Brookfield Property Partners' CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: Brookfield Property (BPY)

Brookfield Property Partners L.P. (NYSE:BPY)

Q1 2014 Results Earnings Conference Call

May 01, 2014 11:00 AM ET

Executives

Melissa Coley - VP Investor Relations and Communications

Ric Clark - Chief Executive Officer

John Stinebaugh - Chief Financial Officer

Brian Kingston - President and Chief Investment Officer

Analysts

Alex Avery - CIBC

Mario Saric - Scotia Bank

Michael Goldberg - Desjardins Securities

Sam Damiani - TD Securities

Neil Downey - RBC Capital Markets

Operator

Welcome, ladies and gentlemen to the Brookfield Property Partners LP First Quarter 2014 Earnings Call. This call is being recorded. It is now my pleasure to turn the call over to Melissa Coley, Vice President Investor Relations and Communications. Please go ahead.

Melissa Coley

Thank you. Before we begin our presentation, let me caution you that our discussion will include forward-looking statements. These 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.

Ric Clark

Good morning, everyone and thank you for joining our earnings call. With me are John Stinebaugh, our CFO; and Brian Kingston, our President and Chief Investment Officer.

Today's call, we thought would be useful to highlight our financial results, operational highlights and major initiatives from the quarter, share some of our market insights and outline some of the things that we're working on moving forward as Brookfield Property Partners or BPY continues to take shape.

From an organizational perspective, the focal point of the quarter was our successful tender offer for any or all of the outstanding common shares of Brookfield Office Properties or BPO, that were not previously owned by BPY. In light of this, we'd like to extend an official welcome to our investors the tenders that BPO shares during the offering period. If this is your first call, if you are first time joining the BPY call. We welcome you and look forward to your participation and interest in the company.

The high level of support for our offer in which almost 80% of the BPO minority shareholders tendered cemented our view that an investment in BPY was compelling for several reasons, including those who tendered would receive a 79% increase in their dividend payout and 18% increase in book value per share and access to investment in one of the world's largest globally diverse multi-sector commercial real estate company that has what we think is an outstanding business plan and a very exciting future. We are appreciative of your support and feel confident that your investment in BPY (inaudible) one.

Also for those who hadn't heard BPY was recently added to the S&P/TSX composite index as well as the Global Property Research GPR 250 index. A weighted index based on shares of 250 leading property companies in the world. We're really pleased with these index inclusions and this will be important for BPY going forward. From a concept perspective most of the heavy lifting has been completed BPY now owned approximately 93% of BPO and we are looking for to completing the second phase transaction by way of plan of arrangement in early June or within approximately five weeks.

At this point, we're moving forward with our plans to integrate BPO into BPY including the consolidation of all of our office property and business development efforts under the BPO umbrella.

To fund the cash portion of the BPO merger, we raise $1.7 billion of acquisition debt and we are in the process of executing a divestiture program to pay down that facility. We currently target raising approximately $2 billion from this initiative through a combination of asset sales and also joint ventures with institutional investors.

Institutional demand to acquire high quality assets with top tier operators remain extremely strong and as a result we're targeting, executing on our program at very attractive valuations fully repaying the acquisition debt within a goal of the next 18 months. With those opening comments on this important BPO initiative, I’d like to turn the call over to John Stinebaugh for his financial result report on the quarter. John?

John Stinebaugh

Thanks Ric. Before I begin as a reminder, my remarks will focus on fully diluted FFO, which is equal to FFO inclusive of the contribution from our GGP warrants assuming their net settle in the applicable period. In addition I’ll discuss pro forma results for all period to prior to the spin-off of BPY in April of last year.

We had a solid first quarter reporting fully diluted FFO of $174 million or $0.31 per unit versus a $155 million or $0.33 per unit in 2013. The largest contributors to the increase were our incremental investments in GGP and BPL combined with strong same-store growth from our retail platform.

As expected, the impact of space was offline in lower Manhattan, reduced office revenue during the quarter. However, Brookfield Place New York redevelopment project is proceeding on plan and we expect that this will result in strong increases and cash flow in future years. On a per unit basis our results were less than 2013 as the impact of investments in GGP and BPO that were financed with the issuance of units have yet to be fully reflected in our FFO.

For the quarter, net income attributable to unit holders was $272 million versus $293 million in the prior year. This quarter we benefited from greater fair value gains particularly on our investment in Canary Wharf, partially offset by a non-cash tax expense associated with a change of law in New York.

Turning to our operations, our office platform generated fully diluted FFO of $84 million in the first quarter, compared with $97 million in 2013, the increased vacancy at Brookfield Place New York was the largest contributor to the decline, which is partially offset by our increased ownership of BPO and reduction in interest expense as a result of attractive refinancing.

For the quarter, our office operations contributed $282 million of fair value gains a $141 million of the gains were attributable to our investment in Canary Wharf as a result of strengthening running office market as well as depreciation and Canary Wharf development pipeline. Additionally, the valuation of our assets increased due to further recovery of the downtown LA office market and continuing success of retail we see at Brookfield Place New York.

In the first quarter, we closed the sale of office property yielding net proceeds of $127 million including a 90% interest in Heritage Plaza in Houston. We bought this asset in December of 2010 in the aftermath of the financial crisis with 15% vacancy. Over the past three years, we signed a number of new leases increasing occupancy to 98%. We’ve realized the compound annual rate of return on this investment over 33%.

During the quarter, our retail platform generated fully diluted FFO of $125 million, compared with $75 million in the prior year. Over the course of the last 12 months, we increased our ownership interest in GGP 23% to 33%, on a fully-diluted basis, which accounted for the majority of the increase. The balance was attributable to GGP’s same-store NOI growth of 5.7%, driven by an increase in same-store occupancy from 95.8% to 96.2% in the current year and a 10.8% increase in suite-to-suite spreads as well as a proportionate gain on extinguishment of debt.

Our multifamily, industrial and hospitality segment posted fully diluted FFO of $19 million for the quarter, this compares $15 million in the prior year. Acquisition activity was the largest contributor to the increase. In addition, the Atlantis hotel had a strong first quarter due to seasonality and an increase in group bookings of 16% compared to the prior year.

Turning to our consolidated balance sheet, our investment properties were $35 billion at quarter end which was a 3% increase compared to year-end. This increase is attributed to $568 million in fair value gains, primarily in our office platform as well as acquisitions. Compared to year-end, equity accounted investments decreased by $73 million to $9.2 billion, the decline was primarily due to our acquisition of an additional interest in Five Manhattan West which is now consolidated on our balance sheet, offset by fair value gains in our retail platform as GGP’s redevelopment projects continue to progress favorably.

Moving to the right side of the balance sheet, we finished the quarter with debt of $24 billion and partnership capital of $16.8 billion, both of which increased mainly due to the acquisitions of shares under the BPO tender offer. Our consolidated debt to capitalization was 49.8% on a per unit basis, our partnership capital declined from 25.23 at the end of the last year 24.98 as the impact of the BPO transaction offset net income during the period.

During the quarter, we executed our credit facility to fund the BPO acquisition as Ric mentioned. The acquisition facility in a two year $2.5 billion facility comprised of a $1 billion revolver and a $1.5 billion term loan. To the extent we paid down the term loan to less than $500 million, we can extend the facility for additional year.

At the asset level, we executed 13 financings during the quarter totaling $500 million on a proportionate basis. Following the course of the BPO acquisition, we will have access to its liquidity which includes approximately $350 million of unrestricted cash and $620 million of availability under its $1 billion corporate credit facilities.

Including this we finished the quarter with $1.7 billion of liquidity at the BPY corporate level. And now I will turn the call back over to Ric.

Ric Clark

Thank you, John. So operationally speaking, the BPO transaction comes at an unexpectedly compelling time in the office markets, specifically regarding Brookfield’s office holdings in our largest market Lower Manhattan. As many of you might know through your research of the market and as reported in various media outlets, Lower Manhattan has become a vibrant multi industry 7 to 24 environment that is literally changing by the week with the announcement of new office tenants, top restaurants and the retail shops and flourishing residential and tourist populations.

Those that have followed BPO over the years have known that a major discussion surrounding the company’s long-term outlook, was the releading of the Bank of America Merrill Lynch days at two of the office towers in our Brookfield Place New York complex.

Since BPO did not have a conference call this quarter, in light of the upcoming integration into BPY, I'd like to provide a quick update on where that particular space stands at this point. So, just going through a couple of data points. Of the original 4.6 million square feet leased in the complex by Merill Lynch, less than 2 million square feet remains available for lease today.

850,000 square feet of this space was leased in 2013 with an additional lease signed in the first quarter of 2014 for 57,000 square feet. As far as the pipeline of perspective tenant goes, we're currently in advanced discussions on leases comprising approximately 1.1 million square feet of the space. If these leases all come to fruition and at this point, we are cautiously optimistic that they will, remaining vacancy and 225 Liberty Street and 250 Vesey Street will fall around 800,000 square feet combined with no contiguous block of space of more than 225,000 square feet.

If recent demand continues to way that it has over the last two or three months, we could end the year of Brookfield Place with considerably less of this space available, it is way too early to claim victory or to counter chicken.

The other three towers at Brookfield Place, 200 Liberty Street, 200 Vesey Street and one North End Avenue, remain at healthy occupancy levels at 94% on a blended overall basis. Over the past six months or so, leasing momentum in the Lower Manhattan sub market is accelerated with overall vacancy rate declining by 100 basis points during the first quarter to 11.2% and direct asking rents going through $50 per square foot for the first time, since the fourth quarter of 2008.

Of our top ten leases globally during the quarter five were in this Lower Manhattan market totaling 424,000 square feet. One building I would point to specifically is One New York Plaza on the east side of Lower Manhattan and at the Southern-most tip of the island were 266,000 square feet at the top of the building was leased to Red Line and Macmillan Publishing two tenants are relocated down town from other sub markets within Manhattan. And I would say that these are good example of non-traditional downtown tenants and industries taking space previously inhabited by financial service industry tenants.

This healthy level of activity downtown goes well beyond users of office space, our retail development at Brookfield place had surpassed its tipping point in terms of an alluring mix of luxury brands, aspirational retailers, quick serves, food operators and fine dining. To date we have secured the following for our dining and retail collection. ‘13 past casual year is for our (inaudible) which is scheduled to open at some point over the next few weeks. Two signature restaurants including the First New York Restaurant by Iron Chef Jose Garces with discussions underway on our other three high-end restaurant spaces.

A highly regarded operator for our French market place (inaudible), 15 shops for our fashion collection including (inaudible) luxury brands, Hermes, (inaudible) Burberry; lifestyle amenities including an Equinox Business Club and The Institute Of Culinary Education. So, for obviously a lot of reasons very positive development coming out of Lower Manhattan which we’re very excited about.

The one other submarket I’d like to dig a little deeper into is that of Downtown LA as we’ve obviously made a significant investment there recently with the purchase of the NPG portfolio and the formation of our downtown Los Angeles fund late last year. While we knew that the improvement of the Downtown LA market was not by any stretch a short-term endeavor what we’ve seen over the last six months or has been very encouraging. Now matter what’s happening in Downtown Manhattan we’re seeing non-traditional Downtown LA tenants shopping for space in the Downtown district.

On the leasing front we’ve been very active within our portfolio especially to gas company tower where we have leased or agreed to lease over 300,000 square feet of space over the last two quarters. Prior to the end of the year we completed two important financings in this market as well at very attractive rates. We have a comprehensive capital improvement and repositioning plan underway to reestablish the former MPG assets to the rightful place as top tier buildings within the market. We’ve [intermarked] about $22 million in CapEx projects to 2014 including lobby renovations, elevator modernizations and common area refurbishments.

Again we’re still in the early innings as it relates to the MPG transactions, but the underlying value of our assets are already on the rise and overall we feel great about the prospects for our investment and those of our funding partners. We see many parallels between the Downtown New York and Downtown LA markets and as I said we remain excited about our investment in both.

I won’t get as granular on our other office markets in general, however I wouldn’t make these blanket statements on our global office platform. In addition, to the two cities previously mentioned there are pockets of positivity in several U.S. market and most notably Denver, Houston and San Francisco. The Canadian office market has slowed over the past few quarters with fundamental starting to weaken probably in light of softer demand and new supply that will be added to the inventory over the next three years.

That said, our portfolio remains very well leased at 95.6% within average remaining lease term of 8.4%. So our portfolio, again, it is somewhat protected in the near-term should fundamentals go sideways because of new supply or should demand continue to be somewhat soft. Also we recently completed an important renewal in Ottawa with the Government of Canada for 1 million square feet and our two major development projects in Canada progressing rapidly and stand at strong pre-lease levels. We will soon be adding two more top-line office assets to our already industry leading Canadian office portfolio, namely Bay Adelaide Center East in Toronto in the first phase of our Brookfield Place Calgary project.

The London market has performed I would in-parallel to the Downtown New York market, so extremely well over the past 9 to 12 months. Leasing velocity slowed somewhat in Q1, but vacancy continued to decline and we project it will continue to do so with signs also pointing towards potential rent growth. I would add that tenant interest in our London development project has been active with the first phase of London wall place fully spoken for and very encouraging discussions with tenants for the second building as well as our principal place side in the shortage area which is adjacent to Broad Gate in the city submarket.

The Australian market has been somewhat stagnant Adelaide that our portfolio remains well leased at 97.6% and we're anticipating temporary improvement in market fundamentals over the course of this year specifically in Sidney.

So just moving onto our other real estate sector starting with retail. As many of you may have heard from their announced results earlier this week General Growth Property just continued to maintain strong momentum and reported solid financial and operational results. Same store NOI increased 5.7%, initial rental rates increased to 11% against fixed hiring leases and overall tenant sales increased 1.2% on a trailing 12 months basis. These rates have returned to pre-recession levels and have begun to moderate a bit but still trending positively.

Finally, the occupancy in the General Growth Properties portfolio now stands at 90.4% an increase of almost 2% from a year ago. GGP made significant progress during the quarter on a number of its major redevelopment projects, most notably the Ala Moana Center in Honolulu where leasing activity has been strong. Within GGP we have $1.4 billion of projects currently under redevelopment and active construction with over $2.2 billion of projects in the pipeline.

During the quarter we closed on our $157 million of investment in China, Xintiandi which we have previously disclosed marking our first investment in China. Our 22% stake in Xintiandi gives us exposure to a portfolio of mixed used properties in Shanghai split between premium retail and office assets as well as an iconic lifestyle centers.

The structure of this investment as we have discussed before as preferred equity allows or flexibility in there is what we believe significant embedded growth both in the Shanghai portfolio as well as other major cities in China. Our growing multi family industrial and hospitality platforms operationally are also performing quite very well.

Multi family occupancy within our portfolio remained stable at 95% and we were able to push rents by an average of 3% over the prior quarter. Occupancy within our industrial portfolio dipped slightly about 120 basis points, primarily resulting from our opportunistic investments in logistic assets with significant vacancies or a near-term lease expiry rollovers. As we have demonstrated in several of our office and retail acquisitions, these challenges are not something we shy away from and past from experiences we find these opportunities to be the most accretive for us.

And finally our hotel business outperformed the prior year with a 2.4% increase in occupancy, primarily due to the success of Atlantis as John alluded to earlier. We anticipate a further investment in this sector in the near future and we'll have an update on that over the next few months and our next quarter's call, we hope.

So, with the first big and important step in our organization revolution, the BPO acquisition essentially behind us, we cannot be more excited about the prospects with Brookfield Property Partners as we look forward. Although, we have dominated today's call with an update on the BPO transaction and operational update on our portfolio assets. Brian Kingston and his team has been equally as active on the acquisition front.

Although, we don't have any new transactions of significance to report today. This is a significant area of growth for us, we've got a great pipeline and we do expect announcements in the future. Maybe Brian can speak to the investment climate during Q&A, if anyone is interested in that.

In addition to expected new business to help fuel our growth, in our view there is an abundance of internal organic low hanging fruit growth opportunities that we think is important for investors to be aware of.

For example, our very sizable office portfolio of roughly 80 million square feet, currently has an occupancy level of 88% versus our target of 95%, which is closer to our historical occupancy level average.

We have great confidence in the ability of our office leasing and asset management professionals and know that with the improving market conditions that I spoke to early that not only will close that occupancy gap, but will also know that 17% current gap between employees rents and market rents in the process executing on these two things that is increasing occupancy and closing the mark-to-market spread could add roughly $130 million to our annual NOI back of the envelop.

Although our retail assets are pretty well leased, they too have in place rents 6% less than where we pay current market rents, the leasing and asset management teams within our mall business are market leading as well and as they continue to work to narrow this gap BPY shareholders will see further NOI increases for our company.

During periods of global economic downturn, we work to add lower misprice development opportunities to our pipeline, we do this on an option basis to the extent possible or pick up (inaudible) pricing below what we believe is market, we work during the downturn to entitle our projects positioning them to be first out of the gate, once markets recover. A few debt points about our development pipeline and launch projects, which I think might be useful for investors to be aware of.

Within our office portfolio we have density to add 19 million square feet in 21 buildings. Of these we have launched full construction on four buildings, one in Toronto, Calgary, third in Sao Paulo once complete these four buildings could add an additional $135 million to our annual NOI.

We're close to launching two buildings totaling roughly 500,000 square feet in London, at London (inaudible) place, which when completed would add about $25 million to annual NOI at our current share.

The first phase of our Manhattan west project is been launch at this point we are creating the land by doming the deck, at Manhattan West we currently anticipating moving to the second phase and launching construction of an 844 unit apartment building in about one year’s time. Once this price is completed and stabilize which we think will be at the end of 2017 or beginning of 2018, the projected annual contribution to our NOI could be around $40 million at 100% ownership. Future phases primarily 4.2 million square feet mostly of office space could add an additional $300 million to our annual NOI as well. Within our retail portfolios our affiliates opportunities to invest capital to update or expand assets such as the GGP mall in (inaudible) which I mentioned earlier.

In total within our retail platform we have $330 million of capital at our share invested in these type of projects which we expect to generate 9% to 11% equity returns, that obviously we have a lot on the go internally and we look forward to updating you on our execution process and the very positive impact of these projects on our results on future calls.

So the final point that I would make before turning the call over to investors and analysts for questions is regarding our investor outreach. At BPY with its global and diversified nature is a bit unique we have a great business plan and are very excited about our future. We realized that we have some work to do so that investors get more familiar with our story, business plan and our great projects.

In that regard John and I will be back on the road shortly and would look forward to catching up with you at your convenience. In the meantime, following our index inclusion we anticipate to begin to benefit from analyst coverage with eight analysts targeting picking up BPY by the end of this year, some within the next 2 or 3 months. Anything we can do to be helpful to facilitate this process just let us know.

So those as our prepared remarks, operator I'd now be happy to turn the call over to investors and analysts to fill their questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Alex Avery, CIBC.

Alex Avery - CIBC

Thank you. Just a number of different questions. I guess just starting out on the hedging program. I notice that you are essentially fully hedged on the euro, 77% hedged on the pound and yet fully un-hedged on the Canadian dollar. I was just wondering if perhaps that was a practicality saying it’s more difficult to hedged the Canadian dollar or some color on greater currency stability or do you on different currencies. Can you just I guess fill in some of the gaps there please?

Ric Clark

John you want to fill that?

John Stinebaugh

Sure. Alex this is John. So in terms of the currencies we work with the treasure of Brookfield back to mentioned (inaudible) and in actively review our currency exposures. And in terms of where the Canadian dollar is right now relative to the U.S. dollar, we feel like they're going to move pretty well in tandem, so that's the reason for that. We're as with the other currencies we've decided it makes sense at the levels that they are to put hedges in place and also in light just of cost of hedges of those various currencies.

Alex Avery - CIBC

Okay that’s helpful. On the lower Manhattan great progress there sounds like things are really shipping up. Could you provide I guess a little bit more color on how we might expect to see some of that released space coming online and contributing to FFO and cash FFO with that?

John Stinebaugh

Well, it’s probably a little early to give, the kind of details you are probably looking for Alex, but I will say that the tenants that we’re looking for, would all be looking to be progression of their -- tenants are in discussions with are looking to be in possession of their space I would say at some point in 2015, and as to where when rent commence or whatever I guess we could talk about that one, we get leases signed should we be able to do that.

But I think the good news is this market is really started to pick up and in fact what we are hearing is that becoming a preferred location versus midtown for certain tenants. So a lot of the deals that have been here with the industry is seeing some tech tenants interested in the space here and some other non financial tenants.

So all of the things that we have been saying for many years about the nature of the market, the percentage of the green space, the overall space the amenity that kind of thing are really appealing to the businesses that are driven by the 25 to 35 year old crowd and I think a lot of those employees live within close public transits access to this market and (inaudible) they prefer to be here.

So we have been pretty encourage by in and I think we could well get the job done here within the next 12 months.

Alex Avery - CIBC

Okay, and so the $1.1 million that you are talks that you are saying most of them are looking at 2015, how I about the guess all of the space that you leased in 2013 that would have been mostly near-term, there wouldn’t have been any 2017 commencements in there?

Ric Clark

The only, I actually don't have that information. The only tenant that -- the one tenant that I'm not really that clear on as [John stated], when they plan to move in. But that lease is done. And I know that they have access to the space. But I just, Alex, I'm sorry, I don't know the timing of that, want to get back to you on it.

Alex Avery - CIBC

Okay, that's great. And then in the retail disclosure, about a 9% downtick in market rents for the retail portfolio. And I was just curious, I noticed that type of volatility in that number before, is that something to do with seasonality or is there something else that can explain that?

John Stinebaugh

Alex, this is John. That's primarily seasonality. The fourth quarter is the strongest associated with the Christmas season for the retail business.

Alex Avery - CIBC

Okay. So, we should expect that in the presentation in the future?

John Stinebaugh

That's correct.

Alex Avery - CIBC

Okay. And then when it comes to the divestiture program, you’ve clearly got a program in place, where you are looking at certain assets for repaying the credit used to buying BPO. But you've also been quite active recycling capital, and I think you basically divested net proceeds over $260 million and invested $275 million or so. Can you talk a little bit more about the ongoing capital recycling program and perhaps what the strategic objectives will be along those lines; are they geographic or currency or asset type?

Ric Clark

Yes. Brian, why don't you speak to that.

Brian Kingston

Sure, yes. So, I’d say, the general approach of the strategy behind the recycling of capital is really about enhancing our returns. And so as we approach on investments really is trying to buy opportunistic or value add type situations, use our platforms to stabilize assets, fill up vacancy et cetera. And then when they’re in a state where we can sell them at very attractive prices and then take that capital and redeploy it into higher returns, then that’s when we do that.

And I know that’s a generic statement, but what I mean by that is it’s not necessarily geared toward a specific currency outcome or geographic or even sector outcome, but it’s informed by, and really I think one of the key benefits of our platform is that we can look at different sectors, and if we think that returns are more attractive in a particular geography or a particular sector or otherwise, we can take capital out of some of them and put it into other.

So at the moment, general comment, I’d say we are -- you will see us most active in recycling capital out of investments that we made two, three, four years ago at the bottom of the cycle at very attractive prices on assets that had a lot of vacancy that we have now matured and stabilized and are at point where there is, you are basically just have market rental growth from that point forward. And taking that capital and putting it into either emerging markets like China or India or into continuing distressed situations like we're seeing in Europe.

Alex Avery - CIBC

And so does that strategy apply to all of your assets or is there sort of [tune back] sort of you got a core strategy and then a core opportunistic value add?

Brian Kingston

It applies to all of our assets, I’d say that we -- just given the scale of two of our platforms GGP and the office business, it’s obviously -- it would be very difficult to make a major shift out of the sector entirely but certainly within both of those portfolios we’re actively recycling capital at the asset level, taking -- selling office assets. As an example they are fully stabilized and redeploying it into either development or value add opportunities in that sector or another one.

Alex Avery - CIBC

Okay. That’s great. I’ll turn it back. Thanks.

Brian Kingston

Okay. Thank you.

Operator

Thank you. Our next question comes from Mario Saric, Scotia Bank.

Mario Saric - Scotia Bank

Hi, good morning. Maybe just coming going back to Lower Manhattan and just a clarification question Ric, on your 1.1 million square feet that’s in advance discussions, would that be consistent with historical 1.5 million square feet that BPO has referenced, so advanced discussions approaching the LOI stage?

Ric Clark

It would. I’d say on top of that there is some discussions that are advancing on space that has future expiries as well. So all-in-all it’s a good pipeline, so it would be consistent; maybe there is a little more activity on some of the future expiring space as well.

Mario Saric - Scotia Bank

Okay. And then I guess we’re reading about tenants looking Brooklyn and New Jersey as potential options; are you seeing any competition for Brookfield Place or your assets on east side which may be looking at Jersey City or Brooklyn at this stage?

Ric Clark

I think every tenant that considers Lower Manhattan, makes a trip over to Jersey City just to see what the value proposition is over there, so yes, I’d say there is markets heat up, the historical experience typically is you start to see competition from New Jersey in the near (inaudible). So yes that competition definitely exists.

Mario Saric - Scotia Bank

Okay. I guess, I'm just trying to understand the relationship, historically one of the awards of Lower Manhattan has been a pretty steep discount to Midtown. So I'm just trying to understand the relationship between those two and then are we Lower Manhattan versus those [boroughs] and whether over time we can expect similar type migration because of the cost advantage?

Ric Clark

Yeah, so Lower Manhattan versus Midtown still definitely a value proposition, the rents are probably at least a third less and media a little bit more. But as I mentioned, the Lower Manhattan overall, vacancy is about 11% now. And as that gets below 10, I think we can expect to see rents start to rise pretty meaningfully and concession starting to tighten. And when that happens, I think the [boroughs] become the value proposition and New Jersey becomes the value proposition. And that's kind of historically what happened. I don’t think we’re quite at the point where people are walking away from Lower Manhattan because the rents are too high or they can’t get the space that they need, but we could get to that point once Brookfield Placed gets leased up in this market. I mean obviously there is a real trade and new development, but it’s price here, we can call that a value proposition.

Mario Saric - Scotia Bank

And maybe just on the World Trade Center, development there is with some press in the last week or so with respect to three World Trade Center. Clearly there probably pros and cons with respect to that moving forward for Brookfield generally speaking, what's Brookfield take on that situation?

Ric Clark

We're trying hard to stay out of it, to be honest. So Mario, I wouldn't have a comment on that right now.

Mario Saric - Scotia Bank

Okay. Maybe a question for John and just on the IFRS, so maybe 24.98 presumably that reflects ownership interest in BPO as of March 31 of 2014, is it fair to say that on a pro forma BPO 100% interest basis that pro forma IFRS maybe may come down 25% or so?

John Stinebaugh

That’s certainty Mario because if you look at what is reflected in that number, the first initial tender offer settled by the end of the quarter, the extension of the tender offer which was for a lot shares, that closed March 31 but it didn’t settle till after and the plan arrangement (inaudible) settle in June. So you have incremental dilution associated with those second two transactions that will be reflected in the NAV and I think your point is a fair point.

Mario Saric - Scotia Bank

Okay, one last question just on the various global indices, done a good job of getting into some in Canada on the GPR, are there any other potential index inclusion scenarios that you see over the next 12 months or is it something that’s more of a longer term objective for BPY?

John Stinebaugh

It’s something we’re actively working to try and see if we can get into various indices, the global ones are I think pretty logical for us just given our business model and our asset mix. So we are having conversations to see if can advance that. So, hard to say because everybody kind of has their index conclusion criteria. But in the case of the TSX, they did change the inclusion criteria, and we are helping to do that with other indices, so we can get broader inclusion.

Mario Saric - Scotia Bank

Okay, great. Thank you.

Operator

Thank you. Moving on to Michael Goldberg, Desjardins Securities.

Michael Goldberg - Desjardins Securities

Thanks. I have some questions about the low hanging fruit items that you mentioned, just wanted to make sure that I got them all and some follow-up questions. So, first one, the rent and occupancy gap that's a $130 million NOI?

Ric Clark

Okay.

Michael Goldberg - Desjardins Securities

Yes. Development outside London 135, London, 25 and Manhattan West apartments 40 is that to all of them?

Ric Clark

Yes.

Michael Goldberg - Desjardins Securities

Okay. So, I guess the two follow-up questions on those things are expected timing and how much of them could be expected to fall down to the FFO line?

Ric Clark

I don't know if we have that calculations with us here, Michael. So we will have to circle back to you on that one

Michael Goldberg - Desjardins Securities

Okay. I also have one other question. Just roughly speaking will you figure that the decrement FFO and FFO per share in the quarter was for the still vacant space in the formal middle space?

Ric Clark

I don’t -- John, do you have anything on that or…?

John Stinebaugh

Yes, it was roughly 80 million per year. So, that was when the lease expired September 31 of last year. So, until we get basically contribution from some of the new leases that have been signed that basically would be decrement.

John Stinebaugh

So it’s still for the quarter roughly about $20 million.

Ric Clark

The 100% BPO is probably $40 million for quarter I think it’s 50% it was $20 million.

John Stinebaugh

So going forward its going to be 40 with 20 million prior to the acquisition of the additional BPO shares.

Michael Goldberg - Desjardins Securities

Okay. Thank you.

Ric Clark

Okay. Thanks bye.

Operator

Thank you. (Operator Instructions). We’ll move on to Sam Damiani, TD Securities.

Sam Damiani - TD Securities

Thanks good morning. Just turning to IFRS, I guess you said there is $0.25 more of incremental dilution, what was the dilution to the IFRS per value in the first quarter? Was it above $0.75 then?

John Stinebaugh

It was $0.70.

Sam Damiani - TD Securities

$0.70. And as you look around the world North America, Europe and emerging markets what’s your favorite property type for acquisitions in each of those regions?

Ric Clark

That can be a long question or a short one, I think we're given the scale and size of our platforms in retail and office, we are just seeing a lot of natural tuck-in acquisition opportunities in both of those sectors in major areas where we operate, which should be North America, Australia and London. And so those, we are seeing, what we're seeing there are good opportunities, relatively small scale transactions to fold into our existing platforms and I think we generally we see those all of the time, but I think at the moment we are probably little more positive particularly on some of the major U.S. markets than some others maybe.

I think within the other asset classes so industrial as an example we’re very positive on it in U.S. and in Western Europe we think it’s been a lagging sector, and it’s a smaller scale platform for us than the other two I mentioned so the percentage change that you’ll see us undertaking over the next 12 months will be a lot higher because it’s an area of significant growth, plans of course both on the acquisition and the development front we think as new supply is relatively constrained in industrial in the U.S. and demand should be strong over the next 12 months.

Multifamily it depends on the market in the U.S. we certainly like the U.S. East and California as markets, a number of the other markets are while supply is reasonable constrained pricing has really been the main issue for us and we’ve been struggling to find opportunities to put money to work there.

Sam Damiani - TD Securities

Okay. And then I hear what you maybe mentioned at the earlier part of the call here a large hotel acquisition coming up later this year, maybe I misheard you?

Ric Clark

One other things we’re working historically we haven’t been a big player in the hotel space anything that we had done in that area had been through providing mezzanine debt that was near to the equity put in by an experience operator as a result of that strategy as you know we now own 7,500 hotel loans and so we decided that we want to get smart in the hotel space. We’ve noted there are lot of people in the private equity area made a lot of money on investing in hotel. So we’re adding some hotel capabilities to our staff and expect to make some investments in hotel. So the only thing I would take exception to what you said is not necessarily a large acquisition is pending, but we could well do a couple of smaller hotel deals.

Sam Damiani - TD Securities

Interesting, okay. And just finally on the topic of index inclusion. I guess there is kind of one major global index, but you're not in at this point. Could you identify what the barrier is in -- to you to be getting added to that index?

John Stinebaugh

Well, the barrier is just our partnership firm. So and that was the case with the S&P, TSX index as well and we were able to get them to change the criteria to enable partnerships to be included, but that's May, June.

Sam Damiani - TD Securities

And is there any precedence for that sort of being relaxed in terms of other companies being added to the index or no?

John Stinebaugh

To the global one?

Sam Damiani - TD Securities

Yes.

John Stinebaugh

Not that I’m aware of. But I think what we’ve seen with this industry is that the index provider has discretion to change the index inclusion rules in consultation with the index committees. So with the S&P, TSX when we ended up meeting with the committee, making the case and were able to over time get them to them to be receptive to the argument, so we look to try do the same thing with other indices.

Sam Damiani - TD Securities

And it’s nothing to do with the fact that your domicile didn’t [remit]?

John Stinebaugh

I don't think that's an issue for the global one, that might be more of an issue for the U.S. one. I think it's more an issue of the partnership form.

Sam Damiani - TD Securities

Okay. All right. Good luck. Thank you.

Operator

Thank you. And we'll take our final question from Neil Downey, RBC Capital Markets.

Neil Downey - RBC Capital Markets

Hi, good morning everyone. A question specifically for John as it relates to your capital expenditure disclosures. Can you just walk us through a little bit what you are telling us here on page 32, I believe is of the supplemental in that business section, the bottom of the page refers to tenant improvements and allowances at specifically sites, the office and retail segment but there is no numbers given here for either industrial or multi-family and other.

And then how the numbers on the bottom of page effectively tie to the numbers on the top of the page where we’ve got three categories effectively tenants installation costs, capital expenditures and then development and redevelopment expenditures.

John Stinebaugh

Sure, Neil. What we wanted to do was to breakout some of the more recurring CapEx, the tenant improvements and leasing costs. So that’s within the second table. And the office and the retail are the most mature, just given the scale of the multi-family and industrial, they are very small numbers at this point in the evolution of our business.

Those are additive to the numbers in the top table which are more the larger CapEx associated with whether it’d be development projects and things of that nature aren’t necessarily recurring CapEx.

Neil Downey - RBC Capital Markets

I believe and this would be sort of tying back to the more of the former BPO disclosure. There is line items described as second generation leasing cost and tenant improvements as opposed to really describe re-leasing cost, and then there was line items such as sustaining capital expenditures. I mean to think that type of disclosure, might be forth coming in the future or is that what you are trying to get at when we look at the bottom of that page 32 or how do I think about that?

John Stinebaugh

Yes, that's what we're trying to get at Neil and certainly the supplemental is a work in progress. So, we will take a look and what we are trying to do is to give people a sense of what's the more recurring CapEx versus what is a CapEx that more growth oriented that where we think we will earn a return on the capital commensurate with new investments.

Neil Downey - RBC Capital Markets

Okay. And I guess for you hotel business, we should maybe just use depreciation as a proxy or for sustaining CapEx or how do we think about that?

John Stinebaugh

I think depreciation is not a bad proxy for that. But we'll look to bolster this in the future quarters Neil. It seems like it probably hasn't been as clear as we wanted it to be. So, we'll [bolster] that.

Neil Downey - RBC Capital Markets

Yes. Okay. Thank you very much.

Operator

And thank you. That does conclude today's question-and-answer session. I would like to turn it back over to the speakers for any closing or additional remarks.

Ric Clark

So, thanks everyone. We appreciate your interest in BPY and attending our call today. As I mentioned, John and I will be back out on the road and happy to meet with anyone. And if you have any questions in the meantime, please let us know. So, thanks again for your support.

Operator

And thank you. That does conclude today's presentation. Thank you for your participation.

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