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Brookfield Office Properties, Inc. (NYSE:BPO)

Q4 2012 Earnings Call

February 1, 2013, 11:00 a.m .ET

Executives

Melissa Coley – VP Investor Relations

Dennis Friedrich – CEO

Bryan Davis – CFO

Tom Farley - President and Global COO

Mitch Rudin - U.S. CEO

Kurt Wilkinson – Australia COO

Analysts

Rob Stevenson – Macquarie

George Auerbach - ISI Group

Michael Bilerman – Citigroup

Josh Attie - Citigroup

Michael Knott - Green Street Advisors

Mario Saric – Scotiabank

Alex Avery – CIBC

Sam Damiani - TD Securities

James Sullivan – Cowen & Co.

Michael Goldberg

Operator

Please standby, we’re about to begin. Welcome ladies and gentlemen to the Brookfield Office Properties Incorporated Fourth Quarter and full-year results Conference Call. Today’s call is being recorded.

It is now my pleasure to turn the call over to Ms. Melissa Coley, VP, Investor Relations, and Communications. Please go ahead Ms. Coley.

Melissa Coley

Thank you. Good morning. And welcome to Brookfield Office Properties fourth quarter 2012 conference call.

Before we begin our presentation, let me caution you that our comments and discussion will include forward-looking statements and information, and there are risks that actual results, performance or achievements could differ materially from anticipated future results, performance, achievements expressed or implied by such forward-looking statements and information.

Certain material factors and assumptions were applied in drawing the conclusions and making the forecast and projections in the forward-looking statements and information. You may find additional information about such material factors and assumptions and the material factors that could cause our actual results, performance or achievements to differ materially set forth in our news release issued this morning.

I would like to -- now to turn the call over to Chief Executive Officer, Dennis Friedrich.

Dennis Friedrich 

Thank you, Melissa. Hello, everyone. Bryan Davis and I will give today’s formal remarks. Tom Farley, our Global Chief Operating Office, Mitch Rudin, head of our U.S. Operations, and [inaudible] head of our Australian Operations are all with us on the call today, and will be available to answer questions on their respective markets and activities during the Q&A portion of the call.

I’ll start my remarks with the recap of our major accomplishments for 2012, and Bryan will cover those items impacting our financial results when I turn the call over to him in a few minutes.

Just speaking in broad strokes, 2012 was a very successful year for the firm. We reached most of the goals we had set out to hit over the course of the year. Starting with leasing, which is obviously an important topic. In today’s market, we completed a total of 6.8 million square feet of leasing volume throughout the portfolio in 2012, a very solid leasing year for us.

I point out that over 3 million square feet, or close to 50% of our 2012 volume, represented leases with new tenants or existing tenant expansion with the balance being renewals. That’s a high percentage. [inaudible] reflects our – continue the ability to attract new tenants to our portfolio, given the high quality nature of our assets, the investment we make in our assets, in the operating platform behind our assets.

Lower Manhattan was the most active leasing market for us last year, with over 1.8 million square feet of completed transactions, including 700,000 square feet of new leasing. Houston was our second most active, with 1.1 million square feet of leasing. We enjoyed healthy activity in Toronto, Washington D.C. and Los Angeles as well in our other North America energy markets, Calgary and Denver.

We finished the year strong with 1.6 million second quarter of leasing successfully completed in the fourth quarter. Consistent with earlier quarters in 2012, lower Manhattan and Houston, again, led the charge.

We leased 322,000 square feet in our lower Manhattan portfolio during the quarter, just under 250,000 second quarter of which was new leasing. At Brookfield Place, New York, leasing progress continues to be made with 173,000 square feet executed in the fourth quarter, and an additional 90,000 second quarter consummated subsequent to quarters end.

The major, recently seen at Brookfield Place included a 105,000 square foot renewal, and expansion with XL Global at 200 Liberty, a 57,000 square foot lease renewal with D’Amato & Lynch, at 225 Liberty, of 55,000 square foot new lease with Rugus at 200 Vesey, and a 11,000 square feet new lease with Mercury, at 225 Liberty.

With this leasing, recent activity, our office leasing volume at Brookfield Place has reached 317,000 square feet since the start of the third quarter last year. 213,000 square feet of that absorption has been for pending Bank of America, Merrill Lynch rollover premises.

In addition to our activity at Brookfield Place, we signed a new 16 year lease for 124,000 square feet with Transatlantic, at one of our other major lower Manhattan assets One Liberty. That lease represented the largest lease for the downtown market during the fourth quarter.

In the fourth quarter, Houston again was our second most active market with 345,000 square feet of leasing, including two sizable renewals at our 2001 Louisiana property, one with Hilcorp for 146,000 square feet and the other with PricewaterhouseCoopers for 141,000 square feet.

We were encouraged by the consistently seeing velocity throughout 2012 within our global portfolio, but also very importantly, pleased with the positive mark-to-market spreads achieved on executed leases over expiring leases.

During the quarter, leases were signed at an average of $33.65 per square foot, producing a 35% increase over expiring net rents in the same period. Continued strong performance by our regional leasing teams during the quarter enabled us to end the year with a positive mark-to-market spread of 34%.

We remain one of the top performing office landlords in this area, quarter-over-quarter, tapping embedded growth within our portfolio through rental uplift on a pretty consistent basis. A prime example of this out performance was achieved in one of our larger lease transactions for the quarter.

A lease renewal with the law firm Cooley, for 106,000 square feet at the Grace building in mid-town Manhattan. The renewal produced an incredibly strong positive mark-to-market spread of 110% over the expiring rent. Our capital investment and upgrades to that prime mid-town asset over the past several years is paying dividends. And our investments and other assets throughout our portfolio, we expect to produce the same results. Maybe not quite 110%, but meaningful mark-to-market spreads.

Moving on to our asset sale objectives. In 2012 we had targeted a [inaudible] non-core asset for distribution. We disposed of two of those assets in the first quarter of 2012, Altius Centre in Calgary, and Defense Plaza in Melbourne, Australia. In the fourth quarter, we were successful in closing the remaining two sales at 33 South 6th street in Minneapolis, and KBR Tower in Houston.

In total, we generated 246 million in net proceeds, exceeding our price targets, and enhancing our overall liquidity position to over 1.2 billion to finish the year. Bryan, will touch on our strong liquidity position in a few minutes.

In the third quarter of the year, I indicated that we were advancing our sales efforts on two additional assets. We closed on a disposition of one of those targeted assets yesterday, RBC Plaza in Minneapolis for 127 million, generating additional 53 million of net proceeds. The sale of RBC Plaza, essentially completes our program to exit the Minneapolis market. It took us a few years, but right now the secondary markets have – with a flow of capital for the secondary markets, play to our favor, and I’m happy we were patient with our efforts.

So aside from a small piece of the retail component, which we retained for the short-term, we will be exiting that market.

In addition to liquidity generated by our active disposition efforts, financing activities totaled approximately 2.4 billion net proceeds of over $1 billion, locking in some of the most attractive rates we may all see in our life time at least.

Actively, recycling our capital and putting our liquidity to work into new asset opportunities or desired markets has been a focus of our organization in 2012, was no exception to that. We completed asset acquisitions totalling 1.2 billion gross, successfully establishing operating platforms in two dynamic target markets.

London and Seattle, with the acquisition of the Hammerson portfolio of operating assets and development sites in London, and the two building two building, Met Park Complex in Seattle. We added – also added a building 779 9th to our portfolio in the east end submarket of Washington D.C., one of the stronger performing markets, in a market that we’re building a considerable leverage in.

In addition to new asset acquisitions, we set out external growth through the continued development of our significant pipeline of well-located sites within our core markets. 2012 marked the completion of Brookfield Place in Perth, a major achievement in place making within that growing natural resource city.

In the fourth quarter we broke ground in the second phase of the Adelaide Centre, our new 980,000 square feet addition to the Toronto Skyline.

A few weeks ago we took another step, a major step in our future development efforts we announced that we had launched the platform for our 5 million square foot Manhattan West project on 9th avenue. Mayor Bloomberg joined us to celebrate the event, we had a great turnout, and we’re very pleased with the press coverage we accomplished for this new product.

The construction cost for the platform are approximately 290 million over the next two years. We are in essence creating a land for an exciting mixed used project in what is the highest growth neighborhood in Manhattan, both from a residential and from an office standpoint. And we’re doing that at a very attractive land basis, which we’ve heard from us in the past.

We have commenced construction of the platform for the site, with a $340 million construction loan from a contortion of banks that we have had long-term relationships with.

With that as a recap of a very busy and productive 2012, I’ll turn the call over to Bryan to go through Q4 and full 2012 financial results. Bryan?

Bryan Davis

Thank you, Dennis, and good morning everyone. As noted in our press release, we ended 2012 with strong fourth quarter performance. Funds from operations totaled $161 million compared to 151 million in the same period 2011.

On a per-share basis, the current quarters fund from operation was $0.28 per diluted share. This compares of $0.26 per diluted share in the prior year. Included in FFO for the current quarter was a break fee, which increased interest expense by $9 million or approximately $0.02 per-share, as a result of an opportunistic refinancing at the Republic Plaza in Denver.

A solid fourth quarter helped us exceed the high end of our revised guidance range. Ending the year with $650 million of funds from operations, or $1.14 per-share. I will summarize our full-year performance, but would like to walk you through highlights of the fourth quarter first.

Property net operating income before fees for the quarter, increased $39 million or 12% to 366 million from 327 million. This was a result of 20 million of net operating income from Brookfield Place Perth, which was completed in May, 2012. $11 million in net operating income from acquisitions we’ve completed since the end of 2011, which includes Metropolitan Park in Seattle, 799 9Th street in Washington, and 99 Bishopsgate in London, as well as a full quarter of income associated with the purchase of 49% interest in Brookfield Place New York, and 1801 California and Denver, both of which were acquired during the fourth quarter of 2011.

We also had $17 million of same-store growth, or 12 million on a cash basis. This was attributed to stronger Canadian and Australian dollars, as well as a healthy uptick in rent, and an increase in same-store occupancy. It will offset by 9 million reduction in NOI from asset sales, which included 53 State Street and Newport Tower in the fourth quarter of last year, Defense Plaza and Altius Centre in the first quarter of this year, and KBR Tower in Houston in the fourth quarter of this year.

Interest and other income included $5 million in the current quarter related to returns on our investment in Australia. Interest expense increased $28 million to 189 million in the current quarter. And contributing to this increase was a $9 million break fee, as I mentioned earlier, to refinance Republic Plaza by an extended term to ten years, and reducing the rate by almost 100 basis points. We also had 10 million of interest related to debt on Brookfield Place Perth, which is reclassified out of development in May, 2012. And the balance of the increase is a result of the acquisition activity, refinancing and the stronger Canadian and Australian dollar, of course offset by the impact of asset sales.

Our net income for the quarter was $342 million, which was up 4 million from 338 million in the prior period. Included in net income is 241 million of fair value gains on our investment properties, representing an increase of value of approximately 1%.

Contributing to this increase was higher property level cash flows, a reduction in our overall discount rate to approximately 7.4%, and a reduction in our overall terminal cap rate to 6.3%.

In looking at slide 19 of our supplemental package, the value of our commercial properties at December 31, 2012, was 24.8 billion or $500 per square foot. This compares to $489 per square foot in the prior quarter, and $452 per square foot in the prior year, and represents a 5.6% cap rate on a analyzed Q4 net operating income.

During the quarter we did have 7.7 billion of assets externally valued across all of our markets, or approximately 31% of this portfolio. The value determined by third-party appraisers were within .3% of the values we have reported as at Q4.

For the full-year 2012, we earned funds from operations of $650 million or $1.14 per diluted share. You know, on our second quarter 2012 earnings call, we reaffirmed our midpoint guidance of $1.10. Our full-year results exceeded this midpoint by $0.04 per-share, and there were a few things that contributed to this out performance.

First off, was a further decline in interest rates in the Australian market, which benefited our floating rate exposure in that market. And also, we had lower interest rates on our refinancing initiatives executed through the balance of the year.

We have higher mark-to-market on leasing, which contributed to same-store growth at 2.6%, which exceeded our expectations. We had a stronger Canadian and Australian dollars than we had expected for the second half of the year. And finally, we were able to avoid a break fee that was anticipated on an early refinancing, by delaying the execution of that refinancing until 2013.

I did want to mention our recycling of capital efforts, which were put to good use during the year. Our acquisitions in London, Seattle, and Washington D.C. contributed $6 million in FFO in 2012, and are expected to contribute $45 million once stabilized.

We did dispose of four properties throughout the year, and just yesterday, as Dennis mentioned, completed the sale of one of RBC Plaza in Minneapolis. We will continue these efforts as opportunities come our way.

Our total return for the year, which takes FFO and fair value gains, attributed to common shareholders was $1.5 billion, or $2.93 per-share. This represents a healthy 16% return on our opening equity per-share.

Equity value per-share increased from $17.90 as of December 31, 2011, and to $21.20, which is on a pre-tax basis as at the end of the fourth quarter. At the end of the year we did receive the repayment of a $480 million note that we received at consideration on the sale of our residential business. This was received well in advanced of maturity, and combined with asset sales brought our liquidity levels up to a healthy 1.2 billion to end the year.

In addition, as Dennis mentioned, during the year we were successful in financing or refinancing over $2.4 billion of debt. That was done at an average rate of 4.35%, which helped to bring our weighted average interest rate down to 5.55%, or down 25 basis points from a year ago.

With that, I’ll turn the call back over to Dennis.

Dennis Friedrich

Thank you, Bryan. For the balance of the call, I’ll elaborate on the focus of our energies for 2013 and touch briefly on some of the macroeconomic factors and real estate trends we’re seeing, which are impacting our key initiatives for the year.

Increasing our overall portfolio occupancy and reducing near-term lease, expiree’s remains our primary 2013 objective. It is an area of opportunity for us to capture future – future embedded growth in our portfolio, as we did last year, and create value for our shareholders.

I’ve highlighted the meetings with any of you over the past few quarters that our U.S. portfolio, which currently stands at 89% occupancy level, represents considerable upside for us.

The U.S. occupancy level is below our historical average, in large part due to recent core plus and opportunistic asset, acquisitions we have made, and also some select lease rollovers in the past 12 to 18 months.

A level of healthy lease up, even consistent with what we achieved in 2012 in the face of flat tenant demand in a number of markets, will drive NOI growth in many pockets of the U.S. portfolio in the upcoming 12 to 24 months.

We project this growth to be a partial offset to the NOI roll off from the [inaudible] at Brookfield Place later in this year, and in 2014 as we relet that space. While stagnation and a partisanship in our government continues to be a factor in the markets, we escape a major negative economic scenario with the settlement of the fiscal cliff, at the start of the new year.

Uncertainty on the debt ceiling will continue to weigh on the markets to some extent, but I think we can say certain boxes have been checked, including the election results. And these were – there were [inaudible] which we’re bogging down occupancy decisions for tenants in 2012.

Although in our discussions, there’s clearly a desire for greater certainty in many areas by the business leaders running companies or firms, earnings in the U.S. are generally healthy and balance sheets are strong.

In the past 60 to 90 days, we’re getting a sense that there’s a higher level of confidence or at least comfort from both perspective tenants, and our existing tenants, we are in discussions with. This morning’s job figure prediction with a retroactive adjustment should help this improving sediment overall.

In addition, there’s a level of pent-up leasing demand that has been building up in the system, so to speak, as many tenants were bidding time during large parts of 2012. Our expirations are now 6 to 12 months closer. If it feels a little bit – it feels like a similar dynamic to what we saw as we picked up pace in 2010 and 2011 after tenants had been on the sidelines for different reasons, during the recession.

These two trends, combined, have resulted in greater activity in the early part of this year. Although we are pleased with our leasing volume over the past 12 months, it has been a bit of life in the slow lane in certain markets. A number of these markets seem poised for acceleration as we move through 2013.

In terms of the dynamics of each of our markets, I won’t go through all of them individually, we’re in a lot of markets and we’d probably be breaking into the weekend if we spend too much time on each one. Of course we’re happy to address specific market conditions during the Q&A session, and I’ll ask the regional team to jump in, or team leaders to jump in where fitting.

I would just reiterate the strength of the energy markets we’re operating in right now, which I think sometimes gets a bit overlooked candidly. The energy markets in which we’re invested, Calgary, Houston, Denver, and Perth, continue to be very strong and outperform the global markets.

Annual GDP growth, rates in these energy markets far exceed their respective countries averages.

For context, job growth in Denver is adding jobs at two times the U.S. national pace. In Houston, it’s two and half times the national pace. The unemployment rate in Calgary at 4.5% is almost 300 basis points below the Canadian national average. The Perth CBD office market currently operates with the lowest vacancy rate at about 5% of all Australian CBD markets.

In Q4 of 2012, we saw tightening of vacancy in all of our energy markets. That trend should continue for at least one more year before the next development cycle ramps up. No Brookfield discussion on leasing, or call would be complete without an update on Brookfield Place in lower Manhattan. And of course it remains the absolute top priority for the executive team of this company.

Our pipeline of lease activity remains in the 5 million square feet range where it has been in recent quarters. We have a number of lease transactions nearing completion that are comparable in size to those we completed over the past several quarters. We kind of refer to them as singles and doubles, but they are material, enough in size and are starting to gain traction.

In addition to those, we are currently negotiating letters of intent with two tenants totally 1.5 million square feet. These negotiations are no guarantee of final lease commitments, but discussions are advanced and they’re headed in the right direction.

Currently the Manhattan office marketplace is value orient. The top of the market is a bit flatter, but there are tenants that are looking for the highest level of value. Brookfield Place is without a question, the highest quality value offering available in the market today. We’re achieving the net rents we had set out to achieve on the leasing, we’ve done, but the reality, we’ve priced it accordingly, and given the quality and the improvements we’re making, we’re the best offering right now in the Manhattan marketplace. And that should continue to drive a high level of tenant interest and activity for us.

The breakdown of tenant interest continues to be weighted heavily, more heavily towards the media, entertainment, tech and professional services sector. Downtown is a logical still over market for Mid-Town South demand, which has been pretty robust. And Brookfield Place has brought appeal, particularly given the improvements we’re making to the complex.

Our new grand entrance, which we referred to as the glass pavilion is on track for an opening this fall. The structural steel is complete, and you can get a sense today of the stunning architectural on West Street, which will bring – will be online when we complete that project. When opened, it will provide greatly improved access to the new transportation hubs in lower Manhattan.

Our retail renovation is also well underway. Our preleasing efforts are producing signed leases in advance of the project opening. The dining terrace, which is a collection of 14 food offerings from some of the most popular food concepts and restaurant tours, and New York, is the first component slated to open. As of today, we have executed leases on 6 of the 14 vendor spaces, with leases out for most of the remaining spaces.

This week we were pleased to finalize an agreement with Harry and Peter Poulakakos to build and operate a highly created European style marketplace and adjoining large outdoor restaurant totaling, combined over 22,000 square feet.

Harry and Peter, for those not familiar with them, have had a long successful history in lower Manhattan, operating Harry’s Restaurant in Hanover Second quarter, and there’s still three restaurant corridor, which is a destination in lower Manhattan, one of the most popular collections of restaurants and taverns in lower Manhattan. Harry and Peter, also own and operate a finance their chain of cafes.

We’ve also kicked off pre-leasing in the luxury of [inaudible] areas of the new project, which will be later phase, but we were pleased to complete a lease with Michael Kors, and we’re also into lease documentation with four additional luxury retailers.

With our redevelopment of Brookfield Place New York complete in 2014, we are confident we’ll serve as the leading example of the modern urban work environment, embracing a lifestyle of today’s young urban professionals.

All of our public spaces will be very rich in amenities, we’ll be Wi-Fi enabled, we’ll offer obviously stunning water front views, and provide employees seamless connections between work, their residents and recreation.

The private tenant spaces we can provide, also offers similar accommodations, including very large private roof terraces and tenant only fitness facilities within flexible floor plates. And this has gotten traction with a number of the non-financial service orient users.

I’ll wrap up my comments on two additional areas of priority for us in 2013. We expect to continue our disposition efforts in 2013 to generate further cash proceeds that can be applied to our external growth initiatives.

As I indicated on our last call, our asset in Long Beach has been positioned for a marketing process in the early part of this year. We are currently evaluating an additional two to three assets in our portfolio as candidates for sale this year. Preliminary gross value range is between its early days, but is between 315 and 400 million with potential net proceeds of 175 to 200 million.

Lastly, advancing and leasing up our development projects will continue to be one of our major 2013 objectives. We have obviously been very active in this area. In many of our core markets, we’re experiencing historically low levels of new construction and projected supply in the upcoming years. And we can – I can support with confidence some new modern, highly efficient environmentally friendly products in these markets.

With the recent trades we’re seeing on the acquisition front on existing buildings demonstrating that cap rates continue to tighten our strategy in the area of build the core development such as the future of Manhattan West Office Towers and the current the Adelaide Tower that we’re developing, is really a good attractive growth alternative to the acquisition of what we find to be heavily bid up existing buildings. Some of them dated and vintage and providing only roughly 300 basis points lower returns, with little upside.

So of course, the right level of risk adjusted pre-leasing is going to be critical for us. We’ll do it in a measured way. And we don’t lose sight of that when formally launching our development products.

With these 2013 priorities in mind, we’ll wrap up our comments before getting to questions with some financial guidance for 2013, and some more detail from Bryan. Bryan, do you want to take over the call from there?

Bryan Davis

Sure. In terms of outlook for 2013, we are providing guidance in a range from $1.16 per-share to $1.20 per-share with a mid-point of $1.18. Our mid-point guidance makes a falling assumptions, as we outlined in our press release, an increase in same-store net operating income of 3%. If you exclude Brookfield Place New York, that’s 5% on a cash basis. We are assuming a $0.98 Canadian dollar will buy you one U.S. dollar, and $0.95 Australian dollar will buy you one U.S. dollar, and 62 pounds will buy you one U.S. dollar. So fairly strong foreign currency throughout the year.

I will note a penny movement in the Canadian dollar and a penny movement in the Australian currency, will impact FFO by about $1.5 million. Each movement in the pound, based off of the amount of earnings we expect on a net basis, 2014 will not have a significant impact.

Lease termination income and non-recurring gains, on the repurchase of debt are expected to be $25 million, which we have a high degree of confidence in executing in the year. We have no acquisition activity, other than closing on the remaining two operating Hammerson assets in London, in June. And our property dispositions, which do include the RBC Plaza, which closed yesterday, amount to proceeds of approximately $105 million, and are expected to be completed in the first half of the year. And they would include RBC and Landmark.

To put this guidance in perspective, in comparing to 2012 actual results of $1.14, the increase of $0.04 to the mid-point can be categorized into a few sound bites. We start off with the decreases, first off, as is widely anticipated, the vacancy of the result of the expiration of the BOA/Merrill lease at Brookfield Place in the fourth quarter, will result in a decrease in net operating of $40 million or $0.08 per-share.

It is important to note however that based on the leasing that we have done to date, at 225 Liberty and 250 Vesey Street, you know all else being equal. Earnings will cover all operating cost on the properties.

Secondly, as reported at the end of the year, we were successful in collecting on our $480 million note that was taken as consideration on the sale of our residential platform. We now have the ability to reinvest this capital into our core business, but it will result in a decrease in interest in other income of about $0.96 per-share.

So ending on a good note with the increases, as indicated in the press release, we expect same-store growth of 3%, excluding Brookfield Place New York, or $0.06 per-share, a full-year of Brookfield Place Perth, and our 2012, 2013 recycling of capital activities will contribute a further $0.06 per-share. The expected gains of 25 million compared with net 5 million after considering our termination income and break fee in 2012, will add $0.04 per-share. And lastly, we expect a net reduction in interest expense, which will be offset slightly by higher non-controlling interest and other cost to benefit by $0.02 per-share.

These expected increase aggregate $0.18 and when offset by the decreases, contribute $0.04 to our mid-point guidance of $1.18, reconciliation from $1.14, which we ended the year 2012 with.

So with that, I’ll turn the call back over to you Dennis.

Dennis Friedrich

Thanks Bryan. Operator with that, we’d be happy to take calls from analyst.

Question-and-Answer Session

Operator

(Operator instructions). And first, we will go to Rob Stevenson with Macquarie.

Rob Stevenson – Macquarie

Good morning, guys.

Dennis Friedrich

Hi, Rob.

Rob Stevenson – Macquarie

Can you give a little bit of color around the ’13 and ’14 lease expirations in D.C.? You know, it’s fairly sizable or there’s a couple of top-20 tenants in there and how are those renewal discussions going at this point?

Dennis Friedrich

Sure. I’m going to turn that question over to Mich Rudin.

Mitch Rudin

We’ve actually had some fairly positive conversations with our government-related tenants. The negative that’s been in that market of tenants not expanding or looking for new spaces turned into a positive for us with some of our existing tenants. We’ve also had very good preliminary results with our new acquisition at 799 with the level of activity that we’ve had there.

Dennis Friedrich

So Rob, the other thing I’d add is, which Mitch alluded to, is in the ’13, ’14 roles, they tend to be government oriented, you know, Mitch indicated one positive outcome of the government shutting down it’s level of leasing activities is the renewal probability when there’s an existing situation or an existing lease rollover has gone up quite a bit so we’re feeling pretty good about those situations.

Rob Stevenson – Macquarie

How much of the 1.8 million square feet rolling over the last couple of years is government versus sort of chunky sort of, you know, 50, 100,000 square foot non-government tenants?

Dennis Friedrich

Mitch, do you have a flavor

Mitch Rudin

It’s roughly 40, 45%.

Rob Stevenson – Macquarie

Is the government?

Mitch Rudin

Yes.

Rob Stevenson – Macquarie

Okay. And is there anybody outside of the government that’s a big chunk – that’s a particularly big chunk of that?

Mitch Rudin

We have – yes, one. Sprint at One Restant Crescent.

Dennis Friedrich

And outside of that is more small-to-mid-sized tenants. And we’re, you know, one thing that we’re pleased with up to a point in this sort of cycle of expirations is we don’t – we have fairly limited exposure to the defense contract situations in Virginia. So you know, that part of the market shuts down a bit, which I – people believe, I think, given some pending cuts. We worked through a lot of that and we just didn’t have much exposure. Most of our expirations are in the district or the one situation in [inaudible].

Rob Stevenson – Macquarie

And how do those rates compare to current market rates? Are you expecting sort of it to roll flat to slowly up or is that a situation where it’s going to be more flat to slightly down?

Dennis Friedrich

No, I think as you first described it, it’s sort of flat, but trending slightly upward.

Rob Stevenson – Macquarie

Okay. And then the other question for Dennis, can you run us through the game plan for the – for BPO for the [inaudible] investment?

Dennis Friedrich

Sure. I’m going to actually, Tom or Kurt, do you want to talk a little to that? The benefit of having them in – the group planning session happens to be in the group here with me, so it would be good to do that.

Kurt Wilkinson

So as far as the [inaudible] acquisition goes for the business, I think it provides another exciting opportunity across the board with the [inaudible] where we have the opportunity to build up to about an 800,000 square foot prime office tower. So at this stage, we’ve seen early planning stages for that development. There is an approval in place for [inaudible], but the Brookfield Properties is now working on ways to improve that scheme. And I guess the residual affect within that portfolio also provides different opportunities for us to enhance value and we’re working through a program for [inaudible].

Rob Stevenson – Macquarie

I mean, a lot of the assets were hotels, is that something that, you know, belongs in the BPO sort of investment vehicle going forward or is that something that sort of gets parted out or reduced over time?

Dennis Friedrich

I think it would be a little more along the lines of the latter. We went into this investment in partnership with one of the Brookfield SM management funds and what we, you know, we liked the business, we bought in, these are attractive properties but you know, we wouldn’t – at the end of the day, Brookfield Office Properties is not a warehouse for hotel assets along those lines. So we’ve got a, you know, we’ve got a game plan as to where it goes but it is something we need to mature in areas here and there. But as Kurt alluded to, you know, the end game for us candidly is a site which is by far the best site in Sydney right now.

Rob Stevenson – Macquarie

Okay. And then just lastly, any thoughts on the Australian assets, whether, you know, sitting here today, you know, does that get spun out into a separate vehicle? Does that stay within BPO for the long term as you guys have been doing this sort of business planning stuff?

Dennis Friedrich

You know, Rob, it’s a good question. When the markets, particularly the public markets weren’t particularly attractive on valuation, we, you know, to be candid, we put it on the back burner. Bryan and I are spending more time thinking about it right now whether it’s a public vehicle or some private vehicle. I think from the nature of your question, you’re picking up on the fact that the public companies are trading up closer to their par or any of these and starting to push through those. I think we’re, you know, it’s an area of opportunity for us, much as we did [inaudible] in the past. It could be an interesting vehicle and we’re spending more time on it than we did 60 to 90 days ago.

Rob Stevenson – Macquarie

Okay. Thanks, guys. Appreciate it.

Operator

Moving on, we’ll go to George Auerback of ISI Group.

George Auerbach - ISI Group

Great. Good morning. Dennis, you mentioned a couple of LOIs down in Brookfield and sorry for the ignorance, but if someone’s anticipating an LOI, does that mean that the tenant has effectively chosen Brookfield Place or is that sort of the part of the sort of shopping for space process?

Dennis Friedrich

Yeah, you’re at a stage, George, where you really are massaging or finalizing the financial and some of the major terms which is a step to getting to lease documentation. It’s a pretty advanced stage when you’re at that, whether it’s over an advanced term sheet or it’s an LOI. So there’s also a chance that things can go on and off track but we’re feeling pretty good about where these are moving and we’ve been working on them for a little while.

George Auerbach - ISI Group

Okay. Well, I guess maybe I’ll say it another way. In your experience, when the tenants sort of sign an LOI, what kind of probability have you seen or would you place on that sort of moving into sort of a signed lease?

Dennis Friedrich

Yeah, George, it’s a high probability. We don’t have fully-executed 100% done LOIs, but they’re down the line but it’s a high probability.

George Auerbach - ISI Group

Great. And then just two quick ones for Bryan. Bryan, what would same-store cash NOI be if you included Brookfield Place in the numbers?

Bryan Davis

Flat. So same-store NOI including Brookfield Place was actually down 1% and cash, same-store cash NOI would be flat to 2012.

George Auerbach - ISI Group

Thanks. And then just finally, Bryan, on the occupancy guidance for next year, do you have any sort of pickup in the Brookfield Place occupancy by your end?

Bryan Davis

In terms of the occupancy relative to those spaces that’s leasing off or in its current form?

George Auerbach - ISI Group

I guess current form, just – I guess the whole portfolio, you’re expecting to go from 92 to 91 and just trying to figure out what the component is or what the contribution of Brookfield Place would be.

Bryan Davis

Yeah, there would be some contribution there for some leasing. I mean, we’re getting into, you know, the timing, the ultimate timing of the – some of the larger transactions could be into the later part of the year. If they happen, obviously they represent some binary events, but we are baking into some of the occupancy this sort of run rate we’ve been getting into on quarterly activity, which has been setting into that 100 to 200,000 square foot range of single and double floors. So there’s an element of that, but there’s, you know, not necessarily a very, very high number towards the end of this year.

George Auerbach - ISI Group

Great. Thank you.

Operator

Next, we’ll go to Josh Attie with Citi.

Michael Bilerman – Citi

Hey, it’s Michael Bilerman with Josh. Bryan, if you think about the – let’s just say a buck 14 without the least term and the debt repayment, how does that trend through the year in thinking about the vacancy coming up at Brookfield Place? What is sort of 4Q relative to the other three quarters?

Bryan Davis

Well, so 4Q, our expectation, you know, will – it will drop, you know, the $40 million impact, you know, of NOI as it relates to the expiration of BofA/Merrill lease happens at the end of Q3, so effectively impacts all of Q4, that’s $0.08 a share. So you know, off of that you’re going to have that flowing through. Offsetting that, of course, will be just the timing of the same-store growth that we expect. I can’t really break that down by a quarter-to-quarter basis, but Q4 will be less than Q1 through Q3.

But effectively somewhere, call it perhaps $0.05 or $0.06 if you’re running, call it just 31 in the first few quarters that, you know, you’re going to have a drop down to probably $0.25 at least in fourth quarter.

Dennis Friedrich

That’s probably a good estimate, Michael.

Michael Bilerman – Citi

And then how do you think about, you know, from – you know, you’re not a REIT, you don’t have to distribute out a dividend. How do you sort of get your arms around sort of the dividend, you know, AFFO today is running, call it 14, $0.15 of AFFO, the dividend, obviously that’s $0.14. You go into the fourth quarter, at what point do you make a determination about continuing to overfund the dividend?

Bryan Davis

You know, I guess, you know, a couple overriding comments. You know, we don’t anticipate, you know, a dividend cut. We’re comfortable with the cash flow forecast of our business and our liquidity position to be able to fund a dividend even through a period where we’re transitioning between an existing tenant and new tenants into Brookfield Place, New York. You know, just to remind everyone, even during 2008 and 2009 timeframe when the market was relatively tough, you know, we maintained our dividends through there and our expectations would be that we’d maintain it through the 2014 time period and at some point in time address with the board when it makes sense to even consider increasing.

Dennis Friedrich

Michael, we will not be reducing our dividend. We have a strong liquidity position right now. In one of the last calls we identified a number of areas where we can continue to identify cash resources and we’re, you know, as you can tell from our teams performance and the liftoff in the other portions of the portfolio, we’re not thinking that to be even a potential [inaudible].

Michael Bilerman – Citi

Right, you’ll just fund it and that’s fine. You know, if you decide to fund it for a little while, I just wanted to make sure that I understood your guys’ perspective.

Maybe just this last one on Brookfield Place. Thinking about this million and a half square feet, do you have a sense of when that – when those leases would start? That’s sort of the first question. And the second is just in terms of that pipeline, that 5 million square feet, is that inclusive of this 1 ½ that you have or that’s in addition to – and I guess just with the amount of lease signings that happen in the third and fourth quarters in New York and like a Jefferies, Microsoft, Group M, that all went to different locations. I guess on one hand I’m kind of pleased to hear that the pipeline’s still 5 million, but maybe you can just give a little bit more color on that?

Dennis Friedrich

I’ll answer the second part. So the 5 million is the overall number, Michael. So the 1 ½ plus what I indicated leases that are already in documentation would all be in that space. A number of those leases that you referenced, not all of the are done, but for instance, I think Loreal was never in that bucket. They were never considering down here, so these are all, obviously, for us live discussions, not pipedreams based upon tenants that are looking somewhere else.

And you know, that’s been a pretty consistent level of activity. We’re starting to convert some of – converting some of that into leases and moving it along.

In terms of timing, I’m really, at this point, not prepared to give exact guidance as to what timing is going to be next year. There’s always a number of dynamics happening, it wouldn’t involve space delivery. In that 2014 timeframe there’s some existing leases involved, but it’s just too early, it’s the early part of 2013, just focus on getting done.

Josh Attie - Citigroup

Bryan, this is Josh. Can you tell us the timing of the termination fee and the debt [inaudible] in 2013? Are they spread evenly throughout the year? Are the concentrated in any particular quarter?

Bryan Davis

Early in the year we expect.

Josh Attie - Citigroup

Okay.

Operator

And we’ll go to Michael Knott, Green Street Advisors.

Michael Knott - Green Street Advisors

Hey, guys. I also wanted to ask you about Brookfield Place. Can we just step back for a second. So I think there’s 3.3 million feet of space to lease total. Can you remind us how much of what you announced this morning in the press release related to that 3.3?

Dennis Friedrich

Yes. The – we announced today, or consolidated together would be – we’re basically netting ourselves down to about 3 million square feet. So when you take the two, I think the 3.3 was probably a number that did not reflect third and fourth quarter activity, which combined took it down to just about 3 million square feet.

Michael Knott - Green Street Advisors

Okay, so this three would then be potentially reduced in half by this 1.5?

Dennis Friedrich

Yes, and any other – and I wouldn’t discount other transactions that I’ve mentioned that we’re working on that we’re – you’re know, we’re starting to get into a group, so to speak, of quarterly transactions.

Michael Knott - Green Street Advisors

Do you believe that the process would be such that if you get one or part of the 1.5 million feet that the rest of it would become easier, that the 1.5 would be sort of a signal that others can go ahead and lease space there?

Dennis Friedrich

Yes. Yeah, I think that’s definitely – and you know, one of the transactions in particular represents a portion of the lower space which is, you know, in this market, actually attracting a fair amount of attention because it’s priced accordingly. But yes, definitely.

Michael Knott - Green Street Advisors

Two other quick questions. One, are you willing to give us some color on where these 1.5 million feet of tenants would be coming from, so that would be the first one.

Dennis Friedrich

There is a bit of a mix, but they’re mid-town oriented.

Michael Knott - Green Street Advisors

Okay. And then Bryan, does the guidance assume different accounting treatment for Brookfield Place say on October 1?

Bryan Davis

It does not. We keep Brookfield Place as an operating property throughout the guidance period.

Michael Knott - Green Street Advisors

Okay, so it’s taken out of same-store but it’s not really treated differently in terms of the accounting?

Bryan Davis

Correct.

Michael Knott - Green Street Advisors

Okay. And then is there anything with respect to capitalized interest then with respect to Brookfield Place that would be different? I guess not based on that answer?

Bryan Davis

No, you’re exactly right. You know, in the context of same store, you know, we did take it out of how we characterize same store simply so it didn’t overshadow the growth that we’re seeing in the balance of the portfolio and the balance of our other markets.

Michael Knott - Green Street Advisors

And last question on Brookfield Place and I’ll cede the floor. Are you willing to give a probability of how much you think of the 3 million feet that’s left to lease you might get done in 2013?

Dennis Friedrich

Not yet. I think we’ve shared as much transparency as we wanted to at this point in time. We’ll keep everybody posted.

Michael Knott - Green Street Advisors

Thank you.

Operator

Next we’ll go to Mario Saric Scotiabank.

Mario Saric – Scotiabank

Hi, good morning. Just with respect to the guidance, when the 91%, just so I understand it correctly, that 91% includes Brookfield Place?

Bryan Davis

It does. Yes.

Mario Saric – Scotiabank

And does not…

Bryan Davis

Not the expected end-of-year 2013 occupancy.

Mario Saric – Scotiabank

Okay. And the 91% - so the occupancy, is that announced occupancy or is that like physical [inaudible]? What does the 91 represent?

Bryan Davis

It is announced occupancy, so you could get in a scenario where it doesn’t translate necessarily to economics.

Mario Saric – Scotiabank

Okay. That’s great. And then maybe, Dennis, you touched on it earlier on, but this would reflect to the industry getting Brookfield Place, it looks like you’re getting pretty much in line with what you’re anticipating or underwriting. So is the view that BPO still thinks they will not see any NOI erosion over the BofA lease going forward? Is that still valid?

Dennis Friedrich

Yes. That is still the view. I think every, you know, with each tranche of leasing, you know, understanding it’s 100,000 and 200,000 here and there, but it’s been sort of validating that view. Our net rents are actually – in this past quarter combined would be in the high 30s net which is even, I think, higher than the – is higher than the Merrill rent. And there will be, though, I would [inaudible], we’ve mentioned before that some of the larger transactions could come in south of that, depending on where it is, but on an overall blended basis, we still feel good about that assumption.

Mario Saric – Scotiabank

Okay, and then maybe just, we’ll start with BofA, it looks like maybe they’re giving us some space in mid-town. You obviously have a relationship there. Is it your sense that they have all the space they need at this point or is there a possibility that they may sign on for additional space?

Dennis Friedrich

You know, they did in a prior quarter. You know, I think right now we’re not anticipating that or putting that in our projections. We’ve always felt that that could be a possibility as banks in the financial services are looking to manage their bottom line as much as possible, but you know, I don’t think there’s any – there’s not anything immediate that we’re discussing with them.

Mario Saric – Scotiabank

Okay. And maybe the last question, turning over to Boston, I’m wondering whether the leasing achieved during the quarter, whether it contributed an all-time high and at [inaudible] you do have a $250 million mortgage maturing in 2013 in June so I’m just wondering what your plans are there given the occupancy is not fully stabilized yet?

Dennis Friedrich

Yeah, so the NOI question, Bryan. The NOI on the recently [inaudible] important leases, - Mario, could you just repeat the first part of that again?

Mario Saric – Scotiabank

I’m wondering, so the Grant Fortant lease, as well as the other lease in Boston, I’m wondering whether that contributed to any NOI during the quarter, during Q4. And then secondly, what your plans are with respect to the mortgage coming due in June.

Bryan Davis

I don’t know the exact number offhand, but you know, I can always follow up if it’s anything material. But it did contribute but I don’t think it was a large amount, Mario.

Mario Saric – Scotiabank

And the second one was on the financing of the asset given it’s a pending majority?

Bryan Davis

Right, right. And we’re looking at refinancing that property in 2013. We’ve built in a little bit of deleveraging with respect to 75 State Street into our capital plans, but of course, you know, we’ll look to execute in the best manner we can.

Mario Saric – Scotiabank

Okay. That’s great. Thank you.

Operator

And next we’ll go to Alex Avery, CIBC.

Alex Avery – CIBC

Thank you. Just on the – I guess the negotiations that continue around the Brookfield Place, New York. Can you give us an idea of what I guess tenant inducements and leasing costs are looking like on that?

Dennis Friedrich

Yes, it’s a bit early. You know, we’re in negotiations. It’s not a – you know, it’s in line with some of the things we’ve talked about before the terms of overall, you know, the large tenants will always be a little bit in the upper end of that platform. But you know, I think we want to see how these discussions and some of the smaller tenant discussions play out. You know, nothing meaningfully different from what we discussed in the past.

Alex Avery – CIBC

So no real direction in terms of higher costs, lower costs or much change on that front?

Dennis Friedrich

Not really much change from what we mentioned before. It will be slightly higher on some of the large larger and a little lower end of the scale on some of the smaller transactions.

Alex Avery – CIBC

Okay. And then just on the forecast or the guidance for 2013, just curious as to essentially you’re calling for a weaker U.S. dollar. Is that – I mean, my recollection is that you really haven’t made much of a call on currencies in prior years’ forecasts?

Bryan Davis

Well, I would say that in every year, we have set our midpoint based off of currency exchange rate. You know, last year I think just by nature of where, you know, the Canadian and [inaudible] dollar were, vis-à-vis the U.S. it was [inaudible]. This year that expectation of what rates are going to be throughout the year, but I would say that the lion’s share of what goes into the range of our guidance will be sensitivities to movements in those rates with either the U.S. dollar strengthening or weakening, vis-à-vis those currencies.

Alex Avery – CIBC

Okay. And then just any comment on the Brookfield Office Properties Canada and where your thinking is on that?

Dennis Friedrich

This is specifically as it relates to the sell down, you know, I think we continue to view it as a source of capital for Brookfield Office Properties. We, you know, of course, as a major shareholder, continue to be pleased with the performance of the REIT. You know, as we’ve said in the past, we would love to see the gap between where it trades at and it’s value, it’s just now, you know, $32.50 a share, narrow a little bit. But you know, there’s always an opportunity that…

Bryan Davis

I think the only thing to add, Dennis, is we always – we like this, with some of the cash building there that the ability to get in more cross opportunities within that vehicle out somewhere in the marketplace would be, we think, helpful to the share price. So that’s a possibility over some time. We still would like to see it trade up to our view of where our value is.

Alex Avery – CIBC

Okay, and then just when you mentioned growth opportunities, are you suggesting third-party acquisitions or is there the potential that they could participate in some developments?

Bryan Davis

It could be both.

Alex Avery – CIBC

Okay, that’s great. Thank you.

Operator

Moving on, we’ll go to Sam Damiani, TD Securities.

Sam Damiani - TD Securities

Thanks. I guess good afternoon. With the guys on the NOI growth, could you just give us some color as to what’s the difference between the 5% cash NOI growth and the 3% reported? What properties specifically are driving that difference?

Bryan Davis

You know, that’s probably too much detail that I wasn’t planning on getting into on this conference call. I would just say in general it’s – it’s across the board. So it would be hard to identify specifically.

Sam Damiani - TD Securities

Not even by market?

Bryan Davis

Not even by market. Well, so hold on. Let me have a look and see if there’s anything that I can follow up with towards the end of the call.

Dennis Friedrich

Is Perth in that number by chance?

Bryan Davis

Perth is in that number. And you know, of course, every year goes by, our Australian assets do benefit from 4% increase in rent bumps.

Sam Damiani - TD Securities

I guess what I was trying to get at was the growth there is pretty strong, kind of suggesting that the bulk of sort of the next occupancy absorption in the portfolio by year end is coming, perhaps, outside of the Towers 2 and 4 in Lower Manhattan.

Bryan Davis

I think that’s right, Sam. I think there’s – portions of it are spread through the U.S., which I mentioned in my comments that was just based upon our current least activities to the U.S. portfolio. There is – there’s definitely opportunity there to raise very high-quality buildings and occupancy if that lease is in effect. There’s really not one or two markets that jump out. I’d say Houston is one area market, Denver is another where we’re experiencing some volume against low occupancy rates. [Inaudible].

Dennis Friedrich

Okay, thanks, Michael. Is there any other questions? Operator, I think that concludes all of our questions from what we can see?

Operator

That’s correct, sir.

Dennis Friedrich

Thank you very much, operator and everyone. Thank you very much for joining us today on the call.

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