Brookfield Property Partners L.P. — FY 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; filed March 1, 2019. This is an annual report, not a standalone fourth-quarter filing. Financial statements are in U.S. dollars and prepared under IFRS. BPY owns and operates a global real estate portfolio across Core Office, Core Retail and LP Investments; reported operating statistics generally present properties as if BPY owned 100%, while consolidated financial statements include non-controlling interests.
Financial performance and position
| Metric | FY 2018 / Dec. 31, 2018 | Prior comparable period |
|---|---|---|
| Total revenue | $7.239 billion | $6.135 billion in 2017 |
| Net income | $3.654 billion | $2.468 billion in 2017 |
| Net income attributable to Unitholders | $1.978 billion; $2.28 per LP Unit basic | $375 million; $0.48 per LP Unit basic in 2017 |
| NOI (non-IFRS) | $3.869 billion | $3.144 billion in 2017 |
| FFO / Company FFO (non-IFRS) | $866 million / $1.179 billion | $873 million / $1.017 billion in 2017 |
| Cash flow from operating activities | $1.357 billion | $639 million in 2017 |
| Cash and cash equivalents | $3.288 billion | $1.491 billion at Dec. 31, 2017 |
| Total assets / debt obligations | $122.520 billion / $63.811 billion | $84.347 billion / $36.884 billion at Dec. 31, 2017 |
| Total equity / equity attributable to Unitholders | $46.740 billion / $28.284 billion | $35.124 billion / $22.186 billion at Dec. 31, 2017 |
| Distributions per LP Unit | $1.26 | $1.18 in 2017 |
Commercial property margin was 63.3%, up 1.9 percentage points from 2017; hospitality margin was 35.4%, up 0.9 points. Commercial property NOI was $3.192 billion and hospitality NOI was $677 million. These segment margins are not an overall company operating margin.
Liquidity included $6.693 billion of group-wide liquidity: $2.057 billion of proportionate cash at subsidiaries, $3.092 billion available under construction facilities and $1.544 billion available under subsidiary credit facilities. The filing notes that some of this liquidity is in investments BPY does not control and is accessible only through distributions. Total debt obligations were $63.811 billion; secured debt obligations were $45.338 billion. Consolidated debt to capitalization was 56% (48% in 2017), and management reported 47% of outstanding debt was floating-rate. A 100-basis-point increase on corporate and commercial floating-rate debt was estimated to raise annual interest expense by about $382 million; refinancing fixed-rate debt due within a year could add about $5 million.
Material changes versus 2017
- BPY acquired control of GGP on August 28, 2018, after holding a 34% interest. Former GGP shareholders received approximately 161 million BPR Units and 88 million BPY LP Units, alongside cash consideration. BPY consolidated GGP for the final four months of 2018; the transaction materially expanded the retail portfolio and contributed to higher revenue, assets and debt.
- BPY acquired Forest City in December for stated consideration of $6.948 billion, along with other significant investments including 666 Fifth Avenue and student-housing and hotel portfolios. Several purchase price allocations, including GGP and Forest City, remained provisional at year-end.
- Fair value gains, net, rose to $2.466 billion from $1.254 billion. The 2018 result included a $921 million provisional bargain-purchase gain on GGP and gains related to U.S. logistics and self-storage disposals and Indian office properties. Fair value gains and transaction accounting contributed substantially to reported IFRS net income.
- FFO edged down to $866 million from $873 million, despite higher NOI. Management cited higher interest expense, transaction costs—particularly for GGP and Forest City—general and administrative costs, and foreign-exchange effects. Company FFO increased to $1.179 billion from $1.017 billion.
- Cash flow from operations increased to $1.357 billion from $639 million. Investing activities used $8.406 billion, including property acquisitions and capital expenditures; financing activities provided $8.873 billion.
Outlook, risks and other notable items
- Outlook and targets: Management targets 10%–12% total returns for Core Office and Core Retail, a 20% average total return and 2.0x capital multiple for LP Investments, and 12%–15% leveraged after-tax returns overall. It targets annual distribution growth of 5%–8% and an approximately 80% FFO payout ratio. These are targets, not assurances. BPY announced a quarterly distribution of $0.33 per unit ($1.32 annualized) in February 2019; the filing cautions that distributions may not be sustainable from operating cash flows alone.
- Operating commentary: Core Office occupancy was 94% across the portfolio; in-place rents were about 10% below market rents. Core Retail was 96.5% leased, compared with 96.7% a year earlier; new and renewal rents for matched retail spaces were 10.6% above expiring rents. Retail competition, tenant bankruptcies and online shopping remain risks.
- Development: Core Office had about 10 million square feet under active development and 11 million in active planning, within a 32-million-square-foot pipeline. Execution, construction costs, pre-leasing, completion timing and permanent financing are key uncertainties.
- Debt, markets and structure: Risks include refinancing availability and cost, interest-rate and foreign-exchange exposure, property valuation changes, tenant defaults and lease rollover. Brookfield controls BPY’s general partner, provides management services and may allocate investment opportunities among affiliated funds; these arrangements create conflicts of interest. BPY’s non-voting partnership structure limits unitholder influence.
- Distributions and capital: 2018 distributions to unitholders were $1.059 billion, compared with $1.357 billion of operating cash flow. The report describes potential reliance on asset sales, refinancing, borrowing and other funding sources to support distributions. Contractual obligations included $63.811 billion of debt, $3.385 billion of capital securities, $6.136 billion of lease obligations and $656 million of commitments.
- Unusual and subsequent items: The GGP acquisition produced the provisional bargain-purchase gain noted above. IFRS 16 adoption from January 1, 2019 was expected to recognize $973 million of lease liabilities and $970 million of right-of-use assets, with no material equity transition impact expected. Subsequent to year-end, BPY announced a tender offer for up to $405 million of its units and BPR for up to $95 million of BPR Units; a subsidiary issued C$350 million of notes at 4.30%, due 2024. BPY also committed $1.0 billion to BSREP III.
- Contingencies and controls: BPY reported no material governmental, legal or arbitration proceedings known to be pending or threatened; it said ordinary-course claims were not expected to have a material adverse effect. BPR disclosed litigation related to the BPY transaction, whose outcome it could not predict. The auditor issued unqualified opinions and management concluded internal controls were effective, but BPY excluded certain recently acquired businesses from its controls assessment; those businesses represented 36% of total assets, 44% of net assets, 12% of revenue and 8% of net income.
Important facts for investors to verify
- Reconcile the $3.654 billion IFRS net income with FFO of $866 million and Company FFO of $1.179 billion, including the effects of fair value gains, the GGP bargain-purchase gain and transaction costs.
- Review GGP and Forest City purchase-price allocations once finalized, and assess the acquisition’s ongoing contribution to NOI, FFO, debt and per-unit results.
- Confirm debt maturities, refinancing plans, covenant headroom, floating-rate exposure and the availability of the reported group-wide liquidity, including facilities and funds BPY does not control.
- Assess whether distributions are covered by recurring cash generation after interest, capital spending and preferred distributions, and whether the $1.32 annualized rate and 5%–8% growth target remain achievable.
- Track occupancy, lease spreads, tenant credit and retail leasing trends, along with execution and funding of development projects.
- Review related-party fees, acquisition allocations and conflict-management approvals, and monitor the integration of acquired businesses and the scope of internal-control testing.