DBRS Limited (DBRS Morningstar) downgraded Brookfield Property Partners L.P.’s (BPP) Issuer Rating and Senior Unsecured Debt rating to BBB (low) from BBB. DBRS Morningstar also downgraded its ratings on Brookfield Property Finance ULC’s Senior Unsecured Notes and Brookfield Office Properties Inc.’s Senior Unsecured Notes to BBB (low) from BBB and Brookfield Office Properties Inc.'s Cumulative Redeemable Preferred Shares, Class AAA to Pfd-3 (low) from Pfd-3. All trends have been changed to Stable from Negative. 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 rating downgrades principally reflect BPY’s weaker-than-expected key financial risk metrics, particularly total debt-to-EBITDA (18.7 times (x) on a last-12-months (LTM) basis at December 31, 2020), as a result of the significant impact the ongoing Coronavirus Disease (COVID-19) pandemic and consequent economic slowdown has had on BPY's operations and tenants. Negative impacts include rent deferrals and abatements, increased bad debt reserves, lower short-term revenues (parking, temporary tenants, etc.), increasing vacancy because of tenant bankruptcies (concentrated in BPY's Core Retail segment), and the impact of drastically lower travel demand on BPY’s hotel portfolio (concentrated in BPY's LP Investments segment).
DBRS Morningstar has also modestly revised downward its overall business risk assessment of BPY because of a lower assessment of BPY's asset quality, partially offset by improvement in market position. DBRS Morningstar is of the view that, while still of high overall quality, demand for BPY's enclosed shopping centre assets in the U.S. will take time to recover, as evidenced by cash flow volatility through the pandemic, the discretionary nature of its tenants with elevated counterparty risk, and tempered transaction activity resulting in a lower asset quality assessment. On the other hand, DBRS Morningstar has revised upward its assessment of BPY's market position as a top player in the global real estate industry across real estate categories, as proven by BPY's continued ability to transact through the pandemic in multiple respects, such as leasing, capital recycling, and financing initiatives. The net impact of the revisions to asset quality and market position result in a modest deterioration in BPY's stand-alone credit assessment.
The Stable trends consider DBRS Morningstar's expectation for significant improvement in BPY's total debt-to-EBITDA to below 16.0x by YE2022, with continued improvement thereafter. This expectation is supported by DBRS Morningstar's view that the worst of the economic fallout from the pandemic has already occurred and that BPY should see a recovery in EBITDA as the economy gradually normalizes, resulting in improved cash rent collections, fewer bad debt expenses, improving occupancy driven by fewer bankruptcies and re-leasing to well-positioned tenants, increasing short-term revenue streams, and improving travel demand for its hotel accommodations, as well as stabilization of its office development projects (e.g., One Manhattan West and 100 Bishopsgate). DBRS Morningstar anticipates that the aforementioned growth drivers will be partially offset by accelerating capital recycling activity as BPY disposes of noncore assets and/or partial interests in core assets and uses the proceeds to pay down debt and fund capital expenditures. As a result of all the above, DBRS Morningstar expects BPY's EBITDA to increase to approximately $3.1 billion and total debt to decrease to approximately $48.0 billion by YE2022 (from $2.8 billion and $52.2 billion in 2020, respectively).
The ratings continue to be supported by (1) the Partnership's robust access to liquidity of $5.5 billion, consisting of $1.7 billion in cash and cash equivalents and $3.8 billion available on credit facilities at December 31, 2020; (2) financial flexibility afforded by nonrecourse mortgage debt and no unsecured maturities until October 2021, when the $314 million Series 2 Senior Unsecured Notes come due; (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) BPY's market position as a pre-eminent global real estate company; and (5) high-quality assets, particularly its Core Office segment, with long-term leases in place and large, recognizable investment-grade-rated tenants. The ratings continue to be constrained by BPY’s weak financial risk assessment as reflected by both its highly leveraged balance sheet and low EBITDA interest coverage (1.25x 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 LP 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.
With these rating downgrades, BPY continues to have little in the way of financial flexibility for the ratings. Indeed, DBRS Morningstar would consider a further negative rating action should BPY's operating environment fail to improve as expected such that total debt-to-EBITDA remains above 16.0x on a sustained basis, all else equal, or if DBRS Morningstar changes its views on the level and strength of implicit support provided by BAM. DBRS Morningstar does not anticipate a positive rating action for the foreseeable future given the constraints noted above.
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/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (June 4, 2020; https://www.dbrsmorningstar.com/research/362015), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020; https://www.dbrsmorningstar.com/research/369165), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at email@example.com.
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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