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Executives

Matthew Cherry

Dennis H. Friedrich - Chief Executive Officer and Director

Bryan Kenneth Davis - Chief Financial Officer and Senior Vice President

Analysts

Joshua Attie - Citigroup Inc, Research Division

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Sam Damiani - TD Securities Equity Research

Steve Sakwa - ISI Group Inc., Research Division

Brookfield Office Properties (BPO) Q4 2013 Earnings Call January 31, 2014 11:00 AM ET

Operator

Good morning, ladies; and gentlemen, and welcome to the Brookfield Office Properties 2013 Fourth Quarter and Full Year Results Conference Call. Today's call is being recorded. I would now like to turn the call over to Matt Cherry, Director of Investor Relations. Please go ahead, sir.

Matthew Cherry

Thank you, and good morning, and welcome to Brookfield Office Properties' Fourth Quarter and Full Year 2013 Results Conference Call.

Before we begin our presentation, let me caution you that our discussion will include forward-looking statements, including statements regarding 2014 guidance. These and other statements that relate to future results and events are based on our current expectations.

Our actual results in future periods may differ materially from those currently expected because of a number of risks, uncertainties and assumptions. The risks, uncertainties and assumptions that we believe are material are outlined in our news release issued this morning.

I will now turn the call over to Chief Executive Officer, Dennis Friedrich.

Dennis H. Friedrich

Thanks, Matt. Hello, everyone. Thanks for joining us today. As is customary, Bryan Davis and I will give today's formal remarks, but also on the line are the heads of several of our operating units. Mitch Rudin, Head of our U.S. Operations; Kurt Wilkinson, Head of our Australian Operation; Jan Sucharda, Head of Canadian Operations; as well as Mark Brown, our Global Chief Investment Officer; and Tom Farley, our Global Chief Operating Officer. All of which -- all of whom will be available to answer questions on their respective activities during the Q&A portion of the call.

I'll hand the call over to Bryan in a few minutes to go through our financial results for the quarter and the year, but prior to that, I will take you through the highlights of what was a particularly active fourth quarter for the firm, particularly in terms of leasing activity.

As you would've seen in our press release issued this morning, we leased close to 4 million square feet, 3.9 million square feet of space during the fourth quarter alone, a total which is more than double our 5-year average quarterly velocity. This high level of leasing volume is definitely an encouraging signal that [indiscernible] confidence and leasing fundamentals are improving in many of our operating markets.

Contributing to that high level of activity was a healthy mix of new leases and renewals, something we always track very closely and like to -- obviously see a high percentage of new leases in our portfolio.

The U.S. was the most active of our regions, and specifically, our largest operating market of downtown Manhattan. I would say there is no arguing that 2013 was a successful and transformative year at Brookfield Place in New York, both on the office and retail leasing fronts.

I'll give a few highlights of the year. 1.2 million square feet of space was leased, in total at the center in 2013. Over 1 million was representative of office leasing. 17 office leases were completed, as well as 20 retail leases. 10 new tenants entered the center, taking office space at the complex, including several large relocations from Midtown and other submarkets. Brookfield Place New York had 3 of the top 10 downtown office leases in 2013, with average rents on those deals being $42 per square foot, which is very much the top of the market for existing assets not representing new -- new development. The entire retail component is just about 50% leased. And based on leases out for signature and trailing demand, we expect to be fully leased by midyear.

We'll be opening our quick-service dining component in mid-April, fully leased. Our French marketplace will open in the fall, and our luxury retail shops in the spring of 2015, which now include the likes of Burberry, Hermes and Ferragamo, amongst others.

Our redevelopment efforts and those of our downtown counter-parties have already began to be recognized as the underground transit connection to Brookfield Place is open. We refer to that as the Pavilion, as is our new 2-story lobby at 250 Vesey St., where we still have some additional progress to make on the rollover of the Merrill BofA space.

Pointing out a few specific deals, we completed in the fourth quarter 2 most notable transactions were the new office lease signings at 250 Vesey St., those being Jones Day and the College Board, for 330,000 square feet and 146,000 square feet, respectively. Both major tenants relocated from prominent Midtown locations and they capped off a 12-month period in which we addressed 850,000 square feet of the BofA Merrill rollover space. Remaining vacancy on the former Merrill Lynch lease has been reduced to just about 2 million square feet, with only 2 large contiguous blocks available today. But clearly, we made some significant progress, particularly as the year went along.

The Manhattan office market closed out 2013 on a very positive note with lower overall vacancy and the highest level of annual leasing volume since the financial crisis. Lower Manhattan was one of the biggest beneficiaries of the improvement in office market fundamentals in Manhattan. Relocations to Lower Manhattan jumped by over 50% as compared to 2012, reaching an all-time high of 2.8 million square feet.

A surge in large leases in the final quarters of 2013 drove downtown to its strongest year since 1998. Overall leasing activity for the submarket was up 27% from 2012. In addition to the Jones Day lease we secured at Brookfield Place, GroupM, the global media firm signed a 515,000 square-foot lease at 3 World Trade Center, consolidating from Midtown as well. As I'm sure you're also aware, Citigroup signed a major renewal at -- on Greenwich St. and will be consolidating headquarters' functions from Midtown.

What we're finding is, creative and tech-related industries continue to cross into Midtown from their traditional Midtown South Base as Midtown remains very supply constrained in terms of mid- to large-sized blocks. And we are also seeing an increasing migration of traditional Midtown tenants into downtown, pursuing lower-cost base alternatives as is witnessed by several of the large deals I just mentioned, including our large transactions here, as well as to the rest of our Lower Manhattan portfolio.

Although 2014 employment forecast for New York City projects somewhat modest conditions, I think our view is, we're seeing anecdotally on the front lines and talking to our tenants, is the anticipated expansion of the overall U.S. economy as witnessed by the recently announced healthy GDP figures. Should figure to drive the New York City economy particularly in sectors such as advertising, media, tech and fashion, which clearly draw a demand when national activities increase. The office product at Brookfield Place that we're offering to the market, and you've heard me mention this before, is a very cost-effective alternative to new development. We are achieving rents that are on top of the market but still inside that being offered by my new product across the street or in prime Midtown locations. And with the completion of our redevelopment program coming online, either prior or concurrently to some of the tenant moving in, our product here, Brookfield Place, is offering tenant amenity services and [indiscernible] is at the top of the market at a rent that still represents a discount to some of the other trophy locations in other submarkets.

We continue to advance discussions and lease negotiations with a large number of office and retail tenants. And really expect to continue the momentum we built in 2013, particularly the second half. To that point, in the first month of this year, we completed a 59,000 square foot renewal with the law firm Richards Kibbe & Orbe at 200 Liberty St.

Rounding out some leasing totals from several other U.S. markets, our Houston portfolio occupancy increased from 89% to just under 92% during the quarter due to strong new leasing and expansion activity. With some leases involving tenants including Chevron, Macquarie and Marsh USA. In Denver, we executed leases for 379,000 square feet, including an extension and expansion with DCP Midstream for 171,000 square feet at our Republic Plaza asset. And several new leases at 1801 California, our major redevelopment project in that market. We'll be holding a major reopening of that building in the upcoming weeks. We stand today at 60% leased with this latest round of transactions and we have a very healthy pipeline of activity in excess of 700,000 square feet, even prior to the -- before reopening of the building.

We leased 371,000 square feet in Washington DC despite continued headwinds in that market. Our activity was highlighted by 2 identical-sized law firm leases at 799 Ninth St., one was Norton Rose Fulbright and the other was Nixon Peabody, both for approximately 64,000 square feet.

You may recall, we acquired this prominently located east-end asset with a major GSA lease rollover where we really took over the building and renovated it nearly fully vacant. We paid only just north of $500 per square foot for the asset in 2012, but with the completion of this renovation program and lease-up level at 69%. With the completion of these leases, we've clearly created a significant amount of value with this -- on this asset. And assets in this market particularly prime East End and district assets continue to trade at record highs.

Moving to Canada. The largest deal for the quarter was the 1-million-square-foot renewal with the Canadian government at Place de Ville complex in Ottawa. The renewal was executed in the fourth quarter on a short-term basis but we obtained an approval from the Treasury Board of Canada on a long-term renewal. Just sticking to Canada for a moment, we also secured an important new lease in the Calgary market for a 200,000 square feet -- 290,000 square feet, sorry, with TransCanada Pipelines at our Fifth Avenue Place complex. The relevance of this lease, in particular, is it's the first step towards us addressing the Imperial Oil lease expiring in April 2016. The lease with TransCanada represents 40% of the space rollover, so it certainly gives us a good headstart with a few years to continue to lease up on this space. And it was also at a rental rate that was in excess of the in-place Imperial Oil rent.

We've announced there's been some softening in the Calgary office statistics lately due to some pressures on the energy sector, but our portfolio there remains over 99% leased to very high credit-quality tenants with an average in-place lease term of over 11 years.

So taking that all, and obviously, we enjoyed a very strong leasing velocity pace in the fourth quarter in many of our largest, most important markets. 3.9 million square feet completed in the quarter brought our full year leasing total to 7.8 million square feet, our third highest annual total ever, and right spot on about 1 million square feet, greater than our activities last year. And that figure is non-inclusive of pre-leasing on our development progress -- projects where we did an additional 1.8 million square feet of leasing over the course of the year, which I'll touch on in a few minutes.

So all told, just under 10 million square feet of leasing activity globally in 2014. We closed the year at an overall occupancy level of 89.1%, a drop in large part due to the large or the long anticipated impact of the BofA Merrill lease rollover. But if you exclude the assets that are currently under redevelopment, major renovation projects, the lease up level is 90%.

Moving on to focus on capital allocation strategy. We made a few notable acquisitions and dispositions during the quarter. We acquired 1 Northland Avenue in downtown Manhattan, the headquarters of New York Mercantile Exchange, which is adjacent to Brookfield Place and historically been treated as an ancillary building to our complex. This opportunity was compelling for us as the building came on the market, concurrent with our large-scale redevelopment of the center. These enhancements and amenities, as well as the diversity of tenants we're seeing in the area should make this asset and its waterfront location very attractive to future tenants once NYMEX consolidates into the lower half of the building in 2016.

NYMEX has leased 90% of the building on a 2-year basis with a follow-on 13-year lease for 222,000 square feet. So we have some time to lease up what will be an available upper portion of the building as we're also leased up the rest of the space at the complex. We have plans to add some additional leasable area in the building by filling in some open outcry trading floors as NYMEX consolidates.

The integration of MPG, our sizable transaction -- corporate transaction in the quarter has gone smoothly. We've shifted our focus from the transaction to driving up occupancy in the former MPG assets to a level more consistent with our pre-existing BPO Downtown LA assets. We completed 2 renewals at Gas Company Tower during the fourth quarter and we're also in advanced lease documentation with a tenant in excess of 100,000 square feet, which will be relocating from a competitive downtown building.

So obviously, in the early innings here, but there are some -- these are some encouraging signs and transactions relating to that acquisition.

The other acquisitions completed during the quarter were 685 Market Street and the Victor Building. We talked about those last quarter, so I'm not going to spend too much time on the call here today. On the disposition front, we sold 500 Jefferson Street in Houston, noncore asset within our portfolio in that market, as well as a 50% interest in the 2 building, that Park complex in Seattle.

In total, we executed 9 asset sales during 2013, raising net proceeds of $330 million, which we are investing into accretive opportunities to the portfolio. I'd say the private capital markets for quality office product continue to be very attractive in terms of monetizing non-strategic assets or recapitalization -- recapitalizing our positions in different assets. And we continue to be active on selling select assets or partnership interests in 2014.

The debt markets remain accessible and attractive for our needs both at the asset and corporate level. Property-level financings and refinancings totaled $1 billion for the quarter, netting proceeds of approximately $250 million. In addition, subsequent to the year end, we upsized our corporate-level revolver from $695 million to $1 billion, including an accordion option for an additional $250 million at the consent of the lender consortium. This upsizing increased our liquidity position to a healthy USD 1.4 billion.

While we continue to make meaningful progress on our active global development pipeline, provide a few high-level updates on each project, we broke ground on Brookfield Place Calgary in the fourth quarter, with the commencement of construction on the east tower, which at 56 stories, will be Western Canada's tallest building upon delivery in 2017. You'll recall the building is 70% pre-let to Synovus. The platform at Manhattan West are 5 million square foot mixed use development on the West Side, hit a major milestone earlier this month as the first of 16 bridge spans that make up that platform was permanently put in place. For those unfamiliar with the process, it's a massive and innovative undertaking. I'd invite everyone to check out Manhattan West website and see how the platform is being constructed but the first span was put in place very successfully. The platform will be complete later this year, and we look forward to commencing our residential component at the project, which will be a 800-plus unit rental tower in early 2015.

We also plan to incorporate our adjacent asset, 450 West 33rd, into the Manhattan West campus through a redevelopment and integration program, which we'll be providing further details on in the upcoming weeks. The ultimate result will be a 7-million-square-foot campus with office spaces and mixed use tailored to different types of users. Bay Adelaide Centre East in Toronto is 12 stories out of the ground today and on track to deliver in late 2015. That property stands at 60% preleased to 2 tenants with strong interest on the remaining portion of the building.

Brookfield Place Perth Tower 2 continues to be on schedule, subterranean work is complete and the core of the building is currently being built out or in advanced negotiations with a number of tenants to join the existing tenant roster, which, today, comprise a pre-let level of 40%.

Earlier this month, we were very pleased to announce, along with our partners Oxford Properties, the commencement of our first U.K. development. The London Wall project, Schroders is one of the -- one of London's leading investment management businesses committed to lease the entire first phase of the 2-building project. First phase total 310,000 square feet. We expect substantial completion of the first phase to be late 2016. The transaction is obviously a positive development for us, but also a very positive sign for the London office market overall, which has staged a resurgence in 2013 going into '14, which Canada lease exceeded even our expectations since our building our presence within the marketplace there. Space take-up or activity in the City of London where our assets reside improved by 1.3 million square feet over 2012 figures, driving down the prime vacancy to 9.4%.

Positive absorption has pushed prime-asking rents to GBP 60 pounds per square foot, a 4% increase from mid-2013 and the highest level since 2008.

I will be approaching the second anniversary of the first stage of the Hammerson portfolio acquisition in June. The market has rebounded strongly and we have been proactively asset managing the portfolio since day one. Since the acquisition, we brought in a 50% partner for the Principal Place residential component at a material mark-up to our initial purchase basis. We sold off a smaller asset at a $6 million profit and we acquired the remaining 50% interest at 125 Old Broad Street. Our portfolio occupancy stands today at 91%, up from when we -- when we acquired the portfolio. But I'd say the shortest lease represents the most material accomplishment in what has been a very successful portfolio acquisition for us to date. That provides a quick overview of our Q4 activities.

And with that, I'll turn the call over to Bryan for his financial report. Bryan?

Bryan Kenneth Davis

Thank you, Dennis, and good morning. As noted in our press release, we reported funds from operations totaling $134 million or $0.22 per share, which includes $8 million of transaction costs associated with the acquisition of assets in downtown LA and compares to $161 million for the same period in 2012 or $0.28 per share.

Highlights for the quarter include a reduction in interest expense of $27 million, largely attributed to a reduction in average cost of debt to 4.71% from 5.55% and the redemption of our Series F capital securities earlier in the year.

We had an increase in fee income of $6 million, which is attributed to leasing fees earned and incremental asset management fees due to the formation of our downtown LA fund. In addition, we had a termination fee of $3 million. These were offset by reduced property NOI of $42 million as a result of the BofA Merrill Lynch expiry during the quarter. We had reduced interest in other income of $12 million, as the prior period included interest earned on the residential note receivable, which was paid in full at the end of 2012. And as previously mentioned, we have the transaction costs associated with the MPG transaction.

In reference to Page 11 and 13 of our supplemental, in source currency, property net operating income was up in Australia and the U.K. and down in Canada and the U.S. In Australia, total NOI and same-store NOI was $78.7 million compared with $77.3 million, an increase of about 2% due mainly to higher rents and recoveries in Sydney and Perth.

Our U.K. net operating income increased to GBP 8 million as a result of the acquisition of our 4 London assets in 2012 and 2013 and same-store NOI was 2.1 million compared to 1.2 million and that's due mainly to higher rents and occupancy at 99 Bishop Street.

In Canada, total and same-store NOI was both $72 million, which compares to $73 million in the prior period, a slight decrease of about 1% as a result of various expiries that were partially offset by higher rental rates in Toronto and Calgary.

And in the U.S., total and same-property NOI was down compared with the prior period, mainly due to the expiry of the BofA Merrill Lynch lease at the beginning of the quarter.

As included on Slide 14, on a same-property basis, excluding foreign exchange and the impact of the large lease expiry, same-store NOI increased 1.3% on a year-to-date basis. Layering in the large lease exploration and the weaker currencies that we experienced during the year, same-store NOI declined 4%.

In looking at our Q4 results versus Q3, FFO decreased by $33 million to $134 million, compared with $167 million. This variance can be boiled down to the impact of the large lease expiry, offset by the incremental fee and termination income discussed earlier.

Our net income for the quarter was $152 million or $0.25 per share compared with $342 million or $0.59 per share in the prior year and $223 million or $0.38 per share in the prior quarter.

Net income in the current period included revaluation gains of $79 million in aggregate, which we highlight in detail on Page 18 of our supplemental. Our total commercial properties are valued at $25.7 billion at an average discount rate of 7.18% and a terminal rate of 6.17%. This translates to $516 per leasable square foot, and represents a 4.7% cap rate on annualized Q4 net operating income or 5.3% cap rate if you adjust for the BofA Merrill Lynch expiration.

During the quarter, we had 26 properties totaling $4.1 billion externally valued. Our IFRS value for those properties was $4 billion or 2% lower. For the year, we had over 40 properties valued, representing 35% of the total portfolio value. Across those properties, management's IFRS values were 80 basis points lower than the appraised values we received.

During the quarter, we successfully completed the refinancing of Bankers Hall in Calgary for $300 million, which generated net proceeds of more than CAD 140 million after repayments of the previous mortgage. This financing was for a term of 10 years in a fixed rate of 4.377%. And as Dennis mentioned, just subsequent to year end, we upsized our corporate revolver, to $1 billion.

As a result of these initiatives and others, we ended the quarter with almost $600 million of cash and approximately $1.4 billion in total immediate liquidity. Additionally, we closed on a construction facility at Brookfield Place East in Calgary for CAD 6 -- 575 million for a term of 4 years. Currently, we have approximately 1.2 billion in facilities to finance our development initiatives, of which we have drawn 200 million to date.

Perhaps the most notable transaction for the quarter was the purchase of assets in downtown LA and the formation of our downtown LA fund, which occurred on October 15 and in which we have a 47% interest. The transaction added Wells Fargo Center - North & South, the Gas Company Tower and 777 Tower to our portfolio and contributed a net increase of $4 million in NOI for the quarter.

In recapping our full year 2013, we earned funds from operations of $652 million or $1.12 per share, which is consistent with our revised guidance from Q3. Excluding the onetime items as indicated on the previous quarter's earnings call, which included the litigation settlement, a debt rate fee and the cost associated with the Maguire transaction, we achieved the midpoint of our original guidance of $1.18 per share.

In terms of outlook for 2014, as outlined in our press release, we are providing guidance in a range of $0.95 per share to $1.01 per share, with a midpoint of $0.98 per share. Our midpoint guidance makes the following assumptions: CAD 1.08 will buy you USD 1; AUD 1.12 will buy you USD 1; and GBP 0.61 -- or 61p will buy you USD 1, implying much weaker foreign currencies on average throughout the year for both the Canadian and Australian dollar. I will note that a $0.01 movement in the Canadian and Australian dollar will impact FFO by about 1.5 million each.

Same-store net operating income. It remains flat in U.S. dollars, if you exclude Brookfield Place New York. It does decline 9.7% in U.S. dollars, if you do include Brookfield Place New York and its impact in 2014. And we also indicated that we have property dispositions amounting to net proceeds of approximately $600 million, half of which we expect by midyear and the balance by the end of the year, with proceeds being reinvested into development and redevelopment initiatives and paying down any corporate debt.

As most analysts have already reflected, 2014 is a transition year, with earnings impacted by the retenanting of Brookfield Place New York. To put our current year guidance into perspective, if you use the normalized midpoint from 2013 of $1.18 per share and layer in the negative impact of Brookfield Place New York of $0.23 per share and of weaker currency projections for 2014 compared with 2013 of $0.04 per share, you get down to $0.91 per share. Adding back to that, the benefit of interest savings, acquisition activity in 2013 and expected NOI growth in the same currency -- source currency basis, you get an incremental $0.07, which brings you to our midpoint of $0.98 per share for 2014.

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

Dennis H. Friedrich

Thanks, Bryan. Before we turn the call over for questions, I just wanted to put a quota on 2013 and give guidance on how our 2013 success is linked to planned 2014 initiatives. For Brookfield office property, the theme for 2013 was one of global growth, primarily through the activation of our development projects around the world and a major expansion in one of our key markets, being downtown Los Angeles.

In 2014, we're focused on creating as much value as possible from those growth initiatives undertaken last year and also, in some prior years. That's going to mean making meaningful leasing, financing and asset management progress throughout our global portfolio. It's about blocking and tackling in what we see as an improving environment and feeding off of the leasing success we achieved in the fourth quarter in particular. There continue to be rental uplift opportunities in our portfolio that our teams are going to push hard to capture.

Advancing Manhattan West is obviously a major focus to the completion of our platform getting ready for the launch of our residential tower in early 2015 and our efforts in securing an anchor tenant for the first office tower.

Progressing our developments in Calgary, Toronto, Perth, and London will remain a priority. And we do expect as a team to bolster the already-strong overall lease-up levels we have in those projects. We will continue -- or certainly expect to continue to dispose of non-core or mature assets either at 100% or through divesting of partial interest at attractive seller cap rates. We've been testing the market on a number of sizable assets. Our guidance, as Bryan indicated, was a somewhat fulsome number at about $600 million. We may not necessarily push the envelope or we may go beyond that. It's a possibility. It's really going to come down to continued appetite in the marketplace. But we think there's opportunities to continue to generate proceeds in the sales markets.

And finally, it's critical for us to build on the positive momentum at Brookfield Place New York. Last year, really, was a breakthrough year for us. I expect continued success through the opening of our various retail components and completing our retail pre-leasing and continuing to lease sizable portions of the remaining Merrill Lynch vacancy.

We expect the economic recovery in the U.S. and the U.K. to accelerate to an extent and project 2014 to be the strongest year since 2006 for the office sector. In terms of return-to-tenant demand, given the ambitious growth initiatives we put in place over the several years or past several years, our business right now is well positioned to reap the benefits of the continued improvement in market fundamentals.

The last item I'd address before turning the call over as it's -- assume it's on the mind of investors and analysts, is the status of the proposed privatization of BPO by Brookfield Property Partners. The last update you would've seen is that our Board of Directors recommended in late December that BPO shareholders accept the upsized BPY offer. BPY Management is fully supportive of the proposed transaction and revised offer. The transaction continues to progress, and BPY will commence its tender offer likely in the first quarter of this year. Don't really have an update beyond that. I'd suggest that interested parties listen in on BPY's results call next Thursday, it's possible there'll be a further update to give at that time if there is any continued progress with the filing.

As I've stated previously, really, our focus and mandate here is -- has not changed. We're focused on executing our stated goals and our business plan.

So operator, with that, I'm pleased to take any questions from analysts.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Josh Attie with Citi.

Joshua Attie - Citigroup Inc, Research Division

Can you discuss the level of activity of Brookfield Place in Lower Manhattan? It seems like Bank of New York and Time Inc. are both in the market looking for blocks of space. What's the competitive advantage that you can offer tenants like that versus, say, World Trade Center or 85 Broad Street or even Jersey City?

Dennis H. Friedrich

I mean, right directly, Josh, just what I alluded to in the call, as I've mentioned on these calls prior, we did not sit back. We knew we had a major block of space to lease and we embarked on an ambitious redevelopment plan, so everything from renovated lobbies to a new retail experience to the connectivity, hailing all [ph] at a very competitive price point. So we're coming in, I think, at a meaningful-enough discount, to new development. I think the marketplace and the reason why our pipeline of activity remains over 3 million square feet is that --at least the Western corridor of Lower Manhattan, given its transportation connectivity and all the things going on here, are attracting a lot of tenancy. Not that the other side is not either, but it's all quite simply put coming online at the right time for us and that's why we've had a robust level of activity in the market. Tenants, although, activity has picked up and we think economic conditions are improving, there's still a sensitivity to economics. And we're -- at this point, we'll reflect the best value in the marketplace, particularly from Midtown, Midtown South tenants that we're talking to.

Joshua Attie - Citigroup Inc, Research Division

Can you elaborate more on the economics that either you're asking for or that you've received on recent deals like Jones Day? You mentioned having good space rents on the recent deals, but can you give us a sense for the amount of free rent being offered and also the concession packages?

Dennis H. Friedrich

Josh, I don't offer up specific terms on individual deals because it's just -- tenants do not like that to be out there. If there's -- but we're still very much in the range of what we've been saying quarter-on-quarter. You got to sense -- I can tell you our average net rents on the leasing we got done this year on the Merrill space is a blended number. It's $39 net. So that gives you a sense of, at least, the rental range in terms of the concession packages. They're just right about all-in, including leasing commissions remaining in sort of the $100 range. They're bumped up -- they push up a little higher than that on a deal of more significance like Jones Day, but they're lower than that on some of the other deals we've done. So really, kind of around the same range.

Joshua Attie - Citigroup Inc, Research Division

Any -- can you give us any color on the amount of free rent?

Dennis H. Friedrich

Yes. And again it varies. One of the transactions that we've announced in this quarter has -- kicks in rent, kicks in right at the start of next year and then it runs from there. So it's going to be staggered through '15 and '16.

Joshua Attie - Citigroup Inc, Research Division

Okay. And then just last question. In your press release, you noted that Morgan Stanley came up with a value for the stock that was a little bit below what your IFRS value was. And I guess, when you look at their valuation versus IFRS, is it -- can you highlight to us where you think the differences were if they were obvious?

Dennis H. Friedrich

I don't think -- I mean, the report, I think, has been filed. They gave a range -- IFRS isn't -- is a good guideline. It's not a pure guideline for NAV or fair -- or complete fair market. I mean, it's more evaluation of underlying assets, not necessarily taking mark-to-market on the debt or other factors in. So I think their range had -- took into account other considerations and other metrics, and I think at the end of the day, it seemed like a fair valuation.

Operator

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

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Just sticking to Brookfield Place, New York. I think, Dennis, you mentioned that the tenant discussion pipeline is still north of 3 million square feet. How about the kind of the discussion pipeline that is approaching the LOI stage that you've cited in the past of 1.5 million square feet? Presumably, Jones Day was in that number. Has there been any change to timing and magnitude of that number?

Dennis H. Friedrich

Yes. So Jones Day was in that number, Mario. Our discussions continue with -- our negotiations continue with a larger tenant that we had in that bucket. I'll tell you that would be the size of the requirement the larger tenant has has dropped down. I won't get any more specific than that in terms of -- but it has dropped a bit. But that being said, within our pipeline of activity, our negotiations with tenants, the number of tenants that are in the 200,000 to 500,000 square foot range has accelerated and picked up. And I think at the end of the day, we may end up candidly in a better place in terms of renovating and even underlying economics. So we are very -- what I didn't include in my long remarks was that the middle -- which in New York -- is still a sizeable requirement, the mid-sized tenant population in Manhattan has really, really picked up throughout Manhattan. So we're seeing a lot of transactions in the 300,000, plus or minus range, whatever number you want to pick. That is -- is encouraging, and I think we expect to be able to [indiscernible] on some of those based upon our discussions.

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Okay. All right. So from a timing, standpoint, I think in the past, you've indicated by early this year, on that 1.5 -- so not withstanding perhaps maybe the change in the size and the timing, still consistent with what you've thought...

Dennis H. Friedrich

Still -- yes, still moving on, still moving along... Those transactions take a while but it's for... We continue to make progress.

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Okay. And then perhaps just on the 2014 guidance. It was flat, same-property NOI is being driven by kind of weaker FX. Can you give us a sense as to what occupancy or what total leasing you're building into that forecast, both excluding BPY or Brookfield Place New York and including it?

Dennis H. Friedrich

Sorry, Mario, the last part of that again, just...

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Both -- so the forecast occupancy embedded in your guidance, both including and excluding Brookfield Place New York.

Bryan Kenneth Davis

Yes. So I don't have the numbers excluding Brookfield Place New York, but I think we're expecting to make progress on our occupancy level over where we ended 2013, probably between 1.5% to 2.5% higher. So that just kind of gives you a sense of leasing through the year. Just getting back to the first part of your question, if you did back out the weakness in foreign currency from our flat same-store growth, it would actually be in source currency up about 2%, 2.3%.

Mario Saric - Scotiabank Global Banking and Markets, Research Division

Okay. And then just last question on the potential asset disposition. I just want to clarify, the $600 million net proceeds, is that at BPO share?

Dennis H. Friedrich

Yes, that -- yes, it is.

Operator

[Operator Instructions] We'll take our next question from Sam Damiani from TD Securities.

Sam Damiani - TD Securities Equity Research

Just on the Brookfield Place New York, you had mentioned that the net rents you've done on the Merrill space averaged $39. Just how -- wondering if you can help us reconcile that with supplemental which shows $37 average rents signed in the year with a starting rent averaging around $27.

Dennis H. Friedrich

Those are grouped together with our entire Lower Manhattan portfolio, Sam. So that would reflect leasing that's done in One New York and One Liberty as well.

Sam Damiani - TD Securities Equity Research

Okay. And the sharp difference between the year 1 rent and the average rent is owing to the long-term of these leases, I suppose, is that right?

Dennis H. Friedrich

Yes. That's it. Yes, we feel very [indiscernible] on some of the long-term-debt.

Sam Damiani - TD Securities Equity Research

And Bryan, the NOI, you mentioned, dropped $42 million, I think, in the quarter due to the Merrill space. On a cash basis, I gather, it's a little more than that, because I believe the straight line rent was actually negative on that lease in the last few years, is that right?

Bryan Kenneth Davis

Yes, you're right, about $4 million more, I think, roughly.

Sam Damiani - TD Securities Equity Research

Okay. Okay, last question, just on the lower floors of 225 Liberty, very large floor plates, 115,000 square feet, where do you -- what do you see is the likely solution for those floors?

Dennis H. Friedrich

They are obviously geared to large user -- large user-based floors are a requirement. So continue to send out -- I understand, of course, I'm going to continue to market those 2 office tenants we have. We have on -- in 1 or 2 spots to broaden some quasi retail uses in there. There's a little bit more of that to go, but nothing beyond, nothing beyond. Though with some of the users, they actually, particularly some of the tech-type users, like the larger floor plates, which has been out.

Operator

And we'll take our next question from Steve Sakwa with ISI Group.

Steve Sakwa - ISI Group Inc., Research Division

Could you just -- I just wanted to go back to the Manhattan West development project. I know you're kind of working through the platform situation. So any tenant looking for that space has got to be sort of 4 years out. But remind me of sort of the economics that you're trying to achieve on that and maybe how the rents for that building gross or net sort of compare to Hudson Yards and the downtown development?

Dennis H. Friedrich

Sure. So we are, you're right, the opening part is that we're -- in terms of timing, we're looking at tenants that would really have a expiration that would be 2018 and beyond. I'd say just realistically, we'd turn over the space and the buildout of their space, Steve, from that standpoint. We have a - from a standpoint, even on the investment in the platform, a very competitive land basis at the end of the day. And our pro forma rents on the first office tower would be in the 80s gross range. I think we can be aggressive on the first tenant in, but expect to be in the 80s gross range. And we have some consensus in place, as well in term -- from the tax standpoint. So I think we're very close to what has been promoted on the -- some of the lease levels downtown here. Trade Center, we're hearing anything from the 70s to 80s on the lease up here, and particularly for some of the remaining space that's being taken care of now or being marketed at this point. Does that answer your question, Steve?

Steve Sakwa - ISI Group Inc., Research Division

Yes, it does. I'm just curious, are those discussion levels kind of active today or -- I'm just curious at kind of the level or number of tenants that far out that are contemplating new construction.

Dennis H. Friedrich

Yes. I mean, there's a healthy level of discussion because there -- these will be tenants that are upsized and understand that they are -- they need to plan into explorations and the turnover of space. So for turning over space in 2017 or so, those tenants are starting to plan their affairs, as much as we've seen some of the tenants that -- or larger tenants that were recently announced, whether it was Crédit Suisse, which got done, obviously, as a renewal, or others, have all had explorations out in time. So it's...

Steve Sakwa - ISI Group Inc., Research Division

And then just lateral question around that, and that maybe you can't answer it yet. But if you talk to these tenants, is there a sense that they're basically downsizing their [indiscernible] more efficient and still they're going through this kind of rationalization process? Or do you sense that these tenants are growing enough in jobs that even with that density taking place, they still might take more square footage versus their current footprint?

Dennis H. Friedrich

I'd say in the discussions we're having, Steve, it's the former. I mean, most of the instances, these tenants are looking at a consolidation of some sort. They are building in some -- it is encouraging to hear they're building in some expansion into the building again with or their space envelope, which I'd say, wouldn't have been the case probably 2 years ago or even 1 year ago. But I'd say net-net in which you can [indiscernible] I think most of these -- everyone is -- what is driving the attraction to development is the efficiency of -- new development is the efficiency of the space and also the opportunity to take some multi-office locations and bring them into one location. So net-net, it's still trending towards a reduction.

Operator

And at this time, there are no further questions remaining in the queue. [Operator Instructions]

Dennis H. Friedrich

Okay. Thank you, everyone. Operator, that concludes our call.

Operator

All right. Thank you. And again, this does conclude today's Brookfield Office Properties 2013 Fourth Quarter and Full Year Results Conference Call. We thank you again for your participation.

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