Brookfield Property Partners' (BPY) CEO Brian Kingston on Q2 2016 Results - Earnings Call Transcript

| About: Brookfield Property (BPY)

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

Q2 2016 Results Earnings Conference Call

August 05, 2016, 11:00 AM ET

Executives

Matthew Cherry – Vice President Investor Relation & Communications

Brian Kingston – Chief Executive Officer

Bryan Davis – Chief Financial Officer

Ric Clark – Chairman

Analysts

Sheila McGrath – Evercore ISI

Mario Saric – Scotiabank

Neil Downey – RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Brookfield Property Partners second quarter of 2016 results conference call. As a reminder, today's call is being recorded.

It is now my pleasure to turn the call over to Mr. Matthew Cherry, Vice President of Investor Relations and Communications. Please go ahead.

Matthew Cherry

Thank you and good morning. Before we begin our presentation, let me caution you that our discussion will include forward-looking statements. These statements that relate to future results and events are based on our current expectations. Our actual results in future periods may differ materially from those currently expected because of a number of risks, uncertainties, and assumptions. The risks, uncertainties, and assumptions that we believe are material are outlined in our press release issued this morning.

With that, I will turn the call over to Chief Executive Officer Brian Kingston.

Brian Kingston

Thank you, Matt, and good morning, everyone, and thank you for joining our call today. With me on the call are Ric Clark, Chairman of BPY, and Bryan Davis, our CFO.

In my opening remarks, I will provide an update on our strategic priorities, as well as some observations on real estate fundamentals and the investment environment, including our outlook for the balance of 2016. Bryan will then go through the details of our quarterly results, and then following those comments, we would be happy to take questions from analysts and investors on the call today.

So as you would have seen in our press release this morning, we reported strong earnings growth in the second quarter of 2016, with an increase in Company FFO per unit of 25% over the same period last year. This is consistent with the year-over-year increase that we reported last quarter.

Our results continue to benefit from new investments made in the last 12 months, higher net operating income from recently signed leases in our office portfolio, and contributions from our multi-family operations.

We started this year with a goal of raising up to $2 billion of net equity from asset sales and we're about 75% complete against that target. These dispositions have been across all of our real estate sectors in the US, Europe, and Australia. You will find the details of these sales in our press release and letter to unitholders issued this morning.

In many instances, these transactions have been completed at sub-5%, and in some cases, sub-4%, cap rates and in all cases at or above our IFRS carrying value, further demonstrating why we believe IFRS value per unit to be a good indicator of the underlying value of our Company.

We continue to see good opportunities to invest in high-quality assets at attractive return. Our $9 billion real estate opportunity fund, in which BPY is a $2.3 billion investor, closed during the second quarter and is now invested or committed to invest $5.2 billion of equity transactions. This puts the fund on track to have the fund fully invested by 2017 and in a position to launch fundraising for the third generation of the series then.

We have begun harvesting capital from the first fund, which closed in 2013, making this strategy largely self funding. The returns on those investments support our significant growth initiatives without having to raise new equity in the public markets or take on substantial corporate debt.

As most of you on the call would be aware, in a referendum held in June the UK voted to exit the European Union. As this was an unexpected outcome, we saw a sharp impact initially on currency and public security, although both have largely stabilized, to some extent. In order to protect our balance sheet against unfavorable currency movements, we have over 80% of our assets in the UK hedged against the pound, including both locally denominated debt and financial hedges. With only about $1 billion or 5% of our total equity exposed to the pound at June 30, we were largely insulated from these short-term impacts.

And while we are likely to see further volatility in the years ahead as the UK adjusts to a new relationship with the rest of Europe, we believe it will continue to be an attractive place to invest and for businesses to locate their operations. The UK has a favorable tax and regulatory framework for foreign investors, a sound rule of law, healthy respect for capital, and a culture of free enterprise.

In the near term, our London office portfolio is 98% leased, with an average remaining lease term of nearly 12 years, and less than 15% of our leases expire over the next five years, providing a great deal of certainty and stability to our portfolio. Our other major business in the UK, Center Parcs, is a short-stay resort operator catering primarily to domestic visitors and so may actually stand to benefit from a weaker pound.

And as we have often seen in the past, uncertainty leads to attractive investment opportunities for patient investors with a long-term view, and we will be ready if any such opportunity should present themselves.

Enhancing our balance-sheet flexibility and optimizing our cost of capital were also strategic priorities for the year. During the quarter, we upsized our corporate credit facility by $700 million, bringing the total to $2.5 billion. We also upsized and extended maturities on several sizable asset-level loans in the US and secured over $1 billion of construction financing on development projects in the US and the UK.

We also pledged at the beginning of the year that we would remain active in unit buybacks, should they continue to trade below fair value. During the quarter, we repurchased 342,000 units at an average price of just under $22 a unit, and have repurchased a total of 2.3 million units over the past 12 months. As we continue to generate cash gains on our asset sales, we will weigh the opportunity to purchase further BPY units against alternate uses, while always maintaining a strong long-term capital structure.

At this point, I will turn the call over to Bryan to walk through our quarterly financial report.

Bryan Davis

Thank you, Brian. During the second quarter, we earned Company FFO of $250 million. This compares with $198 million earned for the same period in 2015. On a per-unit basis, Company FFO for the current quarter was $0.35 per unit, compared with $0.28 per unit in the prior year, which represents an increase of 25%, as operating performance was strong across all business units.

Net income attributable to unitholders for the quarter was $349 million, or $0.49 per unit, and includes fair value gains of just a little over $250 million.

Although not reflected in current-period FFO and only partially reflected in current-period net income, we did realize gains of $117 million, or $0.17 per unit, on assets that were sold in the quarter as a result of strong execution on the sale of a 33% interest in One New York Plaza in New York and King Street Wharf in Sydney at prices well in excess of the capital that we had invested in these assets.

These realized gains, combined with our FFO this quarter, provide strong support for our increased quarterly distribution of $0.28 per unit that was paid at the end of June.

In reviewing our Q2 Company FFO in a little more detail, the main drivers that contributed to the $52 million increase on a year-over-year basis were, number one, investment activity, specifically into our new strategic real estate fund, which acquired interest in Center Parcs in the UK, associated states in the US, an office portfolio in Brazil, a self-storage portfolio in the US, and most recently a portfolio of student housing properties in the UK. These new investments contributed $22 million to Company FFO.

In addition, our opportunistic capital invested in the multi-family sector had a strong quarter, with an incremental $21 million of income earned as a result of the successful sale of merchant-built properties in the southern California market.

In our core office and retail operations, we continue to see the trend of same-store growth in natural currency. For our core office portfolio, we benefited from Jones Day occupying their premises this quarter at 250 Vesey Street, which contributed to a 10% same-property growth compared with last year and a 6% growth compared to last quarter.

Our annual run rate on Brookfield Place New York is now at $80 million annually, and with another $10 million expected in Q4 when Saks occupies their space, we expect we will be at $120 million on an annual basis by the end of the year.

Our core retail business had 2% same-store growth compared with the prior year, due to an increase in same-property occupancy to 95.1% from 94.6% and a continual increase in rents per square foot.

Similar to last quarter, due to a difference between IFRS and US GAAP, we did not include in our earnings this quarter income recognized by GGP from their share of the Ala Moana condominium development project of $3 million at our share. Year to date, this income totals $14 million, and if there were no GAAP difference, it would increase our Company FFO by $0.02 per unit.

These increases were offset by asset sales, which reduced Company FFO by $16 million, and a reduction in FFO of $7 million from our exposure to foreign currencies that weakened relative to the US dollar.

In arriving at Company FFO, which we detail on page 9 of our supplemental, amongst our standard adjustments for GGP warrants and the addback of depreciation of non-real estate assets, we did adjust for $10 million in transaction costs related to our recent acquisitions and $12 million of a currency gain related to our sale of a partial interest in Potsdamer Platz.

Included in net income, we recorded fair value gains of $254 million during the quarter. The majority of these gains were in our core businesses. In office, our New York properties benefited from increased cash flows to reflect recent leasing conditions and the burn-off of free rent periods.

In Sydney, One Shelley Street increased in value to reflect a price at which we closed on its sale early in the third quarter. In London, Principal Place commercial increased in value to reflect the transaction metrics we had negotiated for the partial sale of an interest in that property, which we expect to close in the later part of this year. And these increases were partially offset by a reduction in value in our energy markets of approximately 2.5% to reflect continued challenged leasing conditions in those markets.

In retail, we recognized valuation gains of $95 million spread across the portfolio to reflect improved cash flows due to leasing activity.

While the decision to leave the European Union has led to political and economic uncertainty in the UK, as of now there is not yet sufficient market evidence to determine the impact on valuations of our office properties located in the UK, despite the volatility witnessed in the equity markets. These values were supported by external appraisals over 80% of our operating properties in that market.

As Brian mentioned, the quality, stability, and longevity of the cash flows at our properties in Canary Wharf will insulate that portfolio from significant changes in value and arguably, in light of a declining interest-rate environment, could make those cash flows more valuable to investors looking for yield.

In addition, our office developments already have a high level of preleasing commitments, which allow us to be patient in finding tenants for available space during the remaining period through to stabilization.

In comparing our results to the first quarter of 2016, Company FFO increased by $33 million from $217 million earned in that period. This increase was primarily due to the incremental income earned in our multi-family investments, as I previously mentioned, seasonality in our hospitality assets in the UK and Europe, same-store growth in our core office business, and this was offset by asset sales.

On our proportionate balance sheet, our total assets remain largely unchanged at $66 billion. Our focus through the second quarter of this year was to continue to make progress in increasing the flexibility of our balance sheet, and we achieved this through a continuation of our asset sale program.

In addition, we focused on minimizing the impact to our equity of the volatility that we expected to arise from the referendum in the UK. To achieve this, we increased our FX hedges to GBP2.9 billion at an average rate of [1.41]. This, combined with local currency debt, reduced our equity exposed to that currency from GBP3.7 billion to less than GBP1 billion, or, as Brian mentioned, only 5% of our total equity. As a result, only a $120 million FX loss related to all the post-Brexit volatility was recorded in our equity.

We ended the quarter with an IFRS value per unit of $30. This is consistent with where we were at the end of the prior year and at the end of the prior quarter, as the benefit of FFO and fair value adjustments were offset by the impact of weaker foreign currencies, interest rate hedges, and distributions paid.

Lastly, our Board of Directors yesterday declared a quarterly distribution of $0.28 per unit to be paid at the end of September.

Now with that, I will turn the call back over to you, Brian.

Brian Kingston

Thanks, Bryan. Before getting to questions, I will provide a brief operating report from each of our three business segments. On core office, since we already touched on London, I will start with a brief update on New York City. Leasing activity in New York City remains healthy. We are hopefully just a few months away from finalizing a lease with another major tenant for One Manhattan place -- One Manhattan West.

In total at Manhattan West, we are in active discussions with nine tenants, representing about 3.4 million square feet of space. Obviously, all of these leases won't translate into completed leases, but we are very encouraged by the amount of activity there.

After a slow start in 2015, activity in the Toronto market has picked up markedly in 2016. During the quarter, we closed on leases totaling 280,000 feet, including another tenant at our new development Bay Adelaide East. Investment markets remain healthy, with increasing values seen on recent transactions in that market.

In Australia, Sydney has shown a very strong rental growth and absorption, along with decreasing tenant incentives. Occupancy has decreased modestly, though, due to new product entering the market at Barangaroo, which is causing some backfill vacancy. Despite this, Sydney continues to attract significant investment capital from both domestic and offshore buyers. And as you will note, we have sold several assets in Sydney and Melbourne over the past few quarters.

We have made meaningful progress at Potsdamer Platz in Berlin, increasing our office occupancy from 53% to 75% in the nine months since we took control of the estate. Including leases currently out for completion, our office occupancy would increase to 80% and we expect it to be higher by the end of the year.

There are many positive signs coming out of Berlin. Market vacancy has reached its lowest level in more than 10 years in the second quarter and rental growth has consistently outpaced other major German cities. Demand from technology, media, and telecommunications sector tenants is particularly strong, with 40% of the leases completed in the quarter attributable to those growing industries.

And while Calgary and Houston remain challenging, following quarter-end we came to an agreement with a second tenant for our Brookfield Place Calgary development. When that lease is finalized, it will raise the precommitment level on that project from 71% to 81%, with delivery slated for late next year.

This is a prime example of why we place such importance on owning only the highest-quality assets in markets where we invest. With the significant amount of new supply and weak demand in the Calgary market, tenants are in a position to upgrade their premises into the better buildings and locations, which we are benefiting from. In a market with 22% vacancy, our Calgary portfolio remains 92% occupied, with only a further 5% of the portfolio expiring over the next three years.

Within our core retail platform, occupancy finished the quarter at 95.1%, a 50 basis-point increase from the same period in the prior year. Signed leases commencing in 2016 totaled 7 million square feet, 8.2 million if you include those commencing in 2017, with an average suite-to-suite rental spread of 26% and tenant sales increasing by 2.8% on a trailing 12-month basis.

Foot traffic in our Class A malls has been stable in 2016, after being up about 2% in 2015. Retailer demand for our portfolio continues to be strong. Underperforming department stores are being replaced with nontraditional mall tenants, including anything from restaurants with quick-service food hall concepts to high-end grocers, entertainment venues, and e-tailers doing pop-ups or permanent stores. E-retailers are very much focused on opening bricks-and-mortar stores as part of their delivery strategy in the very best locations.

We have almost 500 full-service restaurants now operating in our retail portfolio, more than half of which have opened in the last five years alone. Inserting new technology has been a major driver to elevate the shopping experience, including enhancements for shopping and dining, entertainment, and even parking facilities.

Development and redevelopment initiatives in the core retail portfolio total about $1 billion, $302 million at our share, of which $500 million is currently under construction and a further $500 million in the pipeline. These projects on average are earning 10% yields on cost, which is a significant spread over cap rates where these assets would trade today in the market.

As mentioned earlier, our opportunistic investing strategy currently takes place through our investment in Brookfield-sponsored private equity funds, and we're seeing no shortage of attractive investment opportunities to put that capital to work and achieve our targeted returns of 20%-plus.

In May, the Fund agreed to acquire a portfolio of 135 manufactured housing communities, comprising 33,000 sites across 13 states. Manufactured housing is a property sector that has been on our radar for some time. Similar to self storage, it produces outsized same-store NOI growth and strong tenant retention, even in recessionary environments. This presents an opportunity for us to gain significant market share in a highly fragmented sector, with minimal institutional ownership.

We also agreed to acquire six suburban office assets in Maryland, comprising 1.2 million square feet. We closed on the first tranche of four assets in the second quarter. The acquisition basis at $200 a square foot represents a significant discount to replacement cost and an attractive entry point to acquire these assets. The assets are close to our existing portfolio in the greater Washington, DC, market and will benefit from public transit accessible locations.

Following the acquisition of 90 self-storage assets in the first quarter, we acquired a further 51 facilities in various states across the United States this quarter. As discussed previously, these types of consolidation opportunities are plentiful and the cash-on-cash and long-term investment returns robust.

On June 23, Rouse shareholders approved our offer of $18.25 per share for the business and we closed on the transaction in early July. We are excited to integrate this platform into our greater business and the global resources that we bring to bear. We believe there is numerous opportunities to unlock value within the business.

And as with our core office and core retail platforms, we have been actively recycling capital within our opportunistic portfolio. In the second quarter, we sold 20 US suburban office -- suburban apartment properties at very attractive values relative to where we acquired them.

So in closing, we are well on track to achieve our stated goals for 2016 and look forward to updating the investment community further on our strategy and plans to grow the business at our annual investor day on September 29 here in New York. If anyone on the call does not have details for our investor day, they're on our website or please feel free to reach out to Matt and he will send you the details and get you signed up.

With those remarks, we are happy to turn the call over to any questions from analysts and investors. Operator, if there are any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Sheila McGrath, Evercore ISI.

Sheila McGrath

I know the Brexit vote is so recent, but I was just wondering if you could give us your view on if some of your sovereign capital partners would be rotating capital towards New York assets or other major US cities, away from London, just in the short term.

Brian Kingston

I guess, as we said earlier, there hasn't really been any transactions to date, but in our discussions with those investors it is actually the opposite. Many of them are -- see this as potentially pretty attractive entry point into London.

As you know, particularly from Asia and the Middle East, there has always been a great deal of interest in London, and they see with the pound down from where it was prior to that and the possibility that there may be some assets coming up for sale, it is more an investment opportunity for them. So I would say, if anything, they're probably more interested in investing in London post-Brexit than they were pre.

I'll caveat that by saying none of them have actually made any investments there yet, so that's pretty anecdotal.

Sheila McGrath

And if opportunities came up, are you comfortable with your percentage exposure there or would you be interested, potentially, in adding to the portfolio?

Brian Kingston

No, as I said in our remarks, I think if we do see an opportunity to acquire assets at what we think is a good price, we are big believers in London in the long term. No question in the next few years, there is going to be some ups and downs, but we do think that's a great place to invest, and if this creates some investment opportunities, we would be interested in doing more.

Sheila McGrath

Okay, great. And then on Manhattan West, you mentioned finalizing a second lease there. I'm just wondering your thoughts on how the lease-up pace is going and if the rents are in line with your pro forma. And whereabouts would, percentagewise, that lease get you in terms of preleasing?

Brian Kingston

Sure, I will maybe let Ric give you a bit more color on that.

Ric Clark

Sheila, so activity there is strong. That lease is roughly a couple hundred thousand feet, so that takes us up another 10% to about 40%.

As Brian mentioned in his remarks, there is robust activity for the center in general, close to 4 million square feet of tenants that we are in discussions with, so we are doing pretty well. We are on track. We underwrote a pretty long lease-up period when we commenced construction and we are achieving our economics. So, I think everything looks pretty good there.

Our goal now is to start working also on finding an anchor tenant on our second office building and launching right into that so that we can complete the full development as quickly as possible.

Sheila McGrath

Okay. And one last question, I know it is not a significant investment, but I think it is interesting one, your investment in Convene, and I am just wondering if you plan on rolling out that product to -- across your portfolio.

Ric Clark

We do. That is -- I think we're in a really unique position versus most of the world's landlords in that we have got a great global presence. We have great properties in a number of the most dynamic cities in the world, and businesses like Convene, we have discovered an opportunity to work with them while they are in startup mode to not only put them in our local buildings to help make the tenant experience better, and I will come back to what Convene does in a second, but also roll them out around the world in a hurry.

So we can take them from start-up to a big organization in a little bit of time, given the size of our portfolio around the world. So in the case of Convene, here is a business that provides conference facilities for tenants. We have had a number of tenants say to us in the past, geez, I am putting a board room in my space. I'm going to use it once a quarter. This is a ridiculous waste of space. Why don't you find something like this for your building and we can use our space more productively?

So we think making investments in businesses like this and helping them grow both helps support our local leasing efforts, but also I think we can make money out of helping them grow their business as well.

Sheila McGrath

Okay, and you…

Ric Clark

So the plan is, yes, to roll them out.

Sheila McGrath

And, Ric, you wouldn't be -- you would still get equivalent rent on the space? It is not like you're giving that space up to be an amenity for the building.

A - Ric Clark

No, no, no. This is -- in most cases, we actually sign leases with Convene. In some cases, we may enter into management arrangements, but the expectation is is that when we do that, we would actually end up making more money than we would through a straight lease. So, yes, this is not an amenity; this is not a cost for us. It is actually -- the expectations are that we will generate meaningful revenue for Brookfield.

Sheila McGrath

Okay, great. Thank you.

Operator

[Operator Instructions] Mario Saric, Scotiabank

Mario Saric

Maybe sticking to the office platform, and Ric, your comment on the global relationships. You have done a really good job in Berlin, increasing that occupancy after a prolonged period under previous ownership with relatively low occupancy. Have the global relationships helped in Berlin thus far or is it a predominately local TAMI tenant?

Ric Clar

It has actually been both. A couple of the deals that we did right off the bat were with global relationships, one of which was a law firm tenant that wasn't sure that they wanted to stay. I think because of the relationship they not only stayed, but they expanded in the project.

So we have been doing some of both and we really see the benefit of this around the world. I can tell you in places like India, we are finding it really helps in our leasing efforts within our Indian office assets. I think people just find it easier to work with partners that they are comfortable with, that they know that they work with in multiple jurisdictions. It is definitely a benefit.

Mario Saric

Okay. More of a general question just on the US office occupancy rates, they trended down a modest 60 basis points quarter over quarter. Most markets came down a very little amount, outside of downtown New York. How do you see that 89.7% or 90% occupancy trending through 2017 and what is the catalyst to get increased velocity, leasing velocity, going forward?

Ric Clark

Well, I think looking over the next 18 months or so, the expectation is that we will move the occupancy levels back up towards the mid-90%s level. That is certainly the goal. We had a few large tenants in some of our buildings whose leases were rolling and they made commitments to new development, so we knew that was coming.

So occupancy might go down just modestly before it goes back up again, but our goal over the next 18 months is to get it to the mid-90%s.

There is in most markets sufficient activity for us to have confidence that we will achieve that. An energy market like Houston is a bit of a different story. There is not a lot of activity in a market like that. The activity is really opportunistic. Let's say the tenants know that the leverage is filtered towards them and they're taking advantage of where the market is to do early renewals and that kind of thing. But in the other markets, I think there is pretty healthy activity.

Mario Saric

Okay, so just to clarify, it's not necessarily contingent upon an acceleration in market fundamentals for you to get back into those mid-90%s.

Ric Clark

No, no, not in most markets. As I said, Houston is a bit of a -- is a little bit problematic because of the state of the energy sector.

Downtown LA, the vacancy has been pretty significant in that market for a long period of time, and I think to make meaningful progress from where we are in that market really depends on starting to see the migration of tenants from the Westside to the downtown LA market and we are beginning to see that happen. There is one music industry tenant that is close to a deal in a downtown location, and this is just what we have been expecting to happen and it looks like that market is on the verge of seeing some changes.

Mario Saric

Okay, that's great. And then, maybe just shifting over to the UK, Brian, you mentioned that at the right kind of price, you are looking to perhaps increase your exposure there. Would that -- I guess two-part question. A, how much depreciation does the right price represent, if any? And then, B, would you feel comfortable adding to central office and Canary office position?

Brian Kingston

If I knew exactly where the currency was going, I would be in a different business, but -- so we do look at it as -- there has been a pretty significant devaluation from where the currency was before. Clearly, interest rates are coming down there. The economy is going to slow down and I think some of that is justified, but certainly at the levels that the currency is at today, it is far more attractive than it had been at higher ones.

And, yes, look, I think we're pretty active. Obviously, our biggest exposure and investment today in the UK is London office between Canary Wharf and the city. But we are pretty actively evaluating across multiple sectors, everything from student housing. We have an industrial business there, et cetera, and it could be -- and obviously the Center Parcs investment, too. So, I really think it could be across multiple sectors, and including office in the city or even the West End if the right opportunities came along.

Mario Saric

I see. And then, looking out, you made the point that from a cash flow perspective the portfolio is very well insulated over the next several years. From a funding requirement perspective or a capital requirement perspective, is there anything -- outside of, I think, one decent-sized mortgage maturing at 20 Canada the next couple of years, are there any funding requirements over the next two to three years that we should think about?

Brian Kingston

No, no, that's it. So, 100 Bishopsgate, the development funding is all in place for that, and Canary Wharf has a very long-term debt profile associated with it, as does the remaining London, so the 20 Canada Square really is the only significant maturity we have, Bryan, for the next three to five years, really.

Bryan Davis

Yes, yes, that's right.

Mario Saric

Okay, and then just a clarification question for Bryan on the IFRS NAV, so there hasn't been any impact to your disclosed IFRS NAV as a result of Brexit because it is still too early to ascertain the impact. Is that right?

Bryan Davis\

Yes, although I will caveat that. Our values haven't gone down to reflect what may be the impact of Brexit, but we did get impacted by currency. And as I think I indicated in my prepared remarks, we had a $120 million loss in value related to the decline in the pound post-Brexit, which would have impacted -- flown right through to equity and impacted our IFRS values, but that's it.

Mario Saric\

Right, it's understood, okay. And then, is it simply just the passage of time in order for you to gain assurance one way or another in terms of adjusting those valuations, or what has to happen in order for that uncertainty to dissipate?

Bryan Davis

You need to see evidence, I think. And if that evidence shows itself over the passage of time, then we will have to reflect on it. If that evidence doesn't, then our values are going to remain consistent with where they are today.

Q - Mario Saric

Got it, okay. Last question for me is just when I look at the liquidity, it's about $600 million or so at the end of the quarter. Looking out the next 12 months, can you talk about some of the major uses and sources of capital to fund the business model?

Bryan Davis

So from a use perspective, I would say our development is largely funded through construction facilities. Brian indicated we had two new facilities this quarter, so we're pretty much funded from that perspective.

We have some commitments to the real estate -- the second real estate opportunity fund, which we expect over the balance of this year and into 2017 as it goes from $5 billion invested up to the $9 billion total investment, and we will fund through additional asset sales, some of which we talked about in the context of this quarter, but we haven't received the cash yet and we expect receive in Q3 and Q4, and some more asset sales that we will look to execute in the early part of 2017.

Q - Mario Saric

Okay, and so the net proceeds that you listed in the unitholder letter amount to about $1.8 billion and you've mentioned that you have done about 60% or 65% of your year-to-date goal of $1 billion to $2 billion, so the delta there would simply be cash not received.

Bryan Davis

Right.

Mario Saric

Is that right?

Bryan Davis

Yes, yes, that's right.

Mario Saric

Sorry, maybe lastly, just the floating-rate debt exposure has come up a little bit quarter over quarter, so it sits at about 43%. How do you see that trending over the next 12 months?

Bryan Davis

I think it will trend downward over the next 12 months. There are a few refinancings that we will look to put in place, either five- or 10-year fixed-rate. A large portion of our floating-rate exposure relates to our corporate credit facility, which, as we have indicated in previous calls, we're going to look to reduce the drawings on that over the next 12 months.

That might be offset slightly by draws on our construction facilities, which tend to be floating rate, but I would say in general it should start to trend downwards.

In this environment, we are not that worried about being exposed to floating rate because a lot of the markets that we operate in are seeing pressures on interest rates and, as a result, we are benefiting from having that floating-rate exposure.

Mario Saric

Understood. Okay, thanks, guys.

Operator

[Operator Instructions] Neil Downey, RBC Capital Markets.

Neil Downey

Brian, you touched briefly on the fact that you now own Rouse outright. Are you able to give us a bit more flavor as to what the strategies will be with that business over the next couple of years?

Brian Kingston

Yes, look, I think the -- clearly, the B mall sector in general is out of favor with public markets in particular, in most cases due to concerns over the health of retailers and/or the amount of retail space.

But I think what we acquired with the Rouse acquisition, in addition to a portfolio of 35 malls, is a great management team who has a tremendous record over the last five years in repositioning these assets. In some cases, that is just changing the nature of the tenancy within these malls to better reflect where the strength in retailers are. In other cases, it is completely rethinking whether the asset should be a mall, and in some cases we have converted malls to alternate retail uses.

A lot of that type of investment activity or repositioning is difficult to execute in a public company format, because it sometimes involves large capital investments and/or taking income off-line for a period of time. And Rouse really was a small market cap company, and so oftentimes those -- the right long-term decisions were hard to make in a public company context.

Now that it is fully privatized and in investors' hands, who are really targeting IRR as opposed to quarterly earnings, we think a lot of those decisions will be much easier to execute, and we have the capital available through the fund to fund some of these capital programs.

So I think what you'll see is a lot of active repositioning within that portfolio and converting assets that are maybe struggling with attracting tenants into higher-performing retail assets.

Neil Downey

So you are suggesting that the fund will put more capital into Rouse to facilitate those plans?

Brian Kingston

Yes, yes, I would expect that…

Neil Downey

And might there also be some consolidation opportunities still, given your comments about the out-of-favor nature or the dislocation of values within the sector?

Brian Kingston

Yes, look, I think there is a tendency to paint all malls, all B malls, with the same brush, and as a result of that, there is some pretty interesting opportunities to buy misunderstood assets. And if you have got the right capabilities, as we do in Rouse, to think about these assets differently or invest capital in them and change them, there could be some really interesting investment opportunities.

Neil Downey

Okay. And one quick question for Bryan Davis on the core office numbers. At share, $370 million of net operating income with about a $36 million non-cash rent adjustment for the quarter. How quickly does that non-cash rent, I will say, transition into cash rent? Is there a big chunk that happens over the next couple of quarters or how do we think about that?

Bryan Davis

Yes, that would relate to, I think, two markets. I think we talked about in Canada we had a few tenants move in during their fixturing period, and so we started to recognize rent even though they weren't paying cash. So it was a free rent period. And, similarly, we have the same with respect to Brookfield Place New York.

Typically, these free rent periods are 12 months, and so we will see that burn off, I would say, by the middle of 2017. Specifically related to Brookfield Place New York, I think I've made some comments that by the latter half of 2017, we will be starting to recognize cash rents on all the leasing that we had done in the last 24 months.

Neil Downey

Right, okay. And in order of magnitude, does this straight-line rent adjustment come down by 50% or more than that or -- looking 12 months out?

Bryan Davis

Yes, yes, 50% is a good number, but I can spend a little bit more time and…

Neil Downey

Okay, super, thank you.

Operator

Sheila McGrath

Brian, I just had a question on how we think about which platforms will be on balance sheet long term? You have acquired self storage, now manufactured housing, and I think you have said that maybe multi-family, some multi-family, will be on balance sheet. What should we think about in terms of which platforms will be on balance sheet long term, rather than in the opportunity funds?

A – Brian Kingston

Yes, so, look, I think for the balance sheet, today, obviously, the bulk of our capital is invested in core office and core retail, and the reason we like those is they are -- they generate very predictable, long-term cash flows. You can invest in those sectors in scale and own high-quality assets throughout the cycle. And so, I think any other sector that meets all of those categories is one that we could potentially see on our balance sheet.

Multi-family you highlighted specifically, we are very actively building that business out today, with a particular focus on urban multi-family. So a lot of the activities we have been doing through our more opportunistic investments have been in more suburban assets, but as we build out that urban platform, more and more of that is happening on the balance sheet.

Investments like self-storage and manufactured housing to date have been -- those investments have been made through the funds, and part of the reason why we think they're attractive is because they are in highly fragmented industries, but as a result of that, it makes it difficult to achieve meaningful scale in them.

And so, it may be harder to migrate those type of investments, ultimately the long-term investment -- they may end up being just trades for the fund. But, look, to the extent we can find an opportunity to find all of those things that I just described, which is high-quality assets with an opportunity to invest in scale, then they could be on the balance sheet. I would say at the moment multi-family is the only active one, though.

Sheila McGrath

Okay, great. Thank you.

Operator

It looks like we have no further questions, so I would like to turn it back over to our speakers for any additional or closing remarks.

Brian Kingston

Great, well, thank you, everyone, for dialing in and for your continued interest, and as I mentioned, we look forward to seeing as many of you as possible at our investor day at the end of September. Thank you.

Operator

And that concludes today's conference. We thank everyone again for their participation.+

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