Toronto-based Brook-field Asset Mana-ge-ment Inc. is in a great position to be a major — and early — beneficiary of the economic recovery and renewed stability of credit markets once the credit crunch becomes a thing of the past.

That’s because Brookfield has a strong balance sheet and offers excellent investment opportunities in high-quality power, real estate and infrastructure projects, which should be among the first opportunities that institutional inves-tors consider when they start feeling more confident about the markets.

Although Brookfield was not involved in the subprime mortgage crisis directly, its stock has suffered, closing at C$28.69 on Sept. 30, down 26.8% from its 52-week high of C$39.17 in October 2007. (All other figures are in U.S. dollars unless otherwise noted.)

As such, the current price offers a good opportunity to buy the stock as either a short-term trading position or a long-term hold, suggests Ian Nakamoto, director of research with MacDougall MacDougall & MacTier Inc. in Toronto.

Once credit markets stabilize, investors are likely to look at Brookfield positively. They will focus on its continued good returns and the recent increase in the quarterly dividend to US13¢ from US12¢ and no longer worry about its ability to attract capital or fill its office towers in Manhattan.

Nakamoto calls the stock “one-stop shopping” because of the company’s diverse activities and global reach. “There aren’t many companies that have hard assets around the world,” he says. “[Brookfield] has very strong power assets and very strong income-producing properties. It’s also a play on energy and emerging markets. And it has a very dynamic management team.”

With management owning a fair portion of the shares — 17%, assuming options are exercised — Nakamoto says, the incentive is there for Bruce Flatt, Brookfield’s senior managing partner and CEO, and his team to produce.

Brookfield had $95 billion in assets on its books as of June 30, primarily in renewable power, property and infrastructure. Its 50 locations are mainly in North America, Brazil and Australia, but there are others in Asia, Europe and the Middle East. Staff include 300 investment professionals and 10,000 operating employees.

Brookfield’s goal is “to become a global asset manager of choice for property, power and infrastructure assets” and to increase “intrinsic” value per share by an average of 12%-15% a year over the long term.

Brookfield’s competitive advantage is that it operates its assets rather than just owning them. It aims at building and maintaining “best in class” operating platforms for high-quality assets that generate high levels of sustainable free cash flow, require minimal capital expenditures and that appreciate in value over time. The company is financially conservative and likes to maintain a high level of financial liquidity and operational flexibility so it can capitalize on opportunities.

Even with the global credit crunch, Brookfield managed to complete $9 billion in financing to extend bond maturities and raise capital since August 2007. The firm currently has around $3 billion of “core” liquidity, $1.5 billion in uninvested commitments from institutional investors and generates around $2 billion of cash annually.

Brookfield sees opportunities coming out of the current market turmoil as companies sell non-core assets and investors continue to look for opportunities in the kind of hard assets that Brookfield manages.

At Brookfield’s Investor Day in New York on Sept. 16, Brian Blattman, the company’s senior managing partner responsible for relationships and strategic transactions, pointed out that the appetite for private-equity investments in hard assets is huge and is expected to reach $5 trillion in the next five years vs $2 trillion in 2007. Blattman noted, for example, that institutional investors are targeting a 9.7% asset allocation for real estate while actual holdings are currently only 6%.

The one drawback for Brookfield is that it’s hard to categorize. It’s normally considered a financial services company, but could just as easily be considered an energy or real estate firm. As a result, it’s “rather complicated to get your head around” what kind of company it actually is, says Nakamoto.

Brookfield’s net income was $307 million in the six months ended June 30 vs $348 million during the same period a year earlier. But a better measure of Brookfield’s earnings is cash flow from operations. This was $821 million vs $769 million. Revenue was $6.6 billion, way up from $4 billion. Debt was $2.4 billion at the corporate level and $8.7 billion for subsidiaries as of June 30. There were also property-specific mortgages of $22.2 billion.

@page_break@Because of Brookfield’s complexity, the company isn’t covered by a lot of research teams; however, besides 3Macs, analysts with Toronto-based Genuity Capital Markets and Royal Bank of Canada, and National Bank Financial Ltd. in Montreal follow Brookfield; all are currently enthusiastic about the stock’s prospects, rating it a “buy” or an “outperform.”

The 12-month target price in reports published Aug. 11 by the latter three research departments are similar: C$39 from NBF, C$39.80 from Genuity and C$40 from RBC.

Genuity believes the stock “deserves to trade at a material premium to net asset value, given its ability to consistently grow NAV over time.” Its price target assumes a 10% premium.

NBF likes the stock for the longer term. It is particularly enthusiastic about Brookfield’s proposal to seed an externally managed Power Fund, whereby ownership of its power assets are shared with others on a fee-bearing basis. NBF believes this would be a major catalyst for Brookfield and a “significant milestone in its goal of transforming into an asset-management company.”

RBC considers Brookfield a “core holding” for many investors, as well as a “potentially interesting alternative to traditional financial stocks such as banks.”

Brookfield’s target investor markets include:

> U.S. pension funds, which, Blattman says, are progressing toward increased infrastructure and real asset allocations.

> Foundations, endowments and family trusts, whose investment success is recognized to be a result of investments in real assets.

> Sovereign wealth funds, which Blattman says are “very receptive” to Brookfield’s platform.

> Insurance companies, which are “demonstrating a broad interest in our asset class,” Blattman says.

Besides Brookfield’s North American marketing efforts, the firm has a presence in Australia, giving it access to domestic investment capital. It is also building new relationships in Europe and has “new promising relationships” in Asia.

Here’s a closer look at Brookfield’s major operations:

> Renewable Power. The company owns and manages $13.3 billion in renewable power capacity (as of June 30), mainly in Ontario, Quebec, New York, New England and Brazil. This generated $515 million in revenue, after direct operating costs, and $255 million in operating cash flow for the six-month period.

Brookfield focuses on hydro but also has wind-generation operations.

In North America, it operates in the highest-value markets and is able to sell power into interconnected markets. Operations are decentralized and highly automated.

In Brazil, operations are in the south, which has the fastest growth in demand and large amounts of untapped hydro resources.

Richard Legault, senior managing partner with Brookfield and president and CEO of subsidiary Brookfield Renewable Power, expects prices in northeastern North American markets to be $100 to $110 per megawatt hour in the near to medium term, while those in Brazil will reach $110 to $120 per megawatt hour. Brookfield is currently getting an average $79 per megawatt hour from all its electricity operations. Meanwhile, Legault notes, the price required for competitors to build a new natural gas-powered generation plant is $110 per megawatt hour.

Brookfield plans to increase capacity by about 1,000 megawatts over the next five years, focusing on high-value hydro projects.

> Real Estate. Brookfield has slightly more than $40 billion in real estate assets — $26 billion in office properties, $3.6 billion in residential properties, $2.5 billion in retail properties and $5.3 billion in projects under development, $1.6 billion in opportunity funds and $1.2 billion in construction and services. This generated $896 million in revenue and $244 million in operating cash flow in the six months ended June 30.

Geographically, 46% of the real estate assets are in the U.S., 26% are in Australia, 15% are in Canada, 11% are in Brazil and 2% are in Britain.

Office properties are the most stable segment. Both the retail and residential segments are weak in the industrialized world and strong in emerging economies. Hotels are performing decently, but concerns are expected to emerge along with the global economy’s slowdown, says Ric Clark, Brookfield’s senior managing partner for property management.

Brookfield sees buying opportunities on the horizon in North American office properties. Clark notes that the emerging middle class in Brazil is producing strong residential demand and that retail sales are strong, but adds that there is increased competition for deals.

He adds that value opportunities are also appearing in the public and private property sectors in Britain and that property markets are recovering in Australia.

Of the $5.3 billion in properties under development, $2.9 billion is in Australia, $1.1 billion is in Brazil, $700 million is in Canada and $600 million is in the U.S.

Brookfield aims to add 35 million square feet to its portfolio, of which the above $5.3 billion represents six million sq. ft. The company is in the advanced planning stage for the other 29 million sq. ft.

> Infrastructure. Brookfield has more than $7.5 billion of its assets in this segment — $3.2 billion in transmission lines in Brazil, Canada and Chile; $3.6 billion in timber in the U.S., Canada and Brazil and agricultural lands in Brazil and $400 million in social infrastructure in Britain and Australia. This generated $162 million in revenue, less direct operating costs, and $53 million in operating cash flow.

This sector’s prospects are excellent due to the large infrastructure deficit in industrialized countries and the need for new infrastructure in the developing world. The capital required for infrastructure projects is beyond the capacity of governments, which are turning to the private sector, often in the form of public/private partnerships.

Sam Pollock, Brookfield’s senior managing partner and co-head of infrastructure activities, notes that these assets tend to be low risk and can support relatively high leverage levels.

Transmission lines are regulated monopolies with a regulated return in Ontario and Chile. In Brazil, Brookfield’s operations are based on long-term concession contracts. Brookfield plans to add gas and water distribution and pipelines to these investments and expects transmission lines to account for 30% of infrastructure assets and return 11%-12% a year.

Timber operations have been negatively affected by the weakness in the U.S. housing market. Brookfield is coping by shifting production to logs, whose prices have held firm, while delaying the harvesting of premium species, whose prices are likely to be higher down the road. The company expects this to account for 30% of infrastructure assets, with an annual return of 12%-13%.

Brookfield’s target for social infrastructure and agricultural lands is 10% of its infrastructure assets. It expects a return of 10%-13% a year on social infrastructure and 20%-plus on agrilands. Brookfield produces sugar cane, soya beans, corn and cattle in Brazil.

In addition, Brookfield plans to invest in railroads, ports and airports, with a target of 30% of infrastructure assets and a return of 13%-15% annually.

> Specialty Funds. Brookfield has $6 billion in five real estate mezzanine and bridge loan funds and two restructuring/distressed capital funds. The company has invested $1.3 billion of its own money in these funds.

Bruce Robertson, Brookfield’s senior managing partner of specialty funds, points out the opportunity for expanding the restructuring/distressed capital funds, given the need for capital and debt in the current credit market environment. He notes that in 2007, there was US$867 billion in defaulted and distressed debt in the U.S.

Brookfield plans to invest in the sectors in which it has expertise, to secure loans with asset and cash flow coverage and have multiple exit strategies. It will also seek equity participation to enhance returns and avoid highly structured loans.

In the U.S., the firm will pursue large-scale opportunities on a co-investment basis with existing clients, but it also plans to expand the scope of its lending geographically.

> Advisory Services. Brookfield manages about $26 billion in fixed-income and equities for institutional clients, with a particular focus on property and infrastructure. IE