Business Context and Reporting Period
Company: Brookfield Property Partners L.P. (BPY)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2013
Jurisdiction: Bermuda (Foreign Private Issuer)
Accounting Basis: International Financial Reporting Standards (IFRS)
BPY is a globally diversified owner and operator of commercial properties, spun off from Brookfield Asset Management in April 2013. The company operates through three primary platforms: Office, Retail, and Multi-Family/Industrial/Other. As of December 31, 2013, the portfolio included 163 office properties, 163 retail properties, and significant industrial and multi-family assets. Brookfield Asset Management maintains an effective economic interest of approximately 72% in the company.
Key Financial Metrics
| Metric (US$ Millions) | 2013 | 2012 |
|---|---|---|
| Total Revenue | $4,287 | $3,768 |
| Net Income | $1,763 | $2,640 |
| Net Income Attributable to Limited Partners | $118 | $0 |
| Funds From Operations (FFO) | $582 | $631 |
| Total Assets | $52,446 | $47,681 |
| Investment Properties | $34,153 | $31,696 |
| Property Debt | $21,640 | $19,808 |
| Total Equity | $24,990 | $24,003 |
| Equity (excl. Non-Controlling Interests) | $13,624 | $13,163 |
Cash Flow: Cash flow from operating activities was $421 million in 2013, down from $605 million in 2012. Total liquidity sources (including borrowings and asset sales) totaled $13.1 billion in 2013.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 14% to $4.3 billion, driven by a $425 million increase in hospitality revenue (full year of Atlantis Bahamas results) and acquisitions in the multi-family and industrial segments.
- Net Income Decline: Net income decreased 33% to $1.8 billion. This was primarily due to a $357 million decrease in fair value gains (from $1.2 billion to $870 million) and a $400 million decrease in equity-accounted earnings, partially offset by higher operating revenues.
- FFO Decrease: FFO declined 8% to $582 million, reflecting lower fair value gains and equity income, despite stable core operating performance.
- Balance Sheet Expansion: Total assets grew 10% to $52.4 billion, and property debt increased 9% to $21.6 billion, reflecting new acquisitions and development activities.
- Office Occupancy: Global office occupancy dropped to 88.0% from 91.1%, largely due to a major lease expiry at Brookfield Place New York in Q4 2013.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Distribution Policy: The company targets an annual distribution of approximately $1.00 per unit, with a goal of growing distributions by 3% to 5% annually. Management notes that current distributions exceed cash flow from operations and are funded by borrowings and asset sales.
- Development Pipeline: A significant office development pipeline of 19 million square feet exists, with 8.4 million square feet in active development. Retail redevelopment pipeline is valued at $600 million.
- Acquisition Activity: In November 2013, the company increased its stake in General Growth Properties (GGP) to 32% (fully diluted). In early 2014, BPY announced an offer to acquire the remaining shares of Brookfield Office Properties.
Key Risks and Contingencies:
- Refinancing Risk: The company relies on a $2.5 billion credit facility (BPY Credit Facility) to finance the Brookfield Office Properties acquisition. There is a risk that this facility may not be extended or refinanced on favorable terms.
- Liquidity and Distributions: There is no assurance that the company can maintain its $1.00 per unit distribution target, as it currently relies on external financing to fund the shortfall between distributions and operating cash flow.
- Related Party Dependence: The company is heavily dependent on Brookfield Asset Management for management services, acquisition sourcing, and capital. Conflicts of interest exist regarding fee structures and investment opportunities.
- Market Risks: Exposure to foreign currency fluctuations (33% of assets outside the U.S.), interest rate volatility (52% of debt is floating rate), and tenant credit risk.
Investor Verification Checklist
- Distribution Sustainability: Verify the company's ability to fund the $1.00 per unit distribution given that operating cash flow is insufficient to cover it without leverage.
- Brookfield Office Properties Merger: Confirm the status and financing terms of the ongoing offer to acquire the remaining shares of Brookfield Office Properties.
- Debt Maturity Profile: Review the maturity schedule of the $21.6 billion property debt and the $2.5 billion BPY Credit Facility to assess refinancing risks.
- Office Occupancy Trends: Monitor the impact of the Brookfield Place New York lease expiry on future rental income and occupancy rates.
- FFO vs. Net Income: Analyze the reconciliation between Net Income and FFO to understand the impact of non-cash fair value adjustments on reported earnings.