EX-99.4 5 d516992dex994.htm EX-99.4 EX-99.4

Exhibit 99.4






Annual Report


A Global Alternative Asset Management Company





Brookfield Asset Management Inc. is a global alternative asset manager with over $175 billion in assets under management.


We have more than a century of experience owning and operating assets with a focus on property, renewable power, infrastructure and private equity. We offer a range of public and private investment products and services, which leverage our expertise and experience and provide us with a distinct competitive advantage in the markets in which we operate.


Brookfield is co-listed on the New York and Toronto stock exchanges under the symbols BAM, BAM.A, respectively, and on the NYSE Euronext under the symbol BAMA.


Leading Global Franchise











Offices and Locations







Investment Professionals







Operating Employees






Letter to Shareholders

     4       Consolidated Financial Statements      87       Corporate Social Responsibility      146   

MD&A of Financial Results

     13       Cautionary Statement Regarding       Shareholder Information      148   

Internal Control Over Financial Reporting

     83       Forward-Looking Statements      145       Board of Directors and Officers      149   



“Our primary objective is to increase the value of Brookfield on a per share basis, at a rate in excess of 12% when measured over the long term.”


2012 Results



Increase in share price
$   1.4B
Funds from operations
$   2.7B
Consolidated net income





Net income

   $ 1.97       $ 2.89   

Funds from operations

     1.94         1.76   

Market trading price – NYSE

     36.65         27.48   



Total assets under management

   $   181,400       $   160,338   

Consolidated balance sheet assets

     108,644         91,022   

Consolidated results



     18,697         15,921   

Net income

     2,747         3,674   

For Brookfield shareholders


Net income

     1,380         1,957   

Funds from operations

     1,356         1,211   

Diluted number of common shares outstanding

     658.0         657.2   

Note: See “Use of Non-IFRS Measures” on page 21.







We are differentiated as an alternative asset manager by our strategic focus on real assets, depth of operating expertise, global platform, scale and extended investment horizon which enable us to drive greater returns over the long term for our shareholders and partners.



Total assets under management


Fee bearing capital

under management for clients



Multi-fund platform to meet the


diverse needs of our global client base

    28    3  
  Private funds    Global flagship listed entities        



Solid pipeline of

private funds in marketing

    6    $5B  
    Private funds    Additional 3rd Party Capital        



Leading global fund investors

  ~150    ~25%  
    Clients       Invested in Multiple Funds        





Brookfield’s approach to investing is disciplined and straightforward. With a focus on value creation and capital preservation, we invest opportunistically in high-quality real assets within our areas of expertise, manage them proactively and finance conservatively to generate stable, predictable and growing cash flows for clients and shareholders. Our approach to investing is anchored by a set of core investment principles that guide our decisions and how we measure success.



Business Philosophy

Build our business and all our 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 client and shareholder money like it’s 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 our 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, as size does not necessarily add value





During the last 12 months a number of investments made in recent years started to pay off. This includes the incredible array of assets we assembled by sponsoring both the recapitalization of Babcock & Brown and General Growth Properties in 2009 and 2010, respectively. In addition, all of our operations were very active during 2012 with both new acquisitions and add-on investments. New asset additions include 23 renewable power facilities, more than 3,200 kilometres of toll roads in South America, a gas utility business in the UK, office properties in Australia and the city of London, and a district energy business in Canada.

The fiscal issues in the U.S. and Europe dominated the financial news during most of the year, but this did not stop the recovery of underlying business fundamentals in most of our operations, which we expect to continue to improve their performance in the current year.

We advanced our brand internationally by adding many new global clients, and we are honoured to have their support. In aggregate, we raised $5 billion of private fund capital and increased the permanent capital base of our listed issuers by a further $5 billion. With the public listing of our property group imminent, the size and scope of our listed issuers are poised to grow significantly. This family of flagship listed issuers, Brookfield Infrastructure Partners, Brookfield Renewable Energy Partners, and the soon to be listed Brookfield Property Partners, in conjunction with our private funds, should allow us to continue to grow each of these businesses globally with access to a broad array of capital sources.

Market Environment

Global equity markets were largely up in 2012, led by the strong performance of the S&P 500. Markets were buoyed by a combination of the aggressive reflationary policies of the world’s central banks, the perceived lower risk of significant systemic events, and the continuation of positive economic performance from both the U.S. and China.

In the U.S., both banks and the capital markets are making credit more freely available to businesses and consumers and this has resulted in positive recoveries in the housing and auto sectors, and consequently, among other things, rising employment levels. In addition, the U.S. banking system is healthy and household formation is finally on the rise. With growing investments in housing, energy-related industries and manufacturing, the U.S. economy has the potential to surprise on the upside as the year progresses. Of course, the ongoing U.S. fiscal debate and political issues represent a risk to this view, but we expect common sense to prevail.

In Europe, the banking system is still contracting, with both the amount and availability of credit shrinking. The economy will not start to grow until this trend is reversed. We expect, however, to find attractive investment opportunities in Europe as we assist corporations in recapitalizing their operations.

China has almost finished its once-in-a-decade leadership change and is poised to continue its gradual transition into an economy that is less dependent on investment-led growth. Retail sales have grown in a strong and steady fashion and China’s positive trade balance has been maintained, despite the



challenges with the economies of some of its major trading partners. Our expectation is that China will meet the economic objectives disclosed in its recently released five-year plan. This is a positive development for all of our Australasian and South American investments.

Our View of the Investment Landscape

There are three long-term trends that will drive our future results. First, we believe global institutional investors will continue to allocate more of their funds to real assets. This bodes well for the continuing growth of our assets under management. Second, interest rates are unlikely to go much lower. While we cannot predict timing, interest rates will eventually rise. As a result, we are avoiding long-term fixed income investments and locking in as much long-term financing as we can. Third, we believe that equity markets look cheap compared to most alternatives, in particular when compared to fixed income markets, with many global companies in excellent shape and multiples low.

With the fear of market collapse dissipating, we believe that capital will also start to rotate from bonds back into equities. The opposite has occurred for the past five years. This, in conjunction with the global recession, caused the S&P to generate compound returns of approximately 2% in the last five years versus 7% from bonds. The net impact has been that many investors have given up on equities, resulting in an allocation to the sector that is now at historic lows.

We believe that markets usually revert to the mean. Therefore, we are positive on the current valuations in the equity markets. In addition, increasing investor allocations to equities should provide upward strength to share prices for the foreseeable future.

In addition, the global reflationary policies represent much more to us than just a macro-economic policy initiative. They represent a compelling opportunity with many sovereign interest rates actually negative on a “real,” or “net of inflation” basis. The opportunity presented is to capitalize on this by locking in long-term, low-cost capital on assets whose revenues are expected to grow substantially. In this regard, during 2012, our various businesses issued approximately $12 billion of long-term fixed rate financing with an average term of nine years at an average coupon interest rate of 4.75%.

Investment Performance

Our share price increased 35% in 2012. More relevant is that at year-end, the compound annual performance for our shares over both 10 and 20 years was approximately 20%. This compared well with most other investment alternatives during these periods.








S&P 500


10 Year



   35%    16%    4%


   20%    11%    9%


   3%    2%    7%


   22%    7%    6%


   19%    8%    6%

In addition to Brookfield’s strong overall performance, the results in virtually all of our listed issuers, and our private and listed securities funds managed by us, were also excellent during 2012, most exceeding relevant benchmarks by wide margins.



2012 Returns


Flagship Listed Entities


Private Funds



Securities Funds


  33%   17%   19%

Renewable Energy

  14%   n/a   n/a


  n/a   18%   33%

Private Equity

  n/a   19%   n/a


  n/a   7%   n/a

Our flagship listed entities performed well, with Brookfield Infrastructure generating a 33% return for shareholders and Brookfield Renewable Energy generating 14%. Both entities increased their cash distributions and have achieved three-year returns of 28%, results that set these entities up well when they seek access to capital in order to grow their operations.

Funding Strategy

We have virtually completed the establishment of our family of flagship operating platforms, which will run our global businesses in the future. This approach features a flagship publicly listed issuer and a major private fund in each of our property, power and infrastructure platforms. Our private equity business is not as well suited to the public markets and, consequently, is funded only with private capital.

In building our business, we have taken great pains to ensure alignment of interest between Brookfield and all of our investment partners and clients, including investing very significant amounts of our own capital alongside them. We have also carefully designed these entities to ensure there are no conflicts between public and private investors.

During the year, we raised $3.6 billion of capital for our private funds from institutional and high net worth investors. We also increased the equity base of our listed issuers by a further $5 billion and deployed $7 billion of capital in investments. We continue to have $9 billion of investable capital, are currently marketing six new funds and expect to raise over $5 billion of additional capital from institutional clients in the next 24 months.

We expect that over the next 10 years, most institutions will increase their allocations of real assets to between 25% and 40%. We believe the impact of this trend will be similar to what took place decades ago, when institutions shifted from bonds to common stocks and valuations on equities soared. While there is some risk that returns will be driven down by these major capital flows, it is important to note that there is a confluence of events occurring. That is, the supply of assets available for investment is also likely to grow dramatically as governments undertake the deleveraging that must occur to get their fiscal books in order.

As institutions continue to increase allocations to real assets, we believe we are one of a few global asset managers who have the depth of experience, capital and operational capabilities to participate meaningfully in this transformation.

Investment Process

Our goal is to generate consistent long-term investment returns for our clients. To meet that objective, our approach to investing attempts to focus on utilizing our strengths as a company in order to ensure



we have a competitive advantage when investing capital. We believe these competitive advantages to consist of (i) size and access to capital, (ii) our extensive global operating platforms and people, and (iii) our longer-term investment horizon and disciplined approach to investing developed over the years. In particular, we believe this investment process allows us to be successful owners and operators of real assets, despite the fact that the company has grown substantially over the past 20 years.

Our investment process relies on a team approach that brings together the skills of our investment professionals and our operating teams in developing investment opportunities, executing transactions and running the businesses we acquire. We believe that we enjoy a competitive advantage as asset managers, due in part to the depth of our operating teams, many of whom have worked together for decades. These teams are in turn overseen by our investment professionals, who can draw on their expertise in capital markets and years of experience in each of these businesses.

Over the past few years, this approach to investing was put to work in various distressed real estate and infrastructure investments, and more recently in Europe, where our initial thesis was that companies would need to dispose of assets to recapitalize their balance sheets. We moved senior executives to Europe, where they indentified owners and operators and worked hard at building relationships. These relationships resulted in a series of negotiated transactions, most of which featured European companies refocusing on their home market by selling us their assets in other markets.

Our recent investments also highlight the fact that we attempt to be contrarian in our approach to investing, which means we often find ourselves acquiring businesses during periods of economic distress. Our belief is that our value-based investment approach allows us to purchase assets at a discount to their replacement cost, building a margin of safety into our acquisitions, while our operating expertise gives us the ability to underwrite decisions when assets and capital structures are more fluid than many organizations are able to work with.

International Financial Reporting Standards (“IFRS”)

We report under IFRS as we are a Canadian Corporation and this accounting framework is mandated in Canada. The main difference of IFRS reporting to U.S. GAAP is that a number of asset classes are carried at fair value under IFRS, as opposed to historical depreciated cost. IFRS is the reporting framework for most developed economies and is the standard in virtually every country where we operate, other than the United States.

We also use fair values to report to the investors in our Funds, both under IFRS and under U.S. GAAP for investment funds which permit fair value accounting. These principles are also widely utilized by asset managers and therefore clients, auditors and management teams are well versed in applying and interpreting them. As a result, IFRS accounting is very suitable for a global business of our type and, in particular, for reporting on the performance of the asset classes in which we invest.

Under IFRS, we carry at fair value virtually all of our commercial office and retail properties, renewable power facilities, most of our timber operations and many of the assets within our infrastructure operations. Financial assets are mostly carried at fair value, similar to U.S. GAAP. Changes in the values are determined at least annually and reported as gains or losses in our financial statements. We believe this is valuable information that would not otherwise be available to investors under U.S. GAAP.



There are, however, certain assets that are not carried at fair value under IFRS. These include assets such as regulatory rate bases and concessions within our infrastructure business and residential development land.

We describe how valuations are determined in more detail within the notes to our consolidated financial statements and our MD&A. In summary, however, IFRS values are intended to be the value at which a buyer will purchase an asset in the absence of any undue influence such as financial pressure. In the case of physical assets, fair value is typically based on projected future cash flows using a discounted cash flow analysis; financial assets are valued based on quoted market prices or, if unavailable, by benchmarking to similar assets or using fundamental analysis.

We prepare most of the analysis internally, however, we also receive external appraisals for roughly one-third of our assets each year. Furthermore, because many of our assets are held through our funds, or because we require appraisals for financing purposes, frequently a larger portion of our assets are appraised externally.

An important concept to note is that while a number of assets that we fair value are held through a public company, we carry our interest in the public company (in the case of an equity accounting investment such as General Growth Properties) or the underlying assets (in the case of a consolidated entity such as Brookfield Infrastructure Partners) based on our proportionate interest in the fundamental underlying value of the assets. In many cases, the stock market value may differ from the fundamental value, and can be higher or lower.

For example at year-end this year, our investments that we own through Brookfield Infrastructure Partners are marked at values based on IFRS that are quite a bit lower than the stock price of Brookfield Infrastructure Partners that we own. On the other hand, our office assets held through Brookfield Office Properties are marked at a price slightly higher than the current trading price. Of course, we pay attention to stock market prices for our businesses, but they are not necessarily relevant for our accounting.

Our view of IFRS after applying it for a number of years is that it does provide our shareholders with a useful snapshot of the values of the company. In conjunction with IFRS, we try to provide you with as much detail as possible so that you can assess these values yourself and therefore make informed decisions. No accounting regime is perfect, but we believe IFRS is helpful in our efforts to describe the business to you.

Brookfield Property Partners (“BPY”)

We hope to complete the distribution of BPY units to you shortly. We encourage you to read all of the materials on BPY so that you can make an informed decision before you decide to hold or sell your units. There is a prospectus filed with the securities regulators in Canada and the U.S., and supplemental materials on our website, so you can further your knowledge of what we are doing.

In the simplest terms, BPY is a spin-off to you of a direct interest in our property operations, which we have benefited significantly from over the past 20 years. This business has generated an annual compound ±15% return since 1989, and while we cannot promise it, we see no reason why returns should not be similar.



Our property business today is large, but highly focused on using our competitive advantages of scale and operating expertise to opportunistically acquire and surface value from high-quality real estate on a global basis. We intend to use these advantages to make BPY one of the best property investments in the capital markets, and once we are cleared by the securities commissions, we will complete the distribution of units to you.

Operating Reports

Property Group

Our property operations remain our largest operation and generated $1.25 billion of cash flow. Total assets under management increased to $103 billion, and we are currently investing capital through Brookfield Property Partners and our private institutional Opportunity Fund.

We acquired Thakral Holdings, a $1 billion Australian property company, and purchased 80% of an 18 million square foot industrial portfolio in the southern U.S. and Mexico with a $900 million enterprise value, along with various other smaller transactions. We collected most of the loans in the New Zealand portfolio which we bought in 2011 from a European financial institution, earning exceptional returns. We acquired an office portfolio in the city of London, increased our interest in a number of retail malls and sold numerous non-core office, industrial and retail properties.

We completed the new Brookfield Place – Perth office tower which houses BHP and is now an iconic complex in this rapidly growing Australian city. In Toronto, we leased 420,000 square feet at Bay Adelaide East to Deloitte and started construction on this tower. We also completed the makeover of First Canadian Place which was well received by tenants and retailers.

Leasing activity in office markets in the U.S. has become much stronger over the past six months which bodes well for the progress we plan to make on leasing in 2013 and 2014. We leased a total of 7 million square feet at rental rates 35% higher than what was formerly in place.

Retail sales in the U.S. have been strong, and as a result, GGP’s performance was strong, and expected to continue to outperform, driven by solid tenant leasing demand and tenant sales. During the year we acquired 11 Sears stores in our malls, and are now transforming a number of these spaces into more traditional mall interiors, filled with in-line retailers. In this regard, the redevelopment of the Sears store at our Ala Moana Mall in Hawaii will be an exceptional addition to one of the best retail centres in the world.

From an investment perspective, we acquired 18 million additional GGP warrants, GGP repurchased 52 million warrants, and we settled the issues we had with a co-shareholder in a positive manner for all parties. As a result of all of this, we now own 43% of GGP in our investment group.

Infrastructure Group

Organic growth and acquisitions combined to increase the scale and performance of our infrastructure business. Cash flow from operations increased to $680 million, an increase of 24% over last year. Total infrastructure assets under management increased to $27 billion and we are currently investing capital through Brookfield Infrastructure Partners and our private institutional fund.



We completed four major transactions in 2012, including the acquisition of the other half of our Santiago toll road; 50% of the controlling stake in 3,200 kilometres of toll roads in Brazil; a gas utility business in the UK, which we merged with a similar company we owned; and acquired the Toronto city district energy company. The Toronto energy business provides heating and cooling to major property complexes, and we believe we can generate attractive returns given our related property operations.

We sold half of our 50% investment in our western Canadian timberlands and are considering a number of alternatives for our timber assets, which could include further institutional ownership or listing in the public market.

Brookfield Infrastructure was established as an investment-grade debt issuer, and completed an inaugural issuance of C$400 million of bonds at a U.S. swapped coupon for five years of 2.7%.

We also completed our $600 million Australian rail construction project to expand the rail network to carry iron ore. This project is supported by take-or-pay contracts which will contribute meaningfully to increased cash flows in 2013.

Power Group

The financial performance of our power group was weak as a result of extremely low water levels and electricity prices that reflected low natural gas prices during the year. Generation totalled 15,821 gigawatt hours, which was 13% below plan. However, total assets under management increased to $19 billion as we are capitalizing on this low price environment to expand the portfolio. We are currently investing capital through Brookfield Renewable Energy Partners and a private institutional fund.

We own one of the world’s largest renewable power operations, and our ability to undertake large time-consuming transactions makes us a preferred partner for industrial companies and utilities that seek to sell their power assets. We committed to invest $2 billion in new acquisitions in 2012, adding 1,000 megawatts of power to our operations. This included two major acquisitions: 378 megawatts of plants from Alcoa and 351 megawatts from NextEra.

The Alcoa transaction included four facilities in the southeastern U.S. which formerly powered aluminum smelters. The NextEra transaction, when completed, will include 19 facilities in Maine on rivers where we already operate, and came about because this highly-rated large utility was refocusing on their core business. We believe both acquisitions will be strong performers over the longer term and they increased our total installed capacity of renewable energy to more than 5,000 megawatts.

During the year we continued construction on three new hydro projects in Canada and Brazil, and acquired a number of smaller facilities.

Brookfield Renewable has flourished since it was established in 2011 as a listed company and the stock price increased 27% since then. We are currently working on a dual listing of this business on the NYSE, and expect to complete this in the first quarter of 2013.



Private Equity Group

Our private equity group had a good year. We closed the Brookfield Capital Partners Fund III, realized on a number of investments and saw meaningful increases in the value of investments made in industries related to the housing sector over the past five years. Total private equity assets under management increased to $26 billion, and we are currently investing through Capital Partners Fund III and from our own balance sheet when additional capital is required.

Norbord and Ainsworth, which sell oriented strand board (OSB) to homebuilders, endured five difficult years, during which time we invested a substantial amount of capital in their franchises. With recovering housing fundamentals, the share prices of both companies have more or less tripled, with OSB prices having more than doubled from approximately $160 per board foot to over $350.

Brookfield Residential’s share price more than doubled from $8 to $18 at year-end, and is over $20 today. Investor interest in the housing sector enabled us to complete a primary equity offering and bond offering. Net proceeds of this capital raising totalled more than $800 million, enabling us to complete the recapitalization of Brookfield Residential, and allowing them to acquire new tracts of land in California and Alberta.

We sold our U.S. residential brokerage operations to Berkshire Hathaway for cash and a one-third ownership interest in the combined business which is now branded under the name Berkshire Hathaway HomeServices. We believe they will do very well with this business and therefore we will benefit accordingly on our remaining investment.

Strategy and Goals

Our strategy is to provide world-class alternative asset management services on a global basis, focused on real assets such as property, renewable power, infrastructure, and private equity investments. Our business model utilizes our global reach to identify and acquire high quality assets at favourable valuations, finance them prudently, and then enhance the cash flows and values of these assets through our established operating platforms to achieve reliable attractive long-term total returns for the benefit of our shareholders and clients.

Our primary long-term goal is to achieve 12% to 15% compound annual returns measured on a per share basis. This increase will not occur consistently each year, but we believe we can achieve this objective over the longer term by:



Offering a focused group of Funds on a global basis to our investment partners; while utilizing our balance sheet capital to invest beside our partners, and to support our Funds in undertaking transactions they could not otherwise contemplate without our assistance.



Focusing the majority of our investments on high-quality, long-life, cash-generating real assets that require minimal sustaining capital expenditures with some form of barrier to entry, and characteristics that lead to appreciation in the value of these assets over time.



Utilizing our operating experience, global platform, scale and extended investment horizons to enhance returns over the long term.


2012 ANNUAL REPORT    11


Maximizing the value of our operations by actively managing our assets to create operating efficiencies, lower our cost of capital and enhance cash flows. Given that our assets generally require a large initial capital investment, have relatively low variable operating costs, and can be financed on a long-term, low-risk basis, even a small increase in the top-line performance typically results in a proportionately larger contribution to the bottom line.



Actively managing our capital. Our strategy of operating our businesses as separate units provides us with opportunities from time to time to enhance value by buying or selling parts of a business if the capital markets enable access to capital at attractive terms. As a result, in addition to the underlying value created in the business, this strategy allows us to earn extra returns over that which would otherwise be earned on the assets we own.

In the short term, our goals include substantial fund raising for our private funds, listing Brookfield Renewable Energy Partners on the NYSE, the spin-off of Brookfield Property Partners, and surfacing value from our timber assets and numerous businesses related to the housing sector.


We remain committed to being a world-class alternative asset manager, and investing capital for you and our investment partners in high-quality, simple-to-understand assets which earn a solid cash return on equity, while emphasizing downside protection of the capital employed.

The primary objective of the company continues to be generating increased cash flows on a per share basis, and as a result, increases in per share values over the longer term.

And, while I personally sign this letter, I respectfully do so on behalf of all of the members of the Brookfield team, who collectively generate the results for you. Please do not hesitate to contact any of us, should you have suggestions, questions, comments, or ideas you wish to share with us.

J. Bruce Flatt
Chief Executive Officer
February 15, 2013



Exhibit 99.2


Management’s Discussion and Analysis (“MD&A”) is provided to enable a reader to assess our results of operations and financial condition for the fiscal year ended December 31, 2012. This MD&A should be read in conjunction with our 2012 annual consolidated financial statements and related notes and is dated March 28, 2013. Unless the context indicates otherwise, references in this Report to the “Corporation” refer to Brookfield Asset Management Inc., and references to “Brookfield,” “us,” “we,” “our” or “the company” refer to the Corporation and its direct and indirect subsidiaries and consolidated entities. All amounts are in U.S. dollars, and are based on financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board unless otherwise noted.

Additional information about the company, including our 2012 Annual Information Form, is available free of charge on our website at www.brookfield.com, on the Canadian Securities Administrators’ website at www.sedar.com and on the EDGAR section of the U.S. Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.

Organization of the MD&A


PART 1 – Overview and Outlook


Our Business


Strategy and Value Creation


Economic and Market Review and Outlook


Basis of Presentation and Key
Financial Measures


PART 2 – Financial Performance Review


Selected Annual Financial


Annual Financial Performance


Financial Profile


Quarterly Financial Performance


Corporate Dividends


PART 3 – Business Segment Results


Results by Business Segment


Asset Management and Other Services




Renewable Power




Private Equity and Residential Development


PART 4 – Capitalization and Liquidity


Financing Strategy






Contractual Obligations


Exposures to Selected Financial Instruments


PART 5 – Operating Capabilities, Environment and Risks


Operating Capabilities


Business Environment and Risks


PART 6 – Additional Information


Accounting Policies and Internal Controls


Related Party Transactions


Part 1 provides an overview of our business, including a discussion of our strategy, and the economic environment and outlook at the time of writing. This section also contains information on the basis of presentation of financial information contained in the MD&A and key financial measures.

Part 2 provides an overview of our annual and fourth quarter financial results utilizing key financial measures contained in our Consolidated Statements of Operations, Other Comprehensive Income and Consolidated Balance Sheets over the past three years including a discussion of variances between the periods.

Part 3 is a discussion of the results of our various business segments based on key financial measures, including certain non-IFRS measures such as Funds from Operations and Net Operating Income. We also utilize key operating metrics in the discussion.

Part 4 reviews our capitalization and liquidity profile.

Part 5 discusses our operating capabilities and a number of key risks associated with our business and our issued securities. Further information on risks is contained in our Annual Information Form.

Part 6 contains additional information on our accounting policies, internal control environment and related party transactions.


This Report to Shareholders contains forward-looking information within the meaning of Canadian provincial securities laws and applicable regulations and “forward-looking statements” within the meaning of the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995. We may make such statements in the Report, in other filings with Canadian regulators or the U.S. Securities and Exchange Commission or in other communications. See “Cautionary Statement Regarding Forward-Looking Statements” on page 145.

We disclose a number of financial measures in this Report that are calculated and presented using methodologies other than in accordance with IFRS. We utilize these measures in managing the business, including performance measurement, capital allocation and valuation purposes and believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures may differ from the calculations disclosed by other businesses, and as a result, may not be comparable to similar measures presented by others. Reconciliations of these non-IFRS financial measures to this most directly comparable financial measures calculated and presented in accordance with IFRS, where applicable, are included within this MD&A.



Information contained in or otherwise accessible through the websites mentioned does not form part of this Report. All references in this Report to websites are inactive textual references and are not incorporated by reference.


2012 ANNUAL REPORT     13



Brookfield is a global alternative asset manager with over $175 billion in assets under management. For more than 100 years we have owned and operated assets on behalf of shareholders and clients with a focus on property, renewable power, infrastructure and private equity.

Our business model is simple: utilize our global reach to identify and acquire high-quality real assets at favourable valuations, finance them on a long-term basis, and enhance the cash flows and values of these assets through our operating platforms to earn reliable, attractive long-term total returns for the benefit of our clients and shareholders.

We have a range of public and private investment products and services which allow investees and clients to benefit from our expertise and experience by investing alongside us. These include entities that are listed on major stock exchanges as well as private funds that are available to accredited investors, typically pension funds, endowments and other institutional investors. We also manage public securities through a series of segregated accounts and mutual funds.

Our strategy includes having a flagship listed entity within each of our property, renewable power and infrastructure segments, which will serve as the primary vehicles through which we will invest in each respective segment. As well as owning assets directly, these entities serve as the cornerstone investors in our institutional private funds, alongside capital committed by institutional investors. For example, within our infrastructure operations, we have established Brookfield Infrastructure Partners L.P. (“BIP”), a publicly listed entity that currently has an $7.6 billion market capitalization, which is, in turn, the cornerstone investor in our Brookfield Americas Infrastructure Fund, a private investment partnership with $2.7 billion of committed capital from BIP and institutional investors. These two entities are supplemented from time to time with additional listed and unlisted niche entities, such as our Latin American country-specific infrastructure funds and timber funds. Brookfield Renewable Energy Partners L.P., a $7.8 billion market capitalization publicly listed pure-play renewable energy company, performs a similar function in our renewable power segment. We recently announced the launch of Brookfield Property Partners L.P., (“BPY”) through which we will invest in our commercial property operations, with an estimated initial capitalization of approximately $12 billion based on the IFRS carrying values of the assets and liabilities contributed to BPY by us.

This approach enables us to attract a broad range of public and private investment capital and the ability to match our various investment strategies with the most appropriate form of capital. Given the nature of our investment strategies, we do not currently envisage the formation of a listed entity within our private equity operations; however we are giving consideration to forming a listed entity that will invest in our timber and agricultural resource operations.

The following chart is intended to illustrate the strategy behind our organization structure.





In March 2013, we sold 8.1 million units of BREP via a secondary offering decreasing our ownership to 65%


Privately held. A 7.5% interest to be spun-off to Brookfield shareholders through a special distribution on April 15, 2013


Privately held


Also owns our interests in Brookfield Office Properties and General Growth Properties


Includes our interests in Brookfield Residential Properties Inc., Brookfield Incorporações SA and Norbord Inc.




We focus on assets and businesses that form the critical backbone of economic activity, whether they provide high quality office space and retail malls in major urban markets, generate reliable clean electricity, or transport goods and resources to or from key locations. These assets and businesses typically benefit from some form of barrier to entry, regulatory regime or other competitive advantage that provides stability in cash flows, strong operating margins and value appreciation over the longer term.

As an asset manager we establish investment products through which our clients can invest in the assets that we own and operate. These products consist of both listed entities and private funds. We invest alongside our clients with capital from our balance sheet. This generates management fees and performance-based income that increases the value to our business and adds further value to the company by providing us with additional capital to grow the business and compete for larger transactions.

We are active managers of capital. We strive to add value by judiciously and opportunistically reallocating capital among our businesses to continuously increase returns.

Our operating platforms include over 24,000 employees worldwide who are instrumental in maximizing the value and cash flows from our assets. Our track record shows that we can add meaningful value and cash flow through “hands-on” operational expertise, through the negotiation of property leases, energy contracts or regulatory agreements, asset development, operations and other activities.

We finance our operations on a long-term, investment-grade basis, with most of our operations financed on a stand-alone asset-by-asset basis with minimal recourse to other parts of the organization. We also strive to maintain excess liquidity at all times in order to be in a position to respond to opportunities. This provides us with considerable stability and enables our management teams to focus on operations and other growth initiatives. It also improves our ability to weather financial cycles and provides the strength and flexibility to react to opportunities.

We prefer to invest in times of distress and in situations which are more multi-faceted and intensive. We believe these situations provide much more attractive valuations than competitive auctions and we have considerable experience in this specialized field.

We maintain development and capital expansion capabilities and a large pipeline of attractive opportunities. This provides us flexibility in deploying growth capital, as we can invest in both acquisitions and organic developments, depending on the relative attractiveness of returns.

As an asset manager, we create value for shareholders in the following ways:



We offer attractive investment opportunities to our clients that will, in turn, enable us to earn base management fees based on the amount of capital that we manage for them, and additional returns such as incentive distributions and carried interests based on our performance. Accordingly, we create value by increasing the amount of capital under management and by achieving strong investment performance that leads to increased cash flows and asset values.



We invest significant amounts of our own capital, alongside our clients in the same assets. This differentiates us from many of our competitors, creates a strong alignment of interest with our clients and enables us to create value by directly participating in the cash flows and value increases generated by these assets, in addition to the performance returns that we earn as the manager.



Our operating capabilities enable us to increase the value of the assets within our businesses, and the cash flows they produce, through our operating expertise, development capabilities and effective financing. We believe this is one of our most important competitive advantages as an asset manager.



We aim to finance assets effectively, using a prudent amount of leverage. We believe the majority of our 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. While we tend to hold our assets for extended periods of time, we endeavour to maximize our ability to realize the value and liquidity of our assets on short notice and without disrupting our operations.



Finally, as an investor and capital allocator with a value investing culture and expertise in recapitalizations and operational turnarounds, we strive to invest at attractive valuations, particularly in situations that create opportunities for superior valuation gains and cash flow returns.


2012 ANNUAL REPORT     15


(As at March 7, 2013)

Overview and Outlook

Despite ongoing macroeconomic volatility and geopolitical uncertainty, 2012 generally represented a year of stabilization within the global economy. Confidence improved as the year progressed, as central banks around the world eased monetary policy in order to support a budding economic recovery. Positive catalysts emerged across the globe, with the U.S. housing market continuing to heal, sovereign debt concerns in Europe beginning to subside, and evidence of stability appearing in China. With liquidity continuing to flood the market and interest rates remaining near historic lows, the world economy ended the year poised for a return to normalcy and moderate levels of growth.

Against this backdrop, demand for income-producing asset classes with upside potential accelerated, as investors sought the unique combination of yield, stability and growth offered by these alternatives. Real Assets, including infrastructure and real estate, emerged as a particularly compelling investment option, offering attractive current yields, stable bond-like cash flows, equity-like upside and an important hedge against future inflation. Moving forward, we expect demand for Real Assets to continue to rise, as investors recognize the ability of the asset class to help navigate the current investment landscape and position existing portfolios for future growth.

United States

U.S. economic growth decelerated in the fourth quarter of 2012, with Gross Domestic Product (“GDP”) declining by an annualized rate of 0.1%, compared with growth of 3.1% in the prior quarter, due mainly to fears over the fiscal cliff, the impact of Hurricane Sandy and reduced government spending. For the full year 2012, the pace of economic growth accelerated, but remained moderate, with GDP increasing by 2.2% up from 1.8% in 2011. Industrial production continued to recover, increasing by 3.6% in 2012, bringing it nearly level with the 2007 pre-crisis peak. Importantly, the U.S. housing sector showed preliminary signs of recovery as housing starts increased steadily throughout the year, averaging a 28% increase compared to 2011. We expect continued strength in this market during 2013, which should provide a positive catalyst for the rest of the U.S. economy.

On the employment front, 1.8 million new jobs were created in 2012, the same rate as in 2011. As a result, the unemployment rate declined to 7.8% by the end of 2012, from 8.5% in December 2011. Inflation remained low, averaging 2.1%, leaving room for the Federal Reserve to maintain the current zero interest rate policy as well as recent asset purchase programs.

Looking ahead, we anticipate the U.S. economy will produce moderate GDP growth of 2.0% in 2013, before re-accelerating to nearly 3.0% growth in 2014. However, fiscal policy remains uncertain, with mandated spending reductions due to take effect in March 2013 absent action by the U.S. government to alter the timing or size of the cutbacks. Current forecasts estimate these cuts may dampen economic growth by as much as one percentage point, should they be enacted as scheduled.


Canadian economic growth remained sluggish at the end of 2012, due to weaker exports and a cooling housing market. GDP is estimated to have grown by 1.7% in the fourth quarter, following a tepid increase of 0.6% in the third quarter. On an annual basis, the pace of GDP growth is expected to have eased to 2.0% in 2012 from 2.6% in 2011. Despite this moderation, employment growth accelerated over the course of the year, with 312,000 new jobs created in 2012 compared to an increase of 190,000 in 2011. As a result, the unemployment rate ended the year at 7.1%, down from 7.5% at the end of 2011. While the housing sector began to rebound in 2012, a contraction occurred during the fall, triggered by more restrictive mortgage rules and high levels of consumer debt. In the fourth quarter, housing starts dropped by 9% compared to the third quarter. However, the pace of inflation has been dropping and currently stands below the Bank of Canada’s target level, indicating that interest rates will likely remain low in the near-term to stimulate the economy.


The Australian economy remained healthy throughout 2012 despite moderately weakening fundamentals. GDP growth decelerated throughout the year, due to softening consumer demand and a restrained housing market. Nevertheless, full year GDP growth is forecast to reach 3.5%, with expectations for a decline to 2.7% growth in 2013. The multi-speed nature of Australia’s economy, with weakening domestic demand offset by a booming mining sector, creates unique challenges for the Reserve Bank of Australia (“RBA”), as monetary policy seeks to maintain low inflation and unemployment levels. Full year inflation of 2.2% remains comfortably within the RBA’s target band, providing room for further cuts to the current cash rate of 3.0% should the labour market continue to soften. Looking ahead, positive catalysts are apparent, as the recent rebound in coal and iron ore pricing, as well as stabilization of the Chinese economy, should translate into favourable trade balance readings in the near term and provide support for the Australian economy.

Latin America

The divergence in the pace of economic growth between Brazil and other South American countries remained prominent throughout 2012. Despite Banco Central do Brasil’s reduction in the SELIC monetary policy rate to a record low 7.25% and a weakening of the Brazilian real, efforts to spur stronger growth have yet to trigger a significant acceleration of economic



activity. While the Brazilian economy grew 1.7% year-over-year in the fourth quarter of 2012, full year GDP growth was more muted at approximately 1%, compared with growth rates of 4% to 6% for Colombia, Chile and Peru. Efforts in Brazil to support growth via a combination of easing monetary policy and direct intervention in the foreign exchange market weakened the real by around 10% in 2012, with the currency now trading in a band from 2.0 to 2.1 real to the U.S. dollar. The Chilean and Colombian pesos remained relatively stable against the dollar while the Peruvian Nuevo Sol continued a long-term trend of appreciation.

Although falling since 2011, fourth quarter data indicated inflation increased in Brazil to a level near 6%, whereas Colombia, Chile and Peru continued to experience slowing inflation in a range of 2% to 3%. Labour markets in all four countries remained healthy, with Brazil and Chile continuing a downward trend in unemployment (5.3% and 6.2%, respectively) while Colombia (9.3%) and Peru (5.7%) remained stable. Moving forward, we expect the combination of low unemployment and rising inflation will lead to accelerating economic growth in Brazil through 2013 and 2014.

Europe and the United Kingdom

Authorities took additional steps to combat the Euro zone sovereign debt crisis during 2012, including increased credit market intervention by the European Central Bank (“ECB”) to provide liquidity to indebted governments and banks. This intervention, combined with the implementation of the European Stability Mechanism (“ESM”), a new 500 billion Euro rescue fund, lowered sovereign bond spreads and provided support for European equity markets. However, despite favourable developments in financial markets, recessionary conditions persisted in many European countries. Euro zone GDP contracted by 0.6% on an annualized rate during the fourth quarter of 2012, following a contraction of 0.3% in the third quarter. For the full year of 2012, GDP is expected to contract by 0.4%. The employment situation remained difficult, as the Euro zone unemployment rate ended 2012 at a record high level of 11.8%, up from 10.6% a year before. While inflation is muted and interest rates are supportive of growth, we believe the Euro zone economy will remain challenged in 2013. We expect flat to modest declines in GDP, as continued budget cuts and limited credit availability extend the current recession.

The UK experienced a second year of economic stagnation during 2012, as the nation weathered the dual challenges of fiscal austerity and above-target inflation. GDP growth was essentially flat on the year, as the economic growth spurred by the London Olympics and Queen’s Jubilee celebration was offset by ongoing pressures on real income levels. Additionally, inflation continued to trend above the Bank of England’s target levels, ending the year at a 2.7% rate. Despite these challenges, the labour market remained resilient, as 300,000 new jobs were forecast to have been created during the year, driving the unemployment rate down to 7.7% as of November 2012. Moreover, credit markets began to re-open, as banks worked through legacy loan issues and government lending initiatives took effect. While still well below previous levels, mortgage approvals improved and the housing market appeared to stabilize. Moving forward, while the economy is anticipated to grow modestly in 2013, we expect any recovery to be slow and grinding. Further monetary and fiscal measures appear likely, as the UK government and Bank of England attempt to combat below-trend economic growth while containing above-target inflation.


Following seven consecutive quarters of slowing growth, China’s economy began to rebound in the fourth quarter, supported by an improving manufacturing environment and strong retail sales. Fourth quarter GDP growth of 7.9% represented a sequential improvement over the third quarter and resulted in full year 2012 GDP growth of 7.8%. While results have slowed from the 9.3% GDP growth produced in 2011, the Chinese economy appears to have successfully weathered a soft landing. Conversely, the Japanese economy remained stagnant, with fourth quarter GDP declining by 0.5% following a 3.5% decline in the third quarter. However, the election of a new government, with a mandate to push through aggressive economic reform, boosted the Japanese stock market by 14% during the fourth quarter. The Yen depreciated by approximately 11% over the quarter, but is expected to rally should the Bank of Japan announce further measures to support economic growth, including higher targets for inflation.


Global property markets continued to benefit from improving capital liquidity and low costs of financing throughout 2012, leading transaction activity to accelerate. New supply remained relatively benign during the year, providing a strong foundation for real estate fundamentals, while demand is anticipated to slowly rise as employment growth recovers.

Within the retail property sector, leasing fundamentals remain strong in the U.S., with particular demand from international retailers seeking to expand in the market. New store openings are at a four-year high, with minimal new supply coming online over the next decade. Despite concerns of secular changes impacting lower productivity malls, this segment of the retail sector continues to experience strong tenant demand. Furthermore, attractive opportunities remain to enhance the value of lower productivity malls through tailored business plans, targeted capital upgrades and improved merchandizing mix.

Within the office property sector there is reluctance among larger scale tenants to make leasing decisions unless pressured by pending large expirations or consolidation needs, due largely to lingering concerns over the health of the global economy and uncertainty over U.S. fiscal policy. Property fundamentals continue to rebound, particularly in markets focused upon technology and energy industries. Transaction activity continues to favour premier assets in gateway markets, leading to a widening valuation gap between prime and secondary assets and property markets. We expect this gap to narrow in the medium term, as investors recognize the potential value creation opportunity available in certain secondary markets.


2012 ANNUAL REPORT    17

The multi-family sector is benefiting from several key secular and fundamental trends, including declining home ownership rates, demand from echo-boomers and limited mortgage credit provision, which have resulted in strong rent and occupancy growth. Although permits for new multi-family developments are beginning to rise, historical evidence demonstrates that multi-family demand is driven largely by employment growth, which is expected to accelerate in the near term.

Leasing velocity in the industrial sector is also demonstrating strength, driven by the reconfiguration of supply chains as e-commerce tenants build their delivery platforms and as tenants consolidate into more efficient space to reduce costs.

In our view, real estate assets should perform well in an environment of rising interest rates and inflation caused by an improving economic climate. Such an environment should translate into meaningful employment growth, providing support for real estate fundamentals through higher levels of consumption and leasing activity.


Despite indications of a strengthening economic recovery in the U.S., 2012 drew to a close with no significant increase in electricity demand over 2011. The substantial gains in gas-fired generation observed in the first half of the year began to recede through the latter half, with a reversal in fuel switching trends evident by year-end due to higher natural gas prices. On a weather-adjusted basis, 2012 demand mirrored that of the prior year, while actual demand was fractionally lower, due largely to the exceptionally mild conditions of the first quarter.

Over the full year, wholesale power markets in New York and New England were significantly down relative to 2011, recording the lowest average prices in over a decade. However, the markets began to recover in the fourth quarter, reflecting the return of natural gas prices to mid-$3/MMBtu levels at Henry Hub. From a capacity perspective, both markets are expected to remain more than comfortably supplied for several years.

Renewable power continued to enjoy a pricing premium over the levels implied by the gas price curve throughout 2012. Consumers and utility companies are recognizing the benefits of renewable power sources, including lower price volatility, eco-friendly production methods and protection against future policy initiatives, including potential CO2 pricing and enhanced regulation surrounding environmental emissions. Moving forward, we expect demand for renewable power to continue to rise, particularly as recent natural disasters have revived efforts within the U.S. to combat climate change.

Power demand in Brazil rebounded during 2012, growing at 4.5% year-over-year. However, industrial demand was stagnant, increasing by only 0.3% year-over-year from January through October. A severe drought reduced hydro inflows and storage, leading power prices higher. As a result, demand for thermal generation has increased, with much of the incremental supply coming from high-cost imported liquefied natural gas.

Growth in the incentivized free market, where power from small (<30 megawatt capacity) hydro plants can be sold, has been rapid. Broker quotes in the free market for conventional power to be delivered in 2014 and 2015 now reach a range of R$130 to $135 per megawatt hour (“MWh”) compared to R$100/MWh one quarter ago.


The infrastructure asset class witnessed further privatization activity during 2012, as governments across the world sought to raise capital and introduce private sector discipline into asset operations. This trend is likely to continue, due to a combination of austerity measures in Europe, rating agency pressures, and budgetary constraints. A secondary trend of diversified conglomerates selling infrastructure assets such as pipelines, airports and toll roads is also likely to accelerate moving forward, as management teams recognize the benefits of placing pure-play infrastructure assets into the hands of dedicated infrastructure investors.

Global infrastructure markets continued to benefit from the economic recovery in most regions. Further developments in the U.S. energy sector resulted in significant change among North American energy infrastructure assets. This was driven primarily by shale gas exploration and production growth, as well as ongoing growth in the oil sands of western Canada, resulting in significant investment opportunities. Publicly listed infrastructure companies in the U.S., were active in this market during the year, and enjoy a favourable cost of capital advantage, as investors are attracted to the income and growth potential offered by these securities.

The performance of transportation assets was more mixed in 2012, as local economic activity drove operational performance. In southern Europe, many toll roads experienced significant traffic declines after having weathered the 2008-2009 crisis relatively well. Other assets in regions with stronger economic activity experienced relatively robust operational and financial metrics. These mixed results across the globe have been a powerful reminder that not all infrastructure assets are created equally and regional as well as asset-specific factors can vary significantly.

Regulation and government policies impacted infrastructure assets to varying degrees during the year. Some of the more noteworthy policy changes in recent years include proposed tax changes for European utilities and concessions and proposed changes to concession renewal terms for power assets in Brazil.



Private Equity and Residential Development

Our private equity portfolio companies operate in a number of sectors, primarily in North America, and with a particular concentration in businesses whose performance is correlated with the U.S. homebuilding sector and the Alberta energy sector, while our residential development businesses operate primarily in select U.S. markets, the Alberta market in Canada, and in Brazil a number of major markets. Economic conditions continue to improve, driven primarily by recovery in the U.S. housing market. Additionally, the low interest rate environment and ongoing strength of the credit markets has enabled businesses to recapitalize their balance sheets, lowering overall borrowing costs and extending debt maturity profiles and favourable equity capital markets are permitting monetization of investments at attractive returns.

The Alberta energy sector, specifically oil and gas production and well servicing, was more challenging during 2012. Persistently high U.S. natural gas production and the absence of winter heating demand resulted in low realized commodity prices. Additionally, Canadian energy producers experienced discounted pricing for crude oil, resulting from steadily increasing continental supply.

Looking ahead, we expect commodity pricing will continue to face headwinds in 2013, although results may be mixed. We believe natural gas pricing is poised to improve, as gas rig counts remain at historical lows, natural gas generated electricity remains robust and North America returns to a normal winter weather cycle. However, we expect Canadian crude oil differentials to face ongoing pressure until infrastructure and export opportunities are realized.

As noted previously, we continue to see improvement in the U.S. housing sector. While regional markets in the U.S. progressed at slightly different rates of recovery, supply generally tightened and demand improved, leading to rising prices. The S&P/Case-Shiller index of U.S. property values in 20 cities posted a year-over-year increase of 6.8% in December 2012, one of the largest gains in home prices since mid-2006. Affordability remains high despite these price gains and we expect extremely low mortgage rates to continue to support home ownership.

Single family residential development operations in both Alberta and Ontario also performed well throughout 2012. Ongoing investment in the energy sector continued to support migration to Alberta, leading the province to the lowest unemployment rate in the country. Similarly, strong migration trends and current supply constraints continued to benefit the low-rise market in Toronto.

Moving forward, we anticipate a much improved U.S. housing market in the year ahead and a generally stable Canadian market. As momentum in the U.S. housing market accelerates and house prices rise, we expect our land assets will continue to appreciate in value. In many of our markets, a 10% increase in house prices may translate into a 20% to 30% increase in the underlying value of finished lots.


Basis of Accounting

We are a Canadian corporation and are required to prepare our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board. We are listed on the Toronto Stock Exchange, New York Stock Exchange and Euronext and recognize that IFRS may not be the generally used accounting methodology for all readers of this report. A particularly notable feature of IFRS is the use of fair value accounting for assets such as commercial properties and other physical assets that are not fair valued under U.S. generally accepted accounting principles (“U.S. GAAP”). Accordingly, the following discussion contains a summary of key features of IFRS that are particularly relevant to our financial statements and key financial measures. A complete summary of our significant accounting policies are described in Note 2 to our consolidated financial statements, which also contains a summary of critical judgments and estimates.

Consolidated Financial Information

Our consolidated financial statements to which this MD&A relates include the accounts of a number of the entities that we manage and invest in on a fully consolidated basis, as well as those which we present using the equity method of accounting.

We consolidate a number of entities even though we hold only a minority economic interest. This is the result of our exercising sufficient control over the affairs of these entities due to contractual arrangements. As a result, we include 100% of the revenues and expenses of consolidated entities in the corresponding line items in our consolidated statement of operations, even though a substantial portion of the net income of the entity is attributable to non-controlling interests. This does not impact net equity or net income attributable to Brookfield shareholders but it can significantly impact the financial statement presentation. For example, a large variance in revenues within a business which is largely owned by non-controlling interests may have a relatively small impact on net income attributable to shareholders.

Interests in entities over which we exercise significant influence, but where we do not exercise control, are accounted for as equity accounted investments. We record our proportionate share of their comprehensive income on a “one-line” basis as equity accounted income within net income and as equity accounted investments within other comprehensive income (“OCI”). As a result, our share of items such as fair value changes, that would be included with other fair value changes if the entity was consolidated, are instead included with the other components of net income of that entity within equity accounted income.


2012 ANNUAL REPORT    19

Certain of our consolidated subsidiaries and equity accounted investments do not utilize IFRS for their reporting purposes. The comprehensive income utilized by us is determined using IFRS and may differ significantly from the comprehensive income pursuant to the accounting principles reported by the investee. For example, IFRS requires a reporting issuer to fair value its investment properties such as office and retail properties, as described below, whereas other accounting principles such as U.S. GAAP may not. Accordingly, their stand-alone financial statements may differ from those which we consolidate.

Use of Fair Value Accounting

In accordance with IFRS, we account for a number of our assets at fair value. As at December 31, 2012 approximately 70% of our consolidated assets were carried at fair value and the remaining 30% were recorded at amortized historical cost or on another basis of accounting. We utilize a fair value measurement framework for our commercial properties, renewable power assets, and certain of our infrastructure and financial assets. Property, plant and equipment and inventory included within our private equity and residential development operations are recorded at amortized historic cost or the lower of cost and net realizable value. Public service concessions within our infrastructure operations are considered intangible assets and are amortized over the life of the concession. Other intangible assets and goodwill are recorded at cost or amortized cost. Equity accounted investments follow the same accounting principles as our consolidated assets and accordingly, include amounts recorded at fair value and amounts recorded on another basis depending on the nature of the underlying assets. The table on page 30 of this MD&A identifies the assets within our consolidated balance sheet that are carried at fair value.

We classify the vast majority all of our commercial property assets, including our office and retail property portfolios, as investment properties. Investment properties are revalued on a quarterly basis and the change in value is recorded as fair value changes within net income. Standing timber and agricultural assets are classified as sustainable resources and accounted for in a similar manner as investment properties. Depreciation is not recorded on investment properties or sustainable resources.

Our renewable power facilities are classified as property, plant and equipment and we have elected to record these assets at fair value using the revaluation method. Unlike investment properties, these assets are revalued only on an annual basis, and positive changes in value are recorded as revaluation surplus within OCI and accumulated within common equity. If a revaluation results in the fair value declining below the depreciated cost of the asset, then an impairment is charged to net income. Impairments of this nature may be subsequently reversed through increases in value. Depreciation is recorded on the revalued carrying values at the beginning of each year and recorded in net income. We also classify property, plant and equipment within our property and infrastructure operations using the revaluation method, however, property, plant and equipment within our other operations is accounted for using the depreciated historical cost method.

A significant amount of the carrying value of our infrastructure operations is recorded as intangible assets. These amounts typically represent the excess purchase price over the ascribed value of tangible assets on the acquisition of infrastructure businesses or assets, and reflect the value of the regulatory rate base or other characteristics. Intangible assets are carried at cost, subject to periodic impairment tests, and are amortized over their useful lives unless they are determined to have an indefinite life, in which case amortization is not recorded.

Financial assets, financial contracts and other contractual arrangements that are treated as derivatives are carried at fair value in our financial statements and changes in their value are recorded in net income or OCI, depending on their nature and business purpose (i.e., whether a security is held for trading, is available-for-sale, or whether a financial contract qualifies for hedge accounting or not). The more significant and common financial contracts and contractual arrangements employed in our business that are fair valued include: interest rate contracts; foreign exchange contracts; and agreements for the sale of electricity.

Key Financial Measures


Many of the revenues from our asset management activities are not included in consolidated revenues because they are earned from entities that are consolidated in our financial statements and therefore are eliminated under IFRS consolidation principles. In addition, we do not recognize performance income such as carried interests that may have accrued due to investment performance until they are no longer subject to future events (i.e., claw-back provisions). Revenues in our construction business are recognized on a percentage-of-completion basis and include both our revenues as well as revenues derived by costs that are recoverable from sub-contractors which are offset by an equivalent amount recognized within direct costs.

We account for our office and retail property leases as operating leases and record the total amount of the contractual rent to be received over the life of the lease on a straight-line basis, which may differ from the actual amount of cash received in any given period. Rental revenues also include recoveries of operating expenses (recorded as direct costs), which are recognized in the period that such costs are charged to tenants. We also record certain revenues within our renewable power and infrastructure businesses on a straight-line basis.

Revenue from residential development activities is based on the completed project basis meaning that revenue is not recognized until such time as the risks and rewards of ownership have been transferred and the project is delivered. In the case of larger projects that are completed over several years, such as the residential condominiums developed in our Brazilian business or bulk lot sales, the resultant revenues and associated net income may be more irregular than those derived from the single family development activities that are typical within our North American business.



Direct Costs include costs associated with our asset management activities, notwithstanding that most of the associated income is not included in revenue because the costs are incurred directly or indirectly by Brookfield whereas the revenues are earned from entities that we consolidate and therefore are eliminated on consolidation. Direct costs in our construction and office property lines of business include sub-contractor costs and tenant operating costs, respectively. Direct costs also include subsidiary corporate costs.

Equity Accounted Income represents our share of the components of net income recorded by investments over which we exercise significant influence, such as our investment in General Growth Properties (“GGP”), and is reported as a single line item in our consolidated statement of operations. GGP reports under a U.S. GAAP framework, which differs from IFRS primarily in respect of the accounting treatment of GGP’s retail mall portfolio. Under IFRS, we record GGP’s retail malls at fair value whereas GGP’s U.S. GAAP reporting follows the depreciated historical cost method, which may result in a significantly different net income than is reported by GGP in its standalone financial statements.

Interest Expense includes dividends declared on our capital securities, which are treated as liabilities under IFRS even though they are preferred shares, because they may be redeemed at the holder’s option after a specific date for a variable number of Class A Limited Voting Shares.

Corporate Costs represent costs that are not attributable to a specific reportable segment.

Fair Value Changes. As noted under “Use of Fair Value Accounting” on page 20, we carry at fair value our commercial properties, standing timber and agricultural assets, and certain financial instruments and power sales agreements that do not qualify as hedges. Changes in the values of these items are recorded as “fair value changes” in our consolidated statement of operations. We record our share of fair value changes recorded by equity accounted investees as a component of equity accounted income.

Depreciation and Amortization includes the depreciation of property, plant and equipment as well as the amortization of intangible assets. Two of the largest components of depreciation relate to renewable power and infrastructure facilities, which are revalued annually in OCI. Depreciation of these assets is based on their fair value at the beginning of each year. We do not record depreciation on assets that are classified as Investment Properties (i.e., commercial office and retail properties) or Biological Assets (i.e., standing timber and agricultural assets).

Income Taxes recorded in our consolidated statement of operations generally relate to income and expenses presented therein while income taxes in OCI relates to items in that statement such as revaluation of property, plant and equipment, available-for-sale financial assets and financial contracts elected for hedge accounting. Income tax expense includes current and deferred amounts. Current taxes represent amounts that are paid/payable or received/receivable in the current year while deferred taxes represent amounts that are not anticipated to become payable or receivable until subsequent fiscal years. Deferred taxes are typically much larger than current taxes because they relate to timing differences associated with the revaluation of assets in our financial statements (for which there is no corresponding change in the tax value) that will be realized over time in subsequent fiscal years through usage or sale. In addition, we maintain large pools of loss carry forwards and generate other forms of tax attributes each year that are available to reduce current taxes. Deferred tax expense is computed using the applicable local tax rate applied to the excess of an asset’s carrying value over its tax value and without discounting.

Non-controlling Interests. As noted above under “Basis of Accounting” we consolidate a number of partially owned entities because of our contractual rights as an asset manager, even though in some cases we own less than 50%. Accordingly, the net income, other comprehensive income and equity of these and other consolidated entities that is attributable to the other investors in these entities are reported on one line as “non-controlling interests” while the associated revenues, expenses, other comprehensive income, assets and liabilities are presented on a “gross” basis within the corresponding line items in our financial statements.

Valuation Items – Other Comprehensive Income include revaluations of property plant and equipment, such as our power generating facilities and certain infrastructure assets, as well as changes in the values of financial contracts and power sales agreements that qualify for hedge treatment, changes in the value of available-for sale securities and equity accounted other comprehensive income, as well as our share of similar items recorded by equity accounted investments.

Use of Non-IFRS Measures

We disclose a number of financial measures in this Report that are calculated and presented using methodologies other than in accordance with IFRS. These measures are used primarily in Part 3 of the MD&A. We utilize these non-IFRS measures in managing the business, including performance measurement, capital allocation and valuation purposes and believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures may differ from the calculations disclosed by other businesses, and as a result, may not be comparable to similar measures presented by others. Reconciliations of these non-IFRS financial measures to the most directly comparable financial measures calculated and presented in accordance with IFRS, where applicable, are included within Part 3 of this MD&A and elsewhere as appropriate.


2012 ANNUAL REPORT    21







   2012       2011       2010         2012 vs 2011          2011 vs 2010    




   $       18,697        $     15,921        $     13,623        $     2,776        $         2,298    

Direct costs

     (13,909)          (11,906)          (9,892)          (2,003)          (2,014)    

Equity accounted income

     1,243          2,205          765          (962)          1,440    




     (2,497)          (2,352)          (1,829)          (145)          (523)    

Corporate costs

     (158)          (168)          (188)          10          20    

Valuation items


Fair value changes

     1,150          1,386          1,651          (236)          (265)    

Depreciation and amortization

     (1,263)          (904)          (795)          (359)          (109)    

Income taxes

     (516)          (508)          (140)          (8)          (368)    
















Net income

     2,747          3,674          3,195          (927)          479    

Non-controlling interests

     (1,367)          (1,717)          (1,741)          350          24    
















Net income attributable to shareholders

   $         1,380        $       1,957        $       1,454        $      (577)        $           503    
















Net income per share

   $           1.97        $         2.89        $         2.33          












Valuation items

   $         1,626        $       1,920        $       (906)        $      (294)        $         2,826    

Foreign currency translation

     (111)          (837)          653          726          (1,490)    

Taxes on above items

     (434)          (147)          448          (287)          (595)    
















Other comprehensive income

     1,081          936          195          145          741    

Non-controlling interests

     (564)          (141)          (421)          (423)          280    
















Other comprehensive income attributable to shareholders

     517          795          (226)          (278)          1,021    
















Comprehensive income attributable to shareholders

   $         1,897        $       2,752        $       1,228        $      (855)        $         1,524    





















Consolidated assets

   $     108,644        $     91,022        $     78,131        $    17,622        $       12,891     

Borrowings and other long-term financial liabilities

     51,782          42,311          37,487          9,471          4,824     


     44,251          37,399          29,192          6,852          8,207    
















Dividends declared for each class of issued securities for the three most recently completed years are presented on page 33.




The following section contains a discussion and analysis of line items presented within our consolidated financial statements. We have disaggregated several of the line items into the amounts that are attributable to our various business segments in order to facilitate the review of variances.

The financial data in this section has been prepared in accordance with IFRS for each of the three most recently completed financial years. Our presentation currency and functional currency was the U.S. dollar throughout each of these years. There were no changes in accounting principles that have had a material impact on the comparability of the results between financial years.

The condensed statement of operations on page 22 presents the results of consolidated entities on a 100% basis even though in many cases we own a much smaller interest. The amount of the net income of these partially owned entities that accrues to other shareholders is recorded as non-controlling interests. Accordingly, the impact of acquisitions and fair value changes within partially owned entities will often have a disproportionately larger impact on individual line items than it will on net income attributable to shareholders, once changes in non-controlling interests are taken into consideration. Similarly, changes in ownership that give rise to consolidation or deconsolidation can also have a significant impact on variances between reporting periods, as our proportionate share of the revenues and expenses of equity accounted investments are reported on a net basis as equity accounted income, as opposed to consolidation.


We reported net income attributable to shareholders of $1.38 billion in 2012, compared to $1.96 billion in 2011 and $1.45 billion in 2010. On a per share basis, net income per share was $1.97, $2.89 and $2.33 in those three years, respectively. The most significant contributor to the fluctuations in net income over the three years was the amount of fair value changes recorded in each year, including our proportionate share of fair value gains recorded by equity accounted investments.

2012 vs. 2011

Net income attributable to shareholders decreased by $577 million year-over-year. The decline is due primarily to a lower level of equity accounted income, which in turn reflects a lower amount of fair value changes recorded by the investees. This was partially offset by the contribution from recently acquired property and infrastructure assets, which led to increased revenues and direct costs, as well as increases in interest expense and non-controlling interests attributable to acquisition and development borrowings and capital from non-controlling interests.

The largest single factor was a decrease of $422 million in the equity accounted income from General Growth Properties (“GGP”) in 2012 compared to 2011, almost all of which was attributable to shareholders. The decrease reflects our share of the reduced amount of fair value gains recorded on GGP’s investment properties in 2012 relative to 2011. We also recorded a lower level of fair value gains in equity accounted commercial office properties relative to 2011 in part due to the consolidation of our U.S. Office Fund part way through that year.

Fair value changes related to units held by others in our renewable power fund resulted in a $376 million downward fair value change in 2011 following an increase in the quoted market price of the units. These units were recorded as liabilities prior to the reorganization of the fund in late 2011, and were subsequently recorded as non-controlling interests reflecting changes in the terms of the units upon reorganization. Accordingly, there were no such charges in 2012.

Same store rents increased in both our office and retail portfolios by 3% and 6%, respectively, and net income was also positively impacted by the contribution from recently acquired properties and the completion of the 1 million square foot Brookfield Place in Perth beginning in the second quarter of 2012. The contribution from our existing hydroelectric and wind energy generation facilities was negatively impacted by lower generation levels as a result of poor water flows; however this was partially offset by the contribution from recently acquired and commissioned facilities.

Our infrastructure business recorded increased revenues and earnings from several acquisitions and capital expansion projects completed since the beginning of 2011, notably the expansion of our Western Australian rail lines.

Our private equity and residential development operations recorded increased revenues and earnings from operations that have benefitted from the ongoing U.S. housing recovery, notably our operations and North American residential operations; however our Brazilian residential development business reported lower revenues and operating losses as a result of a slowdown in project completions and increased development costs.

2011 vs. 2010

Net income attributable to shareholders increased by $503 million year-over-year. The variance was due mostly to our proportionate share of fair value changes recorded by equity accounted investments.

The largest single factor was the acquisition of GGP in late 2010. We recorded $1,401 million of equity accounted income from GGP in 2011 compared to $nil in 2010, representing an increase of $1.4 billion which was almost entirely attributable to shareholders. The income includes our share of fair value gains recorded by General Growth Properties in 2011, which was particularly large following the emergence of the company from bankruptcy, the installation of a new management team and


2012 ANNUAL REPORT    23

strategy and continued improvement in tenant sales, as well as improved valuations of high-quality retail properties as an asset class. We also recorded our proportionate share of the revenues from GGP’s retail properties less direct costs within equity accounted income, which represented a positive contribution to net income relative to 2010.

We recorded an increased amount of fair value gains on our commercial office properties arising from increasing cash flows and decreases in discount rates and terminal capitalization rates that reflected lower risk-free rates and improved valuations of high-quality commercial office properties as an asset class.

These gains were more than offset by a decline of $534 million in gains related to power sales contracts that were not accounted for as hedges between 2010 and 2011, most of which was attributable to shareholders. We recorded large gains in 2010 following a decrease in short-term market prices which increased the value of the contracts because they enabled us to sell power at higher prices. We adopted hedge accounting for several of our power sales agreements in 2011 with the result that mark-to-markets in this year were recorded as a component of OCI. Offsetting this variance was an increase in the negative mark-to-market of units held by others in our Renewable Power Fund following an increase in the quoted market price of the units.

We recorded a $405 million gain on the purchase of an infrastructure business in late 2010, which also gave rise to a decrease in fair value gains in 2011 relative to 2010 as we did not record a similar gain of this magnitude in 2011.

Our commercial office properties reported increases in same store sales relative to 2010. Net income also benefitted from improved results within our infrastructure reflecting the contribution from acquisitions and capital expansion projects.

Estimated impact of foreign currency translation on our consolidated financial results

The impact of currencies on our results was mixed, with the average rate over the year increasing for the Australian dollar and declining for both the Canadian dollar and the Brazilian real. The impact on common equity is reflected in the foreign currency translation component of other comprehensive income, which is discussed on page 29.

The relevant average exchange rates that impact our business are shown in the following table:


             Year-end Spot Rate                       Average Annual Rate           
         2012          2011          2010          2012          2011          2010  

Australian dollar

     1.0395         1.0205         1.0233         1.0357         1.0329         0.9209   

Brazilian real

     2.0435         1.8758         1.6662         1.9546         1.8000         1.6967   

Canadian dollar

     1.0079         0.9787         1.0017         1.0004         1.0109         0.9709   



















Statement of Operations


The following table presents consolidated revenues disaggregated into our business segments consistent with Note 3 to our consolidated financial statements in order to facilitate a review of year-over-year variances:


   2012      2011      2010      2012 vs 2011      2011 vs 2010  

Asset management and other services

   $ 4,520        $       3,535        $       2,374        $       985        $     1,161    


     3,982          2,760          2,659          1,222          101    

Renewable power

     1,179          1,128          1,161          51          (33)   


     2,109          1,725          962          384          763    

Private equity and residential development

     6,900          6,740          6,006          160          734    

Corporate activities

     230          311          623          (81)         (312)   

Eliminations and adjustments1

     (223)         (278)         (162)         55          (116)   
















Total consolidated revenues

   $     18,697        $     15,921        $     13,623        $     2,776        $     2,298    


















Adjustment to eliminate base management fees and interest income earned on/from entities that we consolidate. See Note 3 to our consolidated financial statements

Acquisitions can have a significant impact on revenues, as can changes in the basis of presentation of businesses such as between consolidation and equity accounting following changes in ownership. Revenues from our property and infrastructure assets tend to be relatively consistent between periods because they are largely determined by contractual arrangements; whereas renewable power revenues can be impacted by changes in water availability. Construction and property services revenues fluctuate significantly with the award of large contracts, and the revenues within our private equity and residential development operations can vary in line with changes in the level of economic activity.



2012 vs. 2011

Asset management and other services revenues increased by approximately $1.0 billion of which approximately $680 million relates to increases in construction revenues reflecting an increase in the number and scale of projects under construction, and approximately $200 million relates to increases in property services revenue reflecting the acquisition of a large U.S. relocation and property brokerage business in late 2011.

Property revenues increased by approximately $1.2 billion due to the acquisition of two large resort properties in March 2011 and April 2012, the consolidation of our U.S. Office Fund and Brookfield Place New York in the second half of 2011 and the completion of Brookfield Place Perth in May 2012.

Renewable power generation revenues were virtually unchanged as the contribution from acquired and commissioned facilities was offset by lower generation following unusually low water conditions during the second and third quarters of 2012.

Infrastructure revenues increased by approximately $380 million as a result of a number of acquisitions during the year, as well as the completion of expansion projects, offset by the impact of lower volumes and pricing on our timber revenues.

The increase in revenues within our private equity and residential development segment were principally due to the impact of higher prices and increased volumes on our panelboard operations, although this was largely offset by a lower dollar volume of project completions within our Brazilian residential development operations compared to 2011.

2011 vs. 2010

Asset management and services revenues increased by approximately $1.2 billion primarily as a result of an increase in construction activity as work-in-hand grew to $5.4 billion in 2011 from $4.3 billion in 2010.

Property revenue increased by approximately $100 million as a result of new leasing activity at higher average in-place net rents and currency appreciation in our Australian and Canadian properties. The consolidation of the U.S. Office Fund and other property acquisitions during the second half of the year contributed to the increase but were offset by reduced occupancies in the United States.

Renewable power generation revenues were relatively consistent with 2010 as weaker hydrology conditions in eastern Canada offset the contribution from acquired and commissioned facilities, and pricing for our generation in the northeastern United States, not subject to long-term power contracts, declined in 2011. This was offset partially by a Brazilian hydroelectric acquisition and the practical completion of a wind facility in eastern Canada.

Infrastructure revenues increased by approximately $750 million primarily due to the consolidation of businesses following the Prime Infrastructure merger in addition to increases in our utility and timber operations but was partially offset by a decline in our transport and energy revenues.

The increase in revenues in our private equity and residential development segment was due to an increase in the number of projects completed in our Brazilian residential development operations.

Direct Costs





   2012      2011      2010      2012 vs 2011     2011 vs 2010  

Asset management and other services

   $       4,171       $       3,280       $     1,954       $       891       $     1,326   


     1,812         1,077         1,120         735         (43

Renewable power

     475         379         413         96         (34


     1,138         908         698         230         210   

Private equity and development

     6,105         6,129         5,340         (24     789   

Corporate activities

     114         46         268         68         (222

Eliminations and adjustments1

     94         87         99                (12















   $     13,909       $     11,906       $     9,892       $     2,003       $     2,014   


















Adjustment to reallocate unallocated segment costs

Direct costs within our asset management and other services and residential development operations are primarily variable in nature and increase or decrease in line with changes in revenues. Most of our other direct costs are fixed in nature, and therefore variances tend to relate to acquisitions or dispositions of assets or businesses, or a change in the basis of accounting (i.e., from equity accounting to consolidation). For example, we acquired a controlling interest in our U.S. Office Fund in August 2011, resulting in increased property direct costs in 2012. Changes in currency rates also impact the U.S. equivalent of costs incurred in foreign jurisdictions, particularly Australia, Brazil and Canada.


2012 ANNUAL REPORT    25

2012 vs. 2011

The increase in direct costs within our asset management and other services segment reflects an approximate $700 million increase in direct costs within our construction services business reflecting a greater number of projects relative to 2011 in addition to increases in direct costs within our property services business due to the acquisition of a large relocation and property brokerage business in late 2011.

Property related direct costs increased by approximately $740 million primarily due to the acquisition of two large resort properties. In addition, the consolidation of the U.S. Office Fund, Brookfield Place New York and other acquisitions contributed to the increase. The two large resort properties acquired in March 2011 and April 2012 have large operating costs relative to office and retail properties due to the nature of their business related in particular to much larger work forces.

Direct costs within our renewable power operations increased by approximately $100 million primarily relating to acquisitions and the impact of increased foreign exchange rates on our Brazilian and Canadian operations.

The increase in our infrastructure direct costs of $230 million reflects additional costs incurred within newly acquired businesses in addition to costs associated with completed expansion projects.

The decrease in our private equity and residential development segment reflects a lower amount of deliveries recorded within our Brazilian residential operations offset by increases in costs associated with the increased production experienced at our panelboard operations.

2011 vs. 2010

Direct costs within our asset management and other services segment increased by approximately $1.3 billion due principally to increases in construction activity.

Property related direct costs remained relatively flat as the impact of the consolidation of the U.S. Office Fund, Brookfield Place New York and other acquisitions in the second half of 2011 were offset by decreases in costs associated with the sale of properties in Boston and New Jersey.

Direct costs within our infrastructure operations increased by approximately $200 million principally due to a merger transaction in November 2010 that resulted in the consolidation of several businesses that were previously equity accounted.

Direct costs within our private equity and residential development segment increased by approximately $800 million largely due to a higher number of projects and acquisitions in our residential development operations as well as the consolidation of entities that were previously equity accounted following increases in our ownership levels.

Equity Accounted Income

Equity accounted earnings represent our share of the net income reported by equity our accounted investments.





   2012      2011      2010      2012 vs 2011      2011 vs 2010  

General Growth Properties

   $       979       $     1,401       $       —       $     (422)       $     1,401    

U.S. Office Fund1

             437         366         (437)         71    

Other U.S. office properties

     198         216         296         (18)         (80)   

Infrastructure operations

     15         115         12         (100)         103    


     51         36         91         15          (55)   















   $     1,243       $     2,205       $     765       $     (962)       $     1,440    


















Excludes income from equity accounted investments within the U.S. Office Fund

Equity accounted income increased by $1.4 billion between 2010 and 2011 and declined by $1.0 billion between 2011 and 2012. The increase between 2010 and 2011 was due primarily to the acquisition in late 2010 of our investment in General Growth Properties (“GGP”). The decrease in the contribution from GGP in 2012 was due almost entirely to a lower level of fair value gains recorded in respect of increases in the value of the company’s retail properties, and was offset in part by an increase in our proportionate share of the net operating income produced by GGP.

We began consolidating the results of our U.S. Office Fund in August 2011 and accordingly did not record any equity accounted income from that time on, although we did begin to record equity accounted income from partially owned properties within the fund. Notwithstanding the shortened ownership period during 2011 relative to 2010, the income recorded on this investment increased reflecting a higher level of fair value gains on increases in the value of the underlying office properties as well as increased net operating income due to improved leasing.

The changes in the amount of equity accounted income from infrastructure operations over the three years is due primarily to a larger amount of fair value gains recorded in respect of transmission operations in 2011 relative to 2010 and 2012.



Interest Expense

The following table presents interest expense organized by the balance sheet classification of the associated liability, with the exception of corporate borrowing expense, which includes expenses in respect of subsidiary liabilities that are guaranteed by the Corporation:





   2012      2011      2010      2012 vs 2011      2011 vs 2010  

Corporate borrowings

   $       209       $       197       $       178       $       12        $       19   

Non-recourse borrowings


Property-specific mortgages

     1,808         1,724         1,266         84          458   

Subsidiary borrowings

     405         337         291         68          46   

Capital securities

     75         94         94         (19)           















   $     2,497       $     2,352       $     1,829       $     145        $     523   
















Interest expense from corporate borrowings increased over the three years due to higher average consolidated borrowing levels over the years, as well as slightly higher exchange rates on Canadian dollar borrowings.

The consolidation of our U.S. Office Fund in 2011, resulted in our recording its interest expenses in our consolidated results, whereas previously it was presented on a net basis within equity accounted results giving rise to increases in property-specific and subsidiary borrowing expenses between the three years. Similarly, we began to consolidate a number of infrastructure operations in late 2010, which contributed to the increase in consolidated interest expense during 2011.

The majority of our borrowings are fixed rate long-term financings. Accordingly, changes in interest rates generally have minimal short-term impact on our cash flows.

Fair Value Changes





   2012      2011      2010      2012 vs 2011      2011 vs 2010  

Investment property

   $     1,276        $     1,477        $       835        $     (201)       $      642    

Sustainable resources

     132          292          148          (160)         144    

Power contracts

             54          588          (45)         (534)   


     —          —          405          —          (405)   

Redeemable units

     (11)         (376)         (159)         365          (217)   

Interest rate contracts

     (81)         (64)         (58)         (17)         (6)   

Private equity

     (119)         (74)         11          (45)         (85)   


     (56)         77          (119)         (133)         196    















   $     1,150        $     1,386        $     1,651        $     (236)       $     (265)   
















2012 vs. 2011

Fair value gains from changes in investment property values totalled $1.3 billion in 2012 compared to $1.5 billion in 2011, representing a decrease of $0.2 billion. Changes in the value of our global office portfolio were $0.9 billion, compared to $1.2 billion in 2011 representing a decrease of $0.3 billion. In each year the changes were due primarily to lower discount and terminal capitalization rates as well as increases in projected cash flows.

Fair value changes on redeemable units contributed a positive variance of $0.4 billion. We recorded a valuation charge of $363 million in 2011 that related primarily to increases in the stock market price of units held by others in our listed renewable power entity, which we were required to record as a liability and mark-to-market. Following the reorganization of this entity into Brookfield Renewable Energy Partners L.P. in late 2011, the successor units are now treated as non-controlling interests and no longer marked to market.

2011 vs. 2010

We recorded a $0.6 billion increase in the amount of investment property gains, mostly related to our global office portfolio which in turn reflected both lower discount rates and higher projected cash flows.

We recorded a large mark-to-market gain in 2010 on the revaluation of long-term power sales agreements and which increased in value when electricity prices decreased relative to the price that we were able to sell the power under the contracts. We elected hedge accounting for the agreement in 2011 and accordingly changes in fair value are now recorded in OCI.


2012 ANNUAL REPORT    27

We recorded a $405 million gain within our infrastructure operations during 2010 relating to the purchase of a large infrastructure business at a discount to fair values, and the negative mark-to-market on redeemable units was $217 million higher in 2011 due to a larger increase in the stock market price of our listed renewable power entity than what occurred in 2010.

Depreciation and Amortization

Depreciation and amortization is summarized in the following table:





   2012      2011      2010      2012 vs 2011      2011 vs 2010  

Renewable power

   $       499       $     455       $     488       $       44        $      (33)   

Private equity

     251         227         197         24          30    


     248         147         33         101          114    


     225         33         12         192          21    

Asset management and corporate

     40         42         65         (2)         (23)   















   $     1,263       $     904       $     795       $     359        $     109    
















Depreciation relates mostly to our renewable power generating operations, with smaller amounts arising from infrastructure operations and industrial businesses held within our private equity operations. We do not recognize depreciation or depletion on our commercial office and retail properties, standing timber, and agricultural assets, respectively, as these assets are classified as investment properties and revalued on a quarterly basis in net income as part of “fair value changes.”

Depreciation and amortization on our renewable power facilities increased by $44 million in 2012 compared to 2011, following a decrease of $33 million in the preceding year. We recorded increases in the value of our power facilities at the end of 2011, which increased the amount of depreciation during 2012 whereas we reduced the value of the facilities at the end of 2010, which led to a lower amount of depreciation in 2011. Acquisitions and commissioning of new assets contributed to increases in depreciation in each year.

Private equity depreciation is primarily the depreciation of assets owned by investments held in our private funds.

Infrastructure depreciation and amortization increased by $101 million between 2011 and 2012 due to increased asset valuations, acquisitions and the commencement of depreciation on developments coming on line. The increase of $114 million between 2010 and 2011 is due to the consolidation of several operating units in late 2010.

Although most of our property assets are considered investment properties and are not depreciated under IFRS, we acquired hotel operations in 2011 and 2012, which are considered property plant and equipment and utilize the revaluation method. The increase in depreciation in 2012 is a result of depreciation and amortization recorded on tangible and intangible assets within these operations.

Income Taxes

2012 vs. 2011

The provision for income taxes in the statement of operations increased slightly to $516 million in 2012 from $508 million in 2011. The change from prior year is attributable to various items including the $71 million income tax expense in 2011 reflecting the decrease in value of deferred tax assets arising from a decline in the Canadian corporate income tax rate which did not recur in 2012 offset by a $132 million income tax expense in the current year resulting from an internal reorganization within our property operations.

2011 vs 2010

The provision for income taxes in the statement of operations increased to $508 million in 2011 from $140 million in 2010. This increase was attributable to various items including (i) a one-time derecognition of deferred tax liabilities of $149 million in 2010 in our property operations which arose from the wind-up of a joint venture arrangement; (ii) the $71 million expense in 2011 referred to above; and (iii) larger increases in the fair value of assets relative to their tax basis in 2011 than what occurred in 2010, as reflected in the variance in fair value changes between the two periods.

Non-Controlling Interests

Net income attributable to non-controlling interests decreased by $350 million from 2011 to 2012 and was relatively unchanged between 2010 and 2011. The decrease during 2012 reflects the decline in net income prior to non-controlling interests of $927 million, which is attributable to the variances discussed in this section. Net income prior to non-controlling interests increased by $479 million between 2010 and 2011. A corresponding change in non-controlling interests did not occur because these interests participate in each area of our business to different extents. For example, in 2011 we recorded a large increase in equity accounted income relating to our investment in General Growth Properties, which accrues almost entirely to Brookfield.



Other Comprehensive Income

Revaluation Items

2012 vs. 2011

Fair value changes in OCI during 2012 included a $825 million increase in the valuation of our renewable power facilities reflecting the positive impact of lower discount rates offset in part by the impact of lower price forecasts on projected cash flows. The 2011 results included a $2.3 billion gain, which reflected a larger decrease in discount rates than in 2012.

We recorded an approximate $350 million increase in the valuation of our Western Australian rail project following a $276 million gain in 2011. The gains reflect the completion in stages of a major capital expansion. The revaluation of property plant and equipment in other infrastructure units resulted in a further $200 million of fair value gains in 2012, reflecting capital improvements, lower discount rates and improved cash flows.

2011 vs. 2010

Fair value gains included in other comprehensive income include an increase of $2.3 billion in the carrying value of our renewable power assets, reflecting increases in the property, plant and equipment which were partially offset by a reduction in the carrying values of associated power sales agreements. Revaluation gains also include $300 million in respect of renewable power development projects that was not previously included in IFRS fair values.

Other items in OCI include changes in the fair values of contracts pursuant to which we manage interest rate and currency risks, which occurred primarily in our property and corporate segments.

Foreign Currency Translation

We record the impact of changes in foreign currencies on the carrying value of our net investment in non-U.S. operations in other comprehensive income. As at December 31, 2012, our IFRS net equity of $18.2 billion was invested in the following currencies, principally in the form of net investments which are revalued through other comprehensive income: United States – 56%; Australia – 16%; Brazil – 14%; Canada – 7%; and other – 7%. From time to time, we utilize financial contracts to adjust these exposures. Changes in the value of currency contracts that qualify as hedges are included in foreign currency translation. During 2012, the value of the Brazilian real declined by 9% compared to the U.S. dollar, which resulted in a loss of $111 million after considering the impact of other currency movements and hedging activities. During 2011, the value of our principal non-U.S. currencies (Australia, Brazil and Canada) all declined against the U.S. dollar, giving rise to a total decrease of $837 million after the mitigating impact of hedges, or $443 million after non-controlling interests.

Income Taxes

2012 vs. 2011

The provision for income taxes in the statement of other comprehensive income increased to $434 million in 2012 from $147 million in 2011, representing an increase of $287 million. The prior year’s amount includes a $327 million recovery resulting from the formation of Brookfield Renewable Energy Partners L.P. in that year.

2011 vs 2010

The provision for income taxes in the statement of other comprehensive income was an expense of $147 million in 2011 compared to a recovery of $448 million in 2010. The $595 million increase is mainly attributable to increases in the fair value of assets relative to their tax basis that are recorded in other comprehensive income in 2011. The recovery in 2010 is largely due to a decrease in the revaluation of property plant and equipment in our renewable power operations that reduced the amount by which the book values exceeded the related tax basis.

Non-controlling Interests

Non-controlling interests in other comprehensive income declined by $423 million between 2011 and 2012, notwithstanding an increase in total other comprehensive income of $145 million. A greater proportion of fair value gains occurred within business units that had larger non-controlling ownership interests, whereas several business units that experienced a decrease in fair value gains year-over-year where those in which we had a greater interest. The variances between 2010 and 2011 represent similar anomalies.


2012 ANNUAL REPORT    29


Consolidated Assets

The following table disaggregates our consolidated balance sheet for the past three year-ends into assets that are carried at fair value and those that are carried on another basis such as historical cost:


    Carried at
Fair Value Basis
    Carried on
Other Basis
    Total Consolidated Assets  



  2012     2011     2010     2012     2011     2010     2012     2011     2010  

Investment properties

    $  33,161        $  28,366        $  22,163        $         —        $         —        $         —        $  33,161        $    28,366        $  22,163   

Property, plant and equipment

    28,202        20,036        15,953        2,912        2,796        2,567        31,114        22,832        18,520   

Sustainable resources

    3,283        3,155        2,834                             3,283        3,155        2,834   


    8,487        7,272        5,124        3,202        2,129        1,505        11,689        9,401        6,629   

Cash and cash equivalents

                         2,844        2,027        1,713        2,844        2,027        1,713   

Financial assets

    2,630        2,314        2,343        481        1,459        2,076        3,111        3,773        4,419   

Accounts receivable and other

    1,614        1,502        1,823        5,331        5,221        6,046        6,945        6,723        7,869   


                         6,579        6,060        5,849        6,579        6,060        5,849   

Intangible assets

                         5,764        3,968        3,805        5,764        3,968        3,805   


                         2,490        2,607        2,546        2,490        2,607        2,546   

Deferred income tax asset

                         1,664        2,110        1,784        1,664        2,110        1,784   



























    $  77,377        $  62,645        $  50,240        $  31,267        $  28,377        $  27,891        $  108,644        $  91,022        $  78,131   




























Consolidated balance sheet assets increased to $108.6 billion at the end of 2012. This represents an increase of $17.6 billion over the 2011 year-end, which followed a $12.9 billion increase between 2010 and 2011. The increases relate primarily to investment properties, property, plant and equipment, and investments and reflect acquisitions and fair value changes. In addition, the consolidation of investments that were previously equity accounted resulted in an increase in consolidated assets.

We do not fair value our equity accounted investments under IFRS; however, certain of our investments own assets that are recorded at fair value. This includes, for example, our investment in General Growth Properties, in which we record GGP’s investment properties at fair value on an quarterly basis. We have separated investments into those in which the underlying assets are recorded at fair value or amortized cost in the above table to provide a more a complete analysis for users.

Investment Properties and Property, Plant and Equipment

The following table presents the major contributors to the year-over-year variances for our investment properties and property, plant and equipment balances:


                 Property, Plant and Equipment  
    Infrastructure     Property     Private Equity
and Other
  2012     2011     2012     2011     2012     2011     2012     2011     2012     2011  

Balance, beginning of year

    $28,366         $22,163         $14,727         $12,443         $4,669         $3,510         $  640         $—        $2,796         $2,567    

Fair value changes

    1,276         1,477         830         2,319         706         424                       (58)        27    


    —         —         (489)        (453)        (201)        (88)        (166)               (283)        (197)   


    4,508         7,288         1,530         852         3,472         1,034         2,490         640        469         668    


    (1,136)        (2,150)        (20)        (35)        (48)        (127)        —                (64)        (225)   

Foreign currency translation

    147         (412)        (46)        (399)        104         (84)        —                52         (44)   































Net increase

    4,795         6,203         1,805         2,284         4,033         1,159         2,328         640        116         229    































Balance, end of year

    $  33,161         $  28,366         $  16,532         $  14,727         $  8,702         $  4,669         $  2,968         $  640        $  2,912         $  2,796    































Acquisitions and developments were the major contributor to increases along with fair value gains and increases revaluation surplus. In addition, we consolidated our U.S. Office Fund in 2011, which added $4 billion of consolidated assets in that year, and consolidated a number of infrastructure businesses in late 2010 following an increase in ownership of those businesses.




Note 8 to our consolidated financial statements presents a listing of our investments in associates and equity accounted joint ventures. Investments increased by $2.3 billion during 2012 and by $2.8 billion during 2011. The 2012 increase relates primarily to our share of the undistributed net income recorded by General Growth Properties, including fair value gains. We also acquired several equity accounted investments within our infrastructure operations. The 2011 increase includes $3.1 billion relating to our investment in GGP, which includes our share of undistributed net income, including fair value gains, as well as the acquisition of $1.7 billion of additional equity of GGP in early 2011. This increase was offset by the consolidation during 2011 of the U.S. Office Fund, which was carried at $1.8 billion at the end of 2010.

Borrowings and Other Long-term Financial Liabilities

We present our consolidated balance sheets on a non-classified basis, meaning that we do not distinguish between current and long-term assets or liabilities. We believe this classification is appropriate given the nature of our business strategy. Liabilities are disaggregated into current and long-term components in the relevant notes to our consolidated financial statements.





   2012       2011       2010       2012 vs 2011       2011 vs 2010   

Corporate borrowings

   $ 3,526        $ 3,701        $ 2,905        $ (175)       $ 796    

Non-recourse borrowings


Property-specific borrowings

     33,648          28,415          23,454          5,233          4,961    

Subsidiary borrowings

     7,585          4,441          4,007          3,144          434    

Long-term accounts payable and other liabilities1

     5,407          3,771          3,852          1,636          (81)   

Capital securities

     1,191          1,650          1,707          (459)         (57)   

Other long-term financial liabilities

     425          333          1,562          92          (1,229)   















   $ 51,782        $ 42,311        $ 37,487        $ 9,471        $ 4,824    


















Excludes accounts payable and other liabilities that are due within one year. See Note 15 to our Consolidated Financial Statements for 2012 and 2011 balances

The increase in property-specific borrowings of $5.2 billion during 2012 is due primarily to acquisitions within our property and infrastructure operations. The increase of $5.0 billion during 2011 reflects the consolidation of debt held within our U.S. Office Fund, which was equity accounted at the end of 2010, and acquisitions within our Private Equity operations.

The increase in subsidiary borrowings of $3.1 billion during 2012 reflects acquisitions as well as the issuance of long-term corporate bonds by our managed listed issuers.

Accounts payable and other liabilities with a maturity greater than one year increased in 2012 as a result of long-term liabilities assumed on acquisitions within our property and infrastructure operations and continued expansion of our residential development operations.

We redeemed $506 million of capital securities during 2012 with the proceeds from the issuance of preferred shares at lower rates.

Other long-term liabilities represent interests of others in consolidated funds that are classified as liabilities because they contain terms such as redemption features. We reorganized our Renewable Power Fund in 2011 with the result that the units held by other investors were reclassified as non-controlling interests and therefore no longer treated as long-term liabilities. These units represented $1.4 billion of long-term liabilities at the end of 2010.


Shareholders’ equity increased by $6.9 billion during 2012 following an $8.2 billion increase during 2011. Increases in non-controlling interests provided $4.7 billion of the increase in 2012 and $3.8 billion of the 2011 increase. In each year this reflects the acquisition of consolidated businesses, particularly within our infrastructure operations in 2012 as well as the undistributed comprehensive income and increases in revaluation surplus attributable to non-controlling interests, including fair value changes, which totalled $1.9 billion in each of 2012 and 2011 and $2.2 billion in 2010. Common equity increased by $1.4 billion in 2012, reflecting comprehensive income for shareholders and increases in revaluation surplus less shareholder distributions. The 2011 increase in common equity of $3.9 billion includes similar items as 2012 as well as the issuance of $1.5 billion in common equity net of share buybacks.

We provide a more detailed discussion of our capitalization in Part 4 of the MD&A.


2012 ANNUAL REPORT    31


Total revenues, net income for the eight most recent quarters are as follows:


     2012      2011  



   Q4       Q3       Q2       Q1       Q4       Q3       Q2       Q1   


   $ 5,622        $ 4,644        $ 4,411        $ 4,020        $ 4,122        $ 4,423        $ 3,963        $ 3,413    

Direct costs

     (4,380)         (3,407)         (3,272)         (2,850)         (3,035)         (3,452)         (2,964)         (2,455)   

Equity accounted income

     339          256          258          390          584          393          1,017          211    




     (637)         (593)         (613)         (654)         (620)         (622)         (564)         (546)   

Corporate costs

     (40)         (41)         (35)         (42)         (40)         (42)         (43)         (43)   

Valuation items


Fair value changes

     415          493          (100)         342          434          330          374          248    

Depreciation and amortization

     (352)         (327)         (287)         (297)         (228)         (224)         (231)         (221)   

Income taxes

     (191)         (153)         17          (189)         (257)         (90)         (124)         (37)   

























Net income

   $ 776        $ 872        $ 379        $ 720        $ 960        $ 716        $ 1,428        $ 570    

























Net income for shareholders

   $ 492        $ 334        $ 138        $ 416        $ 588        $ 253        $ 838        $ 278    

























Per share


- diluted

   $ 0.72        $ 0.48        $ 0.17        $ 0.60        $ 0.86        $ 0.36        $ 1.26        $ 0.41    

- basic

   $ 0.74        $ 0.48        $ 0.17        $ 0.63        $ 0.90        $ 0.36        $ 1.26        $ 0.42    

























Summary of Quarterly Results

The company’s quarterly results vary primarily due to the impact of seasonality on our operations, fair value changes recognized on our consolidated assets as well as fair value changes recorded within equity accounted income, the impact of acquisitions or dispositions of assets or businesses and fluctuations in foreign currency exchange rates on non-U.S. operations.

The amount and timing of fair value changes vary on a quarterly basis depending on changes in the fair value of our assets which are recorded at fair value in net income. We recorded $544 million and $357 million of fair value changes on our equity accounted investment in General Growth Properties in the second and fourth quarters of 2011, respectively, resulting in an increase in both equity accounted income and net income in those periods. Fair value changes in the fourth quarter of 2011 include the reversal of $276 million of previously recorded gains, upon realization, resulting in a lower amount of unrealized gains in the period. We recorded $94 million of mark-to-market losses on power sales contracts in the second quarter of 2012.

Water flows and pricing within our renewable power operations are seasonal in nature. During the fall rainy season and spring thaw, water inflows tend to be the highest leading to higher generation; however prices tend not to be as strong as they are in the summer and winter seasons due to the more moderate weather conditions during the fall and spring and associated reductions in demand for electricity.

Our private equity and residential development operations include our Brazilian and North American residential developers, which tend to be seasonal in nature, with the fourth quarter typically the strongest as most of the construction is completed and homes are delivered. The company’s residential operations recognize revenue at the time of delivery, as opposed to over the life of the project, and as a result, revenues and direct costs vary depending on the number of projects completed in a particular quarter. This can have a noticeable impact on the results from our Brazilian operations which involve the development of multi-unit condominium buildings as opposed to single-family dwellings. Also included within private equity is our special situations operations which tend to fluctuate on a quarterly basis as a result of certain of the underlying investments having seasonal operations as well as the timing of acquisitions and dispositions of operations.

Fee revenues generated within our asset management operations are contractual in nature and have increased over the past eight quarters due to higher amounts of fee bearing capital under management. Our construction business line is seasonal in nature and revenues are typically higher in the third and fourth quarters compared to the first half of the year, as weather conditions are more favourable in the latter half of the year.

Our property operations generate consistent results on a quarterly basis due to the long-term nature of contractual lease arrangements subject to the intermittent recognition of disposition and lease termination gains.

Our infrastructure operations are generally stable in nature, as a result of the long-term sales and volumes contracts which with our clients.



We generally finance our operations with long-dated fixed rate borrowings which results in interest expense being relatively consistent on a quarterly basis.

Depreciation and amortization increased in 2012, as a result of a higher valuation on our renewable power assets and increased in the third and fourth quarter of 2012 following the acquisition of depreciable assets.

In August 2011, we restructured and acquired an additional interest in our U.S. Office Fund, within our property operations, increase revenues, direct costs and interest expense. In addition, we acquired and commenced consolidating a number of businesses within our property and infrastructure businesses in the fourth quarter of 2012.

Fourth Quarter Results

We recognized $776 million of net income in the fourth quarter of 2012, $492 million of which was attributable to shareholders. Net income to shareholders in the prior year comparable period was $588 million. Our property and infrastructure operations benefited from the contribution of newly acquired assets and completed development projects coming online. We also realized $34 million of performance-based income in our private funds, $17 million of which was on the close-out of our initial private equity fund. These amounts were offset by lower levels of equity accounted income, primarily a decrease in GGP’s fair value changes and increased depreciation on higher asset values and newly acquired assets.


The dividends paid by Brookfield on outstanding securities during the past three years are as follows:


     Distribution per Security  
     2012       2011       2010   

Class A Limited Voting Shares

   $ 0.55        $ 0.52        $ 0.52    

Class A Preferred Shares


Series 2

     0.52          0.53          0.43    

Series 4 + Series 7

     0.52          0.53          0.43    

Series 8

     0.75          0.76          0.61    

Series 9

     0.95          1.10          1.06    

Series 101

     0.37          1.45          1.39    

Series 112

     1.02          1.40          1.33    

Series 12

     1.35          1.36          1.31    

Series 13

     0.52          0.53          0.43    

Series 14

     1.88          1.91          1.52    

Series 15

     0.42          0.43          0.28    

Series 17

     1.19          1.20          1.15    

Series 18

     1.19          1.20          1.15    

Series 21

     1.24          1.27          1.21    

Series 22

     1.75          1.77          1.70    

Series 243

     1.35          1.36          1.25    

Series 264

     1.12          1.14          0.19    

Series 285

     1.15          1.03          —    

Series 306

     1.20          0.19          —    

Series 327

     0.89          —          —    

Series 348

     0.32          —          —    



Redeemed April 5, 2012


Redeemed October 1, 2012


Issued January 14, 2010


Issued October 29, 2010


Issued February 8, 2011


Issued November 2, 2011


Issued March 13, 2012


Issued September 12, 2012

Dividends on the Class A Limited Voting Shares are declared in U.S. dollars whereas Class A Preferred Share dividends are declared in Canadian dollars.


2012 ANNUAL REPORT    33



How We Measure and Report Our Business Segments

For management purposes, we have organized our business into five segments in which we make operating and capital allocation decisions and assessing performance. In late 2012 we combined the oversight of our timber and agricultural development business lines and have reallocated the results of our agricultural development operations business line from Private Equity and Residential Development to Infrastructure. The comparative results have been revised to conform to our new basis of segment presentation.



Asset Management and Services comprises our asset management, construction and property services businesses. These operations generate contractual service fees earned from consolidated entities included in our other segments and third parties for performing management services, including management of our institutional private funds and listed entities, management of construction projects and residential relocation, franchise and brokerage operations. These operations are also characterized by utilizing relatively low levels of tangible assets relative to our other business segments.



Property operations are predominantly office properties, retail properties, real estate finance, opportunistic investing and office developments located primarily in major North American, Australian, Brazilian and European cities. Income from property operations is primarily comprised of property rental income and, to a lesser degree, interest and dividend income. Virtually all of these operations will be held through Brookfield Property Partners L.P., in which we will own a 92.5% interest following the distribution of a 7.5% interest to our shareholders in April, 2013.



Renewable power operations consist primarily of hydroelectric power generating facilities on river systems in North America and Brazil and wind power generating facilities in North America. The company’s power operations are owned and operated through our 68% interest in Brookfield Renewable Energy Partners L.P. (“BREP”) and a wholly owned subsidiary of the company which engages in the purchase and sale of energy, primarily on behalf of BREP.



Infrastructure operations are predominantly utilities, transport and energy, timberland and agricultural development operations located in Australia, North America, Europe and South America, and are primarily owned and operated through a 28% interest in Brookfield Infrastructure Partners L.P. and direct investments in certain of the company’s sustainable resources operations.



Private equity and residential development operations include the investments and activities overseen by our private equity group. These include direct investments as well as investments in our private equity funds. Our private equity funds have a mandate to invest in a broad range of industries, although currently the portfolios contain a number of investments whose performance is significantly impacted by the North American home building industry. Direct investments include interests in Norbord Inc., a panelboard manufacturer, and two publicly listed residential development businesses: which are predominantly a North American homebuilder and land developer, Brookfield Residential Properties Inc. and a Brazilian condominium developer, Brookfield Incorporações S.A. The operations in this segment are generally characterized by an investment approach that is more opportunistic in nature. Furthermore, these businesses are not integrated into core operating platforms, unlike the assets within our property, renewable power or infrastructure operations.

All other company level activities that are not allocated to these five business segments are included within Corporate operations, such as the company’s cash and financial assets, corporate borrowings, capital securities and preferred equity and net working capital.

We have presented the costs associated with conducting asset management activities in the asset management segment. These include the costs of centralized activities as well as costs of asset management activities performed within other segments.

Certain corporate costs such as technology and operations are on behalf of the business segment and accordingly allocated to each business segment based on an internal pricing framework.

Segment Operating and Performance Measures

The following section contains a description of key operating and performance measures that we employ in discussing our segmented results and elsewhere in our MD&A on a selective basis. As noted below, these measures include non-IFRS financial measures and operating measures. The non-IFRS measures are reconciled to the most comparable financial statement component in Note 3 to our consolidated financial statements on page 38 of this report.

Funds from Operations

Funds from Operations (“FFO”) is a key measure of our financial performance. We define FFO as net income prior to fair value changes, depreciation and amortization, and future income taxes, and including certain disposition gains that are not otherwise included in net income as determined under IFRS. When determining funds from operations, we include our proportionate share of the FFO of equity accounted investments and exclude transaction costs incurred on business combinations, which are required to be expensed as incurred under IFRS. We include disposition gains in FFO because we consider the purchase and sale of assets to be a normal part of the company’s business. We use FFO to assess operating results and our business. We do not use FFO as



a measure of cash generated from our operations. We derive funds from operations for each segment and reconcile total FFO to net income in Note 3 of the consolidated financial statements.

Our definition of funds from operations may differ from the definition used by other organizations, as well as the definition of funds from operations used by the Real Property Association of Canada (“REALPAC”) and the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”), in part because the NAREIT definition is based on U.S. GAAP, as opposed to IFRS. When reconciling our definition of funds from operations to the determination of funds from operations by REALPAC and/or NAREIT, key differences consist of the following: the inclusion of disposition gains or losses that occur as normal part of our business and cash taxes payable on those gains, if any; foreign exchange gains or losses on monetary items not forming part of our net investment in foreign operations; and gains or losses on the sale of an investment in a foreign operation.

Components of FFO

The segment amounts for the following items are derived from Note 3 to our consolidated financial statements. The totals of these amounts for all segments are non-IFRS measures and are reconciled to the most comparable measures under IFRS using the adjustments described in Note 3(c) to our consolidated financial statements.



Equity Accounted FFO represents our share of what an equity accounted investee would report as FFO determined on a consistent basis with how we determine FFO from consolidated entities.



Disposition Gains/Losses include gains or losses arising from transactions during the reporting period adjusted to include fair value changes and revaluation surplus recorded in prior periods. Disposition gains also include amounts that are recorded directly in equity as changes in ownership as opposed to net income because they result from a change in ownership of a consolidated entity.



Interest Expense represents consolidated interest expense, including dividends declared on our capital securities.



Unallocated Costs within business segments include costs that are not allocated to a specific business line within the segment. These costs are included in direct costs in our consolidated statement of operations, with the exception of unallocated corporate costs, which are presented as corporate costs in our consolidated statement of operations. Unallocated costs in our segment analysis also include expenses associated with asset management services provided by us that are eliminated in our consolidated financial statements.



Current Income Taxes represent the portion of consolidated income tax expense attributable to each segment that is paid/payable or received/receivable in the current year.



Non-controlling Interests in FFO represents the interests of non-controlling interests in the FFO of partially-owned consolidated entities.

The following two measures, net operating income and segment operating income, are non-IFRS measures both on a segment basis and an entity basis. These items are reconciled to revenues in Note 3 of our consolidated financial statements and on page 39.



Net Operating Income or NOI is defined as revenues less direct costs, where direct costs exclude costs such as general and administrative expenses that are not directly attributable to specific operating activities (presented separately as unallocated costs). We use net operating income to assess the amount of cash flows generated from our consolidated businesses and assets, prior to the impact of borrowings.



Segment Operating Income shows the performance of our assets prior to the impact of borrowings and is determined by the aggregate of net operating income, equity accounted FFO and disposition gains/losses.

Valuation Items

Valuation Items include our share of fair value changes and depreciation and amortization included in net income and valuation items included in OCI, after deducting non-controlling interests. Segment balances have been derived from Note 3 to our consolidated financial statements and the total amount of valuation items, which is a non-IFRS measure, is reconciled to the financial statement line items from which it is derived also in Note 3.

Components of Segment Financial Position

The following are components of segment financial position and are derived from Note 3 to our consolidated financial statements. The totals of these amounts for all segments are non-IFRS measures and are reconciled to the most comparable financial statement line items also in Note 3.



Segment Assets represent total consolidated assets in a segment or business line other than equity accounted investments, less accounts payable and other liabilities and any deferred tax liabilities.



Borrowings includes corporate borrowings, non-recourse borrowings, and capital securities which represent the financing associated with the particular segment or business line.



Segment Non-Controlling Interests includes interests of others in consolidated funds and non-controlling interests, which represent the interest of other investors in common equity by segment.


2012 ANNUAL REPORT    35


Common Equity by Segment is the amount of common equity allocated to a business segment. This metric is intended to present the net assets associated with the FFO of the segment.

Operating Measures

The following are operating measures that we employ to assess the performance of our asset management activities, as well as a description of how certain asset management income is recorded in our consolidated financial statements and our business segment analysis. The calculation of these measures may differ from other asset managers and, as a result, may not be comparable to similar measures presented by other asset managers.



Asset Management Revenues include base management fees, incentive distributions, transaction and advisory fees and performance income. Many of these items are not included in consolidated revenues because they are earned from consolidated entities and are eliminated on consolidation.

Base management fees are determined by contractual arrangements and are typically equal to a percentage of the Capital Under Management and are accrued quarterly. Base fees are earned on Capital Under Management from both clients and ourselves.

We are entitled to a percentage of distributions paid by our managed listed entities above a predetermined threshold. We call these “incentive distributions” and accrue them when declared by the board of directors of the entity.

Performance income includes arrangements where we are compensated for exceeding pre-determined investment returns. In most cases, these are carried interests whereby we receive a fixed percentage of investment gains generated within a fund that we manage provided that the investors receive a predetermined minimum return. Carried interests are typically paid out towards the end of the life of a fund after the capital has been returned to investors and may be subject to “claw back” until all investments have been monetized and minimum investment returns are sufficiently assured. We defer recognition of carried interests in our financial statements until they are no longer subject to adjustment based on future events; however we include them in our discussion of asset management segment results, in order to provide a more complete representation of performance. Unlike fees and incentive distributions, we only include carried interests earned in respect of third party capital in our segment results.



Capital Under Management represents the capital committed, pledged or invested in our private funds, listed issuers and public securities and includes both called and uncalled amounts and other investments that we manage. Capital under management is the basis for determining base management fees, when held in a fee bearing vehicle such as a private fund or listed entity. We determine client capital in a manner consistent with the determination of the contractual base management fees for fee bearing vehicles. Capital under management also includes the capital committed by us, or entities managed by us, other than capital on which we are not entitled to earn fees (i.e., the fees are credited against other fee arrangements).



Fee Bearing Capital represents capital under management that is managed by us under contractual arrangements that entitle us to earn Asset Management Revenues.



Uninvested Capital (or “Dry Powder”) represents capital that has been committed or pledged to us to invest on behalf of a client. We typically, but not always, earn base management fees on this capital from the time that the commitment or pledge to our private fund is effective until such time as the capital is invested, commonly referred to as the investment period. In certain cases, clients retain the right to approve individual investments before providing the capital to fund them. In these cases, we refer to the capital as “pledged” or “allocated.”






     Operating Segments                

31, 2012


and Services 
     Property       Renewable 
     Infrastructure       Private 
Equity and 

Financial results



   $ 4,520        $ 3,982        $ 1,179        $ 2,109        $ 6,900        $ 230        $ 18,920    






















Net operating income

     349          2,170          704          971          795          116          5,105    

Equity accounted FFO

             386          13          223          15          25          666    

Disposition gains

     —          (49)         214          63          31          100          359    






















Segment operating income

     353          2,507          931          1,257         841          241          6,130    

Interest expense

     —          (1,076)         (412)         (399)         (276)         (369)         (2,532)   

Corporate/unallocated costs

     —          (172)         (36)         (144)         (28)         (160)         (540)   

Current income tax

     —          (9)         (12)         (16)         (79)         (19)         (135)   

Non-controlling interests in FFO

     —          (713)         (158)         (474)         (197)         (25)         (1,567)   






















Funds from operations

   $ 353        $ 537        $ 313        $ 224        $ 261       $ (332)       $ 1,356    






















Valuation items

   $ (56)       $ 1,154        $ 264        $ 161        $ (180)       $ (29)       $ 1,314    






















Financial position


Segment assets

   $ 1,855        $ 37,622        $ 14,325        $ 14,463        $ 9,476        $ 1,196        $ 78,937    


     67          8,143          344          2,606          236          293          11,689    


     (351)         (21,471)         (6,119)         (7,988)         (5,030)         (4,991)         (45,950)   

Segment non-controlling interests

     (1)         (11,336)         (3,559)         (6,510)         (2,107)         (102)         (23,615)   

Preferred equity

     —          —          —          —          —          (2,901)         (2,901)   






















Common equity by segment

   $ 1,570        $ 12,958        $ 4,991        $ 2,571        $ 2,575        $ (6,505)       $ 18,160    






















The information presented in the table above has been extracted from Note 3 to our consolidated financial statements and is reconciled to the most closely related financial statement line item within that note.

Summary of Business Segment Results

The following table presents segment measures on a year-over-year basis for comparison purposes:


     Common Equity by
     Funds from



   2012       2011       2012       2011   

Operating platforms


Asset management and other services

   $ 1,570        $ 1,492        $ 353        $ 269    


     12,958          10,943          537          687    

Renewable power

     4,991          5,109          313          232    


     2,571          2,507          224          172    

Private equity and residential development

     2,575          2,616          261          248    













Total operating segments

     24,665          22,667          1,688          1,608    


     (6,505)         (5,924)         (332)         (397)   














   $ 18,160        $ 16,743        $ 1,356        $ 1,211    













FFO from asset management and other service activities increased by $84 million principally due to a higher level of fee-bearing capital, which was in turn a result of capital committed to our private funds, capital issuances by our listed entities, and increases in market values. We also recorded a higher level of performance income during 2012 as a result of the final return of capital to clients from a private equity fund.


2012 ANNUAL REPORT    37

Property segment FFO declined by $150 million, consisting of an increase in FFO excluding gains of $158 million, offset by a negative variance on disposition gains of $308 million. The increase in FFO excluding disposition gains was due primarily to the contribution from recently acquired and developed properties, improved leasing within our office portfolios, and increased rental revenues within our U.S. retail portfolio reflecting continued growth in tenant sales. The disposition gains and losses reflect the recognition in FFO of fair value changes previously recorded in net income upon the sale of properties. We recorded disposition gains of $203 million in 2011 compared to disposition losses of $105 million in 2012.

Renewable power FFO increased by $81 million, consisting of a $108 million decrease in FFO excluding gains offset by a $189 million increase in disposition gains. The 2012 gain of $214 million arose on the sale of a partial interest in Brookfield Renewable. The 2011 results included a $25 million gain. FFO excluding gains decreased from $207 million in 2011 to $99 million in 2012 primarily as a result of lower generation that was caused by water flows that were meaningfully below both long-term averages and the prior year’s results. The decrease was partially offset by the contribution from recently acquired and commissioned facilities.

Infrastructure FFO increased by $52 million, consisting of a $7 million increase in FFO excluding disposition gains, and a $45 million positive variance in disposition gains. The increase in FFO excluding gains reflects the contribution from acquisitions and capital expansions within our transport and energy operations, offset by a lower contribution from our timber operations which in turn reflects lower pricing and volumes arising from reduced Asian demand. The disposition gains arose on the partial sale of timberlands located in western Canada and agricultural lands in Brazil.

FFO from our private equity and residential development operations increased by $13 million, consisting of a $65 million increase in FFO excluding disposition gains, and a decrease of $52 million in gains. The increase in FFO excluding gains was due primarily to increased pricing and volumes within our North American panelboard operations, which are benefitting from increased demand associated with the recovery in the U.S. home building sector. This improvement also contributed to improved results from our North American residential development operations. These improvements were partially offset by a lower contribution from our Brazilian residential development operations, which experienced a slowdown in activity and higher costs during 2012.

Corporate and unallocated FFO improved by $65 million, consisting of a $52 million increase in net FFO outflows which principally represent carrying charges on corporate borrowings and unallocated operating costs, offset by a $183 million positive variance from disposition gains. The increase in FFO outflows was due to a higher level of borrowing costs arising from higher average debt levels during the year, a $35 million break fee on the early redemption of high coupon debt and increased corporate costs that reflect a higher level of activity during the year. We recorded negative mark-to-markets on corporate securities portfolios in 2011 and positive mark-to-markets in 2012. In addition, these results include a $70 million gain in 2012 on the partial sale of our U.S. residential brokerage business.

Reconciliation of Non-IFRS Measures

The following table reconciles total funds from operations to consolidated net income:





   2012       2011   

Funds from operations

   $ 1,356        $ 1,211    









Less: FFO measures


Gains not recorded in net income

     (259)         (601)   

Equity accounted FFO

     (666)         (674)   

Current income taxes

     135          97    

Non-controlling interests in FFO

     1,567          1,462    

Add: financial statement components not included in FFO


Equity accounted income

     1,243          2,205    

Fair value changes

     1,150          1,386    

Depreciation and amortization

     (1,263)         (904)   

Income taxes

     (516)         (508)   







Total adjustments

     1,391          2,463    







Net income

   $ 2,747        $ 3,674    









The following tables reconcile net operating income and segment operating income to Note 3 of our consolidated financial statements:


     Operating Segments                              
DECEMBER 31, 2012
and Services
     Property      Renewable
     Infrastructure      Private
Equity and

     Adjustments      Consolidated  


   $ 4,520        $ 3,982        $ 1,179        $ 2,109        $ 6,900        $ 230        $ 18,920        $ (223)         18,697    

Direct costs

     (4,171)         (1,812)         (475)         (1,138)         (6,105)         (114)         (13,815)         (94)         (13,909)   

























Net operating income

     349          2,170          704          971          795          116          5,105          (317)         —    

Equity accounted FFO

             386          13          223          15          25          666          (666)         —    

Disposition gains

     —          (49)         214          63          31          100          359          (359)         —    

























Segment operating income

   $ 353        $ 2,507        $ 931        $ 1,257        $ 841        $ 241        $ 6,130        $ (1,342)         —    


























     Operating Segments                              
DECEMBER 31, 2011
and Services
     Property      Renewable
     Infrastructure      Private
Equity and
     Adjustments      Consolidated  


   $ 3,535        $ 2,760        $ 1,128        $ 1,725        $ 6,740        $ 311        $ 16,199        $ (278)         15,921    

Direct costs

     (3,280)         (1,077)         (379)         (908)         (6,129)         (46)         (11,819)         (87)         (11,906)   

























Net operating income

     255          1,683          749          817          611          265          4,380          (365)         —    

Equity accounted FFO

     14          428          25          193          23          (9)         674          (674)         —    

Disposition gains

     —          433          25          —          177          (83)         552          (552)         —    

























Segment operating income

   $ 269        $ 2,544        $ 799        $ 1,010        $ 811        $ 173        $ 5,606        $ (1,591)         —    

























The adjustments in the foregoing tables are described in Note 3 to our consolidated financial statements.



     Construction and
Property Services



   2012       2011       2012       2011       2012       2011   

Segment financial results



   $ 420        $ 331        $ 4,100        $ 3,204        $ 4,520        $ 3,535    



















Net operating income

     190          105          159          150          349          255    

Equity accounted FFO

             14          —          —                  14    



















Funds from operations

   $ 194        $ 119        $ 159        $ 150        $ 353        $ 269    



















Valuation items

   $ —        $ —        $ (56)       $ (34)       $ (56)       $ (34)   



















Segment financial position


Segment assets

   $ —        $ —        $ 1,855        $ 1,930        $ 1,855        $ 1,930    


     —          —          67                  67            


     —          —          (351)         (439)          (351)         (439)   

Segment non-controlling interests

     —          —          (1)         (1)         (1)         (1)   



















Common equity by segment

   $ —        $ —        $ 1,570        $ 1,492        $ 1,570        $ 1,492    




















2012 ANNUAL REPORT    39

Asset Management and Other Fees

Asset management and other fees contributed the following revenues during the year:


   Annualized       2012       2011   



Base management fees

   $         3851,2        $         352        $         269    

Incentive distributions

     303            15            

Transaction and advisory fees

     554            53          58    









   $ 470             420          331    




Direct costs

        (252)         (212)   






        168          119    







Performance based income5



        34          —    

Direct costs

        (8)         —    







Net performance income

        26          —    







Funds from operations

      $ 194        $ 119    









Based on capital committed or invested and contractual arrangements at December 31, 2012


Includes $140 million of annualized base fees on Brookfield capital


Based on Brookfield Infrastructure Partners L.P.’s annual distribution in the amount of $1.72 per unit


Equal to simple average of 2012 and 2011 revenues


Excludes net performance based income subject to clawback

Base management fees increased by 31% to $352 million compared to $269 million in 2011. This reflects the contribution from new funds and an increase in capital committed, particularly in our property and infrastructure operations. Annualized base management fees totalled approximately $385 million at December 31, 2012. Base management fees include 100% of the amounts earned by us, including amounts in respect of Brookfield’s capital. We do this in order to present the operating margins in an appropriate manner given that we record 100% of the costs incurred in providing these services. Base management fees do not include any contribution from approximately $1.5 billion of private funds on which our compensation is derived primarily from performance-based measures and carried interests, as opposed to base management fees. The weighted average term of the commitments related to the base fees is nine years, and our goal is to increase the level of base management fees as we continue to expand our asset management activities.

Brookfield Property Partners L.P., which will be launched in April 2013, will add an annual base management fee of $50 million for the initial capital and 1.25% of future increases in capitalization.

Transaction and advisory fees totalled $53 million in 2012, compared to $58 million in 2011. Our advisory business reported increased revenues compared to 2011, reflecting continued expansion and a number of successful mandates; however we recorded a lower level of transaction gains relative to 2011. We have expanded our investment banking activities into the U.S. and the UK, and continue to advise on a number of mandates in Canada and Brazil. Our primary focus is on real estate and infrastructure transactions.

Direct costs consist primarily of employee expenses and professional fees, as well as allocations of technology costs and other shared services. These costs increased by $40 million year-over-year in particular due to geographic expansion in our infrastructure, public securities and advisory businesses. We have expanded our operating resources considerably in recent years to establish the necessary capabilities to execute and manage these activities; however we believe that we can expand our operating margins in the future now that much of the operating infrastructure is in place.



Our share of accumulated performance income totalled $689 million at December 31, 2012. This represents an increase of $310 million compared to the prior year. We estimate that direct expenses of approximately $57 million will arise on the realization of the income accumulated to date. We recognized $34 million of third party performance income and $8 million of associated expenses in our financial statements and deferred the balance as our accounting policies defer recognition until the end of any determination or clawback period which is typically at or near the end of the fund’s term. The amount of unrealized performance income net of associated costs was $632 million at year end (2011 – $328 million) as shown in the following table:


     2012      2011  



Based Income
     Direct Costs      Net      Unrealized
Based Income
     Direct Costs      Net  

Unrealized balance, beginning of year

   $         379        $         (51)       $         328        $         260        $         (39)       $         221    

In year performance based income



     344          (14)         330          119          (12)         107    


     (34)                 (26)         —          —          —    



















Unrealized balance, end of year

   $ 689        $ (57)       $ 632        $ 379        $ (51)       $ 328    



















Capital Under Management

Capital under management is determined in a manner consistent with the determination of the contractual base management fees for fee bearing vehicles and is defined on page 36.

The following table summarizes the capital managed for clients, co-investors and ourselves:


     Fee Bearing                       



     Other Listed 
     Total       2011   


   $         13,183        $         3,077        $         1,873        $         6,512        $         24,645        $         24,094    

Renewable power

     498          10,061          —          —          10,559          9,031    


     6,843          8,163          1,491          —          16,497          12,974    

Private equity

     2,720          —          12,160          3,266          18,146          18,162    



















December 31, 2012

   $ 23,244        $ 21,301        $ 15,524        $ 9,778        $ 69,847        $ n/a    



















December 31, 2011

   $ 20,454        $ 16,488        $ 19,833        $ 7,486          n/a        $ 64,261    





















Includes Brookfield capital of $8.4 billion in private funds and $10.3 billion in listed issuers

Fee bearing capital includes all capital on which we receive some form of asset management revenue, including capital committed or invested by us. For example, we include 100% of the market capitalization of listed issuers such as Brookfield Infrastructure Partners L.P. and private funds such as Brookfield Capital Partners II because we are entitled to earn fees on all of this capital, including our own. We do not, however, include the capital invested or committed by one Brookfield managed entity into another because the fees otherwise payable to us on this capital are credited against the fees payable to us by the other. Fee bearing capital in the above table includes the following amounts from us: private funds – $8.4 billion; managed listed entities – $10.3 billion.

Capital under management increased by $5.6 billion during 2012, resulting in a $100 million increase in annualized base fees from December 31, 2011 to December 31, 2012. The principal variances are set out in the following table:




    Other Listed 
     Total       Annualized 
Base Fees 

Balance, December 31, 2011

   $     20,454        $     16,488        $     19,833       $     7,486        $     64,261        $     285    




















     5,036          2,090          2,318         —          9,444          50    

Return of capital/distributions

     (2,301)         (704)         (2,549)        —          (5,554)         (5)   

Market appreciation (depreciation)

     —          3,331          (1,139)        —          2,192          55    


     55          96          (2,939) 1      2,292          (496)         —    




















     2,790          4,813          (4,309)        2,292          5,586          100    



















Balance, December 31, 2012

   $ 23,244        $ 21,301        $ 15,524       $ 9,778        $ 69,847        $ 385    





















Represents termination of joint venture


2012 ANNUAL REPORT    41

Private Funds

Private fund capital increased by $2.8 billion during the year to $23.2 billion. The increase reflects $5.0 billion of new commitments offset by distributions of capital to investors and expiry of uninvested commitments. Our approach to value investing means that we will on occasion let investment periods lapse without fully investing available capital if we are not satisfied with potential returns, although our objective is to fully invest the capital entrusted to us by our clients. The invested capital within our private funds of $15.9 billion has an average term of nine years. Private fund capital includes $5.2 billion of client capital that has not been invested to date but which is available to pursue acquisitions within each fund’s specific mandate. Of the total uninvested capital, $3.0 billion relates to property funds, $1.2 billion relates to infrastructure funds and $1.0 billion relates to private equity funds. This uncalled capital has an average term during which it can be called of approximately three years.

Listed Issuers

Listed issuers capital includes the market capitalization of our listed issuers: Brookfield Renewable Energy Partners L.P., Brookfield Infrastructure Partners L.P., Brookfield Canada Office Properties, Acadian Timber and several smaller listed entities. Capital also includes corporate debt and preferred shares issued by these entities to the extent these are included in determining base management fees.

The increase in listed issuer capital of $4.8 billion includes the issuance of $2.1 billion of new capital including $0.5 billion of equity capital, $1.6 billion of corporate debt and preferred equity, and a $3.3 billion increase in the market value of our listed issuers, offset by $0.7 billion in distributions.

Brookfield Property Partners L.P. (“BPY”) when launched in April 2013, will add an estimated $12 billion to listed issuers capital based on the book values of the assets and liabilities contributed to BPY by us.

Public Securities

In our public securities operations, we manage fixed income and equity securities with a particular focus on real estate and infrastructure, including high yield and distress securities. Capital under management in this business line decreased by $4.3 billion during the year. The cessation of a joint venture arrangement resulted in the elimination of $2.9 billion of associated assets we managed. Net outflows were $0.2 billion and we experienced an approximate $1.1 billion valuation decrease. We have continued to refocus the business on higher margin products and have eliminated several lower margin offerings. To this end, we have expanded our range of higher margin mutual fund and similar products and have received strong interest from clients supported in part by excellent performance in many of our funds.

Construction and Property Services

The following table summarizes funds from operations from our construction and property services operations:


     Construction Services      Property Services      Total Services  



   2012       2011       2012       2011       2012       2011   


   $ 3,188        $ 2,505        $     912        $     699        $     4,100        $     3,204    

Operating costs and interest

     (3,075)         (2,385)         (866)         (669)         (3,941)         (3,054)   



















Funds from operations

   $ 113        $ 120        $ 46        $ 30        $ 159        $ 150    



















Construction revenues increased relative to 2011 as we were managing a larger volume of projects during the year.

Operating margins across the construction business decreased to 8.2% from 9.3% in 2011 as a result of increased general and administrative costs associated with the expansion of our engineering and infrastructure operations in Australia and construction operations in Canada.

The remaining work-in-hand totalled $4.3 billion at the end of December 31, 2012, and represented approximately 1.1 years of scheduled activity. We continue to pursue and secure new projects which should position us well for future growth. The following table summarizes the work-in-hand at the end of 2012 and 2011:




   2012      2011  


   $ 2,626        $ 3,091    

Middle East

     1,047          533    

United Kingdom

     606          1,780    


     44          —    






   $     4,323       $     5,404    







Property services fees include property and facilities management, leasing and project management and a range of real estate services. FFO from this business increased to $46 million in 2012 compared to $30 million last year reflecting the continued expansion of our property services business. We acquired a large relocation and residential brokerage business in late 2011 that



significantly expanded our market position in the relocations business which also led to higher revenues in 2012. We merged our U.S. residential brokerage business with another industry participant in late 2012 with the objective of creating a highly competitive business and retained a one-third interest in the combined entity, while at the same time receiving $127 million of cash proceeds and recording a disposition gain of $70 million which has been included in unallocated investment income.

Outlook and Growth Initiatives

We continue to witness increased interest by institutions and other investors in real asset investments, which is the focus of most of our investment strategies and products. The addition of $5.6 billion of capital under management and $100 million of associated annualized base management fees should both lead to increased contribution from this segment, as well as the potential to earn performance income and incentive distributions.

We believe the performance of our funds through the recent economic crisis, and the attractiveness of our investment strategies to our clients should enable us to achieve our goal of increasing capital under management and the associated fees substantially in the coming years. We are actively raising capital for six funds over the course of 2013 and 2014, seeking to obtain approximately $5.0 billion of additional commitments from third-party investors; four of the funds have already held first and subsequent closings. The recent issuance of additional equity by Brookfield Infrastructure Partners L.P. and the formation of Brookfield Renewable Energy Partners L.P. are important steps forward in our continued expansion of listed entities.



Our property assets are currently owned through a number of public and private entities. We are in the final stages of launching Brookfield Property Partners L.P. (“BPY”), a publicly traded partnership through which we will own virtually all of our commercial property businesses. BPY is intended to be listed on the New York and Toronto stock exchanges under the symbol BPY and is anticipated to have an initial IFRS equity of approximately $12 billion. We will distribute approximately 7.5% of BPY to our shareholders by way of a special dividend in April of this year.

BPY will operate in a similar manner as our two other flagship listed entities, Brookfield Infrastructure Partners L.P. and Brookfield Renewable Energy Partners L.P., in that we intend that these entities will be the primary vehicles through which we will invest our capital into each of the property, power and infrastructure sectors. We are the manager of BPY and the majority of the private funds whereas Brookfield Office Properties manages the core office funds.

Our property operations are organized into three business lines:

Office properties, which are primarily held through 50% owned Brookfield Office Properties and consist of high quality well located office buildings in major cities in Australia, Canada and the United States. We also hold a 22% interest in Canary Wharf Group, which includes similar high quality properties in London, UK.

Our commercial property portfolio consists of interests in 125 properties totalling 80 million square feet, including 10 million square feet of parking. Our development portfolio comprises interests in 20 sites totalling 18 million square feet. Our primary markets are the financial, energy and government center cities of New York, Washington, D.C., Houston, Los Angeles, Toronto, Calgary and Ottawa in North America as well as Sydney, Melbourne and Perth in Australia and London in the United Kingdom. Landmark assets include the Brookfield Place complexes in New York, Toronto, and Perth, Bank of America Plaza in Los Angeles, Bankers Hall in Calgary, and Darling Park in Sydney.

Our commercial property investments are held through wholly or partially owned subsidiaries, which are fully consolidated on our balance sheets, and through entities that we jointly control with our partners, for which we recognize our interests in the net assets of such entities using the equity method of accounting.

Retail properties, located in the United States, are held through our 43% consortium interest in General Growth Properties (“GGP”), our 52% consortium interest in Rouse Properties, in Brazil through our 35% owned institutional fund, and direct interests in Australia.

GGP’s portfolio is comprised of 126 regional malls in the United States comprising approximately 129 million square feet of gross leaseable area. GGP’s U.S. mall portfolio includes 70 Class A malls generating tenant sales of $635 per square foot. These malls are located in core markets defined by population density, household growth, and a high-income demographic. The regional malls had 2012 average tenant sales of $545 per square foot.

Rouse Properties is among the largest regional mall owners in the United States with a portfolio that consists of 32 malls in 19 states encompassing 23 million square feet of retail space.

Our Brazilian portfolio, which consists of 3 million square feet of retail space, is owned through a private institutional fund that we manage and in which we own a 35% interest. GGP also holds a 45.6% interest in Aliansce, a listed company which owns a 7 million square foot portfolio, also located in Brazil. We hold most of our 3 million square foot Australian portfolio directly, and continue to monetize these assets selectively as we focus our retail operations on markets in which we have a larger retail presence.


2012 ANNUAL REPORT    43

Office development, opportunity investing and real estate finance activities: Office developments are conducted primarily through Brookfield Office Properties, and our opportunity and real estate finance activities are conducted primarily through a number of institutional funds with total committed capital at year end of $5.3 billion, including $1.8 billion from Brookfield entities.

Highlights for the year included the following:



Secured commitments of $2.9 billion for private funds within our property segment.



Acquired $6.4 billion of property assets enabling us to invest $1.9 billion of equity capital including:



a 884,000 square foot office portfolio in London, UK



a mixed use portfolio in Australia, including a prime office development site in Sydney



a 4,000 room hotel and casino



a portfolio of 19 apartment communities with approximately 5,000 units



a company which owns and operates approximately 18 million square feet of industrial properties and over 20,000 acres of land



731,000 square feet of retail properties



Leased 7.3 million square feet in our core office portfolio and 13.2 million square feet in our retail portfolio at meaningful increases in net rents over the expiring leases. Occupancy in our global office portfolio decreased from 93.3% to 92.1% during the year due to the disposition of higher occupancy assets and acquisition of lower occupancy opportunistic assets as well as expected vacancies in Denver, New York, and Washington, D.C., and increased from 93.5% to 95.1% in our retail portfolio.



Refinanced $11.7 billion of debt during the year, extending term and decreasing cost of capital.



Completed the development of the 1 million square foot Brookfield Place office tower in Perth and advanced work on 6 million square feet of office development projects, including the 5 million square foot Manhattan West project in New York City.



Our two primary listed entities within this group, Brookfield Office Properties and General Growth Properties, produced total returns to investors during 2012 of 10.6% and 36.0%, respectively, based on share price appreciation and distributions.

The following table disaggregates the financial results of our property operations into our principal business lines:



and Finance
   2012       2011       2012       2011       2012       2011       2012       2011   

Segment financial results



   $ 2,612        $ 2,006        $ 215        $ 245        $ 1,155        $ 509        $ 3,982        $ 2,760    

























Net operating income

     1,601          1,271          161          166          408          246          2,170          1,683    

Equity accounted FFO

     92          191          283          236          11                  386          428    

Disposition gains/losses

     (63)         326          (20)         58          34          49          (49)         433    

























Segment operating income

     1,630          1,788          424          460          453          296          2,507          2,544    

Interest expense

     (810)         (718)         (102)         (173)         (164)         (123)         (1,076)         (1,014)   

Unallocated costs

     (134)         (116)