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Brookfield Properties Corporation (NYSE:BPO)

Q3 2010 Earnings Conference Call

October 29, 2010 11 AM ET

Executives

Melissa Colley – VP, IR and Communications

Rick Clark – President and CEO

Bryan Davis – SVP and CFO

Tom Farley – President and CEO, Canadian Commercial Ops

Dennis Friedrich – President and CEO, U.S. Commercial Ops

Analysts

Neil Downey – RBC Capital Markets

Karine Macindoe – BMO Capital Markets

Jay Habermann – Goldman Sachs

Michael Knott – Greenstreet Advisors

John Guinee – Stifel Nicolaus

Suzie Kemp – Credit Suisse

Jimmy Shan – National Bank Financial

Jim Sullivan – Cowen & Company

Sam Damiani – TD Newcrest

John Addy [ph] – Citi

Alex Avery – CIBC

Mario Saric – Scotia Capital

Karine Macindoe – RBC Capital Markets

Sam Daminai – TD Newcrest

George Arbach – ISI Group

Operator

Welcome ladies and gentlemen to the Brookfield Office Properties third quarter 2010 conference call. This call is being recorded. (Operator Instructions) It is now my pleasure to turn the call over Miss Melissa Colley, Vice President Investor Relations and Communications. Please go ahead Miss Colley.

Melissa Colley

Thank you. Good morning and welcome to Brookfield Properties third quarter 2010 conference call.

Before we begin our presentation, let me caution that our comments and discussions will include forward-looking statements and information, and there are risks that actual results, performance or achievements could differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements and information.

Certain material factors and assumptions were applied in drawing the conclusions and making the forecasts and projections in the forward-looking statements and information. You may find additional information about those 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 Rick Clark, President and Chief Executive Officer.

Rick Clark

Thank you Melissa. Good morning everyone. We, as you would have seen from our press release had an active quarter on many front. No surprises this quarter though, and our performance was in line with our expectations.

We experienced solid financial results and can now see a clear path to exceeding the full year guidance that we had previously given. Bryan will give you an update on where we think we may end up the year when he gives his report in just a few minutes.

During the quarter, the trend of improving operating fundamentals continued in most of our markets. The central business districts of New York City and Washington, D.C., continue to be the markets where there’s universal confidence and noticeable visibility in this improvement.

The market metric of the other geographies vary from small to more noticeable recovery and improvement, and Tom and Dennis will talk more about that when they get into the details of our operating performance and what’s going on in the market.

And although concerns linger around local, state and federal budget deficits and how politics might get in the way of responsible decisions and impact things like consumer confidence and job growth, recent demand has steadily improved, at least for high quality office properties in economically dynamic and resilient markets, which are the assets in the markets where we’ve tried of focus our investment.

Backing this and making a couple of points, the first is a couple of days ago, in CBRE quarterly conference call; they reported that leasing revenue was up 27 percent year over year. Also backing this up, if you turn to page 26 of our supplemental, we leased 1.1 million square feet of space during the third quarter and on page 27, 4.7 million square feet year to date.

Our pipeline of tenant interest in activity is very solid and we expect by the end of the year, to be able to meet or exceed our five year, in our prior five year average annual leasing, which is 5.9 million square feet.

Our overall occupancy for the quarter ended at 95.1 percent, which you’ll see on page 28 of the supplemental, representing a 30 basis point overall gain from what we reported last quarter. I point out thought that this pickup resulted from the inclusion of our 99.1 percent leased Australian portfolio in the Q3 leasing statistics.

During the quarter, our U.S. occupancy rate actually declined by 20 basis points to 93.7 percent as a result of two leases expiring in Boston. For Q3, our Canadian portfolio remained steady at 96.9 percent and overall, same store North American portfolio leasing as of the end of the third quarter, was 94.8 percent, also 20 basis points below Q2, and 10 basis points down year to date, but about 60 basis points up from a year ago.

Q3 leasing was done, annual net rental rates exceeding in place rents on expiring leases by $2.21 per square foot, or roughly a 10 percent increase. This represents the 19th consecutive quarter where we have captured mark to market gains in our leasing.

Because of general concerns over consumer confidence and unemployment in the U.S., our expectations are that basically the Fed has no choice but to keep North American interest rates at historically low levels, and this is an opportunity for us.

We’re working on refinancing several of our properties including those within the U.S. office fund. With 10 year Treasuries at 2.65 percent and Canada’s at about 2.9 percent, we are currently fielding all in quotes anywhere from four percent to 5.25 percent for seven to ten year type of financing.

From an ownership perspective, this environment is having a positive impact on cap rates. From a buyer’s perspective, not so good. The door on assets trades has opened though, as capital from all over the world is chasing high quality merchandise focusing specifically on New York City, Washington, D.C., and London where trades are occurring at record pricing.

Our view is that the cap rates will go even lower, pushing values north for high quality assets such as the ones that we own. For lesser quality assets in these markets, I think we’ll see some data points which also go to prove that even the lesser quality assets in these markets are going to trade at pretty low cap rates, and I think what we’re seeing is that there are a handful of owners who are looking to basically make some trades before the end of the year in order to either book gains or raise cash for the yearend balance sheets.

So bottom line, it’s a great time to own a high quality asset in any of these markets.

So later in today’s call, as I mentioned, Dennis and Tom will provide color on office fundamentals and our operating accomplishments in our three geographies and I will give a progress update on our major priorities and strategic initiatives as well.

But before we get into that, Bryan, how about giving a financial report.

Bryan Davis

Great. Thank you Rick, and good morning everyone. This morning we reported funds from operation totaling $169 million for the third quarter. This compares with FFO of $123 million for the same period in 2009. On a per share basis, FFO was $0.32 per share compared with $0.28 per share.

Our net income for the quarter totaled $156 million or $0.28 per share. That compares with a net loss of $288 million or $0.66 per share for the same period in 2009. The prior year did include revaluation losses of approximately $450 million.

The increase in FFO of $6 million, or 37 percent to $169 million can be attributed to a few things. First off, we saw an increase in other income that was earned. This is a result of the carry associated with the repurchase of debt pursuant to the swap as we discussed in previous quarters, which amounted to $17 million including amortization of the discount to maturity.

Secondly, we had increased contribution from our residential operations of $11 million. In addition, we had commercial property net operating income. That was up $10 million. We also had lower interest expense of approximately $ 4 million.

All of these benefits were partially offset by an increase in our general and administration expenses in the quarter of about $4 million over our typical run rate, representing transaction costs associated with the various repositioning transactions we’ve been working on through the quarter.

Net operating income from our continuing operations on a proportionate basis as highlighted on page 11 of our supplemental report, was $258 million for the quarter compared with $248 million for the same period in the prior year.

This increase is a result of the reclassification of Bankers Court in Calgary, The Adelaide Center in Toronto and 1225 Connecticut in Washington, D.C. It’s commercial properties. Leases coming out of those buildings accounted for $8 million of the increase in the quarter.

We also had lease termination and other non-recurring of approximately $2 million received in the quarter. We in addition to that, had $2 million incremental and recurring fee income and same store growth of $2 million, or one percent. These increases were offset by a reduction in net operating income from the sale of our two Washington properties in the fourth quarter of last year.

Our same store growth of one percent benefited primarily from the stronger Canadian dollar, which accounted for $3 million of that. Absent that, same store growth in the quarter was relatively flat as the benefit of increased rental rates on new and modified leases was offset by expiries in some of our markets.

Compared to same store growth last quarter of approximately two percent, we did see a decline and this is attributed to an increase in the denominator as Q3 2009 increased relative to Q2 2009 with the balance of the decrease being attributed to timing of lease rolls and occupancy erosions in some of our markets, particularly Boston.

On a year to date basis, same store growth was 4.1 percent or 1.2 percent excluding the impact of foreign exchange.

Our residential development operations earned $32 million in net operating income as compared to $21 million during the third quarter of 2009. As highlighted in our residential slides which start on page 34 of the supplemental, this increase was a result of increased home sale, which also closed at higher selling prices than in previous year on average. This increase was offset by a reduction in lot sales.

As a result of our announced transaction to dispose of this business in early 2011, we will be classifying it as discontinued operations for next quarter.

Moving to our proportionate balance sheet, the acquisition of the Australian assets which closed at the end of September are reflected in our Q3 balance sheet and have been highlighted on an appendix to our supplement on page 46.

The impact in summary was an increase in commercial properties of approximately $2.6 billion. Valuation metrics have been included on slide 20 and represent a 9.1 percent discount rate and a 7.3 percent average terminal cap rate.

Commercial developments increased $467 million from the acquisition of the active development to City Square in Perth. Commercial property debt increased $1.7 billion which includes draws on our City Square construction facility of $102 million, which we’ve highlighted in our active development statistics on page 33 of the supplemental.

In addition to this, our corporate debt increased as we took out a bridge loan of $560 million as well as drew on our corporate credit facility for about $170 million.

Receivables and accounts payables both increased on the assumption of associated working capital, as did non-controlling interest as a result of the consolidation of a 60 percent Brookfield prime property fund, which is a publicly listed Australian property fund that owns an outright interest or a partial interest in four of the acquired properties.

In addition, on that slide, we highlighted the funding for the acquisition, which as I mentioned before, includes the acquisition facility of $560 million and a draw on our corporate bank line of about $170 million. Over and above that, the funding included cash and cash equivalents of $600 million which included a dividend of $180 million we received from our residential operations.

I will point out that with the recent proceeds from our preferred shares series P offering that we closed last week, we paid back our bank lines and also upon sale of our residential operations in Q1, 2011, we will be in a position to repay the balance of the acquisition bridge loan.

At September 30, the fair value of our investment properties, including our unconsolidated joint ventures and recently acquired Australian properties on a proportionate basis totaled just shy of $18 billion, which translates to a value per leasable square foot of about $412.

As highlighted on page 320, the values during the first nine months of 2010 increased by $3.3 billion. This is largely a result of the aforementioned Australian acquisition. In addition to that, we had the acquisition of a remaining 50 percent interest in 77 Kay Street which we discussed last quarter, and then we had the reclassification of 1225 Connecticut from development to investment property at the beginning of the year.

We also impacted from the strengthening of the Canadian dollar relative to the U.S. dollar and over and above that, we had value increases of about $225 million due mainly to increased cash flows as a result of current period leasing activity and timing adjustments.

As a result of above, our common equity ended the quarter at $6.9 billion or $13.68 per share, or $7.4 billion for $14.71 per share if you don’t consider our future tax liability.

Before I conclude, I did want to update our outlook for the balance of 2010. As Rick did mention, we are on track to outperform our beginning of year guidance as a result of the successful investment of our recent capital raises.

Our original guidance which was updated last quarter for the Tishman gain was a midpoint of $1.28 per share and we are on track to achieve the midpoint of approximately $1.36 per share plus or minus a penny. The increase is really a result of the income contribution from the repurchase of debt at a discount. This is approximately $0.06 per share increase.

We also expect to earn a performance fee from our Canadian fund of approximately $0.06 per share in the fourth quarter. And in addition, with the close of Australia for a full fourth quarter, we expect to have a net contribution from Australia of approximately $0.03 per share.

These increases are offset by transaction related costs as a result of activity associated with the Australian acquisition, the creation of our Canadian REIT box, as well as the sale of our residential platform.

In addition, it’s offset by the addition of non-real estate related depreciation, which was not otherwise factored into our original FFO guidance, and also offset by cash returns on capital that we had originally forecasted in our original guidance, and have now invested.

So on that, I will conclude my comments on the financial results and turn the call back over o Rick.

Rick Clark

Thank you Bryan. So during the third quarter we made good progress on a number of our strategic initiatives and I’ll just go through a few of them quickly. As Bryan mentioned, during the third quarter we completed part one of our international pure play repositioning strategy by concluding the acquisition of a high quality portfolio of Australian properties located in Sydney, Melbourne and Perth.

The terms were mentioned by Bryan and also were previously disclosed and have been incorporated throughout our supplemental where relevant.

I wanted to share with you a recent data point coming out of Australia. Yesterday, ING Management Ltd. announced that it received an offer for ING Industrial Fund at a price equivalent to net tangible asset values which represents a 19 percent premium to where the listed security was trading prior to this activity.

This represented, this price represents an unlevered IIRR of about 9.4 percent which I think compares favorably to our 9.1 percent given that it’s an industrial portfolio versus office. As has been our thesis, no portfolio of assets or platform would trade in this market at less than net asset value.

To learn more about our portfolio and the Australian market in investment annex, I would invite analysts and investors to join us in Australia the week after next. We have a great program lined up including touring our Sydney and Melbourne assets and guest speakers who will talk about the investment and market landscape within Australia. So I hope that you can join us.

Those dates are November 10 through 12. You can register on our website, or please give Melissa a call if you have any questions or need help signing up.

Working to complete our pure play strategy, during the quarter we also announced part two, which is the planned divestiture of our residential land development and housing business, including the agreed upon economic terms for this part of the transaction. We anticipate that this part will close early during the first quarter of next year.

Moving on to some of the things that we’re working on, on the lines of liquidity, the net result of a number of things that we’re working on, we expect could increase our liquidity to about $2.5 billion. And just mentioning these things, we’re refinancing two assets. One is 245 Park Avenue in New York as well as Three World Financial Center and expect to bring in a little over $300 million, probably $325 million into our treasury.

The refinancing of our U.S. office fund is progressing. We previously mentioned we have, through acquiring some of the mezzanine debt, through a total return swap, have previously de-levered this fund and expect, in fact, over delivered, and expect to pull $300 million plus or minus of proceeds out once the refinancing is complete.

We’re also working toward selling down part of our interest in our Canadian listed subsidiary, Brookfield Office Properties Canada, and that could bring in plus or minus $500 million over time. The residential land divestiture transaction will bring with it a $450 million note and when monetized, that money would go into our treasury.

So all of this coupled with about $900 million of undrawn lines and cash on hand give us this total liquidity in excess of $2.5 billion.

As far as using this liquidity, we continue to see opportunities to put it to work accretively and at the moment are pursuing a couple of single asset acquisitions, which if successful, we’ll be able to tell you more about at a later date.

On the development side, although we don’t expect to have to provide any additional funding on the City Square development in Perth, this 900,000 square foot project is advancing on schedule and should be completed at the end of next year, and will generate about $60 million of net operating income once it’s stabilized.

The project is currently 72 percent leased, and we have leases out for the balance of the space, and hopefully by the end of the year, this project, even though it’s 12 months away from being completed, will be 100 percent pre-leased.

We also continue to seek anchor tenants for our London 100 Bishopsgate joint development project and hope to have more to say on this early next year.

So with that just kind of a brief update on some of our strategic initiatives, I’d turn the call over I guess first to Tom to give specific operating report. So Tom, you want to talk about Canada and Australia?

Tom Farley

Sure, thanks Rick and good morning everybody. Starting with Canada, during the third quarter we saw positive absorption in our three largest markets which include Toronto, Calgary and Vancouver, and the overall occupancy rate for Brookfield’s Canadian portfolio stood at 96.9 percent which is unchanged from last quarter.

So looking at a few of our specific markets, in Calgary, the overall vacancy at the end of the quarter totaled 13.8 percent which is an improvement of 140 basis points. Year to date, there’s also been positive absorption of 1.2 million square feet. However, there’s also been 2.3 million square feet of new inventory delivered to the market.

In terms of other new buildings under construction, we’ll see a further 2.2 million square feet brought to the market in the next three years, which will put further pressure on occupancy and fundamentals unless we see an improvement in commodity prices.

In Calgary, we have experience in dealing with these cycles and we’ve been able to anticipate and prepare for a change in environment in this market, and specifically, in 2008, we leased 2.2 million square feet and today have a 98.3 percent occupancy rate at an average lease term of nine years.

Our focus for the remainder of 2010 and through 2011 is on current and future lease renewals with a view to maintaining an above average occupancy rate. And in fact, we’re presently working on several transactions that total more than 1.2 million square feet.

In Toronto, as you will recall, both the Adelaide Center and Cadillac Simcoe 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 to 8.6 percent in the first quarter of 2010, but since that time we’ve seen positive absorption and the current vacancy stands at 5.7 percent.

We’ve also seen a substantial increase in tenant tours and general activity in 2010, and in fact, we’re presently working on 28 transactions totaling nearly 1.4 million square feet. Now these include 125,000 square feet of new tenants for Bay Adelaide Center, 100,000 square feet of new tenant negotiations in our other properties, with the balance representing lease renewals.

Our Toronto portfolio ended the quarter with an occupancy rate of 95.4 percent, which was an improvement of 74 basis points from the second quarter.

So given our low roll over rate, long average lease term and the increase in Toronto and Calgary leasing activity, we expect to continue to maintain better than market occupancy levels in each of our Canadian markets.

Turning to Australia, the national office vacancy increased 20 basis points in the quarter to 7.5 percent and that was caused by the addition of 850,000 square feet of new inventory, 450,000 square feet in Sydney and 400,000 square feet in Melbourne. The occupancy rate for Brookfield’s Australia portfolio stood at 99.1 percent, which is unchanged from the previous quarter.

In Sydney, the overall vacancy rate moved from 7.9 percent to 8.1 percent. However, apart from the addition of new inventory, the market had 297 square feet of positive absorption for the quarter, and 1.1 million square feet year to date.

In Melbourne, the total vacancy rate increased 50 basis points to 6.8 percent and without the addition of new inventory, the market actually absorbed 169,000 square feet and year to date, the overall absorption in Melbourne totaled 760,000 square feet.

In Perth, the vacancy rate improved by 50 basis points to 7.9 percent and total absorption year to date is 899,000 square feet.

In terms of leasing activity in Brookfield’s portfolio, we’re making progress on several fronts. We have several negotiations underway for early renewals on close to one million square feet, and as well, as Rick mentioned, we have conditional deals for the remainder of our new office tower at City Square in Perth.

So overall, strong labor markets are providing a positive demand outlook for the Australian office sector. Rick.

Rick Clark

Thank you Tom. Dennis, you want to talk about the U.S.

Dennis Friedrich

Thanks Rick. Good morning everyone. We, in the U.S. we continue to see signs that our core office markets are working their way off the bottom of the market cycle. A number of metrics point to yet another quarter of improvement or stabilization in leasing fundamentals.

In virtually all of our core operating markets, there was an increase in net absorption in overall leasing velocity, coupled with a drop in sublease space inventory and a drop in overall tenant concessions, which all signal an early recovery in the leasing markets.

Outside of New York and D.C., the tightening market conditions have not yet translated into a material improvement in effective rents, however, we’re definitely encouraged by the direction the markets are heading. The positive momentum is evident in the third quarter and year to date leasing activity within our U.S. portfolio.

We had an active third quarter, completing close to 700,000 square feet of leasing within our U.S. managed portfolio. Close to 40 percent of that leasing during the quarter represented new leasing which is a positive sign that we are attracting tenants to our portfolio and that tenants in the market in general are making new space decisions despite levels of uncertainty and not just simply renewing in place, which was the overwhelming case a year or so ago.

We continue to benefit from a flight to quality given our share of the upper end of the market in terms of asset quality. Our leasing volume through the third quarter exceeded 3.1 million square feet, which is a 40 percent increase over the same period leasing in 2009.

For this quarter, I’m going to focus on market conditions and our activities in our three largest U.S. markets, New York, Washington, D.C. and Houston. There was no material change in conditions or major Brookfield lease transactions in Los Angeles, Boston, Denver and Minneapolis, our other operating markets.

Starting with New York, Manhattan activity remains very healthy and involves a diverse tenant mix at this point. Overall leasing activity reached 18 million through the third quarter in the marketplace, already ahead of the 16 million lease velocity for all of 2009, and trending above the five year average.

In Midtown Manhattan, vacancy continued a downward trend, decreasing from 11.5 percent to 11 percent during the quarter. Our Midtown portfolio occupancy held steady at 95 percent, and we have a number of lease transactions in negotiation currently due to this real strong demand throughout the marketplace and our limited availabilities on our class A buildings. We’ve been able to improve lease economic as compared to some of the deals we completed in the prior quarter deals.

In lower Manhattan, after enjoying a stable vacancy below 10 percent for an extended period of time, the overall market vacancy increased 220 basis points to just over 12 percent. The increase is attributable Goldman Sachs’ relocation into its new headquarters next to the World Financial Center, and the recognition of Goldman’s former lease space becoming available within the next 12 months.

The increase in availability had been anticipated for some time in the marketplace. Given the limited additional new supply on the horizon in near term, meaning 2011 and 2012, and a sense that the level of activity continues to pick up in the market, we’d expect the 12 percent to more represent a level closer to a peak than an upward trend that will continue in the upcoming quarters.

Our downtown portfolio occupancy stands at 98 percent. Given our limited current availabilities, we do not have any sizeable lease transactions to announce during the quarter, and our focus remains on pre-leasing the former Goldman Sachs block at One New York Plaza, which expires early next year and addressing the upcoming 2013 Bank of America/Merrill roll over at the World Financial Center.

With a shortage of quality large class A blocks of space in Manhattan that has been tightening quarter over quarter in general, we have had an encouraging level of activity on both the One New York Plaza block, which totals 600,000 square feet and also the potential future availabilities at the World Financial Center.

Of the World Financial Center expiring space, we are in advance lease documentation on 800,000 square feet, which is actually up from a figure Rick mentioned last quarter of 600,000, and we’re also in serious dialog with prospective tenants for a significant amount of additional space.

In addition, Bank of America is moving closer in their studies to making a decision on their future space needs at the Financial Center.

The progress at the World Trade Center continues to be impressive. The Memorial Plaza, which is four time the size of midtown’s Brian Park is on track for an opening in less than a year from now, and construction on One World Trade Center, the former Freedom Tower, has reached over 40 stories.

As many of you may have read, Conyan [ph] asked to sign a letter of intent to relocate over one million square feet to One World Trade Center from midtown, which is really a major strong indication of the appeal of the lower Manhattan market place to a diversifying tenant mix.

Moving on to Washington, D.C., as you have undoubtedly been hearing from others, and as Rick alluded to earlier, along with New York, the Washington, D.C. market is one of the top performing markets in the country from both a lease standpoint and a capital standpoint.

Year to date positive net absorption in the district topped four million square feet and vacancy dropped 90 basis points to 9.1 percent during the quarter. The pipeline, development pipeline, which was once a cause of concern for us and others, has been steadily absorbed and stands at two million square feet from close to five million square feet just a year ago.

The absorption has been driven largely by a high level of government leasing. To date, our overall D.C. portfolio occupancy increased by 100 basis points to 92.7 percent during the quarter and we completed a sizeable lease with CQ Rollcall for 71,000 square feet at our new development 77 Kay Street in the Capital Hill sub market.

This lease will take us to over 70 percent leased in that project, and we in the previous quarter had purchased our partner’s interest in that project.

Finishing up on the Houston market, and the conditions in the Houston marketplace, after recovering from the implications of the oil spill in the Gulf of Mexico, there is a growing sense in the business community of optimism, particularly in the energy sector.

The lifting of the moratorium on deep water drilling and the shelving of the cap and trade legislation is expected to spur job growth in the upcoming quarters. The class A CBD vacancy remains low, at just around seven percent, and some return to growth by the major oil and gas players could tighten up the market further in the upcoming quarters.

Our Houston portfolio occupancy remains high at approximately 95 percent. We completed a large lease for 65,000 square feet with the City of Houston at our asset Continental Center Two during the quarter. Our year to date leasing activity in Houston has exceeded 5.1 million square feet and we have been able to successfully increase the occupancy levels in our older class B assets from 85 percent to 96 percent since the beginning of the year.

That wraps up my comments, Rick.

Rick Clark

Thanks Dennis. So I’d just wrap up our remarks by saying we’re looking forward to completing the repositioning transaction and to 2011. We’re excited about the way we’re positioned in this environment in which we are operating. The assets that we own lease. They attract capital, both equity and debt and I think as capital works its way back from fixed income investments to equities, it’s going to push cap rates lower and that bodes well for our valuations and our portfolio.

So with that, operator we’d be pleased to take any questions that anybody has.

Question-and-Answer Session

Operator

Our first question will come from Neil Downey from RBC Capital Markets.

Neil Downey – RBC Capital Markets

Hi. Good morning all. Rick, can you give us a quick update on the status of the Minneapolis assets which continue to sit on the balance sheet as a discontinued operation?

Rick Clark

Good morning Neil. I’m actually going to hand that off to Dennis.

Dennis Friedrich

The assets continue from an office standpoint, we’re enjoying strong occupancy in both the RBC Plaza and the 33 South Sixth Street. We’re making some progress on the retail component at City Center and we are watching very closely right now the performance of the capital markets, and I think what we’re expecting is that capital, as it’s being priced out of some of the markets like New York, D.C., I think what we’re seeing is a higher level of interest in assets in some of the secondary markets, and that includes quality assets in places like Minneapolis where there’s a good rent roll, good tenant base.

So I think we’re thinking through that and...

Rick Clark

I’d just jump in and say that there has been a recent trader, an announced pending trade in the Minneapolis, so I think that market is beginning to catch the attention of capital and to the point that Dennis is making before getting shut out of New York and Washington, and starting to look at other markets as well.

So I think our expectation is we may work towards monetizing our investment here in 2011. It’s clearly not a 2010 event.

Neil Downey – RBC Capital Markets

Right, and I guess may a question for Bryan, is probably a bit more of a technical one, but are there any tests there in terms of your accounting treatment for discontinued versus continuing? Are you going to have to reclassify those into continuing operations if you don’t get them sold in the short term?

Bryan Davis

There may be a situation like that. Typically the test is a 12 month test. That 12 month though is always stressed based off of market conditions and when you look at the first 12 months that we had it listed as discontinued operations, it was in a market where nobody was transacting.

But again, every quarter, as we assess the progress we make and the likelihood that we will be able to achieve a sale in the near term, we have to then go back and reflect on whether or not it should be a discontinued op.

The good news is that under IFRS, it’s just a reclassification exercise Neil. You know if you’re under Canadian GAAP, I think you would have stopped it depreciating, so then you would be in a position where you’d have to catch up in the value of the underlying asset, but it would just be a reclassification exercise if that were the case.

Neil Downey – RBC Capital Markets

Ok. And not that I’m trying to bore anyone with the accounting, but Bryan while I have you, can you walk us through slide 46 in just a little bit more detail where you’ve laid out the impact on the balance sheet of the BOPA acquisition and just maybe line by line, because I’m curious as to a couple of things in particular such as the credit in the receivables and other, the residential development debt number, etc. Can you comment on that?

Bryan Davis

Sure. And sorry, I was not as clear as I thought I was in my speaking notes, but what we included in there was also the funding Neil for the acquisition of Australia, as you see the impact on common equity is nil. So $1.4 billion of funding is effectively coming out of our receivables and other line item.

We classified our deposit with them in there. We also had some assets that were otherwise monetized into cash. Over and above that, we had a dividend that was paid to us from the residential development business that represented the $177 million, and it was effectively a draw on their lines and a dividend to us.

If you go back 18 months, we paid down their bank lines with the proceeds from the equity offering, so that was just the money coming back to us. You aggregate those with the acquisition bridge facility and the draw on our bank line, which is the 728 in the corporate debt; you effectively get the $1.4 billion of equity that we put into the $3 billion of investment properties net of the $1.6 billion of debt and minority interest. I hope that helps.

Neil Downey – RBC Capital Markets

OK. I think I got most of those numbers, but they’re certainly all summarized into one column here. Thanks very much.

Bryan Davis

OK.

Operator

Next, we’ll go to Karine Macindoe from BMO Capital Markets.

Karine Macindoe – BMO Capital Markets

Hi. Thank you. The acquisition opportunities that you’re taking a look at, the single asset, can you give us any sense as to magnitude, probability, when you think that some of these could come to fruition?

Rick Clark

In total the gross value of the assets, I’m just going to say – there are two of them – are collectively somewhere between $400 and $500 million gross and if they do come to fruition, they’d be this year transaction.

Karine Macindoe – BMO Capital Markets

And are these U.S. opportunities?

Rick Clark

Both U.S. I can’t disclose the market. Apologies for that, but hopefully we’ll have something to say shortly.

Karine Macindoe – BMO Capital Markets

The U.S. fund and the restructuring some of that debt, is it still anticipated that maybe you can deal with let’s call it about a third of the floating rate debt maybe by the end of this year? How’s your timing looking in terms of an announcement on that front?

Rick Clark

We’re hopeful that we can get about $500 million of it put to bed this year and another just over a billion in the first quarter of next year, and so that’s kind of the timing we’re hoping to accomplish.

Karine Macindoe – BMO Capital Markets

Oh, so quite a chunk of it then in the next four or five months.

Rick Clark

Yes, we’ve been pretty active on it.

Karine Macindoe – BMO Capital Markets

And this is where you’re anticipating interest rates may be in that four to five percent range?

Rick Clark

Yes, Brian...

Bryan Davis

Yes, with respect to this, we’re probably in the low five percent range from a rate, but yes.

Karine Macindoe – BMO Capital Markets

OK. And so I just on the disclosure that’s on page 44 that relates to prime property fund, that was all really the Australian purchase. That isn’t a new investment of any sort. This relates to prime property, having ownership of the Australian assets.

Bryan Davis

Correct. It’s a publicly listed Australian REIT that owns an outright interest in three of the assets that we acquired and then a partial interest in one of the assets that we acquired as part of the transaction that we closed on at the end of the quarter.

Karine Macindoe – BMO Capital Markets

OK. Perfect. Thank you so much.

Operator

Your next question will come from Jay Habermann from Goldman Sachs.

Jay Habermann – Goldman Sachs

Good morning everyone. Rick, just a question on acquisitions. On the one hand you mentioned pricing getting a little aggressive and I think you said record pricing in certain markets, and I assume you’re referring to sort of New York and some of the premier markets. But on the other hand, you’re also mentioned cap rate compression from here. I would have assumed you’d be talking more about rent growth over time. Can you sort of walk us through your assumptions for how you’d be modeling acquisitions at this point in the cycle?

Rick Clark

We’re still pretty conservative. We are not anticipating any major rent spikes in the near term in any of our acquisitions. We haven’t been aggressively chasing some of these trophy assets like others have. We’re rather focusing on things that we think are a little more opportunistic and would be accreting, things where we can create value through our management redevelopment leasing initiatives.

Jay Habermann – Goldman Sachs

I guess I wasn’t referring to rent spikes in the near term, but sort of longer term rent growth, just balancing that versus the cap rate compression we’ve seen thus far.

Rick Clark

I think it would be a little bit on some of the things we’re looking at, a combination of some optimistic view, a bit at a time, but also a little bit of lease up to shore up the NOI. We think there’s a few of these opportunities. The market is still – (inaudible) opportunistic to get in if there’s a little bit of vacancy, and we have strong leasing teams in these core markets and we just feel like we can get the space absorbed less than immediate rent spikes.

Jay Habermann – Goldman Sachs

OK. And Dennis, can you comment on One New York Plaza. It sounds like there might be a tenant that’s looking pretty aggressively at that space. Is that something that you would expect to get addressed in the first half of next year?

Dennis Friedrich

You know we have a number of large tenants right now that are looking at the block of space. It’s obviously attractive block at the top of One New York. Reports a few weeks ago, which we certainly picked up in the papers on Morgan Stanley, they are a tenant in the building. They are thinking through their New York space needs and I think it represents a good opportunity for them, but we’re seeing, as I mentioned in my notes, right now there are very limited large quality blocks of space in Manhattan, and I think One New York represents one of those. So we’re pretty encouraged by the depth.

Jay Habermann – Goldman Sachs

OK. And final question for Bryan, today with the balance sheet roughly 56/57 percent debt to assets, where do you think you’ll be roughly a year from now? Are you looking to target perhaps the low 50 range or even the high 40’s?

Bryan Davis

I’d say that we don’t necessarily set a target as it relates to the fullness of our balance sheet. As you know, our strategy is to refinance at the asset level and so we look at every refinancing that we do in the context of the underlying asset that we’re financing and look to target anywhere between 50 and 60 percent leverage.

So on balance, that usually means that we’re going to operate with a balance sheet on a consolidated basis in that leverage range, and I think that’s no different looking out for the balance of the year.

Jay Habermann – Goldman Sachs

So we shouldn’t expect to see any change going forward?

Bryan Davis

We’re not really changing our policy. The only change that we might notice is the function of cap rate compression, recovering values and IFRS valuation updates, so therefore leverage levels will go down (inaudible) lower level that you’re talking about.

Jay Habermann – Goldman Sachs

OK. Thank you.

Rick Clark

Welcome. Thanks.

Operator

Next we’ll go to Greenstreet Advisor’s Michael Knott for our next question.

Michael Knott – Greenstreet Advisors

Hey guys. Just a question for you on sales. I know you talked about Minneapolis, but when you went through your liquidity options, I didn’t hear you mention any other sales and just curious if that factors into your liquidity plans at all. I know specifically D.C. was one that the press had identified you as marketing a building for sale there.

Rick Clark

We have two buildings in D.C. that we’re actually marketing. They weren’t in the liquidity projection because they’re part of the U.S. office fund portfolio and part of what we’re doing there to refinance those assets. So they weren’t included in liquidity.

There are a handful of assets though that we are on a list of ones that we’re considering to monetize throughout several of our markets and all of that basically would add to the liquidity should we try, should we look to sell any of them.

And I suspect that we will. I think we will take advantage of where we think cap rates are going to kind of move a couple of things or bring partners in on them.

Michael Knott – Greenstreet Advisors

And then a quick question for Dennis. Dennis, you went through the Merrill situation downtown pretty quickly in your comments. Can you just go back and give us maybe a little more color on what your current expectations are there?

Dennis Friedrich

I think as mentioned in my comments, we do have an increasing volume of space and leases right now and they’re never done until they’re executed but it’s approaching one million square feet from that standpoint.

We behind that have pretty strong depth that probably represents in total between leases and negotiations in pretty serious dialog, about 70 percent of the space right now, so I think pretty good traction given the fact that we still have pretty much three years remaining on their lease term.

Michael Knott – Greenstreet Advisors

OK. So the 70 percent pertains to what you’re currently working on and your expectation would be that a good chunk of that would probably come to pass, and then you have a couple years yet on the other 30 percent?

Dennis Friedrich

Yes, I think that’s a fair comment. I mean again, things can change here and there, but these are not casual conversations. They’re serious dialogue and we see some progress.

Michael Knott – Greenstreet Advisors

OK. Thanks.

Operator

Our next question will come from John Guinee from Stifel Nicolaus.

John Guinee – Stifel Nicolaus

John Guinee here. Just a quick administrative question. You had a $36 million income tax expense. Bryan, is that a cash expense or a non cash? I noticed it was added back on FFO.

Bryan Davis

Yes, John. That’s a non-cash expense. It’s effectively tax affecting our earnings which we have the benefit with still having loss pools, the ability to shelter that, so it’s non cash.

John Guinee – Stifel Nicolaus

And will that change at all with the sale of the residential business?

Bryan Davis

No, the residential business has historically been a significant user of our tax losses because it’s a fairly profitable business with minimal inherent tax shelter like depreciation etc., but the actual transaction won’t impact that profile going forward. We’re just, what will impact the change from a future tax position to a current tax position is ultimately the use of our non-capital losses which if we continue to be profitable, will inevitably come, but we hope it’s still two to three years away.

John Guinee – Stifel Nicolaus

Great. Thank you very much.

Operator

Suzie Kemp from Credit Suisse has our next question.

Suzie Kemp – Credit Suisse

Hi, I have a couple questions. With regard to the call option on the U.S. office fund, is there any update on that and how do we sort of begin to understand when that would be exercised? What are the procedures involved and getting us sort of up to date when that sort of happens and transpires?

Rick Clark

The option is structured so that Blackstone has the ability to call their assets effective January 1, 2011 through I think a nine month period ending September 30, 2011. That is at their option. We don’t have any transparency into that to report at this stage.

If they don’t exercise their option, then Brookfield and our fund has the ability to put the non-managed assets of the Blackstone assets to them on January 1, 2013, again for a period of nine months.

Suzie Kemp – Credit Suisse

But would they be contacting do you think before the January 1st timeline, January 2011 timeline or would they be contacting you within the time period. Would you expect that to occur in that sort of order? I’m just trying to understand when ...

Dennis Friedrich

This is Dennis Friedrich. I think we’re close partners and we’re both thinking through the recapitalization of the U.S. funds. I don’t know if I could necessarily give you a complete answer as to exactly mechanically when that would happen, but it’s not as if we’re just operating in separate pools.

We’re thinking about the right time on both sides, and I think both sides are encouraged by the way both the finance markets and the capital markets are headed.

Bryan Davis

It could happen anywhere up until next November, but I think the expectation is on both parties’ part that it will be done well before that, and we’re just looking for the optimum time to do it.

Dennis Friedrich

And if your question was it can’t we’re the ones that is surprised. It can’t technically happen before January, but it doesn’t mean that we’re not in some very meaningful dialogue.

Suzie Kemp – Credit Suisse

Ok. Great. And then secondly, now that your residential business will be sort of allocated to discontinued operations, can we sort of expect fourth quarter numbers to be a sort of a good indication as to how 2011 will start shaping up?

Rick Clark

I think it’s a little early to say yet. We’re just working through our business plans for 2011 and typically we give detailed guidance in February, which is our expectation this year. So it’s just a little bit early unfortunately to say.

Suzie Kemp – Credit Suisse

OK. Great. Thank you.

Rick Clark

OK. Thanks.

Operator

And we’ll now go to Jimmy Shan from National Bank Financial.

Jimmy Shan – National Bank Financial

Thanks. Good morning. Just on the asset sale again, it looks like you’ve also got a couple of properties on the market or at least listed as available for sale. Can you talk a little bit about the rationale for selling and perhaps the level of interest and prospect expectation from those two assets.

Rick Clark

Tom, do you want to speak to that or would you like me to?

Tom Farley

No, sure. I can address that. The two assets that we have in Edmonton are part of the portfolio that we acquired from O&Y Canada in 2006, late 2005, 2006. The consortium partners decided that, collectively decided that that’s essentially – they’re mature assets and it was time to try marketing those properties and so we started a process recently.

We’re part way through that process right now. We do have a high level of interest from a number of parties and we don’t have anything to announce at this point, but we would expect to likely close a transaction in the fourth quarter.

And in terms of pricing, I just don’t want to jinx any of our negotiations, but we’re pretty happy with the level of interest and the price expectation out there.

Rick Clark

I would just add Jim, Tom and his team have very meaningfully increased the NOI on the properties, so it will be a nice transaction for us.

Jimmy Shan – National Bank Financial

OK. And I think Bryan, I think you referred to a $0.06 performance fee fund. Does that have anything to do with that?

Bryan Davis

Tom do you want to address that?

Tom Farley

The performance fee is with respect to the Canadian fund. If you remember Jimmy, going back to when we formed the fund, we actually had a core pool of assets and a non-core pool of assets which we set out a strategy to monetize. This bucket of assets is included in the noncore and then a sort of combination of that exercise, effective the fourth quarter 2010, we have a performance fee that effectively gets paid to us based on our performance as it relates to that strategy.

Rick Clark

Yes, it’s in recognition of all the assets within that noncore bucket and I guess completion of all our obligations towards those assets. It’s not just Edmonton.

Jimmy Shan – National Bank Financial

OK. And then just last question, with respect to the 800,000 square feet of square space that you’re currently in advanced discussion at the World Financial Center, can you talk a little bit about the rent that these discussions are at relative to what Merrill is currently paying?

Rick Clark

At this point there are transactions in place. I don’t think we’re comfortable disclosing economics, but I’d just say generally all of the discussions we’re having for leasing down here, I think in aggregate we expect to be right at or at least pretty close to replicating the NOI that was in place from Merrill Lynch.

So that’s kind of our expectation. Day by day the market gets better actually, and proposals get better each day.

Jimmy Shan – National Bank Financial

OK. Thanks.

Rick Clark

Thank you.

Operator

Your next question will come from Jim Sullivan with Cowen & Company.

Jim Sullivan – Cowen & Company

Yes, thank you. Not to increase your discomfort, but in terms of the discussion about the spreads, can you answer the same question with respect to the One New York Plaza space expiring?

Bryan Davis

I don’t have this number. That is probably a slight rent roll down I’m presuming.

Rick Clark

That will yes. Jim that will be a roll down. Call it off the top of my head, that’s about a mid 50’s gross rental expiration. I’d say at this point our expectation would not be to approach those numbers on the initial term. Average, we’ll probably average up a bit.

Jim Sullivan – Cowen & Company

OK. Having said that, there have been some of course, well discussed, at least in the press and also on some conference calls, lease activity with some lower quality buildings in the same sub market. In your prepared comments you talked about the quality of the building and the quality of the space that’s expiring, so some of those transactions presumably are not a good guide for where you expect to be here.

Rick Clark

Jim, I think that’s absolutely right. I know some of the transactions. That’s absolutely right. There’s one New York, and that sub market is probably the top asset, and this is the top of the building with a lot of infrastructure, so I wouldn’t give you.

Bryan Davis

It’s a different food group. I think the rents quoted, I think I know the transaction you’re referring to probably wouldn’t even cover operating and taxes on our properties, and there’s just that big of a difference in quality.

Jim Sullivan – Cowen & Company

OK, good. And I wonder if you can comment a little bit more about the outlook for the site that you’re working on in London at Bishopsgate, particularly in light of I think in the last week or two, we’ve seen some announcements of some new product coming on in London and if you could address your comfort level with the competitive position of that site and how you feel about leasing activity as you go forward there.

Rick Clark

That’s actually a good question, and I’d say, make a few comments in response. The first is, the City of London vacancy has been going down consistently for the last few quarters and what’s happened there, the city I guess – I don’t know the right words – but there just hasn’t been a lot of development in the city for a very long period of time.

So as leases roll, tenants are looking to upgrade. They need more efficient, more modern space. So the market clearly needs development. There’s a lack of development and the kind of tenants that we go after seem to all run out to Canary Wharf and now I think just a culmination of a lot of things and cooperation between developers and the city has created a very conducive environment to getting modern office buildings built.

So having said that, there are two, well there are three buildings actually working to launch construction that might be competitive with what we’re trying to do and two of them have over the last month or two teamed up with other capital partners or developer partners and are talking about maybe launching their developments on a speculative basis.

It kind of remains to be seen whether they will or they won’t but there’s enough tenant activity in the market to support a couple of developments. Our position in here is that versus at least one of these other properties, actually two of the other three, they probably could go before us and be completed before us, but our view is that the footprint, the floor play, a lot of the things that we’re incorporating into our building will be very attractive to modern office space users.

So we’re pretty excited about our prospects. We’re in discussions with a number of tenants that range in size anywhere from 100,000 square feet to the entire building, and I think it would be – we’ll be positioned to launch our development next April, which is roughly when all the leases expire and we can go in and demolish our structures that are there.

So we’ve got a little bit of time and hopefully we’ll have some tenants locked up by then in order to proceed with the development. Long winded answer. I hope it does it for you.

Jim Sullivan – Cowen & Company

I appreciate it. Thank you.

Rick Clark

You’re welcome.

Operator

Our next question will come from Sam Damiani from TD Newcrest.

Sam Damiani – TD Newcrest

Thanks. Just on the lease roll over, you’re currently collecting income on the Goldman Sachs lease? Is that right?

Bryan Davis

Yes.

Sam Damiani – TD Newcrest

And in Boston, can you maybe address the role there in 2011? Is that front end weighted, back end weighted and what you’re expecting for those expiries?

Bryan Davis

In Boston that relates to predominantly the Wellington space which expires at the end of the first quarter of 2011.

Sam Damiani – TD Newcrest

Any prospects for replacing those guys at this point?

Dennis Friedrich

Sam, there are. It is a challenging market in Boston right now, but what we have at our back on that, it is again a roll over, not dissimilar to the one in New York, at the top of the building as opposed to the lower portion where we’re finding in Boston that the tenant base has gravitated to smaller floor places as opposed to larger.

So it has a lot of appeal to law firms, midsized market money managers and like, so we have some traction on the space.

Rick Clark

The good news is , the bad news is that market has a high vacancy, but the good news is it’s all concentrated in the low part of the buildings and we have the rare commodity which is a great block and a great building at the top of the building. So we do have lots of traction.

Sam Damiani – TD Newcrest

Just switching over to Calgary, there’s some space rolling next year. Could you just give us a sense as to how we should perceive that in terms of the risk?

Tom Farley

Sure, Sam. It’s Tom. We as is typical, we are always working on advance of maturities and we’ve had a very good success rate in Calgary. I would say that over the years we’ve probably been higher than 90 percent retention rate.

So we are having discussions with all of those tenants as we speak, and I would attach a very high probability that we’re going to be able to be successful in retaining those tenants.

Sam Damiani – TD Newcrest

So none of them have already decided to move elsewhere?

Tom Farley

No. That’s right.

Sam Damiani – TD Newcrest

OK. Great. Thank you.

Operator

We’ll not go to Michael Bilerman from Citi.

John Addy – Citi

Hi. Thanks. It’s John Addy [ph] with Michael. Just to follow up on the last question, can you walk through what you think the net NOI impact would be from the burn off of the Goldman lease at One Ten Plaza moved out of Wellington, then also if there’s any offset from leasing up the Adelaide.

Rick Clark

Bryan, do you have enough information to do that here?

Bryan Davis

I do. Just for context, when Goldman and One New York Plaza is approximately $25 million of NOI, and then Wellington and Boston would be about another $15 million, so I can give you context to that. As it relates to what we expect going into 2011, I’ll save that until we meet back in February and work through guidance on that.

John Addy – Citi

Well I guess how quickly is the Adelaide leasing up? I know in the NAV slide you have that it’s not stabilized and a certain amount of income that you expect to recognize. How front end loaded could that be?

Bryan Davis

We’re in discussions with people. Hopefully we’ll be close to 90 percent leased by the end of the year and we’re in discussions with tenants for the rest of the space. Whether we get them or not remains to be seen. Tom, you may have more color on that.

Tom Farley

Not really, we’re at 85 percent and we have deals conditional to take us to 88, and as you say we’re having discussions for the balance of the space. So we’re pretty much on track. I think we’ll have some good news to announce in the next short while.

Bryan Davis

I was just going to make one other point. I think by mid-2011 we’ll probably be at or close to or towards the end, stabilized levels. But the key thing is from a cash rent perspective, there will be periods where we’re not earning cash rents because of free rent periods etc. sort of in the early part of that lease, those lease ups.

John Addy – Citi

Thanks. That’s helpful. And the last question is, on the Blackstone and restructuring of the U.S. office fund, is the restructuring of the ownership in any way tied to the refinancing? Can they be done separately or does one have to happen before the other?

Rick Clark

This is with respect to the exercise of the put call. That’s what you’re referring to?

John Addy – Citi

Yes.

Rick Clark

I think those can be done – they don’t need to be done in tandem. They’re sort of separate transactions. I think when the structure was initially contemplated, the timeline probably did relate in particular January 1 to September 30 period relate to appreciating that financing takes – the refinancing event takes place in October.

But as Dennis mentioned, we’re working alongside with them on an orderly recapitalization and so it doesn’t necessarily need to occur in tandem with that.

John Addy – Citi

OK. Thank you.

Operator

Next we’ll go to Alex Avery with CIBC.

Alex Avery – CIBC

Thank you. Now that you’ve closed the Australian acquisition and looking at the financing that’s associated with that, higher rates and shorter term, how are you looking at that opportunity today in the context of the currency risk and secured versus unsecured financing total return swap structure of that deal? Is it safe to say that you’re just going to continue with the same financing strategy of secured property level mortgages or is there another opportunity that you see there?

Rick Clark

High on our list of priorities for the coming months is to actually figure this out. So I’m not avoiding the answer, it’s just we don’t have the answer yet. But I’d say nothing’s off the table as far as direction goes. We clearly prefer asset level non-recourse financings, but in the case of Australia that might not be the best execution.

So we’re thinking about other options, but it’s really high on our list of priorities because frankly, if we can sort that out and do meaningfully better on the refinance of those properties, it adds tremendous value to this portfolio and for the company. And of course we want to do it on as low risk basis as possible and therein lies the challenge. But we’re working on it.

Alex Avery – CIBC

So I guess where would you put the magnitude of that opportunity? What do you think the maximum spread you could achieve on financing through another form might be?

Rick Clark

Well at the moment, I guess all in rates in Australia are in the seven’s somewhere, mid, high, maybe even closing in on eight percent, so contrast that to some financings we’re working on in the U.S., it’s four percent.

So the most extreme scenario, maybe you’d say 400 basis points, but to the extent something’s done locally, I think the ability to substantially gain is less. But we are seeing improvements in the market. The market has migrated from a two or three year term market to a five or seven year term market.

We’re seeing some of the foreign banks come in now to help basically put some money to work, because everyone’s having a hard time, they’re seeing lots of cash and there’s only so many high quality assets in the market that they’ve operated in, and there’s stiff competition.

Just from some of the things that we’re doing in North America, we’re getting pretty strong interest from everybody. So the environment’s competitive. So we expect the local market to open up. It’s going to take a little bit of time, but, so anyway, anywhere from 100 basis points to 400 basis points depending on the level of risk.

Alex Avery – CIBC

That’s great. Good color. Thanks.

Rick Clark

You’re welcome.

Operator

Your next question comes from Mario Saric of Scotia Capital.

Mario Saric – Scotia Capital

Hi. Good afternoon. Just a couple of really quick questions on the back of the last question. It looks like your floating rate exposure post Australia, kind of running in the 15 to 17 percent range total mortgage debt. Is that a level that you’re comfortable with today and going forward or would be looking to perhaps increase or decrease that.

Bryan Davis

I think in general, we like to operate with fixed rate financing, but we’re always going to be in a position particularly as it relates to construction financing, as we build out our development that we can’t avoid floating rates. I would say that historically we’ve probably been anywhere from five to 25 percent, and so would be comfortable in that range, but probably in this environment, locking in at fixed and reducing that balance would probably be a priority.

Rick Clark

In this environment, going fixed rate and going long on any stabilized asset is absolutely our focus. We have a few assets in transition and those are either leasing to be done, under development or whatever, and those will be floating just because that makes the most sense.

I don’t really have a handle on what percentage that is, but the expectation is the level will float down here over the next three to six months.

Mario Saric – Scotia Capital

OK. And then turning back to the asset dispositions, you have some in Minneapolis, Washington, now Edmonton. Rick, you mentioned declining cap rates several times. I’m just trying to get a sense of what the sensitivity is perhaps expand that disposition program in cap rate compress meaningfully from this point forward?

Rick Clark

I think there are a number of assets within our portfolio that it’s sort of timed recycle capital and believe it or not, notwithstanding my comments on reduced cap rates, we’re seeing some interesting things at higher cap rates, so I think it’s a good time to recycle capital and we may see more transactions. That’s our expectation.

Mario Saric – Scotia Capital

OK. And just focused maybe in New York, Washington and Houston and all three seem to be increasing activity from a capital standpoint. Can you give us a sense as to where you would see cap rates for your quality type portfolio in the market today?

Rick Clark

Maybe the better way to talk about it if you don’t mind in on an unlevered IRR basis, and I think we’ve seen – we’ve read about some trades and seen some trades that have happened, sort of sub selling, six and a half or six. I think in these markets we could see unlevered IRR’s hit five, and I know we’re working on one ourselves which is pretty close to that number. So I think we could see some unlevered IRR’s five or less.

Mario Saric – Scotia Capital

OK. Great. Thank you.

Rick Clark

You’re welcome.

Operator

We now have a follow up question from Neil Downey from RBC Capital Markets.

Neil Downey – RBC Capital Markets

Hi. The TI’s and leasing costs for the quarter I believe were $36 million on a proportionate basis. Presumably that’s a little higher than might be construed as normal. Can you comment what we should be thinking about maybe on an annualized basis including BOPA?

Bryan Davis

I’ll just make a comment and then maybe Tom can give a sense of what the environment is like down in Australia. But yeah, it is a little bit higher. I mean we did have a higher mix of new leases versus renewals in this quarter than we had in previous quarters.

There may also be just sort of timing nuances, Neil with respect to what got recognized in Q3, but I think if you look over the first nine months of the year, we had circa $60 million of leasing costs and TI’s at our proportionate share on about three million square feet of leasing at our proportion share, which is about $20.00 per square foot, which I think all told is kind of in the ball park of where we’ve been at.

Maybe on that Tom, did you have any comments on Australia?

Tom Farley

Well I guess the first thing to point out about our portfolio in Australia is that we have a very occupancy rate in excess of 99 percent with low roll over. So in the next couple of years we’re not going to see huge levels of inducements paid. But in the Australian markets, typically you will see TI’s and inducements run 15 to 30 percent of the net rent per annum of the lease term, and as the market tightens, and demand increases, then you’re going to see inducements at the lower end of that range.

So I would say right now, it’s probably at the midpoint in that range, and I would expect it to be declining over the next couple of years.

Neil Downey – RBC Capital Markets

OK. Thank you.

Operator

And we do have another follow up question from Karine Macindoe – RBC Capital Markets.

Karine Macindoe – RBC Capital Markets

Just back to your guidance midpoint, that’s based on a GAAP number. Do you have the equivalent IFRS? Are you still expecting there to be a better than $0.11 difference?

Bryan Davis

Sorry Karine, that was actually an IFRS number, but we did adjust it at the end of last quarter for the gain we had on the Tishman investment realization.

Karine Macindoe – RBC Capital Markets

Oh, ok.

Bryan Davis

So that’s the $1.28. You were thinking of $1.18, which was the $0.10 or $0.11 adjustment off of our beginning year GAAP number.

Karine Macindoe – RBC Capital Markets

OK. And the X res equivalent, are you still kind of – are you prepared to kind of put a rough number on resi for the full year?

Bryan Davis

Well I think when we did our original ...

Karine Macindoe – RBC Capital Markets

$0.25 I think it was.

Bryan Davis

...guidance, we were $0.25. I think that’s a good a number as any.

Karine Macindoe – RBC Capital Markets

OK. Good. Thanks.

Operator

We have another follow up question from Michael Knott from Greenstreet Advisors.

Michael Knott – Greenstreet Advisors

Hey guys, just to tie a couple things together. I think earlier in the call Rick, you said you were working on a couple of things, acquisitions wise and there was a $400 to $500 million number. Was that in total or was that individual?

Rick Clark

That’s total, and that’s gross asset value.

Michael Knott – Greenstreet Advisors

Right OK. And then a second ago when you talked about unlevered IRR expectations and where those might head, which is helpful commentary by the way, you said the five percent number was one you were working on. Was that one of the acquisition opportunities or is that one of the ...

Rick Clark

Oh, no, no. We’re not a buyer. That’s an important clarification. Sorry about that. We’re working on a deal hopefully in the five’s. We’ve seen a bunch of trades a little over six, maybe mid sixes. Hopefully we’ll pull off a trade below that with a five handle on the selling side.

On the buying side, we’re a little more opportunistic. It doesn’t mean we’re seeing 20 percent levered IRR’s, but we don’t mind taking a little bit of leasing risk or if a property needs to be fixed up, brought from a B status to an A status or whatever. That’s kind of a better formula for us. So we expect higher returns.

Michael Knott – Greenstreet Advisors

OK. Thank you.

Rick Clark

You’re welcome.

Operator

Next follow up question comes from Sam Damiani with TD Newcrest.

Sam Daminai – TD Newcrest

Thanks. I know you’re not giving any guidance for ‘11 yet, but could you give us thoughts on what range of same property NOI growth you’re expecting given the churn in leases we’re seeing?

Rick Clark

It’s just too early Sam. We’re still plowing through business plans and haven’t actually gone through it in detail so it would an unsubstantiated guess which wouldn’t be a good idea.

Sam Daminai – TD Newcrest

Would you say it would be lower than mid 2010 given the lease roll off that you’re faced with?

Rick Clark

I don’t know, Sam.

Sam Daminai – TD Newcrest

Would you be giving guidance next quarter?

Rick Clark

Next conference call we expect to give guidance.

Sam Daminai – TD Newcrest

OK. Thank you.

Operator

We have a question next from George Arbach from ISI Group.

George Arbach – ISI Group

Thanks. Rick, just to clarify your comment and Michael’s question, if you’re seeing IIRR’s in the five percent range, what does that mean for cap rates?

Rick Clark

Well that depends. If it’s a fully leased building it could be five. If it’s got some leasing, four, sub four. In our view, a couple of these things that traded may well have been cap rates in that zip code. It’s kind of hard to say. It depends on which kind of exit cap people use in models.

George Arbach – ISI Group

Have you seen the rate growth people are building in be appreciably higher today than it was two or three months ago.

Rick Clark

I can only answer that from our own perspective, and we’re a lot more conservative. We’re not really expecting huge rent spikes. We don’t rely on them in our modeling and I don’t know that others do as well.

Bryan Davis

I don’t think it’s been materially different. You get some download on the underwriting after. I think some of these in some of the comps Rick is referring to a number could be stable assets where just a burn premium is getting tighter and tighter.

Rick Clark

I’ve been to investor conferences and Canada and Asia and other places where people have given me some feedback on them, and there’s just so much capital. Everything everybody talks about is show me New York. Show me Washington. Show me London, and it’s I think, when people start to pull their money out of fixed income investments, and so much money moved into it, it’s going to start coming back, and I think it just has to push cap rates down.

George Arbach – ISI Group

Just one more question. Would you say the risk premium people are building in, is that as low as you saw sort of at the peak of last cycle?

Bryan Davis

I don’t think so.

Rick Clark

I don’t think so either. I think it would, part of using risk, part of our comments earlier is we’re capturing a bit of opportunity is at the markets, not the complete market is yet ready to take lease up risk, and that’s what we’re finding some pockets of opportunities.

Our comment on premium is more I think where assets were trading at whatever you want to call it over T-bills, a couple hundred basis points, that’s just getting tighter and tighter on core assets, stabilized assets. Right now buyers are not taking a view of interest rates going up.

I think if there are not further questions, operator.

Operator

We have no further questions at this time.

Rick Clark

Great. Thanks everyone for joining our call. Please contact Melissa or sign up for our investor tour. We hope you can join us and we look forward to speaking all of you on our next conference call, and in the meantime if you have questions. Thank you.

Operator

That does conclude our conference for today. Thank you for your participation.

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