Q4 2019 Earnings Call
This conference call.
Reminder, today's call is being recorded.
It's now my pleasure to turn the call over Mr., Matt Cherry Senior Vice President Investor Relations. Please go ahead Sir.
[music]. Thank you Daniel 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 the number of risks uncertainties and assumptions the risks uncertainties assumptions that we believe our materials are outlined in our press release issued this morning with.
I'll turn the call over to Chief Executive Officer, Brian Kingston.
Thank you Matt Good morning, everyone and thank you for joining our call today with me on the call or Ric Clark German at BP, Why Brian Davis, our CFO.
In my prepared remarks, I'll recap or operating performance from a quarter end the year as well as providing an update on our various ongoing strategic initiatives. Brian will then provide a more detailed update on our quarterly and annual financial results and after that we'd be happy to take questions from any of our analysts on the call today.
So as you may have seen in our disclosure. This morning, BP White earned company FFO and realized gains of $459 million or 48 cents per unit in the fourth quarter.
Closing the year with a strong performance in our office business. Good performance in retail and continued active recycling of our capital.
For the full year 2019 cash flow.
From operations unrealized gains was $1.5 billion were $1.57 per unit and that compares to 1.6 billion or $1.97 per unit in 20 928 to the prior year, having benefited from several unusually large realizations in our opportunistic fund strategy.
In light of this performance our board approved the declaration of a quarterly dividend of 33 in a quarter cents per unit, which represents a 1% increase over 2019.
We've continued to utilize cash flow generated from the expansion of our business.
To a but but understand the importance of its dividend to many of our investors since our initial launch in 2013, we have increased the distribution by 5% on a compound annual basis and as more of our development activities become cash generating in the years ahead. This will enable us to continue to increase the dividend in line with that earnings growth.
Consistent with prior years, we completed $3.3 billion of asset sales at prices that were 6% higher than our IRS carrying values generating net proceeds of $1.8 billion to BP, why which were redeployed into our business.
Last year at much higher returns.
We utilize some of the proceeds from sales to repurchase over $500 million of our units in 2019 and expect to remain active should our units continue to trade at a meaningful discount to their intrinsic value.
Over the next several years as we continue to monetize investments in our real estate opportunity funds as well as mature stable assets on our balance sheet.
We expect to generate between one and a half in $2 billion of net proceeds each year, which can then be reinvested into our business.
Performance in our core office business was strong in 2019.
In total we leased 7.8 million square feet of office space at rents that were 32% higher than our expiring leases. We achieved same store growth of 3% in this business and occupancy finished the year at 93% up 90 basis points over last year.
Our retail portfolio remains resilient, we finished the year at over 96% occupancy no decline from the prior year and completed tenant a half million square feet of new leases in 2019, demonstrating the continued demand for high quality well located retail space.
Importantly, we continue to see positive rent spreads and growing tenant sales at our centers.
As presented in our annual Investor Day in September we've identified 15 near and long term value creation initiatives at several of our best performing centers that will add $1.8 billion a value when they are completed.
We look forward to providing you with updates and milestones on these projects as they progress.
The year was also highlighted by the delivery of several of our largest development projects, including one Manhattan West 100, Bishopsgate in sooner collection in Norwalk, Connecticut.
These assets are best in class Premier properties in their respective markets office tenants began occupying.
Space at one Manhattan, West and 100 Bishopsgate in late 2019.
And so no opened its doors just in time for the holiday shopping season with most retailers reporting sales that were above expectations.
These newly developed assets and others that are nearing completion will begin.
Contributing meaningfully to BP wise earnings in 2020 and moving forward.
Furthermore, our development pipeline remains active with major projects underway in New York, Toronto, London, Dubai, Sydney, Melbourne, and first completion to be substantially pre let office projects will continue to drive above average earnings growth in our core office portfolio for the foreseeable future.
We remained active in capital markets in 2019, as the environment offered favorable terms, so well capitalized asset owners and corporate issuers.
Our core office in core retail businesses, we raised over $10 billion of non recourse property mortgages, while reducing our average cost of debt by 30 basis points.
We also issued $434 million of perpetual preferred shares and 600 million Canadian dollars of five year unsecured notes.
While sustainability and other SG initiatives have been in great focus within that business environment over the past 12 months, they've always been an integral part of how we do business.
By constructing energy efficient buildings, we've reduced energy demand through our operations and lowered annual associated operating costs by over $30 million since 2008.
Specifically in 2019, we were able to maintain our green star rating under the annual global real estate sustainability benchmark.
We issued the first ever perpetual green units in our industry and continued our commitment to build a 100% of our new office developments to a minimum LEED gold standard.
In December we announced that we will construct the largest mass timber building in the United States at Pier 70 in San Francisco, demonstrating how we're applying emerging technologies and innovative design to create environmentally sustainable solutions.
Our core retail business is ranked sixth in the us in terms of corporate installed onsite solar capacity and generates over 25% of our portfolios common area electricity needs.
We're committed to continuing to set the standard for sustainable real estate in 2020 and beyond.
With that I'll turn the call over to Brian for the detailed financial report. Thank you Brian during the fourth quarter of 2019 BP why earn company FFO unrealized gains.
$459 million compared with $749 million for the same period in 2018.
And compared to $324 million earned in the prior quarter.
Our earnings this quarter consisted of $185 million earned from our core office business.
$217 million earned from our core retail business and $150 million earned from our LP investments.
These investment level earnings were offset by $93 million of corporate level interest and administrative costs.
In the current quarter, our core office results benefited.
Earnings of $26 million related to the delivery of condominium units at our principal place in South land projects in London.
As well as $80 million and realized gains from our LP investment strategy.
I will provide some more detail on the shortly.
In the prior year, we benefited from land sales gains and investment income of $28 million in our core retail business and $333 million are realized gains in our LP investment strategy as we completed the sale of our North American logistics business.
On a per unit basis company FFO unrealized gains for the current quarter was 48 cents compared with 77 cents earned in the prior year.
For the full year in 2019, we earned $1.51 billion or $1.57 cents per unit compared with $1.57 billion or $1.97 cents per unit earned in 2018.
Net income attributable to unit holders for the quarter was $1 billion or one dollar and seven cents per unit.
And that compares to $534 million or 55 cents per unit earned in the prior year.
In the current quarter, we recorded unrealized fair value gains of $773 million.
Which included $595 million and gains from our investment properties related to higher cash flow forecasts and improved valuation metrics from both our core operations.
And our LP investments and gains in our active developments as we hit a number of construction milestones and progress leasing on a number of our projects.
Our core office business had a strong fourth quarter, our same store operating properties benefited from 4.1% same property NOI growth on an actual currency basis.
And 3.5% in us dollars, reflecting the recent strength of the UK pound in Canadian dollar.
Lastly.
Investment in other income increase to reflect earnings from our condominium projects as I previously mentioned.
At our 299 unit principal place project in London.
We have sold 269 of those units as of the end of the fourth quarter or 90%.
And we delivered 199 units to their owners recognizing a gain of $22 million on this project.
The remaining profit is expected to be expected to be realized is $12 million. The majority of which we will earn in Q1 as the units are delivered to their owners with the balance throughout 2020 as the remaining 30 units are sold and delivered.
At our 476 unit tower Axcelis Bank in London, we.
We have sold 436 of those units as of the end of the fourth quarter or 92% and delivered 61 units to their owners recognizing a gain of $4 million.
The remaining profit that is expected to be realized is $23 million, which we expect the majority to be received in the first half of 2020 as units are delivered.
We have one more condominium project in London in would war that will impact earnings in 2020.
It is a 300 346 unit tower with 80% of the units already pre sold construction is expected to be complete by the middle of the year with our estimated profit of between 15 and $20 million reflected in earnings in the last half of the year as units are delivered to their owners.
In addition included an investment in other income we earned $12 million this quarter related to the monetization of tax credits associated with the affordable units at our for rent residential property the Eugene in New York.
These increases in earnings were partially offset by the impact of asset sales over the past 12 months, where proceeds were either reinvested into another business segment used to reduce leverage or were invested in our development and redevelopment projects that are not yet generating a similar level of current earnings.
In our core retail business, we earned $217 million of company FFO compared with $270 million earned in the prior year. A few things are contributing to this year over year decline first off.
Same store results this quarter continued to be impacted by the bankruptcies that took place over the last 24 months and was down 3%.
These bankruptcies, which aggregate about 3.2 million square feet have put pressure on our same property results, which otherwise were flat on a period over period basis, we've made significant progress in releasing 75% of that space at higher rental rates. So we expect this impact to be only temporary.
In addition, the prior year benefited from a favorable acquisition related straight line rent adjustment lower operating costs, particularly related to insurance on property taxes.
And higher investment in other income primarily due to prior year condo sales at Alamo Wanna Prior year investment income and also a prior year land sale gains.
Lastly, we had an incremental $7 million in general and administrative expenses this quarter.
As a result of the requirement to expense internal leasing costs that were previously capitalized.
Company FFO for our LP investments was $70 million in the quarter and reflects $60 million earned from our investment in the three series of real estate opportunity funds that we highlight on page 32 of our supplemental.
And 10 million from our investment in real estate finance funds multifamily funds and our Brazil retail fund.
Investment level earnings were inline with expectations and variances over prior year results is largely due to the sale of stabilized investments in earlier vintage funds with the reinvestment of capital into newer investments where operations are not yet stabilized.
In addition in the prior year, we benefited from a merchant build gain of $11 million from the sale of a residential development project in our multifamily fund investment.
As I previously mentioned, we earned realized gains of $80 million. This quarter. These gains came from the sale of a multifamily investment in New York, where we earned an 18% IR are in a 2.1 times multiple of capital.
On the investment that was made in our first real estate opportunity fund and from our second real estate opportunity fund on the sale of two office towers in Brazil, where we earned in IR are in the mid 20% range and a multiple of capital of over two times.
Our proportionate balance sheet ended the quarter with equity attributable to unit holders of 28, and a half billion dollars or $29.72 per unit.
Our overall assets increased $88 billion to reflect an increase in value of investment properties stronger foreign currencies relative to the U.S. dollar, particularly the pound and the acquisition of joint venture partner interest in London wall and at a portfolio of four mall properties in our core retail business.
We executed a number of financings during the quarter that raised incremental capital added term and reduced our overall cost of debt. We highlight these financings in our press release.
Assets held for sale. This quarter include one hospitality property in our first real estate opportunity fund investment and one off office property in our second real estate opportunity fund investments, we expect to close on both those transactions by the end of the second quarter.
We continue to hold 100 Bishopsgate in one one Manhattan West and one Bank Street in development properties on our balance sheet.
Even though we've completed construction as of the end of Q3 last year.
We will do so until they are tenants make further progress in building out unoccupied their space, which we would expect will take until the middle of this year. Once these properties are stabilized they will earn about $160 million in net operating income.
Lastly, and this will be the last quarter I refer to this as we will no longer see any impact to comparable results. We did adopt the new leasing standard IRS 16, which resulted in an increase in our proportionate assets and liabilities of a little over $630 million.
To reflect land lease liabilities and an offsetting right of use asset.
The impact to the PNM now in addition to the expense of direct leasing costs. As I. Previously mentioned is an increase in net operating income of $10 million and a corresponding increased interest expense to reflect the re characterization of land lease payments to principal and an associated interest charge.
With that is my planned remarks, I'll turn the call back over to Brian.
Thanks, Brian before we open the lend any questions from our analysts wanted to reiterate our strategic priorities for 2020, which remained largely unchanged from this year.
First we'll continue to monetize stable mature assets and redeploy that capital into higher returning strategies, including unit buybacks.
We'll also continue to access capital markets to try to optimize our cost of capital and keep our balance sheet flexible.
We have a number of new developments on track for completion in 2020 in cities, including New York, London in Dubai, and continue to progress our mall redevelopment repositioning in densification strategies to unlock values in that portfolio of properties and as always.
We'll work to keep our core portfolio, it's highly occupied and marketing rents to market as as those leases mature.
So with those is our prepared remarks, we're happy to take any questions from analysts on the call today. So operator, if I could turn it back over to you.
Ladies and gentlemen to ask a question you will need a press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q and a roster.
And our first question comes from Sheila Mcgrath with Evercore. Your line is now open.
Yes, Brian I was wondering if you could.
Give us your insights on how we should think about the retail performance in 2020, do you think that new bankruptcies or store closings that were recently announced like Macy's for example, make you more cautious in the near term.
Will the 75% of the lease up of bank space that you mentioned well that start to impact.
Typically in 2020.
Yes, thanks, Thanks, Sheila so as Brian mentioned.
Over the last two years. So 2018 in 2019, we had about three to 5 million.
3.3 million, specifically square feet of of.
Closures due to bankruptcies.
Which we released about 75% and that's that's a pretty elevated number compared to historical.
And it's always difficult to say in January how how the year is going to pan out, but I do think it feels as though the holiday season was pretty good this year.
And so our expectation is that 2019, probably was sort of peak for that and we're anticipating that 2020 make it a little better.
You mentioned Macy's they came out with an announcement yesterday on on 125 closures.
Between rose and the GDP portfolio, the former GGP portfolio, we have about 14 of those locations. We knew about all of them more we obviously worked closely with all of the.
The major department stores around which stores are performing which ones aren't so I don't think there was anything that was a surprise there and those closures are wrapping over a very long period of time, we've got plans in place for most of them. So I don't expect that.
That will have is large and impacted some of the inline retail bankruptcies that we saw last year and in fact, that's typically where we see the biggest.
The biggest impacts around around leasing up but as we mentioned we did manage to get 75%. We should have the rest of it leased up this year and on the assumption that we have something less than a million feet, which is what weve average last couple of years.
Of store closures, then you should start to see the bounce back this year.
Okay, and then could you talk about your thoughts on leverage levels over the next one or two years and balancing desire to reduce leverage some with how we should think about share buyback.
Yes, so I think as Brian talked about a number of times, our focus on reducing leverage very specifically is focused on.
Most particularly that the acquisition debt on GGP.
And.
And as we said that the repayment there is through a combination of asset level financings as well some asset sales and so we think about deleveraging that's really the primary.
The primary focus and that really gets driven by those two items right asset sales and as as some of these lower levered mortgages rollover and we refinance them.
We are able to take that down so I don't think it's necessarily a.
A decision around dedicating capital to de levering versus buying back units I think we've got a pretty well set of plan as far as where that deleveraging capital comes from and it will continue to be a focus but it but it's sort of naturally occurring I think the unit buybacks are really just part of our normal capital allocation decision. When we have a dollar that we can put to work.
We compare the relative returns of putting it into developments or new acquisitions or investments in our funds or or indeed buying back our units and so I think you know we continue to believe where the shares trade today.
It's a very attractive.
Particularly when you adjusted for the risk around that you know these are assets that we know very well very attractive place for us to put capital works I think you'll you'll see us continue to be active them both.
Buybacks as well as though the leverage reduction.
Okay. One more question I'll get back in line. If you could just give us an update on how leasing progress is going at.
To Manhattan, West and also Manhattan West retail.
Hi show, it's Rick so.
I think as you've probably seen we signed a large Lisa to Manhattan West with Chris assets for about 25% of 2 million square foot building.
Lots of activity on the remaining space.
The building won't be delivered until 2023 ish. So we've got lots of time to finished but leasing in our expectations are will make a lot of progress.
During the year, just given the level of activity on the retail front in Manhattan West we have.
As we have about 240000 square feet as of today about 80% of that at least.
Have a lease out within.
The restaurant, which will take us to about 85% hopefully that will be done in the next 30 days.
We've got about a year of left in hill, the retail really starts to come online it'll start to come online over the course of next year.
And again activity on pretty much every single piece of retail space that we have left there. So it's I just on all that leasing has been a great success in Manhattan.
Okay. Thank you.
Thank you as a reminder, ladies and gentlemen that Star then once asked a question.
Our next question comes from Mario Saric with Scotiabank. Your line is now open.
Hi, good morning.
Maybe coming to your food distribution.
The buyback.
Sometimes dangerous.
Two point in time.
Q4 results.
Our distribution increase.
I'd be.
How would you compare your sentiment today versus a year ago in terms of allocating capital.
It goes to exercise.
Perhaps be more aggressive.
In the share buyback today.
Mr.
Yes, I mean, yes, you're right, it's sort of dangerous just to pick a particular day of the year.
On the around the buyback I think at that.
In particular was driving the thinking on the SMB a year ago is the.
The shares were dramatically lower than they are today and we felt that it was.
It was a good opportunity to put a lot of capital to work in.
In that buyback and it's not to say that.
We may not do that again at some point in the future.
But where we are today I think.
The focus really is around the the normal course issuer bid.
And.
And.
As we said on the dividend I think what we were trying to do is make sure that we're growing that dividend in line with earnings growth and given the headlines we had over the course of 2019.
Et cetera, it seem more prudent to.
To keeping in line with the earnings growth we saw this year.
Got it.
It would be fair to say that what you're.
Okay.
Distribution.
Per year over time, reaching.
That's right that's right I think it's.
And as we sort of pointed out I think were.
That's what we have been doing for the last five or six years I mean, we would anticipate the earnings growth gets back on track once we clear some of the headwinds around retail center and then the distribution moves in line with that.
Okay, and then maybe switching gears to read too.
Can you talked about how much of the you almost 4% negative same store put in Q4 related to forever 21 issues there to restructuring.
And now.
Your.
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So so there.
I'm not sure I can split it out necessarily but it was not a material amount of that 3.7, a lot of the spreads at the 3.7 was due to store closures.
Which we have not had any forever 21.
With that any forever 21 store closures within the portfolio anywhere so I guess, a simple answer zero of it is due to that but.
There were a number of other bankruptcies enclosures, including.
Payless and a few others earlier on in the year and Thats really where the bulk of that impact came from.
Right.
Over the year 3.3 million square feet of.
For bankruptcies of which 70%.
So it is really how much of that would be income producing.
To start next year.
Okay.
Virtually well sorry at some point in Twentytwenty all of it will be.
I don't know off hand, exactly in Q1, but certainly by Q2 it should all be in in general that once the spaces leased up you might have six months at the most of sort of.
On the free rent or or fitting out today.
So by Q2, all of that 75% will be online and I'd expect by the end of the year, all 100% of it will be.
Okay, so given given that color you.
Just one kind of maintaining or continues.
Yes.
Full year hurdle.
Hydrogel change in terms of same store growth.
In 2020.
Okay.
Yes.
Inquiry.
We're still anticipating for 2020 positive same store NOI growth.
But it will be modestly above zero somewhere between zero and say one an app for some.
Okay great.
21 for the ROE.
Given the refinancing.
Vision.
Should get better.
21 versus 20.
Right.
The global bankruptcies.
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Yes, I think when we when we do get back to a sort of stable long term market.
Expectations, our same store NOI growth in that business should be 2.5% to 3% So I am not.
We'll get to specific about 20 to 21, but I think it's going to move from that zero to one and a half to two and half to three overtime in 2021 should be in that direction.
Okay and then just.
My last question just on the realized gains.
The the net proceeds from asset sales totaled 1.8 billion in 19.
Something similar for the next couple of years.
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We will realize gains per unit 18 cents below the 50 cents.
Over the last couple of years.
Thank you are kind of annual target.
Longer term basis is that because that's just a mix issue timing.
Standing last year.
Do you expect to return to that kind of 50 cents per unit.
Yes, it's it's almost entirely timing related.
So we had a number of.
Large realizations toward the end of 2018.
Had fewer in 2019 and I think.
The number of things in the works early for early 2020 that sort of gets us back on so I think that.
That 40 50 cents on a long term basis is a good is a good stabilize measure, but it is lumpy as you point out because.
These transactions don't necessarily follow calendar years.
Okay. Thank you.
Okay.
Thank you.
Next question as a follow up from Sheila Mcgrath with Evercore. Your line is now.
I guess a couple a modeling question can you give us insight on hunger Bishopsgate, one Manhattan West and the so no collection when did they.
Hi hit where they in for the full quarter fourth quarter, and then seeing similar question on the releasing of the.
3.2 million square feet of bankruptcy has.
The releasing of that has that already impacted the income statement or is that something that should.
Impact sometime in 2020.
Yes, she'll all just.
Take a 100 bishopsgate in one Manhattan West first I'd say, they actually had a negative impact to our earnings this quarter. Although construction is finished tenants are still moving in at 100 Bishopsgate were only about 20% physical occupancy.
And at about one Manhattan West I think we're only 5% physical occupancy and and typically.
Rent tracks the tenants moving in so.
We don't expect until towards the end of 2020.
To reach stabilization.
On those two properties.
So no had about 85% physical occupancy when it opened but I'll remind you that we now only own 19% of that property because we sold the balance to partners. So it didn't really have that much impact.
On our current period results.
One other one I may mention is one bank Street.
That again was another property that we completed construction in 2000 or in Q3.
It's at 40% physical occupancy too so it's about breakeven.
I will start contributing to earnings in the early part.
2020 of this year.
And I think just.
Reiterate Brian's comments on the 3.2 million square feet.
There may be elements of it that were contributing to results, but on an overall basis as you saw from our same store.
Performance in Q4.
Not a lot of it was contributing to our results and our expectation is that by the end of 2020.
That will be fully leased on that space and that will be contributing.
To anyone.
Okay, Great and then on.
You have a couple through forest City acquisition, a couple San Francisco.
Developments appears 75 them I know you announced a new timber building at Pier 70, but then of course that you were in discussions with a single tenant for the entire project can you just update us on what's going on appear 75 them.
Yes, so it would be a little premature to comment specifically on any tenants that but what I will say is the San Francisco market is.
It's virtually fully occupied there's a lot of demand for this and as I think you know pure 70 is is a pretty unique offering for.
Large scale tenants in that market, particularly with the transportation links it has so we've got a lot of.
A lot of interest on that and I anticipate over the course of this year, we'll probably have more to say, but its little early to comment specifically on any tenants.
And do you need.
Prop M allocation for either hi, them or appear 70 or they already.
They are both they're both fully allocated yes, okay.
Okay, and then just on London wall acquisition of buying out your partner can you just give us some insight on.
What drove that transaction.
Yes.
50, 50 partnership and our.
Yes.
Partner on on that one.
Had decided to take their interest to market.
The after they got offers that we thought were below the value of the asset.
And so.
As a 50 50 owner, we had sort of a last look at the price.
And so we elected to.
To buy it rather than see somebody else purchase that price.
I think the expectation was in your sort of roll back. The clock. This was an pretty uncertain time with respect to Brexit and we thought the bids were.
Discounted as a result to that my expectations over the course of this year, you're going to see.
Please move pretty materially in London and Thats.
We think is going to be a pretty attractive basis that we've got on that asset now.
Okay, great. Thank you.
Okay.
Thank you and our next question as a follow up from Mario Saric, What Scotiabank. Your line is now open.
Hi, sorry, just one.
One more for me.
For US now I was up 4% quarter over quarter, which is probably the strongest increase that we've seen in three plus years, albeit some of it was due to.
On the British pound.
Brian as you mentioned.
How much specifically related to one Manhattan West Bishopsgate.
How much additional fair value increase do you see in those two assets going forward.
In terms of merchandising for volume demand for us.
There will be a fair bit.
I'm going to avoid giving exact percentages are exact numbers, because we don't specifically talk about.
Values on assets, but I'd say.
A little bit less for 100, Bishopsgate, because we are farther along in terms of.
Occupancy and and getting on tenants in Spain in place.
But as you can imagine.
With fees IRS models as the cash flows in the free rent periods burn off.
That really drops to the bottom line value of these underlying properties.
It is so I'd say that we still expect to see a fair bit more.
Of realized or unrealized gains associated with both of these properties as.
As they tenant.
Fill up and ultimately the tenants cash.
Free rent period start to burn off.
Got it would it be fair to say that of the roughly 500 million a fair value gains in core office this quarter modest.
Yeah, and you can specifically see in our supplemental where we do breakout.
Fair value gains associated with our development properties in the continuity.
So you can probably get a sense that.
Those values are attributed to the projects at one bank hundred Bishopsgate in five Manhattan West.
In particular, but then almost two thirds of the value of the fair value gains that we had related to our operating properties.
Just related to sort of our core office core retail and operating LP investment properties.
Okay. Thank you.
Ladies and gentlemen, this concludes our question and answer session.
I'd now like turn the call back over to Brian Kingston, Chief Executive Officer for any closing remarks.
Okay. Thank you everyone for joining the call today, and we look forward to providing further updates over the course of 2020 and obviously in the meantime should you have any questions. Please don't hesitate to contact NMS. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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