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Brookfield Property Partners LP  (NASDAQ:BPY)
Q1 2019 Earnings Call
May. 06, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Brookfield Property Partners' First Quarter 2019 Financial Results Conference Call. As a reminder, today's call is being recorded.

It is now my pleasure to turn the call over to Mr. Matt Cherry, Senior Vice President of Investor Relations and Communications. Please go ahead sir.

Matthew Cherry -- Senior Vice President of Investor Relations and Communications

Thank you, Candice, 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 a number of risks, uncertainties and assumptions. The risks uncertainties and assumptions that we believe are material are outlined in our press release issued this morning.

With that I'll turn the call over to Chief Executive Officer, Brian Kingston.

Brian Kingston -- Managing Partner and Chief Executive Officer

Thanks, Matt and good morning, everyone and thank you for joining us. With me on the call today are Rick Clark, Chairman of BPY; Bryan Davis, our CFO; and Sandeep Mathrani, our Global Head of Retail Real Estate. Following our prepared remarks today, we would be happy to take questions from any of our analysts on the call.

This morning, we are pleased to report another quarter of same-property growth in our core operating businesses, maintaining high occupancy and continuing to capture mark-to-market rent increases. The quarter was also highlighted by our successful Substantial Issuer Bid, which closed at the high end of the offer range. Following closing of the offer in March, we remained active repurchasing units, while they traded a discount to their intrinsic value.

During the first quarter within our LP investment strategy, we completed approximately $500 million of gross asset dispositions at our share, at prices that were 3.6% higher than our carrying IFRS values. We continue to believe that selling assets at premiums to carrying value and using those proceeds to repurchase our units at substantial discounts is a good use of our capital and create significant value for our unitholders.

The asset sales completed in Q1 generated approximately $300 million of net proceeds to BPY. We've indicated in the past that our goal is to raise between $1 billion and $2 billion of net proceeds annually from sales of mature stabilized assets, and we're on pace to reach that target this year. As highlighted at our Investor Day last September based on the current and projected returns generated by an -- by investments in Brookfield sponsored real estate funds, we expect to realize more than $5 billion of net cash proceeds over the next five years.

Turning to operations. Our core businesses continue to perform well and our core office portfolio, occupancy in all of our regions are above the broader market and finished the quarter at 93.3% on 1.4 million square feet of total leasing. Importantly, these new leases were signed at rents that were on average 16% above the expiring leases. The strong execution led to 4.2% same-property growth excluding the impact of foreign currency exchange.

Our active development pipeline continues to progress with 5.7 million square feet of new premium quality office space expected to reach substantial completion in 2019. Importantly, these projects were substantially pre-let with significant tenant interest in the remaining space. For many years, we have been anticipating the delivery of several of our larger projects, notably One Manhattan West in New York and 100 Bishopsgate in London, and we're excited to be turning over these projects to their tenants later on this year at an average initial occupancy of 80%.

In London, despite uncertainty around the eventual outcome of Brexit, we continue to make good progress on leasing including a 365,000 square foot lease we signed with the European Bank for Reconstruction and Development at 5 Bank Street at Canary Wharf bringing that building to over 90% leased in advance of its completion later on this year. The EBRD, which funds -- which fosters transition to market economies in many countries including several in Central and Eastern Europe will move their headquarters to Canary Wharf in 2022. This significant commitment to London reiterates our view that it remains an important financial services center for both the global and European economies and demonstrates the importance of London, as a location to conduct international business.

Turning to core retail. This business produced 2.2% same-property growth in the first quarter. Although, the operating environment for many retailers remains challenging, we continue to be encouraged by leasing volumes and consistently high occupancy that we are maintaining in our portfolio. During Q1, we executed 6.6 million square feet of leases commencing in 2019 and with additional approved leases have now leased over 9 million square feet or approximately 90% of our total leasing goal for 2019.

In order to respond to the changing retail landscape, we have been actively working to reduce our exposure to struggling tenants and future-proofing our assets to ensure they continue to be relevant to the next generation of retail tenants. We currently have several digitally native companies including Wayfair, Untuckit and Warby Parker actively seeking to grow their footprint in our shopping centers further aligning the portfolios tenant composition with consumer preferences focusing on omnichannel and experiential shopping.

In addition to these initiatives and some of the retail development opportunities we have -- we highlighted on our last quarter's call, we're nearing completion of The SoNo Collection, our 700,000 square foot retail center in Norwalk, Connecticut. The project is 75% leased and will be opened in time for the 2019 holiday season. The opening of the mall is highly anticipated in the region expecting to serve nearly 600,000 residents along the I-95 corridor, who are currently underserved in fashion forward retailers and destination shopping.

Over the past year, we have engaged in several initiatives to increase liquidity and extend our debt maturities. Last July, we entered the Canadian corporate bond market and have to-date issued $1.15 billion of bonds with an average term of over four years at an average interest rate of 4.3%. In March of this year, we issued $184 million of fixed rate perpetual preferred units, our first US dollar denominated BPY preferred unit issuance. The proceeds raised from these offerings were used to repay a similar amount of shorter duration higher cost capital. In April, we had -- we issued $1 billion of BPR backed secured bonds with a seven year term and fixed interest rate of 5.75%. These bonds ranked pari-passu with the GGP acquisition financing arranged last year, and the proceeds were used to repay shorter term floating rate debt in order to term out our maturities and mitigate interest rate exposure.

As mentioned earlier, we were pleased with the outcome of our Substantial Issuer Bid in February and March. Between the offers for BPY units and BPR shares, approximately $400 million of units were tendered and settled at an average price of $20.83 US per unit. Following completion of the offer, we have continued to repurchase units under our Normal Course Issuer Bid, as we believe acquiring our own units at a substantial discount to their intrinsic value is an attractive use for excess capital.

I'll now turn the call over to Bryan Davis for the detailed financial report for the quarter and year.

Bryan Davis -- Managing Partner and Chief Financial Officer

Thank you, Brian.

During the first quarter of 2019, BPY earned company FFO and realized gains of $367 million, compared with $268 million for the same period in 2018, an increase of $69 million due to the increased capital invested in our core retail business and incremental earnings from our LP investments. On a per unit basis, company FFO and realized gains for the quarter was $0.38 per unit consistent with the prior year and reflects an incremental 267 million (ph) units outstanding on average for the quarter.

Realized gains from our LP investing activity this quarter were $60 million. These gains represent a significant portion of the earnings from these finite life funds and reflect the appreciation and value realized at exit on those assets we listed in our press release that was issued this morning. With our first real estate opportunity fund now entering year seven, it is in the realization stage of its cycle and as a result, we expect to generate significant realized gains, as investments are exited, as we highlighted at last year's Investor Day.

Not including these realized gains, the company FFO for the quarter was $307 million or $0.32 per unit compared with $268 million or $0.38 per unit in the prior period. Of the $0.06 per unit decline period over period, $0.04 per unit is due to the high interest rate environment and the impact of a higher US dollar, and $0.01 is due to an accounting change that limited the ability to capitalize certain leasing costs, which I will discuss later.

Net income attributed to unitholders for the quarter was $333 million or $0.34 per unit compared with a net income of $530 million or $0.75 per unit in the prior year. Net income this quarter we benefited from property fair value gains of approximately $170 million, which were largely due to improved valuation metrics and cash flows in our office properties and LP investments, as well as gains recognized on our development assets, as we near completion and reduce risk.

Our core office business earned $140 million of company FFO compared with $153 million earned in the prior year. The decline was due primarily to the impact of asset sales in New York, Sydney, and Toronto over the past 12 months, where proceeds were either reinvested in another business segment or were invested in our development and redevelopment projects that are not yet generating a similar level of current earnings. In addition, a higher interest rate environment and the resulting strong US dollar had a negative impact on these earnings.

Our recently completed multi-family development, One Blue Slip in Brooklyn is now 38% leased, so good progress was made during the quarter. This development along with the Eugene, Brookfield Place Calgary and London Wall generated about $13 million of NOI this quarter and once stabilized, which we expect by the end of 2019 will generate approximately $100 million in net operating income on an annual basis. Lastly, we generated $24 million of fee income compared to $19 million earned in the prior period to reflect incremental property management and development fees earned.

In our core retail business, we earned $184 million of company FFO compared with $116 million in the prior year. Our additional investment in this portfolio contributed to the increase. Results this quarter were broadly in line with our expectations with the impacts to NOI from Q1 bankruptcies at several national retailers being offset by incremental fee income earned from our joint venture partners. We did not have any significant transactional income earned in the quarter. In the prior year, we did benefit from $5 million in condominium and land parcel sales and investment income.

Lastly, our LP investments earned $146 million of company FFO and realized gains compared with $96 million earned in the prior year. This includes $93 million earned in our opportunistic funds including realized gains, which compares with $47 million earned in the prior year. The balance of $57 million was earned in our other funds investments including our real estate finance fund and multi-family fund, and this compares with $49 million earned in those same funds in the prior year.

Now before moving onto the balance sheet, I did want to mention the adoption of the new leasing standard IFRS 16, which came into effect this year. This standard resulted in an increase in our proportionate assets and liabilities of approximately $630 million to reflect land lease liabilities and an offsetting right of use asset; an increase in net operating income of $10 million was also the result as well as a corresponding increase in interest expense to reflect the recharacterization of the land lease payments to both principal and an associated interest charge.

And lastly, the new standard resulted in an incremental $8 million or $0.01 per unit in general and administrative expenses in our retail business, as a result of a requirement to expense internal leasing costs that were previously capitalized. Over the course of this year, we expect it will reduce our reported company FFO by $0.04 on a comparable basis to prior periods. Our proportionate balance sheet, we ended the quarter with total equity of $45 billion consistent with the prior period and this includes $28 billion or $28.95 per unit attributable to our unitholders.

Now with those as our planned remarks, Candice, we are pleased to open up the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Sheila McGrath of Evercore. Your line is now open.

Sheila McGrath -- Evercore -- Analyst

Yes. Good morning. Could you tell us how much the FX headwind was during the quarter? And based on trends so far in 2Q, if you expect a similar headwind?

Bryan Davis -- Managing Partner and Chief Financial Officer

FX specifically was about $10 million or a little over a penny (ph) per unit. Difficult to predict the impact of -- on Q2 earnings, as you know it takes into consideration the average of FX rates, but there could be a similar impact, as we look out for the balance of the year.

Sheila McGrath -- Evercore -- Analyst

Okay. Thanks. And in your shareholder letter, you mentioned $5 billion of net cash flows over the next five years from realizations. Is there some sort of rule of thumb that we can use as a benchmark on how much gain you would expect to flow through the income statement on average?

Bryan Davis -- Managing Partner and Chief Financial Officer

Yeah, there is. Of course, it will vary investment by investment, but I'll make reference to a couple of slides that we included in our Investor Day presentation this past September, Slides 53 and 54. But just in a nutshell, the $5 billion that -- that Brian referred to half of that relates to a return of capital and half of that effectively relates to profit or earnings from those funds. And I would say, when you look at the half that relates to profits both our first and second real estate opportunity fund are tracking at about a 30% current yield and 70% -- and 70% coming from a realization event or that -- that realized gains that we ultimately expect to -- to earn. I think we've indicated in the past that on an annual basis, we expect to earn anywhere between $450 million and $550 million in annual profit specific to that 70% realized gain event.

Sheila McGrath -- Evercore -- Analyst

Okay. That's very helpful. And then just quick question on Manhattan West. Any update on the status of leasing discussions for Two Manhattan West?

Ric Clark -- Chairman of Brookfield Property Partners Limited

Hi Sheila, It's Rick.

Sheila McGrath -- Evercore -- Analyst

Hi, Rick.

Ric Clark -- Chairman of Brookfield Property Partners Limited

So -- so quickly, we've got good activity there. I think there's a lot of things going for our project, the proximity to transit, the amenities in the project, but also the fact that when Two Manhattan West is done, the project is 100% complete and there'll be no more construction, and -- and that fact has really been resonating with tenants. At the moment, we have a little over 2 million square feet of discussions under way. So you know, I'd say activity is pretty strong. The building will not be complete until the end of '22, the beginning of '23. So we have -- we have lots of time. So we're very -- very optimistic.

Sheila McGrath -- Evercore -- Analyst

And then just on Manhattan, the other tower One Manhattan West. When will that start to impact earnings like when are lease commencement dates there?

Ric Clark -- Chairman of Brookfield Property Partners Limited

So the building, I'll let -- maybe Bryan Davis can respond to that. But the building opens, the first tenant moves in September or October and then --

Bryan Davis -- Managing Partner and Chief Financial Officer

That's right.

Ric Clark -- Chairman of Brookfield Property Partners Limited

The beginning of the following year that major tenant start to move in.

Bryan Davis -- Managing Partner and Chief Financial Officer

Yeah. We indicated in our supplemental the expected date of accounting stabilization and it's trending to the latter -- latter half of 2020. So it typically takes anywhere from 12 months to 18 months once the building is complete for us to start to begin recognizing rent, as tenants move in and occupy their space.

Sheila McGrath -- Evercore -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from Mark Rothschild of Canaccord. Your line is now open.

Mark Rothschild -- Canaccord -- Analyst

Thanks, and good morning, guys. In regard to the US office portfolio, there was good same-store growth. Can you maybe give us some more information on where exactly that came from? And in particular, it seems like things are improving or stronger in Los Angeles, if you talk a little bit about what we could expect from that market?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah. So -- so on specifically on LA, we've been talking about this for a number of years, but -- but we do think there's a lot of parallels what's happening out there too to what we saw here in Lower Manhattan meaning it's -- it's really rapidly transitioning from a -- what was previously a Monday to Friday nine to five type market to more of a 24x7 live work play environment, a lot of residential being built, the addition of LA Live, as well as the huge investment that the city has made in infrastructure -- transportation infrastructure specifically. And so we're, you know we're starting to see the early signs of that happening in LA, and we're pretty excited about the future. So obviously with a -- with a big holding in downtown Los Angeles, we do think the next five years are going to be pretty strong in that market.

With respect to where the growth came from it really was across the portfolio. I mean, New York is obviously our largest market and is the -- the lion share of that. We're seeing good -- good mark to markets here on as leases are rolling over, as well as in DC. So -- so that's really pretty broad based across the whole -- the whole US portfolio not -- there was no particular market or asset that was really driving that number.

Mark Rothschild -- Canaccord -- Analyst

Okay. And then in your comments, you spoke positively about the London office market, but then the same-store numbers were kind of weak there. Is there -- is that something temporary with couple of leases or is that something that will continue?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah. You know it -- that was with one particular asset. And as you know in the UK because of the upward only rent revisions, occasionally rents will get marked at a -- at a high watermark and then be flat for a relatively -- relatively longer period of time. And in the case of this, this was actually a renewal of a tenant, where --

Bryan Davis -- Managing Partner and Chief Financial Officer

Yeah. A renewal of a tenant was one piece of it and then the other piece of it, one specific asset that we have in the Canary Wharf portfolio, one of our premier assets, One Canada Square since the end of 2017, there has been an -- about a 700 basis point erosion in occupancy. We're being patient in terms of finding the right opportunities to release that space. It's been a bit of a challenging environment in light of Brexit, and I think what we're really focused on is being able to maximize the rental rate and ensure the value of that building on a go forward basis. So that -- that was the other big piece related to that roll down in -- in same-store NOI.

Mark Rothschild -- Canaccord -- Analyst

Okay. Thanks. And in regards to the retail portfolio overall, you spoke about buying back units but one way, which you source capital for the GGP transaction was selling interests or selling properties. Are you still looking to sell more partial interest or entire asset from that portfolio? And if so, can you talk about the demand and the pricing that we would expect to see?

Bryan Davis -- Managing Partner and Chief Financial Officer

Yeah. As we sort of set out at the time of the transaction, a portion of the acquisition financing was really meant to serve as a bridge to future asset sales, as we either sold partial interests or 100% interest in some of the assets. So the plan is to -- to execute that over the next two years to three years. As you can imagine the -- for the -- for assets generally in retail, it's more challenging, however for the Class A malls, which still continue to enjoy very high occupancy and good growth. There's a lot of interest from institutional investors. And so I anticipate -- we're staging it over a period of time, but I -- I anticipate that should be -- pricing should be pretty consistent with what we guide for the Company overall, as we expected.

Mark Rothschild -- Canaccord -- Analyst

Okay, great. Thanks.

Operator

Thank you. (Operator Instructions) And our next question comes from Mario Saric of Scotiabank. Your line is now open.

Mario Saric -- Scotiabank -- Analyst

Thank you, and good morning. I just wanted to focus first on the -- the fee and investment revenue line items and then a couple of questions on the development pipeline. So this quarter, I guess the investment and fee revenue combined was $105 million. How should we think about that number going forward? It's moved around a little bit and it will include some termination fees and things like that over time. But how should we think about that number going forward given your planned capital recycling initiatives over the next couple of years?

Bryan Davis -- Managing Partner and Chief Financial Officer

Sorry. That number you quoted was specific to our fee income? Or was it inclusive of our investment and other income as well just --

Mario Saric -- Scotiabank -- Analyst

Inclusive of investment and other shown on the Page 9 of the supplemental.

Bryan Davis -- Managing Partner and Chief Financial Officer

Yes. So the investment and other income is a much lumpier earnings stream. So it's sometimes difficult to -- to predict that on a quarterly basis. It's largely driven by our ability to -- to generate merchant build gains on our -- our developer build multi-family assets, condominium gains that we expect particularly in London at Principal Place and Canary Wharf in the latter part of 2019. That also includes sort of investments that we've made across our -- our platform some of which are subject to -- to seasonality as well. So it's difficult to predict that one.

But as it relates to our fee income, we generated about $25 million in office and then another, I think $36 million in fee income in our retail business. Those are much more stable, those are reflective of the current property management fees, leasing fees and development fees that we earn from our existing joint ventures, as we continue to recycle capital, looking out over the balance of the year to the extent that we're selling an interest in a property there is likely the -- the chance that we'll be able to earn those similar fees from those sales. But I would say that with the exception of the leasing fees, which are generally linked to a specific lease in a joint venture property, those are pretty stable going forward.

Mario Saric -- Scotiabank -- Analyst

Okay. Just on the development pipeline, you referenced a pretty good win at 1 Bank Street during the quarter. It looks like if we include Two Manhattan West at 0% kind of the pro forma development pipeline on the office side about 50% pre-let today. Where would you like to see that number kind of evolve to by the end of '19 or by the end of '20 or how should we think about progression in the leasing over the next couple of years?

Brian Kingston -- Managing Partner and Chief Executive Officer

Well, obviously we'd love to see it at 100% but I -- and I think it's more -- if you go asset-by-asset as opposed to trying to manage an overall number. So -- so the -- the average across the whole thing is sort of what it is. But certainly in developed markets and in sort of large scale, pre-let markets like London and New York, we typically have higher level of pre-commitments in a place like Dubai, for example and so our numbers are sometimes skewed by specific projects. So I'd say we're -- we're happy with where we are with respect to all of these.

I think as I see the Brookfield in Dubai reaches or gets closer to completion, you should see a pretty meaningful uptick there in terms of -- of occupancy. It's about where we would expect it to be, but obviously just given how that market performs. And then as Ric mentioned I think Two Manhattan West is going to be the other big one that will move the overall number and we're -- we're well advanced with the number of tenant there. So I think hopefully by the end of this year, we'll start to see some progress there. And it's a -- it's a hard thing to point to an overall number. I think 100% is the target obviously.

Mario Saric -- Scotiabank -- Analyst

Okay. And then just sticking to the developments, I noticed that the -- the expected returns on a couple of the retail developments came down quarter-over-quarter. Can you maybe walk us through some of the changes at SoNo and Stonestown Galleria? And then kind of whether higher level, you're still thinking about that $1.7 billion (ph) of -- of value creation potential today? Has -- has anything changed on that front versus post Q4 results?

Sandeep Mathrani -- Chief Executive Officer of Brookfield Properties Retail Group & Vice Chairman of Real Estate

So the SoNo collection -- this is Sandeep. This is -- the SoNo collection, I think we have shown it about 6% to 7% return. So the project is virtually complete now. We're about, as Brian said about 75% to 80% pre-lease. So we have a complete handle on the costs and the income, so we're just sort of giving you the -- I use the word final number.

Stonestown Galleria, the project size increased because we actually bought back the Nordstrom's building, and we are putting in a Target and other users into that building. So the Nordstrom's returns came down a little bit. So the blended return is slightly modified, but the Macy's redevelopment was about the same return. We did -- if you also look at that piece of paper, we did increased the pipeline and we increased it predominately because we're going to start a development of a residential rental building in Ala Moana, and we're also going to do a mixed-use project at The Streets at Southpoint, which are the two bigger increases staying in line with the densification strategy on our assets.

And so we have identified, as I mentioned last time 9 assets, they've gone up to 12 assets in various stages of development. We do think that you'll start to see us breaking ground in the next 60 days to 90 days on a couple of them probably the -- the first one on point would be Northbrook Court and then they'll be followed by North Point in -- in Atlanta. So they have now made progress. We've gotten all our approvals that we need from both those jurisdictions, and we're in the process of design, development to start construction.

Mario Saric -- Scotiabank -- Analyst

Okay. And then I guess the $1.7 billion of potential value creation that was attributable to the 9 assets in the previous quarter, is that like how should we think about that number going forward and Sandeep you mentioned that 9 assets have come to 12 assets now. Does that mean that the $1.7 billion inches up or you layering in a bit of let's say conservatism in terms of ultimately achieving that number?

Sandeep Mathrani -- Chief Executive Officer of Brookfield Properties Retail Group & Vice Chairman of Real Estate

No. I think it actually continues to inch up. We hope to get that 12 higher. I mean, our goal is to hopefully get to 20 projects, 25 projects over a period of time. It takes two years to three years for an asset to -- to stabilize. So I would sort of sit back and say 2023 onwards, you'll start to -- start to see -- take that $1.5 billion, $2 billion number and one fifth of that per year we should start to realize the profits.

Mario Saric -- Scotiabank -- Analyst

Got it. Okay. And then Brian also mentioned that the appetite for Class A malls in the US is pretty strong, you don't have many Class B malls. But how do you -- how do you think about the disposition program from that (multiple speakers)?

Bryan Davis -- Managing Partner and Chief Financial Officer

Sure. I'll add to -- I'll add to what Brian commented. Towards the end of the fourth quarter, we did sell a 50% interest in Fashion Place mall in Utah to Texas teachers at a cap rate that was stronger than our original underwriting to buy the company. We do -- we spend the first quarter this year looking at financings. Again, in our portfolio, we financed three assets at a -- at a number that was about $100 million -- $80 million stronger than our underwriting. So -- so obviously there's a great demand for -- for -- from the -- for the -- from the -- the debt sources. And slowly hopefully this year, we will try to get at least to one A mall completed that we will be in the market shortly to finance, and we're seeing healthy institutional demand.

And I might add this quarter, we've gotten inbound calls from institutional investors to invest at A malls, which has been a rarity, usually they were all outbound calls. And so -- so we do feel there is a -- there's a healthy market for A quality asset. Again as you -- as you saw, productivity (ph) of the portfolio is up to almost $765 a square foot, which is a very healthy sales increase quarter-over-quarter.

Mario Saric -- Scotiabank -- Analyst

Okay. My last question, maybe for Bryan Davis, more of a technical question. But you noted the BSREP I had about $3.8 billion (ph) of asset dispositions during Q1. BPY share was 11% of that -- that's kind of below your 31% co-investment in the fund. Is the difference between the 11% and 31% simply co-investment rights on the assets sold?

Bryan Davis -- Managing Partner and Chief Financial Officer

Yeah. I may need to follow up with you a little bit on that Mario. But yeah, the sales should be consistent with our ownership percentage. There was one specific asset that was sold, where we actually had a co-invest. So our interest was -- was greater than that included in the fund. But maybe we can follow up and -- and we can reconcile this thing.

Mario Saric -- Scotiabank -- Analyst

Okay. It sounds good. Thank you.

Operator

Thank you. And our next question comes from Neil Downey of RBC Capital Markets. Your line is now open.

Neil Downey -- RBC Capital Markets -- Analyst

Thank you. Good morning. Sandeep, you were on quite a roll there answering questions, so I have a quick one for you. Can you help us understand a little bit better how the investment in Aeropostale may roll through the income statement kind of quarter-to-quarter I suspect it had some effect of making the Q1 results a little lower than the Q4 results for instance?

Sandeep Mathrani -- Chief Executive Officer of Brookfield Properties Retail Group & Vice Chairman of Real Estate

I probably give that to Bryan Davis. Although, I'll tell you that the Aeropostale investment, as an investment was a very good one for us. Obviously like any business -- in our business, the fourth quarter is always a very good quarter because we get the maximum amount of sales. The first quarter is the weakest quarter because that's when you see closures and -- and sales decline if you will. And so based upon our participation, fourth quarter is always going to be much higher, and that's the delta difference.

Neil Downey -- RBC Capital Markets -- Analyst

Okay. And Bryan, I think you mentioned or touched on briefly the impact I believe it was of -- of a new standard on leases. Is that what you're referring to in terms of increasing both the asset side and the liability side of the balance sheet by about $600 million?

Bryan Davis -- Managing Partner and Chief Financial Officer

Yes. That's correct.

Neil Downey -- RBC Capital Markets -- Analyst

And that lifted your net operating income by $10 million I believe, you -- you also indicated. But was there an impact on FFO or was the net effect? No impact on FFO?

Bryan Davis -- Managing Partner and Chief Financial Officer

No impact, yeah. Obviously, I wasn't clear, but maybe the offsetting impact was an increase in interest expense. Effectively what we have done now, as a result of the standard is the ground lease payments that used to get included in NOI are now sort of reflected in interest expenses sort of a charge against this liability that was created, as a result of applying the standard.

Neil Downey -- RBC Capital Markets -- Analyst

Okay. And finally and not to be -- too far into the weeds and all this but $600 million odd increase in assets. How do I think about that by segment core office, core retail and LP investments?

Bryan Davis -- Managing Partner and Chief Financial Officer

Mostly -- mostly core office, but we in fact do include a footnote in our supplemental in each business segments to give you a sense of how the impact of applying this standard, how that standard impacted each one of their operating results and their balance sheet.

Neil Downey -- RBC Capital Markets -- Analyst

Thank you very much. I'll look for that.

Bryan Davis -- Managing Partner and Chief Financial Officer

Okay.

Operator

Thank you. And our next question comes from Sheila McGrath of Evercore. Your line is now open.

Sheila McGrath -- Evercore -- Analyst

Yes. I was wondering if you could give us a little bit more detail on that Canary Wharf lease that you announced? Do you think it's a sign that tenants -- financial tenants are willing to stay in London? And what was the driver of that tenant relocating to Canary Wharf?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah. No, absolutely, it's -- as I mentioned in the -- in my comments the E in EBRD stands for Europe, and they've made a long term commitment to keeping a European Development Bank headquartered in London. But I think a lot of the reasons that -- that we spoke about before which is just the infrastructure, the -- the ability to attract and retain top talent and -- and really as -- as ease of doing business. So I think it's a really good example of what we've been saying, which is in the short term, Brexit is disruptive and slows down some leasing activity and the uncertainty is unhelpful. But we do think in the long run it -- London will continue to be -- London will continue to be London. So the motivation really was the bank was looking for -- for new modern efficient work space and -- and had been in the market for a little while looking for in fact for a number of years looking for a new headquarters space. And obviously, we're able to provide that with a building that sort of top of the line, top environmental standards et cetera. And with the transportation changes that are coming to Canary Wharf, I think that was the big factor in -- in getting them to sign the lease.

Sheila McGrath -- Evercore -- Analyst

And so what is that pre-lease level go to in that building?

Bryan Davis -- Managing Partner and Chief Financial Officer

It's basically 96%. Okay. It's 96% or 97%.

Sheila McGrath -- Evercore -- Analyst

Great. And then Forest City had two developments in San Francisco that were advancing. And I'm just wondering if you could give us an update on the status of those two projects 5M and Pier 70?

Brian Kingston -- Managing Partner and Chief Executive Officer

So 5M is probably the most developed. We have virtually all of our approvals in place now and expect to be kicking that development off or getting shovel in the ground probably the second half of this year. Pier 70, as you know is a -- is a fairly long term multi-stage project, which -- which we continue to make good progress on. But as you know, probably nothing is exciting to -- to report there, but -- but we continue to advance it. Obviously, the San Francisco market is -- is red hot both in residential and in office. And so I think the -- the limiting factor in all of this frankly is -- is just physically being able to complete the work and getting all the approvals that we need in place that we -- we were pretty confident in the -- the market and the demand.

Sheila McGrath -- Evercore -- Analyst

Okay. And last question on the secured bonds that you issued, I just want to understand why issue them at the BPR level? And just if you could talk about the coupon on that it seems a little higher. Just wonder your view on it?

Bryan Davis -- Managing Partner and Chief Financial Officer

The issue or the reason why we issued them at the BPR level is effectively these are bonds that -- that are against the retail portfolio. I would think of it as the ability to take the term Loan A that we had issued when we acquired the GGP portfolio that was a three year term and term that out to seven years, fix a floating interest rate to a 5.75% coupon, raise $1 billion, but also maintain flexibility with the ability to -- to call these bonds back in year three. I think from a rate perspective 5.75% just reflects current interest rate environment and effectively reflects, where our term loan B was issued to take -- but now take into account sort of the current seven year curve.

So from our perspective, it was -- it was good execution. As Brian indicated that when we acquired GGP, there was a portion of the debt that we put in place that we knew would be structurally long term and then a portion that would be repaid from capital from asset sales. The structurally long term debt will likely be refinanced at the asset level over a period of time, but we need some time in order to be able to -- to refinance debt, as it comes due without incurring any significant break fees. And so this just provided us an opportunity to fix rate and extend duration.

Sheila McGrath -- Evercore -- Analyst

Okay. Thank you.

Operator

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Brian Kingston for closing remarks.

Brian Kingston -- Managing Partner and Chief Executive Officer

Thank you everyone for -- for joining our call again this quarter, and we look forward to giving you an update again next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.

Duration: 41 minutes

Call participants:

Matthew Cherry -- Senior Vice President of Investor Relations and Communications

Brian Kingston -- Managing Partner and Chief Executive Officer

Bryan Davis -- Managing Partner and Chief Financial Officer

Sheila McGrath -- Evercore -- Analyst

Ric Clark -- Chairman of Brookfield Property Partners Limited

Mark Rothschild -- Canaccord -- Analyst

Mario Saric -- Scotiabank -- Analyst

Sandeep Mathrani -- Chief Executive Officer of Brookfield Properties Retail Group & Vice Chairman of Real Estate

Neil Downey -- RBC Capital Markets -- Analyst

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