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Brookfield Properties Corporation (NYSE:BPO)

Q1 2010 Earnings Call

May 6, 2010 11:00 am ET

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

Sloan Bohlen - Goldman Sachs

Sam Damiani - TD Newcrest

Michael Bilerman -Citigroup

John Guinee - Stifel Nicolaus

Alex Avery – CIBC

Mario Saric - Scotia Capital

Karine Macindoe - BMO Capital Markets

Ross Nussbaum - UBS

John Stewart - Green Street Advisors

Jimmy Shan - National Bank Financial

Neil Downey – RBC Capital Markets

Operator

Welcome to the Brookfield Properties Q1 earnings conference call. (Operator Instructions) As a reminder this program is being recorded. Ms. Coley you may now begin your conference.

Melissa Coley

Good morning and welcome to Brookfield Properties’ first quarter 2010 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 were applied in drawing the conclusions and making the forecast and projections in the forward-looking statements and information. You may find additional information about such material factors and assumptions and the material factors that could cause our actual results, performance or achievements to differ materially set forth in our news release issued this morning.

I would now like to turn the call over to Ric Clark, Chief Executive Officer. Ric?

Ric Clark

Thank you, Melissa. Welcome everyone to our first quarter call and thanks to those of you who joined us for our annual meeting yesterday either in person or dialing in. Starting off, mastering the obvious I suppose I will start by saying our business and general outlook is very meaningfully better than it would have been a year ago and even a quarter ago.

Part of our quarter end discipline at least lately has been to pour through the transcripts of the quarterly earnings calls from financial institutions since financial institutions kind of drive the economies in a number of our markets and obviously the capital and debt markets that drive our business everywhere. We thought this would be a good thing to start to do.

Looking through these transcripts for the quarter we took away the following. All of these institutions reported improving economic conditions in general and ignoring write downs, better operating results in greatly diminished write downs. As for future outlook based on those that gave commentary, comments ranged from conditions are improving and the worst is behind us to it is better now but let’s wait and see.

Obviously there is a big tidal wave of loan maturities in the real estate sector alone coming in the 2012/2013 timeframe that have to be sorted through and there are issues with the financial conditions of most governments, not just the European countries that are currently dominating the headlines. On average the consensus from looking through these reports from the financial institutions is that conditions are improving and the worst is in fact behind us.

This consensus would be consistent with our experience within our operations over the first quarter. In general activity in our markets has picked up. Based on our quarter four 2009 experience carrying over into quarter one 2010 it feels to us that our markets have in fact turned the corner. This is an on-average comment and applies to most of our markets but there are of course variations from one market to the other.

The exceptions to us would be on the positive end in our New York City, Washington D.C., Houston and Toronto markets we are witnessing a more meaningful pick up in tenant interest and demand. In some cases rental and deal economic uplift have already been experienced. I have asked Tom Farley and Dennis Friedrich, our Canadian and U.S. Ops division heads respectively to try to give you some data points or a frame of reference on this which they will do in a few minutes.

On the negative side the Calgary market is beginning to grapple with new development overhang but you would have had to have been a direct descendent of Rip Van Winkle I think in this strained time. The Boston market is the Boston market. It has gotten neither better nor worse and it has been as it has been for a very long time. Two items to note from Houston, one good and one possible not so good, during the first quarter of 2010 we signed a 20 year, 1.2 million square foot lease renewal and expansion with KBR in two buildings in that market.

I would like to say congratulations to Paul [Lane] and Paul [Frasier] and their teams on this. Subsequent to Quarter One, Continental and United announced a merger with a consolidated headquarter to be based in Chicago. Obviously this is a bit of a buzz kill for a market that has been picking up momentum over the last few quarters. It is too early to know how this will play out but again Paul and Paul did a good job minimizing this exposure somewhat by renewing Continental’s lease in advance of maturity last year and Dennis I believe in his comments will add more color on what he knows about this and what it might mean to the Houston market.

Similar to our experience in our office division our residential operation mainly in Western Canada has seen a general improvement in activity and had a quarter one financial performance slightly better than our expectations. Alan Norris, who runs our residential division will have more color in his remarks which are coming shortly as well.

On the capital and debt market side after a couple of years of a liquidity freeze the real estate financing markets have shown steady improvement and liquidity is returning. We are I would say far from what I hope the real estate industry needs but liquidity is improving. We are seeing senior loan availability at the 60-65% loan-to-value level and debt yields of around plus or minus 11%. This would have compared to 50-55% loan-to-value levels not long ago and debt yields more like 15%.

We have seen some [inaudible] ability up to 70-75% loan-to-value levels and spreads have tightened from 400 basis points not long ago to about 225-300. All of this sounds good but the market remains a very bifurcated market. Lending is really only done when it is done for better assets and for the best markets and to the best sponsors.

Maybe before we get to Bryan Davis, our CFO for his remarks, and I know just from the calls we have been getting this morning due to our change over to IFRS there might be lots of questions on that so we want to make sure we leave ample time for that. So maybe the rest of our comments in general will be short this quarter versus other quarters. If we have missed anything anybody wants to talk about please pick it up in your questions at the end.

A few high level statistics before we get to Bryan. If you turn to page 21 of your supplemental you will note overall leasing activity in our managed portfolio for the quarter was 2.3 million square feet. Now this is obviously a high level relative to last year. It was 50% of last year’s overall leasing production and I think a good data point to back up our view things are improving and we may well have turned the corner. I would also point out this leasing activity is double last year’s quarterly average. So again we had a very, very good quarter on the leasing side.

Still on page 21 of our supplemental this leasing was completed at initial rents that were $1.10 greater per square foot greater than expiring rents and $4.28 greater using average contractual rents from these new transactions. Turning to page 22 of our supplemental you will note we finished the quarter with an overall occupancy of 94.8%, again in our managed portfolio. This is down 20 basis points from what is noted on this slide for year-end 2009 but what is not noted and I think is useful to point out is that quarter one 2010’s dip is attributable to the inclusion of the Bay Adelaide Centre as an operating property for the first time as is required under IFRS accounting.

Tom will give you more details on where Bay Adelaide Centre stands today. He has done some leasing since the end of the quarter and I think he will get to that in a minute. Bay Adelaide Centre aside, overall occupancy would have increased to 95.2% so basically a 20 basis point improvement over where we were last quarter. So with this in mind occupancy in our Canadian portfolio decreased by 20 basis points versus the more meaningful decrease shown on slide 22 and the U.S. portfolio as you will see on slide 22 showed 40 basis point improvement to 93.9%.

So based on the level of pipeline activity which Tom and Dennis will address shortly, barring any unforeseen we are expecting a solid year from a leasing activity standpoint. With that as a background, Bryan why don’t you get to the riveting IFRS financial statistics?

Bryan Davis

Thank you very much Ric. Good morning everyone. This morning we reported funds from operations totaling $136 million for the first quarter of 2010 compared with funds from operations of $105 million for the same period in 2009. On a per share basis FFO was $0.25 per share compared with $0.27 per share for the same period in 2009.

Our net income for the quarter totaled $252 million or $0.48 per share compared with a loss of $589 million or $1.51 per share for the same period in 2009. In the current quarter we did benefit from revaluation gains net of non-controlling interest of $162 million. This compares with revaluation losses on the same basis of $728 million in the prior year.

This being the first quarter reporting under International Financial Reporting Standards (IFRS), after I discuss our operational results under the current framework I will spend some time reconciling the changes both to our earnings and balance sheet. I will also make reference to specific pages in our supplemental disclosure that you will hopefully find helpful in reorienting yourselves.

Our commercial property operations earned FFO of $121 million for the quarter versus $99 million in 2009 representing a 22% increase. Contributing to this increase was same store growth, the benefit of a stronger Canadian dollar and interest and other income earned. Net operating income from our continuing operations which we have highlighted on page 12 of the supplemental report was $313 million for the quarter which compares with $290 million for the same period in the prior year.

This increase is a result of the reclassification of Bankers Court in Calgary and Bay Adelaide Centre in Toronto to commercial properties which accounted for $7 million. An additional $5 million of recurring fee income as a result of $3 million of leasing commissions and $2 million of increases in contribution from our facilities and residential management businesses and same store growth of $17 million or 6.2%. These increases were offset by a reduction in lease termination income of $2 million and by a reduction in NOI of $4 million associated with the sale and our monetization of our two Washington properties in the fourth quarter.

Our same store growth of 6.2% benefited from a very strong Canadian dollar which accounted for $10 million of that. It also accounted for the benefit of increased rental rates on new and modified leases, a slight increase in parking income in the current quarter which was slightly offset by a 20 basis point decrease in overall occupancy in our same store portfolio.

In analyzing our same store in a little more detail including only our managed properties and excluding the impact of foreign exchange we had same store increase in the quarter of 3.2%. All of this is highlighted on page 13 of our supplemental report.

Our residential development operations continued the momentum from the fourth quarter and earned $15 million in net operating income, an increase over the earnings of $6 million from one year ago. Highlighted on page 31 of our supplemental report we earned $12 million of the $15 million on the sale of 347 lots in the current quarter which represents a 99% increase from a volume perspective and a 100% increase from our earnings from our land development business compared with the same period in the prior year. Our home building operations earned $3 million and closed 144 homes during the quarter, a 69% improvement in volumes.

We set out our guidance at the beginning of the year of $1.17 under IFRS. It was $1.28 under Canadian GAAP with an $0.11 adjustment for the elimination of intangible amortization. If you distribute the residential earnings across the four quarters using sort of the rule of thumb with 10% being earned in the first quarter, 10% being earned in the second quarter, 25% being earned in the third quarter and 55% being earned in the fourth quarter, and you assume our commercial property operation earnings are evenly distributed over the fourth quarters then our FFO of $0.25 per share is in line with our guidance.

As always, there are a number of puts and takes but most net out to nil at the FFO line. For instance, in the interest and other income line it was grossed up in the quarter by $2 million as a result of the structure that was put in place on the monetization of 1625 I Street and similarly an offsetting interest expense was included in the interest expense line item in our P&L. In addition, we did benefit from higher interest carry of $3 million from warehousing and investments on bank debt prior to bringing in institutional clients and selling our interest down to 55%. However, we also saw an increase in general and administration expenses in the quarter of about $3 million due to costs associated with the formation of Brookfield Office Properties Canada, our REIT up in the Canadian market.

In reflecting on our earnings under Canadian GAAP for a second to put this quarter on a level playing field with our previously reported results we have included a reconciliation on page 8 of the supplemental. The major changes as discussed in previous quarters is the elimination of intangible amortization which amounts to $15 million net of minority share or $0.03 per share per quarter.

In addition a few other changes including the inclusion of Bay Adelaide Centre as an income producing property and certain lease modifications accounts for the balance of changes but have minimal impact on our FFO. As a result, under Canadian GAAP our FFO per share would have been $0.27 per share. Again, in line with our guidance but again impacted slightly by the puts and takes that I just discussed.

Looking out over the balance of the year considering the high level of leasing activity in the first quarter at rents above our expiring rents and based on volumes and activities from our residential operations we remain comfortable with our guidance for 2010 of $1.17 per share on an IFRS reporting basis.

Now moving to our balance sheet total assets have increased to $16.2 billion from $15.4 billion at the end of the prior year. This increase is due to a couple of items. First, we had proceeds from the successful issuance of our Series N perpetual preferred shares in January of approximately $260 million. Second, the increasing value of our commercial property assets totaling approximately $480 million which I will get to shortly.

Our commercial property debt remained consistent at $5.1 billion and as a result of the preferred equity issuance and the improvement in our share price our debt to capitalization decreased 400 basis points to 36%.

The adoption of IFRS has a fairly significant impact on our balance sheet primarily as a result of the fair value of our commercial properties as well as the requirement to deconsolidate certain jointly controlled investments. We have included a reconciliation between IFRS and GAAP of our balance sheet on slide 5 of our supplemental.

As it specifically relates to the deconsolidation of certain investments on our balance sheet, these specific joint ventures include the U.S. Office fund and our interest in 245 Park Avenue, Four World Financial Center, 77 K Street and First Canadian Place. They resulted in a reduction in assets of $9.3 billion and a reduction in liabilities predominately property debt of $7.1 billion and the inclusion of an investment in unconsolidated joint ventures as we refer to it as representing the equity of $2.2 billion. We have included details of these joint ventures on slide 10 of our supplemental.

At March 31 the fair value of our investment properties including our unconsolidated joint ventures totaled $19.4 billion which translates to a going in capitalization rate of approximately 6.7% and a value per square foot of $303 based on total square feet at ownership. All of this has been detailed on slide 14. Values during the quarter as previously mentioned increased by $480 million primarily as a result of two things. First, balance sheet adjustments. These include further investments into our properties of $131 million including the acquisition of our interest in Bishopsgate development site in London and also the impact of the appreciation of the Canadian dollar relative to the U.S. dollar which contributed to an increase in property values of $145 million.

Over and above that there are a few income statement adjustments. These aggregate $208 million on a gross basis or $141 million on a net basis of minority share. These are due mainly to increases in cash flows as a result of current period leasing activity and certain timing adjustments. As a result of the above, our common equity increased to $6.7 billion at the end of the quarter or $13.49 per share or $7.2 billion if you don’t include our future tax liability or $14.54 per share.

Our policy for valuing assets will follow the typical practice of most international property firms which is to perform property by property valuations on an annual basis with a semi-annual review of major assumptions and the quarterly review to consider macroeconomic indicators and to reflect executed transactions. Asset will be independently valued on a 3-year rotating cycle.

In reflecting on the adoption of IFRS I think you will agree after you get comfortable with the changes that it results in a cleaner FFO without any intangible amortization and a less complex balance sheet for us as a result of our ability to deconsolidate the U.S. office fund. Although IFRS does not determine net asset value for Brookfield as it does not permit the fair value of our residential development business nor does it value our fee based franchises, it also tends to focus on more historic trends to establish value. It does bridge the gap that previously existed between our historic cost base and historic equity and net asset value.

Appreciating this is a lot to absorb this morning I encourage you to give me a call as I would be happy to walk through the specific changes in much more detail and would also hope if you have any suggestions for how to improve the current disclosure we have included in our supplemental that you pass those on to myself or Melissa. In addition I encourage you this quarter to review our interim report which we will be filing in the next week or so as it will contain a significant amount of incremental disclosure.

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

Ric Clark

Thank you Bryan. Just an update on a couple of the strategic initiatives or accomplishments versus the goals we set out for the year and not much, it is only the first quarter, but I did want to mention one of the things we are focused on is this unusually large amount of leases we hold within our portfolio several years down the road in 2013 and we began the year with 10.6 million square feet or 17.8% of our managed portfolio rolling by the end of that year and have leased about half a million square feet so we have reduced that by about 90 basis points as of today.

I would point out between the U.S. and Canadian office divisions split somewhat equally we have activity on an additional 4 million square feet which would take this number under 10% should we be successful in concluding discussions with all 4 million square feet of those tenants. That is just a quick update on that. Hopefully we will have more to talk about in the coming quarters.

The second thing was we have had a lot of liquidity, one of the things we wanted to do was start to put it to work accretively. Just a couple of things to mention. One is as Bryan mentioned we made investment in a potential future development site in London called 100 Bishopsgate. We did this with a great local partner, Great Portland Estates. We are very excited about it. We are in the planning process looking for tenants, just getting it set up for a possible launch a year from now. Obviously we are not anticipating speculative development and in the meantime there are structures in place which pay a yield of greater than 8%. For us it is kind of a no-brainer, a good partnership and something we are pretty excited about.

The second thing you would have noticed from our press release and I think Bryan comments maybe was that we have acquired 50% of the debt surrounding a collection of assets in Washington D.C. Base amount on that was roughly $300 million. We did this with some institutional partners. Our percentage interest in it is about 55%. I won’t have more to say about that. I apologize in advance if we can’t address your questions on it. It is a situation where we are a lender and just kind of working through the things you might imagine.

Those are the two things we have done so far. We are looking at lots of other things. I think that is all I wanted to report. With that I would turn the call over to Dennis. Dennis maybe you could talk a little bit about what you are seeing in the markets, the level of activity you are seeing and also maybe a little bit about lower Manhattan which is always on people’s minds.

Dennis Friedrich

That’s true. Good morning everyone. Based on our activities in the first quarter and our observations in the initial weeks of this quarter there is definitely positive trends developing within our core U.S. office markets.

As Ric had indicated earlier our view is that certain markets have turned the corner, notably in midtown Manhattan and certain pockets of the D.C. market and that most of our other markets are firming up or finding bottom. It is not a suggestion at this point that this early improvement is translated into wide scale rental growth or a dramatic drop in concessions but it points to improving lease economics as we work our way through 2010.

In general leasing velocity is increasing in most of our U.S. markets. The increase in volume seems to be driven by several dynamics. First there is a sense that rents have or are bottoming out and concessions have peaked which is prompting tenants who had been on the sidelines to move forward with space decisions particularly if it represents an opportunity to trade up to a higher quality building while pricing is still soft in the cycle.

Second, in discussions with our existing as well as prospective tenants there seems to be a high level of business confidence in general. Within certain sectors, predominately the financial services sector, the renewed confidence is generating some job growth or at least space planning for some level of growth in 2010 and 2011. The leasing completed during the first quarter within our U.S. managed portfolio really is indicative of the increase in velocity in the market. We also had a very strong fourth quarter.

We completed 1.9 million square feet of leases in the U.S. in the first three months of the year which resulted in a 40 basis point increase in our occupancy to 93.9%. In part due to the improved leasing volume and very minimal new supply coming on line in most of our markets vacancy rates are moderating after what has been a prolonged period of quarter-to-quarter increases. The blended market vacancy in our core U.S. markets which we calculate every quarter was 12.4% which was a slight decrease over prior quarter. I would point out this is the first quarter in nearly two years that the average U.S. market vacancy in our core U.S. markets did not increase.

As a last general market observation tenants seem to have improved access to capital and a stronger willingness to invest in their premises long-term. This is driving a higher level of relocation activity as opposed to the renewal only mentality we faced over the past several years. The shift in mentality bodes well for owners such as Brookfield which operate the higher quality assets in each market. We completed just under half a million square feet of new leasing during the first quarter or so. We are clearly capturing a share of an increasing pool of tenants choosing new space options.

Just to move onto our observations on several of our more active markets. Starting with New York. The Manhattan market experienced the strongest surge in leasing activity as compared to last year. Most of the statistics we have compiled which I am sure you also have much of that information, really points to an impressive increase in volume ranging from 85-90% as compared with the same period in 2009 and activity in the Manhattan market is falling in line with the 5-year historical averages.

Most of the activity so far this year has been centered in Midtown as Downtown remains about 30% off historical activity levels but there are several sizeable deals pending in lower Manhattan today. The financial services sector in the New York market and within our portfolio has been active. The smaller and mid-sized firms as well as a number of prominent foreign banks are striving to grow their platform in New York and have been adding positions. These are firms that weren’t impacted as much by the financial distress over the past few years. The large financial services companies have been rationalizing their portfolios and have indicated headcount growth for 2010.

Given the increase in demand we increased the asking rents in our Midtown portfolio. We in the quarter completed a sizeable lease transaction for 60,000 square feet at our 245 Park asset. The rents on that lease were approximately 10-15% higher than the levels we would have achieved a year ago. It pushed our Midtown managed portfolio occupancy up to 96.5% from 95.4%. In lower Manhattan despite a lower level of leasing I indicated being completed in the market the class A market vacancy remains under 9% and our portfolio stands at 98% occupied.

So the market is tight which means that some activity is lower because there is not as much space right now. We have seen activity pick up in our Midtown portfolio in the last 60-90 days at a pretty measurable clip where in fact exchanging paper on over 1 million square feet of lease interest which represents several sizeable requirements.

With regard to the Bank of America/Merrill occupancy at World Financial Center we today can’t really provide any more definitive an update on the long-term plans as we have in the past few quarters but I would say at the start of the year BofA/Merrill has relocated employees into the World Financial Center from some other Midtown locations which is a positive signal.

I am going to move over to the Trade Center progress which has been very impressive over the past few months. We actually have a great presentation that we put together that tries to help everyone visualize what will ultimately be in place and we welcome making those presentations to you if you are in New York or we can get a chance to visit you.

The transformational nature of the construction is definitely beginning to take shape. Completion of the Memorial Plaza is on track for the 10th Anniversary of 9/11. The steel in the memorial is actually 99% complete. 400 trees are scheduled to be planted by year-end which will immediately change the landscape of the downtown neighborhood particularly the World Trade Center/World Financial Center corridor.

Key underground connections for the Trade Center Transportation hub are taking shape and the signature arches of the Santiago Calatrava's transit hub will begin to take place later this year. Portions of the underpass that connect the World Financial Center into the future transit hub below West street have already been completed and we have actually been performing work on behalf of the Port Authority to expedite the scheduling.

On the commercial side of the site it has widely been reported a new agreement between the Port Authority and Silverstein Properties, the ground lessee for portions of the Trade Center site have been reached and is being finalized as we speak. The agreement will help ensure that progress on the site particularly restoration of the Eastern portion of the site, the street level, will progress. It also provides for phased commercial development on the site which is the right thing for the market as opposed to all of the development coming online at one point.

The first building totaling 2 million square feet and referred to as One World Trade Center is being developed by Silverstein Properties and will not come online in our view until late 2013 to 2014. The remaining two Silverstein buildings being developed will phase in according to market demand and are not projected to come online until years later. Four World Trade Center and One World Trade Center which is being presently developed by the Port Authority and projected for 2013 delivery ultimately does add competitive supply to the downtown market.

However, both towers have significant commitments from the Fed, state and city agencies and likely early on will be perceived as more public sector type buildings. The new supply will replenish some of the 18 million square feet of supply we lost downtown to the destruction of the original Trade Center and also residential conversion at a time when there will be very limited new supply coming online throughout the island of Manhattan. So if there is an overhang of space that ultimately results from the Bank of America/Merrill expiration we expect the financial center space to be available well in advance of this new supply at a time when there will be very limited supply and new development around Manhattan.

Moving to D.C. the D.C. market is our other core market that has gained momentum over the past two quarters. The GSA government agency has really served as the primary driver for the new activity and has more recently represented approximately one-quarter of overall lease activity as compared to the 10% it represented last year. So clearly GSA has clearly become a much more active player in the market. Despite some near-term challenges in the D.C. market due to new supply particularly in the emerging markets of North Capitol, Southwest and the Ballpark area the market has steadily been absorbing the new product.

The development pipeline which reached 9 million square feet a year ago is down to 3.8 million square feet in the District area at this point. We had another solid quarter of leasing in our D.C. portfolio with over 100,000 square feet of completed transactions and we have a healthy pipeline of 200,000 square feet of deals that are in serious discussion today.

I want to close out on Houston, giving as Ric indicated some major news out of the city on two fronts. It was a very active quarter for us in the Houston region. The 1.2 million square foot KBR lease which we reported this quarter I want to point out included 20% of expansion which helped push up our Houston portfolio occupancy levels by 170 basis points to 95.5%. The KBR lease had a positive impact on the general market as well. Overall vacancy dropped to 10.3% from 11.2% in the prior quarter after several quarters of vacancy creep.

In general I would say the oil and gas tenant base in Houston has been more active with oil prices nearly doubling since early 2009. The news of the Continental/United merger certainly creates some level of uncertainty within our portfolio and also in the Houston market. Houston serves as Continental’s primary hub and Continental is a major tenant in our portfolio. They are not a strong presence much outside of our buildings in the general market. They currently lease 655,000 square feet in two of our buildings; Continental Center 1 and Continental Center 2 in downtown Houston.

We were fortunate enough to complete a lease extension with Continental in 2009 which extended their term through the end of 2014. Without getting into too much detail it is worth pointing out the extension was for a fixed rate right that Continental enjoyed in their lease which was materially below market. We estimate the current in place lease rents to be 20% to 20% plus below market at Continental Center 1 and approximately 10% below market at Continental Center 2.

So it is a bit premature to determine how the merger will impact the occupancy at our two buildings. It has been reported Chicago will serve as the corporate headquarter city so we will plan our affairs as if Continental will be contracting in our buildings but we are hopeful of retaining their occupancy. With the benefit of 4.5 years of remaining lease term coupled with a below market in place rental structure the situation may present a significant mark to market opportunity for us.

Ric, that wraps up my report on U.S. markets.

Ric Clark

Thanks Dennis. Let’s move on to the Canada Office. Tom?

Tom Farley

Good morning everybody. During the first quarter the overall vacancy remained flat in most of our Canadian markets except for Alberta. However in the A and AA category we saw positive absorption in Toronto, Ottawa and Vancouver. At the end of the first quarter the occupancy rates for our Canadian portfolio stood at 98.5% versus 98.6% at the end of 2009 and when including Bay Adelaide Centre which is considered an operating property under IFRS the portfolio occupancy at the end of the quarter would be 96.8%.

Looking at a couple of our specific markets, in Calgary we are seeing of course the continuation of low natural gas prices which contributed to a slowdown in this sector of the energy industry and has negative consequences on the Calgary economy in general and the office market in particular. The market vacancy at the end of the quarter totaled 12.7% which was up 110 basis points during the quarter and this increase was caused primarily by the delivery of new inventory to the markets.

Now in terms of other new buildings under construction we will see a further 3.2 million square feet brought to the Calgary market in the next three years which will put further pressure on occupancy and fundamentals unless we see an improvement in commodity prices in the meantime. Also as mentioned last quarter we have experience in dealing with these cycles in Calgary and we were able to anticipate and prepare for a changing environment in this market. Specifically, in 2008 we leased 2.2 million square feet and today we have a 99.9% occupancy rate and an average lease term of 9 years. Our focus in Calgary in 2010 will continue to be on current and future lease renewals with the view of maintaining an above-average occupancy rate.

In Toronto as you will recall both Bay Adelaide Centre and Cadillac [inaudible] Street projects were completed in the third quarter of 2009 which added 2.4 million square feet to the downtown office inventory and as a result the vacancy rate in Toronto moved up to 6.8%. Now in the first quarter we saw a substantial increase in tenant tours and general activity. In fact, during the first quarter total market lease activity was 818,000 square feet which is about a 35% increase in activity from a year ago. In our Toronto portfolio now we are at the conditional stage of 9 transactions totaling 253,000 square feet so that is above and beyond what was reported in the first quarter activity. Of these amounts, 62,000 square feet represent new tenants at the Adelaide Centre and 201,000 square feet of early renewals on our other properties.

As well, we are at the discussion stage on more than 15 other transactions totaling almost 800,000 square feet and these transactions consist of about 100,000 square feet of new or expansion space while the balance would be lease renewal. So our Toronto portfolio ended the quarter with an occupancy rate of 97.2% and when adding in the Bay Adelaide Centre our overall occupancy was 94.2%.

Now our occupancy at Bay Adelaide Centre specifically is sitting at almost 75%. It is 74.8% today. I just mentioned we have a couple of deals that are at the conditional stage. Once we have moved to completing those two transactions we will be over 80%. One additional item, we were advised yesterday and pleased to hear that Bay Adelaide Centre has achieved lead gold certification from the Canadian Green Building Council.

In terms of outlook for the Canadian market we are still well below equilibrium levels resulting in a continuation of a landlord market in each of the cities that we operate except for Calgary. 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 in each of our markets. Ric?

Ric Clark

Thanks Tom. The last report would be our residential group. Alan?

Alan Norris

Thanks Ric. Good morning everyone. We had a very good quarter as Ric and Bryan pointed out earlier on, on the residential front with lot volumes and housing occupancies exceeding expectations for the quarter. Margins remained steady for lots and improved slightly for housing. As we stated in the last call, low mortgage rates fueled a lot of this activity in Canada. However, it should be noted we have had three consecutive mortgage rate increases over the last month or so which could slow the market somewhat if this continues.

Listings have increased in most of our major markets but counterbalancing these two factors is a much more positive environment generally than 12-15 months ago. In the U.S. we are seeing national builders actively bidding on finished lots to fill their 2010 and 2011 housing programs. As a result finished lot prices are moving up albeit not yet to a level that justifies new development on a large scale. Albeit this does differ on a city by city basis.

All in all we are pleased with where we are at this time and believe that with more stable market environment we can meet our guidance numbers for 2010.

That’s all Ric.

Ric Clark

Great. Thanks Alan. I think that is it for our reports. We probably went a little longer than we had expected. Operator we are pleased to turn the call over to questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Sloan Bohlen - Goldman Sachs.

Sloan Bohlen - Goldman Sachs

I don’t think you mentioned it but could you give us any update on the refinancing progress within the U.S. office fund?

Ric Clark

Not a whole lot to say now other than we have been hard at work at it. We have been talking to a number of bankers and possible lenders. We are pleased as to what we are hearing from people as far as what they are able to achieve. Not a lot of meat to report at this point. Hopefully soon but not yet.

Sloan Bohlen - Goldman Sachs

As a general question, the switch to IFRS does that have any effect at all on where banks would look at your loan to values or how things are underwritten?

Bryan Davis

Ultimately I would say the change to IFRS is really just a representation of our financial statements. It doesn’t ultimately impact any of the economics or the value of our underlying portfolio. As it relates to our specific bank covenants most of them dealt with modified GAAP financial statements in any event and utilize their own valuation metrics to come up with the appropriate loan-to-value covenants. Long and short of it, no impact.

Sloan Bohlen - Goldman Sachs

Lastly, you had mentioned the development opportunity at Bishopsgate. Could you wager an idea of what kind of potential yield you would look at there and what those development costs or what the size of the project might be?

Ric Clark

We are still working through all of that but it is roughly 900,000 square feet. All-in costs including land, interest, the whole works I am just going to say in the 700 million Pound department. Don’t hold me to it because we are still working through everything. That is just kind of a ballpark frame.

Yields would be typical development yields. We would be looking for more opportunistic kind of yields and we would be looking to get a substantial amount of pre-letting done before we launched.

Sloan Bohlen - Goldman Sachs

Are rents today currently justifying that level of cost?

Ric Clark

Moving in that direction. For large space users looking to be accommodated we think it is achievable.

Operator

The next question comes from the line of Sam Damiani - TD Newcrest.

Sam Damiani - TD Newcrest

You comments on the interest expense in the quarter. You mentioned some unusual items and I wonder if you could comment on that? Also, on Page 35 of the supplemental details the average interest rate for the fixed and floating portion of the debt they seem to have changed versus the year-end disclosures and I am wondering if you could explain that?

Dennis Friedrich

The specific unusual item I was referencing was with respect to the monetization of our Washington property. I think we actually talked about this in response to a question last quarter. We had to gross up our balance sheet with an effective preferred share issue and then gross up our other liabilities with respect to an offsetting preferred share issue. All net within the one structure. The result of that of course is a gross up on the P&L of interest income included in interest and other and then offsetting interest expense included in the interest expense line item of $2 million.

With respect to your specific question on movements in rate, I don’t know if I have an answer for you off hand. So I may just defer that until I can get a little bit more detail and get back to you but on average LIBOR rates were relatively consistent through the first quarter as they were with the end of year disclosure. Let me take that away and I will get back to you.

Operator

The next question comes from the line of Michael Bilerman –Citigroup.

Michael Bilerman -Citigroup

It was helpful to have the reconciliation to GAAP and the IFRS. What are your plans for the rest of the year in terms of reporting both and having the disclosure the way you have had it in this supp or is this sort of a one-time and there is not going to be any more sort of GAAP disclosure?

Bryan Davis

Well ultimately we prepare the supplemental to make it easier on those that follow the company to understand our financial results. I would say to the extent you found this helpful we will continue it. In an ideal world we spend a little bit of time just getting everyone comfortable with our IFRS reporting so come at least the end of the year we can ultimately jump both feet in to just full on IFRS reporting and not have to maintain Canadian GAAP. I am open to of course feedback from you guys but I would expect another couple of quarters just to help reorient everyone.

Michael Bilerman -Citigroup

I missed the annual meeting yesterday. What was the rationale for Bruce and Linda stepping off the board and lowering the board to 10 rather than keeping it at 12?

Ric Clark

I think it kind of happened, so the rationale, it happened kind of right as we were filing reports and the rational for Linda it was for her own personal reasons and other commitments and priorities. The feeling from the board was they wanted it to remain largely more independent directors than insiders. So one of the insiders wanted to step down therefore. Bruce decided he would do it. Nothing more to it than that. We think 10 is a large enough board particularly relative to others in the industry. So the board doesn’t feel like they will miss a beat.

Michael Bilerman -Citigroup

Does that signal Bruce’s desire for his own time in terms of his priorities within the BAM organization of stepping off properties versus other things of his focus?

Ric Clark

Not at all. I wouldn’t say that. He still spent lots of time with all of us. It doesn’t indicate that at all.

Michael Bilerman -Citigroup

Maybe you can go over with BCR not that transaction having been affected and now Property is becoming the external manager of that REIT, can you talk about the impact that transaction is having or will have in terms of your financials and your plans to sell down that stake over time and how we should think about that?

Bryan Davis

We still continue to own a great portion of BCR, 90% which is slightly up from the 89% we owned of the predecessor BPO Properties. We are going to continue to consolidate the entities so to that extent the fees we will be paying ourselves with respect to the management will effectively be eliminated as a result of the consolidation. It doesn’t really have any initial financial implications up front.

Where it will ultimately have implications is if at some point in time we execute a sell down of our interests to something lower than 90% maybe at some point lower than an interest that would require us to consolidate at that point we would start to generate of course more income earned from third party investors and would start to get the benefit of that. Hopefully flowing through our feed income line but it wouldn’t surprise me if it somehow gets netted against minority interest as a result of consolidation. Long and short the really only impact starts to take place once we sell our interest down with respect to the new external management arrangement.

Ric Clark

So as far as timing of sell down which I think was part of your question we hope to do that shortly. There are administrative procedures you have to follow to get it done. It is not going to be in a week. Our view is we want to start to do that as soon as we can. We think it would be good for the stock. Good for the minority shareholders and we hope to do it soon.

Michael Bilerman -Citigroup

By way of math if you sold down to 50% and consolidate what is the value of that 50% stake and what would be the fee income properties would earn off of the other half of the stake?

Bryan Davis

The REIT has about $2 billion of equity at today’s price. So 50% of that.

Ric Clark

$800 million because we…

Bryan Davis

We own 1.8.

Ric Clark

40% of two so it is 800. Yeah.

Bryan Davis

I think our forecast with respect to the fees we would earn from the REIT and also remember we are absorbing all of the G&A as well is in the neighborhood of I think $10 million a year. So to the extent we own 50% and we are paying half of that to ourselves then the other half of that would be incremental fee income.

Ric Clark

I would point out I am not suggesting that we are selling down the 50. We might or might not. That was your example. So those that are listening we followed your example.

Michael Bilerman -Citigroup

Relating to the U.S. fund and I think you said you were progressing and having discussions, given the improvement in the debt markets both in terms of proceeds levels and in terms of rate. How do you think about the equity gap that exists today within the fund and your thinking of meeting that using asset sales or using equity contribution to get there?

Ric Clark

First of all as time goes on it is narrowing. So as the financing markets improve and…

Bryan Davis

And the sales markets. The sales markets seem to be improving as well.

Ric Clark

So the gap is narrowing and the plan probably would be a combination of things. There are assets in there that aren’t long-term holds and at some point we will probably move some merchandise and part of it would be possibly an equity infusion. But as time goes on that gap continues to narrow.

Michael Bilerman -Citigroup

Take us through the last 12-18 months you originally thought it was a $1 billion equity gap. Where do you think that is today to what you need to fund?

Ric Clark

I am not even sure we ever thought it was going to be that high. I don’t think we can throw out a number right now. I would say our expectation is it is materially less than the number you just threw out.

Operator

The next question comes from the line of John Guinee - Stifel Nicolaus.

John Guinee - Stifel Nicolaus

The timing of the Blackstone buy/sell being effective, how does that tie in with the big maturities on the U.S. fund? Is that within a month or two?

Bryan Davis

I think the timing is a period in early January which I think coincides with pretty close to the period at which point the U.S. fund matures in October 2011. So there is a time period we have disclosed in our notes that covers off the first half of 2011.

John Guinee - Stifel Nicolaus

So they are within a few months of each other I guess?

Bryan Davis

Yes.

John Guinee - Stifel Nicolaus

Dennis, Goldman Sachs when they moved from lower Broad Street to 200 West that is almost a mile as the crow flies and is over a mile if you actually drive it. We have seen some leases signed at 60 Broad and 125 Broad which tend to indicate a much more of a back office orientation for the Broad Street sub-market. Is there any sense that Goldman moving from one side of a very large market, downtown being 80-90 million square feet, all the way to the far Northwest corner from the Southeast corner to the Northwest end of that sub-market will have any effect of the epicenter of the sub-market or the downtown market moving?

Dennis Friedrich

I think their presence was so significant over on that corridor there could be a trend line there to a certain extent. Parts of that corridor, the upper part of the Broad Street/Water Street corridor have been bringing in different types of users some of which has added some diversity frankly. The 1 New York, 85 Broad, some of those more top of the market buildings in that corridor right now we are getting interest from a number of very substantial financial services firms and other similar type users in that standpoint. The short answer is I think certain things have evolved prior and now this situation we think that for certain products there is a replacement for Goldman on that side.

Ric Clark

I would add there is no question that because of the massive amount of money spent on infrastructure on the West side and because of the vintage, when they were built and the quality of the buildings on the West side, the properties over where we have our offices no question will demand a premium. The buildings you mentioned actually would be lesser in quality than others on the East side which will do well but not as well as the highest quality properties on the West side.

Dennis Friedrich

One more thing, there is a major infrastructure project being launched which is going to extend the promenade from the Hudson River Park wrap all the way around to the footsteps of the Brooklyn Bridge which we think will create a good, great connectivity between basically the water line and the harbor downtown which Ric is alluding to there is a sort of center core where there is a lot of older buildings and then the potential really for the East and West…

Ric Clark

You are going to regret asking this question because we are so excited about lower Manhattan. In addition to ringing the south end, on the north end Fulton Street there is a tax advantage program streetscape is going to be improved and trees planted and the facades actually improved, renovated and lit. I understand over 70 owners along that line have signed up for the program. It is actually going to make great connectivity from the East and West. There is no question I think the properties are less or more valuable for the reasons I gave but the high quality properties because of many of these things should do well in the east.

Dennis Friedrich

I mentioned in my comments and we won’t continue to go on. We do actually have a presentation that we have been very effective with tenants and other stakeholders which could give you a good sense of the way that lower Manhattan is playing out from an infrastructure improvement standpoint including these promenades and parks for either your neck of the woods or if you are in New York we could present that to you.

John Guinee - Stifel Nicolaus

So what you are basically saying is you think World Financial Center will do well relative to its west side competition but One New York Plaza will do well relative to its competition?

Dennis Friedrich

Yes.

John Guinee - Stifel Nicolaus

I think you may have taken out a book value page on your development schedule. Was that a one-time omission or a permanent omission?

Bryan Davis

We do have the value of all of our developments included I think in slide 13 or the slide we include all of our property values on. What we did though is we just continued to maintain the listing of the developments that get included in those numbers that we disclosed on slide 13, just from a size perspective for your reference.

John Guinee - Stifel Nicolaus

So the back up to page 28 will no longer be included?

Bryan Davis

Yes. One of the things we wanted to avoid was getting right down to the asset by asset level of disclosure. Unfortunately that is what the original slide lent itself to. Again, we are going to evolve our disclosure under IFRS so we will take that into consideration.

John Guinee - Stifel Nicolaus

That is a very helpful slide.

Operator

The next question comes from the line of Alex Avery – CIBC.

Alex Avery – CIBC

I was hoping you could talk a little bit about your liquidity position and I guess if you look at that liquidity position if you were to allocate it into different buckets where you would see that going whether it is dealing with the [inaudible] debt, some opportunistic acquisitions or things like Washington and then lastly perhaps some development opportunities?

Bryan Davis

I will start off giving a summary of our liquidity position and then maybe I will turn it over to Ric to just talk through the various different buckets we would likely consider. We talk about a number probably ranges anywhere from $1.5-2 billion including our bank line availability. Currently we continue to have our deposit with Brookfield Asset Management. It is approximately $600 million. We have our consolidated cash position of about $180 million. We also maintain some other sort of liquid short-term investments to the tune of about $300 million. In aggregate that is the $1 billion of cash that we are successful in raising over the course of last year. Over and above that we increased our corporate bank line. I think we ended the year at $420 million or thereabout. We are now up to $460 million. That continues to be undrawn. We also have an undrawn line with Brookfield Asset Management of $300 million. The aggregate of those is about $800 million. If you aggregate all of that together about $1.8 billion of liquidity. With that as a backdrop, in terms of bucketing…

Ric Clark

On the growth side we have been active underwriting assets, both single assets and portfolios. Domestically we have looked at things and I guess we are most interested in New York and Washington D.C. but have looked at some things in some of our other markets. I think if we are going to do a single asset acquisition we are looking for 4+ kinds of returns. Otherwise I don’t think it makes sense to put the money out and looking for greater returns on portfolio acquisitions. We considered some things internationally. Obviously you would have noted we did the deal in London and continue to think that market makes sense for Brookfield long-term. I think there are other markets that might be of interest as well. We will see. We are looking at a lot of things. Hopefully we will find some things that will make sense.

Alex Avery – CIBC

With your recent joint venture in London, that is certainly a positive sign seeing some new development activity. There were some comments earlier on the call about early signs of recovery and recognizing markets like Toronto and New York recognizing the time required for some of the developments like your Manhattan West side project. Are you beginning to reassemble a team looking at development or is it still too early for that kind of thing?

Ric Clark

We didn’t really disperse the band. So we have our development folks here. They have been busy even in the downturn just making sure things are positioned, entitled and ready to go when the market returns. We have seen a few reports from analysts talking about the lack of construction over the last decade or so. That is a point we have made repeatedly. We think this is going to be a very important data point once the economy starts to get legs and recover. Just looking at vacancies relative to low spots, at this point in past cycles it is not bad. It is much better. Looking at the lack of new construction.

In our view we should see pretty healthy rent rises and pretty healthy tenant demand once the economy gets its legs. It is hard to say when that will be but we will be ready. I wouldn’t be surprised if we don’t see development here in North America sooner than everybody expects. Nothing is imminent for us. We are just kind of ready to roll. Times like this when we like to add to our development pipeline we either do it on a low cost basis or deals like we did at 100 Bishopsgate which have a nice yield. If we have to warehouse it for awhile. We are quite excited about it and I think this big pipeline of ours of 15 million square feet could add substantially to our NOI and FFO going forward.

I don’t know if I exactly answered your question. It is hard to peg timing but I bet it is going to be sooner than people think.

Alex Avery – CIBC

With respect to investments like the Washington one are you currently active on any other investments of that type or are you just underwriting straight up acquisitions?

Ric Clark

We are doing both. We are spending a lot of time, we announced a couple of quarters ago our participation in this real estate turnaround consortium at the office sponsor with Brookfield Asset Management sponsoring other real estate alternatives. We have a team looking at lots of things whether it is straight up acquisitions through the equity or through the debt we are poised and have the skills to do either. We are looking at other things. Nothing really to report though at this moment.

Alex Avery – CIBC

So it would be safe to assume that the $300 million liquid investments Bryan referred to would correspond to the Washington portfolio?

Bryan Davis

No. These would just be looking to see a little bit higher return than having it sitting on deposit with a bank and included as cash.

Ric Clark

Just on a short-term basis.

Alex Avery – CIBC

Lastly, with respect to your assets held for disposition can you give us an update on where you think the market is and what your prospects for timing are on that?

Dennis Friedrich

I think one thing that transpired was I believe we reported last quarter was that at the early part of the year the ownership structure on one of the assets was cleaned up so to speak. We had held in essence the equity in a complex wrapped mortgage situation which has now been cleaned up to be a straight forward fee interest. Those assets comprise I would say it is fairly straight forward office buildings both of which are stable and have good, strong tenancy. Then urban retail which is a little more complicated and hasn’t been performing at its high level from an occupancy side. I think if and when we see pick up in the secondary markets and I would say when because capital is starting to get a bit impatient I think for some of the primary cities like New York and D.C. and we are noticing there is more interest in some of the secondary markets like Minneapolis, Denver and L.A. to a certain extent.

I think we could see some things playing out more as that moves along. I think we would want to see the markets firm up a little bit from a capital market standpoint, particularly on the office side for those types of markets.

Alex Avery – CIBC

So it could be later in the year or even into next year?

Dennis Friedrich

Potentially. I think we would like to see some firming up this year. It is really hard to say. I think there has been some momentum heading in that direction of some capital starting to flow into those other types of markets as opposed again just in New York and D.C. which has been the primary interest.

Operator

The next question comes from the line of Mario Saric - Scotia Capital.

Mario Saric - Scotia Capital

With respect to the IFRS valuation and looking at 513 valuation parameters can you give us a bit more color on the construction of the going in cap rates and terminal rates with reference to where you see the longer term U.S. treasuries and [inaudible].

Bryan Davis

Ultimately with respect to the going in cap rates that is like an output from our DCS. Of course on the discount rate front in both of our markets you are focused on a spread over the 10-year which I think sits around 3.5% in Canada and maybe slightly higher in the U.S. as a benchmark rate. I don’t necessarily know if we have a collective view on where rates are going to go except there is likely a momentum they start to trend a little bit higher.

Having said that, as you have seen in the past you may also see a narrowing of the risk spread associated with Class A commercial real estate to get that into that base rate. Ultimately the discount rates we are disclosing on slide 13 were established asset by asset in consideration of a number of things including the tenant profile, under market versus over market lease profile, when the rolls take place, the age of the building, the type of market they are in and it can range anywhere from probably high 11 in some of our markets to a 7% discount rate in other of our more stable markets.

Terminal rates, I don’t know. I think we would expect and I think the equity market is already pricing cap rates at lower than what we are coming up with from our valuation parameters. One of the comments I made in my notes were that this tends to be more heavily influenced by historical trends than it is by future trends. As you see some of the [maps] I think some of the analysts have for us in the $17 to $18 range it would suggest cap rates are trending down into the low 6% range which we would think is absolutely appropriate for a portfolio of our quality.

Mario Saric - Scotia Capital

On the same topic but focusing on the residential business, IFRS doesn’t allow you to mark up that business to fair value. Your parent book field asset management has in the past provided some quantification as far as the per share uplift if it were to do so. Could you maybe provide some comments or color on what that number would look like at the BPO level?

Ric Clark

I don’t think we would have that with us today. It is something we would have to get back with you on. Probably it would make sense for us to look first and see what Brookfield Asset Management has done in the past. I don’t think any of us are familiar with what they have done. We will have a look at it.

Mario Saric - Scotia Capital

Presumably given most of your inventory was accumulated back in the 90’s would it be fair to suggest your perception of fair value is significantly higher than the value today?

Ric Clark

It is hard to say. There was a time when we were earning $240 million a year that we thought for sure it was worth very meaningfully more than book value. Then there was last year. I am not sure we have a firm view. It is an up and down business. Last year in a down period in the cycle it had its fourth best year ever. Anyway, I apologize for not giving you a direct answer. I don’t think we have the answer as we sit here but we will work on it.

Operator

The next question comes from the line of Karine Macindoe - BMO Capital Markets.

Karine Macindoe - BMO Capital Markets

In the event that equity is required with the U.S. office fund is your early indication the various partners are on board for that? Can you give us any color in that regard?

Ric Clark

I don’t know that we can. I can tell you it would be illogical for them not to be on board. It is interesting, I think investors and analysts such as yourselves consider the worst case scenario that our partners don’t pony up the money should they be asked to do so. Honestly that is the worst case scenario and the best case scenario for us because there is lots of value within these assets. The NOI alone on our part of the portfolio has gone up by about 1/3 or will have gone up by about 1/3 by the time the loans roll over next year.

So we would be quite excited about the doomsday scenario. At this point we haven’t really sat around the table and asked everybody to pony up. We are just not that far yet I guess.

Karine Macindoe - BMO Capital Markets

On slide 10 which kind of goes through the unconsolidated JVs and the U.S. office fund detail we have here, that is under IFRS and so is the best guess on fair value. Assuming that we have a relatively stable cap rate environment and this number is somewhat accurate, I guess it would suggest you could go as high as 65% leverage then maybe for 100% of the portfolio there could be $1 billion required. Is that the way to look at this? Or do you think through what you are looking at you could take leverage even higher through other sources?

Ric Clark

I would say a couple of things. So 100% of the portfolio meaning our partners and the Blackstone interest, etc.?

Karine Macindoe - BMO Capital Markets

Yes.

Ric Clark

So, not really studying the numbers right now and digging into the details which aren’t there I would say that could be a ballpark number but my expectation is that if things continue the way that they are going now we could see an increase in those values quarter by quarter and we have a number of quarters before we get to the expiry of those loans. For two, we will be selling some assets within the portfolio. When you put them in a competitive bidding position I bet the values will look nothing like what we have in our valuations here because that is not the way the valuations work.

Bryan Davis

I have to say one other thing as well. Also I think as Ric alluded to before there is a lot of contractual NOI locking in and its ability to increase occupancy. So if you kind of look at this on a debt yield standpoint as you get closer and closer the leverage could go up.

Karine Macindoe - BMO Capital Markets

Now those forecasts would be going into the fair value of the properties I would assume, right?

Dennis Friedrich

Yes but it is still point [time] though.

Karine Macindoe - BMO Capital Markets

The NOI that is here on this slide what is the cash NOI equivalent? Do you have that anywhere?

Bryan Davis

On this slide the majority of the non-cash stuff which is the intangible amortization is no longer included.

Karine Macindoe - BMO Capital Markets

That’s right. On the comment that was made about Merrill moving some employees into the World Financial Center, can you elaborate a little bit more on that in terms of what you are seeing in terms of who they are moving out, what they are moving in and how it is panning out and how you envision this playing out?

Dennis Friedrich

I threw the comment out that we have mentioned in a few other calls that early in the merger they had moved out certain functions like investment banking and trading. What is transpiring now is some other groups are being moved in. I don’t really have a clear picture what that means long-term. It is just a general positive signal that they own half of [four wall] Financial Center, the headquarters I think that is being recognized as a good, low cost option partly because of the ownership. As they have been looking at their New York envelope they have started to move some people. I wouldn’t want to go as far to indicate that is going to be a picture of what is going to happen long-term. It is just a positive signal we had some move outs early on and now it is sort of headed in the opposite direction. It is too early to tell. It is different types of groups. Some support and some middle management side. We are hopeful we will get more and more clarity over the next few quarters.

Karine Macindoe - BMO Capital Markets

Last quarter you were contemplating a redevelopment for this whole complex. Is that still well underway? Do you think you are soon to announce plans?

Ric Clark

We are hoping to soon. Possibly, don’t necessarily hold me to this but possibly by the next time we convene this call.

Operator

The next question comes from the line of Ross Nussbaum – UBS.

Ross Nussbaum - UBS

Why was the London investment made by BPO rather than BAM? Then I guess along a similar line of questioning why is the [Car America] debt being done with Brookfield/Partners as opposed to the opportunity fund?

Ric Clark

The first question London why properties. This was a very logical investment for properties. There are lots of synergies with our organizations. The tenants that are within our North American portfolio many of them are likely candidates for kicking off this development for one. We have said for a number of years we think cities like London make a lot more sense to us than most cities in the United States. That is in keeping with our strategy. So this was a logical investment for us within Property.

There is really nothing more to it than that. BAM has been great about recognizing when there were synergies and I can tell you about the phone calls we have gotten just after making this announcement our thesis that owning assets in a number of the major cities in the world makes a lot of sense. Others who have tried a broader strategy in the past sort of talked about the synergies of savings on toilet paper. We never really bought into that. The synergies really come from the tenant and revenue side and we are kind of seeing that on this deal.

That is kind of cutting through it and is just the reason why. The other question you asked why was this done in the consortium versus the Opportunity Fund. You must be referring to the Opportunity Fund sponsored by BAM? The smaller fund?

Ross Nussbaum - UBS

Yes,

Ric Clark

The mandate for those funds are as far as I know interest in real estate that are not directly competitive with Brookfield Properties. This is high quality portfolio assets in a market where we are one of the dominant landlords. To me it makes clear sense it belongs in Brookfield Properties versus the Opportunity Fund. Really there aren’t assets like this in that opportunity fund.

Ross Nussbaum - UBS

I would agree. How much of your time, if any, is being spent on regional malls and general growth these days? I saw your name is on the list of those [directives].

Ric Clark

I would say not a whole lot of time. We dedicated some real estate resources to this effort a very long time ago but honestly this has been a restructuring so the bulk of the heavy lifting over the last 12 months has been done by the restructuring group. I think you can’t be a senior executive within the BAM group of companies without chiming in on things like this from time to time but it really has not been a lot of my time.

Ross Nussbaum - UBS

A question on page 4 with respect to per share, IFRS valuation, I am curious why was it disclosed on both a pre-tax and a post-tax basis and was that meant in any way to suggest that the $547 million deferred tax liability is something we should think about as Brookfield having never to pay?

Bryan Davis

On a post-tax basis of course that is just calculating our equity in accordance with how it is calculated under IFRS and it would have been under Canadian GAAP. Deferred tax liability is really a theoretical liability. To assume if you sold your entire portfolio today at the value you carry it on your books over and above the positive tax attributes you may have within the system how much would you have to pay, I suspect that is as theoretical a liability as they come. So for the benefit of a lot of people who prepare their net asset values and don’t include that we just sort of did the calculations for them.

Ross Nussbaum - UBS

The reason I ask is obviously it is a material number and obviously from the outside it is hard to figure out whether or not Brookfield will be on the hook for $547 million at some point. Obviously the accountants think so. Otherwise it wouldn’t appear as a liability.

Bryan Davis

If we wound down the company and sold everything then I guess theoretically that is possible.

Operator

The next question comes from the line of John Stewart - Green Street Advisors.

John Stewart - Green Street Advisors

Can you let us know what the rent was on the renewal with RBC at 1 Liberty and 3 World Financial?

Bryan Davis

We usually don’t disclose specific terms on the tenant leases. We tend not to give that out on these calls.

Ric Clark

We want to charge the next guy a little bit more.

John Stewart - Green Street Advisors

Can you give us a sense for rents at the World Financial Center as opposed to other areas of downtown?

Dennis Friedrich

The RBC, I can give you some of the background on the RBC transaction because it is not entirely straight forward type transaction. It involves a relocation of some of the current occupancy at One Liberty over to the World Financial Center and an extension out in time for about 76,000 square feet of that.

The second part of it was an extension also out in time for the other block of space at One Liberty. So it is future rents that was really the key to the transaction and preserving what their existing rent was for a block and then locking in long-term. Where we are right now in the Financial Center is sort of that 50’s gross range. For other parts we are dipping into the 40’s growth. Starting, I should emphasize, not averaging.

John Stewart - Green Street Advisors

You addressed the progress you had made on 2013 expirations and I believe in the context of those comments you had touched on 4 million square feet of activity which would seem like it would have to cover almost all of the Merrill space. Can you give us any color on what you are talking about there?

Ric Clark

4 million of activity is sort of discussions with 4 million of the tenants and it was equally distributed between the U.S. and Canada. So sort of 2 million in the U.S. and 2 million in Canada. So we have the 2013 expiry exposure extends beyond lower Manhattan. It is just an aberrational kind of a year. That is not even the right word. I apologize.

John Stewart - Green Street Advisors

What is the month of the Merrill lease maturity? Is it December or January?

Dennis Friedrich

September.

John Stewart - Green Street Advisors

What is the ground rent at the World Financial Center?

Dennis Friedrich

Very minimal. Just a few dollars a foot. Roughly $2.

John Stewart - Green Street Advisors

I am sure this is an IFRS issue but can you explain the U.S. fund acquisition option that shows up in the other assets?

Bryan Davis

Sure. Under IFRS one of the subtle nuances and differences between Canadian GAAP is we are required to account for the venture as if us and our fund partners own 74% of the entire pool of assets and Blackstone owns 26% of the entire pool of assets. Under Canadian GAAP we were able to account for it on the basis there is a high probability the put call would be exercised by either party. As a result we effectively accounted for our interest based off of our specific pool of assets.

Stepping back into the IFRS world appreciating there is a put call at a future date in 2011, or 2013 in our option, there is a value associated with effectively the indirect interest in the Brookfield assets that are held by one of our partners that they would surrender to us when the option is exercised. That is effectively what is included in that amount in our accounts receivable. It should be read net of an amount that is included in the accounts payable on that same page.

John Stewart - Green Street Advisors

So is that your best guess of the value of the true up and the difference in the value of the managed assets versus non-managed?

Bryan Davis

Effectively yes. I would say another way to look at it is if you take the [$1.42 billion] we disclosed as the net investment on the specific slide 10 you take into account the one other nuance that one of our fund partners actually owns their interest in the same entity that we do and as a result their minority shares are included somewhere else. You take that off the $283 million in the footnote and you get down to a $759 net investment. If you add to that the option that is included on page 34 that would be what we have valued effectively our pool.

John Stewart - Green Street Advisors

I wanted to come back to an earlier comment, I guess Ric had said that refinancing of the debt in 2011 that NOI will have gone up by 1/3. Comparing disclosure previous to current it only looks like about 10% based on what I am inferring. Can you kind of help us bridge the gap there? I know Dennis may have touched on it when he referenced some contractual increases but I am not clear why that wouldn’t be included in a straight line rent number. What are we missing?

Ric Clark

I am going to start with one little clarification and let Bryan do the heavy lifting here. Hopefully he is able. The NOI comment is a cash NOI number. Rough numbers, doing this from memory, it should go up from about $270 million to $370 million if I am remembering right. Bryan do you want to send me a lifeline here?

Bryan Davis

One thing that doesn’t get captured in the straight line rent number is just revenue recognition. As you deal with the renewals of your leases some of which start at future dates even though you have dealt with that leasing activity in the past. You won’t be recognizing those in your current NOI as reported whether it be cash or non-cash. There is also a component of that which is mark to market. I think we also talked about in the past that the expectation is it will be $370 million by 2011. There was a component of that contractually already bound based off of leasing activity that had been done and there was a component of it based off of the activity we expect to do between now and that date.

John Stewart - Green Street Advisors

So of that $100 million how much is contractual?

Ric Clark

The majority. I think the number is probably close to 90%.

John Stewart - Green Street Advisors

It seems if you look at the statement you plan to reduce your stake in BCR over time that kind of seems like a reversal in course from previously tendering for 100% of the thing. Can you help us understand the rationale there?

Ric Clark

For us I guess it is a couple of things. One is it is a very unique collection of assets in public entity in Canada. There really is nothing like it. Anything that was anything remotely like it has been privatized over the prior decade and a half by pension funds. Our feeling was because of the lack of supply for things like that and because of the demand if we created the liquidity for it, it would trade really well and values would creep up.

Part of it was it would give us the flexibility to raise our investment up and down over time and redeploy money into other markets that we thought would be more accretive for Brookfield Properties shareholders. That was part of it. Frankly the second part of it was this would not have been an easy thing to privatize. We have tried a couple of times and couldn’t do it. There were a number of fulcrum investors that like this thing and wanted to stay in it so we decided let’s just embrace it because we think by doing that we can create value for Brookfield Properties shareholders.

Operator

The next question comes from the line of Jimmy Shan - National Bank Financial.

Jimmy Shan - National Bank Financial

Back to the U.S. office fund NOI. If I look on slide 11 I believe the NOI there and it looks like it is cash, $92.3 million for the U.S. fund managed. If I multiple that by four I get essentially 370. Am I missing something there? Is there a one-time fee income there that would have caused this number to be basically at your 2011 target?

Bryan Davis

Not that I am aware of in 2010. The one thing you do have to consider is there are some rolls within that portfolio. In particular one roll at One New York Plaza at the end of 2010 that will ultimately reduce that for a period of time. But I just did that same match. You are not missing anything.

Jimmy Shan - National Bank Financial

With respect Bishopsgate, how should we think about that in terms of is this a one-off opportunity or should we expect you ultimately will have a much more meaningful presence in that market and ultimately an operating platform there?

Ric Clark

I think over time our hope would be to have a meaningful platform there. We are in no hurry. We are in no rush. I think the deal is going to have to make a lot of sense. I think 100 Bishopsgate did. It was just the perfect way to get introduced to the market. We are making a little money in the meantime and can study the market more closely and pick our moment. There are just lots of synergies. I made this point before and apologies for being repetitive but the incoming we got after we made the announcement from our tenant base in North America validated our feelings that there were lots of synergies on the revenue and relationship side that would make this a great market for us.

Jimmy Shan - National Bank Financial

On BCR, the level of retained interest is there a level you are comfortable with at the outset?

Ric Clark

I think the range that and this is just a gut thing so again don’t hold me to it but 40-60% ownership makes sense. I think it would be a long time before we could ever get down to something like 40%. But I think in general gut feeling that is a meaningful stake in this business and I think that is sort of the goalpost over time.

Operator

The next question comes from the line of Neil Downey – RBC Capital Markets.

Neil Downey – RBC Capital Markets

A quick one on your AFFO count. I believe you disclosed $5 million of straight line rents in consolidated properties?

Bryan Davis

Yes.

Neil Downey – RBC Capital Markets

Yet there is a $3 million adjustment as you go from FFO to AFFO. How do I think about that?

Bryan Davis

We have $5 million of straight line rent at Bay Adelaide Centre. Offsetting that is $2 million of sort of the opposite of straight line rent where we are actually…oh right and the other thing we are disclosing to is the net of minority share. So what we are doing is we are effectively backing out the $5 million that relates to Bay Adelaide Centre which is a result of IFRS and it doesn’t impact Canadian GAAP and the minority share of straight line rent that goes the opposite way in our U.S. portfolio that would be included under both Canadian GAAP and IFRS.

Neil Downey – RBC Capital Markets

Along the very same lines you do have about 2/3 of the way through the package some disclosures on TIs and CapEx. That is also broken down between direct and effectively JVs. Do I think of all these numbers as being BPO’s proportionate share of TIs and CapEx?

Bryan Davis

No. These are consolidated numbers. In fact, that is one of the things we will include probably in subsequent supplemental just to make it easier to reconcile.

Ric Clark

At this point we are approaching two hours and unfortunately are going to have to cut the call off. As many of you may still have IFRS or other questions please feel free to check in with Bryan or Melissa or myself. We would be happy to answer any questions that you have.

I would wrap up by saying although we made some really positive comments about the direction of the markets. Sometimes when markets take off they take off a bit like a shot out of a bazooka and that is not what we are suggesting. Things are definitely improving. We are excited about it but there are some negative times out there too. It is kind of a wait and see. I think all is well for us and we are excited about the coming 9 months and the balance of the year. Thank you all. Thank you, Operator. We will talk to you all soon.

Operator

Thank you. Ladies and gentlemen this concludes today’s conference call. You may now disconnect.

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Source: Brookfield Properties Corporation Q1 2010 Earnings Call Transcript

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