The company’s assets largely consist of long duration interest sensitive physical assets. Accordingly, the company’s financial
liabilities consist primarily of long-term fixed rate debt or floating rate debt that has been swapped to floating rates or fixed rates
with interest rate derivatives. These financial liabilities are, with few exceptions, recorded at their amortized cost. The company also
holds interest rate caps to limit its exposure to increases in interest rates on floating rate debt that has not been swapped and holds
interest rate contracts to lock in fixed rates on anticipated future debt issuances and as an economic hedge against the values of
long duration interest sensitive physical assets that have not been otherwise matched with fixed rate debt.
The result of a 50 basis point increase in interest rates on the company’s net floating rate assets and liabilities would have resulted
in a corresponding decrease in net income before tax of $13 million on an annualized basis.
Changes in the value of held-for-trading interest rate contracts are recorded in net income and changes in the value of contracts
that are elected for hedge accounting together with changes in the value of available-for-sale financial instruments are recorded in
other comprehensive income together with the change in the value of the item being hedged. The impact of a 10 basis point parallel
increase in the yield curve on the aforementioned financial instruments is estimated to result in a corresponding increase in net
income of $8 million and an increase in other comprehensive income of $1 million, before tax as at December 31, 2008.
Currency risk
Changes in currency rates will impact the carrying value of financial instruments denominated in currencies other than the U.S. dollar
in addition to any changes in the value of the financial instruments in the relevant foreign currency due to other risks.
The company holds financial instruments with net unmatched exposures in several currencies, changes in the translated value of
which are recorded in net income. The impact of a 1% increase in the U.S. dollar against these currencies would have resulted in
a $21 million increase in the value of these positions on a combined basis, of which $14 million relates to the Canadian dollar. The
impact on cash flows from financial instruments would be insignificant. The company holds financial instruments to hedge the net
investment in self-sustaining operations whose functional and reporting currencies are other than the U.S. dollar. A 1% increase
in the U.S. dollar would increase the value of these hedging instruments by $40 million as at December 31, 2008, which would
be recorded in other comprehensive income and offset by changes in the U.S. dollar carrying value of the net investment being
hedged.
Other price risk
Other price risk is the risk of variability in fair value due to movements in equity prices or other market prices such as commodity
prices and credit spreads.
Financial instruments held by the company that are exposed to equity price risk include equity securities and equity derivatives.
A 5% increase in the market price of equity securities and equity derivatives held by the company, excluding equity derivatives
in respect of compensation arrangements, would have increased net income by $1 million and decreased other comprehensive
Brookfield Asset Management | 2008 Annual Report
105
income by $2 million, prior to taxes. The company’s liability in respect of equity compensation arrangements is subject to variability
based on changes in the company’s underlying common share price. The company holds equity derivatives to hedge almost all of
the variability. A 5% change in the common equity price of the company in respect of compensation agreements would increase
the compensation liability and compensation expense by $15 million. This increase would be offset by a $15 million change in value
of the associated equity derivatives of which $14 million would offset the above mentioned increase in compensation expense and
the remaining $1 million would be recorded in other comprehensive income.
The company sells power and generation capacity under long-term agreements or financial contracts to stabilize future revenues.
Certain of the contracts are considered financial instruments and are recorded at fair value in the financial statements, with
changes in value being recorded in either net income or other comprehensive income as applicable. A 5% increase in energy prices
would have decreased net income for the year ended December 31, 2008 by approximately $15 million and other comprehensive
income by $12 million, prior to taxes. The corresponding increase in the value of the revenue or capacity being contracted, however,
is not recorded in net income until subsequent periods.
The company held credit default swap contracts with an aggregate net notional amount of $2.5 billion at December 31, 2008.
The company is exposed to changes in the credit spread of the contracts’ underlying reference asset. A 10 basis point increase
in the credit spread of the underlying reference assets would have increased net income by $11 million for the year ended
December 31, 2008, prior to taxes.
credit risk
b)
Credit risk is the risk of loss due to the failure of a borrower or counterparty to fulfill its contractual obligations. The company’s
exposure to credit risk in respect of financial instruments relates primarily to counterparty obligations regarding derivative contracts,
loans receivable and credit investments such as bonds and preferred shares.
The company assesses the credit worthiness of each counterparty before entering into contracts and ensures that counterparties
meet minimum credit quality requirements. Management evaluates and monitors counterparty credit risk for derivative financial
instruments and endeavours to minimize counterparty credit risk through diversification, collateral arrangements, and other credit
risk mitigation techniques. The credit risk of derivative financial instruments is generally limited to the positive fair value of the
instruments, which, in general, tends to be a relatively small proportion of the notional value. Substantially all of the company’s
derivative financial instruments involve either counterparties that are banks or other financial institutions in North America, the
United Kingdom and Australia, or arrangements that have embedded credit risk mitigation features. The company does not expect
to incur credit losses in respect of any of these counterparties. The maximum exposure in respect of loans receivables and credit
investments is equal to the carrying value.
liquidity risk
c)
Liquidity risk is the risk that the company cannot meet a demand for cash or fund an obligation as it comes due. Liquidity risk also
includes the risk of not being able to liquidate assets in a timely manner at a reasonable price.
To ensure the company is able to react to contingencies and investment opportunities quickly, the company maintains a high level
of liquidity at the corporate level. The primary source of liquidity consists of cash and financial assets, net of deposits and other
associated liabilities, and undrawn committed credit facilities.
The company is subject to the risks associated with debt financing, including the ability to refinance indebtedness at maturity.
These risks are mitigated through the use of long-term debt secured by high quality assets, maintaining debt levels that are in
management’s opinion relatively conservative, and by diversifying maturities over an extended period of time. The company also
seeks to include in its agreements terms that protect the company from liquidity issues of counterparties that might otherwise
impact the company’s liquidity.
20. capital ManageMent
The capital of the company consists of the components of shareholders’ equity in the company’s consolidated balance sheet
(i.e. common and preferred equity) as well as the company’s capital securities, which consist of preferred shares that are convertible
into common shares at the option of either the holder or the company. As at December 31, 2008, these items totalled $6.3 billion
on a book value basis (2007 – $8.0 billion).
106
Brookfield Asset Management | 2008 Annual Report
The company’s objectives when managing this capital is to maintain an appropriate balance between holding a sufficient amount
of capital to support its operations, which includes maintaining investment grade ratings at the corporate level, and providing
shareholders with a prudent amount of leverage to enhance returns. Corporate leverage, which consists of corporate debt as
well as subsidiary debt that is guaranteed by the company or is otherwise considered corporate in nature, totalled $3.0 billion at
December 31, 2008 (2007 – $2.8 billion). The company monitors its capital base and leverage primarily in the context of its
deconsolidated debt-to-total capitalization ratios. The ratio as at December 31, 2008 was 28% (2007 – 23%), which is within the
company’s target of between 20% and 30% on a book value basis.
The consolidated capitalization of the company includes the capital and financial obligations of consolidated entities, including
long-term property specific financings, subsidiary borrowings, capital securities as well as common and preferred equity and
equity held by other investors in consolidated entities. The capital in these entities is managed at the entity level with oversight by
management of the company. The capital is typically managed with the objective of maintaining investment grade levels in most
circumstances and is, except limited and carefully managed circumstances, without any recourse to the company. Management of
the company also takes into consideration capital requirements of consolidated and non-consolidated entities that it has interests
in when considering the appropriate level of capital and liquidity on a deconsolidated basis.
The company is subject to limited covenants in respect of its corporate debt and is in full compliance with all such covenants as at
December 31, 2008. The company and its consolidated entities are also in compliance with all covenants and other capital require-
ments arising from regulatory or contractual obligations of material consequence to the company.
revenues less direct operating costs
21.
Direct operating costs include all attributable expenses except interest, depreciation and amortization, taxes, other provisions and
non-controlling interests in income. The details are as follows:
(mILLIOns)
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds
Revenue
$ 2,761
1,286
455
3,689
2,090
2008
Expenses
$
930
400
259
3,449
1,786
Net
$ 1,831
886
196
240
304
Revenue
$ 2,851
959
599
1,802
1,246
2007
Expenses
$ 1,303
348
309
1,384
876
net
$ 1,548
611
290
418
370
$ 10,281
$ 6,824
$ 3,457
$ 7,457
$ 4,220
$ 3,237
22. non-controlling interests in incoMe
Non-controlling interests of others in income is segregated into the non-controlling share of income before certain items and their
share of those items, which include depreciation and amortization, income taxes and other provisions.
(mILLIOns)
Non-controlling interests’ share of income prior to the following
Non-controlling interests’ share of depreciation and amortization, and future income taxes and other provisions
Non-controlling interests in income
Distributed as recurring dividends
Preferred
Common
Undistributed (Overdistributed)
Non-controlling interests in income
23.
incoMe taxes
(mILLIOns)
Current
Future
Current and future income tax (recovery) expense
2008
$
791
(430)
$
361
$
$
2
203
156
361
2008
(7)
(461)
(468)
$
$
2007
$
636
(538)
98
5
169
(76)
98
$
$
$
2007
68
88
156
$
$
Future income tax assets relate primarily to non-capital losses available to reduce taxable income which may arise in the future.
The company and its Canadian subsidiaries have future income tax assets of $215 million (2007 – $359 million) that relate to
Brookfield Asset Management | 2008 Annual Report
107
non-capital losses which expire over the next 20 years, and $82 million (2007 – $105 million) that relate to capital losses which
have no expiry date. The company’s U.S. subsidiaries have future income tax assets of $177 million (2007 – $272 million) that
relate to net operating losses which expire over the next 20 years. The company’s international subsidiaries have future income
tax assets of $237 million (2007 – $196 million) that relate to operating losses which generally have no expiry date. The amount of
non-capital and capital losses and deductible temporary differences for which no future income tax assets have been recognized is
approximately $3,004 million (2007 – $2,825 million). The future income tax liabilities represent the cumulative amount of income
tax payable on the differences between the book values and the tax values of the company’s assets and liabilities at the rates
expected to be effective at the time the differences are anticipated to reverse. The future income tax liabilities relate primarily to
differences between book values and tax values of property, plant and equipment due to different depreciation rates for accounting
and tax purposes. The future income tax assets and liabilities are recorded in accounts receivable and other and accounts payable
and other liabilities on the balance sheet.
The following table reflects the company’s effective tax rate at December 31, 2008 and 2007:
Statutory income tax rate
Increase (reduction) in rate resulting from
Portion of gains not subject to tax
Lower income tax rates in other jurisdictions
Change in tax rates on temporary differences
Derecognition of future tax assets/(liabilities)
Foreign exchange gain and losses
Non-recognition of the benefit of current year’s tax losses
Other
Effective income tax rate
equity accounted loss froM investMents
24.
Equity accounted loss from investments includes the following:
(mILLIOns)
Norbord
Fraser Papers 1
Stelco Inc. 2
Total
2008
33%
(6)
(45)
(99)
7
(27)
27
13
(97)%
2007
33%
(13)
(8)
(7)
(9)
9
2
7
14%
$
2008
(46)
—
—
$
(46)
2007
(17)
(23)
(32)
(72)
$
$
1 during 2007, the company increased its ownership in Fraser Papers to 56% and started to account for the investment on a consolidated basis
2 during 2007, the company sold its 23% common equity interest in stelco
Joint ventures
25.
The following amounts represent the company’s proportionate interest in incorporated and unincorporated joint ventures that are
reflected in the company’s accounts:
(mILLIOns)
Assets
Liabilities
Operating revenues
Operating expenses
Net income
Cash flows from operating activities
Cash flows (used in) from investing activities
Cash flows from (used in) financing activities
2008
$
5,615
2,912
693
454
92
104
(145)
105
2007
$ 4,841
2,287
724
408
285
283
74
(189)
post-eMployMent benefits
26.
The company offers pension and other post employment benefit plans to employees of certain of its subsidiaries. The company’s
obligations under its defined benefit pension plans are determined periodically through the preparation of actuarial valuations.
The benefit plans’ expenses for 2008 were $13 million (2007 – $2 million). The discount rate used was 6% (2007 – 6%) with an
increase in the rate of compensation of 3% (2007 – 4%) and an investment rate of 7% (2007 – 8%).
108
Brookfield Asset Management | 2008 Annual Report
(mILLIOns)
Plan assets
Less accrued benefit obligation:
Defined benefit pension plan
Other post-employment benefits
Net (liability) asset
Less: Unamortized transitional obligations and net actuarial losses
Accrued benefit asset
27.
suppleMental cash flow inforMation
(mILLIOns)
Corporate borrowings
Issuances
Repayments
Net commercial paper and bank borrowings issued
Net
Property-specific mortgages
Issuances
Repayments
Net
Other debt of subsidiaries
Issuances
Repayments
Net
Common shares
Issuances
Repayments
Net
Commercial property
Proceeds of dispositions
Investments
Net
Power
Proceeds of dispositions
Investments
Net
Infrastructure
Proceeds of dispositions
Investments
Net
Development and other properties
Proceeds of dispositions
Investments
Net
Securities
Securities sold
Securities purchased
Loans collected
Loans advanced
Net
Financial assets
Securities sold
Securities purchased
Net
2008
983
$
2007
688
$
(1,094)
(62)
(173)
291
118
2008
150
(300)
483
333
$
$
$
$
4,620
(5,642)
$
(1,022)
$
1,379
(1,879)
$
(500)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
32
(281)
(249)
768
(695)
73
—
(529)
(529)
613
(252)
361
216
(915)
(699)
604
(319)
781
(940)
126
665
(346)
319
(586)
(62)
40
14
54
2007
474
(165)
167
476
$
$
$
$ 4,113
(1,629)
$ 2,484
$ 2,897
(1,073)
$ 1,824
$
$
$
44
(165)
(121)
328
(5,468)
$
(5,140)
$
$
$
—
(452)
(452)
—
(1,330)
$
(1,330)
$
$
$
$
127
(785)
(658)
128
(552)
707
(811)
(528)
$ 1,396
(760)
636
$
Brookfield Asset Management | 2008 Annual Report
109
Cash taxes paid were $78 million (2007 – $103 million) and are included in current income taxes. Cash interest paid totalled
$2,163 million (2007 – $1,686 million). Sustaining capital expenditures in the company’s power generating operations were
$70 million (2007 – $50 million), in its property operations were $48 million (2007 – $45 million) and in its transmission operations
were $9 million (2007 – $10 million).
segMented inforMation
28.
The company’s presentation of reportable segments is based on how management has organized the business in making operating
and capital allocation decisions and assessing performance. The company has five reportable segments:
(a)
(b)
(c)
(d)
(e)
commercial properties operations, which are principally commercial office properties and retail properties, located primarily in
major North American, Brazilian, and Australian cities;
power generation operations, which are predominantly hydroelectric power generating facilities on river systems in North
America and Brazil;
infrastructure operations, which are predominantly timberlands and electrical transmission and distribution systems. The
company’s timberland operations are located in North America and Brazil. The electrical transmission and distribution systems
are located in Northern Ontario and Chile;
development and other properties operations, which are principally commercial and residential development, opportunistic
investing and homebuilding operations, located primarily in major North American, Brazilian and Australian cities; and
specialty funds, which include the company’s bridge lending, real estate finance and restructuring funds, and which are
managed by the company for itself and for its institutional partners.
Non-operating assets and related revenues, cash flows and income are presented as financial assets and other.
Revenue, net income and assets by reportable segments are as follows:
As At And FOR thE YEARs EndEd dECEmbER 31
(mILLIOns)
Commercial properties
Power generation
Infrastructure
Development and other properties
Specialty funds
Cash, financial assets, fee revenues and other
Revenue
$ 3,075
1,286
616
3,654
2,139
2,098
Revenue and assets by geographic segments are as follows:
$ 12,868
$
2008
Net
Income
$
203
328
37
(7)
126
(38)
649
Assets
$ 23,699
6,778
4,414
9,822
3,943
4,955
Revenue
$ 2,891
971
622
1,751
1,368
1,740
$ 53,611
$ 9,343
$
2007
net
Income
$
24
106
4
138
187
328
787
As At And FOR thE YEARs EndEd dECEmbER 31
2008
2007
(mILLIOns)
United States
Canada
Australia
Brazil
Europe
Other
Revenue
$ 5,617
3,005
1,826
1,092
543
785
Assets
$ 27,220
11,755
6,031
5,749
1,901
955
Revenue
$ 4,844
2,604
622
636
251
386
Assets
$ 23,571
7,106
4,230
12,115
2,676
5,899
$ 55,597
Assets
$ 27,156
12,248
8,323
5,648
1,154
1,068
$ 12,868
$ 53,611
$ 9,343
$ 55,597
110
Brookfield Asset Management | 2008 Annual Report
29. other inforMation
commitments, guarantees and contingencies
In the normal course of business, the company and its subsidiaries enter into contractual obligations which include commitments
to provide bridge financing, and letters of credit and guarantees provided in respect of power sales contracts and reinsurance
obligations. At the end of 2008, the company and its subsidiaries had $1,269 million (2007 – $1,068 million) of such commitments
outstanding of which $211 million (2007 – $95 million) is included on liabilities in the consolidated balance sheets.
In addition, the company and its consolidated subsidiaries execute agreements that provide for indemnifications and guarantees to
third parties in transactions or dealings such as business dispositions, business acquisitions, sales of assets, provision of services,
securitization agreements, and underwriting and agency agreements. The company has also agreed to indemnify its directors and
certain of its officers and employees. The nature of substantially all of the indemnification undertakings prevents the company
from making a reasonable estimate of the maximum potential amount the company could be required to pay third parties, as
in most cases the agreements do not specify a maximum amount, and the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined at this time. Neither the company nor its consolidated
subsidiaries have made significant payments in the past nor do they expect at this time to make any significant payments under
such indemnification agreements in the future.
The company periodically enters into joint venture, consortium or other arrangements that have contingent liquidity rights in favour
of the company or its counterparties. These include buy-sell arrangements, registration rights and other customary arrangements.
These agreements generally have embedded protective terms that mitigate the risk to us. The amount, timing and likelihood
of any payments by the company under these arrangements is in most cases dependent on either further contingent events or
circumstances applicable to the counterparty and therefore cannot be determined at this time.
The company and its subsidiaries are contingently liable with respect to litigation and claims that arise in the normal course of
business.
The company has acquired $500 million of insurance for damage and business interruption costs sustained as a result of an act
of terrorism. However, a terrorist act could have a material effect on the company’s assets to the extent damages exceed the
coverage.
The company has reviewed its loan agreements and believes it is in compliance, in all material respects, with the contractual
obligations therein.
The company, through its subsidiaries within the residential properties operations, is contingently liable for obligations of its
associates in its land development joint ventures. In each case, all of the assets of the joint venture are available first for the
purpose of satisfying these obligations, with the balance shared among the participants in accordance with predetermined joint
venture arrangements.
insurance
The company conducts insurance operations as part of its asset management activities. As at December 31, 2008, the company held
insurance assets of $309 million (2007 – $581 million) in respect of insurance contracts that are accounted for using the deposit
method which were offset in each year by an equal amount of reserves and other liabilities. During 2008, net underwriting losses on
reinsurance operations were $18 million (2007 income of $67 million) representing $363 million (2007 – $544 million) of premium
and other revenues offset by $381 million (2007 – $477 million) of reserves and other expenses.
Brookfield Asset Management | 2008 Annual Report
111
five year financial review
As At And FOR thE YEARs EndEd dECEmbER 31
(mILLIOns, ExCEPt PER shARE AmOunts; unAudItEd)
per common share (fully diluted)
Book value – actual
– Underlying value
– Underlying value pre-tax
Cash flow from operations
Cash return on book equity
Net income
Market trading price – NYSE
Dividends paid
Common shares outstanding
Basic
Diluted
total (millions)
Total assets under management
Consolidated balance sheet assets
Corporate borrowings
Non-recourse borrowings
Property-specific mortgages
Other debt of subsidiaries
Common equity – book value
– Underlying value 3
– Underlying value, pre-tax 3
Revenues
Operating income
Cash flow from operations
Net income
2008
2007
2006
2005
2004
$
8.93
20.67
24.37
2.33
23%
$
1.02
$ 15.27
$ 1.45 1
572.6
600.3
$ 78,697
53,611
2,284
22,889
5,102
4,918 2
11,931
14,151
12,868
4,809
1,423
649
$ 11.64
—
—
3.11
30%
$
1.24
$ 35.67
0.47
$
583.6
611.0
$ 94,340
55,597
2,048
21,644
7,076
6,644
—
—
9,343
4,509
1,907
787
$
9.37
—
—
2.95
34%
$
1.90
$ 32.12
0.39
$
581.8
610.8
$ 71,121
40,708
1,507
17,148
4,153
5,395
—
—
6,897
3,776
1,801
1,170
$
7.87
—
—
1.46
21%
$
2.72
$ 22.37
0.26
$
579.6
608.0
$ 49,700
26,058
1,620
8,756
2,510
4,514
—
—
5,220
2,319
908
1,662
$
5.67
—
—
1.03
19%
$
0.90
$ 16.01
0.24
$
582.1
611.3
$ 27,146
20,007
1,675
6,045
2,373
3,277
—
—
3,867
1,793
626
555
1 Includes brookfield Infrastructure special dividend of $0.94
2 Reduction reflects distribution of brookfield Infrastructure
3 Reflects fair value prepared in accordance with procedures and assumptions expected to be utilized to prepare the company’s January 1, 2009
IFRs balance sheet
112
Brookfield Asset Management | 2008 Annual Report
Corporate Governance
Management and the Board of Directors are committed to working together to achieve strong and effective corporate governance.
Our Board of Directors is of the view that our corporate governance policies and practices and our disclosure in this regard are
appropriate, effective and consistent with the guidelines established by Canadian and U.S. securities regulators. We continue to
review our corporate governance policies and practices in relation to evolving legislation, guidelines and best practices.
Our Statement of Corporate Governance Practices is set out in full in the Management Information Circular mailed each year to all our
shareholders along with the Notice of our Annual Meeting. This Statement is also available on our web site, www.brookfield.com,
at “About Brookfield / Corporate Governance.”
You can also access the following documents referred to in the Statement on our web site – our Board of Directors Charter, the
Charter of Expectations for Directors, the Charters of the Board’s three Standing Committees (Audit, Governance & Nominating and
Management Resources & Compensation), Board Position Descriptions, our Code of Business Conduct and our Corporate Disclosure
Policy. We encourage you to review these materials.
Sustainable Development
Management and the Board of Directors are committed to the principle that our business decisions will consider a broad range
of issues, including the long-term sustainability of our local communities in which we operate, taking into account current and
future environmental, safety, health and economic considerations. The review and improvement of our sustainability practices is an
ongoing process that we take very seriously throughout our organization.
Environmental initiatives across our operations include energy reduction, water conservation, recycling, air quality standards,
wildlife preservation, timber harvesting techniques and erosion control. We believe that these initiatives will benefit the company
over the long term from an economic perspective by increasing competitiveness and strengthening the local communities in which
we operate. While an appropriate balance is sometimes difficult to achieve, the initiatives we undertake and the investments we
make in building our company are guided by our core set of values around sustainable development.
Our renewable energy business is focused on hydroelectricity and wind power generation, while our office properties contain
building features, systems and programs that foster environmental responsibility, cost and energy savings for tenants, and the
health and safety of all those who work at and visit our properties. We implement comprehensive environmental initiatives in
existing properties as well as new development projects to ensure industry standards are achieved and exceeded. For example,
our most recent office development, the Bay Adelaide Centre in Toronto, is being built to a Leadership in Energy and Environmental
Design (“LEED”) Gold standard. The LEED® Green Building Rating System is the internationally accepted scorecard for sustainable
sites, water efficiency, energy and atmosphere, materials and resources, and indoor environmental quality.
Brookfi eld Asset Management | 2008 Annual Report
113
Shareholder Information
Shareholder Enquiries
Shareholder enquiries are welcomed and should be directed to
our Investor Relations group at 416-363-9491 or at the email
below. Alternatively shareholders may contact the company at its
administrative head office:
Brookfield Asset Management Inc.
Suite 300, Brookfield Place, Box 762, 181 Bay Street
Toronto, Ontario M5J 2T3
Telephone: 416-363-9491
Facsimile: 416-365-9642
Web Site: www.brookfield.com
E-Mail:
inquiries@brookfield.com
Shareholder enquiries relating to dividends, address changes and share
certificates should be directed to the company’s Transfer Agent:
CIBC Mellon Trust Company
P.O. Box 7010, Adelaide Street Postal Station
Toronto, Ontario M5C 2W9
Telephone: 416-643-5500 or
1-800-387-0825 (Toll free throughout North America)
Facsimile: 416-643-5501
Web Site: www.cibcmellon.com
E-Mail:
inquiries@cibcmellon.com
Stock Exchange Listings
Class A Common Shares
Class A Preference Shares
Series 2
Series 4
Series 8
Series 9
Series 10
Series 11
Series 12
Series 13
Series 14
Series 17
Series 18
Series 21
Symbol
BAM
BAM.A
BAMA
BAM.PR.B
BAM.PR.C
BAM.PR.E
BAM.PR.G
BAM.PR.H
BAM.PR.I
BAM.PR.J
BAM.PR.K
BAM.PR.L
BAM.PR.M
BAM.PR.N
BAM.PR.O
Stock Exchange
New York
Toronto
Euronext Amsterdam
Toronto
Toronto
Toronto
Toronto
Toronto
Toronto
Toronto
Toronto
Toronto
Toronto
Toronto
Toronto
Investor Relations and Communications
We are committed to informing our shareholders of our progress through
a comprehensive communications program which includes publication
of materials such as our annual report, quarterly interim reports and
press releases for material information. We also maintain a web site
that provides ready access to these materials, as well as statutory
filings, stock and dividend information and other presentations.
Meeting with shareholders is an integral part of our communications
program. Directors and management meet with Brookfield’s sharehold-
ers at our annual meeting and are available to respond to questions
at any time. Management is also available to investment analysts,
financial advisors and media to ensure that accurate information is
available to investors. All materials distributed at any of these meetings
are posted on the company’s web site.
The text of the company’s 2008 Annual Report is available in French
on request from the company and is filed with and available through
SEDAR at www.sedar.com.
Annual Meeting of Shareholders
The company’s 2009 Annual and Special Meeting of Shareholders
will be held at 9:00 a.m. on Tuesday, May 5, 2009 at the Auditorium,
300 Madison Avenue, New York, New York, U.S.A. and will be webcast
through www.brookfield.com.
Dividend Reinvestment Plan
Registered holders of Class A Common Shares who are resident in
Canada may elect to receive their dividends in the form of newly issued
Class A Common Shares at a price equal to the weighted average price
at which the shares traded on the Toronto Stock Exchange during the
five trading days immediately preceding the payment date of such
dividends.
The Dividend Reinvestment Plan allows current shareholders to
acquire additional Class A Common Shares in the company without
payment of commissions. Further details on the Dividend Reinvestment
Plan and a Participation Form can be obtained from our administrative
head office, our transfer agent or from our web site.
Dividend Record and Payment Dates
Class A Common Shares 1
First day of February, May, August and November
Last day of February, May, August and November
Record Date
Payment Date
Class A Preference Shares 1
Series 2, 4, 10, 11, 12, 13, 17, 18 and 21 15th day of March, June, September and December Last day of March, June, September and December
Series 8 and 14
Series 9
Last day of each month
12th day of following month
15th day of January, April, July and October
First day of February, May, August and November
1
All dividend payments are subject to declaration by the Board of Directors
114
Brookfi eld Asset Management | 2008 Annual Report
Board of Directors and Officers
BOARD OF DIRECTORS
Robert J. Harding, F.C.A.
Chairman
Brookfield Asset Management Inc.
Jack L. Cockwell
Group Chairman
Brookfield Asset Management Inc.
Marcel R. Coutu
President and Chief Executive Officer
Canadian Oil Sands Limited
The Hon. J. Trevor Eyton, O.C.
Member of the Senate of Canada
J. Bruce Flatt
Senior Managing Partner and CEO
Brookfield Asset Management Inc.
James K. Gray, O.C.
Founder and former Chairman
and Chief Executive Officer
Canadian Hunter Exploration Ltd.
Maureen Kempston Darkes, O.C., O.ONT.
Group Vice President and President
Latin America, Africa and Middle East
General Motors Corporation
David W. Kerr
Corporate Director
Lance Liebman
Director
American Law Institute
Philip B. Lind, C.M.
Vice-Chairman
Rogers Communications Inc.
Details on Brookfield’s Directors are provided in the Management Information Circular and on Brookfield’s web site
SENIOR MANAGING PARTNERS
G. Wallace F. McCain, O.C., C.C., O.N.B.
Chairman
Maple Leaf Foods Inc.
The Hon. Frank J. McKenna, P.C., O.C., O.N.B.
Deputy Chair
TD Bank Financial Group
Dr. Jack M. Mintz
Palmer Chair in Public Policy
University of Calgary
Patricia M. Newson, C.A.
President and Chief Executive Officer
AltaGas Utility Group Inc.
James A. Pattison, O.C., O.B.C.
Chief Executive Officer
The Jim Pattison Group
George S. Taylor
Corporate Director
Barry S. Blattman
Jeffrey M. Blidner
Richard B. Clark
Steven J. Douglas
J. Bruce Flatt
Joseph S. Freedman
Harry A. Goldgut
CHAIRMEN
Gordon E. Arnell, O.C.
Ian G. Cockwell
Jack L. Cockwell
Edward C. Kress
Timothy R. Price
John E. Zuccotti
Brian D. Lawson
Richard J. Legault
Luiz Ildefonso Lopes
Cyrus Madon
George E. Myhal
Samuel J.B. Pollock
CORPORATE OFFICERS
J. Bruce Flatt
Senior Managing Partner and
Chief Executive Officer
Brian D. Lawson
Senior Managing Partner and
Chief Financial Officer
Catherine J. Johnston
Corporate Secretary
Brookfield incorporates sustainable development practices within our
corporation. This document was printed in Canada using vegetable based
inks on FSC certified stock.
Brookfi eld Asset Management | 2008 Annual Report
115
CORPORATE OFFICES
REGIONAL OFFICES
New York – United States
Three World Financial Center
200 Vesey Street, 10th Floor
New York, New York
10281-0221
T 212-417-7000
F 212-417-7196
Sydney – Australia
Level 1
1 Kent Street
Sydney, NSW 2000
T 62-2-9256-5000
F 62-2-9256-5001
Hong Kong
Lippo Centre, Tower Two
26/F, 2601
89 Queensway, Hong Kong
T 852-2810-4538
F 852-2810-7083
Dubai – UAE
Level 12, Al Attar Business Tower
Sheikh Zayed Road
Dubai, UAE
T 971-4-3158-500
F 971-4-3158-600
Toronto – Canada
Brookfi eld Place, Suite 300
Bay Wellington Tower
181 Bay Street, Box 762
Toronto, Ontario M5J 2T3
T 416-363-9491
F 416-365-9642
London – United Kingdom
40 Berkeley Square
London W1J 5AL
United Kingdom
T 44 (0) 20-7659-3500
F 44 (0) 20-7659-3501
São Paulo – Brazil
Brascan Century Plaza
Rua Joaquim Floriano,
466 Edifi cio Corporate,10° Andar,
Conjunto 1004
São Paulo, SP Brasil
CEP: 04534-002
T 55 (11) 3707-6700
F 55 (11) 3078-4249
www.brookfield.com NYSE: BAM
TSX: BAM.A
EURONEXT: BAMA