DBRS Morningstar Confirms Ratings of Brookfield Property Partners L.P., Brookfield Property Finance ULC, and Brookfield Office Properties Inc. at BBB (low)/Pfd-3 (low), StableReal Estate
DBRS Limited (DBRS Morningstar) confirmed Brookfield Property Partners L.P.’s (BPP) Issuer Rating and Senior Unsecured Debt rating at BBB (low). DBRS Morningstar also confirmed the ratings on Brookfield Property Finance ULC’s Senior Unsecured Notes and Brookfield Office Properties Inc.’s Senior Unsecured Notes at BBB (low) and Brookfield Office Properties Inc.'s Cumulative Redeemable Preferred Shares, Class AAA at Pfd-3 (low). All trends are Stable. The ratings are based on the credit risk profile of the consolidated entity, including BPP and its subsidiaries (collectively, BPY or the Partnership).
The confirmations and Stable trends consider strong operating results in BPY's core retail and LP investments segments (i.e., hotels), headwinds facing the office sector, the current elevated interest rate environment and BPY’s variable rate debt exposure, and the recent reorganization of Brookfield Corporation (Brookfield) and other recent transactions whereby BPY acquired LP interests in several real estate funds and other investment interests for $3.1 billion through the issuance of junior preferred shares of Brookfield BPY Holdings Inc. and a non-interest-bearing note. The Stable trends also consider DBRS Morningstar's resulting updated expectations for BPY's financial risk metrics. DBRS Morningstar expects that in the near to medium term, BPY will operate with total debt-to-EBITDA and EBITDA interest coverage in the mid-15 times (x) range and 1.1x range, respectively.
The ratings continue to be supported by (1) BPY's market position as a preeminent global real estate company; (2) high-quality assets, particularly BPY Core Office and Retail segment, with long-term leases to large, recognizable investment-grade-rated tenants; (3) superior diversification, in particular by property, tenant, and geography; and (4) DBRS Morningstar’s view of implicit support from Brookfield. The ratings continue to be constrained by BPY’s weak financial risk assessment as reflected by both its highly leveraged balance sheet (total debt-to-EBITDA of 17.0x for the last 12 months ended December 31, 2022 (LTM)) and low EBITDA interest coverage (1.29x LTM); 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 Investments segment composed primarily of hotel, office, retail, and alternative assets; and DBRS Morningstar’s assessment of the unmitigated structural subordination of the Senior Unsecured Debt at the BPP level relative to a material amount of debt at its operating subsidiaries.
DBRS Morningstar would consider a negative rating action should BPY's total debt-to-EBITDA not improve as expected such that it remains above 16.0x, or if BPY's EBITDA interest coverage deteriorates more than expected such that it declines below 1.0x, on a sustained basis, all else equal, or if DBRS Morningstar changes its views on the level and strength of implicit support provided by Brookfield. On the other hand, DBRS Morningstar would consider a positive rating action should DBRS Morningstar's outlook for BPY's total debt-to-EBITDA improve to 13.0x or better.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).
All figures are in U.S. dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023) https://www.dbrsmorningstar.com/research/412477
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022)
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios (December 8, 2022)
-- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate- finance-rating-methodologies-when-analyzing-corporate-finance-transactions
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The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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- Global Methodology for Rating Entities in the Real Estate Industry / April 11, 2023
- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support / March 28, 2023
- DBRS Morningstar Global Criteria: Common Adjustments for Calculating Financial Ratios / December 8, 2022
- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers / October 20, 2022
- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings / May 17, 2022
- DBRS Morningstar Global Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships / October 26, 2022