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Brookfield Office Properties Inc. (NYSE:BPO)

Q3 2012 Results Earnings Call

November 2, 2012 11:00 AM ET

Executives

Matthew Cherry - Director, Investor Relations and Communications

Dennis Friedrich - Chief Executive Officer

Bryan Davis - Chief Financial Officer

Tom Farley - President and Global COO

Mitch Rudin - U.S. Chief Executive Officer

Analysts

Neil Downey - RBC Capital Markets

Mario Saric - Scotiabank

Michael Knott - Green Street Advisors

Josh Attie - Citi

John Guinee - Stifel

Alex Avery - CIBC

Karine MacIndoe - BMO Capital Markets

Michael Bilerman - Citi

Sam Damiani - TD Securities

Rob Stevenson - Macquarie

George Auerbach - ISI Group

Anthony Paolone - JP Morgan

Operator

Please standby, we are about to begin. Welcome ladies and gentlemen to the Brookfield Office Properties Inc.’s Third Quarter 2012 Earnings Conference Call. This call is being recorded.

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

Matthew Cherry

Thank you. Good morning. And welcome to Brookfield Office Properties third quarter 2012 conference call.

Before we begin our presentation, let me caution you that our comments and discussion 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, achievements expressed or implied by such forward-looking statements and information.

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

I would like to -- now to turn the call over to Chief Executive Officer, Dennis Friedrich.

Dennis Friedrich

Thank you, Matt. Good morning, everyone, and thank you for dialing into our call today. Joining me on the call today in addition to our CFO, Bryan Davis are several members of our senior management team, President and Global Chief Operating Officer, Tom Farley; and U.S. Chief Executive Officer, Mitch Rudin.

We have a lot cover this quarter, so Tom and Mitch will not be making any prepared remarks, but are available to answer questions and of course, provide additional color on conditions and activities in our major operating markets.

As we are all aware this has been a very challenging week to say the least for New York Metro area and the entire Eastern seaboard just coping with the impact and effects of Hurricane Sandy.

Before diving into Brookfield Office Properties achievements and results for the quarter, I would like to say that I sincerely hope you and your families weathered the storm without physical harm or material damage to your property. Given the events of this week it is probably appropriate for us to start with an update on the physical condition and impact of Hurricane Sandy on our portfolio.

We issued a release relating to the storm on Wednesday, but I will provide some additional color and updates. I’m very pleased to report that despite the magnitude of the storm and the concentration of our portfolio particularly in Lower Manhattan, our properties faired very well with only minor collateral damage suffered most of our buildings.

This is in large part due to the tireless efforts of our property and operations personnel in both preparing for the storm and also the great resolve and teamwork displayed in reacting quickly to the effects of the Hurricane. They are the best in the business in protecting our buildings and tenants.

In looking at the status of our individual assets in Lower Manhattan, let’s start with the World Financial Center, our largest holding.

The complex is up and running, and has been since a short period after the storm, a power is restored throughout the complex. We suffered only minor water and collateral damage throughout the buildings, and the retail and Winter Garden areas are fully active and are buzzing today.

Given World Financial Center’s position on the waterfront its current impeccable condition relative to most of the rest of Lower Manhattan can be attributed to the quality of the Center’s construction and design. It’s significant in-place emergency infrastructure and world-class operating team.

How strongly the World Financial Center would stood the storm and provided business continuity has definitely resonated with the market and the major tenants we are in discussions with.

At One Liberty Plaza, our asset on the corner of Broadway and Liberty Street, we suffered minor wind damage to a handful of windows and no water damage. Con Edison has restored power to the building. We’re finalizing some testing and expect the building to be open for normal operation today.

Flooding did take place in the sub levels of One New York Plaza, Brookfield’s other holding in Lower Manhattan located on the east side, water removal from the sub level is substantially complete, we stand this morning. We are assessing the extent of the damage and taking steps to bring One New York Plaza back online as soon as possible as we have with our other downtown buildings.

There are no problems or there were no problems encounter at our properties in Midtown Manhattan or in Boston, or Washington, D.C., Brookfield’s other major markets on the Eastern U.S. seaboard.

We have a very good insurance policy in placed, providing over $300 million of coverage for loss and damage relating to the storm, including repair or replacement of equipment, any general building damage and any resulting loss of rental income. A loss and damages will be nowhere near that limit based on our estimates. The storm will have no material financial impact on the company.

Turning back to quarterly results, it was another strong quarter with very solid financial results, healthy levels of overall leasing volume and substantial mark-to-market rental uplift on our leasing activities.

First, let’s take a look at leasing results for the third quarter. We completed lease transactions totaling 1.5 million square feet, spread across a number of our key operating markets.

I like to point out, new leasing was particularly robust and represented over 50% of our overall leasing activity. Again demonstrating that we continue to attract new tenants in a very competitive environment based on the appeal of our assets and our quality of -- the quality of our operating platform.

Leasing completed during the quarter represented a 47% increase over expiring rents in the period and pushes our mark-to-market increase to 37% for the year. We continue to unlock embedded growth in our portfolio in this area and I can say we’re confident, I believe we’re in amongst the top performers in this area.

Our overall portfolio occupancy did dip slightly to just over 92%, due primarily to an anticipated lease expiration at 1801 California and Denver, which you may recall was the opportunistic asset we acquired in the fourth quarter of 2011 for $157 per square foot on the basis that the anchor tenant CenturyLink would be vacating the building. We have addressed the third of CenturyLink’s initial space and are ahead of pace with our projected leasing there.

We were particularly active in several of our large core markets. We posted 298,000 square feet of leasing in Toronto, including a sizable renewal with the law firm Bennett Jones for 145,000 square feet at our newly refurbished First Canadian Place building. Occupancy now stands at 95% in our Toronto portfolio.

Moving to Washington D.C., we achieved 236,000 square feet of total leasing, pushing occupancy up to just under 91% for our portfolio there. Our leasing progress for the quarter was highlighted by the completion of the Georgetown University lease for 91,000 square feet at 650 Mass Avenue early in the quarter, that lease drove the occupancy at 650 Mass from 72% to a highly stabilized 97%.

We also completed an important lease within our downtown Los Angeles portfolio by signing a new 15-year lease with PricewaterhouseCoopers for 135,000 square feet in the base of 601 South Figueroa.

Occupancy for our overall office portfolio in downtown LA has reached 90%, against the market vacancy backdrop in excess of 20%, so we are clearly have -- our teams have been outperforming in that marketplace.

Lower Manhattan is our most active leasing market today. We completed two leases totaling 90,000 square feet at the World Financial Center during the quarter, new 12-year lease with law firm Sedgwick for 43,000 square feet at Two World Financial Center and a 10-year renewal for 47,000 squarer feet with Bank of America/Merrill at Four World Financial Center, which really represent an expansion over the initial renewal we completed with BofA last year.

These two transactions, more progress against the block of the Bank of America space expiring in 2013. The blended average net rents on the leases we $33 as compared to the expiring Bank of America net rental $34 per square foot, which say one of the transactions, the lease transaction with Bank of America was for very low floor and had a, so the lesser concession package, so therefore, somewhat lesser space rate, while Sedgwick acquire then the Merrill expiring average net rent.

The renewal and extension with XL America totaling 105,000 square feet is at One World Financial Center, which is outside of the Bank of America rollover. However, it was executed at very high average net rents of $43.50 per share foot, showing the continued strong economics we are achieving at the World Financial Center, also was a tenant that extended its envelop of space. I will also note that these re-transactions one of the top 20 transactions completed in the entire Manhattan market in an around the third quarter.

I plan to circle back and talk more specifically about the World Financial Center at the close of our call after Bryan’s comments. Brookfield operates in a large number of markets, so in the interest of time, I will not look to walk through conditions in each one.

I’m also conscious it’s a Friday after a long week of commuting for many of us. But Mitch, Tom and I can address any questions related to individual markets when we open the call up to Q&A.

I will however share some high level observations and trends we are seeing in our major markets. Let’s start with the energy and natural resource markets of Houston, Calgary, Denver and Perth.

As you know Brookfield control considerable market share in these high performing markets and I think that’s a unique aspect of our portfolio and platform, and today we derive 22% of our NOI from these markets.

We continue to enjoy the benefits of steady job growth, positive net absorption and healthy vacancy rates within our operating platforms in these markets, also rental uplift opportunities continue to exist within this market portfolio. And we feel, although it was planned strategy, very happy that we are in amongst the top performing markets in North America and in Australia in the Energy sector area.

The remaining major markets in Canada, primarily Toronto and Australia being Sydney and Melbourne are very stable with low vacancies, nothing particularly new to report, they continue to perform well particularly in the Class A portion of the market.

In the U.S. outside of the Energy sector markets of Houston and Denver, private job growth remains positive. I think everyone was pleased with the job report that came out today. Job growth does remain uneven but is driving positive net absorption in many markets albeit at a slow and steady pace.

Leasing activity remains flat as we move towards the end of the year. However, high quality assets in a location such as the ones that we own and operate continue to perform well, and capture more than a share of the market activity.

In several of our U.S. markets such as New York and D.C., the leasing volume has been dictated more by small to midsized tenants with the larger block tenants remaining on the sidelines.

Pending expiries within the large pending universe, I would say, our observation are starting to mount and could kick start leasing velocity into another gear as we clear the election and get into next year.

I’ll now turn the call over to Bryan for review of our financial performance from the quarter. Bryan?

Bryan Davis

Thank you, Dennis, and good morning. This morning we reported solid third quarter performance with funds from operation totaling $164 million or $0.29 per share, compared to $168 million or $0.30 per share for the same period in 2011.

Included in FFO for the current period, our $4 million in costs related to the acquisition of assets in London. As a result on a comparable basis, FFO would be $168 million or $0.30 per share for the current quarter.

I will now walk you through some of the highlights. First off, our property net operating income, which is detailed by market on page 11 of our supplemental, increased by $38 million or 11% to $379 million from $341 million.

$18 million of the increase is from Brookfield Place Perth, which had a full quarter of contribution after becoming an operating property on practical completion in May of this year.

Acquisition activity contributed $26 million, largely due to the purchase of Met Park East and West in Seattle, and 799 9th in D.C., and in Q2 of 2012 which contributed $5 million with 49 -- we acquired a 49% interest in Four World Financial Center, and a 51% interest in 1801 California in Denver in Q4 of last year, which contributed $5 million, and we had Bethesda Metro Center in an additional 20% interest in the U.S. office fund, which were required toward the end of Q3 of 2011 and contributed $15 million.

We also saw $10 million increase in same-store growth or 3.5% as we have benefited from lease renewals and mark-to-markets on existing rents. These positive variances were partially offset by $16 million reduction in NOI due to assets sales, including in the fourth quarter of last year 53 State Street in Newport Tower and in the first quarter of 2012, Defence Plaza in Melbourne and Altius Centre in Calgary.

Variances in other components of our FFO which we highlight on pages seven and nine of our supplemental include a reduction in interest and other income of $24 million to $12 million for the current quarter, as the prior period benefited from $13 million of interest income on the U.S. fund notes that we repurchased in 2010 and a receipt of a one-time settlement of $11 million on our partial investment in 200 Broadway, which was condemned for the new construction of the Fulton transit station.

On the expense side, interest expense on our commercial property debt increased from $172 million to $290 million. This increase was largely due to the reclassification of Brookfield Place Perth to operating, which resulted in the incremental interest of $10 million, as well as the impact of our net acquisition activity, and refinancing and related costs associated with those refinancings executed in the quarter. In addition and as previously mentioned, we incurred $4 million in transaction costs on the London portfolio acquisition, which has also been included in the FFO.

In looking at our Q3 results versus Q2, FFO decreased by $7 million or $0.01 per share. This decrease is due primarily to an $11 million reduction in non-recurring income as result of the lease termination income that we earned last quarter at One New York Plaza combined with the $4 million in incremental transaction costs incurred this quarter. The reductions were partially offset by same-store growth of $6 million or 1.9%, and an incremental benefit from a full quarter of Met Park 799 9th and Brookfield Place Perth.

Non-cash rent did increased to $26 million from $18 million. This is due to incremental non-cash rent from Brookfield Place Perth of about $3 million, an incremental $2 million of non-cash rent from full quarter of the Morgan Stanley lease and about $3 million is spared over the balance of our portfolio.

Our net income for the quarter was $376 million or $0.66 per share, compared with $415 million or $0.72 per share in the prior year and $217 million or $0.38 per share in the prior quarter.

Net income in the current quarter included revaluation gains of $295 million in aggregate, which we highlight and detail on page 19 of our supplemental. Our revaluation gains were spread evenly across our operating portfolios, each up slightly less than 1% to reflect increase property level cash flows.

We did see terminal rates in Canada dropped by 5 basis points to reflect revised pricing in the Toronto market, which was supported by an external appraisal on Bay Wellington Tower during the quarter.

Our total commercial properties are valued at $24.4 billion at an average discount rate of 7.56% and an average terminal rate of 6.37%. This translates to $489 per leasable square foot.

Our development property values increased -- our development property values increased $99 million in the quarter due to revaluation gains, they were driven primarily by an increase in the value our Manhattan West development site. As a result of increase land values in that corridor and again supported by an external appraisal.

These fair value gains along with positive FFO after paying our dividends, in the strength of our foreign currencies help push our value per share to $20.62 from $18.94 at the end of 2011.

Now before turning the call back to Dennis. I did want to remind you that we continue to evaluate two early refinance opportunities that will help to reduce our interest expense in at incremental term to our maturity profile. We expect to incur break fees of up to $15 million based off of the current rate environment if we execute these refinancings in the fourth quarter.

You know if we execute in the fourth quarter, we will pullout in excess of $200 million of capital we will still be able to reduce our interest rate by 150 plus basis points even considering the break fee and we will be able to push maturity out seven to 10 years. So considering above, it something that we will likely execute

With that in consideration our performed and with our outperformance on a year-to-date basis, we still remain comfortable with our original guidance range of $1.07 to $1.12 with a midpoint of $1.10.

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

Dennis Friedrich

Thanks, Bryan. So we have not been pleased with the performance our shares over the past quarter for obvious reasons. In meetings and discussions with many of you on the phone today over the past several weeks, several factors have been highlighted as weighing down our share price.

In wrapping up our prepared remarks today, I’d like to address head on the two most consistent topics raised as having a negative impact on our valuation in share price. The Bank of America/Merrill lease rollover exposure at World Financial Center and our leverage levels in the strength of our balance sheet.

Of course, I would not expect these topics to be a surprise to those who follow us consistently or invest in our shares or consider investing in our shares. But I think it might be helpful to offer some greater perspective on these topics.

Starting with the BoA/Merrill lease rollover and its impact on the long-term performance of the firm, we are not underestimating in anyway the releasing challenge that remains to stabilize the two buildings currently leased by BoA through the third quarter of next year or the potential disruption in net operating income or cash flow.

However, we’d like to highlight is given the scale and diversification within our business and the growth of our portfolio, which has been driven by our recent acquisition and development activities are at our current share price, the impact of the World Financial Center pending leasing availability appears to have become overstated.

We remain confident that we will address the lease expiration successfully for a number of reasons. Our level of active tenant discussions have never been higher. We are currently in active discussions with tenants for space requirements that total over 5.3 million square feet. It’s up from what we’ve reported prior.

We would not expect to convert all of these discussions into leasing agreements. We don’t have that much space obviously. However, the pipeline is growing and it’s advancing in nature in terms of the seriousness of the discussions, which has us very encouraged.

We have begun to convert our pipeline of activity and to execute at least leases as evidenced by the announced leases this quarter at favorable lease terms. And we expect to continue to announce progress through signed leases quarter-over-quarter. The stream of completed leases may consist of some singles and doubles, which is somewhat reflective of the market within certain quarters but we are also engaged in negotiating terms with sizable tenants with pending lease expirations.

On our retail project, we are currently in lease documentation with 10 high profile retailers and restauranters and expect to announce those in the next quarter or two. We also have term sheets progressing within a large number of others as well. Our retail leasing will enhance our office leasing efforts that already has, I think in our discussions and also drive higher NOI in that redevelopment project.

The office space at the World Financial Center is the most attractively priced product relative to quality in the marketplace today. I think -- I don’t think there’s any doubt about that. Although demand has been flat through most of this year, the supply of quality modern space, blocks of space remains very limited.

The complex is located on the waterfront adjacent to the most significant transportation infrastructure project in the country. In addition, the World Financial Center is highly accessible from the driving residential areas within Manhattan, Brooklyn and New Jersey and has had a very high-performing residential and highly desirable residential neighborhood grow up right around it south of chambers.

Our $250 million redevelopment project to be completed when the BoA space becomes available will provide for amenities in the work environment that is appealing to a more diverse mix of tenants and evolving a generation wide workforce that clearly values green amenities and urban -- very unique urban space and we’re able to provide that in an enhanced form at the World Financial Center.

70% of the tenants in our lease pipeline that I mentioned before are now in non-financial services industries. As you may have noticed in our release, we announced plans to change the name of the World Financial Center to Brookfield place effective in the fall of 2013 to coincide with the opening of the complex’s new pavilion entrance on West Street and the completion of much of our other redevelopment work in the common areas.

The rebranding exercising program however has really started and marks the transformation of the complex and the diverse mix of companies relocating to the area. This will be the last call you will hear us actually refer to the World Financial Center as the World Financial Center and calls going forward as the marketplace is starting to taken in, we will refer to it as, as Brookfield Place.

Bryan and I have been doing NAV analysis which we would like to share with you and would be happy to review with you in more detail the NAREIT or in separate meetings. We think it illustrates and I know a lot of you do your own calculation and we are not looking to overwrite those but we think it illustrates that the lease expiration overhang at Brookfield Place has become overstated relative to the underlying value of our shares.

We are not asking you necessarily to agree completely with the analysis or the underlying assumptions but we do think its food for thought. And I’m going to walk through it and we can answer any questions you may have when we open up to Q&A. So looking at the components of our portfolio, in Canada, we have a portfolio that’s 97% leased with an 8.5-year average lease life in-place rents that are 20% below market.

The value of our Canadian portfolio is almost $5 per share net of property debt which is a 5.6% going in cap and 6.5% unlevered IRR. These are all metrics that are consistent with our IFRS valuation. I don’t think any of these, we could give metrics up and down but I don’t think any of these would surprise you.

In Australia, we have a portfolio that is almost 99% leased with a seven-year average lease life and in-place rents that are 30% below market. The value of our Australia portfolio is almost $4.50 per share net of property debt, assuming a 7% going in cap rate and an unlevered IRR of almost 9%.

If you look at our U.S. portfolio, carving out the entire World Financial Center complex for a moment, just to go through the exercise, we have a portfolio that is 88% leased with an average lease life of almost eight years and in-place rents start in our calculation to 25% to 30% below market. The value of this U.S. portfolio net of the financial center is $10 per share, net of property debt which is 5.1% going in cap rate and an unleveled IRR of almost -- actually over 7.5%.

If you add up these components to our portfolio, again putting the financial center aside for a minute, you get $19.50 per share calculation. Back out our corporate level working capital and debt gets you to our share price today, which means in today’s marketplace that the share price we’re trading, you can buy Brookfield shares, participate in the growth of our platforms and essentially get the World Financial complex for free and also our development pipeline for free.

And it seems -- it seems rather compelling. I’d also point out that the World Financial Center complex which we backed, we’ve not just taken out the Bank of America envelope of space of 3 million square feet that we haven’t leased. We’ve also backed out the cash flows and NOI from One World Financial Center and Three World Financial Center, which collectively are -- Bryan can correct me -- of over $50 million or about $50 million in NOI.

So just something to think through on the -- if you haven’t already done that, I guess, on the perceived concern with regard to our leverage levels in the strength of our balance sheet moving forward as many of you have heard from us before, we’ve been successfully operating at or around our current levels of leverage for long time. And that includes getting through periods facing difficult credit conditions.

We remain comfortable with our approach today in large part due to the non-recourse make up of our debt profile, manageable maturity schedule over the next five years, our approaching debt maturity schedules lower than it has been in the past five years and the upcoming major maturities are estimated loan-to-value levels in the range of 30% to 40%.

Our debt capital remains very attractive today, available at historically low interest rates as you’re aware. We believe it’s prudent to lock into this low rate environment as much as possible and capture up financing proceeds. We do not plan. It’s not our strategy to increase our overall leverage levels but to deploy new proceeds into accretive acquisitions or advance our development pipeline of those opportunities to present themselves.

Just drilling down on our current liquidity position at the end of the quarter, we stood at $775 million U.S. We expect to enhance that to $950 million by year end through operating cash flow generated from the business, the sale of two assets. And we’re also including in that $950 million projection in early repayment of our capital securities that come due in 2013.

We continue to execute on our disposition program and have two assets currently under contract scheduled to close within the fourth quarter, which represented in the number I just mentioned. Net proceeds on the two sales are projected to reach $175 million. We expect to be, let say, net sellers through the end of the year, reflecting these sales in our current acquisition pipeline.

Hopping above our planned capital activities through the fourth quarter of this year, I just also like to point out and highlight a number of other leverage that we can pull to generate further liquidity to support our growth initiatives if necessary. We are marketing two additional assets for disposition, our RBC Plaza in Minneapolis and Landmark Square in Long Beach, which we project could generate $100 million in additional net proceeds in the first or second quarter of 2013.

We own close to a $500 million note from the sale of our residential business through Brookfield residential. We are considering a number of alternative than it is likely, we can monetize this note over the next two quarters accelerating that payment and generating $500 million in cash.

With respect to Brookfield Canada office properties BOX, we -- our share price increased to $30 per share, almost 36% over the last 52 weeks. We continued 183% BOX shares and always have the ability to sell down 50% to 60% to raise additional proceeds of between $600 million to $900 million.

Again, if we see the need to do that to create additional sources, and I just like to close on sort of the balance sheet discussion as we generate plus or minus $250 million annually in cash flows after payment of dividends and we have the ability to generate additional $2 billion of capital from normal course refinancing over the next few years.

This liquidity in aggregate provides us with more than enough in our view to support our recent acquisition activities, leasing efforts over the upcoming years and our near-term development priorities.

Operator, with that I’m going to ask you turn the call over to questions please.

Question-and-Answer Session

Operator

(Operator Instruction) And we’ll take our first question from Neil Downey at RBC Capital Markets.

Neil Downey - RBC Capital Markets

Hi. Good morning guys.

Dennis Friedrich

Hi, Neil.

Neil Downey - RBC Capital Markets

Dennis, you did a really good job of running through a lot of the sources of funds. Maybe you can just give us a little refresher on the expected applications of some funds over the next, let say, 6 to 12 months in terms of the remaining commitment to purchase Hammerson assets. I guess, you did already talk about the expenditures on the Brookfield place, New York retail redevelopment but love to go on Hammerson?

Bryan Davis

This is Bryan, Neil. The remaining piece on Hammerson, and then Neil, we can -- I can walk you through -- where we might have some additional uses earmarked. So 220 next year is our projected in U.S. to close out the Hammerson portfolio, Neil?

Neil Downey - RBC Capital Markets

Yeah.

Bryan Davis

And then, borrowing anyone -- we are looking at different acquisition opportunities below to decide if they’re appropriate for us or not but we would be earmarking some capital to advance a few of the development projects that we have marked as priority. Assuming those all, sort of, go to the next stage and that will partly depend upon lease-up in one or two of them that would require about $300 million or so in additional equity. And that would assume we move forward with the deck in short order.

We have actually -- we have equity requirements on the Bay Adelaide Centre East and even identify our next development project in Perth. That’s something we moved forward. We haven’t decided to do that. I think we’re going to move that to a certain level of pre-leasing but that’s included in that number as well.

So I think as we sort of compile the sources, its’ against uses -- it is pretty supportive of our next round of growth initiatives assuming those will lock in ‘13.

Neil Downey - RBC Capital Markets

Okay. That’s very helpful. And to follow up just on Bay Adelaide East, I guess, under IFRS you fair value that asset, and it’s shown at $611 million and with $34 million of estimated stabilized NOI. So that -- that implies a stabilized yield in the mid-to-low 5s. How do we think of that asset in terms of stabilized NOI versus cost?

Bryan Davis

We’re in the -- our yield-to-cost projections are right about in the 8% range on the top of my head, Neil.

Neil Downey - RBC Capital Markets

Okay. Thank you.

Bryan Davis

And we’re doing well on the second round of leasing.

Neil Downey - RBC Capital Markets

Great. Thanks.

Operator

And we’ll go next to Mario Saric of Scotiabank.

Mario Saric - Scotiabank

Hi. Good morning. Dennis, thanks for the breakdown of the NAV there. I just want to clarify the last comment that you made with respect to the NOI from One and Three World Financial Center and whether that’s included in valuation or not?

Dennis Friedrich

It wasn’t included in the build-up valuation where we did -- we did was we backed out all of the financial center to try and keep it simple as opposed to mixing and matching just the blocks, the BoA blocks that to Two World Financial Center and Four. That’s what I was trying to make the point is that even under a doomsday scenario, which we certainly don’t anticipate, you still have the additional $50 million of NOI that is already contractually in place.

Bryan Davis

And the other point is over and above that and we’re making significant progress as Dennis referred to in his comments. The retail redevelopment will add additional NOI, upward $15 million to $50 million that we earn out of both One and Three World.

So assuming nothing, out into two and four, and you’re just looking at One, Three and retail, you got $65 million of annual NOI.

Mario Saric - Scotiabank

Great. It’s very much appreciated. And then maybe just looking at one more financial center, it looks like the occupancy decline about 20,000 square feet on a quarter-over-quarter, if I just compare the individual property data on a quarter-over-quarter basis down to 87%. Just wondering if you can add some color on that fluctuation?

Dennis Friedrich

Yeah. That was one relocation out of building, one rollover by Fidelity, which had decided to move jobs to low-cost locations outside of New York. So it was one single -- one single lease that we had anticipated for a period of time.

Mario Saric - Scotiabank

Okay. And one last question, just on, slide number 32 of the supplemental, small point but I just noticed that the BoA/Merrill subtends a space expiring 2013 decline declined about 124,000 square feet quarter-over-quarter to about 1.4 million square feet. Just want to get a sense of what was driving that kind of reclassification?

Dennis Friedrich

Off hand, I don’t have an answer for you, Mario. So leave that with me and we’ll get back to you.

Mario Saric - Scotiabank

Okay. Thank you.

Dennis Friedrich

Thanks Mario.

Operator

We’ll go next to Michael Knott at Green Street Advisors.

Michael Knott - Green Street Advisors

I’d say Dennis, would you, to an extent, you can maybe give a little more color on the 5 million feet of prospects at World Financial Center. I think you mentioned those -- some of those expirations of those kind of 16, 17 type expirations of those tenants now and would you consider buyouts to their leases?

Dennis Friedrich

Yeah. So Mike, let me give -- I’m happy to give some more color. We had expected that question. So just we had in prior calls, I have sort of presented in different buckets and decided that it may just be easier to consolidate it. So the number of the pipeline has gone up and its -- but its -- of the 5.3 or so we’re talking about right now, 2.5 million square feet of that represent about 10 tenants or so that have expirations in the 2014 to 2016 timeframe and they are -- I have sort of described this bucket before, sort of, single that -- single floor as a 45,000 to tenants that reach pretty good size up to 600,000, 700,000 square feet.

And then in addition to that, we have some interest crystallizing from number of the large tenants, three tenants above a million square feet that make up the difference.

So there are a large -- there’s quite a few tenants in that mix but that’s hopefully give you a little bit of a breakdown.

Michael Knott - Green Street Advisors

Okay. The conventional is not there. There is not really a lot of big tenants on the market. I guess, there is a couple that I probably know about but are these relatively new discussions because you sound more optimistic than on the last call.

Dennis Friedrich

Yeah. I mean, I just -- the last call, I did more about this timing and against our prior projection but other tenant side, it’s a combination to this tenant side or in that we’ve been in discussions with for a period of time and would be like some of the leases we just announced but there has been some additions to our mix of active discussions.

And it’s -- what I think -- our feeling is that there has been a buildup because large tenants have been fairly quite in the past 12, you can argue, 15 months and their expirations are approaching and they are getting more active. We are -- I think we track the other blocks and what act as in midtown or downtown, we are going to be more engaged with a larger number of tenants because of what we have to offer at the Financial Center of Brookfield Place. I’m more encouraged and there has been a pickup in the level of discussions.

Michael Knott - Green Street Advisors

And then just to stick with that, somewhat related, you mention there was a lease at World Financial for $43 net. Is that -- was that above your expectations or I guess, what’s kind of the range? I just don’t know, we’ve always sort of thought about the low 30s. I guess what’s the range on that?

Dennis Friedrich

Yeah. I mean, that would be at the high end of our expectations. We were going new in our mix of relating back to the BOA/Merrill space in question is that’s, which we think clearly is going to be sort of a mix of some base floors and some tower floors, which is going to fluctuate, we think in around the Merrill expiring rent.

This was a lease for a tower floor and One World Financial Center, which arguably is not as strong as the other two towers in terms of amenities. What we are seeing was a very, very strong number but at the high end, Michael. We will be getting a number of those types of numbers in the tower floors in the leasing of the BOA block.

Michael Knott - Green Street Advisors

Okay. And then just last question relates to Australia. Can you just remind us, it’s kind of complicated structure over there, but the prime property fund, your interest has kind of crept up, can you just sort of remind us what’s going on there?

Dennis Friedrich

Bryan, you want to…

Bryan Davis

Yeah. As part of our acquisition in Australia in 2010, we did inherit an existing public company structure down there. The Brookfield Prime Property Fund, which owns four of our assets, just three of our assets down there. That prime property fund itself had a buyback program in place. And as a result of that buyback program, our overall interest has been creeping up slightly.

Michael Knott - Green Street Advisors

Okay. And then just last question for me. Dennis, where do you see the best capital allocation opportunities, today?

Dennis Friedrich

I think there is still some good opportunities in the energy markets. We like Seattle to an extent to see if there is a bit more of a push in those areas. We also think that there will be -- as we struck on few quarters ago there are challenges to the DC market. But I think if you take a long-term view and capture an asset in the right corridor, I think that’s presenting some interesting opportunities as well.

I think we are moving on anything where we are focused on leasing 799, but I’d say those markets continue to be of interest. The larger London, New York -- the supply remains very challenging in terms of new opportunities.

Michael Knott - Green Street Advisors

Thank you.

Dennis Friedrich

Thanks, Michael

Operator

And we’ll move next to Josh Attie of Citi.

Josh Attie - Citi

Thanks. Good morning. Dennis, in your prepared remarks you suggested that post-election you could see an acceleration in some large tenant leasing. Is that what you are hearing from some of the tenants in the pipeline at World Financial Center?

Dennis Friedrich

Yeah. That’s just a general. I think that’s a general feeling. I made the comment in two. Importantly, as I think that there is a sort of pending pipeline that is building. But I think in general, everyone wants more clarity around the fiscal cliff situation and regulation and all those other topics. So, I think there is an element. It’s more made in general comments I’d say in conversations we have with the executives there. But that is the theme.

Josh Attie - Citi

And with respect to the large million-square-foot tenants that are in the pipeline now for World Financial Center, would you characterize those as tenants that you think are committed to moving somewhere downtown, or these tenants that are deciding between downtown and midtown?

Dennis Friedrich

They are making the decisions. Several of our focus is very much on downtown, others are making decisions between the two markets. But I’d say one thing that we are finding and Mitch, you can certainly add color on this. But what has been encouraging for us and we have been expecting this in our discussions is that there is a focus on value and a lower cost alternative. But at the same time efficient and quality space, and that is resonating with the tenants we’ve had discussions on.

And the non-financial services tenant, which at this point in this pipeline represents over two-thirds of them are more inclined to downtown because of their workforce, and everything that’s happening downtown to some of the traditional midtown locations, particularly if it’s and number of them were in a traditional midtown allocation, particularly if they are facing rent mark ups or rents that are at or about $80 to $90 per square foot.

Josh Attie - Citi

Okay. Thanks. And if I could just ask one question on the mark-to-market because I know that’s probably a driver of your NAV. It’s up 20% for the portfolio, and looks like the average duration is seven and a half years. So it doesn’t look like these are particularly old leases. What’s the biggest driver of that mark-to-market being so high?

Dennis Friedrich

Josh, we’ve done -- I think felt the kicks as we got there. There’s definitely been strong mark-to-market in our NAV and natural resource sector market. When we look at it as a piece of the pie, we just either bought in or in some of these markets that had leases or they have improved the leasing market, improved enough to capture that in place.

So, I think that’s been very helpful. It’s been some just specific situations like the Grace Building up in midtown, where when we acquired that from Trizec that was just some below market rents.

We’ve invested capital and repositioned the assets -- that asset at a higher level, so. It comes a bit from our diversification. I mean I think we are in genuine markets. There are number of different markets that are presenting these mark-to-market opportunities to us.

Josh Attie - Citi

Okay. Thank you.

Dennis Friedrich

The others aren’t.

Josh Attie - Citi

Thanks, guys.

Operator

And we’ll take our next question from John Guinee with Stifel.

John Guinee - Stifel

Great. Thank you. Can you talk a little bit, Dennis or Bryan about recent activity on two development sites? As I recall, you are buying your JV partner out of 100 Bishopsgate at a somewhat of a discount. But correct me if I’m wrong and how that would affect the value there? And then the second question is, given the softness of the overall Manhattan market, I’m surprised to see a write-up in the value of the platform over on the west side.

Dennis Friedrich

Sure. Okay. Can I answer those in order? We did, John, after the quarter, enter into a range with our partner to rework that partnership to buy up basically up to 87.5% at a discount to, what’s been invested and we think the land values are there. And they’ve been a great partner of ours, a Great Portland but they have a lot of different things going on, and they wanted to manage down their interest in this project. That helps our, because we did buy it at a discount and we bought it on installment basis, does help our underwriting in terms of the overall development.

And we think, we continue and even though we hold two other development sites there, it’s I think undoubtedly the best development site in the city of London in terms of locations scheme. And then in terms of the Manhattan West markup, we are -- it’s come from a number of [debars]. We are looking at renewing a land loan in that situation on that asset.

Land values have come up in that corridor, because there has been a markup in residential. Values in our site has the ability to build a pretty sizable residential component, such as based upon recent comps and what was underwritten in a loan and a phrase. We feel like it was an appropriate time to mark that up, and that we just have a fair amount of underlying value in that asset, as that corridor has become a very high growth residential corridor and is attracting more office activity.

John Guinee - Stifel

And then lastly, I’m sure you went into great length to sort of talk to study the name change from World Financial Center to Brookfield Place. Can you talk through the positives and negatives of what that does from a leasing, and overall perspective on a fairly iconic project?

Mitch Rudin

John, hi. It’s Mitch. I’ll take that. So it’s really a result. It’s customer driven. For the last two years, we’ve been hearing repeatedly from people who have, either in the market or about to enter the market, who were not in the financial sector that the name actually was a drawback.

So, as Dennis indicated the broad array of tenants that we are talking to that that might be in media or advertising, consumer products did not want to be, something denominated the financial center. We decided to do it transitionally for the sake of and for two reasons, because of our existing tenants.

So that we could spare them the cost of having to make a stationary business card and online changes, which they were appreciative because they could do it on orderly basis. And also since where you are away from have been done with our construction of it, we didn’t want to go through put up temporary signage and to affect the name change without changing signage would not be affective.

I would say we’ve heard nothing negative from anybody. If fortunate, the rollout that started a week ago has been very favorably received and favorably. But particularly favorably by those not in the financial community and neutral for those who were in it.

Dennis Friedrich

I think that’s absolutely right. And I think the market in over time has view the World Financial Center as more of a constraining brand. It’s also been at times just sort of bundled with the World Trade Center, not that necessarily has to be negative but there can be identity issues back and forth with those. And I think moving to different name is more reflective of the diversity we’ve been seeing for sometime in lower Manhattan. It is no longer a purely financial district.

The other thing, John, we have been taking our branding of Brookfield Place, which is really a kind of focus not to compete with our tenants brand, but focus more on the experience in the common areas. We renamed BC place in Toronto, Brookfield Place and City Center South in Perth.

But we know what we are trying to get across to our global tenant base that in the Brookfield places around our major city, you can expect a certain level of amenities and a certain experience that’s very different than. We can lease a number of other assets, but other assets in the marketplace, and it’s been well received.

John Guinee - Stifel

Great. Thank you.

Operator

We’ll go next to Alex Avery of CIBC.

Alex Avery - CIBC

Just wondering about the Denver occupancy drop. That was something that you saw it coming when you bought the property last December. Can you give us a sense of what the NOI that fell off in the quarter was, and also perhaps what leasing prospects look like of that property?

Dennis Friedrich

I’m going to ask Bryan to see whether we might have to circle back on the immediate. We had definitely, which I indicated. We bought on the basis an asset that we expect to generate 20% plus lever IRRs on, so we bought it on the basis of the building. We are clearing out actually to probably a larger extent, and we are now taking care of a third of it. Bryan, do you know the NOI just on that.

Bryan Davis

I don’t, off hand. But if you talk about…

Dennis Friedrich

I’ll let, Bryan try to pull that together. Mitch, I’d say I’d set up and then you can jump in. We are repositioning that asset. We needed an identity change so to speak. It has always been a single owner-occupied type situation. The Denver market is probably with neck and neck with Houston. The most strongest market in the U.S. And I think they are going on 14 months to 15 months of positive net absorption, and we are capturing some of that as well.

The other thing I think is important -- we actually represent the only block of space above Mitch, 50,000 to 100,000 square feet. So, I think the market has had an interesting infill from other parts of the area, but also from some California submarkets. We’ve had tenants move-in and they’ve actually been able -- the market overall has been able to capture over a million square feet of migration into the marketplace from other places.

Mitch Rudin

I want to just pick up on that last point that Dennis made. Denver is one of the few cities in the country, which is attracting major users from outside the immediate area to the CBD and having the largest block -- the only large block of space downtown, we are not only getting their attention. But we are also getting tremendous corporation from the Mayor’s office and the Governor’s office as it relates to the market in general.

Dennis Friedrich

And, Alex, to the first part of your question about $1.9 million of NOI impact.

Alex Avery - CIBC

In Q3.

Dennis Friedrich

In Q3. Yeah. And I believe it was at the beginning of Q3 that they vacated.

Bryan Davis

Yeah. It would have been the middle part of the leasing, beginning.

Alex Avery - CIBC

Okay. And so the leasing commentary sounds quite positive. What kind of horizon, do think you can see this actually, having new tenants take occupancy?

Dennis Friedrich

I can tell you just what our -- say what I’ve got. What my share and what our underwriting was, we actually underwrote to get to stabilization in over a four year timeframe. We think we are moving ahead of that on the basis of our discussions with some of the, what is a large tenant in Denver, which is a tenant of 100,000 square feet plus. I think we are going to be inside that.

Alex Avery - CIBC

And it will be multiple tenants, so they are coming offline gradually.

Dennis Friedrich

Yeah. But I think we are -- the asset definitely appeals to multiple larger tenants of that market as opposed to it. But it’s different from the CenturyLink situation wears out. This was an old quest CenturyLink building, which they were occupying the vast majority of it in town.

Alex Avery - CIBC

Okay. And then throughout the course of this call, you’ve made a lot of comments about your dissatisfaction with the current share price. You haven’t been that active this year in your normal course issuer bid so far, but can we take your comments to I guess, mainly or you are likely to be more active on it?

Dennis Friedrich

We are definitely more likely to consider it as to where our share price is trading today. I mean, we are spending a lot of time because we do have a lot of things we are excited about to launching 2013 which we talked about. I think we are taking a look at our liquidity over the time horizon which were very comfortable, which you can take from my comments. But we are definitely taking under consideration given where it’s trading.

Alex Avery - CIBC

Okay. That’s great. Thanks.

Operator

We’ll move next to Karine MacIndoe of BMO Capital Markets.

Dennis Friedrich

Hi, Karine.

Karine MacIndoe - BMO Capital Markets

Thank you. Thank you. I just have a couple of things. First, on using the box units or the potential liquidity resource. I mean that’s been a topic I guess for some time and there’s quite a gap in how the two companies trade. So, what is preventing you from taking a little bit more from that direction? Is tax planning a part of it or can you shed some light?

Dennis Friedrich

No. I think it’s still. What we are happy with that it has traded up, but I think we still think that there is a bit of room for it to hear what we think the NAV is on it and the underlying value. But it’s -- and we’ve had other areas we’ve been able to tap into. But it’s, I think it is and one part of it is something I think a lever that is available to us. We’d like to see a bit more than we are left.

Karine MacIndoe - BMO Capital Markets

Okay.

Bryan Davis

No tax issues.

Dennis Friedrich

No tax issues. It’s opportunistic.

Karine MacIndoe - BMO Capital Markets

And second, last year at your Investor Day, there was a lot of time spent on the development pipeline. How would you characterize your interest in spending the capital to realize more of this pipeline today versus last year? And I guess I’m wondering, does it make sense, are there discussions to pull in the parent company to help a partner and fund lease?

Dennis Friedrich

I think I’ll jump to the second part of the question. First, there aren’t any discussions and interest because I think we are -- we just try to layout as we think we have the ability to draw from sources to fund our priority projects.

Our sentiment hasn’t changed on that. We continue to -- based upon our track record on the last few projects in particular have sort of built the core, and then ultimately the possibility of bringing in partners or syndicating that out.

I think in today’s environment with a lot of obsolete properties trading at very high levels, building to core something for firm of our scale and size is something we should consider it -- continue to advance and be part of our business. And we do have a very attractive pipeline in the cities that have supported that in getting the Adelaide. The second phase kickoff was a great example of that on a risk adjusted basis to get an eight.

When you have inferior product trading at much lower cap rates than that is just, we are going to -- we continue be measured on it, Karine. But I think it’s still something we spent a lot of time on, and we have a very capable team that can move around the globe and advance these projects. But it will be measured.

Karine MacIndoe - BMO Capital Markets

Okay.

Bryan Davis

And the other important thing too is, Karine, we’ve had a lot of capital over the last number of years invested in developments. Most recently, we took $450 million of capital out of Brookfield Place, Perth and put that into to an operating property and so replacing that pipeline with our most active, the Adelaide Centre. East project, and to the extent that we launch on the Manhattan West deck, doesn’t incrementally increase our exposure at least in the near-term to equity invested in development sites over prior periods.

Karine MacIndoe - BMO Capital Markets

That’s great. Thanks a lot.

Dennis Friedrich

Thanks, Karine.

Operator

We’ll go next to Michael Bilerman of Citi.

Michael Bilerman - Citi

Yeah. I guess it’s, good afternoon at this point.

Dennis Friedrich

You live in [Iowa].

Michael Bilerman - Citi

Fantastic. Just in terms of the detail on the NAV under. It was helpful as you walk through the different markets. I guess if you were just to take everything altogether less the corporate debt, what number do you get to? Is that the 19-31 that’s in the sub or is it something different than that?

Dennis Friedrich

So, if you take everything altogether less the corporate debt then you come up with the $20.62 that we include on a pre-tax basis in our supplemental. When Dennis walk through the components, if you exclude from the $20.62, affectively it’s the value that we put on our development pipeline and the World Financial Center complex you get $15.60 effectively where we’re trading at today. So the point being that within our IFRS value is based off of current trading price you are not paying anything for the complex as well as our development upside and existing land payment.

Michael Bilerman - Citi

Right. And I guess how do you in terms of the valuation that you are undertaking account for the structure of how assets are held and I say that just from the standpoint of you do hold assets effectively through ownership of other common stocks. You think about BOX or the prime example in Australia, you own a lot of assets in joint ventures.

I mean, overall you only own an interest of 75% effective interest in those assets. So how does that sort of factor in into the valuation when you build it all up?

Dennis Friedrich

So, I will say we are -- in our valuation, we are only picking up our net ownership interest in those underlying properties so to the extend that we own 75% of JV or 83% of another public company that’s all we’re picking up in that net number. But as we value the assets, we’re just considering that the value on a growth spaces are not adjusting the value for any structural premiums or discounts associated with how they are owned.

Bryan Davis

I don’t know where they -- I mean, I would think that they were probably more of discount than a premium because why -- where the premium would exist because if you own the asset 100% free and clear, you assume no mortgage debt.

I assume that has the highest possible NAV value to potential purchaser versus owning an asset within, let’s take, BOX. 80% of a public company which may own 50% of the asset, which is subject to long-term secured debt, the ultimate NAV value maybe very different and/or shareholder would be willing to pay a different price for that to get into that structure versus a free and clear asset.

Dennis Friedrich

I guess said another Michael within our IFRS values which is the basis on which we did this analysis, you don’t take into consideration structures.

Michael Bilerman - Citi

And then so what would be the blended apply total cap rate and I assume that’s a current -- different current NOI or the current cap rate?

Dennis Friedrich

Correct.

Michael Bilerman - Citi

Okay. And I guess you thinking about the share repurchase, you have great disclosure in the supplemental going back of last 14, 15 years. And you bought back just under $500 million of stock. You think about the company being today just north of an $8 billion equity market cap company and obviously half of that being control by your parent.

I guess how should we think about how much you would want to buy into that knowing that you’re lowering the liquidity but also if the NAV value is almost $21. I would assume then just from their perspective that putting incremental dollars to work and NAV of $21 and buying the stock at $16 that would be enhancing to their platform. So how do you sort of balance those two things?

Bryan Davis

I mean I think we are still spending time thinking through where we want to apply our liquidity and the impact in the balance of buying shares back. It just we’re headed to a level that it’s obviously becoming more compelling. Have not had any meaningful conversations with our major shareholder in terms of an amount or anything along those lines as some of it is depends on the advancement of the developmental pipeline, which we talked about. And how much -- how do we want to keep drive for acquisition.

So, it’s an ongoing thing that we are thinking about. But it is something we should be thinking about.

Michael Bilerman - Citi

And how with the BAM factor and obviously BPY if and when those get lifted is that source of -- is that a source of capital for them as they grow their strategy when they look at their holdings and obviously properties, Brookfield Office Properties is a major component of their real estate holdings. Do they look at that and say we have an entity that we think is worth 21 bucks, it’s trailing at 16?

Bryan Davis

Well, I have no idea. I don’t know how they would look at it. I’m looking at it from our standpoint.

Michael Bilerman - Citi

Right.

Bryan Davis

And our value and where we are trading.

Michael Bilerman - Citi

Okay. That’s helpful. In terms of World Financial’s, you talked about I guess this 5 million pipeline -- 5 million square foot pipeline and I think you said two thirds of that was the large tenants?

Dennis Friedrich

The two thirds, I said, two thirds of it represented, I was actually referring to the mix when I mentioned the percentage but the large tenants, the very large tenant component would be about 50% of that.

Michael Bilerman - Citi

Right. And then do you have…

Dennis Friedrich

It depends what you characterize as large because that’s the 1 million plus component. There is large tenants in the other 50% obviously in the scheme of things.

Michael Bilerman - Citi

Do you have a sense of how much of that pipeline the tenant effectively can’t stay in there space versus a tenant that probably could stay in their space, obviously are paying some rent and the only reason I ask that is thinking about Viacom situation. They had a --they effectively could have stayed in their place what they ultimately did, it was just a matter of negotiating the best rental outcome in best location for what they were trying to accomplish.

So I’m just curious as these other sort of big fish that you have. How many of them are consolidations where they actually have to move to new spot and then they have to decide okay, where am I going to go, am I going to go west side, am I going to go downtown, am I going to go to world trade, where I am going to go in the city versus guys who were just trying to play the rent game?

Dennis Friedrich

I think its probably just to give you a little sense, I don’t know to the exact percentage Michael, but just to give you a flavor. I think its sort of 50-50, dealing maybe 60-40 more they are -- the compelling reason for them to move on either to consolidation or the asset or the building there in versus is that could be playing the game.

But it’s a -- again there is a lot of factories here, I’m trying to give you as much clear as possible there is a -- there is a factor of -- and number of these situations that maybe the rent won’t realistic world be as low as what the Viacom rent would be.

Bryan Davis

And then does that dynamic as well, there is either there could be a space situation or there could be a situation where there is just -- there is not a landlord on the other side. He is also willing to accept the rent of the certain number relative to World Financial Center.

Michael Bilerman - Citi

Now, that’s extraordinary helpful. And it’s helpful to understand the timing of everything and it’s also helpful as you sort of went through the math in terms of NAV, understanding that where, sort of, investors are not paying for. As we think about World Financial, how should we think about downtime as the space gets leased, in terms of thinking about from an income perspective obviously is BAM as those leases rule in ‘13, how much time should we be thinking about for that to be vacant for?

Dennis Friedrich

Michael, is just there is a lot of work to be done particularly as we get through 2013. And there is so many because we’re talking about a large, I’d say a good number of tenants in that pipeline that, that could downtime and other things could swing in very different interactions compared to what we ultimately leased it, depends on if it’s a large -- more about small or mid size mix up with more immediate expiration. So it’s just -- I think it just not prepared yet to give clarity to that. I don’t think I have it completely. It’s just too many different factors.

Michael Bilerman - Citi

Great. And just last one, last one, just…

Dennis Friedrich

Couple of guys that also want to get in there…

Michael Bilerman - Citi

Okay. It was just on the $500 million note, yeah, just it was extraordinary helpful to get all the sources of capital because I don’t think the market really understands how much liquidity you could generate from the existing. One of the things you talked about was the $500 million note, which I think I asked about a couple of quarters ago, you sounded very positive this time in terms of saying monetizing that within two quarters. I am just curious what sort of change in the thinking like I don’t think, its callable for a little while so I just…

Dennis Friedrich

Mike, I just get make sense when you sort of see the rate, it makes -- it’s sort of as some time as gone by it’s make more sense for that note to be dealt with. There has been some changes in the home business since to the positive side. So it just seems little more likely of an event. Bryan also points out to me right now that we were always in a position to sell that note.

Michael Bilerman - Citi

Right.

Dennis Friedrich

So, I think there is different alternatives. It’s an attractive a bit of paper. And I am not sure whether it’s really been -- I think you did raise because I am not sure, I know its been taken in account somehow but accelerating that may makes more sense for us to from our situation and be able to have another pile of cash to have it wherewithal.

Michael Bilerman - Citi

The $500 million reasons, okay. Thank you.

Dennis Friedrich

Okay. Thanks, Michael. Enjoy the weekend.

Operator

And we’ll go next to Sam Damiani at TD Securities.

Sam Damiani - TD Securities

Thank you and good afternoon. Just on the NAV, you obviously got a $5 share value for the World Financial and the development can you -- how much color can you give us on how you value towers two and four that I should call it towers two?

Bryan Davis

I mean we are sort of look at it. Yeah, we look at in on our couple of complex standpoint the overall complex. I think our range is in our -- into this mix $400 per square foot and north of that?

Dennis Friedrich

Without getting two specific on buildings because as you know Sam we don’t provide specific asset level, net asset value but from a complex perspective, worth about 400 bucks a square foot.

Sam Damiani - TD Securities

Fair enough. The straight-line rent did jump up quite a bit this quarter. How much of that is Perth and maybe some temporary free rent burn off. What’s the outlook on that line item over the next couple quarters?

Dennis Friedrich

Well, so Perth, I had mentioned was about $3 million of the increase that was related to specifically to Perth. Perth isn’t free rent. Perth is all straight-line rent. You got to remember those are 10-year leases with 4% annual rent pumps. So there is a fairly sizable free rent component early on and nearly half of the lease term.

We did have some leasing activity across our portfolio included -- including in Boston and then Washington where we had some free rent periods, which should burn off all of being equal. We may see based off of leasing activity over the next little while that getting replaced but all of that’s been equal. I’d say that five of that’s probably sustain the other five should burn -- the other three to four should burn off.

Sam Damiani - TD Securities

Thank you. And going in cap rate you on your IFRS 5.6% down from 5.8%, I think a quarter ago. Is that the rolling of the London staff and then the impact of Denver or is value taking, somehow taking into account towers two and four of the World Financial Center in that.

Dennis Friedrich

So it is really based off of a run rate of our current quarter NOI. So, London had an impact on it but we did adjust for that but of course the asset that we did acquire is only 60% leased. Losing the NOI at 1801, California is a result of expiry had an impact on that.

The only other thing that had a slight impact in dropping the cap rates from 58 to 56 as well as the fact that our Canadian asset, the exchange rate at the end of the quarter was stronger than the average exchange rate through the quarter. So we had this anomaly where we are translating our Canadian assets at a much higher rate than we would otherwise have been translating our quarterly earnings.

Sam Damiani - TD Securities

Okay. Okay. Got it. And just finally you mentioned possibly $200 million of net refi proceeds by the end of the year, how much of that is on assets within BOX?

Dennis Friedrich

So, about half of that, little more than half of that. And in fact it’s in excess of $200 million but more than half of that is on Bay Adelaide -- Bay Wellington Tower.

Sam Damiani - TD Securities

Okay. Thank you.

Dennis Friedrich

Thanks, Sam.

Operator

We’ll move next to Rob Stevenson with Macquarie.

Rob Stevenson - Macquarie

Good afternoon, guys. Just a couple of quick ones, Dennis, how actively you’re talking to tenants for Midtown West and where are you on the deck there?

Dennis Friedrich

So, how actively -- we are active -- we’re very active in responding to RPs putting proposals out than I was. There is a different in terms of where we stand today. It’s a different timeframe, I think for the tenants we are talking to from the World Financial Center from Brookfield place in terms of delivery to tenants would be towards the late part of 2016.

We have pulled together our arrangements with the rails and where we really are today is we’re just waiting on some final costing in design work on the residential tower which we are. And I have indicated before we have sort of shifted gears in terms of the scheme and are headed in the direction of replacing one of the office towers with the sizable 850 unit apartment building. So that’s sort of last bit, we’re very close to moving forward.

Rob Stevenson - Macquarie

Okay. And then given the magnitude of the big UBS layout in London, if you wind up seeing a significant amount of sublease space coming back from the five Broadgate development, does that push off -- is that likely to push off your development in a 100 Bishopsgate?

Bryan Davis

So, we could -- it could have an impact if it becomes an alternative that’s really attractive to some of the tenants that we’re talking to. It really depend upon what -- where that law comes back if that does happen. So it’s a -- I mean there’s always -- for large tenants, it’d be more interest being an anchor tenant in the new building and their own new building but its -- I think it’s a bit too early to tell whether that -- what impact its going to have, but it’s possible.

Rob Stevenson - Macquarie

Okay. And then just lastly in addition of World Financial Center, you’ve sizable rollover in ‘13 in DC in Ottawa and then DC in Houston in ‘14, are there any sizable tenants other than BoA in the ‘13 or ‘14 rolls that have either notified you guys that they are moving out and you think are very likely to move out at this point?

Bryan Davis

No. In that rollover mix. No. Not at all.

Rob Stevenson - Macquarie

Okay. Thanks, guys.

Operator

We’ll go next to George Auerbach at ISI Group.

George Auerbach - ISI Group

Hey, thanks, guys.

Dennis Friedrich

Hi, George.

George Auerbach - ISI Group

Dennis, you mentioned the investor concerns that you’ve heard about…

Dennis Friedrich

George, it really tough to hear you.

George Auerbach - ISI Group

Is it better?

Dennis Friedrich

Yeah. It’s better.

George Auerbach - ISI Group

Sorry about that. You mentioned in your comments the concern investors have with leverage level. I guess can you help us understand then how high you’ve been allowing leverage to go in a potential buyback given those concerns and then give what’s going to be, I think a pretty big drop in EBITDA next year with the Merrill lease burn off?

Dennis Friedrich

I mean I think -- and I’ll ask Bryan to jump in the part, I sort of marry the two -- the concern with leverage levels and I think also the overall strength of our balance sheet in the near-term is what feedback had been which cannily surprises to certain extent and that’s why we want to make declare that I was -- just a quite a few opportunities out there for us to fund what would you link. Bryan, you want…

Bryan Davis

I’d say George two things, one we tend to focus it more on a debt -- a balance sheet perspective debt to total assets or debt to markets or debt to capitalization based off of our values as opposed to debt to EBITDA. We do appreciate that there is going to be an impact, but we don’t have any covenants that they are driven off of that, that we’re otherwise worried about.

We’ve hovered in around the 50% -- the 48% to 52% level for a number of periods. I think, as the values of our underlying portfolios have gone up, we are now down to 48% debt to total assets to that little bit lower than we begin the year at, I think between 48% and 50% is an area that we are comfortable with that.

So the second thing I would say is that, it’s always something that we have to consider in the context of buying back our stock and we do consider that when we are weighing our allocation of capital between share buybacks and growing our asset base.

George Auerbach - ISI Group

Okay. Thank you.

Dennis Friedrich

Thanks, George.

Operator

And we’ll go next to Anthony Paolone of JP Morgan.

Anthony Paolone - JP Morgan

Thanks.

Dennis Friedrich

Yeah.

Anthony Paolone - JP Morgan

Hi. On the Westside, so if I’m just taking a comments in correctly, is that mean once you get everything proved and ready, you are just going to go forward with the platform build residential before office, or am I reading into that wrong?

Dennis Friedrich

The way, no, I mean, the way the program would work is the deck does take a bit a time to build. So our plan would be, we’re taking that time to market the office building at the same time. But the changes has been, we are now able to actually build two buildings on that project really in the same timeframe as supposed to sequentially building office buildings further out in time. So we move one of the towers forward.

The market for residential is robust. You don’t have to same pre-leasing profile you build more to spec based upon a confident you feel but with the sub 1% vacancy level and the quality. Residential it’s been pretty compelling and there is also major investing -- investment interest in those towers.

So, I think we are just getting last decks in order on it. And moving to create the land but I think with the scheme that has is more diversified than prior and with the lead time to capture tenants to launch the office building. The office building would not -- we wouldn’t be in a position to even start the office building, I mean we had tenant in hand for bit out of time. Does that answer your question.

Anthony Paolone - JP Morgan

Okay. But sounded -- it sounds if you are not holding back on going forward with the platform and building, and going right into the residential towers just more of getting through the process?

Dennis Friedrich

That’s right. That’s fair to say. And we’ve gotten through large part of the process with the rails which have been before something that was holding something up, now we are just making sure we -- the Mass is something more comfortable with our in the residential, really more of the design in the construction costs and that’s sort of in its final stages.

Anthony Paolone - JP Morgan

Okay. And then on World Financial Center, just you talked about hitting singles and doubles there. Can you talk a little bit about just the lease economic after CapEx on doing those types of deals relative to say one of the larger deals that might be in the pipe?

Bryan Davis

I mean there is going to be net effect of rents, there is going to be a good, I would say, good 5% to 10% sort of premium to the small singles and doubles. You just tend to get, the large tenants you get some more of a stronger discount here. So net effect of rents on some of those will be, call it 5% maybe 10% and we are reporting some net rents, but we are really net fees rents, when you look at sort of net effective rents, this is really the way we run our business just if you are looking at just lesser concession packages and typically shorter overall concessions or smaller overall concessions.

So, and we think it’s going to be a bit of both, I’m not suggest, I think this quarter with some singles and doubles, it could be another quarter that or that could be acceleration of the large, I think it just that’s the way the markets going to operate to extent.

Anthony Paolone - JP Morgan

But that 30, call it 33, 34 dollar-ish type net number, what is that go to on net effective or one of these singles or doubles when you are factoring CapEx and fee rents?

Bryan Davis

And commission we are in the, so you call it mid-20s net effective rents.

Anthony Paolone - JP Morgan

Okay. And then, sorry, that’s the my extension just a little bit lower if one of these big things hit.

Bryan Davis

Yeah. Yeah. Which is typically a bit, but then also and I am sorry to say, we very much depend and also we are -- they are in the building. So I mean a larger tenants in a tower floor situation, we are going to be just tighter on our concessions and rents.

Anthony Paolone - JP Morgan

Okay. Thanks.

Bryan Davis

Thanks.

Dennis Friedrich

So, Operator, I think that concludes our call. We wanted to sort of with all things going on this week, keeping our focus on making sure everything is going to smoothly as it has with the storm recovery. We are going to limit and keep the call to under hour and half mark, which is pretty lengthy.

So, with that, I want to thank everybody for calling in and enjoy the weekend. And hopefully you don’t have too many disruptions in your life with the storm. Thank you.

Operator

And that does conclude today’s conference. Again, thank you for your participation.

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