Brookfield Property Partners L.P.
Q2 2017 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Brookfield Property Partners' Second Quarter 2017 Financial Results Conference Call. As a reminder, today’s call is being recorded. It is now pleasure to turn the call over to Mr. Matt Cherry, Senior Vice President of Investor Relations and Communications. Please go ahead, sir.

[Matt Cherry:]

Thank you, and good morning, everyone. 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 and 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'll turn the call over to Chief Executive Officer, Brian Kingston.

[Brian Kingston:]

Thank you, Matt, and good morning, everyone. And thank you for joining the call. With me on the call are Ric Clark, the Chairman of BPY; and Bryan Davis, our CFO. In my prepared remarks, I'll recap our activities and accomplishments from the current quarter as well as providing some observations and real estate fundamentals and the investment environment that we're seeing in our various markets around the globe. Bryan will then go through the details of our quarterly financial results and then following those comments we'd be happy to take questions from any analysts or investors on the call today. As you would have seen in our disclosure this morning we reported another quarter of earnings growth. Our Company FFO was $258 million or $0.37 per unit, which is a 6% increase over the prior year. Bryan will provide further details and what drove those results in his remarks. We continue to make good progress toward recycling between $1 billion and $2 billion of net equity from asset sales this year. Last quarter we mentioned that we were under contract to sell our 51% interest in 245 Park Avenue in New York City that transaction closed following your call in May and generated just under $600 million of net proceeds to BPY. Despite ongoing market concerns around the impact of Brexit on the London office market capital values in the City of London have continued to remain robust. In July, we completed the sale of 20 Canada Square on the Canary Wharf Estate in London for £410 million which generated net proceeds of about $125 million to BPY. We’re also under contract to sell or interest in 20 Fenchurch Street through Canary Wharf at 3.4% cap rate. All of these sale transactions were completed at or above our IFRS carrying values. In addition to recycling capital from assets that are held directly on our balance sheet we have also begun to see the return of capital from some of our opportunistic strategies. Our 2012 vintage opportunity fund is distributed over $2 billion to investors to date, including about $680 million to BPY. Investment realizations within this fund should continue to grow in the coming quarters in proceeds distributed to BPY will allow us to self fund our future investments within the strategy. In addition to asset sales we have also been taking advantage of low interest rates and strong debt capital markets to refinance some of our properties at very attractive terms. In June we issued £830 million pounds of notes from our UK hospitality portfolio that was used to repay £560 million of existing notes and returning the balance to investors. Overall this reduced our annual interest cost by approximately £3 million and despite the higher financing. During the first six months of 2017 we've also completed refinancings within our U.S. industrial and triple net lease businesses. Our Manhattan multifamily portfolio as well as our UK student housing business. I'll now turn the call over to Bryan Davis for the detailed finance report for the quarter.

[Bryan Davis:]

Thank you, Brian. During the second quarter, we are in Company FFO of $258 million, which compares with $250 million for the same period in 2016. On a per unit basis, Company FFO for the current quarter was $0.34 per unit compared with $0.35 per unit in the prior year an increase of 6%. BPY recorded net income attributable to unitholders for the quarter of $239 million or $0.34 per unit which compares with net income of $349 million or $0.49 per unit in the prior year. BPY realized gains of $718 million in the quarter as we successfully closed on the previously announced sale of interest in 245 Park Avenue, office building in New York, which generated $689 million of net proceeds. As well as the sale of various assets within our opportunistic office, multifamily, triple net lease, and industrial portfolios. In the last 12 months we have realized gains of approximately $1.7 billion. As we continue to execute our strategy of selling all or interest in assets where we feel we have maximized value. These realized again combined with our FFO this quarter provide strong support for a quarterly distribution of $0.295 per unit that was paid at the end of March. In reviewing what contributed to the $8 million year-over-year growth in Company FFO, I will highlight the main drivers by our three business units. First off, in our core office business, we earned $162 million of Company FFO compared with $150 million in the prior year, an increase of $12 million or 8%. The current quarter we benefited from another legal settlement, although, this time it related to a dispute over a break fee on the partial redemption of debt in 2014 due to the sale of office assets in London. The settlement at our share resulted in a reduction of the break fee of $32 million over what had previously been provided for. And as a result, we are able to book this reduction through income. In addition, we had same-property net operating income growth in natural currency of about 1% or $3 million. This growth was driven by lease commencements at Brookfield Place, New York and Brookfield Place in Bay Adelaide Centre in Toronto, But we’re somewhat muted due to tenant moveouts at 1600 Smith in Houston, 5 Manhattan West in New York, and at 10 Shelley Street in Sydney. In the last two cases, we have already released the space to new tenants, but we won't see the full benefit of these leases in income for a few more quarters. Offsetting this positive operating momentum, our FFO was impacted by $9 million due to the conversion of foreign currencies into fewer U.S. dollars and by $14 million due mainly to the impact of asset sales, and the reallocation of those proceeds out of this business and into more opportunistic investments. During the quarter, we moved 3 Manhattan West, our multifamily property in New York from development to operating as a result of achieving substantial completion. We have had success in advancing leasing on about 50% of the available market rate units since the launch in March, which is tracking well ahead of schedule. The accounting impact of moving this property to income producing was a negative $1 million compared with the prior period as we are no longer capitalizing any costs. Although, one stabilized, we expect to achieve by mid-2018, we will earn $10 million in FFO on an annual basis. Secondly, in our core retail business, we earned $119 million compared with $108 million in the prior year, $11 million increase or 10%. During the quarter, we realized income of $9 million related to the transfer of title of about 60 condominium units at Ala Moana to the purchasers. We expect over the balance of the year to achieve the revenue recognition hurdle for the remaining income of $14 million related to these sales. In addition, we had same-property growth of 1% or $1 million this quarter largely driven by higher rents as we continue to lease space at positive rent spreads. Same-property net operating income was impacted by $3 million this quarter due to retail bankruptcies during the first half of the year. We have made progress in releasing a good portion of the space already and expect same-property growth to accelerate back to the 3% to 4% range over the balance of the year. Lastly, our opportunistic investments earned $96 million compared with $110 million in the prior year, a $14 million decrease or 13%. In the prior period, we benefited from income of $21 million earned as a result of the successful sale of merchant build properties in Southern California. Excluding this income, our opportunistic investments contributed an incremental $7 million in Company FFO this quarter or an increase of 8%. Much of this increase is due to additional capital invested including our investment in IFC Seoul; our increased ownership interest in Rouse; growth in our simply storage and student housing portfolios, and our new investment in the manufactured housing sector in the U.S., which we closed on in the first quarter of this year. These pluses were partially offset by some softness in our hospitality results driven mainly by redevelopment initiatives at the Atlantis, the Diplomat Hotel and a number of our other North American hotel properties that took rooms offline. In addition, our FFO was impacted by $2 million due to the conversion of foreign currencies into fewer U.S. dollars. In arriving at Company FFO, which we detail on Page 9 of our supplemental, amongst our standard adjustments for GGP warrants and the add-back of depreciation of non-real estate assets, we adjusted for net $2 million in transaction costs related mainly to debt extinguishment costs and $9 million for capitalized interest on active development projects that we now account for under the equity method due to recent sale of interest to third parties. As a reminder, IFRS rules allow for a return on your share of the equity invested in a development only if you consolidate that development and not on the same amount of equity if that development is accounted for under the equity method. As a result, we have adjusted our FFO to reflect a return consistent with our consolidated development projects, and most importantly to be consistent with the return we recognize on these projects in prior periods. In comparing our results to the first quarter of 2017, Company FFO increased by $21 million from $237 million earned in that period. This increase was primarily attributable to the $32 million in income as a result of the settlement related to the debt break fee, $9 million in condo sales income in our core retail business and both of these were partially offset by a legal settlement earned in London, in the prior quarter relating to a historically dispute of $20 million. On our proportionate balance sheet total assets increased by $300 million to $66.3 billion point, largely due to a combination of the benefit of the conversion of stronger foreign currencies into more U.S. dollars, using spot rates at the end of the quarter. Continued investments into the build out of our active development pipeline, funded through construction facilities and net fair value gains where we saw increases in value in our office and student housing portfolios, largely driven by improved cash flows increases in our industrial portfolios driven by valuation metrics, offset by a reduction in the values of some of our retail assets. Our asset level debt is up primarily due to draws on construction facilities, but in addition to that we had a number of successful refinancing executions within our opportunistic investments, which Brian had mentioned. That capitalized on the low rate environment and pushed out maturities. We highlighted details of those transactions in our press release. Lastly with the successful privatization of our Canadian and Australian listed vehicles during the quarter. For a total investment of $600 million finance largely through draws on existing credit facilities. We saw a reduction in our non-controlling interests and a further simplification of our business. We expect over the next 12 months to execute on asset sales in both of these markets to raise capital to repay the facilities, used to fund these privatizations. And on a final note our Board of Directors yesterday declared a quarterly distribution of $29.5 per unit to be paid at the end of September. So with that, I'll turn the call back over to you Brian.

[Brian Kingston:]

Thank you. Since the launch of Brookfield Property Partners in 2013, we’ve executed on several transactions to help clean up some of the publicly listed subsidiaries underneath BPY and establish it really is as Brookfield's flagship listed real estate entity. The latest to these transactions were completed this quarter. This quarter with the privatization of our Canadian and Australian listed office funds. This helps to simplify our balance sheet and enables us to streamline operations and reduce overall administrative costs. Most of the key office markets today are performing well. In New York City, we finalized the lease with JPMorgan Chase for over 300,000 square feet at Manhattan West and in our under advance contract negotiations with a technology tenant to take virtually all of the remaining vacant space in that building. The success of this redevelopment and repositioning has far exceeded our expectations. At One Manhattan West, during the quarter, we completed a lease with law firm McKool Smith for 64,000 feet bringing project to 40% pre-leased. And we are in advanced lease discussions with multiple firms for a further 850,000 square feet. We expect to finalize these leases over the balance of this year bringing the 2 million square foot tower to over 80% completed well ahead of its scheduled delivery in late 2019. And this will allow us to focus our attention on the second 2 million square foot office tower to Manhattan West, where we're already in meaningful discussion with a number of tenants representing over a million square feet of occupancy demand. Leasing execution in our other U.S. core office markets was also strong. In total we leased over 1 million square feet in the U.S. this quarter at rents significantly higher than the expiring rent. Overall occupancy in our U.S. portfolio increased 30 basis points to 89%. Our Canadian core office business has continued it’s healthy performance as well particularly in Toronto where occupancy in our portfolio increased 170 basis points this quarter to 96.5% the highest level we've had in six years. Our office portfolios in London and Berlin finished the quarter at 98% and 86% leased respectively. Execution on the lease up of Potsdamer Platz in Berlin since our acquisition 18 months ago has been very strong and in the second quarter we leased just under 400,000 square feet that rents that were on average 19% higher than the expiring rents. Our key Australian markets of Sydney and Melbourne have remained strong with occupancy in those cities at 97% and 100% respectively. Our development pipeline is robust and we’re capitalizing on this market to both lease our existing space as well as build new properties. In total across the portfolio we leased 1.8 million square feet of office in our global portfolio of this quarter at rents that were on average 42% higher than the leases that expired during the quarter indicating overall strength in most of our markets. Moving into the U.S. mall business it's no secret to anyone on the call today that the retail industry has come under significant pressure over the last 12 months, but that really only tells part of the story. Well there's definitely pockets of weakness in the industry. Retailers that are nimble and willing to evolve along with consumer preferences are actually performing quite well. Drivers of demand for retail space include many traditional e-commerce brands that are now expanding their brick and mortar footprint as a new way to reach customers and grow their businesses. Tangibles examples of this trend can be seen in leases that we've signed with retailers such as Bonobos, UNTUCKit and Warby Parker among others. Bonobos began as a pure online retailer in 2007 before opening its first physical store in 2011. They now occupy 30 physical stores across the United States and are projecting to grow to 100 stores by 2020. UNTUCKit has indicated its intention to open up 100 stores over the next five years as well. And Warby Parker which launched online in 2010 and now has 50 showrooms across the United States is envisioning growth to between 800 and 1,000 stores in the future. This trend has been a factor in our ability to keep our Class A retail portfolio at 95% occupancy as we've been able to rapidly backfill any vacancies that may be created by poor performing tenants. With negative sentiment affecting investor attitudes you have been using this environment to invest further in retail that it's in need of repurposing or repositioning into alternate formats or uses. In July GGP entered into a transaction to acquire interest in 13 Sears locations in various U.S. markets for approximately $250 million. Our belief is that by acquiring big-box anchors in our malls and repositioning them is one of the best areas of growth opportunities in the retail sector today. Over the past five years we repositioned over 100 anchor boxes and today have no vacant anchors within the portfolio. And given the fact the traditional large format department stores pay minimal rent these parcels can be relent at higher rent users including grocery stores, restaurants, fitness centers, theaters and other entertainment driven uses. On average these redevelopment yield between 8% and 10% unlevered return on our costs and up to 20% on our equity. And finally, as many of our in the money warrants in GGP expire in November of this year 16 million of those warrants must be settled on a cashless basis. However, we do have the ability to deliver cash to GGP to purchase additional GGP shares on the remaining 43 million warrants. Given weakness in GGP’s trading price lately, we've given GGP notice of our intention to exercise all 43 million warrants on a full share settlement basis, which will result in us acquiring in total an additional 68 million shares of the Company for approximately $462 million and increasing our common equity ownership in the Company from 29% to 34% at a price that we consider to be very attractive relative to the underlying value of GGP’s assets. This incremental investment reiterates our long-term investment thesis in Class A U.S. retail in support of GGP’s strategic direction. In our opportunistic investment strategies, we invested $150 million in the quarter to acquire interests in three enclosed malls in Burlington, Vermont; Eatontown, New Jersey and Wilmington, North Carolina, and we plan to invest a further $600 million collectively in these three assets through redevelopment and repositioning. During the quarter, we also acquired a 1.8 million square foot mixed-use development – redevelopment project in Fashion District in Downtown, Los Angeles as well as two apartment buildings in Orange County and Metro Washington, D.C. that fit within our value-add multifamily strategy. So to wrap up and before turning to questions, it was another positive quarter for the company with the continued growth of our business, and overall, our operating markets continue to remain healthy. We are excited for the prospects of the balance of the year and hope to see many of you in late September at Brookfield's Annual Investor Day in New York, which will be held on Wednesday, September 22, at Brookfield Place in Downtown, Manhattan. Details are on our website, but should you have any questions, please feel free to contact Matt. So with those as our planned remarks, I'm now happy to open up the line to questions from analysts and investors. Operator?

[Operator:]

[Operator Instructions] And our first question comes from Sheila McGrath from Evercore. Your line is now open.

[Sheila McGrath:]

Yes, good morning. On Manhattan West, could you update us on the lease-up of the Eugene? And also, if you plan on requiring some level of pre-leasing on – before you start construction of the second office tower?

[Richard Clark:]

Hi. Good morning, it's Rick. I guess I would take that one. So on Eugene, the apartment building open effectively April, in the beginning of April, so four months into the leasing we are 50% leased with a market rate units well ahead of our pro forma. I think we've pro forma'd something like an 18-month lease-up. So we are exceeding that. We are achieving strong rents and doing quite well. As far as South Tower to Manhattan West, we've made no firm decision on when to launch the development of that, but I would say as Brian mentioned in his remarks, we've seen very strong interest in the leasing, in the rest of the complex we've signed about 400,000 square feet of leases to date. We're actively negotiating 1.3 million square feet of additional leases, which will take the overall complex to 90% leased. So when we get those done, I think we’ll think further about the South Tower. In the meantime, we've got strong interest in that tower from multiple tenants looking for large amounts of space, so we're actively working on it.

[Sheila McGrath:]

Okay. And then on 245 Park, you successfully closed that transaction in second quarter, but several other office buildings in Manhattan are pulled from the market. I just wanted to get your perspective if you think that there's more limited foreign capital interest or any change in pricing or just unrealistic expectations or what's your view of the success of your transaction in other office buildings being pulled from the market?

[Richard Clark:]

Yes. I saw that article this morning Sheila, and I think – I don't think it all reflects the actual story. I think there is strong investor demand for high quality trophy-type properties in New York city and also properties with strong assured cash flow. I think those buildings that were pulled, that were cited in the article didn't exactly get those profiles. In some cases the buildings had significant near-term rollover. In some cases, they were a notch down in the quality scale. In other cases, they were effectively a pretty ambitious rip down of an existing building in a brand-new development, which is a whole different profile. So I think if we were to go out and market interest in other of our properties in New York, it will be very strong demand for – given our quality and cash flow characteristics.

[Sheila McGrath:]

Okay, great. And then just on the GGP warrant perspective. Can you just give us the different ways that that would have potentially kind of played out? And is that, you're still going to own about 34% interests in GGP or how that will impact reporting? I think that already flows through with that take into an account, so just clarify that whole GGP, okay.

[Richard Clark:]

So on the second question, we already do report our GGP results on a converted basis anyway, so you won't get any significant, okay, but I don't think any significant change in how the reporting will look post the execution. As far as the decision, we in total we own $59 million warrants, 16 of them must be settled on a net settlement basis, meaning no cash changes at hand. We get delivered a certain number of shares depending on the end of money value. On the remaining $43 million it was at our option whether that we settled them on a net basis or whether we exercised them for cash. And obviously, under that cash settlement option it's an opportunity to acquire more shares. And given where the share price is right now, we opted for the option to acquire more shares.

[Sheila McGrath:]

And the price is set like as of now?

[Bryan Davis:]

Yes, it's in GGP disclosure, but there’s two series, but on average it's about $8.41 a share, the exercise price.

[Sheila McGrath:]

Okay, great. Thank you. I’ll get back in the queue.

[Bryan Davis:]

Okay.

[Operator:]

Question comes from Mario Saric from Scotia Capital. Your line is now open.

[Mario Saric:]

Hi, good morning. Maybe Rick, just coming back to your comment in terms of overall strength in the market for high cash flow and trophy asset, can you give us an update in terms of what the thought process is on Brooklyn Place in Lower Manhattan?

[Richard Clark:]

So on Brookfield Place, sorry?

[Mario Saric:]

Yes, on Brooklyn Place, Lower Manhattan in terms of…?

[Richard Clark:]

Yes, so we continue to – as Brian mentioned work on monetizing a few of our assets and including some in Lower Manhattan. So that’s an ongoing process. We have a high degree of confidence that we will be selling a minority interest in a couple of properties downtown. So I think will be successful that answers your question.

[Mario Saric:]

It does. That's great, thank you. And then just maybe sticking to the office theme, I think Brian mentioned core U.S. occupancy was up 30 basis points quarter-over-quarter, global occupancy was up 40 basis points quarter-over-quarter. Based on what you're seeing is kind of the target global office occupancy of 94%, I think for the first half of next year, is that still target, is that a realistic goal at this point?

[Brian Kingston:]

Yes, Mario, a lot of the big movement to get from where we are today to that 94% is related to New York, in particular around Manhattan West. So as we mentioned, we're either in the process of trading paper or in pretty advanced negotiations on a lot of space at that project. So assuming we're successful in executing there, then we should have no issue being where we plan to be at the end of the year.

[Richard Clark:]

I would just add to Brian's comments that, that momentum sort of carriers through the rest of Manhattan well. For our remaining available space in Lower Manhattan, we've got a lot of leases out that we're negotiating and also Midtown as well. So I think just overall, we should see a pretty dramatic improvement in occupancy in New York City by the end of the year.

[Mario Saric:]

Got it, okay. That’s great. And then just in Sydney I noticed that you made the comment that was a pretty strong market and I saw the market rent would increase 5% to 10% quarter-over-quarter in that market with – can you just give us a little more color in terms of what's going on there?

[Brian Kingston:]

Yes, the Australian economy, notwithstanding softer commodity prices over the last five years. Obviously over the course of this year commodities have recovered somewhat and Sydney and Melbourne in particular have been pretty strong economic growth. And then on top of that within Sydney, it's has the second lowest vacancy rate in the entire Asia-Pacific region amongst major cities, second only to Hong Kong at the moment. So it's partly been driven by a lot of demand. It's partly been driven by some space coming off line in that market are being converted to other uses. And so as a result it's actually a very tight market at the moment and that's we saw sort of 5% growth this year we're expecting to see that continue into next year as well. So Sydney in particular, but Melbourne as well have both been performing very well.

[Mario Saric:]

Okay. And just my last question related to the balance sheet, and kind of specifically looking at your floating rate debt exposure kind of inched up a little bit quarter-over-quarter between corporate debts. When you think about your future refinancing initiatives and considering One Liberty Plaza in particular, where do you see that 45% of total debt that floating-rate today? Where do you see that evolving by the end of this year and for 2018?

[Bryan Davis:]

I'll say by the end of this year, it should go down. In fact, we've executed on a refi at One Liberty Plaza on a fixed rate basis. So we expect it to go down. I'd say longer-term, our target is to get it down into the 25% to 30% range. Part of what led to the creep up this quarter was the ability to execute on a number of refis within our opportunistic portfolio where it made sense from a cost perspective and a flexibility perspective to maintain those as floating rate. So we may see a little bit of noise, but the trend is to push that percentage downward over the long term.

[Mario Saric:]

Great. I know Brookfield is very long-term and they're focused in their vision. Can I put you on the spot, so give me sense of what long-term?

[Brian Kingston:]

Five years, I think I said at our last Investor Day I said 25% is our target in the next five years.

[Mario Saric:]

Okay. And then, I may have missed it, but do you have the details in terms of the debt refi at 1 Liberty Plaza in terms of the rate of the LTV is going?

[Bryan Davis:]

Similar levels to the existing debt rates much lower as you can imagine because the market is very attractive for interest rates. I think the rate is almost 250 basis point lower than what has expired.

[Mario Saric:]

Great. Okay thanks guys.

[Operator:]

And our next question comes from Mark Rothschild from Canaccord. Your line is now open.

[Mark Rothschild:]

Thanks and good morning, guys. Can you talk a little bit about the buyback and the level of activity in the quarter and what we should expect going forward?

[Bryan Davis:]

Sure. So look at – I think our approach in attitude towards the buyback has been pretty consistent really over the last couple of years. Notwithstanding from quarter-to-quarter the amount of shares we buyback there is mostly driven by volume on the market frankly in our ability to pickup blocks of shares and so in Q1 of this year it's a pretty large number because we did have one particular opportunity to buy a larger block. I think were still active in the market today but given the stock is up a couple of dollars year-to-date and volumes were a little lighter in the quarter I think it's reflected in our numbers but I wouldn't read too much into how many shares we buy in a particular quarter as to whether that creates a trend.

[Mark Rothschild:]

And just to make sure I understand your comment you spoke more about volume but you also mentioned a stocking of the dollars. So at the current level it's fully expect you to maybe be less active in the buyback?

[Bryan Davis:]

Well, I'd say at $23 which is where the stock is this morning where we still believe that is significantly undervalued relative to value the underlying real estate and so you know it still means an attractive place for us to be buying back shares.

[Mark Rothschild:]

Okay. Thanks. In your comments about the retail environment and retail value for the most part we're positive clearly that is mark to market sentiment as a negative GGP's share price down significantly to date down quite a bit as well. I am wondering if you guys have any thoughts on really increasing exposure to retail whether it's to the roust portfolio is through higher quality assets are you looking for opportunities to really put money to work in the retail segment or do you believe that there is a shift in the market that maybe values have to create.

[Bryan Davis:]

No, look we're as I sort of said of my comments I think this is the number one investment idea that we have right now is retail in America. As a contrarian investment not because we think some of the headwinds don't exist but because it is an area where there's a real shortage of any interest from investors unlike many of the other sectors that we're active in I mean we talk about office in Manhattan et cetera. And so we are interested in putting more capital work in retail we bought three shopping centers through Rouse in our opportunistic strategy during the quarter. As I mentioned we're significantly increasing our interest in GGP by putting another $460 million into that company. So we're sort of investing on both spectrums and I'd say continue to look for opportunities and it is not because we don't think there are some headwinds out there but we do think for high quality real estate that's been located in good markets. Physical retail locations are not going anywhere and we see this is a great opportunity to buy a value when others are more cautious.

[Mark Rothschild:]

Okay. Great. And maybe just lastly your supplemental you have the Calgary development project at a performing yield of 8% I assume that's not in current leasing and stabilized NOI if you could just confirm that? Second if you could just talk about what have a timeframe do you think it might take to get to where is that if I remember correctly you're not at 90% or 95%, yes, but maybe I'm mistaken.

[Bryan Davis:]

Yes, that’s right we’re at 80 based on current leasing and we’re projecting I think that will stabilize 2019. So is your timing as to when we think the rest of that leasing will get done the building is finished next year. So you're right the 8% is based on where we think it will stabilize ultimately once we complete the balance of the leasing. But that is still our current outlook based on discussions we are currently having with tenants.

[Mark Rothschild:]

Okay, great. Thank you very much.

[Operator:]

And our next question comes from Michael Bilerman from Citigroup. Your line is now open.

[Michael Bilerman:]

Great. Thank you. Good morning, guys. I'm just curious on Page 14 the valuation metrics, it looks like you dropped the discount rate from the terminal values on core retail by about 50 basis points sequentially. I guess, what's behind driving that? And Brian, you just talked about trying to be a contrarian right now. I think most people would probably put higher discount rates and higher terminal values if they were trying to underwrite a retail asset today, so sort of what was going on there?

[Brian Kingston:]

Yes. So, I think for – given what's happening with GGP in the market generally, I think we took and when I say we in conjunction with management, GGP took the opportunity this quarter to do a deeper dive on the retail valuations including getting some third-party other brokers opinions of value or in some cases formal appraisals. So I think that's really – look I wouldn't read too much into what happens from one quarter to the next. It's really a refinement. And I think if you look at what happened in the higher quality malls, based on transactions that we have seen happening in that space, in the A malls. The numbers that we were working with were high and discount rates and terminal cap rates were high. And you've seen a similar adjustment probably in the opposite direction on some of the lower productivity mall, say under $600 a square foot of sales were discount rates and terminal cap rats actually moved up. So it's more just a refinement activity overall number. I think the net impact as far as our overall carrying value in GGP is, it's actually down slightly, but it's really just an allocation between the high quality and the lower quality, which again I think is consistent with our comments which is high quality real estate continues to be in demand and is very valuable, and it's really some of the lower quality stuff that is really seeing the biggest value impacts today.

[Michael Bilerman:]

And were you carrying the stock today at per share values?

[Brian Kingston:]

It's about $29 I think.

[Michael Bilerman:]

Sure. And then as you – you talked about BPY from being a discount to NAV and continuing to buy shares of your own. And then, you talked about as well as the GGP and this whole process that they've gone through the last 90 days with you as a board member, your current stake in the company, call it just under $6 billion from an equity perspective before you exercise the warrants and carrying value close to $8 billion just on equity right, so over $2 billion of discount expressed as owning their shares. And then you think about your own market cap of about $17 billion. This is a big piece of the company's equity value that you're effectively getting a double discount, and so the GGP management team was frustrated with where their stock was trading relative to private market values. So I assume, as a board member and a shareholder, are frustrated given the impacts BPY’s currency and your ability to go out and do things. And Sandeep says, we're going to stay the course, I guess you as a shareholder I don't – stay the course is never been in Brookfield's lexicon. You guys are very aggressive at trying to take advantage of this disconnect between public and private. So I guess, why is stay the course for your largest investment on your balance sheet and represents your market cap the right strategy?

[Brian Kingston:]

Well, I think that would stay the course means in Sandeep’s lexicon is continue to aggressively drive value in the assets every day. Stay the course doesn't mean clipping coupons and just collecting the rent. And I think the management team of that company since we emerged from bankruptcy in 2010 has I think been well ahead of most of their competitors in addressing some of the threats that are out there in terms of either repositioning assets or aggressively re-tenanting or buying back boxes et cetera So I don't think you should interpret stay the course as do nothing. I think the company continues to grow their earnings at above average rates frankly we don't care where the share price trades day- to-day in fact where the stock is trading has created this opportunity for us to buy more shares through them through our warrants that are very attractive price. We focus more on how team is doing on growing earnings and growing the underlying value of the real estate. Obviously it would be nice if their share price reflected it, but at the end of the day that's that really doesn't have a big impact on our view of the value of the investment, because we're really looking at it as a one third interest in the highest quality portfolio of retail assets in America.

[Richard Clark:]

But I guess at some point to realize our value, you're in a publicly listed security and it's evident by consolidating all your other entities some point that value has to narrow and…?

[Brian Kingston:]

Yes, but frankly that said right now, we're more focused on investing half a billion in this company at a very attractive price. So I do think…

[Michael Bilerman:]

Your price it won’t doesn’t – that that doesn't impact the price you're paying for the stock right, your warrants – your exercise prices in different, you could have net share settle if their stock was higher, you would have gotten more shares. But the entry price in terms of a cash exercise was always the same irregardless of where GGP was trading – GGP is trading at 26, you still could have executed at 841?

[Brian Kingston:]

Correct.

[Michael Bilerman:]

So I don't think the opportunity unit perceive have more value, but the opportunity is not – more greater and the fact that’s been is trading at 22 versus 25 or 26 or upwards of 29?

[Brian Kingston:]

Okay.

[Michael Bilerman:]

Just last question, just in terms of your discussions with institutional investors and we've seen a lot of office transactions, you did one 245 Park Avenue with HNA. You’ve been asked in London. We just saw Walkie Talkie trade. We've got assets in Hong Kong and Paris, the high quality assets, which still seem to get a significant amount of institutional demand. What are those partners or how are they thinking about the retail environment or you just said retailers was the number one – retail in America is a number one investment opportunity that you see? When your discussions with your capital partners, how is that going across relative to these partners paying pretty high prices for trophy office assets? I don't know if there's an analogy that you can make there.

[Brian Kingston:]

Yes, I don't know that there is an analogy there. I think it's two different types of global investors. I think of you looking at the types of investors that are buying the Walkie Talkie and achieves greater and some of these other assets. It's for the most part, it’s Asian, a lot of it's Asian capital and it's looking for a safe place to park money in a highly liquid market with a long-term stable leasing profile to it, obviously given the dynamic nature of retail. Those types of investors are – while they would look at Class A shopping centers like I’ll use Ala Moana as an example. They'd still be highly interested in that type of retail, a lot of the investment opportunity that we're seeing is in buying, more opportunistically buying assets that need to be repositioned require a significant amount of redevelopment et cetera and that's an entirely different pool of capital looking for that.

[Michael Bilerman:]

Okay. Thank you for taking the time.

[Brian Kingston:]

Okay.

[Operator:]

[Operator Instructions] Then we have a follow-up question from the line of Sheila McGrath. Your line is now open.

[Sheila McGrath:]

Yes, I was wondering if you could talk about the mix use acquisition in L.A., what are your plans for that asset?

[Brian Kingston:]

Yes, so this is a 1.8 million square foot office/retail show room in the arts district in Los Angeles just given what we're seeing happening in that market with a significant amount of multifamily and residential construction happening in downtown L.A., a lot of great restaurants and other mixed use amenities happening. We see this is a good opportunity to significantly reposition that retail into something that will be much more dynamic in a 24/7 market like we think downtown always becoming. So the plan is we acquired it from a private investor. We're going to invest a significant amount of capital and repositioning the showroom into more traditional retail, which bringing all of the various parts of the business into this, including our office and retail teams to really take advantage of what's happening there. So I'd say this is sort of a down the fairway repositioning in a market that we know well, we're one of the largest landlords in Downtown L.A., we're sort of watching what's happening there every day and I think it has a lot of parallels to what we saw over the last five or 10 years in Lower Manhattan.

[Sheila McGrath:]

Okay. And then on the three enclosed mall acquisitions. What are your long term plans? Each of the assets still stay as regional malls and you'll just put more capital or is there some sort of…

[Brian Kingston:]

Three very different business plans; one of them is an enclosed mall that will be converted to more of an open air type center, so it will actually be demold. One of them is a Downtown located enclosed mall that will be converting into a mixed use, which will be good street front retail office, multifamily and student housing. And one of them is an enclosed mall that will remain an enclosed mall, but will be adding density including multifamily and some other uses on the site.

[Sheila McGrath:]

Last question, Bryan. You mentioned in your letter to shareholders that about the large move to amalgamate the public listed to securities into BPY which is definitely a positive from our perspective, but just wondering if you think the current BPY structure that allows for more flexibility on asset sales is still optimal or are you still considering other structures to kind of close the discount to NAV cap?

[Bryan Davis:]

I think as we've said before from a purely operational perspective, we think that the current structure is optimal. It does allow us the greatest flexibility to recycle capital, it's the most tax efficient way for us to own real estate in multiple markets in multiple jurisdictions around the world. And it's really just a question of whether the benefits of conversion to some other structure might weigh those operational benefits, but from a purely operational perspective, we do think this is the optimal.

[Sheila McGrath:]

Okay. And also did you disclose the cap rate for 20 Canada Square?

[Bryan Davis:]

It's about 5.25. I forgot to disclose it.

[Sheila McGrath:]

Okay. All right. Thank you.

[Brian Kingston:]

Thank you.

[Operator:]

And our next question comes from Neil Downey from RBC Capital Markets. Your line is now open.

[Neil Downey:]

Hello. Just on the 20 Fenchurch at 3.4% cap rate, what does that translate to in terms of the growth value for the asset? And what were the net proceeds be from such a sale?

[Brian Kingston:]

Yes. From our perspective the net proceeds are not dramatic because we own this through Canary Wharf, who owned it with a number of partners, so BPY’s effective interest in the property was only 7%. But on a 100% basis, Neil it was £1.3 billion which is about £18.50 per square foot.

[Neil Downey:]

And just to clarify, I believe Sheila asked the question earlier about GGP. And you did suggest that moving from a 29% to 34% interest really doesn't mean anything to the financials, but I think, again just to clarify what you're really referring to is the FFO contribution is unaffected. That’s because you effectively – you do account for on a 29% proportionate basis and then you make a one line adjustment to get to that 33% or 34% effective interest. But as I understand it, when you actually move to owning 34% of the company, you'll simply line by line pick up your share of income expenses, assets and liabilities et cetera.

[Brian Kingston:]

That's correct on a proportionate basis will still continue to equity account it but on a proportionate of basis will then reflect it on a line by line basis. I will make one comment in that. We will be investing in incremental $460 million based on the incremental shares that we get as a result of doing a full settlement instead of the net settlement. It will be slightly a creative to the CFFO adjustment that we currently include on a net settle – for net settle basis. So there will be some accretion to our earnings as a result of committing incremental capital and getting about $20 million incremental shares as a result of a full settlement.

[Sheila McGrath:]

Right and very quickly and finally, the actual effective date of the settlement will be?

[Brian Kingston:]

The warrants expire in the first week of November so it'll be sometime between then and now.

[Sheila McGrath:]

Okay, thank you.

[Operator:]

And we have a follow-up question from the line of Mario Saric. Your line is open.

[Mario Saric:]

Hi, good morning. One more question and Brian just kind of referencing your comment on U.S. retail kind of being the number one, contrarian play out there today that you see in terms of development. How does Brookfield kind of bounce back with, but the concentration of a better word, in terms of [bit rising] a global diversified, trade the company. How do you balance? Where you see very attractive opportunity versus specific region or specific asset class being a very mature part of the Company?

[Brian Kingston:]

Well, okay. I’d said already is it a very material part of the Company. And so the types of investments that I referred to that we made in the quarter don't dramatically alter that. So I'd say that we don't have fixed limits on how much we could have in particular investment opportunity. And if we continue to see great relative returns in a particular sector, then being more concentrated in high returning assets is a good thing.

[Mario Saric:]

Okay. So if for example U.S. retail 33% of the company roughly let's say on an asset value basis trading at a – again 20% to 30% discount intrinsic value, doesn’t necessarily dissuade you from going from 33% to 50% to 60%?

[Bryan Davis:]

I know you’re asking at roundabout way. So what I'll say is hypothetically that percentage wouldn't really matter. Obviously with GGP, we do have an agreement in place that would prevent us from going above 45%.

[Mario Saric:]

Great, yes, okay. Thank you so much.

[Bryan Davis:]

Yes. Okay. All right, thanks Mario. End of Q&A

[Operator:]

And at this time, I’m showing no further questions. I’d like to turn the call back over to Brian Kingston for any closing remarks.

[Brian Kingston:]

Okay, thank you everyone for joining us again this quarter and we look forward to updating you again next quarter and for those of you attending our Investor Day in late September. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.