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Executives

Melissa Coley - Vice President, Investor Relations and Communications

Ric Clark - Chief Executive Officer

Bryan Davis - Chief Financial Officer

Dennis Friedrich - President and Chief Executive Officer, U.S. Commercial Operations

Tom Farley - President and Chief Executive Officer, Canadian Commercial Operations

Alan Norris - President and Chief Executive Officer, Residential Operations

Steve Douglas - President

Analysts

Michael Bilerman -Citigroup

Josh Attie - Citigroup

Sloan Bohlen - Goldman Sachs

Mario Saric - Scotia Capital

Karine Macindoe - BMO Capital Markets

George Auerbach - ISI Group

Jimmy Shan - National Bank Financial

John Stewart - Green Street Advisors

John Guinee - Stifel Nicolaus

Rossa O'Reilly - CIBC

Sam Damiani - TD Newcrest

Shant Poladian - Canaccord Adams

Brookfield Properties Corporation (BPO) Q4 2009 Earnings Call February 5, 2010 11:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder this program is being recorded.

I would now like to introduce your host for today's program, Ms. Melissa Coley. Please go ahead, ma'am.

Melissa Coley

Good morning and welcome to Brookfield Properties fourth quarter 2009 and year-end conference call.

Before we begin our presentation, let me caution you our comments and discussion will include forward-looking statements and information and there are risks that actual results, performance or achievement 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 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 now like to turn the call over to Ric Clark, Chief Executive Officer. Ric?

Ric Clark

Thank you, Melissa. Welcome everyone to our year-end wrap up call. In addition to Melissa, here with me today are Bryan Davis, our CFO, also our three operating heads, Dennis Friedrich, Tom Farley and Alan Norris, all of which you will hear from in a few minutes. Also here is our President Steve Douglas who has actively leading many of our strategic initiatives as most of those aren't yet at a point where we can get into the details. Steve will not make formal remarks but will be available to help field questions at the end of the call.

So I guess just to get going here and at the risk of mastering the obvious, 2009 was an interesting and challenging year for sure. It began with rapidly rising unemployment rates, business failures, frozen debt markets, consumer and business confidence not just way down but gone, so therefore no spending which meant no lease activity. Having cracked our crystal ball in the early 90s, we didn't really have a committed view on when all of this would change, so we made our priorities for 2009 first to preserve and enhance our liquidity position in light of all of this uncertainty.

Second, although you would have heard this from us a million times, our strategy which is solidly grounded in the respect for the cyclical nature of real estate and financial markets, we are constantly working to de-risk the portfolio. So at the beginning of 2009, our second area of focus was to continue to position our properties to limit exposure to what looked like they would be continuing soft market conditions by being pro-active and aggressive in extending leases and working to land those new tenants whenever we look to upgrade higher quality properties like ours in these economic times.

Our third priority for last year, we wanted to maximize the performance of our residential business which had a very, very slow start at the beginning of last year. And finally, we felt that it was important to not only continue to deliver a consistent dividend to shareholders, but to make sure that they were as confident as we were that this was a prudent thing for us to do.

With all of this kind of as background, I am delighted to say as you would have noticed from our financial results posted at earlier this morning that we are able to make very solid progress in meeting these objectives. And here are some of what we accomplished in 2009.

First, through the successful renewal and/or refinancing of 100% of our $1 billion of property and corporate level debt rolling in 2009, also through one common share offering in two preferred share offerings and by selling two of our mature assets in the fourth quarter, our liquidity profile improved from about 700 million at the beginning of the year to over 2 billion at the end. As you will see on page 19 of our supplemental, during the year we completed 4.6 million square feet of leasing within our managed portfolio and putting to bed 2 million square feet of our 2009 availabilities and expiries and 2.4 million square feet of early renewal.

In the process, we lowered our three-year lease expiry profile by 330 basis points and ending the year with an industry low of 3.8% of our 2010 leases expiring. We accomplished this in spite of losing five tenants to the economy comprising 700,000 square feet of space given the quality of our properties the substantial improvements that our tenants typically make in their premises and working infrastructures together with our pro-active leasing efforts as of the end of year I am happy to say that 90% of this space was relet at 105% of the pre-insolvency in place rents.

We did lose 130 basis points of occupancy during the year which was disappointing to us but given the economic environment in which we're operating relative to the industry, I suppose we didn't fair too badly in this regard. Our mostly Western Canadian focused residential land development business exceeded our beginning of the year expectations as demand picked up and we were able to sell our Fernbank lands and a commercial asset in our Cranston development which lacked enough certainty to work into last year's guidance.

And finally, while talking about accomplishments, our dividend was one of the few and the sector that remained consistent throughout the year, so all in all we're quite proud of our 2009 accomplishments. As the year ended, we rolled into 2010, just a general comment. We noticed a very meaningful change in tenant behavior as well as improvements in the debt market.

As I mentioned on our last call, the financial service firms within our portfolio have all begun to hire again and certainly are getting more active. Maybe just to underscore the point, just leaving the target lease renewal in the first quarter aside, our average leasing volume for the first three quarters of 2009 was about 750,000 square feet. Q4 showed almost double that production. So not all of our markets are the same. Some are better than others. But no question there was a very noticeable difference between the beginning of the year and the end. We'll give you more color on this as well as our current view on market conditions, outlook and data points in just a couple of minutes.

Before we get into that, Bryan, why don't you take us through our Q4 and year-end financial reports.

Bryan Davis

Sure. Thank you, Ric and good morning everyone. This morning we reported funds from operations totaling 222 million in the fourth quarter compared with funds from operations of 191 million for the same period in 2008. On a per share basis, the current quarter funds from operations was $0.43 per diluted share, compared with $0.49 per diluted share at the same period in 2008.

Our net income for the quarter totaled $181 million or $0.35 per share. This compares to $458 million or $1.16 per share for the same period in 2008. In the current quarter we did benefit from a net gain of $50 million on the monetization of a 90% interest in 1625, Eye Street in Washington and the outright sale of one Bethesda Center also in Washington.

In 2008, you'll remember we recognized a gain of $479 million on the conversion of our U.S. operations that resided outside the U.S. fund into a REIT structure. As well we had a loss of $140 million on the impairment taken on our assets in Minneapolis.

Excluding these gains and one-time items, net income increased by 10% on a year-over-year basis. In reviewing, our core commercial operations in more detail, net operating income from our continuing operations was 338 million for the quarter, this compared favorably to $317 million for the same period in the prior year. The increase is a result of the reclassification of Bankers Court in Calgary from development properties to commercial properties.

We had an additional $2 million of recurring and nonrecurring fee income this quarter relative to the same quarter last year. We had very strong same-store growth of $18 million or 5.9% and that same-store growth really benefited from a stronger Canadian dollar which accounted for approximately $8 million of that 18.

On in the fourth quarter, we recognized Canadian dollar, $1.06 spot the dollar U.S, whereas in the same period last year it was in the $1.20s.

We also have the benefit of increased rental rates on new and modified lease, which came into effect in the current quarter. We did see a reduction in operating expenses in the quarter and throughout 2009 for that matter. We had an increase in parking income and this was offset in part by higher overall vacancies in our same-store portfolio.

In analyzing our same-store in a little bit more detail, if you include only our managed properties and you exclude the impact of foreign exchange, we’re still at very strong same-store growth in the quarter of 4.1%, compared with the same period in the prior year and 2.2% for all of 2009 compared to all of 2008.

All of this is highlighted on page 12 of our supplemental report. We successfully maintained our occupancy this quarter, as Ric mentioned at 95%, for our managed properties. We continue to lease at rent higher than our expiring rents and as I mentioned earlier and we reduced our lease rollover exposure through pre-leasing efforts which allow for continued stability in our earnings.

Our residential development operations came through in the fourth quarter contributing $74 million in net operating income. Year-to-date results of FFO of 114 million was down from the prior year but well ahead of our expectations and guidance.

As we highlight on page 33 of our supplemental report, we earned $59 million on the sale of 789 lots and 404 acres of land in the current quarter, which is a 93% increase from a volume perspective and a 51% increase in earnings compared with the same period in the prior year.

Our homebuilding operations closed 326 homes during the quarter, which was a 23% improvement over the fourth quarter of 2008 and contributed $15 million to earnings. This operation benefited from affordability and low mortgage rates, home prices have also started to creep upwards since the start of the year and with lower input costs, we are starting to see our new starts return to historical margins.

This is all highlighted on page 34 of our supplemental. We continue to benefit from the falling interest rate environment with the 30-day LIBOR rate averaging about 40 basis points during the quarter, as compared to 2.2% during the same period in the prior year, combined with a reduction in our overall debt levels primarily as a result of paying down our corporate line and very successful refinancing efforts. We have seen a significant decline in our interest expense.

Of course some of the benefit here is offset in our minority interest line item, where our fund partners share in the benefit of the low LIBOR rate that we recognize. On the balance sheet, I just wanted to highlight the movement of 77 K Street and Two Reston Crescent, two commercial properties in the quarter from development properties.

77 K Street is 52% leased and Two Reston is 96% leased. In addition, as it relates to our liquidity, we paid down our corporate bank lines at the end of the third quarter as well as our revolving bank lines that fund our residential operations in the fourth quarter. The remaining liquidity as Ric mentioned, sits as either cash or deposits receivable on our balance sheet.

Before I pass the floor back over to Ric, I just did want to summarize our performance relative to the $0.32 per share consensus for the quarter. As best I can tell, the majority of the 11% increase per share related to the strength of our residential business which exceeded our guidance and likely the guidance was baked into consensus by about $0.08 a share. I think we had about $0.02 a share from the strength of our commercial operations which benefited this quarter from the strong same-store growth, which I just talked about and we also had about a penny a share benefit from a lower interest expense, I think due to lower overall average debt level.

On that I will conclude my comments on the financial results and I will turn the call back over to Ric.

Ric Clark

Thank you, Bryan. In a bit we're going to get to our guidance for 2010, but before we do that, probably we could just give you a little review of what our thoughts are for 2010, so let's just maybe go around the horn and have our operating heads talk a little bit about, what they're seeing within their divisions and residential division, which had a great fourth quarter, why don't we start with Alan Norris, Alan?

Alan Norris

Thanks, Ric. Good morning, everyone. As Bryan touched on we finished the year with a very strong fourth quarter and in addition to good lot and housing sales, we did complete the two asset sales which we refer to in on our last call in October.

The strong underlying lot housing activity in Q4 is the result of tremendous affordability at this time. Mortgage rates in Canada remain in the low 4% range. Resales have also tightened considerably, especially product at $400,000 and below and this recent activity has seen our house prices in Alberta rise probably close to 7% in the last six months through price increases.

Another positive is the renewed investment in oil sands in Northern Alberta, approximately $8 billion of investment has been announced, reannounced again recently which will help employment and housing demand.

In the U.S, we are seeing some activity on inventory that remains builder or speculate our hands. This is good as obviously this has to be absorbed first before new lot development can ever be justified.

As Bryan stated, we have started 2010 with good sales activity on both lots and houses, also starting to see some interest in multi-family sites again which we haven't seen for over 18 months. Our biggest issue will be addressing ongoing affordability and what we know will be a rising interest rate environment over the next several years. However, we do believe even in a rising interest rate environment our recovering oil and gas market should help somewhat offset this. So we remain cautiously optimistic for 2010. Thank you.

Ric Clark

Thanks, Alan. Alan is conservative by nature which is a good thing, never want to throw a wet blanket on that, but I will throw out sort of one data point here and that is, our residential division in Alberta during January alone of 2010 which has seen almost three times the amount, the volume than all of the first quarter of 2009, so we are rolling into 2010 with some very positive momentum. Sticking with Canada and moving from residential to commercial, Tom Farley, why don't we turn it over to you and talk about what you're seeing.

Tom Farley

Great. Thanks, Ric and good morning, everyone. During the fourth quarter of 2009 we saw positive absorption in Ottawa, Edmonton and Vancouver while in Calgary and Toronto new buildings were delivered to these markets causing the overall inventory and vacancy to rise. At the end of the fourth quarter, the occupancy rate for Brookfield Canadian portfolio stood at 98.6%, which is a 40 basis points improvement over the third quarter.

So let's look at a few of our specific markets starting with Calgary. In Calgary, low natural gas prices have continued to contribute to a slowdown in this sector of the energy industry, which has negative consequences on the Calgary economy and the office market in particular. The market vacancy at the end of the quarter totaled 11.6%, which is up 90% during the quarter and this increase was caused primarily by the addition of sublet space.

In terms of new inventory, we'll see a further 4.3 million square feet brought to the market in the next three years, which will put pressure on occupancy and fundamentals unless we see improvements in commodity prices. Now, during our tenure as the largest landlord in the Calgary market, we have experienced in dealing with these cycles and we were able to anticipate and prepare for a changing environment.

Specifically, in 2008 we leased 2.2 million square feet in this market and today we have a 99.8% occupancy rate and an average lease term of nine years. Our focus in Calgary in 2010 will be on current and future lease renewals with a view to maintaining above average market occupancy rate.

Turning to Toronto, as you will recall both Bay Adelaide Centre and catalog Simcoe Street project were completed in the third quarter of 2009, which added 2.4 million square feet to the downtown office inventory. So as a result, a vacancy rate today in Toronto has moved to 6.6%.

But we've seen a substantial increase in tenant tours and general activity in the last few months and in fact during the fourth quarter total market leasing activity was 1.4 million square feet, which has almost doubled the activity from one year ago. And further, we're at the conditional stage on six transactions for some 240,000 square feet and these transactions include approximately 80,000 square feet of new tenants for the Adelaide Centre and 160,000 square feet of early renewals in our other properties.

As well, we're at discussion stage on 15 other transactions totaling almost 1 million square feet and those transactions consist of 160,000 square feet of new or expansion space, while the balance our lease renewals. Our portfolio in Toronto ended the quarter with an occupancy rate of 97.8%, which is an improvement of 80 basis points over the last quarter.

Now, in terms of outlook for the Canadian markets, we're still below delivering on levels and resulting in the continuation of landlord market in each of the cities that we operate with the exception of Calgary. And given our low rollover rate, long average lease term and the increase in Toronto leasing activity, we expect to continue to maintain better than market occupancy levels. Thanks, Ric.

Ric Clark

Thank you, Tom. In the U.S. our U.S. operations also had a solid quarter as well, so moving onto this into Dennis Friedrich for his insights. Dennis.

Dennis Friedrich

Thanks, Ric. As we take a forward view of market fundamentals for our U.S. core markets in 2010. There is definitely reason for optimism and based on improving lease transaction in the fourth quarter, which Ric just touched on and a healthy level of activity in the first month of this year. We're expecting to see improvement in conditions in a number of our markets as we progress through 2010. Not all but certainly a number of them.

Improving occupancy in each market is very challenging today and it will likely remain that way through most of the year, while the Class A quality assets continue to outperform the marketplace in general. We did see market vacancy increase in six of our 11 operating markets during the fourth quarter of 2009, so clearly competition for tenants remains stiff. However, there are signs of turn around or at least stabilization in the past several months and I will throw some certain anecdotal things out here and just in the general discussion on U.S. markets.

Although, I mentioned we did experience increases in the overall markets not our portfolio necessarily in over 50% of our operating cities, that really compares to several quarters last year where we experienced across the board increases in virtually every market.

In addition, the increases and availability last quarter were modest in many markets and engaging activity in the first quarter of this year. I think is very possible that certain markets will begin to reverse the upward trend in vacancy. Business confidence levels within our both our existing tenant base and our target tenant base has definitely improved. This is evidenced by the volume of leasing in our portfolio alone for the fourth quarter where we completed over a million square feet of leasing throughout the U.S. portfolio and 65% of our successful close transactions were for new leasing as opposed to renewals, which was the trend earlier in the year.

A million square feet or so tends to be our normalized level of quarterly leasing on an historical basis. My last general observation on the markets would be that lease concessions seem to have peaked in most markets. So large credit tenants, which makeup most of our portfolio are not as cash constrained as they were 12 months ago and larger landlords ourselves included are pushing back to manage down substantial tenant improvement costs where we can.

Just moving onto specific markets starting in Midtown, Manhattan leasing volume in the market and within our portfolio has been up noticeably since the third quarter of 2009. For the first time, since the middle of 2007 we did not experience an increase in market vacancy in Midtown. That's certainly a good sign that things are turning around. We believe the Class A segment of the market, which is really our platform bottomed out in the third quarter of last year. And we have been able to push rents back up a little in our past few transactions, including the 38,000 square foot lease we just recently completed with high began at 245 Park.

Achievable rents for our portfolio now range in the 60 to $80 gross range, up from high 50s to 60s gross just six to eight months ago. And I would say we expect the Midtown market including rent levels to improve at a steady but modest pace through 2010 as we're seeing instances of tenant expansion and also competition for some of our available space.

In lower Manhattan market vacancy remains stable and actually decreased from 9.9% to 9.6% in the fourth quarter. Downtown despite its skeptics has really remained one of the few major markets in the U.S. with an overall vacancy level under 10%. Downtown tracked very differently from Midtown over the past 12 months, where Midtown experienced a sharp increase in availability, brought on by the impact of major changes in a few of the major tenants in the market including Lehman and Bear Stearns downtown they is not suffered the same spike in sublease availability. And the outlook and direction for the downtown market will definitely be driven by the occupancy status of a number of major tenants including AIG, Goldman and Bank of America/Merrill.

We do know for certain that Goldman will be returning space to the market over the next 12 to 24 months as they complete their consolidation into the new headquarters adjacent to our complex here at the world financial center and they have begun to relet or sublet some of that space.

However, I think we'll likely see vacancy increase over 10%to over to 10% due to the Goldman consolidation and that ill probably bring a little bit of downward pressure on rents.

We are hopeful that this improvement in the Midtown market and which could actually pick up as the year goes on could help downtown as a lower cost option and stabilize any downward pressure here.

The occupancy outlook for AIG and Merrill is far more uncertain and we do not have a new update on bank of America's long-term plans as it relates to the financial center but as we mentioned previously in our discussions with them, they consistently said that they will maintain a presence at the world financial center in downtown over the size of that presence is still being decided.

We have indicated before that some groups have moved to Midtown. Some functions, there is indications that within the next month or two certain groups will be moving downtown into the financial center. So we'll keep you posted on any long-term developments there.

Just moving on remaining on the downtown market for a moment, we are very, very optimistic about the progress being made on the construction and infrastructure upgrades at the trade center site.

We have been performing some work on the Port authority of New York, New Jersey's behalf and had the opportunity to actually tour our board through the site, just a few days ago.

The progress is very impressive is close to 1500 construction workers active right now on the site and the Port Authority is investing close to $150 million per month and other critical projects are getting additional federal stimulus dollars.

So this is really in stark contrast to many cities which are struggling with crumbling infrastructure and is going to be transformational for lower Manhattan. A few critical projects for us including underground connections are already halfway to three quarters complete and we expect a lot of major projects to come online in the 2012 to 2014 timeframe which obviously given our expires at the world financial center is a good timeframe for us.

Just Moving onto Washington, DC, although the overall market vacancy continues to creep up, transaction volume continues to improve driven by government requirements. The development pipeline in the district is being absorbed and now stands at 4.5 million square feet, half of the level of a year ago.

We had robust fourth quarter activity in terms of leasing completing 425,000 square feet which was over 75% of our leasing for the DC region for the year, so a strong finish. We secured significant tendency for our new developments including a lease with the IRS for 167,000 square feet at 77 K and we've also leased up our two Reston project in Virginia up to 96%.

This activity year-to-date that we're experiencing so far leased the first 30 days or so in the year really seems to show continued momentum and we're projecting rents to start to come up and increase a bit at the later half of 2010.

Just wrapping up our remaining markets in Houston there has been an up-tick in market vacancy during the last quarter. Class A vacancy which has been very, very tight increased from 6.6% to 8.2% due to some contraction that is expire and some increase in sublease space but we're seeing limited contraction in our energy sector tenant base in our portfolio and a number of our relationships and large tenants are optimistic about oil and natural gas prices in 2010 and have become more active as compared to the later half of last year.

With regards to Boston and downtown Los Angeles both markets remain very challenged in terms of tenant demand. There is activity but it is primarily driven by pending expirations as opposed to growth or new entrance to the market.

Both markets have shown some signs of stabilization in terms of lease economics and vacancy but until we see an increase in transaction volume and some pockets of growth will likely be bumping along the bottom for a little while there. Ric, that wraps up my reports on U.S. markets.

Ric Clark

Thanks, Dennis. Based on Alan, Tom and Dennis' reports, obviously what we're currently experiencing is way different from a year ago and we believe that we are in solid shape as we focus 2010 in the things that we want to accomplish.

Not withstanding this, there are conflicting signs about where the economy is heading. Walking in here we have handed a couple of jobs reports which noted that the Canadian jobless rate fell a bit to 8.3% and U.S. overall jobless rate actually fell below 10% to 9.7%.

Haven't had time to dig into these but positive signs about the direction of the economy and certainly consistent from what we're hearing from our many of our tenants particularly those in the financial services business.

On the debt side lots of incoming calls from our banking relationships indicate that the debt markets are opening up particularly given what they're talking about wanting to do. Hearing chatter about CMBS market, coming back so those are all on the positive side.

On the negative side domestically state and local governments and other public entities such as transit authorities seems to have made little progress and balancing the budgets. Taxes are certainly going to rise and other charges. Banks are still holding paper back you had up by insufficient collateral and internationally I think there are similar issues throughout most developed nations and several European countries are choking on unmanageable debt and bad investment choices.

So it is a little unclear to us where we are and where we're heading. The signs at the moment are positive as Allan said we're very cautiously optimistic and think we're in good shape for the upcoming year.

So with all of that as sort of background as to what's going on and we're observing within our portfolio and having greatly enhanced our balance sheet in 2009. Our focus in 2010 will be a couple of things. First, obviously as always to continue to work diligently to keep occupancy up and lower rollover exposure and to lock into these mark-to-market opportunities on the rental side that still exist within our portfolio.

Also, you heard Dennis' comments about the work being done in lower Manhattan. We're very excited about this. We think it will have a very meaningful long-term impact on the value of our assets in the next few years as we're facing some lease rollovers but a priority for us in 2010 will be to continue to advance the repositioning and long-term re-letting of the world financial center.

We feel that there is no better investment that we can make than this one internally and we're already making good progress in this regard. We'll more details about what we're planning here for you on future calls but no more specific details at this moment.

Our next major focus for the year is the dense work on the U.S. office fund and the debt maturity which occurs in late 2011. We mention this had on prior calls and as I said, the NOI in our portion of the venture has increased very meaningfully in the three years since we have had it.

And this will greatly help facilitate this objective. We have no specific details on our progress to date other than that we're working very hard on it and we expect to talk at length in more detail on the future and finally for 2010 goals for us, given our substantial liquidity position, a major priority for us will be to work to put some of this money to work on an accretive basis for shareholders.

Hard to say when investment opportunities come along but in the meantime we will look to secure low risk higher yield and short-term investment opportunities that can be monetized when long-term opportunities present themselves to us.

So one I think final thing we'll go through here before we take questions, which is digging a little bit into our guidance and I would say based on our core strategy of owning high quality office properties in the central business districts of North America's most dynamic markets, those that have demonstrated long-term resilience and strength and leasing to high credit quality tenants on a long-term basis gives us the confidence to provide 2010 earnings guidance of between $1.25 and $1.33 per share. This guidance does not anticipate contributions in 2010 from any of our strategic initiatives that we're working on and if we're successful in any of those that could alter this guidance. So Bryan, if you wouldn't mind taking a minute summarizing some of the assumptions behind this guidance.

Bryan Davis

Sure. Thank you, Ric. As Ric mentioned, the guidance range is $1.25 to 1.33, with the mid-point $1.28 which translates to about $675 million of FFO. More specifically and some of which we highlighted in our press release, our mid-point guidance makes the following assumptions. First, portfolio wide occupancy rates that are consistent with 2009, commercial property net operating income growth on a same property basis of approximately 1%. We expect to have higher rents, but this will be offset by lower average occupancy through 2010 compared with the prior year.

Similar margins on residential land sales and increased margins on home sales as compared to 2009. We expect to see volumes of approximately 2,000 lot sales and 950 home closings. The combination of those two translates to residential net operating income of approximately $125 million. And I will remind everyone that that is best as we can predict will be earned on the same quarterly distribution as we have seen in prior years. You have guidance of about 10% Q1, 10% Q2, 25% Q3 and the balance in Q4.

We have assumed as Ric mentioned that there is no strategic initiatives property acquisitions or dispositions in our guidance. And currently, we've got low single-digit investment returns on our excess liquidity. We have made an assumption that the LIBOR rate will increase over the balance of the year, so we have set a rate at a dollar -- sorry, 1.5% which is a fair but higher than where we currently sit today, but we all know the volatility associated with LIBOR rates.

Just to give you guys context, a 25 basis points increase or decrease results in about a $2 million change in FFO, so less than half a penny. We have also assumed a relatively strong Canadian dollar, $1.05 Canadian will buy you $1 U.S. Again, we have seen a fair bit of volatility with these relative currencies and so for your benefit about a penny movement results in a 2 million change in our FFO, so again less than half a penny.

Just to reconcile the mid-point of our guidance of 675 million to what we reported in 2009 of $648 million, I would suggest the following puts and takes. We have residential being up about $10 million. As I mention before, we have same-store up about $13 million representing the 1%. We'll have a full-year return on our liquidity which will provide probably in excess of $15 million over what we saw in 2009. And we have a number of other items including G&A savings, the benefit of a stronger Canadian dollar, slightly offset by higher interest rates based on our assumption which is net to a negative 10 million. So you add all of those up, that's the $27 million difference between 2009 and where we expect to be in 2010, all else being equal.

I will say that the guidance we have provided has been calculated under Canadian GAAP principles, appreciating that we are transitioning to IFRS in the first quarter of 2010. I did want to highlight the one significant adjustment. We did refer to that adjustment at Q3 and in our transition press release and it's the exclusion of intangible amortization from net operating income under IFRS.

The result of this is $100 million reduction in NOI and about a 55 million reduction net of minority share of that in FFO which is approximately $0.11 a share. I think that combined with some other small adjustments related to the inclusion of Adelaide center as an operating property under IFRS as opposed to a development property under Canadian GAAP and the ability to blend and extend leases under IFRS. We expect our mid-point guidance to be approximately $1.17 a share. Bottom line is that FFO under IFRS narrows the gap with AFFO by presenting only cash net operating income as the one major reconciling item.

So on that, I will pass it back over to Ric.

Ric Clark

Great. Thanks, Bryan. So a little long on the prepared comments today. Apologize for that. I would like to wrap up before we get to questions by taking the opportunity to thank the roughly 1,500 Brookfield employees for their hard work and devotion and helping us to achieve our objective last year during one of the most difficult economic periods certainly in my career and also like to take the opportunity to thank our shareholders and business partners for your ongoing support and confidence in us and also in our business plan. So thank you very much for that.

Operator, at this point, we'd be happy to take calls from investors and analysts.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Bilerman from Citigroup. Your question, please.

Josh Attie - Citigroup

Hey. Thanks. It's Josh Attie here with Michael. You talked about deploying capital in 2010 for growth opportunities. How does that break out between doing it on your own balance sheet versus within the BAM fund?

Bryan Davis

Well, little hard to tell to be honest. We're looking for large-scale restructuring that we can do as the sponsor within the real estate turn around consortium that Brookfield Properties and Brookfield Asset Management have co-sponsored. So I couldn't really tell you how it would break down. We're looking at lots of things. We're looking at sort of core quality assets that could be tuck in acquisitions within our portfolio as well as large scale turn around things, so it is really hard to tell.

Josh Attie - Citigroup

Has BAM started to put any money to work yet externally in the office sector or through maybe through debt investments?

Bryan Davis

BAM wouldn't be the sponsor of that fund when it comes to office investments. It would be Brookfield Properties and we have been actively pursuing a couple of ideas we think are very interesting, so nothing really to report at the moment, but we are seeing some things of interest.

Josh Attie - Citigroup

Okay. Thank you.

Bryan Davis

Thank you.

Operator

Thank you. Our next question comes from Sloan Bohlen from Goldman Sachs. Your question, please.

Sloan Bohlen - Goldman Sachs

Ric, just a question maybe. And I know you don't have a lot of details on the strategic front, but just with regard to the refinancing next January. At this point, your strategy versus your partner's strategy certainly your assets are a little differently leased than theirs, but have there been any conversations as we're approaching that date just about what you may do? Just maybe even a little detail there would be helpful.

Ric Clark

Sorry, make sure I understand the question. First of all, if you're referring to the U.S. office fund debt maturity next year, which I think, is that right?

Sloan Bohlen - Goldman Sachs

That's right, yeah.

Ric Clark

So, that happens actually towards the end of the year, not in January.

Sloan Bohlen - Goldman Sachs

I am sorry.

Ric Clark

Yeah. So, I would just point that out. As far as, what we're looking to do there, there are a few assets that we think are mature which we may work to sell. There are some assets that are under levered that we think we can put additional financing on and as I mentioned in our remarks, we are getting lots of incoming calls from our banking relationship with their interest in working with us, on basically a refinancing intake out of the acquisition debt on that. There are lots of things we are doing in there, lot of moving pieces. We're working on it. And I think that's sort of where we are right now.

Sloan Bohlen - Goldman Sachs

Sure. And with regard to the mature assets, is there any strategy on which markets you looked to sell out of, a little more in others or?

Ric Clark

There might be some things in Washington, I think. Dennis, do you want to comment on it?

Dennis Friedrich

I think as we do with the U.S. fund and the all of our assets out of, it is really asset driven. You just see, we did execute on some sales this past year in DC. We like the DC market obviously, but I think when we feel that in asset, we are done our job, assets mature and there maybe an opportunity and the pricing, it won't necessarily be market driven, it will be more asset driven.

Ric Clark

I guess the answer is it would be anywhere in the market.

Sloan Bohlen - Goldman Sachs

And, then Dennis, just maybe a question for you. Have you had any comments or conversations with people on back filling either one on New York Plaza or the Wellington Space in Boston?

Dennis Friedrich

We are. We are in, in both of those instances, we're pretty active in discussions right now. As I mentioned on previous calls, we like the blocks of space in both of those situations in Boston. It represents the top of the building and that's an important distinction in Boston these days. It always seems that top of the building, certain floor plates have performed better than others. We have a lot of law firm activity on that space, so we're encouraged there and the same thing holds true for One New York which is the block at the top of the building that will be coming back to us at the end of the year, likely.

Sloan Bohlen - Goldman Sachs

Okay. And do you get the sense there are more large blocks type tenants out in the market today or?

Dennis Friedrich

Yes. I would say. We are sort of open to both. Both of them play to large block opportunities but, yes, in Boston there is a - decision making had been slow last year, there's a lot of expires in the 2011 and 2013 timeframe, so we're seeing that type of activity.

Sloan Bohlen - Goldman Sachs

Okay. That's it from me. Thanks, guys.

Dennis Friedrich

Thank you.

Operator

Thank you. Our next question comes from Mario Saric from Scotia Capital.

Mario Saric - Scotia Capital

Hi. Good morning. Just with respect to the residential operations, I know, Ric, in the past you commented on how much you liked the business, given the ROEs as it is spinning out. Going forward, how do you see, if the residential operations fitting in within BPO, especially considering BPO seems to be graviton towards more of a global office concept, so just some comments on kind of medium to long-term strategic fit within the Corporation?

Ric Clark

Well. Look, I acknowledge that it is not intuitively obvious investment for, what is predominantly a high quality office company, so no question about it and they are so high in the business. I think from the strategic lands that we have, to the quality of the management behind it. There is lot of good years ahead for this business. At some point we'll have to sit down and think about, if there is a better way to own these two businesses to facilitate our growth and also to unlock value and it is something that we're constantly thinking about.

Obviously, it is not so easy to outright, sell, assuming, we wanted to do that and I am not saying we do a business like this because I think that would look to acquire us we'd be looking for very, very huge opportunistic returns and given how much we know about the business and how bright its future is, we just don't think that's in the shareholders best interests to unload it with those kind of values, so. Anyway I said a lot but I said nothing, I apologize for that but I would say. It is something we're constantly thinking about. We do constantly think about what's the best form of ownership to unleash value.

Mario Saric - Scotia Capital

Okay. And I guess, Bryan, I think last year on the Q4 call, you provided us with some estimates on the tax losses in both U.S. and Canada. Can you provide us with an update as to what those tax loss pools are today and potential expiration period?

Ric Clark

I think last year, I mentioned that we have about $400 million of '09 capital loss pools in the U.S. and about 150 to a million in Canada, which put us in a position, where we were I would say two years out based off of plans from using those up. We did a number of things one of which was converting our U.S. operations into a REIT structure which lowered the effective tax rate. As a result of that, we still have $400 million of losses in the U.S. and so we're in a good position there.

In addition, we're constantly looking at opportunities to, just to lower effective tax rate and get benefits for additional loss pools and in the Canadian market we're actually up in excess of $200 million in loss pools and so we're now sitting at about 630 in aggregate loss pools, I think which puts us in a position where we don't need to consider a structure that would be more tax efficient for another three years.

Mario Saric - Scotia Capital

Okay. That's great. And just one last question, on the acquisition side, Ric, you previously mentioned targeting kind of low 20% lease returns on acquisitions. Given the investment environment today, are those still achievable or are you having to re-look at your acquisition hurdle rates?

Ric Clark

Well. I would say, I guess I will make a couple of comments in response to that question. First of all, within this real estate turn around consortium, that we are co-sponsoring, I think any investment that we take through it would certainly achieve returns in that ballpark and we are seeing things that could meet those investment hurdles. They're not, probably all of us in the industry very naively 15 or 18 months ago thought there would be a Tsunami of 20 plus IRR deals thrown at us for core quality properties and we're definitely not seeing that, but we do think that there are some opportunities to achieve those kind of returns for these big bulk restructuring kind of transactions

On the other hand, we are looking for core quality properties to acquire as tuck-ins to our businesses and we would do that at returns that are less than that provided they're accretive for shareholders and those could be the in the low-teens on a levered IRR basis. So I do think we'll see opportunities like that. They're not as many as we thought, there -- that are both lease is begin and not going to upon in your lap, have you to find them and I do think we'll do some of them.

Mario Saric - Scotia Capital

Okay. Thank you.

Ric Clark

Okay.

Operator

Thank you. Our next question comes from the line of Karine Macindoe from BMO.

Karine Macindoe - BMO Capital Markets

Thanks. So I take it from those comments there has been a fair amount of chatter up here in terms of whether we're likely to see Canadian REIT conversion. I take it you don't see that as a 2010 likely event?

Ric Clark

Karine, we're always looking at ways to advance value for shareholders in everything that we do. So it's one of the things that I think Bryan has spent time considering. So I wouldn't necessarily say that it wouldn't happen.

Bryan Davis

And -- in reference to the loss pools that we have, the one thing that we're still dealing with is within the 89% on subsidiary that we have up in Canada BPO Properties. We do not have any loss pools within that structure and as a result and we have talked about this for a number of quarters. We're looking at all of our options to ensure that we provide a tax efficient vehicle to all of the shareholders that are invested in that business and one of the options that we're looking at is a REIT structure.

Karine Macindoe - BMO Capital Markets

Okay. So if BPP were converted over to a REIT structure. Presumably there would be -- you would look to grow the platform where you're 89% ownership would decline and give a little bit more liquidity to the stock. I mean is that and do you see enough growth potential for the vehicle in Canada that would help to facilitate that?

Bryan Davis

I think, again, just getting back to Ric's comments. We always look at our options as it relates to creating value for our shareholders, but more specifically we're just looking at our options as it relates to creating a in our tax efficient vehicle for the existing shareholders of BPO Properties and one of those options is just simply a conversion to a REIT. Within the Canadian market, we haven't been -- we haven't acquired anything in recent times. The Canadian currency has been relative strong vis-a-vis the U.S. currency. So that has put -- that has put impact on those opportunities in seeking them out.

Ric Clark

And you look, I would just add on this question that it's probably not appropriate for to us to the comment so much on this because BPP has a board and it is something that they would consider and they do have their call and their board meeting next week.

Karine Macindoe - BMO Capital Markets

Okay. Yeah.

Ric Clark

So might be something to take up with them actually.

Karine Macindoe - BMO Capital Markets

Okay. Fair enough. Your comments just lastly, your comment surrounding The World Trade Center and maybe something to be announced surrounding The World Financial Center and your plans there, should we take that to mean that you maybe looking to increase your exposure in the lower Manhattan market, how should we take a stab at reading in?

Ric Clark

Sorry. So I didn't mean to cause so much mystique with those comments. Really what we're looking to do just put it out there is -- we're hopeful that as the year progresses we'll have leasing announcements to make, we also have spent a lot of time, seven years actually setting the relationship between The World Financial Center and The World Trade Center. When -- because when The World Financial Center was built, there was a very different physical environment that existed down here with The World Trade Center.

The World Trade Center had this kind of big wall that on the other side of West Street and the connection was 32 feet above ground, above the west side highway. So all of that is kind of changed, the connection will be underground and there may be some physical enhancements we make to The World Financial Center just to bring the center back into the lower Manhattan community. So this is something we're studying just to be completely transparent on what my comments meant and we're hopeful that we will complete our thoughts on what it is we want to do that will create value for shareholders and be able to present them in a call in the future.

Karine Macindoe - BMO Capital Markets

There may be a way to participate in The World Trade Center redevelopment and then integrate the assets and which would maybe mean that, that we might see an increase in capital allocation into that market until you can kind of stabilize and then maybe realize, would that be?

Ric Clark

I didn't so much mean that, but just to respond to something a comment you made earlier, would we invest more money in lower Manhattan we would. We're kind of opportunistic investors and the truth is at the moment most of our peers, we heard them make comments that they're not interested in lower Manhattan. That's fine with us. As we really believe this will be a very different and very special place between now and 2013. It is just huge amount of money being invested in infrastructure.

So really but lower Manhattan is going to physically function differently and we need to respond to those kind of things just to make The World Financial Center more valuable. And that's really what I meant by my comments, but any opportunity that comes along that can create value, we do love this market, we do think with America's crumbling infrastructure people keep talking about that and as brand new transit system right across the street connecting to The World Financial Center and we think we can capitalize on that.

Karine Macindoe - BMO Capital Markets

Okay. Perfect. Thank you.

Ric Clark

Thanks.

Operator

Thank you. Our next question comes from the line of George Auerbach from ISI Group.

George Auerbach - ISI Group

Great. Thanks. First to follow-up on Sloan's question, the average rate on the U.S. fund debt is 2.8%. Based conversations with your lenders, what rate do you think you will be able to refinance this debt?

Ric Clark

Now, it's a little premature to respond to that. I don't know, if we did it today, we would be well, that's a floating rate loan and I think it could be replaced somewhere comparable to where it is today. So but this is kind of a year out or so and fixed rate debt is obviously more expensive and there's…

Bryan Davis

Different to different, very different profiles, the U.S. fund is a very large fund, so the assets have different profiles and we may put different profile debt in terms of term, floating versus fixed. So it's tough to just come up with a blended number right now until we actually refine that a little bit with the lenders groups.

George Auerbach - ISI Group

Well, can you give us an idea what percentage debt floating versus fixed you would feel comfortable with on a long-term basis?

Ric Clark

We're not to the point yet where we can give that kind of guidance. I can tell you, though that just the lending market is getting healthier and there are lots of relations that are interested in lending and the rates aren't so bad. So if we were just replacing a like behind type of financing. I don't think the rates would be materially different. That may not be what we do, though.

George Auerbach - ISI Group

And Bryan, two questions with regard to the 650 million loan receivable from affiliate. First, it is a floating rate investment and if so what's the spread. And second, the footnote states the balance is waiting redeployment of capital. What are your thoughts for the use of this capital and what would the timeframe be?

Bryan Davis

So I can't give you a sense of timeframe. I mean the use of the capital is related to strategic initiatives that Ric referred to in his comments. But as it relates to your question on rate, we're receiving a rate that's closer to 100 basis points as a deposit which is of course a much higher deposit rate than you would otherwise get with cash sitting in a bank which is closer to 10 basis points.

George Auerbach - ISI Group

Right. And just getting back to your 1.5% average LIBOR rate assumption, just a couple of questions. First, does your assumption indicated, you believe inflation and higher rates will be more of an issue in '10 than the market is currently pricing in? Second, will you be more active and do you have the opportunity to refinance some of your mortgages maturing in '11 and '12?

Bryan Davis

I would say on the rate question. Our view at some point rates go up. We are simply trying to be conservative when we put together our business plan and of course we would rather under promise and over deliver. So that's really what that’s all about. We don't necessarily think rates will hit that level this year but over time typical fold of those within our firm were involved in these matters. The rates are more likely to go up in the near term versus down, but not necessarily immediately. So that's kind of that part of the question.

George Auerbach - ISI Group

When as it relates to opportunistically refinancing out year maturities, we're always look at that. We would likely be able to accomplish that at least as it relates to some of our fixed rate debt rolling in the next few years on a basis that's very comparable if not even less expensive than the debt roll.

Bryan Davis

May be just to be little more specific on that, I would say a lot of these loans that are rolling next year roll later in the year, so at this point because of the yield maintenance and other financial penalty that is break the loan today, it wouldn't make it prudent or ways investment choice for shareholders but as the year progresses we could well work through the period of time where we're faced with those kind of economic issues. They will go away and we will be able to do it. I wouldn't be surprised if we don't refinance things for next year towards the end of the year. It is definitely likely.

George Auerbach - ISI Group

Okay. Just one final question for Dennis. Have leasing discussions with financial service firms changed at all following the recent announcements by the Obama administration regarding [pro-TASCs] and private equity within their firms which even if just modestly negative for profitability have introduced some general uncertainty into the market?

Dennis Friedrich

I would say at this point we're not seeing that it is early to really see that flow through in our leasing discussions. I would say if anything the financial service demand, particularly in New York and a few places elsewhere has been, I really think surpassed our expectations in terms of that and some of that is the dynamic I would mention not to again which is just a little early to tell on your other question is we're definitely we have seen a reshuffling of the deck a bit in terms of the size of tenants and some of the former second tier players in the U.S. that are now hiring people at a very, very rapid pace.

So as we had actually said months ago if not a year ago, we never anticipated financial services to leave New York behind by any means. We expect some firms to come up and continue to grow back. That has played out nicely. We're seeing that. That's been driving certainly some of this activity.

George Auerbach - ISI Group

That's helpful. Thank you.

Operator

Thank you. Our next question comes from Jimmy Shan from National Bank Financial.

Jimmy Shan - National Bank Financial

Hi. Thanks. In terms of the residential development business, the lot and home sale guidance you provided for 2010 actually doesn't look that far off from the peak 2000 levels, 2007 levels from a lot and unit count standpoint which looks to be quite a robust target level. Can you maybe talk a little bit more about what you are seeing in those markets and migration trends and whether you are also seeing the pickup in the home sale from the Multi-Family side which as I understand still quite a bit of inventory to get absorbed?

Dennis Friedrich

Bryan, do you want me to deal with that? Just to respond to that, I think some of the volumes that you're seeing in the numbers that Bryan talked about earlier, it includes some monetization of U.S. thus some inventory we have down there which is not all that great from a margin perspective as more monetization is first point. On the multi-family site, I would say that we have seen -- there is an excess supply in definitely in downtown areas but that does not affect us that much and then likewise on the suburban side we are seeing renewed interest on different types of Multi-Family, primarily row townhouses and things and not so much on any other sort of really dense forms, so it is a little early yet but we're starting to see some life in Alberta on renewed interest there. That's the point there.

Jimmy Shan - National Bank Financial

Okay. So on the 2000 lot guidance, lot sale guidance, there are a number of U.S. lots in there?

Dennis Friedrich

There is probably I can't recall off the top. I think 200 or 300 probably that we are forecasting from a U.S. perspective that don't have the same margin levels as Canada.

Jimmy Shan - National Bank Financial

Thanks. My second question is, there has been a few Toronto properties, office properties traded in the last little while. Any chance the properties that you have originally put on the market, any chance to those coming back on the market?

Dennis Friedrich

Question for Tom, I think.

Tom Farley

It is Tom Farley. As far as we're concerned, we're looking to retain those assets at this point which we certainly review that our strategies from time to time but for the foreseeable future, we'll hold onto those assets and re-evaluate later.

Jimmy Shan - National Bank Financial

Thanks.

Operator

Thank you. Our next question comes from John Stewart from Green Street Advisors.

John Stewart - Green Street Advisors

Thank you. Bryan, can you walk us through the sequential decline in NOI particularly in Midtown and Boston where it looks like if anything you actually picked up some occupancy at 245 Park and flat in Boston?

Bryan Davis

I don't know if I have all the specific details in front of me, so I may have to take it off line a little bit. I think we had a few sort of escalation adjustments in our Midtown properties and we saw maybe a $2 million decline sequential. Sometimes you're dealing with timing on leases rolling and leases coming on and as it relates to Boston, again, I think we saw escalation adjustments related to the leases there but John, I will take that off line and see if I can't come up with anything more specific and get back to you.

John Stewart - Green Street Advisors

Sure. That would be great. Maybe I could follow up on your comment about the five ten antis that you lost to the economy. I don't know if you can give us any color in terms of types of tenants and markets?

Dennis Friedrich

John, it is Dennis. Several of them with the end of 2008 we had lost several law firms, so let me give you the mix, about 60 to 70% were law firm implosions which we were able to re-let very quickly at rates that were as Ric mentioned actually there was rent up lift there and then the others would just fall into a general consulting service oriented profile.

I think a couple in downtown L.A. a couple in lower Manhattan law firms and consulting firms, high quality space, well improved and leased straight away to someone just wanted to move in. Yeah. So as focus is downtown L.A. and New York will really the meaningful situations.

John Stewart - Green Street Advisors

Got it. And then, Ric, just one for you quickly. You referenced the Port Authority, I think specifically in your comments in terms of municipalities are having a hard time balancing their budget and they are I guess reportedly marketing an interest in the freedom tower. Can you comment on that and how you reconcile a potential investment there with the [Merrill] expiration coming up?

Ric Clark

Just to be clear, I did not reference that agency. I made a general comment about transit agencies domestically, so I just want to make that clarification on that.

John Stewart from Green Street Advisors

Okay. Sorry.

Ric Clark

And then the second thing is, we don't really have any comment on what the Port Authority is trying to do across the street with the World Trade Center. I think at this point in time we can't comment on it.

John Stewart from Green Street Advisors

Okay. I didn't mean to put words in your mouth there.

Ric Clark

Yeah. No, it's okay. I just kind of want sometimes to don't want to get tagged with a headline that doesn't belong to me.

John Stewart from Green Street Advisors

Absolutely. Could you just briefly touch on the arbitration with Silverstein and the Port Authority?

Bryan Davis

Yeah. Dennis, do you want to take a stab?

Dennis Friedrich

Yeah. John, I don't think we have a position on in terms of the ruling outcome and ruling whether it was good or bad for either party. I think what I would say is what we're pleased with or positive reaction is we really think it does set the stage for them to work out some agreement in the upcoming, hopefully in the upcoming months. And they have been given a 45 day timeframe to work out an agreement and come back to the arbitrators.

So I think it shored up some of this uncertainty around entitlement to damages and scheduling and I think we're in retrospect it was good. It was a move to put it to the arbitration board. I think it sets it on a track for some sort of agreement to be made between Silverstein and the Port Authority. I think the only thing I would add is what we have mentioned earlier and then I mentioned in my comments is that we want to make sure that everybody is clear and we're closer to this than anybody that even that situation is really not held back to progress that they're making on the other portion of the site where there is just full steam ahead on a lot of these infrastructure upgrades.

John Stewart from Green Street Advisors

Okay. Thanks, guys.

Dennis Friedrich

Thanks.

Operator

Thank you. Our next question comes from John Guinee from Stifel Nicolaus.

John Guinee - Stifel Nicolaus

Thank you. A few quick ones. I guess probably, Dennis, what's available for sublease and for lease within world financial center? I think Dow Jones has moved out, et cetera. Do you have a sense for what else is -- what's going on in the market currently in world financial center?

Dennis Friedrich

Within the financial center? Yeah, the only meaningful block right now is the Dow Jones space, John, which is just about 200,000 square feet.

John Guinee - Stifel Nicolaus

Okay.

Dennis Friedrich

So again, I have mentioned on previous calls and status quo Bank of America Merrill has not put blocks of space on the market. They have accommodated a few relationship tenants where there was need for space, but the real only formal space right now on the market is the Dow Jones space. And we're at 99% occupancy, so we don't have anything in our direct on a direct basis right now.

John Guinee - Stifel Nicolaus

Okay. Second probably, Bryan, you're capitalizing about $14 million of interest each quarter, I think. Correct me if I'm wrong. Which developments or where are you capitalizing?

Bryan Davis

The majority of that relates to our Bay Adelaide Center Development. As we talked about two other developments, 1225 Connecticut -- sorry, 77-K and Reston, we moved out of development and into production, so we're no longer capitalizing interest on that. So it's predominantly Bay Adelaide Center and one of the comments I made has I reconciled our GAAP guidance down to IFRS as we go out into 2010. As we go out into 2010, we will be transferring Bay Adelaide Center into production. And as a result, we'll be recognizing the NOI that we're currently collecting from tenants that are in place and paying and no longer capitalizing interest associated with that.

John Guinee - Stifel Nicolaus

Are you capitalizing interest over -- in the Penn Station asset you have?

Bryan Davis

We are still capitalizing interest there. It's a small portion of that overall number.

John Guinee - Stifel Nicolaus

Okay. 1625 I, how will you handle the accounting going forward on that, the 10% interest?

Bryan Davis

So that was accounted for as a monetization of our interest. It's effectively we recognize the gain associated with that. We still have a 10% interest and we will earn leasing and other fees associated with the arrangement that we have in the joint venture that we'll be recognizing as income on a go-forward basis.

John Guinee - Stifel Nicolaus

As top line or as an unconsolidated JV?

Bryan Davis

Top line or --

John Guinee - Stifel Nicolaus

Commercial property revenue line item top line or somewhere in other income?

Bryan Davis

JV.

John Guinee - Stifel Nicolaus

And then where lastly, where is Newport Tower located?

Bryan Davis

That's in Jersey City, medially. It's pretty much across from the World Financial Center, John.

John Guinee - Stifel Nicolaus

Okay. You still have it located downtown. All right, great. Thanks a lot.

Bryan Davis

Thanks, John.

Operator

Thank you. Our next question comes from Rossa O'Reilly from CIBC.

Rossa O'Reilly - CIBC

Thanks very much. Your current liquidity cash and equivalents and unused line of credit still about 1.5 billion and should we expect you to address the issue of 2011 maturities before you elect to use very much of that for opportunistic acquisitions?

Bryan Davis

Well, no, I mean, I think we have more than enough liquidity hanging around to deal with all the things that we think we need to do over the next few years, so we are not sitting on the sidelines. In fact, we are looking to make some investments.

Rossa O'Reilly - CIBC

Is that number still 1.5 billion? Just using the year-end cash and equivalents and unused lines of credit that I could --

Bryan Davis

We referenced a 2 billion number. One of the other things that you may not have picked up on is we did pay down about 250 million of revolving lines within our residential operations which are available to us. And in addition, we had the second preferred share that was subsequent to the end of the year where we were able to successfully raise Canadian 275 million on the series and I think that we issued for that bridges your gap.

Rossa O'Reilly - CIBC

Will the residential line be usable only for residential type real estate?

Bryan Davis

No.

Rossa O'Reilly - CIBC

I see, so that's general flexibility.

Bryan Davis

Sorry.

Ric Clark

Yes.

Bryan Davis

Yes.

Ric Clark

That's correct.

Rossa O'Reilly - CIBC

I see. And then on the acquisition front, you alluded to the fact that the offering price and the kinds of assets being offered haven't been quite up to the earliest industry hopes perhaps, but how would you characterize the availability of product and the pricing in the markets that you're looking at the moment?

Bryan Davis

Just as far as assets being offered for sale, you're saying?

Rossa O'Reilly - CIBC

Yes.

Bryan Davis

Yeah. So the market really hasn't been robust. We're seeing mostly is that owners transact when they have to or lenders transact when they find themselves in a position of control. So the volume of offerings is probably way below everyone's expectation of a year-and-a-half ago. But having said that, there are things out there, just have to work a little harder and be more creative.

Rossa O'Reilly - CIBC

Are you speaking primarily of the United States or does that include Europe and elsewhere?

Bryan Davis

It is probably the same in Europe. Although in Europe actually there has been in U.K. in particular London, there's been a couple of assets that have been offered up for sale that have actually traded at pretty surprisingly low cap rates in IRRs.

Rossa O'Reilly - CIBC

I see.

Bryan Davis

There has been more assets being offered. That market is actually recovered pretty well.

Rossa O'Reilly - CIBC

But the kinds of things that you're looking to at the moment, are they primarily in the United States?

Bryan Davis

That's our major area of focus at the moment, yes.

Rossa O'Reilly - CIBC

Thanks very much.

Bryan Davis

Yeah. Thanks.

Ric Clark

So I just -- before we take the next question, I would say we have -- we have a bunch of questions left. We don't have a lot of time. We ran over here. We're going to take two more questions and then if we miss out on anybody, please give Bryan, Melissa or myself a call, okay. Next question, operator.

Operator

Our next question comes from Sam Damiani from TD Newcrest. Your question, please.

Sam Damiani - TD Newcrest

Thank you. Just a couple quick ones. Just wondering what the rationale was for paying down the residential lines and looks like some sort of investment showed up on the balance sheet in relation to the asset sales in the fourth quarter as well if you could shed light on that?

Ric Clark

Bryan, do you want me to touch on that? Or do you touch want to touch on the first one?

Bryan Davis

Sure.

Ric Clark

I think just revolving facility, Sam. It was just the ability to pay them down with from an excess cash perspective. We can draw them back up at any time.

Bryan Davis

And with respect to your second question, the JV that was structured for the sale of 1625 I resulted in sort of an asset investment loan that we made into the JV. Similarly, there is a balance that's in our AP and other that's equal and offsetting. For accounting purposes we can't net the two. We have to show them gross and that's really all it relates to.

Sam Damiani - TD Newcrest

For the VTB or it's other?

Bryan Davis

It was just a loan into a JV structure and on the other side there is a preferred share out of the JV structure both of which we own.

Sam Damiani - TD Newcrest

Essentially fully offset each other?

Bryan Davis

Yeah.

Sam Damiani - TD Newcrest

Okay. Thank you.

Ric Clark

Thanks, Sam.

Operator

Thank you. Our next and final question comes from Shant Poladian from Canaccord Adams.

Shant Poladian - Canaccord Adams

Thanks. Two questions on the office fund. First, the slide 10 in your supplemental. If I take the managed cash NOI for the office fund, annualized about 378 million. Is that -- I thought that would be a number we would see in 2011. Am I not factor, is there lease termination income that I am counting in here like what would be an appropriate run rate for 2010?

Bryan Davis

Trying to think if -- there was some lease termination income, absolutely. I think we highlighted 17 million of lease termination income. The majority of which came out of our L.A. market where we had a few terminations which is predominantly our managed assets, so if you're annualizing that, you will not see that in 2010. But what we had sort of said was that inception we had 270 million of cash NOI related to this venture. And by maturity in 2011, we're expecting to see that grow up to 370 plus million. So if you back out the lease terminations and you add in a 1% same-store growth, you're probably getting into around that number.

Shant Poladian - Canaccord Adams

Okay So we shouldn't really think too much more beyond 370, when 2011 comes around?

Bryan Davis

Probably not.

Shant Poladian - Canaccord Adams

Okay. And the other question, just with respect to the thinking about the 2011 debt maturity. What would be the largest check that you would at this point you would think about writing? I mean absent any potential opportunistic things you could do with it?

Bryan Davis

Largest investment check, sorry?

Shant Poladian - Canaccord Adams

No. Largest check to how the pace of the debt down, barring any other opportunistic things you could do?

Bryan Davis

Sorry. I just want to make sure I understand the question. You're saying the largest expected amount or the largest amount?

Shant Poladian - Canaccord Adams

Well, if there is a pay down required to refinance the debt, what would be the maximum that you would consider writing?

Bryan Davis

I think this is digging into the level of detail that we weren't prepared to talk about on this call. We're still working through this and can give more guidance on these kind of things later. I don't think we're ready to give you a number that we can stand behind at this point.

Shant Poladian - Canaccord Adams

Okay. Thank you.

Bryan Davis

Yeah. Okay. Thanks.

Ric Clark

Thank you all for tuning into our call. Again thank you for your support. If we left anybody hanging, apologies for that. Please feel free to give us a call and we look forward to catching up with all of you soon. Thank you.

Operator

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Source: Brookfield Properties Corp Q4 2009 Earnings Call Transcript
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