The report on the Brookfield Office Properties preferred shares BPO.PR.A and BPO.PR.G are updated. See links on the Subscriber home page.
These two have been, frankly, terrible investments. The market is signalling that these are quite or very high risk. Based on the falling prices it appears that the market is signalling that these could even eventually go to zero. I’d be quite surprised if that ever happened but I can’t rule it out. I’m holding my shares but that may not work out well.
These two were issued by Brookfield Office Properties which has ran into the terrible market conditions for office space. But, the credit on these is guaranteed by the immediate parent Brookfield Property partners L.P. (but not by any Brookfield parent above that level). Brookfield Office Properties no longer issues financial statements and the relevant financial statements and results to look at are those of Brookfield Property Partners L.P.
The bad news is that Brookfield Property Partners L.P. has reported losses for each of the past four quarters to June 30 and negative funds from operations for at least the last two quarters. And the soon to be reported September 30 earnings and FFO are likely to be even worse as interest rates have moved even higher. They have a lot of debt and much of it on variable interest.
Also their financial structure is very complex. The partnership equity is divided across about seven classes of limited partnership units. There is also very substantial minority interest in their various subsidiaries. In 2023 the comparison to last year is very difficult to interpret because of some large related party transactions that they did at the end of 2022.
Brookfield Property Partners L.P. is a very large entity with assets of $130 billion. Total equity including minority interests is $47 billion. The partnership equity totals $23.5 billion and the debt is $67 billion. The obligation on the preferred shares is quite small compared to the total entity.
Another negative point is that the market is expecting the credit rating to soon be reduced from barely investment grade to below investment grade.
The great majority of the debt has recourse only to a particular building or property. This means that they are legally allowed to default on the debt of individual problematic assets (like an empty office tower). My hope is that Brookfield Property Partners will continue to be able to meet its obligations by either raising more equity from its parent and other institutional partners or by letting its lenders take over a number of its money-losing properties. They have already defaulted on the debt of several properties. My thinking and hope is that Brookfield Property partners L.P. would not default on a general obligation such as these preferred shares. I think they would jettison a lot of properties and the debt thereon before they would ever default on a general obligation.
There may be more bad news coming in the next month given the potential credit rating downgrade and the upcoming Q3 report. It is looking like things are likely to get worse before they hopefully ultimately get better.