Brookfield Office Projects Lower FFO as Leases Expire

Brookfield Office Properties, owner of lower Manhattan’s World Financial Center, forecast 2011 funds from operations below analysts’ estimates as lease expirations in New York and Boston may result in new deals at lower rents.

FFO this year will be $584 million to $609 million, or $1.05 to $1.10 a share, the New York-based company said today in its fourth-quarter earnings statement. Analysts projected $1.13 a share, the average of 12 estimates in a Bloomberg survey.

Brookfield may be hurt by a Goldman Sachs Group Inc. lease expiration at 1 New York Plaza in Manhattan and the end of a deal at 75 State Street in Boston, according to James Sullivan, an analyst at Cowen & Co. who cut his rating on the stock today. The company also is facing a 2013 expiration of 4.6 million square feet (427,000 square meters) of space rented to Bank of America Corp. at the World Financial Center.

“Lease expirations in Boston and New York are having a bigger effect than we expected,” Sullivan wrote in a note, reducing his rating to “neutral” from “outperform.” “Also, we were disappointed that the company did not confirm more leasing progress at the World Financial Center.”

Brookfield said it expects same-property net operating income to fall 1.5 percent this year, partly because of two lease rollovers in New York and Boston.

The company is expecting 933,000 square feet of leases to expire this year at its lower Manhattan properties, according to the company’s fourth-quarter supplemental earnings statement. It expects 4.9 million square feet to expire in 2013.

‘Priority for Us’

“Filling this space is a priority for us this year,” Chief Executive Officer Richard “Ric” Clark said on a conference call. “The timing of our lease expiries allowed us to effectively skate through the worst of the economic crisis while continuing to maintain steady growth in our earnings.”

Besides the expirations, Brookfield also has to contend with 4.4 million square feet of new offices rising at the World Trade Center, just to the east of World Financial Center, to be completed in 2013.

Clark said on Nov. 4 the financial center’s attractiveness to tenants will be enhanced by the rebuilt World Trade Center, with its Santiago Calatrava-designed mass transit hub connecting Brookfield’s waterfront buildings to downtown’s core, and by a rising number of young New Yorkers living in the area.

Lower Manhattan Rents

Office availability in lower Manhattan was 13.4 percent at the end of January, up from 11.5 percent a year earlier, broker CB Richard Ellis Group Inc. reported on Feb. 9. Landlords were seeking $38.14 a square foot, up 1 percent from a year ago. In Midtown, the biggest and most expensive U.S. office market, the January availability rate was 12.4 percent and the asking rent was $55.82.

The company’s shares were little changed at $17.53 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has fallen 1.6 percent this year, compared with a 4 percent increase in the 78-member Dow Jones U.S. Real Estate Index.

The 2011 guidance excludes lease termination income, special fees and gains. It wasn’t immediately clear if the projection and the 2010 figures are comparable.

Fourth-quarter FFO available to common shareholders rose to $204 million from $203 million a year earlier, the company said in a statement today. On a per-share basis, FFO was unchanged at 40 cents. Analysts projected 39 cents, the average of 10 estimates in a Bloomberg survey.

Brookfield’s lower Manhattan buildings generated about 31 percent of its net operating income from office properties in 2010, according to the supplemental earnings statement.

Goldman Sachs Move

The expiring lease by Goldman Sachs at 1 New York Plaza, a skyscraper on the east side of lower Manhattan, provided Brookfield with about $25 million of annual net operating income, Cowen’s Sullivan said. Goldman Sachs has been moving operations to its new headquarters tower on West Street in Battery Park City, next to the World Financial Center.

Brookfield is in discussions to fill the entire 600,000- square-foot vacancy at 1 New York Plaza, Dennis Friedrich, president of U.S. commercial operations, said on the conference call.

Bank of America, based in Charlotte, North Carolina, “wants to maintain a meaningful presence” at the 8 million- square-foot World Financial Center, Friedrich said. That space includes the former Merrill Lynch & Co. headquarters at 4 World Financial Center. Talks with the bank continue with “nothing concrete” to report, he said.

Deal Falls Through

A tentative deal last year with Deloitte LLP for as much as 630,000 square feet at 4 World Financial fell through when the accounting firm agreed to go to 30 Rockefeller Plaza in midtown Manhattan, Friedrich said.

He said Nomura Holdings Inc. hasn’t committed to a move to Midtown. Nomura is negotiating for space at Worldwide Plaza on Eighth Avenue and West 50th Street, Crain’s New York Business reported on Feb. 4.

“We continue to believe the World Financial Center provides a great headquarters opportunity Nomura to continue to grow their U.S. business,” Friedrich said.

Deloitte and Nomura are the largest among tenants who sublease 1.9 million square feet from Bank of America.

Jonathan Gandal, a Deloitte spokesman, and Peter Truell, a New York-based spokesman for Nomura’s U.S. unit, both declined to comment.

“What’s happening downtown is a challenge,” Ross Smotrich, an analyst at Barclays Capital Inc., said in an interview before today’s statement. “The issue is going to be less interest and more one of price. The lower Manhattan market historically has been a very price-sensitive market.”

Smotrich has an “equal weight” rating on the company.

Funds from operations is a cash-flow measure used by real estate companies. For Brookfield, it excludes items including income taxes and fair-value adjustments.

To contact the reporter on this story: David M. Levitt in New York at dlevitt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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