DBRS Limited (DBRS Morningstar) changed the trend on Brookfield Property Partners L.P.’s (BPP) Senior Unsecured Debt to Negative from Stable. DBRS Morningstar also confirmed the rating at BBB. Additionally, DBRS Morningstar changed the trends on Brookfield Property Finance ULC’s Senior Unsecured Notes and Brookfield Office Properties Inc.’s Senior Unsecured Notes and Cumulative Redeemable Preferred Shares, Class AAA to Negative from Stable. DBRS Morningstar also confirmed the ratings at BBB, BBB, and Pfd-3, respectively. DBRS Morningstar notes that the ratings are based on the credit risk profile of the consolidated entity, including BPP and its subsidiaries (collectively, BPY or the Partnership).
The Negative trends reflect BPY’s weaker-than-expected key financial risk metrics, particularly total debt-to-EBITDA (14.4 times (x) on a last-12-months (LTM) basis at December 31, 2019), combined with material deterioration in the outlook and heightened uncertainty with respect to the Partnership’s ability to delever the balance sheet by way of its capital recycling initiatives in light of the ongoing Coronavirus Disease (COVID-19) pandemic and consequent economic slowdown.
Near-term challenges for BPY in light of coronavirus include substantial exposure to enclosed shopping centres (i.e., discretionary retail exposure and prospects for accelerating tenant bankruptcies) through its Core Retail segment (46% net operating income (NOI) contribution LTM), exposure to hotels (6% NOI contribution LTM) through its LP Investments segment, and a highly levered balance sheet that, in DBRS Morningstar’s view, may limit the Partnership’s financial flexibility.
The aforementioned challenges lead DBRS Morningstar to question the Partnership's ability to grow EBITDA commensurately with recent growth in debt, notwithstanding sizable developments nearing completion or recently completed (One Manhattan West, 100 Bishopsgate), as well as BPY's ability to delever the balance sheet by way of credit accretive capital recycling initiatives, which were already progressing more slowly than previously expected, thus putting downward pressure on the rating.
Accordingly, DBRS Morningstar has tempered its expectations for both EBITDA growth and debt reduction. It expects EBITDA to remain roughly stable at around $3.4 billion through 2021, while it expects total debt to remain higher than previously anticipated (at approximately $49 billion through YE2020) before the Partnership is able to execute meaningful capital recycling dispositions in 2021, thereby reducing debt. DBRS Morningstar’s revised expectations for EBITDA and debt contrast with its last review of BPY on March 15, 2019, wherein it acknowledged BPY’s intention to recycle capital over the next few years to partially fund its development and intensification pipeline and additional acquisitions, resulting in DBRS Morningstar’s prior expectations of EBITDA of approximately $3.5 billion and debt of approximately $47 billion through 2020.
Notwithstanding near-term challenges, the confirmations take into consideration (1) the Partnership's robust access to liquidity of $6.9 billion, consisting of $1.6 billion in cash and cash equivalents and $5.3 billion available on credit facilities at December 31, 2019; (2) financial flexibility afforded by non-recourse mortgage debt and no unsecured maturities until October 2021 when the Series 2 Senior Unsecured Notes come due ($308 million); (3) DBRS Morningstar’s view of implicit support from Brookfield Asset Management Inc. (BAM; rated A (low) with a Stable trend by DBRS Morningstar); (4) high-quality assets, particularly its Core Office segment, with long-term leases in place and large recognizable investment-grade-rated tenants; and (5) BPY's market position as a preeminent global real estate company. Notwithstanding the coronavirus pandemic, the ratings continue to be constrained by BPY’s highly levered balance sheet; a riskier retail leasing profile in terms of lease maturities and counterparty risk relative to BPY’s Core Office segment; a higher-risk opportunistic Limited Partnership (LP) Investments segment composed primarily of hotel, office, and retail assets; and DBRS Morningstar’s assessment of the unmitigated structural subordination of the Senior Unsecured Debt at the BPP level relative to debts at its operating subsidiaries.
DBRS Morningstar will likely consider rating downgrades within the next 12 months if deterioration in BPY’s operating environment is worse than anticipated or BPY fails to demonstrate material credit accretive transaction activity such that total debt-to-EBITDA remains above 14.0x on a sustained basis or if DBRS Morningstar changes its views on the level and strength of implicit support provided by BAM.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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