New York, July 01, 2020 -- Moody's Investors Service, ("Moody's") downgraded
the ratings of Brookfield Property REIT Inc. ("BPYU"),
including its Corporate Family Rating to Ba3 from Ba2 and its senior secured
bank credit facility and senior secured notes to B1 from Ba3. The
REIT's Speculative Grade Liquidity rating remains unchanged at SGL-4.
The rating outlook is negative. This concludes the review for downgrade
on Brookfield that was initiated on April 2, 2020.
The downgrade reflects Brookfield's elevated leverage entering the
pandemic and the high likelihood of weakening operating income in the
next four to six quarters such that its net debt/EBITDA will be sustained
well above the downgrade trigger of 11.5x on a pro-rata
JV basis. Moody's also expects Brookfield to face significant
hurdles in order to refinance its large amount of mortgage debt maturities
this year while its covenant compliance cushion remains very modest.
Downgrades:
Issuer: Brookfield Property REIT Inc.
--Corporate Family Rating, Downgraded to Ba3 from
Ba2
--Senior Secured Bank Credit Facility, Downgraded
to B1 from Ba3
--Senior Secured Notes, Downgraded to B1 from Ba3
Outlook Action:
Issuer: Brookfield Property REIT Inc.
Outlook, Changed to Negative from Rating Under Review
RATINGS RATIONALE
The rapid spread of the coronavirus outbreak, deteriorating global
economic outlook, low oil prices, and high asset price volatility
have created an unprecedented credit shock across a range of sectors and
regions. Moody's regards the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety. Today's action reflects the
impact on BPYU of the deterioration in credit quality it has triggered,
given its exposure to the mall real estate sector, which has left
it vulnerable to shifts in market demand and sentiment in these unprecedented
operating conditions.
Brookfield Property REIT Inc.'s Ba3 corporate family rating
reflects the REIT's meaningful scale and high proportion of good
quality retail assets in a portfolio that is well diversified by tenant,
asset and geography. BPYU's credit profile benefits from
its focus on the ownership of Class A malls with sales per square foot
of $651 for the trailing twelve months as of February 2020 and
same-property occupancy rate of 94.4% as of March
31, 2020. The REIT's credit profile also benefits from
its strong track record of improving portfolio asset quality through redevelopment,
and its implicit support from its parent company Brookfield Property Partners
L.P. (BPY, unrated) and Brookfield Asset Management
Inc. (BAM, Baa1 stable).
BPYU's high leverage and fully secured debt structure, more than
any other factors, constrain BPYU's credit quality. BPYU's
net debt/EBITDA was 13.4x on a consolidated basis with pro-rata
joint ventures (JVs). As a result of its secured funding strategy,
BPR's unencumbered pool is negligible, limiting financial flexibility.
Additionally, many of the REIT's largest tenants are facing financial
distress or are opportunistically rationalizing their store footprints.
While more profitable stores in higher quality portfolios such as those
of BPYU would likely survive the initial cuts, none of the enclosed
mall REITs would be immune to the retail landscape. Moody's
expects the Covid-19 pandemic to accelerate more store closures
in the next 24 months that would otherwise happen over a multi-year
horizon. Moreover, BPYU has an exposure to class B and lower
assets, characterized by soft foot traffic and tenant sales below
$400 per square foot, which are most vulnerable to potential
store closings by a given stressed retailer. As a result,
the REIT's same property growth has been trending negatively in
the last four quarters. Its same property growth for Q1 2020 was
-3.4%, compared to -3.8%
for Q4 2019.
BPYU's speculative grade liquidity rating of SGL-4 reflects
the REIT's modest liquidity position relative to its mortgage maturities
and high reliance on the revolver to bridge various cash needs.
Moody's also expects that BPYU's cash flows will decline as
a result of lower operating income in the next two quarters and that outstanding
cash rent could potentially be deferred through the end of 2021.
BPYU had $1.25 billion in liquidity at March 31, 2020,
comprised of approximately $516.8 million of cash and $735
million available under its $1.5 billion revolver,
which matures in August 2022. Although the next meaningful term-loan
maturity of $2 billion is not due until August 2023, the
REIT has approximately $1.7 billion in mortgage debt coming
due in 2020 and $3.1 billion due in 2021. The SGL-4
also reflects BPYU's modest headroom on the fixed charge maintenance
covenant ratio, given the step up in the requirement to 1.5x
from 1.35x starting in Q4 2019 and BPR's heavy interest expense
burden. Substantially all of BPYU's assets are encumbered,
which limit the REIT's alternative liquidity since there will be
significantly less cash remaining from any potential asset sales after
consideration for payments to the associated mortgage debt repayment or
any joint venture partners.
The negative outlook reflects Moody's concern about BPYU's
ability to refinance the significant amount of mortgage debt maturities
in the next four to six quarters and its modest covenant compliance cushion.
BPR's secured credit facility is rated B1, one notch lower
that the REIT's Ba3 CFR reflecting its junior position to the mortgages
at the asset-level, which encumber nearly all of BPYU's
portfolio of assets.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be downgraded if Moody's is concerned about BPYU's
covenant compliance cushion, or net debt/EBITDA is sustained above
14x on a pro-rata JV basis. Furthermore, BPYU's
inability to refinance its mortgage next maturity over the next four to
six quarters could also lead to a downgrade.
Although not likely, ratings could be upgraded if BPYU is able to
sustain net debt/EBITDA under 11x and improve fixed charge coverage to
over 2.5x. A rating upgrade will also require a meaningful
increase in the covenant compliance cushion above the required levels
while maintaining ample liquidity to meet near and intermediate-term
fixed obligations. In addition, a rating upgrade will also
require profitable growth, as measured by solid occupancy and positive
core NOI growth, as well as successful redevelopment and enhancement
of the productivity of existing centers (as measured by improving sales
per square foot trends).
The principal methodology used in these ratings was REITs and Other Commercial
Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Chicago, Illinois, Brookfield Property REIT
Inc. (NASDAQ: BPYU) is an independent real estate investment
trust (REIT) with a portfolio comprised mainly of Class A retail properties
throughout the United States. BPR had gross assets of approximately
$42.7 billion as of March 31, 2020. BPYU owned
either entirely or with joint venture partners 122 retail properties located
throughout the United States as of March 31, 2020.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Thuy Nguyen
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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Client Service: 1 212 553 1653
Philip Kibel
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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