Brookfield Properties Corporation (BPO)

Q2 2010 Earnings Call Transcript

July 30, 2010 11:00 am ET

Executives

Melissa Coley – VP, IR and Communications

Ric Clark – President and CEO

Bryan Davis – SVP and CFO

Tom Farley – President and CEO, Canadian Commercial Ops

Dennis Friedrich – President and CEO, U.S. Commercial Ops

Analysts

Ross Nussbaum – UBS

Sloan Bohlen – Goldman Sachs

Steve Sakwa – ISI

Michael Bilerman – Citi

Mario Saric – Scotia Capital

Karine MacIndoe – BMO Capital Markets

John Guinee – Stifel

Alex Avery – CIBC

Suzanne Kim – Credit Suisse

Neil Downey – RBC Capital Markets

John Stewart – Green Street Advisors

Joe Dazio – J.P. Morgan

James Sullivan – Cowen and Company

Sam Damiani – TD Newcrest

Shant Poladian – Canaccord Genuity

Jimmy Shan – National Bank Financial

Presentation

Operator

Good morning, my name is Lisa and I will be your conference operator today. At this time, I would like to welcome every to the Brookfield Properties second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Ms. Coley, you may begin the conference.

Melissa Coley

Good morning, and welcome to Brookfield Properties second quarter 2010 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 achievement could differ materially from anticipated future results, performances or achievement express or implied by such forward-looking statements and information. Certain material factors and assumptions were applied in drawing the conclusions in 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 actuality results performance or achievements to differ materially, set forth in our news release issued this morning. I would now like to turn the call over to Ric Clark, President and Chief Executive Officer.

Ric Clark

Thanks, Melissa. To accommodate those of you who wish to dial into the Brookfield conference call which is at noon, rough against a heart stop of 12:00 o’clock today, so because of that and in order to talk about the progress that we've made on our strategic initiatives, we're going to dispense with report from our division CEO's, Tom, Dennis and Alan, who are all on the call and they’d be happy to field your questions if you have any at the end of the call. So apologize for this. But I also, in order to get to everyone in the Q&A, we're going to have to limit questions to one with follow up for clarity, please hop back in the queue and hopefully we’ll be able to answer everyone's question within the one hour timeframe.

So with that, Bryan, why don't we jump into operating results?

Bryan Davis

Sure. Thanks, Ric. Good morning, everyone. This morning, we reported fund from operations totaling $209 million for the second quarter, this compares to $123 million for the same period in 2009, an $86 million increase or 70% on a per share basis, FFO was $0.40 per share compared with $0.32 for the same period in 2009.

The current period results include a $53 million realized return on an investment and debt, which Ric will touch on in his comments. In addition to that gain, this quarter benefited from an increase in residential results of $20 million and in commercial result, $13 million. Compared to the first quarter of this year, FFO is up $76 million, which in addition to the gain was due to an $18 million increase on our residential result and $5 million increase in earnings from our commercial operations.

Before I dig into the results, I did want to point out that we have now included in our supplemental our proportionate earnings including supporting schedules. The purpose of this is to present our share of earnings from those assets that we are now required to equity account for, under IFRS. With that as background, our commercial property operations earned FFO of $123 million, versus $110 million in 2009, representing a 12% increase. We had an active leasing quarter at rents higher than expiring and were able to maintain occupancy at a high 94.8%, in addition, we reduced our out year role over exposure.

Contributing to the increase in results with same store growth, contribution from property previously under development, higher recurring fee income, and the stronger Canadian dollar, this was offset by slightly higher interest expense and increase general and admin expenses due to the transaction costs associated with the formation of our Canadian REIT and our recent transaction.

Our net operating income for our continuing operations on a proportionate basis is highlighted on page nine of our supplemental with $265 million for the quarter, compared to $241 million for the same period in the prior year. This increase as a result of the reclassification of Bankers Court in Calgary, Bay Adelaide Center in Toronto and 225 Connecticut, Washington DC to commercial properties, which accounted for 12 million of the increase, we had termination income of 6 million on a take-back of space in downtown New York, we had an additional $1 million of recurring fee income and same-store growth of $11 million or 5. 1%.

This was offset by a reduction in net operating income from the sale of our two Washington properties in the fourth quarter. Our same-store growth of 5.1% benefit from the stronger Canadian dollar, which accounted for $7 million, in the quarter we had an average rate of $1.03 versus $1.17 in the same period last year. We also benefited from increased rental rates on new and modified leases; we had an increase in same-store occupancy of 80 basis points and the reduction in our operating costs.

Our residential development operations earned $33 million in net operating income, which compares favorably to $13 million earned one year ago. As highlighted in our residential slides, which start on page 31 of the supplemental, this increase was due to strong sales volumes on both lot and home sales.

Now shifting to the balance sheet, total assets on a proportionate basis increased to $19 billion from $18.5 billion at the end of the prior year. The fair value of our commercial office property totaled $14.8 billion or $332 per square foot, resulting in a 6.7% going in cap rate. Values during the first 6 months of 2010 increased by an aggregate of $426 million, which we highlighted on page 18 of our supplemental and this is primarily a result of the acquisition of a 50% interest and 77-K Street, re-class of 1225 Connecticut from development properties and valuation adjustments due mainly to increase cash flows as a result of current period leasing activity and timing adjustments.

Commercial development properties decreased $82 million since the beginning of the year to $540 million or $44 per square foot. This decrease is primarily due to the reclassification of 225 Connecticut, offset by our investment in the first quarter in Bishopsgate, a development site in London.

Our common equity increased from $6.5 billion to $6.7 billion or $13.37 per share on a pretax basis, so excluding our deferred tax liability, common equity at $7.2 billion or $14.36 per share. Now, before I turn the call back over to Ric, I did want to point out a new slide in our supplemental on page 17, called components of net asset value. In this slide, we've attempted to highlight the key opponents in determining our net asset value, including a normalized net operating income, the calculation of our implied going in cap rate and value per square foot based on IFRS value.

A summarized balance sheet for our residential development business and most importantly, the elimination of minority shares of the earnings and net assets of our Canadian REIT and U.S. subsidiary, which I know you all worked through. Hopefully, you'll find this helpful in migrating your models to the new IFRS world or if you have already done that, then as a helpful and quick reference point. As always, I'd be happy to walk you through anything in more detail after this call.

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