Brookfield Property Partners L.P.
Q3 2015 Earnings Call Transcript

Published: 7 Nov 2015

[Operator:]

Welcome to the Brookfield Property Partners 2015 Third Quarter Financial Results Conference Call. This call is being recorded. It is now my pleasure to turn the call over to Matthew Cherry, Vice President, Investor Relations and Communications. Please go ahead.

[Matthew Cherry:]

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

[Ric Clark:]

Thank you, Matt. Good morning, everyone. Thank you for joining our call today. As you would have seen in our release and letter this morning, the Board yesterday has appointed me as Chairman and Brian Kingston, who has been with Brookfield since 2001, served in the role of President and Chief Investment Officer for the past three years and who has been my partner overseeing Brookfield's global property activities, as Chief Executive Officer. So congratulations to Brian for this promotion and recognition of great work and for the next step in his career at Brookfield. Followers of Brookfield Property Partners since our inception in 2013 will know that our growth has been pretty rapid. One of Brookfield's great attributes is the strength of our bench, longevity of our team and history of growing from within to keep up with this expansion. This has helped maintain a consistent culture of excellence, collaboration and unwavering commitment to creating value for all of our unitholders. Brian and I will continue to partner in running our vast global holdings and initiatives and going forward, we will do so as CEO and Chairman respectively. With this promotion, Brian has the honor of hosting these calls every quarter. So those who haven't had the pleasure of interacting with him in the past will get that opportunity in the future starting today. In addition to Brian and myself, also on the call are Bryan Davis, our CFO and John Stinebaugh, our Chief Operating Officer. So hopefully you all would have had a chance to look through our release, letter to unitholders and supplemental this morning which show an active and productive quarter with good financial results. Let's start the call with Bryan Davis' financial report and then over to Brian Kingston for his remarks.

[Bryan Davis:]

Thank you, Ric. The highlights for the third quarter include Company FFO of $218 million compared with $199 million for the same period in 2014. On a per unit basis, FFO for the current quarter was $0.31 per unit compared with $0.28 per unit in the prior year. Net income for the quarter was $193 million compared with $978 million in the prior year. Total return for the quarter calculated as our Company FFO plus capital appreciation was $255 million. And on a last 12-month basis, we have reported a total return of $3.8 billion which represents an annual return in line with our target of achieving 12% to 15% returns over the long term. And lastly, IFRS value per unit was $29 per unit, up from $28 per unit at the end of last year as a result of positive contribution from FFO and value appreciation, offset by distributions to unitholders and the impact of translation to U.S. dollars of our unhedged equity invested in foreign currencies. Our current trading price represents an approximate 20% discount to our IFRS value per unit. In reviewing our Company's funds from operations in a little more detail, the main drivers that contributed to 10% growth year-over-year were an increase in same property net operating income in natural currency across all of our platforms of $25 million. We had net contribution from acquisition activity, mainly Canary Wharf and our recent acquisitions of Center Parcs and Associated Estates of $11 million and this was offset by a reduction in FFO of $16 million mainly from our exposure to foreign currencies that weakened relative to the U.S. dollar. In arriving at Company FFO which we detail on page 9 of our supplemental, amongst our standard adjustments for the net contribution to Company FFO of our GGP warrants and the addback of depreciation of non-real estate assets, we adjusted for $33 million in transaction costs related to acquisitions through our investment in Brookfield's second opportunistic real estate fund of AEC and Center Parcs. As mentioned, we recorded fair value gains of $107 million during the quarter. The majority of these gains were from our office portfolio where we continued to see improved cash flows and transaction metrics mainly in downtown New York and Toronto. Lending support to our fair value process, we executed on two asset sales in our office portfolio in Toronto and London. Both were completed at prices over 20% higher than what we had valued the properties at just prior to starting the sales process. We also saw some value appreciation in our opportunistic sector, specifically in our European industrial portfolio where market conditions continue to improve as reflected by a 20 basis point reduction in discount rates. When comparing our results to the second quarter of 2015, Company FFO increased by $20 million or 10% from $198 million earned in that period. This increase highlights themes that we focused on at our recent Investor Day in October and in our most recent letter to unitholders. The first being leases that we have executed, but that have not been contributing to earnings as the hurdle for revenue recognition has not been met. This quarter, we earned $9 million in incremental office NOI from these leases as tenants in Brookfield Place, New York began to occupy their space. As mentioned in the letter to unitholders, we expect this amount to increase in the fourth quarter and once we begin recognizing all income from these leases already signed, the incremental annual NOI is expected to be about $180 million. Secondly, as we continue to allocate more capital to our opportunistic investments through Brookfield sponsored real estate funds, we benefited from a 10% increase in earnings from that platform largely as a result of the contribution from our recently acquired Center Parcs investment which tends to have a seasonally strong third quarter that more than offset the seasonally weak quarter for our hospitality properties in other parts of the world. On our proportionate balance sheet, reflecting recent investment activity in our opportunistic funds, continued investment in our development and redevelopment initiatives and fair value gains, our total assets are now up to $65 billion, up from $59 billion at the end of the prior year. As we have largely committed the equity required for our active developments with the exception of about $600 million required over the next three years, the majority of our current investment was funded this quarter through committed construction facilities. These contributed to an increase in asset level debt of approximately $300 million since the end of last year. The remaining increase in asset level debt was largely due to the assumption of debt associated with our share of the recent acquisition of Center Parcs and AEC through our investment in that opportunity fund. In addition, as the fund has not achieved final close, a fund subscription facility was used to fund most of the equity required for these acquisitions with the intention to call capital to repay the facility post final close which is expected in the first quarter of 2016. Subsequent to quarter-end, we executed on some sizable asset sales and including asset sales that are in the process of being executed over the balance of 2015 and into the first quarter, we expect to raise over $2 billion in net proceeds, the majority of which will repay debt. And although our ratio of debt to capitalization increased this quarter due to this acquisition activity, our target, as mentioned in previous calls, remains to reduce our debt to capital ratio to around 50% in the near term. Finally, our Board of Directors declared a quarterly distribution of $0.265 per unit to be paid at the end of December which is consistent with the dividend paid in September, but represents a 6% annual increase over distributions in the prior year. With that, I will turn the call over to you, Brian.

[Brian Kingston:]

Thank you, Bryan. One of our goals for 2015 has been to strengthen our balance sheet by repaying debt undertaken to privatize Brookfield Office Properties last year. Given the current trading prices of public real estate securities relative to the values that private markets are ascribing to high-quality assets, the lowest cost source of capital for us to achieve this goal has been to sell interest in mature assets. In light of this, we've continued our asset sales initiatives and as Bryan mentioned, year-to-date, have raised just over $1.7 billion in net proceeds with a goal of approximately $2 billion for the full year of 2015. During the third quarter, we sold 70 York Street in Toronto for $84 million and then, subsequent to year-end, an 80% interest in 99 Bishopsgate in London for $420 million. Both of these sales were executed at sub-5% cap rates and at prices in excess of our June 2015 IFRS values reinforcing our belief that our stated IFRS value per share is a conservative measure of the value of our underlying assets. With premier assets in the best markets trading at historically low cap rates, private investors are increasingly looking for ways to increase returns, including through increased exposure to development of trophy assets. Our development strategy includes selling partial interest in development projects at the appropriate time once they've been substantially derisked and when a development premium can be realized to help enhance our overall returns. This strategy also allows us to manage the amount of capital we have deployed in development at any given time. In keeping with this strategy, last week, we announced the sale of a 44% joint venture interest in our 7 million square foot Manhattan West development project to Qatar Investment Authority. QIA is an important and valued strategic partner for us and we're thrilled that they have chosen to invest alongside of us in this transformative project. Manhattan West is on track to be the leading premier mixed-use development in the Hudson Yards district. In addition to the $2 billion of net asset sales we have either completed or expect to complete prior to the end of this year, we're currently marketing interest in select assets in the U.S., Australia and Canada which we expect will generate a further $1 billion of net proceeds in 2016. Those proceeds will be used to repay the balance of the BPO acquisition facility, as well as to pay down our corporate credit lines, fund equity requirements for our development projects and new acquisitions, as well as to buy back our shares. Turning to operations, in our core office markets, being New York City, London, Toronto and Sydney, we experienced occupancy gains during the third quarter and these markets continue to perform very strongly. While pockets of weakness are evident in our commodity-driven markets, we're well-positioned in those cities with high occupancy, long term leases and limited speculative development exposure. Our core office operations have continued to yield steady performance with overall occupancy at 92.9% at the end of the third quarter, up 30 basis points from the prior quarter. We leased 1.8 million square feet in this portfolio during the third quarter, bringing total office leasing for the year to more than 6 million square feet. These new leases and renewals were executed at rental rates that were on average 25% above the leases that expired during the quarter, so we continue to capitalize on the mark-to-market opportunities within our portfolio. Some select office leasing highlights include a 350,000 square foot renewal with PricewaterhouseCoopers in Sydney; a new lease with KCG Holdings for 169,000 square feet at 300 Vesey Street here at Brookfield Place in downtown Manhattan; a 115,000 square foot renewal for the U.S. government at Two Ballston Place in Arlington; a 98,000 square foot renewal with CI Investments at 2 Queen Street in Toronto which includes 24,000 square feet of expansion space; and in Los Angeles, a 90,000 square foot renewal with the U.S. government at Ernst & Young Plaza; and a 92,000 square foot lease with WeWork at Gas Company Tower. Based on leases we believe will be executed prior to year-end, we anticipate the core office portfolio finishing the year at 93% leased on a same-store basis after completing approximately 7 million square feet of overall leasing. Although it is still below our 95% target which we continue to work toward, it marks our highest occupancy level since 2011. Our retail platform is also performing well. High-quality retail malls in the U.S. which are the types of assets that we're invested in, are displaying strong fundamentals with near peak occupancy, limited new supply and robust tenant sales. A malls continue to outperform the broader sector with assets displaying continued value appreciation. The quality of our mall tenancy is improving as well. Well-positioned retailers are taking space vacated by bankrupt or otherwise struggling operators. We're also seeing more and more traditional online retailers begin to open brick-and-mortar stores to enhance their brand recognition. Within General Growth Properties which comprises the bulk of our core real estate and core retail investment holdings, more than 9 million square feet of leases were executed in the first nine months of the year, surpassing the budgeted target for all of 2015. Initial rent spreads on a suite to suite basis were up 9%. Same-store retail NOI was up 5% year-over-year and tenant sales in the portfolio increased by 5.8% to $550 a square foot, total occupancy ending the quarter at 95%. While we're often asked about the structure of our investment in GGP, it is not something we spend a lot of time worrying about. One of our priorities following the spinout of BPY in April of 2013 was to rebalance our investments which at the time were heavily weighted to investments in public entities and other passive investments. Since then, we've made significant progress in transitioning our balance sheet, including privatizing both Brookfield Office Properties and Canary Wharf which has shifted this mix dramatically toward investments held directly on balance sheet. At our core, we're substance over form investors and believe our current investment in GGP will continue to perform well as its redevelopment in urban street retail strategies begin to contribute to asset flow. Our investment in GGP provides us with exposure to the highest quality portfolio of regional shopping centers and street retail in North America and would be almost impossible to otherwise replicate. We also have a significant amount of development activity underway, most of which was initiated as markets began to recover several years ago. Shortly, we will begin to see the fruits of this strategy as the associated earnings come online, including two recently completed projects being the second phase of Bay Adelaide Center in Toronto and Brookfield Place in Perth, will open their doors to tenants in the fourth quarter. These new buildings will greatly enhance our already market-leading positions in both of those cities. Earlier in the year, we also moved forward with the commencement of early works construction on 100 Bishopsgate in the city of London. Late last week, we finalized an agreement with the Royal Bank of Canada to anchor this project with a 250,000 square foot commitment. RBC is a great example of a repeat tenant within our portfolio with whom we've had a long and successful landlord-tenant relationship. On the heels of this announcement, we've had considerable expressions of interest from a number of high-quality firms for space in the building and we continue to work to advance the leasing of this project hoping to reach 50% pre-let within the next 12 months which would leave us a further 24 months to complete the balance of the properties leasing before substantial completion of construction. The first residential building to be launched at Shell Centre site in London began selling units in September and just to give you a sense of the volume of potential buyers, over 3000 people had pre-registered their interest in this development ahead of that. Development within and surrounding Canary Wharf is also advancing at a rapid pace. The new Canary Wharf Crossrail station was completed during the quarter in anticipation of that important transportation link coming online in 2018. The station includes 115,000 square feet of retail across four levels and a public roof garden. For those of you who joined us on our investor tour in London earlier this year, you would've gotten a look at what is truly a spectacular facility. Crossrail is going to be transformative for East London. A trip between Liverpool Street and Canary Wharf will take just six minutes and to Heathrow in 40 minutes. Crossrail is anticipated to increase the cities will capacity by 10% and greatly enhance the live, work, play atmosphere that is currently redefining Canary Wharf. One of the other areas of growth that we're most excited about within our business is the buildout of our urban multifamily platform. While traditionally our ground-up development has been focused within the office sector, the increased urbanization of the cities we're invested in has afforded us the opportunity to greatly enhance our residential strategy. In addition to luxury multifamily developments that we've launched at Manhattan West, as well as Principal Place, Shell Centre and Canary Wharf in London, subsequent to quarter-end, we closed on a majority development partnership interest in a residential parcel on the waterfront in Greenpoint, Brooklyn which will comprise 784 rental units in two towers when it's complete. Total cost for the project will be about $630 million with delivery scheduled for 2019. We're extremely excited about this project and the buildout of the entire Greenpoint Landing development. So in total, we have about 8 million square feet of office and 3100 urban residential units currently under construction which are expected to produce 15% levered returns on average over the next five years. We also continue to see opportunities to put capital to work in new investments at very attractive rates of return. Last month, we agreed to acquire the Potsdamer Platz estate in Berlin, Germany for approximately €1.3 billion. Potsdamer Platz is a Brookfield Place type asset comprised of 1.4 million square feet of office, 500,000 square feet of retail, 300 residential apartments, 160 hotel rooms and 500,000 square feet of leisure space spread across 16 buildings. Although very high quality iconic real estate, overall occupancy in the estate is just under 80%, so there is considerable opportunity for us to leverage our operating and asset management platforms on this project. Our capital plan for Potsdamer Platz contemplates us holding between a 25% and 50% interest on a long term basis and to that end, we've concluded a joint venture agreement with a sovereign wealth partner to invest alongside of us, taking a 50% interest in the estate. We may consider selling down a further 25% stake in the project in the fourth quarter or early in 2016. Due to its strong and diverse economy, Germany continues to be a key target market for us in Europe. In addition to Potsdamer Platz, we recently consolidated our ownership in a portfolio of 10 German hotels as part of a 50/50 joint venture. As we have been communicating to our investors, we have allocated a portion of our balance sheet to opportunistic real estate strategies in which we leverage the Brookfield franchise, investing alongside institutional partners, targeting mispriced assets with upside potential to produce outsized returns. Brookfield funds have acquired approximately $17 billion of assets over the past three years with BPY's share of the equity investment in these projects being about $2 billion. Overall, our opportunistic strategy currently represents about 10% of BPY's balance sheet. Within this mandate, the focus is on acquiring underperforming assets, driving operational efficiencies, maximizing performance and then recycling that capital for future investments. As this strategy matures, it will become largely self-funding with the proceeds from liquidated assets used to fund new opportunities. Year-to-date, in our opportunistic strategy, we have made six acquisitions -- committed to or made six acquisitions totaling about $3.7 billion of equity commitments, of which BPY's share is about $1 billion. The balance of the equity has been provided by our investment partners. These investments were made in a range of office, multifamily, hospitality and self-storage sectors in the U.S., Europe and in Brazil. Just turning to markets and more generally, real estate equities had a better third quarter than the second and in the most recent commentary from the Fed regarding a potential interest rate rise in December only seemed to cause some minor disruption. We remain of the view that 10-year interest rates will increase in the near future, be it in December or sometime later in 2016 and have been making our investment decisions under that assumption for a long time. We believe the market at large shares this same view which is largely -- which has kept the spread between interest rates and cap rates quite high. And we don't believe that a 100 to 200 basis point increase in interest rates will negatively impact our business in any substantial way. Our units have recently traded a little better along with the broader market and we're working hard to keep advancing that upward trend. As mentioned on our last conference call, we commenced buying back our own units in August. In total, we bought back about 500,000 units during the third quarter and we will continue to evaluate repurchasing our shares as a component of our overall capital allocation strategy. We're also pleased with the continued pickup in sell side coverage of BPY. We now have four analysts publishing continued research on the Company, including our first U.S.-based firm, Evercore ISI. We will continue to work with our existing analysts and those who produce similar research in the industry to communicate our investment story which we believe is quite compelling. As you will have seen in our Investor Day presentation, we have a clear growth path embedded in our business. We're well-positioned to increase earnings from our leasing and redevelopment activities within our core office and retail platforms and we will realize substantial value from the $6 billion of capital that we have invested in our more opportunistic platforms. We have what we believe is a clear achievable path to grow our IFRS value per unit by over 50% based on our current business plan and our aim as always is to grow value over the long term for our unitholders. So with those remarks, we're happy to turn the call over to questions from analysts and investors. Catherine, maybe you could take the first question?

[Operator:]

[Operator Instructions]. We will go to Mario Saric with Scotiabank.

[Mario Saric:]

Just maybe firstly on Potsdamer Platz, can you identify what your equity requirement is at the 50% level and what factors play into your decision in terms of whether you reduce that down to 25% in the next quarter?

[Brian Kingston:]

Mario, for the first part of the question, the total equity requirement is roughly €600 million. We currently have an agreement with a JV partner to take half of that and we're working on further syndicating another 25% interest, so our expectation is that we will end up having about €150 million in it. But subject to timing, it might be twice that until we bring a 25% partner in. And I'm sorry, I missed the second part of the question.

[Mario Saric:]

You answered it, so the second part is good. But in terms of what your plans are at the site, the office has been kind of primarily underleased for some time now. So what kind of -- what plans for what value add do you see coming into the site and how much incremental capital may that require?

[Brian Kingston:]

So the initial capital -- I don't know the exact number, but I think it's pretty much included in that overall equity number. There might be just a little bit more, but it won't be material. This project is right up our alley, I think. It has all the characteristics of a Brookfield Place mixed-use. The office -- the overall occupancy at the moment is about 78%. It's less in the office sector; it's about 64%. I think what we bring to the table I think is global relationships. Our guys have already had a number of conversations with a bunch of tenants. I think we will hit the ground running and get some early successes in the office leasing area. So I think we've got a solid business plan. We will be able to drive some immediate gains and are really excited about it.

[Mario Saric:]

Okay. And then just maybe turning quickly to the balance sheet, I think, Bryan, you mentioned that the target is still, at the cap, around 50% in the near term. How would you quantify near term?

[Bryan Davis:]

I would quantify near term likely over the next six months. We had a number of asset sales initiatives that once executed will put us in the position to pay down our corporate debt, two of which we announced post quarter-end which will allow us to repay $700 million of our acquisition facility in the fourth quarter. But in addition to that, we're looking to repay the fund subscription facility that I mentioned and also some of our corporate debt. So I would say within the next six months, but I would caution that our goal is sort of a long term goal to maintain at around 50%. We may find ourselves in situations where, because of investment activity, that fluctuates higher. We may also find ourselves in situations where we're flush with cash and that fluctuates lower. So our target is really more a long term.

[Mario Saric:]

Right. And presumably that fund subscription facility is just a near-term GAAP adjusting or accounting for the timing between asset sales and your stakes in the private real estate funds. So would that be coming from the parent?

[Bryan Davis:]

No, so the subscription line actually relates to the fund itself and it's really because the fund is still in its initial fundraising mode, so initial investments are put onto that facility. It's not being provided by the parent. It's being provided by third party banks and will be repaid by capital calls to all of the investors of which BPY is one of them.

[Mario Saric:]

I see, okay. Last question, just on the JV at Manhattan West. Is Brookfield privy to any fees from the Qatar East [ph] in terms of leaseup or development management?

[Brian Kingston:]

Yes, sort of the customary fee arrangement, can't really get into the specifics of it. But, yes, customary fees for services provided.

[Operator:]

We will now go to Sheila McGrath with Evercore.

[Sheila McGrath:]

I was wondering if you could give us a little more color on BPY focusing on urban multi family. Does that mean that you will be looking for portfolio acquisitions? Do you have other development opportunities already on the balance sheet?

[Brian Kingston:]

As far as the opportunity goes, I think, for a lot of reasons, we think expanding what we've been doing in the multi-family area to urban areas is a really smart thing to do. Number one, we already have a big presence in many of the world's most important cities with our office division and in some cases, actually have some lands on our balance sheet which a better use may well be for apartments versus for office buildings. I think 50% of the world's population lives in cities. By most estimates, that number is going to grow to 75% over the next 30 years or so. It's a historically solid performing asset class. The thing that I love most is the CapEx is less, it is predominantly less than the office sector. You're seeing rent grow, high occupancy, home ownership declining and increasing renter population for lots of reasons. So we love the space. As far as our portfolio goes, we're building apartments at Manhattan West. We recently announced the JV with a predominant partner in Greenpoint where we're going to build another 780 units, probably have a shovel in the ground within six months. We've got a site in downtown LA which we expect to launch development in about 18 months. There's 700 units there. In Reston, Virginia, we have some land where we could build almost 2000 units. And then we have three other developments with about 1600 units. So we've got a lot on the go in this area. As far as acquisitions, we're always looking for portfolios to acquire if we can. So far over the last five years, our acquisitions have been more for the opportunity fund, largely sort of Class B properties that we could fix up and increase the rental rates and returns. So that's sort of what we've been doing so far.

[Sheila McGrath:]

And then if you can remind us, on the $180 million of NOI from signed leases that's not yet contributing, how fast is that ramping? Will that fully be in place by the end of next year? Just remind us how that ramps.

[Bryan Davis:]

Yes, for the most part, it will be fully in place by the end of 2016. The lion's share of that $180 million comes from Brookfield Place, New York, as we mentioned. We had two large leases come online in this quarter. We have another lease that we expect to come online next quarter and then I'd say the balance of it is in the first six months of 2016 with a little bit coming in sort of the last six months of 2016. And in addition to that, we expect the cash portion of this rent to be stabilized by the end of 2016. So these leases will be cash flowing through 2017.

[Sheila McGrath:]

And then could you clarify what the condominium interest acquisitions at Manhattan West were? I wasn't really clear on that.

[Brian Kingston:]

Yes, so we own, at Manhattan West, over many years, actually probably 27 or so years have assembled an entire two-city block site in Manhattan. So there was actually one part of that two-city block that we didn't own and it was an old loft building that was owned in a condominium venture between two parties. So we were just able to finally after years of trying acquire that -- both interests in that condominium. So that will be redeveloped and incorporated into the development, probably left as an office building.

[Operator:]

[Operator Instructions]. We will now go to Mark Rothschild with Canaccord.

[Mark Rothschild:]

Last quarter, you spoke about the balance sheet and put some emphasis on buying back units and maybe you have bought back some units this quarter and while the unit price has risen a little, it still remains well below NAV and even more so well below where you guys think NAV is going. So should we expect a greater emphasis on that in the near future or is it something that's maybe been pushed to the side with the acquisition opportunities?

[Ric Clark:]

No, I think the stock has moved up a little bit from where it was in August, but we still think where we're trading is substantially below the value of the underlying company, so I don't think you should expect any real change in that strategy. Buying back shares is a part of our overall capital allocation strategy. We're obviously making new investments into things like Potsdamer Platz or Greenpoint, but buying back shares will continue to be part of that as well.

[Mark Rothschild:]

Okay. And with regard to the joint venture in Manhattan with QIA, one of the ways you guys have created value over time has been through development and here you bring in a partner very early in the process where you seem to be giving up some of the upside and the value they create in development. Now I understand it removes some risk, but can you maybe talk about why you felt the need to give up that value?

[Ric Clark:]

I don't know if after 27 years it's all that early, but we brought the project now to a point where it is. It is -- a substantial amount of the risk has been taken out of it. We completed the platform underneath it last year, so construction can now commence and in fact we've started on two of the buildings already. We've signed a substantial pre-commitment for the first office building. And so the price that we brought in a partner at reflects all of that and it was an opportunity for us to take some of that development profit off the table today, as well as de-risk it going forward. And we're really now into the phase of this project where a lot of the value has been created, but a lot of capital needs to be expanded to do that. And so by having a partner like QIA alongside of us, it allows us to reduce the number of dollars that are going into it.

[Mark Rothschild:]

Okay. And then maybe lastly, I'm not sure if you gave any update or if you could give an update on the leasing at 1 Liberty?

[Ric Clark:]

Yes, this is off the top of my head, but that building is really well-positioned in the lower Manhattan sub-market. It's historically done incredibly well from a leasing standpoint. From a leasing price point standpoint, it's a bit of a value proposition. It's priced less than the World Trade Center and Brookfield Place and slightly higher than the lower-cost alternative on the far east side of lower Manhattan. As a result of a Goldman Sachs lease expiring a little more than a year ago and also the relocation of a tenant in the building to Brookfield Place, the occupancy has dropped to about 81%. I might have that slightly wrong, but that's ballpark. And our expectation is we've got probably 80 million to 100 million square feet of deals that we're advancing we hope to get done soon and expect that we will be above 90% within a year. So we're in pretty good shape there.

[Operator:]

We will now go to Neil Downey with RBC Capital Markets.

[Neil Downey:]

Just turning back to Potsdamer Platz, given the occupancy rate at sub-80%, how low is the operating income yield currently on the gross investment of €1.3 billion?

[Ric Clark:]

Yes, going in at the roughly 3.5%, it probably stabilizes at north of 5. The Berlin market is the one market within Germany that's actually been growing and for the first time in a very long period of time, maybe a couple of decades, they are actually starting to see rental growth. So we're pretty excited about this.

[Neil Downey:]

Okay. And again, you mentioned about a €600 million equity check on a 100% basis. The balance being €700 million. Is that largely debt in place that will be assumed or will there be new term financing put in place or a combination of term and variable?

[Ric Clark:]

Yes, so we're going to put new financing in place. I think the goal is five-year financing. Give us a chance to sort of work our business plan and then we'll look to refinance it.

[Neil Downey:]

Sure. And Ric, just to be very clear, this asset is essentially going to be I guess acquired as a core long term hold, i.e. it's not being acquired within the opportunity fund number two?

[Ric Clark:]

That is correct, that's correct.

[Operator:]

We will now go to John Bejjani with Green Street Advisors.

[John Bejjani:]

As you've continued to be active sellers of office as a source of capital, just curious, have you seen any change in the level of investment demand from sovereign wealth in the U.S., UK, Canada, anywhere?

[Brian Kingston:]

I would say there's always particular things happening in each of those markets, so it's not one answer for the whole world, but I would say as a general comment, if anything, we're seeing increasing demand for real estate in a lot of regions. So if you take China as an example, obviously, with a bit of a slowdown in the economy there, it's really increasing the desire of some of these large sovereign wealth funds or other institutional investors within China to put capital to work overseas and they are obviously not set up to do that. Not all of them are set up to do that on a direct basis which is really where our business comes in. So we're seeing very healthy demand coming out of Asia into investments, whether it be in Europe or indeed in Australia where we've got a number of assets on the market. The Middle East is a bit of a mix. There are certain investors who were more heavily reliant on oil revenues than others and obviously, those -- the ones who were more heavily reliant on oil, we've seen a bit of a quiet period from them, but there are a number of very large more mature funds out of that region who continue to be looking to put capital to work. And then here in North America and Canada and U.S. pension funds, etc., all still very, very active in terms of looking for new opportunities.

[John Bejjani:]

And then just looking to the widening debt spreads we've seen recently in the U.S., I guess any concerns there, any impact on your approach to balance sheet management or capital allocation?

[Brian Kingston:]

Not really. It's, obviously, something that we watch closely and there's been a little bit of noise in CMBS markets over the last couple of months, but in general as far as our balance sheet or existing financings, it's not really having an impact on that. I'd say in looking at new acquisitions, we're always pretty conservative in terms of our assumptions on where rates are going generally and spreads more broadly. And I would say that, in general, for good borrowers acquiring good real estate at relatively conservative leverage levels like we do, the markets are still very open.

[Operator:]

Thank you. With no additional questions in the queue, I would like to turn the conference back over to Mr. Brian Kingston for any additional or closing remarks.

[Brian Kingston:]

Thank you, everyone, for joining the call and we look forward to speaking to you again next quarter.

[Operator:]

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation.