Brookfield Office Properties Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Brookfield Office (BPO)

Brookfield Office Properties (NYSE:BPO)

Q1 2013 Earnings Call

April 26, 2013 11:00 am ET

Executives

Matthew Cherry

Dennis H. Friedrich - Chief Executive Officer and Director

Bryan Kenneth Davis - Chief Financial Officer and Senior Vice President

G. Mark Brown - Global Chief Investment Officer

Analysts

Joshua Attie - Citigroup Inc, Research Division

Robert Stevenson - Macquarie Research

Alex Avery - CIBC World Markets Inc., Research Division

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Ross T. Nussbaum - UBS Investment Bank, Research Division

Robert W. Salisbury - UBS Investment Bank, Research Division

Michael Knott - Green Street Advisors, Inc., Research Division

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Neil Downey - RBC Capital Markets, LLC, Research Division

Vincent Chao - Deutsche Bank AG, Research Division

Jenny Ma - Canaccord Genuity, Research Division

Derrick Lau - TD Securities Equity Research

Jonathan Feldman - Nomura Securities Co. Ltd., Research Division

Michael Bilerman - Citigroup Inc, Research Division

Operator

Welcome, ladies and gentlemen, to the Brookfield Office Properties Inc., First Quarter 2013 Conference Call. This call is being recorded. It is now my pleasure to turn the call over to Matthew Cherry, Director of Investor Relations and communications.

Matthew Cherry

Thank you, and good morning, and welcome to Brookfield Office Properties' First Quarter 2013 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 or 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 forecasts and projections in the forward-looking statements and information. You may find additional information about such material factors and assumptions and in 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 -- now like to turn the call over to Chief Executive Officer, Dennis Friedrich.

Dennis H. Friedrich

Thank you, Matt. Hello, everyone. Our CFO, Bryan Davis and I will give today's formal remarks. However, Tom Farley, our global Chief Operating Officer; Mark Brown, our global Chief Investment Officer; Mitch Rudin, head of our U.S. operations; and Jan Sucharda, head of our Canadian operations, are all with us on the call today and will be available to answer questions on their respective activities during the Q&A today.

Before remarks on our operating and financial results, I did want to acknowledge the announcement we made that we have entered into a merger agreement to acquire MPG Office Trust. I assume the majority of those on this call read our press release. For those who did not see the announcement, the press release is available on our website, brookfieldofficeproperties.com.

I'm sure a number of you will have specific questions regarding the transaction during the Q&A portion of this call, but because of the rules governing communications in a public deal of this nature, the terms of the merger agreement and our partnership agreements with our institutional investors in the fund, we will be limited in our ability to provide additional details about the transactions on this call. I can say we're very excited about the transaction and we'll be communicating additional information once the necessary regulatory filings are made.

Although I'm a bit hamstrung at this point, from getting into any specifics, I offer up the following comments regarding the proposed transaction.

Brookfield Office Properties, through its affiliates, has entered into a merger agreement with MPG Office Trust, pursuant to which a newly formed fund controlled by BPO, will acquire MPG. The fund, named DTLA Holdings, will own both BPO's existing downtown Los Angeles office assets and the assets of MPG. Under the terms of the agreement, MPG shareholders will receive $3.15 per share in cash. The per-share price represents a 21% premium to MPG's closing share price on April 24, 2013. The merger agreement also provides that Brookfield will commence a tender offer to purchase all of MPG's outstanding preferred shares for $25 per share in cash without interest. We expect to commence the tender offer in early May. For a clarification on this aspect of the agreement, we've had some questions raised. It should be noticed -- or noted that the price paid for the MPG Series A preferred shares in the tender offer will be $25 per share in cash without interest. There will be no payment made in the tender or by the company with respect to accumulated dividends on the preferred shares.

While the final structure has not yet been determined, the transaction is not intended to provide any substantial benefit or credit support from BPO's downtown L.A. assets are for any of the shares of MPG Series A preferred or any successor preferred stock that is issued in respect of the MPG Series A preferred, after the closing of the merger. The MPG Series A preferred or the successor preferreds that were issued in respect of the MPG Series A preferreds will only have the benefit of the MPG assets.

The transaction is contingent upon several conditions, including the approval of MPG's common shareholders and receipt of certain consents from MPG's current lenders. Upon closing of the transaction, it is expected that the fund's assets will be made up primarily of 7 Class A office assets totaling 8.3 million square feet. That represents 3 existing BPO assets: Bank of America Plaza, 601 South Figueroa, and Ernst & Young Tower; and core existing MPG assets: Wells Fargo Tower, Gas Company Tower, KPMG Tower and 777 Fig Tower. The fund will also acquire 2 additional assets in downtown Los Angeles. Fig at 7th, our newly developed -- redeveloped, sorry, retail complex in the downtown area, as well as a strategically located development site adjacent to Fig at 7th and 2 of the office towers in the fund. BPO will sponsor and manage the fund and will hold a 47% interest, intuitional partners will hold the remaining 53% interest.

To clarify the value of our assets contributed to the downtown L.A. fund, which -- there's been a little bit of confusion. I want to clarify things a bit. We are contributing our assets at a gross value of $1.1 billion, which is subject to property-specific debt of $440 million at March 31, and $265 million of incremental debt that will be retired. I will also add, in case there's any question here, the composition of our fund partners does not include BPY, the newly formed Brookfield entity.

We are very excited about this transaction, as I mentioned in the outset of the call, and the formation of a new fund. It is a great opportunity for us to enhance our position and holdings in an important U.S. office market with a limited incremental equity investment on our behalf. We've been operating successfully in downtown Los Angeles for close to 6 years and expect to continue that success with an expanded portfolio and the operating synergies that it will provide going forward.

Before I turn the call over to Brian for his financial report, I quickly -- I'd like to quickly run through some operational highlights from the first quarter.

Starting with leasing. It was a strong quarter with leasing within our global portfolio, totaling 1.3 million square feet. We finished the quarter with a portfolio-wide occupancy level of 92.1%, up 10 basis points from the end of 2012. 64% of the leasing volume within the quarter represented leases with new tenants or existing tenant expansions, continuing a pattern of performance in successfully attracting new tenant demand to our high-quality portfolio. It's an important measure for us in terms of the balance between new leasing and renewal, and we continue that, helping new leasing metrics quarter-over-quarter. We also continue to report industry-leading mark-to-market rental uplift on signed leases. This quarter's rents on executed transaction were 17% higher than those leases expiring in the same period. Leasing activity during the quarter was particularly strong in Canada, where we completed several large new leases in renewals. The Canadian office markets we are invested in continue to perform quite strongly.

We completed 2 sizable leases in Toronto and 89,000 square foot lease with Zurich Insurance and a 61,000 square feet-- foot lease with law firm Osler, Hoskin & Harcourt. Both leases were at First Canadian Place. As you may recall, the complex went under a major renovation, which we just completed last year and invested $100 million in major upgrades throughout the complex of these leases. These leases are a welcome early indication that our substantial renovation project is paying immediate dividends.

We were also pleased to announce the second signed tenant at Bay Adelaide Centre East, our new development project and second phase of the Adelaide Centre. Law firm of Borden, Ladner & Gervais, signed on for 165,000 square feet and will join anchor tenant Deloitte in this building. At this point, we're 60% pre-leased and we're more than 2 years ahead of delivery. So, very pleased at our progress to date and we look to continue that progress with a healthy pipeline of activity on the remaining space.

We were also active in Calgary with the completion of a new lease with Canadian Natural Resources for 181,000 square feet at Bankers Hall and a renewal with PwC Management Services for 95,000 square feet at Suncor Energy Center. As with our other energy and natural resource operating markets, Calgary continues to experience strong office market fundamentals. Class A market vacancy is very tight at 2.5% and our portfolio is over 99% leased, which has enabled us to continue to push our rental rates in that market.

In the U.S., we completed an important renewal in the D.C. suburbs, subsequent to the quarter, when we reached a lease agreement with the TSA to remain at 601& 701 South 12th in Arlington, Virginia, for a total of 546,000 square feet. The original lease was set to expire in 2014 but the renewal takes the term out an additional 4 years, to 2018. We were able to realize a nice 19% mark-to-market rent adjustment on this transaction. It was a very important renewal for us and I'm -- we're very pleased to have gotten it done. It greatly reduces our expiry profile in the D.C. market in 2014.

In Denver, we made progress on our leasing efforts at 1801 California with the completion of 2 new leases totaling 66,000 square feet. One with Halcon Resources and the other with Newalta Environmental Services. To remind everyone, we acquired 1801 California in late 2011, at a roughly 40% discount-to-replacement cost. Our plan and intentions were to reposition and release the asset upon the expiration of a master lease with Qwest. The major first phase of redevelopment is on track to be completed by year-end, and with the new leases we was able to execute during the quarter, our lease up level has reached 40% and we're ahead of our projections when we acquired the asset at this point. It also reflects, within the Denver market, the only offering that can provide space greater than 200,000 square feet. So we're talking to some sizable tenants for acquirements there as well.

Market conditions and performance in Lower Manhattan were very strong in the first quarter of the year, significantly outperforming the Midtown and Midtown South submarkets. All the key market indicators that we pay a lot of attention to: Vacancy levels, gross leasing volume, net absorption and Class A rental rates trended in a positive direction. It was a very, very strong quarter and start to the year. With over 1.7 million square feet of new leasing activity, this was the highest first quarter leasing level seen in Downtown since 2004. Commitments came from some of the traditional professional service firms, tenants relocating from Midtown, as well as new creative and technology tenants who are looking for alternatives to what has been an overheated Midtown South submarket, and these tenants are increasingly attracted to Downtown's lower rents. Tenants such as HarperCollins, WeWork and Condé Nast, signed sizable leases in what is traditionally known or had been traditionally known as a financial district, and this is another positive stepping stone for the broadening of Downtown's industrial base and its appeal. A recent Cushman & Wakefield report revealed that technology media firms represented 20% of the leasing below Canal Street for the quarter. I think everyone in the market has been watching very closely which market will benefit the most from some of the tightening in Midtown South and the other creative or tech sector traditional corridors, and I think the early performance in Downtown shows that we are capturing our -- more than our fair share of that.

Net absorption, Downtown, in the first quarter totaled 520,000 square feet, outperforming Midtown, which was at 313,000 square feet and is a much larger market, obviously, and Midtown South which actually, after many quarters of very strong performance, had negative absorption of 414,000 square feet. Really -- were attributed to 1 or 2 blocks. While we acknowledge that our vacancy rates will likely rise in the near term due to space becoming available at the World Trade Center and within Brookfield Place, we believe that Downtown Manhattan remains very well-positioned in what continues to be a value-oriented marketplace across, really, all the tenant sectors. And I'd say most of the market participants and brokers we are engaged with regularly -- I think everyone has been very pleased with downtown performance over the past 12 months and is probably ahead of where folks expected on absorption, which should help the equation as new product starts to enter the availability.

In our own portfolio, we completed 2 new leases at Brookfield Place during the quarter. One with Regis for 55,000 square feet, which we announced on the last call, and a new lease with GFK, a firm which specializes in market research at 200 Liberty Street, for 75,000 square feet. These were 2 of the larger transactions downtown during the past quarters and GFK relocated from the Chelsea Market which, again, serves as another example of Downtown benefiting from spillover in a very strong and surging Midtown South submarket.

We continue to advance discussions with a pipeline of office tenants with combined space requirements exceeding 4.5 million square feet. Last quarter on our call, I alluded to 2 sizable tenants, which mean we were negotiating letters of intent. These discussions are ongoing, but given that we're at very important stages with these tenants and we wish to avoid any speculation in the press or the markets regarding these potential transactions and respect tenant confidentiality, we're not in a position to provide additional color or details on our discussions beyond. Just 2 comments I'd make. First, if our progress continues on track, and we see that happening, a realistic timeframe for concluding lease documents is really the end of this year to the early part of 2014. It's a fairly customary timeline and timeframe to complete large complex leases in New York. The second comment or clarification I'd like to make is that these space requirements, for these tenants, are included in the total pipeline of 4.5 million square feet that I mentioned earlier. There's a little bit of confusion after last call on some follow up but they're captured in that overall pipeline.

With respect to the retail project at Brookfield Place, we are pleased and excited to announce the second luxury retailer for our collection of fashion tenants with the signing of Burberry. We're extremely excited to have Burberry on board, joining Michael Kors in the complex, and we're close to announcing 2 more luxury retailers in the near future.

So, with 8 restaurants, 4 luxury brands and an operator for our marketplace, we have a lot of great momentum as we look towards introducing these new amenities to office tenants, residence and tourists early next year, and through 2014. Based on our current leasing success and the status of our advanced discussions on the retail front, we expect the net operating income generated from the redeveloped retail center to reach close to $17 million at stabilization, which is higher than we initially projected and had indicated to you at times. So this will be a more meaningful contribution to the re-tenanting and reletting at Brookfield Place. The new office and retail leasing at Brookfield Place during the quarter brings our total leasing volume in the complex to approximately 400,000 square feet in just the last 9 months. So we do continue to make very steady progress on the rollover of space and availability we have here.

In terms of market conditions and leasing activity in our other operating markets, things were pretty status quo and consistent with last quarter. So, being mindful of time, there really wasn't anything to highlight in other property markets around the -- around our global platform.

On the developed -- on the disposition front, we reported our sale of RBC Plaza, Minneapolis. On the last call, we generated $53 million in net proceeds on that disposition and essentially exited the market as an operating platform. We are actively marketing our asset in Long Beach, Landmark Square, which is a 440,000-square foot Class A office Tower and we expect to execute on that disposition in the third quarter of this year or somewhere thereabouts.

We continue to be active in what had been very favorable debt markets, as we refinanced more than $915 million globally during the quarter, continuing to refinance at very attractive interest rates and lowering our overall cost of capital.

At Manhattan West, our major development project in New York, work continues on the construction of the platform and we're making meaningful progress at the track level, working very closely with the railroad entities. Things have run very smoothly to date. 80 precast concrete segments, which will make up the platform, have already been fabricated, and the marketplace and the tenants we're talking to will see the platform as we get through the year. The physical nature or the path -- 4 aspects of the platform will become more and more apparent.

So, with that I'll turn the call over to Bryan for a view of our financial results, and then we'll turn the call over for questions. Bryan?

Bryan Kenneth Davis

Thank you, Dennis, and good morning. As noted in our press release, we started 2013 with a solid first quarter. Funds from operation totaled $189 million compared to $154 million for the same period in 2012. On a per share basis, the current quarter funds from operation was $0.33 per diluted share compared with $0.27 per diluted share in the prior year. Included in FFO for the current quarter was an investment gain of $22 million or $0.04 per diluted share.

Variances in comparing our current quarter to the prior-year quarter include an increase in property net operating income before fees for the quarter of $35 million or 11% to $362 million from $327 million, largely as a result of $20 million from Brookfield Place Perth, which was completed in May, 2012; $7 million of same-store growth as a result of healthy rents on new leases and lease renewals benefiting from the positive mark-to-market over expiring rents that Dennis alluded to; 7% -- $7 million of net operating income from acquisitions that we've completed since the end of 2011, which include Metropolitan Park in Seattle, 799 9th Street in Washington D.C. and 99 Bishopsgate in London.

We also had an increase in interest in other income of $16 million, which includes the $22 million investment gain that I referred to, which was on the repurchase of debt at 225 Liberty Street at a discount, and this was offset by $8 million in interest income that had been received in the prior period on a residential note which was repaid in full in December, 2012.

We also had an increase in the interest expense of $12 million to $173 million in the current quarter. This was as a result of a $10 million incremental interest related to debt on Brookfield Place Perth, which was reclassified out of development. As mentioned before, we had a $15 million reduction in capitalized interest for the same reason. This was partially offset by the redemption of our Class AAA Series I and Series S capital securities, the repurchase of debt that I previously mentioned, and a lower average corporate debt balance. In addition, we've had lower average rates on refinancing activities. In fact, our average cost of debt in Canada is down 100 basis points on a period-over-period basis; in Australia, it's down 55 basis points; and in the U.S., it's down 40 basis points.

Notably, we just completed a refinancing in Australia in the first quarter, on 2 assets, for a 3-year period at an average interest rate of 4.9%. This compared favorably with the 8.5% on the debt that was coming due. We also benefited in lower interest expense through a weaker Canadian and Australian dollar.

In looking at our is also versus the previous quarter, FFO increased $28 million or $0.05 per share. This increase is attributed to the $22 million gain I had mentioned earlier in addition to interest savings of $16 million, which resulted from the $9 million break fee that was incurred in the prior quarter on the early refinancing of debt at Republic Plaza; the redemption of our Class AAA Series F capital securities which occurred early in January; the repurchase of debt on 225 Liberty; and the repayment of debt at 105 Adelaide; and the benefit of refinancing activity in the quarter at an average rate of 330 basis points less than the expiring interest rate.

Offsetting these benefits was a reduction in interest income as a result of the repayment of the residential note. Our net income for the quarter was $275 million. This was down $77 million from the $352 million that was reported in the prior year and down $67 million from the $342 million reported in the prior quarter. Included in net income is $155 million of fair value gains on our investment properties as compared to $298 million gains in the prior year and $241 million of gains recognized in Q4. The fair value gains recognized in the current period are attributed to higher property level cash flows and represent an average discount rate of 7.39% and an average terminal cap rate of 6.3% unchanged, on average, from the end of 2012.

In looking at Slide 14 of our supplemental package, the value of our commercial properties at March 31 2013 was $24.9 billion or $508 per square foot and represents a 5.5% cap rate on an annualized Q1 net operating income. Our revaluation gains were split fairly evenly across both our U.S. and Australian portfolio. In the U.S., $77 million of gains were recognized largely due to increased property level cash flows, with our U.S. portfolio now being valued at $438 per square foot. In Australia, the benefits of a reduced interest rate environment over the last 9 to 12 months was the main driver in increases in values as discount rates were reduced nearly 20 basis point since the prior quarter. As a result of these gains and our positive earnings, net of dividends, our equity value per share increased from $19.80 at December 31, to $20.08 at the end of the current quarter.

With that, I'll now turn the call back over to you, Dennis.

Dennis H. Friedrich

Thanks, Brian. And with that, operator, we'd be happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll hear first from Josh Attie with Citi.

Joshua Attie - Citigroup Inc, Research Division

Can you give us an update on the other 3 million square feet of leasing pipeline for World Financial Center? What's going on with some of those tenants? Has there been any movement? Just some color on that activity, provided a good update on 1.5 million?

Dennis H. Friedrich

It's a good question, Josh, I'm happy to provide a bit of color on that. So, as I've always broken it down, there are -- within that 3 million there is a sort of pocket or bucket of tenants that are in the 100,000 to 300,000 type range, which are still sizable tenants but not the order of magnitude of the larger. Our discussions with those tenants have advanced quite a bit, which is encouraging for us. They are also, given they're size tenants that need to start making decisions against expiries. And then the other activity in the 3 million net of activity or net pipeline is more of the same type of tenants we've been announcing quarter-over-quarter, which will be single floor to double floor. I'd have to say, we're very, very encouraged and optimistic right now, more than we were last quarter. And it's clear that Lower Manhattan, it's coming through in the statistics, is enjoying a very high level of activity, and as I said in numerous occasions, it is a very value-oriented market and we're presenting a strong value proposition at Brookfield Place and that's helping move these along.

Joshua Attie - Citigroup Inc, Research Division

As you talk to tenants are you feeling any pressure on economics? And do you have a different view of -- do you still feel comfortable that you can hold $35 net rents? It seems like your price is kind of below World Trade Center and above 180 Maiden Lane. As you talk to tenants are you feeling any pressure to change the economics, at all, to get leases done?

Dennis H. Friedrich

No, I'd say, on the transaction we've announced, we continue to be in that same range, if not, be a little bit north of that. So there's not rental pressure. I think, market and the tenants we're talking to recognize that, with the discounting at the Trade Center and some of the other Midtown options and Downtown options, it's priced appropriately. Sort of the tenants that arrive on the sort of -- the first bucket I talk to, which are a little bit more sizable, 100,000, 200,000 square feet, we had to be aggressive on concessions here and there because we're dealing with big relocations. But, overall, there's been no change. No major positive upswing but no downward pressure either, and that affect us.

Joshua Attie - Citigroup Inc, Research Division

And do you still feel comfortable that the total cost, total CapEx, for releasing all 3 million square feet, around $300 million. Do you still feel comfortable with that number?

Dennis H. Friedrich

Yes, yes. For the reletting cost, yes.

Operator

We'll take our next question from Rob Stevenson with Macquarie.

Robert Stevenson - Macquarie Research

Dennis, can you talk about what you guys are seeing in the downtown L.A. market fundamentals today? I mean, presumably, your occupancy there is benefited from having MPG out there as a weak market player in terms of how long they were going to be maintain control of their assets, ability to fund TIs, et cetera. But if I look at this deal, between your portfolio and MPGs, you have something like 1.2 million square feet of vacancy, 0% mark-to-market on your portfolio and some big leases expirations coming in both portfolios. So can you just talk about what has you excited about the market going forward?

Dennis H. Friedrich

Yes, sure. So you do have -- Rob, you have a regional economy, there in the L.A. County, that's actually been improving and I think it's exceeded expectations in terms of job growth, and it's coming in different pockets and it's location-specific, whether it's professional services growth, which increased jobs by 25,000 in the area, and downtown caters to that group, tech, entertainment. That hasn't all, yet, spilled over to downtown L.A. and what we're seeing is west side is again -- West L.A. and some of the markets outside downtown L.A. are tightening up, there's no doubt about it, particularly the quality space. We had, in migration into downtown, over 1 million square feet of tenants have moved in, in the past 5 years, from some of these markets. And as they get stronger, we view there being an ability for more demand there. So we're looking at a limited development pipeline. Our view is, we've operated here for a while, 6 years now, we understand this market very well, the dynamics within the market, we were able to increase our occupancy from 83% to 90% in our portfolio since [indiscernible] -- some of that did come from the fact that MPG was going through some issues, but it also came from us capturing new tenants from West L.A. and also from other buildings in the CBD, so I think our sponsorship is immediately going to help out. But we've been realistic about the downtown L.A. market, it's going to be a slick and slow steady improvement in the market in terms of absorption. But the other piece of that's gotten us excited, everywhere around the globe we're operating in, there has definitely been a trend towards growth in urban areas and urban centers. Downtown L.A. will, can experience much of that same thing over time. So we're looking at this from a long-term standpoint and we underwrote it, I think appropriately, but we like the direction the market's headed and think it will be improving quarter-over-quarter.

Robert Stevenson - Macquarie Research

Okay, and then one question on DC. If I take a look at the 14 expirations and sort of back out the TSA, you still have something around 800 million or so -- or 800,000 square feet of space rolling, and if I take a look at the mark-to-market on the D.C. portfolio on Page 20, it's something like 12%. If I adjust for the TSA lease, does that basically bring the mark-to-market on the rest of the D.C. portfolio down to somewhere in the mid-single-digits? Because I think you said it was a 19% mark-to-market on that one lease?

Dennis H. Friedrich

I did, Rob. Mitch, I don't know if you want to add anything. I'm not sure if I would know the exact sort of drop-down on it. Our mark-to-market, I would say, Rob -- and we could follow-up with you. To be a little more specific, we'd be happy to do that -- is our market rents in the D.C. -- our D.C. portfolio is very diverse. It represents assets in the district east end and the suburban markets, and it's probably the hardest one to tag a direct mark-to-market. We try to blend it, but we could give you a little more color. There's likely to be a bit of a drop off because we've just recognized a meaningful 19% lift. But if we can get back to you on that, we'd be happy to.

Operator

We'll hear next from Alex Avery with CIBC.

Alex Avery - CIBC World Markets Inc., Research Division

When you were talking about Lower Manhattan, you broke the 4.5 million square feet down into this 1.5 million related to 2 potential tenants and then another 3 million. And you also noted in your commentary that there's been a lot of activity in New York, especially in the last quarter. Not so much with respect to who's going to sign, but in terms of the timing, is there any the other dynamics that are, I guess, slowing you guys known in terms of getting some of these leases done? Is there some hesitancy to sign some of the 3 million square feet until you have better clarity on the other 1.5 million?

Dennis H. Friedrich

No. No, I don't think there is a -- we do have a fair amount of space. There is a little bit of crossover which I think is a good thing for us, where there's some requirements in that bucket that are forward space close to the other major tenants, but it's really coming down to some of our pipeline, overall pipeline, call it that 3 million for instance, does represent tenants of good size. They're not the mega tenants but they're tenants of good size that just take a little while to negotiate through longer than the singles and doubles, and singles and doubles, we've continued to tick off and we've gotten 400,000 square feet done in a pretty short period of time.

Alex Avery - CIBC World Markets Inc., Research Division

Okay, and then on the MPG, just wanted to clarify. All that discussion about the preferred shares that will be all part of that 47%, 53% joint venture, that's not an additional investment by BPO?

Dennis H. Friedrich

That's exactly right. Yes, we understand there was a little bit of confusion. Bryan had mentioned that. That is all within the funded venture.

Alex Avery - CIBC World Markets Inc., Research Division

Okay, so the enterprise value of the fund will be something in the $3-billion-plus range?

Dennis H. Friedrich

Yes.

Operator

We'll hear next from John Guinee with Stifel, Nicolaus.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

A question, just to clarify. You're contributing your 3 assets which, I guess, is about 3.7 million square feet. Is it for $1.1 billion in total or is it for $1.1 billion plus $437 million in debt?

Dennis H. Friedrich

No, the $1.1 billion is the gross value of our assets.

Bryan Kenneth Davis

And our ownership, John.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So, essentially, if you took $1.1 billion and you took 3.1 million square feet, which is roughly your ownership, you'd get a contribution of about $355 of square foot or no?

Dennis H. Friedrich

You're right, it's about around $360.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Okay, got you. Okay, perfect. And essentially, you, not Maguire, is taking the risk in terms of whether you're able to successfully tender for the preferred at $25 or whether that number moves up a little bit?

Dennis H. Friedrich

Right, that's correct.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Okay, excellent. One other question, actually. Brian, $22 million gain on debt repurchased at a discount. Can you kind of walk through that a little bit? Because I guess it most have been a very high loan-to-value or something that would drive a lender to sell the debt at a discount? Or what's going on?

Bryan Kenneth Davis

I can't really speak so much to the seller. But, ultimately, we were able to acquire -- these are the zero-coupon notes on what was formally known as Two World Financial Center, for a total value of $160 million. We had previously held that debt on our books at $183 million and, ultimately, benefited from being able to release that liability through the P&L as a gain. It's just a simple valuation difference.

Operator

We'll take our next question from Ross Nussbaum with UBS.

Ross T. Nussbaum - UBS Investment Bank, Research Division

A couple of questions on the MPG deal. Can you give us some colors on who the coinvestors are in the venture?

Dennis H. Friedrich

We can't. They've asked us not to identify them and provide color. The only thing that I can tell you is they're 3 institutional investors of very significant size. And, obviously, to commit this type of capital, but they're comfortable with at least identifying the number of them. So they're good-relationship partners for us.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Is this a long-term proposition for them? Are they looking to somehow monetize this in a shorter timeframe than what you would traditionally do?

Dennis H. Friedrich

We're aligned in terms of a long-term view on this.

Ross T. Nussbaum - UBS Investment Bank, Research Division

From a structural perspective, is it pure pari passu or is it structured with a pref and a promo?

Dennis H. Friedrich

All right, I'm really not in a position, today, to get into that level of detail. And I understand that you'd like to know, but I'm not sure how relevant it is, today, to the whole picture. I mean, I can't say that -- I mean, just on the face of it, which -- I mean, you can obviously figure out, we now have a venture that is a more sizable overall portfolio. We really converted our investment in downtown L.A., from 83% of 3 assets to 47% of a much larger pool. So our fee potential, just in normal course fees, has increased meaningfully.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Sure. Okay, last question on that front. With the loans that are maturing later this year at MPG, can you comment a little bit on what the game plan for that is? And if there is additional equity that's contemplated on being contributed, by the venture, to get those refinanced?

Dennis H. Friedrich

I can't get into any specifics, Russ. What i can, which you saw it in our release, is -- the venture or the fund, as it's capitalized today, has in our view sufficient capital to deal with building capital projects, some of which may have been neglected over time, reletting costs and also address upcoming refinancing. So, probably, there will be some of that pool allocated to that leverage, but we really can't get into more detail than that today.

Robert W. Salisbury - UBS Investment Bank, Research Division

Okay, but the quality that you are -- the cash coming out of your pocket, there isn't additional cash contemplated above and beyond, at this point?

Dennis H. Friedrich

Not at this point, no.

Operator

We'll take our next question from Michael Knott, Green Street Advisors.

Michael Knott - Green Street Advisors, Inc., Research Division

Just on MPG. I think it was sort of asked earlier and I think you alluded to in your comments, but if the preferred tender is not successful, those preferred holders will not get sort of a yielding preferred security in this new joint venture?

Dennis H. Friedrich

That's exactly right, Michael. It is structured in a way that they will not get the benefit of the equity in our pool.

Michael Knott - Green Street Advisors, Inc., Research Division

Okay. And then moving on to downtown New York, and I think someone may have asked this earlier, but I couldn't quite tell. Is it possible that you could sign a lease with someone from the 3 million square foot group before one of the year-end '13 big gorilla releases?

Bryan Kenneth Davis

Yes, yes. They're in advance of those stages. Some of that 3 million is in leases today.

Michael Knott - Green Street Advisors, Inc., Research Division

Bryan, can you maybe just walk through how you guys come up with a $427 a foot valuation for Brookfield Place? I think that's in some of your disclosure. Just given that the old One and Three World Financial Center have long-term leases with really below market rents, and then you obviously have the leasing challenges at Two and Four, just curious how you get there.

Bryan Kenneth Davis

I'm just trying to think how much detail I can give you at this specific asset level. But what you're referring to, we have disclosed as a slide, I think, in our corporate profile, which we went into a little bit more detail, specifically about the value that we attribute in our IFRS value per share to Brookfield Place New York. I will say that, that $427 per square foot is a blend across all 3 office towers, including the retail. Probably the only incremental information that I can say is, as you alluded to, Two and Four, of course aren't stabilized, yet One and Three are. So One and Three trend to the higher end of that range, closer to $500 per square foot and, correspondingly, Two and Four, take into account incremental capital that we need to put into the properties to release, and so are in the $300 range per square foot. Outside of that, just on a general basis, we value using tenured discounted cash flows.

Michael Knott - Green Street Advisors, Inc., Research Division

That's helpful. And then last question for me would be -- just update us on your thinking, currently, on the Manhattan West timeline and outlook. Are you still going to go residential first? Do you have any tenants that you're talking with on the office side there? Can you just update us on your thinking?

Dennis H. Friedrich

Yes, sure. There hasn't really been a change of timeline, consistent platform by the end of '14. On completion, put us in a position to deliver buildings into late 2016, early 2017. We do plan on moving full speed ahead on the residential. When the platform is at a certain stage, on the office, we will obviously look for pre-leasing level. They could, Michael, go side-by-side and physically we can do it and it will all end up on our pre-leasing on the office. We are trading some pretty detailed papers with a number of tenants. Tenants that are outside the Brookfield Place timeline that we're spending a lot of time with. So it was very important, I think, for us to lock-in our timeline when it comes to the discussions with these tenants, and we did that when we moved ahead with the platform. That was probably the one area of uncertainty on our site and that's been clarified and I think, with some of the other competitive sites, there's still a level of uncertainty in terms of the timeline.

Michael Knott - Green Street Advisors, Inc., Research Division

So it's not independent of the re-leasing at Brookfield Place? It's not that you won't consider building office out there while you still have the leasing to do downtown?

Dennis H. Friedrich

No, it's like -- I think we're viewing it as a different timeline. It's really going to depend on for us, what level we can get comfortable with on the pre-leasing of that. Same view we would take in Toronto and in other markets. So, today we expect to be far down the line on the Brookfield Place leasing before final decision making on the Tower.

Michael Knott - Green Street Advisors, Inc., Research Division

And will the residential be for sale or for rent?

Dennis H. Friedrich

It'll be for rent but we're going to position it that -- a proportion of the units will be luxury for-rent, which we can configure in a way to convert the condo down the line. So, Mike, it's been that corridor. It's been very, very hot and pricing continues to go up but it remains more of a rental market than a condo market. But we're planning our affairs accordingly. If we see the potential for the condo, as we're going through the development phase, we can, frankly, call an audible.

Operator

We'll take our next question from Mario Saric with Scotia Bank.

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Just coming back to that 3 million square feet, and specifically looking at that bucket of 100,000 to 300,000 square footers. In the past, I guess you've highlighted systematic obstacles, like the elections and whatnot, that have prevented tenants from signing on the dotted line. Is there anything in the environment today, along those lines, that's preventing the tenants from signing?

Dennis H. Friedrich

No. What we've seen, and I don't recall if I may have mentioned it in the last call, but since the fiscal cliff situation, as we went into the early part of this year, we're finding not just in the Lower Manhattan and in other places, there's a -- I wouldn't call it surging confidence, but there's a much higher comfort level to transact and take care of leasing. And I am a firm believer that, particularly in Manhattan right now, there is pent-up demand in the system, with the tenants having been on the sidelines for almost let's say 18 months, definitely most good part of 2012, expirations are moving closer and we're starting to see the decision-making accelerate.

Mario Saric - Scotiabank Global Banking and Markets, Research Division

And, generally, how far out are the leases that these tenants are currently involved with? Are they making decisions 1 year out or 1.5 years out?

Dennis H. Friedrich

It varies in the band, but they're in that 2014 to early 2016 timeframe.

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Okay. And then maybe Bryan, just one question for you. I noticed that you reclassified the earnings of Brookfield residential services into commercial property NOI, and out G&A, this quarter? I'm just wondering what the contribution was this quarter and what impact, if any, did the reclassification have on your disclosed fair value per share?

Bryan Kenneth Davis

So to answer your second question first, no impact at all. You may recall, the only items that we fair value within our IFRS are our investment properties. We don't tap any fee streams in our IFRS value per share. We'll leave that up to you and your NAV analysis. We had $6 million of G&A related specifically to the Condominium Management business and just slightly over $6 million of fees.

Operator

We'll take our next question from Neil Downey with RBC Capital Markets.

Neil Downey - RBC Capital Markets, LLC, Research Division

If I could just return to your opening comments, Dennis, just to be clear. On the MPG transaction, you talked about $440 million of debt, your share, to go into deal and then you mentioned $265 million of debt to be retired, I believe. Is that any reference to the debt within MPG to be retired?

Dennis H. Friedrich

No, it's in reference to debt on our assets, which are mezz pieces in a partnership loan in the existing fund that they're held in. So that would basically -- the numbers, Neil, would be -- it's $1.1 billion and you net down the $265 million which resides on our assets, and you have remaining property debt that'll be subject to at $440 million.

Neil Downey - RBC Capital Markets, LLC, Research Division

Okay, perfect. Because that $265 million and the $260 million were very close, so I was confused.

Operator

We'll take our next question from Vincent Chow, Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

Coming back to just the downtown market and some of the comments that we've heard from you, as well as others, about value seekers going downtown and then also some Midtown South type tenants moving down there. Just curious, how that relates to sort of the re-branding effort at Brookfield Place? Is that one of the reasons, cited at the time, was sort of make it less financial services oriented? I'm just wondering how successful that is, in terms of your discussion with the type of folks that are seeking downtown space, and whether or not the size of space that they're looking for really matches up with what you have there at the World Financial -- Brookfield Place, sorry.

Dennis H. Friedrich

Sure. So the re-branding exercise, and really importantly the redevelopment exercise as well -- they're sort of both hand in hand -- we did make decisions several years ago, that we felt that the World Financial Center name was too constraining. It automatically created a certain image and we wanted to move the image of the complex to more of a financial services headquarters complex which, in ways, wasn't as firmly in the public areas and turned that into a different type of experience. So we considered a number of different things and elected to move it towards Brookfield Place, which has been well-received in the marketplace. The redevelopment, which is right on the heels of that, is we focused the redevelopment on amenities and certain physical changes that we felt were going to appeal to a broader, maybe nonfinancial services sector or would we just have broad appeal, candidly. So the areas in retail, particularly the marketplace, the dining terrace, these are all cutting edge, very attractive dining experiences that can be outside of the tenant space. So they don't have to necessary put a cafeteria in their space, they can enjoy the benefits of our dining terrace. Then an additional amenity we put in place to broaden the appeal was we were able to capture the right to create significant rooftop terraces across the complex. Tenants in this market -- and most of the markets love rooftop terraces more and more, and the clean air and everything associated with -- is we have spectacular opportunities there. So we've been promoting that and that is definitely resonating with tenants that would be traditionally in other corridors. We are also, in terms of access to their demographics, Lower Manhattan, from a transportation standpoint, has greater access to the neighborhood, residential neighborhoods, that most of these tenant's employees are living, whether it's Jersey City, whether it's Brooklyn, whether it's Chelsea. It's a bit easier to get here. So I think it's all grabbing hold. And one of your other questions, if I got it, was how about the space itself? And what we have at Brookfield Place a lot of different-sized floor plates, including some larger floor plates, which I would say, probably 3 years ago, we were a bit more concerned about. These tenants in the different sectors actually gravitate towards larger floor plates where they can get folks together in a different type of environment, so they're interested and we're getting a lot of activity and to speak that we probably didn't anticipate being as active.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. I guess, there like sweet spot in terms of size that they're looking for? Because you mentioned sort of a bunch of 100 to 300K users, is that really what you're targeting or are you also seeing more folks in smaller buckets, smaller tenants?

Dennis H. Friedrich

We're seeing both. But in the, call it the 100 to 300 bucket, is the tenants in there that actually like the way a 70,000 square foot floor plate lays out or an 80,000, we have a few sizable plates, and they're able to do some interesting things from an architectural standpoint and get all of that people together. It's not the hierarchy that we've traditionally experience in financial services where you have your executive floors, your have your mid-market floors and you have your back office. These firms tend to melt things together and an 80,000 square foot floor plate can help in that, with an adjacent 40,000 square foot floor plate. So the flexibility in the variance in our floor plates has been really helpful.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. And then just on the retail side, I appreciate the color on the NOI expectations there, $17 million. Can you just remind us? What is the time frame for stabilization that you're laying out for that? And from a capital spending perspective, can you just remind us what is left?

Dennis H. Friedrich

So, from a stabilization, Vincent, we'd be hitting and stabilizing the 2015 time frame on that. Some of it will be flowing in '14 but '15 is the number I was tagging it to. In terms of the run rate on the capital, Bryan, I'm not sure where -- kind of what we're willing to the project.

Bryan Kenneth Davis

Yes, and I'd say, in aggregate, it's about $200 million. I'd say we're probably halfway through.

Dennis H. Friedrich

Yes, we're probably $50 million to $100 million. Somewhere around there, off the top of my head.

Vincent Chao - Deutsche Bank AG, Research Division

Okay, so going to start getting some rent in 2014, but 2015 stabilization. Okay. And then just last question, I don't know if you can share it or not, but just on, Fig at 7th. Can you just tell us what the NAV or value that you guys had -- as you run your own analysis there, NAV analysis -- what you had for Fig at 7th?

Dennis H. Friedrich

Put forward, because I think the preference would be not to break down the overall gross valuation. It's not a big piece or big component to it. So it's not going to change, John asked a good question earlier about sort of what the's average per foot, I mean per portfolio, so I don't think it doesn't really vary that very much.

Operator

We'll take our next question from Jenny Ma, Canaccord Genuity.

Jenny Ma - Canaccord Genuity, Research Division

Dennis, can you talk about the change in the pipeline for Brookfield Place New York? It was above 5 for the last couple of conference calls and now it's at 4.5. So, a net decline. Can you talk about the ins and the outs and where some of those potential tenants may have gone to or why they...

Dennis H. Friedrich

Yes. We set approximately 5 million before. We've gotten some leases done, which have netted that down a little bit. And we did have 1 tenant, not of major size, but 1 tenant did drop out of the mix. But, basically, it's the progress we've been making in leasing and me just giving a more, very accurate number. We've been in that sort of high 4s, close to 5 for a period of time and that's starting to move down because we're getting leasing done.

Jenny Ma - Canaccord Genuity, Research Division

Okay, and this is my new question for Bryan. Last quarter, you were talking about lease termination income of about $25 million this year. Can you reiterate that or give a better sense on timing?

Bryan Kenneth Davis

So, we specifically said, lease termination and debt repurchase gain of $25 million. We just got the $22 million and the debt repurchase gain, which then we guided to an incremental $3 million in termination gains over the balance of the year.

Operator

We'll hear next from Derrick Lau TD Securities.

Derrick Lau - TD Securities Equity Research

I just wanted to ask on the London NOI, why it fell from $0.8 million from $1.2 million?

Bryan Kenneth Davis

I think it was just timing due to recoveries at the property there. There wasn't anything specific or related to losing lease occupancy. It's all timing.

Derrick Lau - TD Securities Equity Research

Yes, okay, timing. And then given the commencement at Manhattan West and Bay Adelaide, can we expect, either last quarter or going forward, higher interest capitalization or was there higher interest capitalization in this quarter?

Bryan Kenneth Davis

So, to your point, yes. As we continue to invest capital, and to both of those projects, we will increase our interest capitalization correspondingly. So to answer your question simply, yes, there will be but I don’t think it's material. As we had indicated, a significant amount of our capital has been invested. But, yes, it will increase over the course of this year.

Derrick Lau - TD Securities Equity Research

But nothing so far? It hasn't been material so far?

Bryan Kenneth Davis

Yes.

Derrick Lau - TD Securities Equity Research

Okay. And lastly, just on the MPG acquisition. I don't know if whether you can clarify, but I just wanted to confirm whether it will, in fact, add to balance sheet leverage.

Bryan Kenneth Davis

Not going to. Not in any material way, you're looking at percentage of the venture within our portfolio. So we're not at liberty to talk about where it is, but it's not going to have a material impact on our portfolio leverage.

Operator

We'll hear next from Jonathan Feldman with Nomura Securities.

Jonathan Feldman - Nomura Securities Co. Ltd., Research Division

Just another question on the MPG transaction, and that was -- if you look at the 8-K that was filed, the entity acquiring the assets contemplates or talks about another preferred to be issued. Can you just speak to who that's being issued to?

Dennis H. Friedrich

Mark, do you want to. Mark Brown, do you want to -- is there anything?

G. Mark Brown

That's just the new preferred that gets issued in exchange for the existing one under the same terms.

Jonathan Feldman - Nomura Securities Co. Ltd., Research Division

No, there was another preferred. I believe a Series B with a 12.5% coupon filed in the public documents.

G. Mark Brown

Yes, we can't comment any more other than what's in the actual document on that one.

Jonathan Feldman - Nomura Securities Co. Ltd., Research Division

I mean, can you say is that going to your institutional joint venture partners or who that's being issued to? I mean, it is out there in the document. So doesn't seem an unreasonable question to ask who's it's being issued to.

Dennis H. Friedrich

At this point, we don't want to provide any more detail around those facts.

Operator

We'll take a follow-up question from Josh Attie from Citi.

Michael Bilerman - Citigroup Inc, Research Division

Yes, Bryan, it's Michael Bilerman. The $1.1 billion valuation, how does that compare to your interest accounting?

Bryan Kenneth Davis

Consistent. Slightly higher but fairly consistent.

Dennis H. Friedrich

Close range.

Bryan Kenneth Davis

Yes, close range.

Michael Bilerman - Citigroup Inc, Research Division

And then the strategically located development site, what is that? Because there's no development -- it's not on the development site list in your supplemental.

Dennis H. Friedrich

Well, it wouldn't be on the -- strategically, the place development site is located within the MPG portfolio. That's, Michael, it's a site that is behind 777 Tower and adjacent to our Fig at 7th, which provides the ability to build about 775,000 square feet, so it wouldn't show up in ours.

Michael Bilerman - Citigroup Inc, Research Division

And then just a clarification. The $265 million, you're going to pay that off pre-transaction, so you'll actually inject more cash or no? Because it's $410 million of the equity in your assets, the $440 million of your share of debt, and then $265 million of the mezz that you're going to pay off?

Dennis H. Friedrich

Right, we're not injecting more cash though. It comes in. Cash comes into the venture and some of it is to utilized to pay down the $265 million in debt.

Joshua Attie - Citigroup Inc, Research Division

Has some of the committed equity that they've provided, the $600 million and some of your cash that you've provided, will use to not only to pay down your debt, it will be used to pay down potential proceeds. Because you do have $1 billion, north of $1 billion maturing, I guess, between the 2 companies this year, of debt, and then I guess running capital.

Dennis H. Friedrich

Right.

Operator

Our last question will come from Mario Saric with Scotia Bank.

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Just one really quick follow-up on the 3 million square foot tenant discussion pipeline at World Financial Center or Brookfield Place. Is that a number that potentially includes existing BPO tenants in New York? And if it does, is there a big difference between the 3 million square foot and actual kind of external tenants?

Dennis H. Friedrich

This is like a very small, small percentage of that number that would be within our portfolio. So it's not a situation of us moving people around. It's a very high percentage, it's outside tenants.

All right, operator, I think that concludes our call.

Operator

Certainly. And ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.

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