Brookfield Canada Office Properties' (BOXC) CEO Jan Sucharda on Q4 2015 Results - Earnings Call Transcript

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Brookfield Canada Office Properties (NYSE:BOXC)

Q4 2015 Earnings Conference Call

January 26, 2016 9:00 AM ET

Executives

Jan Sucharda - President and Chief Executive Officer

Bryan Davis - Chief Financial Officer

Analysts

Sam Damiani - TD Securities, Inc.

Mario Saric - Scotiabank

Alex Avery - CIBC World Markets

Marvin Carsley - MC Global Investments

Rob Sutherland - Euro Pacific Canada

Operator

Good day, everyone, and welcome to the Brookfield Canada Office Properties 2015 Fourth Quarter and Full-Year Financial Results Conference Call. Today’s call is being recorded.

It is now my pleasure to turn the call over to Mr. Jan Sucharda, President and Chief Executive Officer. Please go ahead, sir.

Jan Sucharda

Good morning and thank you for joining us for our fourth quarter 2015 conference call. I will be chairing today’s call. With me is Bryan Davis, our Chief Financial Officer. I will start by discussing the highlights for the quarter, Bryan will then take us through the financial results, after which I will provide some commentary on the conditions of our markets and concluding remarks before taking questions.

As we closed out 2015, we continue to see improvements in Toronto and Vancouver with both markets posting decreases in vacancy. Unfortunately, Calgary continue to experience a slowdown in leasing activity, as the energy sector remained in a downward fall.

BOX’s overall occupancy increased 30 basis points to 95.8% from 95.5% in the previous quarter, primarily driven by new leases backfilling vacant space in Toronto and Vancouver. Compared to prior year, occupancy increased by 40 basis points from 95.4%. We remain focused on making headway on the deals in our pipeline, which currently include a blend of renewals and new leases primarily in Toronto.

During the quarter, we leased approximately 596,000 square feet versus 513,000 square feet that expired. The quarterly activities brought our total leasing to 2.1 million square feet for the year similar to what we had achieved for the past three years.

Our ending occupancy of 95.8% compared favorably to the Canadian national average of 89.6%, which declined by 20 basis points from the prior quarter. Leasing highlights include 525,000 square feet in Toronto consisting of three deals at Brookfield Place Toronto, which included a 10-year renewal and expansion with Royal Bank of Canada for 62,000 square feet; a five-year renewal and expansion with Liberty Mutual Insurance Company for 37,000 square feet; and a 10-year new lease with New Gold Inc. for 19,000 square feet; and at other Toronto properties we have at seven-year renewal and expansion with Thomson Reuters Corporation for 82,000 square feet at Bay Adelaide West; a 12-year renewal with Labatt Brewing Company Limited at Queen’s Quay Terminal for 58,000 square feet; a 10-year new lease with Aviva Canada Inc. at First Canadian Place for 47,000 square feet; a four-year expansion with Air Canada for 25,000 square feet; and a 10-year new lease with Eagle Professional Resources for 13,000 square feet, both at 2 Queen St. East; and lastly, a five-year renewal with The Bank of Nova Scotia at Exchange Tower for 25,000 square feet.

In Ottawa, we completed a one-year renewal with Public Works and Government Services Canada at Place de Ville I for 28,000 square feet. And finally in Vancouver, we completed a 10-year new lease with Western Forest Products Inc. at Royal Centre for 30,000 square feet.

With respect to operational initiatives, we achieved substantial completion at Bay Adelaide East during the quarter and transferred it into income-producing properties. We’re very excited to bring this property into operations and to have Deloitte and Gardiner Roberts come in for occupancy earlier this month.

Secondly, the Board of Trustees approved a 5.7% increase in Unitholders’ distributions to $1.31 per unit annually. This is the fourth increase in – since inception and represents a 7% increase from a $1.24 per unit. The increase will commence with the distribution declared in March 2016 payable on April 15, 2016.

I will now turn the call over to Bryan to review our financial results.

Bryan Davis

Thank you, Jan, and good morning, everyone. Before I begin, let me caution you that our discussions 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 the number of risks, uncertainties and assumptions. The risks, uncertainties and assumptions that we believe are material are outlined in our news release that was issued yesterday.

As noted in that news release, we reported funds from operation totaling $38.5 million, or $0.41 per unit for the fourth quarter of 2015, compared to $40.6 million, or $0.44 per unit for the same period in 2014. The decrease of $2.1 million in FFO over the prior year same period was largely driven by a one-time favorable settlement related to parking at Brookfield Place Toronto of $4.7 million that was recognized in the prior year. This was offset in part by incremental FFO from Bay Adelaide East of $1.2 million on transfer into commercial properties.

Higher rent and recoveries of $1.1 million at Exchange Tower and Bay Adelaide West due to lease ups, and a lower ground rent-related expense at Hudson’s Bay Centre of $1.3 million.

Compared to last quarter, FFO was up $5.1 million, or $0.05 per unit, mainly due to a one-time adjustment of $3.6 million in the prior quarter to reflect the catch-up adjustment for higher ground rent at Hudson’s Bay Centre for the period from December 2011 to June 2015. There were higher related legal costs of $1 million associated with that ground rent arbitration.

In addition we had the addition of Bay Adelaide East as an income producing property, as mentioned previously. We also had termination income of $0.7 million, and this was offset partially by a decrease in same property net operating income of $1.4 million, mainly due to lower rents and recoveries and higher non-recoverable expenses at Brookfield Place in Toronto.

Adjusted funds from operations for the quarter was $30.6 million, or $0.33 per unit, compared to $32.1 million, or $0.34 per unit for the same period in 2014, and compared with $25.2 million, or $0.27 per unit in the prior quarter. The changes in AFFO compared to the prior periods are due mainly to the changes in FFO, as previously discussed.

With respect to Bay Adelaide East, as mentioned, in December 2015, we transferred this property to income-producing in accordance with accounting rules, which contributed an incremental $1.2 million of FFO. As you will recall, this property was purchased on an as if stabilized basis, which provides for NOI of $32 million on an annual basis.

Once the property achieve stabilization, which is expected in Q2 of 2017, and once permanent financing is in place, the property will generate approximately $15 million of FFO on an annual basis, representing a 6.9% return on our original equity invested.

As per changes to the balance sheet, our investment in commercial properties, excluding the Bay Adelaide East transfer increased by $146 million in the last quarter, which on a per square foot basis represents an increase of $17 to $467 per square foot.

As per page 7 of our supplemental, the $146 million increase mainly consisted of capital invested in properties of $25 million, and the balance of $121 million due to value increases in the Eastern region of $75 million, including an increase at Bay Adelaide East and an increase in our Western region of $46 million, as a result of significant write-up in the value of our property in Vancouver based on solid interest in our sales process, partially offset by a decrease of values in Calgary, as we adjusted terminal cap rates to reflect the current regional economic downturn.

On a portfolio basis compared to the prior quarter, our discount in terminal cap rates both decreased by 10 basis points to 6.1% and 5.5%, respectively. Our whole period remained steady at 10 years on average.

In addition to commercial properties, we incurred $85 million of development costs during the quarter at Brookfield Place Calgary East and Bay Adelaide East prior to a substantial completion. Of the amount incurred during the quarter, $76 million was funded through existing construction facilities.

BOX’s IFRS per unit now stands at $35.72 compared with $34.34 in the prior quarter. Our balance sheet remains at a loan-to-value level 46% for our investment properties with an average term of maturity of our investment property debt of seven years, which continues to be well matched to our average lease term of eight years. Also, during the quarter, we repurchased 31,000 of our units under our normal course issuer bid at an average price of $26.35 per unit.

On the operations front, our fourth quarter leasing of 596,000 square feet was done at an average rent of $32 per square foot, which was higher than the expiring rent of $32, or $30 per square foot, as well as our average market rents of $28 per square foot.

With that, I’ll now turn the call back over to you Jan.

Jan Sucharda

Thank you, Bryan. With respect to the market updates, we saw occupancy levels improved for the second consecutive quarter in Toronto and Vancouver after several quarters of negative absorption. In contrast, we are experiencing downward momentum in Calgary, which will likely continue in 2016.

Our expectation continues to be that on average migrate upward in 2016, as new inventories in Toronto, Calgary, and Vancouver come online. With respect to specific markets, Toronto was our most active market during the quarter. The downtown vacancy rate for all classes remained at 4.6% compared to prior quarter.

With respect to Class A and AA space in the financial core, absorption was 95,000 square feet, and ended the quarter with the vacancy rate of 5.1%, a drop of 0.9% compared to prior quarter.

Upcoming inventory has seen strong preleasing activity, highlighting demand from companies that are looking to locate in the downtown and embrace new workplace models. As a result, leasing activity and expansionary momentum remains sound. However, we suspect the amount of future space arriving in the next few years will exert downward pressure on rental rates in older Class A and B buildings.

BOX’s Toronto portfolio ended the quarter with the vacancy rate of 4.9%, a decrease of 0.8% from last quarter.

In Calgary, overall vacancy in the downtown core ended the fourth quarter at 18.1%, an increase of 4.2% from the prior quarter. The increase was due to additional space available for sublet, plus the inclusion of two new developments City Centre in Eau Claire Tower in market inventory.

It should be noted that City Center in Eau Claire Tower, which combined for roughly 1.4 million square feet were included in the Q4 2015 inventory, even though they will not be ready for tenant occupancy until early to mid-2016.

Class A and AA vacancy experienced a 3.2% increase, ending the quarter at 14.3%. The bulk of the vacancy in the A and AA category is sublease space, at lease, vacancy represents just 38% of the 14.3% available, which translates to 5.5% of the market. Overall, absorption in the downtown office market was negative 554,000 square feet. Clearly, the decline in global oil prices has put substantial pressure on Calgary’s energy sector. Companies continue to cut capital budgets, lower operational expectations, and reduce workforces.

In terms of our exposure to the energy sector, we have approximately 26% of our space leased to energy tenant. These tenants represents many of the strongest players in the oil and gas sector and our average remaining lease term in Calgary is 10 years. We believe that our portfolio will continue to maintain an above market occupancy rate in 2016.

BOX’s Calgary portfolio ended the quarter with a vacancy rate of 2.7%, an increase of 30 basis points from prior quarter and well below the market vacancy rate.

In Ottawa, the overall vacancy rate in the Central Business District decreased by 10 basis points from prior quarter to 9%, and Class A vacancy rate remained unchanged at 6.2%. BOX’s vacancy rate was unchanged at 4.7%.

Finally, in Vancouver, overall vacancy in the financial core ended the quarter at 11.1%, a decrease of 50 basis points from prior quarter. In the Class A and AA sector, the vacancy rate also decreased by 40 basis points to 12.1% from 12.5% in the prior quarter. Royal Centre ended the quarter with the vacancy rate of 6.3%, a decrease of 2.1% from the prior quarter.

I’ll end with a – just a few closing comments. First, as stated in past calls, we remain focused on backfilling voids and reducing exposure and rollover risk. We have 4% of lease is expiring in 2016, of which half of the exposure resides in Calgary. Given the current operating environment in Calgary, we are looking to Toronto to offset any losses incurred in Calgary.

Second, we will manage the integration of operations and the completion of the remaining construction activities at Bay Adelaide East, excuse me, as well, we continue to advance and actively manage the development of Brookfield Place Calgary East in the lease-up of both properties.

And last, we continue to look for opportunities to create unitholders value. This includes divesting certain assets to crystallize gains and repatriate cash from our investments.

As mentioned in our prior quarter call, we commenced marketing Royal Centre for sale and anticipate a closing in the latter half of Q1 2016. While there have been a number of rumors in the paper, we are not able to provide comment at this time other than to confirm that we received strong interest for the property and that we anticipate having to pay a special distribution in 2016, the amount and timing of which is not yet determined.

In summary, we finished the year with stable results and improved occupancy compared to prior year. We achieved a major milestone by delivering the second office tower unscheduled at Bay Adelaide Centre, and we are also pleased to announce that we are increasing unitholder distribution by 5.7%, starting with our April 2016 payment.

Operator, we will now take questions from investors and analysts.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] And for our first question, we go to Sam Damiani with TD Securities.

Sam Damiani

Thank you. Good morning.

Jan Sucharda

Good morning, Sam.

Sam Damiani

Just on Royal Center, I understand you can’t discuss any pricing specifics. But the comment about declaring a special distribution was a little bit surprising. What’s the reason behind that recently a lack of available opportunities to deploy the proceeds, or were there some tax related reason for the decision?

Bryan Davis

Jan, do you want me to address that?

Jan Sucharda

Yes, Bryan, why don’t you take that one.

Bryan Davis

Yes, it’s both. I think we haven’t seen many opportunities to redeploy capital. But in addition to that for REIT’s to be efficient, you want to distribute the majority of your taxable income and we expect there to be some taxable income generated as a result of the sale that we’ll look to distribute to our unitholders as a special dividend.

Sam Damiani

And that would come shortly after closing, or would there be any delay?

Bryan Davis

As Jan had mentioned, we haven’t determined timing and amount yet. But it’s probably safe to assume that within the first-half of the year, it’s something we would be looking to distribute.

Sam Damiani

And you would be distributing just the gain portion of the proceeds, I guess?

Bryan Davis

Haven’t determined any amount yet.

Sam Damiani

Just over to lease roll, you’ve got the Imperial Oil and the Deloitte space in Calgary – in Toronto, excuse me, coming up this year that is vacant or being vacated. Could you comment on the portion of the space that is in the expiring schedule that is already leased or expected to be leased?

Jan Sucharda

So Sam, starting in Toronto with Deloitte, we have dealt with the space that they had occupied over at 2 Queen, or currently occupied at 2 Queen, there were two floors that are about 50,000 feet. So that has been released. With respect to Bay Wellington Tower, we don’t have any committed deals to that space. But we are working our pipeline on that and we look forward to having that space back just, because we seldom get that size of amount of space in Bay Wellington Tower, and we’re confident that we’ll be able to handle it in due course.

With respect to Imperial Oil, as you know, we dealt with about two-thirds of the space resumed release with TransCanada Pipeline. Unfortunately, as for the remainder Calgary is very quite these days. And although there’s a few things prodding around there, there’s nothing that I see is going to excite us and sort of come through and provide us with the big uptick on that space in the short-term.

So we’re probably looking to backfill what we lose or see come back to us in Calgary through the strength of the Toronto market this year.

Sam Damiani

Understood. And just to clarify some specifics there in the Imperial Oil Lease in Calgary that shows 514,000 square feet. I think the original lease was around 700,000 square feet. So just help me understand the portion that TransCanada took and the portion that is still available?

Jan Sucharda

So you’re correct in your numbers as far as your recollection. IOL has, I think about 717,000 square feet. TransCanada has stepped up to approximately 400,000. There’s call it 300,000, I think the actual number because some others, I think, Enbridge picked up and took some and another tenant. So I think we have about 280,000 square feet, if memory is right to go.

The other thing to remember is though, although we are taking it back, we were successful in getting a good step-up in rental rate from the expiring rent that came off in Imperial Oil that’s going to help us a little.

Sam Damiani

And those new leases would commence right after the expiry of the Imperial Oil Lease, or?

Jan Sucharda

Yes, there’s some – part of that has already started with the fit-out, I think, about six floors Imperial look to give back early, because they’ve already commenced their movement to the suburbs, so that’s in transition. The other space will come back to us in May 1. It will go through some demolition and tenant rebuild with the tenant in an occupying space a year later, April 2017.

Sam Damiani

And Deloitte and Bay Wellington Tower, that’s about 100,000 square feet then or?

Jan Sucharda

Yes, it’s about 100,000 square feet.

Sam Damiani

All right. I’ll turn it back. Thank you.

Jan Sucharda

Thanks, Sam.

Operator

And for our next question we go to Mario Saric with Scotiabank.

Mario Saric

Hi, good morning. Just with respect to Royal Centre, you bought the asset a long time ago, so I guess the cost base must be relatively low. Can you give us any sense in terms of what the cost base on the outfit is?

Bryan Davis

It’s Bryan. Jan, I’ll take it. We are not going to disclose any of those details at this point in time. As mentioned, we are looking to pay a special distribution and once we figure out the amount and timing, we’ll let our unitholders know.

Mario Saric

Okay, I thought I would try. On the operational side, Jan, I think you mentioned the past three years you’ve done about 2.1 million square feet give or take. What’s the target for leasing this year?

Jan Sucharda

Come on, Mario, you called me out on that for all three calls a year ago, when I – you thought I was going to make my target. So you’re really going to make me do it again this year?

Mario Saric

I thought I would try.

Jan Sucharda

We always try to do as much as we possibly can, deals come up during the quarters a bit. Our goal, let me put it in a different way, I think our goal is to try to maintain our occupancy level in that 95% range plus or minus. We obviously have some work ahead of us with the IOL space that portion that is coming back to us. But that’s really where our focus is. And I think I’d rather leave it at that as a target as opposed to getting into specific numbers.

Mario Saric

Okay, well, that’s fair. And then just maybe lastly stock is trading at, call it, 29%, 30% discount to IFRS and maybe, it’s not clear what your net proceeds maybe from Royal Centre relative to where the corporate revolver is today. But can you give us a sense in terms of what you think about the unit buyback whether there’s any consideration in terms of suspending the drip, given where the units are trading today?

Bryan Davis

It’s Bryan. I don’t think we’ve even made any or given any consideration to suspending the drift. That’s something that we offer to shareholders who would like to reinvest their dividends into more units of the REIT. But as I had mentioned in my notes, we did purchase 31,000 units during the fourth quarter. And these prices would continue to look to be active in repurchasing units and supporting liquidity for those that want to sell under the normal course issuer bid.

Mario Saric

Okay, great. Thank you.

Operator

For our next question we go to Alex Avery with CIBC.

Alex Avery

Good morning, guys.

Bryan Davis

Good morning.

Alex Avery

I was wondering if you could just provide a little bit of the details around the Adelaide East coming in, obviously came in December 1. Was there a number that you provided in terms of what the contribution was in order?

Bryan Davis

Yes. To FFO it was $1.2 million, which represented one month of income. But just to sort of give a sense of overall numbers, our – what we earn at the property level is $32 million of NOI on an annual basis. So, we’ll see that come through 2016, interest expense on the facility, the $350 million facility at a – permanent interest rate is about $15 million on an annual basis. So it contributes – the property itself contributes about $17 million to FFO, or when you take into consideration, the incentive fee about $15 million in incremental FFO on an annual basis.

Alex Avery

Okay. And then did you have any comments specifically on leasing up the remainder of that building? Obviously, there’s the head lease in place of 95%, but the actual occupancy is down?

Bryan Davis

Jan, want to save that one for you?

Jan Sucharda

No.

Bryan Davis

Did I lose Alex?

Alex Avery

I’m still here.

Jan Sucharda

Oh, was the – sorry, Alex, was the question leasing up the remainder of Bay Adelaide East?

Alex Avery

Yes.

Jan Sucharda

Oh, okay, thanks. In the quarter, we did several smaller deals that aggregated about a floor. In our pipeline, we have another two floors that are nearing completion and a pipeline building behind that. So I think we’re in pretty good shape. We’re sort of coming up to the 75% level.

And with the building now open, tenants can get up to see the vacant floors and see how beautiful the views are and how open the space is to receive their improvements. And also just the size of the tenancy that we’re now targeting, which are primarily single floor or partial floor occupants. We’re pretty comfortable about where we sit and the activity that we anticipate to secure during the course of 2016 at the site.

Alex Avery

Do you think you’ll get to the 95 level, in terms of committed leases by the end of 2016?

Jan Sucharda

I would love to, I think that’s a tall order, but it’s a stretch goal that we’re going to try to do. Realistically, it’s probably closer in the 80, 85 range type thing. Our sort of development program would have assumed 95% in Q2 2017. We’re sort of running at that pace right now.

Alex Avery

Okay. And it seems like there’s a strong leasing environment for better quality buildings downtown Toronto today, so that doesn’t seem like it’s – may just…

Jan Sucharda

No. It definitely, if there is a good environment right now, and I think the best thing available to our marketing efforts is the fact that the building is now actually open and people can actually see not only the available space, but the opportunity to see what certain other tenants have already done to the space and how it lays out not only can only help us. So we’re pretty excited about the opportunity.

Alex Avery

Okay. And then just trying to understand how the interplay between BPY and BOX works. So when the property came into income-producing on December 1, was it generating basically from a BOX perspective 95% of the NOI that come on?

Bryan Davis

That’s correct. From BOX’s perspective, it’s 95% from an income position.

Alex Avery

And that’s on a cash basis, or is there some free rent period that is working between the two?

Bryan Davis

No, cash.

Alex Avery

Okay. So any non-cash rents or other concessions or the timing of lease commencement from a tenant perspective is all at the BPY level and not at the BOX level?

Bryan Davis

Correct.

Alex Avery

Okay. So just trying to sort of think through the process, if let’s just say the market changes and you aren’t able to lease up a lot of the space. How does that or how would you envision that working between BOX and BPY if there was an extended period. I guess, BPY would just continue to pay their leasehold rents and that would be for an extended period of time?

Jan Sucharda

I’ll start and then Bryan, you can jump in, if you have any points after. But the answer is it depends, I guess, there’s a couple of options for BPY. But essentially the gap is backfilled or topped up by BPY at the point in which you get to the end of this top-up period depending, if market conditions are poor, BPY can extend for another year and continue the top-up.

And ultimately, there’s a provision that provides for a true-up in which, if the leasing is not complete then BPY has the option to either make an adjustment to the purchase price or more likely in this event extend through a longer-term head lease arrangement to continue the top-up for up to 10 years.

Alex Avery

For up to 10 years. And what is the initial term?

Jan Sucharda

It just matches our development lease-up pro forma.

Alex Avery

Yes, okay. Okay, so it’s a year-and-a-half and then one year option and then they can continue to extend as long as 10 years, given that the market didn’t support those numbers. But that doesn’t seem like that will be a problem, okay.

Jan Sucharda

Right.

Alex Avery

All right. As far as the distribution increase, what was the thinking behind that? And can you invest in terms of that consistent with the target payout ratio or?

Jan Sucharda

Yes, it’s our long-term target payout ratio, which is 90%. We haven’t been able to make a distribution and haven’t made a distribution increase in two years. We look with the – bringing Bay Adelaide online that the timing would be good. And in line with our overall plan and long-term distribution target, it was appropriate at this time.

Alex Avery

Okay. And then to the extent that the rumors are true on pricing on the Royal Centre it implies that you make the $200 plus million of additional cash coming onto the balance sheet. So you’ve noted that some of that might go towards special distribution. What other potential uses of excess cash might you consider?

Jan Sucharda

Well, at this time, whatever the amount is Alex, and of course, we’re not tying. But it would be to reduce the corporate line, the credit line.

Alex Avery

Okay.

Jan Sucharda

Okay.

Alex Avery

Okay. Yes, that’s helpful. Thank you very much.

Jan Sucharda

Thanks, Alex.

Operator

[Operator Instructions] We go next to Marvin Carsley with MC Global Investments.

Marvin Carsley

Good morning, gentlemen.

Jan Sucharda

Good morning.

Bryan Davis

Good morning.

Marvin Carsley

First of all, thank you very much for the increase in the dividend. It’s great to be appreciated. But the question I have is, how do you get to these figures of $0.10.92 and $0.10.97? Why don’t you make it a straight $0.11 like everybody else? I mean, how do you get to these odd figures?

Bryan Davis

I would say there is no math behind it. What we do is, we look at our annual distribution target. And then unfortunately, the decimal is a result of dividing that annual by the monthly distribution that we pay out.

Marvin Carsley

Okay. I mean, I can’t figure out how you’re coming to these decimal points of distribution. Normally people round out the figures and we have the profit to be able to pay for it.

The second question I have of you is, Rick Clark has announced that he is actively seeking opportunities in Canada, and it sounds like from what you say that once Vancouver is dealt with, you’re looking at distribution of cash rather than seeking out these opportunities. Does that mean that the opportunities that he has announced or looking for is not going to go towards BOX and why not?

Bryan Davis

Jan, do you want me to start and then you can come in.

Jan Sucharda

Yes, you start and I’ll jump in after.

Bryan Davis

Yes, and look, I’d say there’s two things; one of which we’ve just indicated that the special dividend will at least cover the amount that we need to distribute, so that it’s not taxable at the REIT level.

Secondly, I would venture a guess, if there’s any opportunity within the office sector that is pursued in the Canadian markets, in particular, if Calgary or anywhere else in Alberta provides an opportunity, the primary vehicle for those transactions if they make sense would be through BOX. If there’s real estate in other sectors, industrial, multifamily, retail, which Rick Clark pursues within BPY platform, those likely will not be done within BOX.

Marvin Carsley

So it’s only office buildings that BOX is confined to. Is that correct?

Bryan Davis

Yes, BOX is targeted on office asset in the Canadian market.

Marvin Carsley

Okay, understood what you come from. End of question.

Bryan Davis

Thank you.

Operator

[Operator Instructions] And with a follow-up question we return to Sam Damiani with TD Securities.

Sam Damiani

Thank you. Just on to Bay Adelaide East, just to clarify the $32 million NOI is a cash basis, I believe, confirm that. And so the $15 million of FFO you referenced is actually the cash FFO number.

Bryan Davis

Correct.

Sam Damiani

And so -- and it looked like in the fourth quarter, I mean, the numbers are very small. But maybe for 2016, I guess, is there any material straight line rent or other non-cash rent to come through in addition to the $32 million of cash NOI?

Bryan Davis

I don’t think with – yes, I don’t think so.

Sam Damiani

Okay. And how does that $2 million incentive fee get accounted for in the financial in the income statement?

Bryan Davis

It’s included within G&A.

Sam Damiani

G&A.

Bryan Davis

Yes.

Sam Damiani

And just finally on the cost of the asset, I think, $509 million was transferred for the asset into income properties in the quarter. The budget was $602 million. So I just wanted to confirm does that basically imply that there is about $90 million of expenditure remaining on the asset?

Bryan Davis

Not of expenditure. In fact, part of the fair value gains that we took during the quarter related to Bay Adelaide Center. And so we would have transferred it in that cost written up the value the balance to $602 million does represent some incremental expenditures related to the project.

Sam Damiani

But nothing close to nine like, it’s just…

Bryan Davis

No, not yet.

Sam Damiani

But it’s $10 million or $20 million or $30 million or something like that, pocket change. Okay. And just finally on the Brookfield Place Calgary East, the loan is up in the end of 2017. What are the terms under which it could be extended?

Bryan Davis

There’s a one-year extension that’s provided based on an occupancy threshold, which is at 80%.

Sam Damiani

80%. And do you foresee using the full facility on the construction of the building there or…?

Bryan Davis

We have – we’ll pull down the facility obviously under the current interest rate environment. We probably have some room to spare in that the difference between what had been budgeted versus where the current rates are. But essentially, I will – we expect the pull down everything required.

Sam Damiani

Jan, just in your experience, I mean, sorry, go ahead.

Jan Sucharda

No, no go.

Sam Damiani

I was going to say in your experience watching oil collapse as fast as it’s doing these days. How long will it take for there to be attractive investments in the Calgary office market?

Jan Sucharda

I’m not sure we’re going to wait and see. We’re going to continue to monitor it. But obviously as certain leases roll and we see the stress it puts on others, we’ll see what happens in the market. But it’s very interesting this time about how fast it’s come down. We’ve seen the market jump and come back very fast in past cycles andthis onefeels like it’s going to take a little bit longer, but we’ll have to plan and see. As far as timing to see opportunities, it’s hard to call how long it will take and when. But I’m sure there will be opportunities.

Sam Damiani

Very well. Thank you very much.

Jan Sucharda

Thanks, Sam.

Operator

And for our next question we go to Rob Sutherland with Euro Pacific Canada.

Rob Sutherland

Hi, guys.

Jan Sucharda

Hey, there.

Rob Sutherland

Just a quick question on the top-up with Bay Adelaide that can go in either direction correct, in terms of money going to BOX or money coming from BOX to BPY depending on how leasing does?

Jan Sucharda

You’re saying, oh, I think what you’re asking is it upon completion of the lease-up.

Rob Sutherland

Yes, right.

Jan Sucharda

If there is success, yes. You’re correct. If we have the leasing is so successful that the NOI exceeds the target level then there’s an adjustment that goes in favor of BPY, yes.

Rob Sutherland

Okay. And it’s NOI-based not occupancy-based?

Jan Sucharda

It’s NOI-based.

Rob Sutherland

Okay, perfect. That’s all I needed. Thank you.

Jan Sucharda

Thank you.

Operator

And we go next to a follow-up question with Alex Avery with CIBC.

Alex Avery

Hi, thank you. Just on the IFRS fair values, you saw an increase in the Eastern portfolio and the Western portfolio. And I was wondering if you could maybe talk about any changes that would have happened in the Western portfolio with the Royal Centre being on the market and any changes to the Alberta portfolio?

Bryan Davis

Yes, well we did…

Jan Sucharda

Sorry, Bryan, I’ll just – I’ll take first shot. We did obviously step-up to look at how – what we’ve seen with Royal Centre. Of course, Western blends Vancouver in Calgary. In Calgary, we actually throttled down the terminal cap rate on those investments. So we saw those properties have a partial decrease in value, and that’s really just, because uncertainty as to where the market will be at the end of the investment horizon. And so we adjusted our terminal cap rates for Western Calgary by and large 25 basis points this quarter. Anything you want to add Bryan?

Bryan Davis

No, that was it.

Alex Avery

So I guess that would imply that the increase that you saw in Vancouver was greater than the impact of a 25 basis point move in Calgary?

Bryan Davis

Correct.

Alex Avery

Okay. And then just a follow-up on – there was a question earlier about any investments that BPY might be looking to pursue in Alberta and you noted that BOX is the primary vehicle for any office, investments, but and correct me if I’m wrong. But BOX has also been very focused on Class A and trophytype assets. Is it possible that BPY could make opportunistic investments in lower quality office assets outside of BOX? Assets that wouldn’t fit with the investment profile of the REIT?

Jan Sucharda

Look, it is possible that they could pursue assets that we otherwise wouldn’t have within the REIT. But they wouldn’t do so without making sure that the REIT BOX in particular wasn’t the right spot on those assets.

Alex Avery

So you did an opportunity to look at them and presumably if they weren’t of a quality, you could…

Bryan Davis

Correct. Yes, essentially we BOX with market.

Alex Avery

Okay. That makes sense. Thank you very much.

Bryan Davis

Thank you.

Jan Sucharda

Okay. Thank you.

Operator

And ladies and gentlemen that does conclude our question-and-answer session. Mr. Sucharda, I will turn the conference back over to you for any closing remarks.

Jan Sucharda

Thank you, everyone, for joining us today. We appreciate your support and continued interest and we look forward to seeing you in the coming weeks. Bye for now.

Operator

And again, ladies and gentlemen, this will conclude today’s conference. Thank you for your participation.

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