Brookfield Property Partners L.P. annual report, Q4 FY2020

Business context and reporting period

Brookfield Property Partners L.P. (BPY) filed its annual report on Form 20-F for the fiscal year ended December 31, 2020, prepared under IFRS in U.S. dollars. BPY owns and operates a global real estate portfolio spanning office, retail, hospitality and other property sectors. The filing includes quarterly results, but is an annual report rather than a standalone Q4 filing.

Financial results and key metrics

FFO, Company FFO and NOI are non-IFRS measures; the filing cautions that they are not standardized and should be considered alongside IFRS results. Commercial-property NOI was $3.461 billion, down from $3.724 billion; hospitality NOI fell to $74 million from $690 million. Commercial-property margin was 64.1%, down 2.0 percentage points year over year.

At year-end, total assets were $107.951 billion, debt obligations $54.337 billion and total equity $41.523 billion. Cash and cash equivalents were $2.473 billion. Debt included $13.074 billion classified as current and $41.263 billion non-current. Group-wide liquidity was $5.542 billion, including cash retained at subsidiaries and available subsidiary and construction facilities; BPY separately reported $1.166 billion of available liquidity under credit facilities. Consolidated debt to capitalization was 55%, versus 54% in 2019. Equity attributable to Unitholders was $25.137 billion, or $26.66 per unit including assumed conversion of mandatorily convertible preferred shares, compared with $28.530 billion, or $29.72 per unit.

Material changes versus the prior comparable period

• Revenue declined 20%, mainly as hospitality revenue fell to $702 million from $1.909 billion amid COVID-19 closures and travel restrictions, alongside dispositions and foreign-exchange effects.
• Net loss reflected $1.322 billion of net fair-value losses, including $1.706 billion of losses in Core Retail and $223 million in Core Office, as well as losses from equity-accounted investments and hospitality operations. In 2019, BPY reported $596 million of net fair-value gains.
• FFO declined 38% to $707 million, driven especially by hospitality losses and weaker retail performance; lower interest expense partly offset the decline. Interest expense fell to $2.592 billion from $2.924 billion.
• Retail leasing weakened: Core Retail portfolio leased occupancy was 92.5%, compared with 96.4% a year earlier. BPY reported 2020 retail rent deferrals of 4% and abatements of 5%; it had collected 67% of retail rents since April, versus 96% of office rents.
• Debt obligations fell by about $1.1 billion, largely due to asset sales and Atlantis deconsolidation, partly offset by new borrowing and foreign-exchange movements. Cash rose to $2.473 billion from $1.438 billion.

Outlook, management commentary, risks and unusual items

Management said it had not changed its investment strategy because of COVID-19, but cautioned that near-term cash flows, asset values, development timing and capital recycling could be adversely affected. Office rent growth was expected to be minimal for the next 12–18 months, and management anticipated meaningful lease rollover in 2021. No quantified revenue or earnings guidance is provided. BPY intended to maintain quarterly LP distributions of $0.3325 per unit, or $1.33 annualized, and cited a long-term target distribution growth range of 5%–8%; it explicitly warned these targets were not assured and that proposed distributions exceeded cash received from operating-entity distributions and projected direct-investment cash flow.

Management noted that approximately 3% of debt obligations related to non-recourse mortgages on retail assets for which contractual payments had been suspended while restructuring discussions proceeded. BPY expected to extend, repay or refinance most near-term maturities, but acknowledged lender negotiations could fail and properties could be transferred to lenders. A 100-basis-point rise in rates was estimated to increase annual interest expense by $236 million on floating-rate corporate and commercial debt, plus about $30 million on fixed-rate debt due within one year upon refinancing. Fair-value estimates were subject to substantial uncertainty because of limited market transactions and uncertain pandemic-related cash flows; a 25-basis-point increase in discount and terminal capitalization rates was estimated to reduce commercial-property values by $3.570 billion.

Notable transactions included sales of self-storage, triple-net-lease, Brazilian office and multifamily assets, and the recapitalization and deconsolidation of Atlantis. Subsequent to year-end, Brookfield Asset Management proposed to acquire the LP Units it did not already own for $16.50 per unit, with consideration elected among cash, Brookfield shares and new preferred units, subject to allocation limits. An independent-director committee was formed to review the proposal. Related-party arrangements include Brookfield management fees and other payments; the filing describes potential conflicts of interest and limits on the ability to terminate the Master Services Agreement.

Important facts for investors to verify

• Review the assumptions behind retail and office property valuations, tenant credit reserves and hospitality impairment tests, including their sensitivity to changing market conditions.
• Confirm current rent collections, concessions, tenant bankruptcies and occupancy trends, particularly for retail and hospitality assets.
• Assess the $13.074 billion of current debt, refinancing plans, suspended mortgage payments, covenant headroom and available liquidity; distinguish group-wide liquidity from cash available directly to BPY.
• Evaluate whether distributions are sustainable from recurring cash generation rather than asset sales, refinancing or borrowing, and compare operating cash flow with distributions.
• Follow the status, terms and independent review of Brookfield’s $16.50-per-unit acquisition proposal, and assess its implications for minority unitholders and related-party governance.
• Check the filing’s non-IFRS reconciliations and ownership basis: portfolio statistics generally reflect 100% of properties, while BPY’s economic interests are often lower.