(Refiles to add dropped word to headline)
* Q2 FFO $0.38, beats expectations; net profit up 33 pct
* 725,000 sq feet of space leased in Q2
* Shares fall 2.6 pct in New York, nearly flat in Toronto (Adds details, closing prices on shares. In U.S. dollars unless noted)
By Ka Yan Ng
TORONTO, July 29 (Reuters) - Brookfield Properties BPO.TO, one of Manhattan’s largest office landlords, said on Wednesday a key measure of its quarterly performance slipped but it was starting to see signs of improving demand for space even as economic conditions remained difficult.
Shares of the company ebbed after it reported a drop in funds from operations on lower net operating income from commercial properties. All of Brookfield’s core U.S. markets experienced an increase in vacancies in the quarter, with the exception of Denver, Colorado.
Brookfield said the latest quarter was one of pronounced softness in demand for New York office space, and that its results would have been worse if not for a diversified portfolio and leases timed to expire at wide intervals.
Its 75-million-square-foot portfolio comprises interests in 108 properties and includes the World Financial Center in Manhattan, Brookfield Place in Toronto and Bankers Hall in Calgary, Alberta.
“Overall we’ve been noticing greater leasing interest during the second quarter than we had earlier in the year. Now this is not true for every market, but in general I think the phone has been ringing more in many of our markets as of late,” said Ric Clark, chief executive of Brookfield Properties.
He said neither the economy nor the real estate market had turned the corner yet, and the increase in interest was more likely due to tenants nearing the expiry of current leases.
“The economy is not any better,” Clark said in a conference call with analysts after Brookfield reported a 33 percent rise in net profit in the second quarter but lower funds from operations, the most closely watched measure of its performance.
“Our crystal ball is not calling for a recovery this year nor the first half of next year, if at all next year. Operating in this environment is a bit like a game of dodgeball.”
Commercial property net operating income slipped to $338 million from $341 million. The company said it had leased out 725,000 square feet of space at an average net rent of $25 per square foot during the quarter, up 32 percent over the average expiring net rent of $19 per square foot for the same space.
Brookfield also said it was mulling tapping into the Term Asset-Backed Securities Loan Facility (TALF), a U.S. government-sponsored financing program aimed at offsetting the effects of the credit crisis. The move would be specifically for its 245 Park Avenue building in New York which has a loan maturing in 2011.
“It is something we are thinking about,” Clark said. “That’s really the first thing that would come along for us that probably would be applicable to that program,” he said.
Funds from operations slipped to $148 million, or 38 cents a share, in the second quarter, from $157 million, or 40 cents, in the year-before quarter.
Even so, the result topped forecasts, spurring an early rise in Brookfield stock on Wednesday before it fell back later in the day.
Toronto-listed shares eked out a 0.3 percent rise to C$9.93, while the New York-listed shares fell 2.6 percent to $9 in an overall down day on stock markets.
According to Reuters Estimates, analysts had expected 36 cents a share in funds from operations, a measure that strips out the distorting effects of depreciation and other factors.
Earnings rose 33 percent to $60 million, or 15 cents a share, in the three months ended June 30, while revenue declined 13.5 percent to $619 million.
“Everything was almost exactly with what I was looking for. There were no surprises,” said Mark Rothschild, real estate analyst, at Genuity Capital Markets.
In its smaller residential development division, mostly based in the oil-rich Canadian province of Alberta, net operating income fell more sharply to $13 million from $35 million a year earlier. Even so, the latest result marked an improvement from the $6 million reported in the first quarter.
The company told analysts that the residential unit was “more or less” back on track and that overall results were trending to the midpoint of its original FFO forecast of $1.42-$1.49 a share for 2009.
$1=$1.09 Canadian Additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Savio D'Souza and Peter Galloway