The Investment Case
Brookfield Office Properties is committed to building shareholder value through investment in premier-quality office properties in high-growth and high barrier-to-entry markets whose tenant base consists of some of the most dynamic and well-capitalized participants in the global economy. Whether it is through direct investment, investment with partners in individual assets, or leveraging our operating platforms through the creation of private-equity opportunities for the institutional market, our approach remains focused on the creation of sustainable, growing streams of cash flow.
As we continue to operate Brookfield Office Properties as a world-class property and asset manager, maximizing value within our existing office portfolio while concentrating our investments in the high-quality office property sector, our focus is on three strategic priorities:
Managing Risk through Real Estate Cycles
- Realizing value from our properties through proactive leasing and select redevelopment initiatives;
- Prudent capital management including the refinancing of mature properties; and
- Monetizing development assets as the economy rebounds and supply constraints create opportunities
Owing to our strategy of owning, proactively managing and developing premier properties in high-growth, and in many instances supply-constrained, markets with high barriers to entry, along with our focus on executing long-term leases with strong credit rated tenants, we have been able to reduce the exposure of our commercial property revenues to the cyclical nature of the real estate business. However, considering the severity of the global economic slowdown, there is still a risk that companies succumbing to financial pressures may no longer have a need for all of their leased office space, which may lead to increased supply. To date, we have had a small number of tenants declare bankruptcy but our results have not been materially impacted by this nor by softening market conditions. In addition, we continue to reduce our lease expiry profile for the upcoming years and continue to have in-place net rents below market rents across most of our portfolio, which will continue to add stability to our results going forward.
Tenant Credit Quality
An important characteristic of our portfolio is the strong credit quality of our tenants. We direct special attention to credit quality, particularly in the current economic environment, in order to ensure the long-term sustainability of rental revenues through economic cycles. Major tenants with over one million square feet of space in the portfolio include Bank of America/Merrill Lynch, the U.S. and Canadian governments and government agencies, Chevron, Wells Fargo/Wachovia, CIBC, RBC Financial Group, Kellogg Brown & Root, Bank of Montreal and Suncor Energy.
Our strategy is to sign long-term leases in order to mitigate risk and reduce our overall re-tenanting costs. We typically commence discussions with tenants regarding their space requirements well in advance of the contractual expiration, and although each market is different, the majority of our leases, when signed, extend between 10- and 20-year terms. As a result of this strategy, approximately 8% of our leases, on average, mature annually over the next five years and excluding Bank of America/Merrill Lynch, our largest tenant, less than 7% of our leases, on average, mature annually over the next five years.
Capital Resources & Liquidity
We believe that our revenue, along with proceeds from financing activities, will continue to provide the necessary funds to cover our short-term liquidity needs. We employ a broad range of financing strategies to facilitate growth and manage financial risk, with particular emphasis on the overall reduction of the weighted average cost of capital in order to enhance returns for common shareholders.
We seek to increase income from our existing properties by maintaining quality standards for our assets that promote high occupancy rates and support increases in rental rates while reducing tenant turnover and related re-tenanting costs, and by controlling operating expenses.
Another source of cashflow includes third-party fees generated by our asset management, leasing and development businesses. In addition, our tax status and tax loss pools allow us to retain and reinvest cash generated by our operations without incurring significant cash taxes.
Our commercial property debt is primarily fixed-rate and non-recourse to the company. These investment-grade financings are typically structured on a loan-to-appraised value basis of between 55% and 65% as market conditions permit. Most of our borrowings are in the form of long term property-specific financings with recourse only to the specific assets. Limiting recourse to specific assets ensures that poor performance within one area does not compromise our ability to finance the balance of our operations. Our maturity schedule is fairly diversified so that financing requirements in any given year are manageable.
Key Performance Indicators
Brookfield Office Properties has a long track record of creating value and generating above-average returns. The key indicators by which we measure our performance are:
- Net income
- Net operating income
- Funds from operations
- Overall indebtedness level
- Weighted average cost of debt and
- Occupancy levels
We consider the following items to be important drivers of our current and anticipated financial performance:
- Increases in occupancies by leasing vacant space;
- Increases in rental rates as market conditions permit; and
- Reduction in occupancy costs through achieving economies of scale and diligently managing contracts.
We also believe that the key external performance drivers are:
- The availability of equity capital at a reasonable cost;
- The availability of debt capital at a cost and on terms conducive to our goals; and
- The availability of new property acquisitions that fit into our strategic plan.
Sustainability and Corporate Responsibility
We believe that our business – commercial real estate – can and should play a leadership role in improving the quality of life in the communities in which we operate.
Our corporate responsibility program is focused on three areas of activity:
1. Environment & Sustainability
2. Living Our Values: Community Engagement and Brookfield’s Arts & Events Program
3. People: Fostering a Culture of Employee Volunteerism
We welcome you to read to read our most recent Corporate Responsibility report, which is located within our 2011 Annual Report, to learn more about our corporate responsibility goals and our progress to date.
For several years, Brookfield Office Properties has been a member company of the FTSE4Good Index, the responsible investment index calculated by global index provider FTSE Group.