Halls of Shrewd'm / US Policy❤
No. of Recommendations: 4
S&P Global Ratings said it is considering cutting Brookfield Property Partners to junk status because the commercial property company has 'substantial' amounts of maturing debt to refinance during a time of higher interest rates and lower property values.https://www.bloomberg.com/news/articles/2023-10-06...
No. of Recommendations: 3
Thanks for posting. I am not disagreeing, just documenting here what Brian Kingston said about the debt maturities ladder for real estate (page 102 BN investor day slide deck).
2023 3%
2024 16%
2025 16%
2026 15%
2027+ 50%
More than half matures 2027 and later. But that still leaves half maturing in the next 3 years. It's also worth contemplating what else will go to junk/hell if interest rates stay high for the rest of this decade!
No. of Recommendations: 3
I guess we ignore that 45% is floating rate and focus on maturities. You don't have to go too far, as I posted in the comment about BEP earlier, it seems the numbers for FFO can be made even when interest expense rises 1/3rd of what FFO was previously while sales are flat.
That's either a superb business or an accounting masterpiece. I apologize, but being a self-motivated type I don't much copy/paste management presentations.
No. of Recommendations: 2
I guess we ignore that 45% is floating rate and focus on maturities.
No we don't ignore and thank you for pointing out that a big chunk is floating rate. In fact, a lot bigger than 45%. They say they can manage, we will see. If they default on any of their 29 trophy assets, it will be serious blow to their credibility and increase borrowing costs even more.
From 2022 annual report:
Approximately 62% of our outstanding debt obligations at December 31, 2022 are floating rate debt compared to 48%
at December 31, 2021. This debt is subject to fluctuations in interest rates. A 100 basis point increase in interest rates relating to
our corporate and commercial floating rate debt obligations would result in an increase in annual interest expense of
approximately $367 million. A 100 basis point increase in interest rates relating to fixed rate debt obligations due within one
year would result in an increase in annual interest expense of approximately $35 million upon refinancing. In addition, we have
exposure to interest rates within our equity accounted investments. We have mitigated, to some extent, the exposure to interest
rate fluctuations through interest rate derivative contracts. Refer to Note 31, Financial Instruments in our annual 2022 financial
statements for further information.
At December 31, 2022, our consolidated debt to capitalization was 57% (December 31, 2021 ' 52%). Capitalization
includes debt obligations, capital securities and total equity. It is our view this level of indebtedness is conservative given the
cash flow characteristics of our properties and the fair value of our assets. Based on this, we believe that all debts will be
financed or repaid as they come due in the foreseeable future.
No. of Recommendations: 2
Since article is behind a paywall, posting some excerpts below.
S&P had cut Brookfield Property's issuer credit rating to BBB-, just one rung above junk, in July 2021. The ratings company has placed it on credit watch with negative implications, which means that there's a 50% chance the rating could change within 90 days.
'The CreditWatch placement reflects the company's deteriorating interest coverage metrics, continued secular challenges facing the company's office properties, and a capital structure with a material amount of near-term, floating-rate debt,'
'This designation relates to a specific entity and has no impact on either the pricing or ability of Brookfield to access the real estate capital markets,' Kerrie McHugh, a Brookfield spokesperson, said in an email.
Brookfield has defaulted on office-building loans in New York, Los Angeles and Washington, DC, as well as one of the largest malls in San Francisco this year. It has suspended payments on about 3% of its contractual obligations on non-recourse mortgage debt, according to the ratings service. While S&P considers this a portfolio management exercise by the firm, it could view it more negatively if loan defaults become frequent, its note said.
The size of the parent corporation and 'the reluctance of banks to take back any commercial real estate assets secured by loans in the current market' makes it likely that lenders, in many cases, will agree to extend the maturing debt for Brookfield Property Partners, the analysts wrote.
No. of Recommendations: 5
Apologies for the multiple posts, but this is an important topic.
It also occurred to me that the floating rate is tied to the fed funds rate or LIBOR which means it is basically done going up. Either the Fed is done or there is at most one more rate hike remaining. This means that the damage due to the floating rate increasing is mostly baked in or will be soon.
https://www.cmegroup.com/markets/interest-rates/cm...
No. of Recommendations: 3
As far as Brookfield Property, my guess and it is only a guess as I'm not going to spend the energy to look, is that if you compare revenues to interest expense here vs elsewhere? I'll bet nobody much comes close to matching the figures of Brookfield Property.
But those high energy over-the-top positive investor presentations are simply astoundingly generalized. Growth is the repeated chant.
As I've written ad nauseum, way back debating manlobbi on his euphoric view of Brookfield Property, it ain't investing that's made Brookfield special...for years, years, and more years. It is fees.
Joe and Bob got bored buying real estate and "real" assets and trying to manage living off of them. Joe and Bob set up a business on the side to manage things and sold off a percentage of them to others. And that people is all you need to know about Brookield.
How do you get as close to the fee thingy as possible? Again it should be debated: Is it BN or BAM? I will always has some amount of concern that the power is 100% with BN and if BN needs to re-gain the 25% of the manager that's in BAM they will find a way to do that and it will be at a "fair" price (read cheap) to BN shareholders.
In the meantime let's pretend interest expense doesn't count, you know, those investor day things.
No. of Recommendations: 6
it ain't investing that's made Brookfield special...for years, years, and more years. It is fees.
Joe and Bob got bored buying real estate and "real" assets and trying to manage living off of them. Joe and Bob set up a business on the side to manage things and sold off a percentage of them to others. And that people is all you need to know about Brookfield.
Yes Brookfield started off as principal investor first investing their own balance sheet in real assets. It's trauma, not boredom, that prompted the transition to the current model. I believe they got caught flat footed because they were over levered in a real estate recession in the nineties and were forced to sell assets at low prices and restructure their balance sheet.
After this they invited other people to invest with them, but it's more than just fees that makes this model special.
Of course fees and carried interest are very valuable. But another big reason to invite others is that it reduces your risk. In any given investment you have to commit much less of your own balance sheet capital. An even bigger reason is that it allows you to achieve scale which is a huge competitive advantage. If only a few others can cut such massive checks, that's your moat right there.
No. of Recommendations: 3
To add more details from Substack (Keith Dalrymple):
"The other interesting aspect of the S&P note was the way in which it discussed what looks like financial distress. BPY does not report defaulted debt. As S&P states, BPY has 'suspended payment' on 3% of debt. Brookfield does not define what debt. Using total consolidated debt of $67.6B yields to defaults of around $2B. With respect to suspended debt payments, the notes says 'we view this as a portfolio management exercise, not a default'.
The article also highlights this S&P report excerpt: "A notable portion of the deterioration was caused by the consolidation of one of its funds' (BSREP IV) U.S. investments in December 2022 and foreign investments in January 2023, which added a material amount of new debt to BPY while EBITDA had not fully cycled through on our training 12 month adjusted metrics."
https://brookfield.substack.com/p/is-brookfields-f...Sam
No. of Recommendations: 2
Yield on Brookfield Property preferred units has now exceeded 14%.
BPYPP price is 11.50. It pays quarterly dividend of 0.40625 which means yield is (0.40625 * 4)/11.50 = 14.13%. It's too high and not a good sign. Mr. Market must be thinking Brookfield Property is getting ready to skip some dividend payments.
