Brookfield Raked In Cash From Asset Sales, But Lost $2B In 2020 On Valuation Drops

Brookfield’s giant listed property vehicle reported a sharp drop in income from its office and retail portfolios in its 2020 results Tuesday, but it highlighted the profits it made selling assets in the private market as a sign of its long-term health, ahead of potentially being taken private by its parent company.

Brookfield Property Partners said that its funds from operations, a measure of cash flow for listed real estate companies, fell from $1.35B in 2019 to $815M in 2020, and said the 40% drop was due to falls in the income from its office, retail and hospitality assets. Funds fell 18% in its office portfolio to $540M, while funds from the retail portfolio fell 29% to $550M.

The company had a portfolio valued at $76.5B at the end of 2020, split between offices in big global cities, U.S. shopping malls and investments in opportunity funds managed by Brookfield. It recorded a $2B loss for the year, which was mainly due to a drop in the value of its retail portfolio, which fell by $2.5B in the year to $33B. 

But in its results, and on a conference call with analysts, BPY leaders were keen to flag the profits it had made when selling and refinancing office assets and assets managed by its funds. 

The company is currently subject to a $5.9B takeover offer from its parent company, Brookfield Asset Management. BPY’s shares have consistently traded at a discount to the net value of the assets it owns, and BAM thinks it can take the company private and sell or recapitalize the assets in the private market for a better price than that put on them by stock markets, so the focus on sales and refinancing fits that thesis.

In a disclosure filed after the earnings call, BPY said, "A Special Committee of the Independent Directors of BPY's Board has engaged external legal and financial advisors and collectively they are currently considering the proposal." BPY executives didn't provide an update on the takeover offer on the call.

BPY made $1.37B of sales in the fourth quarter of 2020, at an average of 10% more than its previous valuation of the assets sold. It pointed to the sale of One London Wall Place, a London office building, for $614M, as an example of how investors are still willing to pay pre-pandemic prices for new offices with long leases. The price net a $262M profit for the company.

It sold its U.S. self-storage business, owned by one of its funds, to Blackstone for $1.2B, turning a $109M profit. It also pointed to office sales in Brazil and an under-contract $3.5B life sciences deal, also to Blackstone, that would generate a $100M profit for BPY.

The REIT refinanced two office buildings in New York, the Grace Building and One New York Plaza, bringing in more than $2B of new debt at an average interest rate of about 2%. 

For its main businesses, Brookfield said that the situation was improving, pointing to the fact that funds from operation improved between the third and fourth quarters of 2020. It said that leasing had improved in its mall portfolio since the beginning of 2021.

CEO Brian Kingston said on the conference call that, while there would still be bankruptcies in 2021, they would likely be among smaller retailers and therefore be less detrimental for retail property owners than major bankruptcies of 2020, such as JCPenney, Neiman Marcus and Ascena Retail Group.

Nevertheless, BPY’s results laid bare the issues facing mall owners in 2020. Occupancy in its portfolio fell from 96% in 2019 to 92% at the end of last year. Retailers occupying 3.9M SF of its 120M SF portfolio went bankrupt during the year, and only 54% of that space had been re-leased.

Kingston said that about 20 of its 121 malls were worth the same or less than the debt secured against them, and it was in talks with lenders on what to do with those assets. It has already given back several assets to lenders, including a 1.3M SF mall in Atlanta.

More and more of BPY's retail tenants were fulfilling online orders from stores in its malls, Kingston said, which would support their value and rental levels long-term. As a result, the company is working to convert lower-value areas of malls where tenants had vacated space into shared fulfillment centers for retailers, as rents for the space converged with those in the last-mile logistics sector. 

Its office portfolio, which is concentrated in New York, London and other big North American cities, fared better, but still saw occupancy drop from 93% to 89%, with the value of the portfolio remaining flat on a like-for-like basis. The office portfolio is valued at $38.5B.

Kingston said that the drop in occupancy was due to leases expiring and tenants taking space elsewhere and no new tenants being found, rather than occupiers choosing to shrink their portfolio.

“They don’t know if they will need less space or more space, so they are just not making decisions,” he said. 

Brookfield also announced that Chairman Ric Clark had left the company, and no longer held a position on the board. Clark is joining forces with Waterman Interests’ Philip “Tod” Waterman to form a new investment firm, WatermanClark.