DBRS Confirms Brookfield’s Ratings at BBB (high) with a Stable Trend and Pfd-3 (high)

DBRS has today confirmed the Issuer Rating of Brookfield Properties Corporation (Brookfield or the Company) at BBB (high) and its Cumulative Redeemable Preferred Shares, Class AAA rating at Pfd-3 (high); the trends are Stable. The rating confirmations take into consideration that Brookfield significantly improved its financial flexibility and liquidity position with the proceeds from a $1 billion common equity and $250 million preferred share issuance in Q3 2009. Financial flexibility is also enhanced by its low payout ratio and free cash flow position (before non-cash changes in working capital).

DBRS believes Brookfield will continue to have strong access to capital and the Company now has adequate liquidity to fund more modest amounts of near-term debt maturities and capital spending (DBRS estimates $75 million of planned capital expenditures in 2010) relative to those levels over the last couple of years. DBRS notes that following the completion of the Bay Adelaide Centre in Toronto, Brookfield currently has no active development projects underway. DBRS also believes that Brookfield’s improved financial flexibility has alleviated some of our concerns with respect to the Company’s aggressive credit metrics and large mezzanine debt maturity due in 2011 related to the Trizec acquisition in 2006 (Brookfield’s share is $1.6 billion). Brookfield will likely also use available funds to participate in the recently announced $4 billion investor consortium formed by the Company and Brookfield Asset Management Inc. (BAM), which is expected to invest in global real estate restructuring opportunities. Brookfield and BAM plan to invest $1 billion, with the Company having an option to fund opportunities in the office segment up to $500 million.

The confirmation also reflects Brookfield’s high-quality portfolio of premier office building in major financial (54% of net operating income (NOI)), energy (16%) and government (12%) markets across North America. Despite weak office fundamentals across the Company’s markets and challenges in both the financial services and energy sectors, Brookfield’s portfolio continues to perform relatively well, with same portfolio NOI growth of 3% (excluding the impact of foreign exchange) during Q2 2009 and good occupancy levels (95% as at Q2 2009), which are generally above market levels. The Company’s portfolio is underpinned by healthier results and fundamentals in its Canadian markets. However, the Company has some exposure to a significant amount of new supply (5.5 million square feet, or 26.5% of total supply, of Class A office space) scheduled for completion in Calgary over the next couple of years.

Going forward, DBRS expects office market fundamentals to remain weak until the latter part of 2010, when we expect positive economic momentum, particularly job creation, to take hold and translate into demand for office space. DBRS expects several defensive features of Brookfield’s portfolio to mitigate the challenging operating and leasing environment in the near term, including the following:

(1) The spread between Brookfield’s in-place rents on existing leases and current market rents is positive at 20%, although this spread will likely continue to narrow into 2010.

(2) Brookfield’s tenant profile has a focus on solid investment-grade tenants under long-term leases.

(3) Lease expiries occurring in 2010 and 2011 (5.1% and 7.1%, respectively, of total space) are manageable and reasonably diversified across Brookfield’s major markets. At this time, uncertainty remains with respect to the future tenancy at the World Financial Center in New York of Bank of America/Merrill Lynch, whose lease expires in 2013; this continues to represent a medium-term leasing challenge.

Overall, DBRS expects Brookfield to have slight to flat EBITDA growth in 2010, mainly due to completed development and/or redevelopment projects, which are expected to contribute approximately $58 million of stabilized NOI. Brookfield’s coverage metrics and earnings profile could also benefit from growth opportunities by investing in global real estate restructuring opportunities through the investor consortium and a strengthening Canadian dollar. With that said, DBRS believes that the first half of 2010 should represent the bottom of the cycle for office fundamentals, as we expect economic improvement and job creation to take hold toward the back half of 2010. If Brookfield performs as we expect and maintains reasonable operating metrics and acceptable levels of financial flexibility to address our medium-term concerns, the trend should remain Stable.

However, if the Company’s credit metrics trend away from levels appropriate for the current environment and rating (i.e., below the EBITDA interest coverage range of 1.90 times (excluding capitalized interest)) caused by weaker-than-expected operating performance, inadequate financial flexibility and/or a deeper-than-expected or longer-than-expected office market downturn (which would erode the Company’s capacity to manage its credit metrics), the rating and/or trend would be pressured.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Real Estate, which can be found on our website under Methodologies.

This is a Corporate rating.