Thank you for standing by. This is the conference operator. Welcome to the Brookfield Asset Management Q2 2016 Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Suzanne Fleming, Senior Vice President of Communications. Please go ahead.

Thank you, operator and good morning. Welcome to Brookfield's second quarter conference call. On the call today are Bruce Flatt, our Chief Executive Officer and Brian Lawson, our Chief Financial Officer. Brian will start off by discussing highlights of our financial and operating results for the quarter and Bruce will then talk about our market outlook and Brookfield's approach to investing. After our formal comments, we'll then turn the call over to the operator and take your questions. In order to accommodate all of those who want to ask questions, we ask that you refrain from asking multiple questions at one time in order to provide an opportunity for others in the queue. We'll be happy to respond to additional questions later in the call as time permits. I'd like to remind you that in responding to questions and in talking about new initiatives and our financial and operating performance, we may make forward-looking statements including forward-looking statements within the meaning of applicable Canadian and U.S. securities law. These statements reflect predictions of future events and trends and do not relate to historic events. They're subject to known and unknown risks and future events may differ materially from such statements. For further information on these risks and their potential impacts on our company, please see our filings with the security regulators in Canada and the U.S. and the information available on our Web site. Thank you. And now I'll turn the call over to Brian.

Thanks, Suzanne and good morning everybody. We're quite pleased with the results for the quarter, which highlight the growth in our asset management business and improved operating results across our other businesses. The second quarter marked the completion of several important milestones. In particular, we completed the fund raising for all of our new flagship funds, closing on $27 billion of capital in aggregate and we launched Brookfield Business Partners which is the fourth of our listed entities. While our work isn't over yet, these initiatives have set us up very well for continued growth. Our second quarter funds from operations totaled $637 million compared to $520 million in the prior year quarter. So breaking this down, we recorded $514 million of FFO from operating activities and that's up 54% from the prior year. That benefited from 50% increase in fee related earnings and a 56% increase in the contribution from our invested capital. Also includes realized distribution gains of $123 million. This came from the sale of core office properties in the U.K. energy distribution business and that compares to $186 million of realized distribution gains and carried interest in the prior quarter. Net income was $584 million or $0.15 per share and that reflects the lower level of valuation gains in our Property Group relative to the 2015 quarter. Turning to our asset management results. Fee bearing capital increased to $108 billion driven by inflows of $14 billion in quarter and $23 billion over the past 12 months. Inflows were primarily the result of fund raising for the new flagship funds and these include Brookfield infrastructure partners’ fund 3, which is a $14 billion global infrastructure fund, so largest private fund raised by us to-date and the largest private infrastructure fund raised in the industry. Brookfield's strategic real…

Good morning. As Brian mentioned, I guess notable in the quarter fund raising continues to be very strong and significant amounts of money are flowing into specifically real asset strategies. As Brian also said, we completed the final close for all the flagship funds and significant capital into a number of our other strategies. Total assets today are about $250 billion. I'm going to deal with just three topics today, but Brian or I are prepared to speak on anything else you'd wish at the end. Starting first with the U.K. Our view is that the U.K. will thrive in the long-term, but as all of you know, there often are bumps along the way in these types of situations. We also think that many times these situations present opportunities along the way where you can earn significant returns than otherwise in a situation, which is smooth during the time. Important point though to remember is, it requires a long-term view and an ability to withstand bumps along the way. Some of our businesses in the U.K. will likely not be affected by Brexit and some actually may benefit. For example, we own a short stay resort business that provides vacation accommodation to those who don't own a vacation home. A big part of our competition in this business comes from locals vacationing outside the U.K. But with the currency down, we think people -- more people will be staying local. We're also well diversified across our U.K. businesses and have -- for example, have a local retail mall business, a gas utility business and are building a multifamily residential business, each which will also likely not be affected by the situation. The business we own that will have the most uncertainty for a while is our U.K. office property…

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Cherilyn Radbourne of TD Securities. Please go ahead.

Thanks very much and good morning. Wanted to start on the asset management franchise where you've continued to refine both by introducing new products, I noticed an open ended real estate product this quarter, and also by selling off non-core businesses. So maybe you can just elaborate a little bit on those two topics, new products and pruning.

Thanks for the question. And I'll start with pruning. I'd just say the following. Our business has always been and it is about generally buying assets in large quantums or buying them in off-market situations where we have a significant amount of work to do to get the asset turned around or turned into a pristine asset. Once either of those things -- both of those things are accomplished, usually either they're assets which we're not interested in owning over the longer term, which we then sell. Or secondly, there are -- we own assets which we can't afford to own at the returns that we can sell them at, in particular in the low interest rate environment we're in. And therefore, we continuously will be pruning assets over time to be able to both get rid of the assets we don't want to own longer term, or secondly, to bring other people in with different return characteristics into an asset. And it's not that the -- in the second category, it's not that the assets are not spectacular assets. In fact, often these are phenomenal assets that you would want to own forever. And what we're doing is, we're selling them to clients which -- or institutions which have a different return risk threshold. They want to own an asset for the longer term and it's a great asset for them if they want to earn a 7% yield in perpetuity. And but it came from a strategy in which we needed to earn 14 or 20. And so it's generally how we look at the assets. With respect to new products, I guess what our belief is, is that we should be offering our institutional clients a group of products that satisfies -- that we can operate in but satisfies their needs for capital across the spectrum. So in all of the areas where we have expertise, being our four business areas, we want to be able to offer products both in core, core plus, and opportunistic strategies and we continue to build that out across the spectrum. And the advantage we have, therefore, with large global institutions and with sovereign institutional investors around the world is that we become more of a one stop shop for them to be able to offer products. And it’s just -- it compounds on itself because each fund that you're successful with an institution you get to know them better and that's helpful if we can offer them another product. So we'll continue to do that over the next number of years.

And just by a way of follow-up on the open ended real estate fund, obviously some have had some public issues with that type of fund in the wake of Brexit. What kind of protections would you build into the structure to avoid that kind of thing?

So the open ended funds in the U.K. that had the issue were retail funds and they had daily liquidity on them. None of the funds that we would ever operate with long-term products in them will ever have daily liquidity. So we don't ever foresee having a product like that within our construct.

Okay. And then last one from me. I did want to ask sort of a bigger picture question on the power business because we haven't talked about it for a while. But clearly the shale revolution has had a significant impact on the mix of generation in the U.S. and on power prices, BAM’s long-term thesis has always been that power prices need to rise to incentivize new generation and that clean energy would attract an increasing premium over time. Can you just talk about how your thesis has adapted or how your approach has adapted to the recent changes in the energy market?

Yes, Cherilyn, it's Brian. I'll start off on that one. There is obviously no doubt that some of the technical -- technological advances on shale have lowered the price on gas and that's caused a lower power price for markets in which gas technology is a big part. What we've seen less change in, though, and in fact there continue to be a number of very favorable initiatives for us in that regard, is the continued drive towards having more renewable capacity in a number of key markets for us, particularly in the northeast. So that's giving rise to more auctions for that kind of capacity, forward capacity payments for that kind of technology as well. And so while the -- I think as you recall, a lot of our thinking around energy prices, power prices going forward, we look at -- I'll say the -- almost a corridor, you could call it where the upper band would be the types of incentives and pricing required for new build fully renewable energy, which obviously we qualify for and can pick up a good chunk of that for in place capacity. The lower band, which hits you on the margin, when there's lower capacity utilization, is when you have the floor set on the gas price, purely on the gas price in those sorts of markets. And we're experiencing more of that today. But as the generation requirements continue to expand, as the economy grows, albeit somewhat slowly, we continue to see good long-term prospects for the power price.

Great. That's all my questions. Thank you.

Thanks.

The next question is from Mario Saric of Scotiabank. Please go ahead.

Hi, good morning. I just wanted kind of a high level come back to the negative interest rate discussion given a big part of the world is currently experiencing them. While they may be good for kind of going in yields for real assets, negative interest rates are perhaps there for a reason and may kind of highlight the projected economic growth or lack thereof within those specific regions. So as a long-term investor, how do you think about the balance between the two on real assets which over time as you mentioned before a good economy or strong economy is important to asset appreciation or real asset appreciation? How do you think about the balance between thinking about the economic conditions versus arguably low going in returns because of monetary policy?

Firstly, I think I agree with everything you stated and I'd maybe just answer, add to it by just saying that I think in the world we're in today you're going to see muted -- you're going to see moderate growth even in the best countries in the world and/or more moderate growth than you would have expected in the past. Despite that, some of the returns versus where interest rates are can be very attractive to real asset portfolios. And I just think if you look at what we can earn on real assets across the spectrum, you're getting paid enormous amounts compared to Treasury bill or a U.S. Treasury or something like that and it's probably -- we're at historic highs as the differential between what you can earn on a real asset, even on a core asset, versus an opportunistic asset to an interest rate Treasury. So look, I think we're going to be in a more moderate growth world for a long time and a low -- lower interest rate environment for a long time, but I still think that you'll be able to -- good investors will still be able to make a lot of money.

Okay. And I also thought that the commentary on recycling of capital invested in debt into U.S. Treasuries over time was a pretty interesting one as well. I know over the past couple of years, Brookfield's been selling some U.S. real asset exposure in a flattening yield curve environment, does your perception on the U.S. change and does it become more attractive in a greater beneficiary of incremental capital flow going forward?

I would just say we’re -- that's all -- again, that's all correct. Half of our assets or almost $125 billion of them are in the United States. We'll always be buying and we'll always be selling. In this environment, there's not as many opportunities, so we'll continue to harvest capital out because we can put it in other places with greater returns for the risk we take. And but that's not to say we won't still be in the United States doing things and if long rates continue to come down, I think cap rates in the U.S. will go down. But that's not to say we shouldn't still be doing what we're doing.

Okay. Thank you.

The next question is from Ann Dai of KBW. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Thanks for the detail on the seeding and the new product development that ties into my question. So when we think about how much retained capital you have after the dividend, there's certainly plenty of liquidity to pursue different options for growth. I guess I'm just wondering how you're weighing the potential of doing acquisitions to very quickly expand the capabilities of your third party management platform versus doing the organic growth and rolling out new strategies as we go.

So thanks for the question. So I guess our view has been that -- and over the past 15 years, other than two little tiny acquisitions, we've built the business organically from the start and plan on continuing to do that. We never thought that making any major acquisitions was the right way to build an asset management business. It was much more controllable and disciplined if you did it yourself. And given that we're 15 years into it, I don't think we'll change. On the other hand, there are possibly small areas where we can add expertise and smaller acquisitions could be added over time because what we have today that we didn't have before is a brand name fund raising capabilities and capital to put behind new strategies. And therefore it's possible that there are some management teams or strategies that we could add to the portfolio over time, but they'll be small dollars in relation to the overall business.

Thanks. Appreciate it. And my second question was around carry eligible AUMs. So we saw that grow nicely quarter-over-quarter due to the strong fund raising. But it also looks like performance was strong. We saw the percentage of AUM actually generating carry tick up. So, was wondering if you could speak to that and maybe provide some detail around if there's a certain fund that began generating carry cross the hurdle, anything around that.

Thanks, Ann. So what you're seeing is that -- and as evidenced by the most recent series of funds, is, there's a couple things at play in the stepping up of the amount of carry that we're generating in any particular quarter. So obviously, there's the investment performance itself. But also, what's happening is that the funds that we had raised let's say three years ago, it takes you a year or two to be raising them and they -- and so the carry doesn't start to kick in until you've actually invested the capital and you can start generating the returns. So there's a bit of a lag from when a fund launches and when it becomes “target” carry eligible. So that's one of the things that's happening. So in particular, in one of our real estate funds, in one of our private equity funds it would be around that vintage, would have gotten into that stage where the capital's been largely deployed and the returns are, therefore, starting to manifest themselves. And then, the second part of it is that the funds are larger with each iteration. There's lots that's two times the previous set. The previous set were two times zero-zero set. So, you get a bit of a compounding effect there, exponential growth factor there as well. So it's really those two things that you're seeing at play there. Does that help?

Yes, it does. Thank you. That's it from me.

Great. Thanks.

The next question is from Andrew Kuske of Credit Suisse. Please go ahead.

Thank you. Good morning. I guess the first question is just around some of the supplemental disclosure and it's really on page 10 as it relates to the underlying you've got across property, infrastructure, power and private equity on their pipelines of development activities and how do you think about at the BAM level the balancing act of the growth in the underlying just naturally from their own CapEx activities versus acquisition activities that really tie into your fund business.

So there's -- okay, so I think what you're -- the point being we have the opportunity to invest either in acquisition mode, to put capital -- deploy that way or we can put it to work through development and CapEx projects. And so the reality is we end up doing both and that gives us the flex -- it really happens in two ways. So, one is we have the flexibility of allocating the capital to where we think the best risk adjusted return is, whether it's acquisition or internal development. And obviously, based on market conditions at any particular time, the risk return profile of one versus the other may move. The other point -- so it can be a little bit of a -- not quite either/or but can you shift it from one to the other. The other point though is that often in the context of acquisitions that we make, there are development and CapEx opportunities within those acquisitions. And so that capital can get put to work within those opportunities as well. And given the strength of our operating capabilities and that's one of the big areas that where we seek to add value, that is an attractive line of capital allocation for us as well.

Okay. That's helpful. And then, could you give any color just on the reorganization that's happened with TCH. Because you've given disclosures in the past about your involvement as a first lien holder. Is there any color that you can provide given the reorganization is just underway at this stage?

Yes, it's Bruce. Just maybe three things. One, the reorganization or the -- continues. We expect the company will come out of bankruptcy before the end of this year. It's longer than planned but it's on -- generally on track. Second, as part of the plan there's always been the sale of the encore assets or the business called encore which is, the bid that's on the table today is one from NextEra. And that's always been part of the plan and that or another transaction will happen and as part of this and that will be sold and that was always part of the plan. And third, we've been working on putting -- we and the other bond holders have been working on putting a management team in place so that it can come out of bankruptcy with a management team and be off. And we're quite excited about the opportunity as it comes out but that should be done this year.

Okay. Thank you.

You're welcome.

The next question is from Alex Avery of CIBC. Please go ahead.

Thank you. Bruce, you did a great job of outlining your -- I guess medium and long-term views of the U.K. and the London market in particular and did a great job of hedging the currency going into Brexit. But I'm just wondering when you look at it now, it seems like you're probably less concerned about hedging at this point. So I guess a couple of questions. Where does the hedge stand today? And are there any specific events over the next couple of years as this process plays out where you think you would be more likely to ramp up that hedge again?

Generally we put hedges on when we have specific views or if there are specific risks around. Other than that, it often doesn't make sense to hedge. There's many risk in putting a hedge on as there is in not having one. So I think once we're comfortable that the currencies' at a point where it's stable and then we probably will scale out of the hedges that we had. Where that is, I won't predict right now because it often changes based on events but we have all the hedges on that we had on over the last while.

And are there any specific further hurdles with this process that you think there's volatility or risk around?

I would just -- there will be lots of changes that go on and I think for a while we'll just be watching the situation and what the economic situation is and once that bottoms or comes closer to bottom over the next while, then probably you'll see the currency bottom out or at least get more stable. And at that point in time it probably doesn't make sense for us to have all of our hedges on. In some places it just makes sense to hedge because it doesn't cost a lot to do it, and therefore, and most of our funds report their -- report in U.S. dollars, so it just -- sometimes for us it's better just to hedge perpetually.

Okay. That's great. Thank you.

You are welcome.

This concludes the time allocated for questions on today's call. I would now like to turn the conference back to Suzanne Fleming for closing remarks.

Thank you for participating in our call. And we look forward to updating you at our annual Investor Day in September. Thanks.

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