Brookfield Property Could See Its Credit Rating Cut to Junk Status

Vicki M. Young
·4 min read

Brookfield Property Partners may find itself with a refinancing problem.

The primary real estate arm of global asset management firm Brookfield faces higher borrowing costs due to rising U.S. interest rates, and those numbers could climb even higher should its credit ratings enter junk territory. That means Brookfield Property could face a financial squeeze amid stubbornly high interest rates and falling property values.

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S&P Global Ratings earlier this month placed the mall landlord on CreditWatch Negative because it doesn’t think the company will improve its deteriorating credit protection measures in the next two years.

Brookfield Property took on a “material amount of new debt” after the consolidation of a fund in which it holds a 23 percent stake. This is what triggered the problems with the REIT’s credit protection measures.

According to an August regulatory filing, Brookfield’s core retail portfolio includes 110 million square feet in 109 best-in-class malls and urban retail properties nationwide. Trophy assets include Honolulu’s Ala Moana Center, and Fashion Show and Grand Canal Shoppes in Las Vegas. It also has 88 million square feet in 131 premier office spaces in New York, London and other major markets.

The filing also listed some drivers of current and anticipated financial performance measure, including increasing occupancies by leasing vacant space and increases in rental rates through maintaining the quality of assets. Outside external performance drivers include the availability of debt capital at a cost and on terms conducive to company goals, new property acquisitions and other investment that fit its strategic plan and opportunities to dispose of peak value or non-core assets.

For the three months ended June 30, Brookfield reported a net loss of $458 million, against net income of $520 million a year ago. Total revenue rose 33.5 percent to $2.33 billion from $1.74 billion. It saw gains across its commercial property (revenue rose 19.5 percent to $1.42 billion from $1.19 billion), hospitality and investment and other income categories.

But it also reported $2.61 billion in total expenses, up 61.3 percent from $1.62 billion. Most notable were direct hospitality expenses up 89.5 percent to $525 million and interest costs rising 88.4 percent to $1.17 billion. Brookfield Property said a reorganization and rising interest rates were responsible for the increase.

At the end of the second quarter, the company had cash and cash equivalents of $2.77 billion, down from $4.02 billion for the year ended Dec. 31, 2022. Total assets were listed at $129.97 billion, up from $112.52 billion in 2022. But it ended the quarter with $66.8 billion in debt, up from $58.56 billion at the end of 2022, while liabilities associated with assets held for sale totaled $811 million. An overseas acquisition helped drive up Brookfield’s debt.

Funds from operations (FFO) at the end of the quarter were a negative $108 million, versus a positive $206 million in FFO in the same year-ago quarter. FFO is a metric used by real estate investment trusts to measure cash flow.

S&P cut Brookfield’s issuer credit rating in July 2021 to “BBB-“, putting it just above junk territory. Now that Brookfield is on the credit watch list, this means S&P believes there’s be a 50 percent chance that the mall runner’s rating changes in the next 90 days.

S&P credit analyst Michael Souers and Ana Lai wrote in their report that Brookfield has a “capital structure with a material amount of near-term, floating-rate debt” and problems with office space, given the ongoing return-to-office tensions at big employers nationwide.

Brookfield has already defaulted on office building loans in New York, Los Angeles and Washington, D.C. And it walked away from Westfield San Francisco Centre Mall, a property it co-owned with Unibail-Rodamco-Westfield. The mall, which had over $558 million in mortgage debt, is being turned over to lenders so they can appoint a receiver.

Located in the heart of San Francisco’s Union Square district, the mall lost foot traffic when the pandemic forced most people to work remotely. Then crime starting rising in 2021, with shoplifting spiraling into smash-and-grab robberies as well as crime rings running fencing operations.

Nordstrom signaled the death knell when it closed its last two stores—an anchor location in the mall and a nearby Nordstrom Rack. Last month American Eagle filed a lawsuit accusing Unibail-Rodamco-Westfield of neglect by refusing to invest in security.

Brookfield Property should be able to withstand the current headwinds, because it’s backed by a bigger corporate parent and owns high-end office properties in major U.S. cities and several Class-A malls. But a challenging macro climate could affect the value of its assets.

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