Brookfield Property Partners L.P. — 2017 Form 20-F
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2017, not a standalone fourth-quarter filing. BPY is a Bermuda limited partnership and Brookfield Asset Management’s global commercial-property investment vehicle. Its portfolio spans office, retail, multifamily, industrial, hospitality and other property types. Financial figures below are in U.S. dollars; the statements use IFRS. BPY consolidates the operating partnership despite holding a 37% managing general partnership interest, so consolidated results include substantial non-controlling interests.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $6.135 billion | $5.352 billion |
| Net income | $2.468 billion | $2.717 billion |
| Net income attributable to all Unitholders | $375 million | $1.793 billion |
| Net income attributable to LP Units | $136 million | $660 million |
| Basic net income per LP Unit | $0.48 | $2.30 |
| NOI (non-IFRS) | $3.144 billion | $2.755 billion |
| FFO (non-IFRS) | $873 million | $895 million |
| Company FFO (non-IFRS) | $1.017 billion | $967 million |
| Cash flow from operating activities | $639 million | $745 million |
| Interest expense | $1.967 billion | $1.681 billion |
| Total assets | $84.347 billion | $78.127 billion |
| Debt obligations | $36.884 billion | $33.519 billion |
| Cash and cash equivalents | $1.491 billion | $1.456 billion |
| Equity attributable to Unitholders | $22.186 billion | $22.358 billion |
Commercial-property NOI margin was 61.4%, flat year over year; hospitality NOI margin was 34.5%, up 0.9 percentage points. Debt was 48% of capitalization, versus 47% at year-end 2016. Group-wide liquidity was $5.881 billion, down from $6.354 billion; this includes liquidity at investments BPY does not control and may only access through distributions.
Material changes versus 2016
- Revenue rose about 15%, mainly from acquisitions, same-property growth and foreign exchange, partly offset by asset sales. Total NOI increased about 14%.
- Net income declined about 9%, while net income attributable to Unitholders fell sharply. Reported earnings included fair-value movements and large non-controlling interests; reported net income should not be read as recurring operating performance.
- FFO decreased about 2%, principally reflecting asset dispositions and higher interest expense, partly offset by acquisitions and same-property growth. Company FFO increased about 5%.
- Interest expense rose about 17%, reflecting acquisition-related debt, temporary facility borrowings, property refinancings and higher average variable rates.
- Debt increased about 10%. Investment properties increased to $51.357 billion from $48.784 billion, alongside acquisitions, foreign-exchange effects and portfolio reclassifications.
Cash flow, distributions and notable transactions
- BPY paid $830 million in distributions in 2017, compared with $639 million of operating cash flow. The filing says the gap was funded in part by $1.779 billion of realized gains from asset dispositions; distributions therefore exceeded operating cash generation.
- Distributions were $1.18 per unit for 2017. In February 2018, the quarterly rate was increased to $0.315 per unit, or $1.26 annualized. Management targets annual distribution growth of 5%–8%, but says the distribution is not assured and the proposed payout exceeds cash received from operating-entity distributions and projected direct-investment operating cash flow.
- BPY exercised its GGP warrants in Q4, paying approximately $462 million in cash for a portion of the exercise and increasing its ownership from 29% to 34%. It also made a non-binding proposal to acquire the remaining GGP shares for $23 per share, half cash and half BPY units, with an indicated total value of approximately $14.8 billion.
- BPY sold a European industrial portfolio for approximately $2.8 billion and recorded a realized gain of about $1.2 billion. It also recorded a $442 million gain related to acquiring additional GGP shares at a discount to the fair value of the underlying net assets, as well as $162 million in bargain-purchase gains from acquisitions.
- Core Office recorded $807 million of consolidated fair-value losses, including losses in Downtown New York and Houston; gains in Sydney and Toronto partly offset these losses. Opportunistic fair-value gains were substantial, including gains associated with the European industrial portfolio sale and improved valuations in India and South Korea.
Outlook, risks and other matters
- Management targets leveraged after-tax returns of 12%–15% on invested capital, unlevered pre-tax development returns of 8%–11%, and 20% returns on equity invested in Brookfield-sponsored opportunity funds. These are targets, not guarantees.
- Office occupancy was 92.6% at year-end. In-place rents were reported as 11% below market rents, which management views as potential for future NOI growth, subject to leasing and market conditions. Retail occupancy was 96.2%, down 0.4 percentage points year over year.
- Approximately 52% of debt was floating-rate. Management estimates a 100-basis-point rate increase would add about $195 million to annual interest expense on corporate and commercial floating-rate debt, plus about $7 million on fixed-rate debt due within one year upon refinancing.
- Principal risks include property-market and leasing conditions, tenant defaults, retail-sector competition and online shopping, interest-rate and refinancing exposure, foreign-currency movements, development execution, asset illiquidity, and environmental, climate and other property liabilities. Valuations rely substantially on management estimates and unobservable inputs.
- Brookfield controls the general partner and supplies management services. The filing describes potential conflicts in fee arrangements, investment allocation and related-party transactions. The annual base management fee was $104 million; the partnership also recorded $26 million of equity-enhancement distributions in 2017.
- BPY reported no material governmental, legal or arbitration proceedings known to it, and no defaults or dividend arrearages. Management and the auditor concluded internal control over financial reporting was effective; the assessment excluded certain businesses acquired during 2017, representing 5% of total assets, 4% of net assets, 4% of revenue and 3% of net income.
- The U.S. Tax Cuts and Jobs Act was enacted in December 2017; management said its effects on BPY, its subsidiaries and unitholders remained uncertain. The filing also identifies potentially material tax risks, including partnership-status, REIT, PFIC and CFC considerations.
Investor facts to verify
- How much of 2017 NOI, FFO and Company FFO growth is recurring, versus acquisition-driven, disposition-related or affected by foreign exchange and non-recurring items?
- Whether operating cash flow can support the distribution, given 2017 distributions exceeded operating cash flow and management disclosed dependence on asset sales, financing and other sources.
- The GGP proposal’s status, funding mix, financing cost, approval requirements and potential effect on leverage and unit dilution; it was non-binding when disclosed.
- Debt maturities, refinancing terms and sensitivity to higher rates, including the reported 52% floating-rate exposure and $195 million annual sensitivity to a 100-basis-point increase.
- Key valuation assumptions and subsequent evidence supporting fair values, particularly in Downtown New York, Houston, retail and opportunistic portfolios; the filing states that external appraisals of 197 properties were within 1% of management valuations.
- Brookfield-related fees, preferred-share obligations and governance safeguards, as well as any material updates to the proposed $500 million preferred-share redemption financing.