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Rating Action:

Moody's downgrades Brookfield Property REIT's CFR to Ba3; negative outlook

01 Jul 2020

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Thuy Nguyen
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
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

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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