Office Real Estate Continues To Recover In Third Quarter

 

North American office real estate companies have been seeing stronger leasing activity and increased occupancy rates. This has added to stronger third quarter 2010 results (and 9 month results) for real estate investment trusts and corporations. Heavy acquisition activity has also continued within the industry.

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Brookfield Properties Corporation

– Brookfield Properties Corporation [BPO/tse:BPO], one of North America’s largest office landlords has seen further recovery in the office properties market. The company has seen continued traction in key NY and Washington DC markets in the third quarter of 2010. Overall, FFO was $169 million compared to $123 million in the third quarter last year. The company reported that the occupancy rate increased 30 basis points from the last quarter (Q2 2010) to 95.1%. They have leased 1.1 million sq ft of office space in the quarter with average net rent increase of 9% over the average expiring net rent per square foot. New leases represented 53% of total leases. . Year-to-date (9 month) leasing totaled 4.7 million sq ft. Globally, Brookfield has made large acquisitions in Australia as well as the UK. In the third quarter it acquired a 16-property Australian office portfolio (total equity value of A$1.6 billion or US$1.4 billion) comprising of 8 million sq ft in Sydney, Melbourne and Perth.

– Brookfield Properties, whose parent company is a financially stable heavy weight (Brookfield Asset Management [BAM]), has a global reputation for being a real estate powerhouse. The company owns & leases offices in the major financial centers of the United States (New York, Manhattan, Boston, Washington D.C., Houston, Los Angeles), Canada (Toronto, Calgary, Ottawa), Australia (Sydney, Melbourne, Perth) and the UK (London). Their signature properties define the skylines of many major metropolises and include among others the following:

• Brookfield Place (BCE Place) / TD Canada Trust Tower / Bay Wellington Tower [Toronto]
• First Canadian Place [Toronto]
• Bay Adelaide Centre [Toronto]
• Exchange Tower [Toronto]
• Hudson’s Bay Centre [Toronto]
• Queens Quay Terminal [Toronto]
• Royal Centre [Vancouver]
• Petro-Canada Centre, Bankers Hall [Calgary]
• World Financial Center (One – Four), 300 Madison Ave, One Liberty Plaza [New York]
• Allen Centre (One – Three), KBR Tower [Houston]
• Bank of America Plaza [Los Angeles]
• Ernst & Young Centre [Sydney]
• City Square [Perth]

– Major tenants include KPMG, Bank of America, Merrill Lynch, Thomson Reuters, TD Canada Trust, Royal Bank of Canada, The Bank of Montreal, Ernst & Young, JPMorgan Chase, Canadian Imperial Bank of Commerce, Barclay’s Capital, Suncor Energy Ltd, Internal Revenue Service, KBR Inc., Goodmans, Fasken Martineau DuMoulin, The Louis Berger Group, The National Hockey League (NHL), etc.

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Dundee Real Estate Investment Trust

– Dundee REIT [tse:D.UN], one of Canada’s larger owners of office and industrial properties, announced its Q3 2010 overall portfolio occupancy increased to 97.1% compared to 94.9% a year ago. The trust also experienced a 50% growth in net operating income (“NOI”), and reduced its debt-to-gross book value to 50.4%. During the first 9 months of the year Dundee had acquired properties totaling $676 million located in Toronto, Ottawa, Montreal, Halifax, Regina and Edmonton, with another $134 million expected in the coming quarter(s).

– Dundee’s assets consist mainly of office and industrial properties primarily located in Ontario and Alberta in Canada..

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Cadillac Fairview Corporation

– During the third quarter, Cadillac Fairview Corporation, one of Canada’s largest office and mall landlords, recently acquired Buttonville airport in Markham, Ontario (Canada). Although the land has yet to be rezoned for commercial and residential purposes, the preliminary vision is to build combined office space, condos, and retail shops on the 170 acre land package in a joint venture. The undisclosed value of the deal is believed to be worth in the neighborhood of $100 and $150 million (the estimated value of the airport a year ago). Buttonville airport is commonly used by many private pilots, piloting schools, and business & corporate jets (as it is close to the many large name businesses).

– Cadillac Fairview is one of North America’s largest owners of high quality office properties and regional shopping centres in both Canada & US, with equity investments in real estate companies & international funds. The company is wholly-owned by the wealthy Ontario Teachers’ Pension Plan (OTPP), and also has joint venture retail projects with the Macerich Co in the United States.

– Some familiar office landmarks in Ontario include the Toronto-Dominion Centre and RBC Centre downtown (Toronto, Canada), etc.. Notable shopping malls include the Toronto Eaton Centre (Toronto), Sherway Gardens (Toronto), Shops At Don Mills (Toronto), and Carrefour (Laval, QC), etc..

– Major tenants include TD Bank, Royal Bank of Canada, the Hudson Bay Company, Apple Store, Lululemon, Coach, Lacoste, Starbucks, Sears, etc.

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Vornado Realty Trust

– Vornado Realty Trust [VNO], the third largest REIT in the US by market value, reported third quarter earnings increase primarily from rental income. FFO increased and was $249.0 million for the quarter, compared to $234.2 million in the same period a year earlier. Nine month office leasing in Manhattan increased 66% over the previous year. Vornado also announced that the Canada Pension Plan Investment Board (CPPIB) has entered into a joint venture on two Vornado Washington D.C. office properties valued at $526 million.

– Vornado operates office properties in New York, Washington DC, as well as special retail properties including Merchandise Mart Properties and Toys “R” Us. Their Class A office buildings include 555 California Street in San Francisco, etc.. They are one of the more well known office landlords in the US.

– Major tenants include Microsoft, Warner Music Group, Bank of New York, IKEA, Macy’s, Hollister, Old Navy, etc.

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REAL ESTATE INVESTMENT TRUST (REIT) INDEX RETURNS TO DATE

The Dow Jones Equity All REIT Total Return Index has risen approximately 23% this year as of Friday’s close (11/26/2010).
• iShares Dow Jones US Real Estate (ETF) [IYR] has risen 18% since the beginning of the year.

FTSE NAREIT US Equity REITs index has risen risen approximately 22% since the beginning of the year as of Friday’s close.
• iShares FTSE NAREIT Real Est 50 Ind (ETF) [FTY] has risen 18% year to date as of Friday’s close.

The FTSE NAREIT Office subsector return was 13.8% as of Friday’s close.
The FTSE NAREIT Office/Industrial sector return was 11.18% as of Friday’s close.
• iShares FTSE NAREIT Ind/Off Capp (ETF) [FIO] was 7.5% (28% two weeks ago for comparison). [there doesn’t seem to be a NAREIT office subsector ETF]

Note: Investors are able to invest in the indices/indexes by purchasing the corresponding ETF.
For example: the iShares ETF of the corresponding index.

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NAREIT domestic returns:
http://returns.reit.com/returns/DomesticReturns.pdf

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Disclosure: I hold shares of Brookfield Properties Corporation.

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Thanks and Happy Investing! –

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