SECURITIES AND EXCHANGE COMMISSION
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| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20122015 |
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| ¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-35505
Brookfield Property Partners L.P.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Bermuda
(Jurisdiction of incorporation or organization)
73 Front Street Hamilton, HM 12 Bermuda
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| (Exact name of Registrant as specified in its charter) |
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| Bermuda |
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| 73 Front Street, 5th Floor, Hamilton, HM 12 Bermuda |
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(Address of principal executive office)
Steven J. Douglas
Bryan K. Davis
Brookfield Property Partners L.P.
Brookfield Place
250 Vesey
73 Front Street,
15th5th FloorNew York, NY 10281-1023
Hamilton, HM 12, Bermuda
Tel: 212-417-7000+441-294-3309Fax: 212-417-7196
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
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| (Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person) |
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class | | | | Name of each exchange on which registered |
Limited Partnership Units Limited Partnership Units | | | | Toronto Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
0261,486,211 Limited Partnership Units as of December 31,
2012.2015.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer ¨x | | Accelerated filer ¨ | | Non-accelerated filer x¨ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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U.S. GAAP ¨ | | International Financial Reporting Standards as
issued by the International Accounting Standards Board | x | x | | Other ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Table of Contents
TABLE OF CONTENTS
(continued)
INTRODUCTION AND USE OF CERTAIN TERMS
We have prepared this Form 20-F using a number of conventions, which you should consider when reading the information contained herein. Unless otherwise indicated or the context otherwise requires, in this Form 20-F:
all operating and other statistical information is presented as if we own 100% of each property in our portfolio, regardless of whether we own all of the interests in each property, but unless otherwise specified excludes interests in Brookfield-sponsored real estate opportunityproperty; and finance funds and our interest in Canary Wharf Group plc, or Canary Wharf;
all financial information is presented in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IFRS,IASB, other than certain non-IFRS financial measures which are defined under “Use of Non-IFRS Measures”; and.
the disclosure on Brookfield Asset Management’s ownership in our business does not reflect the portion of our units that Brookfield Asset Management withheld in connection with the satisfaction of Canadian federal and U.S. “backup” withholding tax requirements for non-Canadian registered shareholders.
In this Form 20-F, unless the context suggests otherwise, references to “we”, “us” and “our” are to
our company,Brookfield Property Partners L.P., the Property Partnership, the Holding Entities and the operating entities, each as defined below, taken together. Unless the context suggests otherwise, in this Form 20-F references to:
an “affiliate” of any person are to any other person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such person;
“assets under management” are to assets managed by us or by Brookfield on behalf of our third party investors, as well as our own assets, and also include capital commitments that have not yet been drawn. Our calculation of assets under management may differ from that employed by other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers;
“Australia” are to Australia and New Zealand;
the “BPY General Partner” are to the general partner of our company, which is Brookfield Property Partners Limited, aan indirect wholly-owned subsidiary of Brookfield Asset Management;
“Brookfield” are to Brookfield Asset Management and any subsidiary of Brookfield Asset Management, other than us;
“Brookfield Asset Management” are to Brookfield Asset Management Inc.;
the “Class A Preferred Unitholder” or “QIA” are to Qatar Investment Authority;
the “Class A Preferred Units” or “Preferred Equity Units” are to the Class A preferred limited partnership units of the Property Partnership that are exchangeable for units of our company pursuant to the Preferred Unit Exchange Mechanism;
“our business” are to our business of owning, operating and investing in commercial property, both directly and through our operating entities;
“our company” or “our partnership” are to Brookfield Property Partners L.P., a Bermuda exempted limited partnership;
“commercial property” or “commercial properties” are to commercial and other real property whichthat generates or has the potential to generate income, including office, retail, multi-familyindustrial, multifamily and industrialtriple net leased assets, but does not include, among other things, residential land development, home building, construction, real estate advisory and other similar operations or services;
“our company”, “BPY” or “our partnership” are to Brookfield Property Partners L.P., a Bermuda exempted limited partnership;
“fully-exchanged basis” assume the exchange of all of the issued and outstanding securities that are exchangeable into our units, including the exchange of the issued and outstanding Redemption-Exchange Units in accordance with the Redemption-Exchange Mechanism, the exchange of the issued and outstanding Class A Preferred Units in accordance with the Preferred Unit Exchange Mechanism and the exchange of the issued and outstanding exchangeable limited partnership units of Brookfield Office Properties Exchange LP not held by us;
“Holding Entities” are to the primary holding subsidiaries of the Property Partnership, from time to time, through which it indirectly holds all of our interests in our operating entities;
“our limited partnership agreement” are to the second amended and restated limited partnership agreement of our company entered into on April 10,August 8, 2013;
the “Managers” are to the affiliates of Brookfield that provide services to us pursuant to our Master Services Agreement, which is currently Brookfield Global Management Limited, a subsidiary of Brookfield Asset Management, and unless the context otherwise requires, any other affiliate of Brookfield that is appointed by Brookfield Global Management Limited from time to
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“Master Services Agreement” are to the amended and restated master services agreement among the Service Recipients, the Managers,Service Providers, and certain other subsidiaries of Brookfield Asset Management who are parties thereto;
“operating entities” are to the entities in which the Holding Entities hold interests and that directly or indirectly hold our real estate assets other than entities in which the Holding Entities hold interests for investment purposes only of less than 5% of the equity securities;
“our portfolio” are to the commercial property assets in our office, retail, multi-familyindustrial, multifamily, hospitality and industrial and opportunistic investmenttriple net lease platforms, as applicable;
the “Property General Partner”“Preferred Unit Exchange Mechanism” are to the general partnermechanism by which the Preferred Unitholder may exchange the Class A Preferred Units for units of our company, as more fully described in Item 10.B. “Additional Information - Memorandum and Articles of Association - Description of the Property GP LP, which isPartnership Limited Partnership Agreement - Preferred Unit-Exchange Mechanism”;
the “Preferred Units” are to the limited partnership units of the Property Partnership, including the Class A Preferred Units;
the “Preferred Unitholders” are to holders of Preferred Units;
the “Property Partnership” or the “Operating Partnership” are to Brookfield Property General Partner Limited, a wholly-owned subsidiary of Brookfield Asset Management;L.P.;
“Property Special LP” are to Brookfield Property GPSpecial L.P., aan indirect wholly-owned subsidiary of Brookfield Asset Management, which serves asis the generalsole special limited partner of the Property Partnership;
the “Property Partnership” are to Brookfield Property L.P.;
the “Redemption-Exchange Mechanism” are to the mechanism by which Brookfield may request redemption of its Redemption-Exchange Units in whole or in part in exchange for cash, subject to the right of our company to acquire such interests (in lieu of such redemption) in exchange for units of our company, as more fully described in Item 10.B. “Additional“Additional Information —- Memorandum and Articles of Association —- Description of the Property Partnership Limited Partnership Agreement —- Redemption-Exchange Mechanism”;
the “Redemption-Exchange Units” or “Redeemable/Exchangeable Partnership Units” are to the non-voting limited partnership interests in the Property Partnership that are redeemable for cash, subject to the right of our company to acquire such interests (in lieu of such redemption) in exchange for units of our company, pursuant to the Redemption-Exchange Mechanism;
the “Service Providers” are to the subsidiaries of Brookfield Asset Management that provide services to us pursuant to our Master Services Agreement, and unless the context otherwise requires, any other affiliate of Brookfield that is appointed from time to time to act as a service provider pursuant to our Master Services Agreement or to whom any service provider has subcontracted for the provision of such services;
the “Service Recipients” are to our company, the Property Partnership, the Holding Entities and, at the option of the Holding Entities, any wholly-owned subsidiary of a Holding Entity excluding any operating entity;
“spin-off”Spin-off” are to the special dividend of our units by Brookfield Asset Management on April 15, 2013 as described under Item 4.A. “Information“Information on the Company —- History and Development of the Company”; and
“our units”, “LP Units” and “units of our company” are to the non-voting limited partnership units in our company and references to “our unitholders” and “our limited partners” are to the holders of our units.
Historical Performance and Market Data
This Form 20-F contains information relating to our business as well as historical performance and market data for Brookfield Asset Management and certain of its operating platforms. When considering this data, you should bear in mind that historical results and market data may not be indicative of the future results that you should expect from us.
The financial information contained in this Form 20-F is presented in U.S. Dollars and, unless otherwise indicated, has been prepared in accordance with IFRS.
All figures are unaudited unless otherwiseindicated. In this Form 20-F, all references toAmounts in “$” are to U.S. Dollars.Dollars and amounts in Canadian Dollars (“C$”), Australian Dollars New Zealand Dollars,(“A$”), British Pounds (“£”), Euros and(“€”), Brazilian Reais (“R$”), Indian Rupees (“₨”), and Chinese Yuan (“C¥”) are identified as “C$”, “A$”, “NZ$”, “£”, “€” and “R$”, respectively.
where applicable.
Use of Non-IFRS Measures
In addition to results reported in accordance with IFRS,
To measure our performance against targets, we
use certain non-IFRS financial measures, such as propertyfocus on net operating income,
(“NOI”),or NOI, funds from
operations (“FFO”)operation, or FFO, Company FFO, fair value changes, and
total return (“Total Return”)net income and equity attributable to
evaluate ourunitholders. Some of these performance
and to determine the net asset values of our business. These termsmetrics do not have
standardstandardized meanings prescribed by IFRS and therefore may
not be comparable todiffer from similar
measures presentedmetrics used by other companies.
NOI, FFO and Total Return should not be regarded as alternatives to other financial reporting measures prepared in accordance with IFRS and should not be considered in isolation or as substitutes for measures prepared in accordance with IFRS.We define NOIeach of these measures as follows:
NOI: revenues from our commercial and hospitality operations of consolidated properties less direct commercial property and hospitality expenses, with the exception ofexpenses.
FFO: net income, prior to fair value gains, net, depreciation and amortization of real estate assets. assets, and income taxes less non-controlling interests of others in operating subsidiaries and properties share of these items. When determining FFO, we include our proportionate share of the FFO of unconsolidated partnerships and joint ventures and associates.
Company FFO: FFO before the impact of depreciation and amortization of non-real estate assets, transaction costs, gains (losses) associated with non-investment properties and the FFO that would have been attributable to the partnership’s shares of General Growth Properties, Inc., or GGP, if all outstanding warrants of GGP were exercised on a cashless basis. It also includes dilution adjustments to undiluted FFO as a result of the net settled warrants.
Fair value changes: includes the increase or decrease in the value of investment properties that is reflected in the consolidated statements of income.
Net Income Attributable to Unitholders: net income attributable to holders of our general partnership units, or GP Units, LP Units, Redemption-Exchange Units, special limited partnership units of the Property Partnership, or Special LP Units, and exchangeable limited partnership units of Brookfield Office Properties Exchange L.P., or Exchange LP.
Equity Attributable to Unitholders: equity attributable to holders of our GP Units, LP Units, Redemption-Exchange Units, Special LP Units and exchangeable limited partnership units of Exchange LP, or Exchange LP Units.
NOI is used as a key indicator of our ability to increase cash flow from our operations. We seek to grow NOI through pro-active management and leasing of our properties. In evaluating our performance, we also look at a subset of NOI, defined as it represents“same-property NOI,” which excludes NOI that is earned from assets acquired, disposed of or developed during the periods presented, or not of a measure over which management has a certain degree of control. We evaluaterecurring nature, and from opportunistic assets. Same-property NOI allows us to segregate the performance of our office segment by evaluating NOIleasing and operating initiatives on the portfolio from “Existing properties”, or “same store” basis, and NOI from “Additions, dispositions and other” duethe impact to among other things, the consolidation of the U.S. Office Fund during the period as discussed in Item 5.A. “Operating and Financial Review and Prospects — Operating Results — Overview of Our Business”. NOI from existing properties compares the performance of the property portfolio by excluding the effect of current and prior period dispositions and acquisitions, including developments,investing activities and “one-time items ”,items”, which for the historical periods presented consistsconsist primarily of lease termination income. NOI presented within “Additions, dispositions and other” includes the results of current and prior period acquired, developed and sold properties, as well as the one-time items excluded from the “Existing properties” portion of NOI.
We
do not evaluate the performance of the operating results of the retail segment on a similar basis as the majorityalso consider FFO an important measure of our
investmentsoperating performance. FFO is a widely recognized measure that is frequently used by securities analysts, investors and other interested parties in the
retail segment are accounted for under the equity methodevaluation of real estate entities, particularly those that own and
as a result, are not included in NOI. Similarly, we do not evaluate the operating results of our other segments on a same store basis based on the nature of the investments as the variances between same store and total NOI are not material.operate income producing properties. Our definition of FFO includes all of the adjustments that are outlined in the National Association of Real Estate Investment Trusts, or NAREIT, definition of funds from operations,FFO, including the exclusion of gains (or losses) from the sale of real estate property,investment properties, the add back of any depreciation and amortization related to real estate assets and the adjustment for unconsolidated partnerships and joint ventures. In addition to the adjustments prescribed by NAREIT, we also make adjustments to exclude any unrealized fair value gains (or losses) that arise as a result of reporting under IFRS, and income taxes that arise as certain of our subsidiaries are structured as corporations as opposed to real estate investment trusts, or REITs. These additional adjustments result in an FFO measure that is similar to that which would result if the companyour partnership was organized as a REIT that determined net income in accordance with U.S. generally accepted accounting principles in the United States, or U.S.
GAAP, which is the type of organization on which the NAREIT definition is premised. Our FFO measure will differ from other organizations applying the NAREIT definition to the extent of certain differences between the IFRS and U.S. GAAP reporting frameworks, principally related to the recognition of lease termination
income, which do not have a significant impact on the FFO measure reported.income. Because FFO excludes fair value gains (losses)
(including, including equity accounted fair value gains (losses)
), realized gains (losses)
, on the sale of investment properties, depreciation and amortization of real estate assets and income
tax expense (benefits),taxes, it provides a performance measure that, when compared
year over year,year-over-year, reflects the impact
toon operations from trends in occupancy rates, rental rates, operating costs and interest costs, providing perspective not immediately apparent from net income. We reconcile FFO to net income
attributable to Brookfield rather than cash flow from operating activities as we believe net income is the most comparable measure.
We define Total Return as income before income tax expense (benefit) and the related non-controlling interests. Total Return is used as a key indicator of performance as we believe that our performance is best
assessed by considering FFO plus the increase or decrease in the value of our assets over a period of time because that is the basis on which we make investment decisions and operate our business.
On page
8765 of this Form 20-F, we provide
a reconciliation of NOI
FFO and
Total ReturnFFO to net income (loss)
attributable to parent company for the
periodperiods presented. We urge you to review the IFRS financial measures in this Form 20-F, including the financial statements, the notes thereto
our pro forma financial statements and the other financial information contained herein, and not to rely on any single financial measure to evaluate our company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 20-F contains certain forward-looking statements.“forward-looking information” within the meaning of Canadian provincial securities laws and applicable regulations and “forward-looking statements” within the meaning of “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements relateinclude statements that are predictive in nature, depend upon or refer to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Forward-looking statements in this Form 20-Fconditions, include statements regarding our operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook, as well as the quality of our assets,outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects”, “anticipates”, “plans”, “believes”, “estimates”, “seeks”, “intends”, “targets”, “projects”, “forecasts”, “likely”, or negative versions thereof and other similar expressions, or future or conditional verbs such as “may”, “will”, “should”, “would” and “could”.
Although we believe that our anticipated
financialfuture results, performance
our company’s future growth prospects, our ability to make distributions andor achievements expressed or implied by the
amount of such distributions and our company’s access to capital. In some cases, you can identify forward-looking statements
by terms such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “potential”, “should”, “will” and
“would” or the negative of those terms or other comparable terminology.The forward-looking statementsinformation are based on our beliefs,upon reasonable assumptions and expectations, of our future performance, taking into account allthe reader should not place undue reliance on forward-looking statements and information currently available to us. These beliefs, assumptionsbecause they involve known and expectations can change as a result ofunknown risks, uncertainties and other factors, many possible events or factors, not all of which are known to us or withinbeyond our control. If a change occurs, our business, financial condition, liquidity and results of operationscontrol, which may vary materially from those expressed in our forward-looking statements. The following factors, among others, could cause our actual results, performance or achievements to varydiffer materially from ouranticipated future results, performance or achievement expressed or implied by such forward-looking statements:
statements and information. Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to: risks incidental to the ownership and operation of real estate properties including local real estate conditions; the impact or unanticipated impact of general economic, political and market factors in the general economy;
countries in which we do business; the cyclical natureability to enter into new leases or renew leases on favorable terms; business competition; dependence on tenants’ financial condition; the use of debt to finance our business; the behavior of financial markets, including fluctuations in interest and foreign exchanges rates; uncertainties of real estate industry;
failure to attract new tenantsdevelopment or redevelopment; global equity and enter into renewal or new leases with tenants on favorable terms;
our ability to derive fully anticipated benefits from future or existing acquisitions, joint ventures, investments or dispositions;
actions or potential actions that could be taken by our co-venturers, partners, fund investors or co-tenants;
the bankruptcy, insolvency, credit deterioration or other default of our tenants;
actions or potential actions that could be taken by Brookfield;
the departure of some or all of Brookfield’s key professionals;
the threat of litigation;
changes to legislation and regulations;
possible environmental liabilities and other possible liabilities;
our ability to obtain adequate insurance at commercially reasonable rates;
our financial condition and liquidity;
downgrading of credit ratings and adverse conditions in the credit markets;
changes in financial markets, foreign currency exchange rates, interest rates or political conditions;
the general volatility of the capital markets and the market priceavailability of equity and debt financing and refinancing within these markets; risks relating to our units;insurance coverage; the possible impact of international conflicts and
other developments including terrorist acts; potential environmental liabilities; changes in tax laws and other tax related risks; dependence on management personnel; illiquidity of investments; the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits therefrom; operational and reputational risks; catastrophic events, such as earthquakes and hurricanes; and other risks and factors describeddetailed from time to time in this Form 20-F, including those set forth under Item 3.D. “Key Information — Risk Factors”, Item 5. “Operatingour documents filed with the securities regulators in Canada and Financial Reviewthe United States, as applicable.
We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements or information, investors and Prospects”others should carefully consider the foregoing factors and Item 4.B. “Information on the Company — Business Overview”.
other uncertainties and potential events. Except as required by applicable law, we undertake no obligation to publicly update or revise publicly any forward-looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep this cautionary note in mind as you read this Form 20-F.
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
3.A. SELECTED FINANCIAL DATA
The following tables present selected financial data for
Brookfield’s commercial property operations and are derived from, and should be read in conjunction with, the carve-out financial statementsour company as of
Brookfield’s commercial property operations as at December 31, 2012 and 2011, and for the
years ended December 31, 2012, 2011 and 2010, and the notes thereto, each of which is included elsewhere in this Form 20-F. The information in this section should also be read in conjunction with our unaudited pro forma financial statements (“Unaudited Pro Forma Financial Statements”) as at and for the year ended December 31, 2012 included elsewhere in this Form 20-F. | | | | | | | | | | | | |
| (US$ Millions) Years ended December 31, | | 2012 | | | 2011 | | | 2010 | |
Total revenue | | $ | 3,801 | | | $ | 2,820 | | | $ | 2,270 | |
Net income | | | 2,708 | | | | 3,745 | | | | 2,109 | |
Net income attributable to parent company | | | 1,499 | | | | 2,323 | | | | 1,026 | |
FFO(1) | | | 642 | | | | 576 | | | | 426 | |
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| | Years ended December 31, |
| (US$ Millions, except per unit information) | 2015 |
| 2014 |
| 2013(3) |
| 2012(3) |
| 2011(3) |
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| Total revenue | $ | 4,853 |
| $ | 4,473 |
| $ | 4,287 |
| $ | 3,768 |
| $ | 2,781 |
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| Net income | 3,766 |
| 4,420 |
| 1,763 |
| 2,640 |
| 3,766 |
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| Net income attributable to LP units | 1,064 |
| 1,154 |
| 118 |
| — |
| — |
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| Net income attributable to GP Units | 1 |
| 1 |
| — |
| — |
| — |
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| Net income attributable to Brookfield Asset Management | — |
| — |
| 232 |
| 1,476 |
| 2,344 |
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Net income per LP Unit(1) | 3.72 |
| 5.59 |
| 1.41 |
| — |
| — |
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| Distributions per LP Unit | 1.06 |
| 1.00 |
| 0.63 |
| — |
| — |
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FFO(2) | 710 |
| 714 |
| 582 |
| 631 |
| 565 |
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(1) | Net income per LP Unit has been presented effective for the period from the date of the Spin-off on April 15, 2013, as this is the date of legal entitlement of earnings to the LP Units. |
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(2) | FFO is a non-IFRS measure. See page 87See”Use of this Form 20-F for a reconciliationNon-IFRS Measures” and “Financial Statements Analysis Review of FFOConsolidated Results”. |
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(3) | For periods prior to net income (loss)April 15, 2013, the date of the Spin-off, the financial information reflected is that of Brookfield Asset Management’s commercial property operations. |
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| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
| Dec. 31, 2013 |
| Dec. 31, 2012(2) |
|
| Investment properties | $ | 41,599 |
| $ | 41,141 |
| $ | 34,153 |
| $ | 31,696 |
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| Equity accounted investments | 17,638 |
| 10,356 |
| 9,281 |
| 8,038 |
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| Total assets | 71,866 |
| 65,575 |
| 52,446 |
| 47,681 |
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| Debt obligations | 30,526 |
| 27,006 |
| 21,640 |
| 19,808 |
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| Capital securities | 4,031 |
| 4,011 |
| 2,369 |
| 866 |
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| Total equity | 30,933 |
| 28,299 |
| 24,990 |
| 24,003 |
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Equity attributable to Unitholders(1) | 21,958 |
| 20,208 |
| 13,624 |
| 13,163 |
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(1) | As at December 31, 2015 and 2014, refers to holders of our units, GP Units, Redemption-Exchange Units, Special LP Units and Exchange LP Units. As of December 31, 2013, refers to holders of our units, GP units, Redemption-Exchange Units and Special LP Units. As of December 31, 2012, reflects equity attributable to parent company.Brookfield Asset Management. |
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| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Investment properties | | $ | 31,859 | | | $ | 27,594 | |
Equity accounted investments | | | 8,110 | | | | 6,888 | |
Total assets | | | 48,020 | | | | 40,317 | |
Property debt | | | 19,724 | | | | 15,387 | |
Total equity | | | 24,245 | | | | 21,494 | |
Equity in net assets attributable to parent company | | | 13,375 | | | | 11,881 | |
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(2) | For periods prior to April 15, 2013, the date of the Spin-off, the financial information reflected is that of Brookfield Asset Management’s commercial property operations. |
3.B. CAPITALIZATION AND INDEBTEDNESS
3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Your holding of units of our company
will involveinvolves substantial risks. You should carefully consider the following factors in addition to the other information set forth in this Form 20-F. If any of the following risks actually occur, our business, financial condition and results of operations and the value of your units would likely suffer.
Risks Relating to Us and Our Company
Our company is a newly formed partnership with no separate operating history and the historical and pro forma financial information included herein does not reflect the financial condition or operating results we would have achieved during the periods presented, and therefore may not be a reliable indicator of our future financial performance.
Our company was formed on January 3, 2013 and has only recently commenced its activities and has not generated any significant net income to date. Our limited operating history will make it difficult to assess our ability to operate profitably and make distributions to unitholders. Although most of our assets and operations have been under Brookfield’s control prior to our acquisition of such assets and operations, their combined results have not previously been reported on a stand-alone basis and the historical and pro forma financial statements included in this Form 20-F may not be indicative of our future financial condition or operating results. We urge you to carefully consider the basis on which the historical and pro forma financial information included herein was prepared and presented.
Our company relies on the Property Partnership and, indirectly, the Holding Entities and our operating entities to provide us with the funds necessary to pay distributions and meet our financial obligations.
Our company’s sole direct investment is its
limitedmanaging general partnership interest in the Property Partnership, which owns all of the common shares or equity interests, as applicable, of the Holding Entities, through which we hold all of our interests in the operating entities. Our company has no independent means of generating revenue. As a result, we depend on distributions and other payments from the Property Partnership and, indirectly, the Holding Entities and our operating entities to provide us with the funds necessary to pay distributions on our units and to meet our financial obligations. The Property Partnership, the Holding Entities and our operating entities are legally distinct from our company and they
willare generally
be required to service their debt obligations before making distributions to us or their parent entity, as applicable, thereby reducing the amount of our cash flow available to pay distributions on our units, fund working capital and satisfy other needs.
In addition, the Property Partnership is required to make distributions to Preferred Unitholders before making distributions to us. Any other entities through which we may conduct operations in the future will also be legally distinct from our company and may be restricted in their ability to pay dividends and distributions or otherwise make funds available to our company under certain conditions.
We anticipate that the only distributions our company will receive in respect of our
limitedmanaging general partnership interests in the Property Partnership will consist of amounts that are intended to assist our company in making distributions to our unitholders in accordance with our company’s distribution policy and to allow our company to pay expenses as they become due.
We may not be able to make distributions to holders of our units in amounts intended or at all.
Our company intends to make quarterly cash distributions
in an initial amount currently anticipated to beof approximately
$1.00$1.12 per unit on an annualized basis. However, despite our projections, there can be no assurance that we will be able to make such distributions or meet our target growth rate range of
3%5% to
5%8% annually. Based on amounts received in distributions from our operating entities and our projected operating cash flow from our direct investments, our proposed distributions would be significantly greater than such amounts.
Although we may use distributions from our operating entities, the proceeds of sales of certain of our direct investments and/or borrowings to fund any shortfall in distributions, we may not be able to do so on a consistent and sustainable basis. Our ability to make distributions will depend on several other factors, some of which are out of our control, including, among other things, general economic conditions, our results of operations and financial condition, the amount of cash that is generated by our operations and investments, restrictions imposed by the terms of any indebtedness that is incurred to finance our operations and investments or to fund liquidity needs, levels of operating and other expenses, and contingent liabilities, any or all of which could prevent us from meeting our anticipated distribution levels. Finally, the BPY General Partner has sole authority to determine when and if our distributions will be made in respect of our units, and there can be no assurance that the BPY General Partner will declare and pay the distributions on our units as intended or at all.
We are subject to foreign currency risk and our risk management activities may adversely affect the performance of our operations.
Some of our assets and operations are in countries where the U.S. Dollar is not the functional currency. These operations pay distributions in currencies other than the U.S. Dollar which we must convert to U.S. Dollars prior to making distributions on our units. A significant depreciation in the value of such foreign currencies may have a material adverse effect on our business, financial condition and results of operations.
When managing our exposure to such market risks, we may use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative instruments. The success of any hedging or other derivative transactions that we enter into generally will depend on our ability to structure contracts that appropriately offset our risk position. As a result, while we may enter into such transactions in order to reduce our exposure to market risks, unanticipated market changes may result in poorer overall investment performance than if the transaction had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases.
We are subject to interest rate risk and a rise in interest rates may adversely affect us and the value of an investment in our units.
A number of our assets are interest rate sensitive: increases in long-term interest rates will, absent all else, decrease the value of these assets by reducing the present value of the cash flows expected to be produced by the asset. If interest rates were to rise, it may affect the market perceived or actual value of our assets and/or distributions and consequently the market price of our units may decline in value. Additionally, an increase in interest rates could decrease the amount buyers may be willing to pay for our properties, thereby reducing the market value of our properties and limiting our ability to sell properties or to obtain mortgage financing secured by our properties. Further, increased interest rates may effectively increase the cost of properties we acquire to the extent we utilize leverage for those acquisitions and may result in a reduction in our acquisitions to the extent we reduce the amount we offer to pay for properties, due to the effect of increased interest rates, to a price that sellers may not accept.
Our company is not, and does not intend to become, regulated as an investment company under the U.S. Investment Company Act of 1940,
or the Investment Company Act, (and similar legislation in other jurisdictions) and if our company were deemed an “investment company” under the
U.S. Investment Company Act
of 1940, applicable restrictions would make it impractical for us to operate as contemplated.
The U.S. Investment Company Act of 1940 and the rules thereunder (and similar legislation in other jurisdictions) provide certain protections to investors and impose certain restrictions on companies that are registered as investment companies. Among other things, such rules limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities and impose certain governance requirements. Our company has not been and does not intend to become regulated as an investment company and our company intends to conduct its activities so it will not be deemed to be an investment company under the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions). In order to ensure that our company is not deemed to be an investment company, we may be required to materially restrict or limit the scope of our operations or plans, we will be limited in the types of acquisitions that we may make and we may need to modify our organizational structure or dispose of assets that we would not otherwise dispose of. Moreover, if anything were to happen whichthat would potentially cause our company to be deemed an investment company under the U.S. Investment Company Act, of 1940, it would be impractical for us to operate as intended, agreements and arrangements between and among us and Brookfield would be impaired and our business, financial condition and results of operations would be materially adversely affected. Accordingly, we would be required to take extraordinary steps to address the situation, such as the amendment or termination of our Master Services Agreement, the restructuring of our company and the Holding Entities, the amendment of our limited partnership agreement or the termination of our company, any of which would materially adversely affect the value of our units. In addition, if our company were deemed to be an investment company under the U.S. Investment Company Act, of 1940, it would be taxable as a corporation for U.S. federal income tax purposes, and such treatment would materially adversely affect the value of our units. See Item 10.E. “Additional Information —- Taxation —- U.S. Tax Considerations —- Partnership Status of Our Company and the Property Partnership”.
Our company is a “foreign private issuer” under U.S. securities laws and as a result is subject to disclosure obligations different from requirements applicable to U.S. domestic registrants listed on the New York Stock Exchange, or NYSE.
Although our company is subject to the periodic reporting requirement of the U.S. Securities Exchange Act
of 1934, as amended, or the Exchange Act, the periodic disclosure required of foreign private issuers under the Exchange Act is different from periodic disclosure required of U.S. domestic registrants. Therefore, there may be less publicly available information about us than is regularly published by or about other public companies in the United States and our company is exempt from certain other sections of the Exchange Act that U.S. domestic registrants would otherwise be subject to, including the requirement to provide our unitholders with information statements or proxy statements that comply with the Exchange Act. In addition, insiders and large unitholders of our company
willare not
be obligated to file reports under Section 16 of the Exchange Act and certain of the governance rules imposed by the NYSE
will beare inapplicable to our company.
Our company is a “SEC foreign issuer” under Canadian securities regulations and is exempt from certain requirements of Canadian securities laws.
Although our company is a reporting issuer in Canada, we are a “SEC foreign issuer” and exempt from certain Canadian securities laws relating to continuous disclosure obligations and proxy solicitation as long as we comply with certain reporting requirements applicable in the United States, provided that the relevant documents filed with the U.S. Securities and Exchange Commission, or the SEC, are filed in Canada and sent to our company’s unitholders in Canada to the extent and in the manner and within the time required by applicable U.S. requirements. Therefore, there may be less publicly available information in Canada about us than is regularly published by or about other reporting issuers in Canada.
We may be subject to the risks commonly associated with a separation of economic interest from control or the incurrence of debt at multiple levels within an organizational structure.
Our ownership and organizational structure is similar to structures whereby one company controls another company which in turn holds controlling interests in other companies; thereby, the company at the top of the chain may control the company at the bottom of the chain even if its effective equity position in the bottom company is less than a controlling interest. Brookfield is the sole shareholder of the BPY General Partner and, as a result of such ownership of the BPY General Partner, Brookfield controls the appointment and removal of the BPY General Partner’s directors and, accordingly, exercises substantial influence over us. In turn, we often have a majority controlling interest or a significant influence in our investments. Even though
at the time of the spin-off Brookfield
hadhas an effective economic interest in our business of approximately
92.44%68% as of the date of this Form 20-F as a result of its ownership of our units and the Redemption-Exchange Units, over time Brookfield may reduce this economic interest while still maintaining its controlling interest, and therefore Brookfield may use its control rights in a manner that conflicts with the economic interests of our other unitholders. For example, despite the fact that our company has a conflicts policy in place which addresses the requirement for independent approval and other requirements for transactions in which there is greater potential for a conflict of interest to arise, including transactions with affiliates of Brookfield, because Brookfield exerts substantial influence over us, and, in turn, over our investments, there is a greater risk of transfer of assets of our investments at non-arm’s length values to Brookfield and its affiliates. In addition, debt incurred at multiple levels within the chain of control could exacerbate the separation of economic interest from controlling interest at such levels, thereby creating an incentive to leverage our company and our investments. Any such increase in debt would also make us more sensitive to declines in revenues, increases in expenses and interest rates, and adverse market conditions. The servicing of any such debt would also reduce the amount of funds available to pay distributions to our company and ultimately to our unitholders.
Risks Relating to Our Business
Our economic performance and the value of our assets are subject to the risks incidental to the ownership and operation of real estate assets.
Our economic performance, the value of our assets and, therefore, the value of our units are subject to the risks normally associated with the ownership and operation of real estate assets, including but not limited to:
downturns and trends in the national, regional and local economic conditions where our properties and other assets are located;
the cyclical nature of the real estate industry;
local real estate market conditions, such as an oversupply of commercial properties, including space available by sublease, or a reduction in demand for such properties;
changes in interest rates and the availability of financing;
competition from other properties;
changes in market rental rates and our ability to rent space on favorable terms;
the bankruptcy, insolvency, credit deterioration or other default of our tenants;
the need to periodically renovate, repair and re-lease space and the costs thereof;
increases in maintenance, insurance and operating costs;
civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;
the decrease in the attractiveness of our properties to tenants;
the decrease in the underlying value of our properties; and
certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges that must be made regardless of whether a property is producing sufficient income to service these expenses.
We are dependent upon the economic conditions of the markets where our assets are located.
We are affected by local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own assets. A protracted decline in economic conditions will cause downward pressure on our operating margins and asset values as a result of lower demand for space.
Substantially all of our
Our properties are
largely located in North America, Europe,
and Australia
but also include a growing presence in China, Brazil and
Brazil.India. A prolonged downturn in one or more of these economies or the economy of any other country where we own property would result in reduced demand for space and number of prospective tenants and will affect the ability of our properties to generate significant revenue. If there is an increase in operating costs resulting from inflation and other factors, we may not be able to offset such increases by increasing rents.
Additionally, as part of our strategy for our office property platform is to focus on markets underpinned by major financial, energy,
technology, and professional services businesses, a significant downturn in one or more of the industries in which these businesses operate would also adversely affect our results of operations.
We face risks associated with the use of debt to finance our business, including refinancing risk.
We incur debt in the ordinary course of our business and therefore are subject to the risks associated with debt financing.
TheseThe risks
associated with our debt financing, including the following, may adversely affect our financial condition and results of operations:
cash flows may be insufficient to meet required payments of principal and interest;
payments of principal and interest on borrowings may leave insufficient cash resources to pay operating expenses;
we may not be able to refinance indebtedness on our properties at maturity due to business and market factors, including: disruptions in the capital and credit markets; the estimated cash flows of our properties and other assets; the value of our properties and other assets; and financial, competitive, business and other factors, including factors beyond our control; and
if refinanced, the terms of a refinancing may not be as favorable as the original terms of the related indebtedness.
Our operating entities have a significant degree of leverage on their assets. Highly leveraged assets are inherently more sensitive to declines in revenues, increases in expenses and interest rates, and adverse market conditions. A leveraged company’s income and net assets also tend to increase or decrease at a greater rate than would otherwise be the case if money had not been borrowed. As a result, the risk of loss associated with a leveraged company, all other things being equal, is generally greater than for companies with comparatively less debt.
We rely on our operating entities to provide our company with the funds necessary to make distributions on our units and meet our financial obligations. The leverage on our assets may affect the funds available to our company if the terms of the debt impose restrictions on the ability of our operating entities to make distributions to our company. In addition, our operating entities
will generally have to service their debt obligations before making distributions to our company or their parent entity.
The Property Partnership is also required to make distributions to Preferred Unitholders before making distributions to us.
Leverage may also result in a requirement for liquidity, which may force the sale of assets at times of low demand and/or prices for such assets.
On April 15, 2013,
In addition to the
Holding Entities entered intocorporate credit facility, or the BPY Credit Facility, which provides for an aggregate of $1.0 billion in committed credit availability, we have a
$1.0 billion subordinated credit
agreementfacility with Brookfield
US Holdings Inc. whereby Brookfield US Holdings Inc. agreed to
provide the Holding Entities with a $500 million revolving credit facility.supplement our liquidity. We may also incur indebtedness under future credit facilities or other debt-like instruments, in addition to any asset-level indebtedness. We may also issue debt or debt-like instruments in the market in the future, which may or may not be rated. Should such debt or debt-like instruments be rated, a credit downgrade will have an adverse impact on the cost of such debt.
In addition, Brookfield holds $1.25 billion of redeemable preferred shares of Brookfield BPY Holdings Inc., one of our Holding Entities, which it received as partial consideration for causing the Property Partnership to acquire substantially all of Brookfield Asset Management’s commercial property operations.Entities. We have agreed to use our commercially reasonable efforts to, as soon as reasonably practical, subject to any restrictions in the BPY Credit Facility, issue debt or equity securities or borrow money from one or more financial institutions or
other lenders, on terms reasonably acceptable to us, in an aggregate amount sufficient to fund the redemption of $500 million of the preferred shares. The terms of any such financing may be less favorable to us than the terms of the preferred shares.
If we are unable to refinance our indebtedness on acceptable terms, or at all, we may need to dispose of one or more of our properties or other assets upon disadvantageous terms. In addition, prevailing interest rates or
other factors at the time of refinancing could increase our interest expense, and if we mortgage property to secure payment of indebtedness and are unable to make mortgage payments, the mortgagee could foreclose upon such property or appoint a receiver to receive an assignment of our rents and leases. This may adversely affect our ability to make distributions or payments to our unitholders and lenders.
Restrictive covenants in our indebtedness may limit management’s discretion with respect to certain business matters.
Instruments governing any of our indebtedness or indebtedness of our operating entities or their subsidiaries may contain restrictive covenants limiting our discretion with respect to certain business matters. These covenants could place significant restrictions on, among other things, our ability to create liens or other encumbrances, to make distributions to our unitholders or make certain other payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. These covenants could also require us to meet certain financial ratios and financial condition tests. A failure to comply with any such covenants could result in a default which, if not cured or waived, could permit acceleration of the relevant indebtedness.
If we are unable to manage our interest rate risk effectively, our cash flows and operating results may suffer.
Advances under credit facilities and certain property-level mortgage debt bear interest at a variable rate. We may incur further indebtedness in the future that also bears interest at a variable rate or we may be required to refinance our debt at higher rates. In addition, though we attempt to manage interest rate risk, there can be no assurance that we will hedge such exposure effectively or at all in the future. Accordingly, increases in interest rates above that which we anticipate based upon historical trends would adversely affect our cash flows.
We face potential adverse effects from tenant defaults, bankruptcies or insolvencies.
A commercial tenant may experience a downturn in its business, which could cause the loss of that tenant
as a tenant or weaken its financial condition and result in
the tenant’sits inability to make rental payments when due or, for retail tenants, a reduction in percentage rent payable. If a tenant defaults, we may experience delays and incur costs in enforcing our rights as landlord and protecting our investments.
We cannot evict a tenant solely because of its bankruptcy. In addition, in certain jurisdictions where we own properties, a court may authorize a tenant to reject and terminate its lease. In such a case, our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In any event, it is unlikely that a bankrupt or insolvent tenant will pay the full amount it owes under a lease. The loss of rental payments from tenants and costs of re-leasing would adversely affect our cash flows and results of operations. In the case of our retail properties, the bankruptcy or insolvency of an anchor tenant or tenant with stores at many of our properties would cause us to suffer lower revenues and operational difficulties, including difficulties leasing the remainder of the property. Significant expenses associated with each property, such as mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the property. In the event of a significant number of lease defaults and/or tenant bankruptcies, our cash flows may not be sufficient to pay cash distributions to our unitholders and repay maturing debt or other obligations.
Reliance on significant tenants could adversely affect our results of operations.
Many of our properties are occupied by one or more significant tenants and, therefore, our revenues from those properties are materially dependent on the creditworthiness and financial stability of those tenants. Our business would be adversely affected if any of those tenants failed to renew certain of their significant leases, became insolvent, declared bankruptcy or otherwise refused to pay rent in a timely fashion or at all. In the event of a default by one or more significant tenants, we may experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our investment and re-leasing the property. If a lease of a significant tenant is terminated, it may be difficult, costly and time consuming to attract new tenants and lease the property for the rent previously received.
Our inability to enter into renewal or new leases with tenants on favorable terms or at all for all or a substantial portion of space that is subject to expiring leases would adversely affect our cash flows and operating results.
Our properties generate revenue through rental payments made by tenants of the properties. Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. The terms of any renewal or replacement lease may be less favorable to us than the existing lease. We would be adversely affected, in particular, if any major tenant ceases to be a tenant and cannot be replaced on similar or better terms or at all. Additionally, we may not be able to lease our properties to an appropriate mix of tenants. Retail tenants may negotiate leases containing exclusive rights to sell particular types of merchandise or services within a particular retail property.
When leasing other space after the vacancy of a retail tenant, theseThese provisions may limit the number and types of prospective tenants for the vacant
space.space in such properties.
Our competitors may adversely affect our ability to lease our properties which may cause our cash flows and operating results to suffer.
Each segment of the real estate industry is competitive. Numerous other developers, managers and owners of commercial properties compete with us in seeking tenants and, in the case of our
multi-familymultifamily properties, there are numerous housing alternatives which compete with our properties in attracting residents. Some of the properties of our competitors may be newer, better located or better capitalized. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to make space available at lower prices than the space in our properties, particularly if there is an oversupply of space available in the market. Competition for tenants could have an adverse effect on our ability to lease our properties and on the rents that we may charge or concessions that we must
grant. If our competitors adversely impact our ability to lease our properties,grant, which may cause our cash flows and operating results
mayto suffer.
Our ability to realize our strategies and capitalize on our competitive strengths are dependent on the ability of our operating entities to effectively operate our large group of commercial properties, maintain good relationships with tenants, and remain well-capitalized, and our failure to do any of the foregoing would affect our ability to compete effectively in the markets in which we do business.
Our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates, which could adversely affect our financial condition and results of operations.
We maintain insurance on our properties in amounts and with deductibles that we believe are in line with what owners of similar properties carry; however, our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates in the future.
There also are certain types of risks (such as war, environmental contamination such as toxic mold, and lease and other contract claims)
whichthat are either uninsurable or not economically insurable. Should any uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, one or more properties, and we would continue to be obligated to repay any recourse mortgage indebtedness on such properties.
Possible terrorist activity could adversely affect our financial condition and results of operations and our insurance may not cover some losses due to terrorism or may not be obtainable at commercially reasonable rates.
Possible terrorist attacks in the markets where our properties are located may result in declining economic activity, which could reduce the demand for space at our properties, reduce the value of our properties and
could harm the demand for goods and services offered by our tenants.
Additionally, terrorist activities could directly affect the value of our properties through damage, destruction or loss. Our office portfolio is concentrated in large metropolitan areas, some of which have been or may be perceived to be subject to terrorist attacks. Many of our office properties consist of high-rise buildings, which may also be subject to this actual or perceived threat. Our insurance may not cover some losses due to terrorism or may not be obtainable at commercially reasonable rates.
We are subject to risks relating to development and redevelopment projects.
On a strategic and selective basis, we may develop and redevelop properties. The real estate development and redevelopment business involves significant risks that could adversely affect our business, financial condition and results of operations, including the following:
we may not be able to complete construction on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing the properties;
we may not have sufficient capital to proceed with planned redevelopment or expansion activities;
we may abandon redevelopment or expansion activities already under way, which may result in additional cost recognition;
we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations;
we may not be able to lease properties at all or on favorable terms, or occupancy rates and rents at a completed project might not meet projections and, therefore, the project might not be profitable;
construction costs, total investment amounts and our share of remaining funding may exceed our estimates and projects may not be completed and delivered as planned; and
upon completion of construction, we may not be able to obtain, or obtain on advantageous terms, permanent financing for activities that we have financed through construction loans.
We are subject to risks that affect the retail environment.
We are subject to risks that affect the retail environment, including unemployment, weak income growth, lack of available consumer credit, industry slowdowns and plant closures, low consumer confidence, increased consumer debt, poor housing market conditions, adverse weather conditions, natural disasters and the need to pay down existing obligations.
AllAny of these factors could negatively affect consumer spending and adversely affect the sales of our retail tenants. This could have an unfavorable effect on our operations and our ability to attract new retail tenants.
In addition, our retail tenants face competition from retailers at other regional malls, outlet malls and other discount shopping centers, discount shopping clubs, catalogue companies, and through internet sales and telemarketing. Competition of these types could reduce the percentage rent payable by certain retail tenants and adversely affect our revenues and cash flows. Additionally, our retail tenants are dependent on perceptions by retailers and shoppers of the safety, convenience and attractiveness of our retail properties. If retailers and shoppers perceive competing properties and other retailing options such as the internet to be more convenient or of a higher quality, our revenues may be adversely affected.
Some of our retail lease agreements include a co-tenancy provision which allows the mall tenant to pay a reduced rent amount and, in certain instances, terminate the lease, if we fail to maintain certain occupancy levels at the mall. In addition, certain of our tenants have the ability to terminate their leases prior to the lease expiration date if their sales do not meet agreed upon thresholds. Therefore, if occupancy, tenancy or sales fall below certain thresholds, rents we are entitled to receive from our retail tenants would be reduced and our ability to attract new tenants may be limited.
The computation of cost reimbursements from our retail tenants for common area maintenance, insurance and real estate taxes is complex and involves numerous judgments including interpretation of lease terms and other tenant lease provisions. Most tenants make monthly fixed payments of common area maintenance, insurance, real estate taxes and other cost reimbursements and, after the end of the calendar year, we compute each tenant’s final cost reimbursements and issue a bill or credit for the full amount, after considering amounts paid by the tenant during the year. The billed amounts could be disputed by the tenant or become the subject of a tenant audit or even litigation. There can be no assurance that we will collect all or any portion of these amounts.
We are subject to risks associated with the
multi-familymultifamily residential industry.
We are subject to risks associated with the
multi-familymultifamily residential industry, including the level of mortgage interest rates which may encourage tenants to purchase rather than lease and housing and governmental programs that provide assistance and rent subsidies to tenants. If the demand for
multi-familymultifamily properties is reduced, income generated from our
multi-familymultifamily residential properties and the underlying value of such properties may be adversely affected.
In addition, certain jurisdictions regulate the relationship of an owner and its residential tenants. Commonly, these laws require a written lease, good cause for eviction, disclosure of fees, and notification to residents of changed land use, while prohibiting unreasonable rules, retaliatory evictions, and restrictions on a resident’s choice of landlords. Apartment building owners have been the subject of lawsuits under various “Landlord and Tenant Acts” and other general consumer protection statutes for coercive, abusive or unconscionable leasing and sales practices. If we become subject to litigation, the outcome of any such proceedings may materially adversely affect us and may continue for long periods of time. A few jurisdictions may offer more significant protection to residential tenants. In addition to state or provincial regulation of the landlord-tenant relationship, numerous towns and municipalities impose
rent control on apartment buildings. The imposition of rent control on our
multi-familymultifamily residential units could have a materially adverse effect on our results of operations.
If we are unable to recover from a
A business disruption
on a timely basismay adversely affect our financial condition and results of
operations could be adversely affected.operations.
Our business is vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. If we are unable to recover from a business disruption on a timely basis, our financial condition and results of operations would be adversely affected. We may also incur additional costs to remedy damages caused by such
disruptions.disruptions, which could adversely affect our financial condition and results of operations.
Because certain of our assets are illiquid, we may not be able to sell these assets when appropriate or when desired.
Large commercial properties like the ones that we own can be hard to sell, especially if local market conditions are poor. Such illiquidity could limit our ability to diversify our assets promptly in response to changing economic or investment conditions.
Additionally, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the markets in which we operate in times of illiquidity. These restrictions reduce our ability to respond to changes in the performance of our assets and could adversely affect our financial condition and results of operations.
We face risks associated with property acquisitions.
Competition from other well-capitalized real estate investors, including both publicly traded real estate investment trusts and institutional investment funds, may significantly increase the purchase price of, or prevent us from acquiring, a desired property. Acquisition agreements will typically contain conditions to closing, including completion of due diligence to our satisfaction or other conditions that are not within our control, which may not be satisfied. Acquired properties may be located in new markets where we may have limited knowledge and understanding of the local economy, an absence of business relationships in the area or unfamiliarity with local government and applicable laws and regulations. We may be unable to finance acquisitions on favorable terms or newly acquired properties may fail to perform as expected. We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position or we may be unable to quickly and efficiently integrate new acquisitions into our existing operations. We may also acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. Each of these factors could have an adverse effect on our results of operations and financial condition.
We do not control certain of our operating entities, including
General GrowthGGP and Rouse Properties, Inc., or
GGP, and Canary Wharf,Rouse, and therefore we may not be able to realize some or all of the benefits that we expect to realize from those entities.
We do not have control of certain of our operating entities, including GGP and
Canary Wharf.Rouse. Our interests in those entities subject us to the operating and financial risks of their businesses, the risk that the relevant company may make business, financial or management decisions that we do not agree with, and the risk that we may have differing objectives than the entities in which we have interests. Because we do not have the ability to exercise control over those entities, we may not be able to realize some or all of the benefits that we expect to realize from those entities. For example, we may not be able to cause such operating entities to make distributions to us in the amount or at the time that we need or want such distributions. In addition, we rely on the internal controls and financial reporting controls of the
public companies in which we invest and the failure of such companies to maintain effective controls or comply with applicable standards may adversely affect us.
We do not have sole control over the properties that we own with co-venturers, partners, fund investors or co-tenants or over the revenues and certain decisions associated with those properties, which may limit our flexibility with respect to these investments.
We participate in joint ventures, partnerships, funds and co-tenancies affecting many of our properties. Such investments involve risks not present were a third party not involved, including the possibility that our co-venturers, partners, fund investors or co-tenants might become bankrupt or otherwise fail to fund their share of required capital contributions. The bankruptcy of one of our co-venturers, partners, fund investors or co-tenants could materially and adversely affect the relevant property or properties. Pursuant to bankruptcy laws, we could be precluded from taking some actions affecting the estate of the other investor without prior court approval which would, in most cases, entail prior notice to other parties and a hearing. At a minimum, the requirement to obtain court approval may delay the actions we would or might want to take. If the relevant joint venture or other investment entity has incurred recourse obligations, the discharge in bankruptcy of one of the other investors might result in our ultimate liability for a greater portion of those obligations than would otherwise be required.
Additionally, our co-venturers, partners, fund investors or co-tenants might at any time have economic or other business interests or goals
whichthat are inconsistent with those of our company, and we could become engaged in a dispute with any of them that might affect our ability to develop or operate a property. In addition, we do not have sole control of certain major decisions relating to these properties, including decisions relating to: the sale of the properties; refinancing; timing and amount of distributions of cash from such properties; and capital improvements.
For example, when we participate with institutional investors in Brookfield-sponsored or co-sponsored consortiums for asset acquisitions and as a partner in or alongside Brookfield-sponsored or co-sponsored partnerships, there is often a finite term to the investment which could lead to the investment being sold prior to the date we would otherwise choose.
In some instances where we are the property manager for a joint venture, the joint venture retains joint approval rights over various material matters such as the budget for the property, specific leases and our leasing plan. Moreover, in certain property management arrangements the other venturer can terminate the property management agreement in limited circumstances relating to enforcement of the property managers’ obligations. In addition, the sale or transfer of interests in some of our joint ventures and partnerships is subject to rights of first refusal or first offer and some joint venture and partnership agreements provide for buy-sell or similar arrangements. Such rights may be triggered at a time when we may not want to sell but we may be forced to do so because we may not have the financial resources at that time to purchase the other party’s interest. Such rights may also inhibit our ability to sell an interest in a property or a joint venture or partnership within our desired time frame or on any other desired basis.
Changes in our credit ratings may have an adverse effect on our financial position and ability to raise capital.
We cannot assure you that any credit rating assigned to our partnership, any of our subsidiaries or any of our subsidiaries’ securities will remain in effect for any given period of time or that any rating will not be lowered or withdrawn entirely by the relevant rating agency. A lowering or withdrawal of such ratings may have an adverse effect on our financial position and ability to raise capital.
We are subject to risks associated with commercial property loans.
We have interests in loans or participations in loans, or securities whose underlying performance depends on loans made with respect to a variety of commercial real estate. Such interests are subject to normal credit risks as well as those generally not associated with traditional debt securities. The ability of the borrowers to repay the loans will typically depend upon the successful operation of the related real estate project and the availability of financing. Any factors
whichthat affect the ability of the project to generate sufficient cash flow could have a material effect on the value of these interests. Such factors include, but are not limited to: the uncertainty of cash flow to meet fixed obligations; adverse changes in general and local economic conditions, including interest rates and local market conditions; tenant credit risks; the unavailability of financing, which may make the operation, sale, or refinancing of a property difficult or unattractive; vacancy and occupancy rates; construction and operating costs; regulatory requirements, including zoning, rent control and real and personal property tax laws, rates and assessments; environmental concerns; project and borrower diversification; and uninsured losses. Security underlying such interests will generally be in a junior or subordinate position to senior financing. In certain circumstances, in order to protect our interest, we may decide to repay all or a portion of the senior indebtedness relating to the particular interests or to cure defaults with respect to such senior indebtedness.
We invest in mezzanine debt, which can rank below other senior lenders.
We invest in mezzanine debt interests in real estate companies and properties whose capital structures have significant debt ranking ahead of our investments. Our investments will not always benefit from the same or similar financial and other covenants as those enjoyed by the debt ranking ahead of our investments or benefit from cross-default provisions. Moreover, it is likely that we will be restricted in the exercise of our rights in respect of our investments by the terms of subordination agreements with the debt ranking ahead of the mezzanine capital. Accordingly, we may not be able to take the steps necessary to protect our investments in a timely manner or at all and there can be no assurance that the rate of return objectives of any particular investment will be achieved. To protect our original investment and to gain greater control over the underlying assets, we may elect to purchase the interest of a senior creditor or take an equity interest in the underlying assets, which may require additional investment requiring us to expend additional capital.
We are subject to risks related to syndicating or selling participations in our interests.
The strategy of the finance funds in which we have interests depends, in part, upon syndicating or selling participations in senior interests, either through capital markets collateralized debt obligation transactions or otherwise. If the finance funds cannot do so on terms that are favorable to us, we may not
makegenerate the returns we anticipate.
We face risks relating to the legal aspects of mortgage loans and may be subject to liability as a lender.
Certain interests acquired by us are subject to risks relating to the legal aspects of mortgage loans. Depending upon the applicable law governing mortgage loans (which laws may differ substantially), we may be
adversely affected by the operation of law (including state or provincial law) with respect to our ability to foreclose mortgage loans, the borrower’s right of redemption, the enforceability of assignments of rents, due on sale and acceleration clauses in loan instruments, as well as other creditors’ rights provided in such documents. In addition, we may be subject to liability as a lender with respect to our negotiation, administration, collection and/or foreclosure of mortgage loans. As a lender, we may also be subject to penalties for violation of usury limitations, which penalties may be triggered by contracting for, charging or receiving usurious interest. Bankruptcy laws may delay our ability to realize on our collateral or may adversely affect the priority thereof through doctrines such as equitable subordination or may result in a restructuring of the debt through principles such as the “cramdown” provisions of applicable bankruptcy laws.
We have significant interests in public companies, and changes in the market prices of the stock of such public companies, particularly during times of increased market volatility, could have a negative impact on our financial condition and results of operations.
We hold significant interests in public companies, and changes in the market prices of the stock of such public companies could have a material impact on our financial condition and results of operations. Global securities markets have been highly volatile, and continued volatility may have a material negative impact on our consolidated financial position and results of operations.
We have significant interests in Brookfield-sponsored real estate
opportunity and finance funds, and poor investment returns in these funds could have a negative impact on our financial condition and results of operations.
We have, and expect to continue to have in the future, significant interests in Brookfield-sponsored real estate
opportunity and finance funds, and poor investment returns in these funds, due to either market conditions or underperformance (relative to their competitors or to benchmarks),
wouldcould negatively affect our financial condition and results of operations. In addition, interests in such funds are subject to the risks inherent in the ownership and operation of real estate and real estate-related businesses and assets generally.
Our ownership of underperforming real estate properties involves significant risks and potential additional liabilities.
We hold interests in certain real estate properties with weak financial conditions, poor operating results, substantial financial needs, negative net worth or special competitive problems, or that are over-leveraged. Our ownership of underperforming real estate properties involves significant risks and potential additional liabilities. Our exposure to such underperforming properties may be substantial in relation to the market for those interests and distressed assets may be illiquid and difficult to sell or transfer. As a result, it may take a number of years for the fair value of such interests to ultimately reflect their intrinsic value as perceived by us.
We face risks relating to the jurisdictions of our operations.
We own and operate commercial properties in a number of jurisdictions, including but not limited to North America, Europe, Australia,
China, Brazil and
Brazil.India. Our operations are subject to significant political, economic and financial risks, which vary by jurisdiction, and may include:
changes in government policies or personnel;
restrictions on currency transfer or convertibility;
changes in labor relations;
political instability and civil unrest;
fluctuations in foreign exchange rates;
challenges of complying with a wide variety of foreign laws including corporate governance, operations, taxes and litigation;
differing lending practices;
differences in cultures;
changes in applicable laws and regulations that affect foreign operations;
difficulties in managing international operations;
obstacles to the repatriation of earnings and cash; and
breach or repudiation of important contractual undertakings by governmental entities and expropriation and confiscation of assets and facilities for less than fair market value.
We are subject to possible
health and safety and environmental liabilities and other possible liabilities.
As an owner and manager of real property, we are subject to various laws relating to environmental matters.
TheseWe could be liable under these laws
could hold us liable for the costs of removal and remediation of certain hazardous substances or wastes
present in our buildings, released or deposited on or in our properties or disposed of at other locations. These costs could be significant and
would reduce cash available for our
business.business which could have an adverse effect on our business, financial condition and results of operations. The failure to remove or remediate such substances could adversely affect our ability to sell our properties or our ability to borrow using real estate as collateral and could potentially result in claims or other proceedings against
us.us, which could have an adverse effect on our business, financial condition and results of operations. Environmental laws and regulations can change rapidly and we may become subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have an adverse effect on our business, financial condition or results of operations.
Regulations under building codes
The ownership and human rights codes generally require that public buildingsoperation of our assets carry varying degrees of inherent risk or liability related to worker health and safety and the environment, including the risk of government imposed orders to remedy unsafe conditions and potential civil liability. Compliance with health, safety and environmental standards and the requirements set out in our licenses, permits and other approvals are important to our business. We have incurred and will continue to incur significant capital and operating expenditures to comply with health, safety and environmental standards and to obtain and comply with licenses, permits and other approvals and to assess and manage potential liability exposure. Nevertheless, we may be made accessibleunsuccessful in obtaining or maintaining an important license, permit or other approval or become subject to disabled persons. Non-compliancegovernment orders, investigations, inquiries or other proceedings (including civil claims) relating to health, safety and environmental matters. The occurrence of any of these events or any changes, additions to, or more rigorous enforcement of, health, safety and environmental standards, licenses, permits or other approvals could have a significant impact on our operations and/or result in the imposition ofmaterial expenditures. As a consequence, no assurance can be given that additional environmental and workers’ health and safety issues relating to presently known or unknown matters will not require unanticipated expenditures, or result in fines, penalties or other consequences (including changes to operations) material to our business and operations.
Negative publicity could damage our reputation and business.
Our ability to attract and retain tenants, investors and employees is impacted by
the government or the award of damagesour reputation and negative publicity can expose us to
private litigants. If we are required to make substantial alterations or capital expenditures to one or more oflitigation and regulatory action could damage our
properties, it couldreputation, adversely affect our
financial conditionability to attract and
resultsretain tenants and employees, and divert management’s attention from day-to-day operations. Significant harm to our reputation can also arise from employee misconduct, unethical behavior, environmental matters, litigation or regulatory outcomes, failing to deliver minimum or required standards of
operations.We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state, provincialsafety, service and local regulatory requirements, such as state, provincialquality, compliance failures, unintended disclosure of confidential information and local firethe activities of our tenants and life safety requirements. If we fail to comply with these requirements, we could incur fines or be subject to private damage awards. Existing requirements may change and compliance with future requirements may require significant unanticipated expenditures that may affect our cash flows and results from operations.
counterparties, including vendors.
We may suffer
reputational harm or a significant loss resulting from fraud, other illegal acts and inadequate or failed internal processes or systems.
We may suffer a significant loss resulting from fraud, other illegal acts and inadequate or failed internal processes or systems. We operate in different markets and rely on our employees to follow our policies and processes as well as applicable laws in their activities. Risk of illegal acts or failed systems is managed through our infrastructure, controls, systems, policies and people, complemented by central groups focusing on enterprise-wide management of specific operational risks such as fraud, trading, outsourcing, and business disruption, as well as people and systems risks. Failure to
adequately manage these risks could result in direct or indirect financial loss, reputational impact, regulatory censure or failure in the management of other risks such as credit or market risk.
There is an increasing global focus on the implementation and enforcement of anti-bribery and corruption legislation, and this focus has heightened the risks that we face in this area, particularly as we expand our operations globally. We are subject to a number of laws and regulations governing payments and contributions to public officials or other third parties, including restrictions imposed by the U.S. Foreign Corrupt Practices Act and similar laws in non-U.S. jurisdictions, such as the UK Bribery Act and the Canadian Corruption of Foreign Public Officials Act. Different laws that are applicable to us may contain conflicting provisions, making our compliance more difficult. The policies and procedures we have implemented to protect against non-compliance with anti-bribery and corruption legislation may be inadequate. If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm, incarceration of our employees, restrictions on our operations and other liabilities, which could negatively affect our operating results and financial condition. In addition, we may be subject to successor liability for violations under these laws or other acts of bribery committed by companies in which we or our funds invest.
Instances of bribery, fraud, accounting irregularities and other improper, illegal or corrupt practices can be difficult to detect, and fraud and other deceptive practices can be widespread in certain jurisdictions. We invest in emerging market countries that may not have established stringent anti-bribery and corruption laws and regulations, or where existing laws and regulations may not be consistently enforced. For example, we invest in jurisdictions that are perceived to have materially higher levels of corruption according to international rating standards, such as China, India and Brazil. Due diligence on investment opportunities in these jurisdictions is frequently more challenging because consistent and uniform commercial practices in such locations may not have developed or do not meet international standards. Bribery, fraud, accounting irregularities and corrupt practices can be especially difficult to detect in such locations.
We may be subject to litigation.
In the ordinary course of our business, we may be subject to litigation from time to time. The outcome of any such proceedings may materially adversely affect us and may continue without resolution for long periods of time. Any litigation may consume substantial amounts of our management’s time and attention, and that time and the devotion of these resources to litigation may, at times, be disproportionate to the amounts at stake in the litigation.
The acquisition, ownership and disposition of real property expose us to certain litigation risks which could result in losses, some of which may be material. Litigation may be commenced with respect to a property we have acquired in relation to activities that took place prior to our acquisition of such property. In addition, at the time of disposition of an individual property, a potential buyer may claim that it should have been afforded the opportunity to purchase the asset or alternatively that such buyer should be awarded due diligence expenses incurred or statutory damages for misrepresentation relating to disclosures made, if such buyer is passed over in favor of another as part of our efforts to maximize sale proceeds. Similarly, successful buyers may later sue us under various damage theories, including those sounding in tort, for losses associated with latent defects or other
problems not uncovered in due diligence.problems. We may also be exposed to litigation resulting from the activities of our tenants or their customers.
Climate change may adversely impact our operations and markets.
There is growing concern from members of the scientific community and the general public that an increase in global average temperatures due to emissions of greenhouse gases and other human activities have or will cause significant changes in weather patterns and increase the frequency and severity of climate stress events. Climate change, including the impact of global warming, creates physical and financial risk. Physical risks from climate change include an increase in sea level and changes in weather conditions, such as an increase in intense precipitation and extreme heat events, as well as tropical and non-tropical storms.
We
participateown buildings in
transactions and make tax calculations for which the ultimate tax determinationcoastal locations that may be
uncertain.We participate in many transactionsparticularly susceptible to climate stress events or adverse localized effects of climate change, such as sea-level rise and make tax calculations during the courseincreased storm frequency or intensity. The occurrence of our business for which the ultimate tax determination is uncertain. While we believe we maintain provisions for uncertain tax positions that appropriately reflect our risk, these provisions are made using estimates of the amounts expected to be paid based on a qualitative assessment of several factors. It is possible that liabilities associated with one or more transactions may exceednatural disasters, such as hurricanes, fires, floods, and earthquakes (whether or not caused by climate change), could cause considerable damage to our provisions due to audits by, or litigation with, relevant taxing authorities which may materially affectproperties, disrupt our operations and negatively impact our financial conditionperformance. To the extent these events result in significant damage to or closure of one or more of our buildings, our operations and resultsfinancial performance could be adversely affected through lost tenants and an inability to lease or re-lease the space. In addition, these events could result in significant expenses to restore or remediate a property, increases in fuel (or other energy) prices or a fuel shortage and increases in the costs of operations.
insurance if they result in significant loss of property or other insurable damage.
Risks Relating to Our Relationship with Brookfield
Brookfield exercises substantial influence over us and we are highly dependent on the
Managers.Service Providers.
Brookfield is the sole shareholder of the BPY General Partner. As a result of its ownership of the BPY General Partner, Brookfield is able to control the appointment and removal of the BPY General Partner’s directors and, accordingly, exercise substantial influence over us. In addition, the
Managers,Service Providers, wholly-owned subsidiaries of Brookfield Asset Management, provide management services to us pursuant to our Master Services Agreement. Our company and the Property Partnership do not currently have any senior management and
will depend on the management and administration services provided by the
Managers.Service Providers. Brookfield personnel and support staff who provide services to us are not required to have as their primary responsibility the management and administration of our company or the Property Partnership or to work exclusively for either our company or the Property Partnership. Any failure to effectively manage our business or to implement our strategy could have a material adverse effect on our business, financial condition and results of operations.
Brookfield has no obligation to source acquisition opportunities for us and we may not have access to all acquisitions of commercial properties that Brookfield identifies.
Our ability to grow
will dependdepends in part on Brookfield identifying and presenting us with acquisition opportunities. Pursuant to the Relationship Agreement, Brookfield Asset Management has identified our company as the primary entity through which Brookfield Asset Management will own and operate its commercial property businesses on a global basis. However, Brookfield has no obligation to source acquisition opportunities specifically for us. In addition, Brookfield has not agreed to commit to us any minimum level of dedicated resources for the pursuit of acquisitions of commercial property other than as contemplated by our Master Services Agreement. There are a number of factors
whichthat could materially and adversely impact the extent to which acquisition opportunities are made available to us by Brookfield.
Brookfield will only recommend acquisition opportunities that it believes are suitable for us;
the same professionals within Brookfield’s organization who are involved in acquisitions of commercial property have other responsibilities within Brookfield’s broader asset management business. Limits on the availability of such individuals will likewise result in a limitation on the availability of acquisition opportunities for us;
Brookfield may consider certain assets or operations that have both infrastructure related characteristics and commercial property related characteristics to be infrastructure and not commercial property;
Brookfield may not consider an acquisition of commercial property that comprises part of a broader enterprise to be suitable for us, unless the primary purpose of such acquisition, as determined by Brookfield acting in good faith, is to acquire the underlying commercial property;
legal, regulatory, tax and other commercial considerations will be an important factor in determining whether an opportunity is suitable for us; and
in addition to structural limitations, the determination of whether a particular acquisition is suitable for us is highly subjective and is dependent on a number of factors including our liquidity position at the time, the risk profile of the opportunity, its fit with the balance of our business and other factors.
The departure of some or all of Brookfield’s professionals could prevent us from achieving our objectives.
We depend on the diligence, skill and business contacts of Brookfield’s professionals and the information and opportunities they generate during the normal course of their activities. Our success will depend on the continued service of these individuals, who are not obligated to remain employed with Brookfield. Brookfield has experienced departures of key professionals in the past and may do so in the future, and we cannot predict the impact that any such departures will have on our ability to achieve our objectives. The departure of a significant number of Brookfield’s professionals for any reason, or the failure to appoint qualified or effective successors in the event of such departures, could have a material adverse effect on our ability to achieve our objectives. Our limited partnership agreement and our Master Services Agreement do not require Brookfield to maintain the employment of any of its professionals or to cause any particular professionals to provide services to us or on our behalf.
The control
Control of
the BPY General Partnerour company may be transferred
directly or indirectly to a third party without unitholder consent.
The BPY General Partner may transfer its general partnership interest in our company to a third party, including in a merger or consolidation or in a transfer of all or substantially all of its assets, without the consent of our unitholders. Furthermore, at any time, the sole shareholder of the BPY General Partner may sell or transfer all or part of its shares in the BPY General Partner without the approval of our unitholders. If a new owner were to acquire ownership of the BPY General Partner and to appoint new directors or officers of its own choosing, it would be able to exercise substantial influence over our policies and procedures and exercise substantial influence over our management, our distributions and the types of acquisitions that we make. Such changes could result in our company’s capital being used to make acquisitions in which Brookfield has no involvement or
whichthat are substantially different from our targeted acquisitions. Additionally, we cannot predict with any certainty the effect that any transfer in the ownership of the BPY General Partner would have on the trading price of our units or our ability to raise capital or make investments in the future, because such matters would depend to a large extent on the identity of the new owner and the new owner’s intentions with regards to us. As a result, the future of our company would be uncertain and our financial condition and results of operations may suffer.
Our Master Services Agreement and our other arrangements with Brookfield do not impose on Brookfield any fiduciary duties to act in the best interests of our unitholders.
Our Master Services Agreement and our other arrangements with Brookfield do not impose on Brookfield any duty (statutory or otherwise) to act in the best interests of the Service Recipients, nor do they impose other duties that are fiduciary in nature. As a result, the BPY General Partner, a wholly-owned subsidiary of Brookfield Asset Management, in its capacity as our general partner, has the sole authority to enforce the terms of such agreements and to consent to any waiver, modification or amendment of their provisions, subject to approval by the independent directors in accordance with our conflicts policy.
The Bermuda Limited Partnership Act of 1883, under which our company and the Property Partnership were established, does not impose statutory fiduciary duties on a general partner of a limited partnership in the same manner that corporate statutes, such as theCanadaBusiness Corporations Act, impose fiduciary duties on directors of a corporation. In general, under applicable Bermudian legislation, a general partner has certain limited duties to its limited partners, such as the duty to render accounts, account for private profits and not compete with the partnership in business. In addition, Bermuda common law recognizes that a general partner owes a duty of utmost good faith to its limited partners. These duties are, in most respects, similar to duties imposed on a general partner of a limited partnership under U.S. and Canadian law. However, to the extent that the BPY General Partner and Property GP LP oweowes any fiduciary duties to our company and our unitholders, these duties have been modified pursuant to our limited partnership agreement and the Property Partnership’s limited partnership agreement as a matter of contract law. We have been advised by counsel that such modifications are not prohibited under Bermuda law, subject to typical qualifications as to enforceability of contractual provisions, such as the application of general equitable principles. This is similar to Delaware law which expressly permits modifications to the fiduciary duties owed to partners, other than an implied contractual covenant of good faith and fair dealing. Our limited partnership agreement and the Property Partnership’s limited partnership agreement containcontains various provisions that modify the fiduciary duties that might otherwise be owed to our company and our unitholders, including when conflicts of interest arise. For example, the agreements provideagreement provides that the BPY General Partner the Property General Partner and theirits affiliates do not have any obligation under theour limited partnership agreements of our company or the Property Partnership,agreement, or as a result of any duties stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to our company, the Property Partnership, any Holding Entity or any other holding entity established by us. TheyIt also allowallows affiliates of the BPY General Partner and Property General Partner to engage in activities that may compete with us or our activities. In addition, the agreements permitagreement permits the BPY General Partner and the Property General Partner to take into account the interests of third parties, including Brookfield, when resolving conflicts of interest. The agreements each prohibit theagreement prohibits our limited partners from advancing claims that otherwise might raise issues as to compliance with fiduciary duties or applicable law. These modifications to the fiduciary duties are detrimental to our unitholders because they restrict the remedies available for actions that might otherwise constitute a breach of fiduciary duty and permit conflicts of interest to be resolved in a manner that is not in the best interests of our company or the best interests of our unitholders. See Item 7.B. “Major Shareholders and Related Party Transactions —- Related Party Transactions —- Relationship with Brookfield —- Conflicts of Interest and Fiduciary Duties”.
Our organizational and ownership structure, as well as our contractual arrangements with Brookfield, may create significant conflicts of interest that may be resolved in a manner that is not in the best interests of our company or the best interests of our unitholders.
Our organizational and ownership structure involves a number of relationships that may give rise to conflicts of interest between us and our unitholders, on the one hand, and Brookfield, on the other hand. In certain instances, the interests of Brookfield may differ from the interests of our company and our unitholders, including with respect to the types of acquisitions made, the timing and amount of distributions by us, the reinvestment of returns generated by our operations, the use of leverage when making
acquisitions and theappointment of outside advisors and service providers,Service Providers, including as a result of the reasons described under Item 7.B. “Major
“Major Shareholders and Related Party Transactions —- Related Party Transactions —- Relationship with Brookfield”. In addition, the Managers,Service Providers, affiliates of Brookfield, provide management services to us pursuant to our Master Services Agreement. Pursuant to our Master Services Agreement, we pay a base management fee to the ManagersService Providers equal to $12.5 million per quarter (subject0.5% of the total capitalization of our partnership, subject to an annual minimum of $50 million (plus the amount of any annual escalation by athe specified inflation factor beginning on January 1, 2014)factor). Additionally, the Property Partnership pays a quarterly equity enhancement distribution to the Property GPSpecial LP of 0.3125% of the amount by which the company’s total capitalization value at the end of each quarter exceeds its total capitalization value determined immediately following the spin-off,Spin-off, subject to certain adjustments. The Property GPSpecial LP also receives incentive distributions based on an amount by which quarterly distributions on the limited partnership units of the Property Partnership exceed specified target levels as set forth in the Property Partnership’s limited partnership agreement. For a further explanation of the equity enhancement and incentive distributions, together with examples of how such amounts are calculated, see Item 10.B. “Additional Information —- Memorandum and Articles of Association —- Description of the Property Partnership Limited Partnership Agreement —- Distributions”. This relationship may give rise to conflicts of interest between us and our unitholders, on the one hand, and Brookfield, on the other, as Brookfield’s interests may differ from the interests of our company and our unitholders. The BPY General Partner, the sole shareholder of which is Brookfield, has sole authority to determine whether our company will make distributions and the amount and timing of these distributions. The arrangements we have with Brookfield may create an incentive for Brookfield to take actions
whichthat would have the effect of increasing distributions and fees payable to it, which may be to the detriment of our company and our unitholders. For example, because the equity enhancement distribution is calculated based on our company’s total capitalization, it may create an incentive for Brookfield to increase or maintain our company’s total capitalization over the near-term when other actions may be more favorable to our company or our unitholders. Similarly, Brookfield may take actions to increase our distributions in order to ensure Brookfield is paid incentive distributions in the near-term when other investments or actions may be more favorable to our company or our unitholders. Also, through Brookfield’s ownership of our units and the Redemption-Exchange Units of the Property Partnership, it has an effective economic interest in our business of approximately
92.44%68% as of the date of this Form 20-F and therefore may be incented to increase distributions payable to unitholders and thereby to Brookfield. Finally, the management fee is payable to the
Managers,Service Providers, which are controlled by Brookfield, irrespective of our actual performance.
Our arrangements with Brookfield were effectively determined by Brookfield in the context of the
spin-offSpin-off and may contain terms that are less favorable than those which otherwise might have been obtained from unrelated parties.
The terms of our arrangements with Brookfield were effectively determined by Brookfield in the context of the
spin-off.Spin-off. These terms, including terms relating to compensation, contractual or fiduciary duties, conflicts of interest and Brookfield’s ability to engage in outside activities, including activities that compete with us, our activities and limitations on liability and indemnification, may be less favorable than those which otherwise might have resulted if the negotiations had involved unrelated parties. The transfer agreements under which our assets and operations were acquired from Brookfield do not contain representations and warranties or indemnities relating to the underlying assets and operations. Under our limited partnership agreement, persons who acquire our units and their transferees will be deemed to have agreed that none of those arrangements constitutes a breach of any duty that may be owed to them under our limited partnership agreement or any duty stated or implied by law or equity.
The BPY General Partner may be unable or unwilling to terminate our Master Services Agreement.
Our Master Services Agreement provides that the Service Recipients may terminate the agreement only if: (i) any of the ManagersService Providers defaults in the performance or observance of any material term, condition or covenantcontained in the agreement in a manner that results in material harm to the Service Recipients and the default continues unremedied for a period of 60 days after written notice of the breach is given to such Manager;Service Provider; (ii) any of the ManagersService Providers engages in any act of fraud, misappropriation of funds or embezzlement against any Service Recipient that results in material harm to the Service Recipients; (iii) any of the ManagersService Providers is grossly negligent in the performance of its obligations under the Master Services Agreement and such gross negligence results in material harm to the Service Recipients; or (iv) upon the happening of certain events relating to the bankruptcy or insolvency of each of the Managers.Service Providers. The BPY General Partner cannot terminate the agreement for any other reason, including if any of the ManagersService Providers or Brookfield experiences a change of control, and there is no fixed term to the agreement. In addition, because the BPY General Partner is a wholly-owned subsidiary of Brookfield Asset Management, it may be unwilling to terminate our Master Services Agreement, even in the case of a default. If the Managers’Service Providers’ performance does not meet the expectations of investors, and the BPY General Partner is unable or unwilling to terminate our Master Services Agreement, the market price of our units could suffer. Furthermore, the termination of our Master Services Agreement would terminate our company’s rights under the Relationship Agreement and the licensing agreement.Agreement. See “Relationship Agreement” and “Licensing Agreement” under Item 7.B. “Major
“Major Shareholders and Related Party Transactions —- Related Party Transactions —- Relationship with Brookfield”.
The liability of the
ManagersService Providers is limited under our arrangements with them and we have agreed to indemnify the
ManagersService Providers against claims that they may face in connection with such arrangements, which may lead them to assume greater risks when making decisions relating to us than they otherwise would if acting solely for their own account.
Under our Master Services Agreement, the
ManagersService Providers have not assumed any responsibility other than to provide or arrange for the provision of the services described in our Master Services Agreement in good faith and will not be responsible for any action that the BPY General Partner takes in following or declining to follow their advice or recommendations. In addition, under our limited partnership agreement, the liability of the BPY General Partner and its affiliates, including the
Managers,Service Providers, is limited to the fullest extent permitted by law to conduct involving bad faith, fraud, gross negligence or willful misconduct or, in the case of a criminal matter, action that was known to have been unlawful. The liability of the
ManagersService Providers under our Master Services Agreement is similarly limited. In addition, we have agreed to indemnify the
ManagersService Providers to the fullest extent permitted by law from and against any claims, liabilities, losses, damages, costs or expenses incurred by an indemnified person or threatened in connection with our operations, investments and activities or in respect of or arising from our Master Services Agreement or the services provided by the
Managers,Service Providers, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the conduct in respect of which such persons have liability as described above. These protections may result in the
ManagersService Providers tolerating greater risks when making decisions than otherwise would be the case, including when determining whether to use leverage in connection with acquisitions. The indemnification arrangements to which the
ManagersService Providers are parties may also give rise to legal claims for indemnification that are adverse to our company and our unitholders.
Risks Relating to our Units
The price of our units may fluctuate significantly and you could lose all or part of the value of your units.
The market price of our units may fluctuate significantly and you could lose all or part of the value of your units. Factors that may cause the price of our units to vary include:
changes in our financial performance and prospects and Brookfield’s financial performance and prospects, or in the financial performance and prospects of companies engaged in businesses that are similar to us or Brookfield;
the termination of our Master Services Agreement or the departure of some or all of Brookfield’s professionals;
changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to us;
sales of our units by our unitholders, including by Brookfield and/or other significant holders of our units;
general economic trends and other external factors, including those resulting from war, incidents of terrorism or responses to such events;
speculation in the press or investment community regarding us or Brookfield or factors or events that may directly or indirectly affect us or Brookfield;
our ability to raise capital on favorable terms; and
a loss of any major funding source.
Securities markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies or partnerships. Any broad market fluctuations may adversely affect the trading price of our units.
Our units only recently commenced trading publicly and an active and liquid trading market for our units may not develop.
Our units commenced “regular-way” trading on the NYSE and the Toronto Stock Exchange (the “TSX”) on April 15, 2013, and we cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market for our units or, if such a market develops, whether it will be maintained. We cannot predict the effects on the price of our units if a liquid and active trading market for our units does not develop. In addition, if such a market does not develop, relatively small sales of our units may have a significant negative impact on the price of our units.
Our company may issue additional units in the future in lieu of incurring indebtedness which may dilute existing holders of our units or our company may issue securities that have rights and privileges that are more favorable than the rights and privileges accorded to holders of our units.
Our company may issue additional securities, including units and options, rights, warrants and appreciation rights relating to partnership securities for any purpose and for such consideration and on such terms and conditions as the BPY General Partner may determine. The BPY General Partner’s board of directors will be able to determine the class, designations, preferences, rights, powers and duties of any additional partnership securities, including any rights to share in our company’s profits, losses and distributions, any rights to receive partnership assets upon a dissolution or liquidation of our company and any redemption,
conversion and exchange rights. The BPY General Partner may use such authority to issue additional units
or additional securities exchangeable for our units, such as the Class A Preferred Units, which would dilute existing holders of our units, or to issue securities with rights and privileges that are more favorable than those of our units. You will not have any right to consent to or otherwise approve the issuance of any such securities or the terms on which any such securities may be issued.
Future sales or issuances of our units in the public markets, or the perception of such sales, could depress the market price of our units.
The sale or issuance of a substantial number of our units or other equity-related securities in the public markets, or the perception that such sales could occur, could depress the market price of our units and impair our ability to raise capital through the sale of additional equity securities. Although Brookfield intends to maintain a significant interest in our company, Brookfield expects its interests in the Property Partnership to be reduced over time through mergers, treasury issuances or secondary sales which could also depress the market price of our units. We cannot predict the effect that future sales or issuances of units, other equity-related securities, or the limited partnership units of the Property Partnership would have on the market price of our units.
Our unitholders do not have a right to vote on partnership matters or to take part in the management of our company.
Under our limited partnership agreement, our unitholders are not entitled to vote on matters relating to our company, such as acquisitions, dispositions or
financing,financings, or to participate in the management or control of our company. In particular, our unitholders do not have the right to remove the BPY General Partner, to cause the BPY General Partner to withdraw from our company, to cause a new general partner to be admitted to our partnership, to appoint new directors to the BPY General Partner’s board of directors, to remove existing directors from the BPY General Partner’s board of directors or to prevent a change of control of the BPY General Partner. In addition, except as prescribed by applicable laws, our unitholders’ consent rights apply only with respect to certain amendments to our limited partnership agreement. As a result, unlike holders of common stock of a corporation, our unitholders
willare not
be able to influence the direction of our company, including its policies and procedures, or to cause a change in its management, even if they are dissatisfied with our performance. Consequently, our unitholders may be deprived of an opportunity to receive a premium for their units in the future through a sale of our company and the trading price of our units may be adversely affected by the absence or a reduction of a takeover premium in the trading price.
Our company is a Bermuda exempted limited partnership and it may not be possible for our investors to serve process on or enforce U.S. or Canadian judgments against us.
Our company is a Bermuda exempted limited partnership and a substantial portion of our assets are located outside the United States and Canada. In addition, certain of the directors of the BPY General Partner and certain members of the senior management team who will beare principally responsible for providing us with management services reside outside of the United States and Canada. As a result, it may be difficult or impossible for U.S. or Canadian investors to effect service of process within the United States or Canada upon us or our directors and executive officers, or to enforce, against us or these persons, judgments obtained in the U.S. or Canadian courts predicated upon the civil liability provisions of U.S. federal securities laws or Canadian securities laws. We believe that there is doubt as to the enforceability in Bermuda, in original actions or in actions to enforce judgments of U.S. or Canadian courts, of claims predicated solely upon U.S. federal securities laws or Canadian securities laws. See Item 10.B. “Additional Information —- Memorandum and Articles of Association —- Description of Our Units and Our Limited Partnership Agreement —- Our Units”. Risks Relating to Taxation
We participate in transactions and make tax calculations for which the ultimate tax determination may be uncertain.
We participate in many transactions and make tax calculations during the course of our business for which the ultimate tax determination is uncertain. While we believe we maintain provisions for uncertain tax positions that appropriately reflect our risk, these provisions are made using estimates of the amounts expected to be paid based on a qualitative assessment of several factors. It is possible that liabilities associated with one or more transactions may exceed our provisions due to audits by, or litigation with, relevant taxing authorities which may materially affect our financial condition and results of operations.
Changes in tax law and practice may have a material adverse effect on the operations of our company, the Holding Entities, and our operating entities and, as a consequence, the value of our assets and the net amount of distributions payable to our unitholders.
Our structure, including the structure of the Holding Entities and our operating entities, is based on prevailing taxation law and practice in the local jurisdictions in which we operate. Any change in tax legislation (including in relation to taxation rates) and practice in these jurisdictions could adversely affect these entities, as well as the net amount of distributions payable to our unitholders. Taxes and other constraints that would apply to our operating entities in such jurisdictions may not apply to local institutions or other parties, and such parties may therefore have a significantly lower effective cost of capital and a corresponding competitive advantage in pursuing
such acquisitions.
Our company’s ability to make distributions depends on it receiving sufficient cash distributions from its underlying operations, and we cannot assure unitholders that we will be able to make cash distributions
to them in amounts that are sufficient to fund their tax liabilities.
Our Holding Entities and operating entities may be subject to local taxes in each of the relevant territories and jurisdictions in which they operate, including taxes on income, profits or gains and withholding
taxes. As a result, our company’s cash available for distribution is indirectly reduced by such taxes, and the post-tax return to our unitholders is similarly reduced by such taxes. We intend for future acquisitions to be assessed on a case-by-case basis and, where possible and commercially viable, structured so as to minimize any adverse tax consequences to our unitholders as a result of making such acquisitions.
In general, a unitholder that is subject to income tax in Canada or the United States or Canada must include in income its allocable share of our company’s items of income, gain, loss, and deduction (including, so long as it is treated as a partnership for tax purposes, our company’s allocable share of those items of the Property Partnership) for each of our company’s fiscal years ending with or within such unitholder’s tax year. See Item 10.E. “Additional Information — “Taxation”. However, the cash distributed to a unitholder may not be sufficient to pay the full amount of such unitholder’s tax liability in respect of its investment in our company, because each unitholder’s tax liability depends on such unitholder’s particular tax situation.situation and the tax treatment of the underlying activities or assets of our company. If our company is unable to distribute cash in amounts that are sufficient to fund our unitholders’ tax liabilities, each of our unitholders will still be required to pay income taxes on its share of our company’s taxable income.
Our unitholders may be subject to non-U.S., state and local taxes and return filing requirements as a result of owning our units.
Based on our
expected method of operation and the ownership of our operating entities indirectly through corporate Holding Entities, we do not expect any unitholder, solely as a result of owning our units, to be subject to any additional income taxes imposed on a net basis or additional tax return filing requirements in any jurisdiction in which we conduct activities or own property. However,
our method of operation and current structure may change, and there can be no assurance that our unitholders, solely as a result of owning our units, will not be subject to certain taxes, including non-U.S., state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes imposed by the various jurisdictions in which we do business or own property now or in the future, even if our unitholders do not reside in any of these jurisdictions. Consequently, our unitholders may also be required to file non-U.S., state and local income tax returns in some or all of these jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with these requirements. It is the responsibility of each unitholder to file all U.S. federal, non-U.S., state and local tax returns that may be required of such unitholder.
Our unitholders may be exposed to transfer pricing risks.
To the extent that our company, the Property Partnership, the Holding Entities or our operating entities enter into transactions or arrangements with parties with whom they do not deal at arm’s length, including Brookfield, the relevant tax authorities may seek to adjust the quantum or nature of the amounts received or paid by such entities if they consider that the terms and conditions of such transactions or arrangements differ from those that would have been made between persons dealing at arm’s length. This could result in more tax
(and penalties and interest) being paid by such entities, and therefore the return to investors could be reduced.
For Canadian tax purposes, a transfer pricing adjustment may in certain circumstances result in additional income being allocated to a unitholder with no corresponding cash distribution or in a dividend being deemed to be paid by a Canadian-resident to a non-arm’s length non-resident, which deemed dividend is subject to Canadian withholding tax.
The BPY General Partner
and the Property General Partner believebelieves that the base management fee and any other amount that is paid to the
Managers will beService Providers is commensurate with the value of the services being provided by the
ManagersService Providers and comparable to the fees or other amounts that would be agreed to in an arm’s length arrangement. However, no assurance can be given in this regard.
If the relevant tax authority were to assert that an adjustment should be made under the transfer pricing rules to an amount that is relevant to the computation of the income of the Property Partnership or our company, such assertion could result in adjustments to amounts of income (or loss) allocated to our unitholders by our company for tax purposes. In addition,
our companywe might also be liable for transfer pricing penalties in respect of transfer pricing adjustments unless reasonable efforts were made to determine, and use, arm’s length transfer prices. Generally, reasonable efforts in this regard are only considered to be made if contemporaneous documentation has been prepared in respect of such transactions or arrangements that support the transfer pricing methodology.
The U.S. Internal Revenue Service, or IRS, or Canada Revenue Agency, or CRA, may not agree with certain assumptions and conventions that we use to comply with applicable U.S. and Canadian federal income tax laws or to report income, gain, loss, deduction, and credit to our unitholders.
We apply certain assumptions and conventions to comply with applicable tax laws and to report income, gain, deduction, loss, and credit to a unitholder in a manner that reflects such unitholder’s beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. However, these assumptions and conventions may not be in compliance with all aspects of the applicable tax requirements. A successful IRS or CRA challenge to such assumptions or conventions could adversely affect the amount of tax benefits available to our unitholders and could require that items of income, gain, deduction, loss, or credit, including interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects our unitholders. See Item 10.E. “Taxation”.
If
either our company or the Property Partnership were to be treated as a corporation for U.S. federal income tax purposes, the value of our units might be adversely affected.
The value of our units to our unitholders will dependdepends in part on the treatment of our company and the Property Partnership as partnerships for U.S. federal income tax purposes. InHowever, in order for our company to be treated as a partnership for U.S. federal income tax purposes, under present law, 90% or more of our company’s gross income for every taxable year must consist of qualifying income, as defined in Section 7704 of the U.S. Internal Revenue Code of 1986, as amended, or the U.S. Internal Revenue Code, and the partnershipour company must not be required to register, if it were a U.S. corporation, as an investment company under the U.S. Investment Company Act of 1940 and related rules. Although the BPY General Partner intends to manage our affairs so that our company will not need to be registered as an investment company if it were a U.S. corporation and so that it will meet the 90% test described above in each taxable year, our company may not meet these requirements, or current law may change so as to cause, in either event, our company to be treated as a corporation for U.S. federal income tax purposes. If our company (or the Property Partnership) were treated as a corporation for U.S. federal income tax purposes, adverse U.S. federal income tax consequences could result for our unitholders and our company (or the Property Partnership, as applicable), as described in greater detail in Item 10.E. “Additional Information — “Taxation —- U.S. Tax Considerations —- Partnership Status of Our Company and the Property Partnership”.
The failure of certain of our operating entities (or certain of their subsidiaries) to qualify as
real estate investment trustsREITs under U.S. federal income tax rules generally would have adverse tax consequences which could result in a material reduction in cash flow and after-tax return for our unitholders and thus could result in a reduction of the value of our units.
Certain of our operating entities (and certain of their subsidiaries), including operating entities in which we do not have a controlling interest, intend to qualify for taxation as REITs for U.S. federal income tax purposes. However, no assurance can be provided that any such entity will qualify as a REIT. An entity’s ability to qualify as a REIT depends on its satisfaction of certain asset, income, organizational, distribution, shareholder ownership, and other requirements on a continuing basis. No assurance can be provided that the actual results of operations for any particular entity in a given taxable year will satisfy such requirements. If any such entity were to fail to qualify as a REIT in any taxable year, it would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on its net taxable income at regular corporate rates, and distributions would not be deductible by it in computing its taxable income. Any such corporate tax liability could be substantial and could materially reduce the amount of cash available for distribution to our company, which in turn would materially reduce the amount of cash available for distribution to our unitholders or investment in our business and could have an adverse impact on the value of our units. Unless entitled to relief under certain U.S. federal income tax rules, any entity which so failed to qualify as a REIT would also be disqualified from taxation as a REIT for the four taxable years following the year during which it ceased to qualify as a REIT.
We may be subject to U.S. “backup” withholding tax or other U.S. withholding taxes if any unitholder fails to comply with U.S. tax reporting rules or if the IRS or other applicable state or local taxing authority does not accept our withholding methodology, and such excess withholding tax cost will be an expense borne by our company and, therefore,
by all of our unitholders on a pro rata basis.
We may become subject to U.S. backup withholding tax or other U.S. withholding taxes with respect to any U.S. or non-U.S. unitholder who fails to timely provide usour company (or the applicable clearing agent or other intermediary) with an IRS Form W-9 or IRS Form W-8, as the case may be, or if the withholding methodology we use is not accepted by the IRS or other applicable state or local taxing authorities. Accordingly, itauthority. See Item 10.E. “Taxation - U.S. Tax Considerations - Administrative Matters - Withholding and Backup Withholding”. To the extent that any unitholder fails to timely provide the applicable form (or such form is important that each ofnot properly completed), or should the IRS or other applicable state or local taxing authority not accept our unitholders timely provides us (or the relevant intermediary) with an IRS Form W-9 or IRS Form W-8, as applicable. In addition, under certain circumstances,withholding methodology, our company maymight treat such U.S. backup withholding taxes or other U.S. withholding taxes as an expense, which willwould be borne indirectly by all of our unitholders on a pro rata basis. See Item 10.E. “Additional Information — Taxation —As a result, our unitholders that fully comply with their U.S. Tax Considerations — Administrative Matters — Withholding and Backup Withholding”.tax reporting obligations may bear a share of such burden created by other unitholders that do not comply with the U.S. tax reporting rules.
Tax-exempt organizations may face certain adverse U.S. tax consequences from owning our units.
The BPY General Partner and the Property General Partner intendintends to use commercially reasonable efforts to structure theour activities of our company and the Property Partnership, respectively, to avoid generating income connected with the conduct of a trade or business (which income generally would constitute “unrelated business taxable income”, or UBTI, to the extent allocated to a tax-exempt organization). However, no assurance can be provided that neither our company nor the Property Partnershipwe will not generate UBTI in the future. In particular, UBTI includes income attributable to debt-financed property, and neither our company nor the Property Partnership iswe are not prohibited from financing the acquisition of property with debt. The potential for income to be characterized as UBTI could make our units an unsuitable investment for a tax-exempt organization, as addressed in greater detail in Item 10.E. “Additional Information — “Taxation —- U.S. Tax Considerations —- Consequences to U.S. Holders —- U.S. Taxation of Tax-Exempt U.S. Holders of Our Units”.There may be limitations on the deductibility of our company’s interest expense.
So long as we are treated as a partnership for U.S. federal income tax purposes, each of our unitholders that is taxable in the United States generally will be taxed on its share of our company’s net taxable income. However, U.S. federal, state, or local income tax law may limit the deductibility of such unitholder’s share of our company’s interest expense. Therefore, any such unitholder may be taxed on amounts in excess of such unitholder’s share of the net income of our company. This could adversely impact the value of our units if our company were to incur a significant amount of indebtedness. See Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Consequences to U.S. Holders — Holding of Our Units — Limitations on Interest Deductions”.
If our company were engaged in a U.S. trade or business, non-U.S. persons would face certain adverse U.S. tax consequences from owning our units.
Based on our organizational structure, as well as our expected income and assets, the BPY General Partner and the Property General Partner currently believebelieves that our company is unlikely to earn income treated as effectively connected with a U.S. trade or business, including effectively connected income attributable to the sale of a “U.S.“United States real property interest”, as defined in the U.S. Internal Revenue Code. If our company were deemed to be engaged in a U.S. trade or business, or to realize gain from the sale or other disposition of a U.S. real property interest, unitholders that are notNon-U.S. Holders (as defined in Item 10.E. “Taxation - U.S. personsTax Considerations”) generally would be required to file U.S. federal income tax returns and could be subject to U.S. federal withholding tax at the highest marginal U.S. federal income tax rates applicable to ordinary income. See Item 10.E. “Additional Information — Taxation — “Taxation - U.S. Tax Considerations —- Consequences to Non-U.S. Holders”.
To meet U.S. federal income tax and other objectives, our company and the Property Partnership may invest through U.S. and non-U.S. Holding Entities that are treated as corporations for U.S. federal income tax purposes, and such Holding Entities may be subject to corporate income tax.
To meet U.S. federal income tax and other objectives, our company and the Property Partnership may invest through U.S. and non-U.S. Holding Entities that are treated as corporations for U.S. federal income tax purposes, and such Holding Entities may be subject to corporate income tax. Consequently, items of income, gain, loss, deduction, or credit realized in the first instance by our operating entities will not flow, for U.S. federal income tax purposes, directly to the Property Partnership, our company, or our unitholders, and any such income or gain may be subject to a corporate income tax, in the U.S. or other jurisdictions, at the level of the Holding Entity. Any such additional taxes may adversely affect our company’s ability to maximize its cash flow.
Our unitholders taxable in the United States may be viewed as holding an indirect interest in an entity classified as a “passive foreign investment company” for U.S. federal income tax purposes.
U.S. holders may face adverse U.S. tax consequences arising from the ownership of a direct or indirect interest in a “passive foreign investment company”, or PFIC. Based on our organizational structure, as well as
our expected income and assets, the BPY General Partner and the Property General Partner currently believebelieves that one or more of our current Holding Entities and operating entities are likely to be classified as PFICs. In addition, we may in the future acquire certain investments or operating entities through one or more Holding Entities treated as corporations for U.S. federal income tax purposes, and such future Holding Entities or other companies in which we acquire an interest may be treated as PFICs. In general, gain realized by a U.S. taxpayerHolders from the sale of stock of a PFIC is subject to tax at ordinary income rates, and an interest charge generally applies. Alternatively, a U.S. taxpayerHolders making certain tax elections with respect to atheir direct or indirect interest in a PFIC may be required to recognize taxable income prior to the receipt of cash relating
to such income. The adverse consequences of owning an interest in a PFIC, as well as the availability of certain tax elections for mitigating these adverse consequences, are described in greater detail in Item 10.E. “Additional Information — “Taxation —- U.S. Tax Considerations —- Consequences to U.S. Holders —- Passive Foreign Investment Companies”. You should consult an independent tax adviser regarding the implication of the PFIC rules for an investment in our units.
Tax gain or loss from the disposition of our units could be more or less than expected.
If
you sell youra sale of our units
and areby a unitholder is taxable in the United States,
then youthe unitholder will recognize gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized and
yourthe unitholder’s adjusted tax basis in
yoursuch units. Prior distributions to
youa unitholder in excess of the total net taxable income allocated to
yousuch unitholder will have decreased
yoursuch unitholder’s tax basis in
yourour units. Therefore, such excess distributions will increase
youra unitholder’s taxable gain or decrease
yoursuch unitholder’s taxable loss when
you sell yourour units
are sold, and may result in a taxable gain even if the sale price is less than the original cost. A portion of the amount realized, whether or not representing gain, could be ordinary income to
you.such unitholder.
Our partnership structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. The tax characterization of our partnership structure is also subject to potential legislative, judicial, or administrative change and differing interpretations, possibly on a retroactive basis.
The U.S. federal income tax treatment of our unitholders depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. HoldersUnitholders should be aware that the U.S. federal income tax rules, particularly those applicable to partnerships, are constantly under review by the Congressional tax-writing committees and other persons involved in the legislative process, the IRS, the U.S. Treasury Department and the courts, frequently resulting in changes which could adversely affect the value of our units or cause our company to change the way it conducts its activities. For example, changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible for our company to be treated as a partnership that is not taxable as a corporation for U.S. federal income tax purposes, change the character or treatment of portions of our company’s income, reduce the net amount of distributions available to our unitholders, or otherwise affect the tax considerations of owning our units. In addition, our company’s organizational documents and agreements permit the BPY General Partner to modify our limited partnership agreement, without the consent of our unitholders, to address such changes. These modifications could have a material adverse impact on our unitholders. See Item 10.E. “Additional Information — Taxation — “Taxation - U.S. Tax Considerations —- Administrative Matters - New Legislation or Administrative or Judicial Action”.The IRS may not agree with certain assumptions and conventions that our company uses in order to comply with applicable U.S. federal income tax laws or that our company uses to report income, gain, loss, deduction, and credit to our unitholders.
Our company will apply certain assumptions and conventions in order to comply with applicable tax laws and to report income, gain, deduction, loss, and credit to a unitholder in a manner that reflects such unitholder’s beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. A successful IRS challenge to such assumptions or conventions could adversely affect the amount of tax benefits available to our unitholders and could require that items of income, gain, deduction, loss, or credit, including interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects our unitholders. See Item 10.E. “Additional Information — Taxation — Consequences to U.S. Holders”.
Our company’s delivery of required tax information for a taxable year may be subject to delay, which could require a unitholder
who is a U.S. taxpayer to request an extension of the due date for such unitholder’s income tax return.
It may require longer
Our company has agreed to use commercially reasonable efforts to provide U.S. tax information (including IRS Schedule K-1 information needed to determine a unitholder’s allocable share of our company’s income, gain, losses, and deductions) no later than 90 days after the endclose of each calendar year. However, providing this U.S. tax information to our company’s fiscal yearunitholders will be subject to obtaindelay in the requisiteevent of, among other reasons, the late receipt of any necessary tax information from all lower-tier entities soentities. It is therefore possible that, IRS Schedule K-1s may be prepared for our company. For this reason, holders of our units who are U.S. taxpayers should anticipate thein any taxable year, a unitholder will need to file annually with the IRS (and certain states) a requestapply for an extension past April 15 or the otherwise applicable due date of their incometime to file such unitholder’s tax return for the taxable year.returns. See Item 10.E. “Additional Information — Taxation — “Taxation - U.S. Tax Considerations —- Administrative Matters —- Information Returns”Returns and Audit Procedures”.
The sale or exchange of 50% or more of our units will result in the constructive termination of our partnership for U.S. federal income tax purposes.
Our partnership will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of our units within a 12-month period. A constructive termination of our partnership would, among other things, result in the closing of its taxable year for U.S. federal income tax purposes for all of our unitholders and could result in the possible acceleration of income to certain of our unitholders and certain other consequences that could adversely affect the value of our units. However, the BPY General Partner does not expect a constructive termination, should it occur, to have a material impact on the computation of the future taxable income generated by our company for U.S. federal income tax purposes. See Item 10.E. “Additional Information — Taxation — “Taxation - U.S. Tax Considerations —- Administrative Matters —- Constructive Termination”.
If the IRS makes an audit adjustment to our income tax returns for taxable years beginning after December 31, 2017, it may assess and collect any taxes (including penalties and interest) resulting from such audit adjustment directly from us, in which case cash available for distribution to our unitholders might be substantially reduced.
Under the Bipartisan Budget Act of 2015, for taxable years beginning after December 31, 2017, if the IRS makes an audit adjustment to our income tax returns, it may assess and collect any taxes (including penalties and interest) resulting from such
audit adjustment directly from our company instead of unitholders (as under prior law). We may be permitted to elect to have the BPY General Partner and our unitholders take such audit adjustment into account in accordance with their interests in us during the taxable year under audit. However, there can be no assurance that we will choose to make such election or that it will be available in all circumstances, and the manner in which the election is made and implemented has yet to be determined. If we do not make the election, and we pay taxes, penalties, or interest as a result of an audit adjustment, then cash available for distribution to our unitholders might be substantially reduced. As a result, our current unitholders might bear some or all of the cost of the tax liability resulting from such audit adjustment, even if our current unitholders did not own our units during the taxable year under audit. Moreover, the calculation of such tax liability might not take into account a unitholder’s tax status, such as the status of a current or former unitholder as tax-exempt. The
U.S. Congress has considered legislation that could, if enacted, adversely affectforegoing considerations also apply with respect to our company’s
qualification as a partnership for U.S. federal tax purposes under the publicly traded partnership rules and subject certain income and gains to tax at increased rates. If this or similar legislation were to be enacted and to apply to our company, then the after-tax income of our company, as well as the market price of our units, could be reduced.Over the past several years, a number of legislative proposals have been introducedinterest in the U.S. Congress which could have had adverse tax consequences forProperty Partnership. These rules do not apply to our company or the Property Partnership including the recharacterization of certain items of capital gain income as ordinary income for U.S. federal income tax purposes. However, such legislation was not enacted into law. The Obama administration has indicated it supports such legislation and has proposed that the current law regarding the treatment of such items of capital gain income be changed to subject such income to ordinary income tax. For further detailtaxable years beginning on such proposed legislation, see Item 10.E. “Additional Information — Taxation — U.S. Tax Considerations — Proposed Legislation”.
or before December 31, 2017.
Under the Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act of 2010, commonly known as “FATCA”, certain payments made or received by our company
on or after January 1, 2014 couldmay be subject to a 30% federal withholding tax, unless certain requirements are met.
Under FATCA, a 30% withholding tax may apply to certain payments of U.S.-source income made on or after January 1, 2014 to our company, the Property Partnership, the Holding Entities, or the operating entities, or by our company to a unitholder, (as wellunless certain requirements are met, as described in greater detail in Item 10.E “Taxation - U.S. Tax Considerations - Administrative Matters - Foreign Account Tax Compliance”. The 30% withholding tax may also apply to certain payments made on or after January 1, 20172019 that are attributable to suchU.S.-source income or that constitute gross proceeds from the disposition of property that could produce U.S.-source dividends or interest) could be subject to a 30% withholding tax, unless certain requirements are met, as described in greater detail in Item 10.E “Additional Information — Taxation — U.S. Tax Considerations — Administrative Matters — Foreign Account Tax Compliance”. In addition, tointerest. To ensure compliance with FATCA, information regarding certain unitholders’ ownership of our units may be reported to the IRS or to a non-U.S. governmental authority. Each of our unitholdersUnitholders should consult an independenttheir own tax adviseradvisers regarding the consequences under FATCA of an investment in our units.
If any
non-Canadianof the subsidiaries
that are corporations and that are not resident or deemed to be resident in Canada for purposes of the Income Tax Act (Canada), or, together with the regulations thereunder, the Tax Act, and that are “controlled foreign affiliates”, or CFAs, as defined in the Tax Act in which the Property Partnership directly invests
earnearns income that is characterized as “foreign accrual property income”, or FAPI, as defined in
the Income Tax Act (Canada), or the Tax Act our unitholders may be required to include amounts allocated from our company in computing their income for Canadian federal income tax purposes even though there may be no corresponding cash distribution.
Any non-resident subsidiaries in which the Property Partnership directly invests are expected to be
“foreign affiliates” and “controlled foreign affiliates”, each as defined in the Tax Act, collectively referred to herein as CFAs, of the Property Partnership. If any
CFA of
such non-Canadian subsidiariesthe Property Partnership or any direct or indirect subsidiary thereof that is itself a CFA of the Property Partnership, or an Indirect CFA, earns income that is characterized as FAPI in a particular taxation year of the CFA
or Indirect CFA, the FAPI allocable to the Property
Partnership’s proportionate share of such FAPIPartnership must be included in computing the income of the Property Partnership for Canadian federal income tax purposes for the fiscal period of the Property Partnership in which the taxation year of
suchthat CFA or Indirect CFA that earned the FAPI ends, whether or not the Property Partnership actually receives a distribution of that FAPI. Our company will include its share of such FAPI of the Property Partnership in computing its income for Canadian federal income tax purposes and our unitholders will be required to include their proportionate share of such FAPI allocated from our company in computing their income for Canadian federal income tax purposes. As a result, our unitholders may be required to include amounts in their income for Canadian federal income tax purposes even though they have not and may not receive an actual cash distribution of such amounts.
The Canadian federal incomeTax Act contains anti-avoidance rules to address certain foreign tax consequences to you could be materially different in certain respects from those described in this Form 20-F if our companycredit generator transactions, or the Property Partnership is a “SIFT partnership”Foreign Tax Credit Generator Rules. Under the Foreign Tax Credit Generator Rules, the “foreign accrual tax,” as defined in the Tax Act.
Under the rules in the Tax Act, applicable to a “SIFT partnership”, orparticular amount of FAPI included in the SIFT Rules, certainProperty Partnership’s income and gains earned byin respect of a “SIFT partnership” will be subject to income tax at the partnership level at a rate similar to a corporation and allocations of such income and gains to its partners will be taxed as a dividend from a taxable Canadian corporation. In particular a “SIFT partnership” will be required to pay a tax on the total of its income from businesses carried on in Canada, income from “non-portfolio properties”foreign affiliate, as defined in the Tax Act, (other than taxable dividends), and taxable capital gains from dispositions of non-portfolio properties. “Non-portfolio properties” include, among other things, equity interests or debt of corporations, trusts or partnerships that are resident in Canada, and of non-resident persons or partnerships the principal source of income of which is one or any combination of sources in Canada (other than an “excluded subsidiary entity” as defined in the Tax Act), that are held by the “SIFT partnership” and have a fair market value that is greater than 10% of the equity value of such entity, or that have, together with debt or equity that the “SIFT partnership” holds of entities affiliated (within the meaning of the Tax Act) with such entity, an aggregate fair market value that is greater than 50% of the equity value of the “SIFT partnership”. The tax rate that is applied to the above mentioned sources of income and gains is set at a rate equal to the “net corporate income tax rate”, plus the “provincial SIFT tax rate”, each as defined in the Tax Act.
A partnership will be a “SIFT partnership” throughout a taxation year if at any time in the taxation year (i) it is a “Canadian resident partnership” (as defined in the Tax Act), (ii) “investments” (as defined in the Tax Act) in the partnership are listed or traded on a stock exchange or other public market, and (iii) it holds one or more “non-portfolio properties”. For these purposes, a partnership will be a “Canadian resident partnership” at a particular time if (a) it is a “Canadian partnership” (as defined in the Tax Act) at that time, (b) it would, if it were a corporation be resident in Canada (including, for greater certainty, a partnership that has its central management and control located in Canada), or (c) it was formed under the laws of a province. A “Canadian partnership” for these purposes is a partnership all of whose members are resident in Canada or are partnerships that are “Canadian partnerships”.
Under the SIFT Rules, our partnership and the Property Partnership could eachmay be a “SIFT partnership” if it is a “Canadian resident partnership”. However, the Property Partnership would not be a “SIFT partnership” if our partnership is a “SIFT partnership” regardless of whether the Property Partnership is a “Canadian resident partnership” on the basis that the Property Partnership would be an “excluded subsidiary entity” (as defined in the Tax Act as proposed to be amended under proposed amendments to the Tax Act announced by the Minister of Finance (Canada), or the Minister, on July 25, 2012).
Our company and the Property Partnership will be a “Canadian resident partnership” if the central management and control of these partnerships is located in Canada. This determination is a question of fact and is expected to depend on where the BPY General Partner and the Property General Partner are located and exercise central management and control of the respective partnerships. The BPY General Partner and the Property General Partner will each take appropriate steps so that the central management and control of these entities is not located in Canada such that the SIFT Rules should not apply to our company or to the Property Partnership at any relevant time. However, no assurance can be given in this regard. If our company or the Property Partnership is a “SIFT partnership”, the Canadian federal income tax consequences to our unitholders could be materially differentlimited in certain respects from those described in Item 10.E. “Additional Information — Taxation — Canadian Federal Income Tax Considerations”. In addition, there can be no assurance that the SIFT Rules will not be revised or amended in the future such that the SIFT Rules will apply to our company or to the Property Partnership.
Unitholdersspecified circumstances.
Our unitholders may be required to include imputed amounts in their income for Canadian federal income tax purposes in accordance with
existing section 94.1 of the Tax
Act as proposed to be amended under proposed amendments to the Tax Act announced on March 4, 2010 and contained in Bill C-48 which is currently proceeding through the legislative process.On March 4, 2010, the Minister announced as part of the 2010 Canadian federal budget that the outstanding tax proposals regarding investments in “foreign investment entities” would be replaced with revised tax proposals under which the existing rules in section 94.1 of the Tax Act relating to investments in “offshore investment fund property” would remain in place subject to certain limited enhancements. Legislation to implement the revised tax proposals is contained in Bill C-48, which is currently proceeding through the legislative process. Act.
Section 94.1 of the Tax Act contains rules relating to investments in entities that are not resident or deemed to be resident in Canada for purposes of the Tax Act or not situated in Canada, other than a CFA of the tax payer (“taxpayer, or Non-Resident Entities”),Entities, that could in certain circumstances cause income to be imputed to our unitholders for Canadian federal income tax purposes, either directly or by way of allocation of such income imputed to our company or to the Property Partnership. See Item 10.E. “Additional Information — “Taxation —- Canadian Federal Income Tax Considerations”.
Our
units mayunitholders’ foreign tax credits for Canadian federal income tax purposes will be limited if the Foreign Tax Credit Generator Rules apply in respect of the foreign “business income tax” or
may not continue to be “qualified investments” under the Tax Act for registered plans.Provided that our units are listed on a “designated stock exchange”“non-business income tax”, each as defined in the Tax Act, (which includes the NYSE and the TSX), our units will be “qualified investments” under the Tax Act for a trust governedpaid by a registered retirement saving plan, or RRSP, deferred profit sharing plan, registered retirement income fund, or RRIF, registered education saving plan, registered disability saving plan, and a tax-free savings account, or TFSA. However, there can be no assurance that our units will be listed or continue to be listed on a designated stock exchange. There can also be no assurance that tax laws relating to qualified investments will not be changed. Taxes may be imposed in respect of the acquisition or holding of non-qualified investments by such registered plans and certain other taxpayers and with respect to the acquisition or holding of “prohibited investments” as defined in the Tax Act by a RRSP, RRIF or TFSA.
Our units will not be a “prohibited investment” for a trust governed by a RRSP, RRIF or TFSA, provided that the holder of the TFSA or the annuitant of the RRSP or RRIF, as the case may be, (i) deals at arm’s length with our company for purposes of the Tax Act and (ii) does not have a “significant interest”, as defined in
the Tax Act for purposes of the prohibited investment rules, in (A) our company or in (B) a corporation, partnership or trust with which we do not deal at arm’s length for purposes of the Tax Act. The Department of Finance (Canada) released proposed amendmentsProperty Partnership to the government of a foreign country.
Under the Foreign Tax Act on December 21, 2012 that will deleteCredit Generator Rules, the conditionforeign “business-income tax” or “non-business-income tax” for Canadian federal income tax purposes for any taxation year may be limited in (ii)(B) abovecertain circumstances. If the Foreign Tax Credit Generator Rules apply, the allocation to a unitholder of foreign “business income tax” or “non-business income tax” paid by our company or the Property Partnership, and exclude certain “excluded property” (as defined in the proposed amendments) from being a “prohibited investment”. Generally, our unitstherefore, such unitholder’s foreign tax credits for Canadian federal income tax purposes, will be “excluded property” (i.e. not a “prohibited investment”) to the holder of a TFSA or the annuitant of an RRSP or RRIF, as the case may be, if, at the relevant time, at least 90% of the fair market value of all equity of our company is owned by persons dealing at arm’s length with such holder or annuitant, and their investment in our company meets the other criteria set forth in such proposed amendments. Such proposed amendments will be deemed to have come into force on March 23, 2011. Unitholders who intend to hold our units in a TFSA, RRSP, or RRIF should consult with their own tax advisors regarding the application of the foregoing prohibited investment rules having regard to their particular circumstances.limited. See Item 10.E.
“Taxation-Canadian Federal Income Tax Considerations”. Unitholders who are not resident in Canada or deemed to be resident in Canada
for purposes of the Tax Act and who do not use or
hold and are not deemed to use or hold our units in connection with a
non-Canadianbusiness carried on in Canada, or non-resident limited
partnership,partners, may be subject to Canadian federal income tax with respect to any Canadian source business income earned by our company or the Property Partnership if our company or the Property Partnership were considered to carry on business in Canada.
If our company or the Property Partnership were considered to carry on a business in Canada for purposes of the Tax Act,
non-Canadiannon-resident limited partners would be subject to Canadian federal income tax on their proportionate share of any Canadian source business income earned or considered to be earned by our company, subject to the potential application of the safe harbour rule in section 115.2 of the Tax Act
as proposed to be amended under proposed amendments to the Tax Act contained in Bill C-48, which is currently proceeding through the legislative process, and any relief that may be provided by any relevant income tax treaty or convention.
The BPY General Partner
and the Property General Partner intendintends to manage the affairs of our company and the Property Partnership, to the extent possible, so that they do not carry on business in Canada and are not considered or deemed to carry on business in Canada for purposes of the Tax Act. Nevertheless, because the determination of whether our company or the Property Partnership is carrying on business and, if so, whether that business is carried on in Canada, is a question of fact that is dependent upon the surrounding circumstances, the
Canada Revenue Agency, or CRA, might contend successfully that either or both of our company and the Property Partnership carries on business in Canada for purposes of the Tax Act.
If our company or the Property Partnership is considered to carry on business in Canada or is deemed to carry on business in Canada for
the purposes of the Tax Act,
non-Canadiannon-resident limited partners that are corporations would be required to file a Canadian federal income tax return for each
taxation year in which they are a
non-Canadiannon-resident limited partner regardless of whether relief from Canadian taxation is available under an applicable income tax treaty or convention.
Non-CanadianNon-resident limited partners who are individuals would only be required to file a Canadian federal income tax return for any taxation year in which they are allocated income from our company from carrying on business in Canada that is not exempt from Canadian taxation under the terms of an applicable income tax treaty or convention.
Non-Canadian
Non-resident limited partners may be subject to Canadian federal income tax on capital gains realized by our company or the Property Partnership on dispositions of “taxable Canadian property”
, as defined in the Tax Act.
A
non-Canadiannon-resident limited partner will be subject to Canadian federal income tax on its proportionate share of capital gains realized by our company or the Property Partnership on the disposition of “taxable Canadian property”, other than “treaty protected property”, as defined in the Tax Act. “Taxable Canadian property” includes, but is not limited to, property that is used or held in a business carried on in Canada and shares of corporations
resident in Canada that are not listed on a “designated stock exchange”, as defined in the Tax Act, if more than 50% of the fair market value of the shares is derived from certain Canadian properties during the 60-month period
immediately preceding the disposition. Property of our company and the Property Partnership generally will be “treaty-protected property” to a non-Canadiannon-resident limited partner if the gain from the disposition of the property would, because of an applicable income tax treaty or convention, be exempt from tax under the Tax Act. Our company and the Property Partnership are not expected to realize capital gains or losses from dispositions of “taxable Canadian property”. However, no assurance can be given in this regard. Non-CanadianNon-resident limited partners will be required to file a Canadian federal income tax return in respect of a disposition of “taxable Canadian property” by our company or the Property Partnership unless the disposition is an “excluded disposition” for the purposes of section 150 of the Tax Act. However, non-Canadiannon-resident limited partners that are corporations will still be required to file a Canadian federal income tax return in respect of a disposition of “taxable Canadian property” that is an “excluded disposition” for the purposes of section 150 of the Tax Act if tax would otherwise be payable under Part I of the Tax Act by such non-Canadiannon-resident limited partners in respect of the disposition but is not because of aan applicable income tax treaty or convention (otherwise than in respect of a disposition of “taxable Canadian property” that is “treaty-protected propertyproperty” of the corporation). In general, an “excluded disposition” is a disposition of property by a taxpayer in a taxation year where: (i) the taxpayer is a non-resident of Canada at the time of the disposition; (ii) no tax is payable by the taxpayer under Part I of the Tax Act for the taxation year; (iii) the taxpayer is not liable to pay any amounts under the Tax Act in respect of any previous taxation year (other than certain amounts for which the CRA holds adequate security); and (iv) each “taxable Canadian property” disposed of by the taxpayer in the taxation
year is either:
(i)(A) “excluded property” (as defined in subsection 116(6) of the Tax Act); or
(ii) is(B) property in respect of the disposition of which a certificate under
subsectionsubsections 116(2), (4) or (5.2)
of the Tax Act has been issued by the CRA.
Non-CanadianNon-resident limited partners should consult their own tax advisors with respect to the requirements to file a Canadian federal income tax return in respect of a disposition of “taxable Canadian property” by our company or the Property Partnership.
Non-Canadian
Non-resident limited partners may be subject to Canadian federal income tax on capital gains realized on the disposition of our units if our units are “taxable Canadian property”.
Any capital gain arising from the disposition or deemed disposition of our units by a
non-Canadiannon-resident limited partner will be subject to taxation in Canada, if, at the time of the disposition or deemed disposition, our units are “taxable Canadian property” of the
non-Canadiannon-resident limited partner, unless our units are “treaty-protected property” to such
non-Canadiannon-resident limited partner. In general, our units will not constitute “taxable Canadian property” of any
non-Canadiannon-resident limited partner at the time of disposition or deemed disposition, unless (a) at any time in the 60-month period immediately preceding the disposition or deemed disposition, more than 50% of the fair market value of our units was derived, directly or indirectly
(under proposed amendments to the Tax Act contained in Bill C-48 which is currently proceeding through the legislative process, excluding(excluding through a corporation, partnership or trust, the shares or interests in which were not themselves “taxable Canadian property”), from one or any combination of: (i) real or immovable property situated in Canada; (ii) “Canadian resource property”
, as defined in the Tax Act; (iii) “timber resource property”
, as defined in the Tax Act; and (iv) options in respect of or interests in, or for civil law rights in, such property, whether or not such property exists, or (b) our units are otherwise deemed to be “taxable Canadian property”.
Since our company’s assets consist principally of units of the Property Partnership, our units would generally be “taxable Canadian property” at a particular time if the units of the Property Partnership held by our company derived, directly or indirectly (excluding through a corporation, partnership or trust, the shares or interests in which were not themselves “taxable Canadian property”) more than 50% of their fair market value from properties described in (i) to (iv) above, at any time in the 60-month period preceding the particular time. Units of our company will be “treaty protected property” if the gain on the disposition of our units is exempt from tax under the Tax Act under the terms of an applicable income tax treaty or convention. It is not expected that our units will constitute “taxable Canadian property”
of any non-resident limited partner at any time but no assurance can be given in this regard.
Even if our units constitute “taxable Canadian property”, units of our company will be “treaty protected property” if the gain on the disposition of our units is exempt from tax under the Tax Act under the terms of an applicable income tax treaty or convention. If our units constitute “taxable Canadian property”,
non-Canadiannon-resident limited partners will be required to file a Canadian federal income tax return in respect of a disposition of our units unless the disposition is an “excluded disposition” (as discussed above). If our units constitute “taxable Canadian property”,
non-Canadiannon-resident limited partners should consult their own tax advisors with respect to the requirement to file a Canadian federal income tax return in respect of a disposition of our units.
Non-Canadian
Non-resident limited partners may be subject to Canadian federal income tax reporting and withholding tax requirements on the disposition of “taxable Canadian property”.
Non-Canadian
Non-resident limited partners who dispose of “taxable Canadian property”, other than “excluded property”
, as defined in subsection 116(6) of the Tax Act, and certain other property described in subsection
116(5.2) of the Tax Act (or who are considered to have disposed of such property on the disposition of such property by our company or the Property Partnership), are obligated to comply with the procedures set out in section 116 of the Tax Act and obtain a certificate thereunder.pursuant to the Tax Act. In order to obtain such certificate, the non-Canadiannon-resident limited partner is required to report certain particulars relating to the transaction to the CRA not later than 10 days after the disposition occurs. Our units are not expected to be “taxable Canadian property” and neither our company nor the Property Partnership is expected to dispose of property that is “taxable Canadian property”, but no assurance can be given in these regards.
Payments of dividends or interest (other than interest
exempt fromnot subject to Canadian federal withholding tax) by residents of Canada to the Property Partnership will be subject to Canadian federal withholding tax and we may be unable to apply a reduced rate taking into account the residency or entitlement to relief under an applicable income tax treaty or convention of our unitholders.
Our company and the Property Partnership will be deemed to be a non-resident person in respect of certain amounts paid or credited or deemed to be paid or credited to them by a person resident or deemed to be resident in Canada, including dividends or interest. Dividends or interest (other than interest exempt fromnot subject to Canadian federal withholding tax) paid or deemed to be paid by a person resident or deemed to be resident in Canada to the Property Partnership will be subject to withholding tax under Part XIII of the Tax Act at the rate of 25%. However, the CRA’s administrative practice in similar circumstances is to permit the rate of Canadian federal withholding tax applicable to such payments to be computed by looking through the partnership and taking into account the residency of the partners (including partners who are resident in Canada) and any reduced rates of Canadian federal withholding tax that any non-Canadiannon-resident limited partners may be entitled to under an applicable income tax treaty or convention, provided that the residency status and entitlement to treaty benefits can be established. In determining the rate of Canadian federal withholding tax applicable to amounts paid by the Holding Entities to the Property Partnership, we expect the Holding Entities to look-through the Property Partnership and our company to the residency of the partners of our company (including partners who are residents ofresident in Canada) and to take into account any reduced rates of Canadian federal withholding tax that non-Canadiannon-resident limited
partners may be entitled to under an applicable income tax treaty or convention in order to determine the appropriate amount of Canadian federal withholding tax to withhold from dividends or interest paid to the Property Partnership. However, there can be no assurance that the CRA will apply its administrative practice in this context. If the CRA’s administrative practice is not applied and the Holding Entities withhold Canadian federal withholding tax from applicable payments on a look-through basis, the Holding Entities may be liable for additional amounts of Canadian federal withholding tax plus any associated interest and penalties. Under the Canada-United States Tax Convention (1980), or the Treaty,
in certain circumstances a Canadian resident payer is required
in certain circumstances to look-through fiscally transparent partnerships, such as our company and the Property Partnership, to the residency and
treatyTreaty entitlements of their partners and
to take into account the reduced rates of Canadian federal withholding tax that such partners may be entitled to under the Treaty.
While the BPY General Partner and the Property General Partner expectexpects the Holding Entities to look-through our company and the Property Partnership in determining the rate of Canadian federal withholding tax applicable to amounts paid or deemed to be paid by the Holding Entities to the Property Partnership, we may be unable to accurately or timely determine the residency of our unitholders for purposes of establishing the extent to which Canadian federal withholding taxes apply or whether reduced rates of withholding tax apply to some or all of our unitholders. In such a case, the Holding Entities will withhold Canadian federal withholding tax from all payments made to the Property Partnership that are subject to Canadian federal withholding tax at the rate of 25%. Canadian resident unitholders will be entitled to claim a credit for such taxes against their Canadian federal income tax liability, but non-Canadiannon-resident limited partners will need to take certain steps to receive a refund or credit in respect of any such Canadian federal withholding taxes withheld equal to the difference between the withholding tax at a rate of 25% and the withholding tax at the reduced rate they are entitled to under an applicable income tax treaty or convention. See Item 10.E. “Additional Information — Taxation — “Taxation - Canadian Federal Income Tax Considerations” for further detail. Investors should consult their own tax advisors concerning all aspects of Canadian federal withholding taxes. Our units may or may not continue to be “qualified investments” under the Tax Act for registered plans.
Provided that our units are listed on a “designated stock exchange” (which currently includes the NYSE and the Toronto Stock Exchange, or the TSX), our units will be “qualified investments” under the Tax Act for a trust governed by a registered retirement savings plan, or RRSP, deferred profit sharing plan, registered retirement income fund, or RRIF, registered education savings plan, registered disability savings plan, and tax-free savings account, or TFSA. However, there can be no assurance that our units will continue to be listed on a “designated stock exchange”. There can also be no assurance that tax laws relating to “qualified investments” will not be changed. Taxes may be imposed in respect of the acquisition or holding of non-qualified investments by such registered plans and certain other taxpayers and with respect to the acquisition or holding of “prohibited investments”, as defined in the Tax Act, by a RRSP, RRIF or TFSA.
Notwithstanding the foregoing, a holder of a TFSA or an annuitant under a RRSP or RRIF, as the case may be, will be subject to a penalty tax if our units held in a TFSA, RRSP or RRIF are a “prohibited investment” for the TFSA, RRSP or RRIF, as the case may be. Generally, our units will not be a “prohibited investment” if the holder of the TFSA or the annuitant under the RRSP or RRIF, as applicable, deals at arm’s length with our company for purposes of the Tax Act and does not have a “significant interest”, as defined in the Tax Act, in our company. Unitholders who intend to hold our units in a RRSP, RRIF or TFSA should consult with their own tax advisors regarding the application of the foregoing “prohibited investment” rules having regard to their particular circumstances.
The Canadian federal income tax consequences to you could be materially different in certain respects from those described in this Form 20-F if our company or the Property Partnership is a “SIFT partnership”, as defined in the Tax Act.
Under the rules in the Tax Act applicable to a “SIFT partnership”, or the SIFT Rules, certain income and gains earned by a “SIFT partnership” will be subject to income tax at the partnership level at a rate similar to a corporation and allocations of such income and gains to its partners will be taxed as a dividend from a “taxable Canadian corporation”, as defined in the Tax Act. In particular, a “SIFT partnership” will be required to pay a tax on the total of its income from businesses carried on in Canada, income from “non-portfolio properties”, as defined in the Tax Act (other than taxable dividends), and taxable capital gains from dispositions of “non-portfolio properties”. “Non-portfolio properties” include, among other things, equity interests or debt of corporations, trusts or partnerships that are resident in Canada, and of non-resident persons or partnerships the principal source of income of which is one or any combination of sources in Canada (other than an “excluded subsidiary entity”, as defined in the Tax Act), that are held by the “SIFT partnership” and have a fair market value that is greater than 10% of the equity value of such entity, or that have, together with debt or equity that the “SIFT partnership” holds of entities affiliated (within the meaning of the Tax Act) with such entity, an aggregate fair market value that is greater than 50% of the equity value of the “SIFT partnership”. The tax rate that is applied to the above mentioned sources of income and gains is set at a rate equal to the “net corporate income tax rate” plus the “provincial SIFT tax rate”, each as defined in the Tax Act.
A partnership will be a “SIFT partnership” throughout a taxation year if at any time in the taxation year (i) it is a “Canadian resident partnership”, as defined in the Tax Act, (ii) “investments”, as defined in the Tax Act, in the partnership are listed or traded on a stock exchange or other public market, and (iii) it holds one or more “non-portfolio properties”. For these purposes, a partnership will be a “Canadian resident partnership” at a particular time if (a) it is a “Canadian partnership”, as defined in the Tax Act, at that time, (b) it would, if it were a corporation, be resident in Canada (including, for greater certainty, a partnership that has its central management and control located in Canada), or (c) it was formed under the laws of a province. A “Canadian partnership” for these purposes is a partnership all of whose members are resident in Canada or are partnerships that are “Canadian partnerships”.
Under the SIFT Rules, our partnership and the Property Partnership could each be a “SIFT partnership” if it is a “Canadian resident partnership”. However, the Property Partnership would not be a “SIFT partnership” if our partnership is a “SIFT partnership” regardless of whether the Property Partnership is a “Canadian resident partnership” on the basis that the Property Partnership would be an “excluded subsidiary entity”.
Our company and the Property Partnership will be a “Canadian resident partnership” if the central management and control of these partnerships is located in Canada. This determination is a question of fact and is expected to depend on where the BPY General Partner is located and exercises central management and control of the partnerships. The BPY General Partner will take appropriate steps so that the central management and control of these entities is not located in Canada such that the SIFT Rules should not apply to our company or to the Property Partnership at any relevant time. However, no assurance can be given in this regard. If our company or the Property Partnership is a “SIFT partnership”, the Canadian federal income tax consequences to our unitholders could be materially different in certain respects from those described in Item 10.E. “Taxation - Canadian Federal Income Tax Considerations”. In addition, there can be no assurance that the SIFT Rules will not be revised or amended in the future such that the SIFT Rules will apply to our company or to the Property Partnership.
ITEM 4. | INFORMATION ON THE COMPANY |
ITEM 4. INFORMATION ON THE COMPANY
4.A. HISTORY AND DEVELOPMENT OF THE COMPANY
Our company was established on January 3, 2013 as a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act
of 1883, as amended, and the Bermuda Exempted Partnerships Act
of 1992, as amended. Our company’s head and registered office is 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda, and our company’s telephone number is +441
294-3304.294 3309.
Our company was established by Brookfield Asset Management as its primary vehicle to own and operate certain commercial property operations, including office, retail,
multi-familyindustrial, multifamily and
industrialother assets, on a global basis.
In connection with the spin-off, we acquired from Brookfield Asset Management substantially all of its commercial property operations.Following its formation, all of the interests in our company were held by Brookfield, and our company held all of theOur partnership’s limited partnership interests inunits are listed on the Property Partnership. Prior toNYSE and the spin-off, Brookfield effected a reorganization so that our current operations are held byTSX under the Holding Entities, the common shares of which are wholly-owned by the Property Partnership. In consideration, Brookfield received (i) additional units of our company, (ii) Redemption-Exchange Units, representing an 82.1% limited partnership interest in the Property Partnership,symbols “BPY” and (iii) $1.25 billion of redeemable preferred shares of one of our Holding Entities. “BPY.UN”, respectively.
On April 15, 2013, Brookfield Asset Management distributedcompleted a spin-off of its commercial property operations to our partnership which was effected by way of a special dividend of units of our partnership to holders of Brookfield Asset Management’s Class A and B limited voting shares. Each holder of the shares received one partnership unit for approximately every 17.42 shares, representing 44.7% of the limited partnership interest in our company, to holders of its Class A limited voting shares and Class B limited voting shares as a special dividend.partnership, with Brookfield retainedAsset Management retaining units of our company,partnership, Redemption-Exchange Units, ofand a 1% general partner interest in the Property Partnership and thethrough Property Special LP, which was then known as Brookfield Property GP L.P. Our general partner interests inis an indirect wholly-owned subsidiary of Brookfield Asset Management. In addition, wholly-owned subsidiaries of Brookfield Asset Management provide management services to us pursuant to our company and the Property Partnership, together representing an effective economic interest in our business of approximately 92.4%. Master Services Agreement.
Although Brookfield intends to maintain a significant interest in our company, Brookfield expects its
interestsinterest to be reduced
from its current level over time through mergers, treasury issuances or secondary sales.
Our general partner and
On August 8, 2013, we effected a restructuring pursuant to which the Property Partnership’s limited partnership agreement was amended to make our company the managing general partner of the Property Partnership are wholly-owned subsidiariesand to make Property Special LP, the former general partner of the Property Partnership, a special limited partner of the Property Partnership. This change was made in order to simplify our governance structure and to more clearly delineate our company’s governance rights in respect of the Property Partnership. As a result, the voting agreement between our company and Brookfield, Asset Management. which required Brookfield to exercise certain of its voting rights in respect of the Property Partnership’s former general partner as directed by our company, was terminated and related changes were made to our limited partnership agreement and the Master Services Agreement. Because Brookfield is a party to these agreements, all of the amendments were approved by a special committee of independent directors of the BPY General Partner and the former general partner of the Property Partnership. The economic interests of our company and Brookfield in the Property Partnership were not affected by these changes. See Item 10.B. “Memorandum and Articles of Association - Description of Our Units and Our Limited Partnership Agreement” and “Memorandum and Articles of Association - Description of the Property Partnership Limited Partnership Agreement”.
In addition, wholly-owned subsidiariesNovember 2013, we acquired additional shares and warrants of GGP for total consideration of $1.4 billion. As a result of the acquisition, our fully-diluted ownership interest in GGP was increased to 32%, assuming the exercise of all of the outstanding warrants, or approximately 28% on an undiluted basis. Prior to this transaction, Brookfield Asset Management provides management servicesmanaged a 43% fully-diluted interest in GGP on behalf of a consortium that was formed to usinvest in the recapitalization of GGP in March 2010. As part of the consortium, our fully-diluted interest in GGP was 25%. In November 2013, we acquired interests in GGP from certain consortium members, as well as all of the interests in GGP that were distributed to Brookfield in payment of its carried interest entitlement of approximately $529 million, as manager of the consortium. In total, our company acquired 53 million shares of GGP and warrants to acquire an additional 26 million shares, as well as 1.1 million common shares of Rouse. The acquisition was funded through the issuance of $435 million of our units to institutional investors and $996 million of Redemption-Exchange Units to Brookfield. Following the equity issuances, Brookfield’s interest in our company (on a fully exchanged basis) decreased from approximately 92% to approximately 89%.
On June 9, 2014, pursuant to
a plan of arrangement, or the Arrangement, we completed the acquisition of all of the common shares of Brookfield Office Properties Inc., or Brookfield Office Properties, that we did not already own. The Arrangement followed our
Master Services Agreement.successful offer, or the Offer, to acquire common shares of Brookfield Office Properties. Under each of the Offer and the Arrangement, shareholders of Brookfield Office Properties were able to elect to receive, for each Brookfield Office Properties common share, one of our units or $20.34 in cash, subject to pro-ration. Pursuant to the Offer, which commenced on February 12, 2014, we acquired approximately 89% of the common shares of Brookfield Office Properties that we did not own on a fully diluted basis and in the Arrangement we acquired the remaining common shares that we did not own. As a result of the Offer and the Arrangement, we now own 100% of the issued and outstanding common shares of Brookfield Office Properties. These shares were delisted from the TSX and the NYSE on June 10, 2014 and June 20, 2014, respectively. In connection with the Offer and
the Arrangement, we issued units of our company (and Exchange LP issued Exchange LP Units which are exchangeable into our units at any time), decreasing Brookfield’s interest in our company (on a fully exchanged basis) from approximately 89% to approximately 68%.
On December 4, 2014, the Property Partnership issued $1.8 billion of Class A Preferred Units to the Class A Preferred Unitholder. Assuming the exchange of the Class A Preferred Units and Redemption-Exchange Units in accordance with the Preferred Unit Exchange Mechanism and the Redemption-Exchange Mechanism, respectively, the Class A Preferred Unitholder will own an approximate 9% interest in our company.
In April 2015, a joint venture owned 50% by our company and 50% by the Class A Preferred Unitholder, or the Canary JV, acquired 100% of London’s Canary Wharf through its £2.6 billion acquisition of Songbird Estates plc, or Songbird, and its acquisition of the share capital of Canary Wharf Group plc, or Canary Wharf, not owned by Songbird.
Our companypartnership is Brookfield Asset Management’s primary public entity to make investments in the real estate industry. We are a globally-diversified owner and operator of high-quality properties that typically generate stable and sustainable cash flows over the long term. Our goal is to be a leading global owner and operator and investor in high quality commercial property. We invest in well-locatedof real estate, providing investors with a diversified exposure to some of the most iconic properties in the world and to acquire high-quality assets that generate,at a discount to replacement cost or intrinsic value. With approximately 14,000 employees involved in Brookfield Asset Management’s real estate businesses around the globe, we have the potential to generate, long-term, predictablebuilt operating platforms in various real estate sectors, including:
Office sector through our 100% common equity interest in Brookfield Office Properties and sustainable cash flows with attractive growthour 50% interest in Canary Wharf;
Retail sector through our 29% interest in GGP (34% on a fully diluted basis, assuming all outstanding warrants are exercised) and our 34% interest in Rouse; and
Industrial, multifamily, hospitality and triple net lease sectors through investments in Brookfield Asset Management-sponsored real estate opportunity funds.
Through these platforms, we have amassed a portfolio of premier properties and development potentialsites around the globe, including:
261 office properties totaling approximately 123 million square feet primarily located in the world’s leading commercial markets such as New York, London, Los Angeles, Washington, D.C., Sydney, Toronto, and Berlin;
Office and urban multifamily development sites that enable the construction of 31 million square feet of new properties;
173 regional malls and urban retail properties containing over 155 million square feet in the United States and Brazil;
Approximately 55 million square feet of industrial space across 201 properties, primarily consisting of modern logistics assets in North America and Europe, with an additional 4 million square feet currently under construction;
Approximately 38,900 multifamily units across 137 properties throughout the United States;
Twenty-seven hospitality assets with approximately 18,000 rooms across North America, Europe and Australia; and
Over 300 properties that are leased to automotive dealerships across North America on a triple net lease basis.
Our diversified portfolio of high-quality office and retail assets in some of the world’s most resilientdynamic markets has a stable cash flow profile due to its long-term leases. In addition, as a result of the mark-to-market of rents upon lease expiry, escalation provisions in leases and dynamic markets. Weprojected increases in occupancy, these assets should generate strong same-property NOI growth without significant capital investment. Furthermore, we expect to earn between 8% and 11% unlevered, pre-tax returns on construction costs for our development and redevelopment projects and 20% on our equity invested in Brookfield-sponsored real estate opportunity funds. With this cash flow profile, our goal is to pay an attractive annual distribution to our unitholders and to grow our distribution by 5% to 8% per annum.
Overall, we seek to enhanceearn leveraged after-tax returns of 12% to 15% on our invested capital. These returns will be comprised of current cash flow and capital appreciation. Capital appreciation will be reflected in the fair value gains that flow through our income statement as a result of our revaluation of investment properties in accordance with IFRS to reflect initiatives that increase property level cash flows, and valuechange the risk profile of the asset, or to reflect changes in market conditions. From time to time, we will convert some or all of these assetsunrealized gains to cash through active asset managementsales, joint ventures or refinancings.
Our Business Strategy
Our strategy is to be the leading globally-diversified owner and
our operations-oriented approach. Our properties are located in North America, Europe, Australia and Brazil and we may pursue growth in other markets where we identify attractive opportunitiesoperator of commercial properties. Due to
build operating platforms or acquire assets and to achieve strong risk-adjusted returns. We strive to invest at attractive valuations, capitalizing on distress situations where possible, creating opportunities for superior valuation gains and cash flow returns, and to monetize assets at appropriate times to realize value.We are Brookfield’s flagship public commercial property entity and the primary entity through which Brookfield Asset Management owns and operates these businesses on a global basis. We are positioned to provide unitholders withcyclical nature of the opportunity to benefit from Brookfield’s global presence, operating experience, execution capabilities and relationships.
Given the size and scope of our real estate business,industry, we believe that we will have significant flexibility in sourcing and allocating capital on a global basis and a strong global franchise to generate growth. We plan to grow by acquiring positions of control or significant influence over the assets in which we invest using a variety of strategies to target assets directly or through portfolios and corporate entities. Our goal is to be a premier entity for investors seeking exposure to commercial property across a wide spectrum of real estate portfolio diversified by property type and geography will perform consistently over time. Furthermore, since property valuations fluctuate considerably based on market sentiment and other factors, we believe that the flexibility to shift capital to sectors and geographies.
Our portfolio asgeographies that are out of December 31, 2012 included interests in 124 office properties totaling 80 million square feet and 170 retail properties containing approximately 156 million square feet. We also held interests in a 18 million square foot office development pipeline and a $1.7 billion retail redevelopment pipeline as further discussed below. In addition, as of December 31, 2012 we had an expanding multi-family and industrial platform which consisted of interests in approximately 15,600 multi-family units and more than 29 million square feet of industrial space, and an opportunistic investment platform which consisted of investments in distressed and under-performing real estate assets and businesses and commercial real estate mortgages and mezzanine loans.
The charts below present the equity in net assets attributable to parent company of our portfolio by asset class and by geographic location as at December 31, 2012:
Information regarding the revenues attributable to each of our operating platforms and the geographic locations in which we operate is presented in Note 28 to the December 31, 2012 and December 31, 2011 audited carve-out financial statements of the commercial property operations of Brookfield Asset Management included elsewhere in this Form 20-F.
Our Business Strategy
We invest in well-located real estate assets that generate, or have the potential to generate, long-term, predictable and sustainable cash flows with attractive growth and development potential in some of the world’s most resilient and dynamic markets. We seek to enhance these cash flows through active asset management and our operations-oriented approach. Our properties are located in North America, Europe, Australia and Brazil and we may pursue growth in other markets where we identify attractive opportunities to build operating platforms or acquire assets and to achieve strong risk-adjusted returns.
Our Business Strategy
We invest in well-located real estate assets that generate, or have the potential to generate, long-term, predictable and sustainable cash flows with attractive growth and development potential in some of the world’s most resilient and dynamic markets. We seek to enhance these cash flows through active asset management and our operations-oriented approach. Our properties are located in North America, Europe, Australia and Brazil and we may pursue growth in other markets where we identify attractive opportunities to build operating platforms or acquire assets and to achieve strong risk-adjusted returns.
We strive to invest at attractive valuations, particularly in distress situations that create opportunities for superior valuation gains and cash flow returns, and to monetize assets at appropriate times to realize value. At all points along the risk-return spectrum, we draw on the resources and local market intelligence of our operating entities. We believe our strategyfavor will enable us to generate a high level of stable and sustainable cash flows inearn premium returns on the capital that we invest.
We are currently targeting investments across our
core properties while allowing us to pursue opportunistic returns by taking advantage of dislocations and inefficiencies in the various real estate markets in which we operate.operating platforms. In executing these strategies, we leverage our established property platform, our strategic relationship with Brookfield and our large capitalization to grow our business over time.
To executesummary, our strategy we seek to:
have “best-in-class” operating platforms with high quality real estate assets that are financed with conservative, long-term asset financing, with limited recourseis to our company;
maintain a high level of financial liquidity and operational flexibility to be able to capitalize on opportunities to enhance value through acquisitions, development activity and operational improvements;
invest where we possess competitive advantages;
acquire high-quality assets on a value basis, utilize our operating platforms to add value through pro-active management, develop “best-in-class” properties at a discount to asset valuations, recycle capital for re-investment in new opportunities and finance on a non-recourse basis with investment grade metrics.
Through our operating platforms around the globe, we receive real-time information regarding market conditions and opportunities, which helps us identify the investments that offer the best risk-adjusted returns and give us competitive advantages in the marketplace.
Our teams in each of the regions that we target have developed strong local relationships and partnerships. Through these local networks, we originate proprietary transactions that are generally priced at more favorable valuations than competitive processes.
Brookfield has a goallong history of maximizing returnleading multi-faceted transactions such as recapitalizations. We utilize our structuring expertise to execute these types of transactions, whereby we can acquire high quality assets at a discount to their intrinsic value.
Utilize our operating platforms to add value through pro-active management
Within our operating platforms, we pursue opportunities to maximize revenues in each market, such as optimizing tenant relationships to increase occupancy and raise rents.
We also identify opportunities to redevelop our existing assets that offer premium risk-adjusted returns.
Finally, we make add-on acquisitions that can be integrated into our operating platforms.
Develop “best-in-class” properties at a discount to asset valuations
In markets where asset valuations are at a premium to development cost, we selectively pursue development projects that offer attractive risk-adjusted returns.
Our development strategy is relatively low risk. Before investing a material amount of capital, we generally meet prudent pre-leasing hurdles and secure construction financing and maximum-price contracts. We bring in capital partners on capital;
build sustainablea project-specific basis in order to mitigate risk and manage our cash flowsflow profile. Finally, we monetize land parcels in order to reduce riskour investment in land.
Recycle capital for re-investment in new opportunities
Once we have stabilized an asset, we will consider a full or partial sale in order to recycle capital from these assets, which effectively have low costs of capital, for re-investment in new opportunities with higher rates of return.
For core assets, our preference is to sell down interests in assets to institutional investors, which enables us to preserve our operating platforms and lowerearn incremental fee income.
Finance on a non-recourse basis with investment grade metrics
Similar to other Brookfield Asset Management-sponsored entities, we predominantly utilize asset-level debt. We size the non-recourse debt with investment grade metrics in order to provide broad access to capital throughout market cycles and optimize our cost of capital;capital.
In order to mitigate risk, we generally raise debt financing in local currency, and
recognize that superior returns often require contrarian thinking.
Given the size and scope our debt portfolio is largely fixed rate through issuance of our real estate business, we believe that we have significant flexibility in sourcing and allocating capital on a global basis and a strong global franchise to generate growth. We are not a passive investor. We plan to grow by acquiring positionsfixed coupon debt or use of control or significant influence over the assets in which we invest using a variety of strategies to target assets directly or through portfolios and corporate entities. interest rate derivatives.
We seek to
create value andladder maturities in order to reduce
the risk profile of portfolio assets through our in-house property management, leasing, brokerage, development and construction capabilities where appropriate.We are primarily focused on commercial property and have therefore not acquired Brookfield’s residential land development, home building, construction, real estate advisory services and other similar operations and service businesses. However, we may pursue acquisitions in those sectors, either as part of commercial property acquisitions or on a stand-alone basis, if it would allow us to generate attractive returns.
An integral part ofrefinancing risk.
For opportunistic transactions, our strategy is to pursue acquisitions through
private funds and/or consortium arrangements with institutional investors
strategic partners or financial sponsors andin order to
form partnershipsmanage our level of exposure to
pursue acquisitions on a specialized or global basis.these higher risk investments. Brookfield
Asset Management has a strong track record of leading such consortiums and
partnerships and actively managing underlying assets to improve performance. Brookfield has established and manages a number of private investment entities, managed accounts, joint ventures, consortiums, partnerships and investment funds whose investment objectives include the acquisition of commercial property and Brookfield may in the future establish similar funds. We will be the lead investor in Brookfield’s flagship opportunistic private real estate fund.partnerships.
We believe that a number of competitive strengths differentiate us from other commercial real estate companies.
| • | | Global Scale. We are one
Global Scale. With approximately 14,000 employees involved in Brookfield Asset Management’s real estate business globally, we have operating platforms with scale in each of our targeted sectors and geographies. With the real-time information that we receive regarding market conditions and opportunities, we are well-positioned to opportunistically originate transactions that offer the highest risk-adjusted returns.
Sector and Geographic Diversification. With a portfolio of the world’s largest publicly-traded commercial property owners. Coupled with Brookfield’s global presence, operating experience, execution capabilities and relationships, our scale and presence should permit us to source and execute large-scale transactions across a wide spectrum of real estate sectors and geographies.
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| • | | Sector and Geographic Diversification. We intend to leverage the size and scope of our operating platforms to provide increased revenue diversity and scale, financial strength and capital deployment. Because we have interests in office, retail, multi-family and industrial assets in North America, Europe, Australia and Brazil, as well as local teams on the ground in such markets, we
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| expect our opportunities to be greater and our revenue streams to be more stable than if we were focused on a single type of real property or one geographic region. Our diversification positions us well to pursue growth through development, opportunistic and turn-around strategies and select investments in emerging and high-growth markets.
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| • | | Superior Operating Capabilities.Brookfield’s operating experience and expertise should provide a strong pipeline of deal flow, sourcing capabilities and industry visibility, market-specific underwriting expertise, and the ability to add value at the property and operations level. As we pursue opportunities in the various markets in which we operate, we will benefit from Brookfield’s experience in owning, operating and investing in high quality commercial properties, sourcing and structuring deals with financial and regulatory complexity, executing opportunistic strategies and turnarounds, and employing an operations-oriented approach to adding value by leveraging the strength of our operating entities.
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| • | | Stable and Growing Cash Flow. We believe we will have sustainable and growing cash flow which will be underpinned by our high quality assets, quality credit tenant base and long term lease expiry profile. Our company intends to make quarterly cash distributions in an initial amount currently anticipated to be approximately $1.00 per unit on an annualized basis. We are targeting an initial pay-out ratio of approximately 80% of FFO and are initially pursuing a distribution growth rate target in the range of 3% to 5% annually.
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We have established the initial distribution level and the targeted distribution growth rate based on our projections for the amount of FFO that will be generated by us in the shortoffice, retail, industrial, multifamily, hospitality and triple net lease sectors located primarily in North America, Europe and Australia, with a growing presence in Brazil, China and India, we have diversified cash flows that increase stability and over time should lower our cost of capital. As a result of this diversity, combined with Brookfield Asset Management’s sponsorship and its strong institutional relationships, we believe that we should have access to medium term. The projections were generatedcapital across market cycles. This should enable us to take advantage of attractive opportunities as they arise.
Superior Record of Executing Transactions. Brookfield’s real estate group has a long track record of leading multi-faceted transactions, such as the recapitalization of GGP, whereby it utilized its structuring capabilities to invest in high-quality assets on a value basis. Additionally, Brookfield Asset Management has demonstrated an ability to develop “best-in-class” assets in markets where asset valuations are in excess of development costs, earning attractive returns on equity.
Strong Organic Cash Flow Growth. As a result of escalation provisions in a majority of our leases, the mark-to-market of rents as long-term leases expire and our ability to increase occupancy/permanent occupancy primarily in our office and retail sectors, we have a strong foundation for organic cash flow growth. We will have flexibility to utilize this incremental cash flow to increase our distribution to unitholders or fund other growth initiatives.
Attractive Portfolio of Development/Redevelopment Opportunities. Within our office, retail and industrial platforms we have a portfolio of development and redevelopment opportunities that offer premium returns on invested capital. We will seek to capture the value of this pipeline through analyzing the total underlying operating cashflowsa combination of all the investments held by us considering in-place revenue streams and capital investment plans. Our entitlement to the underlying operating cashflows in the operating entities were then weighed against reinvestment opportunities within those entities to determine the appropriate balance between distributions and reinvestment and the most appropriate allocation of capital to build-out such projects and financingsell-downs to maximize risk adjusted returns.We are not a passive investor and we typically hold positions of control or significant influence over assets in which we invest, enabling us to influence distributions from those assets. In recent years,partners at values that reflect the development value that has been created.
Relationship with Brookfield has agreed to dividend policies that minimize distributions from these investments in favor of reinvestment in the underlying businesses, and has additionally participated in programs that reinvest distributions actually received byAsset Management. As Brookfield into these investments, such as dividend reinvestment plans. Additionally, Brookfield historically has not made distributions to its shareholders in amounts equivalent to 80% of its FFO in light of the various businesses in which it operates. Since our company will be Brookfield’sAsset Management’s flagship public commercial property entity, we are the distributions we have projected to pay are moreprimary vehicle through which it invests in linereal estate on a global basis. As a result, our unitholders benefit from Brookfield Asset Management’s global presence, operating experience, execution capabilities and relationships. Furthermore, with other companies that focus on commercial property operations. In cases where potential underlying operating cashflow distributions are deferred by us in our operating platforms in favor of reinvestment,Brookfield Asset Management’s substantial liquidity and strong relationships with banks and institutional investors, we may be requiredable to finance,participate in the short term, payment of our distributions to our unitholders. To maintain distributions at a level reflective of the total underlying operating cashflow, there are a number of alternatives available to us that are described in further detail herein, including (a) using borrowings under the $500 million credit facility that the Holding Entities entered into with Brookfield US Holdings Inc. on April 15, 2013 and any other credit facilityattractive investments that we may enter into in the future, (b) the Property GP LP electing to accrue and/or waive distributions to be made in respect of the Redemption-Exchange Units that are to be held by Brookfield in accordance with the Property Partnership’s limited partnership agreement, (c) the payment of all or a portion of the fees owed to the Managers pursuant to the Master Services Agreement through the issuance of our units and/or limited partnership units of the Property Partnership, (d) the payment of any equity enhancement distributions to the Property GP LP through the issuance of Redemption-Exchange Units, and (e) utilizing capital returned from our diversified asset base where reinvestment opportunities are determined to be less attractive.However, despite our projections and the alternative methods available to us to maintain our distribution level, there can be no assurance that we will be able to make distributions of approximately $1.00 per unit on an annualized basis or meet our target growth rate. Based on amounts received in distributions from our operating entities and our projected operating cash flow from our direct investments, our proposed distributions would be significantly greater than such amounts. Although we may use distributions from our operating entities, the proceeds of sales of certain of our direct investments and/or borrowings to fund any shortfall in distributions, we maycould not be able to do sohave executed on a consistent and sustainablestand-alone basis. Our ability to make distributions will depend on several factors, some of which are out of our control, including, among other things, general economic conditions, our results of operations and financial condition, the amount of cash that is generated by our operations and investments, restrictions imposed by the terms of any indebtedness that is incurred to finance our operations and investments or to fund liquidity needs, levels of operating and other expenses, and contingent liabilities.
| • | | Brookfield’s Flagship Commercial Property Entity. We are the primary entity through which Brookfield Asset Management owns and operates its commercial property businesses on a global basis. As such, Brookfield Asset Management has agreed to offer us the opportunity to take-up Brookfield’s share in any investment in commercial property that is suitable for us. We have access to Brookfield’s private investments through our right to take up Brookfield’s share in them, including investments in opportunistic, real estate finance and property operations in select emerging markets. Our goal is to have a majority controlling interest or a significant influence in each of these investments.
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| • | | Capitalization and Growth. Our significant market capitalization and listings on the NYSE and the TSX provide us with an attractive currency to source and execute large-scale transactions, typically as the lead investor, across a wide spectrum of real estate sectors and geographies. We will also seek opportunities to grow our portfolio by re-allocating capital from stabilized investments to more accretive opportunities where appropriate risk-adjusted returns can be earned.
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Development of our Business
Brookfield
Asset Management and its predecessor companies have been active in various facets of the real estate business since the 1920s. Canadian Arena Corporation, the predecessor company to Brookfield Office Properties, built the Montreal Forum in 1924 to provide facilities for hockey and other sporting and cultural events and its earnings were derived principally from the ownership of the Montreal Forum and the Montreal Canadiens of the National Hockey League until the sale of the hockey franchise in 1978.
In 1976, Brookfield expanded its real estate interests by acquiring a controlling interest in one of Canada’s largest public real estate companies. The steady escalation in commercial property values over the next ten years
providedenabled the capital base to expand. Brookfield took advantage of falling real estate values during the recession of the early 1990s to upgrade and expand its directly owned commercial property portfolio. In 2003, Brookfield made its first
investmentsinvestment outside of North America
by making property investments in the United Kingdom. Brookfield further expanded outside of North America in 2007 by making property investments in Australia.
In 2014, Brookfield further broadened its geographic reach with investments in China and India.
The accumulation of our
current portfolio of assets was completed through various corporate and property purchases, including the following
acquisitions:acquisitions (with the square footage described as at the time of such initial acquisitions):BCE Developments – - 7 million square feet:feet. In 1990, Brookfield acquired a 50% interest in a portfolio of office properties in Toronto, Denver and Minneapolis from BCE Developments. In 1994, this interest was increased to 100%. Brookfield Place, Brookfield’sour flagship office complex in Toronto, was acquired in this transaction.
Olympia & York U.S.A. – - 14.7 million square feet:feet. In 1996, Brookfield acquired a 46% interest in World Financial Properties LP, the corporation formed from the bankruptcy of Olympia & York, USA which included three of the four towers of Brookfield Place New York (formerly, World Financial Center), One Liberty Plaza and 245 Park Avenue in Manhattan. BrookfieldWe subsequently increased itsour interest in this entity to 99.4%100%.
Trizec Western Canada – - 3.5 million square feet:feet. In 2000, Brookfield acquired a portfolio of Calgary properties, including the Bankers Hall complex.
United Kingdom – - 8.8 million square feet:feet. In 2003, Brookfield acquired a 9% interest in Canary Wharf, marking its entry into the United Kingdom real estate market. Canary Wharf owned and operated 8.8 million square feet of office and retail properties at that time and had 1 million square feet of office space under construction. Brookfield’s interest in Canary Wharf was increased to approximately 22% in 2010. In 2005, Brookfield also purchased an 80% interest2015, the Canary JV acquired the remaining interests in a 555,000 square foot office property at 20 Canada Square, Canary Wharf London. Brookfield now ownsthat it did not own, bringing its ownership in Canary Wharf to 100% of this property. In addition, in 2010, Brookfield acquired a 50% stake in 100 Bishopsgate, a development site in the City of London and increased its stake to 87.5% in 2012..
O&Y Properties/O&Y REIT – - 11.6 million square feet:feet. In 2005, Brookfield acquired 100%O&Y Properties Corporation and the assets and liabilities of O&Y Real Estate Investment Trust with other partners and continues to own a direct 25% interest in a portfolio of high-quality office properties owned by O&Y Properties and O&Y REIT in Toronto, Ottawa, Calgary and EdmontonCalgary with a consortium of investors.
Trizec Properties/Trizec Canada – - 26 million square feet:feet. In 2006, Brookfield acquired Trizec’sTrizec Properties, Inc. and Trizec Canada Inc.’s portfolio of 58 office properties in New York, Washington, D.C., Los Angeles and Houston in a joint venture with a partner.
Brazil – - 2.5 million square feet:feet. In 2007, Brookfield’s retail property fund in Brazil entered into an agreement to acquireacquired five high-quality shopping centers in São Paulo and Rio de Janeiro. This acquisition expanded Brookfield’s portfolio to approximately 2.5 million square feet of retail centersIn 2015, in south-centralpartnership with institutional investors, we acquired interests in five office properties in Brazil.
Australia Portfolio – - 6.2 million square feet:feet. In 2007, Brookfield acquired Multiplex Limited and Multiplex Property Trust, or collectively Multiplex, an Australian commercial property owner and developer. Multiplex’s assets included approximately $3.6 billion of core office and retail properties within nine funds and a $3 billion high-quality office portfolio.
General Growth Properties, Inc. – - 160 million square feet:feet. In 2010,2009, Brookfield led the recapitalization of GGP, the second largest mall owner in the United States with 166 malls as at December 31, 2011. In 2011, Brookfield acquired an additional 113.3 million common shares of GGP, giving Brookfield and its consortium partners an approximate 38% equity interest in GGP (Brookfield’s interest is approximately 21%).malls. In January 2012, GGP spun-off Rouse Properties, Inc., or Rouse, which at the time of the spin-off held a portfolio of 30 malls. On April 12, 2013 Brookfield and our company acquired approximately $157
Hammerson Portfolio - 0.9 million worth of membership interests in the ownership consortium that holds underlying common shares and warrants of GGP and common shares of Rouse, increasing our ownership interest to approximately 22% (approximately 24% assuming the exercise of all warrants) in GGP and approximately 37% in Rouse.
Hammerson Portfolio –square feet. In 2012, Brookfield Office Properties announced the acquisition ofacquired the Hammerson portfolio in the City of London for approximately $871 million. The portfolio includesincluded four operating assets totaling 884,000 square feet and two development sites which cancould accommodate approximately 1.4 million square feet of density. 99 Bishopsgate
Multifamily Portfolio - In partnership with institutional investors, we acquired interests in over 27,800 value-add multifamily units, primarily in 2013 and 2014, including a group4,000-unit multifamily portfolio in Manhattan. In addition, in August 2015, along with our institutional partners, we acquired all outstanding shares of smaller assets closed on September 28, 2012; 125 Old Broad Streetcommon stock of Associated Estates Realty Corp., or Associated Estates. Associated Estates’ portfolio consisted of 56 apartment communities containing approximately 15,000 units located in 10 U.S. states.
Industrial Portfolio - In partnership with institutional investors, we made three major industrial acquisitions to create an industrial property platform. In North America, we acquired Verde Realty in December 2012 and Leadenhall Court are expected to closeIndustrial Developments International Inc. in October 2013. In Europe, we acquired Gazeley Limited (formerly EZW Gazeley Limited) in June 2013.
Since 1989,
Asia - In October 2013, we announced an agreement to invest, along with our institutional partners, up to $750 million in China Xintiandi, or CXTD, a wholly-owned entity of Hong Kong-listed developer Shui On Land. CXTD owns a world class portfolio of retail and office properties in Shanghai. In November 2014, we acquired, along with our institutional partners, a 60% interest in Candor Office Parks, a 15 million square foot portfolio of high-quality office parks in India. In March 2015, we acquired the remaining 40% equity interest in Candor Office Parks.
MPG Office Trust, Inc. - 8.6 million square feet. During the fourth quarter of 2013, we completed the acquisition of MPG Office Trust, Inc. in Los Angeles with institutional partners and created a $1.1 billion fund. Brookfield has invested approximately $16 billion of equityOffice Properties and its institutional partners now own seven Class A office properties totaling 12.8 million square feet in commercial property, generating an estimated compound annual return, or IRR, of approximately 16% through December 31, 2012.The return represents the composite levered investment return fromdowntown Los Angeles market.
Brookfield Office Properties - In 2014, pursuant to the Offer and the Arrangement, we acquired all of the opportunisticcommon shares of Brookfield Office Properties that we did not already own. We now own 100% of the issued and core entitiesoutstanding common shares of Brookfield Office Properties. At the completion of the Arrangement, Brookfield Office Properties owned 114 properties totaling 85 million square feet.
Triple Net Lease Portfolio - In October 2014, we acquired, along with our institutional partners, Capital Automotive L.P., or Capital Automotive, to create our triple net lease business. The acquisition included a 15.6 million square foot portfolio of real estate that has been triple net leased with approximately 300 automotive dealerships.
Hospitality Portfolio - In addition to our ownership of the Atlantis in the Bahamas and investments that were acquired bythe Hard Rock Hotel & Casino in Las Vegas and our company from Brookfieldinterest in connection with the spin-off, from inception through December 31, 2012. The IRR reflects the gross internal ratehotel assets of return before any management fees but after all property level service fees such as lease fees, development and construction fees and property management fees. The IRR was determined using the value of Brookfield’sa mixed-use portfolio in Australia, in 2014 we made further investments in commercial property as at December 31, 2012 (which includes valuations of unrealized investments that are based on assumptions management believes are reasonable as discussed below) compared to the aggregate equity investments madehotel sector when we acquired an interest in such commercial property, and includes all net proceeds generated by these investments.IRR does not have a standard meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies. IRR is used by Brookfield as a key indicator of investment performance because it provides a measure of performance that accounts for the value of unrealized investments in addition to realized investments.
In calculating the IRR, valuations of unrealized investments include assumptions that management believes are fair and reasonable reflecting the fair value exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between non-arm’s length market participants at the measurement date. The December 31, 2012 valuations of unrealized investments reflect the reported fair values under the respective accounting regime, which are within the scope of the 2012 year-end financial statement audit conducted by external auditors. To determine the year-end valuations, management assumptions include, but are not limited to:
projected occupancy rates based on current occupancy, lease renewals and lease-up plans;
projected rental rates based on current rent rolls and anticipated growth based on market activity and lease-up plans;
projected operating expenses based on current expenses, inflation and lease-up plans;
capital expenditures based on age of properties and required upgrades;
appropriate discount rates; and
terminal capitalization rates.
The historical performance of Brookfield should not be taken as an indication of performance by our company or Brookfieldfive hotel assets with 1,800 rooms in the futureUnited States. In addition, with our institutional partners, in August 2015, we acquired Center Parcs Group, or Center Parcs UK, which operates five short break destinations across the United Kingdom.
Germany - 2.5 million square feet.In January 2016, Brookfield, along with a joint venture partner, completed the acquisition of any returns expected on an investmentPotsdamer Platz in our units.Berlin. This trophy, mixed-used estate comprised 16 buildings, 10 streets, and two squares covering a gross area of more than 2,900,000 square feet in the center of Berlin. The buildings are a mix of office (1,376,000 square feet), retail (493,000 square feet), residential (271,000 square feet), leisure (446,000 square feet), and a hotel (138,000 square feet).
Our business is organized in
fourthree operating platforms, with assets as of December 31,
20122015 as set forth in the diagram below. The capital invested in these operating platforms is through a combination of: direct investment; investments in asset level partnerships or joint venture arrangements;
sponsorship and participation in private equity
funds;funds and consortiums; and the ownership of shares in other public companies. Combining both publicly-listed and private institutional capital provides a competitive advantage in flexibility and access to capital to fund growth.
As at the dates set out below, we held our commercial property operations through our interests in the entities and groups of assets set out below.
| | | | | | |
| Operations | | % Ownership at
December 31, 2012 | | % Ownership at December 31, 2011 | | % Ownership at December 31, 2010 |
Office | | | | | | |
Brookfield Office Properties Inc.(1) | | 50% | | 50% | | 50% |
Interest in Australia(2) | | 100% | | 100% | | 100% |
Europe | | 100% | | 100% | | 100% |
Canary Wharf Group plc | | 22% | | 22% | | 22% |
| | | |
Retail | | | | | | |
General Growth Properties, Inc.(3) | | 21% | | 21% | | 8% |
Rouse Properties, Inc.(4) | | 36% | | - | | - |
Brazil Retail Fund | | 35% | | 35% | | 25% |
Interest in Australia | | 100% | | 100% | | 100% |
Europe | | - | | - | | 100% |
| | | |
Multi-Family & Industrial(5) | | | | | | |
Multi-Family (through various funds) | | 13%-52% | | 10%-52% | | 29%-52% |
Industrial (through various funds) | | 29%-40% | | 29% | | - |
| | | |
Opportunistic Investments(5) | | | | | | |
Opportunity Funds | | 29%-82% | | 29%-82% | | 29%-82%
|
Finance Funds | | 13%-33% | | 25%-33% | | 28%-33% |
(1) | Our interest in Brookfield Office Properties is comprised of 49.6% of the outstanding common shares |
(1) | Represents assets and 97.1% of the outstanding voting preferred shares. Brookfield Office Properties owns an approximate 83.3% aggregate equity interest in Brookfield Canada Office Properties, a Canadian real estate investment trust that is listed on the TSXattributable to Unitholders related to our operating segments and the NYSE,excludes corporate assets and an approximate 84.3% interest in the U.S. Office Fund, which consists of a consortium of institutional investors and which is led and managed by Brookfield Office Properties.obligations. |
(2) | Our Australian office platform consists of our economic interest in certain of our Australian office properties not held through Brookfield Office Properties. |
(3) | As at April 30, 2013, our interest in GGP is comprised of an economic interest in approximately 22% (38% with our consortium partners) of the outstanding shares of common stock. We, and our consortium partners, also own warrants to acquire additional shares of common stock, which warrants were “in-the-money” as at April 30, 2013. As at April 30, 2013, only we and our consortium partners owned warrants to acquire GGP common stock. Assuming the exercise of these warrants, we and our consortium partners would hold an aggregate of approximately 441 million shares of GGP, representing approximately 43% of the outstanding shares of common stock of GGP. Of the 441 million shares that would be held by our company and our consortium partners, 246 million common shares of GGP would be owned by our company, representing approximately 24% of the outstanding shares of common stock of GGP (and 25% assuming that only our company, and none of our consortium partners, exercised the warrants). |
(4) | Rouse is a NYSE-listed company that GGP spun-out to its shareholders on January 12, 2012. As at April 30, 2013, we had interests of approximately 37% (54% with our consortium partners) of the outstanding shares of common stock. |
(5) | Our economic interest set forth in the table above is reflected as a range because we hold certain of our multi-family and industrial and opportunistic investment assets through a combination of different funds in which we hold varying economic interests. |
Office Platform
Our strategy for our office platform includes:
| • | | Growing our high quality portfolio.We are continuing to grow our high quality office portfolio in gateway cities. We seek to build a diversified global presence by targeting markets primarily underpinned by major financial, energy and professional services businesses in key urban centers in North America, Australia, and Europe. Our goalBrookfield Property Partners is to maintain a meaningful presence in each of our primary markets in order to maximize the value of our tenant relationships.
|
| • | | Optimizing rental revenues.In order to ensure the long-term sustainability of rental revenues through economic cycles, we seek to continue to attract tenants with strong credit quality, maintain high occupancy levels through proactive leasing initiatives across our portfolio and initiate mark-to-market opportunities on leases.
|
| • | | Adding value through development. We seek to add value across our portfolio by enhancing existing portfolio properties through major capital projects on a selective basis and by creating “best-in-class” new office stock in premium locations through development initiatives.
|
| • | | Utilizing a prudent capital structure. We seek to generate strong risk-adjusted returns by utilizing conservative financing structures while pursuing liquidity initiatives across our portfolio.
|
As at December 31, 2012, our office portfolio consisted of interests in 124 properties containing approximately 80 million square feet of commercial office space. The majority of these properties are located in the central business districts of New York, Washington, D.C., Houston, Los Angeles, Toronto, Calgary, Ottawa, Sydney, Melbourne, Perth and London, making us a global leader in the development, ownership and management of high-qualitypremier office assets. Landmark properties include theproperties. Our office holdings primarily consist of Brookfield Place (formerly World Financial Center) in New York, Brookfield Place in Toronto, BankOffice Properties, of America Plaza in Los Angeles, Bankers Hall in Calgary, Darling Park in Sydney and Brookfield Place (formerly City Square) in Perth. Of the total 124 properties in our office portfolio, 111 properties containing approximately 70 million square feet are consolidated under IFRS and 13 properties containing approximately 10 million square feet are equity accounted under IFRS.
The following is a brief overview of the office property assets in our portfolio and the office property markets in which we operate as at December 31, 2012:
| | | | | | | | | | | | |
| | | Number of
Properties(1) | | Total Area (000’s Sq. Ft.) | | Average Market
Occupancy Rate (%) | | Our Average
Occupancy Rate (%) | | Market Net Rent ($/Sq. Ft.) | | Average In- Place Net rent ($/Sq. Ft.) |
| United States | | 62 | | 47,323 | | 89.0% | | 89.0% | | $32.50 | | $26.80 |
| Canada | | 28 | | 20,716 | | 95.4% | | 96.9% | | 31.98 | | 26.80 |
| Australia | | 31 | | 11,082 | | 92.1% | | 97.7% | | 54.12 | | 53.82 |
| Europe(2) | | 3 | | 940 | | 90.7% | | 85.3% | | 67.01 | | 69.19 |
| Total/Avg | | 124 | | 80,061 | | 90.3% | | 92.1% | | $35.94 | | $31.44 |
(1) | Does not include office assets held within our opportunistic investment platform. |
(2) | Does not include office assets held through our approximate 22% interest in Canary Wharf. |
The table below presents the following information on the assets in our office platform by geographic location as at December 31, 2012: (i) the number of properties, the percentage of the space under lease and the size of the office, retail, leasable, parking and total space in our office portfolio, which provides information as if we own 100% of the office assets in which we have an interest; (ii)its common equity, and our proportionate50% interest in thoseCanary Wharf. Our office assets before considering minority interests; (iii) our proportionate interestportfolio consists of 261 properties comprising 123 million square feet under management and a total of 31 million square feet of development potential. Our properties are primarily located in those office assets net of minority interests; and (iv) our pro-forma proportionate interest net of minority interests reflecting clause (iii) above and the Redemption-Exchange Units held by Brookfield. We believe information presented as if we own 100% of eachcommercial business districts in some of the world’s leading cities, including New York, London, Los Angeles, Washington, D.C., Sydney, Toronto, and Berlin.
Within our office platform, we remain focused on the following strategic priorities:
Realizing value from our properties provides an appropriate basis on whichthrough proactive leasing and select redevelopment and repositioning initiatives to evaluate the performance of properties in the portfolio relativeconvert assets to each other and to other properties in the market. In addition, we have separated the properties in which we have an interest into two additional categories: (i) properties that are consolidated under IFRS; and (ii) properties that are equity accounted under IFRS. Our proportionate interests in the investments demonstrate our ability to manage the underlying economics of the relevant investments,higher yielding (or cash flow generating) properties;
Managing capital prudently, by utilizing conservative financing structures, including the financial performancedisposition of select mature or non-core assets; and cash flows. Proportionate interest
Advancing development projects to create “best-in-class” new stock in premium locations.
Our core office portfolio occupancy stands at 92.2% leased at December 31, 2015 and reflects average in-place net rent of $34.05 compared to average market net rent of $43.09, allowing for 27% potential to capture on higher rents on the
assets netupcoming expiration of
minority interests represents our economic interest inthe underlying property and is relevant because it represents the net assets and operations of the underlying property that we manage that are directly attributable to us.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Office Property
Portfolio(1) | | | | | | | | | | Assets Under Management | | Proportionate(2) | | | | | Proportionate
net of
Non-controlling
Interests(3) | | | Pro-forma
proportionate net of
Non-controlling
Interests(4) | |
| (Sq.ft. in 000’s) | | Number of
properties | | | Leased
% | | | | | Office | | | Retail | | | Leasable | | | Parking | | | Total | | | | | Owned
% | | | Leasable | | | Total | | | | | Leasable | | | Total | | | Leasable | | | Total | |
CONSOLIDATED PROPERTIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
New York | | | 7 | | | | 94.6 | % | | | | | 13,405 | | | | 363 | | | | 13,768 | | | | 282 | | | | 14,050 | | | | | | 97 | % | | | 13,296 | | | | 13,577 | | | | | | 6,647 | | | | 6,787 | | | | 1,061 | | | | 1,083 | |
Boston | | | 1 | | | | 74.6 | % | | | | | 771 | | | | 25 | | | | 796 | | | | 235 | | | | 1,031 | | | | | | 100 | % | | | 796 | | | | 1,031 | | | | | | 399 | | | | 517 | | | | 64 | | | | 83 | |
Washington, D.C. | | | 30 | | | | 90.4 | % | | | | | 5,866 | | | | 493 | | | | 6,359 | | | | 1,092 | | | | 7,451 | | | | | | 85 | % | | | 5,440 | | | | 6,303 | | | | | | 2,719 | | | | 3,150 | | | | 434 | | | | 502 | |
Los Angeles | | | 4 | | | | 87.7 | % | | | | | 3,750 | | | | 399 | | | | 4,149 | | | | 1,069 | | | | 5,218 | | | | | | 84 | % | | | 3,497 | | | | 4,398 | | | | | | 1,748 | | | | 2,198 | | | | 279 | | | | 351 | |
Houston | | | 8 | | | | 86.6 | % | | | | | 6,887 | | | | 228 | | | | 7,115 | | | | 1,255 | | | | 8,370 | | | | | | 79 | % | | | 5,747 | | | | 6,589 | | | | | | 2,874 | | | | 3,295 | | | | 459 | | | | 526 | |
Denver | | | 2 | | | | 66.6 | % | | | | | 2,597 | | | | 48 | | | | 2,645 | | | | 503 | | | | 3,148 | | | | | | 80 | % | | | 2,000 | | | | 2,503 | | | | | | 1,000 | | | | 1,252 | | | | 160 | | | | 200 | |
Seattle | | | 2 | | | | 89.7 | % | | | | | 696 | | | | 3 | | | | 699 | | | | 157 | | | | 856 | | | | | | 100 | % | | | 699 | | | | 856 | | | | | | 350 | | | | 429 | | | | 56 | | | | 69 | |
Minneapolis | | | 2 | | | | 92.2 | % | | | | | 610 | | | | 442 | | | | 1,052 | | | | 196 | | | | 1,248 | | | | | | 100 | % | | | 1,052 | | | | 1,248 | | | | | | 526 | | | | 624 | | | | 84 | | | | 100 | |
| | | | 56 | | | | 88.9 | % | | | | | 34,582 | | | | 2,001 | | | | 36,583 | | | | 4,789 | | | | 41,372 | | | | | | 88 | % | | | 32,527 | | | | 36,505 | | | | | | 16,263 | | | | 18,252 | | | | 2,597 | | | | 2,914 | |
Canadian Properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Toronto | | | 12 | | | | 94.5 | % | | | | | 7,995 | | | | 764 | | | | 8,759 | | | | 1,790 | | | | 10,549 | | | | | | 54 | % | | | 4,736 | | | | 5,719 | | | | | | 2,375 | | | | 2,868 | | | | 379 | | | | 458 | |
Calgary | | | 8 | | | | 99.6 | % | | | | | 5,340 | | | | 299 | | | | 5,639 | | | | 897 | | | | 6,536 | | | | | | 42 | % | | | 2,368 | | | | 2,746 | | | | | | 1,185 | | | | 1,373 | | | | 189 | | | | 219 | |
Ottawa | | | 6 | | | | 99.7 | % | | | | | 1,708 | | | | 37 | | | | 1,745 | | | | 1,030 | | | | 2,775 | | | | | | 21 | % | | | 366 | | | | 583 | | | | | | 183 | | | | 291 | | | | 30 | | | | 47 | |
Vancouver | | | 1 | | | | 97.8 | % | | | | | 493 | | | | 96 | | | | 589 | | | | 264 | | | | 853 | | | | | | 83 | % | | | 489 | | | | 708 | | | | | | 245 | | | | 355 | | | | 39 | | | | 57 | |
Other | | | 1 | | | | 100.0 | % | | | | | – | | | | 3 | | | | 3 | | | | – | | | | 3 | | | | | | 83 | % | | | 3 | | | | 3 | | | | | | 1 | | | | 1 | | | | – | | | | – | |
| | | | 28 | | | | 96.9 | % | | | | | 15,536 | | | | 1,199 | | | | 16,735 | | | | 3,981 | | | | 20,716 | | | | | | 47 | % | | | 7,962 | | | | 9,759 | | | | | | 3,989 | | | | 4,888 | | | | 637 | | | | 781 | |
Australian Properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sydney | | | 10 | | | | 98.9 | % | | | | | 2,020 | | | | 285 | | | | 2,305 | | | | 277 | | | | 2,582 | | | | | | 82 | % | | | 1,908 | | | | 2,124 | | | | | | 1,456 | | | | 1,617 | | | | 232 | | | | 258 | |
Melbourne | | | 2 | | | | 100.0 | % | | | | | 1,335 | | | | 33 | | | | 1,368 | | | | 133 | | | | 1,501 | | | | | | 93 | % | | | 1,275 | | | | 1,401 | | | | | | 637 | | | | 700 | | | | 101 | | | | 111 | |
Brisbane | | | 2 | | | | 85.8 | % | | | | | 521 | | | | 3 | | | | 524 | | | | 23 | | | | 547 | | | | | | 79 | % | | | 415 | | | | 434 | | | | | | 415 | | | | 434 | | | | 66 | | | | 69 | |
Perth | | | 3 | | | | 99.7 | % | | | | | 1,439 | | | | 96 | | | | 1,535 | | | | 61 | | | | 1,596 | | | | | | 94 | % | | | 1,439 | | | | 1,493 | | | | | | 797 | | | | 827 | | | | 127 | | | | 132 | |
Canberra | | | 1 | | | | 100.0 | % | | | | | 176 | | | | – | | | | 176 | | | | 28 | | | | 204 | | | | | | 100 | % | | | 176 | | | | 204 | | | | | | 176 | | | | 204 | | | | 28 | | | | 32 | |
New Zealand | | | 6 | | | | 93.8 | % | | | | | 696 | | | | 39 | | | | 735 | | | | 109 | | | | 844 | | | | | | 100 | % | | | 735 | | | | 844 | | | | | | 327 | | | | 376 | | | | 53 | | | | 61 | |
| | | | 24 | | | | 97.7 | % | | | | | 6,187 | | | | 456 | | | | 6,643 | | | | 631 | | | | 7,274 | | | | | | 89 | % | | | 5,948 | | | | 6,500 | | | | | | 3,808 | | | | 4,158 | | | | 607 | | | | 663 | |
European Properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
London | | | 3 | | | | 85.3 | % | | | | | 882 | | | | 23 | | | | 905 | | | | 35 | | | | 940 | | | | | | 100 | % | | | 905 | | | | 940 | | | | | | 730 | | | | 758 | | | | 116 | | | | 120 | |
| | | | 3 | | | | 85.3 | % | | | | | 882 | | | | 23 | | | | 905 | | | | 35 | | | | 940 | | | | | | 100 | % | | | 905 | | | | 940 | | | | | | 730 | | | | 758 | | | | 116 | | | | 120 | |
Total Consolidated Properties | | | 111 | | | | 92.0 | % | | | | | 57,187 | | | | 3,679 | | | | 60,866 | | | | 9,436 | | | | 70,302 | | | | | | 76 | % | | | 47,342 | | | | 53,704 | | | | | | 24,790 | | | | 28,056 | | | | 3,957 | | | | 4,478 | |
EQUITY ACCOUNTED PROPERTIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
New York | | | 3 | | | | 89.6 | % | | | | | 4,940 | | | | 196 | | | | 5,136 | | | | – | | | | 5,136 | | | | | | 56 | % | | | 2,906 | | | | 2,906 | | | | | | 1,449 | | | | 1,449 | | | | 231 | | | | 231 | |
Washington, D.C. | | | 1 | | | | 92.8 | % | | | | | 294 | | | | 53 | | | | 347 | | | | – | | | | 347 | | | | | | 42 | % | | | 146 | | | | 146 | | | | | | 73 | | | | 73 | | | | 12 | | | | 12 | |
Los Angeles | | | 2 | | | | 92.6 | % | | | | | 356 | | | | 25 | | | | 381 | | | | 87 | | | | 468 | | | | | | 42 | % | | | 161 | | | | 197 | | | | | | 80 | | | | 98 | | | | 13 | | | | 16 | |
| | | | 6 | | | | 90.0 | % | | | | | 5,590 | | | | 274 | | | | 5,864 | | | | 87 | | | | 5,951 | | | | | | 54 | % | | | 3,213 | | | | 3,249 | | | | | | 1,602 | | | | 1,620 | | | | 256 | | | | 259 | |
Australian Properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sydney | | | 6 | | | | 98.1 | % | | | | | 2,635 | | | | 147 | | | | 2,782 | | | | 216 | | | | 2,998 | | | | | | 35 | % | | | 971 | | | | 1,042 | | | | | | 485 | | | | 521 | | | | 77 | | | | 83 | |
Melbourne | | | 1 | | | | 95.6 | % | | | | | 670 | | | | 34 | | | | 704 | | | | 106 | | | | 810 | | | | | | 43 | % | | | 303 | | | | 348 | | | | | | 151 | | | | 174 | | | | 24 | | | | 28 | |
| | | | 7 | | | | 97.6 | % | | | | | 3,305 | | | | 181 | | | | 3,486 | | | | 322 | | | | 3,808 | | | | | | 37 | % | | | 1,274 | | | | 1,390 | | | | | | 636 | | | | 695 | | | | 101 | | | | 111 | |
Total Equity Accounted Properties | | | 13 | | | | 92.8 | % | | | | | 8,895 | | | | 455 | | | | 9,350 | | | | 409 | | | | 9,759 | | | | | | 47 | % | | | 4,487 | | | | 4,639 | | | | | | 2,238 | | | | 2,315 | | | | 357 | | | | 370 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Office Properties | | | 124 | | | | 92.1 | % | | | | | 66,082 | | | | 4,134 | | | | 70,216 | | | | 9,845 | | | | 80,061 | | | | | | 72 | % | | | 51,829 | | | | 58,343 | | | | | | 27,028 | | | | 30,371 | | | | 4,314 | | | | 4,848 | |
(1) | Does not include office assets held within our opportunistic investment platform or our approximate 22% interest in Canary Wharf. |
(2) | Reflects our company’s interest before considering non-controlling interests, such as non-controlling interests in Brookfield Office Properties and Multiplex New Zealand Property Fund. |
(3) | Reflects our company’s interest net of non-controlling interests described in note (2) above. |
(4) | Reflects our company’s pro-forma proportionate interest net of non-controlling interests described in note (3) above and the Redemption-Exchange Units held by Brookfield. |
Anleases.
Another important characteristic of our office portfolio is the strong credit quality of our tenants. We
direct special attention tofocus on tenant credit quality in order to ensure the long-term sustainability of rental revenues through economic cycles. The following list shows major tenants
with over one million square feet of space in our office portfolio by leased area and their respective credit ratings and lease commitments as at December 31,
2012: | | | | | | | | | | | | |
| Tenant | | Primary Location | | Credit
Rating(1) | | Year of
Expiry(2) | | Total
(000’s
Sq. Ft.) | | Sq. Ft.
(%) | |
Various Government Agencies | | All markets | | AA+/AAA | | Various | | 6,023 | | | 8.6% | |
Bank of America/Merrill Lynch (3) | | Toronto/New York/Denver/Los Angeles | | A/A- | | Various | | 4,948 | | | 7.0% | |
CIBC World Markets (4) | | Toronto/New York/Calgary | | A+ | | 2033 | | 1,436 | | | 2.0% | |
Suncor Energy | | Calgary | | BBB+ | | 2025 | | 1,356 | | | 1.9% | |
Royal Bank of Canada | | Vancouver/Toronto/Calgary/New York/Los Angeles/Minneapolis | | AA- | | 2024 | | 1,270 | | | 1.8% | |
Morgan Stanley | | New York/Los Angeles/Denver | | A- | | 2030 | | 1,219 | | | 1.7% | |
Bank of Montreal | | Calgary/Toronto | | A+ | | 2024 | | 1,169 | | | 1.7% | |
Total | | | | | | | | 17,421 | | | 24.7% | |
|
| | | | |
| Tenant | Primary Location | Credit Rating(1) | Exposure (%)(2) |
|
| Government and Government Agencies | Various | AAA/AA+ | 6.8 | % |
| Barclays | London | BBB | 2.4 | % |
| Morgan Stanley | Denver/NY/Toronto | A- | 2.4 | % |
CIBC World Markets(3) | Calgary/Houston/NY/Toronto | A+ | 1.8 | % |
| Suncor Energy Inc. | Calgary/Houston | A- | 1.6 | % |
| Deloitte | Calgary/Houston/LA/Toronto | Not Rated | 1.4 | % |
| Bank of Montreal | Calgary/Toronto | A+ | 1.4 | % |
| Bank of America | Merrill Lynch | Denver/NY/LA/Toronto/D.C. | AA- | 1.3 | % |
| Royal Bank of Canada | Various | AA- | 1.3 | % |
| JPMorgan Chase & Co. | Denver/Houston/LA/NY | A | 1.2 | % |
| Total | | | 21.6 | % |
| |
(1) | From Standard & Poor’s Rating Services, Moody’s Investment Services, Inc. or DBRS Limited. Reflects credit rating of tenant and does not reflect credit rating of any subtenants. |
(2) | Reflects the year of maturity related |
(2) | Prior to lease(s) and is calculated for multiple leases on a weighted average basis based on square feet where practicable.considering partnership interests in partially-owned properties |
(3) | Bank of America/Merrill Lynch leases 4.6 million square feet in Brookfield Place in New York, of which they occupy 2.7 million square feet with the balance being subleased to various subtenants ranging in size up to 500,000 square feet. Of this 2.7 million square feet, 1.9 million is in 250 Vesey Street, and 0.8 million square feet is in 225 Liberty Street. |
(4)(3) | CIBC World Markets leases 1.1 million square feet at 300 Madison Avenue in New York, of which they sublease 925,000 square feet to PricewaterhouseCoopers LLP.LLP and approximately 100,000 square feet to Sumitomo Corporation of America. |
Our
Another important strategy
for our office platform is to sign long-term leases in order to mitigate risk, reduce our overall re-tenanting costs and ensure stable and sustainable cash flows.
As at December 31, 2015, the average lease term of our office platform was 7.8 years, compared to 7.6 years at December 31, 2014. We typically commence discussions with tenants regarding their space requirements well in advance of the contractual expiration.
The following table presents the lease expiry profile
A portion of our office
propertiesplatform is owned through joint venture, partnership, consortium or other arrangements with
institutional partners. Prospectively, as we recycle capital, our preference is to sell down interests in assets to institutional partners and to continue to manage the
assets on behalf of ourselves and the investors. We believe that this strategy enables us to enhance returns on our capital through associated
expiring average in-place net rents by region at December 31, 2012: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Expiring Leases | |
| | | Net
Rental
Area | | | Currently
Available | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 &
Beyond | |
| (000’s sq. ft.) | | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | |
United States | | | 42,447 | | | | 4,649 | | | | 5,149 | | | $ | 31 | | | | 2,907 | | | $ | 25 | | | | 2,960 | | | $ | 22 | | | | 2,141 | | | $ | 25 | | | | 2,304 | | | $ | 26 | | | | 2,732 | | | $ | 30 | | | | 19,605 | | | $ | 35 | |
Canada | | | 16,735 | | | | 523 | | | | 1,697 | | | | 24 | | | | 321 | | | | 33 | | | | 1,486 | | | | 24 | | | | 1,630 | | | | 26 | | | | 645 | | | | 30 | | | | 679 | | | | 32 | | | | 9,754 | | | | 31 | |
Australia | | | 10,129 | | | | 232 | | | | 402 | | | | 47 | | | | 768 | | | | 51 | | | | 1,138 | | | | 60 | | | | 1,015 | | | | 67 | | | | 989 | | | | 53 | | | | 901 | | | | 66 | | | | 4,684 | | | | 78 | |
Europe (1) | | | 905 | | | | 133 | | | | 4 | | | | 34 | | | | 1 | | | | 32 | | | | 5 | | | | 25 | | | | 59 | | | | 93 | | | | 88 | | | | 62 | | | | 2 | | | | 96 | | | | 613 | | | | 69 | |
Total | | | 70,216 | | | | 5,537 | | | | 7,252 | | | $ | 30 | | | | 3,997 | | | $ | 31 | | | | 5,589 | | | $ | 30 | | | | 4,845 | | | $ | 35 | | | | 4,026 | | | $ | 34 | | | | 4,314 | | | $ | 38 | | | | 34,656 | | | $ | 40 | |
Percentage of Total | | | 100.0% | | | | 7.9% | | | | 10.3% | | | | | | | | 5.7% | | | | | | | | 8.0% | | | | | | | | 6.9% | | | | | | | | 5.7% | | | | | | | | 6.1% | | | | | | | | 49.4% | | | | | |
(1) | Does not include office assets held through our approximate 22% interest in Canary Wharf. |
Thefees, which represent an important area of growth. These types of transactions allow us to earn the following table summarizescategories of fees:
Asset Management. Stable base fee for providing regular, ongoing services.
Transaction. Development, redevelopment and leasing activities conducted on behalf of these funds.
Performance. Earned when certain predetermined benchmarks are exceeded. Performance fees, which can add considerably to fee revenue, typically arise later in a partnership’s life cycle and are therefore not fully reflected in current results.
Our development pipeline is a significant component of value of our
leasing activity from December 31, 2011office platform, and we expect this pipeline to
December 31, 2012: | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2011 | | | | Dec. 31, 2012 |
(US $) | | Leasable Area(1) (000’s
Sq.Ft.) | | Leased(1) (000’s
Sq.Ft.) | | Total Expiries (000’s
Sq.Ft.) | | Expiring Net Rent ($ per
Sq.Ft.) | | Leasing (000’s
Sq.Ft.) | | Year One Leasing Net Rent ($ per
Sq.Ft.) | | Average Leasing Net Rent ($ per
Sq.Ft.) | | Acq. (Disp.) Additions (000’s
Sq.Ft.) | | Leasable Area (000’s
Sq.Ft.) | | Leased (000’s
Sq.Ft.) |
United States | | 44,019 | | 40,221 | | (5,831) | | $19.68 | | 5,077 | | $24.62 | | $27.33 | | (1,669) | | 42,447 | | 37,798 |
Canada | | 17,108 | | 16,468 | | (1,236) | | 28.83 | | 1,343 | | 32.07 | | 32.89 | | (363) | | 16,735 | | 16,212 |
Australia | | 9,863 | | 9,549 | | (471) | | 48.19 | | 573 | | 54.71 | | 61.18 | | 266 | | 10,129 | | 9,897 |
Europe | | 556 | | 556 | | (268) | | 60.13 | | 263 | | 60.53 | | 60.92 | | 349 | | 905 | | 772 |
Total | | 71,546 | | 66,794 | | (7,806) | | $24.24 | | 7,256 | | $29.68 | | $32.25 | | (1,417) | | 70,216 | | 64,679 |
(1) | Has been restated to reflect the impact of remeasurements which are done annually in the first quarter. |
(2) | Does not include office assets held through our approximate 22% interest in Canary Wharf. |
contribute significantly to earnings and provide attractive returns on capital upon stabilization. As at December 31, 2012,2015, we held interests in centrally located office development sites with a total development pipelinepotential of approximately 1831 million square feet in the United States, Canada, Australia and Europe.
We classify our office development sites into three categories: (i) active development, (ii) active planning and (iii) held for development.
The following table summarizes all office development projects in our portfolio by geographic location as at December 31, 2012:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | (000’s Sq. Ft.) | |
(sq. ft. in 000’s) | | Number of Sites | | | Owned
Interest
(%) | | | Total | | | Proportionate(1) | | | Proportionate
net of
Non-controlling
Interests(2) | | | Pro-forma
Proportionate
net of
Non-controlling
Interests(3) | |
United States | | | 7 | | | | 95 | % | | | 9,257 | | | | 8,797 | | | | 4,397 | | | | 651 | |
Canada | | | 6 | | | | 83 | % | | | 5,427 | | | | 4,501 | | | | 2,251 | | | | 333 | |
Australia | | | 2 | | | | 100 | % | | | 846 | | | | 846 | | | | 674 | | | | 100 | |
Europe | | | 3 | | | | 82 | % | | | 2,075 | | | | 1,706 | | | | 854 | | | | 126 | |
Total/Avg | | | 18 | | | | 90 | % | | | 17,605 | | | | 15,850 | | | | 8,176 | | | | 1,210 | |
(1) | Reflects our company’s interest before considering minority interests, such as minority interests in Brookfield Office Properties, Brookfield Canada Office Properties, the U.S. Office Fund and Brookfield Financial Properties L.P. |
(2) | Reflects our company’s interest net of minority interests described in note (1) above. |
(3) | Reflects our company’s pro-forma interest net of minority interests described in note (1) above and the Redemption-Exchange Units held by Brookfield. |
Of the 18approximately 31.2 million square feet in our office development pipeline, 68.5 million square feet are in the active development stage, 2.514.2 million square feet are in the active planning stage and 9.18.5 million square feet are held for future development.
The 980,000 square foot Bay Adelaide Centre East site in Toronto and the 5 million square foot Manhattan West site in New York were the only active developments in our office segment as of December 31, 2012. As of December 31, 2012, these two sites had incurred a cost of $441 million and had a total planned development cost of $794 per square foot with a weighted average construction period of 98 months.
Of the remaining 12 million square feet in our office development pipeline as of December 31, 2012, 2.5 million square feet were in the active planning stage comprising of three development projects. Included in the active planning stage were the development rights to 100 Bishopsgate, a well-positioned development site in London, U.K., and we have prepared the site for construction. As of December 31, 2012, those three development sites had incurred a cost of $211 million and had a total planned development cost of $841 per square foot with a weighted average planned construction period of 47 months.
The remaining 9.1 million square feet of our office development pipeline are being held for development and are not in the active planning stage. With all of our development sites, we will proceed with developing these sitesconstruction when our risk adjusted return hurdles and preleasing targets arehave been met.
Retail Platform
Our strategy for our retail platform includes:
| • | | Growing our high quality portfolio. We are continuing to grow our high quality retail portfolio by focusing on growth areas in dynamic and resilient markets where we have a significant presence that we believe are under-served by quality retail centers. We also redevelop our retail properties on a selective basis to enhance our portfolio when we believe a market is ready and appropriate risk-adjusted returns can be earned. We look to maintain a meaningful presence in each of our primary markets in order to maximize the value of our tenant relationships.
|
| • | | Positioning malls as the “only” or “best” mall in town. We seek to position our malls as the “only” or “best” mall in their market areas in order to concentrate consumer traffic and capture favorable demographic trends. We aim to do this by creating malls as irreplaceable destinations within the community.
|
| • | | Optimizing occupancy and enhance income.In order to optimize occupancy levels, we look for ways to increase tenant sales per square foot and lease spreads while decreasing our occupancy costs. We also seek to diversify the tenants at our malls across retail sectors in order to achieve complementary retail mixes. We continue to pursue alternative income streams through parking, merchandising and other initiatives at our malls, while assessing cost efficiencies and synergies across our retail portfolio.
|
| • | | Actively managing our portfolio capital structures. We intend to achieve our goal of protecting and creating growth in the value of our retail portfolio by actively managing capital structures and conservatively financing assets.
|
Our retail portfolio consists of high quality retail centers in target markets predominantly in the United States, Brazil and Australia.
As at December 31,
2012,2015, our retail platform is primarily comprised of our 29% ownership interest in GGP through public ownership (34% on a fully-diluted basis, assuming all outstanding warrants are exercised) and 34% ownership interest in Rouse, and interests in retail assets in Brazil. As at December 31, 2015, our retail portfolio consisted of interests in
170 well-located high quality173 regional malls and urban retail properties
encompassing approximately 156 million square feet of retail space. Of the total 170 properties in our retail portfolio, 12 properties containing
approximately 5 million square feet are consolidated under IFRS and 158 properties containing approximately 151 million square feet are equity accounted under IFRS.As at December 31, 2012, our retail portfolio consisted of interests in 158 regional malls totaling approximately 151over 155 million square feet in major and middle markets throughout the United States withand Brazil and an over $365 million retail mall redevelopment pipeline (on a proportionate basis).
Our primary objective is to be an owner and operator of best-in-class malls that provide an outstanding environment and experience for our communities, retailers, employees and consumers. The strategy for our retail platform includes:
Increasing the concentrationpermanent occupancy of our regional malls as a percentagemall portfolio by converting temporary leases to permanent leases and leasing vacant space;
Renewing or replacing expiring leases at greater rental rates;
Actively recycling capital through the disposition of our total regional mall gross leasable area allocated as follows: pacificstrip centers and mountain region (29%), southwest and southeast region (28%), east and west north central region (22%) and northeast and mideast region (21%). Our U.S. retail portfolio is highly concentrated with 70 Class Alower quality regional malls which produce approximately $635and investing in whole or partial interests in high-quality regional malls and anchor pads; and
Continuing to execute on our existing redevelopment projects and seeking additional opportunities within our portfolio for redevelopment.
In 2015 our retail properties reported a combined average
annualof $546 in tenant sales per square foot.
Regional malls in our portfolio include Ala Moana in Honolulu, Fashion Show in Las Vegas,During this same period, the
Natick Collection in Natick (Boston), Tysons Galleria in Washington, D.C., Park Meadows in Lone Tree (Denver) and Water Tower Place in Chicago. A significant number of these regional malls are eitherspread between the
only mall in their market area, or, as part of a cluster of malls, receive relatively high consumer traffic.Our portfolio also includes, as at December 31, 2012, 8 malls totaling approximately 3 million square feet in Brazil, 59% of which is located in São Paolo, 33% of which is located in Rio de Janeiro and 8% of which is located in Belo Horizonte. These properties are mostly concentrated in premier locations in highly dense urban areas and thereby have leading positions in their respective trade areas. These core properties include the Rio Sul Shopping Center in Rio de Janeirorent paid on expiring leases and the Shopping Pátio Paulista and Shopping Pátio Higienópolis in São Paulo.
In Australia, as at December 31, 2012, our portfolio consisted of an economic interest in 4 retail centers totaling approximately 2 million square feet, 54% of which is located in Sydney and 46% of which is located in New Zealand.
The following isrent commencing under new leases on a brief overview of the retail property assets in our portfolio and the retail property markets in which we operate as at December 31, 2012:
| | | | | | | | | | | | | | | | | | | | |
| | | Number of
Properties(1) | | | Gross Leasable
Area (000’s Sq. Ft.) | | | Occupancy
Rate (%) | | | Average Annual
Tenant Sales
(per sq. ft.)(1) | | | Average In-Place
Rent ($/Sq. Ft.) | |
United States(2) | | | 158 | | | | 151,074 | | | | 95.2 | % | | $ | 508 | | | $ | 52.06 | |
Brazil | | | 8 | | | | 2,802 | | | | 94.7 | % | | | 735 | | | | 50.34 | |
Australia(3) | | | 4 | | | | 1,965 | | | | 98.3 | % | | | n/a | | | | 10.34 | |
Total/Avg | | | 170 | | | | 155,841 | | | | 95.2 | % | | $ | 512 | | | $ | 50.79 | |
(1) | Based only on properties with respect to which tenants are contractually obligated to report this information. |
(2) | Includes only U.S. regional malls. |
(3) | Includes three industrial properties totaling approximately 1.8 million square feet. |
The table below presents the following information on the assets in our retail platform by geographic location as at December 31, 2012: (i) the number of properties, the percentage of the space under lease and the size of the office, retail, leasable, parking and total spacesuite-to-suite basis in our retail portfolio which provides informationincreased by 23%, demonstrating our strong same-property growth potential.
Competition within the retail sector is strong. We compete for tenants and visitors to our malls with other malls in close proximity as ifwell as online retailers. In order to maintain and increase our malls’ competitive position within its marketplace we own 100%focus on the following:
Strategically arrange the physical location of the retail assetsmerchants within each mall to enforce a merchandising strategy that promotes cross-shopping and maximizes sales;
Introduce new concepts to the mall which may include restaurants, theaters, new retailers;
Implement marketing campaigns to attract people to the mall; and
Invest capital to maintain and improve the malls’ aesthetics and infrastructure, including major redevelopments to further establish the malls as a destination.
We believe the high quality of our regional malls enable us to compete effectively for retailers and consumers.
Other Segments
Through investments in whichBrookfield-sponsored real estate opportunity funds created to earn attractive returns, we have an interest; (ii) our proportionate interest in those retail assets before considering minority interests; (iii) our proportionate interestvarious opportunistic real estate sectors around the globe including industrial, multifamily, hospitality and triple net lease. Our ownership in those retail assets net of minority interests; and (iv) our pro-forma proportionate interest net of minority interests reflecting clause (iii) above and the Redemption-Exchange Units held by Brookfield. We believe information presented as if we own 100% of each of the properties provides an appropriate basis on whichthese holdings ranges from 13% to evaluate the performance of properties in the portfolio relative to each other and to other properties in the market. In addition, we have separated the properties in which we have interests into two additional categories: (i) properties that are consolidated under IFRS; and (ii) properties that are equity accounted under IFRS. 52%.
Industrial
Our
proportionate interests in the investments demonstrate our ability to manage the underlying economics of the relevant investments, including the financial performance and cash flows. Proportionate interest in the assets net of minority interests represents our economic interest in the underlying property and is relevant because it represents the net assets and operations of the underlying property that we manage that are directly attributable to us. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retail Property
Portfolio(1) | | | | | | | | Assets Under Management | | | Proportionate(2) | | | Proportionate
net of
Non-controlling
Interests(3) | | | Pro-forma
proportionate
net of
Non-controlling
Interests(4) | |
| (Sq.ft. in 000’s) | | Number of
properties | | | Leased% | | | Office | | | Retail | | | Leasable | | | Parking | | | Total | | | Owned% | | | Leasable | | | Total | | | Leasable | | | Total | | | Leasable | | | Total | |
CONSOLIDATED PROPERTIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Brazilian Properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rio de Janeiro | | | 2 | | | | 95.2 | % | | | – | | | | 928 | | | | 928 | | | | – | | | | 928 | | | | 74 | % | | | 684 | | | | 684 | | | | 241 | | | | 241 | | | | 38 | | | | 38 | |
São Paulo | | | 5 | | | | 93.7 | % | | | – | | | | 1,647 | | | | 1,647 | | | | – | | | | 1,647 | | | | 51 | % | | | 836 | | | | 836 | | | | 300 | | | | 300 | | | | 49 | | | | 49 | |
Belo Horizonte | | | 1 | | | | 99.9 | % | | | – | | | | 227 | | | | 227 | | | | – | | | | 227 | | | | 50 | % | | | 113 | | | | 113 | | | | 40 | | | | 40 | | | | 6 | | | | 6 | |
| | | | 8 | | | | 94.7 | % | | | – | | | | 2,802 | | | | 2,802 | | | | – | | | | 2,802 | | | | 58 | % | | | 1,633 | | | | 1,633 | | | | 581 | | | | 581 | | | | 93 | | | | 93 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Australian Properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sydney | | | 2 | | | | 96.8 | % | | | – | | | | 1,051 | | | | 1,051 | | | | 14 | | | | 1,065 | | | | 100 | % | | | 1,051 | | | | 1,065 | | | | 1,051 | | | | 1,065 | | | | 168 | | | | 170 | |
New Zealand | | | 2 | | | | 100.0 | % | | | – | | | | 900 | | | | 900 | | | | – | | | | 900 | | | | 100 | % | | | 900 | | | | 900 | | | | 401 | | | | 401 | | | | 64 | | | | 64 | |
| | | | 4 | | | | 98.3 | % | | | – | | | | 1,951 | | | | 1,951 | | | | 14 | | | | 1,965 | | | | 100 | % | | | 1,951 | | | | 1,965 | | | | 1,452 | | | | 1,466 | | | | 232 | | | | 234 | |
Total Consolidated Properties | | | 12 | | | | 96.2 | % | | | – | | | | 4,753 | | | | 4,753 | | | | 14 | | | | 4,767 | | | | 75 | % | | | 3,584 | | | | 3,598 | | | | 2,033 | | | | 2,047 | | | | 325 | | | | 327 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EQUITY ACCOUNTED PROPERTIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Properties | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Northeast Region | | | 15 | | | | 95.2 | % | | | 55 | | | | 15,642 | | | | 15,697 | | | | – | | | | 15,697 | | | | 87 | % | | | 13,697 | | | | 13,697 | | | | 2,936 | | | | 2,936 | | | | 468 | | | | 468 | |
Mideast Region | | | 17 | | | | 96.5 | % | | | 357 | | | | 16,325 | | | | 16,682 | | | | – | | | | 16,682 | | | | 86 | % | | | 14,327 | | | | 14,327 | | | | 3,139 | | | | 3,139 | | | | 502 | | | | 502 | |
East North Central Region | | | 21 | | | | 93.9 | % | | | 730 | | | | 20,423 | | | | 21,153 | | | | – | | | | 21,153 | | | | 88 | % | | | 18,530 | | | | 18,530 | | | | 4,677 | | | | 4,677 | | | | 746 | | | | 746 | |
West North Central Region | | | 14 | | | | 93.8 | % | | | – | | | | 12,392 | | | | 12,392 | | | | – | | | | 12,392 | | | | 96 | % | | | 11,868 | | | | 11,868 | | | | 2,552 | | | | 2,552 | | | | 408 | | | | 408 | |
Southeast Region | | | 17 | | | | 95.2 | % | | | 373 | | | | 16,284 | | | | 16,657 | | | | – | | | | 16,657 | | | | 80 | % | | | 13,399 | | | | 13,399 | | | | 2,937 | | | | 2,937 | | | | 469 | | | | 469 | |
Southwest Region | | | 24 | | | | 97.4 | % | | | 149 | | | | 25,011 | | | | 25,160 | | | | – | | | | 25,160 | | | | 86 | % | | | 21,733 | | | | 21,733 | | | | 5,324 | | | | 5,324 | | | | 851 | | | | 851 | |
Mountain Region | | | 24 | | | | 94.4 | % | | | 98 | | | | 19,209 | | | | 19,307 | | | | – | | | | 19,307 | | | | 94 | % | | | 18,084 | | | | 18,084 | | | | 4,311 | | | | 4,311 | | | | 688 | | | | 688 | |
Pacific Region | | | 26 | | | | 94.3 | % | | | 845 | | | | 23,181 | | | | 24,026 | | | | – | | | | 24,026 | | | | 87 | % | | | 20,867 | | | | 20,867 | | | | 5,282 | | | | 5,282 | | | | 844 | | | | 844 | |
Total Equity Accounted Properties | | | 158 | | | | 95.2 | % | | | 2,607 | | | | 148,467 | | | | 151,074 | | | | – | | | | 151,074 | | | | 88 | % | | | 132,505 | | | | 132,505 | | | | 31,158 | | | | 31,158 | | | | 4,976 | | | | 4,976 | |
Total Retail Properties | | | 170 | | | | 95.2 | % | | | 2,607 | | | | 153,220 | | | | 155,827 | | | | 14 | | | | 155,841 | | | | 88 | % | | | 136,089 | | | | 136,103 | | | | 33,191 | | | | 33,205 | | | | 5,301 | | | | 5,303 | |
(1) | Does not include retail assets held within our opportunistic investment platform, the retail assets held by GGP outside of the United States or non-regional malls. |
(2) | Reflects our company’s interest before considering non-controlling interests, including non-controlling interests in GGP, Brazil Retail Fund and Multiplex New Zealand Property Fund. |
(3) | Reflects our company’s interest net of non-controlling interests described in note (2) above. |
(4) | Reflects our company’s pro-forma proportionate interest net of non-controlling interests described in note (3) above and the Redemption-Exchange Units held by Brookfield. |
The following table presents the lease expiry profile of our retail properties with the associated average expiring in-place rents by region at December 31, 2012:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Expiring Leases | |
| | | | | | | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 & Beyond | |
| (000’s sq. ft.) | | Net Rental
Area | | | Currently
Available | | | (000’s
sq.ft.) | | | In-place
Rent | | | (000’s
sq.ft.) | | | In-place
Rent | | | (000’s
sq.ft.) | | | In-place
Rent | | | (000’s
sq.ft.) | | | In-place
Rent | | | (000’s
sq.ft.) | | | In-place
Rent | | | (000’s
sq.ft.) | | | In-place
Rent | | | (000’s
sq.ft.) | | | In-place
Rent | |
United States (1) | | | 60,545 | | | | 2,992 | | | | 6,215 | | | $ | 58 | | | | 6,468 | | | $ | 52 | | | | 5,960 | | | $ | 59 | | | | 5,794 | | | $ | 64 | | | | 6,238 | | | $ | 63 | | | | 5,231 | | | $ | 70 | | | | 21,647 | | | $ | 57 | |
Brazil | | | 2,802 | | | | 149 | | | | 732 | | | | 42 | | | | 301 | | | | 96 | | | | 421 | | | | 72 | | | | 279 | | | | 67 | | | | 231 | | | | 59 | | | | 39 | | | | 63 | | | | 650 | | | | 14 | |
Australia | | | 1,951 | | | | 33 | | | | 24 | | | | 16 | | | | 1 | | | | 26 | | | | 82 | | | | 25 | | | | 703 | | | | 10 | | | | 339 | | | | 17 | | | | – | | | | – | | | | 769 | | | | 10 | |
Total | | | 65,298 | | | | 3,174 | | | | 6,971 | | | $ | 56 | | | | 6,770 | | | $ | 54 | | | | 6,463 | | | $ | 59 | | | | 6,776 | | | $ | 59 | | | | 6,808 | | | $ | 61 | | | | 5,270 | | | $ | 70 | | | | 23,066 | | | $ | 54 | |
Percentage of Total | | | 100.0% | | | | 4.9% | | | | 10.7% | | | | | | | | 10.4% | | | | | | | | 9.9% | | | | | | | | 10.4% | | | | | | | | 10.4% | | | | | | | | 8.1% | | | | | | | | 35.2% | | | | | |
(1) | Represents regional malls only and excludes leases on traditional anchor stores and specialty leasing license agreements. |
The following table summarizes our leasing activity from December 31, 2011 to December 31, 2012:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2011 | | | | | | Dec. 31, 2012 | |
| (US $) | | Leasable
Area(1)
(000’s
Sq.Ft.) | | | Leased(1)
(000’s
Sq.Ft.) | | | Total
Expiries
(000’s
Sq. Ft.) | | | Expiring
Rent
($ per
Sq.Ft.) | | | Leasing
(000’s
Sq. Ft.) | | | Year
One
Leasing
Rent
($ per
Sq.Ft.) | | | Average
Leasing
Rent
($ per
Sq.Ft.) | | | Acq.
(Disp.)
Additions
(000’s
Sq. Ft.) | | | Leasable
Area
(000’s
Sq. Ft.) | | | Leased
(000’s
Sq. Ft.) | |
United States | | | 66,369 | | | | 62,158 | | | | (11,390 | ) | | $ | 52.45 | | | | 12,630 | | | $ | 51.66 | | | $ | 56.06 | | | | (1,739 | ) | | | 64,630 | | | | 61,659 | |
Brazil | | | 3,083 | | | | 2,922 | | | | (567 | ) | | | 49.61 | | | | 560 | | | | 47.26 | | | | 49.18 | | | | (281 | ) | | | 2,802 | | | | 2,653 | |
Australia | | | 2,036 | | | | 2,003 | | | | (1 | ) | | | 45.85 | | | | 1 | | | | 54.63 | | | | 59.17 | | | | (85 | ) | | | 1,951 | | | | 1,918 | |
Total | | | 71,488 | | | | 67,083 | | | | (11,958 | ) | | $ | 52.31 | | | | 13,191 | | | $ | 51.47 | | | $ | 55.77 | | | | (2,105 | ) | | | 69,383 | | | | 66,230 | |
(1) | Has been restated to reflect the impact of remeasurements which are done annually in the first quarter. |
The following list reflects the ten largest tenants in our retail portfolio as at December 31, 2012. The largest tenant in our portfolio accounted for approximately 2.9% of minimum rents, tenant recoveries and other.
| | | | | | |
Top Ten Largest Tenants | | Primary DBA | | Percent of Minimum Rents, Tenant
Recoveries and Other (%) | |
Limited Brands, Inc
| | Victoria’s Secret, Bath & Body Works, PINK | | | 2.9 | % |
The Gap, Inc.
| | Gap, Banana Republic, Old Navy | | | 2.5 | % |
Foot Locker, Inc
| | Footlocker, Champs Sports, Footaction USA | | | 2.2 | % |
Abercrombie & Fitch Stores, Inc
| | Abercrombie, Abercrombie & Fitch, Hollister, Gilly Hicks | | | 1.9 | % |
Forever 21, Inc
| | Forever 21 | | | 1.7 | % |
Macy’s Inc.
| | Macy’s, Bloomingdale’s | | | 1.6 | % |
Golden Gate Capital
| | Express, J. Jill, Eddie Bauer | | | 1.5 | % |
American Eagle Outfitters, Inc.
| | American Eagle, Aerie, Martin + Osa | | | 1.3 | % |
Genesco Inc.
| | Journeys, Lids, Underground Station, Johnston & Murphy | | | 1.2 | % |
Luxottica Retail North America Inc
| | Lenscrafters, Sunglass Hut, Pearle Vision | | | 1.1 | % |
Total
| | | | | 17.9 | % |
We develop and redevelop retail properties on a selective basis to enhance our portfolio when we believe risk-adjusted returns can be earned. As of December 31, 2012, the total anticipated costs of these redevelopment projects were estimated to be approximately $1.7 billion. We are currently redeveloping two consolidated properties within our Brazil Retail Fund, the 86,000 square foot Patio Paulista Mall and the 113,000 square foot Rio Sul mall, for a total planned costindustrial platform consists of approximately $77 million. Those redevelopment projects are expected to be completed in the near term. As of December 31, 2012, we had incurred costs of approximately $47 million in connection with these redevelopment projects.
In addition, we continue to evaluate a number of other redevelopment prospects primarily within our retail equity accounted investments to further enhance the quality of our assets in future periods. Total planned
costs of these remaining projects are approximately $1.6 billion. Planning for these redevelopment projects is in the preliminary phase. Additional details on the properties to be redeveloped and anticipated completion dates will be available as the planning progresses.
Multi-Family and Industrial Platform
Our strategy for our multi-family and industrial platform includes:
| • | | Targeting under-performing properties. We focus on acquiring multi-family properties and acquiring and developing industrial properties in high growth, supply-constrained markets by selectively targeting properties that we believe are under-valued, neglected or under-performing.
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| • | | Leveraging our strategic relationships. We are seeking to leverage the deep sourcing and operating capabilities of Fairfield Residential Company LLC, or Fairfield, for our future investments in multi-family properties. Fairfield, which is 65% owned by Brookfield, is one of the largest vertically-integrated multi-family real estate companies in the United States and is a leading provider of acquisition, development, construction, renovation and property management services.
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In early 2012, Brookfield entered into a joint venture with an industrial partner for the acquisition of industrial properties in the United States, which we believe will provide us with access to investment opportunities and enable us to leverage our partner’s operating capabilities. Our partner has a fully-integrated, national platform and owns or manages 3055 million square feet of industrial warehouse property and controls onespace across 201 properties, primarily consisting of the largest industrial land banks in the United States.
| • | | Enhancing revenues. We seek to leverage our experience and that of our partners in property management services to enhance revenues at our multi-family and industrial properties by growing rents and improving operational efficiencies, with the goal of generating stable but growing rental revenue. We also seek to create value by enhancing our multi-family portfolio through renovation programs and marketing initiatives and selectively developing industrial assets.
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| • | | Positioning portfolios for institutional ownership. Our goal is to position our multi-family and industrial portfolios for institutional ownership. For our multi-family properties, we seek to do this by stabilizing and minimizing the risk profile of our multi-family portfolio. For our industrial properties, we typically seek to do this by aggregating single property, development or complicated portfolio acquisitions into portfolios suitable for institutional ownership through a combination of proactive leasing, marketing and financing initiatives.
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As of December 31, 2012, we owned an interest in approximately 15,600 multi-family units located in coastal and select interior marketsmodern logistics assets in North America and Europe, with an additional 4 million square feet currently under construction and a portion of which are managed by Fairfield. Our focus is on multi-family properties that we believe have significant value-enhancementland portfolio with the potential through the application of dedicated hands-on asset management and operational expertise. As of December 31, 2012, we owned interests in several industrial properties in North America consisting of over 29to build 45 million square feet of industrial space. Asproperties. Our industrial strategy is to acquire older generation logistics properties that we can redevelop into state-of-the-art product. We also seek to selectively develop projects in supply constrained markets that are critical to the global supply chain. We leverage our long track record of December 31, 2012,successfully entitling land in these markets and our multi-family and industrial platform represented approximately 2% of our total equity in net assets attributable to parent company.
Opportunistic Investment Platform
Our strategy for our opportunistic investment platform includes:
| • | | Pursuing an opportunistic investment strategy. We invest in assets with a view to maximizing long-term, risk-adjusted return on capital by pursuing an opportunistic strategy to take advantage of dislocations and inefficiencies at all stages of the investment cycle. We seek to acquire
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| positions of control or significant influence in individual properties, real estate holding companies and distressed loans, with a focus on large, multifaceted, platform acquisitions, which we believe Brookfield is uniquely positioned to source and execute.
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| • | | Providing strong sponsorship. We invest in opportunities that we believe leverage Brookfield’s competitive strengths, such as deal sourcing, financial or restructuring expertise or operational advantages. Our opportunistic investment platform makes investments primarily in Brookfield-sponsored real estate opportunity and finance funds. We will be the lead investor in Brookfield’s flagship opportunistic private real estate fund. We believe that these funds provide a significant growth platform for us to participate in large-scale, opportunistic transactions alongside private institutional partners by providing us with access to transactions with the potential for significant returns. We hold the largest limited partner interest in almost all of the funds in which we are invested, and we expect that we will typically be the lead investor in these funds in the future. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield”.
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| • | | Providing operating excellence. We seek to create long-term value by building long-term sustainable revenues and stabilizing assets through operational, financial structuring and other improvements in our portfolio assets.
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| • | | Diversifying geographically. We seek to build a diversified portfolio of real estate assets in emerging and growth markets by targeting global opportunities where we believe a market offers attractive risk-adjusted returns. Initiatives underway include opportunistic acquisitions of large-scale, distressed corporate platforms and non-performing loan portfolios in the United States, Europe and Australia, office development opportunities in Brazil, distressed and development opportunities in the Middle East and local real estate investment strategies in India.
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Our opportunistic investment platform pursues opportunistic investments predominantly in distressed and under-performing real estate assets and businesses and in commercial real estate mortgages and mezzanine loans. As of December 31, 2012, we held interests in a diverse portfolio of fundsglobal relationships with approximately $1.6 billion of invested fund capital. Through these funds, we have interests in approximately 11 million square feet of office space, mezzanine loansretailers and other real estate assets locatedlogistics companies to negotiate anchor leases to support such projects. Our land bank is comprised of well-located sites near major markets and transport routes in North America, Europe, Australia, Brazilthe Middle East and emerging markets. Depending on the natureChina.
Multifamily
Our multifamily platform consists of
our investment and the specifics of the underlying assets, we may seek to hold and/or enhance the assets we invest in or sell the assets in order to realize a return on our investment. Once an asset has been sufficiently developed and its risk profile stabilized, we may seek to hold the asset through our office, retail, or multi-family and industrial platform as a long-term, stable investment.As at December 31, 2012, our investments in opportunity funds, which primarily invest in distressed and underperforming real estate assets and businesses, represented137 properties with approximately 3% of our equity in net assets attributable to parent company, and our investments in finance funds, which primarily invest in commercial real estate mortgages and mezzanine loans, represented approximately 1% of our equity in net assets attributable to parent company. As of December 31, 2012, our opportunistic investment platform represented approximately 4% of our equity in net assets attributable to parent company.
Market Overview and Opportunities
We believe that we are well-positioned to take advantage of attractive investment conditions in the key regions in which we have operations. We believe that the current volatility in global capital markets will provide compelling investment opportunities, as well as reinforce the benefits of our investment focus on high quality real estate assets with conservative financing that generate, or have the potential to generate, long-term, predictable and sustainable cash flows.
Capital preservation and risk mitigation remain key tenets of our investment philosophy – in every investment and in every economic environment. We believe the next few years will present some very attractive opportunities for real estate investors as economic conditions around the world recover and capital markets stabilize. We believe our company offers an attractive opportunity to participate in these markets by establishing a group of properties that produce significant cash flow for distribution to our unitholders and for the accretive acquisition and development of high-quality assets.
The following is an overview of the real estate industry in each of our primary markets.
North America
Supply and demand fundamentals remain sound in core markets for core assets and we continue to see strong investment demand for well-located, high quality assets. We believe the ability to add value through leasing and property management of under-performing real estate assets in core markets will continue to be a key competitive advantage in these economic conditions.
Further, we continue to see distressed situations requiring new capital and strong sponsorship, especially in38,900 multifamily units across the United States. These opportunitiesThe majority of these apartments are coming directly from banks, private entities facing looming debt maturities and lower asset values,managed by Fairfield Residential Company LLC, or Fairfield, which is 65% owned by Brookfield Asset Management. Fairfield is one of the unwinding of dysfunctional partnerships, operators seeking new growth capital, and deleveraging initiatives, among others. While the regulatory and policy approachlargest vertically-integrated multifamily real estate companies in the United States hasand is a leading provider of acquisition, development, construction, renovation and property-management services. We aim to selectively develop Class A properties in high growth, supply-constrained markets. Due to institutional demand for these types of properties, acquisition opportunities are scarce. We leverage our long track record of successfully entitling land for development of multifamily properties and managing construction in order to maximize returns. We also seek opportunities to redevelop well-located, older assets. We target Class B assets that we can acquire at a significant discount to replacement cost. We typically invest $6,000 to $10,000 per door to upgrade apartments and common areas with amenities that are in demand in today’s market. We seek to earn an attractive return on this capital by raising rents, which are still a significant discount to new product.
Hospitality
Our hospitality platform consists of interests in 27 hospitality assets with approximately 18,000 rooms across North America, Europe and Australia. Our North American hotel investing activities are conducted through Thayer Lodging, a leading global hospitality investment company, with more than two decades of experience in creating value from owning and operating hotels and in the U.K. through Center Parcs. Our strategy is to employ a disciplined approach to asset selection and target investments with significant value creation opportunities. We seeks to invest in hotels and hospitality related ventures in which the company can use its operational expertise to add value. These strategies include, but are not been as rigid as Europe’s, we believe the large upcoming debt maturity profilelimited to, renovations, repositioning, rebranding, management modification, channel distribution management, expense control and creative capital structuring.
Triple Net Lease
Our triple net lease platform consists of
over 300 properties that are leased to automotive dealerships across the United States
and Canada on a triple net lease basis. Our triple net lease platform is managed through
2017 and pool of distressed assets requiring recapitalization inCapital Automotive, a company focused on providing highly tailored sale-leaseback capital to the
United States will continue to provide opportunities.Europe
Sovereign debt issues are continuing to put significant pressure on macroeconomic conditions and capital markets. Europe currently has the largest debt funding gap in the world, and we believe that this, combined with the impact of austerity measures, will provide ample opportunities to acquire groups of assets in various asset classes across Europe in the next few years. Industry sources currently estimate a €400 to €700 billion funding gap in Europeanautomotive retail industry since 1997. Through custom tailored real estate assets. New government regulations will force banks under government ownershipfinance, our strategy is to divest portions ofassist automotive dealer groups in growing their realorganizations, acquiring new locations, upgrading existing facilities, constructing new stores, and facilitating estate by 2014 – 2015.planning and partner buyouts.
Distribution Policy
Our distribution policy is to retain sufficient cash flow within our operations to cover tenant improvements, leasing costs and other sustaining capital expenditures and to pay out substantially all remaining cash flow. In order to finance development projects, acquisitions and other investments, we plan to raise external capital. We believe that a payout ratio of 80% of our FFO should accomplish this combinedobjective. We have invested a substantial amount of capital in development and redevelopment projects primarily in our office and retail platforms. Once we realize stabilized cash flow from these initiatives, we expect the growth in our payout to meet its target range of 5% to 8% per annum.
We established our initial distribution level and our targeted distribution growth rate based on projections of the amount of FFO that we will generate in the short to medium term. These projections reflected the in-place cash flow of all of our investments and our capital investment plans. In a number of our operating entities, we are retaining operating cashflow for reinvestment. As a result, we are required to finance, in the short term, payment of our distributions to our unitholders. To maintain our distributions at the current level, we have a number of alternatives available to us, including (a) using borrowings under our committed revolving credit facilities; (b) electing to accrue and/or waive distributions to be made in respect of the Redemption-Exchange Units that are held by Brookfield Asset Management in accordance with the
introductionProperty Partnership’s limited partnership agreement; (c) paying off all or a portion of
new fund regulations, will provide further consolidationthe fees owed to the Service Providers pursuant to the Master Services Agreement through the issuance of our units and/or Redemption-Exchange Units; (d) paying of any equity enhancement distributions to Property Special LP through the issuance of Redemption-Exchange Units; and
rationalization(e) utilizing distributions from other operating entities from cash flow from operations, asset sales and/or refinancings. We are not a passive investor and we typically hold positions of
real estate ownership.Our European focus remains on the continent’s largest markets, including the United Kingdom, France, Germany and Spain, across various asset classes.
Australia
Our primary focus in Australia remains on the office sector,control or significant influence over assets in which we already haveinvest, enabling us to influence distributions from those assets.
On February 3, 2016, the Board of Directors of the BPY General Partner increased the annual distribution on our units to $1.12 per unit. Despite our projections and the alternative methods available to maintain our distribution level, there can be no assurance that we will be able to maintain an annual distribution of $1.12 per unit or meet our target growth rate. Based on amounts received in distributions from our operating entities and our projected operating cash flow from our direct investments, our proposed distributions are significantly greater than such amounts.
Additionally, our ability to make distributions will depend on a
platformnumber of factors, some of which are out of our control, including, among other things, general economic conditions, our results of operations and
also seefinancial condition, the
largest opportunities. The office marketamount of cash that is
still in the early stages of recovery, drivengenerated by
growth in the domestic economyour operations and
overall low unemployment rates. Supply is limited, boding well for robust rental and capital growth over the medium term, and we believe demand fundamentals remain strong in the major markets. Banks are seeking to reduce exposure to troubled real estate assets, resulting in asset sales and alternative debt funding opportunities are emerging as a result.Our Australian portfolio also includes assets in New Zealand, where our primary focus remains on the office sector, in which we already have a platform and see acquisition and value-add opportunities. The primary office market of Auckland is in the early stages of recovery with increasing leasing enquiry and positive net absorption. There remains a large volume of distressed land throughout New Zealand, and banks are releasing some assets into receivership/sale in a controlled manner presenting opportunities for alternative debt funding.
Brazil
As with other emerging markets, Brazil fared materially better than many developed countries during the recession, however, while we believe that the demographic changes occurring in the region fuelled by a burgeoning middle class will continue to drive growth, we expect the return set in the near-term to be less opportunistic.
We remain focused on the retail and office segments. Retail fundamentals continue to improve throughout the country, driveninvestments, restrictions imposed by the low unemployment ratesterms of any indebtedness that is incurred to finance our operations and increasing household income. Retail sales growth remains strong. National shopping center penetrationinvestments or to fund liquidity needs, levels of operating and other expenses, and contingent liabilities. Furthermore, the Property Partnership, the Holding Entities and our operating entities are still low when comparedlegally distinct from our company and they are generally required to international levels, especially outsideservice their debt and other obligations, such as distributions to Preferred Unitholders, before making distributions to us or their parent entity as applicable, thereby reducing the main capitals. The office sector continuesamount of our cash flow available to post strong absorption levels, as the influx of multinational companiespay distributions on our units, fund working capital and continued relocation of tenants from older dysfunctional assets to new modern structures is driving demand. Both Rio de Janeiro and São Paulo remain at historic lows for vacancy. In Brazil, given that real estate operators are heavily reliant on the public markets for capital to execute business plans, we believe there could be substantial opportunities for private capital, especially with volatility in the Brazilian stock market.
satisfy other needs.
Competition and Marketing
The nature and extent of competition we face varies from property to property and platform to platform. Our direct competitors include other publicly-traded office, retail,
multi-familyindustrial, multifamily, hospitality and
industrial development andtriple net lease operating
companies,companies; private real estate companies and
funds,funds; commercial property developers and other owners of real estate that engage in similar businesses.
We believe the principal factors that our tenants consider in making their leasing decisions include: rental rates; quality, design and location of properties; total number and geographic distribution of properties; management and operational expertise; and financial position of the landlord. Based on these criteria, we believe that the size and scope of our operating platforms, as well as the overall quality and attractiveness of our individual properties, enable us to compete effectively for tenants in our local markets.
Our marketing efforts focus on emphasizing these competitive advantages and leveraging our relationship with Brookfield. We benefit from using the “Brookfield” name and the
Brookfield“Brookfield” logo in connection with our marketing activities as Brookfield
Asset Management has a strong reputation
inthroughout the global real estate industry.
Intellectual Property
Our company and the Property Partnership have each entered into a licensing agreement with Brookfield pursuant to which Brookfield has granted a non-exclusive, royalty-free license to use the name “Brookfield” and the Brookfield logo. Other than under this limited license, we do not have a legal right to the “Brookfield” name and the Brookfield logo.
Brookfield may terminate the licensing agreement effective immediately upon termination of our Master Services Agreement or with respect to any licensee upon 30 days’ prior written notice of termination if any of the following occurs:
the licensee defaults in the performance of any material term, condition or agreement contained in the agreement and the default continues for a period of 30 days after written notice of the breach is given to the licensee;
the licensee assigns, sublicenses, pledges, mortgages or otherwise encumbers the intellectual property rights granted to it pursuant to the licensing agreement;
certain events relating to a bankruptcy or insolvency of the licensee; or
the licensee ceases to be an affiliate of Brookfield.
A termination of the licensing agreement with respect to one or more licensees will not affect the validity or enforceability of the agreement with respect to any other licensees.
Governmental, Legal and Arbitration Proceedings
Our company has not been since its formation and is not currently subject to any material governmental, legal or arbitration proceedings which may have or have had a significant impact on our company’s financial position or profitability nor is our company aware of any such proceedings that are pending or threatened.
We are occasionally named as a party in various claims and legal proceedings which arise during the normal course of our business. We review each of these claims, including the nature of the claim, the amount in dispute or claimed and the availability of insurance coverage. Although there can be no assurance as to the resolution of any particular claim, we do not believe that the outcome of any claims or potential claims of which we are currently aware will have a material adverse effect on us.
Our business is subject to a variety of federal, state, provincial and local laws and regulations relating to the ownership and operation of real property, including the following:
We are subject to various laws relating to environmental matters. TheseWe could be liable under these laws could hold us liable for the costs of removal and remediation of certain hazardous substances or wastes existing in, or released or deposited on or in our properties or disposed of at other locations.
We must comply with regulations under building codes and human rights codes that generally require that public buildings be made accessible to disabled persons.
We must comply with laws and regulations concerning zoning, design, construction and similar matters, including regulations which impose restrictive zoning and density requirements.
We are also subject to state, provincial and local fire and life safety requirements.
These laws and regulations may change and we may become subject to more stringent laws and regulations in the future. Compliance with more stringent laws and regulations could have an adverse effect on our business, financial condition or results of operations. We have established policies and procedures for environmental management and compliance, and we have incurred and will continue to incur significant capital and operating expenditures to comply with health, safety and environmental laws and to obtain and comply with licenses, permits and other approvals and to assess and manage potential liability exposure.
We pride ourselves on contributing positively to the communities in which we operate. This means we continually strive to minimize our impact on the environment, while balancing the need for economic growth for the company and our communities. With over 100 years of operating experience across asset classes, we have built a track record of achievement and recognition for our sustainability efforts. The initiatives we undertake and the investments we make are guided by our core set of values around sustainable development. We:
Commit to the principle that our business decisions will take into consideration the long term sustainability of communities, including the current and future environmental, safety, health and economic conditions;
Ensure that effective management systems are in place in our facilities to minimize risks to the environment;
Comply with applicable legislation, regulation and best practices;
Establish clear objectives and targets to meet and/or exceed regional standards;
Communicate openly on a timely basis with employees, the public, government officials, and other stakeholders on activities involving environment, safety and health; and
Conduct regular assurance audits and self-evaluations of our management systems, programs and activities.
As one of the largest commercial property investors in the world, we are committed to continuous improvement of our environmental performance. Sustainability is a priority for our tenants, and as landlords, our goal is to exceed their expectations. We know that shrinking the environmental footprint in our buildings
andby cutting back on energy, water and waste will have a positive effect on the financial performance of our assets.
Our company intends to build all future office developments to a LEED Gold standard or local equivalent. The LEED Green Building Rating System is an internationally accepted scorecard for sustainable sites, water efficiency, energy and atmosphere, materials and resources, and indoor environmental quality. Within our 80 million square foot global office portfolio:
we have 37 LEED certifications;
85% of our U.S. office properties have earned the EPA’s ENERGY STAR award and 100% of our Canadian office properties have achieved BOMA BESt (Building Environmental Standards); and
80% of our Australian office properties have received a 4-Star rating or higher under NABERS.
We continue to expand and enhance the features, systems and programs that foster energy efficiency in our existing office buildings, as well as the health and safety of all of our tenants, employees and the community. We perform regular, comprehensive environmental reviews and upgrades at our office properties and endeavor to maximize energy efficiency at every office building.
Our goal is to be responsible stewards of our resources, and good citizens in all that we do. We are an active contributor in the communities where we conduct business. We are proud of the commitment we have made to corporate social responsibility. The initiatives we undertake and the investments we make in building our company are guided by our core set of values around sustainable development, as we create a culture and organization that can be successful today and in the future.
4.C. ORGANIZATIONAL STRUCTURE
The chart
belowon the following page represents a simplified summary of our organizational
structure. All ownership interests indicated below are 100% unless otherwise indicated and arestructure as of
April 30, 2013.December 31, 2015. “GP Interest” denotes a general partnership interest and “LP Interest” denotes a limited partnership interest. Certain subsidiaries through which Brookfield Asset Management holds units of our company
and the Redemption-Exchange Units have been omitted. This chart should be read in conjunction with the explanation of our ownership and organizational structure
below.
on the following pages.
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(1) | As of the date of this Form 20-F,December 31, 2015, public holders own units of our company representing a 44.7%an 83% limited partnership interest in our company, and Brookfield owns the remaining units of our company, representing a 55.1%17% limited partnership interest in our company. Our company’s sole direct investment is a 16.9% limited partnership interest inAssuming the Property Partnership through our company’s ownershipexchange of class A non-voting limited partnership interests in the Property Partnership. Brookfield also owns an 82.1% limited partnership interest in the Property Partnership through Brookfield’s ownership of Redemption-Exchange Units. The Redemption-Exchange Units are redeemable for cash or exchangeable for our units in accordance with the Redemption-Exchange Mechanism.Mechanism and the exchange of the issued and outstanding Exchange LP Units not held by us, Brookfield has a 68% interest in our company. On a fully-exchanged basis, public holders (excluding the Class A Preferred Unitholder) would own units of our company representing an 7.6% limited partnershipa 30% interest in our company, the Class A Preferred Unitholder would own units of our company representing a 9% interest in our company and Brookfield would own the remaining units of our company, representing a 92.4% limited partnership interest in our company, and our company would own 100% of the limited partnership interests in the Property Partnership. Brookfield’s interest in our company consists of a combination of our units, Redemption-Exchange Units and general partnership interests, together representing and effective economic interest in our business of 92.4%. |
our company, representing a 61% interest in our company. Brookfield also has an approximately 62% interest in the Property Partnership through Brookfield’s ownership of Redemption-Exchange Units. On a fully-exchanged basis, our company would directly own 99% of the limited partnership interests in the Property Partnership.
(2) | Pursuant to the Voting Agreement, Brookfield has agreed that certain voting rights with respect to the Property General Partner, Property GP LP and the Property Partnership will be voted in accordance with the direction of our company. |
(3)(2) | The Property Partnership owns, directly or indirectly, all of the common shares or equity interests, as applicable, of the Holding Entities. Brookfield holds $1.25 billion of redeemable preferred shares of Brookfield BPY Holdings Inc., or CanHoldco, which it received as partial consideration for causing the Property Partnership to directly acquire substantially all of Brookfield Asset Management’s commercial property operations. In addition, Brookfield has subscribed forholds $5 million of preferred shares of each of CanHoldco and four wholly-owned subsidiaries of other Holding Entities, which preferred shares will beare entitled to vote with the common shares of the applicable entity. Brookfield will havehas an aggregate of 3% of the votes to be cast in respect of CanHoldco and 1% of the votes to be cast in respect of any of the other applicable entities. See Item 7.B. “Major Shareholders and Related Party Transactions —- Related Party Transactions —- Relationship with Brookfield —- Preferred Shares of Certain Holding Entities”. |
(4) | |
(3) | Certain of the operating entities and intermediate holding companies that are directly or indirectly owned by the Holding Entities and that directly or indirectly hold our real estate assets are not shown on the chart. All percentages listed represent our economic interest in the applicable entity or group of assets, which may not be the same as our voting interest in those entities and groups of assets. All interests are rounded to the nearest one percent and are calculated as at December 31, 2012.2015. |
(5) | |
(4) | Our interest in Brookfield Office Properties Inc., or Brookfield Office Properties, is comprisedconsists of 49.6%100% of theits outstanding common shares and 97.1% of the outstanding voting preferred shares as well as interests in certain series of its preferred shares. Brookfield Office Properties owns an approximate 83.3%Our aggregate equity interest in Brookfield Canada Office Properties, a Canadian real estate investment trust that is listed on the TSX and the NYSE, and an approximate 84.3% interest in the U.S. Office Fund, which consistsis approximately 83%, approximately 57% of a consortium of institutional investors and which is led and managed byheld indirectly through Brookfield Office Properties. |
(6) | |
(5) | Our Australian office platform consists of our economic interest in certain of our Australian office properties not held through Brookfield Office Properties. |
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(6) | Our European office platform includes our interest in 20 Canada Square in London, which is not held through Brookfield Office Properties. |
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(7) | Our interest in Canary Wharf is held through the Canary JV. |
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(8) | Other, as it relates to the Office segment, includes 100% ownership of an office development in Rio de Janeiro, Brazil, our interest in an office building in the Faria Lima section of São Paulo, Brazil, as well as office assets held in Brookfield-sponsored private funds in which we hold varying interests. |
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(9) | As at April 30, 2013,December 31, 2015, our interest in General Growth Properties, Inc., or GGP is comprisedconsists of an interest in approximately 22% (38%29% (34% with our consortium partners) of the outstanding shares of common stock. We, and our consortium partners, also own warrants to acquire additional shares of common stock, which warrants were “in-the-money” as at April 30, 2013. As at April 30, 2013, only we and our consortium partners owned warrants to acquire GGP common stock.December 31, 2015. Assuming the exercise of these warrants, we and our consortium partners would hold an aggregate of approximately 441389 million shares of GGP, representing approximately 43%40% of the outstanding shares of common stock of GGP. Of the 441389 million shares that would be held by our company and our consortium partners, 246327 million common shares of GGP would be owned by our company, representing approximately 24%34% of the outstanding shares of common stock of GGP (and 25%34% assuming that only our company, and none of our consortium partners, exercised the warrants). |
(8) | Rouse Properties Inc., or |
(10) | Rouse is a NYSE-listed company that GGP spun-out to its shareholders on January 12, 2012. As at April 30, 2013,December 31, 2015, we had interests of approximately 37% (54% with our consortium partners)34% of the outstanding shares of common stock.stock of Rouse. |
(9) | |
(11) | Our economic interest set forth above is reflected as a range because our multi-familyindustrial, multifamily, hospitality and industrial and our opportunistictriple net lease investments portfolios are held through Brookfield-sponsored privatereal estate opportunity funds in which we hold varying interests. |
The following table provides the percentage of voting securities owned, or controlled or directed, directly or indirectly, by us, and our economic interest in our operating entities included in our organizational chart set out above under “—“- Organizational Chart”. | | | | | | |
Name | | Economic Interest(1) | | Voting Interest(1) | |
Office | | | | | | |
Brookfield Office Properties Inc. | | 50% | | | 51 | %(2) |
Australia | | 100% | | | | (3) |
Europe | | 100% | | | 100 | % |
Canary Wharf Group plc | | 22% | | | 22 | % |
| | |
Retail | | | | | | |
General Growth Properties, Inc. | | 22%(4) | | | 23 | %(4) |
Rouse Properties, Inc. | | 37%(5) | | | 43 | %(5) |
Brazil Retail Fund | | 35% | | | - | (6) |
Australia | | 100% | | | | (7) |
| | |
Multi-Family & Industrial | | | | | | |
Multi-Family(8) | | 13%-52% | | | - | (6) |
Industrial(8) | | 29%-40% | | | - | (6) |
|
| | | |
| Name | Economic Interest(1) | Voting Interest(1) |
| Office | | |
|
Brookfield Office Properties Inc.(2) | 100% | 100% |
|
Australia(3) | 100% | — |
|
| Europe | 100% | 100% |
|
| Canary Wharf Group plc | 50% | 50% |
|
| Brazil | 47% - 51% | 47% - 51% |
|
Other(4) | 27% - 83% | — |
|
| Retail | | |
|
General Growth Properties, Inc.(5) | 29% | 29% |
|
Rouse Properties, Inc.(6) | 34% | 34% |
|
Brazil Retail Fund(4) | 40% | — |
|
| Other segments | | |
|
Industrial(4,7) | 30% - 34% | — |
|
Multifamily(4,7) | 13% - 52% | — |
|
Hospitality(4,7) | 15% - 33% | — |
|
Triple Net Lease(4,7) | 26% | — |
|
| | | | | | |
Name
| | Economic Interest(1) | | Voting Interest(1) | |
| | |
Opportunistic Investments
| | | | | | |
Opportunity Funds(8)
| | 29%-82% | | | - | (6) |
Finance Funds(8)
| | 13%-33% | | | - | (6) |
(1) | All interests are rounded to the nearest one percent and are calculated as at December 31, 2012.2015. |
| |
(2) | Our interest in Brookfield Office Properties is comprisedconsists of 49.6%100% of theits outstanding common shares and 97.1% of the outstanding voting preferred shares, together representing anshares. Our aggregate votingequity interest in Brookfield Canada Office Properties, a Canadian real estate investment trust that is listed on the TSX and the NYSE, is approximately 83%, approximately 57% of approximately 51.3%.which is held indirectly through Brookfield Office Properties. |
| |
(3) | Our Australian office platform consists of our economic interest in certain of our Australian office properties not held through Brookfield Office Properties. This economic interest is held in the form of participating loan agreements with Brookfield, which are convertible by us at any time intohybrid instruments comprising an interest bearing note, a total return swap, and an option to acquire direct or indirect legal ownership interests in the properties inproperties. The participating loan interests provide the Australian portfolio orholding entities (or their wholly owned subsidiaries) with an equity interest in a holding entity that holds the direct ownershipeconomic interest in the results of operations and changes in fair value of the properties. Brookfield retains the legal title to the properties as applicable. Upon conversion into anthrough a wholly-owned subsidiary that is not part of the business in order to preserve existing financing arrangements. We have control or significant influence over the properties via the participating loan interests. Accordingly, the assets, liabilities and results of the entities that have direct ownership of such properties are consolidated or accounted for under the equity interest in amethod by the holding entity, we will acquire Brookfield’s voting rights in such entity.entities (or their wholly owned subsidiaries). |
| |
(4) | We hold our economic interest in these assets primarily through limited partnership interests in Brookfield-sponsored real estate opportunity funds. By their nature, limited partnership interests do not have any voting rights. |
| |
(5) | We, together with our consortium partners, control approximately 38%34% of the outstanding shares of common stock of GGP. In addition, we are entitled to appoint three directors to GGP’s board of directors. We, and our consortium partners, also own warrants to acquire additional shares of common stock of GGP, which warrants were “in-the-money” as at April 30, 2013. As at April 30, 2013, only we and our consortium partners owned warrants to acquire GGP common stock.December 31, 2015. Assuming the exercise of these warrants, we and our consortium partners would hold an aggregate of approximately 441389 million shares of GGP, representing approximately 43%40% of the outstanding shares of common stock of GGP. Of the 441389 million shares that would be held by our company and our consortium partners, 246327 million common shares of GGP would be owned by our company, representing approximately 24%34% of the outstanding shares of common stock of GGP (and 25%34% assuming that only our company, and none of our consortium partners, exercised the warrants). |
(5) | |
(6) | As at April 30, 2013,December 31, 2015, we had interests of approximately 37% (54% with our consortium partners)34% of the outstanding shares of common stock of Rouse. |
(6) | We hold our economic interest in these assets primarily through limited partnership interests in Brookfield-sponsored private funds. By their nature, limited partnership interests do not have any voting rights. |
(7) | Our economic interest in our Australian retail properties is held in the form of participating loan agreements with Brookfield which are convertible by us at any time into direct ownership interests in the properties in the Australian portfolio or an equity interest in a holding entity that holds the direct ownership interest in the properties, as applicable. Upon conversion into an equity interest in a holding entity, we will acquire Brookfield’s voting rights in such entity. |
(8) | Our economic interest set forth above is reflected as a range because our multi-familyindustrial, multifamily, hospitality and industrial and our opportunistictriple net lease investments portfolios are primarily held through Brookfield-sponsored privatereal estate opportunity funds in which we hold varying interests. |
Our company was established on January 3, 2013 as a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act
of 1883, as amended, and the Bermuda Exempted Partnerships Act of 1992, as amended. Our company’s head and registered office is 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda, and our company’s telephone number is +441
294-3304.294 3309.
In connection with the
spin-off,Spin-off, we acquired from Brookfield Asset Management substantially all of its commercial property operations, including its office, retail,
multi-familymultifamily and industrial assets. We are Brookfield’s flagship public commercial property entity and the primary entity through which Brookfield Asset Management owns and operates these businesses on a global basis. We are positioned to take advantage of Brookfield’s global presence, providing unitholders with the opportunity to benefit from Brookfield’s operating experience, execution abilities and global relationships.
Our company’s sole direct investment is a limitedmanaging general partnership interest in the Property Partnership. AsOur company serves as the managing general partner of April 30, 2013, ourthe Property Partnership and has sole authority for the management and control of the Property Partnership.
Our company owns a direct 16.9% limited partnership37% interest in the Property Partnership and Brookfield owns a combinationthrough ownership of our units, Redemption-Exchange Units and general partner interests, together representing an effective economic interest in the Property Partnership of 91.8%.Managing General Partner Units. Holders of our units other than Brookfield, including the Class A Preferred Unitholder, hold the remaining economic interest in the Property Partnership. Brookfield’s interest in the Property Partnership includes a 1% generalspecial limited partnership interest held by Property GPSpecial LP, a wholly-owned subsidiary of Brookfield Asset Management, which entitles it to receive equity enhancement distributions and incentive distributions from the Property Partnership. See Item 7.B. “Major Shareholders and Related Party Transactions —- Related Party Transactions —- Relationship with Brookfield —- Equity Enhancement and Incentive Distributions”. Our
ManagersService Providers
The
Managers,Service Providers, wholly-owned subsidiaries of Brookfield Asset Management, provide management services to us pursuant to our Master Services Agreement. The senior management team that is principally responsible for providing us with management services include many of the same executives that have successfully overseen and grown Brookfield’s global real estate
business, including Richard B. Clark who is Senior Managing Partner and Chief Executive Officer of Brookfield Asset Management’s global real estate group.business.
The BPY General Partner, a wholly-owned subsidiary of Brookfield Asset Management, has sole authority for the management and control of our company. Holders of our units, in their capacities as such, may not take part in the management
or control of the activities and affairs of our company and do not have any right or authority to act for or to bind our company or to take part or interfere in the conduct or management of our company. See Item 10.B. “Additional“Additional Information —- Memorandum and Articles of Association —- Description of Our Units and Our Limited Partnership Agreement”. Property Special LP
Property GPSpecial LP and Property General PartnerThe Property GP LP serves as the generalis a special limited partner of the Property Partnership and has sole authority for the management and control of the Property Partnership. The general partner of Property GPSpecial LP is the Property General Partner, a corporation owned indirectly by Brookfield Asset Management but controlled by our company, through the BPY General Partner, pursuant to the Voting Agreement.Management. Property GPSpecial LP will beis entitled to receive equity enhancement distributions and incentive distributions from the Property Partnership as a result of its ownership of the general partnership interests of the Property Partnership.Special LP Units. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions”.
Our company indirectly holds its interests in our operating entities through the Holding Entities, most of which were formed in connection with the spin-off.Spin-off. The Property Partnership owns, directly or indirectly, all of the common shares or equity interests, as applicable, of the Holding Entities. Brookfield holds $1.25 billion of redeemable preferred shares of one of our Holdings Entities, which it received as partial consideration for causing the Property Partnership to directly acquire substantially all of Brookfield Asset Management’s commercial property operations. In addition, Brookfield has subscribed forholds $5 million of preferred shares of each of CanHoldco and four wholly-owned subsidiaries of other Holding Entities. See Item 7.B. “Major“Major Shareholders and Related Party Transactions — Related Party Transactions —- Relationship with Brookfield —- Preferred Shares of Certain Holding Entities”. Our business is organized in
fourthree operating platforms: office, retail
multi-family and
industrial, and opportunistic investments.other segments. The capital invested in these operating platforms is through a combination of: direct investment; investments in asset level partnerships or joint venture arrangements; sponsorship and participation in private equity funds; and the ownership of shares in other public companies. Combining both publicly-listed and private institutional capital provides a competitive advantage in flexibility and access to capital to fund growth.
Brookfield Office Properties Inc.: OurMost of our U.S., Canadian and CanadianEuropean office properties and our economic interests in most of our Australian office properties are held through our approximate 51% voting interest inownership of Brookfield Office Properties, a global pure-play office company that is incorporated under the laws of Canada and is listed on the NYSE and the TSX. Brookfield Office Properties owns all of itsCanada. Its Canadian office properties are held through itsapproximate 83.3% aggregate equity interest in Brookfield Canada Office Properties, a Canadian real estate investment trust formed under the laws of Canada andthat is listed on the TSX and the NYSE. Brookfield Office Properties alsoNYSE, of which it owns a portionapproximately 57% and with other subsidiaries of its U.S. office properties through its approximate 84.3%our company, we own an aggregate equity interest in the U.S. Office Fund, which consists of a consortium of institutional investors and which is led and managed by Brookfield Office Properties.approximately 83%. As at December 31, 2012,2015, Brookfield Office Properties’ portfolio consisted of interests in 111125 properties totaling 7790 million square feet and interests in 1718 million square feet of high quality, centrally-located development sites. Brookfield has held an interest in Brookfield Office Properties and its predecessors for over 20 years.
Australia: In addition to the office properties in Australia in which Brookfield Office Properties has an economic interest, we hold an economic interest in office properties in Sydney, Melbourne,Canberra, Brisbane and New Zealand. As at December 31, 2012,2015, this portfolio consisted of 12seven office properties totaling approximately 2.71.8 million square feet and two office development sites totaling approximately 500 thousand square feet. Brookfield acquired these office properties in 2007. Europe: In addition to the office properties in Europe in which Brookfield Office Properties has an interest, we own 100% of a 576,000610,000 square foot office property at 20 Canada Square, Canary Wharf, London. Brookfield acquired an interest in this office property in 2005. Canary Wharf Group plc: The remainder of our European office property operations consists of our approximate 22% interest in Canary Wharf. We own 50% of Canary Wharf a company incorporated underthrough the laws of England and Wales which, asCanary JV. As at December 31, 2012, owned and operated 16 office and retail2015, Canary Wharf consisted of interests in 21 properties (not including our interest in the office property at 20 Canada Square) totaling approximately 79.5 million square feet.feet and interests in 11.5 million square feet of high quality, centrally-located development sites. Brookfield acquired an interestinitially invested in Canary Wharf in 2003. Brazil: Our Brazilian office property operations consist of a 485,000 square foot property in São Paulo purchased in 2014 and a 197,000 square foot development site in Rio de Janeiro purchased in 2015. In addition, during the fourth quarter of 2015, we acquired a 3.4 million square foot portfolio of five assets in São Paulo and Rio de Janeiro.
Other: Other investments include office assets in the United States and Brazil held in our real estate opportunity funds.
Retail Platform
GGP:General Growth Properties, Inc.: A substantial portion of the properties in our retail platform are held through our approximate 22%29% interest in GGP, a NYSE-listed company that is incorporated under the laws of Delaware. GGP is the second largest mall owner in the United States. The majority of GGP’s properties rank among the highest quality U.S. retail assets. In late 2010, Brookfield successfully led GGP out of Chapter 11 with a cornerstone investment. Brookfield acquired a furtherOur interest in GGP on January 18, 2011 and on December 31, 2012. See Item 8.B “Significant Changes”. We and the other membersconsists of Brookfield’san interest in approximately 29% (34% with our consortium hold an aggregate of approximately 358 million shares of GGP, representing approximately 38%partners) of the outstanding shares of common stock of GGP.stock. We, and our consortium partners, also own warrants to acquire additional shares of common stock, which warrants were “in-the-money” as at April 30, 2013. As at April 30, 2013, only we and our consortium partners owned warrants to acquire GGP common stock.December 31, 2015. Assuming the exercise of these warrants, we and our consortium partners would hold an aggregate of approximately 441389 million shares of GGP, representing approximately 43%40% of the outstanding shares of common stock of GGP. Of the 441389 million shares that would be held by our company and our consortium partners, 246327 million common shares of GGP would be owned by our company, representing approximately 24%34% of the outstanding shares of common stock of GGP (and 25%34% assuming that only our company, and none of our consortium partners, exercised the warrants). Our consortium partners are domestic and foreign institutional investors who have investedAs at December 31, 2015, GGP’s portfolio consisted of interests in 131 properties totaling 128 million square feet. Brookfield acquired its initial interest in GGP in 2010, when it led GGP out of Chapter 11 with us.a cornerstone investment.
Rouse Properties, Inc.: On January 12, 2012,Rouse: In addition, we and other members of Brookfield’s consortium acquired anhold properties in our retail platform through our approximate 37%34% interest in Rouse, a NYSE-listed company that is incorporated under the laws of Delaware, that GGP spun-out to its shareholders. After giving effect toDelaware. As at December 31, 2015, Rouse’s rights offeringportfolio consisted of interests in March36 retail properties totaling approximately 25 million square feet. In January 12, 2012, we increased our holdings to approximately 36% of the outstanding shares of Rouse common stock and we, together with other members of Brookfield’s consortium hold approximately 54%acquired an interest in Rouse when it was spun out to GGP shareholders. In February 2016, a real estate fund managed by Brookfield Asset Management entered into a definitive agreement to acquire all of the outstanding shares of Rouse common stock. We have also provided a $100 million subordinated credit facility to Rouse. Rouse is the eighth largest publicly-traded regional mall owner in the United States based on square footage and owns and manages dominant Class B regional malls in secondary and tertiary markets.As at December 31, 2012, Rouse owned and operated 32 retail properties totaling approximately 22 million square feet. Our consortium partnersare domestic and foreign institutional investors who have invested with us. On April 12, 2013 Brookfield and our company acquired membership interests in the ownership consortium that holds underlying common shares of Rouse, increasingnot owned by our ownershipcompany, for $18.25 per share in cash. Upon closing of the transaction, our interest to approximately 37%.
in Rouse will increase by virtue of our participation in that fund.
Brazil Retail Fund:Fund: We hold an approximate 35%40% interest in the Brazil Retail Fund, a Brookfield-sponsored retail fund in Brazil. As at December 31, 2012,2015, the Brazil Retail Fund’s portfolio consisted of 8six malls totaling approximately 32.3 million square feet in Brazil, 59% of which is located in São Paolo, 33% of which is located inPaulo and Rio de Janeiro and 8% of which is located in Belo Horizonte.Janeiro. Brookfield acquired an interest in the Brazil Retail Fund in 2006.Australia: We hold an economic interest
Other segments
The following investments are held primarily through our interests in Brookfield’s retail property portfolio in Australia.Brookfield-sponsored real estate opportunity funds:
Industrial: As at December 31, 2012, this portfolio consisted of 4 properties totaling approximately 2 million square feet, 54% of which is located in Sydney and 46% of which is located in New Zealand. Brookfield acquired these retail properties in 2007.Multi-Family and Industrial Platform
Multi-Family: As at December 31, 2012, our multi-family portfolio consisted of interests in approximately 15,600 multi-family units, which were held primarily through a number of Brookfield-sponsored real estate opportunity and finance funds.
Industrial: As at December 31, 2012,2015, our industrial portfolio consisted of interests in over 29approximately 55 million square feet of industrial space through our interestsacross 201 properties, primarily consisting of modern logistics assets in severalNorth America and Europe, with an additional 4 million square feet currently under construction and a land portfolio with the potential to build 45 million square feet of industrial properties in the United States and Mexico. We hold these interests both directly and through private funds.properties.
Opportunistic Investment PlatformMultifamily:As at December 31, 2012,2015, our opportunistic investmentmultifamily portfolio consisted of interests in 137 properties with approximately 11 million square feet38,900 multifamily units throughout the United States.
Hospitality: As at December 31, 2015, our hospitality portfolio consisted of office space, mezzanine loans and other real estateinterests in 27 hospitality assets including eight hotel assetswith approximately 18,000 rooms in North America, Europe and Australia withAustralia.
Triple Net Lease: As at December 31, 2015, our triple net leased portfolio consisted of interests in over 300 properties that are leased to automotive dealerships across the United States and Canada on a total of approximately 7,600 rooms, which we hold primarily through a number of Brookfield-sponsored real estate opportunity and finance funds. The opportunity funds have made direct real estate investments at the individual property, portfolio and entity levels. The finance funds are dedicated commercial real estate debt funds which originate, invest in and manage portfolios primarily comprised of commercial real estate mortgages and mezzanine loans. We hold the largest limited partner interest in almost all of these funds in which we are invested. Other than such real estate opportunity and finance funds, the remainder of our opportunistic investment portfolio consists of a minority interest in a public company, a directly-owned office development in São Paolo, Brazil, a prime development site in the central business district of Sydney, Australia and a mezzanine loan in Germany.triple net lease basis.
4.D. PROPERTY, PLANTS AND EQUIPMENT
See Item 4.B. “Information“Information on the Company —- Business Overview” and Item 4.C. “Information“Information on the Company —- Organizational Structure —- Operating Entities”.ITEM 4A. | UNRESOLVED STAFF COMMENTS |
ITEM 4.A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A. OPERATING RESULTS
Introduction
In connection with the spin-off,
OBJECTIVES AND FINANCIAL HIGHLIGHTS
INTRODUCTION
This management’s discussion and analysis (“MD&A”) of Brookfield Property Partners L.P.
acquired from Brookfield, substantially all of its commercial property operations, including its office, retail, multi-family and industrial assets. We are the primary vehicle through which Brookfield owns and operates these businesses on a global basis. As at December 31, 2012, these operations included interests in 124 office properties and 173 retail properties. In addition, Brookfield had interests in an expanding multi-family and industrial platform and an 18 million square foot commercial office development pipeline, positioning us well for continued growth. These operations also include interests in several Brookfield-sponsored real estate opportunity and finance funds that hold loans and opportunistic equity investments in commercial property businesses. Brookfield’s real estate assets are primarily located in North America, Europe, Australia and Brazil.Financial information and information with respect to number of properties, lease percentages, square footage and similar operational information presented in this management’s discussion and analysis,(“BPY” or MD&A, include certain investment properties and loans and notes receivables within Brookfield’s Australian operations that were not contributed to us in connection with the spin-off. See Item 4.B. “Business Overview” and Item 4.C. “Organizational Structure” and note 4(b) of the Unaudited Pro Forma Financial Statements included elsewhere in this Form 20-F.
This MD&A“our partnership”) covers the financial position as atof December 31, 2012,2015 and December 31, 20112014 and results of operations for the years ended December 31, 2012, 20112015, 2014, and 2010 of2013. For the business comprising Brookfield’s commercial property operationsperiod prior to the spin-off (“of our business”partnership on April 15, 2013, the financial results reflect Brookfield Asset Management Inc.’s (“Brookfield Asset Management”). commercial property operations on a continuity of interest basis. Thereafter, the results reflect our partnership’s actual results. The information in this MD&A should be read in conjunction with the carve-outaudited consolidated financial statements as at December 31, 2015 and December 31, 2014 and each of Brookfield’s commercial property operations, or the Financial Statements, for the aforementioned periods includedyears ended December 31, 2015, 2014, and 2013 (the “Financial Statements”) contained elsewhere in this Form 20-F.
In addition to historical information, this MD&A contains forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. See section entitled “Special“Special Note Regarding Forward-Looking Statements” at.
BASIS OF PRESENTATION
Our sole material asset is our 37% interest in Brookfield Property L.P. (the “Operating Partnership”). As we have the
beginningability to direct its activities pursuant to our rights as owners of
this Form 20-F and Item 3.D. “Key Information — Risk Factors.”Basis of Presentation
The carve-out assets, liabilities and results of operations have not previously been reported on a stand-alone basis and therefore the historicalgeneral partner units, we consolidate the Operating Partnership. Accordingly, our Financial Statements presented in this Form 20-F may not be indicativereflect 100% of future financial condition or operating results. The Financial Statements include theits assets, liabilities, revenues, expenses and cash flows, of our business, including non-controlling interests therein, which reflectcapture the ownership interests of other third parties. We also discuss the results of operations on a segment basis, consistent with how we manage and view our business. Our seven operating segments are office, includingorganized into the following: i) Office, ii) Retail, iii) Industrial, iv) Multifamily, v) Hospitality, vi) Triple Net Lease, which includes Capital Automotive Real Estate Services Inc. (“CARS”) and vii) Corporate. These segments are independently and regularly reviewed and managed by the Chief Executive Officer, who is considered the Chief Operating Decision Maker. For presentation purposes, the Industrial, Multifamily, Hospitality and Triple Net Lease segments have been combined in this MD&A.
Our partnership’s equity interests include general partnership units (“GP Units”), publicly traded limited partnership units (“LP Units”), redeemable/exchangeable partnership units of the Operating Partnership (“Redeemable/Exchangeable Partnership Units”), special limited partnership units of the Operating Partnership (“Special LP Units”) and limited partnership units of Brookfield Office Properties Exchange LP (“Exchange LP Units”). Holders of the GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, and Exchange LP Units will be collectively referred to throughout this MD&A as “Unitholders”. The GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units have the same economic attributes in all respects, except that the Redeemable/Exchangeable Partnership Units have provided Brookfield Asset Management the right to request that its units be redeemed for cash consideration since April 2015. In the event that Brookfield Asset Management exercises this right, our office development projects, retail, multi-familypartnership has the right, at its sole discretion, to satisfy the redemption request with its LP Units, rather than cash, on a one-for-one basis. As a result, Brookfield Asset Management, as holder of Redeemable/Exchangeable Partnership Units, participates in earnings and industrialdistributions on a per unit basis equivalent to the per unit participation of the LP Units of our partnership. However, given the redeemable feature referenced above, we present the Redeemable/Exchangeable Partnership Units as a component of non-controlling interests. The Exchange LP Units are exchangeable at any time on a one-for-one basis, at the option of the holder, for LP Units. As a result of this redemption feature, we present the Exchange LP Units as a component of non-controlling interests.
This MD&A includes financial data for the year ended December 31, 2015 and
opportunistic investments.includes material information up to March 16, 2016. Financial data provided hashave been prepared using accounting policies in accordance with IFRS.International Financial Reporting Standard (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Non-IFRS measures used in this MD&A are reconciled to or calculated from such financial information. AllUnless otherwise specified, all operating and other statistical information is presented as if we own 100% of each property in our portfolio, unless otherwise specified, regardless of whether we own all of the interests in each property, but unless otherwise specified excludesexcluding information relating to our interests held through Brookfield-sponsored opportunity and finance funds and Brookfield’s interest in Canary Wharf.China Xintiandi (“CXTD”). We believe this is the most appropriate basis on which to evaluate the performance of properties in the portfolio relative to each other and others in the market. All dollar references, unless otherwise
stated, are in millions of U.S. Dollars. Canadian Dollars (“C$”), Australian Dollars (“A$”), British Pounds (“£”), Euros and(“€”), Brazilian Reais (“R$”), Indian Rupees (“₨”), and Chinese Yuan (“C¥”) are identified where applicable.
Additional information is available on our website at www.brookfieldpropertypartners.com, or on www.sedar.com or www.sec.gov.
CONTINUITY OF INTERESTS
On April 15, 2013, Brookfield Asset Management completed a spin-off of its commercial property operations (the “Business”) to our partnership (the “Spin-off”), which was effected by way of a special dividend of units of our partnership to holders of Brookfield Asset Management’s Class A and B limited voting shares as “C$”of March 26, 2013. Brookfield Asset Management directly and indirectly controlled the Business prior to the Spin-off and continues to control our partnership subsequent to the Spin-off through its interests in our partnership. As a result of this continuing common control, there is insufficient substance to justify a change in the measurement of the Business. Accordingly, our partnership has reflected the Business in its financial position and results of operations using Brookfield Asset Management’s carrying values prior to the Spin-off.
To reflect the continuity of interests, this MD&A provides comparative information of the Business for the periods prior to the Spin-off, as previously reported by Brookfield Asset Management. The economic and accounting impact of contractual relationships created or modified in conjunction with the Spin-off have been reflected prospectively from the date of the Spin-off and have not been reflected in the results of operations or financial position of our partnership prior to April 15, 2013 as such items were in fact not created or modified prior thereto. Accordingly, the financial information for the periods prior to April 15, 2013 is presented based on the historical financial information for the contributed operations as previously reported by Brookfield Asset Management. For the periods after the Spin-off, the results are based on the actual results of our partnership, including the adjustments associated with the Spin-off and the execution of several new and amended agreements including management service and relationship agreements. Certain of these new or amended agreements resulted in differences in the basis of accounting as recorded by Brookfield Asset Management and as recorded by our partnership.
OVERVIEW OF OUR BUSINESS
Our partnership is Brookfield Asset Management’s primary public entity to make investments in the real estate industry. We are a globally-diversified owner and operator of high-quality properties that typically generate stable and sustainable cash flows over the long term. Our goal is to be a leading global owner and operator of real estate, providing investors with a diversified exposure to some of the most iconic properties in the world and to acquire high-quality assets at a discount to replacement cost or intrinsic value. With approximately 14,000 employees involved in Brookfield Asset Management’s real estate businesses around the globe, we have built operating platforms in various real estate sectors, including:
Office sector through our 100% common equity interest in Brookfield Office Properties Inc. (“BPO”) and our 50% interest in Canary Wharf Group plc (“Canary Wharf”);
Retail sector through our 29% interest in General Growth Properties, Inc. (“GGP”) (34% on a fully diluted basis, assuming all outstanding warrants are exercised) and our 34% interest in Rouse Properties, Inc. (“Rouse”); and
Industrial, multifamily, hospitality and triple net lease sectors through investments in Brookfield Asset Management-sponsored real estate opportunity funds.
Through these platforms, we have amassed a portfolio of premier properties and development sites around the globe, including:
261 office properties totaling approximately 123 million square feet primarily located in the world’s leading commercial markets such as New York, London, Los Angeles, Washington, D.C.,
“A$”, “£”, “€”Sydney, Toronto, and
“R$”, respectively.Performance Measures
Berlin;
Office and urban multifamily development sites that enable the construction of 31 million square feet of new properties;
173 regional malls and urban retail properties containing over 155 million square feet in the United States and Brazil;
Approximately 55 million square feet of industrial space across 201 properties, primarily consisting of modern logistics assets in North America and Europe, with an additional 4 million square feet currently under construction;
Approximately 38,900 multifamily units across 137 properties throughout the United States;
Twenty-seven hospitality assets with approximately 18,000 rooms across North America, Europe and Australia; and
Over 300 properties that are leased to automotive dealerships across North America on a triple net lease basis.
Our diversified portfolio of high-quality office and retail assets in some of the world’s most dynamic markets has a stable cash flow profile due to its long-term leases. In addition, as a result of the mark-to-market of rents upon lease expiry, escalation provisions in leases and projected increases in occupancy, these assets should generate strong same-property net operating income
(“NOI”) growth without significant capital investment. Furthermore, we expect to earn between 8% and 11% unlevered, pre-tax returns on construction costs for our development and redevelopment projects and 20% on our equity invested in Brookfield-sponsored real estate opportunity funds. With this cash flow profile, our goal is to pay an attractive annual distribution to our unitholders and to grow our distribution by 5% to 8% per annum.
Overall, we seek to earn leveraged after-tax returns of 12% to 15% on our invested capital. These returns will be comprised of current cash flow and capital appreciation. Capital appreciation will be reflected in the fair value gains that flow through our income statement as a result of our revaluation of investment properties in accordance with IFRS to reflect initiatives that increase property level cash flows, change the risk profile of the asset, or to reflect changes in market conditions. From time to time, we will convert some or all of these unrealized gains to cash through asset sales, joint ventures or refinancings.
We believe our global scale and best-in-class operating platforms provide us with a unique competitive advantage as we are able to efficiently allocate capital around the world toward those sectors and geographies where we see the greatest returns. We actively recycle assets on our balance sheet as they mature and reinvest the proceeds into higher yielding investment strategies, further enhancing returns. In addition, due to the scale of our stabilized portfolio and flexibility of our balance sheet, our business model is self-funding and does not require us to access capital markets to fund our continued growth.
PERFORMANCE MEASURES
We expect to generate returns to Unitholders from a combination of cash flow earned from our operations and capital appreciation. Furthermore, if we are successful in increasing cash flow earned from our operations we will be able to increase distributions to Unitholders to provide them with an attractive current yield on their investment.
To measure our performance
against these targets, we focus
on: property net operating income (“NOI”),on NOI, funds from operations (“FFO”),
total return (“Total Return”),Company FFO, fair value changes, and
occupancy levels. NOI, FFO,net income and
Total Returnequity attributable to Unitholders. Some of these performance metrics do not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies. We define each of these measures as follows:
| • | | NOI: means revenues from commercial and hospitality operations of consolidated properties less direct commercial property and hospitality expenses, with the exception of depreciation and amortization of real estate assets.
|
| • | | FFO: means income, including equity accounted income, before realized gains (losses), fair value gains (losses) (including equity accounted fair value gains (losses)), depreciation and amortization of real estate assets, income tax expense (benefit), and less non-controlling interests.
|
| • | | Total Return: means income before income tax expense (benefit), and related non-controlling interests.
|
NOI: revenues from our commercial and hospitality operations of consolidated properties less direct commercial property and hospitality expenses.
FFO: net income, prior to fair value gains, net, depreciation and amortization of real estate assets, and income taxes less non-controlling interests of others in operating subsidiaries and properties therein. When determining FFO, we include our proportionate share of the FFO of unconsolidated partnerships and joint ventures and associates.
Company FFO: FFO before the impact of depreciation and amortization of non-real estate assets, transaction costs, gains (losses) associated with non-investment properties and the FFO that would have been attributable to the partnership’s shares of GGP if all outstanding warrants of GGP were exercised on a cashless basis. It also includes dilution adjustments to undiluted FFO as a result of the net settled warrants.
Fair value changes: includes the increase or decrease in the value of investment properties that is reflected in the consolidated statements of income.
Net income attributable to Unitholders: net income attributable to holders of GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units. For the period prior to the Spin-off of our partnership on April 15, 2013, net income attributable to Unitholders represented net income attributable to Brookfield Asset Management.
Equity attributable to Unitholders: equity attributable to holders of GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units.
NOI is
used as a key indicator of
our ability to increase cash flow from our operations. We seek to grow NOI through pro-active management and leasing of our properties. In evaluating our performance,
we also look at a subset of NOI, defined as
it represents“same-property NOI,” which excludes NOI that is earned from assets acquired, disposed of or developed during the periods presented, or not of a
measure over which management has a certain degree of control. We evaluaterecurring nature, and from opportunistic assets. Same-property NOI allows us to segregate the performance of
our office segment by evaluating NOIleasing and operating initiatives on the portfolio from
“Existing properties”, or “same store” basis, and NOI from “Additions, dispositions and other.” NOI from existing properties compares the
impact to performance of
the property portfolio by excluding the effect of current and prior period dispositions and acquisitions, including developmentsinvesting activities and “one-time items”, which for the historical periods presented
consistsconsist primarily of lease termination income.
We reconcile NOI
presented within “Additions, dispositions and other” includes the results of current and prior period acquired, developed and sold properties, as well as the one-time items excluded from the “Existing properties” portion of NOI. We do not evaluate the performance of the operating results of the retail segmentto net income on
a similar basis as the majority of our investments in the retail segment are accounted for under the equity method and, as a result, are not included in NOI. Similarly, we do not evaluate the operating results of our other segments on a same store basis based on the nature of the investments.page 65.
We also consider FFO an important measure of our operating performance. FFO is a widely recognized measure that is frequently used by securities analysts, investors and other interested parties in the evaluation of real estate entities, particularly
those that own and operate income producing properties. Our definition of FFO includes all of the adjustments that are outlined in the
NAREITNational Association of Real Estate Investment Trusts (“NAREIT”) definition of
funds from operations,FFO, including the exclusion of gains (or losses) from the sale of
real estate property,investment properties, the add back of any depreciation and amortization related to real estate assets and the adjustment for unconsolidated partnerships and joint ventures. In addition to the adjustments prescribed by NAREIT, we also make adjustments to exclude any unrealized fair value gains (or losses) that arise as a result of reporting under IFRS, and income taxes that arise as certain of our subsidiaries are structured as corporations as opposed to
REITs.real estate investment trusts (“REITs”). These additional adjustments result in an FFO measure that is similar to that which would result if
the companyour partnership was organized as a REIT that determined net income in accordance with
generally accepted accounting principles in the United States (“U.S.
GAAP,GAAP”), which is the type of organization on which the NAREIT definition is premised. Our FFO measure will differ from other organizations applying the NAREIT definition to the extent of certain differences between the IFRS and U.S. GAAP reporting frameworks, principally related to the recognition of lease termination
income, which do not have a significant impact on the FFO measure reported.income. Because FFO excludes fair value gains (losses), including equity accounted fair value gains (losses), realized gains (losses)
, on the sale of investment properties, depreciation and amortization of real estate assets and income taxes, it provides a performance measure that, when compared
year over year,year-over-year, reflects the impact
toon operations from trends in occupancy rates, rental rates, operating costs and interest costs, providing perspective not immediately apparent from net income. We reconcile FFO to net income
attributable to parent companyon page 65 rather than cash flow from operating activities as we believe net income is the most comparable measure.
We use Total Return as key indicator as
In addition to monitoring, analyzing and reviewing earnings performance, we
believealso review initiatives and market conditions that
our performance is best assessed by considering FFO pluscontribute to changes in the
increase or decrease in thefair value of our
assets overinvestment properties. These value changes, combined with earnings, represent a
period of time, because that istotal return on the
basis on whichequity attributable to Unitholders and form an important component in measuring how we
make investment decisions and operatehave performed relative to our
business.targets.
We do not utilize net income on its own as a key metric in assessingalso consider the performancefollowing items to be important drivers of our business because,current and anticipated financial performance:
Increases in occupancies by leasing vacant space;
Increases in rental rates through maintaining or enhancing the quality of our view, it does not provide a consistent or complete measureassets and as market conditions permit; and
Reductions in operating costs through achieving economies of scale and diligently managing contracts.
We also believe that key external performance drivers include the availability of the ongoingfollowing:
Debt capital at a cost and on terms conducive to our goals;
Equity capital at a reasonable cost;
New property acquisitions that fit into our strategic plan; and
Investors for dispositions of peak value or non-core assets.
FINANCIAL STATEMENTS ANALYSIS
REVIEW OF CONSOLIDATED FINANCIAL RESULTS
In this section, we review our consolidated performance for the years ended December 31, 2015, 2014, and 2013 and our financial position as of December 31, 2015, and 2014. Further details on our results from operations and our financial positions are contained within the “Segment Performance” section on page 68.
Our investment approach is to acquire high-quality assets at a discount to replacement cost or intrinsic value. We have been actively pursuing this strategy through our flexibility to allocate capital to real estate sectors and geographies with the best risk-adjusted returns and to participate in transactions through our investments in various Brookfield Asset Management-sponsored real estate funds. Some of the underlying operations. Nevertheless,more significant transactions are highlighted below:
Significant Developments in 2015
During the year, we
recognize that others may wish to utilize net income as a key measure and therefore provide a reconciliation of net income attributable to parent company to NOI, FFO and Total Return on page 19were successful in
this MD&A.Overview ofexpanding our Business
Our business entails owning, operating and investing in commercial property both directly andcore office platform through operating entities. We focus on well-located, high quality assets that generate or have the potential to generate long-term, predictable and sustainable cash flows, require relatively minimal capital to maintain and, by virtue of barriers to entry or other characteristics, tend to appreciate in value over time. As at December 31, 2012, our principal business segments consist of the following:
Office
We own interests in and operate one of the highest quality commercial office portfolios in the world consisting of 124 properties containing approximately 80 million square feet of commercial office space. The properties are located in major financial, energy and government cities in North America, Europe and Australia. Our strategy is to own and manage a combination of core assets consisting of prominent, well-located properties in high growth, supply-constrained markets that have high barriers to entry and attractive tenant base, and to pursue an opportunistic strategy to take advantage of dislocations in the various markets in which we operate. Our goal is to maintain a meaningful presence in each of our primary markets in order to maximize the value of our tenant relationships. Of the total properties in our office portfolio, 111 properties containing approximately 70 million square feet are consolidated under IFRS and the remaining are equity accounted under IFRS.
We also develop office properties on a selective basis throughout North America, Australia and Europe in close proximity to our existing properties. Our office development assets consist of interests in 19 high-quality, centrally located sites totaling approximately 18 million square feet.
Our U.S., Canadian and most of the economic interests in our Australian properties are held through our approximate 51% voting interest in Brookfield Office Properties. In addition, Brookfield Office Properties owns a significant portion of our European office portfolio following the acquisition of office assets in London from Hammerson plc in Q3 2012. Brookfield Office Properties in turn operates a number of private and listed entities through which public and institutional investors participate in our portfolios. This gives rise to non-controlling interests in the equity in net assets, FFO and Total Return of our office property portfolio. The remainder of our European operations consist primarily of our approximate 22%further interest in Canary Wharf using proceeds raised at the end of 2014 through the issuance of preferred shares. In addition, we committed $2 billion of capital to the second Brookfield Asset Management-sponsored real estate opportunity fund which had an active year executing transactions in the hospitality and ownershipmultifamily sectors. Lastly, we fully repaid our acquisition facility used to help acquire the remaining common shares of 20 Canada SquareBPO in London.
Retail
Our retail portfolio consists2014 using proceeds raised from the sale of interests in 173 well-located high quality retail centers in target marketsa number of our office properties and development sites.
During the fourth quarter of 2015, we disposed of a 44% interest in the Manhattan West development project in New York City to Qatar Investment Authority (“QIA”), thereby reducing our exposure to development risk.
We acquired an interest in Center Parcs Group (“Center Parcs UK”), which operates five short-break destinations across the United States, BrazilKingdom, in the third quarter of 2015.
We acquired an interest in Associated Estates Realty Corp. (“Associated Estates”), a real estate investment trust focused on apartment communities across the U.S., in the third quarter of 2015.
During the second quarter of 2015, we formed Brookfield D.C. Office Partners (“D.C. Fund”), to which we contributed three directly held assets and Australia encompassing approximately 157interests in an additional six assets from our Washington, D.C. office portfolio. We retained a 40% economic interest in the D.C. Fund.
We, in conjunction with our joint venture partner QIA, acquired 100% of Canary Wharf (the “Canary Wharf Transaction”), a 9.5 million square feet of retail space. Similar to our office strategy, we look to maintain a meaningful presenceportfolio in each of our primary marketsLondon with an 11.5 million square feet development pipeline, in order to maximize the value of our tenant relationships and pursue an opportunistic strategy to take advantage of dislocations in the various markets in which we operate. Of the total properties in our retail portfolio, 158 properties containing approximately
| 151 million square feet are equity accounted under IFRS and the remaining are consolidated under IFRS.
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A substantial portion of our retail properties are held through our approximate 21% interest in General Growth Properties, or GGP, which we acquired during 2010 and in January 2011.
During the first quarter of 2012, GGP completed2015. The portfolio is 97.5% leased at December 31, 2015.
Significant Developments in 2014
Our largest accomplishment in 2014 was the spin-off of Rouse Properties, or Rouse, to its shareholders, including us. Rouse subsequently completed an equity rights offering. Following the spin-off and our participation in the rights offering, we own an approximately 36% interest in Rouse. The transaction is intended to allow the management teamsacquisition of the respective companies to focus on strategies that are most appropriate for the different businesses.
On April 12, 2013 Brookfield and our company acquired approximately $157 million worth of membership interests in the ownership consortium that holds underlying common shares and warrants of GGP andremaining common shares of Rouse, increasing our ownership interest to approximately 22% (approximately 24% assumingBPO for $5 billion, which we funded through a combination of the exerciseissuance of all warrants) in GGP and approximately 37% in Rouse.
Multi-Family and Industrial
Our multi-family and industrial investments are part of an expanding platform. At December 31, 2012, we had interests in approximately 15,600 multi-family units and approximately 29borrowings from an acquisition facility. In addition, Brookfield Asset Management’s first real estate opportunity fund, to which BPY had committed $1.3 billion, was successful in pursuing a number of transactions.
We issued $1,800 million square feet of industrial spacemandatorily convertible preferred shares in North America held through Brookfield’s private funds.
In July 2012, Brookfield entered into a merger agreement resulting inconnection with the acquisition of Verde Realty (“Verde”), a privately-owned REITCanary Wharf.
We entered into our first triple net lease portfolio investment with the acquisition of CARS, which owns over 300 properties that acquires, develops, owns and manages industrial distribution facilities in the United States and Mexico. Brookfield completed its 81% acquisition and the company commenced consolidationare leased to automotive dealerships across North America, for consideration of Verde$1,184 million in the fourth quarter.quarter of 2014.
We acquired a portfolio of 19 apartment communities with approximately 5,000 units locatedurban multifamily assets in North Carolina, South CarolinaManhattan in the fourth quarter of 2014 for consideration of $1,056 million.
We acquired the remaining common shares and Virginia. The acquisition was completedvoting preferred shares of BPO that were previously not owned by the partnership, directly or indirectly, in two stages,the first and second quarters of 2014.
We realized a $43 million net gain on the repayment of a debt investment in Inmobiliaria Colonial SA (“Colonial”), a Spanish office company, in the second quarter of 2014.
We experienced significant fair value gains on commercial properties and commercial developments due to improving market conditions and an improved leasing outlook.
We had appreciation of our investments in Canary Wharf, GGP warrants, and CXTD preferred shares and warrants.
Significant Developments in 2013
We acquired incremental interests in GGP and Rouse for total consideration of $1.4 billion in November 2013.
We established our industrial platform with the first tranche, consistingacquisition of ten communities with approximately 2,500 units closing prior to December 31, 2012 and the second stage closing in January 2013 for the remaining properties. Fairfield Residential Company LLC (“Fairfield”) will manage the assets in the portfolio. We are seeking to leverage the deep sourcing and operating capabilities of Fairfield for our future investments in multi-family properties. Fairfield, which is 65% owned by Brookfield, is one of the largest vertically-integrated multi-family real estatetwo companies in the United States and Europe.
We completed the Spin-off from Brookfield Asset Management in April 2013.
Summary of Operating Results
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| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Commercial property revenue | $ | 3,216 |
| $ | 3,038 |
| $ | 2,910 |
|
| Hospitality revenue | 1,276 |
| 983 |
| 1,168 |
|
| Investment and other revenue | 361 |
| 452 |
| 209 |
|
| Total revenue | 4,853 |
| 4,473 |
| 4,287 |
|
| Direct commercial property expense | 1,281 |
| 1,298 |
| 1,204 |
|
| Direct hospitality expense | 902 |
| 791 |
| 957 |
|
| Investment and other expense | 135 |
| 100 |
| — |
|
| Interest expense | 1,528 |
| 1,258 |
| 1,088 |
|
| Depreciation and amortization | 180 |
| 148 |
| 162 |
|
| General and administrative expense | 559 |
| 404 |
| 317 |
|
| Total expenses | 4,585 |
| 3,999 |
| 3,728 |
|
| Fair value gains, net | 2,007 |
| 3,756 |
| 870 |
|
| Share of net earnings from equity accounted investments | 1,591 |
| 1,366 |
| 835 |
|
| Income before income taxes | 3,866 |
| 5,596 |
| 2,264 |
|
| Income tax expense | 100 |
| 1,176 |
| 501 |
|
| Net income | 3,766 |
| 4,420 |
| 1,763 |
|
Net income attributable to non-controlling interests of others in operating
subsidiaries and properties | 851 |
| 686 |
| 856 |
|
| Net income attributable to Unitholders | $ | 2,915 |
| $ | 3,734 |
| $ | 907 |
|
| | | | |
| NOI | $ | 2,309 |
| $ | 1,932 |
| $ | 1,917 |
|
| FFO | $ | 710 |
| $ | 714 |
| $ | 582 |
|
| Company FFO | $ | 839 |
| $ | 739 |
| $ | 610 |
|
Our basic and diluted net income per unit attributable to Unitholders and weighted average units outstanding are calculated as follows:
|
| | | | | | | | | |
| (US$ Millions, except per units information) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Net income attributable to Unitholders – basic | $ | 2,915 |
| $ | 3,734 |
| $ | 907 |
|
| Dilutive effect of conversion of capital securities – corporate and options | 48 |
| 30 |
| — |
|
| Net income attributable to Unitholders – diluted | 2,963 |
| 3,764 |
| 907 |
|
| Weighted average number of units outstanding – basic | 782.6 |
| 668.3 |
| 478.6 |
|
| Conversion of capital securities – corporate and options | 40.4 |
| 40.8 |
| — |
|
| Weighted average number of units outstanding – diluted | 823.0 |
| 709.1 |
| 478.6 |
|
Net income attributable to Unitholders per unit – basic(1) | $ | 3.72 |
| $ | 5.59 |
| $ | 1.41 |
|
Net income attributable to Unitholders per unit – diluted(1) | $ | 3.60 |
| $ | 5.31 |
| $ | 1.41 |
|
| |
(1) | Net income attributable to Unitholders per unit has been presented effective for the period from the date of the Spin-off on April 15, 2013, as this is the date of legal entitlement of earnings to the Unitholders. As a result, for 2013, net income attributable to Unitholders per unit is calculated exclusive of the $232 million net income attributable to Brookfield Asset Management prior to the date of the Spin-off. |
Commercial property revenue and direct commercial property expense
In 2015, commercial property revenue increased by $178 million compared to 2014, as a leading providerresult of incremental capital allocated to higher yielding opportunistic activities, same-property growth in our core office and retail platforms and an increase in our asset base. Acquisitions made in 2014 and 2015, including Associated Estates, CARS and a Manhattan multifamily portfolio contributed to a $405 million increase in revenue. These increases were offset by the disposition of mature assets, some of which resulted in the deconsolidation of certain commercial properties that provided the capital to pursue these acquisitions. Material dispositions, full or partial, include Southern Cross East and West in Melbourne, Manhattan West in New York City, 99 Bishopsgate in London, a portfolio of Washington, D.C. office assets and 75 State Street in Boston.
In 2014, commercial property revenue increased by $128 million compared to 2013, primarily due to revenue from acquisition development, construction, renovation and property management services.
We have a joint venture with an industrial joint venture partner foractivity across our segments, which included the acquisition of industrial propertiesCARS in the United States, which we believe will provide us with accessfourth quarter of 2014. This increase was partially offset by a major expiry at Brookfield Place New York in October 2013 and dispositions of mature assets.
Direct commercial property expense decreased by $17 million largely due to investment opportunities and enable us to leverage our industrial joint venture partner’s operating capabilities. Our partner has a fully-integrated, national platform and owns or manages 30 million square feetthe disposition of industrial warehouse property and controls one of the largest industrial land banks in the United States.
Opportunistic Investments
We have interests in Brookfield-sponsored real estate opportunity and finance funds that include investments in distressed and under-performing real estatemature assets and businessesthe deconsolidation of certain commercial assets. These decreases were offset by higher expenses relating to acquisitions during 2015 and commercial real estate mortgages and mezzanine loans. Through these funds we had interests at December 31, 20122014 as mentioned above. Margins in approximately 11 million square feet2015 were 60%, an improvement of office space, mezzanine loans and other real estate assets located in North America, Europe, Australia and Brazil.
The Brookfield sponsored real estate finance funds in which we have interests, invest in real estate finance transactions in risk positions senior to traditional equity and subordinate to traditional first mortgages or investment grade corporate debt. These funds in which we have interests, are focused on assets where we can make improvements or reposition the property to increase the amount and stability of cash flows with a view to monetizing our investments once such changes are realized over a medium-term time horizon. The opportunity funds also have investments and specialty finance offerings, such as commercial real estate, real estate loans, and real estate-related securities, such as commercial and residential mortgage-backed securities.
Recent Initiatives
Our operating teams completed a number of important initiatives to increase the values and cash flows in our office segment.
Since the beginning of 2011, we acquired interests in office properties in New York, Denver, Washington D.C., Houston, Seattle, Melbourne and Perth, and sold properties in Minneapolis, New Jersey, Boston, Houston, Calgary, Brisbane, Melbourne and Auckland.
In 2012, we signed approximately 7.3 million square feet of new leases, including a 1.2 million square foot lease with Morgan Stanley for One New York Plaza announced in April 2012 that represents what we believe to be one of the largest single-asset office lease in lower Manhattan since 2008. The new leases led to a reduction in our five year lease rollover exposure by approximately 300 basis points.
In 2011, we signed approximately 11points over 2014 and 140 basis points over 2013.
Hospitality revenue and direct hospitality expense
Hospitality revenue increased to $1,276 million
square feet of new commercial office leases as compared to the 7.2 million square feet of new commercial office leases signed duringfor the year ended December 31,
2011.In June 2012, we agreed2015 from $983 million in 2014. Direct hospitality expense increased to acquire a portfolio of office buildings and development sites$902 million in the City of London for approximately $871 million. The portfolio includes four operating assets totaling 884,000 square feet and two development sites which can accommodate approximately 1.42015 from $791 million square feet of density. We closed on the first tranche of assets, which included 99 Bishopsgate and a group of smaller assets, on September 28, 2012. The remaining assets, including 125 Old Broad Street and Leadenhall Court,in 2014. These increases are expectedmostly attributable to close in June 2013.
We are working on a number of attractive growth opportunities, including potential acquisitions and the expansion of our existing operations.
In the fourth quarter of 2012, we closed on the Verde transaction as noted above. This transaction, along with our prior year joint venture with an industrial joint venture partner, will serve as the platform for future growth within our industrial segment.
During the quarter, we also closed on the acquisition of a mixed use portfolio in Australia, including a prime office development site in Sydney. The assets acquired in this acquisition are included in our opportunistic investments segment.
We completed the development of the 1 million square foot Brookfield Place office tower in Perth and advanced work on 6 million square feet of office development projects including the 5 million square foot Manhattan West project in New York City.
Initial rents for new leases commencing occupancy in 2012 in our GGP portfolio increased by 10.2% on a comparable basis and we continued to reposition the business by spinning out 30 malls into a new entity focused on these specific operations.
We simplified the ownership of our U.S. and Australian office assets and better positioned key operating entities to create enhanced value.
In the third quarter 2015 acquisition of 2010, we transferredCenter Parcs UK.
Hospitality revenue decreased to
Brookfield Office Properties, most of our economic interests in our Australian office properties. In$983 million for the
third quarter of 2011 we restructured our U.S. Office Fund, which is held within Brookfield Office Properties, and are now consolidating most of the U.S. Office Fund assets.Financial Performance and Analysis as at December 31, 2012 and 2011 and the yearsyear ended December 31, 2012, 2011 and 2010
Consolidated Results of Operations
The following tables set forth2014 from $1,168 million in 2013. Direct hospitality expense decreased to $791 million in 2014 from $957 million in 2013. These decreases are primarily the results for our business for eachresult of the years ended December 31, 2012, 2011deconsolidation of certain hospitality assets. Before considering the impact of the deconsolidation, hospitality revenue and 2010direct hospitality expense decreased by $53 million and as at December 31, 2012 and 2011. Further details on our operations and financial position are contained within the review of our business segments below.
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Commercial property revenue | | $ | 2,889 | | | $ | 2,425 | | | $ | 2,102 | |
Hospitality revenue | | | 743 | | | | 164 | | | | - | |
Investment and other revenue | | | 169 | | | | 231 | | | | 168 | |
Total revenue | | | 3,801 | | | | 2,820 | | | | 2,270 | |
Direct commercial property expense | | | 1,201 | | | | 944 | | | | 852 | |
Direct hospitality expense | | | 687 | | | | 138 | | | | - | |
Investment and other expense | | | 36 | | | | 54 | | | | 26 | |
Interest expense | | | 1,028 | | | | 977 | | | | 790 | |
Administration expense | | | 171 | | | | 104 | | | | 109 | |
Total expenses | | | 3,123 | | | | 2,217 | | | | 1,777 | |
Fair value gains, net | | | 1,330 | | | | 1,477 | | | | 824 | |
Share of net earnings from equity accounted investments | | | 1,235 | | | | 2,104 | | | | 870 | |
Income before income taxes | | | 3,243 | | | | 4,184 | | | | 2,187 | |
Income tax expense | | | 535 | | | | 439 | | | | 78 | |
Net income | | $ | 2,708 | | | $ | 3,745 | | | $ | 2,109 | |
Net income attributable to | | | | | | | | | | | | |
Parent company | | $ | 1,499 | | | $ | 2,323 | | | $ | 1,026 | |
Non-controlling interests | | | 1,209 | | | | 1,422 | | | | 1,083 | |
| | | $ | 2,708 | | | $ | 3,745 | | | $ | 2,109 | |
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Investment properties | | $ | 31,859 | | | $ | 27,594 | |
Equity accounted investments | | | 8,110 | | | | 6,888 | |
Total assets | | | 48,020 | | | | 40,317 | |
Property debt | | | 19,724 | | | | 15,387 | |
Total equity | | | 24,245 | | | | 21,494 | |
Equity in net assets attributable to parent company | | | 13,375 | | | | 11,881 | |
Consolidated Performance and Analysis
Commercial property revenue increased $464$69 million, in 2012 compared to 2011. This increase was due to an increase in commercial property revenue in our office segment of $498 millionrespectively, which was primarily attributable acquisitions of office properties, the consolidation of the U.S. Office Fund and 250 Vesey Street in New York City (formerly Four World Financial Center) in the second half of 2011 and the practical completion of Brookfield Place Perth in May 2012. This increase was offset by decreases in our retail, multi-family & industrial and opportunistic investments segments, primarily as a result of the sale of retail assetsthe One&Only Ocean Club in our Brazil retail fundthe Bahamas in the second quarter of 2014.
Investment and
multi-familyother revenue and
office assets in our real estate opportunity funds.Commercial propertyinvestment and other expense
Investment and other revenue increased $323includes management fees, leasing fees, development fees, interest income and other non-rental revenue. Investment and other revenue decreased by $91 million in 2011for the year ended December 31, 2015 as compared to 2010. Thethe prior year. Our industrial segment earned more revenue on increased development activity in the current year; however, this increase was primarily dueoffset by a realized gain on the repayment of a debt investment in 2014. This increase in development activity was the main contribution to an increase of $35 million in commercial propertyinvestment and other expense to $135 million in 2015.
Investment and other revenue increased by $243 million for the year ended December 31, 2014 as compared to 2013, largely driven by a realized gain on the repayment of the debt investment. Additionally, we recorded gains from the completion of industrial developments of $50 million and income from our interest in CXTD of $38 million in 2014. This was offset by realized losses on foreign exchange forward contracts in 2014 and a gain recognized from a loan modification in 2013. In addition,
we recorded a $14 million dividend from our office segment of $394investment in Canary Wharf in 2013. Investment and other expense increased by $100 million as a result of new leasinghigher development activity in our industrial platform than 2013.
Interest expense
Interest expense increased by $270 million for the year ended December 31, 2015 as compared to the prior year. This was due to the assumption of debt obligations as a result of acquisition activity and currencythrough incremental debt raised from temporary drawdowns on our credit facilities, as well as through the issuance of convertible preferred shares to source the capital required for these acquisitions.
Additional debt obligations as a result of acquisition and refinancing activity, as well as interest associated with the acquisition facility used to acquire the remaining outstanding common shares of BPO in 2014, contributed to an increase in interest expense of $170 million for the year ended December 31, 2014 as compared to 2013.
General and administrative expense
General and administrative expense increased by $155 million for the year ended December 31, 2015 compared to the prior year. The increase was primarily attributable to transaction costs, including costs related to the acquisitions of Associated Estates and Center Parcs UK, which totaled $49 million, and an increase in management fees during 2015 of $36 million following an increase in the partnership’s capitalization of $1.6 billion. The increase is also attributable to expenses from subsidiaries acquired during 2015 and a full year of general and administrative expenses from subsidiaries acquired in 2014.
General and administrative expense increased by $87 million for the year ended December 31, 2014 compared to 2013. The increase was primarily attributable to $100 million of management fees paid by our partnership in 2014 compared to $36 million in 2013. In addition, the increase is attributable to other corporate costs incurred following the Spin-off of our partnership in April 2013 and expenses from subsidiaries acquired during 2014.
Fair value gains, net
While we measure and record our commercial properties and developments using valuations prepared by management in accordance with our policy, external appraisals and market comparables, when available, are used to support our valuations.
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| Fair value gains, net for our office sector of $1,691 million were recognized in the year ended December 31, 2015. These gains primarily related to properties in New York, London, Melbourne, Vancouver and Toronto, due to capitalization rate and discount rate compression as a result of improving market conditions and a positive impact on cash flows as a result of leases signed during the year.
We recorded fair value gains, net of $3,065 million in the year ended December 31, 2014, primarily in our U.S. office portfolio and due to improving market and economic conditions in the U.S. which resulted in capitalization rate and discount rate compression. |
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| Fair value losses, net for the retail segment of $119 million were recognized in the year ended December 31, 2015, primarily related to our class B mall portfolio in Brazil due to deteriorating market conditions. Additionally, our warrants in GGP depreciated in value due to fluctuations in the market price of the underlying shares.
Fair value gains, net for the retail segment of $532 million were recognized in the year ended December 31, 2014, primarily related to appreciation in the value of our warrants in GGP following a 40% increase in GGP’s share price during 2014. |
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| Fair value gains, net for the other and corporate segments of $435 million were recognized in the year ended December 31, 2015, primarily related to our industrial and multifamily portfolio, where, in the former, we have seen improved market conditions and, in the latter, our renovation program is well underway and completed units have resulted in asset appreciation.
Fair value gains, net for the other and corporate segments of $159 million were recognized in the year ended December 31, 2014, primarily related to our industrial portfolio. |
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|
|
|
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Share of net earnings from equity accounted investments
Our most material equity accounted investments are Canary Wharf in our Australianoffice sector, GGP in our retail sector and Canadianthe Diplomat hotel and our interest in the second value-add multifamily fund in our other segments.
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|
Our share of net earnings from equity accounted investments was $1,591 million for the year ended December 31, 2015, which represents an increase of $225 million compared to the prior year. The increase was driven by increases of $567 million and $112 million in our office and other sectors, respectively. Our interest in Canary Wharf increased from 22% to 50% in 2015, upon which it was classified as an equity accounted investment and accounts for the majority of the increase in the office sector. Also contributing to the increase in office equity accounted investments was the formation of the D.C. Fund which had several holdings in Washington, D.C. that were consolidated prior to the transaction. The other segments contributed an increase of $112 million primarily due to fair value gains on our equity accounted industrial and multifamily properties. These increases were partially offset by a $454 million decrease in the retail segment. The decrease was driven by lower fair value gains on our equity accounted GGP portfolio of class A malls than were recognized in the prior year. In addition, 2014 included a $249 million reversal of an impairment loss recognized in 2013 related to GGP.
|
Reconciliation of Non-IFRS measures
As described in the “Performance Measures” section on page 58, our partnership uses non-IFRS measures to assess the performance of its operations. An analysis of the measures and reconciliation to IFRS measures is included below.
Commercial property NOI increased to $1,935 million for the year ended December 31, 2015 compared with $1,740 million during 2014. The increase was primarily driven by new acquisitions across our portfolio offset by the disposition of mature assets, the deconsolidation of certain assets following partial dispositions thereof and the negative impact of foreign exchange.
Hospitality NOI increased to $374 million for the year ended December 31, 2015 compared to $192 million during the same period in the prior year following the acquisition of Center Parcs UK during the third quarter of 2015 and an increase in NOI at the Atlantis compared to the prior year.
The following table reconciles NOI to net income for the years ended December 31, 2015, 2014, and 2013:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Commercial property revenue | $ | 3,216 |
| $ | 3,038 |
| $ | 2,910 |
|
| Direct commercial property expense | (1,281 | ) | (1,298 | ) | (1,204 | ) |
| Commercial property NOI | 1,935 |
| 1,740 |
| 1,706 |
|
| Hospitality revenue | 1,276 |
| 983 |
| 1,168 |
|
| Direct hospitality expense | (902 | ) | (791 | ) | (957 | ) |
| Hospitality NOI | 374 |
| 192 |
| 211 |
|
| Total NOI | 2,309 |
| 1,932 |
| 1,917 |
|
| Investment and other revenue | 361 |
| 452 |
| 209 |
|
| Share of net earnings from equity accounted investments | 1,591 |
| 1,366 |
| 835 |
|
| Interest expense | (1,528 | ) | (1,258 | ) | (1,088 | ) |
| Depreciation and amortization | (180 | ) | (148 | ) | (162 | ) |
| General and administrative expenses | (559 | ) | (404 | ) | (317 | ) |
| Investment and other expense | (135 | ) | (100 | ) | — |
|
| Fair value gains, net | 2,007 |
| 3,756 |
| 870 |
|
| Income before income taxes | 3,866 |
| 5,596 |
| 2,264 |
|
| Income tax expense | (100 | ) | (1,176 | ) | (501 | ) |
| Net income | 3,766 |
| 4,420 |
| 1,763 |
|
| Net income attributable to non-controlling interests of others in operating subsidiaries and properties | 851 |
| 686 |
| 856 |
|
| Net income attributable to Unitholders | $ | 2,915 |
| $ | 3,734 |
| $ | 907 |
|
The following table reconciles net income to FFO and Company FFO for the years ended December 31, 2015, 2014, and 2013:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Net income | $ | 3,766 |
| $ | 4,420 |
| $ | 1,763 |
|
| Add (deduct): | |
| |
| |
|
| Fair value gains, net | (2,007 | ) | (3,756 | ) | (870 | ) |
| Share of equity accounted fair value gains, net | (867 | ) | (809 | ) | (400 | ) |
| Depreciation and amortization of real-estate assets | 153 |
| 112 |
| 124 |
|
| Income tax expense | 100 |
| 1,176 |
| 501 |
|
| Non-controlling interests in above items | (435 | ) | (429 | ) | (536 | ) |
| FFO | 710 |
| 714 |
| 582 |
|
| Add (deduct): | | | |
Depreciation and amortization of real-estate assets, net(1) | 27 |
| 26 |
| 19 |
|
Transaction costs, net(1) | 69 |
| 37 |
| 9 |
|
Gains/losses associated with non-investment properties, net(1) | (12 | ) | (79 | ) | (18 | ) |
Net contribution from GGP warrants(2) | 45 |
| 41 |
| 18 |
|
| Company FFO | $ | 839 |
| $ | 739 |
| $ | 610 |
|
| |
(1) | Presented net of non-controlling interests. |
| |
(2) | Represents incremental FFO that would have been attributable to the partnership’s share of GGP, if all outstanding warrants of GGP had been exercised on a cashless basis. It also includes the dilution adjustments to FFO as a result of the net settled warrants. |
FFO decreased to $710 million for the year ended December 31, 2015 compared with $714 million during 2014. The decrease was driven by higher corporate-level expenses, including higher management fees as a result of increases in the partnership’s capitalization, transaction costs related to new acquisitions made during the year and interest expense on corporate credit facilities, including the BPO acquisition facility. This facility was paid off in full during the fourth quarter of 2015. The decrease was partially offset by same-property growth at our office and hospitality assets, as well as contributions from assets acquired during the period.
Summary of Financial Position
|
| | | | | | |
| (US$ Millions, except per unit information) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Investment properties: | |
| |
|
| Commercial properties | $ | 39,111 |
| $ | 37,789 |
|
| Commercial developments | 2,488 |
| 3,352 |
|
| Equity accounted investments | 17,638 |
| 10,356 |
|
| Hospitality assets | 5,016 |
| 2,478 |
|
| Cash and cash equivalents | 1,035 |
| 1,282 |
|
| Assets held for sale | 805 |
| 2,241 |
|
| Total assets | 71,866 |
| 65,575 |
|
| Debt obligations | 30,526 |
| 27,006 |
|
| Liabilities associated with assets held for sale | 242 |
| 1,221 |
|
| Total equity | 30,933 |
| 28,299 |
|
| Equity attributable to Unitholders | $ | 21,958 |
| $ | 20,208 |
|
Equity per unit(1) | $ | 30.09 |
| $ | 27.78 |
|
| |
(1) | Assumes conversion of mandatorily convertible preferred shares. See page 68 for additional information. |
As of December 31, 2015, we had $71,866 million in total assets, compared with $65,575 million at December 31, 2014. The increase of $6,291 million reflects acquisition activity since the prior year, including the acquisitions of Associated Estates and Center Parcs UK along with additional interest in Canary Wharf, which is accounted for under the equity method.
Our investment properties are comprised of commercial, operating, rent-producing properties and commercial developments including active sites and those in planning for future development and land. Commercial properties increased from $37,789 million at the end of 2014 to $39,111 million at the end of the current year. The increase was largely due to acquisition activity but also to incremental capital spent to maintain or enhance properties and to valuation gains. This was offset by the full or partial disposition of certain assets during the year, as well as the consolidationimpact of the U.S. Office Fund and property acquisitions during the period, which was offset by reduced occupancies in the United States. In addition,foreign exchange.
Commercial developments consist of commercial property revenue in our multi-familydevelopment sites, density rights and industrial segment increased $54related infrastructure. The total fair value of development land and infrastructure was $2,488 million which wasat December 31, 2015, a decrease of $864 million from the balance at December 31, 2014. The decrease is primarily attributable to the acquisitionreclassification of multi-familyBay Adelaide Centre East in Toronto and Brookfield Place Perth Tower 2 to commercial properties as these properties reached substantial completion. Additionally, following the sale of a 44% interest in Manhattan West, the site is now accounted for under the equity method and has been reclassified to that respective line in our real estate opportunity and finance funds. These increases werebalance sheet. Also contributing to the decrease is the negative impact of foreign exchange. This was offset by decreasescapital expenditures and the recognition of valuation gains.
The following table presents the changes in
commercial propertyrevenue in our opportunistic investment segment of $121properties from December 31, 2014 to December 31, 2015:
|
| | | | | | |
| | Dec. 31, 2015 |
| (US$ Millions) | Commercial properties |
| Commercial developments |
|
| Investment properties, beginning of year | $ | 37,789 |
| $ | 3,352 |
|
| Acquisitions | 3,950 |
| 210 |
|
| Capital expenditures | 916 |
| 1,149 |
|
| Dispositions | (2,393 | ) | (1,517 | ) |
| Fair value gains, net | 1,583 |
| 430 |
|
| Foreign currency translation | (1,746 | ) | (342 | ) |
| Transfer between commercial properties and commercial developments | 911 |
| (911 | ) |
| Reclassifications to assets held for sale and other changes | (1,899 | ) | 117 |
|
| Investment properties, end of year | $ | 39,111 |
| $ | 2,488 |
|
Equity accounted investments, increased by $7,282 million which was primarilysince December 31, 2014 as a result of commercial propertiessignificant transaction activity in the current year:
During the fourth quarter, we sold a 44% interest in our real estate opportunity fund in early 2011 as wellthe Manhattan West development to QIA and, as a $4 million decreaseresult, deconsolidated the assets and subsequently equity account for the development;
We acquired the Potsdamer Platz estate in commercial property revenue in our retail segment attributable to the sale of retail assetsBerlin in the United Kingdomfourth quarter of 2015, where, concurrent with the acquisition, we sold a 50% interest to a sovereign wealth fund;
During the third quarter of 2015, we acquired an equity accounted joint venture interest in a hotel portfolio in Germany, and we converted our interest in CXTD from preferred shares to common shares which resulted in a requirement to equity account for our interest in this investment;
In the second quarter of 2015, we disposed of partial interests in the properties now held in the D.C. Fund and 75 State Street and are equity accounting for our remaining interest within these properties; and
In the first quarter of
2011.2015, we agreed to acquire all of the outstanding shares of Songbird Estates plc (“Songbird”) through a 50/50 joint venture to which we also contributed our investment in Canary Wharf that was previously recognized as a financial asset.
The following table presents a roll-forward of changes in our equity accounted investments:
|
| | | |
| (US$ Millions) | Dec. 31, 2015 |
|
| Equity accounted investments, beginning of year | $ | 10,356 |
|
| Additions, net of disposals | 6,034 |
|
| Share of net earnings from equity accounted investments | 1,591 |
|
| Distributions received | (276 | ) |
| Foreign exchange | (59 | ) |
| Other | (8 | ) |
| Equity accounted investments, end of year | $ | 17,638 |
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Hospitality revenue in 2012assets increased $579by $2,538 million compared to 2011since December 31, 2014, primarily as a result of the acquisition of Paradise Island Holdings Limited (“Atlantis”) inCenter Parcs UK during the Bahamas in April 2012 in our opportunistic investments segment andthird quarter of 2015, as well as revaluation gains related to the inclusionAtlantis.
As of
a full-year’s operating resultsDecember 31, 2015, assets held for
the Hard Rock Hotel and Casino in Las Vegas which was acquired in March 2011.Hospitality revenue in 2011 increased $164 million compared to 2010 as a result of the acquisition of the Hard Rock Hotel and Casino in Las Vegas in March 2011 in our opportunistic investments segment.
Investment and other revenue in 2012 decreased $62 million compared to 2011 primarily as a result of decreasesale included two properties in our office segment, which was due to the settlement of loans receivable from Brookfieldin Sydney and the recognition of one-time items including a condemnation award of $11 million, both in the prior year. This decrease was partially offset by an increase in dividend income from our investment in Canary Wharf.
Investment and other revenue in 2011 increased $63 million compared to 2010 primarily as a result of an increase in interest income in our office segment of $53 million due to a note receivable related to the disposition of the residential development segment to Brookfield Residential Properties, Inc. in the fourth quarter of 2010.
Direct commercial property expense increased $257 million in 2012 compared to 2011. The increase was primarily due to an increase of direct commercial property expense in our office segment of $165 million as a result of the acquisitions of office properties, the practical completion of Brookfield Place Perth in May 2012 and the consolidation of the U.S. Office Fund and 250 Vesey Street in the second half of 2011. In addition, direct commercial property expense in our opportunistic investments segment increased by $98 million as a result of acquisitions made in 2012 by a new Brookfield-sponsored real estate opportunity funds, offset by divestment of assets with lower expenses. These increases were offset by a decrease of $6 million of direct commercial property expenses in our retail and multi-family and industrial segments due to reduction of operating costs and asset dispositions.
Direct commercial property expense in 2011 increased $92 million compared to 2010. This increase was primarily attributable to an increase of $184 million in direct commercial property expense in our office segment as a result of the consolidation of the U.S. Office Fund and the New Zealand Property Fund, the acquisition of properties in Houston, Washington, D.C., Denver, Melbourne and Perth in 2011, as well as an increase of $30 million attributable to the acquisition of multi-family portfolios in our real estate opportunity and finance funds in 2010. These increases were offset by a decrease of direct commercial property expense in our opportunistic investments segment of $110 million as a result of office assets sold in our real estate opportunity fund in early 2011,Vancouver, as well as a decrease in our retail segmentportfolio of $12 million due toindustrial assets near the sale of retailU.S. - Mexico border and two multifamily assets in the United KingdomStates, as we intend to sell controlling interests in these properties to third parties in the first quarter of 2011.
Direct hospitality expensenext 12 months.
Our debt obligations increased
$549to $30,526 million
in 2012 compared to 2011 as a result of the acquisition of the Atlantis in the Bahamas in April 2012 in our opportunistic investments segment and the inclusion of a full-year’s operating results for the Hard Rock Hotel and Casino in Las Vegas.Direct hospitality expense increased $138 million in 2011 compared to 2010 as a result of the acquisition of the Hard Rock Hotel and Casino in Las Vegas in March 2011 in our opportunistic investments segment.
Investment and other expense in 2012 decreased $18 million compared to 2011 primarily as a result of a decrease of fee expense relating to our office segment.
Investment and other expense in 2011 increased $28 million compared to 2010 primarily as a result of an increase of fee expense of $9 million and an increase in foreign exchange expense of $13 million.
Interest expense increased $51 million in 2012 compared to 2011 primarily due to an increase in interest expense in our office segment of $82 million as a result of the consolidation of U.S. Office Fund and the acquisition of office assets during the year. In addition, an increase in interest expense of $53 million in our opportunistic segment was due to the acquisition of hospitality assets, i.e., the Hard Rock Hotel and Casino and the Atlantis, in March 2011 and April 2012, respectively. This was offset by a decrease in interest expense of $68 million in our retail segment primarily related to the debt restructuring in our Brazil retail fund at the end of 2011 and a $18 million decrease in our multi-family and industrial segment as a result of a refinancing on a multi-family portfolio at a lower rate in 2012.
Interest expense increased $187 million in 2011 compared to 2010 primarily as a result of an increase in interest expense of $132 million due to the consolidation of the U.S. Office Fund, property acquisitions during the year and currency appreciation in Australia and Canada in our office segment, an increase of interest rates and currency appreciation in Brazil, and the disposal of United Kingdom retail assets in the first quarter of 2011 in our retail segment, as well as an increase of interest expense in our multi-family and industrial segment as a result acquisitions in the period. These increases were partially offset by a decrease in interest expense in our opportunistic investments segment as a result of the sale of assets in our real estate opportunity fund in early 2011.
Administration expense increased $67 million in 2012 compared to 2011 primarily as a result of an increase in employee compensation and benefits of $18 million and an increase of $35 million relating to depreciation and amortization of non-real estate assets from the acquisition of hospitality assets in March 2011 and April 2012.
We recorded $1.3 billion of fair value gains in 2012 which was a decrease of $147 million compared to the prior year. This was primarily driven by our office segment which recorded $1.0 billion of fair value gains of which 70% related to discount and terminal capitalization rate compression, and 30% related to leasing changes, timing and other assumptions. In addition, we recorded $273 million of fair value gains in our retail segment as a result of discount rates decreasing by 110 basis points on our Brazilian retail malls. We also recorded $65 million of fair value gains in our opportunistic and multi-family and industrial segments primarily relating to improved leasing on office properties, an increase in the market price of certain financial assets and the realization of loans in our real estate opportunity and finance funds.
In 2011, we recorded $1.5 billion of fair value gains in 2011 which was an increase of $653 million compared to the prior year. The gains recorded in 2011 were primarily driven by our office segment which recorded $879 million of fair value gains of which 57% related to discount and terminal capitalization rate compression, and 43% related to leasing changes, timing and other assumptions. In 2011, we recorded $232 million of fair value gains in our retail segment primarily as a result of discount rates decreasing by 40 basis points in Brazil, and $47 million of realized gains related to the sale of three Brazil retail malls. Our opportunistic investments and multi-family and industrial segments recorded $1 million of fair value gains.
Our share of net earnings (losses) from equity accounted investments was $1.2 billion in 2012 which was a decrease of $869 million compared to 2011. Our retail segment recorded $1.0 billion of net earnings from equity accounted investments, which was driven by operating income and fair valuation gains from our interest in GGP. Our office segment recorded $178 million of net earnings from equity accounted investments during the period which was primarily attributable to operating income from our equity accounted investments in the U.S. and Australia. We also recorded $45 million of net earnings from equity accounted investments in our multi-family and industrial and opportunistic investments segment, which was primarily driven by fair value gains in these segments. The decrease of $869 million, when compared to 2011, was primarily a result of significant valuation gains in GGP in the prior year period and net earnings in 2011 from the U.S. Office Fund which was equity accounted until August 2011.
Our share of net earnings (losses) from equity accounted investments was $2.1 billion in 2011 which was an increase of $1.2 billion when compared to 2010. This increase was primarily due to an increase of $1.3 billion in our retail segment due to our investments in GGP in November 2010 and January 2011, and which had significant fair value gains as a result of compression of capitalization rates in the United States. In addition, an increase of $13 million is attributable to the acquisition of assets in our real estate opportunity funds at the end of 2010. These increases were offset by $44 million in our office segment as a result of the consolidation of the U.S. Office Fund assets subsequent to the exercise of the U.S. Office Fund option in the third quarter of 2011 and 250 Vesey Street and First Canadian Place in the fourth quarter of 2011.
Income tax expense increased $96 million in 2012 compared to 2011 primarily due to a greater portion of the prior period’s earnings being subject to tax in jurisdictions with lower income tax rates and a tax asset recognized in the prior year. This increase was partially offset by a decline in income tax expense of $60 million in our office segment as a result of a decrease in net income before taxes and a larger release of tax reserves in the current year.
Income tax expense increased $361 million in 2011 compared to 2010 primarily as a result of an increase in income tax expense in our office segment of $307 million due to increased earnings driven by fair value adjustments, as well as increased earnings driven by higher fair value gains in our retail segment.
Net income attributable to non-controlling interests decreased $213 million in 2012 compared to 2011 as a result of higher net income in the prior year, which was offset by the consolidation of the U.S. Office Fund, which did not report net income attributable to non-controlling interests until it was consolidated in August 2011.
Net income attributable to non-controlling interests increased $339 million in 2011 compared to 2010 as a result of an increase of $202 million in our office segment due to the consolidation of the U.S. Office Fund, 250 Vesey Street and First Canadian Place in the second half of 2011, which did not report net income attributable to non-controlling interests from the beginning of 2011 through the second half of 2011. The increase was also due to a $177 million increase as a result of the non-controlling interests’ share of Brazilian fair value gains in our retail segment and $25 million increase in our opportunistic investments segment as a result of acquisitions in our real estate opportunity and finance funds. These increases were offset by a decrease of $65 million in our multi-family and industrial segment as a result of higher net income in 2010 compared to 2011.
Equity in net assets attributable to parent company increased by $1.5 billion during the year ended December 31, 2012 primarily due to the increase in net income attributable to factors detailed above.
Segment Performance and Analysis
Office
The following table presents the equity in net assets attributable to parent company of our office portfolio by region as at December 31, 2012 and 2011:
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| (US$ Millions) | | United States | | Canada | | Australia | | Europe | | | | | Total | |
| | Dec. 31,
2012 | | | Dec. 31,
2011 | | | | | Dec. 31,
2012 | | | Dec. 31,
2011 | | | | | Dec. 31,
2012 | | | Dec. 31,
2011 | | | | | Dec. 31,
2012 | | | Dec. 31,
2011 | | | | | Dec. 31,
2012 | | | Dec. 31,
2011 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Office properties | | $ | 13,772 | | | $ | 12,959 | | | | | $ | 5,132 | | | $ | 4,571 | | | | | $ | 4,592 | | | $ | 3,739 | | | | | $ | 990 | | | $ | 521 | | | | | $ | 24,486 | | | $ | 21,790 | |
Equity accounted investments | | | 1,485 | | | | 1,467 | | | | | | 17 | | | | 13 | | | | | | 903 | | | | 957 | | | | | | - | | | | - | | | | | | 2,405 | | | | 2,437 | |
Accounts receivable and other | | | 721 | | | | 1,315 | | | | | | 113 | | | | 134 | | | | | | 321 | | | | 490 | | | | | | 1,073 | | | | 994 | | | | | | 2,228 | | | | 2,933 | |
| | | 15,978 | | | | 15,741 | | | | | | 5,262 | | | | 4,718 | | | | | | 5,816 | | | | 5,186 | | | | | | 2,063 | | | | 1,515 | | | | | | 29,119 | | | | 27,160 | |
Property-specific borrowings | | | 7,015 | | | | 6,679 | | | | | | 1,958 | | | | 1,840 | | | | | | 2,453 | | | | 2,452 | | | | | | 676 | | | | 442 | | | | | | 12,102 | | | | 11,413 | |
Accounts payable and other | | | 1,062 | | | | 1,031 | | | | | | 568 | | | | 407 | | | | | | 307 | | | | 229 | | | | | | 68 | | | | 115 | | | | | | 2,005 | | | | 1,782 | |
Non-controlling interests | | | 590 | | | | 636 | | | | | | 512 | | | | 427 | | | | | | 123 | | | | 190 | | | | | | 2 | | | | - | | | | | | 1,227 | | | | 1,253 | |
| | | $ | 7,311 | | | $ | 7,395 | | | | | $ | 2,224 | | | $ | 2,044 | | | | | $ | 2,933 | | | $ | 2,315 | | | | | $ | 1,317 | | | $ | 958 | | | | | $ | 13,785 | | | $ | 12,712 | |
Unallocated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unsecured facilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 418 | | | $ | 381 | |
Capital securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 866 | | | | 994 | |
Non-controlling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,078 | | | | 5,360 | |
Equity in net assets attributable to parent company(1) | | | | | | | | | | | | | | | | | | | $ | 6,423 | | | $ | 5,977 | |
(1) | Does not include office developments which are described in the table below on a geographic basis.
|
Equity in net assets attributable to parent company increased by $4462015 from $27,006 million during the year ended December 31, 2012 to $6.4 billion, excluding office development activities. These increases represent gains in the fair values of properties primarily in the North America and reflect lower discount rates and terminal capitalization rates (70%) and higher projected cash flows (30%), as well as the strengthening of Canadian and Australia currencies relative to the U.S. Dollar. Unallocated non-controlling interests relate primarily to the interests of other shareholders in Brookfield Office Properties, whereas the non-controlling interests in each region relate to funds and joint ventures in those regions.
Specific 2012 major variances include the following:
| • | | The total fair value of commercial properties increased by $2.7 billion to $24.5 billion, primarily as a result of the reclassification of Brookfield Place in Perth from commercial developments to commercial properties and the acquisition of 99 Bishopsgate in London, Metropolitan Park East & West in Seattle and 799 9th Street in Washington D.C.
|
A decrease in accounts receivable and other of $0.7 billion relates primarily to the repayment of the Brookfield Residential promissory notes of $0.5 billion in the fourth quarter of 2012.
Equity accounted investments as at December 31, 2012 primarily include: in2014. Contributing to this increase was the United States, 245 Park Avenue ($0.7 billion) and Grace Building ($0.6 billion); and in Australia, a varietyaddition of property funds and joint ventures interests. Our interest in Canary Wharf ($0.9 billion) is classifiedproperty-specific borrowings related to acquisition activity during the year as a financial asset and is included in accounts receivable and other in the table above.
The following table presents the equity in net assets attributable to parent company of our office development activities by region:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
| | | Consoli-
dated
assets | | | Consoli-
dated
liabilities | | | Non-Controlling
interests | | | Equity in
net assets
attributable
to parent
company | | | Consoli- dated assets | | | Consoli-
dated
liabilities | | | Non-Controlling
interests | | | Equity in net
assets
attributable
to parent
company | |
Australia | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Brookfield Place, Perth | | | $ - | | | | $ - | | | | $ - | | | | $ - | | | | $ 865 | | | | $ 419 | | | | $ 223 | | | | $ 223 | |
Other | | | 256 | | | | 73 | | | | 16 | | | | 167 | | | | 239 | | | | 92 | | | | - | | | | 147 | |
North America | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Manhattan West, New York(1) | | | 465 | | | | 227 | | | | 119 | | | | 119 | | | | 315 | | | | 227 | | | | 44 | | | | 44 | |
Other | | | 341 | | | | 55 | | | | 144 | | | | 142 | | | | 213 | | | | - | | | | 107 | | | | 106 | |
Europe | | | 318 | | | | 69 | | | | 138 | | | | 111 | | | | 81 | | | | - | | | | 41 | | | | 40 | |
| | | | $ 1,380 | | | | $ 424 | | | | $ 417 | | | | $ 539 | | | | $ 1,713 | | | | $ 738 | | | | $ 415 | | | | $ 560 | |
(1) | At December 31, 2012 consolidated liabilities include $122 million of non-recourse fixed rate debt, bearing interest at 5.9% and maturing in 2018, and $105 million of non-recourse floating rate debt bearing interest at 6.0% and maturing in 2013. |
As at December 31, 2012, we held interests in centrally located office development sites with a total development pipeline of approximately 18 million square feet in the United States, Canada, Australia, and Europe. We classify our office development sites into three categories: (i) active development (ii) active planning and (iii) held for development. The 980,000 square foot Bay Adelaide Centre East in Toronto and the 5 million square foot Manhattan West in New York were the only active developments in our office segment as of December 31, 2012. As of December 31, 2012, these two sites had incurred a cost of $441 million and had a total planned development cost of $794 per square foot with a weighted average planned construction period of 98 months.
Of the remaining 12 million square feet in our office development pipeline as of December 31, 2012, 2.5 million square feet were in the active planning stage comprising of three development projects. Included in the active planning stage were the development rights to 100 Bishopsgate, a well-positioned development site in London, U.K., and we have prepared the site for construction. As at December 31, 2012, those three developments had incurred a cost of $211 million and had a total planned development cost of $841 per square foot with a weighted average planned construction period of 47 months.
The remaining 9.8 million square feet of our office development pipeline as of December 31, 2012 were being held for development and were not in the active planning stage. With all our development sites, we proceed with developing the sites when our risk adjusted return hurdles and preleasing targets are met.
As of December 31, 2012, we had a level of indebtedness of approximately 50% of our consolidated office properties.
We attempt to match the maturity of our office property debt with the average lease term of our properties. At December 31, 2012, the average term to maturity of our property debt was 4 years, compared to our average lease term of 7 years. The details of our property debt for our consolidated office properties at December 31, 2012 are as follows:
| | | | | | | | |
| (US$ Millions) | | Weighted Average Rate | | | Debt Balance | |
Unsecured Facilities | | | | | | | | |
Brookfield Canada Office Properties revolving facility | | | 3.2 | % | | $ | 68 | |
Brookfield Office Properties senior notes | | | 4.2 | % | | | 350 | |
Secured Property Debt | | | | | | | | |
Fixed rate | | | 5.7 | % | | | 7,518 | |
Variable rate | | | 4.8 | % | | | 4,938 | |
| | | | | | | $ | 12,874 | |
Current | | | | | | $ | 2,026 | |
Non-current | | | | | | | 10,848 | |
| | | | | | | $ | 12,874 | |
As at December 31, 2012, we had $897 million of committed corporate credit facilities in Brookfield Office Properties consisting of a $695 million revolving credit facility from a syndicate of banks and bilateral agreements between Brookfield Canada Office Properties and a number of Canadian chartered banks for an aggregate revolving credit facility of C$200 million. The balance drawn on these facilities was $68 million (2011 – $381 million). As at December 31, 2012, we also had $30 million (2011 – $30 million) of indebtedness outstanding to Brookfield.
Capital securities includes certain of Brookfield Office Properties’ Class AAA preferred shares issued by Brookfield Office Properties which are presented as liabilities on the basis that they may be settled, at the issuer’s option, in cash or the equivalent value of a variable number of Brookfield Office Properties’ common shares. These represent sources of low cost capital to our business. Brookfield Office Properties had the following capital securities outstanding as at the dates indicated:
| | | | | | | | | | | | | | | | |
| (US$ Millions, except share information) | | Shares
Outstanding | | | Cumulative
Dividend Rate | | | Dec. 31, 2012(1) | | | Dec. 31, 2011(1) | |
Class AAA Series F | | | 8,000,000 | | | | 6.00 | % | | $ | 202 | | | $ | 196 | |
Class AAA Series G | | | 4,400,000 | | | | 5.25 | % | | | 110 | | | | 110 | |
Class AAA Series H | | | 8,000,000 | | | | 5.75 | % | | | 202 | | | | 196 | |
Class AAA Series I | | | - | | | | 5.20 | % | | | - | | | | 150 | |
Class AAA Series J | | | 8,000,000 | | | | 5.00 | % | | | 202 | | | | 196 | |
Class AAA Series K | | | 6,000,000 | | | | 5.20 | % | | | 150 | | | | 146 | |
Total | | | | | | | | | | $ | 866 | | | $ | 994 | |
(1) | Net of transaction costs of nil and $1 million at December 31, 2012 and December 31, 2011, respectively. |
Operating Results – Office
The following table presents the NOI, FFO and Total Return of our office properties by region for the years ended December 31, 2012, 2011 and 2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | NOI(1) | | | FFO(1) | | | Total Return(1) | |
| Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | | | 2012 | | | 2011 | | | 2010 | | | 2012 | | | 2011 | | | 2010 | |
United States | | $ | 820 | | | $ | 561 | | | $ | 418 | | | $ | 470 | | | $ | 435 | | | $ | 427 | | | $ | 693 | | | $ | 985 | | | $ | 742 | |
Canada | | | 285 | | | | 259 | | | | 243 | | | | 220 | | | | 213 | | | | 227 | | | | 376 | | | | 297 | | | | 302 | |
Australia | | | 309 | | | | 264 | | | | 214 | | | | 199 | | | | 134 | | | | 91 | | | | 230 | | | | 152 | | | | 202 | |
Europe | | | 33 | | | | 32 | | | | 31 | | | | 44 | | | | 20 | | | | 27 | | | | 60 | | | | 194 | | | | 76 | |
Unallocated | | | - | | | | - | | | | - | | | | (567 | ) | | | (490 | ) | | | (405 | ) | | | (567 | ) | | | (490 | ) | | | (405 | ) |
| | | $ | 1,447 | | | $ | 1,116 | | | $ | 906 | | | $ | 366 | | | $ | 312 | | | $ | 367 | | | $ | 792 | | | $ | 1,138 | | | $ | 917 | |
(1) | See “— Performance Measures”noted above, in this MD&A for an explanation of components of NOI, FFO and Total Return. |
The increase in NOI in 2012, when compared to 2011, was driven by the increase in commercial property revenue partially offset by an increase in direct commercial property expenses. This was primarily attributable to the consolidation of the U.S. Office Fund in the second half of 2011, as well as borrowings on subscription facilities to fund these acquisitions, in Seattle, Washington, D.C., Denver, London, Melbourne and Perth, and the practical completion of Brookfield Place in Perth.refinancing activity. These increases were partially offset by the saledisposition of propertiesencumbered assets during the year and the negative impact of foreign exchange. In addition, during the fourth quarter of 2015, we repaid the remaining balance on the acquisition facility put in Calgary, Melbourne, Boston and New Jersey. This resultedplace in commercial property revenue increasingMarch 2014 to fund the acquisition of the remaining BPO common shares that were previously not owned, directly or indirectly, by $498our partnership.
The following table presents additional information on our partnership’s outstanding debt obligations:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Corporate borrowings | $ | 2,912 |
| $ | 3,377 |
|
| Funds subscription facilities | 1,591 |
| 504 |
|
| Non-recourse borrowings: | |
| |
|
| Property-specific borrowings | 25,937 |
| 22,569 |
|
| Subsidiary borrowings | 86 |
| 556 |
|
| Total debt obligations | 30,526 |
| 27,006 |
|
| Current | 8,580 |
| 3,127 |
|
| Non-current | 21,946 |
| 23,879 |
|
| Total debt obligations | $ | 30,526 |
| $ | 27,006 |
|
The following table presents the components used to calculate equity attributable to Unitholders per unit:
|
| | | | | | |
| (US$ Millions, except unit information) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Total equity | $ | 30,933 |
| $ | 28,299 |
|
| Less: | |
| |
|
| Interests of others in operating subsidiaries and properties | 8,975 |
| 8,091 |
|
| Equity attributable to Unitholders | 21,958 |
| 20,208 |
|
| Mandatorily convertible preferred shares | 1,554 |
| 1,535 |
|
| Total equity attributable to unitholders | 23,512 |
| 21,743 |
|
| Partnership units | 711,412,925 |
| 712,743,649 |
|
| Mandatorily convertible preferred shares | 70,038,910 |
| 70,038,910 |
|
| Total partnership units | 781,451,835 |
| 782,782,559 |
|
| Equity attributable to Unitholders per unit | $ | 30.09 |
| $ | 27.78 |
|
Equity attributable to Unitholders was $21,958 million and direct commercial property expense increasing by $165 million.at December 31, 2015, an increase of $1,750 million from the balance at December 31, 2014. Assuming the conversion of mandatorily convertible preferred shares, equity attributable to unitholders increased to $30.09 per unit at December 31, 2015 from $27.78 per unit at December 31, 2014. The increase in 2011 when compared to 2010 was primarily driven by acquisitions in Houston, Washington, D.C., Denver, Melbournea result of fair value gains and Perth,income from equity accounted investments recorded during the period, as well as income from new investments, which was partially offset by the saleimpact of foreign exchange.
Interests of others in operating subsidiaries and properties was $8,975 million at December 31, 2015, an increase of $884 million from the balance at December 31, 2014. The increase was primarily a result of the acquisition of new investments through Brookfield-sponsored funds in which the partnership is a limited partner.
SUMMARY OF QUARTERLY RESULTS
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | 2014 |
| (US$ Millions, except per unit information) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 |
| Revenue | $ | 1,267 |
| $ | 1,267 |
| $ | 1,170 |
| $ | 1,149 |
| $ | 1,070 |
| $ | 1,098 |
| $ | 1,243 |
| $ | 1,062 |
|
| Direct operating costs | 573 |
| 573 |
| 504 |
| 533 |
| 524 |
| 505 |
| 533 |
| 527 |
|
| Net income | 1,157 |
| 435 |
| 1,165 |
| 1,009 |
| 1,595 |
| 1,043 |
| 1,289 |
| 493 |
|
| Net income attributable to Unitholders | 863 |
| 193 |
| 1,026 |
| 833 |
| 1,492 |
| 978 |
| 892 |
| 372 |
|
| Net income attributable to Unitholders per unit – basic | $ | 1.10 |
| $ | 0.25 |
| $ | 1.31 |
| $ | 1.06 |
| $ | 2.09 |
| $ | 1.37 |
| $ | 1.31 |
| 0.67 |
|
| Net income attributable to Unitholders per unit – diluted | $ | 1.06 |
| $ | 0.25 |
| $ | 1.26 |
| $ | 1.02 |
| $ | 1.97 |
| $ | 1.33 |
| $ | 1.30 |
| 0.67 |
|
Revenue varies from quarter to quarter due to acquisitions and dispositions of commercial and other income producing assets, changes in occupancy levels, as well as the impact of leasing activity at market net rents. In addition, revenue also fluctuates as a result of changes in foreign exchange rates and seasonality. Seasonality primarily affects our retail assets, wherein the fourth quarter exhibits stronger performance in conjunction with the holiday season. In addition, our North American hospitality assets generally have stronger performance in the winter and spring months compared to the summer and fall months, while our European hospitality assets exhibit the strongest performance during the summer months. Fluctuations in our net income is also impacted by the fair value of properties in Bostonthe period to reflect changes in valuation metrics driven by market conditions or property cash flows.
SEGMENT PERFORMANCE
Our operations are organized into seven operating segments, including our corporate activities. For purposes of this MD&A, we have combined the Industrial, Multifamily, Hospitality and Triple Net Lease results since a majority of these assets were acquired recently and would not be meaningful on a stand-alone basis. The following table presents FFO by segment for comparison purposes:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Office | $ | 675 |
| $ | 546 |
| $ | 376 |
|
| Retail | 459 |
| 460 |
| 308 |
|
| Industrial, Multifamily, Hospitality and Triple Net Lease | 130 |
| 57 |
| 45 |
|
| Corporate | (554 | ) | (349 | ) | (147 | ) |
| FFO | $ | 710 |
| $ | 714 |
| $ | 582 |
|
The following table presents equity attributable to Unitholders by segment as of December 31, 2015 and 2014:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Office | $ | 18,189 |
| $ | 16,003 |
|
| Retail | 9,365 |
| 9,171 |
|
| Industrial, Multifamily, Hospitality and Triple Net Lease | 2,847 |
| 1,590 |
|
| Corporate | (8,443 | ) | (6,556 | ) |
| Equity attributable to Unitholders | $ | 21,958 |
| $ | 20,208 |
|
Office
Our office segment consists of interests in 261 office properties totaling 123 million square feet, which are primarily located in the world’s leading commercial markets such as New Jersey. This resultedYork, London, Los Angeles, Washington, D.C., Sydney, Toronto, and Berlin, among others. The following table presents FFO and net income attributable to Unitholders in commercial property revenue increasing by $394 millionour office segment for the years ended December 31, 2015, 2014, and direct commercial property expense increasing by $1842013:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| FFO | $ | 675 |
| $ | 546 |
| $ | 376 |
|
| Net income attributable to Unitholders | 2,858 |
| 2,948 |
| 787 |
|
FFO from our office segment was $675 million for the year ended December 31,
2011.NOI generated by existing office properties since2015 as compared to $546 million in 2014. The increase was primarily the beginningresult of 2010 (i.e., those held throughout bothour increased ownership in BPO, which was 100% for 2015, compared to 87% for 2014 on a weighted average basis, as well as the FFO contribution from Canary Wharf in the current period and prior period) is presentedthe acquisition of Candor Office Parks which closed in the fourth quarter of 2014. We also recognized a $15 million dividend from our 22% interest in Canary Wharf prior to the Canary Wharf Transaction. These increases were partially offset by the negative impact of foreign exchange.
Compared to 2013, FFO increased to $546 million in 2014 from $376 million. This increase was primarily the result of our increased ownership in BPO, which was 87% on a weighted average basis for 2014, compared to 49% for 2013. In addition we recognized a $43 million realized net gain on our investment in Colonial and a fee in connection with the disposition of Heritage Plaza in Houston in the first quarter of 2014.
Net income attributable to Unitholders for 2015 was $2,858 million compared to $2,948 million in 2014. The decrease of $90 million was primarily a result of higher fair value gains recorded in the prior year due to the strengthening of market conditions and leasing during the period primarily in New York, London and Sydney.
Net income attributable to Unitholders increased by $2,161 million from $787 million in 2013 to $2,948 million in 2014. This increase was primarily the result of our increased ownership in BPO and higher fair value gains across our office portfolio, particularly in New York. In addition, we also recorded fair value gains on our investment in Canary Wharf as a result of continued recovery in the London office market. This increase was partially offset by higher income tax expense during 2014 as a result of higher taxable income and an increase in deferred tax liability as a result of a change in state tax legislation that resulted in an increase in our effective tax rate applicable to future earnings from certain subsidiaries in the impacted jurisdictions.
The following table on a constant exchange rate basis, using the average exchange ratepresents key operating metrics for our office portfolio for the yearyears ended December 31, 20122015 and 2014:
|
| | | | | | | | | | | | |
| (US$ Millions, except where noted) | Consolidated | Unconsolidated |
| As at and for the years ended Dec. 31, | 2015 |
| 2014 |
| 2015 |
| 2014 |
|
| Total portfolio: | |
| |
| |
| |
|
NOI(1) | $ | 1,324 |
| $ | 1,380 |
| $ | 379 |
| $ | 161 |
|
| Number of properties | 187 |
| 211 |
| 74 |
| 33 |
|
| Leasable square feet (in thousands) | 70,626 |
| 78,068 |
| 28,777 |
| 15,747 |
|
| Occupancy | 88.5 | % | 88.0 | % | 94.1 | % | 81.0 | % |
In-place net rents (per square foot)(2) | $ | 24.46 |
| $ | 23.63 |
| $ | 40.85 |
| $ | 30.94 |
|
| Same-property: | |
| |
| |
| |
|
NOI(2) | $ | 1,103 |
| $ | 1,074 |
| $ | 168 |
| $ | 154 |
|
| Number of properties | 73 |
| 73 |
| 9 |
| 9 |
|
| Leasable square feet (in thousands) | 53,534 |
| 53,580 |
| 8,141 |
| 8,152 |
|
| Occupancy | 91.7 | % | 91.1 | % | 96.0 | % | 95.0 | % |
In-place net rents (per square foot)(2) | $ | 26.88 |
| $ | 25.76 |
| $ | 46.58 |
| $ | 43.46 |
|
| |
(1) | NOI for unconsolidated properties is presented on a proportionate basis, representing the Unitholders’ interest in the property. |
| |
(2) | Presented using normalized foreign exchange rates, using the December 31, 2015 exchange rate. |
NOI from our consolidated properties decreased to $1,324 million in 2015 from $1,380 million in 2014. This decrease was primarily due to the negative impact of foreign exchange and the partial disposition of the eight assets contributed to the D.C. Fund and dispositions in Boston, Seattle and Toronto, offset by the NOI contribution from leases in lower Manhattan and acquisitions made during the current year.
Same-property NOI for
the same period in 2011 and 2010. This table illustrates the stability of these cash flows that arises from the high occupancy levels and long-term lease profile. | | | | | | | | | | | | |
| (US$ Millions) | | 2012 | | | 2011 | | | 2010 | |
United States | | $ | 361 | | | $ | 351 | | | $ | 370 | |
Canada | | | 268 | | | | 251 | | | | 241 | |
Australia | | | 224 | | | | 213 | | | | 202 | |
Europe | | | 31 | | | | 32 | | | | 32 | |
NOI relating to existing properties using normalized foreign exchange (“FX”)(1) | | | 884 | | | | 847 | | | | 845 | |
Currency variance | | | - | | | | 2 | | | | (30 | ) |
NOI relating to existing properties | | $ | 884 | | | $ | 849 | | | $ | 815 | |
NOI relating to acquisitions, dispositions and other | | | 563 | | | | 267 | | | | 91 | |
Total NOI | | $ | 1,447 | | | $ | 1,116 | | | $ | 906 | |
Average rent per square foot | | $ | 31.44 | | | $ | 28.55 | | | $ | 28.05 | |
(1) | Using the 2012 year to date average FX rates. |
NOI relating to existingour consolidated properties for the year ended December 31, 20122015 compared with the prior year increased by 4%$29 million to $884 million and increased by 4% when excluding currency appreciation.$1,103 million. This increase was primarily the result of increased occupancy and higher same property average in-place net rents, predominately in our New York, Washington, D.C., Los Angeles and higher same property occupancy dueLondon properties.
NOI from our unconsolidated properties, which is presented on a proportionate basis, increased by $218 million to
lease-ups offset by lease expiries.NOI for$379 million in the year ended December 31, 2011 was2015, compared to $161 million in line with the prior year, although NOI decreasedyear. This increase primarily reflects the inclusion of Canary Wharf in the United States. The decrease in the United States was driven by occupancy reductionscurrent period. Occupancy rates increased to 94.1% from 81.0% largely due to the expiryinclusion of leasesCanary Wharf, where occupancy rates are on average higher than at our other unconsolidated properties. Also contributing to the increase was the formation of the D.C. Fund, the properties in New York and Boston.
FFO forwhich are now equity accounted, but which were consolidated prior to the transaction.
The following table presents certain key operating metrics related to leasing activity in our office segment:
|
| | | | | | |
| | Total portfolio year-to-date |
| (US$ millions, except where noted) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Leasing activity (in thousands of square feet) | |
| |
|
| New leases | 6,026 |
| 7,004 |
|
| Renewal leases | 5,384 |
| 3,814 |
|
| Total leasing activity | 11,410 |
| 10,818 |
|
| Average term (in years) | 7.8 |
| 7.6 |
|
Year-one leasing net rents (per square foot)(1) | $ | 24.92 |
| $ | 29.66 |
|
Average leasing net rents (per square foot)(1) | 27.25 |
| 32.93 |
|
Expiring net rents (per square foot)(1) | 21.99 |
| 24.11 |
|
Estimated market net rents for similar space(1) | 38.57 |
| 33.75 |
|
| Tenant improvements and leasing costs (per square foot) | $ | 40.66 |
| $ | 73.14 |
|
| |
(1) | Presented using normalized foreign exchange rates, using the December 31, 2015 exchange rate. |
For the year ended December 31,
2012 increased by $542015, we leased over 11.4 million
square feet at average in-place net rents approximately 24% higher than expiring net rents. Approximately 53% of our leasing activity represented new leases. Our overall office portfolio’s in-place net rents are currently 25% below market net rents, which gives us confidence that we will be able to
$366 million compared to $312 millionincrease our NOI in the
prior year. The increase is primarily attributable to the acquisitions of properties discussed above, and the refinancing of Australian debt which resulted in a decrease in interest expense. In addition, the Canary Wharf dividend was $40 million in 2012 compared to $16 million in 2011. This increase in FFO was partially offset by higher interest expensecoming years, as
a result of additional corporate debt that was drawn and the consolidation of the U.S. Office Fund, as well as various onetime gains, including a condemnation award of $11 million, in the United States in the prior year recorded within investment and other revenue.FFO forwe sign new leases. For the year ended December 31, 2011 decreased by $55 million2015, tenant improvements and leasing costs were $40.66 per square foot, compared to $312 million from $367 million$73.14 per square foot in the prior period. The decrease is primarily due to the increase of unallocated non-controlling interest which is a result of the transfer of interests in the Australian assets to Brookfield Office Properties. In addition, the Canary Wharf dividend was $16 million in 2011 compared to $26 million in 2010, which was offset by income earned by newly acquired properties in the period. In addition, the increase in interest expense reflects the acquisition and dispositions discussed above as well as the impact of foreign currency translation on borrowings in Australia and Canada.
Total Return for the year ended December 31, 2012 decreased by $346 million to $792 million from $1.1 billion in 2011. The decrease is primarily a result of significant fair value gains, including share of equity accounted fair value gains in 2011 and modest valuations gains in 2012 compared to significant valuations gains in the United States, Canada and Europe in 2011 as a result of decreases in discount and terminal capitalization rates.
Total Return for the year ended December 31, 2011 increased by $221 million to $1.1 billion from $917 million in the prior year. The increase in valuation gains is a result of decrease in discount and terminal capitalization rates as detailed in the table below. This was offset by the decrease in FFO as mentioned above.
The key valuation metrics of our commercial office properties are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows. A 100-basis point change in the discount rate and terminal capitalization rate would result in a change in our 2012 equity in
We calculate net
assets attributable to parent company of $1.7 billion. Discount and capitalization rates have declined meaningfully in all of our principal regions since 2010, giving rise to valuation gains. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | United States | | Canada | | Australia | | Europe | | Europe(1) | |
| | | Dec. 31,
2012 | | | | | Dec. 31,
2011 | | | | | Dec. 31,
2010 | | | | | Dec. 31,
2012 | | | | | Dec. 31,
2011 | | | | | Dec. 31,
2010 | | | | | Dec. 31,
2012 | | | | | Dec. 31,
2011 | | | | | Dec. 31,
2010 | | | | | Dec. 31,
2012 | | | | | Dec. 31,
2011 | | | | | Dec. 31,
2010 | | | | | Dec. 31,
2012 | | | | | Dec. 31,
2011 | | | | | Dec. 31,
2010 | |
Discount rate | | | 7.3 | % | | | | | 7.5 | % | | | | | 8.1 | % | | | | | 6.4 | % | | | | | 6.7 | % | | | | | 6.9 | % | | | | | 8.9 | % | | | | | 9.1 | % | | | | | 9.2 | % | | | | | 7.1 | % | | | | | n/a | | | | | | n/a | | | | | | 6.1 | % | | | | | 6.1 | % | | | | | 6.5 | % |
Terminal cap rate | | | 6.3 | % | | | | | 6.3 | % | | | | | 6.7 | % | | | | | 5.6 | % | | | | | 6.2 | % | | | | | 6.3 | % | | | | | 7.2 | % | | | | | 7.5 | % | | | | | 7.7 | % | | | | | 5.7 | % | | | | | n/a | | | | | | n/a | | | | | | n/a | | | | | | n/a | | | | | | n/a | |
| Investment horizon (years) | | | 11 | | | | | | 12 | | | | | | 10 | | | | | | 11 | | | | | | 11 | | | | | | 11 | | | | | | 10 | | | | | | 10 | | | | | | 10 | | | | | | 10 | | | | | | n/a | | | | | | n/a | | | | | | n/a | | | | | | n/a | | | | | | n/a | |
(1) | Certain properties in Europe use the direct capitalization method for valuation. The amounts presented as the discount rate relate to the implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable. |
The results of operations are primarily driven by occupancy and rental rates of the office properties and stability of earnings is driven by the average lease term. The following tables present key metrics relating to in-place leases of our office property portfolio:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2012 | | Dec. 31, 2011 | | Dec. 31, 2010 | |
| | | Occupancy
(%) | | | Same
Store
Occupancy
(%) | | | Avg.
Lease
Term
(Years) | | | Avg.
“In
Place”
Net
Rent | | | Market
Net
Rent | | | | | Occupancy
(%) | | | Same
Store
Occupancy
(%) | | | Avg.
Lease
Term
(Years) | | | Avg.
“In
Place”
Net
Rent | | | Market
Net
Rent | | | | | Occupancy
(%) | | | Same
Store
Occupancy
(%) | | | Avg.
Lease
Term
(Years) | | | Avg.
“In
Place”
Net
Rent | | | Market
Net
Rent | |
United States | | | 89.0 | % | | | 90.8 | % | | | 7.0 | | | $ | 26.80 | | | $ | 32.50 | | | | | | 91.3 | % | | | 90.6 | % | | | 7.0 | | | $ | 24.53 | | | $ | 31.21 | | | | | | 94.0 | % | | | 94.8 | % | | | 7.1 | | | $ | 24.54 | | | $ | 29.20 | |
Canada | | | 96.9 | % | | | 96.9 | % | | | 8.2 | | | | 26.80 | | | | 31.98 | | | | | | 96.3 | % | | | 96.3 | % | | | 8.7 | | | | 25.48 | | | | 29.87 | | | | | | 96.0 | % | | | 97.0 | % | | | 7.6 | | | | 25.99 | | | | 24.52 | |
Australia | | | 97.7 | % | | | 97.5 | % | | | 6.4 | | | | 53.82 | | | | 54.12 | | | | | | 96.6 | % | | | 97.2 | % | | | 6.1 | | | | 48.33 | | | | 48.39 | | | | | | 98.4 | % | | | 98.2 | % | | | 7.1 | | | | 47.44 | | | | 48.03 | |
Europe(1) | | | 85.3 | % | | | 100.0 | % | | | 10.7 | | | | 69.19 | | | | 67.01 | | | | | | 100.0 | % | | | 100.0 | % | | | 10.3 | | | | 60.47 | | | | 59.87 | | | | | | 100.0 | % | | | 100.0 | % | | | 10.0 | | | | 61.05 | | | | 60.04 | |
Average | | | 92.1 | % | | | 93.3 | % | | | 7.3 | | | $ | 31.44 | | | $ | 35.94 | | | | | | 93.3 | % | | | 93.0 | % | | | 7.3 | | | $ | 28.55 | | | $ | 33.62 | | | | | | 95.1 | % | | | 95.9 | % | | | 7.2 | | | $ | 28.05 | | | $ | 30.67 | |
(1) | Does not include office assets held through our approximate 22% interest in Canary Wharf. |
The worldwide portfolio occupancy rate in our office properties at December 31, 2012 was 92.1%, down from 93.3% at December 31, 2011. The decrease in occupancy levels from prior periods is primarily due to a decline in the United States to 89.0% from 91.3% at December 31, 2011. The decline is due to acquisitions of under-leased properties at attractive values and expected vacancies in Denver, New York, and Washington D.C. In Europe, the acquisition of 99 Bishopsgate in the second quarter of 2012, a building adjacent to our 100 Bishopsgate development
site in London, contributed to Europe’s decline. Occupancy levels elsewhere in our portfolio remain favorable. In 2012, we leased approximately 7.3 million square feet. We currently have a leasing pipeline of 2 million square feet, which would further improve our leasing profile.
We use in-place net rents for our office segment, as a measure of leasing performance, and calculate thisrent as the annualized amount of cash rent receivable from leases on a per square foot basis including tenant expense reimbursements, less operating expenses being incurred for that space, but excluding the impact of straight-lining rent escalations or amortization of free rent periods. This measure represents the amount of cash, on a per square foot basis, generated from leases in a given period.
The following table presents our fair value gains from consolidated and unconsolidated investments attributable to our office segment:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Fair value gains: | |
| |
| |
|
| Consolidated investments | $ | 1,691 |
| $ | 3,065 |
| $ | 806 |
|
Unconsolidated investments(1) | 620 |
| 174 |
| 190 |
|
| Total fair value gains | $ | 2,311 |
| $ | 3,239 |
| $ | 996 |
|
| |
(1) | Fair value gains for unconsolidated investments are presented on a proportionate basis, representing the Unitholders’ interest in the investments. |
We recorded $2,311 million fair value gains in 2015 and $3,239 million in 2014. As discussed earlier in the “Review of Consolidated Financial Results”, fair value gains, net for office primarily related to fair value gains in our New York, London, Melbourne, Vancouver and Toronto office portfolios. Also contributing to this increase were fair value gains on our unconsolidated investments such as Canary Wharf and in the current year on the properties in the D.C. Fund, which were consolidated in 2014 prior to the transaction and are now equity accounted.
The key valuation metrics for commercial properties in our office segment on a weighted-average basis are as follows:
|
| | | | | | | | | | | | |
| | Dec. 31, 2015 | Dec. 31, 2014 |
| | Discount rate |
| Terminal
capitalization
rate |
| Investment
horizon |
| Discount rate |
| Terminal
capitalization
rate |
| Investment
horizon |
|
| Consolidated properties: | |
| |
| |
| |
| |
| |
|
| United States | 7.0 | % | 5.7 | % | 11 |
| 7.1 | % | 5.9 | % | 10 |
|
| Canada | 6.1 | % | 5.5 | % | 10 |
| 6.3 | % | 5.6 | % | 11 |
|
| Australia | 7.6 | % | 6.2 | % | 10 |
| 8.3 | % | 6.8 | % | 10 |
|
| United Kingdom | 6.6 | % | 5.1 | % | 11 |
| 6.8 | % | 5.1 | % | 10 |
|
| Brazil | 9.5 | % | 7.7 | % | 8 |
| 8.5 | % | 7.5 | % | 10 |
|
| India | 14.4 | % | 10.3 | % | 5 |
| 14.5 | % | 11.0 | % | 5 |
|
| Unconsolidated properties: | |
| |
| |
| |
| |
| |
|
| United States | 6.3 | % | 5.3 | % | 11 |
| 6.4 | % | 5.4 | % | 9 |
|
| Australia | 7.4 | % | 6.1 | % | 10 |
| 8.3 | % | 7.0 | % | 10 |
|
United Kingdom(1) | 4.9 | % | 5.2 | % | 10 |
| n/a |
| n/a |
| n/a |
|
| Germany | 8.1 | % | 4.7 | % | 10 |
| n/a |
| n/a |
| n/a |
|
| |
(1) | Certain properties in the United Kingdom accounted for under the equity method are valued using both discounted cash flow and yield models. For comparative purposes, the discount and terminal capitalization rates and investment horizon calculated under the discounted cash flow method are presented in the table above. |
The following table provides an overview of the financial position of our office segment as at December 31, 2012, average in-place2015 and 2014:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Investment properties: | |
| |
|
| Commercial properties | $ | 27,405 |
| $ | 28,531 |
|
| Commercial developments | 1,835 |
| 2,640 |
|
| Equity accounted investments | 7,761 |
| 2,061 |
|
| Participating loan interests | 449 |
| 609 |
|
| Investment in Canary Wharf | — |
| 1,265 |
|
| Accounts receivable and other | 1,062 |
| 1,216 |
|
| Cash and cash equivalents | 546 |
| 620 |
|
| Assets held for sale | 506 |
| 1,676 |
|
| Total assets | 39,564 |
| 38,618 |
|
| Less: | |
| |
|
| Debt obligations | 13,660 |
| 14,402 |
|
| Capital securities – fund subsidiaries | 724 |
| 643 |
|
| Accounts payable and other liabilities | 3,188 |
| 3,040 |
|
| Liabilities associated with assets held for sale | 105 |
| 825 |
|
| Non-controlling interests of others in operating subsidiaries and properties | 3,698 |
| 3,705 |
|
| Equity attributable to Unitholders | $ | 18,189 |
| $ | 16,003 |
|
Equity attributable to Unitholders increased by $2,186 million to $18,189 million at December 31, 2015 from $16,003 million at December 31, 2014. The increase was primarily the result of an additional investment in Canary Wharf, which was funded through the issuance of capital securities in December 2014. The remaining increase in equity was a result of valuation gains recorded in the current year, partially offset by the negative impact of foreign exchange.
Commercial properties totaled $27,405 million at December 31, 2015, compared to $28,531 million at December 31, 2014. This decrease reflects the deconsolidation of certain assets in London, Melbourne, New York, Washington, D.C., Sydney and Vancouver following the disposition of partial interests therein to equity accounted investments or the reclassification of certain assets to held for sale, as well the impact of the disposition of an asset in Toronto, and negative impact of foreign exchange.
Commercial developments decreased by $805 million between December 31, 2014 and December 31, 2015 as a result of substantial completion of Bay Adelaide Centre East in Toronto and Brookfield Place Tower 2 in Perth in the fourth quarter of 2015. In addition, as a result of the disposition of a 44% interest in the Manhattan West project, the development was deconsolidated and is accounted for under the equity method prospectively.
The following table summarizes the scope and progress of active developments in our office segment as of December 31, 2015:
|
| | | | | | | | | | | | | | | | | |
| Active developments: | Square feet under construction (in 000's) |
| Expected
date of cash
stabilization | Percent
pre-
leased |
| Cost | Construction Loan |
| (Millions, except where noted) | Total(1) | | To-date | | Total | | Drawn | |
| Office: | |
| | |
| | |
| | |
| | |
| | |
|
| Brookfield Place East Tower, Calgary | 1,400 |
| Q3 2018 | 71 | % | C$ | 799 |
| C$ | 386 |
| C$ | 575 |
| C$ | 126 |
|
L'Oreal Brazil Headquarters, Rio de Janeiro(2) | 197 |
| Q3 2018 | 93 | % | R$ | 137 |
| R$
| 58 |
| R$ | — |
| R$ | — |
|
London Wall Place, London(2) | 505 |
| Q1 2020 | 73 | % | £
| 190 |
| £
| 100 |
| £
| 137 |
| £
| 31 |
|
| Principal Place - Commercial, London | 621 |
| Q1 2020 | 69 | % | £
| 365 |
| £
| 183 |
| £
| 280 |
| £
| 88 |
|
One Manhattan West, Midtown New York(2) | 2,117 |
| Q4 2020 | 25 | % | $ | 1,063 |
| $ | 206 |
| $ | 700 |
| $ | 12 |
|
| 100 Bishopsgate, London | 962 |
| Q4 2021 | 25 | % | £
| 802 |
| £
| 299 |
| £
| — |
| £
| — |
|
1 Bank Street, London(2) | 715 |
| Q1 2023 | 40 | % | £ | 247 |
| £ | 49 |
| £ | — |
| £ | — |
|
| Multifamily: | | | | | | | | | | | |
Three Manhattan West, Midtown New York(2) | 587 |
| Q3 2018 | n/a |
| $ | 414 |
| $ | 206 |
| $ | 268 |
| $ | 50 |
|
Newfoundland, London(2) | 546 |
| Q4 2020 | n/a |
| £
| 240 |
| £
| 67 |
| £
| — |
| £
| — |
|
Principal Place - Residential, London(2) | 303 |
| n/a | n/a |
| £
| 164 |
| £
| 43 |
| £
| 122 |
| £
| — |
|
Shell Centre - Residential, London(2) | 529 |
| n/a | n/a |
| £
| 164 |
| £
| 49 |
| £
| 93 |
| £
| 6 |
|
| Total | 8,482 |
| | |
| | |
| | |
| | |
| | |
|
| |
(1) | Net of NOI earned during stabilization. |
| |
(2) | Cost and construction loan information is presented on a proportionate basis at our ownership in these developments. |
The following table presents changes in our partnership’s equity accounted investments in the office segment from December 31, 2014 to December 31, 2015:
|
| | | |
| (US$ Millions) | Dec. 31, 2015 |
|
| Equity accounted investments, beginning of year | $ | 2,061 |
|
| Additions, net of disposals | 5,107 |
|
| Share of net earnings from equity accounted investments | 838 |
|
| Distributions received | (48 | ) |
| Foreign exchange | (150 | ) |
| Other | (47 | ) |
| Equity accounted investments, end of year | $ | 7,761 |
|
Equity accounted investments increased by $5,700 million to $7,761 million at December 31, 2015 compared to the prior year-end. The increase reflects acquisition activity, including Potsdamer Platz and a 50% interest in Canary Wharf. Additionally, due to a sell-down of interests in Manhattan West, the assets contributed to the D.C. Fund, and 75 State Street, these assets are no longer consolidated and are now equity accounted. Fair value gains on equity accounted properties in New York and London also contributed to the increase.
At December 31, 2015, we classified a property in Vancouver and a property in Sydney to assets held for sale as we intend to sell controlling interests in these properties to third parties in the next 12 months.
Debt obligations decreased from $14,402 million at December 31, 2014 to $13,660 million at December 31, 2015. This decrease is the result of the reclassification of property-level debt related to office properties classified as held for sale and the impact of foreign exchange. These decreases were partially offset by upfinancing activities and drawdowns on construction facilities.
We also had $724 million of capital securities – fund subsidiaries outstanding at December 31, 2015 (December 31, 2014 - $643 million). Capital securities – fund subsidiaries include $683 million (December 31, 2014 - $643 million) of equity interests in Brookfield DTLA Holdings LLC (“DTLA”) held by our co-investors in the fund, which have been classified as a liability, rather than as non-controlling interests, as the holders of these interests can cause DTLA to redeem their interests in the fund for cash equivalent to the fair value of the interests on October 15, 2023 and on every fifth anniversary thereafter. In addition, capital securities – fund subsidiaries also includes $41 million (December 31, 2014 - nil) which represents the equity interests held by our co-investor in the D.C. Fund which have been classified as a liability, rather than as non-controlling interest, due to the fact
that on June 18, 2023, and on every second anniversary thereafter, the holders of these interests can redeem their interests in the D.C. Fund for cash equivalent to the fair value of the interests.
Reconciliation of Non-IFRS Measures – Office
The key components of NOI in our office segment are presented below:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Commercial property revenue | $ | 2,403 |
| $ | 2,504 |
| $ | 2,463 |
|
| Direct commercial property expense | (1,079 | ) | (1,124 | ) | (1,032 | ) |
| Total NOI | $ | 1,324 |
| $ | 1,380 |
| $ | 1,431 |
|
NOI to net rents across our portfolio increased 9.3%income:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Same-property NOI | $ | 967 |
| $ | 936 |
| $ | 1,037 |
|
| Currency variance | — |
| 72 |
| 106 |
|
| NOI related to acquisitions and dispositions | 236 |
| 337 |
| 245 |
|
| NOI from opportunistic assets | 121 |
| 35 |
| 43 |
|
| Total NOI | 1,324 |
| 1,380 |
| 1,431 |
|
| Investment and other revenue | 143 |
| 257 |
| 158 |
|
| Interest expense | (652 | ) | (686 | ) | (670 | ) |
| Depreciation and amortization on non-real estate assets | (18 | ) | (18 | ) | (20 | ) |
| General and administrative expense | (171 | ) | (160 | ) | (161 | ) |
| Fair value gains, net | 1,691 |
| 3,065 |
| 806 |
|
| Share of net earnings from equity accounted investments | 838 |
| 271 |
| 295 |
|
| Income before income taxes | 3,155 |
| 4,109 |
| 1,839 |
|
| Income tax benefit (expense) | 35 |
| (645 | ) | (207 | ) |
| Net income | 3,190 |
| 3,464 |
| 1,632 |
|
| Net income attributable to non-controlling interests | 332 |
| 516 |
| 845 |
|
| Net income attributable to Unitholders | $ | 2,858 |
| $ | 2,948 |
| $ | 787 |
|
Net income to FFO:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Net income | $ | 3,190 |
| $ | 3,464 |
| $ | 1,632 |
|
| Add (deduct): | |
| |
| |
|
| Fair value gains, net | (1,691 | ) | (3,065 | ) | (806 | ) |
| Share of equity accounted fair value gains, net | (620 | ) | (174 | ) | (190 | ) |
| Income tax (benefit) expense | (35 | ) | 645 |
| 207 |
|
| Non-controlling interests in above items | (169 | ) | (324 | ) | (467 | ) |
| FFO | $ | 675 |
| $ | 546 |
| $ | 376 |
|
Retail
Our retail segment consists of 173 regional malls and 5.2%urban retail properties containing 155 million square feet in the United States and Canada, respectivelyselect markets in Brazil; a substantial portion of our retail properties is held through our 29% interest in GGP (34% on a fully-diluted basis, assuming all outstanding warrants are exercised) and our 34% interest in Rouse.
The following table presents FFO and net income attributable to Unitholders in our retail segment for the years ended December 31, 2015, 2014, and 2013:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| FFO | $ | 459 |
| $ | 460 |
| $ | 308 |
|
| Net income attributable to Unitholders | 471 |
| 1,566 |
| 467 |
|
FFO earned in our retail platform for the year ended December 31, 2015 was $459 million compared to $460 million in the prior year. FFO was flat compared to the prior year primarily due to positive operating performance in our equity accounted U.S. retail portfolio and higher investment income from our investment in CXTD. These increases were offset by asset dispositions in the current year.
The increase in FFO from $308 million in 2013 to $460 million in 2014 was primarily the result of an increase in our ownership in GGP to 29% on a weighted average basis in 2014 compared to 23% in 2013. In addition, FFO increased as a result of positive same-property sales growth and higher lease spreads, and income from our investment in CXTD in 2014. This increase was partially offset by the disposition of our remaining Australian retail asset in the fourth quarter of 2014, as well as the weakening of the Australian Dollar and Brazilian Real against the U.S. Dollar compared to 2013.
Net rents acrossincome attributable to Unitholders decreased by $1,095 million to $471 million in 2015 compared to $1,566 million in 2014. This decrease in net income attributable to Unitholders is primarily attributable to significant fair value gains on our U.S. officeretail portfolio were atin the prior year, as noted below and fair value losses on our Class B portfolio in the current year. In addition, the current year includes negative mark-to-market adjustments on our investment in GGP warrants, as a result of a decline in GGP’s share price since December 31, 2014 compared to positive adjustments in the prior year.
Net income attributable to Unitholders increased by $1,099 million to $1,566 million in 2014 compared to $467 million in 2013. This increase was the result of fair value gains on the Class A malls in the GGP portfolio as a result of positive leasing spreads and tightening discount of approximately 17.5%and capitalization rates owing to the averagestrengthening market rentfor these high-quality malls, as well as the reversal of $32.50 per square foot. In Canada, the net rents were at$249 million of impairment losses on our investment in GGP as a discountresult of approximately 16.2% to the average market rentan increase in share price of $31.98 per square foot. This gives us confidence that we will be able to maintain or increase our net rental incomeGGP, as mentioned in the coming years and, together with our high overall occupancy, to exercise patience in signing new leases.
“Review of Consolidated Financial Results”. In Australia, at December 31, 2012, average in-place net rent in our portfolio was approximately $54 per square foot, which represented a 1% discount to market rents and an approximately 11.2%addition, we recorded fair value gains on the GGP warrants we own, reflecting the 40% increase compared to average in-place net rent at December 31, 2011. This increase primarily relates to the opening of Brookfield Place in Perth at comparatively higher rental rates. Leases in Australia typically include annual escalations, with the result that in-place lease rates tend to increase along with long-term increases in market rents.
In Europe, at December 31, 2012, average in-place net rent in our portfolio increased approximately 14.4% compared to the prior year. The increase is primarily related to the acquisition of the London office portfolioGGP’s public share price during 2012.
2014.The following table presents
key operating metrics in our
leasing activity fromretail portfolio for the years ended December 31,
2011 to December 31, 2012: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | | Dec. 31, 2012 | |
| | | | | | | | Total
Expiries
(000’s
Sq. Ft.) | | | Expiring
Net
Rent
($ per
Sq.Ft.) | | | Leasing
(000’s
Sq. Ft.) | | | Year
One
Leasing
Net
Rent ($ per
Sq.Ft.) | | | Average
Leasing
Net
Rent ($ per
Sq.Ft.) | | | Acq.
(Disp.)
Additions
(000’s
Sq. Ft.) | | | | | | |
| (US $) | | Leasable
Area(1)
(000’s
Sq.Ft.) | | | Leased(1)
(000’s
Sq.Ft.) | | | | | | | | | | | | | Leasable
Area
(000’s
Sq. Ft.) | | | Leased
(000’s
Sq. Ft.) | |
United States (2) | | | 44,019 | | | | 40,221 | | | | | | (5,831 | ) | | $ | 19.68 | | | | 5,077 | | | $ | 24.62 | | | $ | 27.33 | | | | (1,669 | ) | | | | | 42,447 | | | | 37,798 | |
Canada | | | 17,108 | | | | 16,468 | | | | | | (1,236 | ) | | | 28.83 | | | | 1,343 | | | | 32.07 | | | | 32.89 | | | | (363 | ) | | | | | 16,735 | | | | 16,212 | |
Australia | | | 10,166 | | | | 9,850 | | | | | | (471 | ) | | | 51.31 | | | | 574 | | | | 54.70 | | | | 61.16 | | | | (37 | ) | | | | | 10,129 | | | | 9,897 | |
Europe(3) | | | 556 | | | | 556 | | | | | | (268 | ) | | | 33.43 | | | | 263 | | | | 60.53 | | | | 60.92 | | | | 349 | | | | | | 905 | | | | 772 | |
Total | | | 71,849 | | | | 67,095 | | | | | | (7,806 | ) | | $ | 23.51 | | | | 7,257 | | | $ | 29.68 | | | $ | 32.25 | | | | (1,720 | ) | | | | | 70,216 | | | | 64,679 | |
|
| | | | | | | | | | | | |
| (US$ Millions, except where noted) | Consolidated | Unconsolidated |
| As at and for the years ended Dec. 31, | 2015 |
| 2014 |
| 2015 |
| 2014 |
|
| NOI: | |
| |
| |
| |
|
Total portfolio(1) | $ | 76 |
| $ | 109 |
| $ | 738 |
| $ | 729 |
|
Same-property(2) | 70 |
| 65 |
| 722 |
| 692 |
|
| Total portfolio: | |
| |
| |
| |
|
| Number of malls and urban retail properties | 6 |
| 7 |
| 167 |
| 164 |
|
| Leasable square feet (in thousands) | 2,280 |
| 2,640 |
| 152,855 |
| 152,703 |
|
| Occupancy | 95.2 | % | 95.2 | % | 95.6 | % | 95.8 | % |
In-place net rents (per square foot)(2) | $ | 33.00 |
| $ | 29.56 |
| $ | 56.26 |
| $ | 55.16 |
|
Tenant sales (per square foot)(2) | $ | 447 |
| $ | 424 |
| $ | 547 |
| $ | 526 |
|
| |
(1) | Has been restated to reflectNOI for unconsolidated properties is presented on a proportionate basis, representing the impact of remeasurements which are done annuallyUnitholders’ interest in the first quarter.
investments. |
| |
(2) | Presented using normalized foreign exchange rates, using the December 31, 2015 exchange rate. |
NOI on consolidated properties decreased by $33 million year-over-year to $76 million in 2015 primarily due to the disposition of two malls in Brazil as well as the negative impact of foreign exchange.
NOI on unconsolidated properties, which is presented on a proportionate basis, increased to $738 million, from $729 million in the prior year, where improved performance related to the GGP properties was partially offset by dispositions, including partial interests in a marquee mall in Honolulu. On a same-property basis, NOI on unconsolidated properties increased to $722 million from $692 million due to increases in rental rates and higher tenant sales in our United States portfolio.
The results of our operations are primarily driven by changes in occupancy and in-place rental rates. The following table presents new and renewal leases with commencement dates in 2015 and 2016 compared to expiring leases for the prior tenant in the same suite, for leases where the downtime between new and previous tenant is less than 24 months, among other metrics:
|
| | | | | | |
| | Total portfolio year-to-date |
| (US$ Millions, except where noted) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Number of leases | 2,695 |
| 2,681 |
|
| Leasing activity (in thousands of square feet) | 7,844 |
| 7,795 |
|
| Average term in years | 6.2 |
| 6.2 |
|
Initial rent (per square foot)(1) | $ | 60.33 |
| $ | 58.58 |
|
Expiring rent (per square foot)(2) | 54.10 |
| 50.84 |
|
| Initial rent spread (per square foot) | 6.23 |
| 7.74 |
|
| % Change | 11.5 | % | 15.2 | % |
| Tenant allowances and leasing costs | $ | 197 |
| $ | 152 |
|
| |
(1)Includes unconsolidated joint ventures. | Represents initial rent over the term consisting of base minimum rent and common area costs. |
(3) | |
(2)Does not include office assets held through our approximate 22% interest in Canary Wharf. | Represents expiring rent at end of lease consisting of base minimum rent and common area costs. |
For the year ended December 31, 2015, we leased approximately 8 million square feet at initial rents approximately 11.5% higher than expiring net rents on a suite-to-suite basis. Additionally, for the year ended December 31,
2012,2015 tenant
improvementsallowances and leasing costs related to leasing activity
that occurred averaged $42.68 per square foot,were $197 million compared to
$38.12 per square foot$152 million in
2011.the prior year.
Our retail portfolio occupancy rate at December 31, 2015 was 95.6%, down 0.2% from the occupancy rates at December 31, 2014. In our retail segment, we use in-place rents as a measure of leasing performance. In-place rents are calculated on a cash basis and consist of base minimum rent, plus reimbursements of common area costs, and real estate taxes. In-place rents increased to $55.50 at December 31, 2015 from $54.18 at December 31, 2014, primarily as a result of strong leasing activity across our U.S. portfolio. At GGP, tenant sales (excluding anchors) increased by 2.8% on a trailing twelve month basis and suite-to-suite lease spreads increased by 10.8% for leases commenced in the trailing twelve months.
The following table presents
the lease expiry profile of our
office properties with the associated expiring average in-place net rents by region at December 31, 2012: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(000’s sq. ft.) | | | | | | | | Expiring Leases | |
| | Net
Rental
Area | | | Currently
Available | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 &
Beyond | |
| | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | | | (000’s
sq.ft.) | | | Net
Rent | |
United States | | | 42,447 | | | | 4,649 | | | | 5,149 | | | $ | 31 | | | | 2,907 | | | $ | 25 | | | | 2,960 | | | $ | 22 | | | | 2,141 | | | $ | 25 | | | | 2,304 | | | $ | 26 | | | | 2,732 | | | $ | 30 | | | | 19,605 | | | $ | 35 | |
Canada | | | 16,735 | | | | 523 | | | | 1,697 | | | | 24 | | | | 321 | | | | 33 | | | | 1,486 | | | | 24 | | | | 1,630 | | | | 26 | | | | 645 | | | | 30 | | | | 679 | | | | 32 | | | | 9,754 | | | | 31 | |
Australia | | | 10,129 | | | | 232 | | | | 402 | | | | 47 | | | | 768 | | | | 51 | | | | 1,138 | | | | 60 | | | | 1,015 | | | | 67 | | | | 989 | | | | 53 | | | | 901 | | | | 66 | | | | 4,684 | | | | 78 | |
Europe(1) | | | 905 | | | | 133 | | | | 4 | | | | 34 | | | | 1 | | | | 32 | | | | 5 | | | | 25 | | | | 59 | | | | 93 | | | | 88 | | | | 62 | | | | 2 | | | | 96 | | | | 613 | | | | 69 | |
Total | | | 70,216 | | | | 5,537 | | | | 7,252 | | | $ | 30 | | | | 3,997 | | | $ | 31 | | | | 5,589 | | | $ | 30 | | | | 4,845 | | | $ | 35 | | | | 4,026 | | | $ | 34 | | | | 4,314 | | | $ | 38 | | | | 34,656 | | | $ | 40 | |
Percentage of Total | | | 100.0 | % | | | 7.9 | % | | | 10.3 | % | | | | | | | 5.7 | % | | | | | | | 8.0 | % | | | | | | | 6.9 | % | | | | | | | 5.7 | % | | | | | | | 6.1 | % | | | | | | | 49.4 | % | | | | |
(1) | Does not include office assets held through our approximate 22% interest in Canary Wharf. |
Retail
The following table presents equity in net assets attributable to parent company of our retail properties by region as at December 31, 2012fair value gains from consolidated and 2011:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | United States | | | | | Australia | | | | | Brazil | | | | | Total | |
| | | Dec. 31,
2012 | | | Dec. 31,
2011 | | | | | Dec. 31,
2012 | | | Dec. 31,
2011 | | | | | Dec. 31,
2012 | | | Dec. 31,
2011 | | | | | Dec. 31,
2012 | | | Dec. 31,
2011 | |
Retail properties | | $ | - | | | $ | - | | | | | $ | 318 | | | $ | 388 | | | | | $ | 1,959 | | | $ | 1,882 | | | | | $ | 2,277 | | | $ | 2,270 | |
Equity accounted investments | | | 5,219 | | | | 4,099 | | | | | | - | | | | - | | | | | | - | | | | 87 | | | | | | 5,219 | | | | 4,186 | |
Accounts receivable and other | | | 538 | | | | 183 | | | | | | 37 | | | | 19 | | | | | | 328 | | | | 461 | | | | | | 903 | | | | 663 | |
| | | 5,757 | | | | 4,282 | | | | | | 355 | | | | 407 | | | | | | 2,287 | | | | 2,430 | | | | | | 8,399 | | | | 7,119 | |
Property-specific borrowings | | | - | | | | - | | | | | | 137 | | | | 185 | | | | | | 735 | | | | 1,011 | | | | | | 872 | | | | 1,196 | |
Accounts payable and other | | | 305 | | | | 51 | | | | | | - | | | | - | | | | | | 136 | | | | 175 | | | | | | 441 | | | | 226 | |
Non-controlling interests | | | 423 | | | | 293 | | | | | | 22 | | | | 22 | | | | | | 1,047 | | | | 933 | | | | | | 1,492 | | | | 1,248 | |
Equity in net assets attributable to parent company | | $ | 5,029 | | | $ | 3,938 | | | | | $ | 196 | | | $ | 200 | | | | | $ | 369 | | | $ | 311 | | | | | $ | 5,594 | | | $ | 4,449 | |
Specific 2012 major variances included the following:
Equity in net assets attributable to parent companyunconsolidated investments in our retail portfolio increased by $1.1 billion to $5.6 billion at December 31, 2012 from December 31, 2011, reflecting $0.8 billion ofsegment:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Fair value (losses) gains: | |
| |
| |
|
| Consolidated investments | $ | (119 | ) | $ | 532 |
| $ | 65 |
|
Unconsolidated investments(1) | 113 |
| 575 |
| 172 |
|
| Total fair value (losses) gains | $ | (6 | ) | $ | 1,107 |
| $ | 237 |
|
| |
(1) | Fair value gains for unconsolidated properties are presented on a proportionate basis, representing the Unitholders’ interest in the investments. |
We reported fair value gains. These gains reflect the decreaselosses of $6 million in our capitalization rates within the U.S., specifically those attributableretail segment in 2015, compared to our highest quality of regional malls.
Accounts receivable and other increased by $0.2 billion to $0.9 billion at December 31, 2012 from December 31, 2011, which primarily reflects our fourth quarter GGP warrant purchase.
The details of property debt for our consolidated retail properties at December 31, 2012 are as follows:
| | | | | | | | |
| (US$ Millions) | | Weighted Average Rate | | | Debt Balance | |
Secured Property Debt | | | | | | | | |
Variable rate | | | 9.6 | % | | $ | 872 | |
| | | | | | | $ | 872 | |
Current | | | | | | $ | 12 | |
Non-current | | | | | | | 860 | |
| | | | | | | $ | 872 | |
The details of retail property debt related to our equity accounted investment in GGP at December 31, 2012 are as follows:
| | | | | | |
| (US$ Millions) | | Weighted Average Rate | | Debt Balance(1) | |
Unsecured Facilities | | | | | | |
Junior subordinated notes | | 1.8% | | $ | 206 | |
Secured Property Debt | | | | | | |
Fixed rate | | 4.9% | | | 17,488 | |
Variable rate | | 3.3% | | | 1,174 | |
| | | | | $ | 18,868 | |
Current | | | | $ | 421 | |
Non-current | | | | | 18,447 | |
| | | | | $ | 18,868 | |
(1) | Represents GGP’s consolidated and proportionate share of unconsolidated U.S. property debt. |
Operating Results – Retail
The following table presents the NOI, FFO, and Total Return of our retail properties by region for the years ended December 31, 2012, 2011 and 2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | NOI(1) | | FFO(1) | | | | | Total Return(1) | |
| Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | | | | | 2012 | | | 2011 | | | 2010 | | | | | 2012 | | | 2011 | | | 2010 | |
United States | | $ | - | | | $ | - | | | $ | - | | | | | $ | 254 | | | $ | 206 | | | $ | (11 | ) | | | | $ | 998 | | | $ | 1,302 | | | $ | 71 | |
Australia | | | 24 | | | | 26 | | | | 24 | | | | | | 11 | | | | 11 | | | | 11 | | | | | | 7 | | | | 26 | | | | 25 | |
Brazil | | | 95 | | | | 111 | | | | 94 | | | | | | 2 | | | | (8 | ) | | | (3 | ) | | | | | 57 | | | | 83 | | | | 2 | |
Europe | | | - | | | | 1 | | | | 12 | | | | | | - | | | | (1 | ) | | | (2 | ) | | | | | - | | | | (4 | ) | | | 9 | |
| | | $ | 119 | | | $ | 138 | | | $ | 130 | | | | | $ | 267 | | | $ | 208 | | | $ | (5 | ) | | | | $ | 1,062 | | | $ | 1,407 | | | $ | 107 | |
(1) | See “— Performance Measures” above in this MD&A for an explanation of components of NOI, FFO and Total Return. |
NOI, which represents the net amount of commercial property revenue and direct commercial property expense for the year ended December 31, 2012 compared with the prior year decreased by $19 million primarily due to asset sales in Brazil in the fourth quarter 2011 and first quarter 2012.
NOI for the year ended December 31, 2011 compared with the prior year increased by $8 million, which was primarily to the result of the consolidation of retail assets in the New Zealand Property Fund and income from Brazilian mall expansions in 2011.
FFO for the year ended December 31, 2012 compared with the prior year increased by $59 million which was primarily due to an increase of $46 million in share of equity accounted income excluding fair value gains relating our investment in GGP. The remaining increase relates to our Brazilian operations, which benefited from lower interest expense due to the restructure of the debt facility in second half of 2011.
FFO for the year ended December 31, 2011 compared with the prior year decreased by $213 million, which was primarily due to an increase of $230 million in share of equity accounted income excluding fair value gains relating our investment in GGP, this was partially offset by an increase of $24 million in interest expense primarily relating to an increase of interest rates and currency appreciation in Brazil.
Total Return for the year ended December 31, 2012 decreased by $0.3 billion to $1.1 billion from $1.4 billion in the prior year. The decrease is a result of modest valuation gains in 2012 when compared to 2011, which is primarily a result of a smaller compression of implied capitalization rates in the United States and the a smaller decrease in discount and terminal capitalization rates in Brazil, as detailed in the table below. This was offset by the increase in FFO as mentioned above.
Total Return for the year ended December 31, 2011 increased by $1.3 billion to $1.4 billion from $107$1,107 million in the prior year. The increase isfair value losses are due to write-downs on our Brazilian portfolios, as noted above, fair value losses on the GGP warrants as a result of increasea decline in FFOGGP’s stock price, offset by the gain on conversion of our interest in CXTD and fair value gains on our U.S portfolio.
Fair value gains were $1,107 million in 2014, compared to $237 million in 2013 as
mentioned above and increase in valuation gains which is primarily a result of
compressionfair value gains on our U.S. mall portfolio, our GGP warrants and our investment in CXTD, as well as the reversal of
implied capitalization ratesthe impairment loss on our investment in
the United States and the decrease in discount and terminal capitalization rates in Brazil,GGP as
detailed in the table below.noted above.
The key valuation metrics of these properties in our retail properties, including those within our equity accounted investments,segment on a weighted-average basis are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows. Discount
|
| | | | | | | | | | |
| | Dec. 31, 2015 | Dec. 31, 2014 |
| | Discount Rate |
| Terminal
capitalization
rate |
| Investment
horizon | Discount Rate |
| Terminal
capitalization
rate |
| Investment
horizon |
| Consolidated properties: | |
| |
| | |
| |
| |
| Brazil | 9.8 | % | 7.2 | % | 10 | 9.2 | % | 7.1 | % | 10 |
| Unconsolidated properties: | |
| |
| | |
| |
| |
| United States | 7.4 | % | 5.8 | % | 10 | 7.4 | % | 5.8 | % | 10 |
Equity attributable to Unitholders in the retail segment increased by $194 million between December 31, 2014 and
capitalization rates have declined meaningfullyDecember 31, 2015 due to the net income attributable to Unitholders discussed above which was partially offset by dividends received from our investments in
all of our principal regions, giving rise to appraisal gains. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | United States(1) | | Australia | | | | | Brazil | |
| | | Dec. 31,
2012 | | | Dec. 31,
2011 | | | Dec. 31,
2010 | | | | | Dec. 31,
2012 | | | Dec. 31,
2011 | | | Dec. 31,
2010 | | | | | Dec. 31,
2012 | | | Dec. 31,
2011 | | | Dec. 31,
2010 | |
Discount rate | | | 5.7 | % | | | 6.0 | % | | | 6.7 | % | | | | | 9.9 | % | | | 9.8 | % | | | 9.8 | % | | | | | 8.5 | % | | | 9.6 | % | | | 10.0 | % |
Terminal cap rate | | | n/a | | | | n/a | | | | n/a | | | | | | 9.2 | % | | | 8.9 | % | | | 9.0 | % | | | | | 7.2 | % | | | 7.3 | % | | | 7.3 | % |
Investment horizon (years) | | | n/a | | | | n/a | | | | n/a | | | | | | 10 | | | | 10 | | | | 10 | | | | | | 10 | | | | 10 | | | | 10 | |
(1) | The valuation method used by United States is the direct capitalization method. The amounts presented as the discount rate relate to the implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.
|
GGP and Rouse during the period.
The following table presents
key metrics relating to in-place leasesan overview of
our retail property portfolio: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2012 | | Dec. 31, 2011 | | | | | Dec 31. 2010 | |
| | | Occupancy
(%) | | | Avg.
Lease
Term
(Years) | | | Avg.
“In
Place”
Rent | | | Market
Rent | | | | | Occupancy
(%) | | | Avg.
Lease
Term
(Years) | | | Avg. “In
Place”
Rent | | | Market
Rent | | | | | Occupancy
(%) | | | Avg.
Lease
Term
(Years) | | | Avg. “In
Place”
Rent | | | Market
Rent | |
United States (1) | | | 95.0 | % | | | 5.8 | | | $ | 52.06 | | | $ | 58.01 | | | | | | 93.2 | % | | | 5.1 | | | $ | 52.19 | | | $ | 55.87 | | | | | | 92.9 | % | | | 3.9 | | | $ | 55.09 | | | $ | 52.24 | |
Brazil | | | 94.7 | % | | | 7.1 | | | | 50.34 | | | | 51.99 | | | | | | 94.7 | % | | | 6.8 | | | | 52.50 | | | | 51.15 | | | | | | 94.3 | % | | | 5.0 | | | | 45.74 | | | | 43.98 | |
Australia | | | 98.7 | % | | | 6.7 | | | | 10.37 | | | | 10.63 | | | | | | 98.0 | % | | | 7.4 | | | | 10.14 | | | | 10.86 | | | | | | 96.7 | % | | | 6.4 | | | | 9.28 | | | | 10.78 | |
Europe | | | - | | | | - | | | | - | | | | - | | | | | | - | | | | - | | | | - | | | | - | | | | | | 80.1 | % | | | 12.1 | | | | 23.57 | | | | 12.52 | |
Average | | | 95.1 | % | | | 5.9 | | | $ | 50.43 | | | $ | 56.06 | | | | | | 93.4 | % | | | 5.3 | | | $ | 50.53 | | | $ | 53.88 | | | | | | 92.9 | % | | | 4.2 | | | $ | 52.61 | | | $ | 49.80 | |
(1) | Represents regional malls only and excludes leases on traditional anchor stores and specialty leasing license agreements. |
Our retail portfolio occupancy rate at December 31, 2012 was 95.1%, up from 93.4% at December 31, 2011. Occupancy levels in our U.S. portfolio increased by 180 basis points from 93.2% at December 31, 2011 to 95.0%, and the average initial rent on leases signed in 2012 was $56.06 per square foot, up 6.9% or $3.61 per square foot as compared to the expiring rent on comparable leases.
We use in-place rents forfinancial position of our retail segment as at December 31, 2015 and 2014:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Investment properties | $ | 916 |
| $ | 1,496 |
|
| Equity accounted investments | 8,184 |
| 7,295 |
|
| GGP warrants | 1,364 |
| 1,394 |
|
| Accounts receivable and other | 63 |
| 778 |
|
| Cash and cash equivalents | 31 |
| 60 |
|
| Total assets | 10,558 |
| 11,023 |
|
| Less: | |
| |
|
| Debt obligations | 308 |
| 513 |
|
| Accounts payable and other liabilities | 62 |
| 155 |
|
| Non-controlling interests of others in operating subsidiaries and properties | 823 |
| 1,184 |
|
| Total equity attributable to Unitholders | $ | 9,365 |
| $ | 9,171 |
|
Investment properties totaled $916 million at December 31, 2015, a measuredecrease of leasing performance,$580 million from the prior year-end. The decrease was a result of asset dispositions in Brazil, the impact of weakening foreign exchange rates against the U.S. Dollar and valuation losses on our Brazilian portfolio.
Equity accounted investments increased by $889 million primarily as a result of the conversion of our preferred equity interest in CXTD to common shares, which
is calculated onresulted in the partnership’s accounting for this investment under the equity method, as well as net income from our U.S. mall portfolio. The increase in equity accounted investments was partially offset by dividends received from GGP and Rouse during the current period. The conversion of CXTD also drove the decrease of accounts receivable and other which decreased by $715 million to $63 million as our investment in CXTD was recorded as a
cash basis and consists of base minimum rent, plus reimbursements of common area costs, and real estate taxes.financial asset at December 31, 2014.
The following table presents
leasing activity from December 31, 2011 to December 31, 2012: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2011 | | | | | | | Dec. 31, 2012 | |
| (US $) | | Leasable
Area(1)
(000’s
Sq.Ft.) | | | Leased(1)
(000’s
Sq.Ft.) | | | | | Total
Expiries
(000’s
Sq. Ft.) | | | Expiring
Rent ($
per
Sq.Ft.) | | | Leasing
(000’s
Sq. Ft.) | | | Year One
Leasing
Rent ($
per
Sq.Ft.) | | | Average
Leasing
Rent ($
per
Sq.Ft.) | | | Acq.
(Disp.)
Additions
(000’s
Sq. Ft.) | | | | | Leasable
Area
(000’s
Sq. Ft.) | | | Leased
(000’s
Sq.
Ft.) | |
United States | | | 66,369 | | | | 62,158 | | | | | | (11,390 | ) | | $ | 52.45 | | | | 12,630 | | | $ | 51.66 | | | $ | 56.06 | | | | (1,739 | ) | | | | | 64,630 | | | | 61,659 | |
Brazil | | | 3,083 | | | | 2,922 | | | | | | (567 | ) | | | 49.61 | | | | 560 | | | | 47.26 | | | | 49.18 | | | | (281 | ) | | | | | 2,802 | | | | 2,653 | |
Australia | | | 2,746 | | | | 2,689 | | | | | | (5 | ) | | | 57.79 | | | | 5 | | | | 75.28 | | | | 76.85 | | | | (208 | ) | | | | | 2,537 | | | | 2,503 | |
Total | | | 72,198 | | | | 67,769 | | | | | | (11,962 | ) | | $ | 52.32 | | | | 13,195 | | | $ | 51.48 | | | $ | 55.78 | | | | (2,228 | ) | | | | | 69,969 | | | | 66,815 | |
(1) | Has been restated to reflect the impacta roll-forward of remeasurements which are done annually in the first quarter.
|
In addition, we incurred tenant allowances for our retail operating properties of $168 millionpartnership’s equity accounted investments for the year ended December 31, 20122015:
|
| | | |
| (US$ Millions) | Dec. 31, 2015 |
|
| Equity accounted investments, beginning of year | $ | 7,295 |
|
| Additions, net of disposals | 541 |
|
| Share of net earnings from equity accounted investments | 560 |
|
| Distributions received | (200 | ) |
| Other | (12 | ) |
| Equity accounted investments, end of year | $ | 8,184 |
|
The value of GGP warrants decreased as a result of the decline in GGP’s stock price during 2015.
Debt obligations decreased by $205 million to $308 million at December 31, 2015 from $513 million at December 31, 2014 as a result of the paydown of debt in Brazil with proceeds from the dispositions of malls in the fourth quarter of 2014 and $125the second quarter of 2015, as well as the impact of foreign exchange.
Reconciliation of Non-IFRS Measures – Retail
The key components of NOI in our retail segment are presented below:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Commercial property revenue | $ | 94 |
| $ | 137 |
| $ | 150 |
|
| Direct commercial property expense | (18 | ) | (28 | ) | (44 | ) |
| Total NOI | $ | 76 |
| $ | 109 |
| $ | 106 |
|
NOI to net income:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Total NOI | $ | 76 |
| $ | 109 |
| $ | 106 |
|
| Investment and other revenue | 25 |
| 46 |
| 8 |
|
| Interest expense | (54 | ) | (78 | ) | (71 | ) |
| General and administrative expense | (7 | ) | (13 | ) | (1 | ) |
| Fair value gains, net | (119 | ) | 532 |
| 65 |
|
| Share of net earnings from equity accounted investments | 560 |
| 1,014 |
| 487 |
|
| Income before income taxes | 481 |
| 1,610 |
| 594 |
|
| Income tax benefit (expense) | 8 |
| (10 | ) | (63 | ) |
| Net income | 489 |
| 1,600 |
| 531 |
|
Net income attributable to non-controlling interests of others in operating
subsidiaries and properties | 18 |
| 34 |
| 64 |
|
| Net income attributable to Unitholders | $ | 471 |
| $ | 1,566 |
| $ | 467 |
|
Net income to FFO:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Net income | $ | 489 |
| $ | 1,600 |
| $ | 531 |
|
| Add (deduct): | |
| |
| |
|
| Fair value gains, net | 119 |
| (532 | ) | (65 | ) |
| Share of equity accounted fair value gains, net | (113 | ) | (575 | ) | (172 | ) |
| Income tax (benefit) expense | (8 | ) | 10 |
| 63 |
|
| Non-controlling interests in above items | (28 | ) | (43 | ) | (49 | ) |
| FFO | $ | 459 |
| $ | 460 |
| $ | 308 |
|
Industrial, Multifamily, Hospitality and Triple Net Lease
Our industrial, multifamily, hospitality and triple net lease segments are comprised of the following:
Approximately 55 million
during 2011.square feet of industrial space across 201 properties, primarily consisting of modern logistics assets in North America and Europe, with an additional 4 million square feet currently under construction;
Approximately 38,900 multifamily units across 137 properties throughout the United States;
Twenty-seven hospitality assets with approximately 18,000 rooms in North America, Europe and Australia; and
Over 300 properties that are leased to automotive dealerships across North America on a triple net lease basis.
The following table presents
the lease expiry profile of our retail properties with the associated expiring average in-place rents by region at December 31, 2012: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Expiring Leases | |
| | | | | | | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 & Beyond | |
| (000’s sq. ft.) | | Net
Rental
Area | | | Currently
Available | | | (000’s
sq.ft.) | | | In-
place
Rent | | | (000’s
sq.ft.) | | | In- place
Rent | | | (000’s
sq.ft.) | | | In-
place
Rent | | | (000’s
sq.ft.) | | | In-
place
Rent | | | (000’s
sq.ft.) | | | In-
place
Rent | | | (000’s
sq.ft.) | | | In-
place
Rent | | | (000’s
sq.ft.) | | | In-
place
Rent | |
United States(1) | | | 60,545 | | | | 2,992 | | | | 6,215 | | | $ | 58 | | | | 6,468 | | | $ | 52 | | | | 5,960 | | | $ | 60 | | | | 5,794 | | | $ | 64 | | | | 6,238 | | | $ | 63 | | | | 5,231 | | | $ | 70 | | | | 21,647 | | | $ | 57 | |
Brazil | | | 2,802 | | | | 149 | | | | 732 | | | | 42 | | | | 301 | | | | 96 | | | | 421 | | | | 72 | | | | 279 | | | | 67 | | | | 231 | | | | 59 | | | | 39 | | | | 63 | | | | 650 | | | | 14 | |
Australia | | | 2,537 | | | | 34 | | | | 43 | | | | 29 | | | | 22 | | | | 37 | | | | 115 | | | | 24 | | | | 727 | | | | 11 | | | | 340 | | | | 17 | | | | 7 | | | | 42 | | | | 1,249 | | | | 10 | |
Total | | | 65,884 | | | | 3,175 | | | | 6,990 | | | $ | 56 | | | | 6,791 | | | $ | 54 | | | | 6,496 | | | $ | 60 | | | | 6,800 | | | $ | 58 | | | | 6,809 | | | $ | 61 | | | | 5,277 | | | $ | 70 | | | | 23,546 | | | $ | 53 | |
Percentage of Total | | | 100.0 | % | | | 4.9 | % | | | 10.6 | % | | | | | | | 10.3 | % | | | | | | | 9.9 | % | | | | | | | 10.3 | % | | | | | | | 10.3 | % | | | | | | | 8.0 | % | | | | | | | 35.7 | % | | | | |
(1) | Represents regional malls only and excludes leases on traditional anchor stores and specialty leasing license agreements.
|
Multi-Family and Industrial
The following table presents equity in net assets attributable to parent company of our multi-family and industrial segment:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Investment properties | | $ | 2,477 | | | $ | 971 | |
Equity accounted investments | | | 278 | | | | 84 | |
Accounts receivable and other | | | 164 | | | | 57 | |
| | | 2,919 | | | | 1,112 | |
Property-specific borrowings | | | 1,864 | | | | 564 | |
Accounts payable and other liabilities | | | 190 | | | | 20 | |
Non-controlling interests | | | 644 | | | | 371 | |
Equity in net assets attributable to parent company | | $ | 221 | | | $ | 157 | |
Equity in net assets attributable to parent company increased over the period as a result the acquisition of a multi-family portfolio in North Carolina, South Carolina and Virginia, as well as the acquisition of Verde Realty, both of which occurred during the fourth quarter of 2012. This increase was partially offset by asset sales within our existing funds.
Operating Results – Multi-Family and Industrial
The following table presents the NOI, FFO and Total Return ofnet income attributable to Unitholders in our multi-familyindustrial, multifamily, hospitality and industrial segmenttriple net lease segments for the years ended December 31, 2012, 20112015, 2014, and 2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | NOI(1) | | FFO(1) | | | | | Total Return(1) | |
Year ended Dec. 31, | | | 2012 | | | | 2011 | | | | 2010 | | | | | | 2012 | | | | 2011 | | | | 2010 | | | | | | 2012 | | | | 2011 | | | | 2010 | |
| | | $ | 48 | | | $ | 46 | | | $ | 22 | | | | | $ | 5 | | | $ | (5 | ) | | $ | 3 | | | | | $ | 2 | | | $ | 12 | | | $ | 35 | |
(1) | See “— Performance Measures” above2013: | | | | | | | | | | | | (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
| | NOI | $ | 909 |
| $ | 443 |
| $ | 380 |
| | FFO | 130 |
| 57 |
| 45 |
| | Net income attributable to Unitholders | 337 |
| 84 |
| 18 |
|
Over the past three years, we have made significant investments in industrial, multifamily, hospitality and triple net lease properties. These investments are the primary driver of the improvements in this MD&A for an explanation of components of NOI, FFO and Total Return. |
NOI, FFO and net income attributable to Unitholders in each of the past three years. These investments include the following:
In our hospitality sector, in the third quarter of 2015 we acquired Center Parcs UK, which representsoperates five short-break destinations across the U.K.;
Acquired a portfolio of hotels in Germany through a 50/50 joint venture during the third quarter of 2015;
Acquired Associated Estates, which owns approximately 12,800 multifamily units across the United States, during the third quarter of 2015;
Acquired a 4,000-unit multifamily portfolio in Manhattan on a value-add basis, with plans to renovate the majority of those units and benefit from positive rent spreads on the releasing of renovated units, during the fourth quarter of 2014;
Established a new platform with the acquisition of CARS, which owns the real estate for more than 300 automotive dealerships across North America and leases it on a triple net amountbasis, during the fourth quarter of commercial property revenue2014;
Created an industrial platform with assets in North America and direct commercial property expense, increasedEurope with the acquisitions of Gazeley Limited (“Gazeley”) in June 2013 and IDI Realty (“IDI”) in October 2013; and
Expanded our industrial platform in Europe with the acquisition of portfolios in France and Germany during the third and fourth quarters of 2014 and in the Netherlands in the fourth quarter of 2015.
In addition to the contribution from these investments, we also benefited from improved operating results at the Atlantis over the periods presentedprior year.
Contributing to the increase in net income attributable to Unitholders were net income from the acquisitions noted above, as well as fair value gains, particularly related to the value-add multifamily portfolio and our industrial assets in the U.S., U.K. and Germany, where we benefited from discount rate and capitalization rate compression as a result of an improved economic environment.
Offsetting some of these increases were the acquisitiondisposition of income producing assets in 2012 and 2011 in our real estate opportunity and finance funds. In 2012, the increase in FFO is primarily attributable to a refinancing on a multi-family portfolio which resulted in a decrease of interest expense. In 2011, the decrease of FFO was driven by an increase of interest expense from properties acquiredOne&Only Ocean Club in the Bahamas and a portfolio of industrial properties in Mexico in the second and fourth quarters of 2014, respectively, and the disposition of select mature assets within the multifamily and industrial portfolios throughout the period. In addition, the current period includes transaction costs associated with the acquisitions noted above, which are expensed within general and administrative expense.
The
decrease infollowing table presents the contributions to fair value gains
in 2012 was largely driven by lower fair value adjustments on the properties(losses) from consolidated and unconsolidated investments in our
portfolio compared to the prior year. The decrease in fair value gains in 2011 was largely driven by an increase in the discount rateindustrial, multifamily, hospitality and
terminal cap rate and a reduction in realized gains from the sale of multi-family properties in the United States.Property debt related to our multi-family and industrial segment totaled $1.9 billion at December 31, 2012 and had a weighted average interest rate of 3.7% and an average term to maturity of 3.8 years.
triple net lease segments:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Fair value gains (losses): | |
| |
| |
|
| Consolidated investments | $ | 483 |
| $ | 159 |
| $ | (1 | ) |
Unconsolidated investments(1) | 134 |
| 60 |
| 38 |
|
| Total fair value gains (losses) | $ | 617 |
| $ | 219 |
| $ | 37 |
|
| |
(1) | Fair value gains for unconsolidated investments are presented on a proportionate basis, representing the Unitholders’ interest in the investments. |
The key valuation metrics of
theseour industrial, multifamily, hospitality and triple net lease properties
on a weighted-average basis are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | United States | | Canada | | | |
| | | | Dec. 31, 2012 | | | | Dec. 31, 2011 | | | | Dec. 31, 2010 | | | | | | Dec. 31, 2012 | | | | Dec. 31, 2011 | | | | Dec. 31, 2010 | | | |
Discount rate | | | 8.7 | % | | | 8.6 | % | | | 8.4 | % | | | | | 9.0 | % | | | 8.7 | % | | | 9.0 | % | | |
Terminal cap rate | | | 8.0 | % | | | 8.3 | % | | | 6.6 | % | | | | | 7.3 | % | | | 7.7 | % | | | 7.6 | % | | |
Investment horizon (years) | | | 10 | | | | 10 | | | | 10 | | | | | | 10 | | | | 10 | | | | 10 | | | |
Opportunistic Investments
|
| | | | | | | | | | | | |
| | Dec. 31, 2015 | Dec. 31, 2014 |
| | Discount rate |
| Terminal
capitalization
rate |
| Investment
horizon |
| Discount rate |
| Terminal capitalization rate |
| Investment horizon |
|
| Consolidated properties: | |
| |
| |
| |
| |
| |
|
| Industrial | 7.6 | % | 6.8 | % | 10 |
| 7.9 | % | 7.3 | % | 10 |
|
Multifamily(1) | 5.1 | % | n/a |
| n/a |
| 5.4 | % | n/a |
| n/a |
|
| Hospitality | 10.0 | % | 7.4 | % | 7 |
| 10.2 | % | 7.4 | % | 7 |
|
Triple Net Lease(1) | 6.3 | % | n/a |
| n/a |
| 6.6 | % | n/a |
| n/a |
|
| Unconsolidated properties: | |
| |
| |
| |
| |
| |
|
| Industrial | 7.1 | % | 6.5 | % | 10 |
| 7.2 | % | 6.6 | % | 10 |
|
Multifamily(1) | 5.4 | % | n/a |
| n/a |
| 5.5 | % | n/a |
| n/a |
|
| Hospitality | 9.1 | % | 6.7 | % | 6 |
| 11.3 | % | 6.8 | % | 5 |
|
| |
(1) | The valuation method used to value multifamily and triple net lease properties is the direct capitalization method. The rates presented as the discount rate relate to the overall implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable. |
The following table presents equity in net assets attributable to parent companyUnitholders in our industrial, multifamily, hospitality and triple net lease segments:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Investment properties | $ | 11,443 |
| $ | 8,474 |
|
| Hospitality assets | 5,016 |
| 2,478 |
|
| Equity accounted investments | 1,576 |
| 958 |
|
| Loans and notes receivable | 11 |
| 127 |
|
| Accounts receivable and other | 2,727 |
| 768 |
|
| Cash and cash equivalents | 329 |
| 442 |
|
| Assets held for sale | 299 |
| 565 |
|
| Total assets | 21,401 |
| 13,812 |
|
| Less: | |
| |
|
| Debt obligations | 12,055 |
| 8,210 |
|
| Accounts payable and other liabilities | 1,164 |
| 545 |
|
| Liabilities associated with assets held for sale | 137 |
| 396 |
|
| Non-controlling interests of others in operating subsidiaries and properties | 5,198 |
| 3,071 |
|
| Equity attributable to Unitholders | $ | 2,847 |
| $ | 1,590 |
|
The increase in investment properties is primarily the result of our
opportunistic investments business: | | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Investment properties | | $ | 1,266 | | | $ | 912 | |
Equity accounted investments | | | 182 | | | | 118 | |
Loans and notes receivable | | | 392 | | | | 994 | |
Accounts receivable and other | | | 4,363 | | | | 1,189 | |
| | | 6,203 | | | | 3,213 | |
Property-specific borrowings | | | 4,115 | | | | 1,094 | |
Accounts payable and other liabilities | | | 478 | | | | 415 | |
Non-controlling interests | | | 1,012 | | | | 966 | |
Equity in net assets attributable to parent company | | $ | 598 | | | $ | 738 | |
Equity in net assets attributable to parent company decreased over the period as a result of an increase in non-controlling interests as a result of the inclusion of new funds within our opportunistic investments segment, which are less than 100% owned by the company, and asset dispositionsacquisition activity during the year. This decrease was offset by investments by existing and new funds within this segment,year, including the Atlantis,acquisition of Associated Estates, and fair value gains in our opportunitymultifamily, industrial and finance funds.
Our investment properties consist primarilytriple net lease portfolios.
The increase in hospitality assets was the result of operating assets within the Brookfield sponsored real estate opportunity and finance funds. Accounts receivable and other includes eight hotel operating propertiesacquisition of the Center Parcs UK assets.
Equity accounted investments increased during 2015 as
at December 31, 2012.Loans and notes receivable reside primarily in our real estate finance funds. A summarya result of loans and notes receivable by collateral asset class is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | Interest Rate as at Dec. 31, 2012 | | | | Maturity as at Dec. 31, 2012 | | | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
| | | Range | | Weighted
Average | | | | Range | | Weighted
Average | | | | Unpaid
Principal
Balance | | | Percentage of
Portfolio | | | Unpaid
Principal
Balance | | | Percentage
of
Portfolio | |
Asset Class | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Hotel | | 2.56% to 11.31% | | 4.0% | | | | 2013 to 2016 | | 2013 | | | | $ | 148 | | | | 38% | | | $ | 401 | | | | 40% | |
Office | | 1.51% to 12.81% | | 7.0% | | | | 2013 to 2015 | | 2014 | | | | | 173 | | | | 44% | | | | 593 | | | | 60% | |
Retail | | 12.50% to 14.31% | | 13.5% | | | | 2014 to 2017 | | 2015 | | | | | 71 | | | | 18% | | | | - | | | | - | |
Total | | | | | | | | | | | | | | $ | 392 | | | | 100% | | | $ | 994 | | | | 100% | |
Our loan portfolio is comprised of real estate mortgages and mezzanine loans. As the portfolio is comprisedacquisition of a discrete numberportfolio of loans we evaluatehotels in Germany, two hospitality assets in the credit qualityUnited States and fourteen value-add multifamily assets.
Debt obligations increased due to the acquisition activity noted above.
Reconciliation of each loanNon-IFRS Measures - Industrial, Multifamily, Hospitality and note individually rather than through grouping the portfolio by credit quality indicators. Accordingly, we manage the credit risk associated with the portfolio by continually monitoring and performing a comprehensive review of the collateral properties underlying each individual loan and our security position in respect of that collateral. The review involves, but is not limitedTriple Net Lease
NOI to a detailed analysis of recent operating statements, in additionnet income:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Commercial property revenue | $ | 719 |
| $ | 397 |
| $ | 297 |
|
| Hospitality revenue | 1,276 |
| 983 |
| 1,168 |
|
| Direct commercial property expense | (184 | ) | (146 | ) | (128 | ) |
| Direct hospitality expense | (902 | ) | (791 | ) | (957 | ) |
| Total NOI | 909 |
| 443 |
| 380 |
|
| Investment and other revenue | 193 |
| 165 |
| 37 |
|
| Interest expense | (462 | ) | (263 | ) | (215 | ) |
| General and administrative expense | (160 | ) | (93 | ) | (58 | ) |
| Investment and other expense | (135 | ) | (100 | ) | — |
|
| Depreciation and amortization | (162 | ) | (130 | ) | (142 | ) |
| Fair value gains (losses), net | 483 |
| 159 |
| (1 | ) |
| Share of net earnings from equity accounted investments | 183 |
| 76 |
| 50 |
|
| Income before income taxes | 849 |
| 257 |
| 51 |
|
| Income tax benefit (expense) | 6 |
| (6 | ) | (13 | ) |
| Net income (loss) | 855 |
| 251 |
| 38 |
|
| Net income (loss) attributable to non-controlling interests of others in operating subsidiaries and properties | 518 |
| 167 |
| 20 |
|
| Net income (loss) attributable to Unitholders | $ | 337 |
| $ | 84 |
| $ | 18 |
|
Net income to
rent rolls and other occupancy reports obtained from borrowers or loan reviewers. Further, we typically communicate directly with third party sale, leasing or financing brokers to gather the latest information on local markets or current market trends. Although a portion of our loan investments relates to distressed debt, by reviewing the above information, we are able to make an informed assessment regarding the expected future performance of underlying collateral properties and, therefore, reach a conclusion about our ability to recover our investment through realization of the collateral.Property debt related to our opportunistic investments segment totaled $4.1 billion at December 31, 2012 and had a weighted average interest rate of 3.2% and an average term to maturity of 2.2 years.
Operating Results – Opportunistic Investments
FFO:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Net income (loss) | $ | 855 |
| $ | 251 |
| $ | 38 |
|
| Add (deduct): | |
| |
| |
|
| Fair value gains (losses), net | (483 | ) | (159 | ) | 1 |
|
| Share of equity accounted fair value gains, net | (134 | ) | (60 | ) | (38 | ) |
| Depreciation and amortization of real estate assets | 153 |
| 112 |
| 124 |
|
| Income tax (benefit) expense | (6 | ) | 6 |
| 13 |
|
| Non-controlling interests in above items | (255 | ) | (93 | ) | (93 | ) |
| FFO | $ | 130 |
| $ | 57 |
| $ | 45 |
|
Corporate
The following table presents
the NOI, FFO and
Total Return ofnet income attributable to Unitholders in our
opportunistic investments businesscorporate segment for the years ended December 31,
2012, 20112015, 2014, and
2010: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | NOI(1) | | | FFO(1) | | | Total Return(1) | |
Year ended Dec. 31, | | | 2012 | | | | 2011 | | | | 2010 | | | | 2012 | | | | 2011 | | | | 2010 | | | | 2012 | | | | 2011 | | | | 2010 | |
| | | $ | 179 | | | $ | 207 | | | $ | 192 | | | $ | 4 | | | $ | 61 | | | $ | 61 | | | $ | 80 | | | $ | 33 | | | $ | 13 | |
(1) | See “— Performance Measures” above in this MD&A for an explanation of components of NOI, FFO and Total Return. |
The decrease2013:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| FFO | $ | (554 | ) | $ | (349 | ) | $ | (147 | ) |
| Net income (loss) attributable to Unitholders | (751 | ) | (864 | ) | (365 | ) |
Certain amounts are allocated to our corporate segment in NOIour management reports as those activities should not be used to evaluate our segments’ operating performance. FFO was a loss of $28$554 million for the year ended December 31, 2015 compared to a loss of $349 million in the prior year. Interest expense contributes to this loss and for the year ended December 31, 2015 was $360 million, which is comprised of $227 million of interest expense paid on capital securities and $133 million of interest expense on our credit facilities, which were primarily drawn on to fund the acquisition of BPO. General and administrative expense for the year ended December 31, 2015 was $221 million which is comprised of $107 million of asset management fees, $60 million of equity enhancement fees and $54 million of other corporate costs and is also a component of FFO.
In addition, during 2015, we recorded fair value gains, net of $48 million primarily related to the settlement of foreign currency forward contracts during the year ended December 31, 2012, compared2015. Consistent with our risk management policy, the partnership uses such derivative instruments to hedge cash flows in foreign currencies. For further information on the partnership’s use of derivative contracts, please refer to “Derivative Financial Instruments” below.
In 2015, we also recorded $149 million of income tax expense allocated to the
prior year was attributable to asset dispositions in certain funds during the year. This was partially offset by the increase in hospitality revenue and direct hospitality expenses as a result of the acquisitions of the Hard Rock Hotel and Casino in Las Vegas in March 2011 and the Atlantis in the Bahamas in April 2012.The increase in NOI of $15 million during the year ended December 31, 2011, compared to the prior year was attributable to the acquisition of office assets in late 2010 in our real estate opportunity and finance funds, which resulted in an increase of commercial property revenue partially offset by an increase in direct commercial property expenses.
FFO for the year ended December 31, 2012 decreased by $57 million compared to the same period in 2011. This decrease was the result of the acquisition and disposition activity noted above, as well as higher interest expenses and depreciation and amortization of non-real estate assetscorporate segment (2014 - $515 million) related to the acquisitionsdeferred tax liabilities of the Hard Rock Hotelour holding companies and Casino and the Atlantis.
FFO for the year ended December 31, 2011 remained consistent compared with the prior year.
In 2012, the increase in Total Return resulted from changes in FFO and an increase in fair value gains in our real estate opportunity and finance funds, partially offset by an increase in depreciation and amortization of real assets from our hospitality assets.
In 2011 the increase in Total Return resulted from a decrease in the discount rate and terminal cap rate. In addition, 2011 included an impairment of $54 million from investments in our finance funds.
The key valuation metrics of these properties are presented in the following table. The valuations are most sensitive to changes in the discount rate and timing or variability of cash flows.
| | | | | | | | | | | | | | | | |
| | | United States | |
| | | Dec. 31, 2012 | | | | | Dec. 31, 2011 | | | | | Dec. 31, 2010 | |
Discount rate | | | 8.7 | % | | | | | 8.2 | % | | | | | 8.7 | % |
Terminal cap rate | | | 8.1 | % | | | | | 8.1 | % | | | | | 8.1 | % |
Investment horizon (years) | | | 10 | | | | | | 10 | | | | | | 10 | |
Consolidated NOI, FFO and Total Return for the Years Ended December 31, 2012, 2011 and 2010
their subsidiaries.
The following table presents NOI, FFOequity attributable to Unitholders at the corporate level:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Accounts receivable and other | $ | 214 |
| $ | 162 |
|
| Restricted cash | — |
| 1,800 |
|
| Cash and cash equivalents | 129 |
| 160 |
|
| Total assets | 343 |
| 2,122 |
|
| Debt obligations | 4,503 |
| 3,881 |
|
| Capital securities | 3,307 |
| 3,368 |
|
| Deferred tax liabilities | 1,215 |
| 1,131 |
|
| Accounts payable and other liabilities | 505 |
| 167 |
|
| Non-controlling interests | (744 | ) | 131 |
|
| Equity attributable to Unitholders | $ | (8,443 | ) | $ | (6,556 | ) |
The corporate balance sheet includes corporate debt and Total Returncapital securities from our partnership and BPO. The increase in corporate debt obligations is primarily a result of temporary drawdowns on the credit facilities to fund acquisitions in the current period offset by the repayment of the BPO acquisition facility in the fourth quarter of 2015 using proceeds from our capital recycling initiatives.
On December 4, 2014, our partnership issued $1,800 million of exchangeable preferred equity securities (“Preferred Equity Units”) to QIA. The cash proceeds were recorded within restricted cash and allocated between capital securities ($1,535 million) and equity ($265 million) at December 31, 2014. During the first quarter of 2015, the proceeds were used to fund the Canary Wharf Transaction. At December 31, 2015, the balance related to the Preferred Equity Units recorded within capital securities was $1,554 million.
The Preferred Equity Units are exchangeable at the option of QIA into LP Units at a price of $25.70 per unit and were issued in three tranches of $600 million each, with an average dividend yield of 6.5% and maturities of seven, ten and twelve years. Brookfield Asset Management has contingently agreed to acquire the seven-year and ten-year tranches of Preferred Equity Units from QIA for the
years ended December 31, 2012, 2011initial issuance price plus accrued and
2010unpaid distributions and to exchange such units for
Preferred Equity Units with terms and conditions substantially similar to the
geographies and segments indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | NOI(1) | | FFO(1) | �� | Total Return(1) | |
| Years ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | | | | | 2012 | | | 2011 | | | 2010 | | | | | 2012 | | | 2011 | | | 2010 | |
Office | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | $ | 820 | | | $ | 561 | | | $ | 418 | | | | | $ | 470 | | | $ | 435 | | | $ | 427 | | | | | $ | 693 | | | $ | 985 | | | $ | 742 | |
Canada | | | 285 | | | | 259 | | | | 243 | | | | | | 220 | | | | 213 | | | | 227 | | | | | | 376 | | | | 297 | | | | 302 | |
Australia | | | 309 | | | | 264 | | | | 214 | | | | | | 199 | | | | 134 | | | | 91 | | | | | | 230 | | | | 152 | | | | 202 | |
Europe | | | 33 | | | | 32 | | | | 31 | | | | | | 44 | | | | 20 | | | | 27 | | | | | | 60 | | | | 194 | | | | 76 | |
Unallocated(2) | | | - | | | | - | | | | - | | | | | | (567 | ) | | | (490 | ) | | | (405 | ) | | | | | (567 | ) | | | (490 | ) | | | (405 | ) |
| | | 1,447 | | | | 1,116 | | | | 906 | | | | | | 366 | | | | 312 | | | | 367 | | | | | | 792 | | | | 1,138 | | | | 917 | |
Retail | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | | - | | | | - | | | | - | | | | | | 254 | | | | 206 | | | | (11 | ) | | | | | 998 | | | | 1,302 | | | | 71 | |
Australia | | | 24 | | | | 26 | | | | 24 | | | | | | 11 | | | | 11 | | | | 11 | | | | | | 7 | | | | 26 | | | | 25 | |
Brazil | | | 95 | | | | 111 | | | | 94 | | | | | | 2 | | | | (8 | ) | | | (3 | ) | | | | | 57 | | | | 83 | | | | 2 | |
Europe | | | - | | | | 1 | | | | 12 | | | | | | - | | | | (1 | ) | | | (2 | ) | | | | | - | | | | (4 | ) | | | 9 | |
| | | 119 | | | | 138 | | | | 130 | | | | | | 267 | | | | 208 | | | | (5 | ) | | | | | 1,062 | | | | 1,407 | | | | 107 | |
Multi-Family and Industrial | | | 48 | | | | 46 | | | | 22 | | | | | | 5 | | | | (5 | ) | | | 3 | | | | | | 2 | | | | 12 | | | | 35 | |
Opportunistic Investments | | | 179 | | | | 207 | | | | 192 | | | | | | 4 | | | | 61 | | | | 61 | | | | | | 80 | | | | 43 | | | | 26 | |
| | | $ | 1,793 | | | $ | 1,507 | | | $ | 1,250 | | | | | $ | 642 | | | $ | 576 | | | $ | 426 | | | | | $ | 1,936 | | | $ | 2,600 | | | $ | 1,085 | |
| twelve-year tranche to the extent that the market price of LP Units is less than 80% of the exchange price at maturity. The change in non-controlling interest is primarily related to non-controlling interests in the second Brookfield Asset Management-sponsored opportunity fund.
(1)
| NOI, FFO and Total Return are non-IFRS financial measures. See “— Performance Measures” above in this MD&A and the reconciliations to IFRS measures below. |
(2) | Balance sheet and statement of income amounts related to unsecured facilities, capital securities and non-controlling interests in Brookfield Office Properties, one of our operating entities. |
The following table provides a reconciliationadditional information on our outstanding capital securities – corporate:
|
| | | | | | | | | | |
| (US$ Millions, except where noted) | Shares
outstanding |
| Cumulative
dividend rate |
| Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Operating Partnership Class A Preferred Equity Units: | |
| |
| |
| |
|
| Series 1 | 24,000,000 |
| 6.25 | % | $ | 532 |
| $ | 524 |
|
| Series 2 | 24,000,000 |
| 6.50 | % | 516 |
| 510 |
|
| Series 3 | 24,000,000 |
| 6.75 | % | 506 |
| 501 |
|
| Brookfield BPY Holdings Inc. Junior Preferred Shares: | | | | |
| Class B Junior Preferred Shares | 30,000,000 |
| 5.75 | % | 750 |
| 750 |
|
| Class C Junior Preferred Shares | 20,000,000 |
| 6.75 | % | 500 |
| 500 |
|
| BPO Class AAA Preferred Shares: | |
| |
| |
| |
|
Series G(1) | 3,355,403 |
| 5.25 | % | 84 |
| 85 |
|
Series H(1) | 7,000,000 |
| 5.75 | % | 128 |
| 150 |
|
Series J(1) | 6,883,799 |
| 5.00 | % | 125 |
| 150 |
|
Series K(1) | 4,995,414 |
| 5.20 | % | 90 |
| 107 |
|
| BPO Class B Preferred Shares: | | | | |
Series 1(2) | 3,600,000 |
| 70% of bank prime |
| — |
| — |
|
Series 2(2) | 3,000,000 |
| 70% of bank prime |
| — |
| — |
|
| BOP Split Senior Preferred Shares: | |
| |
| |
|
| Series 1 | 949,990 |
| 5.25 | % | 23 |
| 25 |
|
| Series 2 | 1,000,000 |
| 5.75 | % | 18 |
| 22 |
|
| Series 3 | 933,932 |
| 5.00 | % | 17 |
| 22 |
|
| Series 4 | 984,586 |
| 5.20 | % | 18 |
| 22 |
|
| Total capital securities | |
| |
| $ | 3,307 |
| $ | 3,368 |
|
| | | | | |
| Current | |
| |
| $ | 503 |
| $ | 476 |
|
| Non-current | |
| |
| 2,804 |
| 2,892 |
|
| Total capital securities | |
| |
| $ | 3,307 |
| $ | 3,368 |
|
| |
(1) | BPY and its subsidiaries own 1,003,549, 1,000,000, 1,000,000, and 1,004,586 shares of Series G, Series H, Series J, and Series K Class AAA Preferred Shares of BPO as of December 31, 2015, respectively, which has been reflected as a reduction in outstanding shares of the BPO Class AAA Preferred Shares. |
(2) Class B, Series 1 and 2 capital securities - corporate are owned by Brookfield Asset Management. BPO has an offsetting loan receivable against these securities earning interest at 95% of NOI, FFO and Total Return to net income attributable to parent company for the years endedbank prime.
In addition, as at December 31,
2012, 2011 and 2010: | | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Commercial property revenue | | $ | 2,889 | | | $ | 2,425 | | | $ | 2,102 | |
Hospitality revenue | | | 743 | | | | 164 | | | | - | |
Direct commercial property expense | | | (1,201 | ) | | | (944 | ) | | | (852 | ) |
Direct hospitality expense | | | (687 | ) | | | (138 | ) | | | - | |
Depreciation and amortization of real estate assets(1) | | | 49 | | | | - | | | | - | |
NOI | | | 1,793 | | | | 1,507 | | | | 1,250 | |
Investment and other revenue | | | 169 | | | | 231 | | | | 168 | |
Investment and other expense | | | (36 | ) | | | (54 | ) | | | (26 | ) |
Share of equity accounted income excluding fair value gains | | | 427 | | | | 492 | | | | 309 | |
Interest expense | | | (1,028 | ) | | | (977 | ) | | | (790 | ) |
Administration expense | | | (171 | ) | | | (104 | ) | | | (109 | ) |
Non-controlling interests in funds from operations | | | (512 | ) | | | (519 | ) | | | (376 | ) |
FFO | | | 642 | | | | 576 | | | | 426 | |
Depreciation and amortization of real estate assets(1) | | | (49 | ) | | | - | | | | - | |
Fair value gains, net | | | 1,330 | | | | 1,477 | | | | 824 | |
Share of equity accounted fair value gains | | | 808 | | | | 1,612 | | | | 561 | |
Non-controlling interests in total return | | | (795 | ) | | | (1,065 | ) | | | (726 | ) |
Total Return | | | 1,936 | | | | 2,600 | | | | 1,085 | |
Income tax expense | | | (535 | ) | | | (439 | ) | | | (78 | ) |
Non-controlling interest in income tax expense | | | 98 | | | | 162 | | | | 19 | |
Net income attributable to parent company | | | 1,499 | | | | 2,323 | | | | 1,026 | |
(1) | Depreciation and amortization of real estate assets is a component of direct hospitality expense that is added back to NOI and is deducted in the Total Return calculation. |
Income Taxes
2015, we had $25 million of preferred shares with a cumulative dividend rate of 5% outstanding. The major componentspreferred shares were issued by various holding entities of our partnership.
Reconciliation of Non-IFRS Measures – Corporate
Net income
tax expense include the following: | | | | | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Total current income tax | | $ | (136 | ) | | $ | (164 | ) | | $ | (117 | ) |
Total deferred income tax | | | (399 | ) | | | (275 | ) | | | 39 | |
Total income tax expense | | $ | (535 | ) | | $ | (439 | ) | | $ | (78 | ) |
Our effective tax rate is different from Brookfield’s domestic statutory income tax rate due to the differences set out below:
| | | | | | | | | | | | |
| Years ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Statutory income tax rate | | | 27 | % | | | 28 | % | | | 31 | % |
Increase (reduction) in rate resulting from: | | | | | | | | | | | | |
Portion of income not subject to tax | | | (11 | ) | | | (12 | ) | | | (3 | ) |
International operations subject to different tax rates | | | 4 | | | | (4 | ) | | | (12 | ) |
Change in tax rates on temporary differences | | | 1 | | | | - | | | | - | |
Increase in tax basis within flow through joint venture | | | - | | | | - | | | | (7 | ) |
Tax asset previously not recognized | | | - | | | | - | | | | (3 | ) |
Other | | | (4 | ) | | | (2 | ) | | | (2 | ) |
Effective income tax rate | | | 17 | % | | | 10 | % | | | 4 | % |
Risk Management
FFO:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Net income (loss) | $ | (768 | ) | $ | (895 | ) | $ | (438 | ) |
| Add (deduct): | |
| |
| |
|
| Fair value losses, net | 48 |
| — |
| — |
|
| Income tax expense | 149 |
| 515 |
| 218 |
|
| Non-controlling interests in above items | 17 |
| 31 |
| 73 |
|
| FFO | $ | (554 | ) | $ | (349 | ) | $ | (147 | ) |
RISKS AND UNCERTAINTIES
The financial results of our business are impacted by the performance of our properties and various external factors influencing the specific sectors and geographic locations in which we
operate;operate, including: macro-economic factors such as economic growth, changes in currency, inflation and interest rates; regulatory requirements and initiatives; and litigation and claims that arise in the normal course of business.
Our property investments are generally subject to varying degrees of risk depending on the nature of the property. These risks include changes in general economic conditions (including the availability and costs of mortgage funds), local conditions (including an oversupply of space or a reduction in demand for real estate in the markets in which we operate), the attractiveness of the properties to tenants, competition from other landlords with competitive space and our ability to provide adequate maintenance at an economical cost.
Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made regardless of whether a property is producing sufficient income to service these expenses. Certain properties are subject to mortgages which require substantial debt service payments. If we become unable or unwilling to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or
of sale. We believe the stability and long-term nature of our contractual revenues effectively mitigates these risks.
We are affected by local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own assets. A protracted decline in economic conditions
willwould cause downward pressure on our operating margins and asset values as a result of lower demand for space.
Substantially all of our properties are located in North America,
Europe and Australia,
with a growing presence in Brazil,
China and
Europe.India. A prolonged downturn in the economies of these regions would result in reduced demand for space and number of prospective tenants and will affect the ability of our properties to generate significant revenue. If there is an increase in operating costs resulting from inflation and other factors, we may not be able to offset such increases by increasing rents.
We are subject to risks that affect the retail environment, including unemployment, weak income growth, lack of available consumer credit, industry slowdowns and plant closures, consumer confidence, increased consumer debt, poor housing market conditions, adverse weather conditions, natural disasters and the need to pay down existing obligations. All of these factors could negatively affect consumer spending, and adversely affect the sales of our retail tenants. This could have an unfavorable effect on our operations and our ability to attract new retail tenants.
The strategy
As owners of office, retail, and industrial properties, lease rollovers also present a risk, as continued growth of rental income is dependent on strong leasing markets to ensure expiring leases are renewed and new tenants are found promptly to fill vacancies. Refer to “Lease Rollover Risk” below for further details.
For a more detailed description of the risk factors facing our opportunistic investment segment depends, in part, upon our abilitybusiness, please refer to syndicate or sell participations in senior intereststhe section entitled Item 3.D. “Key Information - Risk Factors” in our investments, either through capital markets collateralized debt obligation transactions or otherwise. If we cannot do so on terms that are favorable to us, we may not make the returns we anticipate.Interest Rate and Financing Risk
We attempt to stagger the maturities of our mortgage portfolio, to the extent possible, evenly over a 10-year time horizon. We believe that this strategy will allow us to manage interest rate risk most effectively. We have an on-going need to access debt markets to refinance maturing debt as it comes due. There is a risk that lenders will not refinance such maturing debt on terms and conditions acceptable to us or on any terms at all. Our strategy to stagger the maturities of our mortgage portfolio attempts to mitigate our exposure to excessive amounts of debt maturing in any one year.
Approximately 55% of our outstanding commercial property debt at December 31, 2012 is floating rate debt compared to 48% at December 31, 2011. This debt is subject to fluctuations in interest rates. A 100 basis point increase in interest rates2015 annual report on interest expense relating to our corporate and commercial property floating rate
debt would result in an increase in annual interest expense of approximately $108 million. A 100 basis point increase in interest rates on interest expense relating to fixed rate property debt due within one year would result in an increase in an annual interest expense of approximately $9 million. In addition, we have exposure to interest rates within our equity accounted investments. We have mitigated, to some extent, the exposure to interest rate fluctuations through interest rate derivative contracts. See “Derivative Financial Instruments” below in this MD&A.
At December 31, 2012 we have a level of indebtedness of 62% of fair value of our portfolio of properties (2011 – 56%). It is our view that such level of indebtedness is conservative given the lending parameters currently existing in the real estate marketplace and the fair value of our assets, and based on this, we believe that all debts will be financed or refinanced as they come due in the foreseeable future.
Form 20-F.
Credit risk arises from the possibility that tenants may be unable to fulfill their lease commitments. We mitigate this risk by ensuring that our tenant mix is diversified and by limiting our exposure to any one tenant. We also maintain a portfolio that is diversified by property type so that exposure to a business sector is lessened. AsGovernment and government agencies comprise 6.8% of our office segment tenant base and, as at December 31, 2012,2015, no one office tenant representedcomprises more than 8.6% of totalthis.
The following list shows the largest tenants by leasable area in our office
segment.The following list shows major tenants with over one million square feet of space in our office portfolio by leased area and their respective credit ratings and lease commitmentsexposure as at December 31, 2012:
| | | | | | | | | | |
| Tenant | | Primary Location | | Credit
Rating(1) | | Year of
Expiry(2) | | Total
(000’s
Sq. Ft.) | | Sq. Ft.
(%) |
| Various Government Agencies | | All markets | | AA+/AAA | | Various | | 6,023 | | 8.6% |
| Bank of America/Merrill Lynch(3) | | Toronto/New York/Denver/Los Angeles | | A/A- | | Various | | 4,948 | | 7.0% |
| CIBC World Markets(4) | | Toronto/New York/Calgary | | A+ | | 2033 | | 1,436 | | 2.0% |
| Suncor Energy | | Calgary | | BBB+ | | 2025 | | 1,356 | | 1.9% |
| Royal Bank of Canada | | Vancouver/Toronto/Calgary/New York/Los Angeles/Minneapolis | | AA- | | 2024 | | 1,270 | | 1.8% |
| Morgan Stanley | | New York/Los Angeles/Denver | | A- | | 2030 | | 1,219 | | 1.7% |
| Bank of Montreal | | Calgary/Toronto | | A+ | | 2024 | | 1,169 | | 1.7% |
| Total | | | | | | | | 17,421 | | 24.7% |
(1) |
| | | | |
| Tenant | Primary Location | Credit Rating(1) | Exposure (%)(2) |
|
| Government and Government Agencies | Various | AAA/AA+ | 6.8 | % |
| Barclays | London | BBB | 2.4 | % |
| Morgan Stanley | Denver/NY/Toronto | A- | 2.4 | % |
CIBC World Markets(3) | Calgary/Houston/NY/Toronto | A+ | 1.8 | % |
| Suncor Energy Inc. | Calgary/Houston | A- | 1.6 | % |
| Deloitte | Calgary/Houston/LA/Toronto | Not Rated | 1.4 | % |
| Bank of Montreal | Calgary/Toronto | A+ | 1.4 | % |
| Bank of America | Merrill Lynch | Denver/NY/LA/Toronto/D.C. | AA- | 1.3 | % |
| Royal Bank of Canada | Various | AA- | 1.3 | % |
| JPMorgan Chase & Co. | Denver/Houston/LA/NY | A | 1.2 | % |
| Total | | | 21.6 | % |
| |
(1) | From Standard & Poor’s Rating Services, Moody’s Investment Services, Inc. or DBRS Limited. Reflects credit rating of tenant and does not reflect credit rating of any subtenants. |
(2) | |
Reflects the year(2)
| Exposure is a percentage of maturity related to lease(s) and is calculated for multiple leases on a weighted average basis based ontotal leasable square feet where practicable.feet. |
(3) | Bank of America/Merrill Lynch leases 4.6 million square feet at Brookfield Place in New York, of which they occupy 2.7 million square feet with the balance being subleased to various subtenants ranging in size up to 500,000 square feet. Of this 2.7 million square feet, 1.9 million is in 250 Vesey Street and 0.8 million square feet is in 225 Liberty Street. |
(4)(3)
| CIBC World Markets leases 1.1 million square feet at 300 Madison Avenue in New York, of which they sublease 925,000 square feet to PricewaterhouseCoopers LLP.LLP andapproximately 100,000 square feet to Sumitomo Corporation of America. |
The following list reflects the
ten largest tenants in our retail portfolio as at December 31,
2012.2015. The largest
tenantten tenants in our portfolio accounted for approximately
2.9%22.8% of minimum rents, tenant recoveries and other.
| | |
| | | |
Top Ten Largest TenantsTenant | DBA | Primary DBAExposure (%)(1)
| | Percent of Minimum Rents, Tenant
Recoveries and Other (%) | |
LimitedL Brands, Inc.
| | Victoria’sVictoria's Secret, Bath & Body Works, PINK, Henri Bendel | | | 2.94.5 | % |
Foot Locker, Inc. | Footlocker, Champs Sports, Footaction USA | 3.2 | % |
| The Gap, Inc. | | Gap, Banana Republic, Old Navy | | | 2.52.7 | % |
Foot Locker,Forever 21, Inc.
| | Footlocker, Champs Sports, Footaction USA | | Forever 21 | 2.2 | % |
Abercrombie & Fitch Stores, Inc. | | Abercrombie, Abercrombie & Fitch, Hollister Gilly Hicks | | | 1.9 | % |
Forever 21, Inc.
Signet Jewelers Limited | Zales, Gordon's, Kay, Jared | Forever 21 | | | 1.71.9 | % |
Macy’s Inc.
Ascena Retail Group | Dress Barn, Justice, Lane Bryant, Maurices, Ann Taylor, Loft | Macy’s, Bloomingdale’s | | | 1.61.8 | % |
Golden Gate Capital
| | Express, J. Jill, Eddie Bauer | | | 1.5 | % |
American Eagle Outfitters, Inc.
| | American Eagle, Aerie, Martin + Osa | | | 1.3 | % |
Genesco Inc. | | Journeys, Lids, Underground Station, Johnston & Murphy | | | 1.21.6 | % |
Luxottica Retail North America Inc. | Group S.p.A. | Lenscrafters, Sunglass Hut, Pearle Vision | 1.6 | % |
| Express, Inc. | Express, Express Men | 1.4 | % |
| Total | | 1.122.8 | % |
| |
Total
(1) | | | | | 17.9 | % Exposure is a percentage of minimum rents and tenants recoveries. |
Our exposure to credit risk in respect of our other investments relates primarily to counterparty obligations regarding loans and notes receivable. We assess the credit worthiness of each counterparty before entering into contracts and ensure that counterparties meet minimum credit quality requirements. We also endeavor to minimize counterparty credit risk through diversification, collateral arrangements, and other credit risk mitigation techniques.
Lease
Roll-OverRoll-over Risk
Lease roll-over risk arises from the possibility that we may experience difficulty renewing leases as they expire or in
releasingre-leasing space vacated by tenants upon early lease expiry. We attempt to stagger the lease expiry profile so that we are not faced with disproportionate amounts of space expiring in any one
year;year. On average, approximately
7.3%9.1% of our office,
leasesretail and
10.3% of our retailindustrial leases mature annually
over the next fiveup to 2020. Our office, retail and industrial portfolio has a weighted average remaining lease life of approximately 6.4 years. We further mitigate this risk by maintaining a diversified portfolio mix by geographic location and by
proactivelypro-actively leasing space in advance of its contractual expiry.
Details of our
The following table sets out lease expiry profileexpiries, by square footage, for our office, retail and retail properties,industrial portfolios at December 31, 2015, including our unconsolidated investments:
|
| | | | | | | | | | | | | | | | | | | | | |
(Sq. ft. in
thousands) | Current |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 and | | Total |
|
| Beyond | |
| Office | 9,815 |
| 5,403 |
| 5,719 |
| 7,679 |
| 7,930 |
| 8,451 |
| 5,664 |
| 5,734 |
| 43,008 | | 99,403 |
|
| Expiring % | 9.9 | % | 5.4 | % | 5.8 | % | 7.7 | % | 8.0 | % | 8.5 | % | 5.7 | % | 5.8 | % | 43.2 | % | 100.0 | % |
Retail(1) | 2,898 |
| 8,091 |
| 7,543 |
| 6,692 |
| 6,495 |
| 5,167 |
| 3,960 |
| 7,827 |
| 16,985 | | 65,658 |
|
| Expiring % | 4.4 | % | 12.3 | % | 11.5 | % | 10.2 | % | 9.9 | % | 7.9 | % | 6.0 | % | 11.9 | % | 25.9 | % | 100.0 | % |
| Industrial | 5,045 |
| 5,412 |
| 5,690 |
| 7,518 |
| 4,848 |
| 6,819 |
| 6,317 |
| 2,318 |
| 10,568 | | 54,535 |
|
| Expiring % | 9.3 | % | 9.9 | % | 10.4 | % | 13.8 | % | 8.9 | % | 12.5 | % | 11.6 | % | 4.3 | % | 19.3 | % | 100.0 | % |
| |
(1) | Represents regional malls only and excludes traditional anchor and specialty leasing agreements. |
Tax Risk
We are subject to income taxes in various jurisdictions, and our tax liabilities are dependent upon the distribution of income among these different jurisdictions. Our effective income tax rate is influenced by
geographya number of factors, including changes in tax law, tax treaties, interpretation of existing laws, and
our ability to sustain our reporting positions on examination. Changes in
aggregate, are included elsewhere in this MD&A.any of those factors could change our effective tax rate, which could adversely affect our profitability and results of operations.
As an owner of real property, we are subject to various federal, provincial, state and municipal laws relating to environmental matters. Such laws provide that we could be liable for the costs of removing certain hazardous substances and remediating certain hazardous locations. The failure to remove
such substances or remediate such
substances or locations, if any, could adversely affect our ability to sell such real estate or to borrow using such real estate as collateral and could potentially result in claims against us. We are not aware of any material
noncompliancenon-compliance with environmental laws at any of our properties nor are we aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of our properties or any pending or threatened claims relating to environmental conditions at our properties.
We will continue to make the necessary capital and operating expenditures to ensure that we are compliant with environmental laws and regulations. Although there can be no assurances, we do not believe that costs relating to environmental matters will have a materially adverse effect on our business, financial condition or results of operations. However, environmental laws and regulations can change and we may become subject to more stringent environmental laws and regulations in the future, which could have an adverse effect on our business, financial condition or results of operations.
Real estate is relatively illiquid. Such illiquidity may limit our ability to vary our portfolio promptly in response to changing economic or investment conditions. Also, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the markets in which we operate.
Our commercial properties generate a relatively stable source of income from contractual tenant rent payments. Continued growth of rental income is dependent on strong leasing markets to ensure expiring leases are renewed and new tenants are found promptly to fill vacancies.
Taking into account the current state of the economy, 2013 may not provide the same level of increases in rental rates on renewal as compared to prior years. We are however, substantially protected against short-term market conditions, as most of our leases are long-term in nature with an average term of sevenover six years.
Our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates. We maintain insurance on our properties in amounts and with deductibles that we believe are in line with what owners of similar properties carry. We maintain all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and
named windstorm)weather catastrophe).
Interest Rate and Financing Risk
We have an on-going need to access debt markets to refinance maturing debt as it comes due. There is a risk that lenders will not refinance such maturing debt on terms and conditions acceptable to us or on any terms at all. Our strategy to stagger the maturities of our mortgage portfolio attempts to mitigate our exposure to excessive amounts of debt maturing in any one year and to maintain relationships with a large number of lenders to limit exposure to any one counterparty.
Approximately 55% of our outstanding debt obligations at December 31, 2015 are floating rate debt compared to 56% at December 31, 2014. This debt is subject to fluctuations in interest rates. A 100 basis point increase in interest rates relating to our corporate and commercial floating rate debt obligations would result in an increase in annual interest expense of approximately $169 million. A 100 basis point increase in interest rates relating to fixed rate debt obligations due within one year would result in an increase in an annual interest expense of approximately $10 million upon refinancing. In addition, we have exposure to interest rates within our equity accounted investments. We have mitigated, to some extent, the exposure to interest rate fluctuations through interest rate derivative contracts. See “Derivative Financial Instruments” below in this MD&A.
At December 31, 2015, our consolidated debt to capitalization was 47% (December 31, 2014 – 46%). It is our view this level of indebtedness is conservative given the cash flow characteristics of our properties and the fair value of our assets. Based on this, we believe that all debts will be financed or repaid as they come due in the foreseeable future.
Foreign Exchange
FluctuationsForRisk
As at and for the year ended December 31, 2012,2015, approximately 38%35% of our assets and 37%33% of our revenues originated outside the United States and consequently are subject to foreign currency risk due to potential fluctuations in exchange rates between these currencies and the U.S. Dollar. To mitigate this risk, we attempt to maintain a natural hedged position with respect to the carrying value of assets through debt agreements denominated in local currencies and, from time to time, supplemented through the use of derivative contracts as discussed under “— “Derivative Financial Instruments”. The following table shows the impact of a 10%
decreasechange in foreign exchange rates on net income and other comprehensive income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2012 | | | Dec. 31, 2011 | | | Dec. 31, 2010 | |
| (Millions) | |
| Equity in
net assets
attributable to
parent company |
| | | OCI | | | | Net Income | | |
| Equity in
net assets
attributable to
parent company |
| | | OCI | | | | Net Income | | |
| Equity in
net assets
attributable to
parent company |
| | | OCI | | | | Net Income | |
| Canadian Dollar | | C$ | 1,020 | | | $ | (93) | | | $ | - | | | C$ | 935 | | | $ | (84) | | | $ | - | | | C$ | 820 | | | $ | (74) | | | $ | - | |
| Australian Dollar | | A$ | 2,104 | | | | (199 | ) | | | - | | | A$ | 2,005 | | | | (186 | ) | | | - | | | A$ | 1,863 | | | | (173 | ) | | | - | |
| British Pound | | £ | 785 | | | | (116 | ) | | | - | | | £ | 641 | | | | (90 | ) | | | - | | | £ | 482 | | | | (69 | ) | | | - | |
| Euro | | € | 62 | | | | - | | | | (8 | ) | | € | 83 | | | | - | | | | (10 | ) | | € | 83 | | | | - | | | | (10 | ) |
| Brazilian Real | | R$ | 911 | | | | (41 | ) | | | - | | | R$ | 586 | | | | (28 | ) | | | - | | | R$ | 265 | | | | (14 | ) | | | - | |
| Total | | | | | | $ | (449 | ) | | $ | (8 | ) | | | | | | $ | (388 | ) | | $ | (10 | ) | | | | | | $ | (330 | ) | | $ | (10 | ) |
Derivative Financial Instruments
Our
|
| | | | | | | | | |
| | Dec. 31, 2015 |
| (Millions) | Equity attributable to unitholders(1) | | OCI |
| Net income |
|
| Canadian Dollar | C$ | (268 | ) | $ | 19 |
| $ | — |
|
| Australian Dollar | A$ | 2,721 |
| (198 | ) | — |
|
| British Pound | £ | 3,620 |
| (533 | ) | — |
|
| Euro | € | 588 |
| (64 | ) | — |
|
| Brazilian Real | R$ | 1,725 |
| (44 | ) | — |
|
| New Zealand Dollar | NZ$ | 29 |
| (2 | ) | — |
|
| Indian Rupee | Rs | 9,166 |
| (14 | ) | — |
|
| Chinese Yuan | C¥ | 1,268 |
| $ | (20 | ) | $ | — |
|
| Total | |
|
| $ | (856 | ) | $ | — |
|
| |
(1) | As of December 31, 2015, unitholders are defined as holders of the GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, and Exchange LP Units. |
|
| | | | | | | | | |
| | Dec. 31, 2014 |
| (Millions) | Equity attributable to unitholders(1) | | OCI |
| Net income |
|
| Canadian Dollar | C$ | (223 | ) | $ | 19 |
| $ | — |
|
| Australian Dollar | A$ | 2,668 |
| (218 | ) | — |
|
| British Pound | £ | 1,468 |
| (229 | ) | — |
|
| Euro | € | 205 |
| (9 | ) | (12 | ) |
| Brazilian Real | R$ | 1,325 |
| (50 | ) | — |
|
| New Zealand Dollar | NZ$ | 44 |
| (4 | ) | — |
|
| Indian Rupee | Rs | 6,104 |
| (10 | ) | — |
|
| Total | | |
| $ | (501 | ) | $ | (12 | ) |
| |
(1) | As of December 31, 2014, unitholders are defined as holders of the GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, and Exchange LP Units. |
|
| | | | | | | | | |
| | Dec. 31, 2013 |
| (Millions) | Equity attributable to unitholders(1) | | OCI |
| Net income |
|
| Canadian Dollar | C$ | 631 |
| $ | (59 | ) | $ | — |
|
| Australian Dollar | A$ | 1,716 |
| (154 | ) | — |
|
| British Pound | £ | 998 |
| (165 | ) | — |
|
| Euro | € | 161 |
| (31 | ) | (6 | ) |
| Brazilian Real | R$ | 1,046 |
| (45 | ) | — |
|
| Total | | |
| $ | (454 | ) | $ | (6 | ) |
| |
(1) | As of December 31, 2013, unitholders are defined as holders of the GP Units, LP Units, Redeemable/Exchangeable Partnership Units, and Special LP Units. |
DERIVATIVE FINANCIAL INSTRUMENTS
We and our operating entities use derivative and non-derivative instruments to manage financial risks, including interest rate, commodity, equity price and foreign exchange risks. The use of derivative contracts is governed by documented risk management policies and approved limits. We do not use derivatives for speculative purposes.
OurWe and our operating entities use the following derivative instruments to manage these risks:
Foreign currency forward contracts to hedge exposures to Canadian Dollar, Australian Dollar, and British Pound, Euro and Chinese Yuan denominated investments in foreign subsidiaries and foreign currency denominated financial assets;
interestForeign currency forward contracts to hedge exposures to Brazilian Real denominated cash flows;
Interest rate swaps to manage interest rate risk associated with planned refinancings and existing variable rate debt; and
interestInterest rate caps to hedge interest rate risk on certain variable rate debt; and
total return swaps on Brookfield Office Properties’ shares to economically hedge exposure to variability in its share price under its deferred share unit plan.
We also designate Canadian Dollar financial liabilities of certain of our operating entities as hedges of our net investments in our Canadian operations.
Interest Rate Hedging
We have
The following table provides our partnership’s outstanding derivatives
outstanding that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate
debt.As atdebt as of December 31, 2012, we had derivatives representing a notional amount of $1,377 million in place to fix rates on forecasted fixed rate financings with maturities between 20232015 and 2025 at rates between 2.1% and 4.7%. As at December 31, 2011, we had derivatives representing a notional amount of $1,599 million in place to fix rates on forecasted fixed rate financings with a maturity between 2014 and 2024 at rates between 2.6% and 5.2%. The hedged forecasted fixed rate financings are denominated in U.S. Dollars and Canadian Dollars.
As at December 31, 2012, we had derivatives with a notional amount of $5,034 million in place to fix rates on existing variable rate debt at between 0.6% and 10.5% for debt maturities between 2013 and 2017. As at December 31, 2011, we had derivatives with a notional amount of $5,343 million in place to fix rates on existing variable rate debt at between 0.3% and 9.9% for debt maturities between 2012 and 2016. The hedged variable rate debts are denominated in U.S. Dollars, British Pounds and Australian Dollars.
The fair value of our outstanding interest rate derivative positions as at December 31, 2012 is a loss of $273 million (2011 – loss of $271 million). 2014:
|
| | | | | | | | | |
| (US$ Millions) | Hedging item | Notional |
| Rates | Maturity dates | Fair value |
|
| Dec. 31, 2015 | Interest rate caps of US$ LIBOR debt | $ | 3,654 |
| 2.5% - 5.8% | Jan. 2016 - Oct. 2018 | $ | — |
|
| | Interest rate swaps of US$ LIBOR debt | 285 |
| 2.1% - 2.2% | Oct. 2020 - Nov. 2020 | (8 | ) |
| | Interest rate swaps of £ LIBOR debt | 77 |
| 1.5% | Apr. 2020 | 1 |
|
| | Interest rate swaps of € EURIBOR debt | 187 |
| 0.02% - 1.4% | Oct. 2017 - Feb. 2021 | 5 |
|
| | Interest rate swaps of A$ BBSW/BBSY debt | 488 |
| 3.5% - 5.9% | Jan. 2016 - Jul. 2017 | (9 | ) |
| | Interest rate swaps on forecasted fixed rate debt | 1,885 |
| 3.1% - 5.5% | Jan. 2026 - Jun. 2029 | (332 | ) |
| Dec. 31, 2014 | Interest rate caps of US$ LIBOR debt | $ | 3,174 |
| 2.5% - 5.8% | Jan. 2015 - Oct. 2018 | $ | 1 |
|
| | Interest rate swaps of US$ LIBOR debt | 483 |
| 0.6% - 2.2% | Dec. 2015 - Nov. 2020 | (7 | ) |
| | Interest rate swaps of £ LIBOR debt | 204 |
| 1.1% | Sep. 2017 | (1 | ) |
| | Interest rate swaps of A$ BBSW/BBSY debt | 548 |
| 3.5% - 5.9% | Jan. 2016 - Jul. 2017 | (26 | ) |
| | Interest rate swaps of € EURIBOR debt | 150 |
| 0.3% - 1.4% | Oct. 2017 - Feb. 2021 | (3 | ) |
| | Interest rate swaps on forecasted fixed rate debt | 1,995 |
| 2.3% - 5.1% | May 2025 - Jun. 2029 | (262 | ) |
For the
yearsyear ended December 31,
2012,2015 and
2011,2014, the amount of hedge ineffectiveness recorded in interest expense in connection with our
partnership’s interest rate hedging activities was not significant.
Foreign Currency Hedging
We have
The following table presents the partnership's outstanding derivatives
that are designated as net investment hedges
of its investments in foreign
subsidiaries. As atsubsidiaries or cash flow hedges as of December 31,
2012, we had hedged a notional amount of £45 million at £0.62/$ using foreign currency forward contracts maturing March 2013. As at December 31, 2011, we had designated a notional amount of £45 million at £0.64/$2015 and
A$135 million at A$0.98/US$ using foreign currency contracts that matured between January and March of 2012.The fair value of our outstanding foreign currency forwards as at December 31, 2012 is nil (2011 – loss of $4 million).
2014:
|
| | | | | | | | | |
| (US$ Millions) | Hedging item | | Notional |
| Rates | Maturity dates | Fair value |
|
| Dec. 31, 2015 | Net investment hedges | £ | 2,346 |
| £0.64/$ - £0.68/$ | Jan 2016 -Mar. 2017 | $ | 26 |
|
| | Net investment hedges | C¥ | 2,000 |
| C¥6.62/$ - C¥6.78/$ | Feb. 2016 - Dec. 2016 | 3 |
|
| | Net investment hedges | A$ | 811 |
| A$1.29/$ - A$1.44/$ | Jan. 2016 - Feb. 2017 | 2 |
|
| | Net investment hedges | € | 446 |
| €0.80/$ - €0.94/$ | May 2016 - Dec. 2016 | 1 |
|
| | Cash flow hedges | R$ | 613 |
| R$3.89/$ - R$3.96/$ | Jan. 2016 - Mar. 2016 | (8 | ) |
| Dec. 31, 2014 | Net investment hedges | £ | 1,170 |
| £0.59/$ - £0.65/$ | Apr. 2015 - Jan. 2016 | $ | 36 |
|
| | Net investment hedges | € | 353 |
| €0.75/$ - €0.80/$ | Jan. 2015 - Jun. 2016 | 35 |
|
| | Net investment hedges | A$ | 1,750 |
| A$1.10/$ - A$1.27/$ | Apr. 2015 - Mar. 2016 | 22 |
|
In addition, as of December 31,
2012, we2015, our partnership had designated C$
1.1 billion (2011900 million (December 31, 2014 – C$
903900 million) of Canadian
dollarDollar financial liabilities as hedges
of itsagainst our partnership’s net investment in Canadian operations.
During 2015, the partnership entered into a number of zero cost collars consisting of bought call and sold put options together with foreign currency forward agreements as hedges of certain British Pound and Australian Dollar-denominated net investments. These zero cost collars were unwound by December 31, 2015. In connection with these hedges, $(28) million relating to the time value component of their valuation has been recorded in fair value gains, net on the consolidated income statement for the year ended December 31, 2015. In addition, the partnership recorded within other comprehensive income $79 million relating to the settlement of certain collars. Any remaining put or call options outstanding following the settlement of the partnership’s zero cost collars are presented below within “Other Derivatives”.
For the years ended December 31, 2015 and 2014, the amount of hedge ineffectiveness recorded in earnings in connection with the partnership’s foreign currency hedging activities was not significant.
The following tables provide detail of our partnership’s other derivatives that have been entered into to manage financial risks as of December 31, 2015 and December 31, 2014:
|
| | | | | | | | | |
| (US$ millions) | Derivative type | Notional |
| Maturity dates | Rates | Fair value
(gain)/loss |
| Classification of (gain)/loss |
| Dec. 31, 2015 | Interest rate caps | $ | 381 |
| Mar. 2016 | 3.65% | — |
| General and administrative expense |
| | Interest rate caps | 350 |
| Jul. 2017 | 3.25% | — |
| General and administrative expense |
| | Interest rate caps | 34 |
| Jan. 2016 | 3.00% | — |
| General and administrative expense |
| | Interest rate caps | 75 |
| Feb. 2016 | 2.93% | — |
| General and administrative expense |
| Dec. 31, 2014 | Interest rate caps | $ | 382 |
| Mar. 2016 | 3.65% | — |
| General and administrative expense |
| | Interest rate caps | 350 |
| Jul. 2017 | 3.25% | — |
| General and administrative expense |
| | Interest rate caps | 51 |
| Sep. 2015 | 2.81% - 3.01% | — |
| General and administrative expense |
| | Interest rate caps | 13 |
| Oct. 2015 | 3.00% | — |
| General and administrative expense |
| | Interest rate caps | 34 |
| Jan. 2016 | 3.00% | — |
| General and administrative expense |
| | Interest rate caps | 75 |
| Feb. 2016 | 2.94% | — |
| General and administrative expense |
| | Interest rate caps | 74 |
| Mar. 2016 | 2.94% | — |
| General and administrative expense |
| | Interest rate caps | 68 |
| Jul. 2015 | 3.00% | — |
| General and administrative expense |
|
| | | | | | | | | |
| (US$ Millions) | Derivative type | | Notional |
| Maturity dates | Strike prices | Fair value (gain)/loss |
| Classification of (gain)/loss |
| Dec. 31, 2015 | Call | A$ | 175 |
| Mar. 2016 | A$1.22/$ | — |
| Fair value gains, net |
| | Call | A$ | 275 |
| Apr. 2016 | A$1.25/$ | — |
| Fair value gains, net |
| | Put | £ | 370 |
| Jan. 2016 | £0.71/$ | — |
| Fair value gains, net |
| | Put | £ | 200 |
| Mar. 2016 | £0.71/$ | (1 | ) | Fair value gains, net |
| | Call | A$ | 150 |
| Apr. 2016 | A$1.22/$ | — |
| Fair value gains, net |
| | Call | A$ | 150 |
| Apr. 2016 | A$1.22/$ | — |
| Fair value gains, net |
| | Call | A$ | 250 |
| Apr. 2016 | A$1.22/$ | — |
| Fair value gains, net |
The other derivatives have not been designated as hedges for accounting purposes.
At December 31, 2012, we had a total return swap under which the Company received the return on a notional amount of 1.4 million Brookfield Office Properties common shares in connection with Brookfield Office Properties’ deferred share unit plan. The fair value of the total return swap at December 31, 2012 was a gain of $1 million (2011 – gain of $2 million) and a loss of $1 million in connection with the total return swap was recognized in general and administration expense in the year then ended (2011 – loss of $2 million).
At December 31, 2012, we had foreign exchange contracts outstanding to swap a €83 million notional amount to British Pounds (2011 – €83 million). The fair value of these contracts as at December 31, 2012 was $2 million (2011 – nil) and a loss of $3 million was recognized in investment and other revenue in connection with these contracts in the year ended December 31, 2012 (2011 – gain of $4 million).
At December 31, 2012, we had interest rate cap contracts outstanding with a notional amount of $3,564 million, at rates between 1.2% and 4.5% and expiring between 2013 and 2016. The fair value of these contracts, into which we entered during 2012, at December 31, 2012 was nil (2011 – not applicable).
Related Party Transactions
RELATED PARTIES
In the normal course of operations, we enterthe partnership enters into various transactions on market terms with related parties, whichparties. These transactions are recognized in the consolidated financial statements. These transactions have been measured at exchange value and are recognized in the consolidated financial statements. The immediate parent of the partnership is the general partner. The ultimate parent of the partnership is Brookfield Asset Management. Other related parties of the partnership include the partnership's and Brookfield Asset Management's subsidiaries and operating entities, certain joint ventures and associates accounted for under the equity method, as well as officers of such entities and their spouses.
The partnership has a management agreement with its service providers, wholly-owned subsidiaries of Brookfield Asset Management. Pursuant to a Master Services Agreement, prior to the third quarter, on a quarterly basis, the partnership paid a base management fee ("base management fee"), to the service providers equal to $12.5 million per quarter ($50.0 million annually).
Through the second quarter of 2015, the partnership also paid a quarterly equity enhancement distribution to Special L.P., a wholly-owned subsidiary of Brookfield Asset Management, of 0.3125% of the amount by which the operating partnership’s total capitalization value at the end of each quarter exceeded its total capitalization value that immediately followed the spin-off of Brookfield Asset Management’s commercial property operations on April 15, 2013, subject to certain adjustments. For purposes of calculating the equity enhancement distribution at each quarter-end, the capitalization of the partnership was equal to the volume-weighted average of the closing prices of the LP Units on the NYSE for each of the last five trading days of the applicable quarter multiplied by the number of issued and outstanding units of the partnership on the last of those days (assuming full conversion of Brookfield Asset Management’s interest in the partnership into units of the partnership), plus the amount of third-party debt, net of cash, with recourse to the partnership and the operating partnership and certain holding entities held directly by the operating partnership.
On August 3, 2015, the board of directors of the partnership approved an amendment to the base management fee and equity enhancement distribution calculations, as of the beginning of the third quarter of 2015. Pursuant to this amendment, the annual base management fee paid by the partnership to Brookfield Asset Management was changed from $50.0 million, subject to annual inflation adjustments, to 0.5% of the total capitalization of the partnership, subject to an annual minimum of $50.0 million plus annual inflation adjustments. The calculation of the equity enhancement distribution was amended to reduce the distribution by the amount by which
the revised base management fee is greater than $50.0 million per annum, plus annual inflation adjustments, to maintain a fee level in aggregate that would be the same as prior to the amendment.
The base management fee for the year ended December 31, 2015 was $76.1 million (2014 - $50.0 million, 2013 - $36.0 million). The base management fee for year ended December 31, 2013 was pro-rated for the period from Spin-off through December 31, 2013. The equity enhancement distribution for the year ended December 31, 2015 was $59.9 million (2014 - $50.0 million, 2013 - nil).
In connection with the issuance of Preferred Equity Units to QIA, Brookfield Asset Management has contingently agreed to acquire the seven-year and ten-year tranches of Preferred Equity Units from QIA for the initial issuance price plus accrued and unpaid distributions and to exchange such units for Preferred Equity Units with terms and conditions substantially similar to the twelve-year tranche to the extent that the market price of the LP Units is less than 80% of the exchange price at maturity.
The following table summarizes transactions
and balances with related parties:
| | | | | | | | | | | | |
| (US$ Millions) Transactions for the year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
| Lease revenue | | | $ 10 | | | | $ 2 | | | | $ 2 | |
| Interest income | | | 40 | | | | 101 | | | | 71 | |
| Interest expense | | | 4 | | | | 41 | | | | 7 | |
| Other expense | | | 51 | | | | 50 | | | | 29 | |
| Management fees paid | | | 21 | | | | 30 | | | | 52 | |
| Management fees received | | | - | | | | 15 | | | | 5 | |
| | | | | | | | |
| (US$ Millions) Balances outstanding as at | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
BRPI promissory notes(1) | | $ | - | | | $ | 470 | |
Loans receivable designated as FVTPL | | | - | | | | 138 | |
Loans and notes receivable(2) | | | 423 | | | | 452 | |
Other current receivables | | | 1 | | | | 57 | |
Capitalized construction profits payable to Brookfield | | | 49 | | | | 40 | |
Property debt payable | | | 30 | | | | 64 | |
Other liabilities | | | 52 | | | | 22 | |
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Balances outstanding with related parties: | |
| |
|
| Participating loan interests | $ | 449 |
| $ | 609 |
|
| Equity accounted investments | 143 |
| — |
|
Loans and notes receivable(1) | 63 |
| 82 |
|
| Receivables and other assets | 29 |
| 143 |
|
| Property-specific obligations | (362 | ) | (491 | ) |
| Corporate debt obligations | (1,000 | ) | (570 | ) |
| Other liabilities | (373 | ) | (174 | ) |
| Capital securities held by Brookfield Asset Management | (1,250 | ) | (1,250 | ) |
| Preferred shares held by Brookfield Asset Management | (25 | ) | (25 | ) |
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Transactions with related parties: | |
| |
| |
|
| Commercial property revenue | $ | 22 |
| $ | 16 |
| $ | 7 |
|
| Management fee income | 3 |
| — |
| — |
|
Participating loan interests (including fair value gains, net)(1) | 129 |
| 88 |
| 59 |
|
| Interest expense on debt obligations | 55 |
| 23 |
| 12 |
|
| Interest on capital securities held by Brookfield Asset Management | 76 |
| 76 |
| 56 |
|
General and administrative expense (2) | 207 |
| 187 |
| 277 |
|
Construction costs(3) | 308 |
| 207 |
| 120 |
|
(1) | In the fourth quarter of 2012, BRPI repaid the unsecured promissory notes of C$480 million. All principal and interest were repaid in full. |
(2)(1)
| Includes $148$63 million receivable from Brookfield Asset Management upon the earlier of the company’sour partnership’s exercise of its option to convert its participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating loan notes. Also included is a $200 million loan receivable relatedinterests. |
| |
(2) | Amounts received from Brookfield Asset Management and its subsidiaries for the rental of office premises. |
| |
(3) | Includes amounts paid to Brookfield’s ownershipBrookfield Asset Management and its subsidiaries for management fees, management fees associated with our private funds, and administrative services. |
During the third quarter of 2015, the partnership sold an office development project in São Paulo, Brazil to a subsidiary of Brookfield Asset Management, the partnership’s ultimate parent company. The consideration received was $109 million, based on a third-party valuation performed on the property. Upon close of the transaction, the partnership recognized $63 million of realized fair value losses, primarily as a result of movements in the Brazilian Real to U.S. Dollar exchange rate from the date of acquisition and any interim capital contributions during the construction process.
On June 5, 2015, 9165789 Canada Inc. acquired $12 million of voting preferred shares of an indirect subsidiary of the partnership, BOP Management Holdings Inc., representing a 60% voting interest. 9165789 Canada Inc. was formed by BPO and 16 individuals who are senior officers of BPO and other Brookfield Asset Management subsidiaries, who were given the opportunity to invest in 9165789 Canada Inc. as part of the partnership’s goal of retaining its top executives and aligning executives’ interests with those of the partnership. The senior officers acquired an aggregate of $2 million of common shares of 9165789 Canada Inc. for investment purposes in exchange for cash in an amount equal to the fair value of the shares. BPO also holds a $10 million non-voting preferred share interest in 9165789 Canada Inc. BOP Management Holdings Inc. indirectly owns 33% of BPO’s economic interest in DTLA and an interest in BPO’s U.S. asset management and certain promote fee streams.
On February 18, 2015, Brookfield Global FM Limited Partnership (“FM Co.”) sold its interest in Brookfield Johnson Controls Australia and Brookfield Johnson Controls Canada to a subsidiary of Brookfield Asset Management. FM Co. is accounted for in accordance with the equity method as an investment in associate.
PORTFOLIO LISTING
The following table presents details of our property portfolio as of December 31, 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Office Property Portfolio | | Assets Under Management | | Proportionate at subsidiary
level(1) | | Proportionate to Unitholders(2) | | Proportionate to LP Unitholders(3) |
| Dec. 31, 2015 | Number of properties | % Leased |
| Leasable | | Parking | | Total | | Owned % | | Leasable | | Total | | Leasable | | Total | | Leasable | | Total |
| (Sq. ft in 000's) | | | | | | | | | |
| CONSOLIDATED PROPERTIES | | | | | | | | | | | | | | | | | | | |
| United States | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Midtown New York | 1 |
| 100.0 | % | 1,134 |
| | 14 |
| | 1,148 |
| | 100.0 | % | | 1,134 |
| | 1,148 |
| | 1,134 |
| | 1,148 |
| | 417 |
| | 422 |
|
| Downtown New York | 7 |
| 93.9 | % | 12,814 |
| | 543 |
| | 13,357 |
| | 96.9 | % | | 12,408 |
| | 12,941 |
| | 12,408 |
| | 12,941 |
| | 4,561 |
| | 4,757 |
|
| Washington, D.C. | 18 |
| 82.3 | % | 3,691 |
| | 2,502 |
| | 6,193 |
| | 90.9 | % | | 3,352 |
| | 5,635 |
| | 3,352 |
| | 5,635 |
| | 1,232 |
| | 2,071 |
|
| Los Angeles | 20 |
| 81.9 | % | 9,954 |
| | 4,278 |
| | 14,232 |
| | 52.5 | % | | 5,441 |
| | 7,466 |
| | 4,469 |
| | 6,493 |
| | 1,643 |
| | 2,387 |
|
| San Diego | 1 |
| 45.4 | % | 177 |
| | — |
| | 177 |
| | 100.0 | % | | 177 |
| | 177 |
| | 53 |
| | 53 |
| | 19 |
| | 19 |
|
| Houston | 5 |
| 88.7 | % | 5,052 |
| | 1,187 |
| | 6,239 |
| | 86.6 | % | | 4,389 |
| | 5,400 |
| | 4,389 |
| | 5,400 |
| | 1,613 |
| | 1,985 |
|
| Denver | 1 |
| 84.0 | % | 1,315 |
| | 582 |
| | 1,897 |
| | 51.0 | % | | 671 |
| | 968 |
| | 671 |
| | 968 |
| | 247 |
| | 356 |
|
| San Francisco/San Jose | 39 |
| 60.7 | % | 1,733 |
| | 6 |
| | 1,739 |
| | 100.0 | % | | 1,733 |
| | 1,739 |
| | 659 |
| | 665 |
| | 242 |
| | 244 |
|
| Dallas | 6 |
| 63.4 | % | 466 |
| | — |
| | 466 |
| | 100.0 | % | | 466 |
| | 466 |
| | 139 |
| | 139 |
| | 51 |
| | 51 |
|
| | 98 |
| 86.4 | % | 36,336 |
| | 9,112 |
| | 45,448 |
| | 79.1 | % | | 29,771 |
| | 35,940 |
| | 27,274 |
| | 33,442 |
| | 10,025 |
| | 12,292 |
|
| Canada | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Toronto | 11 |
| 92.5 | % | 9,220 |
| | 1,709 |
| | 10,929 |
| | 69.1 | % | | 6,374 |
| | 7,542 |
| | 6,374 |
| | 7,542 |
| | 2,343 |
| | 2,772 |
|
| Calgary | 8 |
| 97.3 | % | 5,635 |
| | 1,194 |
| | 6,829 |
| | 50.0 | % | | 2,819 |
| | 3,416 |
| | 2,819 |
| | 3,416 |
| | 1,036 |
| | 1,256 |
|
| Ottawa | 6 |
| 95.3 | % | 1,730 |
| | 802 |
| | 2,532 |
| | 25.0 | % | | 434 |
| | 634 |
| | 434 |
| | 634 |
| | 160 |
| | 233 |
|
| Vancouver | 1 |
| 93.7 | % | 581 |
| | 260 |
| | 841 |
| | 100.0 | % | | 581 |
| | 841 |
| | 581 |
| | 841 |
| | 214 |
| | 309 |
|
| Other | 1 |
| 100.0 | % | 3 |
| | — |
| | 3 |
| | 100.0 | % | | 3 |
| | 3 |
| | 3 |
| | 3 |
| | 1 |
| | 1 |
|
| | 27 |
| 94.4 | % | 17,169 |
| | 3,965 |
| | 21,134 |
| | 58.9 | % | | 10,211 |
| | 12,436 |
| | 10,211 |
| | 12,436 |
| | 3,754 |
| | 4,571 |
|
| Australia and New Zealand | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Sydney | 7 |
| 99.1 | % | 1,306 |
| | 414 |
| | 1,720 |
| | 80.1 | % | | 1,091 |
| | 1,377 |
| | 1,091 |
| | 1,377 |
| | 401 |
| | 506 |
|
| Brisbane | 2 |
| 81.8 | % | 520 |
| | 68 |
| | 588 |
| | 79.1 | % | | 412 |
| | 465 |
| | 412 |
| | 465 |
| | 151 |
| | 171 |
|
| Perth | 4 |
| 87.8 | % | 1,891 |
| | 193 |
| | 2,084 |
| | 83.6 | % | | 1,587 |
| | 1,742 |
| | 1,587 |
| | 1,742 |
| | 583 |
| | 640 |
|
| New Zealand | 3 |
| 42.5 | % | 277 |
| | 28 |
| | 305 |
| | 100.0 | % | | 277 |
| | 305 |
| | 277 |
| | 305 |
| | 102 |
| | 112 |
|
| | 16 |
| 87.6 | % | 3,994 |
| | 703 |
| | 4,697 |
| | 82.8 | % | | 3,367 |
| | 3,889 |
| | 3,367 |
| | 3,889 |
| | 1,237 |
| | 1,429 |
|
| United Kingdom | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| London | 5 |
| 99.8 | % | 1,047 |
| | 91 |
| | 1,138 |
| | 100.0 | % | | 1,047 |
| | 1,138 |
| | 936 |
| | 1,022 |
| | 344 |
| | 376 |
|
| | 5 |
| 99.8 | % | 1,047 |
| | 91 |
| | 1,138 |
| | 100.0 | % | | 1,047 |
| | 1,138 |
| | 936 |
| | 1,022 |
| | 344 |
| | 376 |
|
| Brazil | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Rio de Janeiro | 2 |
| 98.8 | % | 1,060 |
| | 618 |
| | 1,678 |
| | 100.0 | % | | 1,060 |
| | 1,678 |
| | 303 |
| | 480 |
| | 111 |
| | 177 |
|
| São Paulo | 4 |
| 43.8 | % | 1,119 |
| | 1,089 |
| | 2,208 |
| | 89.3 | % | | 1,119 |
| | 2,208 |
| | 382 |
| | 740 |
| | 140 |
| | 272 |
|
| | 6 |
| 70.6 | % | 2,179 |
| | 1,707 |
| | 3,886 |
| | 93.9 | % | | 2,179 |
| | 3,886 |
| | 685 |
| | 1,220 |
| | 251 |
| | 449 |
|
| India | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| NCR (Delhi region) | 25 |
| 92.6 | % | 7,379 |
| | 1,562 |
| | 8,941 |
| | 100.0 | % | | 7,379 |
| | 8,941 |
| | 2,414 |
| | 2,925 |
| | 887 |
| | 1,075 |
|
| Kolkata | 10 |
| 80.2 | % | 2,522 |
| | 40 |
| | 2,562 |
| | 100.0 | % | | 2,522 |
| | 2,562 |
| | 825 |
| | 838 |
| | 303 |
| | 308 |
|
| | 35 |
| 89.4 | % | 9,901 |
| | 1,602 |
| | 11,503 |
| | 100.0 | % | | 9,901 |
| | 11,503 |
| | 3,239 |
| | 3,763 |
| | 1,190 |
| | 1,383 |
|
| Total Consolidated Properties | 187 |
| 88.5 | % | 70,626 |
| | 17,180 |
| | 87,806 |
| | 64.4 | % | | 56,476 |
| | 68,792 |
| | 45,712 |
| | 55,772 |
| | 16,801 |
| | 20,500 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| UNCONSOLIDATED PROPERTIES | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| United States | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Midtown New York | 4 |
| 93.0 | % | 5,299 |
| | 104 |
| | 5,403 |
| | 50.2 | % | | 2,662 |
| | 2,713 |
| | 2,662 |
| | 2,713 |
| | 978 |
| | 997 |
|
| Washington, D.C. | 11 |
| 94.7 | % | 2,555 |
| | 909 |
| | 3,464 |
| | 35.2 | % | | 903 |
| | 1,219 |
| | 903 |
| | 1,219 |
| | 332 |
| | 448 |
|
| Boston | 1 |
| 99.9 | % | 835 |
| | 242 |
| | 1,077 |
| | 51.0 | % | | 426 |
| | 549 |
| | 426 |
| | 549 |
| | 157 |
| | 202 |
|
| Los Angeles | 4 |
| 92.6 | % | 1,225 |
| | 389 |
| | 1,614 |
| | 72.8 | % | | 1,011 |
| | 1,175 |
| | 346 |
| | 511 |
| | 127 |
| | 188 |
|
| San Diego | 1 |
| 83.7 | % | 124 |
| | — |
| | 124 |
| | 100.0 | % | | 124 |
| | 124 |
| | 28 |
| | 28 |
| | 10 |
| | 10 |
|
| Houston | 1 |
| 98.6 | % | 1,135 |
| | 699 |
| | 1,834 |
| | 10.0 | % | | 113 |
| | 183 |
| | 113 |
| | 183 |
| | 42 |
| | 68 |
|
| Denver | 2 |
| 91.6 | % | 1,694 |
| | 511 |
| | 2,205 |
| | 58.3 | % | | 1,031 |
| | 1,286 |
| | 745 |
| | 1,000 |
| | 274 |
| | 368 |
|
| Seattle | 3 |
| 84.0 | % | 235 |
| | — |
| | 235 |
| | 100.0 | % | | 235 |
| | 235 |
| | 52 |
| | 52 |
| | 19 |
| | 19 |
|
| | 27 |
| 93.8 | % | 13,102 |
| | 2,854 |
| | 15,956 |
| | 46.9 | % | | 6,505 |
| | 7,484 |
| | 5,275 |
| | 6,255 |
| | 1,939 |
| | 2,300 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Office Property Portfolio | | Assets Under Management | | Proportionate at subsidiary
level(1) | | Proportionate to Unitholders(2) | | Proportionate to LP Unitholders(3) |
| Dec. 31, 2015 | Number of properties | % Leased |
| Leasable | | Parking | | Total | | Owned % | | Leasable | | Total | | Leasable | | Total | | Leasable | | Total |
| (Sq. ft in 000's) | | | | | | | | | |
| Australia and New Zealand | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Sydney | 6 |
| 99.8 | % | 2,923 |
| | 529 |
| | 3,452 |
| | 51.8 | % | | 1,512 |
| | 1,788 |
| | 1,512 |
| | 1,788 |
| | 555 |
| | 656 |
|
| Melbourne | 2 |
| 99.9 | % | 1,357 |
| | 333 |
| | 1,690 |
| | 49.8 | % | | 678 |
| | 842 |
| | 678 |
| | 842 |
| | 249 |
| | 309 |
|
| Canberra | 1 |
| 100.0 | % | 176 |
| | 70 |
| | 246 |
| | 100.0 | % | | 176 |
| | 246 |
| | 176 |
| | 246 |
| | 65 |
| | 91 |
|
| | 9 |
| 99.9 | % | 4,456 |
| | 932 |
| | 5,388 |
| | 53.4 | % | | 2,366 |
| | 2,876 |
| | 2,366 |
| | 2,876 |
| | 869 |
| | 1,056 |
|
| United Kingdom | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| London | 22 |
| 97.6 | % | 8,742 |
| | 1,101 |
| | 9,843 |
| | 81.9 | % | | 6,979 |
| | 8,064 |
| | 3,533 |
| | 4,073 |
| | 1,298 |
| | 1,496 |
|
| | 22 |
| 97.6 | % | 8,742 |
|
| 1,101 |
|
| 9,843 |
|
| 81.9 | % |
| 6,979 |
|
| 8,064 |
|
| 3,533 |
|
| 4,073 |
|
| 1,298 |
|
| 1,496 |
|
| Germany | | | | | | | | | | | | | | | | | | | | | |
| Berlin | 16 |
| 72.9 | % | 2,477 |
| | 1,153 |
| | 3,630 |
| | 100.0 | % | | 2,477 |
| | 3,630 |
| | 1,240 |
| | 1,813 |
| | 456 |
| | 667 |
|
| | 16 |
| 72.9 | % | 2,477 |
|
| 1,153 |
|
| 3,630 |
|
| 100.0 | % |
| 2,477 |
|
| 3,630 |
|
| 1,240 |
|
| 1,813 |
|
| 456 |
|
| 667 |
|
| Total Unconsolidated Properties | 74 |
| 94.1 | % | 28,777 |
| | 6,040 |
| | 34,817 |
| | 63.3 | % | | 18,327 |
| | 22,054 |
| | 12,414 |
| | 15,017 |
| | 4,562 |
| | 5,519 |
|
| Total Office Properties | 261 |
| 90.1 | % | 99,403 |
| | 23,220 |
| | 122,623 |
| | 64.1 | % | | 74,803 |
| | 90,846 |
| | 58,126 |
| | 70,789 |
| | 21,363 |
| | 26,019 |
|
| |
(1) | Reflects our partnership’s interest before considering non-controlling interests in operating subsidiaries. |
| |
(2) | Reflects our partnership’s interest before considering non-controlling interests in subsidiaries, including Brookfield Canada Office Properties and Brookfield Prime Property Fund. |
| |
(3) | Reflects our partnership’s proportionate interest net of non-controlling interests described in note (2) above and the Redeemable/Exchangeable Partnership Units and Special LP Units held by Brookfield Office Properties’ Class AAA Series E capital securities earning a rate of 108% of bank prime.Asset Management and Exchange LP Units. |
Critical Accounting Policies, Estimates and Judgments
|
| | | | | | | | | | | | | | | | | | | | | |
Retail Property Portfolio(1) | | | | | | Assets Under
Management | | Proportionate at subsidiary level(2) | | Proportionate to Unitholders(3) | | Proportionate to LP Unitholders(4) |
| Dec. 31, 2015 | | Number of
properties |
| | % Leased |
| | Total | | Owned % | | Total | | Total | | Total |
| (Sq. ft. in 000’s) | | | | | | | |
| CONSOLIDATED PROPERTIES | | |
| | |
| | |
| | |
| | |
|
| Brazil | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| São Paulo | | 4 |
| | 95.4 | % | | 1,319 |
| | 50.3 | % | | 664 |
| | 289 |
| | 106 |
|
| Rio de Janeiro | | 2 |
| | 94.9 | % | | 961 |
| | 73.2 | % | | 703 |
| | 280 |
| | 103 |
|
| Total Consolidated Properties | | 6 |
| | 95.2 | % | | 2,280 |
| | 60.0 | % | | 1,367 |
| | 569 |
| | 209 |
|
| | | | | | | | | | | | | | | |
| UNCONSOLIDATED PROPERTIES | | |
| | |
| | |
| | |
| | |
|
| U.S. Properties | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Pacific region | | 32 |
| | 94.5 | % | | 26,135 |
| | 83.7 | % | | 21,875 |
| | 6,689 |
| | 2,459 |
|
| Southwest region | | 23 |
| | 96.4 | % | | 24,644 |
| | 88.0 | % | | 21,678 |
| | 6,457 |
| | 2,373 |
|
| East North Central region | | 22 |
| | 94.2 | % | | 21,463 |
| | 87.0 | % | | 18,680 |
| | 5,641 |
| | 2,073 |
|
| Southeast region | | 20 |
| | 96.0 | % | | 19,165 |
| | 79.0 | % | | 15,142 |
| | 4,499 |
| | 1,654 |
|
| Mideast region | | 20 |
| | 95.9 | % | | 19,063 |
| | 87.0 | % | | 16,584 |
| | 4,950 |
| | 1,819 |
|
| Mountain region | | 21 |
| | 96.1 | % | | 17,187 |
| | 90.7 | % | | 15,581 |
| | 4,608 |
| | 1,694 |
|
| Northeast region | | 18 |
| | 97.1 | % | | 15,010 |
| | 85.9 | % | | 12,891 |
| | 3,730 |
| | 1,371 |
|
| West North Central region | | 11 |
| | 95.5 | % | | 10,188 |
| | 94.9 | % | | 9,668 |
| | 2,798 |
| | 1,028 |
|
| Total Unconsolidated Properties | | 167 |
| | 95.6 | % | | 152,855 |
| | 86.4 | % | | 132,099 |
| | 39,372 |
| | 14,471 |
|
| Total Retail Properties | | 173 |
| | 95.6 | % | | 155,135 |
| | 86.0 | % | | 133,466 |
| | 39,941 |
| | 14,680 |
|
| |
(1) | Does not include non-regional malls. |
| |
(2) | Reflects our partnership’s interest before considering non-controlling interests of others in operating subsidiaries. |
| |
(3) | Reflects our partnership’s interest net of non-controlling interests described in note (2) above. |
| |
(4) | Reflects our partnership’s proportionate interest net of non-controlling interests described in note (3) above and the Redeemable/Exchangeable Partnership Units and Special LP Units held by Brookfield Asset Management and Exchange LP Units. |
|
| | | | | | | | | | | | | | | | | | |
| Industrial Property Portfolio | | | | Assets Under
Management | | Proportionate at subsidiary level(1) | | Proportionate to Unitholders(2) | | Proportionate to LP Unitholders(3) |
| Dec. 31, 2015 | | Number of properties | | Total | | Owned % | | Total | | Total | | Total |
| (Sq. ft. in 000's) | | | | | | |
| CONSOLIDATED PROPERTIES | | |
| | |
| | |
| | |
| | |
| | |
|
| United States | | |
| | |
| | |
| | |
| | |
| | |
|
| Texas Border | | 38 |
| | 4,715 |
| | 100.0 | % | | 4,715 |
| | 1,413 |
| | 519 |
|
| Cincinnati/Indianapolis | | 5 |
| | 2,676 |
| | 100.0 | % | | 2,676 |
| | 802 |
| | 295 |
|
| Dallas | | 4 |
| | 1,687 |
| | 100.0 | % | | 1,687 |
| | 505 |
| | 186 |
|
| Houston, Austin, San Antonio | | 13 |
| | 1,659 |
| | 100.0 | % | | 1,659 |
| | 497 |
| | 183 |
|
| Memphis | | 2 |
| | 1,291 |
| | 100.0 | % | | 1,291 |
| | 387 |
| | 142 |
|
| Los Angeles | | 8 |
| | 1,279 |
| | 100.0 | % | | 1,279 |
| | 383 |
| | 141 |
|
| Chicago | | 4 |
| | 1,247 |
| | 100.0 | % | | 1,247 |
| | 374 |
| | 137 |
|
| Pennsylvania, Maryland, Virginia | | 3 |
| | 1,201 |
| | 100.0 | % | | 1,201 |
| | 360 |
| | 132 |
|
| Atlanta | | 2 |
| | 939 |
| | 100.0 | % | | 939 |
| | 281 |
| | 103 |
|
| South Florida | | 4 |
| | 835 |
| | 100.0 | % | | 835 |
| | 250 |
| | 92 |
|
| Other U.S. | | 1 |
| | 765 |
| | 100.0 | % | | 765 |
| | 229 |
| | 84 |
|
| New Jersey | | 1 |
| | 343 |
| | 100.0 | % | | 343 |
| | 103 |
| | 38 |
|
| | | 85 |
| | 18,637 |
| | 100.0 | % | | 18,637 |
| | 5,584 |
| | 2,052 |
|
| Europe | | |
| | |
| | |
| | |
| | |
| | |
|
| France | | 22 |
| | 5,047 |
| | 100.0 | % | | 5,047 |
| | 1,737 |
| | 638 |
|
| Germany | | 15 |
| | 3,597 |
| | 100.0 | % | | 3,597 |
| | 1,238 |
| | 455 |
|
| Netherlands | | 14 |
| | 2,243 |
| | 100.0 | % | | 2,243 |
| | 772 |
| | 284 |
|
| Italy | | 3 |
| | 1,406 |
| | 100.0 | % | | 1,406 |
| | 484 |
| | 178 |
|
| Spain | | 3 |
| | 755 |
| | 100.0 | % | | 755 |
| | 260 |
| | 96 |
|
| United Kingdom | | 2 |
| | 380 |
| | 100.0 | % | | 380 |
| | 131 |
| | 48 |
|
| | | 59 |
| | 13,428 |
| | 100.0 | % | | 13,428 |
| | 4,622 |
| | 1,699 |
|
| Total Consolidated Properties | | 144 |
| | 32,065 |
| | 100.0 | % | | 32,065 |
| | 10,206 |
| | 3,751 |
|
| | | | | | | | | | | | | |
| UNCONSOLIDATED PROPERTIES | | |
| | |
| | |
| | |
| | |
| | |
|
| United States | | |
| | |
| | |
| | |
| | |
| | |
|
| Atlanta | | 8 |
| | 3,785 |
| | 30.0 | % | | 1,135 |
| | 1,134 |
| | 417 |
|
| Cincinnati/Indianapolis | | 7 |
| | 3,258 |
| | 36.6 | % | | 1,191 |
| | 976 |
| | 359 |
|
| Memphis | | 7 |
| | 3,131 |
| | 42.9 | % | | 1,343 |
| | 938 |
| | 345 |
|
| Dallas | | 7 |
| | 2,742 |
| | 38.2 | % | | 1,046 |
| | 822 |
| | 302 |
|
| Los Angeles | | 5 |
| | 2,629 |
| | 42.9 | % | | 1,127 |
| | 788 |
| | 290 |
|
| New Jersey | | 3 |
| | 2,552 |
| | 50.0 | % | | 1,276 |
| | 764 |
| | 281 |
|
| Chicago | | 6 |
| | 2,141 |
| | 44.9 | % | | 961 |
| | 641 |
| | 236 |
|
| South Florida | | 10 |
| | 1,384 |
| | 39.7 | % | | 549 |
| | 415 |
| | 153 |
|
| Houston, Austin, San Antonio | | 3 |
| | 447 |
| | 59.9 | % | | 268 |
| | 134 |
| | 49 |
|
| Pennsylvania, Maryland, Virginia | | 1 |
| | 401 |
| | 50.0 | % | | 200 |
| | 120 |
| | 44 |
|
| Total Unconsolidated Properties | | 57 |
| | 22,470 |
| | 40.5 | % | | 9,096 |
| | 6,732 |
| | 2,476 |
|
| Total Industrial Properties | | 201 |
|
| 54,535 |
| | 75.5 | % | | 41,161 |
| | 16,938 |
| | 6,227 |
|
| |
(1) | Reflects our partnership’s interest before considering non-controlling interests of others in operating subsidiaries. |
| |
(2) | Reflects our partnership’s interest before considering non-controlling interests of others in subsidiaries, including IDI and Gazeley. |
| |
(3) | Reflects our partnership’s proportionate interest net of non-controlling interests described in note (2) above and the Redeemable/Exchangeable Partnership Units and Special LP Units held by Brookfield Asset Management and Exchange LP Units. |
|
| | | | | | | | | | | | | | | | | | |
| Multifamily Property Portfolio | | | | Assets Under Management | | Proportionate at subsidiary level(1) | | Proportionate to Unitholders(2) | | Proportionate to LP Unitholders(3) |
| Dec. 31, 2015 | | Number of
properties | | Total | | Owned % | | Total | | Total | | Total |
| (Sq. ft. in 000's) | | | | | | |
| CONSOLIDATED PROPERTIES | | |
| | |
| | |
| | |
| | |
| | |
|
| United States | | |
| | |
| | |
| | |
| | |
| | |
|
| North Carolina | | 26 |
| | 6,327 |
| | 100.0 | % | | 6,327 |
| | 2,216 |
| | 815 |
|
| New York | | 6 |
| | 3,962 |
| | 99.0 | % | | 3,922 |
| | 1,187 |
| | 436 |
|
| Virginia | | 10 |
| | 3,259 |
| | 100.0 | % | | 3,259 |
| | 1,435 |
| | 527 |
|
| Ohio | | 15 |
| | 2,884 |
| | 100.0 | % | | 2,884 |
| | 1,417 |
| | 521 |
|
| Texas | | 10 |
| | 2,684 |
| | 100.0 | % | | 2,684 |
| | 1,061 |
| | 390 |
|
| Michigan | | 5 |
| | 1,534 |
| | 100.0 | % | | 1,534 |
| | 754 |
| | 277 |
|
| Florida | | 4 |
| | 1,294 |
| | 100.0 | % | | 1,294 |
| | 636 |
| | 234 |
|
| South Carolina | | 5 |
| | 1,268 |
| | 100.0 | % | | 1,268 |
| | 380 |
| | 140 |
|
| Indiana | | 3 |
| | 836 |
| | 100.0 | % | | 836 |
| | 411 |
| | 151 |
|
| Georgia | | 3 |
| | 699 |
| | 100.0 | % | | 699 |
| | 343 |
| | 126 |
|
| Maryland | | 1 |
| | 140 |
| | 100.0 | % | | 140 |
| | 69 |
| | 25 |
|
| Total Consolidated Properties | | 88 |
| | 24,887 |
| | 99.8 | % | | 24,847 |
| | 9,909 |
| | 3,642 |
|
| | | | | | | | | | | | | |
| UNCONSOLIDATED PROPERTIES | | |
| | |
| | |
| | |
| | |
| | |
|
| United States | | |
| | |
| | |
| | |
| | |
| | |
|
| Texas | | 8 |
| | 2,602 |
| | 100.0 | % | | 2,602 |
| | 566 |
| | 208 |
|
| Florida | | 9 |
| | 2,446 |
| | 100.0 | % | | 2,446 |
| | 693 |
| | 255 |
|
| Arizona | | 6 |
| | 2,314 |
| | 100.0 | % | | 2,314 |
| | 711 |
| | 261 |
|
| California | | 7 |
| | 1,687 |
| | 100.0 | % | | 1,687 |
| | 629 |
| | 231 |
|
| Georgia | | 3 |
| | 1,038 |
| | 100.0 | % | | 1,038 |
| | 217 |
| | 80 |
|
| Colorado | | 3 |
| | 948 |
| | 100.0 | % | | 948 |
| | 234 |
| | 86 |
|
| Washington | | 4 |
| | 758 |
| | 100.0 | % | | 758 |
| | 236 |
| | 87 |
|
| North Carolina | | 2 |
| | 692 |
| | 100.0 | % | | 692 |
| | 168 |
| | 62 |
|
| Nevada | | 2 |
| | 556 |
| | 100.0 | % | | 556 |
| | 207 |
| | 76 |
|
| Connecticut | | 2 |
| | 394 |
| | 100.0 | % | | 394 |
| | 92 |
| | 34 |
|
| Massachusetts | | 2 |
| | 304 |
| | 100.0 | % | | 304 |
| | 72 |
| | 26 |
|
| Virginia | | 1 |
| | 226 |
| | 100.0 | % | | 226 |
| | 84 |
| | 31 |
|
| Total Unconsolidated Properties | | 49 |
| | 13,965 |
| | 100.0 | % | | 13,965 |
| | 3,909 |
| | 1,437 |
|
| Total Multifamily Properties | | 137 |
| | 38,852 |
| | 99.9 | % | | 38,812 |
| | 13,818 |
| | 5,079 |
|
| |
(1) | Reflects our partnership’s interest before considering non-controlling interests of others in operating subsidiaries and properties. |
| |
(2) | Reflects our partnership’s interest net of non-controlling interests described in note (1) above. |
| |
(3) | Reflects our partnership’s proportionate interest net of non-controlling interests described in note (2) above and the Redeemable/Exchangeable Partnership Units and Special LP Units held by Brookfield Asset Management and Exchange LP Units. |
|
| | | | | | | | | | | | | | | | | | |
| Hospitality Property Portfolio | | | | Assets Under
Management | | Proportionate at
subsidiary level(1) | | Proportionate to Unitholders(2) | | Proportionate to LP Unitholders(3) |
| Dec. 31, 2015 | | Number of
properties | | Total | | Owned % | | Total | | Total | | Total |
| (Sq. ft. in 000's) | | | | | | |
| CONSOLIDATED PROPERTIES | | |
| | |
| | |
| | |
| | |
| | |
|
| North America | | 2 |
| | 5,308 |
| | 100.0 | % | | 5,308 |
| | 1,661 |
| | 611 |
|
| United Kingdom | | 5 |
| | 4,127 |
| | 100.0 | % | | 4,127 |
| | 1,323 |
| | 486 |
|
| Total Consolidated Properties | | 7 |
| | 9,435 |
| | 100.0 | % | | 9,435 |
| | 2,984 |
| | 1,097 |
|
| | | | | | | | | | | | | |
| UNCONSOLIDATED PROPERTIES | | |
| | |
| | |
| | |
| | |
| | |
|
| Germany | | 10 |
| | 4,517 |
| | 100.0 | % | | 4,517 |
| | 2,259 |
| | 830 |
|
| North America | | 7 |
| | 2,739 |
| | 76.7 | % | | 2,100 |
| | 437 |
| | 161 |
|
| Australia | | 3 |
| | 1,298 |
| | 100.0 | % | | 1,298 |
| | 408 |
| | 150 |
|
| Total Unconsolidated Properties | | 20 |
| | 8,554 |
| | 92.5 | % | | 7,915 |
| | 3,104 |
| | 1,141 |
|
| Total Hospitality Properties | | 27 |
| | 17,989 |
| | 96.4 | % | | 17,350 |
| | 6,088 |
| | 2,238 |
|
| |
(1) | Reflects our partnership’s interest before considering non-controlling interests of others in operating subsidiaries. |
| |
(2) | Reflects our partnership’s interest net of non-controlling interests described in note (1) above. |
| |
(3) | Reflects our partnership’s proportionate interest net of non-controlling interests described in note (3) above and the Redeemable/Exchangeable Partnership Units and Special LP Units held by Brookfield Asset Management and Exchange LP Units. |
|
| | | | | | | | | | | | | | | | | | |
| Triple Net Lease Property Portfolio | | | | Assets Under
Management | | Proportionate at subsidiary level(1) | | Proportionate to Unitholders(2) | | Proportionate to LP Unit holders(3) |
| Dec. 31, 2015 | | Number of
properties | | Total | | Owned % | | Total | | Total | | Total |
| (Sq. ft. in 000's) | | | | | | |
| CONSOLIDATED PROPERTIES | | |
| | |
| | |
| | |
| | |
| | |
|
| North America | | 320 |
| | 16,368 |
| | 100.0 | % | | 16,368 |
| | 4,198 |
| | 1,543 |
|
| Total Consolidated Properties | | 320 |
| | 16,368 |
| | 100.0 | % | | 16,368 |
| | 4,198 |
| | 1,543 |
|
| | | | | | | | | | | | | |
| Total Triple Net Lease Properties | | 320 |
| | 16,368 |
| | 100.0 | % | | 16,368 |
| | 4,198 |
| | 1,543 |
|
| |
(1) | Reflects our partnership’s interest before considering non-controlling interests of others in operating subsidiaries. |
| |
(2) | Reflects our partnership’s interest net of non-controlling interests described in note (1) above. |
| |
(3) | Reflects our partnership’s proportionate interest net of non-controlling interests described in note (2) above and the Redeemable/Exchangeable Partnership Units and Special LP Units held by Brookfield Asset Management and Exchange LP Units. |
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
The discussion and analysis of our financial condition and results of operations is based upon the
carve-out financial statements,Financial Statements, which have been prepared in accordance with IFRS. The preparation of
the consolidated financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect the carrying amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Our most critical accounting policies are those that we believe are the most important in portraying our financial condition and results of operations, and require the most subjectivity and estimates by our management.
Investment properties include commercial properties held to earn rental income and
propertiescommercial developments that are being constructed or developed for future use as
investmentcommercial properties. Commercial properties and commercial developments are recorded at fair value, determined based on available market evidence, at the balance sheet date. We determine the fair value of each investment property based upon, among other things, rental income
from current leases and assumptions about rental income from future leases reflecting market conditions at the balance sheet date, less future cash flows (including rental payments and other outflows) in respect of such leases. Fair valuesInvestment property valuations are primarily determinedcompleted by undertaking one of two accepted income approach methods, which include either: i) discounting the expected future cash flows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows; or ii) undertaking a direct capitalization approach whereby a capitalization rate is applied to estimated current year cash flows. ActiveFair values are primarily determined by discounting the expected future cash flows as opposed to the direct capitalization approach. In determining the appropriateness of the methodology applied, our partnership considers the relative uncertainty of the timing and amount of expected cash flows and the impact such uncertainty would have in arriving at a reliable estimate of fair value. Commercial developments are also measured using a discounted cash flow model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market values for similar assets. Valuations of investment properties are most sensitive to changes in the discount rate and timing or variability of cash flows.
The cost of commercial developments includes direct development costs, realty taxes and borrowing costs directly attributable to the development.
Borrowing costs associated with direct expenditures on properties under development or redevelopment are capitalized. Borrowing costs are also capitalized on the purchase cost of a site or property acquired specifically for development or redevelopment in the short-term but only where activities necessary to prepare the asset for development or redevelopment are in progress. The amount of borrowing costs capitalized is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Where borrowings are associated with specific developments, the amount capitalized is the gross cost incurred on those borrowings less any
incidental investment
income arising on their temporary investment.income. Borrowing costs are capitalized from the commencement of the development until the date of practical completion. The capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. We consider practical completion to have occurred when the property is capable of operating in the manner intended by management. Generally, this occurs upon completion of construction and receipt of all necessary occupancy and other material permits. Where we have pre-leased space as of or prior to the start of the development and the lease requires us to construct tenant improvements which enhance the value of the property, practical completion is considered to occur on completion of such improvements.
Initial direct leasing costs we incur in negotiating and arranging tenant leases are added to the carrying amount of investment properties.
We account for
the acquisition of businesses usingbusiness combinations in which control is acquired under the acquisition method. We
measureconsider three criteria that include input, process and output to assess whether acquired assets and assumed liabilities meet the
costdefinition of
ana business. The acquisition
atprice is the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued in exchange for control of the acquiree.
TheAs a result, our partnership recognizes the acquiree’s identifiable assets
liabilities and
contingentassumed liabilities
that meet the conditions for recognition under IFRS 3, “Business Combinations” are recognized at their
acquisition-date fair values,
at the acquisition date, except for non-current assets
that are classified as held-for-sale,
and measuredwhich are recognized at fair value less costs to sell.
We also evaluate whether there are intangible assets acquired that have not previously been recognized by the acquiree and recognize them as identifiable intangible assets. The interests of non-controlling shareholders in the
acquireacquiree are initially measured at
their proportion of the net fair value
or atof the
non-controlling interests’ proportionate share of identifiable assets
and assumed liabilities
and contingent liabilities acquired.recognized.
To the extent
that the acquisition price exceeds the fair value of the net identifiable assets, the excess is recorded as goodwill. To the extent the fair value of consideration paid is less than the fair value of net identifiable
tangible and intangible assets, the excess is recognized
as a bargain purchase gain in
our partnership’s net
income. Toincome for the
extent the fair value of consideration paid exceeds the fair value of the net identifiable tangible and intangible assets, the excess is recorded as goodwill.respective reporting period.
Where a business combination is achieved in stages, previously held interests in the acquired entity are re-measured to fair value at the acquisition date, which is the date control is obtained, and the resulting gain or loss, if any, is recognized in net income. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to net income. Changes in
the company’sour partnership’s ownership interest of
a subsidiaryan investee that do not result in a
gain or losschange of control are accounted for as equity transactions and are recorded as a component of equity. Acquisition costs are recorded as an expense in
net incomethe reporting period as incurred.
In applying this policy, judgment is applied in determining whether an acquisition meets the definition of a business combination or an asset acquisition by considering the nature of the assets acquired and the processes applied to those assets, or if the integrated set of assets and activities is capable of being conducted and managed for the purpose of providing a return to investors or other owners.
Basis of Accounting for Investees
We consolidate an investee when we control the investee, with control existing if and only if we have power over the investee; exposure, or rights, to variable returns from our involvement with the investee; and the ability to use our power over the investee to affect the amount of our partnership’s returns. Whether we consolidate or equity account an investee may have a significant impact on the presentation of our consolidated financial statements, especially as it relates to the consolidation of the operating partnership.
In determining if we have power over an investee, we make judgments when identifying which activities of the investee are relevant in significantly affecting returns of the investee and the extent of our existing rights that give us the current ability to direct the relevant activities of the investee. We also make judgments as to the amount of potential voting rights which provides us or unrelated parties voting powers, the existence of contractual relationships that provide us voting power, the ability to appoint directors and the ability of other investors to remove us as a manager or general partner. We enter into voting agreements to provide our partnership with the ability to contractually direct the relevant activities of the investee (formally referred to as “power” within IFRS 10, Consolidated Financial Statements). In assessing if we have exposure, or rights, to variable returns from our involvement with the investee we make judgments concerning whether returns from an investee are variable and how variable those returns are on the basis of the substance of the arrangement, the size of those returns and the size of those returns relative to others, particularly in circumstances where our voting interest differs from our ownership interest in an investee. In determining if we have the ability to use our power over the investee to affect the amount of our returns we make judgments when we are an investor as to whether we are a principal or agent and whether another entity with decision-making rights is acting as an agent for us. If we determine that it is acting as an agent, as opposed to principal, we do not control the investee.
Revaluation Method Hospitality Assets
We account for
Property, Plant and EquipmentThe company uses the revaluation method of accounting for certain classes ofour investments in hospitality properties as property, plant and equipment. Property, plant and equipment measured usingunder the revaluation method ismodel. Hospitality properties are recognized initially measured at cost or fair value if acquired in a business combination and subsequently carried at its revalued amount, being the fair value at the balance sheet date of the revaluation less any subsequent accumulated depreciation and any accumulated impairment losses. and subsequent accumulated depreciation. Fair values are determined internally using discounted cash flow models with inputs from available market evidence.
Revaluations of hospitality properties are made on an annual basisperformed annually at December 31, the end of the fiscal year, to ensure that the carrying amount does not differ significantly from fair value. Where the carrying amount of an asset increasesis increased as a result of a revaluation, surplus, the increase is recognized in other comprehensive income and accumulated in equity inwithin revaluation surplus, unless the increase reverses a previously recognized impairmentrevaluation loss recorded through prior period net income, in which case that portion of the increase is recognized in net income. Where the carrying amount of an asset decreases,is decreased, the decrease is recognized in other comprehensive income to the extent of any balance existing in revaluation surplus in respect of the asset, with the remainder of the
decrease recognized in net income.
Canary Wharf Group plc
We have determined that, notwithstanding our 22% common equity interest, we do not exercise significant influence over Canary Wharf as we Revaluation gains are recognized in other comprehensive income, and are not ablesubsequently recycled into profit or loss. The cumulative revaluation surplus is transferred directly to elect board membersretained earnings when the asset is derecognized.
In performing annual revaluations, we first qualitatively assess whether there is any indication that the hospitality properties may be impaired. If no indication is identified, no impairment will be recorded. If we have identified indicators for impairment, the asset’s carrying amount (i.e., fair value less any accumulated depreciation and impairment) is compared with the recoverable amount of the hospitality property, which is determined as the higher of the estimated fair value less costs on disposal or
otherwise influence the
financialpresent value of expected future cash flows generated from the use and
operating decisions.General Growth Properties, Inc.
We acquiredeventual disposal of an indirect interestasset. An impairment is taken if the recoverable amount is less than the carrying amount of the asset and is accounted for in GGP together withthe same manner as a consortium of institutional investors through a series of parallel investment vehicles. revaluation decrease as illustrated in previous paragraphs.
GGP
As of December 31,
2012,2015, we held an indirect
21%29% interest in GGP and were entitled to nominate three of the nine directors to GGP’s board and vote all of our shares for those directors.
We accounted for the investment following the equity method of accounting.We account for our investment in GGP following the equity method of accounting. The carrying value of our investment in GGP consists of our original cost of the investment plus our share of the earnings of GGP, determined in accordance with our accounting policies under IFRS, less distributions received from GGP. This includes our share of GGP’s unrealized fair value gains (losses) in respect of investment property, which is determined in accordance with our accounting policy for valuation of investment properties. Accordingly, the
substantial variance between the value of our investment in GGP based on the
publicly tradedpublicly-traded share price and the carrying value of the equity accounted investment is the result of recording our share of the IFRS net earnings of GGP, which includes the cumulative unrealized fair value gains arising from the
significant fair value increases in the underlying investment properties.
We consider the guidance in IAS 28, Investments in Associates and Joint Ventures (“IAS 28”) and IAS 39, as applicable,36, Impairment of Assets (“IAS 36”) to determine if there are indicators of impairment, one of which is whether there is a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost. Accordingly, we consider whether the variance between the value of the investment as determined using the publicly tradedpublicly-traded share price and the carrying value is an indicator of impairment.
Our evaluation of whether there
wereare impairment indicators present
includedincludes consideration of a number of factors as required by IAS
3936 including an evaluation of the technological, market, economic and legal environment in which GGP operates; consideration of whether GGP was,
or in the near future is expected to be, in significant financial
difficulty; considerations relating to the existence of any contractual breaches of GGPdifficulty and an assessment of trends in
fundsfrom operationsactual net cash flows or operating profit or loss of GGP. Further, with respect specifically to the variance between the value of the investment as determined using the publicly tradedpublicly-traded share price and the carrying value determined under IAS 28, we consider additional factors relative to this variance. This includes an analysis of the original blended cost of our investment in GGP compared to the publicly tradedpublicly-traded share price over the period from the acquisition dates through to each reporting date; the trend in the share price of GGP as at each reporting date up to and including the current date; and an assessment of the underlying cash flows that are expected to be derived from the operating and redevelopment properties, including the significant recovery in property values contributing to the fair value gains recorded by GGP.
Based on our evaluation of the above-noted factors, we have concluded that there are no impairment indicators in respect of our investment in GGP.
We apply judgment in determining the tax rate applicable to our REIT operating entities and identifying the temporary differences related to such operating entities with respect to which deferred income taxes are recognized. Deferred taxes related to temporary differences arising in
the company’sour partnership’s REIT operating entities, joint ventures and associates are measured based on the tax rates applicable to distributions received by the investor entity on the basis that REITs can deduct dividends or distributions paid such that their liability for income taxes is substantially reduced or eliminated for the year, and we intend that these entities will continue to distribute their taxable income and continue to qualify as REITs for the foreseeable future.
We measure deferred income taxes associated with our investment properties based on our specific intention with respect to each asset at the end of the reporting period. Where we have a specific intention to sell a property in the foreseeable future, deferred taxes on the building portion of the investment property are measured based on the tax consequences following from the disposition of the property. Otherwise, deferred taxes are measured on the basis the carrying value of the investment property will be recovered substantially through use. Judgment is required in determining the manner in which the carrying amount of each investment property will be recovered.
We also make judgments with respect to the taxation of gains inherent in our investments in foreign subsidiaries and joint ventures. While we believe that the recovery of our original investment in these foreign subsidiaries and joint ventures will not result in additional taxes, certain unremitted gains inherent in those entities could be subject to foreign taxes depending on the manner of realization.
For investment properties, we account for our leases with tenants as operating leases as we have retained substantially all of the risks and benefits of ownership of our investment properties. Revenue recognition under a lease commences when the tenant has a right to use the leased asset. Generally, this occurs on the lease inception date or, where
the companyour partnership is required to make additions to the property in the form of tenant improvements which enhance the value of the property, upon substantial completion of the improvements. The total amount of contractual
rent to be receivedrents expected from operating leases is recognized on a straight-line basis over the term of the
lease;lease, including contractual base rent and subsequent rent increases as a
straight-lineresult of rent escalation clauses. A rent receivable,
which is included
inwithin the carrying amount of investment
property,properties, is
recorded forused to record the difference between the rental revenue recorded and the contractual amount received.
Rental
Rent receivables and related revenue also includes percentage participating rents and recoveries of operating expenses, including property and capital taxes. Percentage participating rents are recognized when tenants’ specified sales targets have been met. Operating expense recoveries are recognized in the period that recoverable costs are chargeable to tenants.
With regards to hospitality revenue, we recognize revenue on rooms, food and other revenue as services are provided. We recognize
roomsroom revenue net of taxes and
levies that are assessed by government-related agencies. Advancedlevies. Advance deposits are deferred and included in accounts payable and other liabilities until
services are provided to the customer. We recognize the difference between gaming wins and losses from casino gaming activities as gaming revenue. We recognize liabilities for funds deposited by patrons before gaming play occurs and for chips in the patrons’ possession, both of which are included in accounts payable and other liabilities. Revenue and expenses from tour operations include the sale of travel and leisure packages and are recognized on the day the travel package begins. Amounts collected in advance from guests are deferred and included in accounts payable and other liabilities until such amounts are earned.
We classify our financial instruments into categories based on the purpose for which the instrument was acquired or issued, its characteristics and our designation of the instrument. The category into which we classify financial instruments determines its measurement basis (e.g., fair value
or amortized cost) subsequent to initial recognition. We hold financial instruments that represent secured debt and equity interests in commercial properties that are measured at fair value. Estimation of the fair value of these instruments is subject to the estimates and assumptions associated with
the valuation of investment properties. When designating derivatives in cash flow hedging relationships, we make assumptions about the timing and amount of forecasted transactions, including anticipated financings and refinancings.
Fair value is the amount that willing parties would accept to exchange a financial instrument based on the current market for instruments with the same risk, principal and remaining maturity. The fair value of interest bearing financial assets and liabilities is determined by discounting the contractual principal and interest payments at estimated current market interest rates for the instrument. Current market rates are determined by reference to current benchmark rates for a similar term and current credit spreads for debt with similar terms and risk.
Use of Estimates
The company
Our partnership makes estimates and assumptions that affect carried amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amount of earnings for the period. Actual results could differ from estimates. The estimates and assumptions that are critical to the determination of the amounts reported in the
consolidated financial statements relate to the following:
We determine
(i) Fair value of investment property
Our partnership determines the fair value of each operatingcommercial property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the applicable balance sheet dates, less future cash outflows (including rental payments and other outflows) in respect of such leases. Fair valuesWhere available, our partnership determines the fair value of commercial properties based on recent sales of similar property in the same location and condition and subject to a similar leasing profile. Where comparable current sales in an active market do not exist, our partnership considers information from a variety of sources, including: i) discounted cash flows based on reliable estimates of future cash flows, supported by the terms of existing lease and other contracts, and evidence such as current market rents for similar properties in the same location and condition, using discount rates to reflect uncertainty in the amount and timing of the cash flows; ii) recent prices of similar properties in less active markets, with adjustments to reflect any change in economic conditions since the date of the observed transactions that occurred at those prices, including market rents and discount or capitalization rates; and iii) current prices in an active market for properties of a different nature, condition or location, including differences in leasing and other contracts.
In certain cases, these sources will suggest different conclusions about the fair value of an investment property. In such cases, our partnership considers the reasons for any such differences in validating the most reliable estimate of fair value. Investment property valuations are primarily determinedcompleted by undertaking one of two accepted income approach methods, which include either: i) discounting the expected future cash flows, generally over a term of 10 years including a terminal value based on the application of a capitalization
rate to estimated year 11 cash flows. Certain operating properties are valued usingflows; or ii) undertaking a direct capitalization approach whereby a capitalization rate is applied to estimated current year cash flows. Development properties under active developmentIn determining the appropriateness of the methodology applied, our partnership considers the relative uncertainty of the timing and amount of expected cash flows and the impact such uncertainty would have in arriving at a reliable estimate of fair value.
Commercial developments are also measured using a discounted cash flow model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market values for similar assets. In accordance withWe do not measure or record our policy, we measure our operating properties and development properties using valuations prepared by management. From time to time, we obtain valuations of selected operating properties and development properties prepared by qualified external valuation professionals in connection with financing transactions or for other purposes, and while management considers the resultsprofessionals.
(ii) Fair value of
such valuations they do not form the basis of the company’s reported values. | (ii) | Financial instruments |
financial instruments
We determine the fair value of our warrants to acquire common shares of GGP using a Black-Scholes option pricing model wherein we are required to make estimates and assumptions regarding expected future volatility of GGP’s shares and the term of the warrants.
We have certain financial assets and liabilities with embedded participation features related to the values of investment properties whose fair values are based on the fair values of the related properties.
We hold other financial instruments that represent equity interests in investment property entities that are measured at fair value as these financial instruments are designated as fair value through profit or loss or available-for-sale. Estimation of the fair value of these instruments is also subject to the estimates and assumptions associated with investment properties.
The fair value of interest rate caps is determined based on generally accepted pricing models using quoted market interest rates for the appropriate term. Interest rate swaps are valued at the present value of estimated future cash flows and discounted based on applicable yield curves derived from market interest rates.
Application of the effective interest method to certain financial instruments involves estimates and assumptions about the timing and amount of future principal and interest payments.
Future Accounting Policy Changes
The following are accounting policies issued that our partnership expects to adopt in the future:
IFRS 16, We anticipate adopting eachLeases (“IFRS 16”) will bring most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. Under IFRS 16 a lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly and the liability accrues interest. This will typically produce a front-loaded expense profile (whereas operating leases under IAS 17, Leases (“IAS 17”) would typically have had straight-line expenses) as an assumed linear depreciation of the accounting policy changes below inright-of-use asset and the first quarterdecreasing interest on the liability will lead to an overall decrease of expense over the yearreporting period. IFRS 16 supersedes IAS 17 and related interpretations and is effective for which the standardperiods beginning on or after 1 January 2019, with earlier adoption permitted if IFRS 15, Revenue from Contracts with Customers has also been applied. The partnership is applicable and are currently evaluating the impact of each.
IFRS 16 to its consolidated financial statements.
Financial InstrumentsIFRS 9, “Financial Instruments”, orFinancial Instruments (“IFRS 9”) will replace IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 introduces a logical approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule-based requirements that are generally considered to be overly complex and difficult to apply. The new model results in a single impairment model being applied to all financial instruments, thereby removing a source of complexity associated with previous accounting requirements. It also introduces a new, expected-loss impairment model that will require more timely recognition of expected credit losses. IFRS 9 is a multi-phase project to replace IAS 39. IFRS 9 introduces new requirementseffective for classifying and measuring financial assets. In October 2010 the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities and carrying over from IAS 39 the requirements for de-recognition of financial assets and financial liabilities. In December 2011, the IASB issued “Mandatory Effective Date of IFRS 9 and Transition Disclosures”, which amended the effective date of IFRS 9 to annual periods beginning on or after January 1, 2015,2018, with early adoption permitted and modifiedwill be applied retrospectively. The partnership is currently evaluating the relief from restating comparative periods and the associated disclosures in IFRS 7. Early adoption is permitted. The IASB intends to expandimpact of IFRS 9 to add new requirements for impairment of financial assets measured at amortized cost and hedge accounting. On completion of these various phases, IFRS 9 will be a complete replacement of IAS 39.
Consolidated Financial Statements
IFRS 10, “Consolidated Financial Statements”, or IFRS 10 effective January 1, 2013, establishes principles for the preparation of an entity’s financial statements when it controls one or more other entities. The standard defines the principle of control and establishes control as the basis for determining which entities are consolidated in the financial statements of the reporting entity. The standard also sets out the accounting requirements for the preparation ofits consolidated financial statements.
JointIAS 16, Property, Plant, and Equipment (“IAS 16”) and IAS 38, Intangible Assets (“IAS 38”) were both amended by the IASB as a result of clarifying the appropriate amortization method for intangible assets of service concession arrangements under IFRIC 12, Service Concession ArrangementsIFRS 11, “Joint Arrangements”, (“SCA’s”). The IASB determined that the issue does not only relate to SCA’s but all tangible and intangible assets that have finite useful lives. Amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant, and equipment. Similarly, the amendment to IAS 38 introduces a rebuttable presumption that revenue is not an appropriate basis for the amortization of an intangible asset, with only limited circumstances where the presumption can be rebutted. Guidance is also introduced to explain that expected future reductions in selling prices could be indicative of a reduction of the future economic benefits embodied in an asset. The amendments apply prospectively and are effective
for annual periods beginning on or IFRS 11 effectiveafter January 1, 2013, replaces2016, with earlier application permitted. The amendments to IAS 16 and IAS 38 have an immaterial impact to the existing IAS 31, “Interests in Joint Ventures”partnership’s consolidated financial statements.
IFRS 15, Revenue from Contracts with Customers (“IAS 31”). IFRS 11 requires that reporting entities consider whether a joint arrangement is structured through a separate vehicle,15”) specifies how and when revenue should be recognized as well as the termsrequiring more informative and relevant disclosures. This standard supersedes IAS 18, Revenue, IAS 11, Construction Contracts, and a number of revenue-related interpretations. Application of the contractual arrangementstandard is mandatory and other relevant factsit applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and circumstances, to assess whetherinsurance contracts. IFRS 15 is effective for annual periods beginning on or after January 1, 2018 with early application permitted, and will be applied retrospectively. The partnership is currently evaluating the venture is entitled to only the net assetsimpact of the joint arrangement (a “joint venture”) orIFRS 15 to its share of the assets and liabilities of the joint arrangement (a “joint operation”). consolidated financial statements.
IFRS 11, Joint ventures are accountedArrangements: Accounting for using the equity method, whereas joint operations are accounted for using proportionate consolidation.Disclosure Of Interests In Other Entities
IFRS 12, “DisclosureAcquisitions of Interests in Other Entities”, orJoint Operations
(“Amendments to IFRS 12 effective January 1, 2013, applies11”) was amended by the IASB in May 2014. The objective of the amendments is to entities that haveadd new guidance to IFRS 11 on accounting for the acquisition of an interest in a subsidiary,joint operation in which the activity of the joint operation constitutes a joint arrangement, an associatebusiness, as defined in IFRS 3, Business Combinations (“IFRS 3”). Acquirers of such interests are to apply the relevant principles on business combination accounting in IFRS 3 and other standards, as well as disclosing the relevant information specified in these standards for business combinations. The Amendments to IFRS 11 are effective for annual periods beginning on or an unconsolidated structured entity. The standard requires disclosure of information that enables users of financial statements to evaluate: (i) the nature of, and risks associated with interests in other entities; and (ii) the effects of those interests on our financial position, financial performance and cash flows.Fair Value Measurement
IFRS 13, “Fair Value Measurement”, or IFRS 13, effectiveafter January 1, 2013, replaces the current guidance on fair value measurement in IFRS with a single standard. The standard defines fair value, provides guidance on its determination2016 and requires disclosures about fair value measurements but does not change the requirements about the items that should be measured and disclosed at fair value.
applied prospectively. The Amendments to IFRS 11 have an immaterial impact to the partnership’s consolidated financial statements.
5.B. LIQUIDITY AND CAPITAL RESOURCES
The capital of our business consists of
property debt
obligations, capital securities,
other secured and unsecured debtpreferred stock and equity. Our
objectivesobjective when managing this capital
areis to maintain an appropriate balance between holding a sufficient amount of
equity capital to support our operations and
to reducereducing our weighted average cost of capital
and to improve
the returnsour return on
equity through value enhancement initiatives and the consistent monitoring of the balance between debt and equity financing.equity. As at December 31,
2012, the recorded values of2015, capital totaled
$45$65 billion
(Decembercompared with $59 billion at December 31,
2011 – $43 billion). Our principal liquidity needs for the next year are to:2014.meet debt service requirements;
fund those capital expenditures deemed mandatory, including tenant improvements;
fund current development costs not covered under construction loans;
fund investing activities which could include discretionary capital expenditures; and
fund property acquisitions.
We plan to meet these needs with one or more of the following:
cash flows from operations;
proceeds from sales of assets;
proceeds from sale of non-controlling interests in subsidiaries; and
credit facilities and refinancing opportunities.
We attempt to maintain a level of liquidity to ensure we are able to react toparticipate in investment opportunities quicklyas they arise and on a value basis.to better withstand sudden adverse changes in economic circumstances. Our primary sources of liquidity consist ofinclude cash, and undrawn committed credit facilities, as well asconstruction facilities, cash flow from operating activities.activities and access to public and private capital markets. In addition, we structure our affairs to facilitate monetization of longer-duration assets through financings and co-investor participations or refinancings. Our operating entities also generate liquidity by accessing capital markets on an opportunistic basis. The following table summarizes the various sources of cash flows of our operating entities which supplement our liquidity.
| | | | | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Cash flow from operating activities | | $ | 483 | | | $ | 1,574 | | | $ | 781 | |
Borrowings | | | 4,556 | | | | 2,976 | | | | 1,635 | |
Proceeds from asset sales | | | 1,276 | | | | 1,638 | | | | 913 | |
Loans and notes receivable collected | | | 1,238 | | | | 744 | | | | 302 | |
Contributions from parent company | | | 617 | | | | 307 | | | | 358 | |
Loan receivable collected from parent company | | | - | | | | 658 | | | | - | |
Acquisition of subsidiaries, net of disposition | | | 140 | | | | 40 | | | | 33 | |
Contributions from non-controlling interest | | | 919 | | | | 667 | | | | 1,038 | |
| | | $ | 9,229 | | | $ | 8,604 | | | $ | 5,060 | |
participations.
We seek to increase income from our existing properties by maintaining quality standards for our properties that promote high occupancy rates and support increases in rental rates while reducing tenant turnover and related
retenanting costs, and by controlling operating expenses. Consequently, we believe our revenue, along with proceeds from financing activities
and divestitures, will continue to provide the necessary funds to cover our short-term liquidity needs. However, material changes in the factors described above may adversely affect our net cash flows.
Most
Our principal liquidity needs for the current year and for periods beyond include:
Recurring expenses;
Debt service requirements;
Distributions to unitholders;
Capital expenditures deemed mandatory, including tenant improvements;
Development costs not covered under construction loans;
Investing activities which could include:
| |
| ◦ | Discretionary capital expenditures; |
| |
| ◦ | Future developments; and |
| |
| ◦ | Repurchase of our units. |
We plan to meet these liquidity needs by accessing our group-wide liquidity of our borrowings are$4,138 million at December 31, 2015 as highlighted in the formtable below. In addition, we have the ability to supplement this liquidity through cash generated from operating activities, asset sales, co-investor interests and financing opportunities. Since December 31, 2014, we added construction facilities related to the active developments at One and Three Manhattan West ($968 million at share) and Principal Place ($593 million at share).
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Corporate cash and cash equivalents | $ | 79 |
| $ | 73 |
|
| Restricted cash related to issuance of preferred shares to QIA | — |
| 1,800 |
|
| Available committed corporate credit facility | 368 |
| 130 |
|
| Available subordinated credit facility | 174 |
| 399 |
|
| Corporate liquidity | 621 |
| 2,402 |
|
| Proportionate cash retained at subsidiaries | 998 |
| 882 |
|
| Proportionate availability under construction facilities | 1,983 |
| 1,614 |
|
| Proportionate availability under subsidiary credit facilities | 536 |
| 305 |
|
Group-wide liquidity(1) | $ | 4,138 |
| $ | 5,203 |
|
| |
(1) | This includes liquidity of investments which are not controlled and can only be obtained through distributions which the partnership does not control. |
We finance our assets principally at the operating company level with asset-specific debt that generally has long
term asset-specific financingsmaturities, few restrictive covenants and with recourse only to the
specific assets. Limiting recourseasset. We endeavor to
specific assets ensures that poor performance within one area should not compromisemaintain prudent levels of debt and strive to ladder our
ability in and of itself to finance the balance of our operations. A summary of our debt profile for each of our office and retail segments are included elsewhere in this MD&A.As at December 31, 2012 we had $897 million of committed corporate credit facilities in Brookfield Office Properties consisting of a $695 million revolving credit facility from a syndicate of banks and bilateral agreements between Brookfield Canada Office Properties andprincipal repayments over a number of Canadian chartered banks for an aggregate revolving credit facility of C$200 million. years.
The
balance drawnfollowing table summarizes our secured debt obligations on
these facilities was $68 million (2011 – $381 million).investment properties by contractual maturity over the next five years and thereafter:
|
| | | |
| (US$ Millions, except where noted) | Dec. 31, 2015 |
|
| 2016 | $ | 4,404 |
|
| 2017 | 3,916 |
|
| 2018 | 2,472 |
|
| 2019 | 2,517 |
|
| 2020 | 1,400 |
|
| Thereafter | 6,261 |
|
| Deferred financing costs | (144 | ) |
| Secured debt obligations | $ | 20,826 |
|
| Loan to value (%) | 50.1% |
|
Our
partnership’s operating
entitiessubsidiaries are subject to limited covenants in respect of their corporate debt and
wereare in
full compliance with all such covenants at December 31,
2012. Our2015. The partnership’s operating subsidiaries are also in compliance with all covenants and other capital requirements related to regulatory or contractual obligations of material consequence to
us.In addition, see Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Relationship with Brookfield — Preferred Shares of Certain Holding Entities”. For a descriptionour partnership. Summaries of our distribution policy, see Item 10.B. “Memorandumdebt profile for each of our segments are included elsewhere in this Form 20-F.
For the years ended December 31, 2015, 2014 and Articles2013, the partnership made distributions to unitholders of Association — Description$755 million, $663 million and $313 million, respectively. This compares to cash flow from operating activities of $590 million, $ 483 million and $421 million, respectively, for each of the Property Partnership Limited Partnership Agreement — Distributions”three years then ended. In 2015 and Item 3.B. “Capitalization2014, distributions exceeded cash flow from operating activities. The partnership has a number of alternatives at its disposal to fund any difference between the cash flow from operating activities and Indebtedness”.A summarydistributions to unitholders. The partnership is not a passive investor and typically holds positions of our contractual obligations is includedcontrol or significant influence over assets in Item 5.F. “Tabular Disclosurewhich it invests, enabling the partnership to influence distributions from those assets. The partnership will, from time to time, convert some or all of Contractual Obligations”the unrealized fair value gains on investment properties to cash through asset sales, joint ventures or refinancings. The partnership may access its credit facilities in order to temporarily fund its distributions as a result of timing differences between the payments of distributions and cash receipts from its investments. In 2015 and in 2014, the partnership funded the gap between its distributions and cash flow from operating activities through approximately $285 million and $431 million of realized gains within derivative contracts and the disposition of assets with meaningful returns on capital, respectively. Distributions made to unitholders which exceed cash flow from operating activities in future periods may be considered to be a return of capital to unitholders as defined in Canadian Securities Administrators’ National Policy 41-201 -
Income Trusts and Indirect Offerings.
5.C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. We will seek to increase the cash flows from our office and retail property activities through continued leasing activity as described below. In particular, we are operating below our historical office occupancy level, in the United States, which provides the opportunity to expand cash flows through higher occupancy. In addition, we believe that most of our markets have favorable outlooks, (see Item 4.B. “Information on the Company — Business Overview — Market Overview and Opportunities”), which we believe also provides an opportunity for strong growth in lease rates. We do, however, still face a meaningful amount of office lease rollover in 2013, which may restrain FFO growth from this part of our portfolio in the near future. Our beliefs as to the opportunities for our companypartnership to increase its occupancy levels, lease rates and cash flows are based on assumptions about our business and markets that management believes are reasonable in the circumstances. There can be no assurance as to growth in occupancy levels, lease rates or cash flows. See “Special“Special Note Regarding Forward-Looking Statements”.In our North American retail business, we continue to improve the profitability of the business by rationalizing the portfolio, refinancing debt and reducing costs. In January 2012, GGP completed its plan to spin off 30 properties into the newly formed Rouse the shares of which were distributed to its shareholders, including Brookfield, in line with the objective to focus GGP on its highest performing malls, which generate tenant sales over $500 per square foot.
Transaction activity is picking up across
We believe our global
office marketsscale and
best-in-class operating platforms provide us with a unique competitive advantage as we are
considering a number of different opportunitiesable to
acquire singleefficiently allocate capital around the world toward those sectors and geographies where we see the greatest returns. We actively recycle assets
development siteson our balance sheet as they mature and
portfolios at attractivereinvest the proceeds into higher yielding investment strategies, further enhancing returns. In
addition, due to the scale of our stabilized portfolio and flexibility of our balance sheet, our business model is self-funding and does not require us to access capital markets to fund our continued
effort to enhance returns through capital reallocation, we are also looking to divest all of, or a partial interest in, a number of mature assets to capitalize on existing market conditions.growth.
Given the small amount of new office
and retail development that occurred over the last decade and the near total development halt during the global financial crisis, we see an opportunity to advance our development inventory in the near term in response to demand we are seeing in our major markets. In addition, we continue to reposition and redevelop existing retail properties, in particular, a number of the highest performing shopping centers in the United States.
5.E. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
5.F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following table summarizes our significant contractual obligations as of December 31,
2012: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | | | | Payments Due By Period | | | | | Dec. 31, 2011
Total | |
| As at Dec. 31, 2012 | | Total | | | Less than 1 Year | | | 2 –3 years | | | 4 –5 Years | | | After 5 Years | | | | |
Property and other secured debt | | $ | 19,763 | | | $ | 3,396 | | | $ | 6,896 | | | $ | 4,916 | | | $ | 4,555 | | | | | $ | 15,598 | |
Capital securities | | | 866 | | | | 202 | | | | 312 | | | | 352 | | | | - | | | | | | 994 | |
Other financial liabilities | | | 2,149 | | | | 1,660 | | | | 53 | | | | 157 | | | | 279 | | | | | | 1,170 | |
Interest expense(1) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property and other secured debt | | | 3,993 | | | | 951 | | | | 1,457 | | | | 989 | | | | 596 | | | | | | 4,746 | |
Capital securities | | | 106 | | | | 39 | | | | 59 | | | | 8 | | | | - | | | | | | 152 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | |
| Payments due by period |
| Dec. 31, 2015 | Total |
| < 1 Year |
| 1 Year |
| 2 Years |
| 3 Years |
| 4 Years |
| > 5 Years |
|
| Debt obligations | $ | 30,526 |
| $ | 7,787 |
| $ | 4,288 |
| $ | 4,859 |
| $ | 3,170 |
| $ | 3,292 |
| $ | 7,130 |
|
| Capital securities | 4,031 |
| 503 |
| — |
| — |
| — |
| 500 |
| 3,028 |
|
| Lease obligations | 5,180 |
| 33 |
| 33 |
| 33 |
| 37 |
| 36 |
| 5,008 |
|
Commitments(1) | 1,885 |
| 851 |
| 606 |
| 351 |
| 77 |
| — |
| — |
|
| | | |
| |
| |
| |
| |
| |
|
Interest expense(2): | | | | | | | |
| Long term debt | 4,788 |
| $ | 1,161 |
| $ | 993 |
| $ | 729 |
| $ | 560 |
| $ | 456 |
| $ | 889 |
|
| Capital securities | 1,343 |
| 184 |
| 178 |
| 178 |
| 178 |
| 154 |
| 471 |
|
| Interest rate swaps | 32 |
| 14 |
| 6 |
| 5 |
| 4 |
| 3 |
| — |
|
| |
(1) | Primarily consists of construction commitments on commercial developments. |
| |
(2) | Represents aggregate interest expense expected to be paid over the term of the obligations. Variable interest rate payments have been calculated based on current rates. |
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. DIRECTORS AND SENIOR MANAGEMENT As required by law, our limited partnership agreement provides for the management and control of our company by a general partner rather than a board of directors and officers. The BPY General Partner serves as our company’s general partner and has a board of directors. The BPY General Partner has no executive officers. The BPY General Partner has sole responsibility and authority for the central management and control of our company, which is exercised through its board of directors.
The following table presents certain information concerning the current board of directors of the BPY General Partner:
| | | | | | |
Name and Residence(1) | | Age | | Position with the
BPY General Partner | | Principal Occupation |
| | | |
Gordon E. Arnell
Calgary,
Name and Residence(1) | Age | Position with the
BPY General Partner | Principal Occupation |
Jeffrey M. Blidner
Toronto, Canada | | 78 | 67 | Director | | Corporate Director
Senior Managing Partner of Brookfield Asset Management |
Soon Young Chang
Dubai, United Arab Emirates | 56 | Director | Director of Dubai World; Senior Advisor of Investment Corporation of Dubai |
Richard B. Clark
Larchmont, United States | 58 | Chairman of the Board, Director | Senior Managing Partner of Brookfield Asset Management and Chairman, Brookfield Property Group |
Omar Carneiro da Cunha(3)
Rio de Janeiro, Brazil | | 67 | 69 | Director | | Senior Partner of Dealmaker Ltd. and BOND Consultoria Empresarial e Participacoes |
| | | |
Stephen DeNardo(2)
Stamford, United States | | 60 | 62 | Director | | Managing Director and President and Chief Executive Officer of RiverOak Investment Corp., LLC |
| | | |
J. Bruce Flatt
Toronto, Canada
| | 48 | | Director | | Senior Managing Partner and Chief Executive Officer of Brookfield Asset Management |
| | | |
Louis Joseph Maroun(2)(3)
Full Fathoms,Warwick, Bermuda
| | 63 | 65 | Director | | Executive Chairman of Sigma Real Estate Advisors/Sigma Capital Corporation |
| | | |
Lars Rodert(3)
Genese, Belgium
Stockholm, Sweden | | 52 | 54 | Director | | Senior Portfolio ManagerFounder and Chief Executive Officer of Inter IKEA Treasury, North America and EuropeÖstVäst Capital Management |
Lisa M. Shalett
Purchase, United States | 49 | Director | Director |
José Ramón Valente Vías(2)
Santiago, Chile | | 51 | 53 | Director | | Partner and Executive Director of ECONSULT |
| |
(1) | The business address for each of the directors is 73 Front Street, 5th Floor, Hamilton, HM 12, Bermuda. |
| |
(2) | Member of the audit committee. StephenMr. DeNardo is the ChairmanChair of the audit committee and is the audit committee financial expert. |
| |
(3) | Member of the governance and nominating committee. Louis JosephMr. Maroun is the ChairmanChair of the governance and nominating committee. |
Set forth below is biographical information for the BPY General Partner’s current directors.
Gordon E. ArnellJeffrey M. Blidner. Mr. Blidner is a Senior Managing Partner of Brookfield Asset Management and is responsible for strategic planning and transaction execution. Mr. Blidner is also Chief Executive Officer of Brookfield’s Private Funds Group, Chairman and a director of Brookfield Renewable Energy Partners L.P. and a director of Brookfield Infrastructure Partners L.P. and Rouse. Prior to joining Brookfield in 2000, Mr. Blidner was a senior partner at a Canadian law firm. Mr. Blidner received his LLB from Osgoode Hall Law School and was called to the Bar in Ontario as a Gold Medalist.
Soon Young Chang. Dr. Chang is a member of the board of directors of Dubai World. Dr. Chang serves as Senior Advisor to the Investment Corporation of Dubai, providing strategic counsel and lending his global perspective to the investment arm of the Dubai Government. Dr. Chang is the founder and chairman of Midas International Asset Management Company, an international asset management fund which manages over $5 billion. He is also a founding partner of Sentinel Advisor, a New York-based arbitrage fund. Dr. Chang has served as an advisor to a variety of financial institutions, including Korea National Pension Corporation, Hyundai International Merchant Bank and Templeton-Ssangyong Investment Trust Company. Dr. Chang received his Master’s and Doctoral degrees from the George Washington University in the United States and has authored many books and articles on the subject of financial engineering.
Richard B. Clark. Mr. Arnell wasClarkis a Senior Managing Partner of Brookfield Asset Management and Chairman of the board of directors of the company, Chairman of Rouse and a member of the board of directors of GGP and Brookfield Office Properties. He has over 30 years of real estate experience. Mr. Clark has been employed by Brookfield and its predecessors since 1984 in various senior roles including President and CEO of Brookfield Office PropertiesProperties. Mr. Clark holds a Bachelor of Science in Business from October 1995 to July 2012. Mr. Arnell was Presidentthe Indiana University of Brookfield Office Properties from 1990 to 1995 and Chief Executive Officer from 1990 to 2000. He has also previously held senior executive roles at Oxford Development Group Ltd. and Trizec Corporation Ltd.Pennsylvania.
Omar Carneiro da Cunha. Mr. Cunha is a Senior Partner with Dealmaker Ltd., a consultancy and M&A advisory firm, with a focus in telecommunications, information technology, oil & gas and retail, and has also been a Senior Partner of BOND Consultoria Empresarial e Participacoes since 1994. He was the Chairman of “Bob’s”, a Brazilian fast food company, from 1995 to 2008, a director of the Energisa Group since 1996, and a director of Grupo Libra since 2010. In 2005, Mr. Cunha was the Deputy Chairman and Chief Executive Officer of VARIG Brazilian Airline. From 1995 to 1998, Mr. Cunha was the President of AT&T Brasil and a member of the Management Committee of AT&T International. Prior to that, Mr. Cunha worked for 27 years in Brazil and abroad for the Royal Dutch/Shell Group, and was President of Shell Brasil, Billiton Metals and Shell Quimicafrom 1991 to 1994. Mr. Cunha is currently a member of the board of Acao Communitaria do Brasil, Cultura Inglesa S/A UHF Inc. and of the American Chamber of Commerce for Brazil.
Stephen DeNardo. Mr. DeNardo is currently managing director and president and CEO of RiverOak Investment Corp., LLC and has held this position since 1999. From 1997 to 1999 he was Partner and Senior Vice President of ING Realty Partners, where he managed a $1 billion portfolio. Prior to his employment with ING Realty Partners, he was President of ARES Realty Capital from 1991 to 1997, where he managed a $5 billion portfolio of diversified debt and equity assets. Before joining ARES Realty Capital, he was a Partner at First Winthrop Corporation. Mr. DeNardo has held a license as a Certified Public Accountant since 1978 and has a B.S. in Accounting from Fairleigh Dickinson University. J. Bruce Flatt. Mr. Flatt is a Senior Managing Partner and Chief Executive Officer and a director of Brookfield Asset Management and a number of its affiliates. Mr. Flatt previously served on the Board of Directors of Brookfield Office Properties and prior to 2000, Mr. Flatt held a number of executive positions with Brookfield Office Properties, including Chief Executive Officer. Mr. Flatt chairs the Board of Directors of GGP.Louis Joseph Maroun. Mr. Maroun is the Founder and Executive Chairman of Sigma Real Estate Advisors/Advisors and Sigma Capital Corporation, which specializes in international real estate advisory services. Prior to this role, Mr. Maroun was the Executive Chairman of ING Real Estate Canada, and held executive positions in a number of real estate companies where he was responsible for overseeing operations, real estate transactions, asset and property management, as well as many other related functions. Mr. Maroun also is on the board of directors of Brookfield Infrastructure Partners L.P., Brookfield Renewable Energy Partners L.P., Acadian TimberSummit Industrial Income REIT and ThermoCeramix Corp. and Partners REIT. Mr. Maroun graduated from the University of New Brunswick in 1972 with a Bachelor’s degree, followed by a series of post graduate studies and in January of 2007, after a long and successful career in investment real estate, Mr. Maroun was elected to the position of Fellow of the Royal Institute of Chartered Surveyors.
Lars Rodert. Mr. Rodert is the founder and CEO of ÖstVäst Capital Management, or OVCM. Mr. Rodert has 30 years of experience in global investment industry. Prior to OVCM, Mr. Rodert spent 11 years as a Senior PortfolioGlobal Investment Manager for Inter IKEA TreasuryTreasury. Before joining IKEA Mr. Rodert was with SEB Asset Management for 10 years as CIO and responsible for SEB Global Funds. Prior to SEB, Mr. Rodert spent 10 years in North America with five years at Investment Bank Gordon Capital and Europe. Prior to this role, he was most recently Chief Investment Officer, North America,five years as a partner with a private investment holding company, Robur et. Securitas. Mr. Rodert holds a Master of Science Degree in Business and Economics from Stockholm University.
Lisa M. Shalett. Ms. Shalett is a former Partner at SEB Asset ManagementGoldman Sachs, where she worked for 20 years. Over her career, she held a number of different senior leadership roles in both revenue-producing and prior to that he wascontrol functions, including Head of International Equities, COO of Global Compliance, Legal and Internal Audit, and, most recently, Global Head of Brand Marketing and Digital Strategy in the Executive Office, overseeing Goldman Sachs’ corporate brand. She serves on the board of PerformLine, the Advisory Board of the Coach/K Fuqua Center on Leadership and Ethics at Duke University, the same firm. Based in Belgium, Mr. Rodert hasSteering Committee of Kellogg’s Center for Executive Women, and as an in depth knowledgeInternational Selection Panelist for Endeavor. Ms. Shalett received a Master of continental European marketsBusiness Administration from Harvard Business School, and is seasoned in analyzing investment opportunities. Mr. Rodert holds a Bachelor of Arts, degreesumma cum laude, in East Asian Studies from Stockholm University, with a major in finance.Harvard University. José Ramón Valente Vías. Mr. Valente is a partner and executive director of ECONSULT. Mr. Valente is the representative in Chile of Fidelity Investments (U.S.A.) and was a founding partner and director of Duff and Phelps Rating Agency in Chile, Argentina and Peru between 1989 and 2000. Mr. Valente was a Finance and Macroeconomics professor in Universidad de Chile and Universidad Gabriela Mistral between 1989 and 1993. Mr. Valente is currently a member of the board of several companies, such as Transelec Chile S.A., Indura S.A. and Cementos Bío Bío S.A. Mr. Valente is currently a director of the SEP (Public Companies System of the Chilean State). Mr. Valente holds a Commercial Engineering degree from Universidad de Chile and Master in Business Administration from the University of Chicago.Additional Information About Directors and Officers
Mr. Cunha was a director of Varig S.A. — Vição Aérea Rio-Grandense from February 2005 to October 2005. On June 17, 2005, Varig S.A. — Vição Aérea Rio-Grandense applied for a grant of judicial recovery with a view to restructuring payments to its creditors. On August 20, 2010, Varig S.A. — Vição Aérea Rio-Grandense was declared bankrupt. The bankruptcy proceedings are still underway.
The
Managers,Service Providers, wholly-owned subsidiaries of Brookfield Asset Management, provide management services to us pursuant to our Master Services Agreement. Brookfield has built its property platform through the
integration of formative portfolio acquisitions and single asset transactions over several decades and throughout all phases of the real estate investment cycle. Having invested over $16 billion of equity capital through real estate transactions since 1989, Brookfield has a track record of delivering compelling, risk-adjusted returns to investors through a variety of publicly-listed company and private partnership vehicles. The Managers’Service Providers’ investment and asset management professionals are complemented by the depth of real estate investment and operational expertise throughout our operating platforms which specialize in office, retail, multi-familymultifamily and industrial assets, generating significant and stable operating cash flows. Members of Brookfield’s senior management and other individuals from
Brookfield’s global affiliates are drawn upon to fulfill the
Managers’Service Providers’ obligations to provide us with management services under our Master Services Agreement.
The following table presents certain information concerning the Chief Executive Officer and the Chief Financial Officer of our
Managers: | | | | | | | | | | |
Name | | Age | | Years of
Experience | | Years at
Brookfield | | Position
with one of the Managers | |
Richard B. Clark | | 52 | | 31 | | 28 | | | Chief Executive Officer | |
Steven J. Douglas | | 45 | | 18 | | 18 | | | Chief Financial Officer | |
Messrs. Clark and Douglas have substantial operational and transaction origination and execution expertise, having put together numerous consortiums, partnerships and joint ventures for large multifaceted transactions. They have also been integral in building and developing Brookfield’s real property platform. Service Providers:
|
| | | | |
| Name | Age | Years of
Experience | Years at
Brookfield | Position
with one of
the Service Providers |
| Brian W. Kingston | 42 | 18 | 15 | Chief Executive Officer |
| Bryan K. Davis | 42 | 20 | 17 | Chief Financial Officer |
Set forth below is biographical information for Messrs.
ClarkKingston and
Douglas.Davis.
Richard B. Clark.Brian W. Kingston. Mr. Clark is theKingston was named Chief Executive Officer in 2015. He is also a Senior Managing Partner at Brookfield Asset Management and a director of Brookfield’s global property groupGGP and Chairman of Brookfield Office Properties. HeRouse. Prior to that, he was the President and Chief ExecutiveInvestment Officer of Brookfield Office Properties from 2002 to 2012Property Group. Mr. Kingston joined Brookfield in 2001 and was President and Chief Executive Officer of Brookfield Office Properties’ U.S. operations from 2000-2002; and prior to that held senior management positions within the company and its affiliates, including providing mergers and acquisitions, merchant banking and real estate advisory services. From 2008 to 2012, Mr. Kingston held leadership roles for Brookfield Office Propertiesin Australia where the company acquired and its predecessor companies including Chief Operating Officer, Executive Vice Presidentintegrated property and Directorinfrastructure businesses. Mr. Kingston holds a Bachelor of Leasing. Commerce degree from Queen’s University.
Bryan K. Davis. Mr. Clark is on the Executive Committee of the National Association of Real Estate Trusts and the Real Estate Board of New York and is the Former Chairman of the Real Estate Roundtable Tax Policy Advisory Committee. Mr. Clark sits on the board of directors of GGP and is Chairman and a director of Rouse.Steven J. Douglas. Mr. Douglas is theDavis was named Chief Financial Officer of Brookfield’s global property group. Mr. Douglas was GGP’s Executive Vice President and Chief Financial Officer from July 2010in 2015. Prior to December 2011. From 2009 to July 2010, Mr. Douglas served as president of Brookfield Office Properties. Mr. Douglas has been a key member of the Brookfield team for more than 18 years, serving in a variety of senior positions at Brookfield Office Properties and Brookfield Asset Management. From 2003 to 2006,that, he was Chief Financial Officer of Falconbridge Limited. From 1996 until 2003,Brookfield Office Properties, a role he had served since 2007. Before taking that role, he was Senior Vice President, Finance at Brookfield Asset Management. Prior to that, Mr. Douglas served asDavis spent four years in various senior finance positions including Chief Financial Officer of Trilon Financial Corporation, Brookfield Office Properties.Asset Management’s financial services subsidiary. Prior to joining Brookfield Asset Management in 1999, Mr. Douglas joined Brookfield Office Properties from ErnstDavis was involved in providing restructuring and advisory services at Deloitte & Young. Mr. Douglas received hisTouche LLP. He is a Chartered Accountant and holds a Bachelor of Commerce degree from Laurentian University and is a Chartered Accountant.Queen’s University.
The directors and officers of the BPY General Partner and our
ManagersService Providers and their associates, as a group, beneficially own, directly or indirectly, or exercise control and direction over, our units representing in the aggregate less than 1% of our issued and outstanding units on a fully exchanged basis.
The BPY General Partner pays each of its directors $100,000 per year for serving on its board of directors and various board committees. The BPY General Partner pays the
chairpersonchair of the audit committee an additional $20,000 per year and pays the other members of the audit committee an additional $10,000 per year for serving in such positions.
The BPY General Partner also pays the lead independent director an additional $10,000 per year.
The BPY General Partner does not have any employees. Our partnership has entered into a Master Services Agreement with the ManagerService Providers pursuant to which the Managereach Service Provider and certain other affiliates of Brookfield provide, or arrange for other service providersService Providers to provide, day-to-day management and administrative services for our company, the Property Partnership and the Holding Entities. The fees payable under the Master Service Agreement are set forth under Item 7.B “Major7.B. “Major Shareholders and Related Party Transactions —- Related Party Transactions —- Our Master Services Agreement —- Management Fee”. Pursuant to our Master Services Agreement, members of Brookfield’s senior management and other individuals from Brookfield’s global affiliates are drawn upon to fulfill obligations under the Master Services Agreement. However, these individuals, including the Brookfield employees identified in the table under Item 6.A. “Directors,“Directors, Senior Management and Employees —- Directors and Senior Management —- Our Management”, willare not be compensated by our company or the BPY General Partner. Instead, they will continue to beare compensated by Brookfield.
Director Unit Ownership Requirements
The BPY General Partner believes that directors can better represent our company’s unitholders if they have economic exposure to our company themselves. Our company expects that non-Brookfield-employed directors, or outside directors, should hold sufficient limited partnership units such that the acquisition costs of units held by such directors are equal to at least two times their annual retainer, as determined by the board of directors from time to time.
Outside directors are required to purchase limited partnership units on an annual basis in an amount not less than 20% of the minimum economic ownership requirement until the requirement is met. Outside directors are required to achieve this minimum economic ownership within five years of joining the board. In the event of an increase in the annual retainer fee, the outside directors will have two years from the date of the change to comply with the ownership requirement. In the case of outside directors who have served on the board less than five years at the date of the change, such directors will be required to comply with the ownership requirement by the date that is the later of: (i) the fifth anniversary of their appointment to the board, and (ii) two years following the date of the change in retainer fee. Five of our outside directors have met this minimum economic ownership requirement and the remaining two outside directors, who have served less than five years on the board, have met the 20% annual minimum purchase requirements.
Board Structure, Practices and Committees
The structure, practices and committees of the BPY General Partner’s board of directors, including matters relating to the size and composition of the board of directors, the election and removal of directors, requirements relating to board action and the powers delegated to board committees, are governed by the BPY General Partner’s bye-laws. The BPY General Partner’s board of directors is responsible for supervising the management, control, power and authority of the BPY General Partner except as required by applicable law or the bye-laws of the BPY General Partner. The following is a summary of certain provisions of those bye-laws that affect our company’s governance.
Size, Independence and Composition of the Board of Directors
The BPY General Partner’s board of directors may consist of between 3 and 11 directors or such other number of directors as may be determined from time to time by a resolution of the BPY General Partner’s shareholders and subject to its bye-laws. The board is currently set at
sevennine directors and a majority of the directors of the BPY General Partner’s board of directors are independent. In addition, the BPY General Partner’s bye-laws provide that not more than 50% of the directors (as a group) or the independent directors (as a group) may be residents of any one jurisdiction (other than Bermuda and any other jurisdiction designated by the board of directors from time to time).
Pursuant to the investor agreement between us and the Class A Preferred Unitholder dated December 4, 2014, the Class A Preferred Unitholder is entitled, for so long as it owns an aggregate limited partnership interest in our company of at least 5% of our issued and outstanding units on a fully-diluted basis, to designate one individual to the BPY General Partner’s board of directors. Such individual must meet the standards of independence established by the NYSE and the TSX and be reasonably acceptable to the board of directors. As of the date of this Form 20-F, the Class A Preferred Unitholder has not exercised this right.
Lead Independent Director
The BPY General Partner’s board of directors has selected Lars Rodert to serve as lead independent director. The lead independent director's primary role is to facilitate the functioning of the board (independently of the Service Providers and Brookfield), and to maintain and enhance the quality of our company's corporate governance practices. The lead independent director presides over the private sessions of the independent directors of the BPY General Partner that take place following each meeting of the board and conveys the results of these meetings to the chair of the board. In addition, the lead independent director is available, when appropriate, for consultation and direct communication with unitholders or other stakeholders of our company.
Election and Removal of Directors
The BPY General Partner’s board of directors is appointed by its shareholders and each of its current directors will serve until the earlier of his or her death, resignation or removal from office.
Any director designated by the Class A Preferred Unitholder may be removed or replaced by the Class A Preferred Unitholder at any time. Vacancies on the board of directors may be filled and additional directors may be added by a resolution of the BPY General Partner’s shareholders or a vote of the directors then in office. A director may be removed from office by a resolution duly passed by the BPY General Partner’s shareholders. A director will be automatically removed from the board of directors if he or she becomes bankrupt, insolvent or suspends payments to his or her creditors, or becomes prohibited by law from acting as a director.
Action by the Board of Directors
The BPY General Partner’s board of directors may take action in a duly convened meeting at which a quorum is present or by a written resolution signed by all directors then holding office. The BPY General Partner’s board of directors will holdholds a minimum
of four meetings per year. When action is to be taken at a meeting of the board of directors, the affirmative vote of a majority of the votes cast is required for any action to be taken.
Depending on the size of the board of directors, each director shall be entitled to a number of votes set forth in the bye-laws of the BPY General Partner such that any director designated by the Class A Preferred Unitholder will have less than 10% of the aggregate number of votes that may be cast by all directors taken together.
Transactions Requiring Approval by the Governance and Nominating Committee
The BPY General Partner’s governance and nominating committee has approved a conflicts policy which addresses the approval and other requirements for transactions in which there is greater potential for a conflict of interest to arise. These transactions include:
acquisitions by us from, and dispositions by us to, Brookfield;
the dissolution of our partnership;partnership or the Property Partnership;
any material amendment to our Master Services Agreement, the Relationship Agreement, our limited partnership agreement or the Property Partnership’s limited partnership agreement;
any material service agreement or other material arrangement pursuant to which Brookfield will be paid a fee, or other consideration other than any agreement or arrangement contemplated by our Master Services Agreement;
co-investments by us with Brookfield;
acquisitions by us from, and dispositions by us to, Brookfield;
any other material transaction involving us and Brookfield; and
termination of, or any determinations regarding indemnification under, our Master Services Agreement.
Agreement, our limited partnership agreement or the Property Partnership’s limited partnership agreement; and
any other material transaction involving us and Brookfield
Our conflicts policy requires the transactions described above to be approved by the BPY General Partner’s governance and nominating committee. Pursuant to our conflicts policy, the BPY General Partner’s governance and nominating committee may grant approvals for any of the transactions described above in the form of general guidelines, policies or procedures in which case no further special approval will be required in connection with a particular transaction or matter permitted thereby. The conflicts policy can be amended at the discretion of the BPY General Partner’s governance and nominating committee. See Item 7.B. “Major Shareholders and Related Party Transactions —- Related Party Transactions —- Relationship with Brookfield —- Conflicts of Interest and Fiduciary Duties”.
There are no service contracts with directors that provide benefit upon termination of office or services.
Transactions in which a Director has an Interest
A director who directly or indirectly has an interest in a contract, transaction or arrangement with the BPY General Partner, our company or certain of our affiliates is required to disclose the nature of his or her interest to the full board of directors. Such disclosure may generally take the form of a general notice given to the board of directors to the effect that the director has an interest in a specified company or firm and is to be regarded as interested in any contract, transaction or arrangement with that company or firm or its affiliates. A director may participate in any meeting called to discuss or any vote called to approve the transaction in which the director has an interest and no transaction approved by the board of directors will be void or voidable solely because the director was present at or participates in the meeting in which the approval was given provided that the board of directors or a board committee authorizes the transaction in good faith after the director’s interest has been disclosed or the transaction is fair to the BPY General Partner and our company at the time it is approved.
Transactions Requiring Unitholder Approval
Limited partners have consent rights with respect to certain fundamental matters and related party transactions (in accordance with Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions of the Canadian Securities Administrators, or MI 61-101) and on any other matters that require their approval in accordance with applicable securities laws and stock exchange rules. See “Description of the Property Partnership Limited Partnership Agreement - Amendment of the Property Partnership Limited Partnership Agreement”, “Description of the Property Partnership Limited Partnership Agreement - Opinion of Counsel and Limited Partner Approval”, and “Description of the Property Partnership Limited Partnership Agreement - Withdrawal of the Managing General Partner”.
The BPY General Partner’s board of directors is required to maintain an audit committee that operates pursuant to a written charter. The audit committee is required to consist solely of independent directors and each member must be financially literate. Not more than 50% of the audit committee members may be residents of any one jurisdiction (other than Bermuda and any other jurisdiction designated by the board of directors from time to time).
The audit committee is responsible for assisting and advising the BPY General Partner’s board of directors with respect to:
our accounting and financial reporting processes;
the integrity and audits of our financial statements;
our compliance with legal and regulatory requirements; and
the qualifications, performance and independence of our independent accountants.
The audit committee is responsible for engaging our independent auditors, reviewing the plans and results of each audit engagement with our independent auditors, approving professional services provided by our independent accountants, considering the range of audit and non-audit fees charged by our independent auditors and reviewing the adequacy of our internal accounting controls.
Governance and Nominating Committee
The BPY General Partner’s board of directors is required to maintain at all times a governance and nominating committee that operates pursuant to a written charter. The governance and nominating committee
willis required to consist solely of independent directors and not more than 50% of the governance and nominating committee members may be residents of any one jurisdiction (other than Bermuda and any other jurisdiction designated by the board of directors from time to time).
The governance and nominating committee has approved a conflicts policy which addresses the approval and other requirements for transactions in which there is a greater potential for a conflict of interest to arise. The governance and nominating committee may be required to approve any such transactions. See “—“- Transactions Requiring Approval by the Governance and Nominating Committee”. The governance and nominating committee is responsible for approving the appointment by the sitting directors of a person to the office of director and for recommending a slate of nominees for election as directors by the BPY General Partner’s shareholders. The governance and nominating committee is responsible for assisting and advising the BPY General Partner’s board of directors with respect to matters relating to the general operation of the board of directors, our company’s governance, the governance of the BPY General Partner and the performance of its board of directors. The governance and nominating committee is responsible for reviewing and making recommendations to the board of directors of the BPY General Partner concerning the remuneration of directors and committee members and any changes in the fees to be paid pursuant to our Master Services Agreement.
Indemnification and Limitations on Liability
Our Limited Partnership Agreement
The laws of Bermuda permit the partnership agreement of a limited partnership, such as our company, to provide for the indemnification of a partner, the officers and directors of a partner and any other person against any and all claims and demands whatsoever, except to the extent that the indemnification may be held by the courts of Bermuda to be contrary to public policy or to the extent that the laws of Bermuda prohibit indemnification against personal liability that may be imposed under specific provisions of the laws of Bermuda. The laws of Bermuda also permit a partnership to pay or reimburse an indemnified person’s expenses in advance of a final disposition of a proceeding for which indemnification is sought. SeeItem 10.B. “Additional“Additional Information —- Memorandum and Articles of Association —- Description of Our Units and Our Limited Partnership Agreement —- Indemnification; Limitations on Liability” for a description of the indemnification arrangements in place under our limited partnership agreement.
The BPY General Partner’s Bye-laws
The laws of Bermuda permit the bye-laws of an exempted company, such as the BPY General Partner, to provide for the indemnification of its officers, directors and shareholders and any other person designated by the company against any and all claims and demands whatsoever, except to the extent that the indemnification may be held by the courts of Bermuda to be contrary to public policy or to the extent that the laws of Bermuda prohibit indemnification against personal liability that may be imposed under specific provisions of Bermuda law, such as the prohibition under the Bermuda Companies Act 1981 to indemnify liabilities arising from fraud or dishonesty. The BPY General Partner’s bye-laws provide that, as permitted by the laws of Bermuda, it will pay or reimburse an indemnified person’s expenses in advance of a final disposition of a proceeding for which indemnification is sought.
Under the BPY General Partner’s bye-laws, the BPY General Partner is required to indemnify, to the fullest extent permitted by law, its affiliates, directors, officers, resident
representative,representatives, shareholders and employees, any person who serves on a governing body of the Property Partnership or any of its subsidiaries and certain others against any and all losses, claims, damages, liabilities, costs or expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts arising from any and all claims, demands, actions, suits or proceedings, incurred by an indemnified person in connection with our company’s investments and activities or in respect of or arising from their holding such positions, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the indemnified person’s bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful. In addition, under the BPY General Partner’s bye-laws: (i) the liability of such persons has been limited to the fullest extent permitted by law and except to the extent that their conduct involves bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful; and (ii) any matter that is approved by the independent directors will not constitute a breach of any duties stated or implied by law or equity, including fiduciary duties. The BPY General Partner’s bye-laws require it to advance funds to pay the expenses of an indemnified person in connection with a matter in which indemnification may be sought until it is determined that the indemnified person is not entitled to indemnification.
Our partnership has obtained insurance coverage under which the directors of the BPY General Partner are insured, subject to the limits of the policy, against certain losses arising from claims made against such directors by reason of any acts or omissions covered under the policy in their respective capacities as directors of the BPY General Partner, including certain liabilities under securities laws. The insurance applies in certain circumstances where we may not indemnify the BPY General Partner’s directors and officers for their acts or omissions.
Governance6.D. EMPLOYEES
The BPY General Partner does not have any employees. Our partnership has entered into a Master Services Agreement with the Service Providers pursuant to which each Service Provider and certain other affiliates of Brookfield provide, or arrange for other Service Providers to provide, day-to-day management and administrative services for our company, the Property Partnership and the Holding Entities. The board of directors offees payable under the Property General Partner is currently identical to the board of directors of the BPY General Partner. It has substantially similar governance arrangements as the BPY General Partner although it does not have an audit committee or a governanceMaster Service Agreement are set forth under Item 7.B. “Major Shareholders and nominating committee. However, the Property General Partner’s bye-laws allow for alternate directors. A director of the Property General Partner may by written notice to the secretary of the Property General Partner appoint any person, including another director, who meets any minimum standards that are required by applicable law to serve as an alternate director and to attend and vote in such director’s place at any meeting of the Property General Partner’s board of directors at which such director is not personally present and to perform any duties and functions and exercise any rights that such director could perform or exercise personally.
6.D. EMPLOYEES
As at December 31, 2012, our operating entities had approximately 6,000 employees.Related Party Transactions - Related Party Transactions - Our company does not currently have any senior management who carry out the management and activities of our company. The Managers, wholly-owned subsidiaries of Brookfield Asset Management, provide management services to us pursuant to our Master Services Agreement.
Agreement - Management Fee”.
Each of the directors and officers of the BPY General Partner own less than 1% of our units.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
As of the date of this Form 20-F, there are 80,230,777261,389,269 limited partnership units of our company outstanding which includes 24,663 units of our company held for withholding taxes and fractions.outstanding. To our knowledge, as at the date of this Form 20-F, no person or company, other than Brookfield, andFuture Fund Board of Guardians, or Future Fund, Manulife Financial Corporation, Partners Limited and the Class A Preferred Unitholder, beneficially owns or controls or directs, directly or indirectly, more than 5% of our units. Brookfield beneficially owns 41,394,118 units and 389,129,306 Redemption-Exchange Units, or a 91.8% interest in our company (on a fully-exchanged basis) including its indirect general partnership interest in the BPY General Partner. See also the information contained in this Form 20-F under Item 10.B “Additional10.B. “Additional Information —- Memorandum and Articles of Association —- Description of our Units and our Limited Partnership Agreement”. As of
April 30, 2013, 54,421March 11, 2016, 119,350 of our outstanding units were held by
1,311 holders of record in the United States, not including units of our company held of record by
the Depository Trust Company, or DTC. As of
April 30, 2013,March 11, 2016, DTC was the holder of record of
8,448,38580,373,120 units.
As of
April 30, 2013, 315,278March 11, 2016, 281,394 of our outstanding units were held by
4,140 holders of record in Canada, not including units of our company held of record by
Clearing and Depository Services Inc., or CDS. As of
April 30, 2013,March 11, 2016, CDS was the holder of record of
71,261,978180,602,522 units.
The following table presents information regarding the beneficial ownership of our
units,company, as of
April 30, 2013,March 11, 2016, by each person or entity that we know beneficially owns 5% or more of our
units.company. |
| | | | |
| | Units Outstanding |
| Name and Address | Units Owned(1) | Percentage |
Brookfield Asset Management Inc.(2) Suite 300, Brookfield Place, 181 Bay Street
Toronto, Ontario, M5J 2T3 | 482,797,859 |
| 68 | % |
Future Fund Board of Guardians(3)
Level 43, 120 Collins Street
Melbourne VIC 3000, Australia | 12,128,906 |
| 5 | % |
Manulife Financial Corporation(4)
200 Bloor Street East
Toronto, Ontario M4W 1E5 | 15,338,833 |
| 6 | % |
Partners Limited(5)
Suite 300, Brookfield Place, 181 Bay Street
Toronto, Ontario, M5J 2T3 | 486,411,305 |
| 68 | % |
Qatar Investment Authority(6)
Q-Tel Tower
Diplomatic Area Street, West Bay
Doha, Qatar | 70,038,910 |
| 9 | % |
| | | | | | | | |
(1) | | Units Outstanding | |
Name and Address
| | Units Owned | | | Percentage | |
includes our limited partnership units, and for Brookfield Asset Management Inc. Suite 300,and Partners Limited, also includes Redemption-Exchange Units, and for Brookfield Place, 181 Bay
Street, Toronto, Ontario M5J 2T3
| |
| 430,523,424(1)
|
| | | 91.8(1)% | Asset Management, also includes GP Units and Special LP Units. |
| | |
Partners Limited
Suite 300, Brookfield Place, 181 Bay
Street, Toronto, Ontario, M5J 2T3
| | (2) | 434,001,108(1) | | | | 92.5(1)% | |
(1) | Assumes that allBrookfield beneficially owns 45,249,882 of our units, 138,875 GP Units, 432,649,105 Redemption-Exchange Units and 4,759,997 Special LP Units. Brookfield has a 68% interest in our company assuming the exchange of the Redemption-Exchange Units are exchangedand the Exchange LP Units not held by us, and a 61% interest in our company on a fully-exchanged basis. |
| |
(3) | Based on information provided on the Schedule 13D filed with the SEC by Future Fund on November 12, 2013, as amended on April 2, 2014. On a fully-exchanged basis, the percentage beneficially owned by Future Fund would be less than 2%. As disclosed in Future Fund’s Schedule 13D, Future Fund may be deemed to be the beneficial owner of units beneficially owned by Brookfield and its affiliates, and Future Fund disclaims beneficial ownership of such units. |
| |
(4) | Based on information provided on the Schedule 13G filed by Manulife on February 11, 2015. On a fully-exchanged basis, the percentage beneficially owned by Manulife would be less than 2%. |
| |
(5) | Partners Limited is a corporation whose principal business mandate is to hold shares of Brookfield Asset Management, directly or indirectly, for unitsthe long-term. Partners Limited’s holdings of our company in accordance withinclude the Redemption-Exchange Mechanism.Brookfield Asset Management holdings noted above plus 3,613,446 of our units held directly by its subsidiary, Partners Value Fund Inc. |
* | Less than 1%. |
(6) | Represents ownership on a fully-exchanged basis. |
Our major unitholders have the same voting rights as all other holders of our units.
7.B. RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH BROOKFIELD
Brookfield Asset Management
Brookfield Asset Management is a global alternative asset manager with
over $175approximately $225 billion in assets under management. It has over a 100-year history of owning and operating assets with a focus on property, renewable
power,energy, infrastructure and private equity.
Brookfield has a range of public and private investment products and services. Brookfield Asset Management is listed on the NYSE under the symbol “BAM”, on the TSX under the symbol “BAM.A” and on the NYSE Euronext under the symbol “BAMA”.
Brookfield believes its operating experience is an essential differentiating factor in its past ability to generate significant risk-adjusted returns. In addition, Brookfield has demonstrated particular expertise in sourcing and executing large-scale
multifacetedmulti-faceted transactions across a wide spectrum of real estate sectors and geographies.
As a global alternative asset manager, Brookfield brings a strong and proven corporate platform supporting legal, tax, operations oversight, investor reporting, portfolio administration and other client services functions. Brookfield’s management team is multi-disciplinary, comprising investment and operations professionals, each with significant expertise in evaluating and executing investment opportunities and investing on behalf of itself and institutional investors.
We are an affiliate of Brookfield. We have entered into a number of agreements and arrangements with Brookfield in order to enable us to be established as a separate entity and pursue our vision of being a leading owner and operator of high quality commercial real estate assets. While we believe that our ongoing relationship with Brookfield provides us with a unique competitive advantage as well as access to opportunities that would otherwise not be available to us, we operate very differently from an independent, stand-alone entity. We describe below this relationship as well as potential conflicts of interest (and the methods for resolving them) and other material considerations arising from our relationship with Brookfield.
Our company, the Property Partnership, the Holding Entities, the
ManagersService Providers and Brookfield Asset Management have entered into an agreement, referred to as the Relationship Agreement, that governs aspects of the relationship among them. Pursuant to the Relationship Agreement, Brookfield Asset Management has agreed that we will serve as the primary entity through which acquisitions of commercial property will be made by Brookfield Asset Management and its affiliates on a global basis.
In the commercial property industry, it is common for assets to be owned through consortiums and partnerships of institutional equity investors and owner/operators such as ourselves. Accordingly, an integral part of our strategy is to pursue acquisitions through
consortium arrangements with institutional investors, strategic partners or financial sponsors and to form partnerships to pursue acquisitions on a specialized or global basis.
Brookfield Asset Management has a strong track record of leading such consortiums and partnerships and actively managing underlying assets to improve performance. Brookfield has also established and manages a number of private investment entities, managed accounts, joint ventures, consortiums, partnerships and investment funds whose investment objectives include the acquisition of commercial property and Brookfield may in the future establish similar funds. Nothing in the Relationship Agreement
will limitlimits or
restrictrestricts Brookfield from establishing or advising these or similar entities or
limitlimits or
restrictrestricts any such entities from carrying out any investment. Brookfield Asset Management has agreed that it will offer our company the opportunity to take up Brookfield’s share of any investment through these consortium arrangements or by one of these entities that involves the acquisition of commercial property that is suitable for us, subject to certain limitations.
Under the terms of the Relationship Agreement, our company, the Property Partnership and the Holding Entities have acknowledged and agreed that Brookfield carries on a diverse range of businesses worldwide, including the development, ownership and/or management of commercial property, and investing (and advising on investing) in commercial property, or loans, debt instruments and other securities with underlying collateral or exposure to commercial property and that except as explicitly provided in the Relationship Agreement, the Relationship Agreement does not in any way limit or restrict Brookfield from carrying on its business.
Our ability to grow depends in part on Brookfield identifying and presenting us with acquisition opportunities. Brookfield’s commitment to us and our ability to take advantage of opportunities is subject to a number of limitations such as our financial
capacity, the suitability of the acquisition in terms of the underlying asset characteristics and its fit with our strategy, limitations arising from the tax and regulatory regimes that govern our affairs and certain other restrictions. See Item 3.D. “Key Information —- Risk Factors —- Risks Relating to Our Relationship with Brookfield”. Under the terms of the Relationship Agreement, our company, the Property Partnership and the Holding Entities have acknowledged and agreed that, subject to providing us the opportunity to participate on the basis described above, Brookfield may pursue other business activities and provide services to third parties that compete directly or indirectly with us. In addition, Brookfield has established or advised, and may continue to establish or advise, other entities that rely on the diligence, skill and business contacts of Brookfield’s professionals and the information and acquisition opportunities they generate during the normal course of their activities. Our company, the Property Partnership and the Holding Entities have acknowledged and agreed that some of these entities may have objectives that overlap with our objectives or may acquire commercial property that could be considered appropriate acquisitions for us, and that Brookfield may have financial incentives to assist those other entities over us. If any of the Managers determinesService Providers determine that an opportunity is not suitable for us, Brookfield may still pursue such opportunity on its own behalf. Our company, the Property Partnership and the Holding Entities have further acknowledged and agreed that nothing in the Relationship Agreement will limit or restrict: (i) Brookfield’s ability to make any investment recommendation or take any other action in connection with its public securities business; (ii) Brookfield from investing in any loans or debt securities or from taking any action in connection with any loan or debt security notwithstanding that the underlying collateral is comprised ofcomprises or includes commercial property provided that the original purpose of the investment was not to acquire a controlling interest in such property; or (iii) Brookfield from acquiring or holding an investment of less than 5% of the outstanding shares of a publicly traded company or from carrying out any other investment in a company or real estate portfolio where the underlying assets do not principally constitute commercial property. Due to the foregoing, we expect to compete from time to time with other affiliates of Brookfield Asset Management or other third parties for access to the benefits that we expect to realize from Brookfield Asset Management’s involvement in our business. In the event of the termination of our Master Services Agreement, the Relationship Agreement would also terminate, including Brookfield’s commitments to provide us with acquisition opportunities, as described above.
Under the Relationship Agreement, our company, the Property Partnership and the Holding Entities have agreed that none of Brookfield nor any affiliate, director, officer, employee, contractor, agent, advisor,
member, partner, shareholder or other representative of Brookfield, will be liable to us for any claims, liabilities, losses, damages, costs or expenses (including legal fees) arising in connection with the business, investments and activities in respect of or arising from the Relationship Agreement, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the person’s bad faith, fraud, willful misconduct or gross negligence, or in the case of a criminal matter, action that the person knew to have been unlawful. The maximum amount of the aggregate liability of Brookfield, or any of its affiliates, or of any director, officer, employee, contractor, agent, advisor, member, partner, shareholder or other representative of Brookfield, will be equal to the amounts previously paid in the two most recent calendar years by the Service Recipients pursuant to our Master Services Agreement.
Brookfield may provide services to our operating entities which are outside the scope of our Master Services Agreement under arrangements that are on market terms and conditions,
or otherwise permitted or approved by independent directors, pursuant to our conflicts policy, and pursuant to which Brookfield will receive fees. The services that may be provided under these arrangements include financial advisory, property management, facilities management, development, relocation services, construction activities, marketing or other services.
Preferred Shares of Certain Holding Entities
Brookfield holds $750 million of Class B and $500 million of Class C redeemable preferred shares of CanHoldco, one of our Holding Entities, which it received as partial consideration for causing the Property Partnership to acquire substantially all of Brookfield Asset Management’s commercial property operations. The Class B preferred shares are entitled to receive a cumulative preferential dividend equal to 5.75% of their redemption value as and when declared by the board of directors of CanHoldco until the fifth anniversary of their issuance, after which the preferred shares will be entitled to receive a cumulative preferential dividend equal to 5.0% plus the prevailing yield for 5-year U.S. Treasury Notes. CanHoldco may redeem the Class B preferred shares at any time and must redeem all of the outstanding Class B preferred shares on the tenth anniversary of their issuance. Brookfield has a right of retraction following the fifth anniversary of the issuance of the Class B preferred shares. The Class C preferred shares are entitled to receive a cumulative preferential dividend equal to 6.75% of their redemption value as and when declared by the board of directors of CanHoldco. CanHoldco may redeem the Class C preferred shares at any time and must redeem all of the outstanding Class C preferred shares on the seventh anniversary of their issuance. Brookfield has a right of retraction following the third anniversary of the issuance of the Class C preferred shares. The Class B and Class C preferred shares will beare entitled to vote with the common shares of CanHoldco and each class of preferred shares will havehas an aggregate of 1% of the votes to be cast in respect of CanHoldco. We have agreed to use our commercially reasonable efforts to, as soon as reasonably practical, issue debt or equity
securities or borrow money from one or more financial institutions or other lenders, on terms reasonably acceptable to us, in an aggregate amount sufficient to fund the redemption by CanHoldco of the Class C preferred shares. The terms of any such financing may be less favorable to us than the terms of the Class C preferred shares. We are not permitted to draw on our credit facility
In connection with Brookfield in order to fund a redemption or retractionthe issuance of the Class A Preferred Units, Brookfield has agreed with the Class A Preferred Unitholder that the Class A Preferred Units will rank pari passu with CanHoldco’s Class A senior preferred shares, Class B orpreferred shares and Class C preferred shares in the payment of dividends, and that this will not prevent CanHoldco from redeeming its preferred shares except in the event of a dissolution, liquidation or winding-up of CanHoldco, in which case the Class A Preferred Units will rank pari passu with CanHoldco’s preferred shares. In addition, Brookfield has provided $5 million of working capital to each of CanHoldco and four wholly-owned subsidiaries of other Holding Entities, for a total of $25 million, through a subscription for preferred shares of such entities. These preferred shares are entitled to receive a cumulative preferential cash dividend equal to 5% as and when declared by the board of directors of the applicable entity and are redeemable at the option of the applicable entity, subject to certain limitations, at any time after the twentieth anniversary of their issuance. The preferred shares
will beare entitled to vote with the common shares of the applicable entity and
will have an aggregate of 1% of the votes to be cast in respect of the applicable entity.
Credit Facility
On April 15, 2013, the Holding Entities entered into a three-year unsecured revolving credit facility with Brookfield US Holdings Inc. that provides borrowings on a revolving basis of up to $500 million, which will be used for general corporate purposes and capital expenditures. As of April 30, 2013, no amounts have been drawn. The credit facility bears interest at a rate per annum equal to LIBOR plus 2.75% in the case of a LIBOR loan. The credit facility requires our company to maintain compliance with a ratio of total debt to total capitalization as well as maintain a minimum tangible net worth and contains other restrictions on the ability of the borrowers to, among other things, incur liens, engage in certain mergers and consolidations, transact with affiliates, and enter into hedging arrangements.
Brookfield US Holdings Inc. has advised us that it intends to syndicate the commitments under such facility to other lenders and, in connection with the syndication of such commitments, the terms of such facility may change.
Redemption-Exchange Mechanism
At any time after April 15, 2015, the holders of Redemption-Exchange Units of the Property Partnership will have the right to require the Property Partnership to redeem all or a portion of the Redemption-Exchange Units for either (a) cash in an amount equal to the market value of one of our units multiplied by the number of units to be redeemed (subject to certain adjustments) or (b) such other amount of cash as may be agreed by the relevant holder and the Property Partnership, subject to our company’s right to acquire such interests (in lieu of redemption) in exchange for our units. See Item 10.B. “Additional“Additional Information —- Memorandum and Articles of Association —- Description of the Property Partnership Limited Partnership Agreement —- Redemption-Exchange Mechanism”. Taken together, the effect of the redemption right and the right of exchange is that the holders of Redemption-Exchange Units will receive our units, or the value of such units, at the election of our company. Should we determine not to exercise our right of exchange, cash required to fund a redemption of Redemption-Exchange Units will likely be financed by a public offering of our units. Registration Rights Agreement
Our company has entered into a customary registration rights agreement with Brookfield pursuant to which we have agreed that, upon the request of Brookfield, our company will file one or more registration statements to register for sale, under the U.S. Securities Act of 1933, as amended or one or more prospectuses to qualify the distribution in Canada,
of, any of our units held by Brookfield (including units of our company acquired pursuant to the Redemption-Exchange Mechanism). Under the registration rights agreement, our company
willis not
be required to file a U.S. registration statement or a Canadian prospectus unless Brookfield requests that units having a value of at least $50 million be registered or qualified. In the registration rights agreement, we have agreed to pay expenses in connection with such registration and sales, except for any underwriting discounts or commissions, which will be borne by the selling unitholder, and to indemnify Brookfield for material misstatements or omissions in the registration statement and/or prospectus.
Equity Enhancement and Incentive Distributions
Property
GPSpecial LP, a wholly-owned subsidiary of Brookfield Asset Management, is entitled to receive equity enhancement distributions and incentive distributions from the Property Partnership as a result of its ownership of the
generalspecial limited partnership interest in the Property Partnership. Property
GPSpecial LP will receive quarterly equity enhancement distributions equal to 0.3125% of the amount by which our company’s total capitalization value exceeds an initial reference value determined based on the market capitalization immediately following the
spin-off,Spin-off, subject to certain adjustments. In addition,
the Property
GPSpecial LP will receive incentive distributions calculated in increments based on the amount by which quarterly distributions on the limited partnership units of the Property Partnership exceed specified target levels as set forth in the Property Partnership’s limited partnership agreement.
We believe these arrangements create an incentive for Brookfield to manage our company in a way that helps us achieve our goal of creating value for our unitholders both through distributions and capital appreciation. For a further explanation of the equity enhancement and incentive distributions, together with examples of how such amounts are calculated, see Item 10.B. “Additional Information —- Memorandum and Articles of Association —- Description of the Property Partnership Limited Partnership Agreement —- Distributions”.The
Property
GPSpecial LP may, at its sole discretion, elect to reinvest equity enhancement distributions and incentive distributions in exchange for Redemption-Exchange Units.
To the extent that any Holding Entity or any operating entity pays to Brookfield any comparable performance or incentive distribution, the amount of any future incentive distributions will be reduced in an equitable manner to avoid duplication of distributions.
General Partner Distributions
Pursuant to our limited partnership agreement, the BPY General Partner is entitled to receive a general partner distribution equal to 0.2% of the total distributions of our company.
Special Limited Partner Distributions
Pursuant to the limited partnership agreement of the Property Partnership, Property GPSpecial LP is entitled to receive a general partner distribution from the Property Partnership equal to a share of the total distributions of the Property Partnership in proportion to the Property GPSpecial LP’s percentage interest in the Property Partnership which will be equal to 1% of the total distributions of the Property Partnership. See Item 10.B. “Additional Information —- Memorandum and Articles of Association —- Description of the Property Partnership Limited Partnership Agreement —- Distributions”.Distribution Reinvestment Plan
We intend
Credit Facility
On December 6, 2013, we entered into a $500 million subordinated credit facility with Brookfield to
adoptsupplement our liquidity. Under the facility, we do not pay a
distribution reinvestment plan for holderscommitment fee on any undrawn balance. The size of
our units residentthis facility was increased to $700 million in
Canada. We may in the future expand our distribution reinvestment plan to include holders of our units resident in the United States. The Property Partnership will also have a distribution reinvestment plan. Brookfield has advised our company that it may from time to time reinvest distributions it receives from the Property Partnership in the Property Partnership’s distribution reinvestment plan. The following is a summary description of the principal terms of our company’s distribution reinvestment plan. To the extent Brookfield participates in our dividend reinvestment plan and reinvests distributions it receives on our units, it will receive additional units of our company.Pursuant to the distribution reinvestment plan, Canadian holders of our units can elect to have distributions paid on units held by them automatically reinvested in additional units in accordance with the terms of the plan. Distributions to be reinvested in our units under the distribution reinvestment plan will be reduced by the amount of any applicable withholding tax.
Distributions due to plan participants will be paid to the plan agent, for the benefit of the plan participants and, if a plan participant has elected to have his or her distributions automatically reinvested, or applied, on behalf of such plan participant, to the purchase of additional units, such purchases will be made from our company on the distribution date at a price per unit calculated by reference to the volume weighted average of the trading price for our units on a stock exchange on which our units are listed for the five trading days immediately preceding the date the relevant distribution is paid by our company.
As soon as reasonably practicable after each distribution payment date, a statement of account will be mailed to each participant setting out the amount of the relevant cash distribution reinvested, the price of each unit purchased, the number of units purchased under the distribution reinvestment plan on the distribution payment date and the total number of units, computed to four decimal places, held for the account of the participant under the
distribution reinvestment plan (or, in the case of beneficial holders, CDS Clearing and Depository Services Inc., or CDS, will receive such statement on behalf of the beneficial holders participating in the plan). While our company will not issue fractional units, a plan participant’s entitlement to units purchased under the distribution reinvestment plan may include a fraction of a unit and such fractional units shall accumulate. A cash adjustment for any fractional units will be paid by the plan agent upon the withdrawal from or termination by a plan participant of his or her participation in the distribution reinvestment plan or upon termination of the distribution reinvestment plan at a price per unit based upon the closing price for our units on a stock exchange on which our units are listed on the trading day immediately preceding such withdrawal or termination. A registered holder may, at any time, obtain unit certificates for any number of whole units held for the participant’s account under the plan by notifying the plan agent. Certificates for units acquired under the plan will not be issued to participants unless specifically requested. Prior to pledging, selling or otherwise transferring units held for a participant’s account (except for sale of our units through the plan agent), a registered holder must request that his or her units be electronically transferred to his or her brokerage account or a unit certificate be issued. The automatic reinvestment of distributions under the plan will not relieve participants of any income tax obligations applicable to such distributions. No brokerage commissions will be payable in connection with the purchase of our units under the distribution reinvestment plan and all administrative costs will be borne by our company.
Unitholders can terminate their participation in the distribution reinvestment plan by providing, or by causing to be provided, notice to the plan agent. Such notice, if actually received by the plan agent no later than five business days prior to a record date, will have effect in respect of the distribution to be made as of such date. Thereafter, distributions to such unitholders will be in cash. In addition, unitholders may request that all or part of their units be sold. When our units are sold through the plan agent, a holder will receive the proceeds less a handling charge and any brokerage trading fees. Our company will be able to terminate the distribution reinvestment plan, in its sole discretion, upon notice to the plan participants and the plan agent but, such action will have no retroactive effect that would prejudice a participant’s interest. Our company will also be able to amend, modify or suspend the distribution reinvestment plan at any time in its sole discretion, provided that the plan agent gives notice of that amendment, modification or suspension to our unitholders, for any amendment, modification or suspension to the distribution reinvestment plan that in our company’s opinion may materially prejudice participants.
The Property Partnership will have a corresponding distribution reinvestment plan in respect of distributions made to our companyMarch 2014 and to holders of the Redemption-Exchange Units. Our company does not intend to reinvest distributions it receives from the Property Partnership$1.0 billion in the Property Partnership’s distribution reinvestment plan except to the extent that holders of our units elect to reinvest distributions pursuant to our distribution reinvestment plan. Brookfield has advised our company that it may from time to time reinvest distributions it receives from us in respect of our units or from the Property Partnership in respect of the Redemption-Exchange Units pursuant to the distribution reinvestment plans of our company or the Property Partnership, as applicable. To the extent Brookfield reinvests distributions it receives on our units, it will receive additional units of our company. To the extent Brookfield elects to reinvest distributions it receives from the Property Partnership pursuant to the Property Partnership’s dividend reinvestment plan, it will receive Redemption-Exchange Units. Such Redemption-Exchange Units received by Brookfield also would become subject to the Redemption-Exchange Mechanism and may therefore result in Brookfield acquiring additional units of our company.
December 2014.
Indemnification Arrangements
Subject to certain limitations, Brookfield and its directors, officers, agents, subcontractors, contractors, delegates, members, partners, shareholders and employees generally benefit from indemnification provisions and limitations on liability that are included in our limited partnership agreement, the BPY General Partner’s bye-laws, the Property Partnership’s limited partnership agreement, our Master Services Agreement and other arrangements with Brookfield. See Item 7.B. “Major“Major Shareholders and Related Party Transactions —- RelatedParty Transactions —- Our Master Services Agreement”
, Item 10.B. “Additional Information —- Memorandumand Articles of Association —- Description of Our Units and Our Limited Partnership Agreement —- Indemnification; Limitations of Liability”
and Item 10.B. “Additional“Additional Information —- Memorandum and Articles of Association —- Description of the Property Partnership Limited Partnership Agreement —- Indemnification; Limitations of Liability”.Licensing Agreement
Our company
Maturity of Class A Preferred Units
The Class A Preferred Units are exchangeable at the option of the Class A Preferred Unitholder into our units at a price of $25.70 per unit and
were issued on December 4, 2014 in three tranches of $600 million each, with an average dividend yield of 6.5% and maturities of seven, ten and twelve years. After three years for the
Property Partnership have each enteredseven-year tranche and four years for the ten- and twelve-year tranches, we can effectively require a holder of Class A Preferred Units to exchange the Class A Preferred Units into
a licensing agreement with Brookfield pursuant to whichour units as long as our units are trading at or above 125%, 130% and 135%, respectively, of the exchange price. Upon maturity, the Class A Preferred Units that remain outstanding will be redeemed in exchange for our units valued at the 20-day, volume-weighted average trading price at such time. To the extent that the market price of our units is less than 80% of the exchange price at maturity, Brookfield has
granted a non-exclusive, royalty-free licensecontingently agreed to
useacquire the
name “Brookfield”seven-year and
ten-year tranches of Class A Preferred Units from the
holder of Class A Preferred Units for the initial issuance price plus accrued and unpaid distributions and to exchange such units for Preferred Units with terms and conditions substantially similar to the twelve-year tranche. Brookfield
logo. Other than under this limited license, we do not have a legalhas also agreed with the Class A Preferred Unitholder to grant Brookfield the right to
purchase all or any portion of the
“Brookfield” nameClass A Preferred Units held by the Class A Preferred Unitholder a maturity, and
to grant the
Brookfield logo. Brookfield Asset Management may terminateClass A Preferred Unitholder the
licensing agreement immediately upon terminationright to sell all or any portion of
our Master Services Agreementthe Class A Preferred Unitholders held by the Class A Preferred Unitholder at maturity, in each case at a price equal to the issue price for such Class A Preferred Units plus accrued and
it may be terminated in the circumstances described under Item 4.B. “Information on the Company — Business Overview — Intellectual Property”.unpaid dividends.
Conflicts of Interest and Fiduciary Duties
Our organizational and ownership structure and strategy involve a number of relationships that may give rise to conflicts of interest between our company and our unitholders, on the one hand, and Brookfield, on the other hand. In particular, conflicts of interest could arise, among other reasons, because:
in originating and recommending acquisition opportunities, Brookfield has significant discretion to determine the suitability of opportunities for us and to allocate such opportunities to us or to itself or third parties;
because of the scale of typical commercial property acquisitions and because our strategy includes completing acquisitions through consortium or partnership arrangements with pension funds and other financial sponsors,investors, we will likely make co-investments with Brookfield and Brookfield-sponsored funds or Brookfield-sponsored or co-sponsored consortiums and partnerships involving third party investors to whom Brookfield will owe fiduciary duties, which it does not owe to us;
the same professionals within Brookfield’s organization who are involved in acquisitions that are suitable for us are responsible for the consortiums and partnerships referred to above, as well as having other responsibilities within Brookfield’s broader asset management business. Limits on the availability of such individuals will likewise result in a limitation on the availability of acquisition opportunities for us;
there may be circumstances where Brookfield will determine that an acquisition opportunity is not suitable for us because of the fit with our acquisition strategy, limits arising due to regulatory or tax considerations, limits on our financial capacity or because of the immaturity of the target assets and Brookfield is entitled to pursue the acquisition on its own behalf rather than offering us the opportunity to make the acquisition;
where Brookfield has made an acquisition, it may transfer it to us at a later date after the assets have been developed or we have obtained sufficient financing;
our relationship with Brookfield involves a number of arrangements pursuant to which Brookfield provides various services, access to financing arrangements and originates acquisition opportunities, and circumstances may arise in which these arrangements will need to be amended or new arrangements will need to be entered into;
as certain of our arrangements with Brookfield were effectively determined by Brookfield in the context of the spin-off,Spin-off, they may contain terms that are less favorable than those which otherwise might have been negotiated between unrelated parties;
Brookfield is generally entitled to share in the returns generated by our operations, which could create an incentive for it to assume greater risks when making decisions than it otherwise would in the absence of such arrangements;
Brookfield is permitted to pursue other business activities and provide services to third parties that compete directly with our business and activities without providing us with an opportunity to participate, which could result in the allocation of Brookfield’s resources, personnel and acquisition opportunities to others who compete with us;
Brookfield does not owe our company or our unitholders any fiduciary duties, which may limit our recourse against it; and
the liability of Brookfield and its directors is limited under our arrangements with them, and we have agreed to indemnify Brookfield and its directors against claims, liabilities, losses, damages, costs or expenses which they may face in connection with those arrangements, which may lead them to assume greater risks when making decisions than they otherwise would if such decisions were being made solely for its own account, or may give rise to legal claims for indemnification that are adverse to the interests of our unitholders.
See Item 3.D. “Key“Key Information —- Risk Factors —- Risks Relating to Our Relationship with Brookfield —- Our organizational and ownership structure, as well as our contractual arrangements with Brookfield, may create significant conflicts of interest that may be resolved in a manner that is not in the best interests of our company or the best interests of our unitholders”. With respect to transactions in which there may be a conflict of interest, the BPY General Partner may be required to seek the prior approval of its governance and nominating committee pursuant to a conflicts policy that has been approved by its governance and nominating committee. These transactions include: (i) acquisitions by us from, and dispositions by us to, Brookfield; (ii) the dissolution of our partnership; (ii)partnership or the Property Partnership; (iii) any material amendment to our Master Services Agreement, the Relationship Agreement, our limited partnership agreement or the Property Partnership’s limited partnership
agreement; (iii)(iv) any material service agreement or other material arrangement pursuant to which Brookfield will be paid a fee, or other consideration other than any agreement or arrangement contemplated by our Master Services Agreement; (iv) co-investments by us with Brookfield; (v) acquisitions by us from, and dispositions by us to, Brookfield; (vi) any other material transaction involving us and Brookfield; and (vii) termination of, or any determinations regarding indemnification under, our Master Services Agreement.Agreement, our limited partnership agreement or the Property Partnership’s limited partnership agreement; and (vi) any other material transaction involving us and Brookfield. Pursuant to our conflicts policy, the BPY General Partner’s governance and nominating committee may grant prior approvals for any of these transactions in the form of general guidelines, policies or procedures in which case no further special approval will be required in connection with a particular transaction or matter permitted thereby. In certain circumstances, these transactions may be related party transactions for the purposes of, and subject to certain requirements of, Multilateral Instrument 61-101 — Protection of Minority Security Holders in Special Transactions, or MI 61-101. MI 61-101 provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. See “Canadian“Canadian Securities Law Exemptions” below for application of MI 61-101 to our company. The conflicts policy states that conflicts be resolved based on the principles of transparency, third-partythird party validation and approvals. The policy recognizes the benefit to us of our relationship with Brookfield and our intent to pursue a strategy thatseeks to maximize the benefits from this relationship. The policy also recognizes that the principal areas of potential application of the policy on an ongoing basis will beare in connection with our acquisitions and our participation in Brookfield ledBrookfield-led consortiums and partnership arrangements, together with any management or service arrangements entered into in connection therewith or the ongoing operations of the underlying operating entities. In general, the
conflicts policy provides that acquisitions that are carried out jointly by us and Brookfield, or in the context of a Brookfield-led or co-led consortium or partnership be carried out on the basis that the consideration paid by us be no more, on a per share or proportionate basis, than the consideration paid by Brookfield or other participants, as applicable. The policy also provides that any fees or carried interest payable in respect of our proportionate investment, or in respect of an acquisition made solely by us, must be credited in the manner contemplated by the Property Partnership’s limited partnership agreement, where applicable, or that such fees or carried interest must either have been negotiated with another arm’s length participant or otherwise
demonstrated to be on market terms (or better). The policy generally provides that if the acquisition involves the purchase by us of an asset from Brookfield, or the participation in a transaction involving the purchase by us and Brookfield of different assets, that a fairness opinion or, in some circumstances, a valuation or appraisal by a qualified expert be obtained. These requirements provided for in the conflicts policy are in addition to any disclosure, approval, or valuation requirements that may arise under applicable law.
Our limited partnership agreement
and the limited partnership agreement of the Property Partnership containcontains various provisions that modify the fiduciary duties that might otherwise be owed to us and our unitholders. These duties include the duties of care and loyalty. In the absence of provisions in
theour limited partnership
agreements of our company and the Property Partnershipagreement to the contrary, the duty of loyalty would generally prohibit the BPY
General Partner and the Property General Partner from taking any action or engaging in any transaction as to which it has a conflict of interest.
TheOur limited partnership
agreements ofagreement prohibits our
company and the Property Partnership each prohibit the limited partners from advancing claims that otherwise might raise issues as to compliance with fiduciary duties or applicable law. For example, the
agreements provideagreement provides that the BPY General Partner
the Property General Partner and
theirits affiliates do not have any obligation under
theour limited partnership
agreements of our company or the Property Partnership,agreement, or as a result of any duties stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to our company, the Property Partnership, any Holding Entity or any other holding entity established by us.
TheyIt also
allowallows affiliates of the BPY
General Partner and Property General Partner to engage in activities that may compete with us or our activities. In addition, the
agreements permitagreement permits the BPY
General Partner and the Property General Partner to take into account the interests of third parties, including Brookfield, when resolving conflicts of interest.
These modifications to the BPY General Partner board of director’s fiduciary duties are detrimental to our unitholders because they restrict the remedies available for actions that might otherwise constitute a breach of fiduciary duty and permit conflicts of interest to be resolved in a manner that is not always in the best interests of our company or the best interests of our unitholders. We believe it is necessary to modify the fiduciary duties that might otherwise be owed to us and our unitholders, as described above, due to our organizational and ownership structure and the potential conflicts of interest created thereby. Without modifying those duties, the ability of the BPY General Partner and the Property General Partner to attract and retain experienced and capable directors and to take actions that we believe are necessary for the carrying out of our business would be unduly limited due to their concern about potential liability. See Item 3.D. “Key“Key Information —- Risk Factors —- Risks Relating to Our Relationship with Brookfield —- Our Master Services Agreement and our other arrangements with Brookfield do not impose on Brookfield any fiduciary duties to act in the best interests of our unitholders.”
Canadian Securities Law Exemptions
MI 61-101 provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. Our company has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and
valuation requirements for transactions that would have a value of less than 25% of our market capitalization, if the indirect equity interest in our company, which is held in the form of Redemption-Exchange Units, or in the form of non-voting Exchange LP Units, is included in the calculation of our company’s market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements apply, is increased to include the approximately 82%approximate 62% indirect interest in our company held in the form of Redemption-Exchange Units. See Item 7.B. “Major“Major Shareholders and Related Party Transactions —- Related Party Transactions —- Relationship with Brookfield —- Conflicts of Interest and Fiduciary Duties” above. above and Item 10.B. “Memorandum and Articles of Association – Description of Our Units and Our Limited Partnership Agreement – Exchange LP Units and the Support Agreement” below. Although our company is a reporting issuer in Canada, it is
aan “SEC foreign issuer”
under Canadian securities regulations and exempt from certain Canadian securities laws relating to continuous disclosure obligations and proxy solicitation as long as we comply with certain reporting requirements applicable in the United States, provided that the relevant documents filed with the SEC are filed in Canada and sent to our company’s unitholders in Canada to the extent and in the manner and within the time required by applicable U.S. requirements. Therefore, there may be less publicly
available information in Canada about us than inis regularly published by or about other reporting issuers in Canada. Our company has undertaken to the provincial and territorial securities regulatory authorities in Canada that to the extent it complies with the foreign private issuer disclosure regime under U.S. securities law:
our company will only rely on the exemptions in Part 4 of National Instrument 71-102 –- Continuous Disclosure and Other Exemptions Relating to Foreign Issuers;
our company will not rely on any exemption from the foreign private issuer disclosure regime;
our company will file its financial statements pursuant to Part 4 of National Instrument 51-102 –- Continuous Disclosure Obligations, or NI 51-102, except that our company does not have to comply with the conditions in section 4.2 of NI 51-102 if it files such financial statements on or before the date that it is required to file its Form 20-F with the SEC;
our company will file an interim financial report as set out in Part 4 of NI 51-102 and the management’s discussion and analysis as set out in Part 5 of NI 51-102 for each period commencing on the first day of the financial year and ending nine, six, or three months before the end of the financial year;
our company will file a material change report as set out in Part 7 of NI 51-102 in respect of any material change in the affairs of our company that is not reported or filed by our company on SEC Form 6-K; and
our company will include in any prospectus filed by our company financial statements or other information about any acquisition that would have been or would be a significant acquisition for the purposes of Part 8 of NI 51-102 that our company has completed or has progressed to a state where a reasonable person would believe that the likelihood of our company completing the acquisition is high if the inclusion of the financial statements is necessary for the prospectus to contain full, true and plain disclosure of all materials facts relating to the securities being distributed. The requirement to include financial statements or other information will be satisfied by including or incorporating by reference (a) the financial statements or other information as set out in Part 8 of NI 51-102, or (b) satisfactory alternative financial statements or other information, unless at least nine months of the operations of the acquired business or related businesses are incorporated into our company’s current annual financial statements included or incorporated by reference in the prospectus.
OUR MASTER SERVICES AGREEMENT
The Service Recipients have entered into a Master Services Agreement pursuant to which the
ManagersService Providers have agreed to provide or arrange for other
service providersService Providers to provide management and administration services to our company and the other Service Recipients.
The following is a summary of certain provisions of our Master Services Agreement and is qualified in its entirety by reference to all of the provisions of the agreement. Because this description is only a summary of our Master Services Agreement, it does not necessarily contain all of the information that you may find useful. We therefore urge you to review our Master Services Agreement in its entirety. Copies of ourOur Master Services Agreement will beis available electronically on the website of the SEC atwww.sec.gov and on our SEDAR profile atwww.sedar.com and will be madeis available to our unitholders as described under Item 10.C. “Additional“Additional Information —- Material Contracts” and Item 10.H. “Documents“Documents on Display”.
Appointment of the
ManagersService Providers and Services Rendered
Under our Master Services Agreement, the Service Recipients have appointed the
Managers,Service Providers, as the
service providers,Service Providers, to provide or arrange for the provision by an appropriate
service providerService Provider of the following services:
supervising the carrying out of all day-to-day management, secretarial, accounting, banking, treasury, administrative, liaison, representative, regulatory and reporting functions and obligations;
providing overall strategic advice to the Holding Entities including advising with respect to the expansion of their business into new markets;
supervising the establishment and maintenance of books and records;
identifying and recommending to the Holding Entities acquisitions or dispositions from time to time and, where requested to do so, assisting in negotiating the terms of such acquisitions or dispositions;
recommending and, where requested to do so, assisting in the raising of funds whether by way of debt, equity or otherwise, including the preparation, review or distribution of any prospectus or offering memorandum in respect thereof and assisting with communications support in connection therewith;
recommending to the Holding Entities suitable candidates to serve on the boards of directors or the equivalent governing bodies of our operating entities;
making recommendations with respect to the exercise of any voting rights to which the Holding Entities are entitled in respect of our operating entities;
making recommendations with respect to the payment of dividends by the Holding Entities or any other distributions by the Service Recipients, including distributions by our company to our unitholders;
monitoring and/or oversight of the applicable Service Recipient’s accountants, legal counsel and other accounting, financial or legal advisors and technical, commercial, marketing and other independent experts, and managing litigation in which a Service Recipient is sued or commencing litigation after consulting with, and subject to the approval of, the relevant board of directors or its equivalent;
attending to all matters necessary for any reorganization, bankruptcy proceedings, dissolution or winding up of a Service Recipient, subject to approval by the relevant board of directors or its equivalent;
supervising the making of all tax elections, determinations and designations, the timely calculation and payment of taxes payable and the filing of all tax returns due, by each Service Recipient;
supervising the preparation of the Service Recipients’ annual consolidated financial statements, quarterly interim financial statements and other public disclosure;
making recommendations in relation to and effecting the entry into insurance of each Service Recipient’s assets, together with other insurances against other risks, including directors and officers insurance as the relevant service providerService Provider and the relevant board of directors or its equivalent may from time to time agree;
arranging for individuals to carry out the functions of principal executive, accounting and financial officers for our company only for purposes of applicable securities laws;
providing individuals to act as senior officers of the Holding Entities as agreed from time to time, subject to the approval of the relevant board of directors or its equivalent;
providing advice, when requested, to the Service Recipients regarding the maintenance of compliance with applicable laws and other obligations; and
providing all such other services as may from time to time be agreed with the Service Recipients that are reasonably related to the Service Recipient’s day-to-day operations.
The
Managers’Service Providers’ activities are subject to the supervision of the board of directors or equivalent governing body of the BPY General Partner and of each of the other Service Recipients, as applicable.
The Managersrelevant governing body remains responsible for all investment and divestment decisions made by the Service Recipient.
Any Service Provider may, from time to time, appoint an affiliate of Brookfield to act as a new
ManagerService Provider under our Master Services Agreement, effective upon the execution of a joinder agreement by the new
Manager.Service Provider.
Pursuant to our Master Services Agreement, we pay a base management fee to the
ManagersService Providers equal to
$12.5 million per quarter (subject0.5% of the total capitalization of our partnership, subject to an annual
minimum of $50 million (plus the amount of any annual escalation by
athe specified inflation
factor beginning on January 1, 2014)factor). For any quarter in which the BPY General Partner determines that there is insufficient available cash to pay the base management fee as well as the next regular distribution on our units, the Service Recipients may elect to pay all or a portion of the base management fee in our units or
in limited partnership units of the Property Partnership,Redemption-Exchange Units, subject to certain conditions.
Reimbursement of Expenses and Certain Taxes
We
will also reimburse the
ManagersService Providers for any out-of-pocket fees, costs and expenses incurred in the provision of the management and administration services, including those of any third party. However, the Service Recipients are not required to reimburse the
ManagersService Providers for the salaries and other remuneration of their management, personnel or support staff who carry out any services or functions for such Service Recipients or overhead for such persons.
The relevant Service Recipient
will reimbursereimburses the
ManagersService Providers for all other out-of-pocket fees, costs and expenses incurred in connection with the provision of the services including those of any third party. Such out-of-pocket fees, costs and expenses
are expected to include, among other things: (i) fees, costs and expenses relating to any debt or equity financing; (ii) fees, costs and expenses incurred in connection with the general administration of any Service Recipient in respect of services; (iii) taxes, licenses and other statutory fees or penalties levied against or in respect of a Service Recipient; (iv) amounts owed by the
ManagersService Providers under indemnification, contribution or similar arrangements; (v) fees, costs and expenses relating to our financial reporting, regulatory filings and investor relations and the fees, costs and expenses of agents, advisors and other persons who provide services to or on behalf of a Service Recipient; and (vi) any other fees, costs and expenses incurred by the
ManagersService Providers that are reasonably necessary for the performance by the
ManagersService Providers of their duties and functions under our Master Services Agreement.
In addition, the Service Recipients are required to pay all fees, costs and expenses incurred in connection with the investigation, acquisition, holding or disposal of any asset or business that is made or that is proposed to be made by us. Such additional fees, expenses and costs represent out-of-pocket costs associated with investment activities that will be undertaken pursuant to our Master Services Agreement.
The Service Recipients are also required to pay or reimburse the
ManagersService Providers for all sales, use, value added, goods and services, harmonized sales, withholding or other taxes or customs duties or other governmental charges levied or imposed by reason of our Master Services Agreement or any agreement it contemplates, other than income taxes, corporation taxes, capital taxes or other similar taxes payable by the
Managers,Service Providers, which are personal to the
Managers.Service Providers.
Our Master Services Agreement may not be assigned by the
ManagersService Providers without the prior written consent of our company except that (i)
the Managersany Service Provider may subcontract or arrange for the provision of services by another
service provider,Service Provider, provided that the
ManagersService Providers remain liable under the agreement, and (ii) any of the
ManagersService Providers may assign the agreement to an affiliate or to a person that is its successor by way of merger, amalgamation or acquisition of the business of the
Manager.Service Provider.
Our Master Services Agreement continues in perpetuity until terminated in accordance with its terms. However, the Service Recipients may terminate our Master Services Agreement upon written notice of termination from the BPY General Partner to the
ManagersService Providers if any of the following occurs:
any of the ManagersService Providers defaults in the performance or observance of any material term, condition or covenant contained in the agreement in a manner that results in material harm to the Service Recipients and the default continues unremedied for a period of 60 days after written notice of the breach is given to such Service Provider;
| Recipients and the default continues unremedied for a period of 60 days after written notice of the breach is given to such Manager;
|
any of the ManagersService Providers engages in any act of fraud, misappropriation of funds or embezzlement against any Service Recipient that results in material harm to the Service Recipients;
any of the ManagersService Providers is grossly negligent in the performance of its obligations under the agreement and such gross negligence results in material harm to the Service Recipients; or
certain events relating to the bankruptcy or insolvency of each of the Managers.Service Providers.
The Service Recipients have no right to terminate for any other reason, including if any of the
ManagersService Providers or Brookfield experiences a change of control. The BPY General Partner may only terminate our Master Services Agreement on behalf of our company with the prior unanimous approval of the BPY General Partner’s independent directors.
Our Master Services Agreement expressly provides that our Master Services Agreement may not be terminated by the BPY General Partner due solely to the poor performance or the underperformance of any of our operations.
The
ManagersService Providers may terminate our Master Services Agreement upon written notice of termination to the BPY General Partner if any Service Recipient defaults in the performance or observance of any material term, condition or covenant contained in the agreement in a manner that results in material harm to the
ManagersService Providers and the default continues unremedied for a period of 60 days after written notice of the breach is given to the Service Recipient. The
ManagersService Providers may also terminate our Master Services Agreement upon the occurrence of certain events relating to the bankruptcy or insolvency of the Service Recipients.
If our Master Services Agreement is terminated,
the licensing agreement, the Relationship Agreement and any of Brookfield Asset Management’s obligations under the Relationship Agreement will also terminate.
Indemnification and Limitations on Liability
Under our Master Services Agreement, the
ManagersService Providers have not assumed and do not assume any responsibility other than to provide or arrange for the provision of the services called for thereunder in good faith and will not be responsible for any action that the Service Recipients take in following or declining to follow the advice or recommendations of the
Managers.Service Providers. In addition, under our Master Services Agreement, the
ManagersService Providers and the related indemnified parties will not be liable to the Service Recipients for any act or omission, except for conduct that involved bad faith, fraud, willful misconduct, gross negligence or in the case of a criminal matter, conduct that the indemnified person knew was unlawful. The maximum amount of the aggregate liability of the
ManagersService Providers or any of their affiliates, or of any director, officer, agent, subcontractor, contractor, delegate, member, partner, shareholder, employee or other representative of the
ManagersService Providers or any of their affiliates, will be equal to the amounts previously paid by the Service Recipients in respect of services pursuant to our Master Services Agreement in the two most recent calendar years. The Service Recipients have agreed to indemnify the
Managers,Service Providers, their affiliates, directors, officers, agents, subcontractors, delegates, members, partners, shareholders and employees to the fullest extent permitted by law from and against any claims, liabilities, losses, damages, costs or expenses (including legal fees) incurred by an indemnified person or threatened in connection with our respective businesses, investments and activities or in respect of or arising from our Master Services Agreement or the services provided by the
Managers,Service Providers, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the indemnified person’s bad faith, fraud or willful misconduct, gross negligence or in the case of a criminal matter, action that the indemnified person knew to have been unlawful.
Our Master Services Agreement does not prohibit the
ManagersService Providers or their affiliates from pursuing other business activities or providing services to third parties that compete directly or indirectly with us.
Our company and Brookfield have determined that it is advisable for
certain subsidiaries of our company to have
the ability to control
the entities through which we hold certain of our operating entities, or the Specified Entities, including certain of our investments by private equity funds. Accordingly, subsidiaries of our company have entered into voting agreements to provide us with the ability to elect to have voting rights over the
Property General Partner, Property GP LP and the Property Partnership. Accordingly, the Voting Agreement provides our company, through the BPY General Partner, with a number of rights.Specified Entities.
Pursuant to the
Voting Agreement, anyvoting agreements, voting rights,
if elected, with respect to
the Property General Partner, Property GP LP and the Property Partnership will be voted in favourany of the
election of directors approved by our company. For these purposes, our company may maintain, from time to time, an approved slate of nominees or provide direction with respect to the approval or rejection of any matter in the form of general guidelines, policies or procedures in which case no further approval or direction will be required. Any such general guidelines, policies or procedures may be modified by our company in its discretion.In addition, pursuant to the Voting Agreement, any voting rights with respect to the Property General Partner, Property GP LP and the Property PartnershipSpecified Entities will be voted in accordance with the direction of our companythese subsidiaries with respect to certain matters, including: (i) the approvalelection of a majority of directors or rejection of the following matters: (i) any sale of all or substantially all of its assets;their equivalent, if any; (ii) any merger, amalgamation, consolidation, business combination or other similar material corporate transaction, except in connection with any internal reorganization that does not result in a change of control; (iii) any plan or proposal for a complete or partial liquidation or dissolution, or any reorganization or any case, proceeding or action seeking relief under any existing laws or future laws relating to bankruptcy or insolvency; (iv) any amendment to the limited partnership agreement of Property GP LP or the Property Partnership;its governing documents; or (v) any commitment or agreement to do any of the foregoing.
In addition, pursuant to the Voting Agreement, Brookfield has agreed that it will not exercise its right under the limited partnership agreement for Property GP LP to remove the Property General Partner as the general partner of Property GP LP except with the prior consent of our company.
The Voting Agreement will be terminated: (i) at such time that our company ceases to own any limited partnership interest in the Property Partnership; (ii) at such time that the BPY General Partner (or its successors or permitted assigns) involuntarily ceases to be the general partner of our company; (iii) at such time that the Property GP LP (or its successors or permitted assigns) involuntarily ceases to be the general partner of Property Partnership; or (iv) at such time that the Property General Partner (or its successors or permitted assigns) involuntarily ceases to be the general partner of the Property GP LP. In addition, our company is permitted to terminate the Voting Agreement upon 30 days’ notice.
The Voting Agreement also contains restrictions on transfers of the shares of the Property General Partner and provides that Brookfield may transfer shares of the Property General Partner to any of its affiliates.
Our company and Brookfield have also determined that it is advisable for our company to have control over certain of the entities through which we hold our operating entities. Accordingly, our company has entered into voting agreements on substantially the same terms as the Voting Agreement, to provide us, through the BPY General Partner, with voting rights over the entities through which we hold certain of our operating entities, including GGP, Rouse and certain of our private equity funds.
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
To the knowledge of our company, no current or former director, officer or employee of our company, nor any associate or affiliate of any of them, is or was indebted to our company at any time since its formation.
At April 30, 2013, the
The aggregate indebtedness to Brookfield Office Properties
one(one of our operating
entities,entities) or its subsidiaries of all officers, directors and employees and former officers, directors and employees of Brookfield Office Properties and its subsidiaries
wasis C$698,726. No loans have been extended
by Brookfield Office Properties since July 30,
2002 to directors, executives or senior officers of Brookfield Office Properties. At February 28, 2013, Richard B. Clark, the former CEO of Brookfield Office Properties, hadhas an outstanding non-interest bearing loan from Brookfield Office Properties of C$698,726. The largest amount outstanding of such loan during the 12 months ended December 31, 20122015 was C$698,726. Mr. Clark’s common sharessecurities purchased with the loan are held as security for the loan.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Except as disclosed in this Form 20-F, no proposed director or senior officer of the BPY General Partner or the ManagersService Providers or other insider of our company, nor any associate or affiliate of the foregoing persons, has any existing or potential material conflict of interest with our company, the Property Partnership or any of its subsidiaries or interest in any material transaction involving our company, the Property Partnership or any of its subsidiaries.
7.C. INTERESTS OF EXPERTS AND COUNSEL Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See Item 18. “Financial“Financial Statements”.
On April 12, 2013, approximately $157 million worthFebruary 2, 2016, the partnership sold World Square Retail in Sydney for A$285 million.
On February 3, 2016, the partnership was assigned a BBB corporate rating by Standard & Poor’s Rating Services with a stable outlook.
On February 5, 2016, the partnership announced that its Board of membership interests were acquired by Brookfield and our company from three investors in the ownership consortium that holds underlying common shares and warrants of GGP and common shares of Rouse. As consideration for these interests, the investors received from Brookfield approximately $110 million in cash and a note for approximately $47 million that was issued by one of our Holding Entities and that matures on October 12, 2013. The interests that Brookfield received were contributed to our company prior to the spin-off. This transaction resulted inDirectors approved an increase in the valuedistributions per unit from $0.265 per unit per quarter to $0.28 per unit per quarter.
On February 25, 2016, a real estate fund managed by Brookfield Asset Management entered into a definitive agreement to acquire all of the special dividendoutstanding shares of our units to Brookfield shareholders fromRouse, not owned by the $1.45 valuepartnership, for $18.25 per share thatin cash.
On February 29, 2016, Royal Centre in Vancouver was estimated upon declaration of the dividend to $1.47 per share upon payment, or approximately $920 million in the aggregate, based on IFRS carrying values.sold for C$428 million.
ITEM 9. THE OFFER AND LISTING
9.A. OFFER AND LISTING DETAILS The following table sets forth the annual high and low prices and trading volume for our units on the TSX and NYSE for the periods indicated since when-issued trading commenced on April 15, 2013:
|
| | | | | | | | | |
| | | Units on TSX | Units on NYSE |
| | | High |
| Low |
| High |
| Low |
|
| | | (C$) |
| (C$) |
| (US$) |
| (US$) |
|
| Year Ended | December 31, 2013 | 24.70 |
| 19.47 |
| 23.99 |
| 18.80 |
|
| Year Ended | December 31, 2014 | 27.55 |
| 20.41 |
| 23.94 |
| 18.19 |
|
| Year Ended | December 31, 2015 | 33.12 |
| 26.02 |
| 26.54 |
| 19.89 |
|
The following table sets forth the quarterly high and low prices for the Units on the TSX
| | | | | | | | | | | | |
| | | High | | | Low | | | Volume | |
April 15, 2013 to April 29, 2013 | | C$ | 23.11 | | | C$ | 21.29 | | | | 7,411,422 | |
and NYSE
| | | | | | | | | | | | |
| | | High | | | Low | | | Volume | |
April 15, 2013 to April 29, 2013 | | $ | 22.60 | | | $ | 20.75 | | | | 11,095,512 | |
for the periods indicated for the past two financial years:
|
| | | | | | | | |
| | Units on TSX | Units on NYSE |
| | High |
| Low |
| High |
| Low |
|
| | (C$) |
| (C$) |
| (US$) |
| (US$) |
|
| January 1, 2014 to March 31, 2014 | 22.26 |
| 20.41 |
| 20.23 |
| 18.19 |
|
| April 1, 2014 to June 30, 2014 | 22.77 |
| 20.45 |
| 20.92 |
| 18.50 |
|
| July 1, 2014 to September 30, 2014 | 23.90 |
| 21.66 |
| 21.94 |
| 20.21 |
|
| October 1, 2014 to December 31, 2014 | 27.55 |
| 22.60 |
| 23.94 |
| 20.24 |
|
| January 1, 2015 to March 31, 2015 | 33.12 |
| 26.40 |
| 26.54 |
| 22.63 |
|
| April 1, 2015 to June 30, 2015 | 31.02 |
| 26.78 |
| 24.90 |
| 21.80 |
|
| July 1, 2015 to September 30, 2015 | 30.07 |
| 26.02 |
| 23.12 |
| 19.89 |
|
| October 1, 2015 to December 31, 2015 | 32.25 |
| 28.30 |
| 24.20 |
| 21.24 |
|
| January 1, 2016 to March 11, 2016 | 31.84 |
| 26.00 |
| 22.95 |
| 18.69 |
|
The following table sets forth, for the periods indicated, the market price ranges and trading volumes of the Units on the TSX and NYSE for the most recent six months:
|
| | | | | | | | | | | | |
| | Units on TSX | Units on NYSE |
| | High |
| Low |
| Volume |
| High |
| Low |
| Volume |
|
| | (C$) |
| (C$) |
| |
| (US$) |
| (US$) |
| |
|
| 2015 | |
| |
| |
| |
| |
| |
|
| October | 31.69 |
| 28.30 |
| 3,495,611 |
| 24.20 |
| 21.49 |
| 1,896,843 |
|
| November | 31.30 |
| 29.19 |
| 3,488,912 |
| 23.85 |
| 21.91 |
| 1,813,547 |
|
| December | 32.25 |
| 29.23 |
| 3,223,412 |
| 23.30 |
| 21.24 |
| 3,915,196 |
|
| | | | | | | |
| 2016 | |
| |
| |
| |
| |
| |
|
| January | 31.84 |
| 28.32 |
| 3,627,293 |
| 22.95 |
| 19.42 |
| 5,489,305 |
|
| February | 29.68 |
| 26.00 |
| 4,199,428 |
| 21.43 |
| 18.69 |
| 3,277,960 |
|
| March (March 1 to March 11) | 28.81 |
| 27.42 |
| 1,687,015 |
| 21.69 |
| 20.44 |
| 1,238,762 |
|
9.B. PLAN OFDISTRIBUTIONOF DISTRIBUTION Our units are listed on the NYSE and TSX under the symbols “BPY” and “BPY.UN”, respectively.
9.D. SELLING SHAREHOLDERS
9.F. EXPENSES OF THE ISSUE Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION
DESCRIPTION OF OUR UNITS AND OUR LIMITED PARTNERSHIP AGREEMENT
The following is a description of the material terms of our units and our amended and restated limited partnership agreement, which we entered into in connection with the consummation of the spin-off, and is qualified in its entirety by reference to all of the provisions of our limited partnership agreement. Because this description is only a summary of the terms of our units and our limited partnership agreement, it does not contain all of the information that you may find useful. For more complete information, you should read our limited partnership agreement. The limited partnership agreement is available electronically on the website of the SEC atwww.sec.gov and on our SEDAR profile atwww.sedar.com and madeis available to our holders as described under Item 10.C. “Additional“Additional Information —- Material Contracts” and Item 10.H. “Documents“Documents on Display”. Our company is a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act 1883 and the Bermuda Exempted Partnerships Act 1992. Our company has a perpetual existence and will continue as a limited liability partnership unless terminated or dissolved in accordance with our limited partnership agreement. Our partnership interests consist of our units, which represent limited partnership interests in our company, and any additional partnership interests representing limited partnership interests that we may issue in the future as described below under “—“- Issuance of Additional Partnership Interests”.
As required by law, our limited partnership agreement provides for the management and control of our company by a general partner, the BPY General Partner.
Under our limited partnership agreement, the purpose of our company is to: acquire and hold interests in the Property Partnership and, subject to the approval of the BPY General Partner, interests in any other entity; engage in any activity related to the capitalization and financing of our company’s interests in such entities;
serve as the managing general partner of the Property Partnership and execute and deliver, and perform the functions of a managing general partner of the Property Partnership specified in, the limited partnership agreement of the Property Partnership; and engage in any other activity that is incidental to or in furtherance of the foregoing and that is approved by the BPY General Partner and that lawfully may be conducted by a limited partnership organized under the Bermuda Limited Partnership Act 1883, the Bermuda Exempted Partnerships Act 1992 and our limited partnership agreement.
Our units are non-voting limited partnership interests in our company. A holder of our units does not hold a share of a body corporate. As holders of units of our company, holders willdo not have statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring “oppression” or “derivative” actions. The rights of holders of units of our company are based on our limited partnership agreement, amendments to which may be proposed only by or with the consent of the BPY General Partner as described below under “—“- Amendment of Our Limited Partnership Agreement”.
Units of our company represent a fractional limited partnership interest in our company and do not represent a direct investment in our company’s assets and should not be viewed by investors as direct securities of our company’s assets. Holders of our units are not entitled to the withdrawal or return of capital contributions in respect of our units, except to the extent, if any, that distributions are made to such holders pursuant to our limited partnership agreement or upon the liquidation of our company as described below under “—“- Liquidation and Distribution of Proceeds” or as otherwise required by applicable law.Exceptlaw. Except to the extent expressly provided in our limited partnership agreement, a holder of our units willdoes not have priority over any other holder of our units, either as to the return of capital contributions or as to profits, losses or distributions. Holders of our units do not have the ability to call meetings of unitholders, and holders of our units are not entitled to vote on matters relating to our company except as described below under “—“- No Management or Control; NoLimited Voting”. Any action that may be taken at a meeting of unitholders may be taken without a meeting if written consent is solicited by or on behalf of the BPY General Partner and it receives approval of not less than the minimum percentage of support necessary to authorize or take such action at a meeting as described below under “—“- Meetings”.
Exchange LP Units and the Support Agreement
In connection with the acquisition of Brookfield Office Properties, Canadian residents had the election to receive in exchange for their common shares an Exchange LP Unit instead of our units, which allows for full or partial deferral of capital gains for Canadian federal income tax purposes. Holders of Exchange LP Units are entitled to receive distributions economically equivalent to the distributions, if any, paid from time to time by us on our units. Exchange LP Units are not transferrable, except upon the death of a holder.
Holders of Exchange LP Units are entitled at any time to retract (i.e., to require Exchange LP to redeem) any or all Exchange LP Units held by them and to receive in exchange one of our units, plus the full amount of all declared and unpaid distributions on the Exchange LP Units and all distributions declared on one of our units that have not yet been declared or paid on the Exchange LP Units, or the Distribution Amount, if any. Instead of Exchange LP redeeming the retracted units, we have a call right to purchase all but not less than all of the units covered by the retraction request.
Exchange LP has the right, commencing on the seventh anniversary of the initial take-up date of the Offer, to redeem all of the then outstanding Exchange LP Units for a purchase price equal to one of our units for each outstanding Exchange LP Unit plus the Distribution Amount, if any. The redemption date may be accelerated if certain conditions are met. As an alternative to Exchange LP exercising its redemption right, we can require that each holder of Exchange LP Units sell all the Exchange LP Units held by such holder to us on the redemption date upon payment by us to such holder of the purchase price for such Exchange LP Units.
Under the Support Agreement between us and Exchange LP, we have covenanted that, so long as such Exchange LP Units not owned by us or our subsidiaries are outstanding, we will, among other things: (a) not declare or pay any distribution on our units unless (i) on the same day Exchange LP declares or pays, as the case may be, an equivalent distribution on the Exchange LP Units and (ii) Exchange LP has sufficient money to pay such distribution; (b) take actions reasonably necessary to ensure that the declaration date, record date and payment date for distributions on the Exchange LP Units are the same as those for any corresponding distributions on our units; (c) take all actions reasonably necessary to enable Exchange LP to pay the liquidation amount, the retraction price or the redemption price to the holders of the Exchange LP Units in the event of a liquidation, dissolution or winding up of Exchange LP, a retraction request by a holder of Exchange LP Units or a redemption of Exchange LP Units, as the case may be.
The Support Agreement also provides that, without the prior approval of Exchange LP and the holders of Exchange LP Units, we will not distribute our units or rights to subscribe for our units or other property or assets to all or substantially all of our holders, change any of the rights, privileges or other terms of our units, or change the then outstanding number of our units into a lesser or greater number, unless the same or an equivalent distribution on, or change to, the Exchange LP Units is made simultaneously. In the event of any proposed cash offer, share exchange offer, issuer bid, take-over bid or similar transaction affecting our units, we and Exchange LP will use reasonable best efforts to take all actions necessary or desirable to enable holders of Exchange LP Units to participate in such transaction to the same extent and on an economically equivalent basis as our holders.
The foregoing is a summary of certain of the material terms of the Exchange LP Units, as set out in the limited partnership agreement of Exchange LP, and the Support Agreement and is qualified in its entirety by reference to the full text of the limited partnership agreement of Exchange LP and the Support Agreement, which are available electronically on the website of the SEC atwww.sec.gov and on our SEDAR profile atwww.sedar.com.
Class A Preferred Units and Redemption-Exchange Units
The Class A Preferred Units and Redemption-Exchange Units are exchangeable into our units in accordance with the Preferred Unit Exchange Mechanism and the Redemption-Exchange Mechanism, respectively.
Distribution Reinvestment Plan
We have a distribution reinvestment plan for holders of our units resident in Canada. We may in the future expand our distribution reinvestment plan to include holders of our units resident in the United States. The Property Partnership also has a distribution reinvestment plan. Holders of our units who are not resident in Canada or the United States may participate in the distribution reinvestment plan provided that there are not any laws or governmental regulations that may limit or prohibit them from doing so. The following is a summary of the principal terms of our company’s distribution reinvestment plan.
Pursuant to the distribution reinvestment plan, holders of our units can elect to have distributions paid on units held by them automatically reinvested in additional units in accordance with the terms of the plan. Distributions to be reinvested in our units under the distribution reinvestment plan are reduced by the amount of any applicable withholding tax.
Distributions due to plan participants are paid to the plan agent for the benefit of the plan participants and, if a plan participant has elected to have his or her distributions automatically reinvested, or applied, on behalf of such plan participant to the purchase of additional units, such purchases will be made from our company on the distribution date at a price per unit calculated by reference to the volume weighted average of the trading price for our units on the NYSE for the five trading days immediately preceding the date the relevant distribution is paid by our company.
As soon as reasonably practicable after each distribution payment date, a statement of account will be mailed to each participant setting out the amount of the relevant cash distribution reinvested, the price of each unit purchased, the number of units purchased under the distribution reinvestment plan on the distribution payment date and the total number of units, computed to four decimal places, held for the account of the participant under the distribution reinvestment plan (or, in the case of beneficial holders, CDS will receive such statement on behalf of the beneficial holders participating in the plan). While our company does not issue fractional units, a plan participant’s entitlement to units purchased under the distribution reinvestment plan may include a fraction of a unit and such fractional units shall accumulate. A cash adjustment for any fractional units will be paid by the plan agent upon the withdrawal from or termination by a plan participant of his or her participation in the distribution reinvestment plan or upon termination of the distribution reinvestment plan at a price per unit based upon the closing price for our units on the NYSE on the trading day immediately preceding such withdrawal or termination. A registered holder may, at any time, obtain unit certificates for any number of whole units held for the participant’s account under the plan by notifying the plan agent. Certificates for units acquired under the plan will not be issued to participants unless specifically requested. Prior to pledging, selling or otherwise transferring units held for a participant’s account (except for sale of our units through the plan agent), a registered holder must request that his or her units be electronically transferred to his or her brokerage account or a unit certificate be issued. The automatic reinvestment of distributions under the plan will not relieve participants of any income tax obligations applicable to such distributions. No brokerage commissions are payable in connection with the purchase of our units under the distribution reinvestment plan and all administrative costs are borne by our company.
Unitholders can terminate their participation in the distribution reinvestment plan by providing, or by causing to be provided, notice to the plan agent. Such notice, if actually received by the plan agent no later than five business days prior to a record date, will have effect in respect of the distribution to be made as of such date. Thereafter, distributions to such unitholders will be in cash. In addition, unitholders may request that all or part of their units be sold. When our units are sold through the plan agent, a holder will receive the proceeds less a handling charge and any brokerage trading fees. Our company is able to terminate the distribution reinvestment plan, in its sole discretion, upon notice to the plan participants and the plan agent, but such action will have no retroactive effect that would prejudice a participant’s interest. Our company is also able to amend, modify or suspend the distribution reinvestment plan at any time in its sole discretion, provided that our company, through the plan agent, gives notice of any amendment, modification or suspension to the distribution reinvestment plan that in our company’s opinion may materially prejudice participants.
The Property Partnership has a corresponding distribution reinvestment plan in respect of distributions made to our company and to holders of the Redemption-Exchange Units. Our company does not intend to reinvest distributions it receives from the Property Partnership in the Property Partnership’s distribution reinvestment plan except to the extent that holders of our units elect to reinvest distributions pursuant to our distribution reinvestment plan. Brookfield has advised our company that it may from time to time reinvest distributions it receives from us in respect of our units or from the Property Partnership in respect of the Redemption-Exchange Units pursuant to the distribution reinvestment plans of our company or the Property Partnership, as applicable. To the extent Brookfield reinvests distributions it receives on our units, it will receive additional units of our company. To the extent
Brookfield elects to reinvest distributions it receives from the Property Partnership pursuant to the Property Partnership’s distribution reinvestment plan, it will receive Redemption-Exchange Units. Such Redemption-Exchange Units received by Brookfield also would become subject to the Redemption-Exchange Mechanism and may therefore result in Brookfield acquiring additional units of our company.
Issuance of Additional Partnership Interests
The BPY General Partner has broad rights to cause our company to issue additional partnership interests and may cause us to issue additional partnership interests (including new classes of partnership interests and options, rights, warrants and appreciation rights relating to such interests) for any partnership purpose, at any time and on such terms and conditions as it may determine without the approval of any limited partners. Any additional partnership interests may be issued in one or more classes, or one or more series of classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of partnership interests) as may be determined by the BPY General Partner in its sole discretion, all without the approval of our limited partners.
Investments in Property Partnership
If and to the extent that our company raises funds by way of the issuance of equity or debt securities, or otherwise, pursuant to a public offering, private placement or otherwise, an amount equal to the proceeds will be invested in the Property Partnership, unless otherwise agreed by us and the Property Partnership.
No partner has the right to withdraw any or all of its capital contribution. The limited partners have no liability for further capital contributions to our company. Each limited partner’s liability will be limited to the amount of capital such partner is obligated to contribute to our company for its limited partner interest plus its share of any undistributed profits and assets, subject to certain exceptions. See “—“- Limited Liability” below.
Distributions to partners of our company will be made only as determined by the BPY General Partner in its sole discretion. However, the BPY General Partner will not be permitted to cause our company to make a distribution if it does not have sufficient cash on hand to make the distribution (including as a result of borrowing), the distribution would render it insolvent, or if, in the opinion of the BPY General Partner, the distribution would leave it with insufficient funds to meet any future or contingent obligations, or the distribution would contravene the Bermuda Limited Partnership Act 1883. For greater certainty, our company, the Property Partnership or one or more of the Holding Entities may (but none is obligated to) borrow money in order to obtain sufficient cash to make a distribution. The amount of taxes withheld or paid by us in respect of our units held by limited partners or the BPY General Partner shall be treated either as a distribution to such partner or as a general expense of our company as determined by the BPY General Partner in its sole discretion.
The BPY General Partner has sole authority to determine whether our company will make distributions and the amount and timing of these distributions. The BPY General Partner has adopted a distribution policy pursuant to which our company intends to make quarterly cash distributions in an initialthe amount currently anticipated to be approximately $1.00$1.12 per unit on an annualized basis. Our distribution policy is to retain sufficient cash flow within our operations to cover tenant improvements, leasing costs and other sustaining capital expenditures and to pay out substantially all remaining cash flow. In order to finance development projects, acquisitions and other investments, we plan to raise external capital. We are targeting an initial pay-outbelieve that a payout ratio of approximately 80% of FFO.FFO should accomplish this objective. See Item 5.A. “Operating“Operating and Financial Review and Prospects —- Operating Results — Performance Measures”Results” for a discussion of FFO. We will initially pursuehave invested a distributionsubstantial amount of capital in development and redevelopment projects primarily in our office and retail platforms. Once we realize stabilized cash flow from these initiatives, we expect the growth ratein our payout to meet its target in the range of 3%5% to 5%8% annually. Our company, the Property Partnership or one or more Holding Entities may (but none is obligated to) borrow money in order to obtain sufficient cash to make a distribution. From time to time our distributions may exceed the above percentages as a result of acquisitions that are attractive on a long-term cash flow and/or total return basis but are not immediately accretive to FFO. However, there can be no assurance that we will be able to make distributions in the amounts discussed above or meet our target growth rate. Our company’s ability to make distributions will depend on our company receiving sufficient distributions from the Property Partnership, which in turn will depend on the Property Partnership receiving sufficient distributions from the Holding Entities, and we cannot assure you that our company will in fact make cash distributions as intended. In particular, the amount and timing of distributions will depend upon a number of factors, including, among others, our actual results of operations and financial condition, the amount of cash that is generated
by our operations and investments, restrictions imposed by the terms of any indebtedness that is incurred to leverage our operations and investments or to fund liquidity needs, levels of operating and other expenses, contingent liabilities and other factors that the BPY General Partner deems relevant.
Distributions made by the Property Partnership will be madepro rata with respect to the Property Partnership’s limitedmanaging general partnership interestsinterest owned by us and those limited partnership interests owned by Brookfield. Our company’s ability to make distributions will also be subject to additional risks and uncertainties, including those set forth in this Form 20-F under Item 3.D. “Key“Key Information —- Risk Factors” and Item 5. “Operating“Operating and Financial Review and Prospects”. In particular, see Item 3.D “Key“Key Information —- Risk Factors —- We may not be able to make distributions to holders of our units in amounts intended or at all” and “—“- Our organizational and ownership structure, as well as our contractual arrangements with Brookfield, may create significant conflicts of interest that may be resolved in a manner that is not in the best interests of our company or the best interests of our unitholders.” In addition, the BPY General Partner will not be permitted to cause our company to make a distribution if we do not have sufficient cash on hand to make the distribution, ifthe distribution would render our company insolvent or if, in the opinion of the BPY General Partner, the distribution would leave us with insufficient funds to meet any future or contingent obligations.
obligations, or the distribution would contravene the Bermuda Limited Partnership Act of 1883.
Allocations of Income and Losses
Limited partners share in the net profits and net losses of our company generally in accordance with their respective percentage interest in our company.
Net income and net losses for U.S. federal income tax purposes will be allocated for each taxable year or other relevant period among our partners using a monthly, quarterly or other permissible convention pro rata on a per unit basis, except to the extent otherwise required by law or pursuant to tax elections made by our company. Each item of income, gain, loss and deduction so allocated to a partner of our partnership generally will be the same source and character as though such partner had realized the item directly.
The income for Canadian federal income tax purposes of our company for a given fiscal year will be allocated to each partner in an amount calculated by multiplying such income by a fraction, the numerator of which is the sum of the distributions received by such partner with respect to such fiscal year and the denominator of which is the aggregate amount of the distributions made by our company to partners with respect to such fiscal year. To such end, any person who was a partner at any time during such fiscal year but who has transferred all of their units before the last day of that fiscal year may be deemed to be a partner on the last day of such fiscal year for the purposes of subsection 96(1) of the Tax Act. Generally, the source and character of items of income so allocated to a partner with respect to a fiscal year of our company will be the same source and character as the distributions received by such partner with respect to such fiscal year.
The BPY General Partner may adjust allocations of items that would otherwise be made pursuant to the terms of our limited partnership agreement to the extent necessary to avoid an adverse effect on our company’s limited partners, subject to the approval of a committee of the board of directors of the BPY General Partner made up of independent directors.
If, with respect to a given fiscal year, no distribution is made by our company or we have a loss for Canadian federal income tax purposes, one quarter of the income, or loss, as the case may be, for Canadian federal income tax purposes of our company for such fiscal year, will be allocated to the partners of record at the end of each calendar quarter ending in such fiscal year pro rata to their respective percentage interests in our company, which in the case of the BPY General Partner shall mean 0.2%, and in the case of all of our limited partners shall mean in the aggregate 99.8%, which aggregate percentage interest shall be allocated among the limited partners in the proportion that the number of our units held at each such date by a limited partner is of the total number of our units issued and outstanding at each such date. Generally, the source and character of such income or losses so allocated to a partner at the end of each calendar quarter will be the same source and character as the income or loss earned or incurred by our company in such calendar quarter.
Assuming that a limited partner does not participate in the control or management of our company or conduct the affairs of, sign or execute documents for or otherwise bind our company within the meaning of the Bermuda Limited Partnership Act 1883 and otherwise acts in conformity with the provisions of our limited partnership agreement, such partner’s liability under the Bermuda Limited Partnership Act 1883 and our limited partnership agreement will be limited to the amount of capital such partner is obligated to contribute to our company for its limited partner interest plus its share of any undistributed profits and assets, except as described below.
If it were determined, however, that a limited partner was participating in the control or management of our company or conducting the affairs of, signing or executing documents for or otherwise binding our company (or purporting to do any of the foregoing) within the meaning of the Bermuda Limited Partnership Act 1883 or the Bermuda Exempted Partnerships Act 1992, such limited partner would be liable as if it were a general partner of our partnership in respect of all debts of our company incurred while that limited partner was so acting or purporting to act. Neither our limited partnership agreement nor the Bermuda Limited Partnership Act 1883 specifically provides for legal recourse against the BPY General Partner if a limited partner were to lose limited liability through any fault of the BPY General Partner. While this does preclude a limited partner from seeking legal recourse, we are not aware of any precedent for such a claim in Bermuda case law.
No Management or Control;
NoLimited Voting
Our company’s limited partners, in their capacities as such, may not take part in the management or control of the activities and affairs of our company and do not have any right or authority to act for or to bind our company or to take part or interfere in the conduct or management of our company. Limited partners are not entitled to vote on matters relating to our company, although holders of units are entitled to consent to certain matters with respect to certain amendments to our limited partnership agreement and certain matters with respect to the withdrawal of the BPY General Partner as described in further detail below. Each unit entitles the holder thereof to one vote for the purposes of any approvals of holders of units.
In addition to their rights under our limited partnership agreement, limited partners have consent rights with respect to certain fundamental matters and related party transactions (in accordance with MI 61-101) and on any other matters that require their approval in accordance with applicable securities laws and stock exchange rules. Each unit entitles the holder thereof to one vote for the purposes of any approvals of holders of units.
The BPY General Partner may call special meetings of the limited partners at a time and place outside of Canada determined by the BPY General Partner on a date not less than 10 days nor more than 60 days after the mailing of notice of the meeting. The limited partners do not have the ability to call a special meeting. Only holders of record on the date set by the BPY General Partner (which may not be less than 10 nor more than 60 days before the meeting) are entitled to notice of any meeting.
Written consents may be solicited only by or on behalf of the BPY General Partner. Any such consent solicitation may specify that any written consents must be returned to our company within the time period, which may not be less than 20 days, specified by the BPY General Partner.
For purposes of determining holders of partnership interests entitled to provide consents to any action described above, the BPY General Partner may set a record date, which may be not less than 10 nor more than 60 days before the date by which record holders are requested in writing by the BPY General Partner to provide such consents. Only those holders of partnership interests on the record date established by the BPY General Partner will be entitled to provide consents with respect to matters as to which a consent right applies.
Amendment of Our Limited Partnership Agreement
Amendments to our limited partnership agreement may be proposed only by or with the consent of the BPY General Partner. To adopt a proposed amendment, other than the amendments that do not require limited partner approval discussed below, the BPY General Partner must seek approval of a majority of our outstanding units required to approve the amendment, either by way of a meeting of the limited partners to consider and vote upon the proposed amendment or by written approval.
No amendment may be made that would:
| 1. |
| 1) | enlarge the obligations of any limited partner without its consent, except that any amendment that would have a material adverse effect on the rights or preferences of any class of partnership interests in relation to other classes of partnership interests may be approved by at least a majority of the type or class of partnership interests so affected; or |
| 2. |
| 2) | enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by our company to, the BPY General Partner or any of its affiliates without the consent of the BPY General Partner, which may be given or withheld in its sole discretion. |
The provision of our limited partnership agreement preventing the amendments having the effects described in clauses (1) and (2) above can be amended upon the approval of the holders of at least 90% of the outstanding units.
No Limited Partner Approval
Subject to applicable law, the BPY General Partner may generally make amendments to our limited partnership agreement without the approval of any limited partner to reflect:
| 1. |
| 1) | a change in the name of our company, the location of our registered office or our registered agent; |
| 2. |
| 2) | the admission, substitution or withdrawal of partners in accordance with our limited partnership agreement; |
| 3. |
| 3) | a change that the BPY General Partner determines is reasonable and necessary or appropriate for our company to qualify or to continue our company’s qualification as an exempted limited partnership under the laws of Bermuda or a partnership in which the limited partners have limited liability under the laws of any jurisdiction or is necessary or advisable in the opinion of the BPY General Partner to ensure that our company will not be treated as an association taxable as a corporation or otherwise taxed as an entity for tax purposes; |
| 4. |
| 4) | an amendment that the BPY General Partner determines to be necessary or appropriate to address certain changes in tax regulations, legislation or interpretation; |
| 5. |
| 5) | an amendment that is necessary, in the opinion of our counsel, to prevent our company or the BPY General Partner or its directors or officers, from in any manner being subjected to the provisions of the U.S. Investment Company Act of 1940 or similar legislation in other jurisdictions; |
| 6. |
| 6) | an amendment that the BPY General Partner determines in its sole discretion to be necessary or appropriate for the creation, authorization or issuance of any class or series of partnership interests or options, rights, warrants or appreciation rights relating to partnership securities; |
| 7. |
| 7) | any amendment expressly permitted in our limited partnership agreement to be made by the BPY General Partner acting alone; |
| 8. |
| 8) | any amendment that the BPY General Partner determines in its sole discretion to be necessary or appropriate to reflect and account for the formation by our company of, or its investment in, any corporation, partnership, joint venture, limited liability company or other entity, as otherwise permitted by our limited partnership agreement; |
| 9. |
| 9) | a change in our company’s fiscal year and related changes; or |
| 10. |
| 10) | any other amendments substantially similar to any of the matters described in (1) through (9) above. |
In addition, the BPY General Partner may make amendments to our limited partnership agreement without the approval of any limited partner if those amendments, in the discretion of the BPY General Partner:
| 1. |
| 1) | do not adversely affect our company’s limited partners considered as a whole (including any particular class of partnership interests as compared to other classes of partnership interests) in any material respect; |
| 2. |
| 2) | are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any governmental agency or judicial authority; |
| 3. |
| 3) | are necessary or appropriate to facilitate the trading of our units or to comply with any rule, regulation, guideline or requirement of any securities exchange on which our units are or will be listed for trading; |
| 4. |
| 4) | are necessary or appropriate for any action taken by the BPY General Partner relating to splits or combinations of units under the provisions of our limited partnership agreement; or |
| 5. |
| 5) | are required to effect the intent expressed in this Form 20-F or the intent of the provisions of our limited partnership agreement or are otherwise contemplated by our limited partnership agreement. |
Opinion of Counsel and Limited Partner Approval
The BPY General Partner will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to the limited partners if one of the amendments described above under “—“- No Limited Partner Approval”Approval” should occur. No other amendments to our limited partnership agreement will become effective without the approval of holders of at least 90% of our units, unless our company obtains an opinion of counsel to the effect that the amendment will not (i) cause our company to be treated as an association taxable as a corporation or otherwise taxable as an entity for tax purposes (provided that for U.S. tax purposes the BPY General Partner has not made the election described below under “—“- Election to be Treated as a Corporation”Corporation”), or (ii) affect the limited liability under the Bermuda Limited Partnership Act 1883 of any of our company’s limited partners. In addition to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of any type or class of partnership interests in relation to other classes of partnership interests will also require the approval of the holders of at least a majority of the outstanding partnership interests of the class so affected.
In addition, any amendment that reduces the voting percentage required to take any action must be approved by the written consent or affirmative vote of limited partners whose aggregate outstanding voting units constitute not less than the voting requirement sought to be reduced.
Sale or Other Disposition of Assets
Our limited partnership agreement generally prohibits the BPY General Partner, without the prior approval of the holders of at least 66
2/3% 2/3% of the voting power of our units, from causing our company to, among other things, sell, exchange or otherwise dispose of all or substantially all of our assets in a single transaction or a series of related transactions. However, the BPY General Partner, in its sole discretion, may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets (including for the benefit of persons who are not our company or our company’s subsidiaries) without that approval. The BPY General Partner may also sell all or substantially all of our assets under any forced sale of any or all of our assets pursuant to the foreclosure or other realization upon those encumbrances without that approval.If, within 120 days after the date of a take-over bid, as defined in the Securities Act (Ontario), the take-over bid is accepted by holders of not less than 90% of our outstanding units, other than our units held at the date of the take-over bid by the offeror or any affiliate or associate of the offeror, and the offeror acquires the units deposited or tendered under the take-over bid, the offeror will be entitled to acquire our units not deposited under the take-over bid on the same terms as the units acquired under the take-over bid. Election to be Treated as a Corporation
If the BPY General Partner determines in its sole discretion that it is no longer in our company’s best interests to continue as a partnership for U.S. federal income tax purposes, the BPY General Partner may elect to treat our company as an association or as a publicly traded partnership taxable as a corporation for U.S. federal (and applicable state) income tax purposes.
Termination and Dissolution
Our company will terminate upon the earlier to occur of: (i) the date on which all of our company’s assets have been disposed of or otherwise realized by us and the proceeds of such disposals or realizations have been distributed to partners; (ii) the service of notice by the BPY General Partner, with the special approval of a majority of its independent directors, that in its opinion the coming into force of any law, regulation or binding
authority renders illegal or impracticable the continuation of our company; and (iii) at the election of the BPY General Partner, if our company, as determined by the BPY General Partner, is required to register as an “investment company” under the U.S. Investment Company Act of 1940 or similar legislation in other jurisdictions.
Our partnership will be dissolved upon the withdrawal of the BPY General Partner as the general partner of our partnership (unless a successor entity becomes the general partner as described in the following sentence or the withdrawal is effected in compliance with the provisions of our limited partnership agreement that are described below under “—“- Withdrawal of the BPY General Partner”) or the date on which any court of competent jurisdiction enters a decree of judicial dissolution of our partnership or an order to wind-up or liquidate the BPY General Partner without the appointment of a successor in compliance with the provisions of our limited partnership agreement that are described below under “—“- Withdrawal of the BPY General Partner”. Our partnership will be reconstituted and continue without dissolution if within 30 days of the date of dissolution (and provided a notice of dissolution has not been filed with the Bermuda Monetary Authority), a successor general partner executes a transfer
deed pursuant to which the new general partner assumes the rights and undertakes the obligations of the general partner, but only if our partnership receives an opinion of counsel that the admission of the new general partner will not result in the loss of limited liability of any limited partner.
Liquidation and Distribution of Proceeds
Upon our dissolution, unless our company is continued as a new limited partnership, the liquidator authorized to wind-up our company’s affairs will, acting with all of the powers of the BPY General Partner that the liquidator deems necessary or appropriate in its judgment, liquidate our company’s assets and apply the proceeds of the liquidation first, to discharge our company’s liabilities as provided in our limited partnership agreement and by law and thereafter to the partners pro rata according to the percentages of their respective partnership interests as of a record date selected by the liquidator. The liquidator may defer liquidation of our assets for a reasonable period of time or distribute assets to partners in kind if it determines that an immediate sale or distribution of all or some of our company’s assets would be impractical or would cause undue loss to the partners.
Withdrawal of the BPY General Partner
The BPY General Partner may withdraw as the general partner without first obtaining approval of our unitholders by giving written notice to the other partners, and that withdrawal will not constitute a violation of our limited partnership agreement.
Upon the withdrawal of a general partner, the holders of at least a majority of our units may select a successor to that withdrawing general partner. If a successor is not selected, or is selected but an opinion of counsel regarding limited liability, tax matters and the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions) cannot be obtained, our company will be dissolved, wound up and liquidated. See “— “- Termination and Dissolution” above. In the event of the withdrawal of a general partner, where such withdrawal will violate our limited partnership agreement, a successor general partner will have the option to purchase the general partnership interest of the departing general partner for a cash payment equal to its fair market value. Under all other circumstances where a general partner withdraws, the departing general partner will have the option to require the successor general partner to purchase the general partnership interest of the departing general partner for a cash payment equal to its fair market value. In each case, this fair market value will be determined by agreement between the departing general partner and the successor general partner. If no agreement is reached within 30 days of the general partner’s departure, an independent investment banking firm or other independent expert selected by the departing general partner and the successor general partner will determine the fair market value. If the departing general partner and the successor general partner cannot agree upon an expert within 45 days of the general partner’s departure, then an expert chosen by agreement of the experts selected by each of them will determine the fair market value.
If the option described above is not exercised by either the departing general partner or the successor general partner, the departing general partner’s general partnership interest will automatically convert into units pursuant to a valuation of those interests as determined by an investment banking firm or other independent expert selected in the manner described in the preceding paragraph.
Transfer of the General Partnership Interest
The BPY General Partner may transfer all or any part of its general partnership interests without first obtaining approval of any unitholder. As a condition of this transfer, the transferee must: (i) be an affiliate of the general partner of the Property Partnership (or the transfer must be made concurrently with a transfer of the general partnership units of the Property Partnership to an affiliate of the transferee); (ii) agree to assume the rights and duties of the BPY General Partner to whose interest that transferee has succeeded; (iii) agree to assume and be bound by the provisions of our limited partnership agreement; and (iv) furnish an opinion of counsel regarding limited liability, tax matters and the
U.S. Investment Company Act
of 1940 (and similar legislation in other jurisdictions). Any transfer of the general partnership interest is subject to prior notice to and approval of the relevant Bermuda regulatory authorities. At any time, the members of the BPY General Partner may sell or transfer all or part of their shares in the BPY General Partner without the approval of the unitholders.
If the BPY General Partner ceases to be the general partner of our partnership and our new general partner is not an affiliate of Brookfield, our company will be required by our limited partnership agreement to change our name to a name that does not include “Brookfield” and which could not be capable of confusion in any way with such name. Our limited partnership agreement explicitly provides that this obligation shall be enforceable and waivable by the BPY General Partner notwithstanding that it may have ceased to be the general partner of our partnership.
Transactions with Interested Parties
The BPY General Partner, its affiliates and their respective partners, members, directors, officers, employees and shareholders, which we refer to as “interested parties,” may become limited partners or beneficially interested in limited partners and may hold, dispose of or otherwise deal with our units with the same rights they would have if the BPY General Partner was not a party to our limited partnership agreement. An interested party will not be liable to account either to other interested parties or to our company, our company’s partners or any other persons for any profits or benefits made or derived by or in connection with any such transaction.
Our limited partnership agreement permits an interested party to sell investments to, purchase assets from, vest assets in and enter into any contract, arrangement or transaction with our company, the Property Partnership, any of the Holding Entities, any operating entity or any other holding entity established by our company and may be interested in any such contract, transaction or arrangement and shall not be liable to account either to our company, the Property Partnership, any of the Holding Entities, any operating entity or any other holding entity established by our company or any other person in respect of any such contract, transaction or arrangement, or any benefits or profits made or derived therefrom, by virtue only of the relationship between the parties concerned, subject to the bye-laws of the BPY General Partner.
Outside Activities of the BPY General Partner; Conflicts of Interest
Under our limited partnership agreement, the BPY General Partner is required to maintain as its sole activity the activity of acting as the general partner of our partnership. The BPY General Partner is not permitted to engage in any business or activity or incur or guarantee any debts or liabilities except in connection with or incidental to its performance as general partner or incurring, guaranteeing, acquiring, owning or disposing of debt
or equity securities of the Property Partnership, a Holding Entity or any other holding entity established by our company.
Our limited partnership agreement provides that each person who is entitled to be indemnified by our company (other than the BPY General Partner), as described below under “—“- Indemnification; LimitationLimitations on Liability”, will have the right to engage in businesses of every type and description and other activities for profit, and to engage in and possess interests in business ventures of any and every type or description, irrespective of whether: (i) such businesses and activities are similar to our activities; or (ii) such businesses and activities directly compete with, or disfavor or exclude, the BPY General Partner, our company, the Property Partnership, any Holding Entity, any operating entity or any other holding entity established by us. Such business interests, activities and engagements will be deemed not to constitute a breach of our limited partnership agreement or any duties stated or implied by law or equity, including fiduciary duties, owed to any of the BPY General Partner, our company, the Property Partnership, any Holding Entity, any operating entity and any other holding entity established by us (or any of their respective investors), and shall be deemed not to be a breach of the BPY General Partner’s fiduciary duties or any other obligation of any type whatsoever of the BPY General Partner. None of the BPY General Partner, our company, the Property Partnership, any Holding Entity, any operating entity, any other holding entity established by us or any other person shall have any rights by virtue of our limited partnership agreement or theour partnership relationship established thereby or otherwise in any business ventures of any person who is entitled to be indemnified by our company as described below under “—“- Indemnification; LimitationLimitations on Liability”. The BPY General Partner and the other indemnified persons described in the preceding paragraph do not have any obligation under our limited partnership agreement or as a result of any duties stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to our company, our limited partners, the Property Partnership, any Holding Entity, any operating entity or any other holding entity established by our company. These provisions do not affect any obligation of an indemnified person to present business or investment opportunities to our company, the Property Partnership, any Holding Entity, any operating entity or any other holding entity established by our company pursuant to the Relationship Agreement or a separate written agreement between such persons.
Any conflicts of interest and potential conflicts of interest that are approved by the BPY General Partner’s governance and nominating committee from time to time will be deemed approved by all partners. Pursuant to our conflicts policy, by a majority vote, independent directors may grant approvals for any of the transactions described above in the form of general guidelines, policies or procedures in which case no further special approval will be required in connection with a particular transaction or matter permitted thereby. See Item 7.B. “Major“Major Shareholders and Related Party Transactions —- Related Party Transactions —- Relationship with Brookfield —- Conflicts of Interest and Fiduciary Duties”.
Indemnification; Limitations on Liability
Under our limited partnership agreement, our company is required to indemnify to the fullest extent permitted by law the BPY General Partner and any of its affiliates (and their respective officers, directors, agents, shareholders, partners, members and employees), any person who serves on a governing body of the Property Partnership, a Holding Entity, operating entity or any other holding entity established by our company and any other person designated by the BPY General Partner as an indemnified person, in each case, against all losses, claims, damages, liabilities, costs or expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, incurred by an indemnified person in connection with our investments and activities or by reason of their holding such positions, except to the extent that the claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the indemnified person’s bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful. In addition, under our limited partnership agreement: (i) the liability of such persons has been limited to the fullest extent permitted by law, except to the
extent that their conduct involves bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful; and (ii) any matter that is approved by the independent directors of the BPY General Partner will not constitute a breach of our limited partnership agreement or any duties stated or implied by law or equity, including fiduciary duties. Our limited partnership agreement requires us to advance funds to pay the expenses of an indemnified person in connection with a matter in which indemnification may be sought until it is determined that the indemnified person is not entitled to indemnification.
Accounts, Reports and Other Information
Under our limited partnership agreement, within the time required by applicable
law,laws and regulations, including any rules of any applicable securities exchange, the BPY General Partner is required to prepare financial statements in accordance with IFRS or such other appropriate accounting principles as determined from time to time and make publicly available as of a date selected by the BPY General Partner, in its sole discretion, our company’s financial statements together with a statement of the accounting policies used in their preparation, such information as may be required by applicable laws and regulations and such information as the BPY General Partner deems appropriate. Our company’s annual financial statements must be audited by an independent accounting firm of international standing. Our company’s quarterly financial statements may be unaudited and will be made available publicly as and within the time period required by applicable laws and regulations, including any rules of any applicable securities exchange.
The BPY General Partner is also required to use commercially reasonable efforts to prepare and send to the limited partners of our partnership on an annual basis a Schedule K-1 (or equivalent). The BPY General Partner will, where reasonably possible, prepare and send information required by the non-U.S. limited partners of our partnership for U.S. federal income tax reporting purposes. The BPY General Partner will also use commercially reasonable efforts to supply information required by limited partners of our partnership for Canadian federal income tax purposes.
Governing Law; Submission to Jurisdiction
Our limited partnership agreement is governed by and will be construed in accordance with the laws of Bermuda. Under our limited partnership agreement, each of our company’s partners (other than governmental entities prohibited from submitting to the jurisdiction of a particular jurisdiction) will submit to the non-exclusive jurisdiction of any court in Bermuda in any dispute, suit, action or proceeding arising out of or relating to our limited partnership agreement. Each partner waives, to the fullest extent permitted by law, any immunity from jurisdiction of any such court or from any legal process therein and further waives, to the fullest extent permitted by law, any claim of inconvenient forum, improper venue or that any such court does not have jurisdiction over the partner. Any final judgment against a partner in any proceedings brought in a court in Bermuda will be conclusive and binding upon the partner and may be enforced in the courts of any other jurisdiction of which the partner is or may be subject, by suit upon such judgment. The foregoing submission to jurisdiction and waivers will survive the dissolution, liquidation, winding up and termination of our company.
We are not required to recognize any transfer of our units until certificates, if any, evidencing such units are surrendered for registration of transfer. Each person to whom a unit is transferred (including any nominee holder or an agent or representative acquiring such unit for the account of another person) will be admitted to our partnership as a partner with respect to the unit so transferred subject to and in accordance with the terms of our limited partnership agreement. Any transfer of a unit will not entitle the transferee to share in the profits and losses of our company, to receive distributions, to receive allocations of income, gain, loss, deduction or credit or any similar item or to any other rights to which the transferor was entitled until the transferee becomes a partner and a party to our limited partnership agreement.
By accepting a unit for transfer in accordance with our limited partnership agreement, each transferee will be deemed to have:
executed our limited partnership agreement and become bound by the terms thereof;
granted an irrevocable power of attorney to the BPY General Partner or the liquidator of our company and any officer thereof to act as such partner’s agent and attorney-in-fact to execute, swear to, acknowledge, deliver, file and record in the appropriate public offices: (i) all certificates, documents and other instruments relating to the existence or qualification of our company as an exempted limited partnership (or a partnership in which the limited partners have limited liability) in Bermuda and in all jurisdictions in which our company may conduct activities and affairs or own property; any amendment, change, modification or restatement of our limited partnership agreement, subject to the requirements of our limited partnership agreement; the dissolution and liquidation of our company; the admission or withdrawal of any partner of our partnership or any capital contribution of any partner of our partnership; the determination of the rights, preferences and privileges of any class or series of units or other partnership interests of our company, and any tax election with any limited partner or general partner on behalf of our partnership or the partners; and (ii) subject to the requirements of our limited partnership agreement, all ballots, consents, approvals, waivers, certificates, documents and other instruments necessary or appropriate, in the sole discretion of the BPY General Partner or the liquidator of our company, to make, evidence, give, confirm or ratify any voting consent, approval, agreement or other action that is made or given by our company’s partners or is consistent with the terms of our limited partnership agreement or to effectuate the terms or intent of our limited partnership agreement;
made the consents and waivers contained in our limited partnership agreement, including with respect to the approval of the transactions and agreements entered into in connection with our formation and the spin-off;Spin-off; and
ratified and confirmed all contracts, agreements, assignments and instruments entered into on behalf of our company in accordance with our limited partnership agreement, including the granting of any charge or security interest over the assets of our company and the assumption of any indebtedness in connection with the affairs of our company.
The transfer of any unit and the admission of any new partner to our partnership will not constitute any amendment to our limited partnership agreement.
Our units may be represented in the form of one or more fully registered unit certificates held by, or on behalf of,
the Canadian Depository for Securities, or CDS
or the Depository Trust Company, or DTC, as applicable, as custodian of such certificates for the participants of CDS or DTC, registered in the name of CDS or DTC or their respective nominee, and registration of ownership and transfers of our units may be effected through the book-based system administered by CDS or DTC as applicable.
DESCRIPTION OF THE PROPERTY PARTNERSHIP LIMITED PARTNERSHIP AGREEMENT
The following is a description of the material terms of the Property Partnership’s limited partnership agreement
which we entered into in connection with the consummation of the spin-off, and is qualified in its entirety by reference to all of the provisions of such agreement. You
willare not
be a limited partner of the Property Partnership and
willdo not have any rights under its limited partnership agreement. However,
pursuant to the Voting Agreement, our company
throughis the
BPY General Partner, will have a number of voting rights, including the right to direct all eligible votes in the election of the directorsmanaging general partner of the Property
General Partner.Partnership and is responsible for the management and control of the Property Partnership.
We have included a summary of what we believe are the most important provisions of the Property Partnership’s limited partnership agreement because we intend to conduct our operations through the Property Partnership and the Holding Entities and our rights with respect to our equity holdingpartnership interest in the Property Partnership will beare governed by the terms of the Property Partnership’s limited partnership agreement. Because this description is only a summary of the terms of the agreement, it does not contain all of the information that you may find useful. For more complete information, you should read the Property Partnership’s limited partnership agreement. The agreement is available electronically on the website of the SEC atwww.sec.gov and on our SEDAR profile atwww.sedar.com and madeis available to our unitholders as described under Item 10.C. “Additional“Additional Information —- Material Contracts” and Item 10.H. “Documents“Documents on Display”. The Property Partnership is a Bermuda exempted limited partnership registered under the Bermuda Limited Partnership Act 1883 and the Bermuda Exempted Partnerships Act 1992. The Property Partnership has a perpetual existence and will continue
as a limited liability partnership unless
theour partnership is terminated or dissolved in accordance with its limited partnership agreement.
As required by law, the Property Partnership’s limited partnership agreement provides for the management and control of the Property Partnership by
aits managing general partner,
the Property GP LP.our company.
Under its limited partnership agreement, the purpose of the Property Partnership is to: acquire and hold interests in the Holding Entities and, subject to the approval of
the Property GP LP,our company, any other entity; engage in any activity related to the capitalization and financing of the Property Partnership’s interests in such entities; and engage in any other activity that is incidental to or in furtherance of the foregoing and that is approved by
the Property GP LPour company and that lawfully may be conducted by a limited partnership organized under the Bermuda Limited Partnership Act 1883, the Bermuda Exempted Partnerships Act 1992 and our limited partnership agreement.
In connection with the Spin-off, Class A limited partnership units of the Property Partnership has two classeswere issued to our company, the Redemption-Exchange Units were issued to certain wholly-owned subsidiaries of units: classBrookfield Asset Management and the general partnership interests were issued to Property Special LP (formerly known as Brookfield Property GP L.P.). On August 8, 2013, we effected a restructuring pursuant to which: (i) all of the Class A non-voting limited partnership units of the Property Partnership were reclassified as Managing General Partner Units; and (ii) all of the general partnership interests in the Property Partnership orwere reclassified as Special LP Units.
As of the Class Adate hereof, the Property Partnership has four classes of units: Redemption-Exchange Units, Special LP Units, Managing General Partner Units and the Redemption-ExchangePreferred Units. Holders of eitherany class of Property Partnership units are not entitled to the withdrawal or return of capital contributions in respect of their units, except to the extent, if any, that distributions are made to such holders pursuant to the Property Partnership’s limited partnership agreement or upon the dissolution of the Property Partnership as described below under “—“- Dissolution” or as otherwise required by applicable law. Holders of the Property Partnership’s units are not entitled to vote on matters relating to the Property Partnership except as described below under “—“- No Management or Control; No Voting”. Except to the extent expressly provided in the PropertyPartnership’s limited partnership agreement, a holder of Property Partnership units will not have priority over any other holder of Property Partnership units, either as to the return of capital contributions or as to profits, losses or distributions. TheExcept with respect to the Class A Preferred Units, the Property Partnership’s limited partnership agreement does not contain any restrictions on ownership of the Property Partnership units. The units of the Property Partnership have no par or other stated value.
The
All of the outstanding Redemption-Exchange Units
and Special LP Units are
identical to the Class A Units, except as described below under “— Distributions” and “— No Management or Control; No Voting” and except that they have the right of redemption or exchange as described below under “— Redemption-Exchange Mechanism”.In connection with the spin-off, the Class A Units of the Property Partnership were issued to our company and the Redemption-Exchange Units were issued toheld by certain wholly-owned subsidiaries of Brookfield Asset Management.
Management and all of the outstanding Managing General Partner Units are held by our company. As of the date hereof, all of the outstanding Preferred Units are held by the Class A Preferred Unitholder.
Issuance of Additional Partnership Interests
The Property Partnership may issue additional partnership interests (including
Class AManaging General Partner Units, Preferred Units, Special LP Units and Redemption-Exchange Units as well as new classes of partnership interests and options, rights, warrants and appreciation rights relating to such interests) for any partnership purpose, at any time and on such terms and conditions as
the Property GP LPour company may determine without the approval of any limited partners. Any additional partnership interests may be issued in one or more classes, or one or more series of classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of partnership interests) as may be determined by
Property GP LPour company in its sole discretion, all without the approval of our limited partners.
Redemption-Exchange Mechanism
At any time,
after two years from April 15, 2013, the date of closing of the spin-off, the holders of the Redemption-Exchange Units
will have the right to require the Property Partnership to redeem all or a portion of the Redemption-Exchange Units for cash, subject to our company’s right to acquire such interests for our units as described below. Any such holder may exercise its right of redemption by delivering a notice of redemption to the Property Partnership and our company.
After presentation for
A holder of Redemption-Exchange Units who delivers a notice of redemption
it will receive,
on the redemption-exchange date and subject to our company’s right to acquire such interests (in lieu of redemption) in exchange for units of our company,
for each unit that is presented, either (a) cash in an amount equal to the market value of one of our units
multiplied by the number of units to be redeemed (as determined by reference to the five day volume weighted average of the trading price of our units on the principal stock exchange for our units based on trading volumes)
multiplied by the number of units to be redeemed or (b) such other amount of cash as may be agreed by such holder and the Property Partnership. Upon its receipt of the redemption notice, our company will have a right to elect, at its sole discretion, to acquire all (but not less than all) Redemption-Exchange Units presented to the Property Partnership for redemption in exchange for units of our company on a
one for oneone-for-one basis. Upon a redemption, the holder’s right to receive distributions with respect to the
Property Partnership Redemption-Exchange Units so redeemed will cease.
The date of exchange specified in any redemption notice may not be less than five business days nor more than twenty business days after the date upon which the redemption notice is received by the Property Partnership and our company. At any time prior to the applicable redemption-exchange date, any holder of Redemption-Exchange Units who delivers a redemption notice will be entitled to withdraw such redemption notice.
Based
Brookfield’s aggregate interest in our company is approximately 68% as of the date of this Form 20-F assuming the exchange of the Redemption-Exchange Units and Exchange LP Units not held by us, and is currently approximately 61% on a fully-exchanged basis.
Class A Preferred Units
The Class A Preferred Units were issued to the Class A Preferred Unitholder on December 4, 2014 in three tranches of $600 million each, with an average dividend yield of 6.5% and maturities of seven, ten and twelve years. In addition, a holder of the Class A Preferred Units is entitled to receive an additional distribution, or excess distribution, in any quarter in which the greater of (i) the aggregate distributions declared on an exchange number of our units distributedand (ii) the aggregate distributions paid on an exchange number of the Redemption-Exchange Units divided by an exchange ratio, exceeds the base distribution such holder is entitled to receive for such quarter. Pursuant to the terms of the Class A Preferred Units, the Property Partnership shall not declare or pay dividends on its Managing General Partner Units or Redemption-Exchange Units, or buy back such units, unless it has paid or also pays any arrears of dividends to the holder of the Class A Preferred Units.
In connection with the issuance of the Class A Preferred Units, our company has agreed to guarantee the obligation of the Property Partnership to pay a liquidation amount in the spin-offevent of the liquidation, dissolution or winding-up of the Property Partnership equal to holders of Brookfield Asset Management’sthe issue price per Class A limited voting sharesPreferred Unit together with all accrued and unpaid dividends. Such guarantee ranks junior to any indebtedness of our company, pari passu with all obligations of our company in respect of any preferred partnership interested issued by our company from time to time, and senior to all obligations of our company with respect of all other non-preferred partnership units issued by our company from time to time.
Our company has entered into an investor agreement with the Class
B limited voting shares,A Preferred Unitholder in connection with the
numberissuance of the Class A Preferred Units pursuant to which we have agreed that, upon the request of a holder of the Class A Preferred Units, our company will file up to four registration statements to register for sale, under the U.S. Securities Act of 1933, as amended or up to four prospectuses to qualify the distribution in Canada, any of our units
heldacquired pursuant to the Preferred Unit Exchange Mechanism. Our company is not required to file a U.S. registration statement or a Canadian prospectus unless such holder requests that units having a value of at least $50 million be registered or qualified. We have agreed to pay expenses in connection with such registration and sales, except for any underwriting discounts or commissions, which will be borne by
Brookfield Asset Managementthe selling unitholder, and
to indemnify the
number of Redemption-Exchange Units Brookfield received, Brookfield’sselling unitholder for material misstatements or omissions in the registration statement and/or prospectus.
Pursuant to the investor agreement, the Class A Preferred Unitholder is also entitled, for so long as it owns an aggregate limited partnership interest in our company of at least 5% of our issued and outstanding units on a fully-diluted basis, to designate one individual to the BPY General Partner’s board of directors. Such individual must meet the standards of independence established by the NYSE and the TSX and be reasonably acceptable to the board of directors.
The Class A Preferred Unitholder is currently approximately 92.44% if it exercised its redemption rightnot entitled to transfer the Class A Preferred Units (or the units into which they are exchangeable) except in fullaccordance with the investor agreement. The investor agreement permits transfers to affiliates of the Class A Preferred Unitholder. In addition, the restrictions on transfer in the investor agreement will be lifted in respect of one-third of the Class A Preferred Units of each series (or the units into which they are exchangeable) on each of the first, second and third anniversaries of the date of the agreement. The rights under the investor agreement are only transferable to an affiliate of the Class A Preferred Unitholder.
Preferred Unit Exchange Mechanism
The Class A Preferred Units are exchangeable at the option of a holder of such Class A Preferred Units into our
company exercised its rightunits at an exchange price of $25.70 per unit. After three years for the seven-year tranche and four years for the ten- and twelve-year tranches, we can effectively require a holder of such Class A Preferred Units to
acquire such interestsexchange the Class A Preferred Units into our units as long as our units are trading at or above 125%, 130% and 135%, respectively, of the exchange price. Upon maturity, the Class A Preferred Units that remain outstanding will be redeemed in exchange for
our units
valued at the 20-day, volume-weighted average trading price at such time. To the extent that the market price of our
company onunits is less than 80% of the
Property Partnership Redemption-Exchangeexchange price at maturity, Brookfield has contingently agreed to acquire the seven-year and ten-year tranches of Class A Preferred Units
redeemed. Brookfield’s total percentage interest in our company would be increased if it participates infrom the
Property Partnership’s distribution reinvestment plan.holder of Class A Preferred Units for the initial issuance price plus accrued and unpaid distributions and to exchange such units for Class A Preferred Units with terms and conditions substantially similar to the twelve-year tranche.
Distributions by the Property Partnership will be made in the sole discretion of
the Property GP LP.our company. However,
the Property GP LPour company will not be permitted to cause the Property Partnership to make a distribution if the Property Partnership does not have sufficient cash on hand to make the distribution, the distribution would render the Property Partnership insolvent or if, in the opinion of
the Property GP LP,our company, the distribution would or might leave the Property Partnership with insufficient funds to meet any future or contingent obligations, or the distribution would contravene the Bermuda Limited Partnership Act 1883. For greater certainty, the Property Partnership or one or more of the Holding Entities may (but none is obligated to) borrow money in order to obtain sufficient cash to make a distribution.
Except as set forth below, prior to the dissolution of the Property Partnership, distributions of available cash (if any), including cash that has been borrowed for such purpose, in any given quarter will be made by the Property Partnership as follows, referred to as the Regular Distribution Waterfall:
first, 100% of any available cash to our company until our company has been distributed an amount equal to our expenses and outlays for the quarter properly incurred;
second, but only at such times as there are no Preferred Units outstanding, to the extent distributions in respect of Redemption-Exchange Units have accrued in previous quarters (as described in the next paragraph), 100% to all the holders of Redemption-Exchange Units pro rata in proportion to their respective percentage interests (which will be calculated using Redemption-Exchange Units only) (which distribution will be treated as having been made pursuant to the fourthsixth and fifthseventh provision below, as applicable) of all amounts that have been accrued in previous quarters and not yet recovered to the holders of Redemption-Exchange Units;
third, an equity enhancement distribution of 100% of any available cash then remaining to the Property GPSpecial LP until an amount equal to 0.3125% of the amount by which our company’s total capitalization value exceeds the total capitalization value of our company determined immediately following the spin-offSpin-off has been distributed to the Property GPSpecial LP, provided that for any quarter in which the Property GP LPour company determines that there is insufficient cash to pay this equity enhancement distribution, the Property GP LPour company may elect to pay all or a portion of this distribution in Redemption-Exchange Units. This distribution for any quarter will be reduced by an amount equal to (i) fees in excess of the base management fee of $12.5 million (plus the amount of any annual escalation by the specified inflation factor) are payable under our Master Services Agreement in such quarter plus (ii) the proportion of each cash payment in relation to such quarter made by an Operating Entity to Brookfield, including any payment made in the form of a dividend, distribution or other profit entitlement, which the Property GP LPour company determines to be comparable to this equity enhancement distribution that is attributable to the amount that a Service Recipient has committed and/or contributed at such time (either as debt or equity) to such Operating Entity (and, in the case of a commitment, as set forth in the terms of the subscription agreement or other underlying documentation with respect to such Operating Entity at or prior to such time), provided that the aggregate amount of any such payments under this clause (ii)(i) will not exceed an amount equal to 0.3125% of the amount the Service Recipient has so committed and/or contributed.contributed and the deduction of such amount will not result in this equity enhancement adjustment being less than zero; and (ii) the amount, if any, by which 0.125% of the total capitalization value of our company on the last day of such quarter exceeds $12.5 million (plus the amount of any annual escalation by the specified inflation factor), provided that the deduction of such amount under this clause (ii) will not result in this equity enhancement adjustment being less than zero. The total capitalization value of our company will be equal to the aggregate of the value of all of our outstanding units and the securities of other Service Recipients that are not held by our company, the Property Partnership, the Holding Entities, the operating entities or any other direct or indirect subsidiary of a Holding Entity, plus all outstanding third party debt (including, generally, debt owed to Brookfield but not amounts owed under the Brookfield revolving credit facility that was in place at closing of the Spin-off) with recourse against our company, the Property Partnership or a Holding Entity, less all cash held by such entities;
| the value of all of our outstanding units and the securities of other Service Recipients that are not held by our company, the Property Partnership, the Holding Entities, the operating entities or any other direct or indirect subsidiary of a Holding Entity, plus all outstanding third party debt (including, generally, debt owed to Brookfield but not amounts owed under the Brookfield revolving credit facility that was in place at closing of the spin-off) with recourse against our company, the Property Partnership or a Holding Entity, less all cash held by such entities;
|
fourth, 100% of any available cash then remaining to holders of the Preferred Units, pro rata to their respective relative percentage of Preferred Units held (determined by reference to the aggregate value of the issue price of the Preferred Units held by each such holder relative to the aggregate value of the issue price of all Preferred Units outstanding), until an amount equal to all preferential distribution to which the holders of the Preferred Units are entitled under the terms of the Preferred Units then outstanding (including any excess distribution and any outstanding accrued and unpaid preferential distributions from prior periods) has been distributed in respect of each Preferred Unit outstanding during such quarter;
fifth, at any time that Preferred Units are outstanding, 100% of any available cash then remaining to holders of Redemption-Exchange Units pro rata in proportion to their respective percentage interests (which will be calculated using Redemption-Exchange Units only) (which distribution will be treated as having been made pursuant to the sixth and seventh provision below, as applicable) all amounts that have been deferred in previous quarters pursuant to the third provision above);
sixth, 100% of any available cash then remaining to the owners of the Property Partnership’s partnership interests (other than owners of the Preferred Units), pro rata to their percentage interests (the percentage interests as to any Preferred Unitholder shall be zero), until an amount equal to the First Distribution Threshold, scheduled to be $0.275 per unit, has been distributed in respect of each limited partnership unitinterest of the Property Partnership during such quarter;
seventh, 85% of any available cash then remaining to the owners of the Property Partnership’s partnership interests (other than owners of the Preferred Units), pro rata to their percentage interests (the percentage interests as to any Preferred Unitholder shall be zero), and an incentive distribution of 15% to the Property GPSpecial LP, until an amount equal to the Second Distribution Threshold, scheduled to be $0.30 per unit, has been distributed in respect of each partnership interest of the Property Partnership limited partnership unit(other than Preferred Units) during such quarter; and
thereafter; 75% of any available cash then remaining to the owners of the Property Partnership’s partnership interests (other than owners of the Preferred Units), pro rata to their percentage interests (the percentage interests as to any Preferred Unitholder shall be zero), and an incentive distribution of 25% to the Property GPSpecial LP.
In 2015, we paid $60 million of equity enhancement distributions and no incentive distributions to Property Special LP. Set forth below is an example of how the
base management fee, equity enhancement and incentive distributions to be made to
the Property
GPSpecial LP are calculated on a quarterly and annualized basis. The figures used below are for illustrative purposes only and are not indicative of our company’s expectations.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Quarterly | | | Annualized | |
Equity Enhancement Distribution Calculation | | Units (m) | | | Per Unit ($) | | | Total
($m) | | | Per Unit ($) | | | Total
($m) | |
Initial capitalization(1) | | | | | | | | | | | | | | | | | | | | |
Market value of our company’s units per unit | | | | | | $ | 25.0 | | | | | | | $ | 25.0 | | | | | |
Our company’s units | | | 80 | | | | | | | | | | | | | | | | | |
Redemption-Exchange Units held by Brookfield(2) | | | 394 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total units | | | 474 | | | | | | | | | | | | | | | | | |
Total market value | | | | | | | | | | $ | 11,850.0 | | | | | | | $ | 11,850.0 | |
| | | | | |
Preferred shares of holding entities held by Brookfield | | | | | | | | | | | 1,275.0 | | | | | | | | 1,275.0 | |
Recourse debt, net of cash | | | | | | | | | | | — | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total capitalization | | | | | | | | | | $ | 13,125.0 | | | | | | | $ | 13,125.0 | |
| | | | | |
Capitalization at illustrative quarter end(3) | | | | | | | | | | | | | | | | | | | | |
Market value of our company’s units per unit | | | | | | $ | 27.0 | | | | | | | $ | 27.0 | | | | | |
Our company’s units | | | 76 | | | | | | | | | | | | | | | | | |
Redemption-Exchange Units held by Brookfield(2) | | | 398 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total units | | | 474 | | | | | | | | | | | | | | | | | |
Total market value | | | | | | | | | | $ | 12,798.0 | | | | | | | $ | 12,798.0 | |
Preferred shares of holding entities held by Brookfield | | | | | | | | | | | 1,275.0 | | | | | | | | 1,275.0 | |
Recourse debt, net of cash | | | | | | | | | | | — | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total capitalization | | | | | | | | | | $ | 14,073.0 | | | | | | | $ | 14,073.0 | |
| | | | | | | | | | | | | | | | | | | | |
Increase in total capitalization | | | | | | | | | | $ | 912.0 | | | | | | | $ | 912.0 | |
| | | | | |
Days in quarter / year | | | | | | | | | | | 90 | | | | | | | | 365 | |
Fraction of quarter / year(4) | | | | | | | | | | | 100.00 | % | | | | | | | 100.00 | % |
Equity enhancement distribution fee rate | | | | | | | | | | | 0.3125 | % | | | | | | | 1.25 | % |
| | | | | | | | | | | | | | | | | | | | |
Gross equity enhancement distribution to general partner | | | | | | | | | | $ | 3.0 | | | | | | | $ | 11.9 | |
| | | | | | | | | | | | | | | | | | | | |
Notes:
|
| | | | | | | | | | | | | |
| | | Quarterly | Annualized |
| Illustrative Base Management Fee Calculation | | Per Unit ($) | Total ($m) | Per Unit ($) | Total ($m) |
Capitalization at illustrative quarter-end(1) | | |
| |
| |
| |
|
| Market value of our company’s units per unit | | $ | 22.90 |
| 16,287.6 |
| $ | 22.90 |
| 16,287.6 |
|
| Add: Brookfield Group preferred shares | | |
| 1,275.0 |
| |
| 1,275.0 |
|
| Add: QIA preferred shares | | |
| 1,800.0 |
| |
| 1,800.0 |
|
| Add: Recourse debt, net of cash |
| |
| 1,587.8 |
| |
| 1,587.8 |
|
| Total capitalization | | |
| $ | 20,950.4 |
| |
| $ | 20,950.4 |
|
| Base management fee rate | | |
| 0.125 | % | |
| 0.500 | % |
| Base management fee | | |
| $ | 26.2 |
| |
| $ | 104.8 |
|
| |
(1) | Based on the number of units, Exchange LP Units and Redemption-Exchange Units as of December 31, 2015. For purposes of calculating the quarter end total capitalization, securities were valued based on their volume weighted average trading price on the principal stock exchange (NYSE) for the preceding five trading days. For illustrative purposes only, the example above assumes a value of $22.90 per unit. |
|
| | | | | | | | | | | | | | |
| | | Quarterly | Annualized |
| Illustrative Equity Enhancement Distribution Calculation | Units (m) | Per Unit ($) | Total
($m) | Per Unit ($) | Total
($m) |
Initial capitalization(1) | |
| |
| |
| |
| |
|
| Market value of our company's units per unit | |
| $ | 21.914 |
| |
| $ | 21.914 |
| |
|
| Our company's units | 80.2 |
| |
| |
| |
| |
|
Redemption-Exchange Units held by Brookfield(2) | 386.1 |
| |
| |
| |
| |
|
| Total units | 466.3 |
| |
| |
| |
| |
|
| Total market value | |
| |
| $ | 10,218.2 |
| |
| $ | 10,218.2 |
|
| | | | | | |
| Preferred shares of holding entities held by Brookfield | |
| |
| 1,275.0 |
| |
| 1,275.0 |
|
| Recourse debt, net of cash | |
| |
| (25.0 | ) | |
| (25.0 | ) |
| Total capitalization | |
| |
| $ | 11,468.2 |
| |
| $ | 11,468.2 |
|
| | | | | | |
Capitalization at illustrative quarter end(3) | |
| |
| |
| |
| |
|
| Market value of our company's units per unit | |
| $ | 22.90 |
| |
| $ | 22.90 |
| |
|
| GP Units and LP Units | 254.2 |
| |
| |
| |
| |
|
| Exchange LP Units | 21.1 |
| |
| |
| |
| |
|
Redemption-Exchange Units held by Brookfield(2) | 437.4 |
| |
| |
| |
| |
|
| Total units | 712.7 |
| |
| |
| |
| |
|
| Total market value | |
| |
| $ | 16,287.6 |
| |
| $ | 16,287.6 |
|
| Preferred shares of holding entities held by Brookfield | |
| |
| 1,275.0 |
| |
| 1,275.0 |
|
| QIA preferred shares | |
| |
| 1,800.0 |
| |
| 1,800.0 |
|
| Recourse debt, net of cash | |
| |
| 1,587.8 |
| |
| 1,587.8 |
|
| Total capitalization | |
| |
| $ | 20,950.4 |
| |
| $ | 20,950.4 |
|
| Increase in total capitalization | |
| |
| $ | 9,482.2 |
| | $ | 9,482.2 |
|
| | | | | | |
| Days in quarter / year | |
| |
| 90 |
| |
| 365 |
|
Fraction of quarter / year(4) | |
| |
| 100.00 | % | |
| 100.00 | % |
| Equity enhancement distribution fee rate | |
| |
| 0.3125 | % | |
| 1.25 | % |
| Gross equity enhancement distribution to Property Special LP | |
| |
| $ | 29.6 |
| |
| $ | 118.5 |
|
Fee offsets(5) | |
| |
| (22.4 | ) | |
| (89.5 | ) |
| Net equity | |
| |
| $ | 7.2 |
| |
| $ | 29.0 |
|
| |
(1) | For purposes of calculating the equity enhancement distribution at each quarter-end,quarter end, the initial total capitalization against which the quarter-endquarter end total capitalization is measured will always be theour company’s total capitalization immediately following the spin-off.Spin-off. For purposes of calculating the initial total capitalization, securities will bewere valued based on their volume-weightedvolume weighted average trading price on the principal stock exchange (determined on the basis of trading volumes)(NYSE) for the 30 trading days commencing on April 15, 2013, the date of the spin-off; provided that if a security is not traded on a stock exchange, the fair market value of such security is determined by the BPY General Partner. For illustrative purposes only, the above example assumes a value of $25.00 per unit of our company.Spin-off. |
| |
(2) | Includes (a) Redemption-Exchange Units of the Property Partnership that are held by Brookfield and that are redeemable for cash or exchangeable for theour company’s units in accordance with the Redemption-Exchange Mechanism and (b) a 1% general partnership interest in the Property PartnershipSpecial LP Units held by the Property GPSpecial LP. For purposes of calculating total capitalization, the value of these securities is assumed to be equal to the value of our company’s units. |
(3) | |
(3) | Based on the number of units, Exchange LP Units and Redemption-Exchange Units as of December 31, 2015. For purposes of calculating the quarter-endquarter end total capitalization, securities will bewere valued based on their volume-weightedvolume weighted average trading price on the principal stock exchange (determined on the basis of trading volumes)(NYSE) for the preceding five trading days; provided that if a security is not traded on a stock exchange, the fair market value of such security is determined by the BPY General Partner.days. For illustrative purposes only, the example above assumes a value of $27.00$22.90 per unit of our company.unit. |
| |
(4) | The example above assumes a full illustrative quarter and a full illustrative year. The equity enhancement distribution fee will be pro-rated for any partial payment period. |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Quarterly | | | Annualized | |
Incentive Distribution Calculation | | Units (m) | | | Per Unit ($) | | | Total ($m) | | | Per Unit ($) | | | Total ($m) | |
Illustrative distribution | | | | | | $ | 0.320 | | | | | | | $ | 1.280 | | | | | |
First distribution threshold | | | | | | $ | 0.275 | | | | | | | $ | 1.100 | | | | | |
Total units of Property Partnership(1) | | | 474 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total first distribution | | | | | | | | | | $ | 130.4 | | | | | | | $ | 521.4 | |
| | | | | | | | | | | | | | | | | | | | |
Distribution in excess of first distribution threshold | | | | | | $ | 0.025 | | | | | | | $ | 0.100 | | | | | |
Total units of Property Partnership(1) | | | 474 | | | | | | | | | | | | | | | | | |
Second distribution to all partners | | | | | | | | | | $ | 11.9 | | | | | | | $ | 47.4 | |
15% incentive distribution to general partner | | | | | | | | | | | 2.1 | | | | | | | | 8.4 | |
| | | | | | | | | | | | | | | | | | | | |
Total second distribution | | | | | | | | | | $ | 14.0 | | | | | | | $ | 55.8 | |
| | | | | | | | | | | | | | | | | | | | |
Distribution in excess of second distribution threshold | | | | | | $ | 0.020 | | | | | | | $ | 0.080 | | | | | |
Total units of Property Partnership(1) | | | 474 | | | | | | | | | | | | | | | | | |
Third distribution to all partners | | | | | | | | | | $ | 9.5 | | | | | | | $ | 37.9 | |
25% incentive distribution to general partner | | | | | | | | | | | 3.2 | | | | | | | | 12.6 | |
| | | | | | | | | | | | | | | | | | | | |
Total third distribution | | | | | | | | | | $ | 12.7 | | | | | | | $ | 50.5 | |
| | | | | | | | | | | | | | | | | | | | |
Total distributions to partners of the Property Partnership (including incentive distributions) | | | | | | | | | | $ | 157.1 | | | | | | | $ | 627.7 | |
| | | | | | | | | | | | | | | | | | | | |
Total incentive distributions to general partner | | | | | | | | | | $ | 5.3 | | | | | | | $ | 21.0 | |
| | | | | | | | | | | | | | | | | | | | |
Notes:
(1) | Includes (a) class A non-voting limited partnership interests in the Property Partnership held by our company, (b) Redemption-Exchange Units of the Property Partnership that are held by Brookfield and that are redeemable for cash or exchangeable for the company’s units in accordance with the Redemption-Exchange Mechanism and (c) a 1% general partnership interest in the Property Partnership held by the Property GP LP. |
The table below quantifies, on a quarterly and annualized basis, all management fees and equity enhancement and incentive distributions that would be earned based on the equity enhancement and incentive distribution examples set forth above. Other than the fixed base management fee, the table below is for illustrative purposes only and is not indicative of our company’s expectations.
| | | | | | | | |
| | | Quarterly | | | Annualized | |
Total Pro Forma Amounts for Illustrative Quarter | | $m | | | $m | |
Fixed base management fee1 | | $ | 12.5 | | | $ | 50.0 | |
Equity enhancement distribution2 | | | 3.0 | | | | 11.9 | |
Incentive distribution | | | 5.3 | | | | 21.0 | |
| | | | | | | | |
Total pro forma amounts | | $ | 20.8 | | | $ | 82.9 | |
| | | | | | | | |
Notes:
(1) | Pursuant to the Master Services Agreement, we pay the Managers a fixed base management fee equal to $12.5 million per quarter (subject to an annual escalation by a specified inflation factor beginning on January 1, 2014). For any quarter in which the BPY GeneralPartner determines that there is insufficient available cash to pay the base management fee as well as the next regular distribution on our units, we may elect to pay all or a portion of the base management fee in our units or in limited partnership units of the Property Partnership, subject to certain conditions.
|
(2)(5) | The equity enhancement distribution for any quarter will be reduced by an amount equal to (i) fees in excess of the base management fee of $12.5 million (plus the amount of any annual escalation by the specified inflation factor) that are payable under the Master Services Agreement in such quarter plus (ii) the proportion of each cash payment in relation to such quarter made by an operating entityOperating Entity to Brookfield, including any payment made in the form of a dividend, distribution or other profit entitlement, which the Property GP LPour company determines to be comparable to the equity enhancement distribution that is attributable to the amount that a Service Recipient has committed and/or contributed at such time (either as debt or equity) to such operating entityOperating Entity (and, in the case of a commitment, as set forth in the terms of the subscription agreement or other underlying documentation with respect to such operating entity at or prior to such time), provided that the aggregate amount of any such payments under this clause (ii)(i) will not exceed an amount equal to 0.3125% of the amount the Service Recipient has so committed and/or contributed.contributed and the deduction of such amount will not result in this equity enhancement adjustment being less than zero; and (ii) the amount, if any, by which 0.125% of the total capitalization value of our company on the last day of such quarter exceeds $12.5 million (plus the amount of any annual escalation by the specified inflation factor), provided that the deduction of such amount under this clause (ii) will not result in this equity enhancement adjustment being less than zero. For any quarter in which the Property GP LPour company determines that there is insufficient cash to pay the equity enhancement distribution, the Property GP LPour company may elect to pay all or a portion of this distribution in Redemption-Exchange Units. |
|
| | | | | | | | | | | | | | |
| | | Quarterly | Annualized |
| Illustrative Incentive Distribution Calculation | Units (m) | Per Unit ($) | Total ($m) | Per Unit ($) | Total ($m) |
| Illustrative distribution | |
| $ | 0.265 |
| |
| $ | 1.060 |
| |
|
| First distribution threshold | |
| $ | 0.275 |
| |
| $ | 1.100 |
| |
|
Total units of Property Partnership(1) | 712.7 |
| |
| |
| |
| |
|
| Total first distribution | |
| |
| $ | 188.5 |
| |
| $ | 754.1 |
|
| Distribution in excess of first distribution threshold | |
| $ | — |
| |
| $ | — |
| |
|
Total units of Property Partnership(1) | 712.7 |
| |
| |
| |
| |
|
| Second distribution to all partners | |
| |
| $ | — |
| |
| $ | — |
|
| 15% incentive distribution to Property Special LP | |
| |
| — |
| |
| — |
|
| Total second distribution | |
| |
| $ | — |
| |
| $ | — |
|
| Distribution in excess of second distribution threshold | |
| $ | — |
| |
| $ | — |
| |
|
Total units of Property Partnership(1) | 712.7 |
| |
| |
| |
| |
|
| Third distribution to all partners | |
| |
| $ | — |
| |
| $ | — |
|
| 25% incentive distribution to Property Special LP | |
| |
| — |
| |
| — |
|
| Total third distribution | |
| |
| $ | — |
| |
| $ | — |
|
| Total distributions to partners of the Property Partnership (including incentive distributions) | |
| |
| $ | 188.5 |
| |
| $ | 754.1 |
|
| Total incentive distributions to Property Special LP | |
| |
| $ | — |
| |
| $ | — |
|
| |
(1) | Based on the number of units on December 31, 2015. Includes (a) Managing General Partner Units of the Property Partnership held by our company, (b) Redemption-Exchange Units of the Property Partnership that are held by Brookfield and that are redeemable for cash or exchangeable for the company’s units in accordance with the Redemption-Exchange Mechanism and (c) Special LP Units of the Property Partnership held by Property Special LP. |
The table below quantifies, on a quarterly and annualized basis, all management fees and equity enhancement and incentive distributions that would be earned based on the equity enhancement and incentive distribution examples set forth above. The table below is for illustrative purposes only and is not indicative of our company’s expectations.
|
| | | | | | |
| | Quarterly | Annualized |
| Total Illustrative Amounts | $m | $m |
Base management fee(1) | $ | 26.2 |
| $ | 104.8 |
|
| Equity enhancement distribution | 7.2 |
| 29.0 |
|
| Incentive distribution | — |
| — |
|
| Total | $ | 33.4 |
| $ | 133.8 |
|
| |
(1) | On August 3, 2015, the board of directors of the partnership approved an amendment to the base management fee and equity enhancement distribution calculations, as of the beginning of the third quarter of 2015. Pursuant to this amendment, the annual base management fee paid by the partnership to Brookfield Asset Management was changed from $50 million, subject to annual inflation adjustments, to 0.5% of the total capitalization of the partnership, subject to an annual minimum of $50 million, plus annual inflation adjustments. The calculation of the equity enhancement distribution was amended to reduce the distribution by the amount by which the revised base management fee is greater than $50 million per annum, plus annual inflation adjustments. |
If, prior to the dissolution of the Property Partnership,
except at any time that Preferred Units are outstanding, available cash in any quarter is not sufficient to pay a distribution to the owners of all Property Partnership interests, pro rata to their percentage interest, then
the Property General Partnerour company may elect to pay the distribution at the then current level first to our company, in respect of the
Class AManaging General Partner Units of the Property Partnership held by our company, and then to the holders of the Redemption-Exchange Units to the extent practicable, and shall accrue any such deficiency for payment from available cash in future quarters as described above.
If, prior to the dissolution of the Property Partnership,
and subject to the terms of any Preferred Units then outstanding, available cash is deemed by
the Property GP LP,our company, in its sole discretion, to be (i) attributable to sales or other dispositions of the Property Partnership’s assets, and (ii) representative of unrecovered capital, then such available cash shall be distributed to the partners of the Property Partnership
other than Preferred Unitholders in proportion to the unrecovered capital attributable to the Property Partnership interests
(other than Preferred Units) held by the partners until such time as the unrecovered capital attributable to each such partnership interest is equal to zero. Thereafter, distributions of available cash made by the Property Partnership (to the extent made prior to dissolution) will be made in accordance with the Regular Distribution Waterfall.
Upon the occurrence of an event resulting in the dissolution of the Property Partnership, all cash and property of the Property Partnership in excess of that required to discharge the Property Partnership’s liabilities will be distributed as follows: (i) to the extent such cash and/or property is attributable to a realization event occurring prior to the event of dissolution, such cash and/or property will be distributed in accordance with the Regular Distribution Waterfall and/or the distribution waterfall applicable to unrecovered capital, (ii) only if there are no Preferred Units outstanding, the aggregate amount of distributions previously deferred
in respect of the Redemption-Exchange Units and not previously recovered and (iii) all other cash and/or property will be distributed in the manner set forth below:
first, 100% to our company until our company has received an amount equal to the excess of: (i) the amount of our outlays and expenses incurred during the term of the Property Partnership; over (ii) the aggregate amount of distributions received by our company pursuant to the first tier of the Regular Distribution Waterfall during the term of the Property Partnership;
second, 100% to the Property GPSpecial LP until the Property GPSpecial LP has received an amount equal to the fair market value of the equity enhancement distribution entitlement, as determined by a qualified independent valuator in accordance with the Property Partnership’s limited partnership agreement, provided that such amount may not exceed 2.5 times the aggregate equity enhancement distribution payments made to the Property GPSpecial LP during the immediately prior 24 months;
third, 100% to holders of the Preferred Units, pro rata to their respective relative percentage of Preferred Units held (determined by reference to the aggregate value of the issue price of the Preferred Units held by each such holder relative to the aggregate value of the issue price of all Preferred Units outstanding), until an amount equal to all preferential distribution to which the holders of the Preferred Units are entitled in the event of dissolution, liquidation, or winding-up of the Property Partnership under the terms of the Preferred Units then outstanding (including any outstanding accrued and unpaid preferential distributions from prior periods) has been distributed in respect of each Preferred Unit outstanding;
fourth, if there are Preferred Units outstanding, an amount equal to the amount of cash or property held by the Property Partnership at such time, that is attributable to a realization event occurring prior to a dissolution event and that has been deemed by our company, in its sole discretion, to be (i) attributable to sales or other dispositions of the Property Partnership’s assets, and (ii) representative of unrecovered capital, shall be distributed to the partners of the Property Partnership other than Preferred Unitholders in proportion to the unrecovered capital attributable to the Property Partnership interests (other than Preferred Units) held by the partners until such time as the unrecovered capital attributable to each such partnership interest is equal to zero, as if such distribution were a distribution occurring prior to dissolution;
fifth, if there are Preferred Units outstanding, to holders of Redemption-Exchange Units pro rata in proportion to their respective percentage interests (which will be calculated using Redemption-Exchange Units only), the aggregate amount of distributions previously deferred and not previously recovered;
sixth, 100% to the partners of the Property Partnership other than Preferred Unitholders, in proportion to their respective amounts of unrecovered capital in the Property Partnership;.
seventh, 100% to the owners of the Property Partnership’s partnership interests other than Preferred Unitholders, pro rata to their percentage interests (the percentage interest as to the Preferred Unitholders shall be zero), until an amount has been distributed in respect of each partnership interest of the Property Partnership limited partnership unit equal to the excess of: (i) the First Distribution Threshold for each quarter during the term of the Property Partnership (subject to adjustment upon the subsequent issuance of additional partnership interests in the Property Partnership); over (ii) the aggregate amount of distributions made in respect of a partnership interest of Property Partnership limited partnership unitother than Preferred Units pursuant to the sixth tier of the Regular Distribution Waterfall during the term of the Property Partnership (subject to adjustment upon the subsequent issuance of additional partnership interests in the Property Partnership);
| third tier of the Regular Distribution Waterfall during the term of the Property Partnership (subject to adjustment upon the subsequent issuance of additional partnership interests in the Property Partnership);
|
eighth, 85% to the owners of the Property Partnership’s partnership interests other than Preferred Unitholders, pro rata to their percentage interests (the percentage interest as to the Preferred Unitholders shall be zero), and 15% to the Property GPSpecial LP, until an amount has been distributed in respect of each partnership interest of the Property Partnership limited partnership unit equal to the excess of: (i) the Second Distribution Threshold less the First Distribution Threshold for each quarter during the term of the Property Partnership (subject to adjustment upon the subsequent issuance of additional partnership interests in the Property Partnership); over (ii) the aggregate amount of distributions made in respect of ana partnership interest of the Property Partnership limited partnership unit pursuant to the fourthseventh tier of the Regular Distribution Waterfall during the term of the Property Partnership (subject to adjustment upon the subsequent issuance of additional partnership interests in the Property Partnership); and
thereafter, 75% to the owners of the Property Partnership’s partnership interests other than Preferred Unitholders, pro rata to their percentage interests, and 25% to the Property GPSpecial LP.
Each partner’s percentage interest is determined by the relative portion of all outstanding partnership interests held by that partner from time to time and is adjusted upon and reflects the issuance of additional partnership interests of the Property Partnership. In addition, the unreturned capital attributable to each of theour partnership interests, as well as certain of the distribution thresholds set forth above, may be adjusted pursuant to the terms of the limited partnership agreement of the Property Partnership
so as to ensure the uniformity of the economic rights and entitlements of: (i) the previously outstanding Property Partnership’s partnership interests; and (ii) the subsequently-issued Property Partnership’s partnership interests.
The limited partnership agreement of the Property Partnership provides that, to the extent that any Holding Entity or any operating entity pays to Brookfield any comparable performance or incentive distribution, the amount of any incentive distributions paid to
the Property
GPSpecial LP in accordance with the distribution entitlements described above will be reduced in an equitable manner to avoid duplication of distributions.
The
Property
GPSpecial LP may elect, at its sole discretion, to reinvest equity enhancement distributions and incentive distributions in Redemption-Exchange Units.
No Management or Control; No Voting
The Property Partnership’s limited partners, in their capacities as such, may not take part in the management or control of the activities and affairs of the Property Partnership and do not have any right or authority to act for or to bind the Property Partnership or to take part or interfere in the conduct or management of the Property Partnership. Limited partners are not entitled to vote on matters relating to the Property Partnership, although holders of units are entitled to consent to certain matters as described below under “—“- Amendment of the Property Partnership Limited Partnership Agreement”, “—“- Opinion of Counsel and Limited Partner Approval”, and “— “- Withdrawal of the Managing General Partner” which may be effected only with the consent of the holders of the percentages of outstanding units of the Property Partnership specified below. For purposes of any approval required from holders of the Property Partnership’s units, if Brookfield and its subsidiariesholders of Redemption-Exchange Units are entitled to vote, they will be entitled to one vote per unit held subject to a maximum number of votes equal to 49% of the total numbervoting power of all units of the Property Partnership then issued and outstanding. Each unit entitles the holder thereof to one vote for the purposes of any approvals of holders of units.In addition, pursuant to the Voting Agreement, our
Meetings
Our company
through the BPY General Partner, has a number of voting rights, including the right to direct all eligible votes in the election of the directors of the Property General Partner. See Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions — Voting Agreements”.Meetings
The Property GP LP may call special meetings of the limited partners of the Property Partnership at a time and place outside of Canada determined by itus on a date not less than 10 days nor more than 60 days after the mailing of notice of the meeting. Special meetings of the limited partners may also be called by limited partners owning 50% or more of the outstanding partnership interests of the class or classes for which a meeting is proposed. For this purpose, theour partnership interests outstanding do not include partnership interests owned by the Property GP LPour company or Brookfield. Only holders of record on the date set by the Property GP LPour company (which may not be less than 10 days nor more than 60 days before the meeting) are entitled to notice of any meeting.
Amendment of the Property Partnership Limited Partnership Agreement
Amendments to the Property Partnership’s limited partnership agreement may be proposed only by or with the consent of
the Property GP LP.our company. To adopt a proposed amendment, other than the amendments that do not require limited partner approval discussed below,
the Property GP LPour company must seek approval of a majority of the Property Partnership’s outstanding units required to approve the amendment, either by way of a meeting of the limited partners to consider and vote upon the proposed amendment or by written approval. For this purpose, the Redemption-Exchange Units will not constitute a separate class and will vote together with the other outstanding limited partnership units of the Property Partnership.
For purposes of any approval required from holders of the Property Partnership’s units, if
Brookfield and its subsidiariesholders of Redemption-Exchange Units are entitled to vote, they will be entitled to one vote per unit held subject to a maximum number of votes equal to 49% of the total voting power of all units of the Property Partnership then issued and outstanding.
No amendment may be made that would:
| 1. |
| 1) | enlarge the obligations of any limited partner of the Property Partnership without its consent, except that any amendment that would have a material adverse effect on the rights or preferences of any class of partnership interests in relation to other classes of partnership interests may be approved by at least a majority of the type or class of partnership interests so affected; oror; |
| 2. |
| 2) | enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by the Property Partnership to the Property GPSpecial LP or any of its affiliates without the consent of the Property GPSpecial LP which may be given or withheld in its sole discretion. |
The provision of the Property Partnership’s limited partnership agreement preventing the amendments having the effects described in clauses (1) or (2) above can be amended upon the approval of the holders of at least 90% of the outstanding
units.limited partnership units of the Property Partnership.
No Limited Partner Approval
Subject to applicable law,
the Property GP LPour company may generally make amendments to the Property Partnership’s limited partnership agreement without the approval of any limited partner to reflect:
| 1. |
| 1) | a change in the name of the partnership,Property Partnership, the location of the partnership’sProperty Partnership’s registered office or the partnership’sProperty Partnership’s registered agent; |
| 2. |
| 2) | the admission, substitution, withdrawal or removal of partners in accordance with the limited partnership agreement;agreement of the Property Partnership; |
| 3. |
| 3) | a change that the Property GP LPour company determines is reasonable and necessary or appropriate for the partnershipProperty Partnership to qualify or to continue its qualification as an exempted limited partnership under the laws of Bermuda or a partnership in which the limited partners have limited liability under the laws of any jurisdiction or is necessary or advisable in the opinion of the Property GP LPour company to ensure that the Property Partnership will not be treated as an association taxable as a corporation or otherwise taxed as an entity for tax purposes; |
| 4. |
| 4) | an amendment that the Property GP LPour company determines to be necessary or appropriate to address certain changes in tax regulations, legislation or interpretation; |
| 5. |
| 5) | an amendment that is necessary, in the opinion of counsel, to prevent the Property Partnership or the Property GP LPour company or its directors or officers, from in any manner being subjected to the provisions of the U.S. Investment Company Act of 1940 or similar legislation in other jurisdictions; |
| 6. |
| 6) | an amendment that the Property GP LPour company determines in its sole discretion to be necessary or appropriate for the creation, authorization or issuance of any class or series of partnership interests or options, rights, warrants or appreciation rights relating to partnership interests; |
| 7. |
| 7) | any amendment expressly permitted in the Property Partnership’s limited partnership agreement to be made by the Property GP LPour company acting alone; |
| 8. |
| 8) | any amendment that the Property GPour company determines in its sole discretion to be necessary or appropriate to reflect and account for the formation by the partnershipProperty Partnership of, or its investment in, any corporation, partnership, joint venture, limited liability company or other entity, as otherwise permitted by the Property Partnership’s limited partnership agreement; |
| 9. |
| 9) | a change in the Property Partnership’s fiscal year and related changes; |
| 10. |
| 10) | any amendment concerning the computation or allocation of specific items of income, gain, expense or loss among the partners that, in the sole discretion of the Property GP LP,our company, is necessary or appropriate to: (i) comply with the requirements of applicable law; (ii) reflect the partners’ interests in the Property Partnership; or (iii) consistently reflect the distributions made by the Property Partnership to the partners pursuant to the terms of the limited partnership agreement of the Property Partnership; |
| 11. |
| 11) | any amendment that the Property GP LPour company determines in its sole discretion to be necessary or appropriate to address any statute, rule, regulation, notice, or announcement that affects or could affect the U.S. federal income tax treatment of any allocation or distribution related to any interest of the Property GP LPour company in the profits of the Property Partnership; or |
| 12. |
| 12) | any other amendments substantially similar to any of the matters described in (1) through (11) above. |
In addition,
the Property GP LPour company may make amendments to the Property Partnership’s limited partnership agreement without the approval of any limited partner if those amendments, in the discretion of
the Property GP LP:our company: | 1. |
| 1) | do not adversely affect the Property Partnership’s limited partners considered as a whole (including any particular class of partnership interests as compared to other classes of partnership interests) in any material respect; |
| 2. |
| 2) | are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any governmental agency or judicial authority; |
| 3. |
| 3) | are necessary or appropriate for any action taken by the Property GP LPour company relating to splits or combinations of units under the provisions of the Property Partnership’s limited partnership agreement; or |
| 4. |
| 4) | are required to effect the intent expressed in this Form 20-Fthe final registration statement and prospectus of our company filed in connection with the Spin-off or the intent of the provisions of the Property Partnership’s limited partnership agreement or are otherwise contemplated by the Property Partnership’s limited partnership agreement. |
Opinion of Counsel and Limited Partner Approval
The Property GP LP
Our company will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to the limited partners if one of the amendments described above under “—“- No Limited Partner Approval” should occur. Any other amendment to the Property Partnership’s limited partnership agreement will only become effective either with the approval of at least 90% of the Property Partnership’s units or if an opinion of counsel is obtained to effect that the amendment will not (i) cause the Property Partnership to be treated as an association taxable as a corporation or otherwise taxable as an entity for tax purposes (provided that for U.S. tax purposes the Property GP LPour company has not made the election described below under “—“- Election to be Treated as a Corporation”), or (ii) affect the limited liability under the Bermuda Limited Partnership Act 1883 of any of the Property Partnership’s limited partners. In addition to the above restrictions, any amendment that would have a material adverse effect on the rights or preferences of any type or class of partnership interests in relation to other classes of partnership interests will also require the approval of the holders of at least a majority of the outstanding partnership interests of the class so affected.
In addition, any amendment that reduces the voting percentage required to take any action must be approved by the written consent or affirmative vote of limited partners whose aggregate outstanding voting units constitute not less than the voting requirement sought to be reduced.
Sale or Other Disposition of Assets
The Property Partnership’s limited partnership agreement generally prohibits
the Property GP LP,our company, without the prior approval of the holders of a majority of the units of the Property Partnership, from causing the Property Partnership to, among other things, sell, exchange or otherwise dispose of all or substantially all of the Property Partnership’s assets in a single transaction or a series of related transactions, including by approving on the Property Partnership’s behalf the sale, exchange or other disposition of all or substantially all of the assets of the Property Partnership’s subsidiaries. However,
the Property GP LP,our company, in its sole discretion, may mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the Property Partnership’s assets (including for the benefit of persons who are not the Property Partnership or the Property Partnership’s subsidiaries) without that approval.
The Property GP LPOur company may also sell all or substantially all of the Property Partnership’s assets under any forced sale of any or all of the Property Partnership’s assets pursuant to the foreclosure or other realization upon those encumbrances without that approval.
Election to be Treated as a Corporation
If
the Property GP LPour company determines that it is no longer in the Property Partnership’s best interests to continue as a partnership for U.S. federal income tax purposes,
the Property GP LPour company may elect to treat the Property Partnership as an association or as a publicly traded partnership taxable as a corporation for U.S. federal (and applicable state) income tax purposes.
Dissolution
DissolutionThe Property Partnership will dissolve and its affairs will be wound up upon the earlier to occur of: (i) the service of notice by the Property GP LP,our company, with the approval of a majority of the members of the independent directors of the PropertyBPY General Partner, that in the opinion of the Property GP LPour company the coming into force of any law, regulation or binding authority renders illegal or impracticable the continuation of the Property Partnership; (ii) the election of the Property GP LPour company if the Property Partnership, as determined by the Property GP LP,our company, is required to register as an “investment company” under the U.S. Investment Company Act of 1940 or similar legislation in other jurisdictions; (iii) the date that the Property GP LPour company withdraws from the Property Partnership (unless a successor entity becomes the managing general partner of the Property Partnership as described below under “—“- Withdrawal of the Managing General Partner”); (iv) the date on which any court of competent jurisdiction enters a decree of judicial dissolution of the Property Partnership or an order to wind-up or liquidate the Property GP LPour company without the appointment of a successor in compliance with the provisions of the Property Partnership’s
limited partnership agreement that are described below under “—“- Withdrawal of the Managing General Partner”; and (v) the date on which the Property GP LPour company decides to dispose of, or otherwise realize proceeds in respect of, all or substantially all of the Property Partnership’s assets in a single transaction or series of transactions. The Property Partnership will be reconstituted and continue without dissolution if within 30 days of the date of dissolution (and provided that a notice of dissolution with respect to the Property Partnership has not been filed with the Bermuda Monetary Authority), a successor
managing general partner executes a transfer deed pursuant to which the new
managing general partner assumes the rights and undertakes the obligations of the original
managing general partner, but only if the Property Partnership receives an opinion of counsel that the admission of the new
managing general partner will not result in the loss of limited liability of any limited partner of the Property Partnership.
Withdrawal of the
Managing General Partner
The Property GP LP
Our company may withdraw as
managing general partner
of the Property Partnership without first obtaining approval of unitholders
of the Property Partnership by giving written notice, and that withdrawal will not constitute a violation of the limited partnership agreement.
Upon the withdrawal of the Property GP LP,our company, the holders of at least a majority of outstanding units may select a successor to that withdrawing managing general partner. If a successor is not selected, or is selected but an opinion of counsel regarding limited liability, tax matters and the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions) cannot be obtained, the Property Partnership will be dissolved, wound up and liquidated. See “— “- Dissolution” above.The Property GP LP
Our company may not be removed
unless that removal is approved by the vote of the holders of at least 66 2/3% of the outstanding class of units that are not Redemption-Exchange Units and it receives a withdrawal opinion of counsel regarding limited liability tax matters and the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions). Any removal of the Property GP LP is also subject to the approval of a successoras managing general partner by the votepartners of the holders of a majority of its outstanding units that are not Redemption-Exchange Units.Property Partnership.
In the event of
(i) the removal of a general partner under circumstances where cause exists, or (ii) the withdrawal of a
managing general partner as a result of certain events relating to the bankruptcy, insolvency or dissolution of that
managing general partner, which withdrawal will violate the Property Partnership’s limited partnership agreement, a successor
managing general partner will have the option to purchase the
general partnership interestManaging General Partner Units of the departing
managing general partner for a cash payment equal to its fair market value. Under all other circumstances where a
managing general partner withdraws,
or is removed by the limited partners, the departing
managing general partner will have the option to require the successor
managing general partner to purchase the
general partnership interestManaging General Partner Units of the departing
managing general partner for a cash payment equal to its fair market value. In each case, this fair market value will be determined by agreement between the departing
managing general partner and the successor
managing general partner. If no agreement is reached within 30 days of the
managing general partner’s departure, an independent investment banking firm or other independent
expert selected by the departing managing general partner and the successor managing general partner will determine the fair market value. If the departing managing general partner and the successor managing general partner cannot agree upon an expert within 45 days of the managing general partner’s departure, then an expert chosen by agreement of the experts selected by each of them will determine the fair market value.
If the option described above is not exercised by either the departing
managing general partner or the successor
managing general partner, the departing
managing general partner’s
general partnership interestsManaging General Partner Units will automatically convert into units pursuant to a valuation of those interests as determined by an investment banking firm or other independent expert selected in the manner described in the preceding paragraph.
Transfer of the
Managing General
Partnership InterestThe Property GP LPPartner Units
Our company may transfer all or any part of its general partnership interestsManaging General Partner Units without first obtaining approval of any unitholder.unitholder of the Property Partnership. As a condition of this transfer, the transferee must: (i) be an affiliate of the BPY General Partner (or the transfer must be made concurrently with a transfer of the general partnership units of our companyGP Units to an affiliate of the transferee); (ii) agree to assume the rights and duties of the managing general partner to whose interest that transferee has succeeded; (iii) agree to assume the provisions of the Property Partnership’s limited partnership agreement; and (iv) furnish an opinion of counsel regarding limited liability, tax matters and the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions). Any transfer of the general partnership interestManaging General Partner Units is subject to prior notice to and approval of the relevant Bermuda regulatory authorities. At any time, the members of the Property GP LPBPY General Partner may sell or transfer all or any part of their unitsits general partnership interests in the Property GP LPour company without the approval of our unitholders as described under Item 10.B. “Memorandum and Articles of Association - Description of our Units and our Limited Partnership Agreement - Transfer of the unitholders.General Partnership Interest”.
Transactions with Interested Parties
The Property GP LP,
Our company, its affiliates and their respective partners, members, directors, officers, employees and shareholders, which we refer to as “interested parties”, may become limited partners or beneficially interested in limited partners and may hold, dispose
of or otherwise deal with units of the Property Partnership with the same rights they would have if
the Property GP LP and Property General Partnerour company were not a party to the limited partnership agreement of the Property Partnership. An interested party will not be liable to account either to other interested parties or to the Property Partnership, its partners or any other persons for any profits or benefits made or derived by or in connection with any such transaction.
The limited partnership agreement of the Property Partnership permits an interested party to sell investments to, purchase assets from, vest assets in and enter into any contract, arrangement or transaction with our company, the Property Partnership, any of the Holding Entities, any operating entity or any other holding entity established by the Property Partnership and may be interested in any such contract, transaction or arrangement and shall not be liable to account either to the Property Partnership, any of the Holding Entities, any operating entity or any other holding entity established by the Property Partnership or any other person in respect of any such contract, transaction or arrangement, or any benefits or profits made or derived therefrom, by virtue only of the relationship between the parties concerned, subject to the bye-laws of the
PropertyBPY General Partner.
Outside Activities of the
Managing General Partner
Under the Property Partnership’s
In accordance with our limited partnership agreement,
our company is authorized to: (i) acquire and hold interests in the
general partner is requiredProperty Partnership and, subject to
maintain as its solethe approval of the BPY General Partner, interests in any other entity; (ii) engage in any activity
related to the
activitycapitalization and financing of
actingour company’s interests in the Property Partnership and such other entities; (iii) serve as the
managing general partner of the Property
Partnership. ThePartnership and execute and deliver, and perform the functions of a managing general partner
is not permitted tospecified in, the limited partnership agreement of the Property Partnership; and (iv) engage in any
business orother activity
or incur or guarantee any debts or liabilities except in connection with orthat is incidental to
its performance as general partner or
incurring, guaranteeing, acquiring, owning or disposingin furtherance of
debt or equity securities of a subsidiary of an Holding Entity or any other holding entity establishedthe foregoing and that is approved by the
Property Partnership.BPY General Partner and that lawfully may be conducted by a limited partnership organized under the Bermuda Limited Partnership Act 1883, the Bermuda Exempted Partnerships Act 1992 and our limited partnership agreement.
The Property Partnership’s limited partnership agreement provides that each person who is entitled to be indemnified by the partnership (other than the general partner),Property Partnership, as described below under “—“- Indemnification; Limitations on Liability”, will have the right to engage in businesses of every type and description and other activities for profit, and to engage in and possess interests in business ventures of any and every type or description, irrespective of whether: (i) such businesses and activities are similar to our activities; or (ii) such businesses and activities directly compete with, or disfavor or exclude, the PropertyBPY General Partner, the Property GP LP,our company, the Property Partnership, any Holding Entity, any operating entity, or any other holding entity established by the Property Partnership. Such business interests, activities and engagements will be deemed not to constitute a breach of the Property Partnership’s limited partnership agreement or any duties stated or implied by law or equity, including fiduciary duties, owed to any of the PropertyBPY General Partner, the Property GP LP,our company, the Property Partnership, any Holding Entity, any operating entity, and any other holding entity established by the Property Partnership (or any of their respective investors), and shall be deemed not to be a breach of the Property General Partner’sour company’s fiduciary duties or any other obligation of any type whatsoever of the general partner.our company. None of the PropertyBPY General Partner, the Property GP LP,our company, the Property Partnership, any Holding Entity, operating entity, any other holding entity established by the Property Partnership or any other person shall have any rights by virtue of the Property Partnership’s limited partnership agreement or theour partnership relationship established thereby or otherwise in any business ventures of any person who is entitled to be indemnified by the Property Partnership as described below under “—“- Indemnification; Limitations on Liability”.The Property GP LP
Our company and the other indemnified persons described in the preceding paragraph do not have any obligation under the Property Partnership’s limited partnership agreement or as a result of any duties stated or implied by law or equity, including fiduciary duties, to present business or investment opportunities to the Property Partnership, the limited partners of the Property Partnership, any Holding Entity, operating entity, or any other holding entity established by the Property Partnership. These provisions do not affect any obligation of such indemnified person to present business or investment opportunities to our company, the Property Partnership, any Holding Entity, any operating entity or any other holding entity established by the Property Partnership pursuant to the Relationship Agreement or any separate written agreement between such persons.
Accounts, Reports and Other Information
Under the Property Partnership’s limited partnership agreement,
the Property GP LPour company is required to prepare financial statements in accordance with IFRS or such other appropriate accounting principles as determined from time to time by
the Property GP LP,our company, in its sole discretion.
The Property GP LP will deliver to our company: (i) the annual financial statements of the Property Partnership and (ii) the accounts and financial statements of any Holding Entity or any other holding entity established by the Property Partnership.The Property GP LP
Our company is also required to use commercially reasonable efforts to prepare and send to the limited partners of the Property Partnership on an annual basis a Schedule K-1 (or equivalent).
The Property GP LPOur company will also, where reasonably possible, prepare and send information required by the non-U.S. limited partners of the Property Partnership for U.S. federal income tax reporting purposes.
Indemnification; Limitations on Liability
Under the Property Partnership’s limited partnership agreement, it is required to indemnify to the fullest extent permitted by law the
PropertyBPY General Partner,
the Property GP LPour company and any of their respective affiliates (and their respective officers, directors, agents, shareholders, partners, members and employees), any person who serves on a governing body of the Property Partnership, a Holding Entity, operating entity or any other holding entity established by our company and any other person designated by its general partner as an indemnified person, in each case, against all losses, claims, damages, liabilities, costs or expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, incurred by an indemnified person in connection with its business, investments and activities or by reason of their holding such positions, except to the extent that the
claims, liabilities, losses, damages, costs or expenses are determined to have resulted from the indemnified person’s bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful. In addition, under the Property Partnership’s limited partnership agreement: (i) the liability of such persons has been limited to the fullest extent permitted by law, except to the extent that their conduct involves bad faith, fraud or willful misconduct, or in the case of a criminal matter, action that the indemnified person knew to have been unlawful; and (ii) any matter that is approved by the independent directors will not constitute a breach of any duties stated or implied by law or equity, including fiduciary duties. The Property Partnership’s limited partnership agreement requires it to advance funds to pay the expenses of an indemnified person in connection with a matter in which indemnification may be sought until it is determined that the indemnified person is not entitled to indemnification.
The Property Partnership’s limited partnership agreement is governed by and will be construed in accordance with the laws of Bermuda.
The following are the only material contracts, other than contracts entered into in the ordinary course of business, which have been entered into by us since our formation:
| 1. |
| 1) | Support Agreement, dated March 19, 2014, between Brookfield Property Partners L.P. and Brookfield Office Properties Exchange LP described under “Additional Information - Memorandum and Articles of Association - Description of Our Units and Our Limited Partnership Agreement”; |
| |
| 2) | Credit Agreement, dated March 18, 2014, by and among Brookfield Property Split Corp., Brookfield Office Properties Exchange LP, Brookfield Property Partners L.P., Brookfield Property L.P., and the other borrowers and lenders thereto described below; |
| |
| 3) | Amended and Restated Master Purchase Agreement described under Item 4.A. “Information on the Company —- History and Development of the Company”; |
| 2. |
| 4) | Amended and Restated Master Services Agreement by and among Brookfield Asset Management, the Service Recipients and the ManagersService Providers described under Item 7.B. “Major“Major Shareholders and Related Party Transactions —- Related Party Transactions —- Our Master Services Agreement”; |
| 3. |
| 5) | Relationship Agreement by and among Brookfield Asset Management, our company and the ManagersService Providers and others described under Item 7.B. “Major“Major Shareholders and Related Party Transactions —- Related Party Transactions — Relationship with Brookfield —- Relationship Agreement”; |
| 4. |
| 6) | Registration Rights Agreement between our company and Brookfield Asset Management described under the heading Item 7.B. “Major“Major Shareholders and Related Party Transactions —- Related Party Transactions —- Relationship with Brookfield —- Registration Rights Agreement”; |
| 5. |
| 7) | Acknowledgement of Termination of Voting Agreement betweenby and among Brookfield Asset Management, theBrookfield Property General Partner Limited and our company dated August 8, 2013 described under Item 7.B. “Major Shareholders4.A. “History and Related Party Transactions — Related Party Transactions — Voting Agreements”Development of the Company”; |
| 6. |
| 8) | Second Amended and Restated Limited Partnership Agreement of our partnership described under Item 10.B. “Additional“Additional Information —- Memorandum and Articles of Association —- Description of Our Units and Our Limited Partnership Agreement”; and |
| 7. |
| 9) | Second Amended and Restated Limited Partnership Agreement of the Property Partnership described under Item 10.B. “Additional“Additional Information —- Memorandum and Articles of Association —- Description of the Property Partnership Limited Partnership Agreement”.; |
| |
| 10) | First Amendment to Second Amended and Restated Limited Partnership Agreement of the Property Partnership described under Item 10.B. “Additional Information - Memorandum and Articles of Association - Description of the Property Partnership Limited Partnership Agreement”; |
| |
| 11) | Arrangement Agreement between our company, Brookfield Office Properties Exchange LP, Brookfield Property Split Corp. and Brookfield Office Properties Inc., dated as of April 24, 2014 described under Item 4.A. “History and Development of the Company”; |
| |
| 12) | Guarantee Agreement between our company and the Class A Preferred Unitholder dated December 4, 2014 described under Item 4.A. “History and Development of the Company”; |
| |
| 13) | Investor Agreement between our company and the Class A Preferred Unitholder dated December 4, 2014 described under Item 4.A. “History and Development of the Company”; and |
| |
| 14) | Subscription Agreement among our company, the Property Partnership and the Class A Preferred Unitholder dated December 4, 2014 described under Item 4.A. “History and Development of the Company”. |
| |
| 15) | First Amendment to the Amended and Restated Master Services Agreement by and among Brookfield Asset Management, the Service Recipients and the Service Providers described under Item 7.B. “Major Shareholders and Related Party Transactions - Related Party Transactions - Our Master Services Agreement”; |
| |
| 16) | First Amendment to the Second Amended and Restated Limited Partnership Agreement of our partnership described under Item 10.B. “Additional Information - Memorandum and Articles of Association - Description of Our Units and Our Limited Partnership Agreement”; and |
| |
| 17) | Second Amendment to Second Amended and Restated Limited Partnership Agreement of the Property Partnership described under Item 10.B. “Additional Information - Memorandum and Articles of Association - Description of the Property Partnership Limited Partnership Agreement”. |
Copies of the agreements noted above are available, free of charge, byfrom the BPY General Partner and are available electronically on the website of the SEC atwww.sec.gov and on our SEDAR profile atwww.sedar.com. Written requests for such documents should be directed to our Corporate Secretary at 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.
BPY Credit Facility
On March 18, 2014 we entered into the BPY Credit Facility, consisting of a $1.5 billion term acquisition credit facility to fund the Offer, or the Acquisition Credit Facility, and a $1 billion revolving facility to be used to replace our existing revolving credit facilities, to fund a portion of the additional cash required to complete the Offer and any second-step transaction up to a limit of $365,508,000, and for general corporate and operating purposes.
Borrowings under the BPY Credit Facility are subject to certain customary conditions for loan facilities of this type. Interest under the BPY Credit Facility is payable, at the option of borrowers thereunder, either at a base rate plus 1.25% or a LIBOR-based rate plus 2.25%. The term of the BPY Credit Facility was extended to March 18, 2017 (subject to the periodic payment of extension fees) pursuant to a first amending agreement entered into on February 22, 2016. The BPY Credit Facility may be prepaid, in whole or in part (subject to minimums and increments), at any time and without bonus or penalty. The Acquisition Credit Facility has been repaid in full. Our operating entities are subject to limited covenants in respect of their corporate debt and were in compliance with all such covenants as of December 31, 2015. Our operating subsidiaries are also in compliance with all covenants and other capital requirements related to regulatory or contractual obligations of material consequence to us.
There are currently no governmental laws, decrees, regulations or other legislation of Bermuda which restrict the import or export of capital or the remittance of dividends, interest or other payments to non-residents of Bermuda holding our units.
The following summary discusses certain material U.S.
, and Canadian
and Bermudian tax considerations related to the holding and disposition of our units as of the date hereof. Prospective purchasers of our units are advised to consult their own tax advisers concerning the consequences under the tax laws of the country of which they are resident or in which they are otherwise subject to tax of making an investment in our units.
This summary discusses certain material U.S. federal income tax considerations to unitholders relating to the
receipt, holding and disposition of our units as of the date hereof. This summary is based on provisions of the U.S. Internal Revenue Code,
of 1986, as amended, or the U.S. Internal Revenue Code, on the regulations promulgated thereunder,
or the U.S. Treasury Regulations, and on published administrative rulings, judicial decisions, and other applicable authorities, all as in effect on the date hereof and all of which are subject to change at any time, possibly with retroactive effect. This summary is necessarily general and may not apply to all categories of investors, some of
whichwhom may be subject to special rules, including, without limitation, persons that own (directly or indirectly, applying certain attribution rules) 5% or more of our units, dealers in securities or currencies, financial institutions or financial services entities,
mutual funds, life insurance companies, persons that hold our units as part of a straddle, hedge, constructive sale or conversion transaction with other investments,
persons whose units are loaned to a short seller to cover a short sale of units, persons whose functional currency is not the U.S. Dollar, persons who have elected mark-to-market accounting, persons who hold our units through a partnership or other entity treated as a pass-through entity for U.S. federal income tax purposes, persons for whom our units are not a capital asset, persons who are liable for the alternative minimum tax and certain U.S. expatriates or former long-term residents of the United States. Tax-exempt organizations are addressed separately below. The actual tax consequences of the ownership and disposition of our units will vary depending on your individual circumstances.
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of one or more of our units that is for U.S. federal
income tax purposes: (i) an individual citizen or resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust (a) that is subject to the primary supervision of a court within the United States and all substantial decisions of which one or more U.S. persons have the authority to control or (b) that has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.
A “Non-U.S. Holder” is a beneficial owner of one or more of our units, other than a U.S. Holder or an entity classified as a partnership or other fiscally transparent entity for U.S. federal tax purposes.
If a partnership holds our units, the tax treatment of a partner of such partnership generally will depend upon the status of the partner and the activities of
the partnership.our company. Partners of partnerships that hold our units should consult
an independenttheir own tax
adviser.advisers.
This discussion does not constitute tax advice and is not intended to be a substitute for tax planning. You should consult
an independentyour own tax adviser concerning the U.S. federal, state and local income tax consequences particular to your ownership and disposition of our units, as well as any
tax consequences under the laws of any other taxing jurisdiction.
Partnership Status of Our Company and the Property Partnership
Each of our company and the Property Partnership
will makehas made a protective election to be classified as a partnership for U.S. federal tax purposes. An entity that is treated as a partnership for U.S. federal tax purposes incurs no U.S. federal income tax liability. Instead, each partner is required to take into account its allocable share of items of income, gain, loss, deduction, or credit of
the partnershipour company in computing its U.S. federal income tax liability, regardless of whether cash distributions are made. Distributions of cash by a partnership to a partner generally are not taxable unless the amount of cash distributed to a partner is in excess of the partner’s adjusted basis in its partnership interest.
An entity that would otherwise be classified as a partnership for U.S. federal income tax purposes may nonetheless be taxable as a corporation if it is a “publicly traded partnership”, unless an exception applies. Our company
will beis publicly traded. However, an exception, referred to as the “Qualifying Income Exception”, exists with respect to a publicly traded partnership if (i) at least 90% of such partnership’s gross income for every taxable year consists of “qualifying income” and (ii)
theour partnership would not be required to register under the
U.S. Investment Company Act
of 1940 if it were a U.S. corporation. Qualifying income includes certain interest income, dividends, real property rents, gains from the sale or other disposition of real property, and any gain from the sale or disposition of a capital asset or other property held for the production of income that otherwise constitutes qualifying income.
The BPY General Partner
and the Property General Partner intendintends to manage the affairs of our company and the Property Partnership
respectively, so that our company will meet the Qualifying Income Exception in each taxable year. Accordingly, the BPY General Partner believes that our company will be treated as a partnership and not as
an association taxable as a corporation for U.S. federal income tax purposes.
If our company fails to meet the Qualifying Income Exception, other than a failure which is determined by
the U.S. Internal Revenue Service, or the IRS to be inadvertent and which is cured within a reasonable time after discovery, or if our company is required to register under the
U.S. Investment Company Act,
of 1940, our company will be treated as if it had transferred all of its assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which our company fails to meet the Qualifying Income Exception, in return for stock in such corporation, and then distributed the stock to our unitholders in liquidation. This deemed contribution and liquidation generally would be tax-free to a U.S. Holder, unless our company were to have liabilities in excess of the tax basis of its assets at such time. Thereafter, our company would be treated as a corporation for U.S. federal income tax purposes.
If our company were treated as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, our company’s items of income, gain, loss, deduction, or credit would be reflected only on our company’s tax return rather than being passed through to our unitholders, and our company would be subject to U.S. corporate income tax and potentially branch profits tax with respect to its income, if any, effectively connected with a U.S. trade or business. Moreover, under certain circumstances, our company might be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes, and a U.S. Holder would be subject to the rules applicable to PFICs discussed below. See “—“- Consequences to U.S. Holders —- Passive Foreign Investment Companies”. Subject to the PFIC rules, distributions made to U.S. Holders would be treated as taxable dividend income to the extent of our company’s current or accumulated earnings and profits. Any distribution in excess of current and accumulated earnings and profits would first be treated as a tax-free return of capital to the extent of a U.S. Holder’s adjusted tax basis in its units. Thereafter, to the extent such distribution were to exceed a U.S. Holder’s adjusted tax basis in its units, the distribution would be treated as gain from the sale or exchange of such units. The amount of a distribution treated as a dividend could be eligible for reduced rates of taxation, provided certain conditions are met. In addition, interest and certain other passive income received by our company with respect to U.S. investments generally would be subject to U.S. withholding tax at a rate of 30% (although certain Non-U.S. Holders nevertheless mightbe entitled to certain treaty benefits in respect of their allocable share of such income) and U.S. Holders would not be allowed a tax credit with respect to any such tax withheld. In addition, the “portfolio interest” exemption would not apply to certain interest income of our company (although certain Non-U.S. Holders nevertheless might be entitled to certain treaty benefits in respect of their allocable share of such income).
Based on the foregoing consequences, the treatment of our company as a corporation could materially reduce a holder’s after-tax return and therefore could result in a substantial reduction of the value of our units. If the Property Partnership were to be treated as a corporation for U.S. federal income tax purposes, consequences similar to those described above would apply.
The remainder of this summary assumes that our company and the Property Partnership will be treated as partnerships for U.S. federal tax purposes. We expect that a substantial portion of the items of income, gain, deduction, loss, or credit realized by our company will be realized in the first instance by the Property Partnership and allocated to our company for reallocation to our unitholders. Unless otherwise specified, references in this section to realization of our company’s items of income, gain, loss, deduction, or credit include a realization of such items by the Property Partnership (or other lower tier partnership) and the allocation of such items to our company.
Proposed Legislation
Over the past several years, a number of legislative and administrative proposals relating to partnership taxation have been introduced and, in certain cases, have been passed by the U.S. House of Representatives. On May 28, 2010, the U.S. House of Representatives passed legislation which, if it had been finally enacted into law and applied to our company or to the Property Partnership, could have had adverse consequences, including (i) the recharacterization of capital gain income as “ordinary income”, (ii) the potential reclassification of qualified dividend income as “ordinary income” subject to a higher rate of U.S. income tax, and (iii) potential limitations on the ability of our company to meet the “qualifying income” exception for taxation as a partnership for U.S. federal income tax purposes. This legislation was not passed by the U.S. Senate and therefore was not enacted into law. However, similar legislation was introduced in both the U.S. House of Representatives and the U.S. Senate in February 2013.
The Obama administration has indicated it supports the adoption of legislation that similarly changes the treatment of carried interest for U.S. federal income tax purposes. In its published revenue proposals for 2014, the Obama administration proposed that the current law governing the treatment of carried interest be changed to subject such income to ordinary income tax. The Obama administration’s published revenue proposals for previous years contained similar proposals.
It remains unclear whether any legislation related to such revenue proposals or similar to the legislation described above will be proposed or enacted by the U.S. Congress and, if enacted, whether such legislation would affect an investment in our company. You should consult an independent tax adviser as to the potential effect of any proposed or future legislation on an investment in our company.
The remainder of this discussion is based on current law without regard to the proposed legislation or administrative proposals discussed above.
Consequences to U.S. Holders
Income and Loss. If you are a U.S. Holder, you will be required to take into account, as described below, your allocable share of our company’s items of income, gain, loss, deduction, and credit for each of our company’s taxable years ending with or within your taxable year. Each item generally will have the same character and source as though you had realized the item directly. You must report such items without regard towhether any distribution has been or will be received from our company. Our company intends to make cash distributions to all unitholders on a quarterly basis in amounts generally expected to be sufficient to permit U.S. Holders to fund their estimated U.S. tax obligations (including U.S. federal, state, and local income taxes) with respect to their allocable shares of our company’s net income or gain. However, based upon your particular tax situation and simplifying assumptions that our company will make in determining the amount of such distributions, and depending upon whether you elect to reinvest such distributions pursuant to the distribution reinvestment plan, if available, your tax liability might exceed cash distributions made to you, in which case any tax liabilities arising from your ownership of our units would need to be satisfied from your own funds.
With respect to U.S. Holders who are individuals, certain dividends paid by a corporation (including certain qualified foreign corporations) to our company and that are allocable to such U.S. Holders may qualify for reduced rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of specified income tax treaties with the United States. In addition, a foreign corporation is treated as a qualified corporation with respect to its shares that are readily tradable on an established securities market in the United States. Among other exceptions, U.S. Holders who are individuals will not be eligible for reduced rates of taxation on any dividends if the payer is a PFIC for the taxable year in which such dividends are paid or for the preceding taxable year. Dividends received by non-corporate U.S. Holders may be subject to an additional Medicare tax on unearned income of 3.8% (see “—Tax Rates” “-Medicare Tax” below). U.S. Holders that are corporations generally will not be entitled to a “dividends received deduction” in respect of dividends paid by non-U.S. corporations in which our company (through the Property Partnership) owns stock. You should consult an independentyour own tax adviser regarding the application of the foregoing rules in light of your particular circumstances. For U.S. federal income tax purposes, your allocable share of our company’s items of income, gain, loss, deduction, or credit will be governed by our limited partnership agreement if such allocations have “substantial economic effect” or are determined to be in accordance with your interest in our company. Similarly, our company’s allocable share of items of income, gain, loss, deduction, or credit of the Property Partnership will be governed by the limited partnership agreement of the Property Partnership if such allocations have “substantial economic effect” or are determined to be in accordance with our
company’s interest in the Property Partnership. The BPY General Partner
and the Property General Partner believebelieves that, for U.S. federal income tax purposes, such allocations should be given effect, and the BPY General Partner
and the Property General Partner intendintends to prepare and file tax returns based on such allocations. If the IRS were to successfully challenge the allocations made pursuant to either our company’s limited partnership agreement or the limited partnership agreement of the Property Partnership, then the resulting allocations for U.S. federal income tax purposes might be less favorable than the allocations set forth in such agreements.
Basis. You will have an initial tax basis in your units equal to the sum of (i) the amount of cash paid for our units (or, if you received your units pursuant to the spin-off,Spin-off, their fair market value on the date you received them pursuant to the spin-off)Spin-off) and (ii) your share of our company’s liabilities, if any. That basis will be increased by your share of our company’s income and by increases in your share of our company’s liabilities, if any. That basis will be decreased, but not below zero, by distributions you receive from our company, by your share of our company’s losses, and by any decrease in your share of our company’s liabilities. Under applicable U.S. federal income tax rules, a partner in a partnership has a single, or “unitary”, tax basis in his or her partnership interest, unlike a shareholder of a corporation.interest. As a result, any amount you pay to acquire additional units (including through the distribution reinvestment plan, if available)plan) will be averaged with the adjusted tax basis of units owned by you prior to the acquisition of such additional units. The BPY General Partner expresses no opinion regarding the appropriate methodology to be used in making this determination. For purposes of the foregoing rules, the rules discussed immediately below, and the rules applicable to a sale or exchange of our units, our company’s liabilities generally will include our company’s share of any liabilities of the Property Partnership.
Limits on Deductions for Losses and Expenses. Your deduction of your allocable share of our company’s losses will be limited to your tax basis in our units and, if you are an individual or a corporate holder that is subject to the “at risk” rules, to the amount for which you are considered to be “at risk” with respect to our company’s activities, if that is less than your tax basis. In general, you will be at risk to the extent of your tax basis in our units, reduced by (i) the portion of that basis attributable to your share of our company’s liabilities for which you will not be personally liable (excluding certain qualified non-recourse financing) and (ii) any amount of money you borrow to acquire or hold our units, if the lender of those borrowed funds owns an interest in our company, is related to you, or can look only to your units for repayment. Your at-risk amount generally will increase by your allocable share of our company’s income and gain and decrease by distributions you receive from our company and your allocable share of losses and deductions. You must recapture losses deducted in previous years to the extent that distributions cause your at-risk amount to be less than zero at the end of any taxable year. Losses disallowed or recaptured as a result of these limitations will carry forward and will be allowable to the extent that your tax basis or at-risk amount, whichever is the limiting factor, subsequently increases. Upon the taxable disposition of our units, any gain recognized by you can be offset by losses that were previously suspended by the at-risk limitation, but may not be offset by losses suspended by the basis limitation. Any excess loss above the gain previously suspended by the at-risk or basis limitations may no longer be used. You should consult an independentyour own tax adviser as to the effects of the at-risk rules. Limitations on Deductibility of Organizational Expenses and Syndication Fees. In general, neither our company nor any U.S. Holder may deduct organizational or syndication expenses. Similar rules apply to organizational or syndication expenses incurred by the Property Partnership. Syndication fees (which would include any sales or placement fees or commissions) must be capitalized and cannot be amortized or otherwise deducted. Limitations on Interest Deductions. Your share of our company’s interest expense is likely to be treated as “investment interest” expense. For a non-corporate U.S. Holder, the deductibility of “investment interest” expense generally is generally limited to the amount of such holder’s “net investment income”. Your share of our company’s dividend and interest income will be treated as
investment income, although “qualified dividend income” subject to reduced rates of tax in the hands of an individual will only be treated as investment income if such individual elects to treat such dividend as ordinary income not subject to reduced rates of tax. In addition, state and local tax laws may disallow deductions for your share of our company’s interest expense.
Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment.
Deductibility of Partnership Investment Expenditures by Individual Partners and by Trusts and Estates. Subject to certain exceptions, all miscellaneous itemized deductions of an individual taxpayer, and certain of such deductions of an estate or trust, are deductible only to the extent that such deductions exceed 2% of the taxpayer’s adjusted gross income. Moreover,In addition, the otherwise allowable itemized deductions of individuals whose gross income exceeds an applicable threshold amount are subject to reduction by an amount equal to the lesser of (i) 3% of the excess of the individual’s adjusted gross income over the threshold amount and (ii) 80% of the amount of the individual’s itemized deductions. The operating expenses of our company, including our company’s allocable share of the base management fee or any other management fees, may be treated as miscellaneous itemized deductions subject to the foregoing rule. Accordingly, if you are a non-corporate U.S. Holder, you should consult an independentyour own tax adviser regarding the application of these limitations.
Treatment of Distributions
Distributions of cash by our company generally will not be taxable to you to the extent of your adjusted tax basis (described above) in our units. Any cash distributions in excess of your adjusted tax basis generally will
be considered to be gain from the sale or exchange of our units (described below). Such gain generally will be treated as capital gain and will be long-term capital gain if your holding period for our units exceeds one year. A reduction in your allocable share of our liabilities, and certain distributions of marketable securities by our company, if any, will be treated similar to cash distributions for U.S. federal income tax purposes.
Sale or Exchange of Our Units
You will recognize gain or loss on the sale or taxable exchange of our units equal to the difference, if any, between the amount realized and your tax basis in our units sold or exchanged. Your amount realized will be measured by the sum of the cash or the fair market value of other property received plus your share of our company’s liabilities, if any.
Gain or loss recognized by you upon the sale or exchange of our units generally will be taxable as capital gain or loss and will be long-term capital gain or loss if you held our units were held for more than one year as of the date of such sale or exchange. Assuming you have not elected to treat your share of our company’s investment in any PFIC as a “qualified electing fund”, gain attributable to such investment in a PFIC would be taxable in the manner described below in “—Passive“-Passive Foreign Investment Companies”. In addition, certain gain attributable to “unrealized receivables” or “inventory items” could be characterized as ordinary income rather than capital gain. For example, if our company were to hold debt acquired at a market discount, accrued market discount on such debt would be treated as “unrealized receivables”. The deductibility of capital losses is subject to limitations. Each U.S. Holder who acquires our units at different times and intends to sell all or a portion of our units within a year of the most recent purchase should consult
an independentits own tax adviser regarding the application of certain “split holding period” rules to such sale and the treatment of any gain or loss as long-term or short-term capital gain or loss.
Medicare Tax
Tax RatesUnder recently enacted legislation, U.S. Holders that are individuals, estates, or trusts may be required to pay a 3.8% Medicare tax on the lesser of (i) the excess of such U.S. Holders’ “modified adjusted gross income” (or “adjusted gross income” in the case of estates and trusts) over certain thresholds and (ii) such U.S. Holders’ “net investment income” (or “undistributed net investment income” in the case of estates and trusts). Net investment income generally is expected to includeincludes your allocable share of our company’s income, as well as gain realized by you from a sale of our units. Under recently proposed U.S. Treasury Regulations, specialSpecial rules relating to the 3.8% Medicare tax may apply to dividends and gain, if any, derived by a U.S. HolderHolders with respect to an investment through our companycompany’s interest in a PFIC. See “—“- Consequences to U.S. Holders —- Passive Foreign Investment Companies”. Each U.S. HolderHolders should consult an independenttheir own tax adviseradvisers regarding the implications of this recently enacted legislation and the recently proposed U.S. Treasury Regulations3.8% Medicare tax for the ownership and disposition of our units.
For the 2012 taxable year, the highest marginal U.S. federal income tax rates for individuals applicable to ordinary income and long-term capital gains (generally, gains from the sale or exchange of certain investment assets held for more than one year) were 35% and 15%, respectively. Under the American Taxpayer Relief Act of 2012, in taxable years beginning on or after January 1, 2013, the highest marginal federal income tax rate applicable to ordinary income of individuals is 39.6%, and the highest marginal federal income tax rate applicable to long-term capital gains of individuals is 20% (not including the 3.8% Medicare tax).
Foreign Tax Credit Limitations
If you are a U.S. Holder, you generally will be entitled to a foreign tax credit with respect to your allocable share of creditable foreign taxes paid on our company’s income and gain. Complex rules may,
depending on your particular circumstances, limit the availability or use of foreign tax credits. Gain from the sale of our company’s investments may be treated as U.S.-source gain. Consequently, you may not be able to use the foreign tax credit arising from any foreign taxes imposed on such gain unless the credit can be applied (subject to applicable limitations) against U.S. tax due on other income treated as derived from foreign sources. Certain losses that our company incurs may be treated as foreign-source losses, which could reduce the amount of foreign tax credits otherwise available.
Our company and the Property Partnership
have each
intend to makemade the election permitted by Section 754 of the U.S. Internal Revenue Code, or the Section 754 Election. The Section 754 Election cannot be revoked without the consent of the IRS. The Section 754 Election generally requires our company to adjust the tax basis in its assets, or inside basis, attributable to a transferee of our units under Section 743(b) of the U.S. Internal Revenue Code to reflect the purchase price paid by the transferee for our units. This election does not apply to a person who purchases units directly from us. For purposes of this discussion, a transferee’s inside basis in our company’s assets will be considered to have two components: (i) the transferee’s share of our company’s tax basis in our company’s assets, or common basis, and (ii) the adjustment under Section 743(b) of the U.S. Internal Revenue Code to that basis. The foregoing rules would also apply to the Property Partnership.
Generally, a Section 754 Election would be advantageous to a transferee U.S. Holder if such holder’s tax basis in its units were higher than such units’ share of the aggregate tax basis of our company’s assets immediately prior to the transfer. In that case, as a result of the Section 754 Election, the transferee U.S. Holder would have a higher tax basis in its share of our company’s assets for purposes of calculating, among other items, such holder’s share of any gain or loss on a sale of our company’s assets. Conversely, a Section 754 Election would be disadvantageous to a transferee U.S. Holder if such holder’s tax basis in its units were lower than such units’ share of the aggregate tax basis of our company’s assets immediately prior to the transfer. Thus, the fair market value of our units may be affected either favorably or adversely by the election.
Whether or not the Section 754 Election is made, if our units are transferred at a time when our company has a “substantial built-in loss” in its assets, our company will be obligated to reduce the tax basis in the portion of such assets attributable to such units.
The calculations involved in the Section 754 Election are complex, and the BPY General Partner
and the Property GP LP adviseadvises that
eachit will make such calculations on the basis of assumptions as to the value of our
company’s assets and other matters. Each U.S. Holder should consult
an independentits own tax adviser as to the effects of the Section 754 Election.
Because we cannot match transferors and transferees of our units, we must maintain
the uniformity of the economic and tax characteristics of our units to a purchaser of our units. In the absence of uniformity, we may be unable to comply fully with a number of U.S. federal income tax requirements. A lack of uniformity can result from a literal application of certain U.S. Treasury regulations to our company’s Section 743(b) adjustments, a determination that our company’s Section 704(c) allocations are unreasonable, or other reasons. Section 704(c) allocations would be intended to reduce or eliminate the disparity between tax basis and the value of our company’s assets in certain circumstances, including on the issuance of additional units. In order to maintain the fungibility of all of our units at all times, we will seek to achieve the uniformity of U.S. tax treatment for all purchasers of our units which are acquired at the same time and price (irrespective of the identity of the particular seller of our units or the time when our units are
issued)issued by our company), through the application of certain tax accounting principles that the BPY General Partner believes are reasonable for our company. However, the IRS may disagree with us and may successfully challenge our application of such tax accounting principles. Any non-uniformity could have a negative impact on the value of our units.
Foreign Currency Gain or Loss
Our company’s functional currency
will beis the U.S. Dollar, and our company’s income or loss
will beis calculated in U.S. Dollars. It is likely that our company will recognize “foreign currency” gain or loss with respect to transactions involving non-U.S. Dollar currencies. In general, foreign currency gain or loss is treated as ordinary income or loss. You should consult
an independentyour own tax adviser regarding the tax treatment of foreign currency gain or loss.
Passive Foreign Investment Companies
U.S. Holders may be subject to special rules applicable to indirect investments in foreign corporations, including an investment through our company in a PFIC. A PFIC is defined as any foreign corporation with respect to which (after applying certain look-through rules) either (i) 75% or more of its gross income for a taxable year is “passive income” or (ii) 50% or more of its assets in any taxable year (generally based on the quarterly average of the value of its assets) produce or are held for the production of “passive income”. There are no minimum stock ownership requirements for PFICs. If you hold an interest in a foreign corporation for any taxable year during which the corporation is classified as a PFIC with respect to you, then the corporation will continue to be classified as a PFIC with respect to you for any subsequent taxable year during which you continue to hold an interest in the corporation, even if the corporation’s income or assets would not cause it to be a PFIC in such subsequent taxable year, unless an exception applies.
Subject to certain elections described below, any gain on the disposition of stock of a PFIC owned by you indirectly through our company, as well as income realized on certain “excess distributions” by such PFIC, would be treated as though realized ratably over the shorter of your holding period of our units or our company’s holding period for the PFIC. Such gain or income generally would be taxable as ordinary income, and dividends paid by the PFIC would not be eligible for the preferential tax rates for dividends paid to non-corporate U.S. Holders. In addition, an interest charge would apply, based on the tax deemed deferred from prior years.
If you were to
make an electionelect to treat your share of our company’s interest in a PFIC as a “qualified electing fund”, such election a “QEF
election”Election”, for the first year you were treated as holding such interest, then in lieu of the tax consequences described in the paragraph immediately above, you would be required to include in income each year a portion of the ordinary earnings and net capital gains of the PFIC, even if not distributed to our company or to you. A QEF
electionElection must be made by you on an entity-by-entity basis. To make a QEF
election,Election, you must, among other things, (i) obtain a PFIC annual information statement (through an intermediary statement supplied by our company) and (ii) prepare and submit IRS Form 8621 with your annual income tax return. To the extent reasonably practicable, we intend to timely provide you with
information related to the
PFIC status of each entity we are able to identify as a PFIC, including information necessary to make a QEF
electionElection with respect to
any entity that the BPY General Partner and the Property General Partner believe is a PFIC with respect to you.each such entity. Any such election should be made for the first year our company holds an interest in such entity or for the first year in which you hold our units, if later.
Once you have made a QEF
electionElection for an entity, such election applies to any additional shares of interest in such entity acquired directly or indirectly, including through additional units acquired after the QEF
electionElection is made (such as units acquired under the distribution reinvestment plan, if available). If you were to make a QEF
electionElection after the first year that you were treated as holding an interest in a PFIC, the adverse tax consequences relating to PFIC stock would continue to apply with respect to the pre-QEF
electionElection period, unless you were to make a “purging election”. The purging election would create a deemed sale of your previously held share of our company’s interests in a PFIC. The gain recognized by the purging election would be subject to the special tax and interest charge rules, which treat the gain as an excess distribution, as described above. As a result of the purging election, you would have a new basis and holding period in your share of our company’s interests in the PFIC.
YouU.S. Holders should consult
an independenttheir own tax
adviseradvisers as to the manner in which such direct inclusions could affect
yourtheir allocable share of our company’s income and
yourtheir tax basis in our units and the advisability of making a QEF
electionElection or a purging election.
Recently proposed
U.S. Treasury Regulations under Section 1411 of the U.S. Internal Revenue Code contain special rules for applying the 3.8% Medicare tax (as described above under “- Medicare Tax”) to non-corporate U.S. Holders making QEF elections. Althoughpersons owning an interest in a PFIC. Under the regulations generally are proposed to become effective for taxable years beginning on or after January 1, 2014, you are permitted to rely on the proposed regulations for taxable years beginning on or after January 1, 2013. Ifspecial rules, if you are a non-corporate U.S. Holder and havethat has made a QEF electionElection with respect to our company’s interest in a PFIC, andthen you include in income your share of the ordinary earnings and net capital gains of such PFIC, you may be required under the proposed regulationsare permitted to make certain adjustments to your basis in our units for purposes of the 3.8% Medicare tax. These basis adjustments could differ from the basis adjustments required for U.S. federal income tax purposes generally. Moreover, you may be required to make certain adjustments to your “modified adjusted gross income” or “adjusted gross income” for purposes of the 3.8% Medicare tax. However, you generally would not be requireda special election to treat your share of the ordinary earnings and net capital gains of such PFIC as “net investment income” for purposes of the 3.8% Medicare tax. See “—Tax Rates” above. Instead, your net investment income for such purposes generally would include your share of distributions made by the PFIC out of previously taxed earnings and profits. Additional special rules under the proposed U.S. Treasury Regulations may apply to your disposition of our units. To mitigate the complexity of the foregoing rules, the proposed U.S. Treasury Regulations permit you to make a special election to forego adjustments to basis or gross income solely for purposes of the 3.8% Medicare tax. If you make the special election, you must treat your share of a PFIC’s ordinary earnings and net capital gains as net investment income for purposes of the 3.8% Medicare tax. If you do not make the special election, you may be required to calculate your basis in our units for purposes of the 3.8% Medicare tax in a manner that differs from the calculation of your basis in our units for U.S. federal income tax purposes generally. You should consult an independentyour own tax adviser regarding the implications of thisthe special election, as well as the other implications of the 3.8% Medicare tax and the recently proposed U.S. Treasury Regulations under Section 1411 of the U.S. Internal Revenue Code for your ownership and disposition of our units. In the case of a PFIC that is a publicly traded foreign company, and in lieu of making a QEF Election, an election may be made to “mark to market” the stock of such
publicly traded foreign company on an annual basis. Pursuant to such an election, you would include in each year as ordinary income the excess, if any, of the fair market value of such stock over its adjusted basis at the end of the taxable year. The BPY General Partner
and the Property General Partner currently
believebelieves it is possible that one or more of our existing or future operating entities will qualify as PFICs that are publicly traded. However, there can be no assurance that a mark-to-market election will be available for any such entity. You should consult
an independentyour own tax adviser regarding the availability of the mark-to-market election with respect to any PFIC in which you are treated as owning an interest through our company.
Based on our organizational structure, as well as our company’s expected income and assets, the BPY General Partner and the Property General Partner currently believebelieves that one or more of our existing Holding Entities and operating entities are likely to be classified as PFICs. Moreover, we may in the future acquire certain investments or operating entities through one or more Holding Entities treated as corporations for U.S. federal income tax purposes, and such future Holding Entities or other companies in which we acquire an interest may be treated as PFICs. In addition, in order to ensure that we satisfy the Qualifying Income Exception, we may decide to hold an existing or future operating entity through a Holding Entity that would be classified as a PFIC. See “—Investment“-Investment Structure” below.Recently enacted U.S. legislation requires each
Subject to certain limited exceptions, a U.S. person who directly or indirectly owns an interest in a PFIC
generally is required to file an annual report with the IRS, and the failure to file such report could result in the imposition of penalties on such U.S. person and in the extension of the statute of limitations with respect to federal income tax returns filed by such U.S. person. You should consult
an independentyour own tax adviser regarding the PFIC rules, including the
potential effect of this legislation on yourforegoing filing requirements,
andas well as the advisability of making a QEF
election,Election, a special election under the
proposedU.S. Treasury Regulations
relating tounder Section 1411 of the
3.8% Medicare tax,U.S. Internal Revenue Code, or
if applicable, a mark-to-market election,
as applicable, with respect to any PFIC in which you are treated as owning an interest through our company.
To ensure that our company meets the Qualifying Income Exception for publicly traded partnerships (discussed above) and complies with certain requirements in its limited partnership agreement, we may structure certain investments through an entity classified as a corporation for U.S. federal income tax purposes. Such investments will be structured as determined in the sole discretion of the BPY
General Partner and the Property General Partner generally to be efficient for our unitholders. However, because our unitholders will be located in numerous taxing jurisdictions, no assurance can be given that any such investment structure will benefit all our unitholders to the same extent, and such an investment structure might even result in additional tax burdens on some unitholders. As discussed above, if any such entity were a non-U.S. corporation, it might be considered a PFIC. If any such entity were a U.S. corporation, it would be subject to U.S. federal net income tax on its income, including any gain recognized on the disposition of its investments. In addition, if the investment were to involve U.S. real property, gain recognized on the disposition of the investment by a corporation generally would be subject to corporate level tax, whether the corporation were a U.S. or a non-U.S. corporation.
Although each U.S. Holder is required to provide us with an IRS Form W-9, we nevertheless may be unable to accurately or timely determine the tax status of our investors for purposes of determining whether U.S. withholding applies to payments made by our company to some or all of our unitholders. In such a case, payments made by our company to U.S. Holders might be subject to U.S. “backup” withholding at the applicable rate or other U.S. withholding taxes. You would be able to treat as a credit your allocable share of any U.S. withholding taxes paid in the taxable year in which such withholding taxes were paid and, as a result, you might be entitled to a refund of such taxes from the IRS. In the event you transfer or otherwise dispose of some or all of your units, special rules might apply for purposes of determining whether you or the transferee of such units were subject to U.S. withholding taxes in respect of income allocable to, or distributions made on account of, such units or entitled to refunds of any such taxes withheld. See below “Administrative Matters—Certain“Administrative Matters-Certain Effects of a Transfer of Units”. You should consult an independentyour own tax adviser regarding the treatment of U.S. withholding taxes.
Transferor/Transferee Allocations
Our company may allocate items of income, gain, loss, and deduction using a monthly
or other convention, whereby any such items recognized in a given month by our company are allocated to our unitholders as of a specified date of such month. As a result, if you transfer your units, you might be allocated income, gain, loss, and deduction realized by our company after the date of the transfer. Similarly, if you acquire additional units, you might be allocated income, gain, loss, and deduction realized by our company prior to your ownership of such units.
Although
Section 706 of the U.S. Internal Revenue Code generally governs allocations of items of partnership income and deductions between transferors and transferees of partnership interests,
and the U.S. Treasury Regulations provide a safe harbor allowing a publicly traded partnership to use a monthly simplifying convention for such purposes. However, it is not clear that our company’s allocation method complies with the requirements. If our company’s convention were not permitted, the IRS might contend that our company’s taxable income or losses must be reallocated among our unitholders. If such a contention were sustained, your tax liabilities might be adjusted to your detriment. The BPY General Partner is authorized to revise our company’s method of allocation between transferors and transferees (as well as among investors whose interests otherwise vary during a taxable period).
U.S. Federal Estate Tax Consequences
If our units are included in the gross estate of a U.S. citizen or resident for U.S. federal estate tax purposes, then a U.S. federal estate tax might be payable in connection with the death of such person. Individual U.S. Holders should consult
an independenttheir own tax
adviseradvisers concerning the potential U.S. federal estate tax consequences with respect to our units.
Certain Reporting Requirements
A U.S. Holder who invests more than $100,000 in our company may be required to file IRS Form 8865 reporting the investment with such U.S. Holder’s U.S. federal income tax return for the year that includes the date of the investment. You may be subject to substantial penalties if you fail to comply with this and other information reporting requirements with respect to an investment in our units. You should consult
an independentyour own tax adviser regarding such reporting requirements.
U.S. Taxation of Tax-Exempt U.S. Holders of Our Units
Income recognized by a U.S. tax-exempt organization is exempt from U.S. federal income tax except to the extent of the organization’s
unrelated business taxable income, or UBTI. UBTI is defined generally as any gross income derived by a tax-exempt organization from an unrelated trade or business that it regularly carries on, less the deductions directly connected with that trade or business. In addition, income arising from a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) that holds operating assets or is otherwise engaged in a trade or business generally will constitute UBTI. Notwithstanding the foregoing, UBTI generally does not include any dividend income, interest income, certain other categories of passive income, or capital gains realized by a tax-exempt organization, so long as such income is not “debt-financed”, as discussed below. The BPY General Partner currently believes that our company should not be regarded as engaged in a trade or business, and anticipates that any operating assets held by our company will be held through entities that are treated as corporations for U.S. federal income tax purposes.
The exclusion from UBTI does not apply to income from “debt-financed property”, which is treated as UBTI to the extent of the percentage of such income that the average acquisition indebtedness with respect to the property bears to the average tax basis of the property for the taxable year. If an entity treated as a partnership for U.S. federal income tax purposes incurs acquisition indebtedness, a tax-exempt partner in such partnership will be deemed to have acquisition indebtedness equal to its allocable portion of such acquisition indebtedness. If any such indebtedness were used by our company or by the Property Partnership to acquire property, such property generally would constitute debt-financed property, and any income from or gain from the disposition of such debt-financed property allocated to a tax-exempt organization generally would constitute UBTI to such tax-exempt organization. In addition, even if such indebtedness were not used either by our company or by the Property Partnership to acquire property but were instead used to fund distributions to our unitholders, if a tax-exempt organization subject to taxation in the United States were to use such proceeds to make an investment outside our company, the IRS might assert that such investment constitutes debt-financed property to such unitholder with the consequences noted above. The BPY General Partner
and the Property General Partner dodoes not expect our company or the Property Partnership to directly incur debt to acquire property, and the BPY General Partner
and the Property General Partner dodoes not believe that our company or the Property Partnership will generate UBTI attributable to debt-financed property in the future. Moreover, the BPY General Partner
and the Property General Partner intendintends to use commercially reasonable efforts to structure the activities of our company and the Property Partnership, respectively, to avoid generating UBTI. However, neither our company nor the Property Partnership is prohibited from incurring indebtedness, and no assurance can be provided that neither our company nor the Property Partnership will generate UBTI attributable to debt-financed property in the future. Tax-exempt U.S. Holders should consult
an independenttheir own tax
adviseradvisers regarding the tax consequences of an investment in our units.
Investments by U.S. Mutual Funds
A U.S. mutual fund that is treated as a regulated investment company, or RIC, for U.S. federal income tax purposes is required, among other things, to meet an annual 90% gross income and a quarterly 50% asset value test under Section 851(b) of the U.S. Internal Revenue Code to maintain its favorable U.S. federal income tax status. The treatment of an investment by a RIC in our units for purposes of these tests will depend on whether our company is treated as a “qualified publicly traded partnership”. If our company is so treated, then
our units themselves are the relevant assets for purposes of the 50% asset value test, and the net income from our units is the relevant gross income for purposes of the 90% gross income test. If, however, our company is not so treated, then the relevant assets are the RIC’s allocable share of the underlying assets held by our company, and the relevant gross income is the RIC’s allocable share of the underlying gross income earned by our company. Whether our company will qualify as a qualified publicly traded partnership depends on the exact nature of its future investments, but the BPY General Partner believes it is likely that our company will not be treated as a qualified publicly traded partnership. RICs should consult an independent tax adviser regarding the U.S. tax consequences of an investment in our units.
Consequences to Non-U.S. Holders
Based on our organizational structure, as well as our company’s expected income and assets, the BPY General Partner
and the Property General Partner currently
believebelieves that our company is unlikely to earn income treated as effectively connected with a U.S. trade or business, including effectively connected income attributable to the sale of a
“U.S.“United States real property interest”, as defined in the U.S. Internal Revenue Code.
Specifically, our company intends not to make an investment, whether directly or through an entity which would be treated as a partnership for U.S. federal income tax purposes, if the BPY General Partner believes at the time of such investment that such investment would generate income treated as effectively connected with a U.S. trade or business. If, as anticipated, our company is not treated as engaged in a U.S. trade or business or as deriving income which is treated as effectively connected with a U.S. trade or business, and provided that a Non-U.S. Holder is not itself engaged in a U.S. trade or business, then such Non-U.S. Holder generally will not be subject to U.S. tax return filing requirements solely as a result of owning our units and generally will not be subject to U.S. federal income tax on its allocable share of our company’s interest and dividends from non-U.S.-sources or gain from the sale or other disposition of securities or real property located outside of the United States.
However, there can be no assurance that the law will not change or that the IRS will not deem our company to be engaged in a U.S. trade or business. If, contrary to the BPY General Partner’s expectations, our company is treated as engaged in a U.S. trade or business, then a Non-U.S. Holder generally would be required to file a U.S. federal income tax return, even if no effectively connected income were allocable to it. If our company were to have income treated as effectively connected with a U.S. trade or business, then a Non-U.S. Holder would be required to report that income and would be subject to U.S. federal income tax at the regular graduated rates. In addition, our company might be required to withhold U.S. federal income tax on such Non-U.S. Holder’s distributive share of such income. A corporate Non-U.S. Holder might also be subject to branch profits tax at a rate of 30%, or at a lower treaty rate, if applicable. Finally, if our company were treated as engaged in a U.S. trade or business, a portion of any gain realized by a Non-U.S. Holder upon the sale or exchange of its units could be treated as income effectively connected with a U.S. trade or business and therefore subject to U.S. federal income tax at the regular graduated rates.
In general, even if our company is not engaged in a U.S. trade or business, and assuming you are not otherwise engaged in a U.S. trade or business, you will nonetheless be subject to a withholding tax of 30% on the gross amount of certain U.S.-source income which is not effectively connected with a U.S. trade or business. Income subjected to such a flat tax rate is income of a fixed or determinable annual or periodic nature, including certain interest income. Such withholding tax may be reduced or eliminated with respect to certain types of income under an applicable income tax treaty between the United States and your country of residence or under the “portfolio interest” rules or other provisions of the U.S. Internal Revenue Code, provided that you provide proper certification as to your eligibility for such treatment. Notwithstanding the foregoing, and although each Non-U.S. Holder is required to provide us with an IRS Form W-8, we nevertheless may be unable to accurately or timely determine the tax status of our investors for purposes of establishing whether reduced rates of withholding apply to some or all of our investors. In such a case, your allocable share of distributions of U.S.-source interest income will be subject to U.S. withholding tax at a rate of 30%. Further, if you would not be subject to U.S. tax based on your tax status or otherwise were eligible for a reduced rate of U.S. withholding, you might need to take additional steps to receive a credit or refund of any excess withholding tax paid on your account, which could include the filing of a non-resident U.S. income tax return with the IRS. Among other limitations applicable to claiming treaty benefits, if you reside in a treaty jurisdiction which does not treat our company as a pass-through entity, you might not be eligible to receive a refund or credit of excess U.S.withholding taxes paid on your account. In the event you transfer or otherwise dispose of some or all of your units, special rules may apply for purposes of determining whether you or the transferee of such units are subject to U.S. withholding taxes in respect of income allocable to, or distributions made on account of, such units or entitled to refunds of any such taxes withheld. See “—Administrative Matters—Certain
“-Administrative Matters-Certain Effects of a Transfer of Units” below.. You should consult an independentyour own tax adviser regarding the treatment of U.S. withholding taxes. Special rules may apply
in the case of a Non-U.S. Holder subject to
special rules, including, without limitation, any Non-U.S. Holder (i) that has an office or fixed place of business in the United States; (ii) that is present in the United States for 183 days or more in a taxable year; or (iii) that is (a) a former citizen or long-term resident of the United States, (b) a foreign insurance company that is treated as holding a partnership interest in our company in connection with its U.S. business, (c) a PFIC, or (d) a corporation that accumulates earnings to avoid U.S. federal income tax. You should consult
an independentyour own tax adviser regarding the application of these special rules.
Taxes in Other Jurisdictions
Based on our expected method of operation and the ownership of our operating entities indirectly through corporate Holding Entities, we do not expect any unitholder, solely as a result of owning our units, to be subject to any additional income taxes imposed on a net basis or additional tax return filing requirements in any jurisdiction in which we conduct activities or own property. However,
our method of operation and current structure may change, and there can be no assurance that, solely as a result of owning our units, you will not be subject to certain taxes, including non-U.S., state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes imposed by the various jurisdictions in which we do business or own property now or in the future, even if you do not reside in any of these jurisdictions. Consequently, you may also be required to file non-U.S., state and local income tax returns in some or all of these jurisdictions. Further, you may be subject to penalties for failure to comply with these requirements. It is your responsibility to file all U.S. federal, state, local, and non-U.S. tax returns that may be required of you.
Income or gain from investments held by our company may be subject to withholding or other taxes in jurisdictions outside the United States, except to the extent an income tax treaty applies. If you wish to claim the benefit of an applicable income tax treaty, you might be required to submit information to one or more of our company, an intermediary, or a tax authority in such jurisdiction. You should consult
an independentyour own tax adviser regarding the U.S. federal, state, local, and non-U.S. tax consequences of an investment in our company.
Administrative Matters
Tax Matters Partner
The BPY General Partner will act as our company’s “tax matters partner”. As the tax matters partner, the BPY General Partner will have the authority, subject to certain restrictions, to act on behalf of our company in connection with any administrative or judicial review of our company’s items of income, gain, loss, deduction, or credit.
Information Returns
and Audit Procedures
We have agreed to use commercially reasonable efforts to furnish to you, within 90 days after the close of each calendar year,
U.S. tax information (including IRS Schedule K-1), which describes on a U.S. Dollar basis your share of our company’s income, gain, loss, and deduction for our preceding taxable year. However, providing this U.S. tax information to our unitholders will be subject to delay in the event of, among other reasons, the late receipt of any necessary tax information from lower-tier entities. It is therefore possible that, in any taxable year, you will need to apply for an extension of time to file your tax returns. In preparing this U.S. tax information, we will use various accounting and reporting conventions, some of which have been mentioned in the previous discussion, to determine your share of income, gain, loss, and deduction. The IRS may successfully contend that certain of these reporting conventions are impermissible, which could result in an adjustment to your income or loss.
Our company may be audited by the IRS. Adjustments resulting from an IRS audit could require you to adjust a prior year’s tax liability and result in an audit of your own tax return. Any audit of your tax return could result in adjustments not related to our
company’s tax returns, as well as those related to our
company’s tax returns.
Under the Bipartisan Budget Act of 2015, for taxable years beginning after December 31, 2017, if the IRS makes an audit adjustment to our income tax returns, it may assess and collect any taxes (including penalties and interest) resulting from such audit adjustment directly from our company instead of unitholders (as under prior law). We may be permitted to elect to have the BPY General Partner and our unitholders take such audit adjustment into account in accordance with their interests in us during the taxable year under audit. However, there can be no assurance that we will choose to make such election or that it will be available in all circumstances, and the manner in which the election is made and implemented has yet to be determined. If we do not make the election, and we pay taxes, penalties, or interest as a result of an audit adjustment, then cash available for distribution to our unitholders might be substantially reduced. As a result, our current unitholders might bear some or all of the cost of the tax liability resulting from such audit adjustment, even if our current unitholders did not own our units during the taxable year under audit. Moreover, the calculation of such tax liability might not take into account a unitholder’s tax status, such as the status of a current or former unitholder as tax-exempt. The foregoing considerations also apply with respect to our company’s interest in the Property Partnership. These rules do not apply to our company or the Property Partnership for taxable years beginning on or before December 31, 2017.
For taxable years beginning on or before December 31, 2017, the BPY General Partner will act as our company’s “tax matters partner.” As the tax matters partner, the BPY General Partner will have the authority, subject to certain restrictions, to act on behalf of our company in connection with any administrative or judicial review of our company’s items of income, gain, loss, deduction, or credit. For taxable years beginning after December 31, 2017, a “partnership representative” designated by our company will have the sole authority to act on behalf of our company in connection with such administrative or judicial review. In particular, our partnership representative will have the sole authority to bind both our former and current unitholders and to make certain elections on behalf of our company pursuant to the Bipartisan Budget Act of 2015.
The application of the Bipartisan Budget Act of 2015 to our company and our unitholders is uncertain and remains subject to U.S. Treasury Regulations and IRS guidance yet to be issued. You should consult your own tax adviser regarding the implications of the Bipartisan Budget Act of 2015 for an investment in our units.
Tax Shelter Regulations and Related Reporting Requirements
If we were to engage in a “reportable transaction”, we (and possibly our unitholders) would be required to make a detailed disclosure of the transaction to the IRS in accordance with regulations governing tax shelters and other potentially tax-motivated transactions. A transaction may be a reportable transaction based upon any of several factors, including the fact that it is a type of tax avoidance transaction publicly identified by the IRS as a “listed transaction” or “transaction of interest”, or that it produces certain kinds of losses in excess of $2 million (or, in the case of certain foreign currency transactions, losses in excess of $50,000). An investment in our company may be considered a “reportable transaction” if, for example, our company were to recognize certain significant losses in the future. In certain circumstances, a unitholder who disposes of an interest in a transaction resulting in the recognition by such holder of significant losses in excess of certain threshold amounts may be obligated to disclose its participation in such transaction. Certain of these rules are unclear, and the scope of reportable transactions can change retroactively. Therefore, it is possible that the rules may apply to transactions other than significant loss transactions.
Moreover, if we were to participate in a reportable transaction with a significant purpose to avoid or evade tax, or in any listed transaction, you might be subject to significant accuracy related penalties with a broad scope, for those persons otherwise entitled to deduct interest on federal tax deficiencies, non-deductibility of interest on any resulting tax liability, and in the case of a listed transaction, an extended statute of limitations. We do not intend to participate in any reportable transaction with a significant
purpose to avoid or evade tax, nor do we intend to participate in any listed transactions. However, no assurance can be provided that the IRS will not assert that we have participated in such a transaction.
You should consult
an independentyour own tax adviser concerning any possible disclosure obligation under the regulations governing tax shelters with respect to the disposition of our units.
Our company
currently uses the calendar year as its taxable year for U.S. federal income tax purposes. Under certain circumstances which we currently believe are unlikely to apply, a taxable year other than the calendar year may be required for such purposes.
Subject to the electing large partnership rules described below, our company will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of our units within a 12-month period.
A constructive termination of our company would result in the close of its taxable year for all unitholders. If a unitholder reports on a taxable year other than a fiscal year ending on our company’s year-end, and the unitholder is otherwise subject to U.S. federal income tax, the closing of our company’s taxable year may result in more than 12 months of our company’s taxable income or loss being includable in such unitholder’s taxable income for the year of the termination. We would be required to make new tax elections after a termination, including a new Section 754 Election. A constructive termination could also result in penalties and other adverse tax consequences if we were unable to determine that the termination had occurred. Moreover, a constructive termination might either accelerate the application of, or subject our company to, any tax legislation enacted before the termination.
Elective Procedures for Large Partnerships
The U.S. Internal Revenue Code allows large partnerships to elect streamlined procedures for income tax reporting. This election would reduce the number of items that must be separately stated on the IRS Schedules K-1 that are issued to our unitholders, and such IRS Schedules K-1 would have to be provided to holders on or before the first March 15 following the close of each taxable year. In addition, this election would prevent our company from suffering a “technical termination” (which would close our company’s taxable year and require that we make a new Section 754 Election) if, within a 12-month period, there were a sale or exchange of 50% or more of our
company’s total units. Despite the foregoing benefits, there are also costs and administrative burdens associated with such an election. Consequently, as of this time, our company has not elected to be subject to the reporting procedures applicable to large partnerships.
Withholding and Backup Withholding
For each calendar year, we will report to you and to the IRS the amount of distributions that we pay, and the amount of tax (if any) that we withhold on these distributions. The proper application to our company of the rules for withholding under Sections 1441 through 1446 of the U.S. Internal Revenue Code (applicable to certain dividends, interest, and amounts treated as effectively connected with a U.S. trade or business, among other items) is unclear. Because the documentation we receive may not properly reflect the identities of unitholders at any particular time (in light of possible sales of our units), we may over-withhold or under-withhold with respect to a particular unitholder. For example, we may impose withholding, remit such amount to the IRS and thus reduce the amount of a distribution paid to a Non-U.S. Holder. It may be the case, however, that the corresponding amount of our income was not properly allocable to such holder, and the appropriate amount of withholding should have been less than the actual amount withheld. Such Non-U.S. Holder would be entitled to a credit against the holder’s U.S. federal income tax liability for all withholding, including any such excess withholding. However, if the withheld amount were to exceed the holder’s U.S. federal income tax liability, the holder would need to apply for a refund to obtain the benefit of such excess withholding. Similarly, we may fail to withhold on a distribution, and it may be the case that the corresponding income was properly allocable to a Non-U.S. Holder and that withholding should have been imposed. In such case, we intend to pay the under-withheld amount to the IRS, and we may treat such under-withholding as an expense that will be borne indirectly by all unitholders on a pro rata basis (since we may be unable to allocate any such excess withholding tax cost to the relevant Non-U.S. Holder).
Under the backup withholding rules, you may be subject to backup withholding tax with respect to distributions paid unless: (i) you are an exempt recipient and demonstrate this fact when required; or (ii) provide a taxpayer identification number, certify as to no loss of exemption from backup withholding tax, and otherwise comply with the applicable requirements of the backup withholding tax rules. A U.S. Holder that is exempt should certify such status on a properly completed IRS Form W-9. A Non-U.S. Holder may qualify as an exempt recipient by submitting a properly completed IRS Form W-8. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S.
federal income tax liability and may entitle you to a refund from the IRS, provided you supply the required information to the IRS in a timely manner.
If you do not timely provide our company, or the applicable nominee, broker, clearing agent, or other intermediary, with IRS Form W-9 or IRS Form W-8, as applicable, or such form is not properly completed, then our company may become subject to U.S. backup withholding taxes in excess of what would have been imposed had our company or the applicable intermediary received properly completed forms from all unitholders. For administrative reasons, and in order to maintain the fungibility of our units, such excess U.S. backup withholding taxes,
and if necessary similar items, may be treated by our company as an expense that will be borne indirectly by all unitholders on a pro rata basis (e.g., since it may be impractical for us to allocate any such excess withholding tax cost to the unitholders that failed to timely provide the proper U.S. tax forms).
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act of 2010, commonly known as “FATCA”, impose
FATCA imposes a 30% withholding tax on “withholdable payments” made to a “foreign financial institution” or a “non-financial foreign entity”, unless such financial institution or entity satisfies certain information reporting or other requirements. Withholdable payments include certain U.S.-source income,
(suchsuch as interest, dividends, and other passive
income) andincome. Beginning January 1, 2019, withholdable payments also include gross proceeds from the sale or disposition of property that can produce U.S.-source interest or dividends.
The withholding tax appliesWe intend to
withholdable payments made on or after January 1, 2014 (or January 1, 2017 in the case of gross proceeds). The BPY General Partner intends to ensure that our company compliescomply with FATCA,
including by entering into an agreement with the IRS if necessary, so as to ensure that the 30% withholding tax does not apply to any withholdable payments received by our company, the Property Partnership, the Holding Entities, or the operating entities.
If our units are not “regularly traded on an established securities market” for FATCA purposes, then Nonetheless, the 30% withholding tax may apply to your allocable share of distributions attributable to withholdable payments, made by our company tounless you properly certify your FATCA status on IRS Form W-8 or IRS Form W-9 (or other applicable form) and satisfy any unitholder who fails to meet certainadditional requirements under FATCA. The 30% withholding tax may also apply to “foreign passthru payments” made by our company on or after January 1, 2017 to any unitholder that is (i) a foreign financial institution that fails to meet certain requirements under FATCA or (ii) a “recalcitrant account holder” for FATCA purposes. The BPY General Partner believes that our units should be regarded as regularly traded on an established securities market for FATCA purposes.However, this conclusion is based upon recently promulgated U.S. Treasury Regulations whose meaning is not free from doubt. Moreover, the scope of foreign passthru payments must be determined under U.S. Treasury Regulations that have yet to be issued. Thus it is uncertain whether the 30% withholding tax will apply to certain payments made by our company in the future to unitholders who fail to meet certain requirements under FATCA. The foregoing rules remain subject to modification by an applicable intergovernmental agreement between the United States and another country or by other future U.S. Treasury Regulations or guidance.
To ensure
In compliance with FATCA, information regarding certain unitholders’ ownership of our units may be reported to the IRS or to a non-U.S. governmental authority.
EachFATCA remains subject to modification by an applicable intergovernmental agreement between the United States and another country, such as the agreement in effect between the United States and Bermuda for cooperation to facilitate the implementation of
our unitholdersFATCA, or by future U.S. Treasury Regulations or guidance. You should consult
an independentyour own tax adviser regarding the consequences under FATCA of an investment in our units.
Information Reporting with Respect to Foreign Financial Assets
Under U.S. Treasury Regulations, U.S. individuals that own “specified foreign financial assets” with an aggregate fair market value exceeding either $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year generally are required to file an information report with respect to such assets with their tax returns. Significant penalties may apply to persons who fail to comply with these rules. Specified foreign financial assets include not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person, and any interest in a foreign entity.
Upon the issuance of future U.S. Treasury Regulations, theseThese information reporting requirements
mayalso apply to
certain U.S.
entities that owncorporations, partnerships, and trusts formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets. The failure to report information required under the current regulations could result in substantial penalties and in the extension of the statute of limitations with respect to federal income tax returns filed by you. You should consult
an independentyour own tax adviser regarding the possible implications of these U.S. Treasury Regulations for an investment in our units.
Certain Effects of a Transfer of Units
Our company may allocate items of income, gain, loss, deduction, and credit using a monthly
or other convention, whereby any such items recognized in a given month by our company are allocated to our
unitholders as of a specified date of such month. The Property Partnership may invest in debt obligations or other securities for which the accrual of interest or income thereon is not matched by a contemporaneous receipt of cash. Any such accrued interest or other income would be allocated pursuant to such monthly or other convention. Consequently, our unitholders may recognize income in excess of cash distributions received from our company, and any income so included by a unitholder would increase the basis such unitholder has in our units and would offset any gain (or increase the amount of loss) realized by such unitholder on a subsequent disposition of its units. In addition, U.S. withholding taxes generally would be withheld by our company only on the payment of cash in respect of such accrued interest or other income, and, therefore, it is possible that some unitholders would be allocated income which might be distributed to a subsequent unitholder, and such subsequent unitholder would be subject to withholding at the time of distribution. As a result, the subsequent unitholder, and not the unitholder who was allocated income, would be entitled to claim any available credit with respect to such withholding.
The Property Partnership has invested and will continue to invest in certain Holding Entities and operating entities organized in non-U.S. jurisdictions, and income and gain from such investments may be subject to withholding and other taxes in such jurisdictions. If any such non-U.S. taxes were imposed on income allocable to a U.S. Holder, and such holder were thereafter to dispose of its units prior to the date distributions were made in respect of such income, under applicable provisions of the U.S. Internal Revenue Code and U.S. Treasury regulations, the unitholder to whom such income was allocated (and not the unitholder to whom distributions were ultimately made) would, subject to other applicable limitations, be the party permitted to claim a credit for such non-U.S. taxes for U.S. federal income tax purposes. Thus a unitholder may be affected either favorably or adversely by the foregoing rules. Complex rules may, depending on a unitholder’s particular circumstances, limit the availability or use of foreign tax credits, and you are urged to consult
an independentyour own tax adviser regarding all aspects of foreign tax credits.
Persons who hold an interest in our company as a nominee for another person may be required to furnish to us:
| (a) |
| a) | the name, address and taxpayer identification number of the beneficial owner and the nominee; |
| (b) |
| b) | whether the beneficial owner is (1) a person that is not a U.S. person, (2) a foreign government, an international organization, or any wholly owned agency or instrumentality of either of the foregoing, or (3) a tax-exempt entity; |
| (c) |
| c) | the amount and description of units held, acquired, or transferred for the beneficial owner; and |
| (d) |
| d) | specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition cost for purchases, as well as the amount of net proceeds from sales. |
Brokers and financial institutions may be required to furnish additional information, including whether they are U.S. persons and specific information on
our units they acquire, hold, or transfer for their own account. A penalty of $100 per failure, up to a maximum of $1,500,000 per calendar year, generally is imposed by the U.S. Internal Revenue Code for the failure to report such information to us. The nominee is required to supply the beneficial owner of our units with the information furnished to us.
New Legislation or Administrative or Judicial Action
The U.S. federal income tax treatment of our unitholders depends, in some instances, on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. You should be aware that the U.S. federal income tax rules, particularly those applicable
to partnerships, are constantly under review (including currently) by the Congressional tax-writing committees and other persons involved in the legislative process, the IRS, the U.S. Treasury Department and the courts, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations, any of which could adversely affect the value of our units and be effective on a retroactive basis. For example, changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible for our company to be treated as a partnership that is not taxable as a corporation for U.S. federal income tax purposes, affect the tax considerations of owning our units, change the character or treatment of portions of our company’s income, and adversely affect an investment in our units. Such changes could also affect or cause our company to change the way it conducts its activities, affect the tax considerations of an investment in our company, and otherwise change the character or treatment of portions of our company’s income (including changes that recharacterize certain allocations as potentially non-deductible fees).
, reduce the net amount of distributions available to our unitholders, or otherwise affect the tax considerations of owning our units. Such changes could also affect or cause our company to change the way it conducts its activities and adversely affect the value of our units.
Our company’s organizational documents and agreements permit the BPY General Partner to modify our limited partnership agreement from time to time, without the consent of our unitholders, to elect to treat our company as a corporation for U.S. federal tax purposes, or to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all of our unitholders.
THE FOREGOING DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. THE TAX MATTERS RELATING TO OUR COMPANY AND UNITHOLDERS ARE COMPLEX AND ARE SUBJECT TO VARYING INTERPRETATIONS. MOREOVER, THE EFFECT OF EXISTING INCOME TAX LAWS, THE MEANING AND IMPACT OF WHICH IS UNCERTAIN, AND OF PROPOSED CHANGES IN INCOME TAX LAWS WILL VARY WITH THE PARTICULAR CIRCUMSTANCES OF EACH UNITHOLDER, AND IN REVIEWING THIS ANNUAL REPORT
ON FORM 20-F THESE MATTERS SHOULD BE CONSIDERED. EACH UNITHOLDER SHOULD CONSULT
AN INDEPENDENTITS OWN TAX ADVISER WITH RESPECT TO THE U.S. FEDERAL, STATE, LOCAL, AND OTHER TAX CONSEQUENCES OF ANY INVESTMENT IN OUR UNITS.
Canadian Federal Income Tax Considerations
The following is aan accurate summary of the principal Canadian federal income tax consequences under the Tax Act of the receipt, holding and disposition of units in our company generally applicable to a holderunitholder, who for purposes of the Tax Act and at
all relevant times, holds our units as capital property, deals at arm’s length with and is not affiliated with our company, the Property Partnership, the BPY General Partner
the Property General Partner, the Property GP LP andor their respective
affiliates.affiliates, or a Holder. Generally, our units will be considered to be capital property to a
holder,Holder, provided that the
holderHolder does not use or hold our units in the course of carrying on a business of trading or dealing in securities and has not acquired them in one or more transactions considered to be an adventure or concern in the nature of trade.
This summary is not applicable to
(i) a
holderHolder: (i) that is a “financial institution”
, as defined in the Tax Act for purposes of the “mark-to-market”
property rules, (ii)
a holder that is a “specified financial institution”
, as defined in the Tax Act, (iii)
a holder who makes or has made a functional currency reporting election pursuant to section 261 of the Tax Act, (iv)
a holder an interest in which would be a “tax shelter investment” as defined in the Tax Act or
a holder who acquires our units as a “tax shelter investment” (and this summary assumes that no such persons hold our units), (v)
a holder who has, directly or indirectly, a “significant interest”
, as defined in subsection 34.2(1) of the Tax Act, in our company, or (vi)
a holder to whom any affiliate of our company is a “foreign affiliate”
for purposes of, as defined in the Tax Act. Any such
holdersHolders should consult their own tax advisors with respect to an investment in our units.
This summary is based on the current provisions of the Tax Act,
the regulations thereunder, or the Regulations, all specific proposals to amend the Tax Act
or the Regulations publicly announced by or on behalf of the Minister
of Finance (Canada) prior to the date hereof, or the Tax Proposals, and the current published administrative and
assessing policies and practices of the CRA. This summary assumes that all Tax Proposals will be enacted in the form proposed but no assurance can be given that the Tax Proposals will be enacted in the form proposed or at all. This summary does not otherwise take into account or anticipate any changes in law, whether by judicial, administrative or legislative decision or action, or changes in the CRA’s administrative and assessing policies and practices, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ significantly from those described herein. A holderThis summary is not exhaustive of all possible Canadian federal income tax consequences that may affect unitholders. Holders should consult their own tax advisors in respect of the provincial, territorial or foreign income tax consequences to them of holding and disposing of our units.
This summary assumes that neither our company nor the Property Partnership will be considered to carry on business in Canada. Our Managing General Partner and the Property General Partner have advised that they intend to organize and conduct the affairs of each of these entities, to the extent possible, so that neither of these entities should be considered to carry on business in Canada for purposes of the Tax Act. However, no assurance can be given in this regard.
This summary also assumes that neither our company nor the Property Partnership is a “tax shelter”
or “tax shelter investment”,
each as defined in the Tax
Act.Act, or “tax shelter investment”. However, no assurance can be given in this regard.
This summary also assumes that neither our company nor the Property Partnership will be a “SIFT partnership” at any relevant time for purposes of the SIFT Rules on the basis that neither our company nor the Property Partnership will be a “Canadian resident partnership” at any relevant time. However, there can be no assurance that the SIFT Rules will not be revised or amended such that the SIFT Rules will apply.
This summary does not address the deductibility of interest on money borrowed to acquire our units.
This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular holder of our units,Holder, and no representation with respect to the Canadian federal income tax consequences to any particular holderHolder is made. Consequently, holders of our unitsHolders are advised to consult their own tax advisors with respect to their particular circumstances. See also Item 3.D3.D. “Risk Factors —- Risks Relating to Taxation.” For purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of our units must be expressed in Canadian
Dollarsdollars including any distributions, adjusted cost base and proceeds of disposition. For purposes of the Tax Act, amounts denominated in a currency other than the Canadian
Dollardollar generally must be converted into Canadian
Dollarsdollars using the rate of exchange quoted by the Bank of Canada at noon on the date such amounts arose, or such other rate of exchange as is acceptable to the CRA.
Taxation of Canadian Resident Limited Partners
The following
is a discussionportion of the
consequences under the Tax Actsummary is generally applicable to a
unitholderHolder who, for purposes of the Tax Act and at all relevant times, is
resident or
is deemed to be resident in Canada, or
a Canadian Limited
Partners.Partner.
Computation of Income or Loss
Each Canadian Limited Partner is required to include (or, subject to the “at-risk rules” discussed below, entitled to deduct) in computing his or her income for a particular taxation year the Canadian Limited Partner’s
pro rata share of the income (or loss) of our company for its fiscal year ending in, or coincidentally with, the Canadian Limited Partner’s taxation year end, whether or not any of that income is distributed to the Canadian Limited Partner in the taxation year and regardless of whether our units were held throughout such year.
Our company will not itself be a taxable entity and is not expected to be required to file an income tax return in Canada for any taxation year. However, the income (or loss) of our company for a fiscal period for purposes of the Tax Act will be computed as if it were a separate person resident in Canada and the unitholders will be allocated a share of that income (or loss) in accordance with our limited partnership agreement. The
income (or loss) of our company will include our company’s share of the income (or loss) of the Property Partnership for a fiscal year determined in accordance with the Property Partnership’s limited partnership agreement. For this purpose, our company’s fiscal year end and that of the Property Partnership will be December 31.
The income for tax purposes of our company for a given fiscal year of our company will be allocated to each Canadian Limited Partner in an amount calculated by multiplying such income that is allocable to unitholders by a fraction, the numerator of which is the sum of the distributions received by such Canadian Limited Partner with respect to such fiscal year and the denominator of which is the aggregate amount of the distributions made by our company to all unitholders with respect to such fiscal year.
If, with respect to a given fiscal year, no distribution is made by us to our unitholders or our company has a loss for tax purposes, one quarter of the income, or loss, as the case may be, for tax purposes of our company for such fiscal year that is allocable to unitholders, will be allocated to our unitholders of record at the end of each calendar quarter ending in such fiscal year in the proportion that the number of our units held at each such date by a unitholder is of the total number of units of our company that are issued and outstanding at each such date. Generally, the source and character of such income or loss allocated to a unitholder at the end of the each calendar quarter will be the same source and character as the income or loss earned or incurred by our company in such calendar quarter.
The income of our company as determined for purposes of the Tax Act may differ from its income as determined for accounting purposes and may not be matched by cash distributions. In addition, for purposes of the Tax Act, all income (or losses) of our company and the Property Partnership must be calculated in Canadian currency. Where our company (or the Property Partnership) holds investments denominated in U.S.
Dollarsdollars or other foreign currencies, gains and losses may be realized by our company as a consequence of fluctuations in the relative values of the Canadian and foreign currencies.
In computing the income (or loss) of our company, deductions may be claimed in respect of reasonable administrative costs, interest and other expenses incurred by us for the purpose of earning income, subject to the relevant provisions of the Tax Act. Our company may also deduct from its income for the year a portion of the reasonable expenses, if any, incurred by our company to issue our units. The portion of such issue expenses deductible by our company in a taxation year is 20% of such issue expenses, pro-rated where our company’s taxation year is less than 365 days.
Our company and the Property Partnership may be required to withhold and remit Canadian federal withholding tax on any management or administration fees or charges paid or credited to a non-resident person, to the extent that such management or administration fees or charges are deductible in computing our company’s or the Property Partnership’s income from a source in Canada.In general, a Canadian Limited Partner’s share of any income (or loss) from our company from a particular source will be treated as if it were income (or loss) of the Canadian Limited Partner from that source, and any provisions of the Tax Act applicable to that type of income (or loss) will apply to the Canadian Limited Partner. Our company will invest in limited partnership units of the Property Partnership. In computing our company’s income (or loss) under the Tax Act, the Property Partnership will itself be deemed to be a separate person resident in Canada which computes its income (or loss) and allocates to its partners their respective share of such income (or loss). Accordingly, the source and character of amounts included in (or deducted from) the income of Canadian Limited Partners on account of income (or loss) earned by the Property Partnership generally will be determined by reference to the source and character of such amounts when earned by the Property Partnership.
The characterization by CRA of gains realized by our company or the Property Partnership on the disposition of investments as either capital gains or income gains will depend largely on factual considerations, and no conclusions are expressed herein.
A Canadian Limited Partner’s share of taxable dividends received or considered to be received by our company in a fiscal year from a corporation resident in Canada will be treated as a dividend received by the Canadian Limited Partner and will be subject to the normal rules in the Tax Act applicable to such dividends, including the enhanced
dividend gross-up and
dividend tax credit for “eligible dividends”
, as defined in the Tax Act, when the dividend received by the Property Partnership is designated as an “eligible dividend”.
Foreign taxes paid by our company or the Property Partnership and taxes withheld at source on amounts paid or credited to our company or the Property Partnership (other than for the account of a particular unitholder) will be allocated pursuant to the governing partnership agreement. Each Canadian Limited Partner’s share of the “business-income tax” and “non-business-income tax” paid into the government of a foreign country for a year will be creditable against its Canadian federal income tax liability to the extent permitted by the detailed foreign tax credit rules contained in the Tax Act. Although the foreign tax credit provisionsrules are designed to avoid double taxation, the maximum credit is limited. Because of this, and because of timing differences in recognition of expenses and income and other factors, there is a risk of double taxation. The Minister announced the Foreign Tax Credit Generator Proposals on March 4, 2010 which are contained in Bill C-48, which is currently proceeding through the legislative process as anti-avoidance rules, to address certain foreign tax credit generator transactions.provisions may not provide a full foreign tax credit for the “business-income tax” and “non-business-income tax” paid by our company or the Property Partnership to the government of a foreign country. Under the Foreign Tax Credit Generator Proposals,Rules, the foreign “business income“business-income tax” or “non-business-income tax” allocated to a Canadian Limited Partner for the purpose of determining such Canadian Limited Partner’s foreign tax credit for any taxation year may be limited in certain circumstances, including where a Canadian Limited Partner’s share of the income of our company’s incomecompany
or the Property Partnership under the income tax laws of any country (other than Canada) under whose laws the income of our company
or the Property Partnership is subject to income taxation,
or the Relevant Foreign Tax Law, is less than the Canadian Limited Partner’s share of such income for purposes of the Tax Act.
For this purpose, a Canadian Limited Partner is not considered to have a lesser direct or indirect share of the income of our company or the Property Partnership under the Relevant Foreign Tax Law than for the purposes of the Tax Act solely because, among other reasons, of a difference between the Relevant Foreign Tax Law and the Tax Act in the manner of computing the income of our company or the Property Partnership or in the manner of allocating the income of our company or the Property Partnership because of the admission or withdrawal of a partner. No
assurancesassurance can be given that the Foreign Tax Credit Generator
ProposalsRules will not apply to any Canadian Limited Partner. If the Foreign Tax Credit Generator
ProposalsRules apply,
the allocation to a
Canadian Limited Partner of foreign “business-income tax” or “non-business-income tax” paid by our company or the Property Partnership, and therefore such Canadian Limited Partner’s foreign tax credits, will be limited.
Our company and the Property Partnership will be deemed to be a non-resident person in respect of certain amounts paid or
credited or deemed to be credited to them by a person resident or deemed to be resident in Canada, including dividends or interest. Dividends or interest (other than interest
exempt fromnot subject to Canadian federal withholding tax)
paid or deemed to be paid by a person resident or deemed to be resident in Canada to the Property Partnership will be subject to withholding tax under Part XIII of the Tax Act at the rate of 25%. However,
the CRA’s administrative practice in similar circumstances is to permit the rate of Canadian federal withholding tax applicable to such payments to be computed by looking through the partnership and taking into account the residency of the partners (including partners who are resident in Canada) and any reduced rates of Canadian federal withholding tax that any non-resident partners may be entitled to under an applicable income tax treaty or convention, provided that the residency status and entitlement to the treaty benefits can be established. In determining the rate of Canadian federal withholding tax applicable to amounts paid by the Holding Entities to the Property Partnership,
the BPY General Partner and the Property General Partnerwe expect
that the Holding Entities to look-through the Property Partnership and our company to the residency of the partners of our company (including partners who are
residents ofresident in Canada) and to take into account any reduced rates of Canadian federal withholding tax that non-resident partners may be entitled to under an applicable income tax treaty or convention in order to determine the appropriate amount of Canadian federal withholding tax to withhold from dividends or interest paid to the Property Partnership. However, there can be no assurance that
the CRA
wouldwill apply its administrative practice in this context. Under the Treaty,
in certain circumstances a Canadian resident payer is required
in certain circumstances to look-through fiscally transparent partnerships, such as our company and the Property Partnership, to the residency and
treatyTreaty entitlements of their partners and
to take into account
the reduced rates of Canadian federal withholding tax that such partners may be entitled to under the Treaty.
If our company incurs losses for tax purposes, each Canadian Limited Partner will
subject to the REOP Proposals discussed below, be entitled to deduct in the computation of income for tax purposes the Canadian Limited Partner’s
pro rata share of any net losses for tax purposes of our company for its fiscal year to the extent that the Canadian Limited Partner’s investment is “at-risk” within the meaning of the Tax Act. The Tax Act contains “at-risk rules” which may, in certain circumstances, restrict the deduction of a limited partner’s share of any losses of a limited partnership. The BPY General Partner
and the Property General Partner dodoes not anticipate that our company or the Property Partnership will incur losses, but no assurance can be given in this
regard. Accordingly, Canadian Limited Partners should consult their own tax advisors for specific advice with respect to the potential application of the “at-risk rules”.
On October 31, 2003, the Department of Finance released for public comment Tax Proposals under which a taxpayer would be considered to have a loss from a source that is a business or property for a taxation year only if, in that year, it is reasonable to assume that the taxpayer will realize a cumulative profit (excluding capital gains or losses) from the business or property during the period that the business is carried on or that the property is held. In general, these Tax Proposals, or the REOP Proposals, may deny the realization of losses by Canadian Limited Partners from their investment in our company in a particular taxation year, if, in the year the loss is claimed, it is not reasonable to expect that an overall cumulative profit would be earned from the investment in our company for the period in which the Canadian Limited Partner has held and can reasonably be expected to hold the investment. The BPY General Partner and the Property General Partner do not anticipate that the activities of our company and the Property Partnership will, in and of themselves, generate losses, but no assurance can be given in this regard. However, Canadian Limited Partners may incur expenses in connection with an acquisition of units in our company that could result in a loss that could be affected by the REOP Proposals. As part of the 2005 Canadian federal budget, the Minister announced that an alternative proposal to reflect the REOP Proposals would be released for comment at an early opportunity. No such alternative proposal has been released to date. There can be no assurance that such alternative proposal will not adversely affect Canadian Limited Partners, or that any revised proposal may not differ significantly from the REOP Proposals described herein.
On March 4, 2010, the Minister announced as part of the 2010 Canadian federal budget that the outstanding Tax Proposals regarding investments in “foreign investment entities” would be replaced with revised Tax Proposals under which the existing rules in section 94.1 of the Tax Act relating to investments in “offshore investment fund property” would remain in place subject to certain limited enhancements. Legislation to implement the revised Tax Proposals is contained in Bill C-48 which is currently proceeding through the legislative process.
Section 94.1 of the Tax Act contains rules relating to investments by a taxpayer in Non-Resident Entities that could, in certain circumstances, cause income to be imputed to Canadian Limited Partners, either directly or by way of allocation of such income imputed to our company or the Property Partnership. These rules would apply if it is reasonable to conclude, having regard to all the circumstances, that one of the main reasons for the Canadian Limited Partner, our company or the Property Partnership acquiring,
holding or
holdinghaving an investment in a non-resident entity is to derive a benefit from “portfolio investments” in
certain assets from which the Non-Resident Entity may reasonably be considered to derive its value in such a manner that taxes under the Tax Act on income, profits and gains
from such assets for any year are significantly less than they would have been if such income, profits and gains had been earned directly. In determining whether this is the case,
existing section 94.1 of the Tax Act provides that consideration must be given to, among other factors, the extent to which the income, profits and gains for any fiscal period are distributed in that or the immediately following fiscal period. No assurance can be given that
existing section 94.1 of the Tax Act
as proposed to be amended will not apply to a Canadian Limited Partner, our company or the Property Partnership. If these rules apply to a Canadian Limited Partner, our company or the Property Partnership, income,
determined by reference to a prescribed rate of interest plus 2% applied to the “designated cost”, as defined in section 94.1 of the Tax Act, of the interest in the Non-Resident Entity, will be imputed directly to the Canadian Limited Partner,
or to our company or to the Property Partnership and allocated to the Canadian Limited Partner in accordance with the rules in
existing section 94.1 of the Tax
Act as proposed to be amended.Act. The rules in section 94.1 of the Tax Act are complex and Canadian Limited Partners should consult their own tax advisors regarding the application of these rules to them in their particular circumstances.
Dividends paid to the Property Partnership by the CFAs toa CFA of the Property Partnership will be included in computing the income of the Property Partnership. To the extent that any of the CFAs or any direct or indirect subsidiary that itself is a controlled foreign affiliateCFA of the Property Partnership or Indirect CFA thereof earns income that is characterized
as FAPI in a particular taxation year of the CFA or Indirect CFA, the FAPI allocable to the Property Partnership
under the rules in the Tax Act must be included in computing the income of the Property Partnership for Canadian federal income tax purposes for the fiscal period of the Property Partnership in which the taxation year of that CFA or Indirect CFA ends, whether or not the Property Partnership actually receives a distribution of that FAPI. Our company will include its share of such FAPI of the Property Partnership in computing its income for Canadian
federal income tax purposes and Canadian Limited Partners will be required to include their proportionate share of such FAPI allocated from our company in computing their income for Canadian federal income tax purposes. As a result, Canadian Limited Partners may be required to include amounts in their income even though they have not and may not receive an actual cash distribution of such amount.amounts. If an amount of FAPI is included in computing the income of the Property Partnership for Canadian federal income tax purposes, an amount may be deductible in respect of the “foreign accrual tax” as defined in the Tax Act applicable to the FAPI. Any amount of FAPI included in income net of the amount of any deduction in respect of “foreign accrual tax” will increase the adjusted cost base to the Property Partnership of its shares of the particular CFA in respect of which the FAPI was included. At such time as the Property Partnership receives a dividend of this type of income that was previously treatedincluded in the Property Partnership’s income as FAPI, thatsuch dividend will under the Tax Proposals in Bill C-48 (which is currently proceeding through the legislative process) effectively not be included in computing the income of the Property Partnership and there will be a corresponding reduction in the adjusted cost base to the Property Partnership of the particular CFA shares. Under the Foreign Tax Credit Generator Proposals,Rules, the “foreign accrual tax” applicable to a particular amount of FAPI included in the Property Partnership’s income in respect of a particular “CFA”“foreign affiliate” of the Property Partnership may be limited in certain specified circumstances, including where the direct or indirect share of the income of any member of the Property Partnership (which is deemed for this purpose to include a Canadian Limited Partner) that is a person resident in Canada or a “foreign affiliate” of such a person is, under the income tax laws of any country (other than Canada) under whose laws the income of the Property Partnership is subject to income taxation,a Relevant Foreign Tax Law, less than itssuch member’s share thereofof such income for purposes of the Tax Act. No assurancesassurance can be given that the Foreign Tax Credit Generator ProposalsRules will not apply to the Property Partnership. For this purpose, a Canadian Limited Partner is not considered to have a lesser direct or indirect share of the income of the Property Partnership under the Relevant Foreign Tax Law than for purposes of the Tax Act solely because, among other reasons, of a difference between the Relevant Foreign Tax Law and the Tax Act in the manner of computing the income of the Property Partnership or in the manner of allocating the income of the Property Partnership because of the admission or withdrawal of a partner. If the Foreign Tax Credit Generator ProposalsRules apply, the “foreign accrual tax” applicable to a particular amount of FAPI included in the Property Partnership’s income in respect of a particular “foreign affiliate” of the Property Partnership will be limited.
The disposition
(or deemed disposition) by a Canadian Limited Partner of a unit of our company will result in the realization of a capital gain (or capital loss) by such limited
partner. The amount of such capital gain (or capital loss) will generally bepartner in the amount, if any, by which the proceeds of disposition of
athe unit, less any reasonable costs of disposition, exceed (or are exceeded by) the adjusted cost base of such unit. In general, the adjusted cost base of a Canadian Limited Partner’s units of our company will be equal
toto: (i) the actual cost of the units (excluding any portion thereof financed with limited recourse indebtedness)
; plus (ii) the
pro rata share of the income of our company allocated to the Canadian Limited Partner for the fiscal years of our company ending before the relevant
timetime; less (iii) the aggregate of the
pro rata share of losses of our company allocated to the Canadian Limited Partner (other than losses which cannot be deducted because they exceed the Canadian Limited Partner’s “at-risk” amount) for the fiscal years of our company ending before the relevant
timetime; and
less (iv) the Canadian Limited Partner’s distributions
received from our company made before the relevant time. The adjusted cost base of each of our units will be subject to the averaging provisions contained in the Tax Act.
Where a Canadian Limited Partner disposes of all of its units
ofin our company,
such personit will no longer be a partner of our partnership. If, however, a Canadian Limited Partner is entitled to receive a distribution from our company after the disposition of all such units, then the Canadian Limited Partner will be deemed to dispose of
thesuch units at the later of: (i) the end of the fiscal year of our company during which the disposition occurred; and (ii) the date of the last distribution made by our company to which the Canadian Limited Partner was entitled.
Pursuant to the Tax Proposals contained in Bill C-48 which is currently proceeding through the legislative process, theThe pro rata share of the income (or loss) for tax purposes of our company for a particular fiscal year which is allocated to a Canadian Limited Partner who has ceased to be a partner will generally be added (or deducted) in the computation of the adjusted cost base of the Canadian Limited Partner’s units immediately prior to the time of the disposition.
These rules are complex and Canadian Limited Partners should consult their own tax advisors for advice with respect to the specific tax consequences to them of disposing of units of our company.A Canadian Limited Partner will
generally realize a deemed capital gain if, and to the extent that, the adjusted cost base of the Canadian Limited Partner’s units of our company is negative at the end of any of our fiscal years. In such a case, the adjusted cost base of the Canadian Limited Partner’s units of our company will be nil at the beginning of our next fiscal year.
Canadian Limited Partners should consult their own tax advisors for advice with respect to the specific tax consequences to them of disposing of units of our company.
Taxation of Capital Gains and Capital Losses
In general, one-half of a capital gain realized by a Canadian Limited Partner must be included in computing such Canadian Limited Partner’s income as a
taxable“taxable capital
gain.gain”. One-half of a capital loss is deducted as an
allowable“allowable capital
lossloss” against
taxable“taxable capital
gainsgains” realized in the year and any remainder may be deducted against
taxablenet “taxable capital
gainsgains” in any of the three years preceding the year or any year following the year to the extent and under the circumstances described in the Tax Act.
Special rules in the Tax Act may apply to disallow the one-half treatment on all or a portion of the capital gain realized on a disposition of our units to a tax-exempt person or a non-resident person. Canadian Limited Partners contemplating such a disposition should consult their own tax advisors in this regard.
A Canadian Limited Partner that is throughout the relevant taxation year a “Canadian-controlled private corporation”
, as defined in the Tax Act, may be liable to pay an additional refundable tax
of 6 2/3% on its “aggregate investment income”, as defined in the Tax Act, for the year, which is defined to include taxable capital gains.
Canadian Limited Partners that are individuals or trusts may be subject to the alternative minimum tax rules. Such Canadian Limited Partners should consult their own tax advisors.
Eligibility for Investment
Provided that our units are listed on a “designated stock exchange”
as defined in the Tax Act (which currently includes the NYSE and the TSX), our units will be “qualified investments” under the Tax Act for a trust governed by
aan RRSP, deferred profit sharing plan, RRIF, registered education
savingsavings plan, registered disability
savingsavings plan, and
a TFSA.
However, there can be no assurance that tax laws relating to “qualified investments” will not be changed. Taxes may be imposed in respect of the acquisition or holding of non-qualified investments by such registered plans and certain other taxpayers and with respect to the acquisition or holding of “prohibited investments”
as defined in the Tax Act by a RRSP, RRIF or TFSA.
Our
Notwithstanding the foregoing, a holder of a TFSA or an annuitant under a RRSP or RRIF, as the case may be, will be subject to a penalty tax if our units held in a TFSA, RRSP or RRIF are a “prohibited investment” for the TFSA, RRSP or RRIF, as the case may be. Generally, our units will not be a “prohibited investment”
for a trust governed by a RRSP, RRIF or TFSA, provided thatif the holder of the TFSA or the annuitant
ofunder the RRSP or RRIF, as
the case may be, (i)applicable, deals at arm’s length with our company for purposes of the Tax Act and
(ii) does not have a “significant interest”, as defined in the Tax Act,
for purposes of the prohibited investment rules, in (A) our company or (B) in a corporation, partnership or trust with which we do not deal at arm’s length for purposes of the Tax Act. The Department of Finance (Canada) released proposed amendments to the Tax Act on December 21, 2012 that will delete the condition in (ii) (B) above and will exclude certain “excluded property” (as defined in the proposed amendments) from being a “prohibited investment”. Generally, our units will be “excluded property” (i.e. not a “prohibited investment”) to the holder of a TFSA or the annuitant of an RRSP or RRIF, as the case may be, if, at the relevant time, at least 90% of the fair market value of all equity of our company is owned by persons dealing at arm’s length with such holder or annuitant, and their investment in our
company meets the other criteria set forth in such proposed amendments. Such proposed amendments will be deemed to have come into force on March 23, 2011. Investorscompany. Unitholders who intend to hold our units in a
TFSA, RRSP,
RRIF or
RRIFTFSA should consult with their own tax advisors regarding the application of the foregoing
prohibited investment“prohibited investment” rules having regard to their particular circumstances.
Canadian Limited Partners that are individuals or trusts may be subject to the alternative minimum tax rules. Such Canadian Limited Partners should consult their own tax advisors.
Taxation of Non-Canadian Limited Partners
The following
portion of the summary
appliesis generally applicable to a
holderHolder who, for purposes of the Tax Act
and at all relevant times, is not, and is not deemed to be, resident in Canada and who does not use or hold
their investment inand is not deemed to use or hold our
companyunits in connection with a business carried on, or deemed to be carried on, in Canada, or a Non-Canadian Limited Partner.
The following portion of the summary assumes that (i) our units are not and will not beat any relevant time constitute “taxable Canadian property” of any Non-Canadian Limited Partner, at any relevant time, and (ii) our company and the Property Partnership will not dispose of propertiesproperty that areis “taxable Canadian property”. “Taxable Canadian property” includes, but is not limited to, property that is used or held in a business carried on in Canada and shares of corporations resident in Canada that are not listed on a “designated stock exchange” if more than 50% of the fair market value of the shares is derived from certain Canadian properties during the 60-month period immediately preceding the disposition.particular time. In general, our units will not constitute “taxable Canadian property” of any Non-Canadian Limited Partner at thea particular time, of disposition, unless (a) at any time during the 60-month period immediately preceding the disposition,particular time, more than 50% of the fair market value of our units was derived, directly or indirectly (under Tax Proposals contained in Bill C-48, which is currently proceeding through the legislative process, excluding(excluding through a corporation, partnership or trust, the shares or interestinterests in which were not themselves “taxable Canadian property”), from one or any combination of: (i) real or immovable property situated in Canada; (ii) “Canadian resource property”; (iii) “timber resource property”; and (iv) options in respect of, or interests in, or for civil law rights in, such property, whether or not such property exists, or (b) our units are otherwise deemed to be “taxable Canadian property”. Since our company’s assets will consist principally of units of the Property Partnership, our units would generally be “taxable Canadian property” at a particular time if the units of the Property Partnership held by our company derived, directly or indirectly (under Tax Proposals contained in Bill C-48, which is currently proceeding through the legislative process, excluding(excluding through a corporation, partnership or trust, the shares or interestinterests in which were not themselves “taxable Canadian property”), more than 50% of their fair market value from properties described in (i) to (iv) above, at any time in the 60-month period preceding the particular time. The BPY General Partner and the Property General Partner dodoes not expect our units to be “taxable Canadian property” of any Non-Canadian Limited Partner at any relevant time and dodoes not expect our company or the Property Partnership to dispose of “taxable Canadian property”. However, no assurance can be given in this regard. See alsoItem 3.D3.D. “Risk Factors —- Risks Relating to Taxation.”
The following portion of the summary also assumes that neither our company nor the Property Partnership will be considered to carry on business in Canada. The BPY General Partner intends to organize and conduct the affairs of each of these entities, to the extent possible, so that neither of these entities should be considered to carry on business in Canada for purposes of the Tax Act. However, no assurance can be given in this regard. If our company or the Property Partnership carry on business in Canada, the tax implications to our partnership or the Holding LP and to holders may be materially and adversely different as set out herein.
Special rules, which are not discussed in this summary, may apply to a Non-Canadian Limited Partner that is an insurer carrying on business in Canada and elsewhere.
Taxation of Income or Loss
A Non-Canadian Limited Partner will not be subject to Canadian federal income tax under Part I of the Tax Act on its share of income from a business carried on by our company (or the Property Partnership) outside Canada or the
non-business incomenon-business-income earned by our company (or the Property Partnership) from sources in Canada. However, a Non-Canadian Limited Partner may be subject to Canadian federal withholding tax under Part XIII of the Tax Act, as described below.
The BPY General Partner and the Property General Partner, as the case may be, intend to organize and conduct the affairs of our company and the Property Partnership such that Non-Canadian Limited Partners should not be considered to be carrying on business in Canada solely by virtue of holding our units. However, no assurance can be given in this regard.Our company and the Property Partnership will be deemed to be a non-resident person in respect of certain amounts
paid or credited or deemed to be paid or credited to them by a person resident or deemed to be resident in Canada, including dividends or interest. Dividends or interest (other than interest
exempt fromnot subject to Canadian federal withholding tax)
paid or deemed to be paid by a person resident or deemed to be resident in Canada to the Property Partnership will be subject to withholding tax under Part XIII of the Tax Act at the rate of 25%. However, the CRA’s administrative practice in similar circumstances is to permit the rate of Canadian federal withholding tax applicable to such payments to be computed by looking through
the partnership and taking into account the residency of the partners (including partners who are resident in Canada) and any reduced rates of Canadian federal withholding tax that any non-resident partners may be entitled to under an applicable income tax treaty or convention, provided that the residency status and entitlement to the treaty benefits can be established. In determining the rate of Canadian federal withholding tax applicable to amounts paid by the Holding Entities to the Property Partnership, the BPY General Partner and the Property General Partnerwe expect the Holding Entities to look-through the Property Partnership and our company to the residency of the partners of our company (including partners who are residents ofresident in Canada) and to take into account any reduced rates of Canadian federal withholding tax that Non-Canadian Limited Partners may be entitled to under an applicable income tax treaty or convention in order to determine the appropriate amount of Canadian federal withholding tax to withhold from dividends or interest paid to the Property Partnership. However, there can be no assurance that the CRA would apply its administrative practice in this context. Under the Treaty, in certain circumstances a Canadian resident payer is required in certain circumstances to look-through fiscally transparent partnerships, such as our company and the Property Partnership, to the residency and treatyTreaty entitlements of their partners and to take into account the reduced rates of Canadian federal withholding tax that such partners may be entitled to under the Treaty.
Bermuda Tax Considerations
In Bermuda there are no taxes on profits, income or dividends, nor is there any capital gains tax, estate duty or death duty. Profits can be accumulated and it is not obligatory to pay dividends. As “exempted undertakings”, exempted partnerships and overseas partnerships are entitled to apply for (and will ordinarily receive) an assurance pursuant to the Exempted Undertakings Tax Protection Act 1966 that, in the event that legislation introducing taxes computed on profits or income, or computed on any capital asset, gain or appreciation, is enacted, such taxes shall not be applicable to the partnership or any of its operations until March 31, 2015. Such an assurance may include the assurance that any tax in the nature of estate duty or inheritance tax shall not be applicable to the units, debentures or other obligations of the partnership.
Exempted partnerships and overseas partnerships fall within the definition of “international businesses” for the purposes of the Stamp Duties (International Businesses Relief) Act 1990, which means that instruments executed by or in relation to an exempted partnership or an overseas partnership are exempt from stamp duties (such duties were formerly applicable under the Stamp Duties Act 1976). Thus, stamp duties are not payable upon, for example, an instrument which effects the transfer or assignment of a unit in an exempted partnership or an overseas partnership, or the sale or mortgage of partnership assets; nor are they payable upon the partnership capital.
10.F. DIVIDENDS AND PAYING AGENTS
10.G. STATEMENT BY EXPERTS
10.H.10.H DOCUMENTS ON DISPLAY
Any statement in this Form 20-F about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the Form 20-F, the contract or document is deemed to modify the description contained in this Form 20-F. You must review the exhibits themselves for a complete description of the contract or document.
Brookfield Asset Management and our company are both subject to the information filing requirements of the Exchange Act, and accordingly are required to file periodic reports and other information with the SEC. As a foreign private issuer under the SEC’s regulations, we expect to file annual reports on Form 20-F and will furnish other reports on Form 6-K. The information disclosed in our reports may be less extensive than thatrequired to be disclosed in annual and quarterly reports on Forms 10-K and 10-Q required to be filed with the SEC by U.S. issuers. Moreover, as a foreign private issuer, we are not subject to the proxy requirements under Section 14 of the Exchange Act, and the BPY General Partner’s directors and our principal unitholders are not subject to the insider short swing profit reporting and recovery rules under Section 16 of the Exchange Act. Our and Brookfield Asset Management’s SEC filings are available at the SEC’s website atwww.sec.gov. You may also read and copy any document we or Brookfield Asset Management files with the SEC at the public reference facilities maintained by the SEC at SEC Headquarters,
Public Reference Section, 100 F Street, N.E., Washington D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330.
In addition, Brookfield Asset Management and our company are required by Canadian securities laws to file documents electronically with Canadian securities regulatory authorities and these filings are available on our or Brookfield Asset Management’s SEDAR profile atwww.sedar.com. Written requests for such documents should be directed to our Corporate Secretary at 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.
10.I. SUBSIDIARY INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See the information contained in this Form 20-F under Item 5.
“Operating and Financial Review and Prospects”.
ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. | CONTROLS AND PROCEDURES |
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of December 31,
2012,2015, an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of
the United States Securities Exchange Act of 1934, or the Exchange Act) was carried out under the supervision and with the participation of persons performing the functions of principal executive and principal financial officers for us and our
Managers.Service Providers. Based upon that evaluation, the persons performing the functions of principal executive and principal financial officers for us have concluded that, as of December 31,
2012,2015, our disclosure controls and procedures were effective: (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’sSEC’s rules and forms; and (ii) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the persons performing the functions of principal executive and principal financial officers for us, to allow timely decisions regarding required disclosure.
It should be noted that while our management, including persons performing the functions of principal executive and principal financial officers for us, believe our disclosure controls and procedures provide a reasonable level of assurance that such controls and procedures are effective, they do not expect that our disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
This annual report does not include a report of management’s assessment regarding
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, oras such term is defined in Exchange Act Rules 13a−15(f). Under the supervision and with the participation of our management, including persons performing the functions of principal executive and principal financial officers for us, we conducted an attestation reportevaluation of the company’s registered public accounting firm due to a transition periodeffectiveness of our internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control-Integrated Framework (2013) issued by rulesthe Committee of Sponsoring Organizations of the SecuritiesTreadway Commission. Based
on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.
Our management excluded from its design and
Exchange Commissionassessment of internal control over financial reporting Center Parcs UK and Associated Estates Realty Corp., which were acquired during 2015, and whose total assets, net assets, total revenue and net income on a combined basis constitute approximately 10%, 4%, 7% and 4%, respectively, of the consolidated financial statement amounts as of and for
newly public companies.the year ended December 31, 2015.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Report of Independent Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by Deloitte LLP, Chartered Professional Accountants, Independent Registered Public Accounting Firm, who have also audited the financial statements of our company, as stated in their reports which are included herein.
Changes in Internal Control
There was no change in our internal control over financial reporting during the year ended December 31,
2012,2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
16.A. AUDIT COMMITTEE FINANCIAL EXPERTS The BPY General Partner’s board of directors has determined that Stephen DeNardo possesses specific accounting and financial management expertise and that he is an audit committee financial expert as defined by the
U.S. Securities and Exchange CommissionSEC and is independent within the meaning of the rules of the NYSE. The BPY General Partner’s board of directors has also determined that other members of the Audit Committee have sufficient experience and ability in finance and compliance matters to enable them to adequately discharge their responsibilities.
On April 4, 2013, the BPY General Partner adopted a Code of Conduct and Ethics, (the “Code”)or the Code, that applies to the members of the board of directors of the BPY General Partner, our Companycompany and any officers or employees of the BPY General Partner. The Code is reviewed and updated annually. We have posted a copy of the Code on our website atwww.brookfieldpropertypartners.comwww.brookfieldpropertypartners.com.
16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES The BPY General Partner has retained Deloitte LLP to act as our
Company’scompany’s independent registered
chartered accountants.public accounting firm.
The table below summarizes the fees for professional services rendered by Deloitte LLP for the audit of our annual financial statements for the periods ended December 31,
2012. | | | | | | | | |
| | | December 31,
2012 | |
| THOUSANDS | | USD | | | % | |
Audit fees(1) | | $ | 925,000 | | | | 49 | % |
Audit-related fees(2) | | $ | 225,000 | | | | 12 | % |
Tax fees(3) | | $ | — | | | | 0 | % |
Other(4) | | $ | 729,400 | | | | 39 | % |
Total | | $ | 1,879,400 | | | | 100 | % |
|
| | | | | | | | | | |
| | December 31, 2015 | December 31, 2014 |
| (US$ Thousands) | Total |
| % |
| Total |
| % |
|
Audit fees(1) | $ | 5,876 |
| 31 | % | $ | 6,281 |
| 32 | % |
Audit-related fees(2) | 11,632 |
| 61 | % | 12,259 |
| 64 | % |
Tax fees(3) | 1,277 |
| 7 | % | 807 |
| 4 | % |
Other(4) | 113 |
| 1 | % | 54 |
| — | % |
| Total | $ | 18,898 |
| 100 | % | $ | 19,401 |
| 100 | % |
| |
(1) | Audit fees include fees for services that would normally be provided by the external auditoraudit of our annual consolidated financial statements, internal control over financing reporting and interim reviews of the consolidated financial statements included in connection with statutory and regulatory filings or engagements, including fees for services necessary to perform an audit or review in accordance with generally accepted auditing standards.our quarterly interim reports. This category also includes services that generally only the external auditor reasonably can provide, includingfees for comfort letters, statutory audits, attest services, consents and assistance with and review of certain documents filed with securities regulatory authorities. |
| |
(2) | Audit-related fees areinclude fees for assurance and related services, such as due diligence services, that traditionally are performed by the external auditor. More specifically, these services include, among others: employee benefit planaudit or review of financial statements for certain of our subsidiaries, including audits accounting consultations and audits in connectionof individual properties to comply with acquisitions, attest services that are not required by statutelender, joint venture partner or regulation, and consultation concerning financial accounting and reporting standards.tenant requirements. |
| |
(3) | Tax fees are principally for assistance in tax return preparation and tax advisory services. |
| |
(4) | All other fees include fees for due diligence related to mergersassistance with corporate and acquisitions, translation and advisory support services.social responsibility reporting. |
The audit committee of the BPY General Partner pre-approves all audit and non-audit services provided to our partnership by Deloitte LLP.
16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESNot applicable.
None.
16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSNone.
Under our normal course issuer bid, our company may, during the twelve month period commencing August 6, 2015 and ending August 5, 2016, purchase on the TSX, NYSE and any alternative Canadian trading platform up to 13,142,359 of our units, representing approximately 5% of our issued and outstanding units. During the year ended December 31, 2015, we purchased 1,612,442 of our units at an average price of $22.35 per unit.
16.F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 16.G. CORPORATE GOVERNANCE Our corporate practices are not materially different from those required of domestic limited partnerships under the NYSE Listing Standards.
16.H. MINING SAFETY DISCLOSURE Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities under the regulation of the Federal Mine Safety and Health Administration,
(“MSHA”)or the MSHA, under the Federal Mine Safety and Health Act of 1977, as amended,
(the “Mine Act”).or the Mine Act. During the fiscal year ended December 31,
2012,2015, our company did not have any mines in the United States subject to regulation by MSHA under the Mine Act.
ITEM 17. | FINANCIAL STATEMENTS |
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. | FINANCIAL STATEMENTS |
ITEM 18. FINANCIAL STATEMENTS
See the list of financial statements beginning on page F-1 which are filed as part of the annual report on Form 20-F.
In addition, see the Unaudited Pro Forma Financial Statements beginning on page PF-1 which are filed as part of the annual report on Form 20-F.
ITEM 19. EXHIBITS
| | |
Number | | Description |
| |
| 1.1 | | Certificate of registration of our company, registered as of January 3, 2012*2013* |
| |
| 1.3 | | Second Amended and Restated Limited Partnership Agreement of our company, dated April 10,August 8, 2013**** |
| |
| 4.1 | | Amended and Restated Master Purchase Agreement between our company and Brookfield Asset Management** |
| |
| 4.2 | | Amended and Restated Master Services Agreement by and among Brookfield Asset Management, the Service Recipients and the Managers,Service Providers, dated April 10, 2013March 3, 2015********** |
| |
| 4.3 | | Second Amended and Restated Limited Partnership Agreement of the Property Partnership, dated April 10,August 8, 2013**** |
| |
| 4.4 | | Relationship Agreement among our company, the Property Partnership, the Holding Entities, the ManagersService Providers and Brookfield Asset Management, dated April 15, 2013*** |
| |
| 4.5 | | Registration Rights Agreement between our company and Brookfield Asset Management dated
April 10, 2013*** |
| |
| 4.6 | | Acknowledgement of Termination of Voting Agreement among Brookfield Asset Management, theBrookfield Property General Partner Limited and our company, dated April 15,August 8, 2013**** |
| |
| 4.7 | | Credit Agreement, dated March 18, 2014, by and among Brookfield Property Split Corp., Brookfield Office Properties Exchange LP, Brookfield Property Partners L.P., Brookfield Property L.P., and the other borrowers and lenders thereto****** |
| |
| 4.8 | | Support Agreement, dated March 19, 2014, between Brookfield Property Partners L.P. and Brookfield Office Properties Exchange LP****** |
| | |
| 4.9 | | First Amendment to Second Amended and Restated Limited Partnership Agreement of the Property Partnership dated December 4, 2014******** |
| | |
| 4.10 | | Arrangement Agreement between our company, Brookfield Office Properties Exchange LP, Brookfield Property Split Corp. and Brookfield Office Properties Inc., dated as of April 24, 2014******* |
| | |
| 4.11 | | Guarantee Agreement between our company and the Class A Preferred Unitholder dated December 4, 2014******** |
| | |
| 4.12 | | Investor Agreement between our company and the Class A Preferred Unitholder dated December 4, 2014******** |
| | |
| 4.13 | | Subscription Agreement among our company, the Property Partnership and the Class A Preferred Unitholder dated December 4, 2014******** |
| | |
| 4.14 | | Refinancing Agreement among Brookfield Asset Management, our company and the Property Partnership dated December 4, 2014********* |
| | |
|
| | |
8.14.15 | | ListSecond Amendment to Second Amended and Restated Limited Partnership Agreement of significant subsidiariesthe Property Partnership dated July 1, 2015*********** |
| | |
| 4.16 | | First Amendment to the Amended and Restated Master Services Agreement by and among Brookfield Asset Management, the Service Recipients and the Service Providers, dated July 1, 2015*********** |
| | |
| 4.17 | | First Amendment to the Second Amended and Restated Limited Partnership Agreement of our company, (incorporated by reference to Item 4C. Organizational Structure)dated November 5, 2015*********** |
| | |
| 4.18 | | First Amending Agreement to the Credit Agreement dated February 22, 2016*********** |
| | |
| 12.1 | | Certification of Richard B. Clark,Brian W. Kingston, Chief Executive Officer, Brookfield Property PartnersGroup LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002********** |
| | |
| 12.2 | | Certification of Steven J. Douglas,Bryan K. Davis, Chief Financial Officer, Brookfield Property PartnersGroup LLC, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002********** |
| |
| 13.1 | | Certification of Richard B. Clark,Brian W. Kingston, Chief Executive Officer, Brookfield Property PartnersGroup LLC, pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes Oxley Act of 2002********** |
| |
| 13.2 | | Certification of Steven J. Douglas,Bryan K. Davis, Chief Financial Officer, Brookfield Property PartnersGroup LLC, pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes Oxley Act of 2002********** |
| | |
| 15.1 | | Consent of Deloitte LLP, Independent Registered Public Accounting Firm, relating to the incorporation of the consolidated financial statements of Brookfield Property Partners L.P. into this Annual Report on Form 20-F.********** |
| | |
| 15.2 | | Consent of Deloitte & Touche LLP relating to the incorporation of the consolidated financial statements of General Growth Properties, Inc. into this Annual Report on Form 20-F.********** |
| | |
| * | | Filed as an exhibit to Amendment No. 1 to Registration Statement on Form 20-F on June 12, 2012 and incorporated herein by reference. |
| | |
| ** | | Filed as an exhibit to Amendment No. 6 to Registration Statement on Form 20-F on February 1, 2013 and incorporated herein by reference. |
| | |
| *** | | Filed as an exhibit to Form 6-K on April 16, 2013 and incorporated herein by reference. |
| | |
| **** | | Filed as an exhibit to Form 6-K on August 8, 2013 and incorporated herein by reference. |
| | |
| ***** | | Filed as an exhibit to Form F-4 on January 24, 2014 and incorporated herein by reference. |
| | |
| ****** | | Filed as an exhibit to Form 6-K on March 19, 2014 and incorporated herein by reference. |
| | |
| ******* | | Filed as an exhibit to Form 6-K on April 25, 2014 and incorporated herein by reference. |
| | |
| ******** | | Filed as an exhibit to Form 6-K on December 4, 2014 and incorporated herein by reference. |
| | |
| ********* | | Filed as an exhibit to Brookfield Asset Management’s Schedule 13D/A filed on December 4, 2014 and incorporated herein by reference. |
| | |
|
| | |
| ********** | | Filed as an exhibit to Form 20-F on March 17, 2015 and incorporated herein by reference. |
| | |
| *********** | | Filed herewith. |
The registrant hereby agrees to furnish to the
Securities and Exchange CommissionSEC at its request copies of long-term debt instruments defining the rights of holders of outstanding long-term debt that are not required to be filed herewith.
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
| | |
| BROOKFIELD PROPERTY PARTNERS L.P., |
| by its general partner,BROOKFIELD PROPERTY PARTNERS LIMITED |
| | |
By: | By: | /s/ Jane Sheere |
| | Name: Jane Sheere |
| |
| | Title: Secretary |
Date: April 30, 2013March 16, 2016
INDEX TO FINANCIAL STATEMENTS
Index to Financial Statements
COMMERCIAL PROPERTY OPERATIONS OF BROOKFIELD
ASSET MANAGEMENT INC.
Carve-out
Brookfield Property Partners L.P.
Consolidated financial statements as
As at December 31,
20122015 and
December 31, 20112014 and
for each of the years in the three-year periodended December 31, 2012
2015, 2014 and 2013
Report of Independent Registered
Chartered AccountantsPublic Accounting Firm
To the Board of Directors
and Unitholders of
Brookfield Asset Management Inc.
Property Partners L.P.
We have audited the accompanying carve-out financial statements of the Commercial Property Operationsconsolidated balance sheets of Brookfield Asset Management Inc.Property Partners L.P. and subsidiaries (the “Business”“Partnership”), which comprise the carve-out balance sheets as atof December 31, 20122015 and December 31, 2011,2014, and the carve-outrelated consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and the notes to the carve-out financial statements.2015. Our auditaudits also included the audit of a supplemental schedule of investment property information as atof December 31, 20122015. These financial statements and financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and Canadian generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Partnership and subsidiaries as of December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Partnership’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2016 expressed an unqualified opinion on the Partnership’s internal control over financial reporting.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
March 16, 2016
Toronto, Canada
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Unitholders of Brookfield Property Partners L.P.
We have audited the internal control over financial reporting of Brookfield Property Partners L.P.and subsidiaries (the “Schedule”“Partnership”).as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s ResponsibilityReport on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Center Parcs UK and Associated Estates Realty Corp., which were acquired during 2015, and whose total assets, total equity, total revenue and net income constitute approximately 10%, 4%, 7% and 4% of the consolidated financial statement amounts, respectively, as of and for the Carve-out Financial Statementsyear ended December 31, 2015. Accordingly, our audit did not include the internal control over financial reporting at Center Parcs UK and the ScheduleManagementAssociated Estates Realty Corp. The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. A company’s internal control over financial reporting includes those policies and
fair presentationprocedures that (1) pertain to the maintenance of
these carve-outrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and
that receipts and expenditures of the
Schedule, and for such internal control as management determines is necessary to enable the preparation of carve-out financial statements and the Schedule thatcompany are
free from material misstatement, whether due to fraud or error.Auditor’s Responsibility
Our responsibility is to express an opinion on these carve-out financial statements and the Schedule based on our audits. We conducted our auditsbeing made only in accordance with Canadian generally accepted auditing standardsauthorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
. Those and Canadian generally accepted auditing standards,
require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the carve-outconsolidated financial statements and the
Schedule are free from material misstatement.An audit involves performing procedures to obtain audit evidence aboutsupplemental schedule of investment property information as of and for the amountsyear ended December 31, 2015 of the Partnership and disclosures in the carve-outour report dated March 16, 2016 expressed an unqualified opinion on those financial statements and the Schedule. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the carve-out financial statements and the Schedule, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the carve-out financial statements and the Schedule in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the carve-out financial statements and the Schedule.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the carve-out financial statements present fairly, in all material respects, the financial position of the Business as at December 31, 2012 and December 31, 2011, and its financial performance and its cash flows for each of the years in the three-year period ended December 31, 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also, in our opinion, the Schedule, when considered in relation to the carve-out financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
statement schedule.
/s/ Deloitte LLP
Independent Registered
Chartered
Professional Accountants
Licensed Public Accountants
March 16, 2016
Toronto, Canada
April 30, 2013
Commercial
Brookfield Property
Operations of Brookfield Asset Management Inc.Carve-outPartners L.P.
Consolidated Balance Sheets
| | | | | | | | | | | | |
| (US$ Millions) | | Note | | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Assets | | | | | | | | | | | | |
Non-current assets | | | | | | | | | | | | |
Investment properties | | | 5 | | | $ | 31,859 | | | $ | 27,594 | |
Equity accounted investments | | | 7 | | | | 8,110 | | | | 6,888 | |
Other non-current assets | | | 8 | | | | 5,636 | | | | 2,532 | |
Loans and notes receivable | | | 9 | | | | 246 | | | | 985 | |
| | | | | | | | 45,851 | | | | 37,999 | |
Current assets | | | | | | | | | | | | |
Loans and notes receivable | | | 9 | | | | 237 | | | | 773 | |
Accounts receivable and other | | | 10 | | | | 1,022 | | | | 796 | |
Cash and cash equivalents | | | | | | | 910 | | | | 749 | |
| | | | | | | | 2,169 | | | | 2,318 | |
Total assets | | | | | | $ | 48,020 | | | $ | 40,317 | |
Liabilities and equity in net assets | | | | | | | | | | | | |
Non-current liabilities | | | | | | | | | | | | |
Property debt | | | 11 | | | $ | 16,358 | | | $ | 13,978 | |
Capital securities | | | 12 | | | | 664 | | | | 844 | |
Other non-current liabilities | | | 13 | | | | 441 | | | | 493 | |
Deferred tax liability | | | 14 | | | | 997 | | | | 728 | |
| | | | | | | | 18,460 | | | | 16,043 | |
Current liabilities | | | | | | | | | | | | |
Property debt | | | 11 | | | | 3,366 | | | | 1,409 | |
Capital securities | | | 12 | | | | 202 | | | | 150 | |
Accounts payable and other liabilities | | | 15 | | | | 1,747 | | | | 1,221 | |
| | | | | | | | 5,315 | | | | 2,780 | |
Total liabilities | | | | | | | 23,775 | | | | 18,823 | |
Equity in net assets | | | | | | | | | | | | |
Equity in net assets attributable to parent company | | | 16 (a) | | | | 13,375 | | | | 11,881 | |
Non-controlling interests | | | 16 (b) | | | | 10,870 | | | | 9,613 | |
Total equity in net assets | | | | | | | 24,245 | | | | 21,494 | |
Total liabilities and equity in net assets | | | | | | $ | 48,020 | | | $ | 40,317 | |
|
| | | | | | | |
| (US$ Millions) | Note | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Assets | | |
| |
|
| Non-current assets | | |
| |
|
| Investment properties | 7 | $ | 41,599 |
| $ | 41,141 |
|
| Equity accounted investments | 9 | 17,638 |
| 10,356 |
|
| Participating loan interests | 11 | 449 |
| 609 |
|
| Hospitality assets | 12 | 5,016 |
| 2,478 |
|
| Other non-current assets | 13 | 3,883 |
| 4,017 |
|
| Loans and notes receivable | 14 | 217 |
| 209 |
|
| | | 68,802 |
| 58,810 |
|
| Current assets | | |
| |
|
| Loans and notes receivable | 14 | 4 |
| 117 |
|
| Accounts receivable and other | 15 | 1,220 |
| 3,125 |
|
| Cash and cash equivalents | | 1,035 |
| 1,282 |
|
| | | 2,259 |
| 4,524 |
|
| Assets held for sale | 16 | 805 |
| 2,241 |
|
| Total assets | | $ | 71,866 |
| $ | 65,575 |
|
| | | | |
| Liabilities and equity | | |
| |
|
| Non-current liabilities | | |
| |
|
| Debt obligations | 17 | $ | 21,946 |
| $ | 23,879 |
|
| Capital securities | 18 | 3,528 |
| 3,535 |
|
| Other non-current liabilities | | 388 |
| 646 |
|
| Deferred tax liabilities | 19 | 3,107 |
| 2,639 |
|
| | | 28,969 |
| 30,699 |
|
| Current liabilities | | |
| |
|
| Debt obligations | 17 | 8,580 |
| 3,127 |
|
| Capital securities | 18 | 503 |
| 476 |
|
| Accounts payable and other liabilities | 20 | 2,639 |
| 1,753 |
|
| | | 11,722 |
| 5,356 |
|
| Liabilities associated with assets held for sale | 16 | 242 |
| 1,221 |
|
| Total liabilities | | 40,933 |
| 37,276 |
|
| | | | |
| Equity | | |
| |
|
| Limited partners | 21 | 7,425 |
| 6,586 |
|
| General partner | 21 | 6 |
| 5 |
|
| Non-controlling interests attributable to: | | |
| |
|
| Redeemable/exchangeable and special limited partnership units | 21,22 | 14,218 |
| 13,147 |
|
| Limited partnership units of Brookfield Office Properties Exchange LP | 21,22 | 309 |
| 470 |
|
| Interests of others in operating subsidiaries and properties | 8,22 | 8,975 |
| 8,091 |
|
| Total equity | | 30,933 |
| 28,299 |
|
| Total liabilities and equity | | $ | 71,866 |
| $ | 65,575 |
|
See accompanying notes to the carve-outconsolidated financial statementsCommercial.
Brookfield Property
Operations of Brookfield Asset Management Inc.Carve-outPartners L.P.
Consolidated Statements of Income
| | | | | | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | Note | | | 2012 | | | 2011 | | | 2010 | |
Commercial property revenue | | | 17 | | | $ | 2,889 | | | $ | 2,425 | | | $ | 2,102 | |
Hospitality revenue | | | | | | | 743 | | | | 164 | | | | - | |
Investment and other revenue | | | 18 | | | | 169 | | | | 231 | | | | 168 | |
Total revenue | | | | | | | 3,801 | | | | 2,820 | | | | 2,270 | |
Direct commercial property expense | | | 19 | | | | 1,201 | | | | 944 | | | | 852 | |
Direct hospitality expense | | | 20 | | | | 687 | | | | 138 | | | | - | |
Investment and other expense | | | 21 | | | | 36 | | | | 54 | | | | 26 | |
Interest expense | | | | | | | 1,028 | | | | 977 | | | | 790 | |
Administration expense | | | 22 | | | | 171 | | | | 104 | | | | 109 | |
Total expenses | | | | | | | 3,123 | | | | 2,217 | | | | 1,777 | |
Fair value gains, net | | | 23 | | | | 1,330 | | | | 1,477 | | | | 824 | |
Share of net earnings from equity accounted investments | | | 7 | | | | 1,235 | | | | 2,104 | | | | 870 | |
Income before income taxes | | | | | | | 3,243 | | | | 4,184 | | | | 2,187 | |
Income tax expense | | | 14 | | | | 535 | | | | 439 | | | | 78 | |
Net income | | | | | | $ | 2,708 | | | $ | 3,745 | | | $ | 2,109 | |
Net income attributable to | | | | | | | | | | | | | | | | |
Parent company | | | | | | $ | 1,499 | | | $ | 2,323 | | | $ | 1,026 | |
Non-controlling interests | | | | | | | 1,209 | | | | 1,422 | | | | 1,083 | |
| | | | | | | $ | 2,708 | | | $ | 3,745 | | | $ | 2,109 | |
|
| | | | | | | | | | |
| (US$ Millions, except per unit information) Years ended Dec. 31, | Note | 2015 |
| 2014 |
| 2013 |
|
| Commercial property revenue | 23 | $ | 3,216 |
| $ | 3,038 |
| $ | 2,910 |
|
| Hospitality revenue | | 1,276 |
| 983 |
| 1,168 |
|
| Investment and other revenue | 24 | 361 |
| 452 |
| 209 |
|
| Total revenue | | 4,853 |
| 4,473 |
| 4,287 |
|
| Direct commercial property expense | 25 | 1,281 |
| 1,298 |
| 1,204 |
|
| Direct hospitality expense | 26 | 902 |
| 791 |
| 957 |
|
| Investment and other expense | | 135 |
| 100 |
| — |
|
| Interest expense | | 1,528 |
| 1,258 |
| 1,088 |
|
| Depreciation and amortization | 27 | 180 |
| 148 |
| 162 |
|
| General and administrative expense | 28 | 559 |
| 404 |
| 317 |
|
| Total expenses | | 4,585 |
| 3,999 |
| 3,728 |
|
| Fair value gains, net | 29 | 2,007 |
| 3,756 |
| 870 |
|
| Share of net earnings from equity accounted investments | 9 | 1,591 |
| 1,366 |
| 835 |
|
| Income before income taxes | | 3,866 |
| 5,596 |
| 2,264 |
|
| Income tax expense | 19 | 100 |
| 1,176 |
| 501 |
|
| Net income | | $ | 3,766 |
| $ | 4,420 |
| $ | 1,763 |
|
| | | | | |
| Net income attributable to: | | |
| |
| |
|
Limited partners(1) | | $ | 1,064 |
| $ | 1,154 |
| $ | 118 |
|
General partner(1) | | 1 |
| 1 |
| — |
|
Brookfield Asset Management Inc.(2) | | — |
| — |
| 232 |
|
| Non-controlling interests attributable to: | | |
| |
| |
|
Redeemable/exchangeable and special limited partnership units(1) | | 1,789 |
| 2,444 |
| 557 |
|
Limited partnership units of Brookfield Office Properties Exchange LP(1) | | 61 |
| 135 |
| — |
|
| Interests of others in operating subsidiaries and properties | | 851 |
| 686 |
| 856 |
|
| | | $ | 3,766 |
| $ | 4,420 |
| $ | 1,763 |
|
| | | | | |
| Net income per LP Unit: | | |
| |
| |
|
Basic(3) | 21 | $ | 3.72 |
| $ | 5.59 |
| $ | 1.41 |
|
Diluted(3) | 21 | $ | 3.60 |
| $ | 5.31 |
| $ | 1.41 |
|
| |
(1) | For periods subsequent to April 15, 2013. |
| |
(2) | For periods prior to April 15, 2013. |
| |
(3) | Net income per LP Unit has been presented effective for the period from the date of the Spin-off on April 15, 2013, as this is the date of legal entitlement of earnings to the LP Unit holders. |
See accompanying notes to the
carve-outconsolidated financial
statementsCommercialstatements.
Brookfield Property
Operations of Brookfield Asset Management Inc.Carve-outPartners L.P.
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | Note | | | 2012 | | | 2011 | | | 2010 | |
Net income | | | | | | $ | 2,708 | | | $ | 3,745 | | | $ | 2,109 | |
Other comprehensive income (loss) | | | 16 (c) | | | | | | | | | | | | | |
Foreign currency translation | | | | | | | 56 | | | | (387 | ) | | | 430 | |
Cash flow hedges | | | | | | | (38 | ) | | | (258 | ) | | | 67 | |
Available-for-sale securities | | | | | | | 20 | | | | 4 | | | | (2 | ) |
Revaluation surplus | | | 8 | | | | 53 | | | | - | | | | - | |
| | | | | | | | 91 | | | | (641 | ) | | | 495 | |
Total comprehensive income | | | | | | $ | 2,799 | | | $ | 3,104 | | | $ | 2,604 | |
Comprehensive income attributable to | | | | | | | | | | | | | | | | |
Parent company | | | | | | | | | | | | | | | | |
Net income | | | | | | $ | 1,499 | | | $ | 2,323 | | | $ | 1,026 | |
Other comprehensive income (loss) | | | | | | | 92 | | | | (365 | ) | | | 368 | |
| | | | | | | | 1,591 | | | | 1,958 | | | | 1,394 | |
Non-controlling interests | | | | | | | | | | | | | | | | |
Net income | | | | | | | 1,209 | | | | 1,422 | | | | 1,083 | |
Other comprehensive income (loss) | | | | | | | (1 | ) | | | (276 | ) | | | 127 | |
| | | | | | | | 1,208 | | | | 1,146 | | | | 1,210 | |
Total comprehensive income | | | | | | $ | 2,799 | | | $ | 3,104 | | | $ | 2,604 | |
|
| | | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | Note | 2015 |
| 2014 |
| 2013 |
|
| Net income | | $ | 3,766 |
| $ | 4,420 |
| $ | 1,763 |
|
| Other comprehensive (loss) income | 31 | |
| |
| |
|
| Items that may be reclassified to net income: | | |
| |
| |
|
| Foreign currency translation | | (831 | ) | (517 | ) | (819 | ) |
| Cash flow hedges | | (35 | ) | (162 | ) | 159 |
|
| Available-for-sale securities | | 1 |
| 4 |
| — |
|
| Equity accounted investments | | 50 |
| (84 | ) | 14 |
|
| Items that will not be reclassified to net income: | | |
| |
| |
|
| Revaluation surplus | | 134 |
| 312 |
| 183 |
|
| Total other comprehensive (loss) income | | (681 | ) | (447 | ) | (463 | ) |
| Total comprehensive income | | $ | 3,085 |
| $ | 3,973 |
| $ | 1,300 |
|
| Comprehensive income attributable to: | | |
| |
| |
|
Limited partners(1) | | |
| |
| |
|
| Net income | | $ | 1,064 |
| $ | 1,154 |
| $ | 118 |
|
| Other comprehensive (loss) income | | (143 | ) | (135 | ) | (42 | ) |
| | | 921 |
| 1,019 |
| 76 |
|
General partner(1) | | |
| |
| |
|
| Net income | | 1 |
| 1 |
| — |
|
| Other comprehensive (loss) income | | — |
| — |
| — |
|
| | | 1 |
| 1 |
| — |
|
Brookfield Asset Management Inc.(2) | | |
| |
| |
|
| Net income | | — |
| — |
| 232 |
|
| Other comprehensive (loss) income | | — |
| — |
| (25 | ) |
| | | — |
| — |
| 207 |
|
| Non-controlling interests | | |
| |
| |
|
Redeemable/exchangeable and special limited partnership units(1) | | |
| |
| |
|
| Net income | | 1,789 |
| 2,444 |
| 557 |
|
| Other comprehensive (loss) income | | (240 | ) | (285 | ) | (200 | ) |
| | | 1,549 |
| 2,159 |
| 357 |
|
Limited partnership units of Brookfield Office Properties Exchange LP(1) | |
| |
| |
|
| Net income | | 61 |
| 135 |
| — |
|
| Other comprehensive (loss) income | | (8 | ) | (16 | ) | — |
|
| | | 53 |
| 119 |
| — |
|
| Interests of others in operating subsidiaries and properties | | |
| |
| |
|
| Net income | | 851 |
| 686 |
| 856 |
|
| Other comprehensive (loss) income | | (290 | ) | (11 | ) | (196 | ) |
| | | 561 |
| 675 |
| 660 |
|
| Total comprehensive income | | $ | 3,085 |
| $ | 3,973 |
| $ | 1,300 |
|
| |
(1) | For periods subsequent to April 15, 2013. |
| |
(2) | For periods prior to April 15, 2013. |
See accompanying notes to the
carve-outconsolidated financial
statementsCommercialstatements.
Brookfield Property
Operations of Brookfield Asset Management Inc.Carve-outPartners L.P.
Consolidated Statements of Changes in Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | | | | Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | |
| | | Equity in
net assets | | | Foreign currency
translation | | | Cash flow
hedges | | | Available-for-sale
securities | | | Revaluation
Surplus | | | Total | | | Equity in net
assets
attributable to
parent
company | | | Non-controlling
interests | | | Total equity
in net assets | |
Balance as at December 31, 2009 | | $ | 5,473 | | �� | $ | 528 | | | $ | (16 | ) | | $ | (9 | ) | | $ | - | | | $ | 503 | | | $ | 5,976 | | | | $ 5,237 | | | | $ 11,213 | |
Net income | | | 1,026 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,026 | | | | 1,083 | | | | 2,109 | |
Other comprehensive income | | | - | | | | 296 | | | | 67 | | | | 5 | | | | - | | | | 368 | | | | 368 | | | | 127 | | | | 495 | |
Total comprehensive income | | | 1,026 | | | | 296 | | | | 67 | | | | 5 | | | | - | | | | 368 | | | | 1,394 | | | | 1,210 | | | | 2,604 | |
Contributions | | | 2,185 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,185 | | | | 1,529 | | | | 3,714 | |
(Distributions) | | | (2,091 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,091 | ) | | | (296 | ) | | | (2,387 | ) |
Balance as at December 31, 2010 | | $ | 6,593 | | | $ | 824 | | | $ | 51 | | | $ | (4 | ) | | $ | - | | | $ | 871 | | | $ | 7,464 | | | $ | 7,680 | | | $ | 15,144 | |
Net income | | | 2,323 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,323 | | | | 1,422 | | | | 3,745 | |
Other comprehensive income (loss) | | | - | | | | (218 | ) | | | (155 | ) | | | 8 | | | | - | | | | (365 | ) | | | (365 | ) | | | (276 | ) | | | (641 | ) |
Total comprehensive income | | | 2,323 | | | | (218 | ) | | | (155 | ) | | | 8 | | | | - | | | | (365 | ) | | | 1,958 | | | | 1,146 | | | | 3,104 | |
Contributions | | | 2,909 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,909 | | | | 1,684 | | | | 4,593 | |
(Distributions) | | | (450 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (450 | ) | | | (897 | ) | | | (1,347 | ) |
Balance as at December 31, 2011 | | $ | 11,375 | | | $ | 606 | | | $ | (104 | ) | | $ | 4 | | | $ | - | | | $ | 506 | | | $ | 11,881 | | | $ | 9,613 | | | $ | 21,494 | |
Net income | | | 1,499 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,499 | | | | 1,209 | | | | 2,708 | |
Other comprehensive income (loss) | | | - | | | | 78 | | | | (20 | ) | | | 17 | | | | 17 | | | | 92 | | | | 92 | | | | (1 | ) | | | 91 | |
Total comprehensive income | | | 1,499 | | | | 78 | | | | (20 | ) | | | 17 | | | | 17 | | | | 92 | | | | 1,591 | | | | 1,208 | | | | 2,799 | |
Contributions | | | 624 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 624 | | | | 882 | | | | 1,506 | |
(Distributions) | | | (721 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (721 | ) | | | (833 | ) | | | (1,554 | ) |
Balance as at December 31, 2012 | | $ | 12,777 | | | $ | 684 | | | $ | (124 | ) | | $ | 21 | | | $ | 17 | | | $ | 598 | | | $ | 13,375 | | | $ | 10,870 | | | $ | 24,245 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Brookfield Asset Management Inc. | | Limited partners | | General partner | | Non-controlling interests | |
| (US$ Millions) | Equity |
| Accumulated
other
compre-hensive
(loss) income |
| Brookfield
Asset
Management
Inc. equity |
| | Capital |
| Retained earnings |
| Ownership
changes |
| Accumulated
other
compre-hensive
(loss) income |
| Limited
partners equity |
| | Capital |
| Retained
earnings |
| Accumulated
other
compre-hensive
(loss) income |
| General
partner equity |
| | Redeemable/ exchangeable
and special
limited
partnership
units |
| Limited
partnership
units of Brookfield Office
Properties
Exchange LP |
| Interests of
others in
operating
subsidiaries
and properties |
| Total equity |
|
| Balance as at Dec. 31, 2014 | $ | — |
| $ | — |
| $ | — |
| | $ | 5,612 |
| $ | 1,010 |
| $ | 125 |
| $ | (161 | ) | $ | 6,586 |
| | $ | 4 |
| $ | 1 |
| $ | — |
| $ | 5 |
| | $ | 13,147 |
| $ | 470 |
| $ | 8,091 |
| $ | 28,299 |
|
| Net income | — |
| — |
| — |
| | — |
| 1,064 |
| — |
| — |
| 1,064 |
| | — |
| 1 |
| — |
| 1 |
| | 1,789 |
| 61 |
| 851 |
| 3,766 |
|
| Other comprehensive income (loss) | — |
| — |
| — |
| | — |
| — |
| — |
| (143 | ) | (143 | ) | | — |
| — |
| — |
| — |
| | (240 | ) | (8 | ) | (290 | ) | (681 | ) |
| Total comprehensive income (loss) | — |
| — |
| — |
| | — |
| 1,064 |
| — |
| (143 | ) | 921 |
| | — |
| 1 |
| — |
| 1 |
| | 1,549 |
| 53 |
| 561 |
| 3,085 |
|
| Distributions | — |
| — |
| — |
| | — |
| (276 | ) | — |
| — |
| (276 | ) | | — |
| — |
| — |
| — |
| | (464 | ) | (15 | ) | (830 | ) | (1,585 | ) |
| Issuances / repurchases of equity interests in operating subsidiaries | — |
| — |
| — |
| | — |
| (7 | ) | — |
| — |
| (7 | ) | | — |
| — |
| — |
| — |
| | (12 | ) | — |
| 1,153 |
| 1,134 |
|
| Exchange of exchangeable units | — |
| — |
| — |
| | 203 |
| — |
| 1 |
| (3 | ) | 201 |
| | — |
| — |
| — |
| — |
| | (2 | ) | (199 | ) | — |
| — |
|
| Balance as at Dec. 31, 2015 | $ | — |
| $ | — |
| $ | — |
| | $ | 5,815 |
| $ | 1,791 |
| $ | 126 |
| $ | (307 | ) | $ | 7,425 |
| | $ | 4 |
| $ | 2 |
| $ | — |
| $ | 6 |
| | $ | 14,218 |
| $ | 309 |
| $ | 8,975 |
| $ | 30,933 |
|
| | | | | | | | | | | | | | | | | | | | |
| Balance as at Dec. 31, 2013 | $ | — |
| $ | — |
| $ | — |
| | $ | 2,470 |
| $ | 62 |
| $ | — |
| $ | (4 | ) | $ | 2,528 |
| | $ | 4 |
| $ | — |
| $ | — |
| $ | 4 |
| | $ | 11,092 |
| $ | — |
| $ | 11,366 |
| $ | 24,990 |
|
| Net income | — |
| — |
| — |
| | — |
| 1,154 |
| — |
| — |
| 1,154 |
| | — |
| 1 |
| — |
| 1 |
| | 2,444 |
| 135 |
| 686 |
| 4,420 |
|
| Other comprehensive income (loss) | — |
| — |
| — |
| | — |
| — |
| — |
| (135 | ) | (135 | ) | | — |
| — |
| — |
| — |
| | (285 | ) | (16 | ) | (11 | ) | (447 | ) |
| Total comprehensive income (loss) | — |
| — |
| — |
| | — |
| 1,154 |
| — |
| (135 | ) | 1,019 |
| | — |
| 1 |
| — |
| 1 |
| | 2,159 |
| 119 |
| 675 |
| 3,973 |
|
| Distributions | — |
| — |
| — |
| | — |
| (203 | ) | — |
| — |
| (203 | ) | | — |
| — |
| — |
| — |
| | (437 | ) | (23 | ) | (1,193 | ) | (1,856 | ) |
| Issuances / repurchases of equity interests in operating subsidiaries | — |
| — |
| — |
| | 2,569 |
| (3 | ) | 133 |
| (20 | ) | 2,679 |
| | — |
| — |
| — |
| — |
| | 350 |
| 920 |
| (2,757 | ) | 1,192 |
|
| Exchange of exchangeable units | — |
| — |
| — |
| | 573 |
| — |
| (8 | ) | (2 | ) | 563 |
| | — |
| — |
| — |
| — |
| | (17 | ) | (546 | ) | — |
| — |
|
| Balance as at Dec. 31, 2014 | $ | — |
| $ | — |
| $ | — |
| | $ | 5,612 |
| $ | 1,010 |
| $ | 125 |
| $ | (161 | ) | $ | 6,586 |
| | $ | 4 |
| $ | 1 |
| $ | — |
| $ | 5 |
| | $ | 13,147 |
| $ | 470 |
| $ | 8,091 |
| $ | 28,299 |
|
| | | | | | | | | | | | | | | | | | | | |
| Balance as at Dec. 31, 2012 | $ | 12,956 |
| $ | 207 |
| $ | 13,163 |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | 10,840 |
| $ | 24,003 |
|
| Net income | 232 |
| — |
| 232 |
| | — |
| 118 |
| — |
| — |
| 118 |
| | — |
| — |
| — |
| — |
| | 557 |
| — |
| 856 |
| 1,763 |
|
| Other comprehensive income (loss) | — |
| (25 | ) | (25 | ) | | — |
| — |
| — |
| (42 | ) | (42 | ) | | — |
| — |
| — |
| — |
| | (200 | ) | — |
| (196 | ) | (463 | ) |
| Total comprehensive income (loss) | 232 |
| (25 | ) | 207 |
| | — |
| 118 |
| — |
| (42 | ) | 76 |
| | — |
| — |
| — |
| — |
| | 357 |
| — |
| 660 |
| 1,300 |
|
| Contributions and equity issuances of subsidiaries | 147 |
| — |
| 147 |
| | (8 | ) | — |
| — |
| — |
| (8 | ) | | — |
| — |
| — |
| — |
| | (35 | ) | — |
| 1,030 |
| 1,134 |
|
| Distributions | (230 | ) | — |
| (230 | ) | | — |
| (56 | ) | — |
| — |
| (56 | ) | | — |
| — |
| — |
| — |
| | (257 | ) | — |
| (726 | ) | (1,269 | ) |
| Unit issuance / reorganization | (13,105 | ) | (182 | ) | (13,287 | ) | | 2,478 |
| — |
| — |
| 38 |
| 2,516 |
| | 4 |
| — |
| — |
| 4 |
| | 11,027 |
| — |
| (438 | ) | (178 | ) |
| Balance as at Dec. 31, 2013 | $ | — |
| $ | — |
| $ | — |
| | $ | 2,470 |
| $ | 62 |
| $ | — |
| $ | (4 | ) | $ | 2,528 |
| | $ | 4 |
| $ | — |
| $ | — |
| $ | 4 |
| | $ | 11,092 |
| $ | — |
| $ | 11,366 |
| $ | 24,990 |
|
See accompanying notes to the
carve-outconsolidated financial statements,
Commercial Property Operations specifically Note 5, Acquisition of Brookfield Asset ManagementOffice Properties Inc.
Carve-out, Note 18, Capital Securities, and Note 21, Equity.
Brookfield Property Partners L.P.
Consolidated Statements of Cash
flows | | | | | | | | | | | | |
| (US$ Millions) | | 2012 | | | 2011 | | | 2010 | |
Operating activities | | | | | | | | | | | | |
Net income | | $ | 2,708 | | | $ | 3,745 | | | $ | 2,109 | |
Share of net earnings from equity accounted investments | | | (1,235 | ) | | | (2,104 | ) | | | (870 | ) |
Fair value gains, net | | | (1,330 | ) | | | (1,477 | ) | | | (824 | ) |
Deferred income taxes | | | 399 | | | | 275 | | | | (39 | ) |
Accretion of discount on loan receivable | | | (24 | ) | | | (39 | ) | | | (28 | ) |
Depreciation and amortization | | | 104 | | | | 20 | | | | 21 | |
Initial direct leasing costs | | | (56 | ) | | | (37 | ) | | | (19 | ) |
Working capital and other | | | (84 | ) | | | 1,191 | | | | 431 | |
| | | | 483 | | | | 1,574 | | | | 781 | |
Financing activities | | | | | | | | | | | | |
Property debt, issuance | | | 2,993 | | | | 1,954 | | | | 1,467 | |
Property debt, repayments | | | (2,696 | ) | | | (3,536 | ) | | | (1,906 | ) |
Other secured debt, issuance | | | 1,563 | | | | 1,022 | | | | 168 | |
Other secured debt, repayments | | | (1,025 | ) | | | (683 | ) | | | (268 | ) |
Capital securities redeemed | | | (153 | ) | | | (25 | ) | | | - | |
Proceeds from equity installment receivable | | | - | | | | 121 | | | | - | |
Non-controlling interests, issued | | | 919 | | | | 667 | | | | 1,038 | |
Non-controlling interests, purchased | | | - | | | | (86 | ) | | | - | |
Non-controlling interests, distributions | | | (793 | ) | | | (410 | ) | | | (225 | ) |
Contributions from parent company | | | 617 | | | | 307 | | | | 358 | |
Distributions to parent company | | | (589 | ) | | | (337 | ) | | | (551 | ) |
| | | | 836 | | | | (1,006 | ) | | | 81 | |
Investing activities | | | | | | | | | | | | |
Investment properties, proceeds of dispositions | | | 1,111 | | | | 1,537 | | | | 804 | |
Investment properties, investments | | | (2,208 | ) | | | (373 | ) | | | (692 | ) |
Distributions from equity accounted investments | | | - | | | | - | | | | 316 | |
Investment in equity accounted investments | | | (608 | ) | | | (1,053 | ) | | | (485 | ) |
Proceeds from sale of investments | | | 165 | | | | 101 | | | | 109 | |
Financial assets, investments | | | - | | | | (150 | ) | | | (463 | ) |
Foreign currency hedges of net investments | | | (41 | ) | | | (97 | ) | | | (35 | ) |
Loans and notes receivables, collected | | | 1,238 | | | | 744 | | | | 302 | |
Loans and notes receivables, advanced | | | (258 | ) | | | (181 | ) | | | (102 | ) |
Loan receivable from parent company, collected | | | - | | | | 658 | | | | - | |
Loan receivable from parent company, advanced | | | - | | | | (364 | ) | | | (28 | ) |
Other property, plant and equipment, investments | | | - | | | | - | | | | (8 | ) |
Restricted cash and deposits | | | (27 | ) | | | (25 | ) | | | 13 | |
Acquisition of subsidiaries, net of disposition | | | 140 | | | | 40 | | | | 33 | |
Capital expenditures - development and redevelopment | | | (239 | ) | | | (605 | ) | | | (130 | ) |
Capital expenditures - operating properties | | | (428 | ) | | | (447 | ) | | | (355 | ) |
| | | | (1,155 | ) | | | (215 | ) | | | (721 | ) |
Cash and cash equivalents | | | | | | | | | | | | |
Change in cash and cash equivalents | | | 164 | | | | 353 | | | | 141 | |
Foreign exchange revaluation | | | (3 | ) | | | (3 | ) | | | (4 | ) |
Balance, beginning of year | | | 749 | | | | 399 | | | | 262 | |
Balance, end of year | | $ | 910 | | | $ | 749 | | | $ | 399 | |
Flows
|
| | | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | Note | 2015 |
| 2014 |
| 2013 |
|
| Operating activities | | |
| |
| |
|
| Net income | | $ | 3,766 |
| $ | 4,420 |
| $ | 1,763 |
|
| Share of equity accounted earnings, net of distributions | | (1,315 | ) | (817 | ) | (599 | ) |
| Fair value (gains), net | 29 | (2,007 | ) | (3,756 | ) | (870 | ) |
| Deferred income tax expense | 19 | 25 |
| 1,150 |
| 487 |
|
| Depreciation and amortization | 27 | 180 |
| 148 |
| 162 |
|
| Working capital and other | | (59 | ) | (662 | ) | (522 | ) |
| | | 590 |
| 483 |
| 421 |
|
| Financing activities | | |
| |
| |
|
| Debt obligations, issuance | | 11,767 |
| 10,305 |
| 8,776 |
|
| Debt obligations, repayments | | (8,310 | ) | (6,564 | ) | (7,085 | ) |
| Capital securities issued | | — |
| 1,800 |
| 392 |
|
| Capital securities redeemed | | (29 | ) | — |
| (201 | ) |
| Non-controlling interests, issued | | 1,663 |
| 2,444 |
| 1,128 |
|
| Non-controlling interests, purchased | | (313 | ) | (1,733 | ) | — |
|
| Repurchases of limited partnership units | | (36 | ) | — |
| — |
|
| Distributions to non-controlling interests in operating subsidiaries | | (809 | ) | (1,134 | ) | (667 | ) |
| Contributions from Brookfield Asset Management Inc. | | — |
| — |
| 20 |
|
| Distributions to Brookfield Asset Management Inc. | | — |
| — |
| (381 | ) |
| Distributions to limited partnership unitholders | | (276 | ) | (203 | ) | (56 | ) |
| Distributions to redeemable/exchangeable and special limited partnership unitholders | | (464 | ) | (437 | ) | (257 | ) |
| Distributions to holders of Brookfield Office Properties Exchange LP units | | (15 | ) | (23 | ) | — |
|
| | | 3,178 |
| 4,455 |
| 1,669 |
|
| Investing activities | | |
| |
| |
|
| Investment properties and subsidiaries, proceeds of dispositions | | 2,167 |
| 2,037 |
| 1,627 |
|
| Investment properties and subsidiaries, investments | | (7,899 | ) | (5,336 | ) | (3,202 | ) |
| Cash acquired in business combinations | | 85 |
| 37 |
| 237 |
|
| Investment in equity accounted investments | | (2,374 | ) | (517 | ) | (168 | ) |
| Proceeds from sale of equity accounted investments and participating loan notes | | 1,656 |
| 280 |
| — |
|
| Financial assets, proceeds of dispositions | | 112 |
| 1,195 |
| 495 |
|
| Financial assets, acquisitions | | (2 | ) | (1,149 | ) | (583 | ) |
| Foreign currency hedges of net investments | | 517 |
| 124 |
| (32 | ) |
| Other property, plant and equipment, proceeds of dispositions | | 10 |
| 144 |
| — |
|
| Other property, plant and equipment, investments | | (62 | ) | (29 | ) | — |
|
| Restricted cash and deposits | | 1,856 |
| (1,786 | ) | 4 |
|
| | | (3,934 | ) | (5,000 | ) | (1,622 | ) |
| Cash and cash equivalents | | |
| |
| |
|
| Net change in cash and cash equivalents during the period | | (166 | ) | (62 | ) | 468 |
|
| Effect of exchange rate fluctuations on cash and cash equivalents held in foreign currencies | | (81 | ) | (24 | ) | 6 |
|
| Balance, beginning of year | | 1,282 |
| 1,368 |
| 894 |
|
| Balance, end of year | | $ | 1,035 |
| $ | 1,282 |
| $ | 1,368 |
|
| | | | | |
| Supplemental cash flow information | | |
| |
| |
|
| Cash paid for: | | |
| |
| |
|
| Income taxes | | $ | 83 |
| $ | 63 |
| $ | 114 |
|
| Interest (excluding dividends on capital securities) | | $ | 1,249 |
| $ | 1,154 |
| $ | 995 |
|
See accompanying notes to the
carve-outconsolidated financial
statementsstatements.
Brookfield Property Partners L.P.
Notes to the
Carve-outConsolidated Financial Statements
NOTE
1:1. ORGANIZATION AND NATURE
AND DESCRIPTION OF THE
OPERATIONSThe CommercialBUSINESS
Brookfield Property
OperationsPartners L.P. (“BPY” or the “partnership”) was formed as a limited partnership under the laws of Bermuda, pursuant to a limited partnership agreement dated January 3, 2013, as amended and restated on August 8, 2013. BPY is a subsidiary of Brookfield Asset Management Inc. (“
Brookfield”Brookfield Asset Management” or the “parent company”)
consist of substantially all of Brookfield’sand is the primary entity through which the parent company and its affiliates own, operate, and invest in commercial
and other income producing property
operations, including office, retail, multi-family and industrial and opportunistic investments, located in North America, Australia, Brazil and Europe that have historically been owned and operated, both directly and through its operating entities, by Brookfield (collectively, the “Business” or the “company”). These operations include interests in 124 office properties and 173 retail properties. In addition, Brookfield has interests inon a
multi-family and industrial platform and an 18 million square foot commercial office development pipeline.Brookfield will effect a reorganization so that an interest in the Business is acquired by holding entities, which will be owned by a subsidiary of Brookfield Property Partners L.P. (the “partnership”), a newly formed limited partnership. Brookfield intends to transfer the Business through a special dividend to holders of its Class A limited voting shares and Class B limited voting shares of the partnership’s non-voting limited partnership units (the “spin-off’). global basis.
The partnership’s sole direct investment will bematerial asset at December 31, 2015 is a limited partner37% managing general partnership unit interest in Brookfield Property L.P. (the “property“operating partnership”), which will controlholds the Business through holding entities. It is currently anticipated that immediately followingpartnership’s interest in commercial and other income producing property operations. Prior to August 8, 2013, the spin-off, holderspartnership’s interest in the operating partnership was comprised solely of a limited partnership interest in class A limited partnership units (the “Class A LP Units”) of the operating partnership. Effective August 8, 2013, the terms of the Class A limited voting sharesLP Units were amended and Class B limited voting shares will own approximately 7.5%they were renamed managing general partner units (“GP Units”). The GP Units provide the partnership with the power to direct the relevant activities of the issuedoperating partnership.
The partnership’s limited partnership units (“BPY Units” or “LP Units”) are listed and outstanding unitspublicly traded on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”) under the symbols “BPY” and “BPY.UN”, respectively.
The registered head office and principal place of business of the company on a fully-exchanged basis and Brookfield will hold unitspartnership is 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| |
| a) | Statement of compliance |
These consolidated financial statements of
the company and units of the property partnership that, taken together on a fully-exchanged basis, represent approximately 92.5% of the units of the company. The partnership will control the strategic, financial and operating policy decisions of the property partnership pursuant to a voting agreement to be entered into between the partnership and
Brookfield. Wholly-ownedits subsidiaries
of Brookfield will serve as the general partners for both the partnership and the property partnership.The parent company’s registered head office is Brookfield Place, 181 Bay Street, Suite 300, Toronto, Ontario, M5J 2T3.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
These carve-out financial statements (the “financial statements”) have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) using the historical books and records of Brookfield. .
The consolidated financial statements represent a carve-outwere approved and authorized for issue by the Board of Directors of the assets, liabilities, revenues, expenses,partnership on February 3, 2016.
| |
| b) | Continuity of interests |
On April 15, 2013, Brookfield Asset Management completed a spin-off of its commercial property operations (the “Business”) to the partnership (the “Spin-off”), which was effected by way of a special dividend LP Units of the partnership to holders of Brookfield Asset Management’s Class A and cash flowsB limited voting shares as of March 26, 2013 (See Note 3, The Spin-off, for further discussion). Brookfield Asset Management directly and indirectly controlled the Business prior to the Spin-off and continues to control the partnership subsequent to the Spin-off through its interests in the partnership. As a result of this continuing common control, there is insufficient substance to justify a change in the measurement of the Business. Accordingly, the partnership has reflected the Business in its financial position and results of operations using Brookfield Asset Management’s carrying values prior to the Spin-off.
To reflect the continuity of interests, the consolidated financial statements provide comparative information of the Business that will be contributedfor the periods prior to the partnership.Spin-off, as previously reported by Brookfield Asset Management. The principal operating subsidiarieseconomic and accounting impact of contractual relationships created or modified in conjunction with the Spin-off have been reflected prospectively from the date of the Business generally maintain their own independent managementSpin-off and infrastructure. To the extent that certain resources are centralized by Brookfield and shared across entities including those of the Business, such as information technology, fees for access to and use of such resources have not been charged to the respective subsidiaries as a means of allocation of such costs across the operations. Such fees are includedreflected in the results of operations or financial position of the Business. Thepartnership prior to April 15, 2013 as such items were in fact not created or modified prior thereto. Accordingly, the financial statements do not includeinformation for the parent company’s general partner interests in certain ofperiods prior to April 15, 2013 is presented based on the retail and other investmentshistorical financial information for the contributed operations as these interestspreviously reported by Brookfield Asset Management. For the periods after the Spin-off, the results are not being transferred tobased on the partnership.The financial statements present the equity in the net assets of the Business rather than the shareholders’ equity. Non-controlling interests in the net assets andactual results of the partnership, including the adjustments associated with the Spin-off and the execution of several new and amended agreements including management service and relationship agreements (see Note 35,
Related Parties, for further discussion). Accordingly, net income and comprehensive income not attributable to interests of others in operating subsidiaries withinand properties has been allocated to the Business are shown separatelyparent company prior to April 15, 2013 and allocated to the limited partners, the general partner, holders of the redeemable/exchangeable partnership units of the operating partnership (“Redeemable/Exchangeable Partnership Units”), holders of the special limited partnership units of the operating partnership (“Special LP Units”) (see Note 2(d)(i) for further discussion), and holders of the limited partnership units of Brookfield Office Properties Exchange LP (“Exchange LP Units”) (see Note 5, Acquisition of Brookfield Office Properties Inc., for further discussion) on and after April 15, 2013. Certain of these new or amended agreements resulted in equitydifferences in the carve-out balance sheet. basis of accounting as recorded by Brookfield Asset Management and as recorded by the partnership.
| |
| c) | Change in operating segments |
In addition, while the Business is notsecond quarter of 2014, the partnership realigned the organizational and governance structures of its businesses to align them more closely with the nature of the partnership’s investments and reflect the impact of the acquisition of additional interests in Brookfield Office Properties Inc. (“Brookfield Office Properties” or “BPO”). This realignment gave rise to changes in how the partnership evaluates information from and the performance of its investments. Consequently, the partnership changed its reporting segments for financial reporting and management decision-making purposes. As a taxable legal entity, currentresult of the acquisition of Capital Automotive Real Estate Services Inc. (“CARS”), which owns the real estate for more than 300 automotive dealerships across North America and deferred income taxesleases it on a triple net basis, in the fourth quarter of 2014, the partnership added an additional segment, Triple Net Lease. As of December 31, 2015, the partnership’s operating segments are organized into seven reportable segments: i) Office, ii) Retail, iii) Industrial, iv) Multifamily, v) Hospitality, vi) Triple Net Lease and, vii) Corporate. Segment disclosures for periods prior to the realignment of segments during the second quarter of 2014 have been providedrecast to reflect the changes in these carve-outthe partnership’s operating segments. See Note 38, Segment Information, for further discussion.
These consolidated financial statements as if it were.Due to the inherent limitations of carving out the assets, liabilities, operations and cash flows from larger entities, these financial statements may not necessarily reflect the company’s financial position, results of operations and cash flow for future periods, nor do they reflect the financial position, results of operations and cash flows that would have been realized had the Business been a stand-alone entity during the periods presented.
The financial statements are prepared on a going concern basis and have beenare presented in United States (“U.S. dollars”) Dollars rounded to the nearest million unless otherwise indicated. TheNew accounting policies set out below have been applied consistently in all material respects. Standards and interpretationsstandards issued but not yet effective for futurethe current accounting periodsperiod are described in Note 4.
4, Future Accounting Policy Changes. The consolidated financial statements include the accounts of the partnership and its subsidiaries over which the partnership has control. Control exists when the partnership has power over its investee, has exposure, or rights, to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect the amount of its returns. The partnership considers all relevant facts and circumstances in assessing whether or not the partnership’s voting rights in the investee are sufficient to give it power over the investee.
Consolidation of a subsidiary begins on the date on which the partnership obtains control over the subsidiary and ceases when the partnership loses control over the subsidiary. Transactions that do not result in the partnership losing control of a subsidiary are recognized as equity transactions and presented within equity. Income and expenses of a subsidiary acquired or disposed of during a reporting period are consolidated only for the period when the partnership has control over the subsidiary. All accounts and transactions relating to transactions among the partnership and its subsidiaries are eliminated in consolidation. In cases where a subsidiary reports under a different accounting policy, adjustments are made to the financial statements of the subsidiary to present its financial position and results of operations in accordance with the partnership’s accounting policy.
Net income and loss and each component of other comprehensive income are attributed to owners of the partnership and to non-controlling interests. Non-controlling interests in the partnership’s operating subsidiaries and properties, the redeemable/exchangeable and special limited partnership units, and Exchange LP Units (described in Note 2(b)) are presented separately in equity on the consolidated balance sheets.
As part of the Spin-off and prior to August 8, 2013, the partnership entered into a voting agreement with Brookfield Asset Management under which the partnership was indirectly assigned Brookfield Asset Management’s voting rights in Brookfield Property Special L.P. The partnership entered similar arrangements with various affiliates of Brookfield Asset Management, whereby the partnership effectively gained control over the entities with respect to which voting agreements were put in place. Accordingly, the partnership consolidated the accounts of the operating partnership and its subsidiaries prior to August 8, 2013.
On August 8, 2013, the partnership and Brookfield Asset Management amended the partnership agreement for the operating partnership, to among other things make the partnership the managing general partner of the operating partnership. As a result, the voting agreement between the partnership and Brookfield Asset Management, which required Brookfield Asset Management to exercise certain of its voting rights in respect of the operating partnership’s general partner as directed by the partnership, was terminated. The partnership did not amend any other voting agreements previously entered into with various affiliates of Brookfield Asset Management, such that the partnership’s power over the entities previously consolidated did not change. In conjunction with the amendment of the partnership agreement for the operating partnership, the general partner interest in the operating partnership indirectly owned by Brookfield Asset Management was exchanged for a special limited partnership interest in the operating partnership, and the limited partnership interest in class A limited partnership units in the operating partnership held by the partnership was transferred for managing general partner units. The managing general partner units provide the partnership with the power to direct the relevant activities of the partnership and expose the partnership to variable returns which it can influence by exercising the power inherent in the GP Units. Accordingly, the partnership continued to consolidate the operating partnership and its subsidiaries following the amendment to the partnership agreement for the operating partnership.
| |
| (ii) | Associates and joint ventures |
An associate is an entity over which the partnership has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee. The partnership is presumed to have significant influence when it holds 20 percent or more of the voting rights of an investee, unless it can be clearly demonstrated that this is not the case. The partnership does not control its associates.
A joint arrangement is an arrangement in which two or more parties have joint control which is the contractually agreed upon sharing of control where decisions about the relevant activities require the unanimous consent of the parties sharing control. A joint venture is a joint arrangement where the parties that have joint control have rights to the net assets of the arrangement. None of the parties involved have unilateral control of a joint venture.
The partnership accounts for its interests in joint ventures and associates using the equity method of accounting. Under the equity method, investment balances in a joint venture or an associate are carried on the consolidated balance sheets at initial cost as adjusted for the partnership’s proportionate share of profit or loss and other comprehensive income of the joint venture or associate. The partnership assesses whether its balances of equity method investments are impaired at the end of each reporting period.
The partnership applies IAS 28, Investments in Associates and Joint Ventures (“IAS 28”), which prescribes the requirements relating to the assessment of impairment and considers the guidance in IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”) to determine if there are indicators of impairment. If such indicators are identified, the partnership performs an impairment analysis in accordance with IAS 36, Impairment of Assets (“IAS 36”). Consequently, the partnership determines at the end of each reporting period whether there exist any indications that an investment may be impaired. If any such indication exists, the partnership estimates the recoverable amount of the asset, which is the higher of (i) fair value less costs to sell and (ii) value in use. Value in use is defined in IAS 36 as the present value of the future cash flows expected to be derived from such an investment and may result in a measure which is different from fair value less costs to sell. For equity accounted investments, for which quoted market prices exist, the partnership also considers whether a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment. As IAS 39 does not define “significant” or “prolonged”, the partnership exercises judgment in such assessment.
When the partnership transacts with a joint venture or an associate, any profit or loss or account balance is eliminated only to the extent of the partnership’s proportionate share and the remaining amounts are recognized in the partnership’s consolidated financial statements. Outstanding balances between the partnership and jointly controlled entities are not eliminated on the balance sheet.
A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to assets and obligations for liabilities relating to the arrangement. This usually results from direct interests in the assets and liabilities of an investee rather than through the establishment of a separate legal entity. None of the parties involved have unilateral control of a joint operation. The partnership recognizes its assets, its liabilities and its share of revenues and expenses of the joint operations in accordance with the IFRS applicable to the particular assets, liabilities, revenues and expenses.
When the partnership sells or contributes assets to a joint operation in which it is a joint operator, the partnership is considered to be conducting transactions with the other parties to the joint operation, and any gain or loss resulting from the transactions is recognized in the partnership’s consolidated financial statements only to the extent of the other parties’ interests in the joint operation. When the partnership purchases an asset from a joint operation in which it is a joint operator, the partnership does not recognize its share of the gain or loss until those assets are resold to a third party.
| |
| e) | Foreign currency translation and transactions |
The U.S. Dollar is the functional currency and presentation currency of the partnership. Each of the partnership’s subsidiaries, associates, joint ventures and joint operations determine their own functional currency and presentation currency for their separate financial statements.
Subsidiaries, associates or joint ventures having a functional currency other than the U.S. Dollar translate their carrying amounts of assets and liabilities when reporting to the partnership at the rate of exchange prevailing as of the balance sheet date, and their revenues and expenses at average exchange rates during the reporting period. Any gains or losses on foreign currency translation are recognized by the partnership in other comprehensive income. On disposition or partial disposition of a foreign operation (i.e., any subsidiary, associate, joint arrangement, or branch of the partnership with a functional currency other than the U.S. Dollar) during the reporting period resulting in the loss of control, the component of other comprehensive income due to accumulated foreign currency translation relating to that foreign operation is reclassified to net income. On partial disposal of a foreign operation in which control is retained, the proportionate share of the component of other comprehensive income or loss relating to that foreign operation is reclassified to non-controlling interests in that foreign operation.
The partnership’s foreign currency transactions are translated into the functional currency using exchange rates as of the date of the transactions. At the end of each reporting period, foreign currency denominated monetary assets and liabilities are translated to the functional currency using the exchange rate prevailing as of the balance sheet date and non-monetary assets and liabilities measured at fair value are translated at the exchange rate prevailing as of the date when the fair value was determined. Any gain or loss from the translation of monetary items is recognized in net income, except for those related to monetary liabilities qualified as hedges of the partnership’s investment in foreign operations or intercompany loans with foreign operations for which settlement is neither planned nor likely to occur in the foreseeable future, which are included in other comprehensive income. Foreign currency denominated non-monetary assets and liabilities, measured at historic cost, are translated at the rate of exchange at the transaction date.
| |
| f) | Cash and cash equivalents |
Cash and cash equivalents includes cash on hand and all non-restricted highly liquid investments with original maturities of three months or less.
Investment properties include operatingconsists of commercial properties which are principally held to earn rental income and propertiescommercial developments that are being constructed or developed for future use as commercial properties. The partnership identifies most of its portfolio investments as investment properties. Operating properties, which includes properties in its office, retail, industrial, multifamily and developmenttriple net lease segments. Investment properties are recordedmeasured initially at cost, or fair value determined based on available market evidence, at the balance sheet date. Related fair value gains and losses are recordedif acquired in net income in the period in which they arise.a business combination (see Note 2(q),
Business Combinations, for further discussion). The cost of commercial development properties includes direct development costs, realty taxes and borrowing costs directly attributable to the development. The partnership elects the fair value model for all investment properties and measures them at fair value subsequent to initial recognition on the consolidated balance sheet. As a result, impairment assessments do not apply. Fair values of the investment properties are primarily determined based on inputs from available market evidence as of the balance sheet date. Related fair value gains and losses are recognized in fair value gains, net in the period in which they arise.
Borrowing costs associated with direct expenditures on properties under development or redevelopment are capitalized. Borrowing costs are also capitalized on
the purchase cost of a site or propertythose properties acquired specifically for redevelopment in the short-term
but only where activities necessary to prepare
the assetthem for
development or redevelopment are in progress. The amount of borrowing costs capitalized is determined first by
reference to borrowings specific to
the project,a property where relevant, and
otherwisethen by
applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Where borrowings are associated with specific developments, the amount capitalized is the gross
costborrowing costs incurred
on those borrowings less any
incidental investment
income arising on their temporary investment.income. Borrowing costs are capitalized from the commencement of the development until the date of practical completion. The capitalization of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. The
Businesspartnership considers practical completion to have occurred when the property is capable of operating in the manner intended by management. Generally this occurs upon completion of construction and receipt of all necessary occupancy and other material permits. Where the
Businesspartnership has pre-leased space as of or prior to the start of the development and the lease requires the
Businesspartnership to construct tenant improvements which enhance the value of the property, practical completion is considered to occur on completion of such improvements.
Initial direct leasing costs incurred by the
Businesspartnership in negotiating and arranging tenant leases are added to the carrying amount of investment properties.
c) | Equity accounted investments |
| h) | Assets held for sale |
| (i) | Investments in joint ventures |
A joint venture
Non-current assets and groups of assets and liabilities which comprise disposal groups are presented as assets held for sale where the asset or disposal group is available for immediate sale in its present condition, and the sale is highly probable. For this purpose, a sale is highly probable if management is committed to a plan to achieve the sale; there is an active program to find a buyer; the non-current asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; the sale is anticipated to be completed within one year from the date of classification; and it is unlikely there will be significant changes to the plan or that the plan will be withdrawn. Where an asset or disposal group is acquired with a view to resale, it is classified as a non-current asset held for sale at the acquisition date only if the disposal is expected to take place within one year of the acquisition, and it is highly probable that the other general requirements and specific conditions referred to above will be met within a short period following the acquisition (usually within three months). Non-current assets held for sale and disposal groups that are not investment properties are recorded at the lesser of carrying amount and fair value less costs to sell on the consolidated balance sheet. Investment properties that are held for sale are recorded at fair value determined in accordance with IFRS 13, Fair Value Measurement.
Where a component of an entity has been disposed of, or is classified as held for sale, and it represents a separate major line of business or geographical area of operations or is a contractual arrangement pursuantsubsidiary acquired exclusively with a view to whichresale, the related results of operations and gain or loss on reclassification or disposition are presented in discontinued operations.
The partnership accounts for its investments in hospitality properties as property, plant and equipment under the revaluation model. Hospitality properties are recognized initially at cost or fair value if acquired in a business combination (see Note 2(q), Business Combinations, for further discussion) and other parties undertake an economic activity that is subject to joint control wherebysubsequently carried at fair value at the strategic financialbalance sheet date less any accumulated impairment and operating policy decisions relating tosubsequent accumulated depreciation. Fair values are determined internally using discounted cash flow models with inputs from available market evidence.
Revaluations of hospitality properties are performed annually at December 31, the
activitiesend of the
joint venture requirefiscal year, to ensure that the
unanimous consentcarrying amounts do not differ significantly from fair values. Where the carrying amount of an asset is increased as a result of a revaluation, the increase is recognized in other comprehensive income and accumulated in equity within revaluation surplus, unless the increase reverses a previously recognized revaluation loss recorded through prior period net income, in which case that portion of the
parties sharing control.Joint venture arrangements that involveincrease is recognized in net income. Where the establishment of a separate entity in which each venture has an interest are referred to as jointly controlled entities. The Business reports its interests in jointly controlled entities using the equity method of accounting. Under the equity method, investments in jointly controlled entities are carried in the carve-out balance sheet at cost as adjusted for the company’s proportionate share of post-acquisition changes in the net assets of the joint ventures, or for post-acquisition changes in any excess of the company’s carrying amount overof an asset is decreased, the net assets of the joint ventures, less any identified impairment loss. When the company’s share of losses of a joint venture equals or exceeds its interest in that joint venture, the Business discontinues recognizing its share of further losses. An additional share of losses is provided for and a liabilitydecrease is recognized only to the extent that the company has incurred legal or constructive obligations to fund the entity or made payments on behalf of that entity.
Where the Business undertakes its activities under joint venture arrangements through a direct interest in the joint venture’s assets, rather than through the establishment of a separate entity, the company’s proportionate share of joint venture assets, liabilities, revenues and expenses are recognized in the financial statements and classified according to their nature.
Where the Business transacts with its jointly controlled entities, unrealized profits and losses are eliminatedother comprehensive income to the extent of any balance existing in revaluation surplus in respect of the company’s interestasset, with the remainder of the decrease recognized in the joint venture. Balances outstanding between the Businessnet income. Revaluation gains are recognized in other comprehensive income, and jointly controlled entities in which it has an interest are not eliminated insubsequently recycled into profit or loss. The cumulative revaluation surplus is transferred directly to retained earnings when the carve-out balance sheet.
| (ii) | Investments in associates |
An associateasset is an entity over whichderecognized.
In performing annual revaluations, the
investorpartnership first qualitatively assesses whether there is any indication that the hospitality properties may be impaired. If no indication is identified, no impairment will be recorded. If the partnership has
significant influence but not controlidentified indicators for impairment, the asset’s carrying amount (i.e., fair value less any accumulated depreciation and
thatimpairment) is
not a subsidiary or an interest in a joint venture.The results and assets and liabilities of associates are incorporated incompared with the financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the carve-out balance sheet at cost as adjusted for the company’s proportionate share of post-acquisition changes in the net assetsrecoverable amount of the associates, or for post-acquisition changes in any excesshospitality property, which is determined as the higher of the company’sestimated fair value less costs on disposal or the present value of expected future cash flows generated from the use and eventual disposal of an asset. An impairment is taken if the recoverable amount is less than the carrying amount over the net assets of the associates, less any identified impairment loss. When the company’s share of losses of an associate equals or exceeds its interest in that associate, the Business discontinues recognizing its share of further losses. An additional share of losses is provided for and a liability is recognized only to the extent that the Business has incurred legal or constructive obligations or made payments on behalf of that associate.
Where the Business transacts with an associate of the Business, profits and losses are eliminated to the extent of the company’s interest in the relevant associate. Balances outstanding between the Business and associates are not eliminated in the carve-out balance sheet.
d) | Other property, plant and equipment |
The company accounts for its other property, plant and equipment using the revaluation method or the cost model, depending on the nature of the asset and is accounted for in the operating segment. Other property, plant and equipment measuredsame manner as a revaluation decrease as described above.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using the revaluation method is initially measured at cost and subsequently carried at its revalued amount, beinganother valuation technique. In estimating the fair value of an asset or a liability, the partnership takes into account the characteristics of the asset or liability and how market participants would take those characteristics into account when pricing the asset or liability at the measurement date.
Inputs to fair value measurement techniques are disaggregated into three hierarchical levels, which are directly based on the degree to which inputs to fair value measurement techniques are observable by market participants:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the revaluation less any subsequent accumulated depreciationasset’s or liability’s anticipated life.
Level 3 – Inputs are unobservable and any accumulated impairment losses. Underreflect management’s best estimate of what market participants would use in pricing the cost method,asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs in determining the estimate.
Fair value measurements are adopted by the partnership to calculate the carrying amounts of various assets
are initially recorded at cost and
are subsequently depreciated over the assets’ useful lives, unless an impairment is identified requiring a write-down to estimated fair value.liabilities. e) | |
| k) | Loans and notes receivable |
Loans and notes receivable are carried at amortized cost with interest income recognized
followingusing the effective interest method.
NotesLoans and notes receivable purchased at a discount
or premium are also carried at amortized cost with discounts
or premiums amortized over the remaining expected life of the loan following the effective interest method.
Loans are evaluated individually for impairment given the unique nature and size of each loan. A loan is considered impaired when, based upon current information and events, it is probable that the companypartnership will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. Loans are evaluated individually for impairment given the unique nature and size of each loan. For each collateralized loan, the company’s financepartnership’s subsidiaries perform a quarterly review of all collateral properties underlying the loans receivables.loan receivable. Impairment is measured based
on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
f) | Taxation |
| l) | Intangible assets |
Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at fair value at the acquisition date. The partnership’s intangible assets are comprised primarily of trademarks and licensing agreements.
Subsequent to initial recognition, intangible assets with a finite life are measured at cost less accumulated amortization and impairment losses. Amortization is calculated on a straight-line basis over the estimated useful life of the intangible asset and is recognized in net income for the respective reporting period. Intangible assets with an indefinite life are measured at cost as adjusted for subsequent impairment. Impairment tests for intangible assets are performed annually. Impairment losses previously taken may be subsequently reversed in net income of future reporting periods.
Goodwill represents the excess of the acquisition price paid for a business combination over the fair value of the net identifiable tangible and intangible assets and liabilities acquired. Upon initial recognition, goodwill is allocated to the cash-generating unit to which it relates. The partnership identifies a cash-generating unit as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.
The partnership evaluates the carrying amount of goodwill annually or more often when events or circumstances indicate there may be an impairment. The partnership’s goodwill impairment test is performed at the cash-generating unit level. If assets within a cash-generating unit or the cash-generating unit are impaired, impairments are taken for those assets or the cash-generating unit before any goodwill impairment test is performed. In assessing whether goodwill is impaired, the partnership assesses if the carrying value of a cash-generating unit, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell and the present value of future cash flows expected from the cash-generating unit. Impairment losses then recognized first reduce the carrying value of goodwill and any excess is allocated to the carrying amount of assets in the cash-generating unit. Any goodwill impairment is charged to net income in the respective reporting period. Impairment losses on goodwill are not subsequently reversed.
On disposal of a subsidiary, any attributable amount of goodwill is included in determination of the gain or loss on disposal.
| |
| n) | Financial instruments and hedge accounting |
| |
| (i) | Classification and measurement |
The partnership and its subsidiaries classify and measure financial instruments as summarized in the following table:
|
| | |
| Classification | Measurement basis |
| Financial assets | | |
| Participating loan interests | Loans and receivables | Amortized cost(1) |
| Loans and notes receivables | Loans and receivables | Amortized cost |
| Other non-current assets: | | |
| Securities designated as fair value through profit or loss (“FVTPL”) | FVTPL | Fair value |
| Securities designated as available-for-sale (“AFS”) | AFS | Fair value |
| Derivative assets | FVTPL | Fair value |
| Accounts receivable and other | Loans and receivables | Amortized cost |
| Cash and cash equivalents | Loans and receivables | Amortized cost |
| Financial liabilities | | |
| Accounts payable | Other liabilities | Amortized cost |
| Debt obligations | Other liabilities | Amortized cost(1) |
| Capital securities | Other liabilities | Amortized cost(1) |
| |
(1) | Excluding embedded derivatives that are classified as FVTPL. |
Financial instruments carried at amortized cost incur interest income or expense in each reporting period. The periodic interest income or expense of these financial instruments includes the amortization of any premium or discount from original issuance or purchase. Transaction costs that are directly attributable to the acquisition or issue of the financial instruments are included in the carrying amount of such financial instrument and amortized through interest income or expense in each reporting period using the effective interest method. Transaction costs that are directly attributable to the acquisition or issue of the financial instruments are capitalized as part of the initial measurement of such financial instrument and amortized through interest income or expense in each reporting period.
Financial instruments carried at fair value incur fair value gains or losses in each reporting period. Fair values of those financial instruments are determined by reference to quoted bid or ask prices or prices within the bid ask spread, as appropriate, and when unavailable, to the closing price of the most recent transaction of that instrument. Fair values of certain financial instruments also incorporate significant use of unobservable inputs which reflect the partnership’s market assumptions. Fair value gains and losses on AFS financial assets are recognized in other comprehensive income and reclassified to net income upon sale or impairment. Fair value gains and losses on financial instruments designated as FVTPL are recognized in fair value gains, net.
In addition, the partnership assesses the issuance of debt and equity to determine the appropriate classification of each instrument. Equity instruments issued but meeting the definition of a financial liability are presented within capital securities on the partnership’s consolidated balance sheets.
| |
| (ii) | Impairment of financial instruments |
Financial assets carried at amortized cost are assessed for impairment at the end of each reporting period. The partnership first determines whether there are qualitative indications that a financial asset may be impaired. If there is no objective evidence indicative of impairment, no impairment is taken. If there is objective evidence of impairment, the amount of the recorded loss is measured as the difference between the financial asset’s carrying amount and the present value of future cash flows from the financial asset, discounted at the original effective interest rate. When impaired, the carrying amount of a financial asset is decreased directly or through an allowance account and the amount of impairment loss is recognized in net income in the reporting period as incurred. In the case of AFS instruments, when objective evidence of impairment exists, the cumulative loss in accumulated other comprehensive income is reclassified as loss in net income in the reporting period.
| |
| (iii) | Derivatives and hedging |
The partnership assesses each financial instrument and other non-financial contracts for embedded derivatives. Derivative instruments are recorded in the consolidated balance sheet at fair value, including those derivatives that are embedded in financial or non-financial contracts and which are not closely related to the host contract. Changes in the fair value of derivative instruments, including embedded derivatives, which are not designated as hedges for accounting purposes, are recognized in fair value gains, net or general and administrative expense consistent with the underlying nature and purpose of the derivative instrument.
The partnership’s subsidiaries selectively utilize derivative financial instruments to manage financial risks, including interest rate risk, commodity and foreign currency risk. Fair values of derivative instruments are determined on a credit-adjusted basis.
The partnership applies hedge accounting to certain derivative instruments designated as cash flow hedges, and to derivative and non-derivative financial instruments designated as hedges of net investments in subsidiaries. Hedge accounting is discontinued prospectively when the hedge relationship is terminated or no longer qualifies as a hedge, or when the hedging item is sold or terminated.
In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recognized in other comprehensive income while the ineffective portion is recognized in fair value gains, net. Hedging gains and losses recognized in accumulated other comprehensive income are reclassified to net income in the periods when the hedged item affects net income. Gains and losses on derivatives are immediately reclassified to investment and other income when the hedged item is sold or terminated or when it is determined that a hedged forecasted transaction is no longer probable.
In a net investment hedging relationship, the effective portion of foreign currency gains and losses on the hedging instruments is recognized in other comprehensive income and the ineffective portion is recognized in net income. The amounts recorded in accumulated other comprehensive income are recognized in net income, together with the related cumulative translation gain or loss, when there is a disposition or partial disposition that results in the loss of control of the foreign subsidiary.
The partnership is a flow-through entity for tax purposes and as such is not subject to Bermudian taxation. However, income tax expenses are recognized for taxes payable by holding entities and their direct or indirect corporate subsidiaries.
Current income tax assets and liabilities are measured at the amount expected to be paid to tax authorities by the
parent companyholding entities in respect of the
Businesspartnership or directly by the
company’spartnership’s taxable subsidiaries, net of recoveries,
based on the tax rates and laws enacted or substantively enacted at the balance sheet date.
Deferred income tax liabilities are provided for using the liability method on temporary differences between the tax basesbasis used in the computation of taxable income and carrying amounts of assets and liabilities.liabilities in the consolidated financial statements. Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax
losses, to the extent that it is probable that deductions, tax credits and tax losses
canwill be utilized. The carrying
amountamounts of deferred income tax assets
isare reviewed at each balance sheet date and reduced to the extent it is no longer probable that the income tax asset will be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the
yearperiod when the asset is realized or the liability settled, based on the tax rates and laws that have been enacted or substantively enacted at the balance sheet date.
Current and deferred income tax relating to items recognized directly in equity are also recognized directly in equity.A provision is a liability of uncertain timing or amount. Provisions are recognized when the
Businesspartnership has a present
legalobligation (legal or
constructive obligationconstructive) as a result of
a past
events,event, it is probable that
an outflow of resourcesthe partnership will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Provisions are re-measured at each balance sheet date using the current discount rate. The increase in the provision due to passage of time is recognized as interest expense.
The financial statements are presented in U.S. dollars, which is the functional currency of the parent company and the presentation currency for the financial statements.
Assets and liabilities of subsidiaries or equity accounted investees having a functional currency other than the U.S. dollar are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at average rates for the period. The resulting foreign currency translation adjustments are recognized in other comprehensive income (“OCI”).
Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the date of the transactions. At the end of each reporting period, foreign currency denominated monetary assets and liabilities are translated to the functional currency using the prevailing rate of exchange at the balance sheet date. Gains and losses on translation of monetary items are recognized in the carve-out statements of income in investment and other expense, except for those related to monetary liabilities qualifying as hedges of the company’s investment in foreign operations or certain intercompany loans to or from a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future, which are included in other OCI.
The Business has retained substantially all of the risks and benefits of ownership of its investment properties and therefore accounts for leases with its tenants as operating leases. Revenue recognition under a lease commences when the tenant has a right to use the leased asset. Generally, this occurs on the lease inception date or, where the Business is required to make additions to the property in the form of tenant improvements which enhance the value of the property, upon substantial completion of those improvements. The total amount of contractual rent to be received from operating leases is recognized on a straight-line basis over the term of the lease; a straight-line rent receivable, which is included in the carrying amount of investment property, is recorded for the difference between the rental revenue recorded and the contractual amount received.
Rental revenue also includes percentage participating rents and recoveries of operating expenses, including property and capital taxes. Percentage participating rents are recognized when tenants’ specified sales targets have been met. Operating expense recoveries are recognized in the period that recoverable costs are chargeable to tenants.
Rooms, food and beverage and other revenue are recognized as services are provided. The company recognizes rooms revenue net of taxes and levies that are assessed by government-related agencies. Advanced deposits are deferred and included in accounts payable and other liabilities until services are provided to the customer. The company recognizes the net win from casino gaming activities (the difference between gaming wins and losses) as gaming revenue. The company recognizes liabilities for funds deposited by patrons before gaming play occurs and for chips in the patrons’ possession, both of which are included in accounts payable and other liabilities. Revenue and expenses from tour operations include the sale of travel and leisure packages and are recognized on the day the travel package begins. Amounts collected in advance from guests are deferred and included in accounts payable and other liabilities until such amounts are earned.
| (iii) | Performance and management fee revenue |
Certain of the company’s operating subsidiaries are entitled to management fees and performance fees on the management of properties for third parties. The Business recognizes management fees as earned. The Business recognizes performance fees in revenue when the amount receivable from its fund partners is determinable at the end of a contractually specified term.
j) | Financial instruments and hedge accounting |
Derivative instruments are recorded in the carve-out balance sheets at fair value, including those derivatives that are embedded in financial or non-financial contracts and which are not closely related to the host contract.
The following summarizes the company’s classification and measurement of financial assets and liabilities:
| | | | | | | | |
(US$ Millions)q) | | Classification | | | Measurement basis | |
Financial Assets
| | | | | | | | |
Loans and notes receivable
| | | Loans & Receivables | | | | Amortized Cost(1) | |
Other non-current assets
| | | | | | | | |
Securities designated as Fair value through profit or loss (“FVTPL”)
| | | FVTPL | | | | Fair Value | |
Derivative assets
| | | FVTPL | | | | Fair Value | |
Securities designated as available-for-sale (“AFS”)
| | | AFS | | | | Fair Value | |
Other receivables
| | | Loans & Receivables | | | | Amortized Cost | |
Accounts receivable and other
| | | Loans & Receivables | | | | Amortized Cost | |
Cash and cash equivalents
| | | Loans & Receivables | | | | Amortized Cost | |
Financial Liabilities
| | | | | | | | |
Property debt
| | | Other Liabilities | | | | Amortized Cost(1) | |
Capital securities
| | | Other Liabilities | | | | Amortized Cost | |
Other non-current liabilities
| | | | | | | | |
Other secured debt
| | | Other Liabilities | | | | Amortized Cost | |
Other non-current financial liabilities
| | | Other Liabilities | | | | Amortized Cost(1) | |
Accounts payable and other liabilities
| | | Other Liabilities | | | | Amortized Cost(1) | Business combinations |
(1) | Except for derivatives embedded in the related financial instruments that are classified as FVTPL
|
The
company’s subsidiaries selectively utilize derivative financial instruments primarily to manage financial risks, including interest rate and foreign exchange risks. Derivative financial instruments are recorded at fair value determined on a credit adjusted basis.The Business applies hedge accounting to derivative financial instruments in cash flow hedging relationships, and to derivative and non-derivative financial instruments designated as hedges of net investments in subsidiaries. Hedge accounting is discontinued prospectively when the hedge relationship is terminated or no longer qualifies as a hedge, or when the hedging item is sold or terminated.
In cash flow hedging relationships, the effective portion of the change in the fair value of the hedging derivative is recognized in OCI while the ineffective portion is recognized in net income. Hedging gains and losses
recognized in accumulated other comprehensive income (“AOCI”) are reclassified to net income in the periods when the hedged item affects net income. Gains and losses on derivatives are immediately reclassified to investment and other revenue when the hedged item is sold or terminated or when it is determined that a hedged forecasted transaction is no longer probable.
In a net investment hedging relationship, the effective portion of foreign exchange gains and losses on the hedging instruments is recognized in OCI and the ineffective portion is recognized in net income. The amounts recorded in AOCI are recognized in net income when there is a disposition or partial disposition of the foreign subsidiary.
Changes in the fair value of derivative instruments, including embedded derivatives, that are not designated as hedgespartnership accounts for accounting purposes are recognized in fair value gains (losses) or administrative expense consistent with the underlying nature and purpose of the derivative instrument.
The asset or liability relating to unrealized gains and losses on derivative financial instruments are recorded in accounts receivable and other or accounts payable and other liabilities, respectively.
Goodwill represents the excess of the price paid for the acquisition of a consolidated entity over the fair value of the net identifiable tangible and intangible assets and liabilities acquired. Goodwill is allocated to the cash generating unit to which it relates. The Business identified cash generating units as identifiable groups of assets that are largely independent of the cash inflows from other assets to group of assets.
Goodwill is evaluated for impairment annually or more often if events or circumstances indicate there may be impairment. Impairment is determined for goodwill by assessing if the carrying value of a cash generating unit, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell or the value in use. Impairment losses recognized in respect of a cash generating unit are first allocated to the carrying value of goodwill and any excess is allocated to the carrying amount of assets in the cash generating unit. Any goodwill impairment is charged to net income in the periodbusiness combinations in which the impairmentcontrol is identified. Impairment losses on goodwill are not subsequently reversed.
The acquisition of businesses is accounted for usingacquired under the acquisition method. The costpartnership considers three criteria that include input, process and output to assess whether acquired assets and assumed liabilities meet the definition of ana business. The acquisition price is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued in exchange for control of the acquiree. TheAs a result, the partnership recognizes the acquiree’s identifiable assets liabilities and contingentassumed liabilities that meet the conditions for recognition under IFRS 3, “Business Combinations” (“IFRS 3”), are recognized at their acquisition-date fair values, at the acquisition date, except for non-current assets that are classified as held-for-sale, in accordance with IFRS 5, “Non-current Assets Held for Sale and Discontinued Operations”, which are recognized and measured at fair value less costs to sell. The partnership also evaluates whether there are intangible assets acquired that have not previously been recognized by the acquiree and recognizes them as identifiable intangible assets. The interests of non-controlling shareholders in the acquiree are initially measured at the non-controlling interests’their proportion of the net fair value of the identifiable assets liabilities and contingentassumed liabilities recognized.
To the extent
that the
fair value of consideration paidacquisition price exceeds the fair value of the net
identifiable tangible and intangible assets, the excess is recorded as goodwill. To the extent the fair value of consideration paid is less than the fair value of net identifiable
tangible and intangible assets, the excess is recognized
in net income.Whereas a business combination is achieved in stages, previously held interestsbargain purchase gain in the acquired entity are re-measured to fair value at the acquisition date, which is the date control is obtained, and the resulting gain or loss, if any, is recognized in net income. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in OCI are reclassified to net income. Changes in the company’s ownership interest of a subsidiary that do not result in a gain or loss of control are accounted for as equity transactions and are recorded as a component of equity. Acquisition costs are recorded as an expense inpartnership’s net income as incurred.
m) | Cash and cash equivalents |
Cash and cash equivalents include cash and short-term investments with original maturities of three months or less.
n) Critical judgments in applying accounting policies
The following are the critical judgments that have been made in applying the company’s accounting policies and that have the most significant effect on the amounts in the financial statements:
The company’s accounting policies relating to investment property are described in Note 2(b). In applying this policy, judgment is applied in determining whether certain costs are additions to the carrying amount of the property and, for properties under development, identifying the point at which practical completion of the property occurs and identifying the directly attributable borrowing costs to be included in the carrying value of the development property. Judgment is also applied in determining the extent and frequency of independent appraisals.
The Business applies judgment in determining the tax rate applicable to its Real Estate Investment Trust (“REIT”) subsidiaries and identifying the temporary differences related to such subsidiaries with respect to which deferred income taxes are recognized. Deferred taxes related to temporary differences arising in the company’s REIT subsidiaries, joint ventures and associates are measured based on the tax rates applicable to distributions received by the investor entity on the basis that REITs can deduct dividends or distributions paid such that their liability for income taxes is substantially reduced or eliminated for the year, and the Business intends that these entities will continue to distribute their taxable income and continue to qualify as REITs for the foreseeable future.
The Business measures deferred income taxes associated with its investment properties based on its specific intention with respect to each asset at the end of therespective reporting period. Where the Business has a specific intention to sell a property in the foreseeable future, deferred taxes on the building portion of the investment property are measured based on the tax consequences following from the disposition of the property. Otherwise, deferred taxes are measured on the basis the carrying value of the investment property will be recovered substantially through use. Judgment is required in determining the manner in which the carrying amount of each investment property will be recovered.
The Business also makes judgments with respect to the taxation of gains inherent in its investments in foreign subsidiaries and joint ventures. While the Business believes that the recovery of its original investment in these foreign subsidiaries and joint ventures will not result in additional taxes, certain unremitted gains inherent in those entities could be subject to foreign taxes depending on the manner of realization.
The company’s policy for revenue recognition on operating properties is described in Note 2(i)(i). In applying this policy, the Business makes judgments with respect to whether tenant improvements provided in connection with a lease enhance the value of the leased property which determines whether such amounts are treated as additions to operating property as well as the point in time at which revenue recognition under the lease commences. In addition, where a lease allows a tenant to elect to take all or a portion of any unused tenant improvement allowance as a rent abatement, the Business must exercise judgment in determining the extent to which the allowance represents an inducement that is amortized as a reduction of lease revenue over the term of the lease.
The Business also makes judgments in determining whether certain leases, in particular those tenant leases with long contractual terms where the lessee is the sole tenant in a property and long-term ground leases where the Business is lessor, are operating or finance leases. The Business has determined that all of its leases are operating leases.
| (iv) | Financial instruments |
The company’s accounting policies relating to financial instruments are described in Note 2(j). The critical judgments inherent in these policies relate to applying the criteria set out in IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”) to designate financial instruments as amortized cost, fair value through profit or loss (“FVTPL”) or available for sale (“AFS”), assessment of the effectiveness of hedging relationships, determining whether the Business has significant influence over investees with which it has contractual relationships in addition to the financial instrument it holds and identification of embedded derivatives subject to fair value measurement in certain hybrid instruments.
The Business has determined that, notwithstanding its 22% common equity interest, it does not exercise significant influence over Canary Wharf Group plc, a privately-held commercial property investment and development company in the United Kingdom, as it is not able to elect a member of the board or otherwise influence its financial and operating decisions.
When determining the appropriate basis of accounting for the company’s investments, the company uses the following critical judgments and assumptions: the degree of control or influence that the company exerts; the amount of potential voting rights which provide the company or unrelated parties voting powers; the ability to appoint directors the ability of other investors to remove the company as a manager or general partner in a controlled partnership; and the amount of benefit that the company receives relative to other investors.
| (vi) | Common control transactions |
IFRS does not include specific measurement guidance for transfers of businesses or subsidiaries between entities under common control. Accordingly, the Business has developed a policy to account for such transactions taking into consideration other guidance in the IFRS framework and pronouncements of other standard-setting bodies. The company’s policy is to record assets and liabilities recognized as a result of transfers of businesses or subsidiaries between entities under common control at the carrying value on the transferor’s financial statements. Differences between the carrying amount of the consideration given or received, where the Business is the transferor, and the carrying amount of the assets and liabilities transferred are recorded directly in equity.
| (vii) | Other critical estimates and judgments |
Other critical estimates and judgments utilized in the preparation of the company’s financial statements are: assessment of net recoverable amounts; net realizable values; depreciation and amortization rates and useful lives; value of goodwill and intangible assets; ability to utilize tax losses and other tax measurements; and the determination of functional currency. Critical estimates and judgments also include the determination of effectiveness of financial hedges for accounting purposes; the likelihood and timing of anticipated transactions for hedge accounting; the fair value of assets held as collateral and the company’s ability to hold financial assets, and the selection of accounting policies.
| (viii) | Business combinations |
The acquisition of businesses is accounted for using the acquisition method. The cost of an acquisition is measured at the aggregate of the fair values at the date of exchange of assets given, liabilities incurred or assumed, and equity instruments issued in exchange for control of the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, “Business Combinations” (“IFRS 3”) are recognized at their fair values at the acquisition date, except for non-current assets that are classified as held-for-sale and measured at fair value, less costs to sell. The interests of non-controlling shareholders in the acquiree are initially measured at fair value or at the non-controlling interests’ proportionate share of identifiable assets, liabilities and contingent liabilities acquired.
To the extent the fair value of consideration paid is less than the fair value of net identifiable tangible and intangible assets, the excess is recognized in net income. To the extent the fair value of consideration paid exceeds the fair value of the net identifiable tangible and intangible assets; the excess is recorded as goodwill.
Where a business combination is achieved in stages, previously held interests in the acquired entity are re-measured to fair value at the acquisition date, which is the date control is obtained, and the resulting gain or loss, if any, is recognized in net income. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to net income. Changes in the
company’spartnership’s ownership interest of
a subsidiaryan investee that do not result in a
gain or losschange of control are accounted for as equity transactions and are recorded as a component of equity. Acquisition costs are recorded as an expense in
net incomethe reporting period as incurred.
| (ix) |
| r) | Revaluation method for property, plant, and equipmentRevenue recognition |
Revenue from investment properties is presented within commercial property revenue on the consolidated statements of income. The company usespartnership has retained substantially all of the revaluation methodrisks and benefits of accountingownership of its investment properties and therefore accounts for leases with its tenants as operating leases. Revenue recognition under a lease commences when the tenant has a right to use the leased asset. Generally, this occurs on the lease inception date or, where the partnership is required to make additions to the property in the form of tenant improvements to enhance the value of the property, upon substantial completion of those improvements. The total amount of contractual rents expected from operating leases is recognized on a straight-line basis over the term of the lease, including contractual base rent and subsequent rent increases as a result of rent escalation clauses. A rent receivable, included within the carrying amount of investment properties, is used to record the difference between the rental revenue recorded and the contractual amount received.
Rental receivables and related revenue also includes percentage participating rents and recoveries of operating expenses, including property and capital taxes. Percentage participating rents are recognized when tenants’ specified sales targets have been met. Operating expense recoveries are recognized in the period that recoverable costs are chargeable to tenants. Where a tenant is legally responsible for operating expenses and pays them directly in accordance with the terms of the lease, the partnership does not recognize the expenses or any related recovery revenue.
Revenue from hospitality properties is presented within hospitality revenue on the consolidated statements of income. Room, food and beverage and other revenues are recognized as services are provided. The partnership recognizes room revenue net of taxes and levies. Advance deposits are deferred and included as a liability until services are provided to the customer. The partnership recognizes net wins from casino gaming activities (the difference between gaming wins and losses) as gaming revenue. The
partnership recognizes liabilities for funds deposited by patrons before gaming play occurs and for chips in the patrons’ possession, both of which are included in accounts payable and other liabilities. Revenue and expenses from tour operations include the sale of travel and leisure packages and are recognized on the first day the travel package is in use. Amounts collected in advance from guests are deferred as a liability until such amounts are earned.
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| (iii) | Performance and management fee revenue |
Fee revenue is presented on the consolidated statements of income within investment and other revenue. Certain of the partnership’s operating subsidiaries are entitled to management fees and performance fees from property management for third parties. The partnership recognizes management fees as earned. The partnership recognizes performance fees in revenue when the amount receivable from its fund partners is determinable at the end of a contractually specified term.
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| s) | Unit-based compensation |
The partnership and its subsidiaries issue unit-based awards to certain classesemployees and non-employee directors of property, plantcertain subsidiaries. The cost of cash-settled unit-based transactions, comprised of unit options, deferred share units and equipment. Property, plant and equipmentrestricted share units, is measured using the revaluation method is initially measured at cost and subsequently carried at its revalued amount, beingas the fair value at the grant date and expensed on a proportionate basis over the vesting period. The corresponding accrued liability is measured at each reporting date at fair value with changes in fair value recognized in net income. The cost of equity-settled unit-based transactions, comprised of unit options and restricted units, is determined as the fair value of the award on the grant date. The cost of equity-settled unit-based transactions is recognized as each tranche vests and is recorded within equity.
As of June 9, 2014, the partnership established certain unit-based awards plans in connection with the acquisition of BPO. The share options and restricted shares outstanding under the pre-existing BPO share-based compensation plans were either redeemed for cash or replaced under these new option or unit plans. The prior BPO plans were accounted for as equity-settled unit-based transactions. The terms of the new plans entitles holders of unit options to redeem such options for a cash payment equal to the amount by which the fair market value of an LP Unit at the date of exercise exceeds the revaluation less any subsequent accumulated depreciationexercise price. Consequently, the partnership accounted for these new options plans as cash-settled unit-based transactions, effective June 9, 2014, as described above.
On February 3, 2015, the BPY Unit Option Plan (the “BPY Plan”) was amended and any accumulated impairment losses. Revaluations are maderestated by the board of directors of the general partner of BPY, and approved by unitholders on an annual basis to ensure thatMarch 26, 2015. The amended BPY Plan allows for the carrying amount does not differ significantly from fair value. Wheresettlement of the carryingin-the-money amount of an asset increasesoption upon exercise in BPY Units for certain qualifying employees whose location of employment is outside of Australia and Canada. This amendment applies to all options granted under the BPY Plan, including those options outstanding prior to February 3, 2015. Consequently, as a result of this amendment, options granted to employees whose location of employment is outside of Australia and Canada under the amended and restated BPY Plan are accounted for as an equity-based compensation agreement while the remaining options continue to be accounted for as cash-settled unit-based transactions (see Note 30, Unit-based Compensation).
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| t) | Redeemable/Exchangeable Partnership Units |
Beginning on April 15, 2015, the Redeemable/Exchangeable Partnership Units may, at the request of the holder, be redeemed in whole or in part, for cash in an amount equal to the market value of one of the partnership’s LP Units multiplied by the number of units to be redeemed (subject to certain adjustments). This right is subject to the partnership’s right, at its sole discretion, to elect to acquire any unit presented for redemption in exchange for one of the partnership’s LP Units (subject to certain customary adjustments). If the partnership elects not to exchange the Redeemable/Exchangeable Partnership Units for LP Units, Redeemable/Exchangeable Partnership Units are required to be redeemed for cash. The Redeemable/Exchangeable Partnership Units provide the holder the direct economic benefits and exposures to the underlying performance of the operating partnership and accordingly to the variability of the distributions of the operating partnership, whereas the partnership’s unitholders have indirect access to the economic benefits and exposures of the operating partnership through direct ownership interest in the partnership which owned a revaluation surplus,direct interest in the increase is recognized in other comprehensive incomeClass A LP Units of the operating partnership prior to August 8, 2013, and accumulated ina managing general partnership interest on and subsequent to August 8, 2013 (see Note 1(a)). Accordingly, the Redeemable/Exchangeable Partnership Units have been presented within non-controlling interests on the consolidated balance sheets. The Redeemable/Exchangeable Partnership Units do not entail a contractual obligation on the part of the partnership to deliver cash and can be settled by the partnership, at its sole discretion, by issuing a fixed number of its own equity in revaluation surplus, unless the increase reverses a previously recognized impairment recorded throughinstruments. Refer to Note 3, The Spin-off, for further discussion.
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| u) | Earnings per limited partnership unit |
The partnership calculates basic earnings per unit by dividing net income in which case that portionattributable to limited partners by the weighted average number of LP Units outstanding during the period. In addition, pursuant to IAS 33, Earnings per Share (“IAS 33”), the impact of the increase is recognized in net income. Wherepotential conversion of mandatorily convertible preferred shares, such as the carrying amount of an asset decreases, the decrease is recognized in other comprehensive incomeexchangeable preferred equity securities (“Preferred Equity Units”) issued to the extent of any balance existingQatar Investment Authority (“QIA”), is included in revaluation surplus in respectthe calculation of the asset, withweighted average number of LP Units outstanding during the remainderperiod without an add back to net income attributable to limited partners of the decrease recognized in net income. | (x) | Investment in associates |
The company considers the guidance in IAS 28, “Investments in Associates” (“IAS 28”) and IAS 39, as applicable,associated carry on such preferred shares. Refer to determine if there are indicators of impairment, one of which is whether there is a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost. Accordingly, the company considers whether the variance between the valueNote 18,
Capital Securities, for further discussion of the investment as determined using the publicly traded share pricePreferred Equity Units.
The partnership also calculates diluted earnings per unit by adjusting net income attributable to limited partners and the
carrying value is an indicator of impairment.Specifically for the Company’s investment in General Growth Properties, Inc. (“GGP”), the evaluation of whether there were impairment indicators present included consideration of aweighted average number of factors as required by IAS 39 including an evaluationLP Units outstanding to reflect the impact of dilutive financial instruments. The calculation of diluted earnings per LP Units of the technological, market, economic and legal environment in which GGP operates; considerationpartnership includes the dilutive impact of whether GGP was in significant financial difficulty; considerations relatingsecurities issued by the partnership’s subsidiaries that are convertible into LP Units of the partnership, as well as options granted to employees pursuant to the existence of any contractual breaches of GGP and an assessment of trends in funds from operations of GGP. Further, with respect specifically to the variance between the valueBPY Plan.
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| v) | Critical judgments and estimates in applying accounting policies |
The preparation of the
investment as determined using the publicly traded share price and the carrying value determined under IAS 28, the company considers additional factors relativepartnership’s consolidated financial statements requires management to
this variance. This includes an analysis of the original blended cost of the company’s investment in GGP compared to the publicly traded share price over the period from acquisition dates through to each reporting date; the trend in the share price of GGP as at each reporting date up to and including current date; and an assessment of the underlying cash flows that are expected to be derived from the properties, including the significant recovery in property values contributing to the fair value gains recorded by GGP.o) | Critical accounting estimates and assumptions |
The company makesmake critical judgments, estimates and assumptions that affect the carriedreported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses that are not readily apparent from other sources, during the reporting period. These estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. Critical judgments and estimates made by management and utilized in the normal course of preparing the partnership’s consolidated financial statements are outlined below.
In determining whether the partnership has power over an investee, the partnership makes judgments in identifying relevant activities that would significantly affect the returns of an investee, in assessing the partnership’s voting rights or other contractual rights that would give it power to unilaterally make decisions, and in assessing rights held by other stakeholders which might give them decision-making authority. In assessing if the partnership has exposure or rights to variable returns from its involvement with the investee, the partnership makes judgments concerning the variability of the returns from an investee based on the substance of the arrangement, the absolute and relative size of those returns. In determining if the partnership has the ability to use its power to affect its returns in an investee, the partnership makes judgments in assessing whether it is acting as a principal or agent in decision-making and whether another entity with decision-making rights is acting as an agent for the partnership. Where other stakeholders have decision marking authority, the partnership makes judgments as to whether its decision-making rights provide it with control, joint control or significant influence over the investee.
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In addition to the above, the partnership makes judgments in respect of joint arrangements that are carried on through a separate vehicle in determining whether the partnership’s interest represents an interest in the assets and liabilities of the arrangement (a joint operation) or in its net assets (a joint venture).
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| (ii) | Common control transactions |
The purchase and sale of businesses or subsidiaries between entities under common control fall outside the scope of IFRS and accordingly, management uses judgment when determining a policy to account for such transactions taking into consideration other guidance in the IFRS framework and pronouncements of other standard-setting bodies. The partnership’s policy is to record assets and liabilities recognized as a result of transfers of businesses or subsidiaries between entities under common control at carrying value. Differences between the carrying amount of earningsthe consideration given or received and the carrying amount of the assets and liabilities transferred are recorded directly in equity.
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| (iii) | Business combinations |
Judgment is applied in determining whether an acquisition is a business combination or an asset acquisition by considering the nature of the assets acquired and the processes applied to those assets, or if the integrated set of assets and activities is capable of being conducted and managed for the period. Actual results could differ from estimates. The estimatespurpose of providing a return to investors or other owners. Judgment is also applied in identifying acquired assets and assumptions thatassumed liabilities and determining their fair values.
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| (iv) | Investment properties |
In applying relevant accounting policies, judgment is made in determining whether certain costs are
criticaladditions to the
determinationcarrying amount of the
amounts reportedproperty, in
identifying the
financial statements relatepoint at which practical completion of the development property occurs, and in identifying borrowing costs directly attributable to the
following:carrying amount of the development property.
The critical
assumptions and estimates
and assumptions underlying the valuation of operating properties and property developments are set out in Note 5. | (ii) | Financial instruments |
As discussed in Note 8, the Business determinesused when determining the fair value of investment properties are: the timing of rental income from future leases reflecting current market conditions; assumptions of future cash flows in respect of current and future leases; maintenance and other capital expenditures; discount rates; terminal capitalization rates; and terminal valuation dates. Properties under active development are recorded at fair value using a discounted cash flow model which includes estimates in respect of the timing and cost to complete the development.
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| (v) | Investments in Australia |
The partnership has an economic interest in a portfolio of properties in Australia owned by Brookfield Asset Management in the form of participating loan agreements that provide the partnership with an interest in the results of operations and changes in fair values of the properties in the Australian portfolio. These participating loan interests are convertible by the partnership at any time
into direct ownership interests in either the properties in the Australian portfolio or the entities that have direct ownership of the property (the “property subsidiaries”). The critical judgments made in the accounting for this investment relate to the partnership’s determination that the economic interests held by the partnership in certain entities within the Australian portfolio represent controlling interests in those entities, the determination of unit of account where related financial instruments have been entered into in contemplation of each other, the identification of the terms of embedded derivatives within the partnership’s participating loan interests, the recognition of certain amounts paid to the partnership’s parent as financial assets or equity transactions, and the measurement of assets and liabilities recognized as a result of transactions with entities under common control.
As a result of these judgments, the partnership has accounted for its warrantsinterests in certain property subsidiaries as a controlling interest in a subsidiary or an equity accounted interest in a jointly controlled entity. Interests in other properties and subsidiaries are accounted for as participating loan notes that give rise to acquire common sharesinterest income reflecting the results of General Growth Properties (“GGP”), which are not tradedoperations of the underlying property and gain or losses on an active market. As such, market transactionsembedded derivative that corresponds to the property’s change in fair value.
The partnership’s accounting policies relating to assets held for sale are used when available,described in Note 2(h), Assets Held for Sale. In applying this policy, judgment is applied in determining whether sale of certain assets is highly probable, which is a necessary condition for being presented within assets held for sale.
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| (vii) | Revaluation of hospitality assets |
When determining the carrying amounts under the revaluation method, the partnership uses the following critical assumptions and a Black-Scholes option pricing model is used, when no applicable market transactions occur, wherein it is required to makeestimates: the timing of forecasted revenues, future sales prices and margins; future sales volumes; future regulatory rates; maintenance and other capital expenditures; discount rates; terminal capitalization rates; terminal valuation dates; useful lives; and residual values.
In applying relevant accounting policies, judgments are made in determining the probability of whether deductions, tax credits and tax losses can be utilized. In addition, the consolidated financial statements include estimates and assumptions regardingfor determining the future tax rates applicable to subsidiaries and identifying the temporary differences that relate to each subsidiary. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply during the period when the assets are realized or the liabilities settled, using the tax rates and laws enacted or substantively enacted at the consolidated balance sheet dates. The partnership measures deferred income taxes associated with its investment properties based on its specific intention with respect to each asset at the end of the reporting period. Where the partnership has a specific intention to sell a property in the foreseeable future, volatilitydeferred taxes on the building portion of GGP’s sharesthe investment property are measured based on the tax consequences following from the disposition of the property. Otherwise, deferred taxes are measured on the basis that the carrying value of the investment property will be recovered substantially through use. Judgment is required in determining the manner in which the carrying amount of each investment property will be recovered.
The partnership also makes judgments with respect to the taxation of gains inherent in its investments in foreign subsidiaries and joint ventures. While the partnership believes that the recovery of its original investment in these foreign subsidiaries and joint ventures will not result in additional taxes, certain unremitted gains inherent in those entities could be subject to foreign taxes depending on the manner of realization.
In applying its accounting policy for recognition of lease revenue, the partnership makes judgments with respect to whether tenant improvements provided in connection with a lease enhance the value of the leased property, which in turn is used to determine whether these amounts are treated as additions to operating property and the point in time to recognize revenue under the lease. In addition, where a lease allows a tenant to elect to take all or a portion of any unused tenant improvement allowance as a rent abatement, the partnership must exercise judgment in determining the extent to which the allowance represents an inducement that is amortized as a reduction of lease revenue over the term of the
warrants.lease.
The Businesspartnership also makes judgments in determining whether certain leases, in particular those tenant leases with long contractual terms where the lessee is the sole tenant in a property and long-term ground leases where the partnership is lessor, are operating or finance leases. The partnership has certaindetermined that all of its leases are operating leases. Where operating costs are paid directly by tenants, the partnership exercises judgment in determining whether those costs are expenses of the partnership or the tenant which impacts the extent to which operating costs recovery revenue is recognized.
The critical judgments inherent in the relevant accounting policies relate to the classification of financial assets or financial liabilities, designation of financial instruments as FVTPL, the assessment of the effectiveness of hedging relationships, the
determination of whether the partnership has significant influence over investees with which it has contractual relationships, and liabilities withthe identification of embedded participation features relatedderivatives subject to the values of investment properties whose fair values are based onvalue measurement in certain hybrid instruments.
Estimates and assumptions used in determining the fair
valuesvalue of financial instruments are: equity and commodity prices; future interest rates; the credit risk of the
related properties.partnership and its counterparties; amount and timing of estimated future cash flows; discount rates and volatility utilized in option valuations.
The
Businesspartnership holds other financial instruments that represent equity interests in investment property entities that are measured at fair value as these financial instruments are designated as FVTPL or AFS. Estimation of the fair value of these instruments is also subject to the estimates and assumptions associated with investment properties.
The fair value of interest rate caps is determined based on generally accepted pricing models using quoted market interest rates for the appropriate term. Interest rate swaps are valued at the present value of estimated future cash flows and discounted based on applicable yield curves derived from market interest rates.
Application
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| (xi) | Indicators of impairment |
Judgment is applied when determining whether indicators of impairment exist when assessing the carrying values of the effectivepartnership’s assets for potential impairment. Consideration is given to a combination of factors, including but not limited to forecasts of revenues and expenses, values derived from publicly traded prices, and projections of market trends and economic environments.
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| (xii) | Other critical judgments |
Other critical judgments utilized in the preparation of the partnership’s consolidated financial statements are: assets’ recoverable amounts; assets’ net realizable values; depreciation and amortization rates and assets’ useful lives; determination of assets held for sale and discontinued operations; impairment of goodwill and intangible assets; the determination of functional currency; the likelihood and timing of anticipated transactions for hedge accounting; and the selection of accounting policies, among others.
NOTE 3. THE SPIN-OFF
Following the Spin-off, each holder of the parent company’s shares received one BPY Unit for approximately every 17.42 shares, representing 44.7% of the limited partnership interest methodin the partnership, with Brookfield Asset Management retaining BPY Units, Redeemable/Exchangeable Partnership Units, and a 1% general partner interest in the operating partnership through Brookfield Property GP L.P., an indirect wholly-owned subsidiary of Brookfield Asset Management, pursuant to certain financial instruments involves estimatesthe agreement dated April 10, 2013, as amended on August 8, 2013. The following describes the impact of those new or amended agreements that resulted in changes to the basis of accounting for investments as recorded by Brookfield Asset Management and assumptions aboutas recorded by the timingpartnership.
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| a) | Redeemable/Exchangeable Partnership Units |
Prior to the Spin-off, Brookfield Asset Management effected a reorganization so that the partnership’s commercial property operations, including its office, retail, industrial, multifamily, hospitality and amountother assets, located in the United States, Canada, Australia, Brazil and Europe, that had historically been owned and operated, both directly and through its operating entities, by Brookfield Asset Management, were acquired by the holding entities. The holding entities which were newly formed entities under the laws of future principalthe Province of Ontario, the State of Delaware and Bermuda, were established to hold the partnership’s interest payments.in the Business, and the common shares of each of the holding entities are wholly-owned by the operating partnership. In consideration, Brookfield Asset Management received (i) additional LP Units of the partnership, (ii) Redeemable/Exchangeable Partnership Units, representing an 81.8% limited partnership interest in the operating partnership at Spin-off (61.9% as at December 31, 2015 - refer to Note 21(b)), and (iii) $1.25 billion of redeemable preferred shares of one of the holding entities (see Note 18,
Capital Securities, for further discussion). The company’s historical capital structure is not indicativeRedeemable/Exchangeable Partnership Units enable Brookfield Asset Management, at its request, to redeem the units in whole or in part in exchange for cash, subject to the partnership’s first right to acquire such interest (in lieu of its prospective structure since no direct ownership relationship existed among allsuch redemption) in exchange for LP Units of the various units comprisingpartnership. The impact of the Business. Accordingly, historical earnings per shareRedeemable/Exchangeable Partnership Units has not been presentedrecorded in these consolidated financial statements prior to April 15, 2013, as the Redeemable/Exchangeable Partnership Units were not in place prior thereto. | |
| b) | Investments in Australia |
On the date of the Spin-off, the partnership and Brookfield Asset Management entered into various agreements which resulted in the
financial statements.NOTE 3: ADOPTION OF ACCOUNTING STANDARD
holding entities (or their wholly-owned subsidiaries) having economic interests in referenced Brookfield Asset Management commercial and other real property in Australia. The company adopted amendmentsinterests were acquired in the form of participating loan agreements with Brookfield Asset Management, which are hybrid instruments comprising an interest bearing note, a total return swap, and an option to IAS 12, “Income Taxes” (“IAS 12”), effective January 1, 2012. These amendments are applicableacquire direct or indirect legal ownership in the properties. The participating loan interests provide the holding entities (or their wholly-owned subsidiaries) with an economic interest in the results of operations and changes in fair value of the properties. Brookfield Asset Management retains the legal title to the measurementproperties through a wholly-owned subsidiary that is not part of deferred taxthe
Business in order to preserve existing financing arrangements. The partnership has control or significant influence over the properties via the participating loan interests. Accordingly, the assets, liabilities and deferred tax assets where investment property is measured using the fair value model in IAS 40, “Investment Property.” The amendments introduce a rebuttable presumption that, for purposes of determining deferred tax consequences associated with temporary differences relating to investment properties, the carrying amount of an investment property is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially allresults of the economic benefits embodiedentities that have direct ownership of such properties are consolidated or accounted for under the equity method by the holding entities (or their wholly-owned subsidiaries).
These consolidated financial statements reflect the commercial and other real property interests in Australia owned by Brookfield Asset Management as direct ownership interests prior to April 15, 2013 and reflect the impact of the participating loan agreements thereafter.
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| c) | Other arrangements with Brookfield Asset Management |
The partnership entered into a Master Services Agreement with affiliates of Brookfield Asset Management (the “service providers”), to provide management services to the partnership. Pursuant to a Master Services Agreement, the partnership paid a base management fee to the service providers equal to $12.5 million per quarter. Additionally, the operating partnership paid a quarterly equity enhancement distribution to the Brookfield Property Special L.P. (“Property Special LP”) of 0.3125% of the amount by which the partnership’s total capitalization value at the end of each quarter exceeds its total capitalization value determined immediately following the Spin-off, subject to certain adjustments. Property Special LP also receives incentive distributions based on an amount by which quarterly distributions on the limited partnership units of the operating partnership exceed specified target levels as set forth in the investment property over time, rather than through sale. The company has determined that based on its business model,operating partnership’s limited partnership agreement.
On August 3, 2015, the rebuttable presumption introducedboard of directors of the partnership approved an amendment to the base management fee and equity enhancement distribution calculations, effective as of the beginning of the third quarter of 2015. Pursuant to this amendment, the annual base management fee paid by the amendmentspartnership to IAS 12Brookfield Asset Management was changed from $50.0 million, subject to annual inflation adjustments, to 0.5% of the total capitalization of the partnership, subject to an annual minimum of $50.0 million, plus annual inflation adjustments. The calculation of the equity enhancement distribution was amended to reduce the distribution by the amount by which the revised base management fee is greater than $50.0 million per annum, plus annual inflation adjustments.
The impact of the above-mentioned arrangements with Brookfield Asset Management has not been overcomerecorded in these consolidated financial statements prior to April 15, 2013, as such arrangements were not in place prior thereto.
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| d) | Allocations by Brookfield Asset Management to the partnership |
Prior to April 15, 2013, the consolidated financial statements included expenses of Brookfield Asset Management allocated to the partnership for certain functions provided by Brookfield Asset Management, including but not limited to, general corporate expenses related to finance, legal, information technology, human resources, communications, ethics and has continuedcompliance, shared services, employee benefits and incentives and insurance. These expenses were allocated to measure deferred taxesthe results of operations on the basis thatof direct usage when identifiable, with the carrying amount of investment properties will be recovered through use except where there is a specific plan to sell a property in the foreseeable future. Therefore, the amendments to IAS 12 did not have an impactremainder allocated on the measurementbasis of revenue, headcount or other measures. The partnership considers the basis on which the expenses were allocated to be a reasonable reflection of the company’s deferred tax liabilities.NOTE 4: FUTURE ACCOUNTING POLICY CHANGES
The following areutilization of services provided to, or the accounting policies thatbenefit received, by the Business expects to adopt induring the future:
IFRS 9, “Financial Instruments” (“IFRS 9”) is a multi-phase project to replace IAS 39. IFRS 9 introduces new requirements for classifying and measuring financial assets. In October 2010,periods presented. The allocations may not, however, reflect the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities and carrying over from IAS 39expense the requirements for de-recognition of financial assets and financial liabilities. In December 2011, the IASB issued “Mandatory Effective Date of IFRS 9 and Transition Disclosures”, which amended the effective date of IFRS 9 to annual periods beginning on or after January 1, 2015, and modified the relief from restating comparative periods and the associated disclosures in IFRS 7, “Financial Instruments: Disclosures”. Early adoption is permitted. The IASB intends to expand IFRS 9 to add new requirements for impairment of financial assets measured at amortized cost and hedge accounting. On completion of these various phases, IFRS 9 will be a complete replacement of IAS 39.
| (b) | Consolidated financial statements |
IFRS 10, “Consolidated Financial Statements” (“IFRS 10”) establishes principlespartnership would have incurred as an independent, publicly-traded company for the preparationperiods presented. Subsequent to the Spin-off, the partnership performs these functions through the Master Services Agreement with, among others, Brookfield Property Partners Limited (“BPY General Partner”), a wholly owned subsidiary of an entity’sBrookfield Asset Management (see Note 35,
Related Parties, for further information), and such costs have been recorded in these consolidated financial statements when it controls one or more other entities. The standard defines the principle of control and establishes control as the basis for determining which entities are consolidated in the financial statements of the reporting entity. The standard also sets out the accounting requirements for the preparation of consolidated financial statements.IFRS 11, “Joint Arrangements” (“IFRS 11”) replaces the existing IAS 31, “Interests in Joint Ventures” (“IAS 31”). IFRS 11 requires that reporting entities consider whether a joint arrangement is structured through a separate vehicle, as well as the terms of the contractual arrangement and other relevant facts and circumstances, to assess whether the venture is entitled to only the net assets of the joint arrangement (a “joint venture”) or to its share of the assets and liabilities of the joint arrangement (a “joint operation”). Joint ventures are accounted for using the equity method, whereas joint operations are accounted for using proportionate consolidation.
| (d) | Disclosure of interests in other entities |
IFRS 12, “Disclosure of Interests in Other Entities” (“IFRS 12”) applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. The standard requires the reporting entity to disclose information that enables users of financial statements to evaluate: i.) the nature of, and risks associated with, the reporting entity’s interests in other entities; and ii.) the effects of those interests on the reporting entity’s financial position, financial performance and cash flows.
| (e) | Fair value measurement |
IFRS 13, “Fair Value Measurement” (“IFRS 13”) replaces the current guidance on fair value measurement in IFRS with a single standard. The standard defines fair value, provides guidance on its determination and requires disclosures about fair value measurements but does not change the requirements about the items that should be measured and disclosed at fair value.
| (f) | Financial statement presentation |
The IASB issued amendments to IAS 1, “Presentation of Financial Statements”, (“IAS 1”) which require items within OCI that will be reclassified to profit and loss to be grouped separately from those that will not.
Each of the above are effective for annual periods beginning on or after January 1, 2013, except for IFRS 9 which is effective for annual periods beginning on or after January 1, 2015. Earlier application is permitted for each standard. The Business anticipates adopting each of the above in the first quarter of the year for which the standard is applicable and is currently evaluating the impact of each to its financial statements.
actual amounts. NOTE 5:4. FUTURE ACCOUNTING POLICY CHANGES
The following are accounting policies issued that the partnership expects to adopt in the future:
IFRS 16, Leases (“IFRS 16”) will bring most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained. Under IFRS 16 a lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly and the liability accrues interest. This will typically produce a front-loaded expense profile (whereas operating leases under IAS 17, Leases (“IAS 17”) would typically have had straight-line expenses) as an assumed linear depreciation of the right-of-use asset and the decreasing interest on the liability will lead to an overall decrease of expense over the reporting period. IFRS 16 supersedes IAS 17 and related interpretations and is effective for periods beginning on or after 1 January 2019, with earlier adoption permitted if IFRS 15, Revenue from Contracts with Customers has also been applied. The partnership is currently evaluating the impact of IFRS 16 to its consolidated financial statements.
IFRS 9, Financial Instruments (“IFRS 9”) will replace IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 introduces a logical approach for the classification of financial assets, which is driven by cash flow characteristics and the
business model in which an asset is held. This single, principle-based approach replaces existing rule-based requirements that are generally considered to be overly complex and difficult to apply. The new model results in a single impairment model being applied to all financial instruments, thereby removing a source of complexity associated with previous accounting requirements. It also introduces a new, expected-loss impairment model that will require more timely recognition of expected credit losses. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted and will be applied retrospectively. The partnership is currently evaluating the impact of IFRS 9 to its consolidated financial statements.
IAS 16, Property, Plant, and Equipment (“IAS 16”) and IAS 38, Intangible Assets (“IAS 38”) were both amended by the IASB as a result of clarifying the appropriate amortization method for intangible assets of service concession arrangements under IFRIC 12, Service Concession Arrangements (“SCA’s”). The IASB determined that the issue does not only relate to SCA’s but all tangible and intangible assets that have finite useful lives. Amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant, and equipment. Similarly, the amendment to IAS 38 introduces a rebuttable presumption that revenue is not an appropriate basis for the amortization of an intangible asset, with only limited circumstances where the presumption can be rebutted. Guidance is also introduced to explain that expected future reductions in selling prices could be indicative of a reduction of the future economic benefits embodied in an asset. The amendments apply prospectively and are effective for annual periods beginning on or after January 1, 2016, with earlier application permitted. The amendments to IAS 16 and IAS 38 have an immaterial impact to the partnership’s consolidated financial statements.
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) specifies how and when revenue should be recognized as well as requiring more informative and relevant disclosures. This standard supersedes IAS 18, Revenue, IAS 11, Construction Contracts, and a number of revenue-related interpretations. Application of the standard is mandatory and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts. IFRS 15 is effective for annual periods beginning on or after January 1, 2018 with early application permitted, and will be applied retrospectively. The partnership is currently evaluating the impact of IFRS 15 to its consolidated financial statements.
IFRS 11, Joint Arrangements: Accounting for Acquisitions of Interests in Joint Operations (“Amendments to IFRS 11”) was amended by the IASB in May 2014. The objective of the amendments is to add new guidance to IFRS 11 on accounting for the acquisition of an interest in a joint operation in which the activity of the joint operation constitutes a business, as defined in IFRS 3, Business Combinations (“IFRS 3”). Acquirers of such interests are to apply the relevant principles on business combination accounting in IFRS 3 and other standards, as well as disclosing the relevant information specified in these standards for business combinations. The Amendments to IFRS 11 are effective for annual periods beginning on or after January 1, 2016 and should be applied prospectively. The Amendments to IFRS 11 have an immaterial impact to the partnership’s consolidated financial statements.
NOTE 5. ACQUISITION OF BROOKFIELD OFFICE PROPERTIES INC.
As of December 31, 2013, the partnership’s interest in Brookfield Office Properties consisted of 49% of its outstanding common shares and 97% of its outstanding voting preferred shares. On February 12, 2014, the partnership and its indirect subsidiaries, Brookfield Office Properties Exchange LP (“Exchange LP”) and Brookfield Property Split Corp. (“BOP Split”, and collectively with BPY and Exchange LP, the “Purchasers”), announced the commencement of the tender offer to acquire any or all of the common shares of Brookfield Office Properties that they did not already own (the “Offer”). Under the Offer, Brookfield Office Properties shareholders were able to elect to receive one LP Unit or $20.34 in cash for each BPO common share tendered, subject in each case to pro-ration based on a maximum number of LP Unit and maximum cash consideration equating to approximately 67% and 33%, respectively, of the total number of BPO common shares subject to the Offer. BOP Split was incorporated as a wholly-owned subsidiary of Brookfield BPY Holdings Inc., a primary holding subsidiary of the partnership, to acquire common stock of BPO under the Offer and was established as a preferred share issuer.
Immediately after completion of the Offer, the Purchasers owned 92% of the outstanding BPO common shares. In June 2014, the Purchasers completed a subsequent acquisition of all the remaining BPO common shares by way of a plan of arrangement (the “Arrangement”) under Canadian corporate law. Under the Arrangement, holders of BPO securities received the following consideration:
Pursuant to the terms of the Offer and Arrangement, BPO shareholders were able to receive either one LP Unit or $20.34 in cash for each BPO common share held, subject to pro-ration. Canadian BPO shareholders were given the option to receive, in lieu of LP Units, Exchange LP Units. Shareholders electing to receive LP Units, or Exchange LP Units, received one limited partnership unit for each BPO common share tendered (or deemed tendered). Exchange LP Units are exchangeable at any time on a one-for-one basis, at the option of the holder, for LP Units, subject to certain terms and applicable law. An Exchange LP Unit provides a holder thereof with economic terms which are substantially equivalent to those of a LP Unit.
Holders of outstanding BPO Class AAA Preference Shares, Series G, Series H, Series J, and Series K (collectively, the “BPO Convertible Preference Shares”), were given the option to elect either:
| |
| i. | to exchange their BPO Convertible Preference Shares for BOP Split senior preferred shares (“BOP Split Senior Preferred Shares”), subject to minimum listing requirements and a maximum of 1,000,000 BOP Split Senior Preferred Shares issued per series, pro-rated, or |
| |
| ii. | to continue holding their BPO Convertible Preference Shares, the conditions of which were modified in order to provide for the BPO Convertible Preference Shares to be exchangeable into BPY Units rather than convertible into BPO common shares. |
| |
| c) | Class A Voting Preferred Shares |
All Class A Series A and B voting preference shares of BPO, other than those held by the Purchasers or their subsidiaries, were redeemed by BPO for cash.
Under IFRS 10, Consolidated Financial Statements (“IFRS 10”), the buy-out of a non-controlling interest by a parent is accounted for as an equity transaction. As a result of the Offer and Arrangement, BPY owns 100% of the issued and outstanding common shares of BPO. Prior to the Arrangement, BPO was consolidated by BPY. Subsequent to the Arrangement, BPY continues to consolidate BPO. In addition, and in accordance with IAS 32, Financial Instruments: Presentation (“IAS 32”), transaction costs associated with such a transaction are accounted for as a deduction from equity in the consolidated financial statements. As a result, the partnership deducted approximately $25 million from equity for the year ended December 31, 2014.
The acquisition of the remaining common shares in BPO, paid for through a combination of the issuance of approximately 160 million BPY Units and Exchange LP Units with a value of $3,030 million and cash consideration of $1,538 million, resulted in a reduction in non-controlling interests of $5,074 million. In addition, certain Canadian BPO shareholders had their shares redeemed directly by BPO. BPO acquired 22.5 million of these common shares for consideration of $195 million in cash and 12.9 million Exchange LP Units valued at $263 million. The acquired BPO shares were subsequently cancelled.
NOTE 6. ACQUISITIONS AND BUSINESS COMBINATIONS
In December 2015, the partnership acquired a portfolio of office properties in Brazil. Funds sponsored by Brookfield Asset Management contributed $396 million of cash which was drawn on subscription facilities. At the date the partnership’s consolidated financial statements were approved for issuance, the valuations of investment properties and property debt obligations were still under evaluation by the partnership. Accordingly, they have been accounted for on a provisional basis and may be adjusted retrospectively in future periods in accordance with IFRS 3.
On August 7th 2015, the partnership acquired 100% of the voting equity interests in Associated Estates Realty Corp. (“Associated Estates”) for consideration of $2,559 million. Associated Estates is a real estate investment trust focused on apartment communities located in major metropolitan areas across the U.S. Funds sponsored by Brookfield Asset Management contributed $1,007 million of cash which was drawn on subscription facilities with the remainder funded through debt financing. Included in the consideration paid was $873 million which was used to repay all of the existing debt obligations that were outstanding immediately prior to the acquisition. At the date the partnership’s September 30, 2015 consolidated financial statements were approved for issuance, the valuations of investment properties and property debt obligations were still under evaluation by the partnership. Accordingly, they were accounted for on a provisional basis. During the fourth quarter of 2015, the partnership completed the purchase price allocation for the acquisition of Associated Estates. No material changes were made to the provisional purchase price allocation disclosed in the September 30, 2015 consolidated financial statements.
On August 3rd 2015, the partnership acquired 100% of the voting equity interests in Center Parcs Group (“Center Parcs UK”) for consideration of $1,958 million. Center Parcs UK operates five short-break destinations across the United Kingdom. The acquisition was funded with $249 million in cash from the partnership, $551 million in cash contributed from third party co-investors, $749 million contributed by funds sponsored by Brookfield Asset Management which was drawn on subscription facilities and the remainder financed with debt. At the date the partnership’s consolidated financial statements were approved for issuance, the valuations of hospitality properties and intangible assets and goodwill, as well as deferred income taxes were still under evaluation by the partnership. Accordingly, they have been accounted for on a provisional basis and may be adjusted retrospectively in future periods in accordance with IFRS 3.
The following table summarizes the impact of material acquisitions during the year ended December 31, 2015:
|
| | | | | | | | | | | | | | | |
| (US$ Millions) | Associated Estates |
| Center Parcs UK |
| Brazil Office Portfolio |
| Other |
| Total |
|
| Investment properties | $ | 2,468 |
| $ | — |
| $ | 626 |
| $ | 652 |
| $ | 3,746 |
|
| Hospitality assets | — |
| 2,618 |
| — |
| — |
| 2,618 |
|
| Accounts receivable and other | 143 |
| 71 |
| 36 |
| 12 |
| 262 |
|
| Cash and cash equivalents | 11 |
| 72 |
| 1 |
| 2 |
| 86 |
|
Goodwill(1) | — |
| 941 |
| — |
| — |
| 941 |
|
| Intangible assets | — |
| 1,099 |
| — |
| — |
| 1,099 |
|
| Total assets | 2,622 |
| 4,801 |
| 663 |
| 666 |
| 8,752 |
|
| Less: | |
| |
| |
| |
| |
|
| Non-recourse borrowings | — |
| (2,139 | ) | (177 | ) | (5 | ) | (2,321 | ) |
| Accounts payable and other | (61 | ) | (254 | ) | (21 | ) | (32 | ) | (368 | ) |
| Deferred income tax liabilities | — |
| (450 | ) | (69 | ) | — |
| (519 | ) |
Non-controlling interests(2) | (2 | ) | — |
| — |
| (8 | ) | (10 | ) |
| Net assets acquired | $ | 2,559 |
| $ | 1,958 |
| $ | 396 |
| $ | 621 |
| $ | 5,534 |
|
Consideration(3) | $ | 2,559 |
| $ | 1,958 |
| $ | 396 |
| $ | 620 |
| $ | 5,533 |
|
| Transaction costs | $ | 42 |
| $ | 5 |
| $ | 11 |
| $ | 4 |
| $ | 62 |
|
| |
(1) | The amount of goodwill from Center Parcs UK is still preliminary and subject to change. |
| |
(2) | Includes non-controlling interests recognized on business combinations measured as the proportionate share of the fair value of the assets, liabilities and contingent liabilities on the date of acquisition. |
| |
(3) | Includes consideration paid with funds received from issuance of non-controlling interests to certain institutional investors in funds sponsored by Brookfield Asset Management. |
In the period from each acquisition date to December 31, 2015, the partnership recorded revenue and net income in connection with these acquisitions of approximately $379 million and $148 million, respectively. If the acquisitions had occurred on January 1, 2015, the partnership’s total revenue and net income would have been $5,754 million and $3,921 million, respectively, for the year ended December 31, 2015.
The partnership completed the following acquisitions during the year ended December 31, 2014, all of which were accounted for as business combinations in accordance with IFRS 3.
In December 2014, the partnership acquired 100% of the equity in Moor Place in London for $334 million.
In November 2014, the partnership acquired equity interests in a portfolio of six high quality office parks in India (“Candor Office Parks”) for a total consideration of $304 million which was funded with $94 million in cash from the partnership and $210 million from the issuance of non-controlling interests to certain institutional investors through funds sponsored by Brookfield Asset Management. Upon the initial acquisition of its interest, the partnership did not have the current ability to appoint the directors necessary to exercise power over the activities of the Candor Office Parks entities and, accordingly, initially accounted for them as investments in associates using the equity method. In December 2014, the partnership entered into an agreement with the manager of the entities that gave it the ability to appoint the directors necessary to exercise control over four of the entities and joint control over the remaining two entities. The acquisition of control in December is accounted for as a business combination and the equity accounted investments in the entities over which control was acquired were measured at fair value at that date. As of the date the 2014 consolidated financial statements were approved for issuance, the partnership had not finalized its valuation of the investment properties and other assets acquired and debt obligations, deferred tax and other liabilities assumed. Also, the partnership had not completed its evaluation of certain payments made in connection with the business combination to determine if they represent consideration for the transaction or should be accounted for separately from the transaction. Accordingly, the measurement of the consideration paid, assets, liabilities and non-controlling interests were recognized on a provisional basis at December 31, 2014. During the fourth quarter of 2015, the partnership completed the purchase price allocation for Candor Office Parks. No material changes were made to the provisional purchase price allocation disclosed in the December 31, 2014 audited consolidated financial statements.
In October 2014, the partnership acquired 91% of the voting equity interest in CARS for consideration of $1,184 million which was funded with $334 million in cash from the partnership and $850 million in the issuance of non-controlling interests through funds sponsored by Brookfield Asset Management. As of the date the partnership’s 2014 consolidated financial statements were approved for issuance, the valuation of investment properties, debt obligations, deferred income taxes and contingent consideration
were still under evaluation by the partnership and were accounted for on a provisional basis. During 2015, the partnership finalized the purchase price allocation for the acquisition of CARS. No material changes were made to the provisional purchase price allocation disclosed in the December 31, 2014 audited consolidated financial statements.
In addition, in October 2014, the partnership acquired 99% of the voting equity interests in a portfolio of six multifamily residential properties located in New York City for a total consideration of $1,056 million which was funded with $98 million in cash from the partnership, $220 million in the issuance of non-controlling interests through funds sponsored by Brookfield Asset Management, and $738 million of debt financing.
In June 2014, the partnership acquired an additional 50% interest in KPMG Tower in Sydney for a net purchase price of approximately $130 million bringing its ownership in the property to 100%. The acquisition of the additional interest in KPMG Tower is accounted for as a business combination and KPMG Tower has been consolidated by the partnership since the acquisition date. Prior to the acquisition date, KPMG Tower was accounted for as an investment in joint operations.
In January 2014, the partnership purchased an additional 23.6% interest in Five Manhattan West (previously known as 450 West 33rd Street) for a net purchase price of $57 million, which includes cash consideration of $50 million and the settlement of a $7 million loan receivable. As a result, the partnership’s ownership in Five Manhattan West increased to 98.6%. The partnership has consolidated Five Manhattan West as a result of the business combination since the acquisition date, prior to which it was accounted for as an investment in joint venture under the equity method of accounting.
The following table summarizes the impact of significant acquisitions during the year ended December 31, 2014 that resulted in consolidation:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | Candor Office Parks |
| CARS |
| Manhattan Multi- family |
| Moor Place |
| KPMG Tower |
| Five Manhattan West |
| Other Business Combinations(1) |
| Total |
|
| Investment properties | $ | 785 |
| $ | 4,313 |
| $ | 1,044 |
| $ | 332 |
| $ | 130 |
| $ | 653 |
| $ | 633 |
| $ | 7,890 |
|
| Accounts receivable and other | 100 |
| 6 |
| 9 |
| 2 |
| — |
| 57 |
| 4 |
| $ | 178 |
|
| Cash and cash equivalents | — |
| 15 |
| 15 |
| — |
| — |
| — |
| 7 |
| $ | 37 |
|
| Total assets | 885 |
| 4,334 |
| 1,068 |
| 334 |
| 130 |
| 710 |
| 644 |
| 8,105 |
|
| Less: | |
| |
| |
| |
| |
| |
| |
| |
|
| Non-recourse borrowings | (193 | ) | (2,980 | ) | — |
| — |
| — |
| (462 | ) | (118 | ) | (3,753 | ) |
| Accounts payable and other | (179 | ) | (50 | ) | (9 | ) | — |
| — |
| (2 | ) | (1 | ) | (241 | ) |
Non-controlling interests(2) | (209 | ) | (120 | ) | (3 | ) | — |
| — |
| (4 | ) | (9 | ) | (345 | ) |
| Net assets acquired | $ | 304 |
| $ | 1,184 |
| $ | 1,056 |
| $ | 334 |
| $ | 130 |
| $ | 242 |
| $ | 516 |
| $ | 3,766 |
|
Consideration(3)(4) | $ | 304 |
| $ | 1,184 |
| $ | 1,056 |
| $ | 334 |
| $ | 130 |
| $ | 57 |
| $ | 516 |
| $ | 3,581 |
|
| Transaction costs | $ | 5 |
| $ | 9 |
| $ | 7 |
| $ | 4 |
| $ | — |
| $ | — |
| $ | 8 |
| $ | 33 |
|
| |
(1) | Includes seven acquisitions of 53 properties completed during the year. |
| |
(2) | Includes non-controlling interests recognized on business combinations measured as the proportionate share of fair value of the assets, liabilities, and contingent liabilities on the date of acquisition. |
| |
(3) | Consideration for the acquisition of Five Manhattan West is before considering the existing investment in joint venture accounted for under the equity method of accounting. |
| |
(4) | Includes consideration paid with funds received from issuance of non-controlling interests to certain institutional investors in funds sponsored by Brookfield Asset Management. |
In the period from each acquisition date to December 31, 2014, the partnership recorded revenue and net income in connection with these acquisitions of approximately $143 million and $51 million, respectively. If the acquisitions had occurred on January 1, 2014, the partnership’s total revenue and net income would have been $4,948 million and $4,569 million, respectively, for the year ended December 31, 2014.
Acquisition-related costs, which primarily relate to legal and consulting fees, are expensed as incurred in accordance with IFRS 3 and included in administration and other expense on the consolidated statements of income.
NOTE 7. INVESTMENT PROPERTIES
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
| (US$ Millions) | | Operating
properties | | | Development
properties | | | Total | | | Operating
properties | | | Development
properties | | | Total | |
Balance at beginning of year | | $ | 25,730 | | | $ | 1,864 | | | $ | 27,594 | | | $ | 19,395 | | | $ | 1,565 | | | $ | 20,960 | |
Property acquisitions | | | 2,584 | | | | 266 | | | | 2,850 | | | | 6,411 | | | | 158 | | | | 6,569 | |
Property dispositions(1) | | | (968) | | | | (34) | | | | (1,002) | | | | (1,661) | | | | - | | | | (1,661) | |
Capital expenditures | | | 387 | | | | 330 | | | | 717 | | | | 343 | | | | 341 | | | | 684 | |
Reclassification of development to operating | | | 1,068 | | | | (1,068) | | | | - | | | | 166 | | | | (166) | | | | - | |
Fair value gains (losses) | | | 1,232 | | | | 88 | | | | 1,320 | | | | 1,374 | | | | (15) | | | | 1,359 | |
Foreign currency translation and other changes | | | 258 | | | | 122 | | | | 380 | | | | (298) | | | | (19) | | | | (317) | |
Balance at end of year | | $ | 30,291 | | | $ | 1,568 | | | $ | 31,859 | | | $ | 25,730 | | | $ | 1,864 | | | $ | 27,594 | |
The following table presents a roll forward of investment property balances for the years ended December 31, 2015 and 2014:
|
| | | | | | | | | | | | | | | | | | |
| | Year ended Dec. 31, 2015 | Year ended Dec. 31, 2014 |
| (US$ Millions) | Commercial
properties |
| Commercial
developments |
| Total |
| Commercial
properties |
| Commercial
developments |
| Total |
|
| Balance, beginning of year | $ | 37,789 |
| $ | 3,352 |
| $ | 41,141 |
| $ | 31,679 |
| $ | 2,474 |
| $ | 34,153 |
|
| Changes resulting from: | |
| |
|
|
| |
| |
|
|
|
| Property acquisitions | 3,950 |
| 210 |
| 4,160 |
| 8,080 |
| 26 |
| 8,106 |
|
| Capital expenditures | 916 |
| 1,149 |
| 2,065 |
| 821 |
| 881 |
| 1,702 |
|
Property dispositions(1) | (2,393 | ) | (1,517 | ) | (3,910 | ) | (2,512 | ) | (200 | ) | (2,712 | ) |
| Fair value gains, net | 1,583 |
| 430 |
| 2,013 |
| 2,781 |
| 289 |
| 3,070 |
|
| Foreign currency translation | (1,746 | ) | (342 | ) | (2,088 | ) | (1,026 | ) | (150 | ) | (1,176 | ) |
| Transfers between commercial properties and commercial developments | 911 |
| (911 | ) | — |
| 56 |
| (56 | ) | — |
|
| Reclassifications of assets held for sale and other changes | (1,899 | ) | 117 |
| (1,782 | ) | (2,090 | ) | 88 |
| (2,002 | ) |
| Balance, end of year | $ | 39,111 |
| $ | 2,488 |
| $ | 41,599 |
| $ | 37,789 |
| $ | 3,352 |
| $ | 41,141 |
|
| |
(1) | Property dispositions represent fairthe carrying value at timeon date of sale, or the selling price. sale. |
The
Businesspartnership determines the fair value of each
operatingcommercial property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the applicable balance sheet dates, less future cash outflows in respect of such leases.
Where available, the Business determines the fair value of investmentInvestment property
based on sales of similar property in the same location and in similar condition and leasing profile. Where comparable sales do not exist the Business considers information from a variety of sources, including: (i) discounted cash flows based on reliable estimates of future cash flows, supported by the terms of existing lease and other contracts, and evidence such as current market rents for similar properties in the same location and condition, using discount rates to reflect uncertainty in the amount and timing of the cash flows; (ii) recent prices of similar properties in less active markets, with adjustments to reflect any change in economic conditions since the date of the observed transactions that occurred at those prices, including market rents and discount or capitalization rates; and (iii) current prices in an active market for properties of a different nature, condition or location, including differences in leasing and other contracts.In certain cases, these sources will suggest different conclusions about the fair value of an investment property. In such cases, the Business considers the reasons for any such differences in validating the most reliable estimate of fair value. Discounted cash flow valuations are completed by undertaking one of two accepted market valuationincome approach methods, which include either: (i)i) discounting the expected future cash flows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows; or (ii)ii) undertaking a direct capitalization approach whereby a capitalization rate is applied to estimated current year cash flows. Fair values are primarily determined by discounting the expected future cash flows as opposed to the direct capitalization approach. In determining the appropriateness of the methodology applied, the Businesspartnership considers the relative uncertainty of the timing and amount of expected cash flows and the impact such uncertainty would have in arriving at a reliable estimate of fair value. In circumstances where there is low uncertainty as toSee table below for further information on what valuation method the timing and amount of expected cash flows, which is primarily due to the lease profile, maturity and the market in which the property is located, a discounted cash flow approach is applied.
Development properties under active developmentpartnership uses for its asset classes.
Commercial developments are also measured using a discounted cash flow model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market values for similar assets.
In accordance with its policy, the
Businesspartnership measures
and records its
operatingcommercial properties and
development propertiesdevelopments using valuations prepared by management. The
Companypartnership does not measure
or record its properties based on valuations prepared by external valuation professionals.
The key valuation metrics for
operatingthe partnership’s consolidated commercial properties
including propertiesand equity accounted
for under the equity method,investments are set
outforth in the following
tables: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
| | | Primary Valuation
Method | | Discount
Rate | | | Terminal
Capitalization
Rate | | | Investment
Horizon
(yrs) | | | Discount
Rate | | | Terminal
Capitalization
Rate | | | Investment
Horizon
(yrs) | |
Office | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | Discounted Cash Flow | | | 7.3% | | | | 6.3% | | | | 11 | | | | 7.5% | | | | 6.3% | | | | 12 | |
Canada | | Discounted Cash Flow | | | 6.4% | | | | 5.6% | | | | 11 | | | | 6.7% | | | | 6.2% | | | | 11 | |
Australia | | Discounted Cash Flow | | | 8.9% | | | | 7.2% | | | | 10 | | | | 9.1% | | | | 7.5% | | | | 10 | |
Europe | | Discounted Cash Flow | | | 7.1% | | | | 5.7% | | | | 10 | | | | n/a | | | | n/a | | | | n/a | |
Europe (1) | | Direct Capitalization | | | 6.1% | | | | n/a | | | | n/a | | | | 6.1% | | | | n/a | | | | n/a | |
| | | | | | | |
Retail | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States (1) | | Direct Capitalization | | | 5.7% | | | | n/a | | | | n/a | | | | 6.0% | | | | n/a | | | | n/a | |
Australia | | Discounted Cash Flow | | | 9.9% | | | | 9.2% | | | | 10 | | | | 9.8% | | | | 8.9% | | | | 10 | |
Brazil | | Discounted Cash Flow | | | 8.5% | | | | 7.2% | | | | 10 | | | | 9.6% | | | | 7.3% | | | | 10 | |
| | | | | | | |
Multi-Family and Industrial | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | Discounted Cash Flow | | | 8.7% | | | | 8.0% | | | | 10 | | | | 8.6% | | | | 8.3% | | | | 10 | |
Canada | | Discounted Cash Flow | | | 9.0% | | | | 7.3% | | | | 10 | | | | 8.7% | | | | 7.7% | | | | 10 | |
| | | | | | | |
Opportunistic Investments | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | Discounted Cash Flow | | | 8.7% | | | | 8.1% | | | | 10 | | | | 8.2% | | | | 8.1% | | | | 10 | |
|
| | | | | | | | | | | | | |
| | | Dec. 31, 2015 | Dec. 31, 2014 |
| Consolidated properties | Primary valuation
method | Discount
rate |
| Terminal
capitalization
rate |
| Investment
horizon
(yrs.) |
| Discount
rate |
| Terminal
capitalization
rate |
| Investment
horizon
(yrs.) |
|
| Office | | |
| |
| |
| |
| |
| |
|
| United States | Discounted cash flow | 7.0 | % | 5.7 | % | 11 |
| 7.1 | % | 5.9 | % | 10 |
|
| Canada | Discounted cash flow | 6.1 | % | 5.5 | % | 10 |
| 6.3 | % | 5.6 | % | 11 |
|
| Australia | Discounted cash flow | 7.6 | % | 6.2 | % | 10 |
| 8.3 | % | 6.8 | % | 10 |
|
| United Kingdom | Discounted cash flow | 6.6 | % | 5.1 | % | 11 |
| 6.8 | % | 5.1 | % | 10 |
|
| Brazil | Discounted cash flow | 9.5 | % | 7.7 | % | 8 |
| 8.5 | % | 7.5 | % | 10 |
|
| India | Discounted cash flow | 14.4 | % | 10.3 | % | 5 |
| 14.5 | % | 11.0 | % | 5 |
|
| Retail | | |
| |
| |
| |
| |
| |
|
| Brazil | Discounted cash flow | 9.8 | % | 7.2 | % | 10 |
| 9.2 | % | 7.1 | % | 10 |
|
| Industrial | Discounted cash flow | 7.6 | % | 6.8 | % | 10 |
| 7.9 | % | 7.3 | % | 10 |
|
Multifamily(1) | Direct capitalization | 5.1 | % | n/a |
| n/a |
| 5.4 | % | n/a |
| n/a |
|
Triple Net Lease(1) | Direct capitalization | 6.3 | % | n/a |
| n/a |
| 6.6 | % | n/a |
| n/a |
|
| |
(1) | The valuation method used to value multifamily and triple net lease properties is the direct capitalization method. The amountsrates presented as the discount rate relate to the overall implied overall capitalization rate. The terminal capitalization rate and investment horizon are not applicable. |
Values are most sensitive to changes in discount rates and timing or variability of cash flows.
Included in operating properties is $548 million (2011
-
$308 million) of net straight-line rent receivables arising from the recognition of rental revenue on a straight-line basis over the lease term in accordance with IAS 17, “Leases.”F-27 -
|
| | | | | | | | | | | | | |
| | | Dec. 31, 2015 | Dec. 31, 2014 |
Equity accounted
investments(1) | Primary valuation
method | Discount
rate |
| Terminal
capitalization
rate |
| Investment
horizon
(yrs.) |
| Discount
rate |
| Terminal
capitalization
rate |
| Investment
horizon
(yrs.) |
|
| Office | | |
| |
| |
| |
| |
| |
|
| United States | Discounted cash flow | 6.3 | % | 5.3 | % | 11 |
| 6.4 | % | 5.4 | % | 9 |
|
| Australia | Discounted cash flow | 7.4 | % | 6.1 | % | 10 |
| 8.3 | % | 7.0 | % | 10 |
|
United Kingdom(2) | Discounted cash flow | 4.9 | % | 5.2 | % | 10 |
| n/a |
| n/a |
| n/a |
|
| Germany | Discounted cash flow | 8.1 | % | 4.7 | % | 10 |
| n/a |
| n/a |
| n/a |
|
| Retail | | |
| |
| |
| |
| |
| |
|
| United States | Discounted cash flow | 7.4 | % | 5.8 | % | 10 |
| 7.4 | % | 5.8 | % | 10 |
|
| Industrial | Discounted cash flow | 7.1 | % | 6.5 | % | 10 |
| 7.2 | % | 6.6 | % | 10 |
|
Multifamily(3) | Direct capitalization | 5.4 | % | n/a |
| n/a |
| 5.5 | % | n/a |
| n/a |
|
| |
(1) | See Note 9 for further discussion on the partnership’s equity accounted investments. |
| |
(2) | Certain properties in the United Kingdom accounted for under the equity method are valued using both discounted cash flow and yield models. For comparative purposes, the discount and terminal capitalization rates and investment horizon calculated under the discounted cash flow method are presented in the table above. |
| |
(3) | The valuation method used to value multifamily investments is the direct capitalization method. The rates presented as the discount rate relate to the overall implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable. |
Operating properties with a fair value of approximately
$5.5$10.8 billion
(2011(December 31, 2014 -
$4.9$7.6 billion) are situated on land held under leases or other agreements largely expiring after the year 2065. Investment properties do not include any
propertiesbuildings held under operating leases.
The following table presents the partnership’s investment properties measured at fair value in the consolidated financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as defined above.
|
| | | | | | | | | | | | | | | | | | |
| Dec. 31, 2015 | Dec. 31, 2014 |
| (US$ Millions) | Level 1 |
| Level 2 |
| Level 3 |
| Level 1 |
| Level 2 |
| Level 3 |
|
| Investment properties: | |
| |
| |
| | | |
| Commercial properties | $ | — |
| $ | — |
| $ | 39,111 |
| $ | — |
| $ | — |
| $ | 37,789 |
|
| Commercial developments | — |
| — |
| 2,488 |
| — |
| — |
| 3,352 |
|
| Total | $ | — |
| $ | — |
| $ | 41,599 |
| $ | — |
| $ | — |
| $ | 41,141 |
|
There were no transfers between Level 1 and Level 2 during the years ended December 31, 2015, 2014, and 2013. Investment properties with a fair value of $39.2 billion (December 31, 2014 - $36.6 billion) are pledged as security for property debt.
During the year ended December 31,
2012,2015, the
Businesspartnership capitalized a total of
$330$1,149 million
(2011(December 31, 2014 -
$341$881 million) of costs related to
property developments.development properties. Included in this amount is
$257$1,034 million
(2011(December 31, 2014 -
$251$778 million) of construction and related costs and
$73$115 million
(2011- $90(December 31, 2014 - $103 million) of borrowing costs capitalized. The weighted average
interest rate used for the capitalization of borrowing costs to development properties
is 6.2% (2011 - 7.1%).Investment properties with a fair value of $25.7 billion (2011 - $22.0 billion) are pledged as security for property debt.
NOTE 6: BUSINESS AQUISTIONS AND COMBINATIONS
The company accounts for business combinations using the acquisition method of accounting, pursuant to which the cost of acquiring a business is allocated to its identifiable tangible and intangible assets and liabilities on the basis of the estimated fair values at the date of acquisition.
Completed During 2012
In December 2011, a subsidiary of Brookfield commenced acquiring the debentures of a company with a portfolio of various office, retail and hotel assets in addition to some residential land assets. The acquired debentures were secured by 39% of Thakral Holdings Group (“Thakral”) securities. In the first quarter of 2012, the debentures were in default. Brookfield proceeded to bid to acquire all of the outstanding Thakral securities and, in August 2012, Thakral approved Brookfield’s bid of A$0.81 per Thakral security. Brookfield closed its 100% acquisition and the company commenced consolidation of Thakral in the fourth quarter.
In April 2012, Brookfield acquired a 100% interest in Paradise Island Holdings Limited (“Atlantis”), a large hotel and casino resort, in exchange for debt and cash as part of a financial restructuring. Brookfield completed the acquisition and the company commenced consolidating Atlantis in the second quarter.
In July 2012, Brookfield entered into a merger agreement resulting in the acquisition of Verde Realty (“Verde”), a privately-owned REIT that acquires, develops, owns and manages industrial distribution facilities in the United States and Mexico. Brookfield completed its 81% acquisition and the company commenced consolidation of Verde in the fourth quarter.
As a result of the acquisitions made during the year ended December 31, 2015 is 4.3% (December 31, 2014 - 5.9%).
NOTE 8. INVESTMENTS IN SUBSIDIARIES
The partnership considers all relevant facts and circumstances in determining that its voting rights in these material subsidiaries are sufficient to give it power over these subsidiaries. In addition, the
company recorded $653 millionpartnership has exposure and rights to substantial variable returns from its economic interests in these subsidiaries, even after consideration of
revenue and $16 million in net loss form operations. Total revenue and net loss, including fair value changes, that would have been recorded if the acquisitions had occurred at the beginning of the year would have been $1,364 million and $170 million, respectively.The following table summarizes the balance sheet impact of significant acquisitions during 2012 that resulted in consolidation:
| | | | | | | | | | | | | | | | | | | | |
As at Dec. 31, 2012 (US$ Millions) | | Thakral/
Wynyard | | | Atlantis | | | Verde | | | Other | | | Total | |
Cash and cash equivalents | | $ | 5 | | | $ | 85 | | | $ | 37 | | | $ | 14 | | | $ | 141 | |
Accounts receivable and other | | | 33 | | | | 282 | | | | 36 | | | | 12 | | | | 363 | |
Inventory | | | 65 | | | | - | | | | - | | | | - | | | | 65 | |
Investments | | | - | | | | - | | | | 10 | | | | - | | | | 10 | |
Investment properties | | | 240 | | | | - | | | | 911 | | | | 1,474 | | | | 2,625 | |
Property, plant and equipment | | | 688 | | | | 1,758 | | | | - | | | | - | | | | 2,446 | |
Intangible assets | | | - | | | | 359 | | | | 17 | | | | - | | | | 376 | |
Total assets | | | 1,031 | | | | 2,484 | | | | 1,011 | | | | 1,500 | | | | 6,026 | |
Less: | | | | | | | | | | | | | | | | | | | | |
Accounts payable and other liabilities | | | (52 | ) | | | (170 | ) | | | (48 | ) | | | (139 | ) | | | (409 | ) |
Non-recourse borrowings | | | (472 | ) | | | (2,139 | ) | | | (571 | ) | | | (296 | ) | | | (3,478 | ) |
Deferred income tax liability | | | - | | | | - | | | | - | | | | - | | | | - | |
Non-controlling interests(1) | | | - | | | | - | | | | (117 | ) | | | (71 | ) | | | (188 | ) |
Non-controlling interests net to company(2) | | | (309 | ) | | | (117 | ) | | | (168 | ) | | | (526 | ) | | | (1,120 | ) |
Equity in net assets | | $ | 198 | | | $ | 58 | | | $ | 107 | | | $ | 468 | | | $ | 831 | |
| | | | | | | | | | | | | | | | | | | | | |
Consideration(3) | | $ | 507 | | | $ | 175 | | | $ | 275 | | | $ | 972 | | | $ | 1,929 | |
(1) | Includesmaterial non-controlling interests recognized on business combinations measured as the proportionate share of fair value of the assets and liabilities on the date of acquisition.
|
(2) | Non-controlling interests determined on application of consolidation principles.
|
(3) | Aggregate of equity and non-controlling interests net to Brookfield.
|
Completed During 2011
In October 2006, Brookfield formed a joint venture to purchase a portfolio of office properties (“U.S. Office Fund”). The company’s interest in the U.S. Office Fund is held through an indirect interest in TRZ Holdings LLC, an entity originally established by the company and a joint venture partner. Under the terms of the joint venture agreement, Brookfield’s venture partner had an option to acquire its interest in certain ofsubsidiaries. The partnership is able to use its power to affect the U.S. Office Fund’s properties which it managed, and to sell its interest in the properties that the company managed to Brookfield.
In August 2011, Brookfield’s venture partner exercised its option and sold the company its interest in the properties that it managed, resulting in the company’s interest increasing to 83% and the U.S. Office Fund being consolidated. Prior to the acquisition, Brookfield jointly controlled the properties of the U.S. Office Fund and accounted for its investment using the equity method. The company recorded a $212 million gain on the revaluationamount of its previously held interest in the U.S. Office Fund at the time of acquisition. No consideration was paid in connection with the company’s venture partner’s exercise of its optionreturns and the company’s consolidation of the U.S. Office Fund with the exception of the settlement of consideration payable under the joint venture agreement.
Other acquisitions consisted of interest in office, multi-family and opportunistic properties. The company paid total consideration of $558 million for its interest in the other assets of which the largest investment was $263 million.
As a result of the acquisitions made during the year, the company recorded $404 million of revenue and $136 million in net income from the operations. Total revenue and net income, including fair value changes, that would have been recorded if the acquisition had occurred at the beginning of the year would have been $903 million and $883 million, respectively.
The following table summarizes the balance sheet impact of significant acquisitions during 2011 that resulted in consolidation:
| | | | | | | | | | | | |
As at Dec. 31, 2011 (US$ Millions) | | U.S. Office Fund | | | Other | | | Total | |
Cash and cash equivalents | | $ | 32 | | | $ | 8 | | | $ | 40 | |
Accounts receivable and other | | | 84 | | | | 64 | | | | 148 | |
Investments | | | 685 | | | | - | | | | 685 | |
Property, plant and equipment | | | - | | | | 640 | | | | 640 | |
Investment properties | | | 4,953 | | | | 893 | | | | 5,846 | |
Intangible assets | | | - | | | | 180 | | | | 180 | |
Total assets | | | 5,754 | | | | 1,785 | | | | 7,539 | |
Less: | | | | | | | | | | | | |
Accounts payable and other liabilities | | | (225 | ) | | | (45 | ) | | | (270 | ) |
Non-recourse borrowings | | | (3,293 | ) | | | (1,144 | ) | | | (4,437 | ) |
Non-controlling interests(1) | | | (366 | ) | | | (38 | ) | | | (404 | ) |
Non-controlling interests net to company(2) | | | (944 | ) | | | (232 | ) | | | (1,176 | ) |
Equity in net assets | | $ | 926 | | | $ | 326 | | | $ | 1,252 | |
| | | | | | | | | | | | | |
Consideration(3) | | $ | 1,870 | | | $ | 558 | | | $ | 2,428 | |
(1) | Includes non-controlling interests recognized on business combinations measured as the proportionate share of fair value of the assets and liabilities on the date of acquisition.
|
(2) | Non-controlling interests determined on application of consolidation principles.
|
(3) | Aggregate of equity and non-controlling interests net to Brookfield.
|
NOTE 7: EQUITY ACCOUNTED INVESTMENTS
consolidates these subsidiaries.
The following table presents
principal business activity, ownership interest and carrying value of the
company’s investments in equity accounted jointly controlled entities and associates: | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | | | Ownership interest | | | | | Carrying value | |
| Name of Property / Investees | | Principal Business | | Dec. 31, 2012 | | | Dec. 31, 2011 | | | | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Joint controlled entities | | | | | | | | | | | | | | | | | | | | |
Grace Building, New York | | Office Properties | | | 50% | | | | 50% | | | | | $ | 625 | | | $ | 618 | |
245 Park Avenue, New York | | Office Properties | | | 51% | | | | 51% | | | | | | 656 | | | | 619 | |
450 W 33rd Street, New York | | Office Properties | | | 75% | | | | 75% | | | | | | 114 | | | | 57 | |
Bourke Place Trust, Sydney | | Office Properties | | | 43% | | | | 43% | | | | | | 194 | | | | 187 | |
Darling Park Complex, Sydney | | Office Properties | | | 30% | | | | 30% | | | | | | 366 | | | | 349 | |
E&Y Complex, Sydney | | Office Properties | | | 50% | | | | 50% | | | | | | 266 | | | | 275 | |
Various | | Various | | | 13% - 75% | | | | 13% - 75% | | | | | | 655 | | | | 671 | |
| | | | | | | | | | | | | | | | 2,876 | | | | 2,776 | |
Investments in associates | | | | | | | | | | | | | | | | | | | | |
General Growth Properties(1) | | Retail Properties | | | 23% | | | | 23% | | | | | | 4,837 | | | | 4,099 | |
Rouse Properties(1) | | Retail Properties | | | 43% | | | | N/A | | | | | | 381 | | | | - | |
Various | | Various | | | 24% - 40% | | | | 24% - 40% | | | | | | 16 | | | | 13 | |
| | | | | | | | | | | | | | | | | | 5,234 | | | | 4,112 | |
Total | | | | | | | | | | | | | | | | $ | 8,110 | | | $ | 6,888 | |
(1) | The 23% (2011—23%) and 43% ownership interests relate to the company’s consolidated ownership in GGP and Rouse, respectively, which include the interests of fund investors controlled by the company and which are required to be consolidated in the company’s financial statements. The company’s net economic interests in GGP and Rouse are 21% (2011—21%) and 36%, respectively.
|
Other jointly controlled entities hold individual operating properties and property developments that the Business owns together with co-owners where the strategic financial and operating decisions require approval of the co-owners.
The fair value of the common shares of GGP consolidated by the company based on the trading price of GGP common stockpartnership’s material subsidiaries as of December 31, 2012 is $4.2 billion (2011 - $3.2 billion). 2015 and 2014:
|
| | | | | | | | | |
| | Jurisdiction of formation | Economic interest | Voting interest |
| | Dec. 31, 2015 |
| Dec. 31, 2014 |
| Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Holding entities | | |
| |
| |
| |
|
Brookfield Property L.P.(1) | Bermuda | 37 | % | 37 | % | 100 | % | 100 | % |
| BPY Bermuda IV Holdings L.P. | Delaware | 37 | % | — | % | 100 | % | — | % |
| Brookfield BPY Retail Holdings II Inc. | Ontario | 37 | % | 37 | % | 100 | % | 100 | % |
| BPY Bermuda Holdings Limited | Bermuda | 37 | % | 37 | % | 100 | % | 100 | % |
| BPY Bermuda Holdings II Limited | Bermuda | 37 | % | 37 | % | 100 | % | 100 | % |
| Brookfield BPY Holdings Inc. | Ontario | 37 | % | 37 | % | 100 | % | 100 | % |
| BPY Bermuda Holdings IV Limited | Bermuda | 37 | % | — | % | 100 | % | — | % |
| BPY Bermuda Holdings 1A Limited | Bermuda | 37 | % | — | % | 100 | % | — | % |
| Real estate entities | | |
| |
| |
| |
|
| Brookfield Office Properties Inc. | Canada | 100 | % | 100 | % | 100 | % | 100 | % |
Brookfield BPY Holdings (Australia) ULC(2) | Canada | 100 | % | 100 | % | — | % | — | % |
| DS4 Holdings Limited | Barbados | 100 | % | 100 | % | 100 | % | 100 | % |
BSREP CARS Sub-Pooling LLC(3) | United States | 26 | % | 26 | % | — | % | — | % |
Center Parcs UK(3) | United Kingdom | 32 | % | — | % | — | % | — | % |
BSREP Industrial Pooling Subsidiary L.P.(3) | United States | 30 | % | 28 | % | — | % | — | % |
Associated Estates(3) | United States | 34 | % | — | % | — | % | — | % |
Brookfield Brazil Retail Fundo de Investimento em Participaç��es(3) | Brazil | 40 | % | 35 | % | — | % | — | % |
BREF ONE, LLC(3) | United States | 33 | % | 33 | % | — | % | — | % |
BSREP Europe Holdings L.P.(3) | Cayman Islands | 34 | % | 31 | % | — | % | — | % |
BSREP UA Holdings LLC(3) | United States | 30 | % | 30 | % | — | % | — | % |
BSREP CXTD Holdings L.P.(3,4) | Cayman Islands | 31 | % | 31 | % | — | % | — | % |
BSREP India Office Holdings Pte. Ltd.(3) | Singapore | 33 | % | 19 | % | — | % | — | % |
| |
(1) | BPY holds all managing general partner units of the operating partnership and therefore has the power to direct the relevant activities and affairs of the operating partnership. The managing general partner units represent 37% and 37% of the total number of the operating partnership’s units at December 31, 2015 and 2014, respectively. |
| |
(2) | This entity holds economic interest in certain of its Australian properties not held through BPO. This economic interest is held in the form of participating loan agreements with Brookfield Asset Management. |
| |
(3) | The partnership holds its economic interest in these assets primarily through limited partnership interests in Brookfield Asset Management-sponsored private funds. By their nature, limited partnership interests do not have any voting rights. The partnership has entered into voting agreements to provide the partnership with the ability to contractually direct the relevant activities of the investees. |
| |
(4) | The partnership holds its interest in CXTD through BSREP CXTD Holdings L.P., which interest is accounted for under the equity method. Refer to Note 9, Equity Accounted Investments for additional information. |
The fair valuetable below shows details of non-wholly owned subsidiaries of the common shares of Rouse held by the company based on the trading price of Rouse common stock as of December 31, 2012 is $358 million (2011 partnership that have material non-controlling interests: |
| | | | | | | | | |
| | Jurisdiction of formation | Proportion of economic
interests held by non-
controlling interests | Non-controlling interests |
| (US$ Millions) | Dec. 31, 2015 | Dec. 31, 2014 | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
Brookfield Office Properties Inc.(1) | Canada | —% | —% | $ | 2,622 |
| $ | 2,790 |
|
| BSREP CARS Sub-Pooling LLC | United States | 74% | 74% | 1,104 |
| 763 |
|
| Center Parcs UK | United Kingdom | 68% | —%
| 1,071 |
| — |
|
| BSREP Industrial Pooling Subsidiary L.P. | United States | 70% | 72% | 883 |
| 829 |
|
| Associated Estates | United States | 66% | —%
| 645 |
| — |
|
Brookfield Brazil Retail Fundo de
Investimento em Participaçoes | Brazil | 60% | 65% | 406 |
| 763 |
|
| BREF ONE, LLC | United States | 67% | 67% | 457 |
| 457 |
|
BSREP CXTD Holdings L.P.(2) | Cayman Islands | 69% | 69% | 410 |
| 427 |
|
| BSREP Europe Holdings L.P. | Cayman Islands | 66% | 69% | 386 |
| 382 |
|
| BSREP UA Holdings LLC | United States | 70% | 70% | 333 |
| 233 |
|
| BSREP India Office Holdings Pte. Ltd. | Singapore | 67% | 81% | 284 |
| 441 |
|
| Other | Various | 18% - 88% | 18% - 87% | 374 |
| 1,006 |
|
| Total | | | | $ | 8,975 |
| $ | 8,091 |
|
| |
(1) | Includes non-controlling interests in BPO subsidiaries which vary from 16% - 100%. |
| |
(2) | The partnership holds its interest in CXTD through BSREP CXTD Holdings L.P., which interest is accounted for under the equity method. Refer to Note 9, Equity Accounted Investments for additional information. |
-
$nil). There are no published prices for the company’s other equity accounted investments.F-29 -
Summarized financial information in respect of
each of the
company’s equity accounted investmentspartnership’s subsidiaries that has material non-controlling interests is
provided below: | | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Non-current assets | | $ | 47,523 | | | $ | 43,861 | |
Current assets | | | 1,655 | | | | 1,595 | |
Total assets | | | 49,178 | | | | 45,456 | |
Non-current liabilities | | | 22,547 | | | | 23,893 | |
Current liabilities | | | 1,654 | | | | 271 | |
Total liabilities | | | 24,201 | | | | 24,164 | |
Net assets | | | 24,977 | | | | 21,292 | |
Company’s share of net assets | | $ | 8,110 | | | $ | 6,888 | |
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec 31, | | 2012 | | | 2011 (1) | | | 2010(1) | |
Revenue | | $ | 4,674 | | | $ | 5,309 | | | $ | 2,096 | |
Expenses | | | 3,071 | | | | 3,737 | | | | 1,548 | |
Income before fair value gains | | | 1,603 | | | | 1,572 | | | | 548 | |
Fair value gains | | | 3,311 | | | | 5,962 | | | | 885 | |
Net income | | | 4,914 | | | | 7,534 | | | | 1,433 | |
Company’s share of net earnings | | $ | 1,235 | | | $ | 2,104 | | | $ | 870 | |
(1) | The company’s share of net earnings from equity accounted investments includes earnings from TRZ Holdings LLC which was a jointly controlled entity prior to the company’s acquisition of control in the third quarter of 2011 (see note 6). |
set out below. The summarized financial information below represents amounts before intercompany eliminations. |
| | | | | | | | | | | | | | | | | | |
| | Dec. 31, 2015 |
| | |
| |
| |
| |
| Equity attributable to |
| (US$ Millions) | Current
assets |
| Non-current
assets |
| Current
liabilities |
| Non-current
liabilities |
| Non-
controlling
interests |
| Owners of the
entity |
|
| Brookfield Office Properties Inc. | $ | 1,465 |
| $ | 32,489 |
| $ | 5,805 |
| $ | 11,475 |
| $ | 1,911 |
| $ | 14,763 |
|
| BSREP CARS Sub-Pooling LLC | 13 |
| 4,612 |
| 190 |
| 2,950 |
| 1,104 |
| 380 |
|
| Center Parcs UK | 95 |
| 4,421 |
| 190 |
| 2,753 |
| 1,071 |
| 502 |
|
| BSREP Industrial Pooling Subsidiary L.P. | 302 |
| 1,733 |
| 353 |
| 481 |
| 883 |
| 318 |
|
| Associated Estates | 73 |
| 2,629 |
| 60 |
| 1,665 |
| 645 |
| 332 |
|
Brookfield Brazil Retail Fundo de
Investimento em Participaçoes | 52 |
| 862 |
| 37 |
| 331 |
| 406 |
| 140 |
|
| BREF ONE, LLC | 287 |
| 2,308 |
| 185 |
| 1,729 |
| 457 |
| 224 |
|
| BSREP Europe Holdings L.P. | 66 |
| 1,113 |
| 164 |
| 437 |
| 386 |
| 192 |
|
| BSREP UA Holdings LLC | 42 |
| 1,178 |
| 27 |
| 720 |
| 333 |
| 140 |
|
| BSREP India Office Holdings Pte. Ltd. | 95 |
| 1,037 |
| 50 |
| 660 |
| 284 |
| 139 |
|
| Total | $ | 2,490 |
| $ | 52,382 |
| $ | 7,061 |
| $ | 23,201 |
| $ | 7,480 |
| $ | 17,130 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Dec. 31, 2014 |
| | |
| |
| |
| |
| Equity attributable to |
| (US$ Millions) | Current
assets |
| Non-current
assets |
| Current
liabilities |
| Non-current
liabilities |
| Non-
controlling
interests |
| Owners of the
entity |
|
| Brookfield Office Properties Inc. | $ | 2,829 |
| $ | 31,576 |
| $ | 3,961 |
| $ | 14,908 |
| $ | 2,009 |
| $ | 13,527 |
|
Brookfield Brazil Retail Fundo de
Investimento em Participaçoes | 87 |
| 1,545 |
| 27 |
| 594 |
| 763 |
| 248 |
|
| BSREP Industrial Pooling Subsidiary L.P. | 148 |
| 1,777 |
| 105 |
| 694 |
| 829 |
| 297 |
|
| BSREP Europe Holdings L.P. | 170 |
| 803 |
| 130 |
| 297 |
| 382 |
| 164 |
|
| BREF ONE, LLC | 313 |
| 2,270 |
| 173 |
| 1,727 |
| 457 |
| 226 |
|
| BSREP CARS Sub-Pooling LLC | 27 |
| 4,340 |
| 370 |
| 2,994 |
| 763 |
| 240 |
|
| BSREP India Office Holdings Pte. Ltd. | 132 |
| 785 |
| — |
| 377 |
| 441 |
| 99 |
|
| BSREP UA Holdings LLC | 26 |
| 1,055 |
| 11 |
| 738 |
| 233 |
| 99 |
|
BSREP CXTD Holdings L.P.
| 21 |
| 603 |
| 3 |
| — |
| 427 |
| 194 |
|
| Total | $ | 3,753 |
| $ | 44,754 |
| $ | 4,780 |
| $ | 22,329 |
| $ | 6,304 |
| $ | 15,094 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Year ended Dec. 31, 2015 |
| | |
| Attributable to non-controlling interests | Attributable to owners of the partnership |
| (US$ Millions) | Revenue |
| Net
income
(loss) |
| Total
compre-hensive
income |
| Distributions |
| Net
income
(loss) |
| Total
compre-hensive
income |
|
| Brookfield Office Properties Inc. | $ | 2,170 |
| $ | 172 |
| $ | (3 | ) | $ | 69 |
| $ | 2,153 |
| $ | 1,662 |
|
| BSREP CARS Sub-Pooling LLC | 283 |
| 146 |
| 146 |
| 47 |
| 50 |
| 50 |
|
| Center Parcs UK | 285 |
| 69 |
| 20 |
| 20 |
| 36 |
| 4 |
|
| BSREP Industrial Pooling Subsidiary L.P. | 128 |
| 107 |
| 107 |
| 36 |
| 37 |
| 38 |
|
| Associated Estates | 75 |
| 24 |
| 24 |
| 3 |
| 5 |
| 3 |
|
Brookfield Brazil Retail Fundo de
Investimento em Participaçoes | 91 |
| (71 | ) | (301 | ) | 15 |
| (47 | ) | (125 | ) |
| BREF ONE, LLC | 799 |
| (19 | ) | 69 |
| 63 |
| (9 | ) | 34 |
|
| BSREP Europe Holdings L.P. | 128 |
| 98 |
| 38 |
| 15 |
| 50 |
| 18 |
|
| BSREP UA Holdings LLC | 109 |
| 99 |
| 99 |
| — |
| 42 |
| 42 |
|
| BSREP India Office Holdings Pte. Ltd. | 113 |
| 78 |
| 52 |
| — |
| 44 |
| 36 |
|
| Total | $ | 4,181 |
| $ | 703 |
| $ | 251 |
| $ | 268 |
| $ | 2,361 |
| $ | 1,762 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Year ended Dec. 31, 2014 |
| | |
| Attributable to non-controlling interests | Attributable to owners of the partnership |
| (US$ Millions) | Revenue |
| Net
income
(loss) |
| Total
compre-hensive
income |
| Distributions |
| Net
income
(loss) |
| Total
compre-hensive
income |
|
| Brookfield Office Properties Inc. | $ | 2,372 |
| $ | 204 |
| $ | 123 |
| $ | 569 |
| $ | 2,614 |
| $ | 2,161 |
|
Brookfield Brazil Retail Fundo de
Investimento em Participaçoes | 129 |
| (60 | ) | (161 | ) | 12 |
| (33 | ) | (66 | ) |
| BSREP Industrial Pooling Subsidiary L.P. | 110 |
| 88 |
| 88 |
| 32 |
| 30 |
| 30 |
|
| BSREP Europe Holdings L.P. | 88 |
| 99 |
| 61 |
| — |
| 43 |
| 27 |
|
| BREF ONE, LLC | 783 |
| (58 | ) | 129 |
| 33 |
| (28 | ) | 64 |
|
| BSREP CARS Sub-Pooling LLC | 58 |
| 14 |
| 14 |
| — |
| 5 |
| 5 |
|
| BSREP India Office Holdings Pte. Ltd. | — |
| (4 | ) | (4 | ) | — |
| (2 | ) | (2 | ) |
| BSREP UA Holdings LLC | 21 |
| — |
| — |
| — |
| — |
| — |
|
BSREP CXTD Holdings L.P.
| — |
| 97 |
| 97 |
| 10 |
| 44 |
| 44 |
|
| Total | $ | 3,561 |
| $ | 380 |
| $ | 347 |
| $ | 656 |
| $ | 2,673 |
| $ | 2,263 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Year ended Dec. 31, 2013 |
| | |
| Attributable to non-controlling interests | Attributable to owners of the partnership |
| (US$ Millions) | Revenue |
| Net
income
(loss) |
| Total
compre-hensive
income |
| Distributions |
| Net
income
(loss) |
| Total
compre-hensive
income |
|
| Brookfield Office Properties Inc. | $ | 2,304 |
| $ | 131 |
| $ | 86 |
| $ | 221 |
| $ | 1,091 |
| $ | 827 |
|
Brookfield Brazil Retail Fundo de
Investimento em Participaçoes | 142 |
| 39 |
| (9 | ) | — |
| 6 |
| (11 | ) |
| BSREP Industrial Pooling Subsidiary L.P. | 83 |
| 107 |
| — |
| — |
| 34 |
| — |
|
| BSREP Europe Holdings L.P. | 46 |
| 38 |
| 44 |
| — |
| 16 |
| 18 |
|
| BREF ONE, LLC | 862 |
| (72 | ) | 46 |
| 29 |
| (35 | ) | 23 |
|
| Total | $ | 3,437 |
| $ | 243 |
| $ | 167 |
| $ | 250 |
| $ | 1,112 |
| $ | 857 |
|
Certain of the partnership’s subsidiaries are subject to restrictions over the extent to which they can remit funds to the partnership in the form of cash dividends, or repayment of loans and advances as a result of borrowing arrangements, regulatory restrictions and other contractual requirements.
NOTE
8: OTHER NON-CURRENT ASSETS9. EQUITY ACCOUNTED INVESTMENTS
The
componentspartnership has investments in joint arrangements that are joint ventures, and also has investments in associates. Joint ventures hold individual commercial properties and developments that the partnership owns together with co-owners where decisions relating to the relevant activities of
other non-current assetsthe joint venture require the unanimous consent of the co-owners. Details of the partnership’s investments in joint ventures and associates, which have been accounted for in accordance with the equity method of accounting, are as follows:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Hotel operating assets | | $ | 2,970 | | | $ | 640 | |
Securities designated as fair value through profit or loss (“FVTPL”) | | | 915 | | | | 856 | |
Derivative assets | | | 538 | | | | 210 | |
Securities designated as available-for-sale (“AFS”) | | | 238 | | | | 194 | |
Goodwill | | | 138 | | | | 150 | |
Other non-current assets | | | 837 | | | | 482 | |
| | | $ | 5,636 | | | $ | 2,532 | |
|
| | | | | | | | | | |
| | | | Proportion of ownership
interests/voting
rights held by the
partnership | Carrying value |
| (US$ Millions) | Principal activity | Principal place
of business | Dec. 31, 2015 | Dec. 31, 2014 | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Joint ventures | | | | | |
| |
|
Stork Holdco LP (“Stork”)(1) | Property holding company | United Kingdom | 50% | —% | $ | 3,401 |
| $ | — |
|
| Manhattan West, New York | Property holding company | United States | 56% | —% | 1,073 |
| — |
|
| 245 Park Avenue, New York | Property holding company | United States | 51% | 51% | 784 |
| 708 |
|
| Grace Building, New York | Property holding company | United States | 50% | 50% | 590 |
| 538 |
|
Southern Cross East, Melbourne(2) | Property holding company | Australia | 50% | —% | 334 |
| — |
|
| Potsdamer Platz, Berlin | Holding company | Germany | 50% | —% | 316 |
| — |
|
| Brookfield D.C. Office Partners LLC (“D.C. Fund”), Washington, D.C. | Property holding company | United States | 51% | —% | 316 |
| — |
|
EY Centre, Sydney(2) | Property holding company | Australia | 50% | 50% | 203 |
| 218 |
|
| 75 State Street, Boston | Property holding company | United States | 51% | —% | 159 |
| — |
|
| Republic Plaza, Denver | Property holding company | United States | 50% | 50% | 123 |
| 112 |
|
| Other | Various | Various | 13% - 83% | 12% - 83% | 1,484 |
| 1,056 |
|
| | | | | | 8,783 |
| 2,632 |
|
| Associates | | | | | |
| |
|
| General Growth Properties, Inc. ("GGP") | Real estate investment trust | United States | 29% | 29% | 7,215 |
| 6,887 |
|
China Xintiandi (“CXTD”)(3) | Property holding company | China | 22% | —% | 589 |
| — |
|
| Rouse Properties, Inc. (“Rouse”) | Real estate investment trust | United States | 34% | 34% | 380 |
| 408 |
|
| Diplomat Resort and Spa ("Diplomat") | Property holding company | United States | 90% | 90% | 322 |
| 210 |
|
| Other | Various | Various | 23% - 49% | 23% - 49% | 349 |
| 219 |
|
| | | | | | 8,855 |
| 7,724 |
|
| Total | | | | | $ | 17,638 |
| $ | 10,356 |
|
| |
(1) | Stork is the joint venture through which the partnership acquired Canary Wharf Group plc (“Canary Wharf”) in London. |
| |
(2) | The partnership exercises joint control over these jointly controlled assets through a participating loan agreement with Brookfield Asset Management that is convertible at any time into a direct equity interest in the entity. |
| |
(3) | The partnership’s interest in CXTD is held through BSREP CXTD Holdings L.P. in which it has an approximate 31% interest. Refer to Note 8, Investment in Subsidiaries for additional information. |
During the first quarter of 2015, the partnership formed a joint venture, Stork, that acquired all of the outstanding equity of Songbird Estates plc, which prior to the transaction owned approximately 69% of Canary Wharf. Stork also acquired the remaining equity interests in Canary Wharf held by the partnership and other investors. The partnership contributed cash of approximately $1.5 billion and its 22% equity interest in Canary Wharf to Stork for a 50% equity interest therein. The partnership has joint control over Stork and, through Stork, the underlying investment in Canary Wharf, as Stork’s governing documents require that directors appointed by each investor jointly direct its relevant activities.
During the second quarter of 2015, the partnership formed the D.C. Fund by contributing 650 Massachusetts Avenue, 77K Street, 799 9th Avenue and interests in five properties formerly held in the US Office Fund (1400K Street, 1200K Street, 1250 Connecticut Avenue, Bethesda Crescent and the Victor Building) from its Washington, D.C. office portfolio. BPO’s US Office Fund (“US Office Fund”) consists of a portfolio of office properties in New York, Washington, D.C., Houston and Los Angeles and is led and managed by BPO, which has an 84% interest in the fund. An institutional investor in the US Office Fund also contributed its share of the US Office Fund assets mentioned above to the D.C. Fund. The partnership sold an interest in the D.C. Fund for proceeds of approximately $282 million and initially recognized a 51% equity accounted investment at its fair value of $305 million less a $26 million note payable and capital securities of $39 million, both held by the US Office Fund investor, which are both convertible into equity interests in the D.C. Fund. The partnership retained a 40% economic ownership in the D.C. Fund.
On April 30, 2015, the partnership sold a 49% interest in 75 State Street in Boston, which was previously consolidated within commercial properties, for $238 million, net of assumed debt. The partnership retained joint control and initially recognized the equity accounted investment at its fair value of $148 million.
During the third quarter of 2015, the partnership converted its interest in convertible preferred equity of CXTD into common equity in the entity. The investment was recognized at fair value at the date of conversion. As of December 31, 2015, the carrying value for the investment in CXTD was $589 million and is being accounted for under the equity method as an associate. Prior to conversion, the investment was accounted for as a financial asset measured at FVTPL.
Also during the third quarter of 2015, the partnership acquired a 50% joint venture interest in a portfolio of hotels in Germany, which is accounted for under the equity method with a carrying amount of $179 million as of December 31, 2015. The partnership had previously held loan notes receivable secured by this portfolio, which were recorded within loans and notes receivable on the consolidated balance sheets of the partnership. In connection with the acquisition, certain of the notes were repaid in full.
During the fourth quarter, the partnership entered into the following transactions, which resulted in additions to its equity accounted investment balance:
On October 6, 2015, the partnership sold an 80% interest in 99 Bishopsgate in London for net proceeds of £104 million. As a result of the transaction, the partnership retained joint control and initially recognized the equity accounted investment at its fair value of £29 million.
On October 28, 2015, the partnership sold approximately 44% of the Manhattan West development, Five Manhattan West, and 424/434 West 33rd Street for $716 million. As a result of the transaction, the partnership retained joint control and initially recognized the equity accounted investment at its fair value of $1,117 million.
On December 18, 2015, the partnership sold an interest in Southern Cross East in Melbourne for A$456 million. As a result of the transaction, the partnership retained joint control and initially recognized the equity accounted investment at its fair value of A$458 million.
On December 30, 2015, the partnership acquired Potsdamer Platz, a mixed-use estate consisting of 16 properties in Berlin along with an outside partner. The partnership has joint control and initially recognized the equity accounted investment at its fair value of €293 million.
The fair value of the common shares of GGP held by the partnership based on the trading price of GGP common stock as of December 31, 2015 is $6,948 million (December 31, 2014 - $7,183 million). The fair value of the common shares of Rouse held by the partnership based on the trading price of Rouse common stock as of December 31, 2015 is $282 million (December 31, 2014 - $359 million). There are no quoted market prices for the partnership’s other equity accounted investments.
At December 31, 2015, the partnership performed a review to determine whether there is any objective evidence that the investments in GGP and Rouse are impaired. As a result of this review, management determined that there is no objective evidence of impairment of GGP and Rouse at December 31, 2015.
At December 31, 2014, the partnership performed a review to determine whether there is any objective evidence that the investment in GGP is impaired or whether there is any indication that the impairment loss recognized in 2013 of $249 million, or any portion thereof, may no longer exist. Management reviewed the carrying value of the partnership’s investment in GGP ($6,638 million, prior to taking into consideration any reversal of the impairment loss recorded in 2013) and compared this balance to the fair value of the common shares of GGP held by the partnership based on the published trading price of GGP common stock as of December 31, 2014 ($7,183 million). Consequently, management estimated the recoverable amount of the investment in GGP to be the fair value of the common shares of GGP at December 31, 2014 and determined that the impairment loss recognized in 2013 should be reversed. Accordingly, the consolidated statements of income for the year ended December 31, 2014 include, within share of net earnings from equity accounted investments, the reversal of the full $249 million impairment charge taken in the prior year, which resulted in a carrying value of the investment in common shares of GGP of $6,887 million at December 31, 2014.
The following table presents the change in the balance of the partnership’s equity accounted investments as of December 31, 2015 and 2014:
|
| | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
|
| Equity accounted investments, beginning of year | $ | 10,356 |
| $ | 9,281 |
|
| Additions, net of disposals | 6,034 |
| 275 |
|
| Share of net earnings from equity accounted investments | 1,591 |
| 1,366 |
|
| Distributions received | (276 | ) | (549 | ) |
| Foreign currency translation | (59 | ) | (44 | ) |
| Other | (8 | ) | 27 |
|
| Equity accounted investments, end of year | $ | 17,638 |
| $ | 10,356 |
|
The following tables present the gross assets and liabilities of the partnership’s equity accounted investments as of December 31, 2015 and 2014:
|
| | | | | | | | | | | | | | | |
| | Dec. 31, 2015 |
| (US$ Millions) | Current
assets |
| Non-current
assets |
| Current
liabilities |
| Non-current
liabilities |
| Net
assets |
|
| Joint ventures | |
| |
| |
| |
| |
|
| Stork | $ | 853 |
| $ | 12,643 |
| $ | 896 |
| $ | 5,799 |
| $ | 6,801 |
|
| Manhattan West | 251 |
| 2,681 |
| 71 |
| 945 |
| 1,916 |
|
| 245 Park Avenue | 44 |
| 2,299 |
| 9 |
| 796 |
| 1,538 |
|
| Grace Building | 25 |
| 2,056 |
| 16 |
| 882 |
| 1,183 |
|
| Southern Cross East | 4 |
| 666 |
| 2 |
| — |
| 668 |
|
| Potsdamer Platz | 19 |
| 1,464 |
| 14 |
| 838 |
| 631 |
|
| D.C. Fund | 42 |
| 1,363 |
| 32 |
| 754 |
| 619 |
|
| EY Centre | 11 |
| 423 |
| 28 |
| — |
| 406 |
|
| Republic Plaza | 40 |
| 502 |
| 21 |
| 275 |
| 246 |
|
| 75 State Street | 10 |
| 618 |
| 7 |
| 309 |
| 312 |
|
| Other | 378 |
| 6,656 |
| 887 |
| 2,342 |
| 3,805 |
|
| | 1,677 |
| 31,371 |
| 1,983 |
| 12,940 |
| 18,125 |
|
| Associates | |
| |
| |
| |
| |
|
| GGP | 2,390 |
| 44,126 |
| 1,130 |
| 21,544 |
| 23,842 |
|
| CXTD | 358 |
| 4,466 |
| 1,115 |
| 1,018 |
| 2,691 |
|
| Rouse | 93 |
| 3,012 |
| 110 |
| 1,707 |
| 1,288 |
|
| Diplomat | 19 |
| 716 |
| 16 |
| 362 |
| 357 |
|
| Other | 322 |
| 1,496 |
| 118 |
| 756 |
| 944 |
|
| | 3,182 |
| 53,816 |
| 2,489 |
| 25,387 |
| 29,122 |
|
| Total | $ | 4,859 |
| $ | 85,187 |
| $ | 4,472 |
| $ | 38,327 |
| $ | 47,247 |
|
|
| | | | | | | | | | | | | | | |
| | Dec. 31, 2014 |
| (US$ Millions) | Current
assets |
| Non-current
assets |
| Current
liabilities |
| Non-current
liabilities |
| Net
assets |
|
| Joint ventures | |
| |
| |
| |
| |
|
| 245 Park Avenue | $ | 30 |
| $ | 2,167 |
| $ | 13 |
| $ | 795 |
| $ | 1,389 |
|
| Grace Building | 47 |
| 1,930 |
| 19 |
| 882 |
| 1,076 |
|
| EY Centre | 3 |
| 441 |
| 9 |
| — |
| 435 |
|
| Republic Plaza | 33 |
| 487 |
| 24 |
| 270 |
| 226 |
|
| Other | 1,017 |
| 2,952 |
| 806 |
| 1,078 |
| 2,085 |
|
| | 1,130 |
| 7,977 |
| 871 |
| 3,025 |
| 5,211 |
|
| Associates | |
| |
| |
| |
| |
|
| GGP | 1,108 |
| 40,631 |
| 830 |
| 17,985 |
| 22,924 |
|
| Rouse | 107 |
| 2,823 |
| 76 |
| 1,618 |
| 1,236 |
|
| Diplomat | 18 |
| 610 |
| 34 |
| 360 |
| 234 |
|
| Other | 158 |
| 1,585 |
| 472 |
| 584 |
| 687 |
|
| | 1,391 |
| 45,649 |
| 1,412 |
| 20,547 |
| 25,081 |
|
| Total | $ | 2,521 |
| $ | 53,626 |
| $ | 2,283 |
| $ | 23,572 |
| $ | 30,292 |
|
Summarized financial information in respect of the partnership’s equity accounted investments for the years ended December 31, 2015, 2014 and 2013 is set out below:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year ended Dec. 31, 2015 |
| (US$ Millions) | Revenue |
| Expenses |
| Fair value gains (losses) |
| Net income |
| Other compre- hensive income |
| Partnership’s share of net income |
| Distributions received |
|
| Joint ventures | |
| |
| |
| |
| |
| |
| |
|
| Stork | $ | 606 |
| $ | 365 |
| $ | 763 |
| $ | 1,004 |
| $ | (102 | ) | $ | 463 |
| $ | — |
|
| Manhattan West | 12 |
| 6 |
| 15 |
| 21 |
| — |
| 12 |
| — |
|
| 245 Park Avenue | 157 |
| 92 |
| 127 |
| 192 |
| — |
| 98 |
| 21 |
|
| Grace Building | 120 |
| 81 |
| 102 |
| 141 |
| — |
| 70 |
| 18 |
|
| Southern Cross East | 1 |
| — |
| — |
| 1 |
| — |
| 1 |
| — |
|
| Potsdamer Platz | — |
| — |
| (4 | ) | (4 | ) | — |
| (2 | ) | — |
|
| D.C. Fund | 75 |
| 43 |
| 6 |
| 38 |
| — |
| 19 |
| 5 |
|
| EY Centre | 35 |
| 8 |
| 30 |
| 57 |
| — |
| 29 |
| — |
|
| Republic Plaza | 45 |
| 29 |
| — |
| 16 |
| — |
| 8 |
| — |
|
| 75 State Street | 28 |
| 18 |
| 17 |
| 27 |
| — |
| 14 |
| — |
|
| Other | 448 |
| 310 |
| 455 |
| 593 |
| 4 |
| 266 |
| 30 |
|
| | 1,527 |
| 952 |
| 1,511 |
| 2,086 |
| (98 | ) | 978 |
| 74 |
|
| Associates | |
| |
| |
| |
| |
| |
| |
|
| GGP | 3,208 |
| 1,801 |
| 450 |
| 1,857 |
| (12 | ) | 526 |
| 186 |
|
| CXTD | 170 |
| 159 |
| 957 |
| 968 |
| 2 |
| 46 |
| — |
|
| Rouse | 370 |
| 108 |
| (196 | ) | 66 |
| — |
| (12 | ) | 14 |
|
| Diplomat | 148 |
| 132 |
| (18 | ) | (2 | ) | 121 |
| (9 | ) | — |
|
| Other | 318 |
| 275 |
| 122 |
| 165 |
| 36 |
| 64 |
| 2 |
|
| | 4,214 |
| 2,475 |
| 1,315 |
| 3,054 |
| 147 |
| 615 |
| 202 |
|
| Total | $ | 5,741 |
| $ | 3,427 |
| $ | 2,826 |
| $ | 5,140 |
| $ | 49 |
| $ | 1,593 |
| $ | 276 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year ended Dec. 31, 2014 |
| (US$ Millions) | Revenue |
| Expenses |
| Fair value
gains
(losses) |
| Net
income |
| Other
compre-
hensive
income |
| Partnership’s
share of net
income |
| Distributions
received |
|
| Joint ventures | |
| |
| |
| |
| |
| |
| |
|
| 245 Park Avenue | $ | 149 |
| $ | 86 |
| $ | 101 |
| $ | 164 |
| $ | — |
| $ | 84 |
| $ | 17 |
|
| Grace Building | 106 |
| 61 |
| 146 |
| 191 |
| — |
| 95 |
| 252 |
|
| EY Centre | 43 |
| 10 |
| — |
| 33 |
| — |
| 17 |
| 15 |
|
| Republic Plaza | 30 |
| 20 |
| 9 |
| 19 |
| — |
| 9 |
| — |
|
| Other | 235 |
| 128 |
| 251 |
| 358 |
| — |
| 154 |
| 84 |
|
| | 563 |
| 305 |
| 507 |
| 765 |
| — |
| 359 |
| 368 |
|
| Associates | |
| |
| |
| |
| |
| |
| |
|
| GGP | 3,188 |
| 1,628 |
| 996 |
| 2,556 |
| (5 | ) | 985 |
| 158 |
|
| Rouse | 304 |
| 221 |
| 4 |
| 87 |
| — |
| 29 |
| 14 |
|
| Diplomat | 41 |
| 61 |
| (5 | ) | (25 | ) | 21 |
| (22 | ) | — |
|
| Other | 161 |
| 134 |
| 21 |
| 48 |
| 12 |
| 15 |
| 9 |
|
| | 3,694 |
| 2,044 |
| 1,016 |
| 2,666 |
| 28 |
| 1,007 |
| 181 |
|
| Total | $ | 4,257 |
| $ | 2,349 |
| $ | 1,523 |
| $ | 3,431 |
| $ | 28 |
| $ | 1,366 |
| $ | 549 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2013 |
| (US$ Millions) | Revenue |
| Expenses |
| Fair value
gains
(losses) |
| Net
income |
| Other
compre-
hensive
income |
| Partnership's
share of net
income |
| Distributions
received |
|
| Joint ventures | |
| |
| |
| |
| |
| |
| |
|
| 245 Park Avenue | $ | 145 |
| $ | 83 |
| $ | (7 | ) | $ | 55 |
| $ | — |
| $ | 27 |
| $ | 29 |
|
| Grace Building | 100 |
| 48 |
| 102 |
| 154 |
| — |
| 76 |
| — |
|
| Five Manhattan West | 48 |
| 46 |
| 101 |
| 103 |
| — |
| 76 |
| — |
|
| Bourke Place Trust | 11 |
| 3 |
| 3 |
| 11 |
| — |
| 6 |
| — |
|
| Darling Park Complex | 26 |
| 18 |
| (1 | ) | 7 |
| — |
| 9 |
| — |
|
| EY Centre | 44 |
| 11 |
| 23 |
| 56 |
| — |
| 24 |
| 18 |
|
| Other | 189 |
| 148 |
| 145 |
| 186 |
| — |
| 116 |
| 71 |
|
| | 563 |
| 357 |
| 366 |
| 572 |
| — |
| 334 |
| 118 |
|
| Associates | |
| |
| |
| |
| |
| |
| |
|
| GGP | 3,079 |
| 1,940 |
| 1,510 |
| 2,649 |
| 64 |
| 425 |
| 102 |
|
| Rouse | 263 |
| 216 |
| 99 |
| 146 |
| — |
| 63 |
| 11 |
|
| Other | 496 |
| 457 |
| — |
| 39 |
| — |
| 13 |
| 5 |
|
| | 3,838 |
| 2,613 |
| 1,609 |
| 2,834 |
| 64 |
| 501 |
| 118 |
|
| Total | $ | 4,401 |
| $ | 2,970 |
| $ | 1,975 |
| $ | 3,406 |
| $ | 64 |
| $ | 835 |
| $ | 236 |
|
Certain of the partnership’s investment in joint ventures and associates are subject to restrictions over the extent to which they can remit funds to the partnership in the form of the cash dividends or repayments of loans and advances as a result of borrowing arrangements, regulatory restrictions and other contractual requirements.
NOTE 10. INVESTMENTS IN JOINT OPERATIONS
The partnership’s interests in the following properties are subject to joint control and, accordingly, the partnership has recorded its share of the assets, liabilities, revenues, and expenses of the properties in these consolidated financial statements:
|
| | | | | | |
| | | Place of incorporation and
principal place of business | Ownership(1) |
| Name of property | Principal activity | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Brookfield Place - Retail & Parking | Property | Toronto | 56 | % | 56 | % |
| Brookfield Place III | Development property | Toronto | 54 | % | 54 | % |
| Exchange Tower | Property | Toronto | 50 | % | 50 | % |
First Canadian Place(2) | Property | Toronto | 25 | % | 25 | % |
| 151 Yonge Street | Property | Toronto | — | % | 25 | % |
| 2 Queen Street East | Property | Toronto | 25 | % | 25 | % |
| Bankers Hall | Property | Calgary | 50 | % | 50 | % |
| Bankers Court | Property | Calgary | 50 | % | 50 | % |
| Bankers West Parkade | Development property | Calgary | 50 | % | 50 | % |
| Suncor Energy Centre | Property | Calgary | 50 | % | 50 | % |
| Fifth Avenue Place | Property | Calgary | 50 | % | 50 | % |
| Place de Ville I | Property | Ottawa | 25 | % | 25 | % |
| Place de Ville II | Property | Ottawa | 25 | % | 25 | % |
| Jean Edmonds Towers | Property | Ottawa | 25 | % | 25 | % |
| 300 Queen Street | Development property | Ottawa | 25 | % | 25 | % |
World Square Retail(3) | Property | Sydney | 50 | % | 50 | % |
52 Goulburn Street(3) | Property | Sydney | 50 | % | 50 | % |
235 St Georges Terrace(3) | Property | Perth | 50 | % | 50 | % |
108 St Georges Terrace(3) | Property | Perth | 50 | % | 50 | % |
Southern Cross West(3) | Property | Melbourne | 50 | % | — | % |
| Shopping Patio Paulista | Property | São Paulo | 60 | % | 60 | % |
| Shopping Patio Paulista - Expansion | Development property | São Paulo | 44 | % | 44 | % |
| Shopping Mogi | Property | São Paulo | — | % | 63 | % |
| Shopping Patio Higienópolis | Property | São Paulo | 25 | % | 25 | % |
| Shopping Patio Higienópolis - Expansion | Development property | São Paulo | 32 | % | 32 | % |
| Shopping Patio Higienópolis - Co-Invest | Property | São Paulo | 5 | % | 5 | % |
| Shopping Patio Higienópolis Expansion - Co-Invest | Development property | São Paulo | 6 | % | 6 | % |
| Brookfield Brazil Higienópolis | Property | São Paulo | 20 | % | 11 | % |
| Brookfield Brazil Higienópolis - Expansion | Development property | São Paulo | 12 | % | 11 | % |
| Shopping Raposo | Property | São Paulo | 60 | % | 60 | % |
| West Shopping | Property | São Paulo | 45 | % | 45 | % |
| G2-Infospace Gurgaon | Property | NCR-Delhi Region | 72 | % | 72 | % |
| |
(1) | Represents ownership in these properties before non-controlling interests in subsidiaries that hold these ownership interests. |
| |
(2) | First Canadian Place in Toronto is subject to a ground lease with respect to 50% of the land on which the property is situated. At the expiry of the ground lease, the other land owner will have the option to acquire, for a nominal amount, an undivided 50% beneficial interest in the property. |
| |
(3) | The partnership exercises joint control over these jointly controlled assets through a participating loan agreement with Brookfield Asset Management that is convertible by the partnership at any time into a direct equity interest in the entities that have a direct co-ownership interest in the underlying assets. |
The partnership disposed of its interests in 151 Yonge Street on January 22, 2015 for consideration of C$38 million and its interests in Shopping Mogi on May 4, 2015 for consideration of R$210 million.
On December 18, 2015, the partnership sold 50% of its interest in Southern Cross West in Melbourne for A$218 million. As a result, the partnership now has joint control of the property and will proportionately consolidate its remaining 50% interest.
NOTE 11. PARTICIPATING LOAN INTERESTS
Participating loan interests represent interests in certain properties in Australia that do not provide the partnership with control over the entity that owns the underlying property and are accounted for as loans and receivables and held at amortized cost on the consolidated balance sheets. The instruments, which are receivable from a wholly-owned subsidiary of Brookfield Asset Management, have contractual maturity dates of September 26, 2020 and February 1, 2023, subject to the partnership’s prior right to convert into direct ownership interests in the underlying commercial properties, and have contractual interest rates that vary with the results of operations of those properties.
The outstanding principal of the participating loan interests relates to the following properties:
|
| | | | | | | | | | |
| (US$ Millions) | Participation interest | Carrying value |
| Name of property | Dec. 31, 2015 |
| Dec. 31, 2014 |
| Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Darling Park Complex, Sydney | 30 | % | 30 | % | $ | 195 |
| $ | 155 |
|
| IAG House, Sydney | 50 | % | 50 | % | 94 |
| 103 |
|
Bourke Place Trust, Melbourne(1) | — | % | 43 | % | — |
| 168 |
|
| Jessie Street, Sydney | 100 | % | 100 | % | 136 |
| 153 |
|
| Infrastructure House, Canberra | 100 | % | 100 | % | 24 |
| 30 |
|
| Total participating loan interests | | |
| $ | 449 |
| $ | 609 |
|
(1) Asset was disposed of during 2015.
Included in the balance of participating loan interests is an embedded derivative representing the partnership’s right to participate in the changes in the fair value of the referenced properties. The embedded derivative is measured at fair value with changes in fair value reported through earnings in fair value gains, net on the consolidated statements of income. As of December 31, 2015, the carrying value of the embedded derivative is $118 million (December 31, 2014 - $43 million).
For the year ended December 31, 2015, the partnership recognized interest income on the participating loan interests of $41 million (2014 - $50 million; 2013 - $40 million) and fair value gains of $88 million (2014 - $38 million; 2013 - $19 million).
Summarized financial information in respect of the properties underlying the partnership’s investment in participating loan interests is set out below:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Non-current assets | $ | 1,674 |
| $ | 2,050 |
|
| Current assets | 35 |
| 35 |
|
| Total assets | 1,709 |
| 2,085 |
|
| Non-current liabilities | 483 |
| 821 |
|
| Current liabilities | 180 |
| 20 |
|
| Total liabilities | 663 |
| 841 |
|
| Net assets | $ | 1,046 |
| $ | 1,244 |
|
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Revenue | $ | 159 |
| $ | 197 |
| $ | 237 |
|
| Expenses | 74 |
| 95 |
| 116 |
|
| Earnings before fair value gains | 85 |
| 102 |
| 121 |
|
| Fair value gains, net | 258 |
| 51 |
| 59 |
|
| Net earnings | $ | 343 |
| $ | 153 |
| $ | 180 |
|
NOTE 12. HOSPITALITY ASSETS
Consolidated hospitality assets primarily consist of the partnership’s hospitality properties as part of the acquisition of Center Parcs UK, which was acquired during the third quarter 2015. In addition, hospitality assets includes the partnership’s hospitality properties received as part of the acquisitions of Paradise Island Holdings Limited (“Atlantis”) and BREF HR, LLC (“Hard Rock Hotel operatingand Casino”). Hospitality assets are presented on a cost basis, net of accumulated fair value changes and accumulated depreciation. The partnership depreciates these assets on a straight-basis over their relevant estimated useful lives.
The following table presents the useful lives of each hospitality asset by class:
|
| |
| Hospitality assets by class | Useful life (in years) |
| Building and building improvements | 7 to 50+ |
| Land improvements | 14 to 30 |
| Furniture, fixtures and equipment | 3 to 20 |
Accumulated fair value changes include unrealized revaluations of
property, plant and equipmenthospitality assets using the revaluation method, which are recorded in revaluation surplus as a component of equity, as well as unrealized impairment losses recorded in net income.
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Cost | | | | | | | | |
Balance at the beginning of the year | | $ | 640 | | | $ | - | |
Additions, net of disposals | | | 43 | | | | - | |
Acquisitions through business combinations | | | 2,446 | | | | 640 | |
| | | 3,129 | | | | 640 | |
Accumulated fair value changes | | | | | | | | |
Balance at the beginning of the year | | | - | | | | - | |
Provision for impairment | | | (52 | ) | | | - | |
Revaluation surplus | | | 53 | | | | - | |
| | | 1 | | | | - | |
Accumulated depreciation | | | | | | | | |
Balance at the beginning of the year | | | - | | | | - | |
Depreciation | | | (160 | ) | | | - | |
| | | | (160 | ) | | | - | |
| | | $ | 2,970 | | | $ | 640 | |
Included The
partnership determines the fair value of these its North American hospitality assets using internal valuations on an annual basis as of December 31 by discounting the expected future cash flows, generally over a term of 7 years including a terminal value based on the application of a capitalization rate to estimated year 8 cash flows. The partnership also obtained valuations prepared by external valuation professionals as at December 31, 2015 to assist in equitydetermining fair value. Such valuations are used as another data point for management to ultimately conclude on the fair value estimate determined. The hospitality operating assets are pledged as collateral for the property debt at their respective properties.
Significant unobservable inputs (Level 3) are utilized when determining the fair value of hospitality properties. The significant Level 3 inputs include the discount rate, terminal capitalization rate, and investment horizon. Key valuation assumptions for the partnership’s North American hospitality assets included a weighted average discount rate of 10.0% (2014 – 10.2%), terminal capitalization rate of 7.4% (2014 – 7.4%), and investment horizon of 7 years (2014 – 7 years).
As of December 31, 2015, the fair value of the hospitality assets acquired in connection with the acquisition of Center Parcs UK during the third quarter of 2015 was determined using external valuations by discounting the expected future cash flows. Key valuation assumptions included a weighted average discount rate of 8.6%, terminal capitalization rate of 7.6%, and investment horizon of 6 years. As discussed in Note 6, Acquisitions and Business Combinations, the valuations of hospitality properties were still under evaluation by the partnership on the date the partnership’s consolidated financial statements were approved for issuance. Accordingly, these assets have been accounted for on a provisional basis and may be adjusted retrospectively in future periods in accordance with IFRS 3.
The following table presents the change to the components of the partnership’s hospitality assets from the beginning of the year:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Cost: | |
| |
|
| Balance, beginning of year | $ | 2,430 |
| $ | 2,569 |
|
| Acquisitions through business combinations | 2,619 |
| — |
|
| Additions | 74 |
| 27 |
|
| Disposals | (10 | ) | (166 | ) |
| Foreign currency translation | (151 | ) | — |
|
| | 4,962 |
| 2,430 |
|
| Accumulated fair value changes: | |
| |
|
| Balance, beginning of year | 426 |
| 129 |
|
| Increase from revaluation | 163 |
| 302 |
|
| Provision for impairment | (4 | ) | (5 | ) |
| | 585 |
| 426 |
|
| Accumulated depreciation: | |
| |
|
| Balance, beginning of year | (378 | ) | (266 | ) |
| Depreciation | (153 | ) | (112 | ) |
| | (531 | ) | (378 | ) |
| Total hospitality assets | $ | 5,016 |
| $ | 2,478 |
|
NOTE 13. OTHER NON-CURRENT ASSETS
The components of other non-current assets are as follows:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Securities designated as FVTPL | $ | 37 |
| $ | 1,929 |
|
| Derivative assets | 1,379 |
| 1,424 |
|
| Securities designated as AFS | 142 |
| 143 |
|
| Goodwill | 888 |
| 78 |
|
| Intangible assets, net | 1,321 |
| 307 |
|
| Other | 116 |
| 136 |
|
| Total other non-current assets | $ | 3,883 |
| $ | 4,017 |
|
| |
| a) | Securities designated as FVTPL |
At December 31, 2014, securities designated as FVTPL is aincluded the partnership’s 22% common equity interest in Canary Wharf Group plc, a privately held commercial property investment and development companyWharf. Beginning in the United Kingdom.first quarter of 2015, the partnership’s interest in Canary Wharf has been included in equity accounted investments on the consolidated balance sheets through its joint venture interest in Stork, as discussed in Note 9,
Equity Accounted Investments.
At December 31, 2014, securities designated as FVTPL also included an investment in convertible preferred equity of CXTD, which was made by an indirect subsidiary of the partnership, in which the partnership holds an approximate 31% interest. During the third quarter of 2015, the preferred equity interest was converted into a 22% common equity interest of CXTD. Following this conversion, the partnership’s voting interest in CXTD has been included in equity accounted investments on the consolidated balance sheets, as discussed in Note 9, Equity Accounted Investments.
Derivative assets
primarily include
the carrying amount of warrants to purchase shares of common stock of GGP
measured at FVTPL with a carrying amount of
$538$1,364 million
(2011(December 31, 2014 -
$210$1,394 million). The fair value of the
GGP warrants as
of December 31,
20122015 was determined using a Black-Scholes option pricing model, assuming a
4.91.9 year term
(2011(December 31, 2014 -
6.02.9 year term),
48%57% volatility
(2011(December 31, 2014 -
37%)51% volatility), and a risk free interest rate of
0.72% (20110.98% (December 31, 2014 -
1.1%1.01%).
| |
| c) | Securities designated as AFS |
Securities designated as AFS include $105 million (2011 - $107 million) representingrepresent the company’s common and preferredpartnership’s retained equity interestinterests in an office property1625 Eye Street in Washington, D.C. and Heritage Plaza in Houston, both property holding companies, that it previously controlled and in which isit retained a non-controlling interest following disposition of these properties to third parties. The partnership continues to manage these properties on behalf of the acquirer but does not exercise significant influence over the relevant activities of the properties. Included in securities designated as AFS are $106 million of securities pledged as security for a loan payable to the issuer in the amount of $92 million (2011(December 31, 2014 - $92 million) recognized in other non-current liabilities. Also included in securities designated as AFS are commercial mortgage-backed securities (“CMBS”) with an estimated fair
Goodwill is primarily attributable to the carrying value of
$34 million (2011 - $46 million)goodwill related to the acquisition of Center Parcs UK in the third quarter of 2015 of $888 million. As discussed in Note 6, the amount is still preliminary and
common shares with a fair valuesubject to change. At December 31, 2014, prior to the acquisition of
based on quoted market prices of $99 million (2011 - $41 million).Goodwill representsCenter Parcs UK, goodwill was attributable to a portfolio premium recognized in connection with the historical purchase of the company’spartnership’s Brazilian retail assets.
Included in other non-current assets is The partnership performs a $148 million (2011 - $145 million) receivable from Brookfield upongoodwill impairment test annually by assessing if the earliercarrying value of the exercise by Brookfield Office Properties Inc. (“BPO”),cash-generating unit, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell or the value in use. As a 51% owned subsidiaryresult of Brookfield that is includedthe annual impairment test, the partnership impaired the remaining portfolio premium balance ($51 million) in the Business,third quarter of its option to acquire direct ownership2015 as a result of certain propertiesthe continuing weakness in the Australian portfolio from a subsidiary of BrookfieldBrazilian economy and the impact on the maturityvaluation of the related loans. See Note 27 for related party disclosures.
NOTE 9: LOANS AND NOTES RECEIVABLE
Loans and notes receivable reside primarilypartnership’s retail assets in the company’s real estate finance fundscountry.
The partnership’s intangible assets are presented on a cost basis, net of accumulated amortization and are generally securedaccumulated impairment losses in the consolidated balance sheets. These intangible assets primarily represent the trademark assets acquired in connection with the acquisition of Center Parcs UK during the third quarter of 2015. As discussed in Note 6, Acquisitions and Business Combinations, the acquired assets of Center Parcs UK, including trademark assets, and assumed liabilities were still under evaluation by commercial and other income producing real property. | | | | | | | | | | | | |
| (US$ Millions) | | Interest Rate | | Maturity Date | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Variable rate | | LIBOR plus 0.65% to 14.00% | | On Demand to 2017 | | $ | 483 | | | $ | 1,009 | |
Fixed rate(1) | | - | | - | | | - | | | | 715 | |
Non-Interest Bearing | | - | | - | | | - | | | | 34 | |
| | | | | | | $ | 483 | | | $ | 1,758 | |
Current | | | | On Demand to 2014 | | $ | 237 | | | $ | 773 | |
Non-current (1) | | | | 2014 to 2017 | | | 246 | | | | 985 | |
| | | | | | | $ | 483 | | | $ | 1,758 | |
(1) | See Note 27 for related party disclosures.
|
Included in loans and notes receivable is $82 million (2011 - $107 million) of loans receivable in Euros of €62 million (2011 - €83 million). Loans receivable of $102 million (2011 - $672 million)the partnership at the date the partnership’s financial statements were approved for issuance. Accordingly, they have been pledgedaccounted for on a provisional basis and may be adjusted retrospectively in future reporting periods in accordance with IFRS 3.
In addition, intangible assets include the trademark and licensing assets acquired as collateral for borrowings under credit facilities. Also included in the December 31, 2011 notes receivable is $470 million related to the unsecured promissory notes of C$480 million as partial proceeds for the dispositionpart of the company’s residential development segment to Brookfield Residential Properties Inc. (“BRPI”), paid down duringhistorical acquisitions of Atlantis and Hard Rock Hotel and Casino.
|
| | |
| Intangible assets by class | Useful life (in years) |
|
| Trademarks | Indefinite |
|
| Gaming rights | Indefinite |
|
| Water/ electricity rights | Indefinite |
|
| Management contracts | 40 |
|
| Customer relationships | 9 to 10 |
|
| Other | 6 to 10 |
|
Intangible assets with indefinite useful lives and intangible assets not yet available for use, are tested for impairment at least annually, and whenever there is an indication that the
year.A summaryasset may be impaired.
The following table presents a roll forward of
loans and notes receivable by collateral asset class as of December 31, 2012 and 2011, is as follows: | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | | | Dec. 31, 2011 | |
| | | Unpaid Principal Balance | | | Percentage of Portfolio (1) | | | | | Unpaid Principal Balance | | | Percentage of Portfolio (1) | |
Asset Class | | | | | | | | | | | | | | | | | | |
Hotel | | | $ 148 | | | | 38 | % | | | | | $ 401 | | | | 33% | |
Office | | | 173 | | | | 44 | % | | | | | 814 | | | | 67% | |
Retail | | | 71 | | | | 18 | % | | | | | - | | | | 0% | |
Total collateralized | | | $ 392 | | | | 100 | % | | | | | $ 1,215 | | | | 100% | |
(1) | Represents percentage of collateralized loans.
|
the partnership’s intangible assets:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Balance, beginning of year | $ | 307 |
| $ | 326 |
|
| Acquisitions, net of disposals | 1,083 |
| (3 | ) |
| Amortization | (5 | ) | (15 | ) |
| Impairment losses | — |
| (1 | ) |
| Foreign currency translation | (64 | ) | — |
|
| Balance, end of year | $ | 1,321 |
| $ | 307 |
|
NOTE 10:14. LOANS AND NOTES RECEIVABLE
Loans and notes receivable primarily represents investments in debt instruments secured by commercial and other income producing real property. Loans and notes receivable are financial assets that are carried at amortized cost on the consolidated balance sheets with interest income recognized following the effective interest method on the consolidated statements of income. A loan is considered impaired when, based upon current information and events, it is probable that the partnership will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. Loans are evaluated individually for impairment given the unique nature and size of each loan. On a quarterly basis, the partnership’s subsidiaries perform a quarterly review of all collateral properties underlying the loans receivable for each collateralized loan. There is no impairment of loans and notes receivable for the year ended December 31, 2015.
NOTE 15. ACCOUNTS RECEIVABLE AND OTHER
The components of
receivablesaccounts receivable and other
assets are as follows:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Accounts receivable (1) | | $ | 305 | | | $ | 255 | |
Loans receivable designated as FVTPL (1) | | | - | | | | 138 | |
Restricted cash | | | 325 | | | | 185 | |
Other current assets | | | 392 | | | | 218 | |
| | | $ | 1,022 | | | $ | 796 | |
(1)See Note 27 for related party disclosures.
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
Accounts receivable(1) | $ | 422 |
| $ | 478 |
|
Restricted cash and deposits(2) | 338 |
| 2,121 |
|
| Other current assets | 460 |
| 526 |
|
| Total accounts receivable and other | $ | 1,220 |
| $ | 3,125 |
|
| |
(1) | See Note 35, Related Parties, for further discussion. |
| |
(2) | Restricted cash and deposits at December 31, 2014 include $1,800 million of cash received from the issuance of the Preferred Equity Units to QIA that included restrictions requiring that it first be used to finance the acquisition of Canary Wharf in the first quarter of 2015. |
Restricted
cash relates to cash and deposits
that are considered restricted when they are subject to contingent rights of third
parties.parties that prevent the assets’ use for current purposes.
NOTE 11: PROPERTY16. ASSETS HELD FOR SALE
Non-current assets and groups of assets and liabilities which comprise disposal groups are presented as assets held for sale where the asset or disposal group isavailable for immediate sale in its present condition, and the sale is highly probable.
During the first and second quarters of 2015, the partnership disposed of interests in the following office properties that were classified as assets held for sale at December 31, 2014: Metropolitan Park East & West in Seattle, 1250 Connecticut Avenue, 650 Massachusetts, 77 K Street, 799 9th Street, 1400 K Street, 1200 K Street, Bethesda Crescent, and Victor Building, all of which are located in Washington, D.C., 75 State Street in Boston and 151 Yonge Street in Toronto, as well as a portfolio of multifamily assets in Virginia.
During the second quarter of 2015, HSBC Building in Toronto was reclassified to assets held for sale and on September 30, 2015, the partnership sold the property for C$110 million. Net proceeds of C$67 million was received after the debt was assumed.
During the third quarter of 2015, 99 Bishopsgate in London was reclassified to assets held for sale and on October 6, 2015, the partnership sold an 80% interest for net proceeds of £104 million.
At December 31, 2015, assets held for sale include two properties in the partnership’s office segment, in Vancouver and Sydney, a portfolio of industrial assets near the U.S. - Mexico border and two multifamily properties in the U.S. On February 2, 2016, and February 29, 2016, the partnership sold the office properties in Sydney and Vancouver for A$285 million and C$428 million, respectively.
The following is a summary of the assets and liabilities that were classified as held for sale as of December 31, 2015 and December 31, 2014:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Investment properties | $ | 775 |
| $ | 2,173 |
|
| Accounts receivables and other assets | 30 |
| 68 |
|
| Assets held for sale | 805 |
| 2,241 |
|
| Debt obligations | 229 |
| 1,165 |
|
| Accounts payable and other liabilities | 13 |
| 56 |
|
| Liabilities associated with assets held for sale | $ | 242 |
| $ | 1,221 |
|
NOTE 17. DEBT
Property OBLIGATIONS
The partnership’s debt
includesobligations include the following:
| | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2012 | | Dec. 31, 2011 | |
| (US$ Millions) | | Weighted Average Rate | | | Debt Balance | | | | | Weighted Average Rate | | | Debt Balance | |
Unsecured Facilities | | | | | | | | | | | | | | | | | | |
BPO’s revolving facility | | | - | | | $ | - | | | | | | 2.4% | | | $ | 264 | |
BPO’s Canadian revolving facility | | | 3.2% | | | | 68 | | | | | | 3.3% | | | | 117 | |
BPO’s senior unsecured notes | | | 4.2% | | | | 350 | | | | | | - | | | | - | |
Funds subscription credit facility | | | 1.8% | | | | 523 | | | | | | - | | | | - | |
| | | | | |
Secured Property Debt | | | | | | | | | | | | | | | | | | |
Fixed rate | | | 5.6% | | | | 8,526 | | | | | | 5.9% | | | | 7,946 | |
Variable rate | | | 4.5% | | | | 10,257 | | | | | | 6.8% | | | | 7,060 | |
| | | | | | | $ | 19,724 | | | | | | | | | $ | 15,387 | |
Current | | | | | | $ | 3,366 | | | | | | | | | $ | 1,409 | |
Non-current | | | | | | | 16,358 | | | | | | | | | | 13,978 | |
| | | | | | | $ | 19,724 | | | | | | | | | $ | 15,387 | |
Property debt is secured and non-recourse to the Business. Unsecured facilities are recourse to the assets of the operating subsidiaries issuing such debt.
Property debt includes
|
| | | | | | | | | | |
| | Dec. 31, 2015 | Dec. 31, 2014 |
| (US$ Millions) | Weighted-
average rate |
| Debt balance |
| Weighted-
average rate |
| Debt balance |
|
| Unsecured facilities: | |
| |
| |
| |
|
| Brookfield Property Partners' credit facilities | 3.16 | % | $ | 1,632 |
| 2.68 | % | $ | 2,711 |
|
| Brookfield Office Properties' revolving facility | 2.15 | % | 884 |
| 1.86 | % | 683 |
|
| Brookfield Office Properties' senior unsecured notes | 4.17 | % | 252 |
| 4.17 | % | 299 |
|
| Brookfield Canada Office Properties' revolving facility | 2.29 | % | 140 |
| 2.73 | % | 159 |
|
| | | | | |
| Subsidiary borrowings | 4.60 | % | 86 |
| 4.45 | % | 81 |
|
| | | | | |
| Secured debt obligations: | |
| |
| |
| |
|
Funds subscription credit facilities(1) | 1.91 | % | 1,594 |
| 1.88 | % | 504 |
|
| Fixed rate | 5.36 | % | 13,709 |
| 5.18 | % | 12,296 |
|
| Variable rate | 3.87 | % | 12,458 |
| 4.38 | % | 11,438 |
|
| Total debt obligations | |
| $ | 30,755 |
| |
| $ | 28,171 |
|
| | | | | |
| Current | |
| $ | 8,580 |
| |
| $ | 3,127 |
|
| Non-current | |
| 21,946 |
| |
| 23,879 |
|
| Debt associated with assets held for sale | |
| 229 |
| |
| 1,165 |
|
| Total debt obligations | |
| $ | 30,755 |
| |
| $ | 28,171 |
|
| |
(1) | Funds subscription credit facilities are secured by co-investors’ capital commitments. |
Debt obligations include foreign currency denominated debt
payable in the functional currencies of the borrowing subsidiaries.
Property debtDebt obligations by
local currency
is as follows: | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2012 | | Dec. 31, 2011 | |
| (Millions) | | US$ Balance | | | Local Currency Balance | | | | | US$ Balance | | | Local Currency Balance | |
U.S. dollars | | $ | 12,365 | | | $ | 12,365 | | | | | $ | 8,753 | | | $ | 8,753 | |
Canadian dollars | | | 2,506 | | | C$ | 2,487 | | | | | | 2,033 | | | C$ | 2,078 | |
Australian dollars | | | 3,311 | | | A$ | 3,186 | | | | | | 3,148 | | | A$ | 3,085 | |
Brazilian reais | | | 867 | | | R$ | 1,772 | | | | | | 1,011 | | | R$ | 1,896 | |
British pounds | | | 675 | | | £ | 416 | | | | | | 442 | | | £ | 284 | |
| | | $ | 19,724 | | | | | | | | | $ | 15,387 | | | | | |
Included in property debt is an embedded derivative representing a lender’s right to participate in the appreciation in value of a notional 25% equity interest in the property secured by its mortgage that can be settled, at the company’s option, in cash or equity in the underlying property on maturity of the debt in 2014. The embedded derivative is measured at FVTPL with changes in fair value reported in net income as fair value gains, net. The carrying amount of the embedded derivative at December 31, 2012 is $54 million (2011 - $56 million).
NOTE 12: CAPITAL SECURITIES
The company has the following capital securities outstanding:
| | | | | | | | | | | | | | | | | | |
| (US Millions, except share information) | | Shares
Outstanding | | | Cumulative
Dividend Rate | | | | | Dec. 31, 2012(1) | | | Dec. 31, 2011(1) | |
Class AAA Series F | | | 8,000,000 | | | | 6.00% | | | | | | 202 | | | | 196 | |
Class AAA Series G | | | 4,400,000 | | | | 5.25% | | | | | | 110 | | | | 110 | |
Class AAA Series H | | | 8,000,000 | | | | 5.75% | | | | | | 202 | | | | 196 | |
Class AAA Series I | | | - | | | | 5.20% | | | | | | - | | | | 150 | |
Class AAA Series J | | | 8,000,000 | | | | 5.00% | | | | | | 202 | | | | 196 | |
Class AAA Series K | | | 6,000,000 | | | | 5.20% | | | | | | 150 | | | | 146 | |
Total capital securities | | | | | | | | | | | | $ | 866 | | | $ | 994 | |
Current | | | | | | | | | | | | $ | 202 | | | $ | 150 | |
Non-current | | | | | | | | | | | | | 664 | | | | 844 | |
Total capital securities | | | | | | | | | | | | $ | 866 | | | $ | 994 | |
(1) | Net of transaction costs of nil at December 31, 2012 (December 31, 2011 – $1 million)
|
On March 30, 2012, the company redeemed all of the outstanding Class AAA Series I shares for cash of C$25.00 per share. On December 21, 2012, the company announced its intention to redeem all of the outstanding Class AAA Series F shares for cash of C$25.00 per share plus accrued and unpaid dividends thereon of C$0.1233 per share, representing a total redemption price of C$25.1233 per share, subsequent to December 31, 2012.
Capital securities includes $756 million (2011 - $884 million) repayable in Canadian dollars of C$750 million (2011 - C$903 million).
Cumulative preferred dividends are payable quarterly, as and when declared by the Board of Directors, on the last day of March, June, September and December. On January 31, 2013 the Board of Directors of the company declared quarterly dividends payable for the Class AAA Series F, G, J and K preferred shares.
The redemption terms of capital securities are as follows:
| | | | | | | | |
| | Redemption Date(1) | | Redemption Price(2) | | Company’s Option(3) | | Holder’s Option(4) |
Class AAA Series E(2)
| | Retractable at par | | - | | - | | - |
Class AAA Series F
| | September 30, 2009 | | C$25.75 | | September 30, 2009 | | March 31, 2013 |
Class AAA Series G
| | June 30, 2011 | | US $26.00 | | June 30, 2011 | | September 30, 2015 |
Class AAA Series H
| | December 31, 2011 | | C$26.00 | | December 31, 2011 | | December 31, 2015 |
Class AAA Series J
| | June 30, 2010 | | C$26.00 | | June 30, 2010 | | December 31, 2014 |
Class AAA Series K
| | December 31, 2012 | | C$26.00 | | December 31, 2012 | | December 31, 2016 |
(1) | Subject to applicable law and rights of the company, the company may, on or after the dates specified above, redeem Class AAA preferred shares for cash as follows: the Series F at a price of C$25.75, if redeemed during the 12 months commencing September 30, 2009 and decreasing by C$0.25 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after September 30, 2012; the Series G at a price of US$26.00, if redeemed during the 12 months commencing June 30, 2011 and decreasing by US$0.33 each 12-month period thereafter to a price per share of US$25.00 if redeemed on or after June 30, 2014; the Series H at a price of C$26.00, if redeemed during the 12 months commencing December 31, 2011 and decreasing by C$0.33 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after December 31, 2014; the Series J at a price of C$26.00 if redeemed during the 12 months commencing June 30, 2010 and decreasing by C$0.25 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after June 30, 2014; the Series K at a price of C$26.00 if redeemed during the 12 months commencing December 31, 2012 and decreasing by C$0.33 each 12-month period thereafter to a price per share of C$25.00 if redeemed on or after December 31, 2015
|
(2) | Subject to applicable law and rights of the company, the company may purchase Class AAA preferred shares for cancellation at the lowest price or prices at which, in the opinion of the Board of Directors of the company, such shares are obtainable
|
(3) | Subject to the approval of the Toronto Stock Exchange the company may, on or after the dates specified above, convert the Class AAA, Series F, G, H, J and K into common shares of the company. The Class AAA, Series F, G, H, J and K preferred shares may be converted into that number of common shares determined by dividing the then-applicable redemption price by the greater of C$2.00 (Series G - US$2.00) or 95% of the weighted average trading price of common shares at such time
|
(4) | Subject to the company’s right to redeem or find substitute purchasers, the holder may, on or after the dates specified above, convert Class AAA, Series F, G, H, J and K preferred shares into that number of common shares determined by dividing the then-applicable redemption price by the greater of C$2.00 (Series G - US$2.00) or 95% of the weighted average trading price of common shares at such time
|
NOTE 13: OTHER NON-CURRENT LIABILITIES
The components of the company’s other non-current liabilities are as follows:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Other secured debt | | $ | 9 | | | $ | 150 | |
Other non-current financial liabilities | | | 432 | | | | 343 | |
| | | $ | 441 | | | $ | 493 | |
Other secured debt represent obligations of the company’s real estate finance funds which are secured by loans and notes receivable having a carrying value of $102 million (2011
|
| | | | | | | | | | | | | | |
| | Dec. 31, 2015 | Dec. 31, 2014 |
| (US$ Millions) | U.S.
Dollars |
| Local
currency | | U.S.
Dollars |
| Local
currency | |
| U.S. Dollars | $ | 22,345 |
| $ | $ | 22,345 |
| $ | 21,490 |
| $ | $ | 21,490 |
|
| British Pounds | 3,340 |
| £ | 2,267 |
| 971 |
| £ | 624 |
|
| Canadian Dollars | 2,376 |
| C$ | 3,287 |
| 2,682 |
| C$ | 3,116 |
|
| Australian Dollars | 1,504 |
| A$ | 2,064 |
| 1,848 |
| A$ | 2,261 |
|
| Brazilian Reais | 535 |
| R$ | 2,088 |
| 707 |
| R$ | 1,877 |
|
| Euros | 439 |
| € | 404 |
| 280 |
| € | 231 |
|
| Indian Rupee | 216 |
| Rs | 14,314 |
| 193 |
| Rs | 12,313 |
|
| Total debt obligations | $ | 30,755 |
| | |
| $ | 28,171 |
| | |
|
-
$672 million). The liabilities are recourse only to the assets of the finance subsidiary. The other secured debt is at variable rates with basis in the one-month or three-month LIBOR averages. As of December 31, 2012, the average weighted rate was 2.8% (2011F-42 -
1.3%).NOTE 14: INCOME TAXES
The sources of deferred income tax balances are as follows:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Non-capital losses (Canada) | | $ | 127 | | | $ | 73 | |
Capital losses (Canada) | | | 115 | | | | 120 | |
Net operating losses (U.S.) | | | 38 | | | | 26 | |
Difference in basis | | | (1,277 | ) | | | (947 | ) |
Total net deferred tax liability | | $ | (997 | ) | | $ | (728 | ) |
The deferred tax balance movements are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | | | | Recognized in | | | Reclassified | | | | |
| | | Dec. 31, 2011 | | | Income | | | Equity | | | Other | | | OCI | | | | | | Dec. 31, 2012 | |
| Deferred tax assets related to non-capital losses and capital losses | | $ | 219 | | | $ | 34 | | | $ | 2 | | | $ | 1 | | | $ | 24 | | | $ | - | | | $ | 280 | |
| Deferred tax liabilities related to difference in tax and book basis, net | | | (947 | ) | | | (433 | ) | | | (6 | ) | | | 5 | | | | (8 | ) | | | 112 | | | | (1,277 | ) |
Net deferred tax liability | | $ | (728 | ) | | $ | (399 | ) | | $ | (4 | ) | | $ | 6 | | | $ | 16 | | | $ | 112 | | | $ | (997 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | | | | Recognized in | | | Reclassified | | | | |
| | | Dec. 31, 2010 | | | Income | | | Equity | | | Other | | | OCI | | | | | | Dec. 31, 2011 | |
| Deferred tax assets related to non-capital losses and capital losses | | $ | 204 | | | $ | (8 | ) | | $ | (7 | ) | | $ | - | | | $ | 30 | | | $ | - | | | $ | 219 | |
| Deferred tax liabilities related to difference in tax and book basis, net | | | (759 | ) | | | (267 | ) | | | 9 | | | | 16 | | | | 70 | | | | (16 | ) | | | (947 | ) |
Net deferred tax liability | | $ | (555 | ) | | $ | (275 | ) | | $ | 2 | | | $ | 16 | | | $ | 100 | | | | $ (16 | ) | | $ | (728 | ) |
The Business has deferred tax assets related to net operating losses with no expiry of $159 million at December 31, 2012 (2011 - $169 million), the benefit of which has not been recognized in these financial statements.
The major components of income tax expense benefit include the following:
| | | | | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Total current income tax | | $ | (136 | ) | | $ | (164 | ) | | $ | (117 | ) |
Total deferred income tax | | | (399 | ) | | | (275 | ) | | | 39 | |
Total income tax expense | | $ | (535 | ) | | $ | (439 | ) | | $ | (78 | ) |
The company’s effective tax rate is different from the company’s domestic statutory income tax rate due to the differences set out below:
| | | | | | | | | | | | |
| Years ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Statutory income tax rate | | | 27 | % | | | 28 | % | | | 31 | % |
Increase (reduction) in rate resulting from: | | | | | | | | | | | | |
Portion of income not subject to tax | | | (11 | ) | | | (12 | ) | | | (3 | ) |
International operations subject to different tax rates | | | 4 | | | | (4 | ) | | | (12 | ) |
Change in tax rates on temporary differences | | | 1 | | | | - | | | | - | |
Increase in tax basis within flow through joint venture | | | - | | | | - | | | | (7 | ) |
Tax asset previously not recognized | | | - | | | | - | | | | (3 | ) |
Other | | | (4 | ) | | | (2 | ) | | | (2 | ) |
Effective income tax rate | | | 17 | % | | | 10 | % | | | 4 | % |
The aggregate amount of temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognized as at December 31, 2012 is $4.3 billion (2011 – $3.5 billion).
NOTE 15:18. CAPITAL SECURITIES
The partnership had the following capital securities outstanding as of December 31, 2015 and 2014:
|
| | | | | | | | | | |
| (US$ Millions, except where noted) | Shares
outstanding |
| Cumulative
dividend rate |
| Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Operating Partnership Class A Preferred Equity Units: | |
| |
| |
| |
|
| Series 1 | 24,000,000 |
| 6.25 | % | $ | 532 |
| $ | 524 |
|
| Series 2 | 24,000,000 |
| 6.50 | % | 516 |
| 510 |
|
| Series 3 | 24,000,000 |
| 6.75 | % | 506 |
| 501 |
|
| Brookfield BPY Holdings Inc. Junior Preferred Shares: | | | | |
| Class B Junior Preferred Shares | 30,000,000 |
| 5.75 | % | 750 |
| 750 |
|
| Class C Junior Preferred Shares | 20,000,000 |
| 6.75 | % | 500 |
| 500 |
|
| BPO Class AAA Preferred Shares: | |
| |
| |
| |
|
Series G(1) | 3,355,403 |
| 5.25 | % | 84 |
| 85 |
|
Series H(1) | 7,000,000 |
| 5.75 | % | 128 |
| 150 |
|
Series J(1) | 6,883,799 |
| 5.00 | % | 125 |
| 150 |
|
Series K(1) | 4,995,414 |
| 5.20 | % | 90 |
| 107 |
|
| BPO Class B Preferred Shares: | | | | |
Series 1(2) | 3,600,000 |
| 70% of bank prime |
| — |
| — |
|
Series 2(2) | 3,000,000 |
| 70% of bank prime |
| — |
| — |
|
| BOP Split Senior Preferred Shares: | |
| |
| |
|
| Series 1 | 949,990 |
| 5.25 | % | 23 |
| 25 |
|
| Series 2 | 1,000,000 |
| 5.75 | % | 18 |
| 22 |
|
| Series 3 | 933,932 |
| 5.00 | % | 17 |
| 22 |
|
| Series 4 | 984,586 |
| 5.20 | % | 18 |
| 22 |
|
| Capital Securities – Fund Subsidiaries | | | 724 |
| 643 |
|
| Total capital securities | |
| |
| $ | 4,031 |
| $ | 4,011 |
|
| | | | | |
| Current | |
| |
| $ | 503 |
| $ | 476 |
|
| Non-current | |
| |
| 3,528 |
| 3,535 |
|
| Total capital securities | |
| |
| $ | 4,031 |
| $ | 4,011 |
|
| |
(1) | BPY and its subsidiaries own 1,003,549, 1,000,000, 1,000,000, and 1,004,586 shares of Series G, Series H, Series J, and Series K Class AAA Preferred Shares of BPO as of December 31, 2015, respectively, which has been reflected as a reduction in outstanding shares of the BPO Class AAA Preferred Shares. |
| |
(2) | Class B, Series 1 and 2 capital securities - corporate are owned by Brookfield Asset Management. BPO has an offsetting loan receivable against these securities earning interest at 95% of bank prime. |
The capital securities presented above represent interest in the partnership or its subsidiaries that are in legal form equity and are accounted for as liabilities in accordance with IAS 32, Financial Instruments: Presentation due to the redemption features of these instruments.
On December 4, 2014, the partnership issued $1,800 million of Preferred Equity Units to QIA. The Preferred Equity Units are exchangeable at the option of QIA into LP Units at a price of $25.70 per unit and were issued in three tranches of $600 million each, with an average dividend yield of 6.5% and maturities of seven, ten and twelve years. After three years for the seven-year tranche and four years for the ten- and twelve-year tranches, the partnership can effectively require the holder to exchange the Preferred Equity Units into LP Units as long as the LP Units are trading at or above 125%, 130% and 135%, respectively, of the exchange price. Upon maturity, the Preferred Equity Units that remain outstanding will be redeemed in exchange for LP Units valued at the 20-day, volume-weighted average trading price at such time. Brookfield Asset Management has contingently agreed to acquire the seven-year and ten-year tranches of Preferred Equity Units from QIA for the initial issuance price plus accrued and unpaid distributions and to exchange such units for Preferred Equity Units with terms and conditions substantially similar to the twelve-year tranche to the extent that the market price of the LP Units is less than 80% of the exchange price at maturity. QIA has the right to designate one member to the board of directors of the partnership. The Preferred Equity Units have been accounted for as a compound instrument comprised of (i) a financial liability representing the partnership’s obligations to redeem the Preferred Equity Units at maturity for a variable number of BPY Units and (ii) an equity instrument representing QIA’s right to convert the Preferred Equity Units to a fixed number of BPY Units. The cash proceeds received from issuing the Preferred Equity Units were allocated between capital securities ($1,535 million) and limited partners’ equity ($265 million). The allocation between capital securities and equity was based on first determining the liability component by discounting the cash flows associated with these securities at market interest rates. The equity component was then assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component.
The $750 million of Class B Junior and $500 million of Class C Junior redeemable preferred shares of one of the holding entities that are held by Brookfield Asset Management were issued as partial consideration for the Business acquired by the partnership. The Class B preferred shares are entitled to receive a cumulative preferential dividend equal to 5.75% of their redemption value as and when declared by the Board of Directors of the holding entity until the fifth anniversary of their issuance. After the fifth anniversary of their issuance the Class B preferred shares will be entitled to receive a cumulative preferential dividend equal to 5.0% plus the prevailing yield for 5-year U.S. Treasury Notes. The holding entity may redeem the Class B preferred shares at any time and must redeem all of the outstanding Class B preferred shares on the tenth anniversary of their issuance. Brookfield Asset Management will have a right of retraction following the fifth anniversary of the issuance of the Class B preferred shares. Pursuant to a retraction call right, the partnership may redeem up to an aggregate maximum of $375 million, Class B preferred shares for LP Units. The number of LP Units to be delivered is determined by dividing the amount of Class B preferred shares to be retracted by the greater of $2.00 and 95% of the 20-day volume-weighted average trading price of LP Units.
The Class C preferred shares are entitled to receive a cumulative preferential dividend equal to 6.75% of their redemption value as and when declared by the board of directors of the holding entity. The holding entity may redeem the Class C preferred shares at any time and must redeem all of the outstanding Class C preferred shares on the seventh anniversary of their issuance. Brookfield Asset Management will have a right of retraction following the third anniversary of the issuance of the Class C preferred shares. The Class B and Class C preferred shares will be entitled to vote with the common shares of the holding entity and each class of preferred shares will have an aggregate of 1% of the votes to be cast in respect of the holding entity.
The terms of BPO’s Class AAA Preferred Shares were amended in June 2014 such that these shares are exchangeable into BPY Units and no longer convertible into BPO common shares. As discussed previously, in connection with the Arrangement, holders of such securities were given the option, subject to an overall limit of 1,000,000 shares per series and certain other conditions, to exchange their BPO Class AAA Preferred Shares for BOP Split Senior Preferred Shares. Subsequent to the Arrangement, 1,000,000 such shares of each series were issued in exchange for the same number of BPO Class AAA Preferred Shares, which are now held by BOP Split.
In accordance with IAS 32 and IAS 1, Presentation of Financial Statements, the BOP Split Senior Preferred Shares are presented as current liabilities within capital securities on the consolidated balance sheets as there is a contractual obligation to deliver cash as well as a retraction provision that permits holders of each series of shares to retract the BOP Split Senior Preferred Shares at any time.
The holders of each series of the BOP Split Senior Preferred Shares are each entitled to receive fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors of BOP Split. Dividends on each series of the BOP Split Senior Preferred Shares are payable quarterly on the last day of March, June, September and December in each year. The first dividend paid on the BOP Split Senior Preferred Shares was for the full quarter ended September 30, 2014.
Cumulative preferred dividends on the BPO Class AAA Preferred Shares and BOP Split Senior Preferred Shares are payable quarterly, as and when declared by the Boards of Directors of BPO and BOP Split. On February 8, 2016 the Boards of Directors of BPO and BOP Split declared quarterly dividends payable for the BPO Class AAA Preferred Shares and BOP Split Senior Preferred Shares, respectively.
The Capital Securities - Fund Subsidiaries includes $683 million (December 31, 2014 - $643 million) of equity interests in Brookfield DTLA Holdings LLC (“DTLA”) held by co-investors in DTLA which have been classified as a liability, rather than as non-controlling interest, as holders of these interests can cause DTLA to redeem their interests in the fund for cash equivalent to the fair value of the interests on October 15, 2023, and on every fifth anniversary thereafter. Capital Securities - Fund Subsidiaries are measured at redemption amount.
Capital Securities - Fund Subsidiaries also includes $41 million at December 31, 2015 (December 31, 2014 - nil) which represents the equity interests held by the partnership’s co-investor in the D.C. Fund which have been classified as a liability, rather than as non-controlling interest, due to the fact that on June 18, 2023, and on every second anniversary thereafter, the holders of these interests can redeem their interests in the D.C. Fund for cash equivalent to the fair value of the interests.
Capital securities includes $394 million (December 31, 2014 - $473 million) repayable in Canadian Dollars of C$545 million (December 31, 2014 - C$550 million).
The redemption terms of the outstanding BOP Split Senior Preferred Shares are as follows:
|
| | | | | | |
| | Redemption date(1) | Redemption price(1,2) |
| BPY's option | Holder’s option |
| BOP Split Senior Preferred Shares: | | |
| | |
| Series 1 | June 30, 2014 | $ | 25.00 |
| June 30, 2014 | September 30, 2015 |
| Series 2 | December 31, 2014 | C$ | 25.00 |
| December 31, 2014 | December 31, 2015 |
| Series 3 | June 30, 2014 | C$ | 25.00 |
| June 30, 2014 | December 31, 2014 |
| Series 4 | December 31, 2015 | C$ | 25.00 |
| December 31, 2015 | December 31, 2016 |
| |
(1) | Subject to the terms of any shares ranking prior to the BOP Split Senior Preferred Shares applicable law and provisions described in the Arrangement, the partnership, at its option, may at any time redeem all, or from time to time any part, of the then outstanding BOP Split Senior Preferred Shares for cash as follows: the Series 1 at a price of US$25.00 plus accrued and unpaid dividends; the Series 2 at a price of C$25.00 plus accrued and unpaid dividends; the Series 3 at a price of C$25.00 plus accrued and unpaid dividends; the Series 4 at a price of C$25.00 plus accrued and unpaid dividends if redeemed on or after December 31, 2015. |
| |
(2) | Subject to applicable law and certain provisions, the partnership may acquire for canceling all or any part of the BOP Split Senior Preferred Shares outstanding from time to time at the lowest price at which in the opinion of the directors of the partnership such shares are available. |
The redemption terms of the outstanding BPO Class AAA and Class B Preferred Shares are as follows:
|
| | | | |
| BPO's option(1) |
| Holder's option(2) |
|
| BPO Class AAA Preferred Shares: | |
| |
|
| Series G | June 30, 2011 |
| September 30, 2015 |
|
| Series H | December 31, 2011 |
| December 31, 2015 |
|
| Series J | June 30, 2010 |
| December 31, 2014 |
|
| Series K | December 31, 2012 |
| December 31, 2016 |
|
| BPO Class B Preferred Shares: | | |
| Series 1 | — |
| — |
|
| Series 2 | — |
| — |
|
| |
(1) | Subject to applicable law of BPO’s articles of incorporation and, if required, other regulatory approvals, BPO may, on or after the dates specified above, convert the Class AAA, Series G, H, J and K into units of BPY. The Class AAA Series H, J and K preferred shares may be converted into that number of BPY units determined by dividing $25.00 (Series G - $2.00) by the greater of C$2.00 (Series G - $2.00) and 95% of the weighted average trading price of BPY units at such time |
| |
(2) | Subject to applicable law and BPO’s articles of incorporation, BPY’s call rights and the BPO’s right to redeem or find substitute purchasers, the holder may, on the dates specified above and on specified dates thereafter, convert Class AAA, Series G, H, J and K preferred shares into that number of BPY units determined by dividing $25.00 (Series G - $2.00) by the greater of C$2.00 (Series G - $2.00) and 95% of the weighted average trading price of BPY units at such time |
NOTE 19. INCOME TAXES
The partnership is a flow-through entity for tax purposes and as such is not subject to Bermudian taxation. However, income taxes are recognized for the amount of taxes payable by the primary holding subsidiaries of the partnership (“Holding Entities”), any direct or indirect corporate subsidiaries of the Holding Entities and for the impact of deferred tax assets and liabilities related to such entities.
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Deferred income tax assets: | |
| |
|
| Non-capital losses (Canada) | $ | 62 |
| $ | 106 |
|
| Capital losses (Canada) | 67 |
| 85 |
|
| Net operating losses (United States) | 85 |
| 89 |
|
| Non-capital losses (foreign) | 32 |
| 14 |
|
| Deferred financing costs | 43 |
| 49 |
|
| Foreign currency | 41 |
| 39 |
|
| Financial instruments | 17 |
| 18 |
|
| Other | 32 |
| 14 |
|
| | 379 |
| 414 |
|
| Deferred income tax (liabilities): | |
| |
|
| Properties | (2,457 | ) | (2,110 | ) |
| Investments in associates | (977 | ) | (902 | ) |
| Other | (52 | ) | (41 | ) |
| | (3,486 | ) | (3,053 | ) |
| Net deferred tax (liability) | $ | (3,107 | ) | $ | (2,639 | ) |
The changes in deferred tax balances are presented as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Recognized in | |
|
| (US$ Millions) | Dec. 31, 2014 |
| Reclass |
| Income |
| Equity |
| Acquisitions and Dispositions |
| OCI |
| Dec. 31, 2015 |
|
| Deferred tax assets | $ | 414 |
| $ | — |
| $ | (3 | ) | $ | 11 |
| $ | 17 |
| $ | (60 | ) | $ | 379 |
|
| Deferred tax (liabilities) | (3,053 | ) | — |
| (22 | ) | (28 | ) | (592 | ) | 209 |
| $ | (3,486 | ) |
| Net deferred tax (liability) | $ | (2,639 | ) | $ | — |
| $ | (25 | ) | $ | (17 | ) | $ | (575 | ) | $ | 149 |
| $ | (3,107 | ) |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Recognized in | |
| (US$ Millions) | Dec. 31, 2013 |
| Reclass |
| Income |
| Equity |
| Acquisitions and Dispositions |
| OCI |
| Dec. 31, 2014 |
|
| Deferred tax assets | $ | 312 |
| $ | (4 | ) | $ | 22 |
| $ | 52 |
| $ | — |
| $ | 32 |
| $ | 414 |
|
| Deferred tax (liabilities) | (1,844 | ) | 4 |
| (1,172 | ) | (84 | ) | — |
| 43 |
| $ | (3,053 | ) |
| Net deferred tax (liability) | $ | (1,532 | ) | $ | — |
| $ | (1,150 | ) | $ | (32 | ) | $ | — |
| $ | 75 |
| $ | (2,639 | ) |
During 2015 the partnership and its subsidiaries acquired two investments Candor Office Parks and Center Parcs UKthat caused the recognition of net deferred tax (liabilities) of $145 million and $430 million, respectively.
The aggregate amount of gross temporary differences associated with investments and interests in joint arrangements in subsidiaries for which deferred tax liabilities have not been recognized as of December 31, 2015 is approximately $8 billion (December 31, 2014 - $7 billion).
The gross deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognized are as follows:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Unused tax losses - gross | |
| |
|
| Net operating losses (United States) | $ | 111 |
| $ | 73 |
|
| Net operating losses (foreign) | 778 |
| 731 |
|
Unrecognized deductible temporary differences, unused tax losses, and unused tax credits
| $ | 889 |
| $ | 804 |
|
The Holding Entities and their Canadian subsidiaries have deferred tax assets of $62 million (December 31, 2014 - $106 million) related to non-capital losses that expire over the next 20 years, and $67 million (December 31, 2014 - $85 million) related to capital losses that have no expiry. The Holding Entities and their U.S. subsidiaries have deferred tax assets of $85 million (December 31, 2014 - $89 million) related to non-capital losses that expire over the next 20 years. The Holding Entities and their foreign subsidiaries, mainly in the United Kingdom and India, have deferred tax assets of $32 million (December 31, 2014 - $14 million) related to non-capital losses which do not expire. The Holding Entities, their U.S. subsidiaries, and foreign subsidiaries have gross deductible temporary differences, unused tax losses, and unused tax credits which have not been recognized of $889 million (December 31, 2014 - $804 million) related to net operating losses, the majority of which have no expiry.
The major components of income tax expense include the following:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Current income tax expense | $ | 75 |
| $ | 26 |
| $ | 14 |
|
| Deferred income tax expense | 25 |
| 1,150 |
| 487 |
|
| Income tax expense | $ | 100 |
| $ | 1,176 |
| $ | 501 |
|
The decrease in income tax expense for the year ended December 31, 2015 compared to the prior year primarily relates to a reorganization of the partnership’s interest in certain subsidiaries that occurred in 2015 and lower before tax book income.
The increase in income tax expense for the year ended December 31, 2014 compared to the prior year primarily relates to an increase in income due to fair value gains recognized during the period, an increase resulting from a change in legislation (which affects the rate at which some of the partnership’s temporary differences will be taxed), and an increase in deferred taxes related to transactions undertaken in connection with the purchase of additional interests in BPO.
|
| | | | | | |
| Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Statutory income tax rate | 26 | % | 26 | % | 29 | % |
| Increase (decrease) in rate resulting from: | |
| |
| |
|
| Portion of income not subject to tax | — |
| — |
| (3 | )% |
| International operations subject to different tax rates | (8 | )% | (7 | )% | (5 | )% |
| Non-controlling interests in income of flow-through entities | (5 | )% | (4 | )% | (6 | )% |
| Change in basis of accounting of investments in associates | — |
| — |
| 6 | % |
| Change in tax rates applicable to temporary differences in other jurisdictions | (13 | )% | 4 | % | — |
|
| Other | 3 | % | 2 | % | 1 | % |
| Effective income tax rate | 3 | % | 21 | % | 22 | % |
As the partnership is not subject to tax, the 2015 and 2014 analyses used the applicable Canadian blended Federal and Provincial tax rate as the statutory income tax rate. In 2013, the analysis used a blended statutory rate for jurisdictions where the holding entities and any direct or indirect corporate subsidiaries of such holding entities operate.
NOTE 20. ACCOUNTS PAYABLE AND OTHER LIABILITIES
The components of
the company’s accounts payable and other liabilities are as follows:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Accounts payable and accrued liabilities | | $ | 1,450 | | | $ | 1,094 | |
Other secured debt | | | 30 | | | | 61 | |
Other liabilities | | | 267 | | | | 66 | |
| | | $ | 1,747 | | | $ | 1,221 | |
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Accounts payable and accrued liabilities | $ | 2,123 |
| $ | 1,592 |
|
| Other liabilities | 516 |
| 161 |
|
| Total accounts payable and other liabilities | $ | 2,639 |
| $ | 1,753 |
|
Included in accounts payable and other liabilities are derivative liabilities with a carrying amount of $401 million at December 31, 2015 (December 31, 2014 – $161 million).
NOTE
16:21. EQUITY
IN NET ASSETSEquity
The partnership’s capital structure is comprised of five classes of partnership units: GP Units and LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, and Exchange LP Units. Prior to the Spin-off, equity otherwise not attributable to interests of others in operating subsidiaries and properties had been allocated to Brookfield Asset Management.
| |
| a) | General and limited partnership units |
GP Units entitle the holder to the right to govern the financial and operating policies of the partnership. The GP Units are entitled to a 1% general partnership interest.
LP Units entitle the holder to their proportionate share of distributions and are listed and publicly traded on the NYSE and the TSX. Each LP Unit entitles the holder thereof to one vote for the purposes of any approval at a meeting of limited partners, provided that holders of the Redeemable/Exchangeable Partnership Units that are exchanged for LP Units will only be entitled to a maximum number of votes in respect of the Redeemable/Exchangeable Partnership Units equal to 49% of the total voting power of all outstanding units.
The following table presents changes to the GP Units and LP Units from the beginning of the year:
|
| | | | | | | | | | | | |
| | GP Units | LP Units |
| (Thousands of units), Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
| 2015 |
| 2014 |
| 2013 |
|
| Outstanding, beginning of year | 139 |
| 139 |
| — |
| 254,080 |
| 102,522 |
| — |
|
| Issued on Spin-off | — |
| — |
| 139 |
| — |
| — |
| 80,091 |
|
| Issued on November 1, 2013 for the acquisition of incremental interest in GGP | — |
| — |
| — |
| — |
| — |
| 22,431 |
|
| Issued on March 20, April 1, and June 9 2014 for the acquisition of incremental BPO shares | — |
| — |
| — |
| — |
| 124,637 |
| — |
|
| Exchange LP Units exchanged | — |
| — |
| — |
| 8,736 |
| 27,011 |
| — |
|
| Distribution reinvestment program | — |
| — |
| — |
| 201 |
| 133 |
| — |
|
| Issued under unit-based compensation plan | — |
| — |
| — |
| 80 |
| — |
| — |
|
| Repurchases of LP Units | — |
| — |
| — |
| (1,611 | ) | (223 | ) | — |
|
| Outstanding, end of year | 139 |
| 139 |
| 139 |
| 261,486 |
| 254,080 |
| 102,522 |
|
| |
| b) | Units of the operating partnership held by Brookfield Asset Management |
Redeemable/Exchangeable Partnership Units
The following table presents changes to the Redeemable/Exchangeable Partnership Units from the beginning of the year:
|
| | | | | | |
| | Redeemable/Exchangeable Partnership Units(1) |
| (Thousands of units) | Dec. 31, 2015 |
| Dec. 31, 2014 |
| Dec. 31, 2013 |
|
| Outstanding, beginning of year | 432,649 |
| 432,649 |
| — |
|
| Issued on Spin-off | — |
| — |
| 381,329 |
|
| Issued on November 15, 2013 for the acquisition of incremental interest in GGP | — |
| — |
| 51,320 |
|
| Outstanding, end of year | 432,649 |
| 432,649 |
| 432,649 |
|
(1) Refer to Note 2 (t), Summary of Significant Accounting Policies - Redeemable/Exchangeable Partnership Units for further discussion.
Special limited partnership units
Prior to August 8, 2013, Property Special LP held 1% of the general partner units of the operating partnership and as part of the reorganization effected on August 8, 2013, these units were converted into 1% Special LP Units. This reorganization was done in order to simplify the partnership’s governance structure and to more clearly delineate the partnership’s governance rights in respect of the operating partnership. Property Special LP is entitled to receive equity enhancement distributions and incentive distributions from the operating partnership as a result of its ownership of the Special LP Units.
There were 4,759,997 Special LP Units outstanding at December 31, 2015, 2014 and 2013.
| |
| c) | Limited partnership units of Brookfield Office Properties Exchange LP |
Exchange LP Units were issued in March, April and June 2014 to certain Canadian holders of common shares of BPO who elected to receive such units for BPO common shares tendered in the Offer or the Arrangement by such shareholders. The Exchange LP Units are exchangeable at any time on a one-for-one basis, at the option of the holder, subject to their terms and applicable law, for LP Units. An Exchange LP Unit provides a holder thereof with economic terms that are substantially equivalent to those of a LP Unit. Subject to certain conditions and applicable law, Exchange LP will have the right, commencing on the seventh anniversary of the completion of the Arrangement, to redeem all of the then outstanding Exchange LP Units at a price equal to the 20-day volume-weighted average trading price of an LP Unit plus all declared, payable, and unpaid distributions on such units.
The following table presents changes to the Exchange LP Units from the beginning of the year:
|
| | | | | | |
| | Exchange LP Units |
| (Thousands of units) | Dec. 31, 2015 |
| Dec. 31, 2014 |
| Dec. 31, 2013 |
|
| Outstanding, beginning of year | 21,115 |
| — |
| — |
|
| Issued on March 20, April 1, and June 9 2014 for the acquisition of incremental BPO shares | — |
| 48,126 |
| — |
|
Exchange LP Units exchanged (1) | (8,736 | ) | (27,011 | ) | — |
|
| Outstanding, end of year | 12,379 |
| 21,115 |
| — |
|
| |
(1) | Exchange LP Units issued for the acquisition of incremental BPO common shares that have been exchanged are held by an indirect subsidiary of the partnership. Refer to the Consolidated Statements of Changes in Equity for the impact of such exchanges on the carrying value of Exchange LP Units. |
Distributions made to each class of partnership units, including units of subsidiaries that are exchangeable into LP Units, are as follows:
|
| | | | | | | | | |
| (US$ Millions, except per unit information) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013(1) |
|
| General partner | $ | — |
| $ | — |
| $ | — |
|
| Limited partners | 276 |
| 203 |
| 56 |
|
| Holders of: | |
| |
| |
| Redeemable/exchangeable partnership units | 460 |
| 432 |
| 254 |
|
| Special limited partnership units | 4 |
| 5 |
| 3 |
|
| Limited partnership units of Exchange LP | 15 |
| 23 |
| — |
|
| Total distributions | $ | 755 |
| $ | 663 |
| $ | 313 |
|
Per unit(2) | $ | 1.06 |
| $ | 1.00 |
| $ | 0.63 |
|
| |
(1) | Distributions for the year ended December 31, 2013 reflect distributions for the period from April 15, 2013, the date of the Spin-off, to December 31, 2013. |
| |
(2) | Per unit outstanding on the record date for each. |
Earnings per Unit
The partnership’s net assetsincome per LP Unit and weighted average units outstanding are calculated as follows:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013(1) |
|
| Net income attributable to limited partners | $ | 1,064 |
| $ | 1,154 |
| $ | 118 |
|
| Income reallocation related to mandatorily convertible preferred shares | 166 |
| — |
| — |
|
| Net income attributable to limited partners - basic | 1,230 |
| 1,154 |
| 118 |
|
| Dilutive effect of conversion of preferred shares and options | 104 |
| 159 |
| — |
|
| Net income attributable to limited partners - diluted | $ | 1,334 |
| $ | 1,313 |
| $ | 118 |
|
| | | | |
| (Millions of units/shares) | | | |
| Weighted average number of LP Units outstanding | 260.1 |
| 206.6 |
| 83.8 |
|
| Mandatorily convertible preferred shares | 70.0 |
| — |
| — |
|
| Weighted average number of LP Units outstanding - basic | 330.1 |
| 206.6 |
| 83.8 |
|
| Dilutive effect of conversion of preferred shares and options | 40.4 |
| 40.8 |
| — |
|
| Weighted average number of LP Units outstanding - diluted | 370.5 |
| 247.4 |
| 83.8 |
|
| |
(1) | Presented effective for the period from the Spin-off on April 15, 2013, as this is the date of legal entitlement of earnings to the holders of the LP Units. See Note 3, The Spin-off. |
NOTE 22. NON-CONTROLLING INTERESTS
Non-controlling interests consists of the following:
| | | | | | | | | | | | |
| (US$ Millions) | | Note | | | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Equity in net assets attributable to parent company | | (a) | | | | $ | 13,375 | | | $ | 11,881 | |
Non-controlling interests | | (b) | | | | | 10,870 | | | | 9,613 | |
| | | | | | | $ | 24,245 | | | $ | 21,494 | |
(a) | Equity in net assets attributable to parent company |
Equity in net assets attributable to parent company consists of the following:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Equity in net assets | | $ | 12,777 | | | $ | 11,375 | |
Accumulated other comprehensive income | | | 598 | | | | 506 | |
| | | $ | 13,375 | | | $ | 11,881 | |
(b) | Non-controlling interests |
Non-controlling interests consist of the following:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Preferred equity | | $ | 1,443 | | | $ | 1,190 | |
Other non-controlling interests | | | 9,427 | | | | 8,423 | |
| | | $ | 10,870 | | | $ | 9,613 | |
(c) | Other comprehensive income (loss) |
Other comprehensive income (loss) consists of the following:
| | | | | | | | | | | | |
| (US Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Foreign currency translation | | | | | | | | | | | | |
Unrealized foreign currency translation gains (losses) in respect of foreign operations | | $ | 84 | | | $ | (363) | | | $ | 542 | |
Losses on hedges of net investments in foreign operations, net of income taxes of $1 million (2011 - $8 million; 2010 - $23 million) | | | (28) | | | | (24) | | | | (112) | |
| | | | 56 | | | | (387) | | | | 430 | |
Cash flow hedges | | | | | | | | | | | | |
Gains (losses) on derivatives designated as cash flow hedges, net of income taxes of $28 million (2011 - $32 million; 2010 - $24 million) | | | (45) | | | | (260) | | | | 95 | |
Reclassification of gains (losses) on derivatives designated as cash flow hedges, net of income taxes of $3 million (2011 - $1 million; 2010 - $5 million) | | | 7 | | | | 2 | | | | (28) | |
| | | | (38) | | | | (258) | | | | 67 | |
Available-for-sale securities | | | | | | | | | | | | |
Unrealized gains (losses) on equity securities designated as AFS, net of income taxes of nil (2011 - $3 million; 2010 - nil) | | | 20 | | | | 4 | | | | (9) | |
Reclassification to earnings of (gains) losses on AFS securities, net of income taxes of nil (2011 - nil; 2010 - $2 million) | | | - | | | | - | | | | 7 | |
| | | | 20 | | | | 4 | | | | (2) | |
Revaluation surplus, net of taxes of nil | | | 53 | | | | - | | | | - | |
Other comprehensive income (loss) | | $ | 91 | | | $ | (641) | | | $ | 495 | |
NOTE 17: COMMERCIAL PROPERTY REVENUE
The components of commercial property revenue are as follows:
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Base rent | | $ | 2,454 | | | $ | 2,160 | | | $ | 1,903 | |
Straight-line rent | | | 96 | | | | 35 | | | | 25 | |
Lease termination | | | 21 | | | | 8 | | | | 21 | |
Other | | | 318 | | | | 222 | | | | 153 | |
Commercial property revenue | | $ | 2,889 | | | $ | 2,425 | | | $ | 2,102 | |
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Redeemable/exchangeable and special limited partnership units | $ | 14,218 |
| $ | 13,147 |
|
| Limited partnership units of Exchange LP | 309 |
| 470 |
|
| Interest of others in operating subsidiaries and properties: | |
| |
|
| Preferred shares held by Brookfield Asset Management | 25 |
| 25 |
|
| Preferred equity of subsidiaries | 1,650 |
| 1,649 |
|
| Non-controlling interests in subsidiaries and properties | 7,300 |
| 6,417 |
|
| Total interests of others in operating subsidiaries and properties | 8,975 |
| 8,091 |
|
| Total non-controlling interests | $ | 23,502 |
| $ | 21,708 |
|
NOTE
18: INVESTMENT AND OTHER23. COMMERCIAL PROPERTY REVENUE
The components of
investment and othercommercial property revenue are as follows:
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Fee revenue | | $ | 51 | | | $ | 69 | | | $ | 97 | |
Dividend income | | | 47 | | | | 28 | | | | 28 | |
Interest income | | | 72 | | | | 129 | | | | 62 | |
Other | | | (1 | ) | | | 5 | | | | (19 | ) |
Investment and other revenue | | $ | 169 | | | $ | 231 | | | $ | 168 | |
NOTE 19: DIRECT COMMERCIAL PROPERTY EXPENSE
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Base rent | $ | 2,840 |
| $ | 2,700 |
| $ | 2,573 |
|
| Straight-line rent | 131 |
| 106 |
| 107 |
|
| Lease termination | 19 |
| 20 |
| 5 |
|
| Other | 226 |
| 212 |
| 225 |
|
| Total commercial property revenue | $ | 3,216 |
| $ | 3,038 |
| $ | 2,910 |
|
The
componentspartnership, in its role of
direct commercial property expense are as follows: | | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Employee compensation and benefits | | $ | 93 | | | $ | 62 | | | $ | 47 | |
Property maintenance | | | 550 | | | | 460 | | | | 346 | |
Real estate taxes | | | 376 | | | | 308 | | | | 263 | |
Ground rents | | | 29 | | | | 29 | | | | 39 | |
Other | | | 153 | | | | 85 | | | | 157 | |
Direct commercial property expense | | $ | 1,201 | | | $ | 944 | | | $ | 852 | |
The Businesslandlord or lessor, leases properties under operating leases generally with lease terms of between 1 and 15 years, with options to extend up to a further 5 years. Minimum rental commitments onunder non-cancellable tenant operating leases are as follows:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Not later than 1 year | | $ | 1,619 | | | $ | 1,577 | |
Later than 1 year and not longer than 5 years | | | 5,226 | | | | 5,854 | |
Later than 5 years | | | 6,457 | | | | 6,248 | |
| | | $ | 13,302 | | | $ | 13,679 | |
Direct commercial property expense for the year ended December 31, 2012 includes $27 million (2011 - $21 million) representing rent expense associated with operating leases for land on which certain
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Less than 1 year | $ | 1,926 |
| $ | 2,133 |
|
| 1-5 years | 6,418 |
| 8,036 |
|
| More than 5 years | 10,916 |
| 11,440 |
|
| Total | $ | 19,260 |
| $ | 21,609 |
|
NOTE 24. INVESTMENT AND OTHER REVENUE
The components of
the company’s operating properties are situated. The Business does not have an option to purchase the leased land at the expiry of the lease periods. Future minimum lease payments under these arrangementsinvestment and other revenue are as follows:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Not later than 1 year | | $ | 33 | | | $ | 33 | |
Later than 1 year and not longer than 5 years | | | 112 | | | | 119 | |
Later than 5 years | | | 1,523 | | | | 1,591 | |
| | | $ | 1,668 | | | $ | 1,743 | |
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Fee revenue | $ | 40 |
| $ | 27 |
| $ | 50 |
|
| Dividend income | 51 |
| 51 |
| 19 |
|
| Interest income | 47 |
| 89 |
| 44 |
|
| Participating loan interests | 41 |
| 50 |
| 40 |
|
| Development revenue | 164 |
| 148 |
| — |
|
| Other | 18 |
| 87 |
| 56 |
|
| Total investment and other revenue | $ | 361 |
| $ | 452 |
| $ | 209 |
|
NOTE 20:25. DIRECT COMMERCIAL PROPERTY EXPENSE
The components of direct commercial property expense are as follows:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Property maintenance | $ | 685 |
| $ | 650 |
| $ | 587 |
|
| Real estate taxes | 396 |
| 411 |
| 385 |
|
| Employee compensation and benefits | 102 |
| 121 |
| 98 |
|
| Ground rents | 42 |
| 40 |
| 33 |
|
| Other | 56 |
| 76 |
| 101 |
|
| Total direct commercial property expense | $ | 1,281 |
| $ | 1,298 |
| $ | 1,204 |
|
Ground rents include rent expenses associated with operating leases for land on which certain of the partnership’s operating properties are situated. The partnership does not have an option to purchase the leased land at the expiry of the lease periods. Future minimum lease payments under these arrangements are as follows:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Less than 1 year | $ | 32 |
| $ | 31 |
|
| 1-5 years | 140 |
| 129 |
|
| More than 5 years | 5,008 |
| 1,576 |
|
| Total | $ | 5,180 |
| $ | 1,736 |
|
NOTE 26. DIRECT HOSPITALITY EXPENSE
The components of direct hospitality expense are as follows:
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Employee compensation and benefits | | $ | 248 | | | $ | 56 | | | $ | - | |
Marketing and advertising | | | 35 | | | | 5 | | | | - | |
Cost of food, beverage, and retail goods sold | | | 60 | | | | 18 | | | | - | |
Entertainment fees | | | 10 | | | | 8 | | | | - | |
Maintenance and utilities | | | 71 | | | | 6 | | | | - | |
Depreciation and amortization of real estate assets | | | 49 | | | | - | | | | - | |
Other | | | 214 | | | | 45 | | | | - | |
Direct hospitality expense | | $ | 687 | | | $ | 138 | | | $ | - | |
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Employee compensation and benefits | $ | 290 |
| $ | 266 |
| $ | 357 |
|
| Cost of food, beverage, and retail goods sold | 183 |
| 113 |
| 80 |
|
| Marketing and advertising | 42 |
| 42 |
| 48 |
|
| Maintenance and utilities | 77 |
| 79 |
| 96 |
|
| Other | 310 |
| 291 |
| 376 |
|
| Total direct hospitality expense | $ | 902 |
| $ | 791 |
| $ | 957 |
|
NOTE
21: INVESTMENT27. DEPRECIATION AND
OTHER EXPENSEAMORTIZATION
The components of
investmentdepreciation and
otheramortization expense are as follows:
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Fee expense | | $ | 34 | | | $ | 47 | | | $ | 38 | |
Foreign exchange | | | 2 | | | | 2 | | | | (11 | ) |
Other | | | - | | | | 5 | | | | (1 | ) |
Investment and other expense | | $ | 36 | | | $ | 54 | | | $ | 26 | |
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Depreciation and amortization of real estate assets | $ | 153 |
| $ | 112 |
| $ | 124 |
|
| Depreciation and amortization of non-real estate assets | 27 |
| 36 |
| 38 |
|
| Total depreciation and amortization | $ | 180 |
| $ | 148 |
| $ | 162 |
|
NOTE
22: ADMINISTRATION28. GENERAL AND ADMINISTRATIVE EXPENSE
The components of
administrationgeneral and administrative expense are as follows:
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Employee compensation and benefits | | $ | 72 | | | $ | 54 | | | $ | 62 | |
Depreciation and amortization of non-real estate assets | | | 55 | | | | 20 | | | | 21 | |
Other | | | 44 | | | | 30 | | | | 26 | |
Administration expense | | $ | 171 | | | $ | 104 | | | $ | 109 | |
NOTE 23: FAIR VALUE GAINS, NET
The components of fair value are as follows:
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Investment properties | | $ | 1,320 | | | $ | 1,358 | | | $ | 798 | |
Financial instruments | | | 20 | | | | 165 | | | | 17 | |
Other fair value gains (losses) | | | (10) | | | | (46) | | | | 9 | |
| | | $ | 1,330 | | | $ | 1,477 | | | $ | 824 | |
NOTE 24: GUARANTEES, CONTINGENCIES AND OTHER
In the normal course of operations, the Business and its consolidated entities execute agreements that provide for indemnification and guarantees to third parties in transactions such as business dispositions, business acquisitions, sales of assets and sales of services.
The company’s operating subsidiaries have also agreed to indemnify its directors and certain of its officers and employees. The nature of substantially all of the indemnification undertakings prevent the Business from making a reasonable estimate of the maximum potential amount that it could be required to pay third parties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, neither the Business nor its consolidated subsidiaries have made significant payments under such indemnification agreements.
The Business does not conduct its operations, other than those of equity-accounted investments, through entities that are not fully or proportionately consolidated in these financial statements, and has not guaranteed or otherwise contractually committed to support any material financial obligations not reflected in these financial statements.
The Business and its operating subsidiaries are contingently liable with respect to litigation and claims that arise from time to time in the normal course of business or otherwise. A specific litigation is being pursued against one of the company’s subsidiaries related to security on a defaulted loan. At this time, the amount of contingent cash outflow related to the litigation and claims currently being pursued against the subsidiary is uncertain and could be up to C$65 million in the event the Business is completely unsuccessful in defending the claims.
The Business maintains insurance on its properties in amounts and with deductibles that it believes are in line with what owners of similar properties carry. The Business maintains all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and named windstorm).
NOTE 25: CAPITAL MANAGEMENT AND LIQUIDITY
The capital of the Business consists of property debt, capital securities, other secured debt and equity.
The parent company’s objectives when managing this capital are to maintain an appropriate balance between holding a sufficient amount of capital to support its operations and to reduce its weighted average cost of capital and improve the returns on equity through value enhancement initiatives and the consistent monitoring of the balance between debt and equity financing of the subsidiaries. As at December 31, 2012, the recorded values of capital in the financial statements totaled $45 billion (2011—$38 billion). Its principal liquidity needs for the next year are to:
meet debt service requirements;
fund those capital expenditures deemed mandatory, including tenant improvements;
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Employee compensation and benefits | $ | 157 |
| $ | 133 |
| $ | 133 |
|
| Management fees | 182 |
| 100 |
| 36 |
|
| Other | 220 |
| 171 |
| 148 |
|
| Total general and administrative expense | $ | 559 |
| $ | 404 |
| $ | 317 |
|
fund current development costs not covered under construction loans; and
fund investing activities which could include:
| ¡ | | discretionary capital expenditures; and
|
Most of the company’s borrowings are in the form of long-term asset-specific financings with recourse only to the specific assets. Limiting recourse to specific assets ensures that poor performance within one area does not compromise the company’s ability to finance the balance of its operations.
The company’s operating subsidiaries are subject to limited covenants in respect of their corporate debt and are in full compliance with all such covenants at December 31, 2012 and 2011. The company’s operating subsidiaries are also in compliance with all covenants and other capital requirements related to regulatory or contractual obligations of material consequence to the company.
The parent company’s strategy is to satisfy its liquidity needs in respect of the Business using the company’s cash on hand, cash flows generated from operating activities and provided by financing activities, as well as proceeds from asset sales. The operating subsidiaries of the Business also generate liquidity by accessing capital markets on an opportunistic basis.
The company’s principal liquidity needs for periods beyond the next year are for scheduled debt maturities, distributions, recurring and non-recurring capital expenditures, development costs and potential property acquisitions. The Business plans to meet these needs with one or more of: cash flows from operations; construction loans; creation of new funds; proceeds from sales of assets; proceeds from sale of non-controlling interests in subsidiaries; and credit facilities and refinancing opportunities.
The following table presents the contractual maturities of the company’s financial liabilities at December 31, 2012:
| | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | | | | Payments Due By Period | | | Dec. 31,
2011
Total | |
| As at Dec. 31, 2012 | | Total | | | Less than
1 Year | | | 2 – 3 years | | | 4 – 5 Years | | | After 5
Years | | |
Property and other secured debt | | $ | 19,763 | | | $ | 3,396 | | | $ | 6,896 | | | $ | 4,916 | | | $ | 4,555 | | | $ | 15,598 | |
Capital securities | | | 866 | | | | 202 | | | | 312 | | | | 352 | | | | - | | | | 994 | |
Other financial liabilities | | | 2,149 | | | | 1,670 | | | | 43 | | | | 157 | | | | 279 | | | | 1,170 | |
Interest expense(1) | | | | | | | | | | | | | | | | | | | | | | | | |
Property and other secured debt | | | 3,993 | | | | 951 | | | | 1,457 | | | | 989 | | | | 596 | | | | 4,746 | |
Capital securities | | | 106 | | | | 39 | | | | 59 | | | | 8 | | | | - | | | | 152 | |
(1) | Represents aggregate interest expense expected to be paid over the term of the obligations. Variable interest rate payments have been calculated based on current rates.
|
NOTE 26: FINANCIAL INSTRUMENTS
(a) | Derivatives and hedging activities |
The company’s subsidiaries use derivative and non-derivative instruments to manage financial risks, including interest rate, commodity, equity price and foreign exchange risks. The use of derivative contracts is governed by documented risk management policies and approved limits. The Business does not use derivatives for speculative purposes. The Business uses the following derivative instruments to manage these risks:
Foreign currency forward contracts to hedge exposures to Canadian dollar, Australian dollar and British pound denominated investments in foreign subsidiaries and foreign currency denominated financial assets;
Interest rate swaps to manage interest rate risk associated with planned refinancings and existing variable rate debt;
Interest rate caps to hedge interest rate risk on certain variable rate debt; and
Total return swaps on BPO’s shares to economically hedge exposure to variability in its share price under its deferred share unit plan.
The company also designates Canadian Dollar financial liabilities of certain of its operating entities as hedges of its net investments in its Canadian operations.
Interest rate hedging
The company has derivatives outstanding that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate debt.
As at December 31, 2012, the company had derivatives representing a notional amount of US$1,377 million in place to fix rates on forecasted fixed rate financings with maturities between 2023 and 2025 at rates between 2.1% and 4.7%. As at December 31, 2011, the company had derivatives representing a notional amount of US$1,599 million in place to fix rates on forecasted fixed rate financings with maturities between 2014 and 2024 at rates between 2.6% and 5.2%. The hedged forecasted fixed rate financings are denominated in U.S. Dollars and Canadian Dollars.
As at December 31, 2012, the company had derivatives with a notional amount of US$5,034 million in place to fix rates on existing variable rate debt at between 0.6% and 10.5% for debt maturities between 2013 and 2017. As at December 31, 2011, the company had derivatives with a notional amount of US$5,343 million in place to fix rates on existing variable rate debt at between 0.3% and 9.9% for debt maturities between 2012 and 2014. The hedged variable rate debts are denominated in U.S. Dollars, British Pounds and Australian Dollars.
The fair value of the company’s outstanding interest rate derivative positions as at December 31, 2012 is a loss of $273 million (2011 - loss of $271 million). For the years ended December 31, 2012, and 2011, the amount of hedge ineffectiveness recorded in interest expense in connection with the company’s interest rate hedging activities was not significant.
Foreign currency hedging
The company has derivatives designated as net investment hedges of its investments in foreign subsidiaries. As at December 31, 2012, the company had hedged a notional amount of £45 million at £0.62/US$ using foreign currency forward contracts maturing March 2013. As at December 31, 2011, the company had designated a notional amount of £45 million at £0.64/US$ and A$135 million at A$0.98/US$ using foreign currency contracts that matured between January and March of 2012.
The fair value of the company’s outstanding foreign currency forwards as at December 31, 2012 is nil (2011 - loss of $4 million).
In addition, as of December 31, 2012, the company had designated C$1.1 billion (2011 - C$903 million) of Canadian dollar financial liabilities as hedges of its net investment in Canadian operations.
Other derivatives
The following other derivatives have been entered into to manage financial risks and have not been designated as hedges for accounting purposes.
At December 31, 2012, the company had a total return swap under which it received the return on a notional amount of 1.4 million BPO common shares in connection with BPO’s deferred share unit plan. The fair value of the total return swap at December 31, 2012 was a gain of $1 million (2011 - gain of $2 million) and a loss of $1 million in connection with the total return swap was recognized in administration expense in the year ended December 31, 2012 (2011 - loss of $2 million).
At December 31, 2012, the company had foreign exchange contracts outstanding to swap a €83 million notional amount to British Pounds (2011 - €83 million). The fair value of these contracts as at December 31, 2012 was $2 million (2011 - nil) and a loss of $3 million was recognized in investment and other revenue in connection with these contracts in the year ended December 31, 2012 (2011 - gain of $4 million).
(b) | Measurement and classification of financial instruments |
Classification and measurement
The following table outlines the classification and measurement basis, and related fair value for disclosures, of the financial assets and liabilities in the financial statements:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
| (US$ Millions) | | Classification | | Measurement basis | | Carrying
value | | | Fair value | | | Carrying
value | | | Fair
value | |
Financial Assets | | | | | | | | | | | | | | | | | | | | |
Loans and notes receivable | | Loans & Receivables | | Amortized Cost (1) | | $ | 483 | | | $ | 483 | | | $ | 1,758 | | | $ | 1,675 | |
Other non-current assets | | | | | | | | | | | | | | | | | | | | |
Securities designated as FVTPL | | FVTPL | | Fair Value | | | 915 | | | | 915 | | | | 856 | | | | 856 | |
Derivative assets | | FVTPL | | Fair Value | | | 538 | | | | 538 | | | | 210 | | | | 210 | |
Securities designated as AFS | | AFS | | Fair Value | | | 238 | | | | 238 | | | | 194 | | | | 194 | |
Other receivables | | Loans & Receivables | | Amortized Cost | | | 148 | | | | 148 | | | | 201 | | | | 201 | |
Accounts receivable and other | | Loans & Receivables | | Amortized Cost | | | 1,022 | | | | 1,022 | | | | 796 | | | | 796 | |
Cash and cash equivalents | | Loans & Receivables | | Amortized Cost | | | 910 | | | | 910 | | | | 749 | | | | 749 | |
| | | | | | | $ | 4,254 | | | $ | 4,254 | | | $ | 4,764 | | | $ | 4,681 | |
Financial Liabilities | | | | | | | | | | | | | | | | | | | | |
Property debt | | Other Liabilities | | Amortized Cost (2) | | $ | 19,724 | | | $ | 20,269 | | | $ | 15,387 | | | $ | 15,765 | |
Capital securities | | Other Liabilities | | Amortized Cost | | | 866 | | | | 890 | | | | 994 | | | | 1,054 | |
Other non-current liabilities | | | | | | | | | | | | | | | | | | | | |
Other secured debt | | Other Liabilities | | Amortized Cost | | | 9 | | | | 9 | | | | 150 | | | | 150 | |
Other non-current financial liabilities | | Other Liabilities | | Amortized Cost (3) | | | 432 | | | | 432 | | | | 343 | | | | 343 | |
Accounts payable and other liabilities | | Other Liabilities | | Amortized Cost (4) | | | 1,747 | | | | 1,747 | | | | 1,221 | | | | 1,221 | |
| | | | | | | $ | 22,778 | | | $ | 23,347 | | | $ | 18,095 | | | $ | 18,533 | |
(1) | Includes loans and notes receivable classified as FVTPL and measured at fair value of nil (2011 - $138 million).
|
(2) | Includes embedded derivatives classified as FVTPL and measured at fair value of $54 million (2011 - $56 million).
|
(3) | Includes embedded derivatives classified as FVTPL and measured at fair value of $98 million (2011 - $83 million).
|
(4) | Includes embedded derivatives classified as FVTPL and measured at fair value of $248 million (2011 - $228 million).
|
Fair value hierarchy
The Business values instruments carried at fair value using quoted market prices, where available. Quoted market prices represent a Level 1 valuation. When quoted market prices are not available, the Business maximizes the use of observable inputs within valuation models. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the significant use of unobservable inputs are considered Level 3.
The following table outlines financial assets and liabilities measured at fair value in the financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as defined above:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
| (US$ Millions) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Financial Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other non-current assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities designated as FVTPL | | $ | - | | | $ | - | | | $ | 915 | | | $ | 915 | | | $ | - | | | $ | - | | | $ | 856 | | | $ | 856 | |
Loans receivable designated as FVTPL | | | - | | | | - | | | | 144 | | | | 144 | | | | - | | | | - | | | | 138 | | | | 138 | |
Securities designated as AFS | | | 99 | | | | - | | | | 139 | | | | 238 | | | | 41 | | | | - | | | | 153 | | | | 194 | |
Derivative assets | | | - | | | | - | | | | 538 | | | | 538 | | | | - | | | | - | | | | 210 | | | | 210 | |
| | | $ | 99 | | | $ | - | | | $ | 1,736 | | | $ | 1,835 | | | $ | 41 | | | $ | - | | | $ | 1,357 | | | $ | 1,398 | |
| | | | | | | | |
Financial Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property debt | | $ | - | | | $ | - | | | $ | 54 | | | $ | 54 | | | $ | - | | | $ | - | | | $ | 56 | | | $ | 56 | |
Other non-current liabilities | | | - | | | | 98 | | | | - | | | | 98 | | | | - | | | | 83 | | | | - | | | | 83 | |
Accounts payable and other liabilities | | | - | | | | 248 | | | | - | | | | 248 | | | | - | | | | 228 | | | | - | | | | 228 | |
| | | $ | - | | | $ | 346 | | | $ | 54 | | | $ | 400 | | | $ | - | | | $ | 311 | | | $ | 56 | | | $ | 367 | |
A reconciliation of fair value measurements in Level 3 is presented below:
| | | | | | | | | | | | | | | | |
| | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
| (US$ Millions) | | Financial Assets | | | Financial Liabilities | | | Financial Assets | | | Financial Liabilities | |
Opening balance | | $ | 1,357 | | | $ | 56 | | | $ | 1,418 | | | $ | 187 | |
Acquisitions | | | 370 | | | | - | | | | 138 | | | | - | |
Dispositions | | | (179 | ) | | | - | | | | (370 | ) | | | (133 | ) |
Fair value gains (losses), net | | | 188 | | | | (2 | ) | | | 171 | | | | 2 | |
Closing balance | | $ | 1,736 | | | $ | 54 | | | $ | 1,357 | | | $ | 56 | |
Interest Rate risk
The Business faces interest rate risk on its variable rate financial assets and liabilities. In addition, there is interest rate risk associated with the company’s fixed rate debt due to the expected requirement to refinance such debt in the year of maturity. The following table outlines the impact on interest expense of a 100 basis point increase or decrease in interest rates on the company’s variable rate assets and liabilities and fixed rate debt maturing within one year:
| | | | | | | | |
| (US$ Millions) | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
BPO Corporate revolving facilities | | $ | 1 | | | $ | 4 | |
Variable rate property debt | | | 107 | | | | 71 | |
Fixed rate property debt due within one year | | | 9 | | | | 3 | |
Total | | $ | 117 | | | $ | 78 | |
The Business manages interest rate risk by primarily entering into fixed rate operating property debt and staggering the maturities of its mortgage portfolio over a 10-year horizon when the market permits. The company also makes use of interest rate derivatives to manage interest rate risk on specific variable rate debts and on anticipated refinancing of fixed rate debt.
Foreign currency risk
The Business is structured such that its foreign operations are primarily conducted by entities with a functional currency which is the same as the economic environment in which the operations take place. As a result, the net income impact of currency risk associated with financial instruments is limited as its financial assets and liabilities are generally denominated in the functional currency of the subsidiary that holds the financial instrument. However, the Business is exposed to foreign currency risk on the net assets of its foreign currency denominated operations. The company’s exposures to foreign currencies and the sensitivity of net income and other comprehensive income, on a pre-tax basis, to a 10% change in the exchange rates relative to the US dollar is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 31, 2012 | | | | | Dec. 31, 2011 | | | | | Dec. 31, 2010 | |
| (Millions) | | Equity in net
assets
attributable to parent
company | | | OCI | | | Net
Income | | | | | Equity in net
assets
attributable to parent
company | | | OCI | | | Net
Income | | | | | Equity in net
assets
attributable to parent
company | | | OCI | | | Net
Income | |
Canadian Dollar | | C$ | 1,020 | | | $ | (93) | | | $ | - | | | | | C$ | 935 | | | $ | (84) | | | $ | - | | | | | C$ | 820 | | | $ | (74) | | �� | $ | - | |
Australian Dollar | | A$ | 2,104 | | | | (199) | | | | - | | | | | A$ | 2,005 | | | | (186) | | | | - | | | | | A$ | 1,863 | | | | (173) | | | | - | |
British Pound | | £ | 785 | | | | (116) | | | | - | | | | | £ | 641 | | | | (90) | | | | - | | | | | £ | 482 | | | | (69) | | | | - | |
Euro | | € | 62 | | | | - | | | | (8 | ) | | | | € | 83 | | | | - | | | | (10 | ) | | | | € | 83 | | | | - | | | | (10 | ) |
Brazilian Real | | R$ | 911 | | | | (41) | | | | - | | | | | R$ | 586 | | | | (28) | | | | - | | | | | R$ | 265 | | | | (14) | | | | - | |
Total | | | | | | $ | (449) | | | $ | (8 | ) | | | | | | | | $ | (388) | | | $ | (10 | ) | | | | | | | | $ | (330) | | | $ | (10 | ) |
Equity price risk
The Business faces equity price risk in connection with a total return swap under which it receives the returns on a notional 1,347,152 of BPO’s common shares. A $1 increase or decrease in BPO’s share price would result in a $1 million gain or loss being recognized in administration expense.
The Business also faces equity price risk related to its 22% common equity interest in Canary Wharf Group plc. A $1 increase in Canary Wharf Group plc’s share would result in a $141 million gain being recognized in fair value gains.
The company’s maximum exposure to credit risk associated with financial assets is equivalent to the carrying value of each class of financial assets as separately presented in loans and notes receivable, other non-current assets, accounts receivables and other, and cash and cash equivalents.
Credit risk arises on loans and notes receivables in the event that borrowers default on the repayment to the Business. The Business mitigates this risk by attempting to ensure that adequate security has been provided in support of such loans and notes.
Credit risk related to accounts receivable arises from the possibility that tenants may be unable to fulfill their lease commitments. The Business mitigates this risk through diversification, ensuring that borrowers meet minimum credit quality requirements and by ensuring that its tenant mix is diversified and by limiting its exposure to any one tenant. The Business maintains a portfolio that is diversified by property type so that exposure to a business sector is lessened. Currently no one tenant represents more than 10% of operating property revenue.
The majority of the company’s trade receivables are collected within 30 days. The balance of accounts receivable and loans and notes receivable past due is not significant.
NOTE 27: RELATED PARTIES
Related Parties include subsidiaries, associates, joint arrangements, key management personnel, the Board of Directors (Directors), immediate family members of key management personnel and Directors, and entities which are, directly or indirectly, controlled by, jointly controlled by or significantly influenced by key management personnel, Directors or their close family members.
In the normal course of operations, the Business enters into various transactions on market terms with related parties, which have been measured at exchange value and are recognized in the financial statements. The following table summarizes transactions with related parties:
| | | | | | | | | | | | |
| (US$ Millions) Transactions for the year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Lease revenue | | $ | 10 | | | $ | 2 | | | $ | 2 | |
Interest income | | | 40 | | | | 101 | | | | 71 | |
Interest expense | | | 4 | | | | 41 | | | | 7 | |
Other expense | | | 51 | | | | 50 | | | | 29 | |
Management fees paid | | | 21 | | | | 30 | | | | 52 | |
Management fees received | | | - | | | | 15 | | | | 5 | |
| | | | | | | | |
| (US$ Millions) Balances outstanding as at | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
BRPI promissory notes(1) | | $ | - | | | $ | 470 | |
Loans receivable designated as FVTPL | | | - | | | | 138 | |
Loans and notes receivable(2) | | | 423 | | | | 452 | |
Other current receivables | | | 1 | | | | 57 | |
Capitalized construction profits payable to Brookfield | | | 49 | | | | 40 | |
Property debt payable | | | 30 | | | | 64 | |
Other liabilities | | | 52 | | | | 22 | |
(1) | In the fourth quarter of 2012, BRPI repaid the unsecured promissory notes of C$480 million. All principal and interest were repaid in full.
|
(2) | Includes $148 million receivable from Brookfield upon the earlier of the company’s exercise of its option to convert its participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating loan notes. Also included is a $200 million loan receivable related to Brookfield’s ownership of Brookfield Office Properties’ Class AAA Series E capital securities earning a rate of 108% of bank prime.
|
NOTE 28: SEGMENTED INFORMATION
The Business has four operating segments which are independently reviewed and managed by the chief operating decision maker (“CODM”), who is identified as the company’s chief executive officer. The operating segments are office, retail, multi-family and industrial, and opportunistic investments, located in the United States, Canada, Australia, Brazil and Europe.
Information on the company’s reportable segments is presented below:
The office segment owns and manages commercial office portfolios, located in major financial, energy, resource and government center cities in the North America, Australia and Europe. Included in the office segment is office development which entails developing office properties on a selective basis throughout North America, Australia and Europe in close proximity to the company’s existing properties.
The retail segment owns interests in retail shopping centers in the United States, Australia and Brazil. The largest investment is a portfolio of U.S. super-regional shopping mall properties held through the company’s economic interest in GGP.
The multi-family and industrial segment currently owns interests in multi-family and industrial properties through Brookfield’s private funds.
The opportunistic investments segment includes interests in Brookfield-sponsored real estate finance and opportunity funds.
The CODM measures and evaluates segment performance based on equity in net assets attributable to parent company, net operating income, funds from operations and total return. Property net operating income (“NOI”), funds from operations (“FFO”)and total return do not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies. The Business defines these measures as follows:
NOI: means revenues from commercial and hospitality operations of consolidated properties less direct commercial property and hospitality expenses, with the exception of depreciation and amortization of real estate assets.
FFO: means income, including equity accounted income, before realized gains (losses), fair value gains (losses) (including equity accounted fair value gains (losses)), depreciation and amortization of real estate assets, income tax expense (benefit), and less non-controlling interests.
Total return: means income before income tax expense (benefit) and related non-controlling interests.
The following summary presents segmented financial information for the company’s principal geographic areas of business:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | Total assets | | | | | Total liabilities | | | | | Equity attributable to parent | |
| | | Dec. 31, 2012 | | | Dec. 31, 2011 | | | | | Dec. 31, 2012 | | | Dec. 31, 2011 | | | | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
Office | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States(1) | | $ | 15,978 | | | $ | 15,741 | | | | | $ | 8,077 | | | $ | 7,710 | | | | | $ | 7,311 | | | $ | 7,395 | |
Canada(2) | | | 5,262 | | | | 4,718 | | | | | | 2,526 | | | | 2,247 | | | | | | 2,224 | | | | 2,044 | |
Australia(3) | | | 5,816 | | | | 5,186 | | | | | | 2,760 | | | | 2,681 | | | | | | 2,933 | | | | 2,315 | |
Europe | | | 2,063 | | | | 1,515 | | | | | | 744 | | | | 557 | | | | | | 1,317 | | | | 958 | |
Developments | | | 1,380 | | | | 1,713 | | | | | | 424 | | | | 738 | | | | | | 539 | | | | 560 | |
Unallocated(4) | | | - | | | | - | | | | | | 1,284 | | | | 1,375 | | | | | | (7,362) | | | | (6,735) | |
| | | | 30,499 | | | | 28,873 | | | | | | 15,815 | | | | 15,308 | | | | | | 6,962 | | | | 6,537 | |
Retail | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | | 5,757 | | | | 4,282 | | | | | | 305 | | | | 51 | | | | | | 5,029 | | | | 3,938 | |
Australia | | | 355 | | | | 407 | | | | | | 137 | | | | 185 | | | | | | 196 | | | | 200 | |
Brazil | | | 2,287 | | | | 2,430 | | | | | | 871 | | | | 1,186 | | | | | | 369 | | | | 311 | |
| | | 8,399 | | | | 7,119 | | | | | | 1,313 | | | | 1,422 | | | | | | 5,594 | | | | 4,449 | |
Multi-Family and Industrial(5) | | | 2,919 | | | | 1,112 | | | | | | 2,054 | | | | 584 | | | | | | 221 | | | | 157 | |
Opportunistic Investments(6) | | | 6,203 | | | | 3,213 | | | | | | 4,593 | | | | 1,509 | | | | | | 598 | | | | 738 | |
| | | $ | 48,020 | | | $ | 40,317 | | | | | $ | 23,775 | | | $ | 18,823 | | | | | $ | 13,375 | | | $ | 11,881 | |
1. | Equity attributable to parent is net of non-controlling interests of $590 million (2011 - $636 million). |
2. | Equity attributable to parent is net of non-controlling interests of $512 million (2011 - $427 million). |
3. | Equity attributable to parent is net of non-controlling interests of $123 million (2011 - $190 million). |
4. | Unallocated liabilities include corporate debt and capital securities. Equity attributable to parent includes non-controlling interests. |
5. | Operations primarily in North America. |
6. | Operations primarily in North America with interests in Europe, Australia, and Brazil. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | Total revenue | | NOI | | | | | FFO | | | | | Total Return | |
| Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | | | | | 2012 | | | 2011 | | | 2010 | | | | | 2012 | | | 2011 | | | 2010 | | | | | 2012 | | | 2011 | | | 2010 | |
Office | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States(1) | | $ | 1,418 | | | $ | 1,124 | | | $ | 768 | | | | | $ | 820 | | | $ | 561 | | | $ | 418 | | | | | $ | 470 | | | $ | 435 | | | $ | 427 | | | | | $ | 693 | | | $ | 985 | | | $ | 742 | |
Canada(2) | | | 598 | | | | 525 | | | | 540 | | | | | | 285 | | | | 259 | | | | 243 | | | | | | 220 | | | | 213 | | | | 227 | | | | | | 376 | | | | 297 | | | | 302 | |
Australia | | | 471 | | | | 438 | | | | 320 | | | | | | 309 | | | | 264 | | | | 214 | | | | | | 199 | | | | 134 | | | | 91 | | | | | | 230 | | | | 152 | | | | 202 | |
Europe(3) | | | 77 | | | | 49 | | | | 61 | | | | | | 33 | | | | 32 | | | | 31 | | | | | | 44 | | | | 20 | | | | 27 | | | | | | 60 | | | | 194 | | | | 76 | |
Unallocated(4) | | | - | | | | - | | | | - | | | | | | - | | | | - | | | | - | | | | | | (567) | | | | (490) | | | | (405) | | | | | | (567) | | | | (490) | | | | (405) | |
| | | | 2,564 | | | | 2,136 | | | | 1,689 | | | | | | 1,447 | | | | 1,116 | | | | 906 | | | | | | 366 | | | | 312 | | | | 367 | | | | | | 792 | | | | 1,138 | | | | 917 | |
Retail | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | | - | | | | - | | | | 6 | | | | | | - | | | | - | | | | - | | | | | | 254 | | | | 206 | | | | (11) | | | | | | 998 | | | | 1,302 | | | | 71 | |
Australia | | | 37 | | | | 30 | | | | 39 | | | | | | 24 | | | | 26 | | | | 24 | | | | | | 11 | | | | 11 | | | | 11 | | | | | | 7 | | | | 26 | | | | 25 | |
Brazil | | | 143 | | | | 167 | | | | 136 | | | | | | 95 | | | | 111 | | | | 94 | | | | | | 2 | | | | (8) | | | | (3) | | | | | | 57 | | | | 83 | | | | 2 | |
Europe | | | - | | | | 1 | | | | 16 | | | | | | - | | | | 1 | | | | 12 | | | | | | - | | | | (1) | | | | (2) | | | | | | - | | �� | | (4) | | | | 9 | |
| | | 180 | | | | 198 | | | | 197 | | | | | | 119 | | | | 138 | | | | 130 | | | | | | 267 | | | | 208 | | | | (5) | | | | | | 1,062 | | | | 1,407 | | | | 107 | |
Multi-Family and Industrial(5) | | | 106 | | | | 108 | | | | 54 | | | | | | 48 | | | | 46 | | | | 22 | | | | | | 5 | | | | (5) | | | | 3 | | | | | | 2 | | | | 12 | | | | 35 | |
Opportunistic Investments(6) | | | 951 | | | | 378 | | | | 330 | | | | | | 179 | | | | 207 | | | | 192 | | | | | | 4 | | | | 61 | | | | 61 | | | | | | 80 | | | | 43 | | | | 26 | |
| | | $ | 3,801 | | | $ | 2,820 | | | $ | 2,270 | | | | | $ | 1,793 | | | $ | 1,507 | | | $ | 1,250 | | | | | $ | 642 | | | $ | 576 | | | $ | 426 | | | | | $ | 1,936 | | | $ | 2,600 | | | $ | 1,085 | |
1. | 2012 funds from operations include equity accounted income of $79 million (2011-$172 million, 2010-$232 million) and is net of non-controlling interests of $29 million (2011-$53 million, 2010-$34 million). |
2. | 2012 funds from operations is net of non-controlling interests of $65 million (2011-$23 million, 2010-$16 million). |
3. | 2012 funds from operations include a dividend of $40 million from Canary Wharf (2011-$16 million, 2010-$26 million). |
4. | Funds from operations include unallocated interest expense, operating costs and non-controlling interest. |
5. | Operations primarily in North America. |
6. | Operations primarily in North America with interests in Europe, Australia, and Brazil. |
The following table provides a reconciliation of revenue, net operating income, funds from operations and total return to net income attributable to parent company for each of the years ended December 31, 2012, 2011, and 2010:
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Commercial property revenue | | $ | 2,889 | | | $ | 2,425 | | | $ | 2,102 | |
Hospitality revenue | | | 743 | | | | 164 | | | | - | |
Direct commercial property expense | | | (1,201 | ) | | | (944 | ) | | | (852 | ) |
Direct hospitality expense | | | (687 | ) | | | (138 | ) | | | - | |
Depreciation and amortization of real estate assets (1) | | | 49 | | | | - | | | | - | |
NOI | | | 1,793 | | | | 1,507 | | | | 1,250 | |
Investment and other revenue | | | 169 | | | | 231 | | | | 168 | |
Investment and other expense | | | (36 | ) | | | (54 | ) | | | (26 | ) |
Share of equity accounted income excluding fair value gains | | | 427 | | | | 492 | | | | 309 | |
Interest expense | | | (1,028 | ) | | | (977 | ) | | | (790 | ) |
Administration expense | | | (171 | ) | | | (104 | ) | | | (109 | ) |
Non-controlling interests in funds from operations | | | (512 | ) | | | (519 | ) | | | (376 | ) |
FFO | | | 642 | | | | 576 | | | | 426 | |
Depreciation and amortization of real estate assets(1) | | | (49 | ) | | | - | | | | - | |
Fair value gains, net | | | 1,330 | | | | 1,477 | | | | 824 | |
Share of equity accounted fair value gains | | | 808 | | | | 1,612 | | | | 561 | |
Non-controlling interests in total return | | | (795 | ) | | | (1,065 | ) | | | (726 | ) |
Total Return | | | 1,936 | | | | 2,600 | | | | 1,085 | |
Income tax expense | | | (535 | ) | | | (439 | ) | | | (78 | ) |
Non-controlling interest in income tax expense | | | 98 | | | | 162 | | | | 19 | |
Net income attributable to parent company | | | 1,499 | | | | 2,323 | | | | 1,026 | |
(1) | Depreciation and amortization of real estate assets is a component of direct hospitality expense that is added back to NOI and is deducted in the Total Return calculation.
|
The following summary presents financial information by the company’s principal geographic regions in which it operates:
| | | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | | Total revenue year ended
Dec. 31, | | | | | Total non-current assets as at | |
| | | 2012 | | | 2011 | | | 2010 | | | | | Dec. 31, 2012 | | | Dec. 31, 2011 | |
United States | | $ | 2,400 | | | $ | 1,610 | | | $ | 1,158 | | | | | $ | 28,545 | | | $ | 23,079 | |
Canada | | | 602 | | | | 525 | | | | 540 | | | | | | 5,509 | | | | 4,714 | |
Australia | | | 579 | | | | 468 | | | | 359 | | | | | | 7,215 | | | | 6,474 | |
Brazil | | | 143 | | | | 167 | | | | 136 | | | | | | 2,360 | | | | 2,175 | |
Europe | | | 77 | | | | 50 | | | | 77 | | | | | | 2,222 | | | | 1,557 | |
| | | $ | 3,801 | | | $ | 2,820 | | | $ | 2,270 | | | | | $ | 45,851 | | | $ | 37,999 | |
NOTE 29: SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents the cash interest and taxes paid for the years ended December 31, 2012 and 2011:
| | | | | | | | | | | | |
| (US$ Millions) Year ended Dec. 31, | | 2012 | | | 2011 | | | 2010 | |
Cash taxes paid | | $ | 96 | | | $ | 94 | | | $ | 49 | |
Cash interest paid | | | 906 | | | | 755 | | | | 730 | |
Included in cash and cash equivalents is $803 million (2011 – $605 million) of cash and $107 million of short-term deposits at December 31, 2012 (2011 – $144 million).
NOTE 30: APPROVAL OF FINANCIAL STATEMENTS
The financial statements were approved by the board of directors and authorized for issue on April 29, 2013.
NOTE
31: SUBSEQUENT EVENTS29. FAIR VALUE GAINS, NET
The components of fair value gains, net, are as follows:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Commercial properties | $ | 1,583 |
| $ | 2,781 |
| $ | 805 |
|
| Commercial developments | 430 |
| 289 |
| 143 |
|
| Financial instruments and other | (6 | ) | 686 |
| (78 | ) |
| Total fair value gains, net | $ | 2,007 |
| $ | 3,756 |
| $ | 870 |
|
NOTE 30. UNIT-BASED COMPENSATION
On April 15,February 3, 2015, the BPY Plan was amended and restated by the board of directors of the general partner of BPY, and approved by unitholders on March 26, 2015. The BPY Plan originally provided for a cash payment on the exercise of an option equal to the amount by which the fair market value of a BPY Unit on the date of exercise exceeds the exercise price of the option. The amended BPY Plan allows for the settlement of the in-the-money amount of an option upon exercise in BPY Units for certain qualifying employees whose location of employment is outside of Australia and Canada. This amendment applies to all options granted under the BPY Unit Option Plan, including those options outstanding prior to February 3, 2015. Consequently, as a result of this amendment, options granted to employees whose location of employment is outside of Australia and Canada under the amended and restated BPY Plan are accounted for as an equity-based compensation agreement.
During the year ended December 31, 2015, the partnership incurred $23 million (2014 - $23 million; 2013 - $9 million) of expense in connection with its unit-based compensation plans.
Awards under the BPY Plan (“BPY Awards”) generally vest 20% per year over a period of five years and expire 10 years after the grant date, with the exercise price set at the time such options were granted and generally equal to the market price of an LP Unit on the NYSE on the last trading day preceding the grant date. Upon exercise of a vested BPY Award, the participant is entitled to receive BPY Units or a cash payment equal to the amount by which the fair market value of an LP Unit at the date of exercise exceeds the exercise price of the BPY Award. Subject to a separate adjustment arising from forfeitures, the estimated expense is revalued every reporting period using the Black-Scholes model as a result of the cash settlement provisions of the plan for employees whose location of employment is Australia or Canada. In terms of measuring expected life of the BPY Awards with various term lengths and vesting periods, BPY will segregate each set of similar BPY Awards and, if different, exercise price, into subgroups and apply a weighted average within each group.
The partnership estimated the fair value of the BPY Awards granted during the years ended December 31, 2015 and 2014 using the Black-Scholes valuation model. The following assumptions were utilized:
|
| | | | | |
| | Unit of measurement | Years ended Dec. 31, |
| | 2015 |
| 2014 |
|
| Exercise price | US$ | 25.18 |
| 19.73 |
|
| Average term to exercise | In years | 7.50 |
| 6.93 |
|
| Unit price volatility | % | 30 |
| 30 |
|
| Liquidity discount | % | 25 |
| 25 |
|
| Weighted average of expected annual dividend yield | % | 6.50 |
| 4.00 |
|
| Risk-free rate | % | 1.87 |
| 2.26 |
|
| Weighted average fair value per option | US$ | 3.46 |
| 2.72 |
|
| |
| i. | Equity-settled BPY Awards |
The change in the number of options outstanding under the equity-settled BPY Awards for the years ended December 31, 2015 and 2014 is as follows:
|
| | | | | | | | | | |
| | Year ended Dec. 31, 2015 | Year ended Dec. 31, 2014 |
| | Number of
options |
| Weighted average
exercise price |
| Number of
options |
| Weighted average
exercise price |
|
| Outstanding, beginning of year | — |
| $ | — |
| — |
| $ | — |
|
| Granted | 2,542,340 |
| 25.18 |
| — |
| — |
|
| Exercised | (745,392 | ) | 19.92 |
| — |
| — |
|
| Expired/forfeited | (174,153 | ) | 21.40 |
| — |
| — |
|
Reclassified(1) | 15,726,834 |
| 19.75 |
| — |
| — |
|
| Outstanding, end of year | 17,349,629 |
| $ | 20.53 |
| — |
| $ | — |
|
| Exercisable, end of year | 4,795,099 |
| $ | 19.03 |
| — |
| $ | — |
|
| |
(1) | Relates to the reclassification of options for employees outside of Canada and Australia whose options are equity-settled subsequent to the amendment of the BPY Plan. |
The following table sets out details of options issued and outstanding at December 31, 2015 and 2014 under the equity-settled BPY Awards by expiry date:
|
| | | | | | | | | | |
| | Dec. 31, 2015 | Dec. 31, 2014 |
| Expiry date | Number of
options |
| Weighted average
exercise price |
| Number of
options |
| Weighted average
exercise price |
|
| 2015 | — |
| $ | — |
| — |
| $ | — |
|
| 2020 | 368,400 |
| 13.07 |
| — |
| — |
|
| 2021 | 421,300 |
| 17.44 |
| — |
| — |
|
| 2022 | 1,535,900 |
| 18.25 |
| — |
| — |
|
| 2023 | 1,247,680 |
| 16.80 |
| — |
| — |
|
| 2024 | 11,286,224 |
| 20.59 |
| — |
| — |
|
| 2025 | 2,490,125 |
| 25.18 |
| — |
| — |
|
| Total | 17,349,629 |
| $ | 20.53 |
| — |
| $ | — |
|
| |
| ii. | Cash-settled BPY Awards |
The change in the number of options outstanding under the cash-settled BPY Awards for the years ended December 31, 2015 and 2014 is as follows:
|
| | | | | | | | | | |
| | Year ended Dec. 31, 2015 | Year ended Dec. 31, 2014 |
| | Number of
options |
| Weighted average
exercise price |
| Number of
options |
| Weighted average
exercise price |
|
| Outstanding, beginning of year | 21,946,145 |
| $ | 19.75 |
| — |
| $ | — |
|
| Exchanged into BPY Awards | — |
| — |
| 5,664,980 |
| 17.16 |
|
| Granted | 775,215 |
| 25.18 |
| 16,581,645 |
| 20.59 |
|
| Exercised | (89,540 | ) | 17.40 |
| (212,800 | ) | 16.17 |
|
| Expired/forfeited | — |
| — |
| (87,680 | ) | 19.67 |
|
Reclassified(1) | (15,726,834 | ) | 19.75 |
| — |
| — |
|
| Outstanding, end of year | 6,904,986 |
| $ | 20.37 |
| 21,946,145 |
| $ | 19.75 |
|
| Exercisable, end of year | 1,956,693 |
| $ | 19.16 |
| 2,370,370 |
| $ | 16.72 |
|
| |
(1) | Relates to the reclassification of options for employees outside of Canada and Australia whose options are equity-settled subsequent to the amendment of the BPY Plan. |
The following table sets out details of options issued and outstanding at December 31, 2015 and 2014 under the cash-settled BPY Awards by expiry date:
|
| | | | | | | | | | |
| | Dec. 31, 2015 | Dec. 31, 2014 |
| Expiry date | Number of
options |
| Weighted average
exercise price |
| Number of
options |
| Weighted average
exercise price |
|
| 2015 | — |
| $ | — |
| 251,200 |
| $ | 19.08 |
|
| 2020 | 78,000 |
| 13.07 |
| 473,600 |
| 12.98 |
|
| 2021 | 226,800 |
| 17.44 |
| 666,400 |
| 17.44 |
|
| 2022 | 581,200 |
| 18.07 |
| 2,145,700 |
| 18.20 |
|
| 2023 | 604,200 |
| 16.80 |
| 1,894,080 |
| 16.80 |
|
| 2024 | 4,639,571 |
| 20.59 |
| 16,515,165 |
| 20.59 |
|
| 2025 | 775,215 |
| 25.18 |
| — |
| — |
|
| Total | 6,904,986 |
| $ | 20.37 |
| 21,946,145 |
| $ | 19.75 |
|
| |
| b) | Restricted BPY LP Unit Plan |
The Restricted BPY LP Unit Plan provides for awards to participants of LP Units purchased on the NYSE (“Restricted Units”). Under the Restricted BPY LP Unit Plan, units awarded generally vest over a period of five years, except as otherwise determined or for Restricted Units awarded in lieu of a cash bonus as elected by the participant, which may vest immediately. The estimated total compensation cost measured at grant date is evenly recognized over the vesting period of five years.
As of December 31, 2015, the total number of Restricted Units granted was 442,332 (December 31, 2014 - 485,698) with a weighted average exercise price of $20.87 (December 31, 2014 - $20.81).
| |
| c) | Restricted BPY LP Unit Plan (Canada) |
The Restricted BPY LP Unit Plan (Canada) is substantially similar to the Restricted BPY LP Unit Plan described above, except that it is for Canadian employees, there is a five year hold period, and purchases of units are made on the TSX instead of the NYSE.
As of December 31, 2015, the total number of Canadian Restricted Units granted was 19,410 (December 31, 2014 - 19,410) with a weighted average exercise price of C$22.14 (December 31, 2014 - C$22.14).
| |
| d) | Deferred Share Unit Plan |
In addition, BPO has a deferred share unit plan, the terms of which were amended in connection with the Arrangement to substitute LP Units for BPO common shares subject to such deferred shares. At December 31, 2015, BPO had 1,456,719 deferred share units (December 31, 2014 - 1,421,139) outstanding and vested.
NOTE 31. OTHER COMPREHENSIVE (LOSS) INCOME
Other comprehensive (loss) income consists of the following:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Items that may be reclassified to net income: | |
| |
| |
|
| Foreign currency translation | |
| |
| |
|
| Unrealized foreign currency translation (losses) gains in respect of foreign operations | $ | (1,319 | ) | $ | (834 | ) | $ | (854 | ) |
Gains (losses) on hedges of net investments in foreign operations, net of income taxes of $19 million (2014 - $51 million; 2013 - $3 million)(1) | 488 |
| 317 |
| 35 |
|
| | (831 | ) | (517 | ) | (819 | ) |
| Cash flow hedges | |
| |
| |
|
| (Losses) gains on derivatives designated as cash flow hedges, net of income taxes of $(12) million (2014 - $(57) million; 2013 - $48 million) | (35 | ) | (162 | ) | 159 |
|
| | (35 | ) | (162 | ) | 159 |
|
| Available-for-sale securities | |
| |
| |
|
| Net change in unrealized gains (losses) on available-for-sale securities, net of income taxes of nil (2014 - nil; 2013 - nil) | 1 |
| 4 |
| — |
|
| | 1 |
| 4 |
| — |
|
| Equity accounted investments | |
| |
| |
|
| Share of unrealized foreign currency translations (losses) gains in respect of foreign operations, net of income taxes of nil (2014 - nil; 2013 - $11 million) | (111 | ) | (84 | ) | 14 |
|
| Share of revaluation surplus, net of income taxes of $1 million (2014 - nil, 2013 - nil) | 161 |
| — |
| — |
|
| | 50 |
| (84 | ) | 14 |
|
| Items that will not be reclassified to net income: | |
| |
| |
|
| Revaluation surplus, net of income taxes of nil (2014 – $1 million; 2013 – nil) | 134 |
| 312 |
| 183 |
|
| | 134 |
| 312 |
| 183 |
|
| Total other comprehensive (loss) income | $ | (681 | ) | $ | (447 | ) | $ | (463 | ) |
| |
(1) | Unrealized gains (losses) on a number of hedges of net investments in foreign operations in the years ended December 31, 2014 and 2013 were with a related party. |
NOTE 32. OBLIGATIONS, GUARANTEES, CONTINGENCIES AND OTHER
In the normal course of operations, the partnership and its consolidated entities execute agreements that provide for indemnification and guarantees to third parties in transactions such as business dispositions, business acquisitions, sales of assets and sales of services.
Certain of the partnership’s operating subsidiaries have also agreed to indemnify their directors and certain of their officers and employees. The nature of substantially all of the indemnification undertakings prevent the partnership from making a reasonable estimate of the maximum potential amount that it could be required to pay third parties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, neither the partnership nor its consolidated subsidiaries have made significant payments under such indemnification agreements.
The partnership and its operating subsidiaries may be contingently liable with respect to litigation and claims that arise from time to time in the normal course of business or otherwise. During the first quarter of 2015, the partnership reached an agreement to settle a specific litigation brought by the former MPG Office Trust, Inc.’s preferred shareholders related to the acquisition of MPG Office Trust, Inc. As per the settlement, the partnership is required to pay a portion of previously accrued and unpaid preferred dividends as well as the plaintiffs’ attorney fees. During the fourth quarter of 2015, the settlement of the preferred dividends was finalized and a $2 million provision was recorded for plaintiff’s attorney fees. Subsequent to year-end, the preferred dividends were paid.
At December 31, 2015, the partnership had commitments totaling approximately $643 million for the development of Manhattan West in Midtown New York, approximately C$306 million for the development of Brookfield Place East Tower in Calgary and the completed development of Bay Adelaide East in Toronto, approximately A$42 million for the completed development of Brookfield Place Perth Tower 2 and approximately £635 million for the development of London Wall Place, 100 Bishopsgate, Principal Place Commercial and Principal Place Residential in London.
During 2013, Brookfield distributedAsset Management announced the final close on the $4.4 billion Brookfield Strategic Real Estate Partners fund, a global private fund focused on making opportunistic investments in commercial property. The partnership, as lead investor, committed approximately $1.3 billion to the holdersfund. As of December 31, 2015, there remained approximately $200 million of uncontributed capital commitments.
As of December 31, 2015, the partnership had committed $2.0 billion as lead investor to a new real estate opportunistic fund sponsored by Brookfield Asset Management.
The partnership maintains insurance on its properties in amounts and with deductibles that it believes are in line with what owners of similar properties carry. The partnership maintains all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and named windstorm). The partnership does not conduct its operations, other than those of equity accounted investments, through entities that are not fully or proportionately consolidated in these financial statements, and has not guaranteed or otherwise contractually committed to support any material financial obligations not reflected in these financial statements.
NOTE 33. LIQUIDITY AND CAPITAL MANAGEMENT
The capital of the partnership’s business consists of debt obligations, capital securities, preferred stock and equity. The partnership’s objective when managing this capital is to maintain an appropriate balance between holding a sufficient amount of equity capital to support its operations and reducing its weighted average cost of capital to improve its return on equity. As at December 31, 2015, capital totaled $65 billion (December 31, 2014 - $59 billion).
The partnership attempts to maintain a level of liquidity to ensure it is able to participate in investment opportunities as they arise and to better withstand sudden adverse changes in economic circumstances. The partnership’s primary sources of liquidity include cash, undrawn committed credit facilities, construction facilities, cash flow from operating activities and access to public and private capital markets. In addition, the partnership structures its affairs to facilitate monetization of longer-duration assets through financings and co-investor participations.
The partnership seeks to increase income from its existing properties by maintaining quality standards for its properties that promote high occupancy rates and support increases in rental rates while reducing tenant turnover and related costs, and by controlling operating expenses. Consequently, the partnership believes its revenue, along with proceeds from financing activities and divestitures, will continue to provide the necessary funds to cover its short-term liquidity needs. However, material changes in the factors described above may adversely affect the partnership’s net cash flows.
The partnership’s principal liquidity needs for the current year and for periods beyond include:
Recurring expenses;
Debt service requirements;
Distributions to unitholders;
Capital expenditures deemed mandatory, including tenant improvements;
Development costs not covered under construction loans;
Investing activities which could include:
| |
| ◦ | Discretionary capital expenditures; |
| |
| ◦ | Repurchase of the partnership’s units. |
Most of the partnership’s borrowings are in the form of long-term asset-specific financings with recourse only to the specific assets. Limiting recourse to specific assets ensures that poor performance within one area does not compromise the partnership’s ability to finance the balance of its Class Aoperations.
In addition, the partnership may, from time to time, issue equity instruments, including, but not limited to, LP Units, Redeemable/Exchangeable Partnership Units and
B limited voting shares one unitExchange LP Units, to the public and preferred equity in private placements in certain circumstances to provide financing for significant transactions, such as the acquisitions of the
company for approximately every 17.42remaining common shares of
Brookfield through a special dividend.Schedule III –
Supplemental ScheduleBPO and the outstanding ordinary shares of Investment Property Information
Songbird Estates plc (“Songbird”).
The partnership’s operating subsidiaries are subject to limited covenants in respect of their corporate debt and are in full compliance with all such covenants at December 31, 2015. The partnership’s operating subsidiaries are also in compliance with all covenants and other capital requirements related to regulatory or contractual obligations of material consequence to the partnership.
The partnership’s strategy is to satisfy its liquidity needs in respect of the partnership using the partnership’s cash on hand, cash flows generated from operating activities and provided by financing activities, as well as proceeds from asset sales. The operating subsidiaries of the partnership also generate liquidity by accessing capital markets on an opportunistic basis.
The partnership’s principal liquidity needs for periods beyond the next year are for scheduled debt maturities, distributions, recurring and non-recurring capital expenditures, development costs and potential property acquisitions. The partnership plans to meet these needs with one or more of: cash flows from operations; construction loans; creation of new funds; proceeds from sales of assets; proceeds from sale of non-controlling interests in subsidiaries and properties; and credit facilities and refinancing opportunities.
The table below presents the partnership’s contractual obligations as of December 31, 2015:
|
| | | | | | | | | | | | | | | | | | | | | |
| (US$ Millions) | |
| Payments due by period |
| Dec. 31, 2015 | Total |
| < 1 Year |
| 1 Year |
| 2 Years |
| 3 Years |
| 4 Years |
| > 5 Years |
|
| Debt obligations | $ | 30,526 |
| $ | 7,787 |
| $ | 4,288 |
| $ | 4,859 |
| $ | 3,170 |
| $ | 3,292 |
| $ | 7,130 |
|
| Capital securities | 4,031 |
| 503 |
| — |
| — |
| — |
| 500 |
| 3,028 |
|
| Lease obligations | 5,180 |
| 33 |
| 33 |
| 33 |
| 37 |
| 36 |
| 5,008 |
|
Commitments(1) | 1,885 |
| 851 |
| 606 |
| 351 |
| 77 |
| — |
| — |
|
| | | | | | | | |
Interest expense(2): | | |
| |
| |
| |
| |
| |
|
| Long term debt | 4,788 |
| 1,161 |
| 993 |
| 729 |
| 560 |
| 456 |
| 889 |
|
| Capital securities | 1,343 |
| 184 |
| 178 |
| 178 |
| 178 |
| 154 |
| 471 |
|
| Interest rate swaps | 32 |
| 14 |
| 6 |
| 5 |
| 4 |
| 3 |
| — |
|
| |
(1) | Primarily consists of construction commitments on commercial developments. |
| |
(2) | Represents aggregate interest expense expected to be paid over the term of the obligations. Variable interest rate payments have been calculated based on current rates. |
NOTE 34. FINANCIAL INSTRUMENTS
| |
| a) | Derivatives and hedging activities |
The partnership and its operating entities use derivative and non-derivative instruments to manage financial risks, including interest rate, commodity, equity price and foreign exchange risks. The use of derivative contracts is governed by documented risk management policies and approved limits. The partnership does not use derivatives for speculative purposes. The partnership and its operating entities use the following derivative instruments to manage these risks:
foreign currency forward contracts to hedge exposures to Canadian Dollar, Australian Dollar, British Pound, Euro and Chinese Yuan denominated net investments in foreign subsidiaries and foreign currency denominated financial assets;
foreign currency forward contracts to hedge exposures to Brazilian Real denominated cash flows;
interest rate swaps to manage interest rate risk associated with planned refinancings and existing variable rate debt; and
interest rate caps to hedge interest rate risk on certain variable rate debt.
The partnership also designates Canadian Dollar financial liabilities of certain of its operating entities as hedges of its net investments in its Canadian operations.
Interest Rate Hedging
The following table provides the partnership’s outstanding derivatives that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate debt as of December 31, 2015 and 2014:
|
| | | | | | | | | |
| (US$ Millions) | Hedging item | Notional |
| Rates | Maturity dates | Fair value |
|
| Dec. 31, 2015 | Interest rate caps of US$ LIBOR debt | $ | 3,654 |
| 2.5% - 5.8% | Jan. 2016 - Oct. 2018 | $ | — |
|
| | Interest rate swaps of US$ LIBOR debt | 285 |
| 2.1% - 2.2% | Oct. 2020 - Nov. 2020 | (8 | ) |
| | Interest rate swaps of £ LIBOR debt | 77 |
| 1.5% | Apr. 2020 | 1 |
|
| | Interest rate swaps of € EURIBOR debt | 187 |
| 0.02% - 1.4% | Oct. 2017 - Feb. 2021 | 5 |
|
| | Interest rate swaps of A$ BBSW/BBSY debt | 488 |
| 3.5% - 5.9% | Jan. 2016 - Jul. 2017 | (9 | ) |
| | Interest rate swaps on forecasted fixed rate debt | 1,885 |
| 3.1% - 5.5% | Jan. 2026 - Jun. 2029 | (332 | ) |
| Dec. 31, 2014 | Interest rate caps of US$ LIBOR debt | $ | 3,174 |
| 2.5% - 5.8% | Jan. 2015 - Oct. 2018 | $ | 1 |
|
| | Interest rate swaps of US$ LIBOR debt | 483 |
| 0.6% - 2.2% | Dec. 2015 - Nov. 2020 | (7 | ) |
| | Interest rate swaps of £ LIBOR debt | 204 |
| 1.1% | Sep. 2017 | (1 | ) |
| | Interest rate swaps of A$ BBSW/BBSY debt | 548 |
| 3.5% - 5.9% | Jan. 2016 - Jul. 2017 | (26 | ) |
| | Interest rate swaps of € EURIBOR debt | 150 |
| 0.3% - 1.4% | Oct. 2017 - Feb. 2021 | (3 | ) |
| | Interest rate swaps on forecasted fixed rate debt | 1,995 |
| 2.3% - 5.1% | May 2025 - Jun. 2029 | (262 | ) |
For the years ended December 31, 2015 and 2014, the amount of hedge ineffectiveness recorded in interest expense in connection with the partnership’s interest rate hedging activities was not significant.
Foreign Currency Hedging
The following table presents the partnership’s outstanding derivatives that are designated as net investment hedges in foreign subsidiaries or cash flow hedges as of December 31, 2015 and 2014:
|
| | | | | | | | | |
| (US$ Millions) | Hedging item | | Notional |
| Rates | Maturity dates | Fair value |
|
| Dec. 31, 2015 | Net investment hedges | £ | 2,346 |
| £0.64/$ - £0.68/$ | Jan 2016 -Mar. 2017 | $ | 26 |
|
| | Net investment hedges | C¥ | 2,000 |
| C¥6.62/$ - C¥6.78/$ | Feb. 2016 - Dec. 2016 | 3 |
|
| | Net investment hedges | A$ | 811 |
| A$1.29/$ - A$1.44/$ | Jan. 2016 - Feb. 2017 | 2 |
|
| | Net investment hedges | € | 446 |
| €0.80/$ - €0.94/$ | May 2016 - Dec. 2016 | 1 |
|
| | Cash flow hedges | R$ | 613 |
| R$3.89/$ - R$3.96/$ | Jan. 2016 - Mar. 2016 | (8 | ) |
| Dec. 31, 2014 | Net investment hedges | £ | 1,170 |
| £0.59/$ - £0.65/$ | Apr. 2015 - Jan. 2016 | $ | 36 |
|
| | Net investment hedges | € | 353 |
| €0.75/$ - €0.80/$ | Jan. 2015 - Jun. 2016 | 35 |
|
| | Net investment hedges | A$ | 1,750 |
| A$1.10/$ - A$1.27/$ | Apr. 2015 - Mar. 2016 | 22 |
|
In addition, as of December 31, 2015, the partnership had designated C$900 million (December 31, 2014 - C$900 million) of Canadian Dollar financial liabilities as hedges against the partnership’s net investment in Canadian operations.
During 2015, the partnership entered into a number of zero cost collars consisting of bought call and sold put options together with foreign currency forward agreements as hedges of certain British Pound- and Australian Dollar-denominated net investments. These zero cost collars were unwound by December 31, 2015. In connection with these hedges, $(28) million relating to the time value component of their valuation has been recorded in fair value gains, net on the consolidated income statement for the year ended December 31, 2015. In addition, the partnership recorded within other comprehensive income $79 million relating to the settlement of certain collars during the third quarter of 2015. Any remaining put or call options outstanding following the settlement of the partnership’s zero cost collars are presented below within “Other Derivatives”.
For the years ended December 31, 2015 and 2014, the amount of hedge ineffectiveness recorded in earnings in connection with the partnership’s foreign currency hedging activities was not significant.
Other Derivatives
The following tables provide detail of the partnership’s other derivatives that have been entered into to manage financial risks as of December 31, 2015 and 2014:
|
| | | | | | | | | | |
| (US$ millions) | Derivative type | Notional |
| Maturity dates | Rates | Fair value
(gain)/loss |
| Classification of (gain)/loss |
| Dec. 31, 2015 | Interest rate caps | $ | 381 |
| Mar. 2016 | 3.65% | $ | — |
| General and administrative expense |
| | Interest rate caps | 350 |
| Jul. 2017 | 3.25% | — |
| General and administrative expense |
| | Interest rate caps | 34 |
| Jan. 2016 | 3.00% | — |
| General and administrative expense |
| | Interest rate caps | 75 |
| Feb. 2016 | 2.93% | — |
| General and administrative expense |
| Dec. 31, 2014 | Interest rate caps | $ | 382 |
| Mar. 2016 | 3.65% | $ | — |
| General and administrative expense |
| | Interest rate caps | 350 |
| Jul. 2017 | 3.25% | — |
| General and administrative expense |
| | Interest rate caps | 51 |
| Sep. 2015 | 2.81% - 3.01% | — |
| General and administrative expense |
| | Interest rate caps | 13 |
| Oct. 2015 | 3.00% | — |
| General and administrative expense |
| | Interest rate caps | 34 |
| Jan. 2016 | 3.00% | — |
| General and administrative expense |
| | Interest rate caps | 75 |
| Feb. 2016 | 2.94% | — |
| General and administrative expense |
| | Interest rate caps | 74 |
| Mar. 2016 | 2.94% | — |
| General and administrative expense |
| | Interest rate caps | 68 |
| Jul. 2015 | 3.00% | — |
| General and administrative expense |
|
| | | | | | | | | |
| (US$ Millions) | Derivative type | | Notional |
| Maturity dates | Strike prices | Fair value (gain)/loss |
| Classification of (gain)/loss |
| Dec. 31, 2015 | Call | A$ | 175 |
| Mar. 2016 | A$1.22/$ | — |
| Fair value gains, net |
| | Call | A$ | 275 |
| Apr. 2016 | A$1.25/$ | — |
| Fair value gains, net |
| | Put | £ | 370 |
| Jan. 2016 | £0.71/$ | — |
| Fair value gains, net |
| | Put | £ | 200 |
| Mar. 2016 | £0.71/$ | (1 | ) | Fair value gains, net |
| | Call | A$ | 150 |
| Apr. 2016 | A$1.22/$ | — |
| Fair value gains, net |
| | Call | A$ | 150 |
| Apr. 2016 | A$1.22/$ | — |
| Fair value gains, net |
| | Call | A$ | 250 |
| Apr. 2016 | A$1.22/$ | — |
| Fair value gains, net |
The other derivatives have not been designated as hedges for accounting purposes.
| |
| b) | Measurement and classification of financial instruments |
Fair value is the amount that willing parties would accept to exchange a financial instrument based on the current market for instruments with the same risk, principal and remaining maturity. The fair value of interest bearing financial assets and liabilities is determined by discounting the contractual principal and interest payments at estimated current market interest rates for the instrument. Current market rates are determined by reference to current benchmark rates for a similar term and current credit spreads for debt with similar terms and risk.
Classification and Measurement
The following table outlines the classification and measurement basis, and related fair value for disclosures, of the financial assets and liabilities in the consolidated financial statements:
|
| | | | | | | | | | | | | | |
| | | | Dec. 31, 2015 | Dec. 31, 2014 |
| (US$ Millions) | Classification | Measurement
basis | Carrying
value |
| Fair
value |
| Carrying
value |
| Fair
value |
|
| Financial assets | | | |
| |
| |
| |
|
| Participating loan interests | Loans and receivables | Amortized cost | $ | 449 |
| $ | 449 |
| $ | 609 |
| $ | 609 |
|
| Loans and notes receivable | Loans and receivables | Amortized cost | 221 |
| 221 |
| 326 |
| 326 |
|
| Other non-current assets | | | |
| |
| |
| |
|
| Securities designated as FVTPL | FVTPL | Fair value | 37 |
| 37 |
| 1,929 |
| 1,929 |
|
| Derivative assets | FVTPL | Fair value | 1,379 |
| 1,379 |
| 1,424 |
| 1,424 |
|
| Securities designated as AFS | AFS | Fair value | 142 |
| 142 |
| 143 |
| 143 |
|
| Accounts receivable and other | | | |
| |
| |
| |
|
Other receivables(1) | Loans and receivables | Amortized cost | 1,250 |
| 1,250 |
| 3,193 |
| 3,193 |
|
| Cash and cash equivalents | Loans and receivables | Amortized cost | 1,035 |
| 1,035 |
| 1,282 |
| 1,282 |
|
| Total financial assets | | | $ | 4,513 |
| $ | 4,513 |
| $ | 8,906 |
| $ | 8,906 |
|
| Financial liabilities | | | |
| |
| |
| |
|
Debt obligations(2) | Other liabilities | Amortized cost | $ | 30,755 |
| $ | 31,084 |
| $ | 28,171 |
| $ | 28,722 |
|
| Capital securities | Other liabilities | Amortized cost | 4,031 |
| 4,032 |
| 4,011 |
| 4,028 |
|
| Other non-current liabilities | | | |
| |
| |
| |
|
| Loan payable | FVTPL | Fair value | 26 |
| 26 |
| — |
| — |
|
| Other non-current financial liabilities | Other liabilities | Amortized cost(3) | 362 |
| 362 |
| 646 |
| 646 |
|
Accounts payable and other liabilities(4) | Other liabilities | Amortized cost(5) | 2,652 |
| 2,652 |
| 1,809 |
| 1,809 |
|
| Total financial liabilities | | | $ | 37,826 |
| $ | 38,156 |
| $ | 34,637 |
| $ | 35,205 |
|
| |
(1) | Includes other receivables associated with assets classified as held for sale on the consolidated balance sheets in the amounts of $30 million and $68 million as of December 31, 2015 and December 31, 2014, respectively. |
| |
(2) | Includes debt obligations associated with assets classified as held for sale on the consolidated balance sheets in the amount of $229 million and $1,165 million as of December 31, 2015 and December 31, 2014, respectively. |
| |
(3) | Includes derivative liabilities measured at fair value of approximately $45 million and $145 million as of December 31, 2015 and December 31, 2014, respectively. |
| |
(4) | Includes accounts payable and other liabilities associated with assets classified as held for sale on the consolidated balance sheets in the amount of $13 million and $56 million as of December 31, 2015 and December 31, 2014, respectively. |
| |
(5) | Includes derivative liabilities measured at fair value of approximately $401 million and $161 million as of December 31, 2015 and December 31, 2014, respectively. |
The following table outlines financial assets and liabilities measured at fair value in the financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as defined above:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Dec. 31, 2015 | Dec. 31, 2014 |
| (US$ Millions) | Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
|
| Financial assets | |
| |
| |
| |
| |
| |
| |
| |
|
| Participating loan interests – embedded derivative | $ | — |
| $ | — |
| $ | 118 |
| $ | 118 |
| $ | — |
| $ | — |
| $ | 43 |
| $ | 43 |
|
| Securities designated as FVTPL | — |
| — |
| 37 |
| 37 |
| 18 |
| — |
| 1,911 |
| 1,929 |
|
| Securities designated as AFS | 4 |
| — |
| 138 |
| 142 |
| — |
| — |
| 143 |
| 143 |
|
Derivative assets(1) | — |
| 99 |
| 1,371 |
| 1,470 |
| — |
| 136 |
| 1,288 |
| 1,424 |
|
| Total financial assets | $ | 4 |
| $ | 99 |
| $ | 1,664 |
| $ | 1,767 |
| $ | 18 |
| $ | 136 |
| $ | 3,385 |
| $ | 3,539 |
|
| | | | | | | | | |
| Financial liabilities | |
| |
| |
| |
| |
| |
| |
| |
|
| Accounts payable and non-current other liabilities | $ | — |
| $ | 446 |
| $ | — |
| $ | 446 |
| $ | — |
| $ | 306 |
| $ | — |
| $ | 306 |
|
| Loan payable | — |
| — |
| 26 |
| 26 |
| — |
| — |
| — |
| — |
|
| Total financial liabilities | $ | — |
| $ | 446 |
| $ | 26 |
| $ | 472 |
| $ | — |
| $ | 306 |
| $ | — |
| $ | 306 |
|
| |
(1) | Includes $91 million of derivative assets as of December 31, 2015 classified in other receivables and loans and notes receivable on the consolidated balance sheets. |
There were no transfers between levels during the year ended December 31, 2015 and 2014. The following table presents the valuation techniques and inputs of the partnership’s Level 2 assets and liabilities:
|
| | |
| Type of asset/liability | | Valuation technique |
| Foreign currency forward contracts | | Discounted cash flow model - forward exchange rates (from observable forward exchange rates at the end of the reporting period) and discounted at a credit adjusted rate |
| Interest rate contracts | | Discounted cash flow model - forward interest rates (from observable yield curves) and applicable credit spreads discounted at a credit adjusted rate |
The table below presents the valuation techniques and inputs of Level 3 assets:
|
| | | | | | |
| Type of asset/liability | | Valuation techniques | | Significant unobservable input(s) | | Relationship of unobservable input(s) to fair value |
| Participating loan interests - embedded derivative | | Discounted cash flow model | | (a) Discount rate (b) Terminal capitalization rate | | (a) Decreases (increases) in the discount rate would increase (decrease) fair value (b) Increases (decreases) in the terminal capitalization rate would (decrease) increase fair value |
| Investment in common shares | | Net asset valuation | | (a) Forward exchange rates (from observable forward exchange rates at the end of the reporting period) (b) Discount rate | | (a) Increased (decreases) in the forward exchange rate would increase (decrease) fair value (b) Decreases (increases) in the discount rate would increase (decrease) fair value |
| Warrants | | Black-Scholes model | | (a) Volatility | | (a) Increases (decreases) in volatility would increase (decrease) fair value |
The following table presents the change in the balance of financial assets and financial liabilities classified as Level 3 as of December 31, 2015 and 2014:
|
| | | | | | | | | | | | |
| | Dec. 31, 2015 | Dec. 31, 2014 |
| (US$ Millions) | Financial
assets |
| Financial
liabilities |
| Financial
assets |
| Financial
liabilities |
|
| Balance, beginning of year | $ | 3,385 |
| $ | — |
| $ | 2,116 |
| $ | — |
|
| Acquisitions | 1 |
| 26 |
| 526 |
| — |
|
Dispositions(1) | (2,052 | ) | — |
| (12 | ) | — |
|
| Fair value gains, net and OCI | 223 |
| — |
| 755 |
| — |
|
| Other | 107 |
| — |
| — |
| — |
|
| Balance, end of year | $ | 1,664 |
| $ | 26 |
| $ | 3,385 |
| $ | — |
|
| |
(1) | Includes the contribution of the partnership’s 22% interest in Canary Wharf to a 50/50 joint venture in the first quarter of 2015 and the conversion of the partnership’s convertible preferred interest to a 22% common equity interest in CXTD during the third quarter of 2015. |
Interest rate risk
The partnership faces interest rate risk on its variable rate financial assets and liabilities. In addition, there is interest rate risk associated with the partnership’s fixed rate debt due to the expected requirement to refinance such debt in the year of maturity. The following table outlines the impact on interest expense of a 100 basis point increase or decrease in interest rates on the partnership’s variable rate liabilities and fixed rate debt maturing within one year:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Variable rate property debt | $ | 169 |
| $ | 156 |
|
| Fixed rate property debt due within one year | 10 |
| 3 |
|
| Total | $ | 179 |
| $ | 159 |
|
The partnership manages interest rate risk by primarily entering into fixed rate operating property debt and staggering the maturities of its mortgage portfolio over a 10-year horizon when the market permits. The partnership also makes use of interest rate derivatives to manage interest rate risk on specific variable rate debts and on anticipated refinancing of fixed rate debt.
Foreign currency risk
The partnership is structured such that its foreign operations are primarily conducted by entities with a functional currency which is the same as the economic environment in which the operations take place. As a result, the net income impact of currency risk associated with financial instruments is limited as its financial assets and liabilities are generally denominated in the functional currency of the subsidiary that holds the financial instrument. However, the partnership is exposed to foreign currency risk on the net assets of its foreign currency denominated operations. The partnership’s exposures to foreign currencies and the sensitivity of net income and other comprehensive income, on a pre-tax basis, to a 10% change in the exchange rates relative to the U.S. dollar is summarized below:
|
| | | | | | | | | |
| | Dec. 31, 2015 |
| (Millions) | Equity attributable to unitholders(1) | | OCI |
| Net income |
|
| Canadian Dollar | C$ | (268 | ) | $ | 19 |
| $ | — |
|
| Australian Dollar | A$ | 2,721 |
| (198 | ) | — |
|
| British Pound | £ | 3,620 |
| (533 | ) | — |
|
| Euro | € | 588 |
| (64 | ) | — |
|
| Brazilian Real | R$ | 1,725 |
| (44 | ) | — |
|
| New Zealand Dollar | NZ$ | 29 |
| (2 | ) | — |
|
| Indian Rupee | Rs | 9,166 |
| (14 | ) | — |
|
| Chinese Yuan | C¥ | 1,268 |
| (20 | ) | — |
|
| Total | |
|
| $ | (856 | ) | $ | — |
|
| |
| (1) | As of December 31, 2015, unitholders are defined as holders of the GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, and Exchange LP Units. |
|
| | | | | | | | | |
| | Dec. 31, 2014 |
| (Millions) | Equity attributable to unitholders(1) | | OCI |
| Net income |
|
| Canadian Dollar | C$ | (223 | ) | $ | 19 |
| $ | — |
|
| Australian Dollar | A$ | 2,668 |
| (218 | ) | — |
|
| British Pound | £ | 1,468 |
| (229 | ) | — |
|
| Euro | € | 205 |
| (9 | ) | (12 | ) |
| Brazilian Real | R$ | 1,325 |
| (50 | ) | — |
|
| New Zealand Dollar | NZ$ | 44 |
| (4 | ) | — |
|
| Indian Rupee | Rs | 6,104 |
| (10 | ) | — |
|
| Total | | |
| $ | (501 | ) | $ | (12 | ) |
| |
(1) | As of December 31, 2014, unitholders are defined as holders of the GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, and Exchange LP Units. |
|
| | | | | | | | | |
| | Dec. 31, 2013 |
| (Millions) | Equity attributable to unitholders(1) | | OCI |
| Net income |
|
| Canadian Dollar | C$ | 631 |
| $ | (59 | ) | $ | — |
|
| Australian Dollar | A$ | 1,716 |
| (154 | ) | — |
|
| British Pound | £ | 998 |
| (165 | ) | — |
|
| Euro | € | 161 |
| (31 | ) | (6 | ) |
| Brazilian Real | R$ | 1,046 |
| (45 | ) | — |
|
| Total | | |
| $ | (454 | ) | $ | (6 | ) |
| |
(1) | As of December 31, 2013, unitholders are defined as holders of the GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, and Exchange LP Units. |
Equity price risk
The partnership faces equity price risk related to its common equity interest in GGP warrants. A $1 increase or decrease in GGP’s share price would result in a $70 million gain or loss being recognized in fair value gains, net.
The partnership’s maximum exposure to credit risk associated with financial assets is equivalent to the carrying value of each class of financial asset as separately presented in loans and notes receivable, certain other non-current assets, accounts receivables and other, and cash and cash equivalents.
Credit risk arises on loans and notes receivables in the event that borrowers default on the repayment to the partnership. The partnership mitigates this risk by attempting to ensure that adequate security has been provided in support of such loans and notes.
Credit risk related to accounts receivable arises from the possibility that tenants may be unable to fulfill their lease commitments. The partnership mitigates this risk through diversification, ensuring that borrowers meet minimum credit quality requirements and by ensuring that its tenant mix is diversified and by limiting its exposure to any one tenant. The partnership maintains a portfolio that is diversified by property type so that exposure to a business sector is lessened.
Currently no one tenant represents more than 10% of operating property revenue.
The majority of the partnership’s trade receivables are collected within 30 days. The balance of accounts receivable and loans and notes receivable past due is not significant.
NOTE 35. RELATED PARTIES
In the normal course of operations, the partnership enters into transactions with related parties. These transactions are recognized in the consolidated financial statements. These transactions have been measured at exchange value and are recognized in the consolidated financial statements. The immediate parent of the partnership is the BPY General Partner. The ultimate parent of the partnership is Brookfield Asset Management. Other related parties of the partnership include the partnership’s and Brookfield Asset Management’s subsidiaries and operating entities, certain joint ventures and associates accounted for under the equity method, as well as officers of such entities and their spouses.
The partnership has a management agreement with its service providers, wholly-owned subsidiaries of Brookfield Asset Management. Pursuant to a Master Services Agreement, prior to the third quarter, on a quarterly basis, the partnership paid a base management fee (“base management fee”), to the service providers equal to $12.5 million per quarter ($50.0 million annually).
Through the second quarter of 2015, the partnership also paid a quarterly equity enhancement distribution to Special L.P., a wholly-owned subsidiary of Brookfield Asset Management, of 0.3125% of the amount by which the operating partnership’s total capitalization value at the end of each quarter exceeded its total capitalization value that immediately followed the spin-off of Brookfield Asset Management’s commercial property operations on April 15, 2013, subject to certain adjustments. For purposes of calculating the equity enhancement distribution at each quarter-end, the capitalization of the partnership was equal to the volume-weighted average of the closing prices of the LP Units on the NYSE for each of the last five trading days of the applicable quarter multiplied by the number of issued and outstanding units of the partnership on the last of those days (assuming full conversion of Brookfield Asset Management’s interest in the partnership into LP Units of the partnership), plus the amount of third-party debt, net of cash, with recourse to the partnership and the operating partnership and certain holding entities held directly by the operating partnership.
On August 3, 2015, the board of directors of the partnership approved an amendment to the base management fee and equity enhancement distribution calculations, as of the beginning of the third quarter of 2015. Pursuant to this amendment, the annual base management fee paid by the partnership to Brookfield Asset Management was changed from $50.0 million, subject to annual inflation adjustments, to 0.5% of the total capitalization of the partnership, subject to an annual minimum of $50.0 million, plus annual inflation adjustments. The calculation of the equity enhancement distribution was amended to reduce the distribution by the amount by which the revised base management fee is greater than $50.0 million per annum, plus annual inflation adjustments, to maintain a fee level in aggregate that would be the same as prior to the amendment.
The base management fee for the year ended December 31, 2015 was $76.1 million (2014 - $50.0 million, 2013 - $36.0 million). The base management fee for year ended December 31, 2013 was pro-rated for the period from Spin-off through December 31, 2013. The equity enhancement distribution for the year ended December 31, 2015 was $59.9 million (2014 - $50.0 million, 2013 - nil).
In connection with the issuance of Preferred Equity Units to QIA, Brookfield Asset Management has contingently agreed to acquire the seven-year and ten-year tranches of Preferred Equity Units from QIA for the initial issuance price plus accrued and unpaid distributions and to exchange such units for Preferred Equity Units with terms and conditions substantially similar to the twelve-year tranche to the extent that the market price of the LP Units is less than 80% of the exchange price at maturity.
The following table summarizes transactions and balances with related parties:
|
| | | | | | |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Balances outstanding with related parties: | |
| |
|
| Participating loan interests | $ | 449 |
| $ | 609 |
|
| Equity accounted investments | 143 |
| — |
|
Loans and notes receivable(1) | 63 |
| 82 |
|
| Receivables and other assets | 29 |
| 143 |
|
| Property-specific obligations | (362 | ) | (491 | ) |
| Corporate debt obligations | (1,000 | ) | (570 | ) |
| Other liabilities | (373 | ) | (174 | ) |
| Capital securities held by Brookfield Asset Management | (1,250 | ) | (1,250 | ) |
| Preferred shares held by Brookfield Asset Management | (25 | ) | (25 | ) |
| |
(1) | At December 31, 2015, includes $63 million (December 31, 2014 - $82 million) receivable from Brookfield Asset Management upon the earlier of the partnership’s exercise of its option to convert its participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating loan interests. |
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Transactions with related parties: | |
| |
| |
|
Commercial property revenue(1) | $ | 22 |
| $ | 16 |
| $ | 7 |
|
| Management fee income | 3 |
| — |
| — |
|
| Participating loan interests (including fair value gains, net) | 129 |
| 88 |
| 59 |
|
| Interest expense on debt obligations | 55 |
| 23 |
| 12 |
|
| Interest on capital securities held by Brookfield Asset Management | 76 |
| 76 |
| 56 |
|
General and administrative expense (2) | 207 |
| 187 |
| 277 |
|
Construction costs(3) | 308 |
| 207 |
| 120 |
|
| |
(1) | Amounts received from Brookfield Asset Management and its subsidiaries for the rental of office premises. |
| |
(2) | Includes amounts paid to Brookfield Asset Management and its subsidiaries for management fees, management fees associated with the partnership’s private funds, and administrative services. |
| |
(3) | Includes amounts paid to Brookfield Asset Management and its subsidiaries for construction costs of development properties. |
During the third quarter of 2015, the partnership sold an office development project in São Paulo, Brazil to a subsidiary of Brookfield Asset Management, the partnership’s ultimate parent company. The consideration received was $109 million, based on a third-party valuation performed on the property. Upon close of the transaction, the partnership recognized $63 million of realized fair value losses, primarily as a result of movements in the Brazilian Real to U.S. Dollar exchange rate from the date of acquisition and any interim capital contributions during the construction process.
On June 5, 2015, 9165789 Canada Inc. acquired $12 million of voting preferred shares of an indirect subsidiary of the partnership, BOP Management Holdings Inc., representing a 60% voting interest. 9165789 Canada Inc. was formed by BPO and 16 individuals who are senior officers of BPO and other Brookfield Asset Management subsidiaries, who were given the opportunity to invest in 9165789 Canada Inc. as part of the partnership’s goal of retaining its top executives and aligning executives’ interests with those of the partnership. The senior officers acquired an aggregate of $2 million of common shares of 9165789 Canada Inc. for investment purposes in exchange for cash in an amount equal to the fair value of the shares. BPO also holds a $10 million non-voting preferred share interest in 9165789 Canada Inc. BOP Management Holdings Inc. indirectly owns 33% of BPO’s economic interest in DTLA and an interest in BPO’s U.S. asset management and certain promote fee streams.
On February 18, 2015, Brookfield Global FM Limited Partnership (“FM Co.”) sold its interest in Brookfield Johnson Controls Australia and Brookfield Johnson Controls Canada to a subsidiary of Brookfield Asset Management. FM Co. is accounted for in accordance with the equity method as an investment in associate.
NOTE 36. SUBSIDIARY PUBLIC ISSUERS
BOP Split was incorporated for the purpose of being an issuer of preferred shares and owning the Purchasers’ additional investment in BPO common shares. Pursuant to the terms of the Arrangement, holders of outstanding BPO Convertible Preference Shares Series G, H, J and K, which were convertible into BPO common shares, were able to exchange their shares for BOP Split Senior Preferred Shares, subject to certain conditions. The BOP Split Senior Preferred shares are listed on the TSX and began trading on June 11, 2014. All shares issued by BOP Split are retractable by the holders at any time for cash.
The following table provides consolidated summary financial information for the partnership, BOP Split, and the Holding Entities:
|
| | | | | | | | | | | | | | | | | | |
| (US$ Millions) | Brookfield
Property
Partners
L.P. |
| BOP Split |
| Holding
entities(2) |
| Other
subsidiaries |
| Consolidating
adjustments(3) |
| Brookfield
Property
Partners L.P.
consolidated |
|
| Year ended December 31, 2015 |
| Revenue | $ | — |
| $ | — |
| $ | 311 |
| $ | 4,853 |
| $ | (311 | ) | $ | 4,853 |
|
Net income attributable to unitholders(1) | 1,085 |
| 986 |
| 2,915 |
| 1,618 |
| (3,689 | ) | 2,915 |
|
| | | | | | | |
| Year ended December 31, 2014 | |
| |
| |
| |
| |
| |
|
| Revenue | $ | — |
| $ | — |
| $ | 300 |
| $ | 4,474 |
| $ | (301 | ) | $ | 4,473 |
|
Net income attributable to unitholders(1) | 1,266 |
| 1,074 |
| 3,737 |
| 2,363 |
| (4,706 | ) | 3,734 |
|
| | | | | | | |
| Year ended December 31, 2013 | | | | | | |
| Revenue | $ | — |
| $ | — |
| $ | 161 |
| $ | 4,287 |
| $ | (161 | ) | $ | 4,287 |
|
Net income attributable to unitholders(1) | 97 |
| — |
| 907 |
| 746 |
| (843 | ) | 907 |
|
| |
(1) | Includes net income attributable to limited partners, general partner, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units. |
| |
(2) | For the year ended December 31, 2015, includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings 1A Ltd., BPY Bermuda Holdings Limited, BPY Bermuda IV Holdings LP, BPY Bermuda Holdings IV Limited, and BPY Bermuda Holdings II Limited. For the years ended December 31, 2014 and 2013, includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited and BPY Bermuda Holdings II Limited. |
| |
(3) | Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis. |
|
| | | | | | | | | | | | | | | | | | |
| (US$ Millions) | Brookfield Property Partners L.P. |
| BOP Split |
| Holding entities |
| Other subsidiaries |
| Consolidating adjustments |
| Brookfield Property Partners L.P. consolidated |
|
| As of Dec. 31, 2015 |
| Current assets | $ | — |
| $ | — |
| $ | 1,771 |
| $ | 488 |
| $ | — |
| $ | 2,259 |
|
| Non-current assets | 8,237 |
| 6,505 |
| 19,603 |
| 68,802 |
| (34,345 | ) | 68,802 |
|
| Assets held for sale | — |
| — |
| — |
| 805 |
| — |
| 805 |
|
| Current liabilities | — |
| — |
| 385 |
| 11,337 |
| — |
| 11,722 |
|
| Non-current liabilities | — |
| 3,079 |
| (968 | ) | 26,858 |
| — |
| 28,969 |
|
| Liabilities associated with assets held for sale | — |
| — |
| — |
| 242 |
| — |
| 242 |
|
| Equity attributable to interests of others in operating subsidiaries and properties | — |
| — |
| — |
| 8,975 |
| — |
| 8,975 |
|
Equity attributable to unitholders(1) | $ | 8,237 |
| $ | 3,426 |
| $ | 21,957 |
| $ | 22,683 |
| $ | (34,345 | ) | $ | 21,958 |
|
| | | | | | | |
| As of Dec. 31, 2014 | |
| |
| |
| |
| |
| |
|
| Current assets | $ | — |
| $ | — |
| $ | 177 |
| $ | 4,347 |
| $ | — |
| $ | 4,524 |
|
| Non-current assets | 7,427 |
| 5,759 |
| 22,967 |
| 58,810 |
| (36,153 | ) | 58,810 |
|
| Assets held for sale | — |
| — |
| — |
| 2,241 |
| — |
| 2,241 |
|
| Current liabilities | — |
| — |
| 564 |
| 4,792 |
| — |
| 5,356 |
|
| Non-current liabilities | — |
| 2,894 |
| 2,369 |
| 25,436 |
| — |
| 30,699 |
|
| Liabilities associated with assets held for sale | — |
| — |
| — |
| 1,221 |
| — |
| 1,221 |
|
| Equity attributable to interests of others in operating subsidiaries and properties | — |
| — |
| 5 |
| 8,086 |
| — |
| 8,091 |
|
Equity attributable to unitholders(1) | $ | 7,427 |
| $ | 2,865 |
| $ | 20,206 |
| $ | 25,863 |
| $ | (36,153 | ) | $ | 20,208 |
|
| |
(1) | Includes equity attributable to limited partners, general partner, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units. |
NOTE 37. PAYROLL EXPENSE
The partnership has no employees or directors; therefore the partnership does not remunerate key management personnel. Key decision makers of the partnership are all employees of Brookfield Asset Management, the ultimate parent company, who provide management services under the Master Services Agreement.
Throughout the year, the managing general partner in its capacity as the partnership’s general partner incurs director fees, a portion of which are charged to the partnership in accordance with the limited partnership agreement. During the year ended December 31, 2015, the amount of director fees incurred were immaterial (2014 - immaterial, 2013 - immaterial).
NOTE 38. SEGMENT INFORMATION
IFRS 8, Operating Segments, requires operating segments to be determined based on internal reports that are regularly reviewed by the chief operating decision maker (“CODM”) for the purpose of allocating resources to the segment and to assessing its performance. Prior to April 1, 2014, the partnership managed the business in the following operating segments: i) Office, ii) Retail, iii) Multifamily, Industrial, and Hospitality. As discussed in Note 2(c), in the second quarter of 2014, the partnership realigned its operating segments as a result of changes to the organizational structure of its businesses, following the acquisition of additional interests in BPO and the acquisition of CARS. Accordingly, and as of December 31, 2015, the partnership has the following seven operating segments that are independently and regularly reviewed and managed by the CODM: i) Office, ii) Retail, iii) Industrial, iv) Multifamily, v) Hospitality, vi) Triple Net Lease, and vii) Corporate.
The CODM measures and evaluates the performance of the partnership’s operating segments based on net operating income (“NOI”), funds from operations (“FFO”), Company FFO and net income and equity attributable to unitholders. These performance metrics do not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies and organizations. The partnership defines these measures as follows:
| |
| i. | NOI: revenues from properties in the partnership’s commercial and hospitality operations less direct commercial property and hospitality expenses. |
| |
| ii. | FFO: net income, prior to fair value gains, net, depreciation and amortization of real estate assets, and income taxes less non-controlling interests of others in operating subsidiaries and properties share of these items. When determining FFO, the partnership also includes its proportionate share of the FFO of unconsolidated partnerships and joint ventures and associates. |
| |
| iii. | Company FFO: FFO before the impact of depreciation and amortization of non-real estate assets, transaction costs, gains (losses) associated with non-investment properties and the FFO that would have been attributable to the partnership’s shares of GGP if all outstanding warrants of GGP were exercised on a cashless basis. It also includes dilution adjustments to undiluted FFO as a result of the net settled warrants. |
| |
| iv. | Fair value changes: includes the increase or decrease in the value of investment properties that is reflected in the consolidated statements of income. |
| |
| v. | Net income attributable to unitholders: net income attributable to holders of GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units. For the period prior to the Spin-off of the partnership on April 15, 2013, net income attributable to unitholders represented net income attributable to Brookfield Asset Management. |
| |
| vi. | Equity attributable to unitholders: equity attributable to holders of GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units. |
| |
| c) | Reportable segment measures |
The following summaries present certain financial information regarding the partnership’s operating segments for the year ended December 31, 2015, 2014, and 2013.
|
| | | | | | | | | | | | | | | | | | |
| (US$ Millions) | Total revenue | NOI |
| Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
| 2015 |
| 2014 |
| 2013 |
|
| Office | $ | 2,546 |
| $ | 2,761 |
| $ | 2,621 |
| $ | 1,324 |
| $ | 1,380 |
| $ | 1,431 |
|
| Retail | 119 |
| 183 |
| 158 |
| 76 |
| 109 |
| 106 |
|
| Industrial | 311 |
| 298 |
| 128 |
| 102 |
| 94 |
| 78 |
|
| Multifamily | 307 |
| 201 |
| 154 |
| 150 |
| 99 |
| 76 |
|
| Hospitality | 1,287 |
| 988 |
| 1,220 |
| 374 |
| 192 |
| 226 |
|
| Triple Net Lease | 283 |
| 58 |
| — |
| 283 |
| 58 |
| — |
|
| Corporate | — |
| (16 | ) | 6 |
| — |
| — |
| — |
|
| Total | $ | 4,853 |
| $ | 4,473 |
| $ | 4,287 |
| $ | 2,309 |
| $ | 1,932 |
| $ | 1,917 |
|
|
| | | | | | | | | | | | | | | | | | |
| (US$ Millions) | FFO | Company FFO |
| Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
| 2015 |
| 2014 |
| 2013 |
|
| Office | $ | 675 |
| $ | 546 |
| $ | 376 |
| $ | 720 |
| $ | 539 |
| $ | 373 |
|
| Retail | 459 |
| 460 |
| 308 |
| 499 |
| 472 |
| 332 |
|
| Industrial | 13 |
| 15 |
| 7 |
| 14 |
| 20 |
| 8 |
|
| Multifamily | 23 |
| 21 |
| 12 |
| 44 |
| 28 |
| 19 |
|
| Hospitality | 62 |
| 17 |
| 26 |
| 70 |
| 22 |
| 25 |
|
| Triple Net Lease | 32 |
| 4 |
| — |
| 32 |
| 7 |
| — |
|
| Corporate | (554 | ) | (349 | ) | (147 | ) | (540 | ) | (349 | ) | (147 | ) |
| Total | $ | 710 |
| $ | 714 |
| $ | 582 |
| $ | 839 |
| $ | 739 |
| $ | 610 |
|
The following summary presents information about certain consolidated balance sheet items of the partnership, on a segmented basis, as of December 31, 2015 and 2014:
|
| | | | | | | | | | | | | | | | | | |
| | Total assets | Total liabilities | Total equity attributable
to unitholders |
| (US$ Millions) | Dec. 31, 2015 |
| Dec. 31, 2014 |
| Dec. 31, 2015 |
| Dec. 31, 2014 |
| Dec. 31, 2015 |
| Dec. 31, 2014 |
|
| Office | $ | 39,564 |
| $ | 38,618 |
| $ | 17,677 |
| $ | 18,910 |
| $ | 18,189 |
| $ | 16,003 |
|
| Retail | 10,558 |
| 11,023 |
| 370 |
| 668 |
| 9,365 |
| 9,171 |
|
| Industrial | 3,214 |
| 2,897 |
| 1,435 |
| 1,226 |
| 510 |
| 460 |
|
| Multifamily | 5,060 |
| 2,870 |
| 2,978 |
| 1,807 |
| 878 |
| 417 |
|
| Hospitality | 8,502 |
| 3,678 |
| 5,803 |
| 2,754 |
| 1,078 |
| 473 |
|
| Triple Net Lease | 4,625 |
| 4,367 |
| 3,140 |
| 3,364 |
| 381 |
| 240 |
|
| Corporate | 343 |
| 2,122 |
| 9,530 |
| 8,547 |
| (8,443 | ) | (6,556 | ) |
| Total | $ | 71,866 |
| $ | 65,575 |
| $ | 40,933 |
| $ | 37,276 |
| $ | 21,958 |
| $ | 20,208 |
|
The following summary presents a reconciliation of NOI and FFO to net income for the years ended December 31, 2015, 2014, and 2013:
|
| | | | | | | | | |
| (US$ Millions) Years ended Dec. 31, | 2015 |
| 2014 |
| 2013 |
|
| Commercial property revenue | $ | 3,216 |
| $ | 3,038 |
| $ | 2,910 |
|
| Hospitality revenue | 1,276 |
| 983 |
| 1,168 |
|
| Direct commercial property expense | (1,281 | ) | (1,298 | ) | (1,204 | ) |
| Direct hospitality expense | (902 | ) | (791 | ) | (957 | ) |
| NOI | 2,309 |
| 1,932 |
| 1,917 |
|
| Investment and other revenue | 361 |
| 452 |
| 209 |
|
| Investment and other expense | (135 | ) | (100 | ) | — |
|
| Share of equity accounted income - FFO | 724 |
| 557 |
| 435 |
|
| Interest expense | (1,528 | ) | (1,258 | ) | (1,088 | ) |
| General and administrative expense | (559 | ) | (404 | ) | (317 | ) |
| Depreciation and amortization of non-real estate assets | (27 | ) | (36 | ) | (38 | ) |
| Non-controlling interests of others in operating subsidiaries and properties in FFO | (435 | ) | (429 | ) | (536 | ) |
FFO(1) | 710 |
| 714 |
| 582 |
|
| Depreciation and amortization of real estate assets | (153 | ) | (112 | ) | (124 | ) |
| Fair value gains, net | 2,007 |
| 3,756 |
| 870 |
|
| Share of equity accounted income - non-FFO | 867 |
| 809 |
| 400 |
|
| Income tax expense | (100 | ) | (1,176 | ) | (501 | ) |
| Non-controlling interests of others in operating subsidiaries and properties - non-FFO | (416 | ) | (257 | ) | (320 | ) |
Net income attributable to unitholders(2) | 2,915 |
| 3,734 |
| 907 |
|
| Non-controlling interests of others in operating subsidiaries and properties | 851 |
| 686 |
| 856 |
|
| Net income | $ | 3,766 |
| $ | 4,420 |
| $ | 1,763 |
|
| |
(1) | FFO represents interests attributable to GP Units, LP Units, Exchange LP Units, Redeemable/Exchangeable Partnership Units and Special LP Units. The interests attributable to Exchange LP Units, Redeemable/Exchangeable Units and Special LP Units are presented as non-controlling interests in the consolidated statements of income. |
| |
(2) | Includes net income attributable to general partner, limited partners, Exchange LP Units, Redeemable/Exchangeable Partnership Units and Special LP Units. The interests attributable to Exchange LP Units, Redeemable/Exchangeable Units and Special LP Units are presented as non-controlling interests in the consolidated statements of income. |
The following summary presents financial information by the partnership’s geographic regions in which it operates:
|
| | | | | | | | | | | | | | | |
| | Total revenue
for the years ended Dec. 31, | Total non-current assets
as at Dec. 31, |
| (US$ Millions) | 2015 |
| 2014 |
| 2013 |
| 2015 |
| 2014 |
|
| United States | $ | 3,241 |
| $ | 2,952 |
| $ | 2,833 |
| $ | 44,748 |
| $ | 41,614 |
|
| Canada | 426 |
| 505 |
| 566 |
| 4,945 |
| 5,211 |
|
| Australia | 315 |
| 388 |
| 606 |
| 3,668 |
| 4,317 |
|
| Europe | 616 |
| 447 |
| 139 |
| 12,015 |
| 4,192 |
|
| Brazil | 122 |
| 143 |
| 143 |
| 1,800 |
| 2,088 |
|
| China | 21 |
| 38 |
| — |
| 589 |
| 603 |
|
| India | 112 |
| — |
| — |
| 1,037 |
| 785 |
|
| Total | $ | 4,853 |
| $ | 4,473 |
| $ | 4,287 |
| $ | 68,802 |
| $ | 58,810 |
|
NOTE 39. SUBSEQUENT EVENTS
On February 2, 2016, the partnership sold World Square Retail in Sydney for A$285 million.
On February 3, 2016. the partnership was assigned a BBB corporate rating by Standard & Poor’s Rating Services with a stable outlook.
On February 5, 2016, the partnership announced that its Board of Directors approved an increase in distributions per unit from $0.265 per unit per quarter to $0.28 per unit per quarter.
On February 25, 2016, a real estate fund managed by Brookfield Asset Management entered into a definitive agreement to acquire all of the outstanding shares of Rouse, not owned by the partnership, for $18.25 per share in cash.
On February 29, 2016, Royal Centre in Vancouver was sold for C$428 million.
SCHEDULE III – SUPPLEMENTAL SCHEDULE OF INVESTMENT PROPERTY INFORMATION
The table below presents the partnership’s number of commercial properties, the related fair value, debt
andobligations, weighted average year of acquisition and weighted average year of construction by segment as of December 31,
2012. | | | | | | | | | | | | | | | | | | | | |
| | | Number of
properties | | | Fair Value (2)
($ millions) | | | Debt(3) ($ millions) | | | Weighted Average Year
of Acquisition(1) | | | Weighted Average Year
of Construction(1) | |
Office Properties | | | | | | | | | | | | | | | | | | | | |
United States | | | 55 | | | $ | 13,772 | | | $ | 6,547 | | | | 2002 | | | | 1983 | |
Canada | | | 27 | | | | 5,132 | | | | 1,960 | | | | 1999 | | | | 1986 | |
Australia | | | 33 | | | | 4,592 | | | | 2,453 | | | | 2008 | | | | 2002 | |
Europe | | | 2 | | | | 990 | | | | 675 | | | | 2007 | | | | 2000 | |
| | | | 117 | | | | 24,486 | | | | 11,635 | | | | 2003 | | | | 1988 | |
Retail Properties | | | | | | | | | | | | | | | | | | | | |
Brazil | | | 10 | | | | 1,911 | | | | 735 | | | | 2000 | | | | 1987 | |
Australia | | | 8 | | | | 305 | | | | 137 | | | | 2008 | | | | 1989 | |
| | | | 18 | | | | 2,216 | | | | 872 | | | | 2001 | | | | 1987 | |
Multi-Family and Industrial | | | | | | | | | | | | | | | | | | | | |
United States | | | 151 | | | | 2,477 | | | | 1,489 | | | | 2011 | | | | 1991 | |
| | | | 151 | | | | 2,477 | | | | 1,489 | | | | 2011 | | | | 1991 | |
Opportunistic Investments | | | | | | | | | | | | | | | | | | | | |
United States | | | 21 | | | | 879 | | | | 389 | | | | 2009 | | | | 1985 | |
Canada | | | 1 | | | | 30 | | | | 20 | | | | 2006 | | | | n/a | (4) |
Australia | | | 8 | | | | 203 | | | | 651 | | | | 2012 | | | | 1978 | |
| | | | 30 | | | | 1,112 | | | | 1,060 | | | | 2009 | | | | 1984 | |
Total | | | 316 | | | $ | 30,291 | | | $ | 15,056 | | | | 2002 | | | | 1987 | |
|
| | | | | | | | | | |
| | Dec. 31, 2015 |
| Number of
properties |
| Fair
value(1) |
|
Debt(2) |
| Weighted average year
of acquisition | Weighted average year
of construction(3) |
| (US$ millions, except where noted) |
| Office | |
| |
| |
| | |
| United States | 105 |
| $ | 18,105 |
| $ | 8,590 |
| 2003 | 1983 |
| Canada | 27 |
| 3,948 |
| 1,736 |
| 2001 | 1989 |
| Australia | 15 |
| 2,503 |
| 1,504 |
| 2010 | 2007 |
| Europe | 5 |
| 1,226 |
| 766 |
| 2009 | 1995 |
| Brazil | 6 |
| 816 |
| 227 |
| 2015 | 2013 |
| India | 35 |
| 807 |
| 430 |
| 2014 | 2009 |
| | 193 |
| 27,405 |
| 13,253 |
| 2004 | 1988 |
| Retail | |
| |
| |
| | |
| Brazil | 6 |
| 887 |
| 308 |
| 2000 | 1987 |
| Industrial | 103 |
| 1,753 |
| 950 |
| 2013 | 2003 |
| Multifamily | 88 |
| 4,458 |
| 2,861 |
| 2014 | 1992 |
Triple Net Lease(4) | 306 |
| 4,557 |
| 3,099 |
| 2014 | 1989 |
| Total | 696 |
| $ | 39,060 |
| $ | 20,471 |
| 2003 | 1989 |
| |
(1) | Weighted against the current fair value of the properties.
|
(2) | Excludes development properties and land/parking lots with a fair value of $1,568$2,488 million in the United States, Australia, Canada, Europe, and Brazil. |
| |
(3)(2)
| Excludes debt related to the development properties and land in the amount of $486$537 million, in the United States, Australiaunsecured and Brazil. corporate facilities of $86 million and debt on hospitality assets of $4,929 million. |
| |
(3) | Weighted against the fair value of the properties at December 31, 2015. |
| |
(4) | Represents an investment in land.
Excludes land and parking lots. |
BROOKFIELD PROPERTY PARTNERS L.P.
Balance sheet
as at January 15, 2013
Report of Independent Registered Chartered Accountants
To the Directors of
Brookfield Property Partners L.P.
We have audited the accompanying balance sheet of Brookfield Property Partners L.P. (the “Partnership”) as at January 15, 2013 and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Balance Sheet
Management is responsible for the preparation and fair presentation of the balance sheet in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of a balance sheet that is free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the balance sheet. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the balance sheet, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the balance sheet in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the balance sheet.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the balance sheet presents fairly, in all material respects, the financial position of the Partnership as at January 15, 2013, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ Deloitte LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Canada
February 1, 2013
BROOKFIELD PROPERTY PARTNERS L.P.
BALANCE SHEET
(all dollar amounts are in U.S. dollars)
| | | | |
| | | As at
January 15,
2013 | |
Assets | | | | |
Investment (Note 3) | | $ | 1,000 | |
| | | | |
| | $ | 1,000 | |
| | | | |
| |
Partners’ capital | | $ | 1,000 | |
| | | | |
| | $ | 1,000 | |
| | | | |
The accompanying notes are an integral part of these financial statements.
BROOKFIELD PROPERTY PARTNERS L.P.
NOTES TO THE BALANCE SHEET
Brookfield Property Partners L.P. (the “Partnership”) was formed as a limited partnership established under the laws of Bermuda, pursuant to a limited partnership agreement dated January 3, 2012. The general partner of the Partnership, Brookfield Property Partners Limited, contributed $100 and Brookfield Asset Management Inc. (as a limited partner) contributed $900. The Partnership has been established to serve as the general partner’s primary vehicle to own and operate real property assets on a global basis.
The Partnership’s registered head office is 73 Front Street, Hamilton, HM 12, Bermuda.
The financial statements were approved by the board of directors and authorized for issue on January 25, 2013.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The balance sheet has been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Separate Statements of Income, Changes in Partners’ Capital and Cash Flows have not been presented as there have been no activities for this entity.
The Partnership made an initial capital contribution of $1,000 to Brookfield Property L.P. (the “Property Partnership”), a limited partnership formed under the laws of Bermuda, in exchange for 1,000 limited partner units of the Property Partnership.
GENERAL GROWTH PROPERTIES, INC.
Consolidated financial statements of General Growth Properties, Inc. as of December 31, 20122015 and 20112014 and for each of the three years in the period ended December 31, 20122015GENERAL GROWTH PROPERTIES, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
General Growth Properties, Inc.
We have audited the accompanying consolidated balance sheets of General Growth Properties, Inc. and subsidiaries (the
‘‘Company’’“Company”) as of December 31,
20122015 and
2011,2014, and the related consolidated statements of operations and comprehensive income,
(loss), equity, and cash flows for
each of the
three years
in the period ended December 31,
2012 and 2011, for2015. Our audits also included the
period from November 10, 2010 through December 31, 2010 (Successorconsolidated financial statement schedule of the Company
operations), and forlisted in the
period from January 1, 2010 through November 9, 2010 (Predecessor Company operations).Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits.
We did not audit the financial statements of GGP/Homart II L.L.C. and GGP TRS L.L.C., the Company’s investments in which are accounted for by use of the equity method. The Company’s equity of $700,568,000 and $800,784,000 in GGP/Homart II L.L.C.’s net assets as of December 31, 2012 and 2011, respectively, and of $9,315,000, $(4,740,000), and $(1,109,000) in GGP/Homart II L.L.C.’s net income (loss) for each of the three years in the respective period ended December 31, 2012 are included in the accompanying financial statements. The Company’s equity of $242,802,000 and $229,519,000 in GGP-TRS L.L.C.’s net assets as of December 31, 2012 and 2011, respectively, and of $6,133,000, $(4,620,000), and $(16,403,000) in GGP-TRS L.L.C.’s net income (loss) for each of the three years in the respective period ended December 31, 2012 are included in the accompanying financial statements. The financial statements of GGP/Homart II L.L.C. and GGP-TRS L.L.C. were audited by other auditors related to the periods listed above whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for such companies, is based on the reports of the other auditors and the procedures that we considered necessary in the circumstances with respect to the inclusion of the Company’s equity investments and equity method income in the accompanying consolidated financial statements taking into consideration (1) the basis adjustments of the equity method investments as a result of the revaluation of the investments to fair value discussed in Note 3 and (2) the allocation of the equity method investment income from the operations of these investees between the two periods within the calendar year 2010 for the Predecessor Company and Successor Company.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
and the reports of the other auditors provide a reasonable basis for our opinion.
In our opinion,
based on our audits and the reports of the other auditors, the Successor Companysuch consolidated financial statements present fairly, in all material respects, the financial position of General Growth Properties, Inc. and subsidiaries as of December 31,
20122015 and
2011,2014, and the results of their operations and their cash flows for
each of the
three years
in the period ended December 31,
2012 and 2011 and the period from November 10, 2010 through December 31, 20102015 in conformity with accounting principles generally accepted in the United States of America.
Further,Also, in our opinion,
based on our audits andsuch financial statement schedule, when considered in relation to the
reports of the other auditors, the Predecessor Companybasic consolidated financial statements
referred to above presenttaken as a whole, presents fairly, in all material respects, the
results of their operations and their cash flows for the period from January 1, 2010 through November 9, 2010 in conformity with accounting principles generally accepted in the United States of America.information set forth therein.
As discussed in Note
32 to the consolidated financial statements,
on October 21, 2010, the
Bankruptcy Court entered an order confirming the planCompany has changed its method of
reorganization which became effective on November 9, 2010. Accordingly, the accompanying financial statements have been prepared in conformity with ASC 852-10,Reorganizations,accounting for and
ASC 805-10,Business Combinations,disclosure of discontinued operations for the
Successor Company as a new entity including assets, liabilities,year ended December 31, 2015 due to the adoption of Accounting Standards Update 2014-08, “Reporting Discontinued Operations and
a capital structure with carrying values not comparable with prior periods.Disclosures of Disposals of Components of an Entity.”
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012,2015, based on the criteria established inInternal Control —Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report (not presented herein) dated February 28, 201319, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting. /s/ Deloitte & Touche LLP
February
28, 2013Independent Auditors’ Report
The Members
GGP/Homart II L.L.C.:
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of GGP/Homart II L.L.C. (a Delaware Limited Liability Company) and its subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income, changes in capital, and cash flows for each of the years in the three-year period ended December 31, 2012, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GGP/Homart II L.L.C. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in accordance with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
February 28, 2013
Independent Auditors’ Report
The Members
GGP-TRS L.L.C.:
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of GGP-TRS L.L.C. (a Delaware Limited Liability Company) and its subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in members’ capital, and cash flows for each of the years in the three-year period ended December 31, 2012, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GGP-TRS L.L.C. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in accordance with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
February 28, 2013
19, 2016
GENERAL GROWTH PROPERTIES, INC.
(Dollars in thousands, except per share amounts)
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | | December 31,
2012 | | | December 31,
2011 | |
| | | (Dollars in thousands, except per share amounts) | |
Assets: | | | | | | | | |
Investment in real estate: | | | | | | | | |
Land | | $ | 4,278,471 | | | $ | 4,623,944 | |
Buildings and equipment | | | 18,806,858 | | | | 19,837,750 | |
Less accumulated depreciation | | | (1,440,301 | ) | | | (974,185 | ) |
Construction in progress | | | 376,529 | | | | 135,807 | |
| | | | | | | | |
Net property and equipment | | | 22,021,557 | | | | 23,623,316 | |
Investment in and loans to/from Unconsolidated Real Estate Affiliates | | | 2,865,871 | | | | 3,052,973 | |
| | | | | | | | |
Net investment in real estate | | | 24,887,428 | | | | 26,676,289 | |
Cash and cash equivalents | | | 624,815 | | | | 572,872 | |
Accounts and notes receivable, net | | | 260,860 | | | | 218,749 | |
Deferred expenses, net | | | 179,837 | | | | 170,012 | |
Prepaid expenses and other assets | | | 1,329,465 | | | | 1,805,535 | |
Assets held for disposition | | | - | | | | 74,694 | |
| | | | | | | | |
Total assets | | $ | 27,282,405 | | | $ | 29,518,151 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Mortgages, notes and loans payable | | $ | 15,966,866 | | | $ | 17,143,014 | |
Accounts payable and accrued expenses | | | 1,212,231 | | | | 1,445,738 | |
Dividend payable | | | 103,749 | | | | 526,332 | |
Deferred tax liabilities | | | 28,174 | | | | 29,220 | |
Tax indemnification liability | | | 303,750 | | | | 303,750 | |
Junior Subordinated Notes | | | 206,200 | | | | 206,200 | |
Warrant liability | | | 1,488,196 | | | | 985,962 | |
Liabilities held for disposition | | | - | | | | 74,795 | |
| | | | | | | | |
Total liabilities | | | 19,309,166 | | | | 20,715,011 | |
| | | | | | | | |
Redeemable noncontrolling interests: | | | | | | | | |
Preferred | | | 136,008 | | | | 120,756 | |
Common | | | 132,211 | | | | 103,039 | |
| | | | | | | | |
Total redeemable noncontrolling interests | | | 268,219 | | | | 223,795 | |
| | | | | | | | |
Commitments and Contingencies | | | - | | | | - | |
Equity: | | | | | | | | |
Common stock: 11,000,000,000 shares authorized, $0.01 par value, 939,049,318 and 935,307,487 shares issued and outstanding as of December 31, 2012 and 2011 | | | 9,392 | | | | 9,353 | |
Additional paid-in capital | | | 10,432,447 | | | | 10,405,318 | |
Retained earnings (accumulated deficit) | | | (2,732,787 | ) | | | (1,883,569 | ) |
Accumulated other comprehensive loss | | | (87,354 | ) | | | (47,773 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 7,621,698 | | | | 8,483,329 | |
Noncontrolling interests in consolidated real estate affiliates | | | 83,322 | | | | 96,016 | |
| | | | | | | | |
Total equity | | | 7,705,020 | | | | 8,579,345 | |
| | | | | | | | |
Total liabilities and equity | | $ | 27,282,405 | | | $ | 29,518,151 | |
| | | | | | | | |
|
| | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 |
| Assets: | | |
| | |
|
| Investment in real estate: | | |
| | |
|
| Land | | $ | 3,596,354 |
| | $ | 4,244,607 |
|
| Buildings and equipment | | 16,379,789 |
| | 18,028,844 |
|
| Less accumulated depreciation | | (2,452,127 | ) | | (2,280,845 | ) |
| Construction in progress | | 308,903 |
| | 703,859 |
|
| Net property and equipment | | 17,832,919 |
| | 20,696,465 |
|
| Investment in and loans to/from Unconsolidated Real Estate Affiliates | | 3,506,040 |
| | 2,604,762 |
|
| Net investment in real estate | | 21,338,959 |
| | 23,301,227 |
|
| Cash and cash equivalents | | 356,895 |
| | 372,471 |
|
| Accounts and notes receivable, net | | 949,556 |
| | 663,768 |
|
| Deferred expenses, net | | 214,578 |
| | 130,389 |
|
| Prepaid expenses and other assets | | 997,334 |
| | 813,777 |
|
| Assets held for disposition | | 216,233 |
| | — |
|
| Total assets | | $ | 24,073,555 |
| | $ | 25,281,632 |
|
| Liabilities: | | |
| | |
|
| Mortgages, notes and loans payable | | $ | 14,216,160 |
| | $ | 15,944,187 |
|
| Investment in Unconsolidated Real Estate Affiliates | | 38,488 |
| | 35,598 |
|
| Accounts payable and accrued expenses | | 784,493 |
| | 934,897 |
|
| Dividend payable | | 172,070 |
| | 154,694 |
|
| Deferred tax liabilities | | 1,289 |
| | 21,240 |
|
| Junior subordinated notes | | 206,200 |
| | 206,200 |
|
| Liabilities held for dispositions | | 58,934 |
| | — |
|
| Total liabilities | | 15,477,634 |
| | 17,296,816 |
|
| Redeemable noncontrolling interests: | | |
| | |
|
| Preferred | | 157,903 |
| | 164,031 |
|
| Common | | 129,724 |
| | 135,265 |
|
| Total redeemable noncontrolling interests | | 287,627 |
| | 299,296 |
|
| Commitments and Contingencies | | — |
| | — |
|
| | | | | |
| Equity: | | |
| | |
|
| Common stock: 11,000,000,000 shares authorized, $0.01 par value, 966,096,656 issued, 882,397,202 outstanding as of December 31, 2015, and 968,340,597 issued and 884,912,012 outstanding as of December 31, 2014 | | 9,386 |
| | 9,409 |
|
| Preferred Stock: | | |
| | |
|
| 500,000,000 shares authorized, $.01 par value, 10,000,000 shares issued and outstanding as of December 31, 2015 and December 31, 2014 | | 242,042 |
| | 242,042 |
|
| Additional paid-in capital | | 11,362,369 |
| | 11,351,625 |
|
| Retained earnings (accumulated deficit) | | (2,141,549 | ) | | (2,822,740 | ) |
| Accumulated other comprehensive loss | | (72,804 | ) | | (51,753 | ) |
| Common stock in treasury, at cost, 56,240,259 shares as of December 31, 2015 and 55,969,390 shares as of December 31, 2014 | | (1,129,401 | ) | | (1,122,664 | ) |
| Total stockholders' equity | | 8,270,043 |
| | 7,605,919 |
|
| Noncontrolling interests in consolidated real estate affiliates | | 24,712 |
| | 79,601 |
|
| Noncontrolling interests related to long-term incentive plan common units | | 13,539 |
| | — |
|
| Total equity | | 8,308,294 |
| | 7,685,520 |
|
| Total liabilities and equity | | $ | 24,073,555 |
| | $ | 25,281,632 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-73
GENERAL GROWTH PROPERTIES, INC.
(Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10, 2010
through
December 31, 2010 | | | Period from
January 1, 2010
through
November 9, 2010 | |
| | | (Dollars in thousands, except per share amounts) | |
Revenues: | | | | | | | | | | | | | | | | |
Minimum rents | | $ | 1,578,074 | | | $ | 1,536,328 | | | $ | 225,411 | | | $ | 1,321,004 | |
Tenant recoveries | | | 716,120 | | | | 711,663 | | | | 97,444 | | | | 613,564 | |
Overage rents | | | 69,550 | | | | 60,849 | | | | 17,609 | | | | 31,056 | |
Management fees and other corporate revenues | | | 71,949 | | | | 61,165 | | | | 8,883 | | | | 54,351 | |
Other | | | 76,157 | | | | 74,779 | | | | 14,600 | | | | 55,370 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 2,511,850 | | | | 2,444,784 | | | | 363,947 | | | | 2,075,345 | |
| | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | |
Real estate taxes | | | 226,482 | | | | 224,013 | | | | 31,552 | | | | 189,711 | |
Property maintenance costs | | | 84,783 | | | | 91,204 | | | | 17,228 | | | | 74,539 | |
Marketing | | | 33,854 | | | | 33,602 | | | | 10,622 | | | | 21,359 | |
Other property operating costs | | | 368,154 | | | | 376,152 | | | | 55,947 | | | | 319,838 | |
Provision for doubtful accounts | | | 4,517 | | | | 5,075 | | | | (47 | ) | | | 12,628 | |
Property management and other costs | | | 159,671 | | | | 187,035 | | | | 29,337 | | | | 134,602 | |
General and administrative | | | 39,255 | | | | 30,886 | | | | 22,241 | | | | 24,392 | |
Provision for impairment | | | 58,198 | | | | 916 | | | | - | | | | 4,516 | |
Depreciation and amortization | | | 793,877 | | | | 874,189 | | | | 121,782 | | | | 492,823 | |
| | | | | | | | | | | | | | | | |
Total expenses | | | 1,768,791 | | | | 1,823,072 | | | | 288,662 | | | | 1,274,408 | |
| | | | | | | | | | | | | | | | |
Operating income | | | 743,059 | | | | 621,712 | | | | 75,285 | | | | 800,937 | |
Interest income | | | 2,924 | | | | 2,418 | | | | 718 | | | | 1,455 | |
Interest expense | | | (811,094 | ) | | | (879,532 | ) | | | (126,647 | ) | | | (1,167,032 | ) |
Warrant liability adjustment | | | (502,234 | ) | | | 55,042 | | | | (205,252 | ) | | | - | |
Gain from change in control of investment properties | | | 18,547 | | | | - | | | | - | | | | - | |
Loss on extinguishment of debt | | | (15,007 | ) | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Loss before income taxes, equity in income (loss) of Unconsolidated Real Estate Affiliates, reorganization items, discontinued operations and allocation to noncontrolling interests | | | (563,805 | ) | | | (200,360 | ) | | | (255,896 | ) | | | (364,640 | ) |
(Provision for) benefit from income taxes | | | (9,091 | ) | | | (8,723 | ) | | | 8,992 | | | | 60,962 | |
Equity in income (loss) of Unconsolidated Real Estate Affiliates | | | 54,984 | | | | 2,898 | | | | (504 | ) | | | 12,139 | |
Equity in income (loss) of Unconsolidated Real Estate Affiliates-gain on investment | | | 23,358 | | | | - | | | | - | | | | 9,718 | |
Reorganization items | | | - | | | | - | | | | - | | | | (354,726 | ) |
| | | | | | | | | | | | | | | | |
Loss from continuing operations | | | (494,554 | ) | | | (206,185 | ) | | | (247,408 | ) | | | (636,547 | ) |
Discontinued operations: | | | | | | | | | | | | | | | | |
Loss from discontinued operations, including gains (losses) on dispositions | | | (27,744 | ) | | | (100,619 | ) | | | (8,676 | ) | | | (576,178 | ) |
Gain on extinguishment of debt | | | 50,765 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Discontinued operations, net | | | 23,021 | | | | (100,619 | ) | | | (8,676 | ) | | | (576,178 | ) |
| | | | | | | | | | | | | | | | |
Net loss | | | (471,533 | ) | | | (306,804 | ) | | | (256,084 | ) | | | (1,212,725 | ) |
Allocation to noncontrolling interests | | | (9,700 | ) | | | (6,368 | ) | | | 1,868 | | | | 26,967 | |
| | | | | | | | | | | | | | | | |
Net loss attributable to common stockholders | | $ | (481,233 | ) | | $ | (313,172 | ) | | $ | (254,216 | ) | | $ | (1,185,758 | ) |
| | | | | | | | | | | | | | | | |
GENERAL GROWTH PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Continued)
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10, 2010
through
December 31, 2010 | | | Period from
January 1, 2010
through
November 9, 2010 | |
| | | (Dollars in thousands, except per share amounts) | |
Basic Loss Per Share: | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.54 | ) | | $ | (0.22 | ) | | $ | (0.26 | ) | | $ | (1.96 | ) |
Discontinued operations | | | 0.02 | | | | (0.11 | ) | | | (0.01 | ) | | | (1.78 | ) |
| | | | | | | | | | | | | | | | |
Total basic loss per share | | $ | (0.52 | ) | | $ | (0.33 | ) | | $ | (0.27 | ) | | $ | (3.74 | ) |
| | | | | | | | | | | | | | | | |
Diluted Loss Per Share: | | | | | | | | | | | | | | | | |
Continuing operations | | $ | (0.54 | ) | | $ | (0.27 | ) | | $ | (0.26 | ) | | $ | (1.96 | ) |
Discontinued operations | | | 0.02 | | | | (0.10 | ) | | | (0.01 | ) | | | (1.78 | ) |
| | | | | | | | | | | | | | | | |
Total diluted loss per share | | $ | (0.52 | ) | | $ | (0.37 | ) | | $ | (0.27 | ) | | $ | (3.74 | ) |
| | | | | | | | | | | | | | | | |
Dividends declared per share | | $ | 0.42 | | | $ | 0.83 | | | $ | 0.38 | | | $ | - | |
Comprehensive Loss, Net: | | | | | | | | | | | | | | | | |
Net loss | | $ | (471,533 | ) | | $ | (306,804 | ) | | $ | (256,084 | ) | | $ | (1,212,725 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Net unrealized gains on financial instruments | | | - | | | | - | | | | 129 | | | | 15,024 | |
Accrued pension adjustment | | | - | | | | - | | | | - | | | | 1,745 | |
Foreign currency translation | | | (39,674 | ) | | | (48,545 | ) | | | 75 | | | | (16,552 | ) |
Unrealized gains (losses) on available-for-sale securities | | | (165 | ) | | | 263 | | | | (32 | ) | | | 38 | |
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | | | (39,839 | ) | | | (48,282 | ) | | | 172 | | | | 255 | |
| | | | | | | | | | | | | | | | |
Comprehensive loss | | | (511,372 | ) | | | (355,086 | ) | | | (255,912 | ) | | | (1,212,470 | ) |
Comprehensive (income) loss allocated to noncontrolling interests | | | (9,442 | ) | | | (6,031 | ) | | | 1,869 | | | | 26,921 | |
| | | | | | | | | | | | | | | | |
Comprehensive loss, net attributable to common stockholders | | $ | (520,814 | ) | | $ | (361,117 | ) | | $ | (254,043 | ) | | $ | (1,185,549 | ) |
| | | | | | | | | | | | | | | | |
INCOME (LOSS)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Revenues: | | |
| | |
| | |
|
| Minimum rents | | $ | 1,481,614 |
| | $ | 1,583,695 |
| | $ | 1,553,941 |
|
| Tenant recoveries | | 689,536 |
| | 739,411 |
| | 716,932 |
|
| Overage rents | | 44,024 |
| | 51,611 |
| | 55,998 |
|
| Management fees and other corporate revenues | | 86,595 |
| | 70,887 |
| | 68,792 |
|
| Other | | 102,137 |
| | 89,955 |
| | 90,354 |
|
| Total revenues | | 2,403,906 |
| | 2,535,559 |
| | 2,486,017 |
|
| Expenses: | | |
| | |
| | |
|
| Real estate taxes | | 222,883 |
| | 227,992 |
| | 239,807 |
|
| Property maintenance costs | | 60,040 |
| | 66,897 |
| | 69,411 |
|
| Marketing | | 21,958 |
| | 24,654 |
| | 27,627 |
|
| Other property operating costs | | 302,797 |
| | 333,620 |
| | 341,420 |
|
| Provision for doubtful accounts | | 8,081 |
| | 8,055 |
| | 3,920 |
|
| Property management and other costs | | 161,556 |
| | 155,093 |
| | 164,457 |
|
| General and administrative | | 50,405 |
| | 64,051 |
| | 49,237 |
|
| Provision for impairment | | 8,604 |
| | 5,278 |
| | — |
|
| Depreciation and amortization | | 643,689 |
| | 708,406 |
| | 749,722 |
|
| Total expenses | | 1,480,013 |
| | 1,594,046 |
| | 1,645,601 |
|
| Operating income | | 923,893 |
| | 941,513 |
| | 840,416 |
|
| Interest income and dividend income | | 49,254 |
| | 28,613 |
| | 7,699 |
|
| Interest expense | | (607,675 | ) | | (699,285 | ) | | (723,152 | ) |
| Loss on foreign currency | | (44,984 | ) | | (18,048 | ) | | (7,312 | ) |
| Warrant liability adjustment | | — |
| | — |
| | (40,546 | ) |
| Gains from changes in control of investment properties | | 634,367 |
| | 91,193 |
| | 219,784 |
|
| Loss on extinguishment of debt | | — |
| | — |
| | (36,479 | ) |
| Income before income taxes, equity in income of Unconsolidated Real Estate Affiliates, discontinued operations and allocation to noncontrolling interests | | 954,855 |
| | 343,986 |
| | 260,410 |
|
| Benefit from (provision for) | | 38,334 |
| | (7,253 | ) | | (345 | ) |
| Equity in income of Unconsolidated Real Estate Affiliates | | 73,390 |
| | 51,568 |
| | 58,919 |
|
| Unconsolidated Real Estate Affiliates- gain on investment | | 327,017 |
| | 9,710 |
| | 9,837 |
|
| Income from continuing operations | | 1,393,596 |
| | 398,011 |
| | 328,821 |
|
| Discontinued operations: | | |
| | |
| | |
|
| Income from discontinued operations, including gains (losses) on dispositions | | — |
| | 137,989 |
| | (37,516 | ) |
| Gain on extinguishment of tax indemnification liability | | — |
| | 77,215 |
| | — |
|
| Gain on extinguishment of debt | | — |
| | 66,679 |
| | 25,894 |
|
| Discontinued operations, net | | — |
| | 281,883 |
| | (11,622 | ) |
| Net income | | 1,393,596 |
| | 679,894 |
| | 317,199 |
|
| Allocation to noncontrolling interests | | (19,035 | ) | | (14,044 | ) | | (14,671 | ) |
| Net income attributable to General Growth Properties, Inc. | | 1,374,561 |
| | 665,850 |
| | 302,528 |
|
| Preferred Stock dividends | | (15,937 | ) | | (15,936 | ) | | (14,078 | ) |
| Net income attributable to common stockholders | | $ | 1,358,624 |
| | $ | 649,914 |
| | $ | 288,450 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-74
GENERAL GROWTH PROPERTIES, INC.
(Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF
EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common
Stock | | | Additional
Paid-In
Capital | | | Retained
Earnings
(Accumulated
Deficit) | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Treasury
Stock | | | Noncontrolling
Interests in
Consolidated
Real Estate
Affiliates | | | Total Equity | |
| | | (Dollars in thousands, except per share amounts) | |
Balance at January 1, 2010 (Predecessor) | | $ | 3,138 | | | $ | 3,729,453 | | | $ | (2,832,627 | ) | | $ | (249 | ) | | $ | (76,752 | ) | | $ | 24,376 | | | $ | 847,339 | |
Net (loss) income | | | | | | | | | | | (1,185,758 | ) | | | | | | | | | | | 1,545 | | | | (1,184,213 | ) |
Distributions to noncontrolling interests in consolidated Real Estate Affiliates | | | | | | | | | | | | | | | | | | | | | | | (1,927 | ) | | | (1,927 | ) |
Restricted stock grants, net of forfeitures (87,059 common shares) | | | 1 | | | | 8,309 | | | | | | | | | | | | | | | | | | | | 8,310 | |
Issuance of common stock - payment of dividend (4,923,287 common shares) | | | 49 | | | | 53,346 | | | | | | | | | | | | | | | | | | | | 53,395 | |
Other comprehensive income | | | | | | | | | | | | | | | 47,684 | | | | | | | | | | | | 47,684 | |
Fair value adjustment for noncontrolling interest in Operating Partnership | | | | | | | (38,854 | ) | | | | | | | | | | | | | | | | | | | (38,854 | ) |
Distribution of HHC | | | | | | | | | | | (1,487,929 | ) | | | 1,268 | | | | | | | | (808 | ) | | | (1,487,469 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at November 9, 2010 (Predecessor) | | $ | 3,188 | | | $ | 3,752,254 | | | $ | (5,506,314 | ) | | $ | 48,703 | | | $ | (76,752 | ) | | $ | 23,186 | | | $ | (1,755,735 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Effects of acquisition accounting: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Elimination of Predecessor common stock | | | (3,188 | ) | | | (3,752,254 | ) | | | | | | | | | | | 76,752 | | | | (23,186 | ) | | | (3,701,876 | ) |
Elimination of Predecessor accumulated deficit and accumulated other comprehensive income | | | | | | | | | | | 5,506,314 | | | | (48,703 | ) | | | | | | | | | | | 5,457,611 | |
Issuance of common stock pursuant to the Plan (643,780,488 common shares, net of 120,000,000 stock warrants issued and stock issuance costs) | | | 6,438 | | | | 5,569,060 | | | | | | | | | | | | | | | | | | | | 5,575,498 | |
Issuance of common stock to existing common shareholders pursuant to the Plan | | | 3,176 | | | | 4,443,515 | | | | | | | | | | | | | | | | | | | | 4,446,691 | |
Restricted stock grants, net of forfeitures (1,725,000 common shares) | | | 17 | | | | (17 | ) | | | | | | | | | | | | | | | | | | | - | |
Change in basis for noncontrolling interests in consolidated real estate affiliates | | | | | | | | | | | | | | | | | | | | | | | 102,169 | | | | 102,169 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at November 10, 2010 (Successor) | | $ | 9,631 | | | $ | 10,012,558 | | | $ | - | | | $ | - | | | $ | - | | | $ | 102,169 | | | $ | 10,124,358 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | | | | | | | | | (254,216 | ) | | | | | | | | | | | 534 | | | | (253,682 | ) |
Issuance of common stock (154,886,000 common shares, net of stock issuance costs) | | | 1,549 | | | | 2,145,488 | | | | | | | | | | | | | | | | | | | | 2,147,037 | |
Clawback of common stock pursuant to the Plan (179,276,244 common shares) | | | (1,792 | ) | | | (1,797,065 | ) | | | | | | | | | | | | | | | | | | | (1,798,857 | ) |
Restricted stock grants, net of forfeitures (1,315,593 common shares) | | | 13 | | | | 5,026 | | | | | | | | | | | | | | | | | | | | 5,039 | |
Stock option grants, net of forfeitures (1,828,369 common shares) | | | 18 | | | | 4,978 | | | | | | | | | | | | | | | | | | | | 4,996 | |
Distributions to noncontrolling interests in consolidated Real Estate Affiliates | | | | | | | | | | | | | | | | | | | | | | | (416 | ) | | | (416 | ) |
Other comprehensive income | | | | | | | | | | | | | | | 172 | | | | | | | | | | | | 172 | |
Fair value adjustment for noncontrolling interest in Operating Partnership | | | | | | | (11,522 | ) | | | | | | | | | | | | | | | | | | | (11,522 | ) |
Issuance of subsidiary preferred shares (360 preferred shares) | | | | | | | | | | | | | | | | | | | | | | | 360 | | | | 360 | |
Cash distributions declared ($0.038 per share) | | | | | | | | | | | (35,736 | ) | | | | | | | | | | | | | | | (35,736 | ) |
Stock distributions declared ($0.342 per share) | | | | | | | 322,123 | | | | (322,123 | ) | | | | | | | | | | | | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2010 (Successor) | | $ | 9,419 | | | $ | 10,681,586 | | | $ | (612,075 | ) | | $ | 172 | | | $ | - | | | $ | 102,647 | | | $ | 10,181,749 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Continued)
|
| | | | | | | | | | | | |
| Basic Earnings (Loss) Per Share: | | |
| | |
| | |
|
| Continuing operations | | $ | 1.54 |
| | $ | 0.42 |
| | $ | 0.32 |
|
| Discontinued operations | | — |
| | 0.32 |
| | (0.01 | ) |
| Total basic earnings per share | | $ | 1.54 |
| | $ | 0.74 |
| | $ | 0.31 |
|
| Diluted Earnings (Loss) Per Share: | | |
| | |
| | |
|
| Continuing operations | | $ | 1.43 |
| | $ | 0.39 |
| | $ | 0.32 |
|
| Discontinued operations | | — |
| | 0.30 |
| | (0.01 | ) |
| Total diluted earnings per share | | $ | 1.43 |
| | $ | 0.69 |
| | $ | 0.31 |
|
| Comprehensive Income (Loss), Net: | | |
| | |
| | |
|
| Net income | | $ | 1,393,596 |
| | $ | 679,894 |
| | $ | 317,199 |
|
| Other comprehensive income (loss): | | |
| | |
| | |
|
| Foreign currency translation | | (33,292 | ) | | (13,604 | ) | | 49,644 |
|
| Unrealized gains (losses) on available-for-sale securities | | 11,978 |
| | — |
| | (65 | ) |
| Net unrealized gains (losses) on other financial instruments | | 30 |
| | (54 | ) | | (5 | ) |
| Other comprehensive income (loss) | | (21,284 | ) | | (13,658 | ) | | 49,574 |
|
| Comprehensive income | | 1,372,312 |
| | 666,236 |
| | 366,773 |
|
| Comprehensive income allocated to noncontrolling interests | | (18,802 | ) | | (13,966 | ) | | (15,064 | ) |
| Comprehensive income attributable to General Growth Properties, Inc. | | 1,353,510 |
| | 652,270 |
| | 351,709 |
|
| Preferred stock dividends | | (15,937 | ) | | (15,936 | ) | | (14,078 | ) |
| Comprehensive income, net, attributable to common stockholders | | $ | 1,337,573 |
| | $ | 636,334 |
| | $ | 337,631 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-75
GENERAL GROWTH PROPERTIES, INC.
(Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF EQUITY
(Continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common
Stock | | | Additional
Paid-In
Capital | | | Retained
Earnings
(Accumulated
Deficit) | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Treasury
Stock | | | Noncontrolling
Interests in
Consolidated
Real Estate
Affiliates | | | Total Equity | |
| | | (Dollars in thousands, except per share amounts) | |
Net loss | | | | | | | | | | $ | (313,172 | ) | | | | | | | | | | $ | (1,075 | ) | | $ | (314,247 | ) |
Distributions to noncontrolling interests in consolidated Real Estate Affiliates | | | | | | | | | | | | | | | | | | | | | | | (5,556 | ) | | | (5,556 | ) |
Issuance of common stock - payment of dividend (22,256,121 common shares) | | $ | 223 | | | $ | (244 | ) | | | 21 | | | | | | | | | | | | | | | | - | |
Restricted stock grants, net of forfeitures ((341,895) common shares) | | | (3 | ) | | | 11,578 | | | | (307 | ) | | | | | | | | | | | | | | | 11,268 | |
Stock option grants, net of forfeitures (121,439 common shares) | | | 1 | | | | 834 | | | | | | | | | | | | | | | | | | | | 835 | |
Purchase and cancellation of common shares ((35,833,537) common shares) | | | (358 | ) | | | (398,590 | ) | | | (154,562 | ) | | | | | | | | | | | | | | | (553,510 | ) |
Cash dividends reinvested (DRIP) in stock (7,225,345 common shares) | | | 71 | | | | 115,292 | | | | | | | | | | | | | | | | | | | | 115,363 | |
Other comprehensive loss | | | | | | | | | | | | | | $ | (47,945 | ) | | | | | | | | | | | (47,945 | ) |
Cash distributions declared ($0.40 per share) | | | | | | | (16 | ) | | | (376,824 | ) | | | | | | | | | | | | | | | (376,840 | ) |
Cash redemptions for common units in excess of carrying value | | | | | | | (648 | ) | | | | | | | | | | | | | | | | | | | (648 | ) |
Fair value adjustment for noncontrolling interest in Operating Partnership | | | | | | | (4,474 | ) | | | | | | | | | | | | | | | | | | | (4,474 | ) |
Dividend for RPI Spin-off | | | | | | | | | | | (426,650 | ) | | | | | | | | | | | | | | | (426,650 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2011 (Successor) | | $ | 9,353 | | | $ | 10,405,318 | | | $ | (1,883,569 | ) | | $ | (47,773 | ) | | $ | - | | | $ | 96,016 | | | $ | 8,579,345 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | | | | | | | | | (481,233 | ) | | | | | | | | | | | 784 | | | | (480,449 | ) |
Distributions to noncontrolling interests in consolidated Real Estate Affiliates | | | | | | | | | | | | | | | | | | | | | | | (13,478 | ) | | | (13,478 | ) |
Restricted stock grants, net of forfeitures ((85,452) common shares) | | | (1 | ) | | | 8,888 | | | | | | | | | | | | | | | | | | | | 8,887 | |
Employee stock purchase program (98,076 common shares) | | | 1 | | | | 1,604 | | | | | | | | | | | | | | | | | | | | 1,605 | |
Stock option grants, net of forfeitures (617,842 common shares) | | | 6 | | | | 19,853 | | | | | | | | | | | | | | | | | | | | 19,859 | |
Cash dividends reinvested (DRIP) in stock (3,111,365 common shares) | | | 33 | | | | 48,490 | | | | | | | | | | | | | | | | | | | | 48,523 | |
Other comprehensive loss | | | | | | | | | | | | | | | (39,581 | ) | | | | | | | | | | | (39,581 | ) |
Cash distributions declared ($0.42 per share) | | | | | | | | | | | (394,029 | ) | | | | | | | | | | | | | | | (394,029 | ) |
Cash redemptions for common units in excess of carrying value | | | | | | | (1,083 | ) | | | | | | | | | | | | | | | | | | | (1,083 | ) |
Fair value adjustment for noncontrolling interest in Operating Partnership | | | | | | | (50,623 | ) | | | | | | | | | | | | | | | | | | | (50,623 | ) |
Adjustment to dividend for RPI Spin-Off | | | | | | | | | | | 26,044 | | | | | | | | | | | | | | | | 26,044 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 (Successor) | | $ | 9,392 | | | $ | 10,432,447 | | | $ | (2,732,787 | ) | | $ | (87,354 | ) | | $ | - | | | $ | 83,322 | | | $ | 7,705,020 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common
Stock | | Preferred
Stock | | Additional
Paid-In
Capital | | Retained
Earnings
(Accumulated
Deficit) | | Accumulated
Other
Comprehensive
Income (Loss) | | Common
Stock in
Treasury | | Noncontrolling Interests in Consolidated Real Estate Affiliates and Long Term Incentive Plan Common Units
| | Total
Equity |
| Balance at January 1, 2013 | | $ | 9,392 |
| | $ | — |
| | $ | 10,432,447 |
| | $ | (2,732,787 | ) | | $ | (87,354 | ) | | $ | — |
| | $ | 83,322 |
| | $ | 7,705,020 |
|
| | | | | | | | | | | | | | | | | |
| Net income | | |
| | |
| | |
| | 302,528 |
| | |
| | |
| | 3,103 |
| | 305,631 |
|
| Issuance of Preferred Stock, net of issuance costs | | |
| | 242,042 |
| | |
| | |
| | |
| | |
| | |
| | 242,042 |
|
| Distributions to noncontrolling interests in consolidated Real Estate Affiliates | | |
| | |
| | |
| | |
| | |
| | |
| | (4,283 | ) | | (4,283 | ) |
| Restricted stock grants, net of forfeitures (18,444 common shares) | | — |
| | |
| | 8,340 |
| | |
| | |
| | |
| | |
| | 8,340 |
|
| Employee stock purchase program (135,317 common shares) | | — |
| | |
| | 2,708 |
| | |
| | |
| | |
| | |
| | 2,708 |
|
| Stock option grants, net of forfeitures (344,670 common shares) | | 3 |
| | |
| | 35,995 |
| | |
| | |
| | |
| | |
| | 35,998 |
|
| Treasury stock purchases (28,345,108 common shares) | | |
| | |
| | |
| | |
| | |
| | (566,863 | ) | | |
| | (566,863 | ) |
| Cash dividends reinvested (DRIP) in stock (28,852 common shares) | | — |
| | |
| | 613 |
| | |
| | |
| | |
| | |
| | 613 |
|
| Other comprehensive loss before reclassification | | |
| | |
| | |
| | |
| | (60,680 | ) | | |
| | |
| | (60,680 | ) |
| Amounts reclassified from Accumulated Other Comprehensive Loss | | |
| | |
| | |
| | |
| | 109,861 |
| | |
| | |
| | 109,861 |
|
| Cash distributions declared ($0.51 per share) | | |
| | |
| | |
| | (471,386 | ) | | |
| | |
| | |
| | (471,386 | ) |
| Cash distributions on Preferred Stock | | |
| | |
| | |
| | (14,078 | ) | | |
| | |
| | |
| | (14,078 | ) |
| Fair value adjustment for noncontrolling interest in Operating Partnership | | |
| | |
| | (3,173 | ) | | |
| | |
| | |
| | |
| | (3,173 | ) |
| Common stock warrants | | |
| | |
| | 895,513 |
| | |
| | |
| | |
| | |
| | 895,513 |
|
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2013 | | $ | 9,395 |
| | $ | 242,042 |
| | $ | 11,372,443 |
| | $ | (2,915,723 | ) | | $ | (38,173 | ) | | $ | (566,863 | ) | | $ | 82,142 |
| | $ | 8,185,263 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-76
GENERAL GROWTH PROPERTIES, INC.
(Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF
CASH FLOWS | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10,
2010 through
December 31,
2010 | | | Period from
January 1,
2010 through
November 9,
2010 | |
| | | (Dollars in thousands, except per share amounts) | |
Cash Flows from Operating Activities: | | | | | | | | | | | | | | | | |
Net loss | | $ | (471,533 | ) | | $ | (306,804 | ) | | $ | (256,084 | ) | | $ | (1,212,725 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | |
Equity in (income) loss of Unconsolidated Real Estate Affiliates | | | (54,984 | ) | | | (2,898 | ) | | | 504 | | | | (12,139 | ) |
Equity in (income) loss of Unconsolidated Real Estate Affiliates - gain on investment | | | (23,358 | ) | | | - | | | | - | | | | (9,718 | ) |
Provision for impairment from Equity in income of Unconsolidated Real Estate Affiliates | | | - | | | | - | | | | - | | | | 20,200 | |
Distributions received from Unconsolidated Real Estate Affiliates | | | 35,399 | | | | 18,226 | | | | 4,745 | | | | 52,150 | |
Provision for doubtful accounts | | | 4,807 | | | | 7,944 | | | | 480 | | | | 19,472 | |
Depreciation and amortization | | | 813,953 | | | | 985,686 | | | | 142,274 | | | | 603,653 | |
Amortization/write-off of deferred finance costs | | | 5,380 | | | | 2,705 | | | | - | | | | 27,885 | |
Accretion/write-off of debt market rate adjustments | | | (39,798 | ) | | | (60,093 | ) | | | (2,898 | ) | | | 80,733 | |
Amortization of intangibles other than in-place leases | | | 105,871 | | | | 144,239 | | | | 15,977 | | | | 3,977 | |
Straight-line rent amortization | | | (61,963 | ) | | | (89,728 | ) | | | (3,204 | ) | | | (31,101 | ) |
Deferred income taxes including tax restructuring benefit | | | 1,655 | | | | (3,148 | ) | | | (6,357 | ) | | | (497,890 | ) |
Non-cash interest expense on Exchangeable Senior Notes | | | - | | | | - | | | | - | | | | 21,618 | |
Non-cash interest expense resulting from termination of interest rate swaps | | | - | | | | - | | | | - | | | | 9,635 | |
Non-cash interest income related to properties held for sale | | | - | | | | - | | | | - | | | | (33,417 | ) |
(Gain) loss on dispositions | | | (24,426 | ) | | | (4,332 | ) | | | 4,976 | | | | (6,684 | ) |
Loss on HHC distribution | | | - | | | | - | | | | - | | | | 1,117,961 | |
Payments pursuant to Contingent Stock Agreement | | | - | | | | - | | | | (220,000 | ) | | | (10,000 | ) |
Land/residential development and acquisitions expenditures | | | - | | | | - | | | | - | | | | (66,873 | ) |
Cost of land and condominium sales | | | - | | | | - | | | | - | | | | 74,302 | |
Revenue recognition of deferred land and condominium sales | | | - | | | | - | | | | - | | | | (36,443 | ) |
Gain from change in control of investment properties | | | (18,547 | ) | | | - | | | | - | | | | - | |
Gain on extinguishment of debt | | | (60,676 | ) | | | - | | | | - | | | | - | |
Provisions for impairment | | | 118,588 | | | | 68,382 | | | | - | | | | 35,893 | |
Warrant liability adjustment | | | 502,234 | | | | (55,042 | ) | | | 205,252 | | | | - | |
Reorganization items - finance costs related to emerged entities/DIP Facility | | | - | | | | - | | | | - | | | | 180,790 | |
Non-cash reorganization items | | | - | | | | - | | | | - | | | | 12,503 | |
Net changes: | | | | | | | | | | | | | | | | |
Accounts and notes receivable | | | 4,985 | | | | (30,239 | ) | | | 14,751 | | | | 79,636 | |
Prepaid expenses and other assets | | | 8,956 | | | | 13,741 | | | | 26,963 | | | | (113,734 | ) |
Deferred expenses | | | (45,518 | ) | | | (67,719 | ) | | | (6,282 | ) | | | (16,517 | ) |
Restricted cash | | | 50,864 | | | | 17,407 | | | | (78,489 | ) | | | (76,513 | ) |
Accounts payable and accrued expenses | | | (63,945 | ) | | | (135,448 | ) | | | (203,084 | ) | | | (137,618 | ) |
Other, net | | | 19,159 | | | | (77 | ) | | | 1,869 | | | | (38,018 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 807,103 | | | | 502,802 | | | | (358,607 | ) | | | 41,018 | |
| | | | | | | | | | | | | | | | |
GENERAL GROWTH PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSEQUITY (Continued)
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10,
2010 through
December 31,
2010 | | | Period from
January 1,
2010 through
November 9,
2010 | |
| | | (Dollars in thousands, except per share amounts) | |
Cash Flows from Investing Activities: | | | | | | | | | | | | | | | | |
Acquisition of real estate and property additions | | | (362,358 | ) | | | (45,034 | ) | | | - | | | | - | |
Development of real estate and property improvements | | | (339,988 | ) | | | (208,242 | ) | | | (54,083 | ) | | | (223,373 | ) |
Proceeds from sales of investment properties | | | 397,251 | | | | 627,872 | | | | 108,914 | | | | 39,450 | |
Proceeds from sales of investment in Unconsolidated Real Estate Affiliates | | | - | | | | 74,906 | | | | - | | | | 94 | |
Contributions to Unconsolidated Real Estate Affiliates | | | (265,107 | ) | | | (92,101 | ) | | | (6,496 | ) | | | (51,448 | ) |
Distributions received from Unconsolidated Real Estate Affiliates in excess of income | | | 372,205 | | | | 131,290 | | | | 19,978 | | | | 160,624 | |
Decrease (increase) in restricted cash | | | (23,455 | ) | | | (2,975 | ) | | | (4,943 | ) | | | (10,363 | ) |
Distributions of HHC | | | - | | | | - | | | | - | | | | (3,565 | ) |
Other, net | | | - | | | | (293 | ) | | | - | | | | (579 | ) |
| | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (221,452 | ) | | | 485,423 | | | | 63,370 | | | | (89,160 | ) |
| | | | | | | | | | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | | | | | | | | | |
Proceeds from (repayment of) Pershing Note | | | - | | | | - | | | | (350,000 | ) | | | 350,000 | |
Clawback of common stock pursuant to the Plan | | | - | | | | - | | | | (1,798,857 | ) | | | - | |
Principal payments on mortgages, notes and loans payable pursuant to the Plan | | | - | | | | - | | | | - | | | | (2,258,984 | ) |
Proceeds from refinancing/issuance of mortgages, notes and loans payable | | | 5,622,525 | | | | 2,145,848 | | | | - | | | | 431,386 | |
Principal payments on mortgages, notes and loans payable | | | (5,796,656 | ) | | | (2,797,540 | ) | | | (226,319 | ) | | | (758,182 | ) |
Deferred finance costs | | | (34,137 | ) | | | (19,541 | ) | | | - | | | | - | |
Finance costs related to the Plan | | | - | | | | - | | | | - | | | | (180,790 | ) |
Cash distributions paid to common stockholders | | | (384,339 | ) | | | (319,799 | ) | | | - | | | | (5,957 | ) |
Cash distributions reinvested (DRIP) in common stock | | | 48,523 | | | | 115,363 | | | | - | | | | - | |
Cash distributions paid to holders of common units | | | (3,812 | ) | | | (6,802 | ) | | | - | | | | - | |
Cash dividends paid to holders of perpetual and convertible preferred units | | | - | | | | - | | | | - | | | | (16,199 | ) |
Purchase and cancellation of common shares | | | - | | | | (553,510 | ) | | | - | | | | - | |
Proceeds from capitalization pursuant to the Plan | | | - | | | | - | | | | 2,147,037 | | | | 3,371,769 | |
Other, net | | | 14,188 | | | | (683 | ) | | | 7,088 | | | | (1,698 | ) |
| | | | | | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (533,708 | ) | | | (1,436,664 | ) | | | (221,051 | ) | | | 931,345 | |
| | | | | | | | | | | | | | | | |
Net change in cash and cash equivalents | | | 51,943 | | | | (448,439 | ) | | | (516,288 | ) | | | 883,203 | |
Cash and cash equivalents at beginning of period | | | 572,872 | | | | 1,021,311 | | | | 1,537,599 | | | | 654,396 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 624,815 | | | $ | 572,872 | | | $ | 1,021,311 | | | $ | 1,537,599 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock | | Preferred Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Common Stock in Treasury | | Noncontrolling Interests in Consolidated Real Estate Affiliates and Long Term Incentive Plan Common Units | | Total Equity |
| Balance at January 1, 2014 | | $ | 9,395 |
| | $ | 242,042 |
| | $ | 11,372,443 |
| | (2,915,723 | ) | | $ | (38,173 | ) | | (566,863 | ) | | 82,142 |
| | 8,185,263 |
|
| | | | | | | | | | | | | | | | | |
| Net income | | |
| | |
| | |
| | 665,850 |
| | |
| | |
| | 1,851 |
| | 667,701 |
|
| Distributions to noncontrolling interests in consolidated Real Estate Affiliates | | |
| | |
| | |
| | |
| | |
| | |
| | (4,392 | ) | | (4,392 | ) |
| Restricted stock grants, net of forfeitures (16,112 common shares) | | — |
| | — |
| | 2,496 |
| | |
| | |
| | |
| | |
| | 2,496 |
|
| Employee stock purchase program (138,446 common shares) | | 1 |
| | |
| | 2,951 |
| | |
| | |
| | |
| | |
| | 2,952 |
|
| Stock option grants, net of forfeitures (1,164,945 common shares) | | 12 |
| | |
| | 40,714 |
| | |
| | |
| | |
| | |
| | 40,726 |
|
| Treasury stock purchases (27,624,282 common shares) | | |
| | |
| | |
| | |
| | |
| | (555,801 | ) | | |
| | (555,801 | ) |
| Cash dividends reinvested (DRIP) in stock (22,186 common shares) | | 1 |
| | — |
| | 505 |
| | |
| | |
| | |
| | |
| | 506 |
|
| Other comprehensive loss | | |
| | |
| | |
| | |
| | (13,580 | ) | | |
| | |
| | (13,580 | ) |
| Cash distributions declared ($0.63 per share) | | |
| | |
| | |
| | (556,931 | ) | | |
| | |
| | |
| | (556,931 | ) |
| Cash distributions on Preferred Stock | | |
| | |
| | |
| | (15,936 | ) | | |
| | |
| | |
| | (15,936 | ) |
| Fair value adjustment for noncontrolling interest in Operating Partnership | | |
| | |
| | 3,169 |
| | |
| | |
| | |
| | |
| | 3,169 |
|
| Fair value adjustment for noncontrolling interest in GGPOP | | |
| | |
| | (70,653 | ) | | |
| | |
| | |
| | |
| | (70,653 | ) |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2014 | | $ | 9,409 |
| | $ | 242,042 |
| | $ | 11,351,625 |
| | $ | (2,822,740 | ) | | $ | (51,753 | ) | | $ | (1,122,664 | ) | | $ | 79,601 |
| | $ | 7,685,520 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-77
GENERAL GROWTH PROPERTIES, INC.
(Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF
CASH FLOWSEQUITY (Continued)
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10, 2010
through
December 31, 2010 | | | Period from
January 1, 2010
through
November 9, 2010 | |
| | | (Dollars in thousands, except per share amounts) | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | | | | | | | | | |
Interest paid | | $ | 859,809 | | | $ | 903,758 | | | $ | 93,987 | | | $ | 1,409,681 | |
Interest capitalized | | | 1,489 | | | | 1,914 | | | | 208 | | | | 2,627 | |
Income taxes paid | | | 2,664 | | | | 9,422 | | | | 179 | | | | 5,247 | |
Reorganization items paid | | | - | | | | 128,070 | | | | 154,668 | | | | 317,774 | |
Third party property exchange | | | - | | | | 44,672 | | | | - | | | | - | |
Non-Cash Transactions: | | | | | | | | | | | | | | | | |
Change in accrued capital expenditures included in accounts payable and accrued expenses | | $ | 4,945 | | | $ | (13,810 | ) | | $ | 5,928 | | | $ | (73,618 | ) |
Common stock issued in exchange for Operating Partnership Units | | | - | | | | - | | | | - | | | | 3,224 | |
Changed in deferred contingent property acquisition liabilities | | | - | | | | - | | | | - | | | | 161,622 | |
Mortgage debt market rate adjustments related to Emerged Debtors prior to the Effective Date | | | - | | | | - | | | | - | | | | 323,318 | |
Gain on Aliansce IPO | | | - | | | | - | | | | - | | | | 9,718 | |
Gain on investment in Unconsolidated Real Estate Affiliates | | | 23,358 | | | | - | | | | - | | | | - | |
Debt payoffs via deeds in-lieu | | | - | | | | 161,524 | | | | - | | | | 97,539 | |
Non-Cash Stock Transactions related to the Plan: | | | | | | | | | | | | | | | | |
Stock issued for paydown of the DIP facility | | | - | | | | - | | | | - | | | | 400,000 | |
Stock issued for debt paydown pursuant to the Plan | | | - | | | | - | | | | - | | | | 2,638,521 | |
Stock issued for reorganization costs pursuant to the Plan | | | - | | | | - | | | | - | | | | 960 | |
Rouse Properties, Inc. Dividend: | | | | | | | | | | | | | | | | |
Adjustment to dividend for RPI Spin-off | | | (26,044 | ) | | | - | | | | - | | | | - | |
Non-cash dividend for RPI Spin-off | | | - | | | | 426,650 | | | | - | | | | - | |
Non-Cash Distribution of RPI Spin-off and HHC Spin-off: | | | | | | | | | | | | | | | | |
Assets | | | 1,554,486 | | | | - | | | | - | | | | 3,618,819 | |
Liabilities and equity | | | (1,554,486 | ) | | | - | | | | - | | | | (3,622,384 | ) |
Non-Cash Sale of Property to RPI: | | | | | | | | | | | | | | | | |
Assets | | | 63,672 | | | | - | | | | - | | | | - | |
Mortgage debt forgiven or assumed by acquirer | | | (71,908 | ) | | | - | | | | - | | | | - | |
Other liabilities and equity | | | 8,236 | | | | - | | | | - | | | | - | |
Non-Cash Sale of Property to HHC: | | | | | | | | | | | | | | | | |
Assets | | | 17,085 | | | | - | | | | - | | | | - | |
Mortgage debt forgiven or assumed by acquirer | | | (19,166 | ) | | | - | | | | - | | | | - | |
Other liabilities and equity | | | 2,081 | | | | - | | | | - | | | | - | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common
Stock | | Preferred
Stock | | Additional
Paid-In
Capital | | Retained
Earnings
(Accumulated
Deficit) | | Accumulated
Other
Comprehensive
Income (Loss) | | Common
Stock in
Treasury | | Noncontrolling Interests in Consolidated Real Estate Affiliates and Long Term Incentive Plan Common Units | | Total
Equity |
| Balance at January 1, 2015 | | $ | 9,409 |
| | $ | 242,042 |
| | $ | 11,351,625 |
| | $ | (2,822,740 | ) | | $ | (51,753 | ) | | $ | (1,122,664 | ) | | $ | 79,601 |
| | $ | 7,685,520 |
|
| | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | 1,374,561 |
| | | | | | 2,685 |
| | $ | 1,377,246 |
|
| Distributions to noncontrolling interests in consolidated Real Estate Affiliates | | | | | | | | | | | | | | (55,050 | ) | | (55,050 | ) |
| Long Term Incentive Plan Common Unit grants, net (1,645,901 LTIP Units) | | | | | | | | | | | | | | 11,015 |
| | 11,015 |
|
| Restricted stock grants, net of forfeitures (216,640 common shares) | | 2 |
| | | | 3,438 |
| | | | | | | | | | 3,440 |
|
| Employee stock purchase program (137,247 common shares) | | 1 |
| | | | 3,249 |
| | | | | | | | | | 3,250 |
|
| Stock option grants, net of forfeitures (1,432,250 common shares) | | 14 |
| | | | 42,602 |
| | | | | | | | | | 42,616 |
|
| Cancellation of repurchased common shares (4,053,620 common shares) | | (40 | ) | | | | (52,871 | ) | | (49,922 | ) | | | | 102,833 |
| | | | — |
|
| Treasury stock purchases (4,324,489 common shares) | | | | | | | | | | | | (109,570 | ) | | | | (109,570 | ) |
| Cash dividends reinvested (DRIP) in stock (23,542 common shares) | | | | | | 487 |
| | | | | | | | | | 487 |
|
| Other comprehensive loss | | | | | | | | | | (21,051 | ) | | | | | | (21,051 | ) |
| Cash distributions declared ($0.71 per share) | | | | | | | | (627,511 | ) | | | | | | | | (627,511 | ) |
| Cash distributions on Preferred Stock | | | | | | | | (15,937 | ) | | | | | | | | (15,937 | ) |
| Fair value adjustment for noncontrolling interest in Operating Partnership | | | | | | 13,839 |
| | | | | | | | | | 13,839 |
|
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2015 | | $ | 9,386 |
| | $ | 242,042 |
| | $ | 11,362,369 |
| | $ | (2,141,549 | ) | | $ | (72,804 | ) | | $ | (1,129,401 | ) | | $ | 38,251 |
| | $ | 8,308,294 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-78
GENERAL GROWTH PROPERTIES, INC.
(Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued) | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10, 2010
through
December 31, 2010 | | | Period from
January 1, 2010
through
November 9, 2010 | |
| | | (Dollars in thousands, except per share amounts) | |
Non-Cash Sale of Regional Mall: | | | | | | | | | | | | | | | | |
Assets | | | 20,296 | | | | - | | | | - | | | | - | |
Mortgage debt forgiven or assumed by acquirer | | | (66,000 | ) | | | - | | | | - | | | | - | |
Other liabilities and equity | | | 45,704 | | | | - | | | | - | | | | - | |
Non-Cash Acquisition of The Oaks and Westroads: | | | | | | | | | | | | | | | | |
Assets (consolidated) | | | 218,071 | | | | - | | | | - | | | | - | |
Liabilities and equity (consolidated) | | | (218,071 | ) | | | - | | | | - | | | | - | |
Decrease in assets and liabilities resulting from the contribution of two wholly owned malls into two newly formed unconsolidated joint ventures | | | | | | | | | | | | | | | | |
Assets | | $ | - | | | $ | (349,942 | ) | | $ | - | | | $ | - | |
Liabilities and equity | | | - | | | | (234,962 | ) | | | - | | | | - | |
Supplemental Disclosure of Cash Flow Information Related to Acquisition | | | | | | | | | | | | | | | | |
Accounting: | | | | | | | | | | | | | | | | |
Non-cash changes related to acquisitions accounting: | | | | | | | | | | | | | | | | |
Land | | $ | - | | | $ | - | | | $ | - | | | $ | 1,726,166 | |
Buildings and equipment | | | - | | | | - | | | | - | | | | (1,605,345 | ) |
Less accumulated depreciation | | | - | | | | - | | | | - | | | | 4,839,700 | |
Investment in and loans to/from Unconsolidated Real Estate Affiliates | | | - | | | | - | | | | - | | | | 1,577,408 | |
Deferred expenses, net | | | - | | | | - | | | | - | | | | (258,301 | ) |
Mortgages, notes and loans payable | | | - | | | | - | | | | - | | | | (421,762 | ) |
Equity | | | - | | | | - | | | | - | | | | (6,421,548 | ) |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Cash Flows provided by Operating Activities: | | |
| | |
| | |
|
| Net income | | $ | 1,393,596 |
| | $ | 679,894 |
| | $ | 317,199 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
| | |
|
| Equity in income of Unconsolidated Real Estate Affiliates | | (73,390 | ) | | (51,568 | ) | | (58,919 | ) |
| Distributions received from Unconsolidated Real Estate Affiliates | | 87,138 |
| | 46,463 |
| | 53,592 |
|
| Provision for doubtful accounts | | 8,081 |
| | 8,151 |
| | 4,095 |
|
| Depreciation and amortization | | 643,689 |
| | 718,064 |
| | 773,255 |
|
| Amortization/write-off of deferred finance costs | | 11,607 |
| | 13,621 |
| | 9,453 |
|
| Accretion/write-off of debt market rate adjustments | | 13,171 |
| | 13,442 |
| | 9,698 |
|
| Amortization of intangibles other than in-place leases | | 62,106 |
| | 76,615 |
| | 84,229 |
|
| Straight-line rent amortization | | (27,809 | ) | | (48,935 | ) | | (49,780 | ) |
| Deferred income taxes | | (42,136 | ) | | (5,615 | ) | | (3,847 | ) |
| Litigation loss | | — |
| | 17,854 |
| | — |
|
| (Gain) loss on dispositions, net | | (30,669 | ) | | (131,849 | ) | | 811 |
|
| Unconsolidated Real Estate Affiliates-gain on investment, net | | (327,017 | ) | | (9,710 | ) | | (9,837 | ) |
| Gains from changes in control of investment properties and other | | (634,367 | ) | | (91,193 | ) | | (219,784 | ) |
| Gain on extinguishment of debt | | — |
| | (66,679 | ) | | (25,894 | ) |
| Provisions for impairment | | 8,604 |
| | 5,278 |
| | 30,936 |
|
| Loss (gain) on foreign currency | | 44,984 |
| | 18,048 |
| | (7,312 | ) |
| Warrant liability adjustment | | — |
| | — |
| | 40,546 |
|
| Cash paid for extinguishment of tax indemnification liability | | — |
| | (138,000 | ) | | — |
|
| Gain on extinguishment of tax indemnification liability | | — |
| | (77,215 | ) | | — |
|
| Net changes: | | |
| | |
| | |
|
| Accounts and notes receivable | | (30,116 | ) | | (19,613 | ) | | 1,697 |
|
| Prepaid expenses and other assets | | (24,381 | ) | | (28,966 | ) | | 25,273 |
|
| Deferred expenses, net | | (42,708 | ) | | (24,234 | ) | | (44,877 | ) |
| Restricted cash | | (3,698 | ) | | (1,070 | ) | | 16,894 |
|
| Accounts payable and accrued expenses | | (4,858 | ) | | 21,703 |
| | (80,902 | ) |
| Other, net | | 33,061 |
| | 25,238 |
| | 23,005 |
|
| Net cash provided by operating activities | | 1,064,888 |
| | 949,724 |
| | 889,531 |
|
| Cash Flows (used in) provided by Investing Activities: | | |
| | |
| | |
|
| Acquisition of real estate and property additions | | (384,270 | ) | | (537,357 | ) | | (433,405 | ) |
| Development of real estate and property improvements | | (694,621 | ) | | (624,829 | ) | | (516,906 | ) |
| Loans to joint venture partners | | (328,819 | ) | | (137,070 | ) | | (32,161 | ) |
| Proceeds from sales of investment properties and Unconsolidated Real Estate Affiliates | | 1,155,765 |
| | 361,183 |
| | 1,006,357 |
|
| Contributions to Unconsolidated Real Estate Affiliates | | (173,704 | ) | | (130,500 | ) | | (87,909 | ) |
| Distributions received from Unconsolidated Real Estate Affiliates in excess of income | | 145,461 |
| | 387,234 |
| | 222,053 |
|
| Acquisition of marketable securities | | (33,300 | ) | | — |
| | — |
|
| Increase (decrease) in restricted cash | | 733 |
| | 3,414 |
| | 8,831 |
|
| Net cash (used in) provided by investing activities | | (312,755 | ) | | (677,925 | ) | | 166,860 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-79
GENERAL GROWTH PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Cash Flows used in Financing Activities: | | |
| | |
| | |
|
| Proceeds from refinancing/issuance of mortgages, notes and loans payable | | 1,837,440 |
| | 2,401,407 |
| | 5,501,047 |
|
| Principal payments on mortgages, notes and loans payable | | (1,831,624 | ) | | (1,760,032 | ) | | (5,155,453 | ) |
| Deferred finance costs | | (7,095 | ) | | (21,264 | ) | | (20,548 | ) |
| Net proceeds from issuance of Preferred Stock | | — |
| | — |
| | 242,042 |
|
| Purchase of Warrants | | — |
| | — |
| | (633,229 | ) |
| Treasury stock purchases | | (109,570 | ) | | (555,801 | ) | | (566,863 | ) |
| Cash distributions to noncontrolling interests in consolidated real estate affiliates | | (55,050 | ) | | (4,392 | ) | | (4,283 | ) |
| Cash distributions paid to common stockholders | | (610,554 | ) | | (534,151 | ) | | (447,195 | ) |
| Cash distributions reinvested (DRIP) in common stock | | 658 |
| | 506 |
| | 614 |
|
| Cash distributions paid to preferred stockholders | | (15,937 | ) | | (15,936 | ) | | (10,093 | ) |
| Cash distributions and redemptions paid to holders of common units | | (950 | ) | | (718 | ) | | (36,894 | ) |
| Other, net | | 24,973 |
| | 13,782 |
| | 26,920 |
|
| Net cash used in financing activities | | (767,709 | ) | | (476,599 | ) | | (1,103,935 | ) |
| Net change in cash and cash equivalents | | (15,576 | ) | | (204,800 | ) | | (47,544 | ) |
| Cash and cash equivalents at beginning of year | | 372,471 |
| | 577,271 |
| | 624,815 |
|
| Cash and cash equivalents at end of year | | $ | 356,895 |
| | $ | 372,471 |
| | $ | 577,271 |
|
| Supplemental Disclosure of Cash Flow Information: | | |
| | |
| | |
|
| Interest paid | | $ | 602,495 |
| | $ | 688,297 |
| | $ | 834,155 |
|
| Interest capitalized | | 12,752 |
| | 16,665 |
| | 11,210 |
|
| Income taxes paid | | 14,286 |
| | 10,202 |
| | 6,313 |
|
| Accrued capital expenditures included in accounts payable and accrued expenses | | 158,027 |
| | 198,471 |
| | 103,988 |
|
| Settlement of Tax indemnification liability: | | |
| | |
| | |
|
| Assets | | — |
| | 106,743 |
| | — |
|
| Liability extinguished | | — |
| | (321,958 | ) | | — |
|
| Non-Cash Transactions: | | |
| | |
| | |
|
| Notes receivable related to sale of investment property and Aliansce | | — |
| | — |
| | 151,127 |
|
| Gain on investment in Unconsolidated Real Estate Affiliates | | — |
| | — |
| | 9,837 |
|
| Amendment of warrant agreement | | — |
| | — |
| | 895,513 |
|
| Non-Cash Sale of Retail Property | | |
| | |
| | |
|
| Assets | | — |
| | 21,426 |
| | 71,881 |
|
| Liabilities and equity | | — |
| | (21,426 | ) | | (71,881 | ) |
| Non-Cash Acquisition of Quail Springs | | — |
| | — |
| | 35,610 |
|
| Non-Cash Sale of The Grand Canal Shoppes and The Shoppes at The Palazzo | | — |
| | — |
| | 211,468 |
|
| Non-Cash Sale of Bayside Marketplace—Refer to Note 3 | | |
| | |
| | |
|
| Non-Cash Sale of Ala Moana Center—Refer to Note 3 | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
F-80
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
General Growth Properties, Inc. (“GGP”
, the “Successor” or the “Company”), a Delaware corporation, was organized in July 2010 and is a self-administered and self-managed real estate investment trust, referred to as a “REIT”.
GGP is the successor registrant, by merger, on November 9, 2010 to GGP, Inc. (the “Predecessor”). The Predecessor had filed for bankruptcy protection under Chapter 11 of Title 11 of the United States Code (“Chapter 11”) in the Southern District of New York on April 16, 2009 and emerged from bankruptcy, pursuant to a plan of reorganization (the “Plan”) on November 9, 2010 (the “Effective Date”). In these notes, the terms “we,” “us” and “our” refer to GGP and its
subsidiaries or, in certain contexts, the Predecessor and its subsidiaries.
GGP, through its subsidiaries and affiliates,
operates, managesis an owner and
selectively re-develops primarily regional malloperator of retail properties. As of December 31,
2012, our portfolio was comprised2015, we are the owner, either entirely or with joint venture partners of
126 regional malls in the United States and 18 malls in Brazil comprising approximately 135 million square feet of gross leaseable area (“GLA”). In addition to regional malls, as of December 31, 2012, we owned 11 strip/other131 retail
centers totaling 2.5 million square feet, primarily in the Western region of the United States, as well as seven stand-alone office buildings totaling 0.9 million square feet, concentrated in Columbia, Maryland.properties.
Substantially all of our business is conducted through GGP
Operating Partnership, LP (“GGPOP”), GGP Nimbus, LP (“GGPN”) and GGP Limited Partnership
(the(“GGPLP”, and together with GGPN the “Operating
Partnership” or “GGPLP”Partnerships”)
. GGPLP owns, subsidiaries of GGP. The Operating Partnerships own an interest in
all retail and other rentalthe properties that are part of the consolidated financial statements of GGP. As of December 31,
2012,2015, GGP held approximately a 99% common equity ownership (without giving effect to the potential conversion of the Preferred Units
and LTIP Units as defined below) of the Operating
Partnership,Partnerships, while the remaining 1% was held by limited partners
that indirectly include family members of the original stockholders of the Predecessor and certain previous contributors of properties to the Operating
Partnership.ThePartnerships or their predecessors.
GGPOP is the general partner of, and owns a 1.5% equity interest in, each Operating
PartnershipPartnership. GGPOP has common units of limited partnership (“Common Units”), which are redeemable for cash or, at our option, shares of GGP common stock. It also has preferred units of limited partnership interest
(the “Preferred(“Preferred Units”)
outstanding. The terms, of
thewhich, certain Preferred Units
provide that the Preferred Units are convertiblecan be converted into Common Units
and then redeemed for cash or, at our option, shares of GGP common stock (Note 11). GGPOP has full value long term incentive plan units and appreciation only long term incentive plan units (collectively “LTIP Units”), which
then are redeemable for cash or, at our option, shares of GGP common stock (Note
12)13).
In addition to holding ownership interests in various joint ventures, the Operating
PartnershipPartnerships generally
conducts itsconduct their operations through
the following subsidiaries:GGP-TRC, LLC (“TRCLLC”), formerly known as The Rouse Company, LLC, which has ownership interests in certain Consolidated Properties and Unconsolidated Properties (each as defined below) and is the borrower of certain unsecured bonds (Note 8).
General Growth Management, Inc. (“GGMI”), aGeneral Growth Services, Inc. (“GGSI”) and GGPLP REIT Services, LLC (“GGPRS”). GGMI and GGSI are taxable REIT subsidiary (a “TRS”)subsidiaries (“TRS”s), which manages, leases,provide management, leasing, tenant coordination, business development, marketing, strategic partnership and performs variousother services for somea majority of our Unconsolidated Real Estate Affiliates (defined below). GGMI also performs marketing and strategic partnership services atfor substantially all of our Consolidated Properties, as defined below. GGSI also serves as a contractor to GGMI for these services. GGPRS generally provides financial, accounting, tax, legal, development, and other services to our Consolidated Properties.
We refer to our ownership interests in properties in which we own a majority or controlling interest and
as a result, are consolidated under accounting principles generally accepted in the United States of America (“GAAP”) as the “Consolidated Properties.” We also
hold someown interests in certain properties through joint venture entities in which we own a noncontrolling interest (“Unconsolidated Real Estate Affiliates”) and we refer to those properties as the “Unconsolidated
Properties”.NOTE 2 CHAPTER 11 AND THE PLAN
In April 2009, the Predecessor and certain of its domestic subsidiaries (the “Debtors”) filed voluntary petitions for relief under Chapter 11 in the bankruptcy court of the Southern District of New York (the “Bankruptcy Court”). On October 21, 2010, the Bankruptcy Court entered an order confirming the Debtors’ plan of reorganization (the “Plan”).
The Plan was based on the agreements (collectively, as amended and restated, the “Investment Agreements”) with REP Investments LLC, an affiliate of Brookfield Asset Management Inc. (the “Brookfield Investor”), an affiliate of Fairholme Funds, Inc. (“Fairholme”) and an affiliate of Pershing Square Capital Management, L.P. (“Pershing Square” and together with the Brookfield Investor and Fairholme, the “Plan Sponsors”), pursuant to which the Predecessor would be divided into two companies, GGP and The Howard Hughes Corporation (“HHC”), and the Plan Sponsors would invest in the Company’s standalone emergence plan. In addition, the Predecessor entered into an investment agreement with Teachers Retirement System of Texas (“Texas Teachers”) to purchase shares of GGP common stock. The Plan Sponsors also entered into an agreement with affiliates of the Blackstone Group (“Blackstone”) whereby Blackstone subscribed for equity in GGP.
On the Effective Date, the Plan Sponsors, Blackstone and Texas Teachers owned a majority of the outstanding common stock of GGP. The Predecessor common stockholders held approximately 317 million shares of GGP common stock at the Effective Date; whereas, the Plan Sponsors, Blackstone, Texas Teachers held approximately 644 million shares of GGP common stock on such date. Notwithstanding such majority ownership, the Plan Sponsors entered into certain agreements that limited their discretion with respect to affiliate, change of control and other stockholder transactions or votes. In addition, 120 million warrants (the “Warrants”) to purchase our common stock were issued to the Plan Sponsors and Blackstone (Note 10). The fair value of the Warrants was recognized as a liability on the Effective Date and subsequent changes in the fair value of the liability were reflected in earnings. As of December 31, 2012, the Brookfield Investor, Pershing and Blackstone held approximately 474 million shares of GGP common stock.
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of GGP, our subsidiaries and joint ventures in which we have a controlling interest. For consolidated joint ventures, the noncontrolling partner’s share of the assets, liabilities and operations of the joint ventures (generally computed as the joint venture partner’s ownership percentage) is included in noncontrolling interests in consolidated real estate affiliates as permanent equity of the Company. All significant intercompany balances and transactions have been eliminated.
We operate in a single reportable segment which includes the operation, development and management of retail and other rental properties, primarily regional malls. Our portfolio of regional malls represents a collection of retail properties that are targeted to a range of market sizes and consumer tastes. Each of our operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. We do not distinguish or group our consolidated operations based on geography, size or type. Further, all material operations are within the United States and no customer or tenant comprises more than 10% of consolidated revenues. As a result, the Company’s operating properties are aggregated into a single reportable segment.
Reclassifications
Certain prior period amounts included in the Consolidated Statements of Operations and Comprehensive Loss and related footnotes associated with properties we have disposed of have been reclassified to discontinued operations for all periods presented. Also, we have separately presented certain amounts within our Consolidated Statements of Cash Flows to conform to the current year presentation.
Properties
Real estate assets are stated at cost less any provisions for impairments. Expenditures for significant betterments and improvements are capitalized. Maintenance and repairs are charged to expense when incurred. Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized. Real estate taxes and interest costs incurred during construction periods are capitalized. Capitalized interest costs are based on qualified expenditures and interest rates in place during the construction period. Capitalized real estate taxes and interest costs are amortized over lives which are consistent with the constructed assets.
Pre-development costs, which generally include legal and professional fees and other third-party costs directly related to the construction assets, are capitalized as part of the property being developed. In the event a development is no longer deemed to be probable, the costs previously capitalized are expensed (see also our impairment policies in this Note 3 below).
We periodically review the estimated useful lives of our properties. Depreciation or amortization expense is computed using the straight-line method based upon the following estimated useful lives of 45 years for building and improvements, five to 10 years for equipment and fixtures and the shorter of lease term or useful life for tenant improvements.
Acquisitions of Operating Properties (Note 4)
Acquisitions of properties are accounted for utilizing the acquisition method of accounting and, accordingly, the results of operations of acquired properties have been included in the results of operations from the respective dates of acquisition. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment, assumed debt liabilities and identifiable intangible assets and liabilities such as amounts related to in-place tenant leases, acquired above and below-market tenant and ground leases, and tenant relationships. No significant value had been ascribed to tenant relationships.
The acquisition method of accounting was applied by the Company at the Effective Date, and as a result, the accompanying consolidated financial statements of the Successor have been prepared in conformity with reorganizations and business combinations accounting standards and reflect the revaluation of the Predecessor’s assets, liabilities and equity to fair value. As a result, the financial statements of the Successor may not be comparable to the financial statements of the Predecessor.
Investments in Unconsolidated Real Estate Affiliates (Note 7)
We account for investments in joint ventures where we own a non-controlling joint interest using the equity method. Under the equity method, the cost of our investment is adjusted for our share of the earnings of such Unconsolidated Real Estate Affiliates from the date of acquisition, increased by our contributions and reduced by distributions received. Generally, the operating agreements with respect to our Unconsolidated Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages. Therefore, we generally also share in the profit and losses, cash flows and other matters relating to our Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages. Except for Retained Debt (as described in Note 7), differences between the carrying amount of our investment in the Unconsolidated Real Estate Affiliates and our share of the underlying equity of our Unconsolidated Real Estate Affiliates are typically amortized over lives ranging from five to 45 years. When cumulative distributions exceed our investment in the joint venture, the investment is reported as a liability in our consolidated financial statements. The liability is limited to our maximum potential obligation to fund contractual obligations, including recourse related to certain debt obligations.
To determine the method of accounting for partially owned joint ventures, we evaluate the characteristics of associated entities and determine whether an entity is a variable interest entity (‘‘VIE’’) and, if so, determine which party is primary beneficiary by analyzing whether we have both the power to direct the entity’s significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the nature of the entity’s operations, future cash flow projections, the entity’s financing and capital structure, and contractual relationship and terms. We consolidate a VIE when we have determined that we are the primary beneficiary.
Primary risks associated with our VIEs include the potential of funding the entities’ debt obligations or making additional contributions to fund the entities’ operations.
Partially owned, non-variable interest joint ventures over which we have controlling financial interest are consolidated in our consolidated financial statements. In determining if we have a controlling financial interest, we consider factors such as ownership interest, authority to make decisions, kick-out rights and substantive participating rights. Partially owned joint ventures where we do not have a controlling financial interest, but have the ability to exercise significant influence, are accounted for using the equity method.
We continually analyze and assess reconsideration events, including changes in the factors mentioned above, to determine if the consolidation treatment remains appropriate. Decisions regarding consolidation of partially owned entities frequently require significant judgment by our management. Errors in the assessment of consolidation could result in material changes to our consolidated financial statements.
Cash and Cash Equivalents
Highly-liquid investments with maturities of three months or less are classified as cash equivalents.
Leases
We account for the majority of our leases, in which we are the lessor or lessee, as operating leases. Leases in which we are the lessor that transfer substantially all the risks and benefits of ownership to tenants are considered finance leases and the present values of the minimum lease payments and the estimated residual values of the leased properties, if any, are accounted for as receivables. Leases in which we are the lessee that transfer substantially all the risks and benefits of ownership to us are considered capital leases and the present values of the minimum lease payments are accounted for as assets and liabilities.
Tenant improvements, either paid directly or in the form of construction allowances paid to tenants, are capitalized as Buildings and equipment and depreciated over the shorter of the useful life or the applicable lease term.
In leasing tenant space, we may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, we determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership of such improvements. If we are considered the owner of the leasehold improvements, we capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the leasehold improvements or the related lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the improvements, the allowance is capitalized to Deferred expenses and considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue on a straight-line basis.
Deferred Expenses
Deferred expenses primarily consist of leasing commissions and related costs and are amortized using the straight-line method over the life of the leases. Deferred expenses also include financing fees we incurred in order to obtain long-term financing and are amortized as interest expense over the terms of the respective financing agreements using the straight-line method, which approximates the effective interest method.
Revenue Recognition and Related Matters
Minimum rent revenues are recognized on a straight-line basis over the terms of the related operating leases, including the effect of any free rent periods. Minimum rent revenues also include lease termination income collected from tenants to allow for the tenant to vacate their space prior to their scheduled termination dates, as well as, accretion related to above and below-market tenant leases on acquired properties and properties that were recorded at fair value at the Effective Date. The following is a summary of amortization of straight-line rent, net amortization/accretion related to above and below-market tenant leases and termination income:
| | | | | | | | | | | | | | | | | | |
| | | Successor | | | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10,
2010 through
December 31,
2010 | | | | | Period from
January 1,
2010 through
November 9,
2010 | |
Amortization of straight-line rent | | $ | 60,446 | | | $ | 77,241 | | | $ | 2,695 | | | | | $ | 28,199 | |
Net amortization/accretion of above and below-market tenant leases | | | (86,197 | ) | | | (99,854 | ) | | | (11,369 | ) | | | | | 5,131 | |
Lease termination income | | | 8,624 | | | | 15,532 | | | | 1,948 | | | | | | 17,071 | |
The following is a summary of straight-line rent receivables, which are included in Accounts and notes receivable, net in our Consolidated Balance Sheets and are reduced for allowances and amounts doubtful of collection:
| | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
Straight-line rent receivables, net | | $ | 148,282 | | | $ | 97,565 | |
Overage rent is paid by a tenant when the tenant’s sales exceed an agreed upon minimum amount and is recognized on an accrual basis once tenant sales exceed contractual tenant lease thresholds and is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease. Recoveries from tenants are established in the leases or computed based upon a formula related to real estate taxes, insurance and other property operating expenses and are generally recognized as revenues in the period the related costs are incurred.
We provide an allowance for doubtful accounts against the portion of accounts receivable, including straight-line rents, which is estimated to be uncollectible. Such allowances are reviewed periodically based upon our recovery experience. The following table summarizes the changes in allowance for doubtful accounts:
| | | | | | | | | | | | | | | | | | |
| | | Successor | | | | | Predecessor | |
| | | 2012 | | | 2011 | | | 2010 | | | | | 2010 | |
Balance as of January 1, (November 10, 2010 for Successor) | | $ | 32,859 | | | $ | 40,746 | | | $ | 53,670 | | | | | $ | 69,235 | |
Provisions for doubtful accounts | | | 4,517 | | | | 5,075 | | | | (47 | ) | | | | | 12,628 | |
Provisions for doubtful accounts in discontinued operations | | | 291 | | | | 1,229 | | | | 527 | | | | | | 3,242 | |
Write-offs | | | (12,975 | ) | | | (14,191 | ) | | | (13,404 | ) | | | | | (31,435 | ) |
| | | | | | | | | | | | | | | | | | |
Balance as of December 31, (November 10, 2010 for Predecessor) | | $ | 24,692 | | | $ | 32,859 | | | $ | 40,746 | | | | | $ | 53,670 | |
| | | | | | | | | | | | | | | | | | |
Management Fees and Other Corporate Revenues
Management fees and other corporate revenues primarily represent management and leasing fees, development fees, financing fees and fees for other ancillary services performed for the benefit of certain of the Unconsolidated Real Estate Affiliates and are reported at 100% of the revenue earned from the joint venture in management fees and other corporate revenues on our Consolidated Statements of Operations and
Comprehensive Loss. Our share of the management fee expense incurred by the Unconsolidated Real Estate Affiliates is reported within equity in income (loss) of Unconsolidated Real Estate Affiliates on our Consolidated Statements of Operations and Comprehensive Loss and in property management and other costs in the Condensed Combined Statements of Income in Note 7. The following table summarizes the management fees from affiliates and our share of the management fee expense:
| | | | | | | | | | | | | | | | | | |
| | | Successor | | | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10,
2010 through
December 31,
2010 | | | | | Period from
January 1,
2010 through
November 9,
2010 | |
Management fees from affiliates | | $ | 70,506 | | | $ | 60,752 | | | $ | 8,673 | | | | | $ | 51,257 | |
Management fee expense | | | (23,061 | ) | | | (22,473 | ) | | | (3,401 | ) | | | | | (18,042 | ) |
Net management fees from affiliates | | | 47,445 | | | | 38,279 | | | | 5,272 | | | | | | 33,215 | |
In connection with the spin-off of Rouse Properties, Inc. (“RPI” and the “RPI Spin-Off”), we have entered into a Transition Services Agreement (“TSA”) with RPI. In accordance with the TSA, we have agreed to provide legal and other services to RPI for established fees, which were not material for the year ended December 31, 2012.
Income Taxes (Note 9)
We expect to distribute 100% of our capital gains and ordinary income to shareholders annually to avoid current entity level U.S. federal income taxes. If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct distributions to shareholders in computing our taxable income and federal income tax. If any of our REIT subsidiaries fail to qualify as a REIT, such failure could result in our loss of REIT status. If we lose our REIT status, corporate level income tax, including any applicable alternative minimum tax, would apply to our taxable income at regular corporate rates. As a result, the amount available for distribution to holders of equity securities that would otherwise receive dividends would be reduced for the year or years involved, and we would no longer be required to make distributions. In addition, unless we were entitled to relief under the relevant statutory provisions, we would be disqualified from treatment as a REIT for four subsequent taxable years.
Deferred income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns and are recorded primarily by certain of our taxable REIT subsidiaries. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, is included in the current tax provision. The Successor experienced a change in control, as a result of the transactions undertaken to emerge from bankruptcy, pursuant to Section 382 of the Internal Revenue Code that could limit the benefit of deferred tax assets. In addition, we recognize and report interest and penalties, if necessary, related to uncertain tax positions within our provision for income tax expense.
Impairment
Operating properties
We review our consolidated properties for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment indicators are assessed
separately for each property and include, but are not limited to, significant decreases in real estate property net operating income, significant decreases in occupancy percentage, debt maturities, management’s intent with respect to the properties and prevailing market conditions.
If an indicator of potential impairment exists, the property is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flows. Although the carrying amount may exceed the estimated fair value of certain properties, a real estate asset is only considered to be impaired when its carrying amount cannot be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is determined to be necessary, the excess of the carrying amount of the property over its estimated fair value is expensed to operations. In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset group. The adjusted carrying amount, which represents the new cost basis of the property, is depreciated over the remaining useful life of the property.
Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a potential development and construction in progress, are assessed by project and include, but are not limited to, significant changes in the Company’s plans with respect to the project, significant changes in projected completion dates, tenant demand, anticipated revenues or cash flows, development costs, market factors and sustainability of development projects.
Impairment charges are recorded in the Consolidated Statements of Operations and Comprehensive Loss when the carrying value of a property is not recoverable and it exceeds the estimated fair value of the property, which can occur in accounting periods preceding disposition and / or in the period of disposition.
Although we may market a property for sale, there can be no assurance that the transaction will be complete until the sale is finalized. However, GAAP requires us to utilize the Company’s expected holding period of our properties when assessing recoverability. If we cannot recover the carrying value of these properties within the planned hold period, we will estimate the fair values of the assets and record impairment charges for properties in which the estimated fair value is less than their carrying value.
During the years ended December 31, 2012 and 2011 and the period ended November 9, 2010, we determined there were events and circumstances indicating that certain properties were not recoverable and therefore required impairments. These impairment charges for our operating properties are included in provision for impairment in our Consolidated Statements of Operations and Comprehensive Loss. For the year ended December 31, 2012, we recorded impairment charges related to three operating properties of $58.2 million. Of the total impairment charges in 2012, $46.2 million related to two regional malls that were transferred to a special servicer and resulted in an aggregate net book value of $100.8 million, which was less than the aggregate carrying value of the non-recourse debt of $166.1 million and were recorded because the estimated fair values of the properties, based on discounted cash flow analyses, were less than the carrying values of the properties. The remaining impairment charge recorded during the year ended December 31, 2012 of $12.0 million related to a regional mall for which the impairment charge was recorded because the sales price of the property was lower than its carrying value. In 2011, we recorded impairment charges related to an operating property of $0.9 million. The Predecessor recorded impairment charges related to an operating property of $4.5 million for the period from January 1, 2010 through November 9, 2010.
Of the total impairment charges in 2012, the following impairment charges are included in Discontinued Operations in our Consolidated Statements of Operations and Comprehensive Income (Loss). We recorded impairment charges of $50.5 million, net of the gain on forgiveness of debt of $9.9 million, for the year ended December 31, 2012. These impairment charges related to four regional malls and one office portfolio as the sales prices of these properties were lower than their carrying values. In addition, we recorded impairment charges of $67.5 million relating to two operating properties and one non-income producing asset for the year ended December 31, 2011. The Predecessor recorded impairment charges of $30.8 million for the period from January 1, 2010 through November 9, 2010 relating to operating properties and properties under development.
Investment in Unconsolidated Real Estate Affiliates
According to the guidance related to the equity method of accounting for investments, a series of operating losses of an investee or other factors may indicate that an other-than-temporary decline in value of our investment in the Unconsolidated Real Estate Affiliates has occurred. The investment in each of the Unconsolidated Real Estate Affiliates is evaluated periodically and as deemed necessary for valuation declines below the carrying amount. Accordingly, in addition to the property-specific impairment analysis that we perform for such joint ventures (as part of our operating property impairment process described above), we also considered whether there were other-than-temporary decline with respect to the carrying values of our Unconsolidated Real Estate Affiliates.
In the period January 1, 2010 through November 9, 2010, the Predecessor recorded an impairment provision of $21.1 million related to the sale of its interest in a Turkish joint venture, recorded in equity in income (loss) of Unconsolidated Real Estate Affiliates. No provisions for impairment related to the investments in Unconsolidated Real Estate Affiliates were required for the years ended December 31, 2012 and 2011, or for the period from November 10, 2010 through December 31, 2010.
General
Impairment charges could be taken in the future if economic conditions change or if the plans regarding our assets change. Therefore, we can provide no assurance that material impairment charges with respect to our assets, including operating properties, construction in progress and investments in Unconsolidated Real Estate Affiliates, will not occur in future periods. We will continue to monitor circumstances and events in future periods to determine whether impairments are warranted.
Property Management and Other and General and Administrative Costs
Property management and other costs represent regional and home office costs and include items such as corporate payroll, rent for office space, supplies and professional fees, which represent corporate overhead costs not generated at the properties. General and administrative costs represent the costs to run the public company and include payroll and other costs for executives, audit fees, professional fees and administrative fees related to the public company.
Fair Value Measurements (Note 6)
The accounting principles for fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Properties.”Level 1 - defined as observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Note 6 includes a discussion of properties measured at fair value on a non-recurring basis using Level 2 and Level 3 inputs and the fair value of debt, which is estimated on a recurring basis using Level 2 and Level 3 inputs. Note 10 includes a discussion of the warrant liability which is measured at fair value on a recurring basis using Level 3 inputs.
Reorganization Items
Reorganization items are expense or income items that were incurred or realized by the Debtors as a result of the Chapter 11 Cases and are presented separately in the Consolidated Statements of Operations and Comprehensive Loss of the Predecessor. Reorganization items include legal fees, professional fees and similar types of expenses resulting from activities of the reorganization process, gains on liabilities subject to compromise directly related to the Chapter 11 Cases, and interest earned on cash accumulated by the Debtors as a result of the Chapter 11 Cases. We recognized a net expense on reorganization items of $354.7 million for the period January 1, 2010 through November 9, 2010. These amounts exclude reorganization items that are currently included within discontinued operations. We did not recognize any reorganization items during the years ended December 31, 2012 and 2011, or in the Successor period of 2010.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, capitalization of development and leasing costs, provision for income taxes, recoverable amounts of receivables and deferred taxes, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets and fair value of debt. Actual results could differ from these and other estimates.
NOTE 4 ACQUISITIONS AND INTANGIBLES
Acquisitions
On April 17, 2012, we acquired 11 Sears anchor pads (including fee interests in five anchor pads and long-term leasehold interests in six anchor pads) for the purpose of redevelopment or remerchandising. Total consideration paid was $270.0 million. Of the total purchase price, $212.0 million for the leasehold interests was recorded in construction in progress, as the buy-out costs were necessary costs related to redevelopment projects at these properties, and $58.0 million for the fee interests was recorded in land and building in our Consolidated Balance Sheets as of December 31, 2012.
In addition, during the year ended December 31, 2012, we also acquired five additional anchor pads for an aggregate purchase price of $26.3 million.
On April 5, 2012, we acquired the remaining 49% interest in The Oaks and Westroads, previously owned through a joint venture, for $191.1 million which included the assumption of the remaining 49% of debt and net working capital of $92.8 million and $98.3 million of cash. The properties were previously recorded under the equity method of accounting and are now consolidated in accordance with GAAP. The acquisition resulted in a remeasurement of the net assets acquired to fair value. We recorded an $18.5 million gain from the change in control, since the fair value of the net assets acquired was greater than our investment in the joint venture and the cash paid. This gain is reported in our Consolidated Statements of Operations and Comprehensive Loss.
| | | | |
Total fair value of net assets acquired | | $ | 200,271 | |
Previous investment in the Oaks and Westroads | | | (83,415 | ) |
Cash paid to acquire our joint venture partner’s interest | | | (98,309 | ) |
| | | | |
Gain from change in control of investment properties | | $ | 18,547 | |
| | | | |
The following table summarizes the allocation of the purchase price to the net assets acquired at the date of acquisition. These allocations were based on the relative fair values of the assets acquired and liabilities assumed.
| | | | |
Investment in real estate | | $ | 402,197 | |
Above-market lease intangibles | | | 15,746 | |
Below-market lease intangibles | | | (29,393 | ) |
Fair value of mortgages, notes and loans payable | | | (197,927 | ) |
Net working capital | | | 9,648 | |
| | | | |
Net assets acquired | | $ | 200,271 | |
| | | | |
Intangible Assets and Liabilities
The following table summarizes our intangible assets and liabilities:
| | | | | | | | | | | | |
| | | Gross Asset
(Liability) | | | Accumulated
(Amortization)/
Accretion | | | Net Carrying
Amount | |
As of December 31, 2012 | | | | | | | | | | | | |
Tenant leases: | | | | | | | | | | | | |
In-place value | | $ | 972,495 | | | | $ (423,492 | ) | | $ | 549,003 | |
Above-market | | | 1,230,117 | | | | (425,837 | ) | | | 804,280 | |
Below-market | | | (725,878 | ) | | | 251,896 | | | | (473,982 | ) |
Building leases: | | | | | | | | | | | | |
Above-market | | | (15,268 | ) | | | 3,393 | | | | (11,875 | ) |
Ground leases: | | | | | | | | | | | | |
Above-market | | | (9,756 | ) | | | 805 | | | | (8,951 | ) |
Below-market | | | 169,539 | | | | (9,825 | ) | | | 159,714 | |
Real estate tax stabilization agreement | | | 111,506 | | | | (13,523 | ) | | | 97,983 | |
| | | |
As of December 31, 2011 | | | | | | | | | | | | |
Tenant leases: | | | | | | | | | | | | |
In-place value | | $ | 1,252,484 | | | | $ (391,605 | ) | | $ | 860,879 | |
Above-market | | | 1,478,798 | | | | (315,044 | ) | | | 1,163,754 | |
Below-market | | | (819,056 | ) | | | 184,254 | | | | (634,802 | ) |
Building leases: | | | | | | | | | | | | |
Above-market | | | (15,268 | ) | | | 1,697 | | | | (13,571 | ) |
Ground leases: | | | | | | | | | | | | |
Above-market | | | (9,839 | ) | | | 439 | | | | (9,400 | ) |
Below-market | | | 204,432 | | | | (6,202 | ) | | | 198,230 | |
Real estate tax stabilization agreement | | | 111,506 | | | | (7,211 | ) | | | 104,295 | |
The gross asset balances of the in-place value of tenant leases are included in buildings and equipment in our Consolidated Balance Sheets. The above-market tenant leases and below-market ground leases are included in prepaid expenses and other assets (Note 15); the below-market tenant leases, above-market ground leases and above-market building lease are included in accounts payable and accrued expenses (Note 16) in our Consolidated Balance Sheets.
Amortization/accretion of these intangibles had the following effects on our loss from continuing operations:
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10,
2010 through
December 31,
2010 | | | Period from
January 1,
2010 through
November 9,
2010 | |
Amortization/accretion effect on continuing operations | | $ | (344,448 | ) | | $ | (466,712 | ) | | $ | (63,305 | ) | | $ | (33,467 | ) |
Future amortization/accretion of these intangibles is estimated to decrease results from continuing operations as follows:
| | | | |
Year | | Amount | |
2013 | | $ | 240,812 | |
2014 | | | 194,945 | |
2015 | | | 157,901 | |
2016 | | | 125,222 | |
2017 | | | 95,268 | |
NOTE 5 DISPOSITIONS, DISCONTINUED OPERATIONS AND GAINS (LOSSES) ON DISPOSITIONS OF INTERESTS IN OPERATING PROPERTIES
All of our dispositions, for all periods presented, are included in discontinued operations in our Consolidated Statements of Operations and Comprehensive Loss and are summarized in the table below. Gains on disposition, including settlement of debt, are recorded in the Consolidated Statements of Operations and Comprehensive Loss in the period the property is disposed.
On January 12, 2012, we completed the RPI Spin-Off, a 30-mall portfolio totaling approximately 21 million square feet. The RPI Spin-Off was accomplished through a special dividend of the common stock of RPI to holders of GGP common stock as of December 30, 2011. Subsequent to the spin-off, we retained a 1% interest in RPI.
In addition, during 2012, we sold our interests in non-core assets including an office portfolio, three office properties, 11 strip/other retail centers, seven regional malls and an anchor box totaling approximately seven million square feet of GLA for $524.5 million, which reduced our property level debt by $320.6 million. These sales generated net proceeds of $239.1 million.
The following dispositions are included in the paragraph above:
On February 21, 2012, we sold one regional mall to RPI. Prior to the sale, the lender forgave $18.9 million of the secured indebtedness, which was partially offset by the write-off of debt market rate adjustments of $9.0 million. The net gain on extinguishment of debt of $9.9 million is included in discontinued operations in our Consolidated Statements of Operations and Comprehensive Loss. RPI assumed the remaining $62.0 million of debt on the property as full consideration for the sale.
On August 15, 2012, we sold one office building to HHC for $35.2 million, including $19.2 million of cash and $16.0 million of debt assumed.
On November 21, 2012, we closed on the sale of one regional mall for $15.2 million, which represents the amount of debt assumed by the buyer. In conjunction with the sale, the lender forgave $50.8 million of debt, resulting in a gain on the extinguishment of debt that is included in discontinued operations in our Consolidated Statements of Operations and Comprehensive Loss.
The following table summarizes the operations of the properties included in discontinued operations.
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10,
2010 through
December 31,
2010 | | | Period from
January 1,
2010 through
November 9,
2010 | |
Retail and other revenue | | $ | 66,305 | | | $ | 364,997 | | | $ | 65,709 | | | $ | 507,118 | |
Land and condominium sales | | | - | | | | - | | | | - | | | | 96,976 | |
| | | | | | | | | | | | | | | | |
Total revenues | | | 66,305 | | | | 364,997 | | | | 65,709 | | | | 604,094 | |
| | | | | | | | | | | | | | | | |
Retail and other operating expenses | | | 51,754 | | | | 307,021 | | | | 51,003 | | | | 331,586 | |
Land and condominium sales operations | | | - | | | | - | | | | - | | | | 99,449 | |
Provisions for impairment and other gains | | | 50,483 | | | | 67,517 | | | | - | | | | 30,784 | |
Gain on debt extinguishment | | | (50,765 | ) | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Total expenses | | | 51,472 | | | | 374,538 | | | | 51,003 | | | | 461,819 | |
| | | | | | | | | | | | | | | | |
Operating income (loss) | | | 14,833 | | | | (9,541 | ) | | | 14,706 | | | | 142,275 | |
Interest expense, net | | | (16,215 | ) | | | (94,778 | ) | | | (18,306 | ) | | | (103,795 | ) |
Other expenses | | | - | | | | - | | | | - | | | | 24,449 | |
| | | | | | | | | | | | | | | | |
Net (loss) income from operations | | | (1,382 | ) | | | (104,319 | ) | | | (3,600 | ) | | | 62,929 | |
(Provision for) benefit from income taxes | | | (23 | ) | | | (632 | ) | | | (100 | ) | | | 472,170 | |
Gains (losses) on dispositions | | | 24,426 | | | | 4,332 | | | | (4,976 | ) | | | (1,111,277 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) from discontinued operations | | $ | 23,021 | | | $ | (100,619 | ) | | $ | (8,676 | ) | | $ | (576,178 | ) |
| | | | | | | | | | | | | | | | |
NOTE 6 FAIR VALUE
Fair Value of Operating Properties
The following table summarizes certain of our assets that are measured at fair value on a nonrecurring basis as a result of impairment charges recorded as of December 31, 2012.
| | | | | | | | | | | | | | | | |
| | | Total Fair Value
Measurement | | | Quoted Prices in
Active Markets
for Identical Assets
(Level 1) | | | Significant Other
Observable Inputs
(Level 2) | | | Significant
Unobservable Inputs
(Level 3) | |
Year Ended December 31, 2012 | | | | | | | | | | | | | | | | |
Investments in real estate(1) | | $ | 112,829 | | | $ | - | | | $ | 12,070 | | | $ | 100,759 | |
Year Ended December 31, 2011 | | | | | | | | | | | | | | | | |
Investments in real estate(1) | | $ | 46,478 | | | $ | - | | | $ | - | | | $ | 46,478 | |
(1) | Refer to Note 3 for more information regarding impairment. |
We estimate fair value relating to impairment assessments based upon discounted cash flow and direct capitalization models that include all projected cash inflows and outflows over a specific holding period, or the negotiated sales price, if applicable. Such projected cash flows are comprised of contractual rental revenues and forecasted rental revenues and expenses based upon market conditions and expectations for growth. Capitalization rates and discount rates utilized in these models are based on a reasonable range of current market rates for each property analyzed. Based upon these inputs, we determined that our valuations of properties using a discounted cash flow or a direct capitalization model were classified within Level 3 of the fair value hierarchy. For our properties for which the estimated fair value was based on negotiated sales prices, we determined that our valuation was classified within Level 2 of the fair value hierarchy.
The following table sets forth quantitative information about the unobservable inputs of our Level 3 real estate, which are recorded at fair value as of December 31, 2012:
| | | | |
Unobservable Quantative Input
| | Range | |
Discount rates
| | | 9.0% to 10.0% | |
Terminal capitalization rates
| | | 9.0% to 10.0% | |
Fair Value of Financial Instruments
The fair values of our financial instruments approximate their carrying amount in our consolidated financial statements except for debt. Management’s estimates of fair value are presented below for our debt as of December 31, 2012 and 2011.
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Carrying Amount (1) | | | Estimated Fair
Value | | | Carrying Amount (1) | | | Estimated Fair
Value | |
Fixed-rate debt | | $ | 14,954,601 | | | $ | 16,190,518 | | | $ | 14,795,370 | | | $ | 14,978,908 | |
Variable-rate debt | | | 1,012,265 | | | | 1,040,687 | | | | 2,347,644 | | | | 2,326,533 | |
| | | | | | | | | | | | | | | | |
| | $ | 15,966,866 | | | $ | 17,231,205 | | | $ | 17,143,014 | | | $ | 17,305,441 | |
| | | | | | | | | | | | | | | | |
(1) | Includes market rate adjustments. |
The fair value of our Junior Subordinated Notes approximates their carrying amount as of December 31, 2012 and 2011. We estimated the fair value of mortgages, notes and other loans payable using Level 2 and Level 3 inputs based on recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate (‘‘LIBOR’’), U.S. treasury obligation interest rates and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assume that the debt is outstanding through maturity. We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist in specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of GGP, our subsidiaries and joint ventures in which we have a controlling interest. For consolidated joint ventures, the noncontrolling partner’s share of the assets, liabilities and operations of the joint ventures (generally computed as the joint venture partner’s ownership percentage) is included in noncontrolling interests in consolidated real estate affiliates as permanent equity of the Company. Intercompany balances and transactions have been eliminated.
We operate in a single reportable segment which includes the operation, development and management of retail and other rental properties, primarily regional malls. Our portfolio is targeted to a range of market sizes and consumer tastes. Each of our operating properties is considered a separate operating segment, as each property earns revenues and incurs expenses, individual operating results are reviewed and discrete financial information is available. The Company’s chief operating decision maker is comprised of a team of several members of executive management who use Company NOI in assessing segment operating performance. We do not distinguish or group our consolidated operations based on geography, size or type for purposes of making property operating decisions. Our operating properties have similar economic characteristics and provide similar products and services to our tenants. There are no individual operating segments that are greater than 10% of combined revenue, Company NOI, or combined assets.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Company NOI excludes certain non-cash and non-comparable items such as straight-line rent and intangible asset and liability amortization, which are a result of our emergence, acquisition accounting and other capital contribution or restructuring events. Further, all material operations are within the United States and no customer or tenant comprises more than 10% of consolidated revenues. As a result, the Company’s operating properties are aggregated into a single reportable segment.
Reclassifications
We elected to early-adopt Accounting Standards Update (ASU) No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” issued by the Financial Accounting Standards Board (FASB). This ASU amends Accounting Standards Codification (ASC) 835-30 and requires debt issuance costs related to borrowings be presented in the Consolidated Balance Sheets as a direct reduction from the carrying amount of the debt. The adoption of this ASU resulted in the reclassification of $54.1 million from deferred expenses, net to mortgages, notes and loans payable on our Consolidated Balance Sheets as of December 31, 2014, as presented herein. In addition, $1.2 million and $1.4 million of expenses were reclassified from other property operating costs to marketing for the years ended December 31, 2014 and 2013, respectively, to conform prior periods to the current year presentation. Also, $9.7 million and $9.8 million was separately presented as Unconsolidated Real Estate Affiliates-gain on investment, previously recorded as equity in income of Unconsolidated Real Estate Affiliates on the Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013, respectively, to conform prior periods to the current year presentation. Finally, $4.4 million and $4.3 million was separately presented as cash distributions to noncontrolling interests in consolidated real estate affiliates, previously presented as other, net within the financing section of the Consolidated Statements of Cash Flows, for the years ended December 31, 2014 and 2013, respectively, to conform prior periods to the current year presentation. The reclassifications are changes from one acceptable presentation to another acceptable presentation.
Properties
Real estate assets are stated at cost less any provisions for impairments. Expenditures for significant betterments and improvements are capitalized. Maintenance and repairs are charged to expense when incurred. Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized. Real estate taxes, interest costs, and internal costs associated with leasing and development overhead incurred during construction periods are capitalized. Capitalization is based on qualified expenditures and interest rates. Capitalized real estate taxes, interest costs, and internal costs associated with leasing and development overhead are amortized over lives which are consistent with the related assets.
Pre-development costs, which generally include legal and professional fees and other third-party costs directly related to the construction assets, are capitalized as part of the property being developed. In the event a development is no longer deemed to be probable of occurring, the capitalized costs are expensed (see also our impairment policies in this note below).
We periodically review the estimated useful lives of our properties, and may adjust them as necessary. The estimated useful lives of our properties range from 10-45 years.
Depreciation or amortization expense is computed using the straight-line method based upon the following estimated useful lives
|
| |
| Years |
| Buildings and improvements | 10 - 45 |
| Equipment and fixtures | 3 - 20 |
| Tenant improvements | Shorter of useful life or applicable lease term |
Acquisitions of Operating Properties (Note 3)
Acquisitions of properties are accounted for utilizing the acquisition method of accounting and, accordingly, the results of operations of acquired properties have been included in the results of operations from the respective dates of acquisition. Estimates of future cash flows and other valuation techniques are used to allocate the purchase price of acquired property between land, buildings and improvements, equipment, assumed debt liabilities and identifiable intangible assets and liabilities such as amounts related to in-place tenant leases, acquired above and below-market tenant and ground leases, and tenant relationships.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
The fair values of tangible assets are determined on an “if vacant” basis. The “if vacant” fair value is allocated to land, where applicable, buildings, equipment and tenant improvements based on comparable sales and other relevant information with respect to the property. Specifically, the “if vacant” value of the buildings and equipment was calculated using a cost approach utilizing published guidelines for current replacement cost or actual construction costs for similar, recently developed properties; and an income approach. Assumptions used in the income approach to the value of buildings include: capitalization and discount rates, lease-up time, market rents, make ready costs, land value, and site improvement value.
The estimated fair value of in-place tenant leases includes lease origination costs (the costs we would have incurred to lease the property to the current occupancy level of the property) and the lost revenues during the period necessary to lease-up from vacant to the current occupancy level. Such estimates include the fair value of leasing commissions, legal costs and tenant coordination costs that would be incurred to lease the property to this occupancy level. Additionally, we evaluate the time period over which such occupancy level would be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period, which generally ranges up to one year. The fair value of acquired in-place tenant leases is included in the balance of buildings and equipment and amortized over the remaining lease term for each tenant.
Identifiable intangible assets and liabilities are calculated for above-market and below-market tenant and ground leases where we are either the lessor or the lessee. The difference between the contractual rental rates and our estimate of market rental rates is measured over a period equal to the remaining non-cancelable term of the leases, including significantly below-market renewal options for which exercise of the renewal option appears to be reasonably assured. The remaining term of leases with renewal options at terms significantly below market reflect the assumed exercise of such below-market renewal options and assume the amortization period would coincide with the extended lease term.
The gross asset balances of the in-place value of tenant leases are included in buildings and equipment in our Consolidated Balance Sheets.
|
| | | | | | | | | | | | |
| | | Gross Asset | | Accumulated
Amortization | | Net Carrying
Amount |
| As of December 31, 2015 | | |
| | |
| | |
|
| Tenant leases: | | |
| | |
| | |
|
| In-place value | | $ | 409,637 |
| | $ | (264,616 | ) | | $ | 145,021 |
|
| As of December 31, 2014 | | |
| | |
| | |
|
| Tenant leases: | | |
| | |
| | |
|
| In-place value | | $ | 608,840 |
| | $ | (362,531 | ) | | $ | 246,309 |
|
The above-market tenant leases and below-market ground leases are included in prepaid expenses and other assets (Note 15); the below-market tenant leases, above-market ground leases and above-market headquarters office lease are included in accounts payable and accrued expenses (Note 16) in our Consolidated Balance Sheets.
Amortization/accretion of all intangibles, including the intangibles in Note 15 and Note 16, had the following effects on our income from continuing operations:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Amortization/accretion effect on continuing operations | | $ | (137,462 | ) | | $ | (196,792 | ) | | $ | (237,302 | ) |
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Future amortization/accretion of these intangibles is estimated to decrease results from continuing operations as follows:
|
| | | | |
| Year | | Amount |
| 2016 | | $ | 90,101 |
|
| 2017 | | 67,552 |
|
| 2018 | | 43,469 |
|
| 2019 | | 25,832 |
|
| 2020 | | 17,182 |
|
Marketable Securities
Marketable securities are comprised of equity securities that are classified as available-for-sale. Available-for-sale securities are presented in prepaid expenses and other assets on our Consolidated Balance Sheets at fair value. Unrealized gains and losses resulting from the mark-to-market of these securities are included in other comprehensive income. Realized gains and losses are recognized in earnings only upon the sale of the securities and are recorded based on the weighted average cost of such securities.
Investments in Unconsolidated Real Estate Affiliates (Note 6)
We account for investments in joint ventures where we own a non-controlling joint interest using either the equity method or the cost method. If we have significant influence but not control over the investment, we utilize the equity method. If we have neither control or significant influence, we utilize the cost method. Under the equity method, the cost of our investment is adjusted for our share of the earnings of such Unconsolidated Real Estate Affiliates from the date of acquisition, increased by our contributions and reduced by distributions received.
To determine the method of accounting for partially owned joint ventures, we evaluate the characteristics of associated entities and determine whether an entity is a variable interest entity (“VIE”) and, if so, determine which party is primary beneficiary by analyzing whether we have both the power to direct the entity’s significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the nature of the entity’s operations, future cash flow projections, the entity’s financing and capital structure, and contractual relationship and terms. We consolidate a VIE when we have determined that we are the primary beneficiary.
Primary risks associated with our VIEs include the potential of funding the entities’ debt obligations or making additional contributions to fund the entities’ operations.
Generally, the operating agreements with respect to our Unconsolidated Real Estate Affiliates provide that assets, liabilities and funding obligations are shared in accordance with our ownership percentages. Therefore, we generally also share in the profit and losses, cash flows and other matters relating to our Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages. Except for Retained Debt (as described in Note 6), differences between the carrying amount of our investment in the Unconsolidated Real Estate Affiliates and our share of the underlying equity of our Unconsolidated Real Estate Affiliates are typically amortized over lives ranging from 5 to 45 years. When cumulative distributions exceed our investment in the joint venture, the investment is reported as a liability in our consolidated financial statements. The liability is limited to our maximum potential obligation to fund contractual obligations, including recourse related to certain debt obligations.
Partially owned, non-variable interest joint ventures over which we have controlling financial interest are consolidated in our consolidated financial statements. In determining if we have a controlling financial interest, we consider factors such as ownership interest, authority to make decisions, kick-out rights and substantive participating rights. Partially owned joint ventures where we do not have a controlling financial interest, but have the ability to exercise significant influence, are accounted for using the equity method.
To the extent that we contribute assets to a joint venture accounted for using the equity method, our investment in the joint venture is recorded at our cost basis in the assets that were contributed to the joint venture. We will recognize gains and losses on the contribution of our real estate to joint ventures, relating solely to the outside partner’s interest, to the extent the buyer is independent of the Company, the collection of the sales price is reasonably assured, and we will not be required to support the operations of the property or its related obligations to an extent greater than our proportionate interest.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
The combined summarized financial information of unconsolidated joint ventures is disclosed in Note 6 to the Consolidated Financial Statements.
We continually analyze and assess reconsideration events, including changes in the factors mentioned above, to determine if the consolidation treatment remains appropriate. Decisions regarding consolidation of partially owned entities frequently require significant judgment by our management.
Cash and Cash Equivalents
Highly-liquid investments with initial maturities of three months or less are classified as cash equivalents, excluding amounts restricted by certain lender and other agreements.
Leases
Our leases, in which we are the lessor or lessee, are substantially all accounted for as operating leases. Leases in which we are the lessor that transfer substantially all the risks and benefits of ownership to tenants are considered finance leases and the present values of the minimum lease payments and the estimated residual values of the leased properties, if any, are accounted for as receivables. Leases in which we are the lessee that transfer substantially all the risks and benefits of ownership to us are considered capital leases and the present values of the minimum lease payments are accounted for as assets and liabilities.
Tenant improvements, either paid directly or in the form of construction allowances paid to tenants, are capitalized as buildings and equipment and depreciated over the shorter of the useful life or the applicable lease term.
In leasing tenant space, we may provide funding to the lessee through a tenant allowance. In accounting for a tenant allowance, we determine whether the allowance represents funding for the construction of leasehold improvements and evaluate the ownership of such improvements. If we are considered the owner of the leasehold improvements, we capitalize the amount of the tenant allowance and depreciate it over the shorter of the useful life of the leasehold improvements or the related lease term. If the tenant allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the leasehold improvements, the allowance is capitalized to deferred expenses and considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue on a straight-line basis.
Deferred Expenses
Deferred expenses primarily consist of leasing commissions and related costs and are amortized using the straight-line method over the life of the leases.
Revenue Recognition and Related Matters
Minimum rents are recognized on a straight-line basis over the terms of the related operating leases, including the effect of any free rent periods. Minimum rents also include lease termination income collected from tenants to allow for the tenant to vacate their space prior to their scheduled termination dates, as well as, accretion related to above and below-market tenant leases on acquired properties and properties that were recorded at fair value. The following is a summary of amortization of straight-line rent, net amortization/accretion related to above and below-market tenant leases and termination income, which is included in minimum rents:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Amortization of straight-line rent | | $ | 27,809 |
| | $ | 48,254 |
| | $ | 47,567 |
|
| Net amortization/accretion of above and below-market tenant leases | | (55,062 | ) | | (66,258 | ) | | (67,344 | ) |
| Lease termination income | | 13,786 |
| | 10,590 |
| | 10,633 |
|
The following is a summary of straight-line rent receivables, which are included in accounts and notes receivable, net in our Consolidated Balance Sheets and are reduced for allowances and amounts doubtful of collection:
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 |
| Straight-line rent receivables, net | | $ | 234,862 |
| | $ | 228,153 |
|
Overage rent is paid by a tenant when the tenant’s sales exceed an agreed upon minimum amount and is recognized on an accrual basis once tenant sales exceed contractual tenant lease thresholds and is calculated by multiplying the sales in excess of the minimum amount by a percentage defined in the lease.
Tenant recoveries are established in the leases or computed based upon a formula related to real estate taxes, insurance and other property operating expenses and are generally recognized as revenues in the period the related costs are incurred.
Real estate sales are recognized whenever (1) a sale is consummated, (2) the buyer has demonstrated an adequate commitment to pay for the property, (3) our receivable is not subject to future subordination, and (4) we have transferred to the buyer the risks and rewards of ownership and do not have continuing involvement. Unless all conditions are met, recognition of all or a portion of the profit shall be postponed.
We provide an allowance for doubtful accounts against the portion of accounts and notes receivable, net including straight-line rents, which is estimated to be uncollectible. Such allowances are reviewed periodically based upon our recovery experience. The following table summarizes the changes in allowance for doubtful accounts:
|
| | | | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 |
| Balance as of January 1, | | $ | 15,621 |
| | $ | 17,892 |
| | $ | 24,692 |
|
Provision for doubtful accounts(1) | | 11,833 |
| | 10,934 |
| | 5,528 |
|
| Provisions for doubtful accounts in discontinued operations | | — |
| | 602 |
| | 1,277 |
|
| Write-offs | | (12,800 | ) | | (13,807 | ) | | (13,605 | ) |
| Balance as of December 31, | | $ | 14,654 |
| | $ | 15,621 |
| | $ | 17,892 |
|
_______________________________________________________
| |
| (1) | Excludes recoveries of $2.1 million, $2.7 million and $1.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. |
Management Fees and Other Corporate Revenues
Management fees and other corporate revenues primarily represent management and leasing fees, development fees, financing fees, and fees for other ancillary services performed for the benefit of certain of the Unconsolidated Real Estate Affiliates. Management fees are reported at 100% of the revenue earned from the joint venture in management fees and other corporate revenues on our Consolidated Statements of Operations and Comprehensive Income. Our share of the management fee expense incurred by the Unconsolidated Real Estate Affiliates is reported within equity in income of Unconsolidated Real Estate Affiliates on our Consolidated Statements of Operations and Comprehensive Income and in property management and other costs in the Condensed Combined Statements of Income in Note 6.
The following table summarizes the management fees from affiliates and our share of the management fee expense:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Management fees from affiliates | | $ | 86,595 |
| | $ | 70,887 |
| | $ | 68,681 |
|
| Management fee expense | | (30,723 | ) | | (26,972 | ) | | (25,551 | ) |
| Net management fees from affiliates | | $ | 55,872 |
| | $ | 43,915 |
| | $ | 43,130 |
|
Income Taxes (Note 8)
We expect to distribute 100% of our taxable capital gains and taxable ordinary income to shareholders annually. If, with respect to any taxable year, we fail to maintain our qualification as a REIT and cannot correct such failure, we would not be allowed to deduct distributions to shareholders in computing our taxable income and federal income tax. If any of our REIT subsidiaries fail to qualify as a REIT, such failure could result in our loss of REIT status. If we lose our REIT status, corporate level income tax would apply to our taxable income at regular corporate rates, or we may be subject to applicable alternative minimum tax. As a
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
result, the amount available for distribution to holders of equity securities that would otherwise receive dividends would be reduced for the year or years involved, and we would no longer be required to make distributions. In addition, unless we were entitled to relief under the relevant statutory provisions, we would be disqualified from treatment as a REIT for four subsequent taxable years.
Deferred income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns and are recorded primarily by certain of our taxable REIT subsidiaries. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, is included in the current tax provision. In 2010, GGP experienced a change in control, pursuant to Section 382 of the Internal Revenue Code that could limit the benefit of deferred tax assets. In addition, we recognize and report interest and penalties, if necessary, related to uncertain tax positions within our provision for income tax expense.
We earn investment tax credits related to solar projects at certain properties. We use the flow through method of accounting for investment tax credits. Under this method, investment tax credits are recognized as a reduction to income tax expense in the year they are earned.
Impairment
Operating properties
We regularly review our consolidated properties for potential impairment indicators whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment indicators are assessed separately for each property and include, but are not limited to, significant decreases in real estate property net operating income, significant decreases in occupancy percentage, debt maturities, management’s intent with respect to the properties and prevailing market conditions.
If an indicator of potential impairment exists, the property is tested for recoverability by comparing its carrying amount to the estimated future undiscounted cash flows. Although the carrying amount may exceed the estimated fair value of certain properties, a real estate asset is only considered to be impaired when its carrying amount cannot be recovered through estimated future undiscounted cash flows. To the extent an impairment provision is determined to be necessary, the excess of the carrying amount of the property over its estimated fair value is expensed to operations. In addition, the impairment provision is allocated proportionately to adjust the carrying amount of the asset group. The adjusted carrying amount, which represents the new cost basis of the property, is depreciated over the remaining useful life of the property.
Although we may market a property for sale, there can be no assurance that the transaction will be complete until the sale is finalized. However, GAAP requires us to utilize the Company’s expected holding period of our properties when assessing recoverability. If we cannot recover the carrying value of these properties within the planned holding period, we will estimate the fair values of the assets and record impairment charges for properties when the estimated fair value is less than their carrying value.
Impairment indicators for pre-development costs, which are typically costs incurred during the beginning stages of a potential development and construction in progress, are assessed by project and include, but are not limited to, significant changes in the Company’s plans with respect to the project, significant changes in projected completion dates, tenant demand, anticipated revenues or cash flows, development costs, market factors and sustainability of development projects.
Impairment charges are recorded in the Consolidated Statements of Operations and Comprehensive Income when the carrying value of a property is not recoverable and it exceeds the estimated fair value of the property, which can occur in accounting periods preceding disposition and / or in the period of disposition.
During the year ended December 31, 2015, we recorded an $8.6 million impairment charge in continuing operations of our Consolidated Statements of Operations and Comprehensive Income. This impairment charge related to one operating property and was recorded because the estimated fair value of the property, based on a bona-fide purchase offer, was less than the carrying value of the property.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
During the year ended December 31, 2014, we recorded a $5.3 million impairment charge in continuing operations of our Consolidated Statements of Operations and Comprehensive Income. This impairment charge related to one operating property and was recorded because the estimated fair value of the property, based on a bona-fide purchase offer was less than the carrying value of the property. During the year ended December 31, 2014, we recorded no impairment charges in discontinued operations of our Consolidated Statement of Operations and Comprehensive Income.
During the year ended December 31, 2013, we recorded no impairment charges in continuing operations of our Consolidated Statements of Operations and Comprehensive Income. During the year ended December 31, 2013, we recorded $30.9 million of impairment charges in discontinued operations of our Consolidated Statement of Operations and Comprehensive Income, which related to five operating properties. We recorded a gain on extinguishment of debt in discontinued operations of approximately $66.7 million in the first quarter of 2014 related to one of these impaired properties that is included in discontinued operations of our Consolidated Statement of Operations and Comprehensive Income.
Investment in Unconsolidated Real Estate Affiliates
A series of operating losses of an investee or other factors may indicate that an other-than-temporary decline in value of our investment in an Unconsolidated Real Estate Affiliate has occurred. The investment in each of the Unconsolidated Real Estate Affiliates is evaluated for valuation declines below the carrying amount. Accordingly, in addition to the property-specific impairment analysis that we performed for such joint ventures (as part of our operating property impairment process described above), we also considered whether there were other-than-temporary declines with respect to the carrying values of our Unconsolidated Real Estate Affiliates. An impairment of $3.2 million related to our investments in Unconsolidated Real Estate Affiliates was recognized for the year ended December 31, 2015. This impairment charge related to one operating property and was recorded because the estimated fair value of the property, based on a bona-fide purchase offer, was less than the carrying value of the property.
No impairments related to our investments in Unconsolidated Real Estate Affiliates were recognized for the years ended December 31, 2014 and 2013.
Property Management and Other and General and Administrative Costs
Property management and other costs represent regional and home office costs and include items such as corporate payroll, rent for office space, supplies and professional fees, which represent corporate overhead costs not generated at the properties. General and administrative costs represent the costs to run the public company and include payroll and other costs for executives, audit fees, professional fees and administrative fees related to the public company.
Fair Value Measurements (Note 5)
The accounting principles for fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1-defined as observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2-defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3-defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The impairment section above includes a discussion of all impairments recognized during the years ended December 31, 2015, 2014 and 2013, which were based on Level 2 inputs. Note 5 includes a discussion of properties measured at fair value on a non-recurring basis using Level 2 inputs and the fair value of debt, which is estimated on a recurring basis using Level 2 and Level 3 inputs. Note 9 includes a discussion of our outstanding warrants, which were measured at fair value using Level 3 inputs until the warrant agreement was amended on March 28, 2013. Note 11 includes a discussion of certain redeemable noncontrolling interests that are measured at fair value using Level 1 inputs.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents. We are exposed to credit risk with respect to cash held at various financial institutions and access to our credit facility. Our credit risk exposure with regard to our cash and the $1.5 billion available under our credit facility is spread among a diversified
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
group of investment grade financial institutions. We had $315.0 million and $100.0 million outstanding under our credit facility as of December 31, 2015 and 2014, respectively.
Recently Issued Accounting Pronouncements
Effective January 1, 2015 the definition of discontinued operations has been revised to limit what qualifies for this classification and presentation to disposals of components of a company that represent strategic shifts that have (or will have) a major effect on the company’s operations and financial results. Required expanded disclosures for disposals or disposal groups that qualify for discontinued operations are intended to provide users of financial statements with enhanced information about the assets, liabilities, revenues and expenses of such discontinued operations. In addition, in accordance with this pronouncement, companies are required to disclose the pretax profit or loss of an individually significant component that does not qualify for discontinued operations treatment. Pursuant to its terms, we have adopted this pronouncement effective January 1, 2015. This definition was applied prospectively and is anticipated to substantially reduce the number of transactions, going forward, that qualify for discontinued operations as compared to historical results. (See Note 4).
Effective January 1, 2016, the FASB issued an update that will require us to evaluate whether we should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. Aside from certain expanded disclosure requirements, we do not expect the adoption of this standard will have a material impact to our consolidated financial statements for the adoption of this standard.
Effective January 1, 2016, companies are required to present debt issuance costs related to a recognized debt liability (excluding revolving credit facility) as a direct deduction from the carrying amount of that debt liability on the balance sheet. The recognition and measurement guidance for debt issuance costs will not be affected. We elected to early adopt this pronouncement as of December 31, 2015 which resulted in the reclassification of unamortized capitalized loan fees from deferred expenses to a direct reduction of the Company’s indebtedness on our Consolidated Balance Sheets for all periods presented.
Effective January 1, 2018, companies will be required to apply a five-step model in accounting for revenue arising from contracts with customers. The core principle of the revenue model is that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease contracts will be excluded from this revenue recognition criteria; however, the sale of real estate will be required to follow the new model. Expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this pronouncement. The new standard can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company is evaluating the potential impact of this pronouncement on its consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, capitalization of development and leasing costs, provision for income taxes, recoverable amounts of receivables and deferred taxes, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to acquisitions, impairment of long-lived assets and fair value of debt. Actual results could differ from these and other estimates.
NOTE 3 ACQUISITIONS AND JOINT VENTURE ACTIVITY
On November 6, 2015, we acquired an additional 2.5% direct interest in Miami Design District Associates, LLC (“MDDA”) located in Miami, Florida for a gross purchase price of $40.0 million. We also own a 2.5% interest in MDDA through a joint venture and a 10% interest in MDDA through a consolidated subsidiary. The total investment of 15% is considered a cost method investment and is included in investment in and loans to/from Unconsolidated Real Estate Affiliates on the Consolidated Balance Sheets.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
On July 7, 2015, we purchased 1,125,760 shares of Seritage Growth Properties common stock at $29.58 per share for a total of $33.3 million as part of the spin-off of Sears Holdings Corporation. This investment is classified as an available-for-sale security with changes in fair value recognized in accumulated other comprehensive loss on the Consolidated Balance Sheets. As of December 31, 2015, Seritage Growth Properties common stock traded at $40.22 per share resulting in unrealized gains of approximately $12.0 million, included in other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income for the year ended December 31, 2015.
On April 27, 2015, we sold the office portion of 200 Lafayette in New York, New York for a gross sales price of approximately $124.5 million. This transaction resulted in a gain on sale of $11.9 million recognized in gain from changes in control of investment properties and other on our Consolidated Statements of Comprehensive Income for the year ended December 31, 2015.
On April 17, 2015, we and our joint venture partners acquired the Crown Building located at 730 Fifth Avenue in New York, New York for a purchase price of $1.78 billion, which was funded with $1.25 billion of secured debt. We have an effective 50% interest in the retail portion of the property. GGP and Jeff Sutton will own, redevelop, lease and manage the retail portion of the property which is $1.30 billion of the purchase price. Vladislav Doronin’s Capital Group and Michael Shvo will own, redevelop, lease and manage the office tower which is $475.0 million of the purchase price. The office tower will be redeveloped into luxury residential condominiums. Our share of the retail property purchase price is $650.0 million, and our share of the equity is $208.5 million. In connection with the acquisition, we provided $204.3 million in loans to our joint venture partners (Note 14).
On April 1, 2015 we acquired a 50% interest in a joint venture to own 85 Fifth Avenue in New York, New York. The total purchase price was $86.0 million which was funded with $60.0 million of secured debt. GGP’s share of the equity is $14.0 million. In connection with the acquisition, we provided a $7.0 million loan to our joint venture partner (Note 14).
On March 31, 2015, we acquired a 50% interest in a joint venture with Sears Holdings Corporation that owns anchor pads and in-place leases at 12 stores located at our properties for approximately $165.0 million. Subsequently, Sears Holdings Corporation sold its investment in the joint venture to Seritage Growth Properties, which was an affiliated company. We recorded the investment in the joint venture for approximately $164.5 million ($165.0 million net of prorations and acquisition costs) to investment in and loans to/from Unconsolidated Real Estate Affiliates on our Consolidated Balance Sheets. On December 14, 2015, GGP entered into agreements with GGP Homart II, LLC and Urban Shopping Centers, L.P. (Oakbrook) to assign interest in 4 of the 12 anchor pads. For the assignment and transfer of the assigned interests, GGP Homart II, LLC and Urban Shopping Centers, L.P. agreed to consideration of $34.1 million and $39.9 million, respectively.
We account for the interests in the Crown, 85 Fifth, and Sears joint ventures under the equity method of accounting (Note 6) because we share control over major decisions with the joint venture partners which resulted in the partners obtaining substantive participating rights.
On February 27, 2015, we sold a 25% interest in Ala Moana Center in Honolulu, Hawaii for net proceeds of $907.0 million. We received $670.0 million at closing and will receive the remaining proceeds of $237.0 million in late 2016 upon completion of the redevelopment and expansion. Subsequently on April 10, 2015, we sold an additional 12.5% interest in Ala Moana Center for net proceeds of $453.5 million to another joint venture partner. We received $335.0 million at closing and will receive the remaining proceeds of $118.5 million in late 2016 upon completion of the redevelopment and expansion. As a result, our joint venture partners own a combined 37.5% economic interest in the joint venture.
Upon sale of the 25% interest in Ala Moana Center and in accordance with applicable accounting standards for real estate sales with future development required, we recognized a $584.4 million gain on change in control of investment properties and other as of the closing date calculated on the percentage of the basis (real estate asset carrying value of Ala Moana Center and development costs incurred to date) as compared to the total estimated costs expected to be incurred through completion of the development. During the twelve months ended December 31, 2015, we recognized an additional $38.0 million gain on change of control of investment properties and other using the percentage of completion method for the construction completed from the closing date on February 27, 2015 through December 31, 2015. We will recognize an additional $26.3 million gain on change of control of investment properties and other through substantial completion of construction. In total, we recorded a gain from change in control of investment properties and other of $622.4 million on our Consolidated Statements of Comprehensive Income for the year ended December 31, 2015 as a result of this transaction.
Upon sale of the 12.5% interest in Ala Moana Center and in accordance with applicable accounting standards for real estate sales with future development required, we recognized a $295.9 million gain in Unconsolidated Real Estate Affiliates - gain on investment as of the closing date calculated on the percentage of the basis (real estate asset carrying value of Ala Moana Center and development costs incurred to date) as compared to the total estimated costs expected to be incurred through completion of the development.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
During the year ended December 31, 2015, we recognized an additional $15.4 million gain in Unconsolidated Real Estate Affiliates - gain on investment using the percentage of completion method for the construction completed from the closing date on April 10, 2015 through December 31, 2015. We will recognize an additional $13.1 million gain in Unconsolidated Real Estate Affiliates - gain on investment through substantial completion of construction. In total, we recorded a gain in Unconsolidated Real Estate Affiliates - gain on investment of $311.3 million on our Consolidated Statements of Comprehensive Income for the year ended December 31, 2015 as a result of this transaction.
We account for the 62.5% interest in the joint venture that owns Ala Moana Center under the equity method of accounting (Note 6) because we share control over major decisions with the joint venture partners which resulted in the partners obtaining substantive participating rights. Ala Moana Center was previously wholly owned by GGP and accounted for on a consolidated basis.
The table below summarizes the gain calculation ($ in millions) for the 25% and 12.5% interests sold:
|
| | | | | | | |
| Gain on Sale of Interests in Ala Moana Center | 25.0 | % | | 12.5 | % |
| Total proceeds (net of transaction costs of $6.8 million and $2.5 million, respectively) | $ | 900.2 |
| | $ | 451.0 |
|
| Joint venture partner share of debt | 462.5 |
| | $ | 231.3 |
|
| Total consideration | 1,362.7 |
| | 682.3 |
|
| Less: JV partner proportionate share of investment in Ala Moana Center and estimated development costs | (714.0 | ) | | (357.9 | ) |
| Total gain from changes in control of investment properties and other | 648.7 |
| | — |
|
| Total Unconsolidated Real Estate Affiliates - gain on investment | — |
| | 324.4 |
|
| Gain attributable to JV partner proportionate share of investment in Ala Moana Center at closing | 584.4 |
| | 295.9 |
|
| Gain attributable to post-sale development activities through December 31, 2015 | 38.0 |
| | 15.4 |
|
| Estimated future gain from changes in control of investment properties and other | 26.3 |
| | — |
|
| Estimated future Unconsolidated Real Estate Affiliates - gain on investment | $ | — |
| | $ | 13.1 |
|
On December 24, 2014 we formed a joint venture that holds 100% of Bayside Marketplace and sold a portion of our interest to a third party. We received $71.9 million in cash, net of debt assumed of $122.5 million, and the partner received a 49% economic interest in the joint venture. We recorded gain from change in control of investment properties and other of $91.2 million on our Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2014, as a result of this transaction. We are the managing member, however we account for the joint venture under the equity method of accounting because we share control over major decisions with the joint venture partner and the partner has substantive participating rights including establishing operating and capital decisions including budgets, in the ordinary course of business.
The table below summarizes the gain calculation ($ in millions):
|
| | | |
| Cash received from joint venture partner | $ | 71.9 |
|
| Less: Proportionate share of previous investment in Bayside Marketplace | 19.3 |
|
| Gain from change in control of investment property | $ | 91.2 |
|
During the year ended December 31, 2014, we acquired joint venture interests in five retail properties located in New York City, Miami, and Bellevue (WA) for total consideration of $690.2 million (excluding closing costs), which included equity of $405.5 million and the assumption of debt of $310.2 million. The five retail properties acquired are described below. We account for the joint ventures under the equity method of accounting (excluding Miami Design District Associates which is accounted for using the cost method) because we share control over major decisions with our joint venture partners. These properties will be accounted for as Unconsolidated Real Estate Affiliates, and are recorded within the investment in and loans to/from Unconsolidated Real Estate Affiliates on our Consolidated Balance Sheets (Note 6).
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
On October 22, 2014, we contributed $49.1 million for a 50% interest in a joint venture that acquired the retail portion of 530 Fifth Avenue in New York, New York for a gross purchase price of $300 million with $190 million in gross property-level financing. We have an effective 50% interest in the joint venture. In connection with the acquisition, we provided $39.4 million in loans to our joint venture partner and $31.0 million in a mezzanine loan to the joint venture (Note 14).
On September 30, 2014, we contributed $8.3 million for a 10% interest in a joint venture that acquired the retail portion of 522 Fifth Avenue in New York, New York for a gross purchase price of $165.0 million with $83.3 million in gross property-level financing. We have an effective 10% interest in the joint venture. In connection with the acquisition we provided a $5.3 million loan to our joint venture partner (Note 14).
On September 15, 2014, we contributed $244.7 million to a joint venture that acquired a 20% interest in a development located in Miami, Florida and an 85.67% interest in a mall located in Bellevue, Washington. The joint venture’s 20% interest in the Miami Design District Associates, LLC was acquired for a purchase price of $280.0 million. Through the formation of the joint venture, we have a 12.5% share of this investment and account for it as a cost method investment. Subsequently, 10% of this interest was distributed to a consolidated subsidiary through a non-liquidating distribution. The joint venture partner contributed a property, The Shops at the Bravern, LLC (“Bravern”), for a net contribution of $79.0 million. Through the formation of the joint venture, we have a 40% interest in the property and account for the joint venture under the equity method of accounting.
On June 27, 2014, we contributed $106.6 million to a joint venture that acquired 685 Fifth Avenue in New York, New York for a gross purchase price of $521.4 million with $340.0 million in gross property-level financing. We have a 50% interest in the joint venture. In connection with the acquisition we provided an $85.3 million loan to our joint venture partner (Note 14).
NOTE 4 DISCONTINUED OPERATIONS AND HELD FOR DISPOSITION
In the first quarter of 2015, the Company adopted ASU No. 2014-08, “Reporting Discontinued operations and Disclosures of Disposals of Components of an Entity” issued by the Financial Accounting Standards Board. ASU No. 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results (e.g., a disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity). The Company’s adoption of ASU No. 2014-08 resulted in a change in how the Company would record operating results and gains on sales of real estate. Any future sale that does not meet the updated definition of discontinued operations, would not be reflected within discontinued operations in the Company’s Consolidated Statements of Comprehensive Income.
During 2014, one property, which was previously transferred to a special servicer, was sold in a lender-directed sale in full satisfaction of the debt. This resulted in a gain on extinguishment of debt of $66.7 million and a reduction of property-level debt of $79.0 million. We transferred six office properties and cash aggregating total consideration of $268.0 million in full settlement of our $322.0 million tax indemnification liability (Note 18). Additionally, we sold three operating properties for $278.6 million, which resulted in a gain of $125.2 million. We used the net proceeds from these transactions to repay debt of $127.0 million.
The Company did not have any dispositions during the year ended December 31, 2015 that qualified for discontinued operations presentation subsequent to its adoption of ASU No. 2014-08. The following table summarizes the operations of the properties included in discontinued operations for the years ended 2014 and 2013.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2014 | | 2013 |
| Retail and other revenue | | $ | 27,276 |
| | $ | 73,329 |
|
| Total revenues | | 27,276 |
| | 73,329 |
|
| Retail and other operating expenses | | 17,515 |
| | 56,926 |
|
| Provisions for impairment | | — |
| | 30,935 |
|
| Total expenses | | 17,515 |
| | 87,861 |
|
| Operating income (loss) | | 9,761 |
| | (14,532 | ) |
| Interest expense, net | | (2,188 | ) | | (22,167 | ) |
| Provision for income taxes | | — |
| | — |
|
| Gains (losses) on dispositions | | 130,416 |
| | (817 | ) |
| Net income (loss) from operations | | 137,989 |
| | (37,516 | ) |
| Gain on extinguishment of debt | | 66,679 |
| | 25,894 |
|
| Gain on extinguishment of tax indemnification liability | | 77,215 |
| | — |
|
| Net income (loss) from discontinued operations | | $ | 281,883 |
| | $ | (11,622 | ) |
As of December 31, 2015, non-refundable deposits were received from the buyers on two properties. Therefore, the two properties were considered held for disposition as of December 31, 2015. Total assets held for disposition were $216.2 million, which included $204.4 million of net investment in real estate, and total liabilities held for disposition were $58.9 million, which included $42.6 million of mortgages, notes and loans payable (Note 20).
NOTE 5 FAIR VALUE
Fair Value of Certain Operating Properties
The following table summarizes certain of our assets that are measured at fair value on a nonrecurring basis as a result of impairment charges recorded as of December 31, 2015 and 2014.
|
| | | | | | | | | | | | | | | | |
| | | Total Fair Value
Measurement | | Quoted Prices in
Active Markets
for Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable Inputs
(Level 3) |
| Year ended December 31, 2015 | | |
| | |
| | |
| | |
|
Investments in real estate(1) | | $ | 61,500 |
| | $ | — |
| | $ | 61,500 |
| | $ | — |
|
| Year ended December 31, 2014 | | |
| | |
| | |
| | |
|
Investments in real estate(1) | | $ | 26,250 |
| | $ | — |
| | $ | 26,250 |
| | $ | — |
|
| |
| (1) | Refer to Note 2 for more information regarding impairment. Investments in real estate includes consolidated properties and Unconsolidated Real Estate Affiliates. |
We estimated the fair value relating to impairment assessments based upon negotiated sales prices, which is classified within Level 2 of the fair value hierarchy.
Disclosure of Fair Value of Financial Instruments
The fair values of our financial instruments approximate their carrying amount in our consolidated financial statements except for debt. Management’s estimates of fair value are presented below for our debt as of December 31, 2015 and 2014.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 |
| | | Carrying Amount(1)(2) | | Estimated Fair Value | | Carrying Amount(1)(2) | | Estimated Fair Value |
| Fixed-rate debt | | $ | 11,921,302 |
| | $ | 12,247,451 |
| | $ | 13,573,451 |
| | $ | 14,211,247 |
|
| Variable-rate debt | | 2,294,858 |
| | 2,304,551 |
| | 2,370,736 |
| | 2,399,547 |
|
| | | $ | 14,216,160 |
| | $ | 14,552,002 |
| | $ | 15,944,187 |
| | $ | 16,610,794 |
|
________________________________________________________
| |
| (1) | Includes market rate adjustments of $33.0 million and $19.9 million as of December 31, 2015 and 2014, respectively. |
| |
| (2) | Includes deferred financing costs of $40.2 million and $54.1 million as of December 31, 2015 and 2014, respectively. |
The fair value of our Junior Subordinated Notes approximates their carrying amount as of December 31, 2015 and 2014. We estimated the fair value of mortgages, notes and other loans payable using Level 2 and Level 3 inputs based on recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current London Interbank Offered Rate (“LIBOR”), U.S. treasury obligation interest rates and on the discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and assume that the debt is outstanding through maturity. We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions and do not acknowledge transfer or other repayment restrictions that may exist in specific loans, it is unlikely that the estimated fair value of any such debt could be realized by immediate settlement of the obligation.
Recurring Fair Value of Marketable Securities
Marketable securities are measured at fair value on our Consolidated Balance Sheets using Level 1 inputs and included in prepaid expenses and other assets. The fair values are shown below.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | December 31, 2015 | | December 31, 2014 |
| | | Fair Value | | Cost Basis | | Unrealized Gain | | Fair Value | | Cost Basis | | Unrealized Gain |
| Marketable securities: | | | | | | | | | | | | |
| Seritage Growth Properties | | $ | 45,278 |
| | $ | 33,300 |
| | $ | 11,978 |
| | $ | — |
| | $ | — |
| | $ | — |
|
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTE 6 UNCONSOLIDATED REAL ESTATE AFFILIATES
Following is summarized financial information for all of our Unconsolidated Real Estate Affiliates includingaccounted for using the equity method and a reconciliation to our total investment in Unconsolidated Real Estate Affiliates, inclusive of investments accounted for using the cost method (Note 2).
|
| | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 |
| Condensed Combined Balance Sheets—Unconsolidated Real Estate Affiliates (1) | | |
| | |
|
| Assets: | | |
| | |
|
| Land | | $ | 1,949,577 |
| | $ | 1,152,485 |
|
| Buildings and equipment | | 12,344,045 |
| | 10,009,490 |
|
| Less accumulated depreciation | | (3,131,659 | ) | | (2,591,347 | ) |
| Construction in progress | | 828,521 |
| | 125,931 |
|
| Net property and equipment | | 11,990,484 |
| | 8,696,559 |
|
| Investments in unconsolidated joint ventures | | 421,778 |
| | 16,462 |
|
| Net investment in real estate | | 12,412,262 |
| | 8,713,021 |
|
| Cash and cash equivalents | | 426,470 |
| | 308,621 |
|
| Accounts and notes receivable, net | | 258,589 |
| | 203,511 |
|
| Deferred expenses, net | | 239,262 |
| | 234,211 |
|
| Prepaid expenses and other assets | | 472,123 |
| | 594,257 |
|
| Total assets | | $ | 13,808,706 |
| | $ | 10,053,621 |
|
| Liabilities and Owners' Equity: | | |
| | |
|
| Mortgages, notes and loans payable | | $ | 9,812,378 |
| | $ | 7,898,204 |
|
| Accounts payable, accrued expenses and other liabilities | | 740,388 |
| | 418,995 |
|
| Cumulative effect of foreign currency translation ("CFCT") | | (67,224 | ) | | (35,238 | ) |
| Owners' equity, excluding CFCT | | 3,323,164 |
| | 1,771,660 |
|
| Total liabilities and owners' equity | | $ | 13,808,706 |
| | $ | 10,053,621 |
|
| Investment In and Loans To/From Unconsolidated Real Estate Affiliates, Net: | | |
| | |
|
| Owners' equity | | $ | 3,255,940 |
| | $ | 1,736,422 |
|
| Less: joint venture partners’ equity | | (1,518,581 | ) | | (861,515 | ) |
| Plus: excess investment/basis differences | | 1,550,193 |
| | 1,694,257 |
|
Investment in and loans to/from Unconsolidated Real Estate Affiliates, net (equity method) | | $ | 3,287,552 |
| | $ | 2,569,164 |
|
Investment in and loans to/from Unconsolidated Real Estate Affiliates, net (cost method) | | 180,000 |
| | — |
|
Investment in and loans to/from Unconsolidated Real Estate Affiliates, net | | 3,467,552 |
| | 2,569,164 |
|
| Reconciliation—Investment In and Loans To/From Unconsolidated Real Estate Affiliates: | | |
| | |
|
Asset—Investment in and loans to/from Unconsolidated Real Estate Affiliates | | $ | 3,506,040 |
| | $ | 2,604,762 |
|
Liability—Investment in Unconsolidated Real Estate Affiliates | | (38,488 | ) | | (35,598 | ) |
Investment in and loans to/from Unconsolidated Real Estate Affiliates, net | | $ | 3,467,552 |
| | $ | 2,569,164 |
|
| |
| (1) | The Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates include Ala Moana Center as of December 31, 2015 as the property was contributed into a joint venture during the first quarter of 2015. |
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | |
| | | Year ended December 31, 2015 | | Year ended December 31, 2014 | | Year ended December 31, 2013 |
| Condensed Combined Statements of Income—Unconsolidated Real Estate Affiliates (1) | | |
| | |
| | |
|
| Revenues: | | |
| | |
| | |
|
| Minimum rents | | $ | 1,011,393 |
| | $ | 827,436 |
| | $ | 768,353 |
|
| Tenant recoveries | | 443,905 |
| | 355,188 |
| | 327,033 |
|
| Overage rents | | 38,282 |
| | 30,915 |
| | 32,500 |
|
| Other | | 52,027 |
| | 39,804 |
| | 34,007 |
|
| Total revenues | | 1,545,607 |
| | 1,253,343 |
| | 1,161,893 |
|
| Expenses: | | |
| | |
| | |
|
| Real estate taxes | | 129,593 |
| | 110,665 |
| | 104,270 |
|
| Property maintenance costs | | 41,619 |
| | 39,105 |
| | 34,666 |
|
| Marketing | | 19,348 |
| | 14,626 |
| | 15,981 |
|
| Other property operating costs | | 214,417 |
| | 172,547 |
| | 160,286 |
|
| Provision for doubtful accounts | | 5,427 |
| | 3,052 |
| | 1,283 |
|
Property management and other costs (2) | | 64,084 |
| | 57,980 |
| | 52,803 |
|
| General and administrative | | 10,245 |
| | 9,250 |
| | 2,333 |
|
| Depreciation and amortization | | 408,537 |
| | 325,787 |
| | 279,522 |
|
| Total expenses | | 893,270 |
| | 733,012 |
| | 651,144 |
|
| Operating income | | 652,337 |
| | 520,331 |
| | 510,749 |
|
| Interest income | | 7,070 |
| | 5,909 |
| | 1,431 |
|
| Interest expense | | (395,114 | ) | | (315,339 | ) | | (286,917 | ) |
| Provision for income taxes | | (996 | ) | | (1,497 | ) | | (316 | ) |
| Equity in loss of unconsolidated joint ventures | | (28,513 | ) | | (194 | ) | | — |
|
| Income from continuing operations | | 234,784 |
| | 209,210 |
| | 224,947 |
|
| Net income from disposed investment | | — |
| | 1,415 |
| | 28,166 |
|
| Allocation to noncontrolling interests | | (64 | ) | | (58 | ) | | 1 |
|
| Net income attributable to the ventures | | $ | 234,720 |
| | $ | 210,567 |
| | $ | 253,114 |
|
| Equity In Income of Unconsolidated Real Estate Affiliates: | | |
| | |
| | |
|
| Net income attributable to the ventures | | $ | 234,720 |
| | $ | 210,567 |
| | $ | 253,114 |
|
| Joint venture partners' share of income | | (112,582 | ) | | (114,263 | ) | | (140,193 | ) |
| Amortization of capital or basis differences (3) | | (48,748 | ) | | (44,736 | ) | | (54,002 | ) |
| Equity in income of Unconsolidated Real Estate Affiliates | | $ | 73,390 |
| | $ | 51,568 |
| | $ | 58,919 |
|
(1) The Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates include income from Ala Moana Center subsequent to the formation of the joint venture on February 27, 2015.
(2) Includes management fees charged to the unconsolidated joint ventures by GGMI and GGSI.
(3) Includes a $3.2 million impairment charge related to our investment in
Aliansce. | | | | | | | | |
| | | December 31,
2012 | | | December 31,
2011 | |
Condensed Combined Balance Sheets - Unconsolidated Real Estate Affiliates | | | | | | | | |
Assets: | | | | | | | | |
Land | | $ | 960,335 | | | $ | 953,603 | |
Buildings and equipment | | | 7,658,965 | | | | 7,906,346 | |
Less accumulated depreciation | | | (2,080,361 | ) | | | (1,950,860 | ) |
Construction in progress | | | 173,419 | | | | 99,352 | |
| | | | | | | | |
Net property and equipment | | | 6,712,358 | | | | 7,008,441 | |
Investments in unconsolidated joint ventures | | | 1,201,044 | | | | 758,372 | |
| | | | | | | | |
Net investment in real estate | | | 7,913,402 | | | | 7,766,813 | |
Cash and cash equivalents | | | 485,387 | | | | 387,549 | |
Accounts and notes receivable, net | | | 167,548 | | | | 162,822 | |
Deferred expenses, net | | | 298,050 | | | | 250,865 | |
Prepaid expenses and other assets | | | 140,229 | | | | 143,021 | |
| | | | | | | | |
Total assets | | $ | 9,004,616 | | | $ | 8,711,070 | |
| | | | | | | | |
Liabilities and Owners’ Equity: | | | | | | | | |
Mortgages, notes and loans payable | | $ | 6,463,377 | | | $ | 5,790,509 | |
Accounts payable, accrued expenses and other liabilities | | | 509,064 | | | | 446,462 | |
Owners’ equity | | | 2,032,175 | | | | 2,474,099 | |
| | | | | | | | |
Total liabilities and owners’ equity | | $ | 9,004,616 | | | $ | 8,711,070 | |
| | | | | | | | |
Investment In and Loans To/From Unconsolidated Real Estate Affiliates, Net: | | | | | | | | |
Owners’ equity | | $ | 2,032,175 | | | $ | 2,474,099 | |
Less joint venture partners’ equity | | | (1,105,457 | ) | | | (1,417,682 | ) |
Excess investment/basis differences* | | | 1,939,153 | | | | 1,996,556 | |
| | | | | | | | |
Investment in and loans to/from | | | | | | | | |
Unconsolidated Real Estate Affiliates, net | | $ | 2,865,871 | | | $ | 3,052,973 | |
| | | | | | | | |
* | Includes gain on investment in Aliansce of $ 23.4 million. |
| | | | | | | | | | | | | | | | | | |
| | | Successor | | | | | Predecessor | |
| | | Year Ended
December 31, 2012 | | | Year Ended
December 31, 2011 | | | Period from
November 10, 2010
through
December 31, 2010 | | | | | Period from
January 1, 2010
through
November 9, 2010 | |
Condensed Combined Statements of Income - Unconsolidated Real Estate Affiliates | | | | | | | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | | | |
Minimum rents | | $ | 770,609 | | | $ | 723,121 | | | $ | 101,266 | | | | | $ | 585,791 | |
Tenant recoveries | | | 297,567 | | | | 297,530 | | | | 41,610 | | | | | | 245,102 | |
Overage rents | | | 30,663 | | | | 26,736 | | | | 6,502 | | | | | | 9,103 | |
Management and other fees(1) | | | 21,465 | | | | 16,346 | | | | 1,217 | | | | | | 15,592 | |
Other | | | 53,363 | | | | 52,721 | | | | 8,491 | | | | | | 21,414 | |
| | | | | | | | | | | | | | | | | | |
Total revenues | | | 1,173,667 | | | | 1,116,454 | | | | 159,086 | | | | | | 877,002 | |
| | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | |
Real estate taxes | | | 95,643 | | | | 98,738 | | | | 11,971 | | | | | | 73,830 | |
Property maintenance costs | | | 38,277 | | | | 40,293 | | | | 7,309 | | | | | | 31,882 | |
Marketing | | | 16,573 | | | | 17,791 | | | | 5,215 | | | | | | 10,894 | |
Other property operating costs | | | 164,889 | | | | 162,572 | | | | 23,052 | | | | | | 130,621 | |
Provision for (recovery of) doubtful accounts | | | 3,039 | | | | 6,826 | | | | (471 | ) | | | | | 5,287 | |
Property management and other costs(2) | | | 48,724 | | | | 46,935 | | | | 7,576 | | | | | | 40,409 | |
General and administrative(1) | | | 31,366 | | | | 29,062 | | | | 2,491 | | | | | | 36,034 | |
Provisions for impairment | | | - | | | | - | | | | - | | | | | | 881 | |
Depreciation and amortization | | | 271,897 | | | | 267,369 | | | | 36,225 | | | | | | 211,725 | |
| | | | | | | | | | | | | | | | | | |
Total expenses | | | 670,408 | | | | 669,586 | | | | 93,368 | | | | | | 541,563 | |
| | | | | | | | | | | | | | | | | | |
Operating income | | | 503,259 | | | | 446,868 | | | | 65,718 | | | | | | 335,439 | |
Interest income | | | 10,553 | | | | 18,355 | | | | 2,309 | | | | | | 17,932 | |
Interest expense | | | (334,633 | ) | | | (350,716 | ) | | | (47,725 | ) | | | | | (271,476 | ) |
(Provision for) benefit from income taxes | | | (935 | ) | | | (794 | ) | | | (179 | ) | | | | | 66 | |
Equity in income of unconsolidated joint ventures | | | 49,200 | | | | 54,207 | | | | 9,526 | | | | | | 43,479 | |
| | | | | | | | | | | | | | | | | | |
Income from continuing operations | | | 227,444 | | | | 167,920 | | | | 29,649 | | | | | | 125,440 | |
Discontinued operations | | | (544 | ) | | | 165,323 | | | | 219 | | | | | | 50,757 | |
Allocation to noncontrolling interests | | | (2,388 | ) | | | (3,741 | ) | | | 111 | | | | | | 964 | |
| | | | | | | | | | | | | | | | | | |
Net income attributable to the ventures | | $ | 224,512 | | | $ | 329,502 | | | $ | 29,979 | | | | | $ | 177,161 | |
| | | | | | | | | | | | | | | | | | |
Equity In Income (Loss) of Unconsolidated Real Estate Affiliates: | | | | | | | | | | | | | | | | | | |
Net income attributable to the ventures | | $ | 224,512 | | | $ | 329,502 | | | $ | 29,979 | | | | | $ | 177,161 | |
Joint venture partners’ share of income | | | (131,047 | ) | | | (181,213 | ) | | | (17,878 | ) | | | | | (67,845 | ) |
Amortization of capital or basis differences | | | (38,481 | ) | | | (145,391 | ) | | | (12,605 | ) | | | | | (61,302 | ) |
Loss on Highland Mall conveyance | | | - | | | | - | | | | - | | | | | | (29,668 | ) |
Discontinued operations | | | - | | | | - | | | | - | | | | | | (6,207 | ) |
| | | | | | | | | | | | | | | | | | |
Equity in income (loss) of Unconsolidated Real Estate Affiliates | | $ | 54,984 | | | $ | 2,898 | | | $ | (504 | ) | | | | $ | 12,139 | |
| | | | | | | | | | | | | | | | | | |
(1) | Primarily includes activity from Aliansce (defined below). |
(2) | Includes management fees charged to the unconsolidated joint ventures by GGMI. |
a single property venture (Note 2).
The Unconsolidated Real Estate Affiliates
representsrepresent our investments in real estate joint ventures that are not consolidated. We hold interests in
1926 domestic joint ventures, comprising
32 of42 U.S.
regional malls,retail properties, one other retail center and
two internationalone joint
ventures, comprising 18 regional mallsventure in Brazil. Generally, we share in the profits and losses, cash flows and other matters relating to our investments in Unconsolidated Real Estate Affiliates in accordance with our respective ownership percentages. We manage most of the properties owned by these joint ventures. As we have joint control of these ventures with our venture partners, we account for these joint ventures under the equity method.
Aliansce Shopping Centers S.A. (‘‘Aliansce’’)
On January 29, 2010, our BrazilianMarch 7, 2014, we formed a joint venture, AliansceAMX Partners, LLC (“AMX”), with Kahikolu Partners, LLC (“MKB”) for the purpose of constructing a luxury residential condominium tower on a site located within the Ala Moana Shopping Centers S.A. (‘‘Aliansce’’), commenced trading onCenter. In
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
conjunction with the Brazilian Stock Exchange, or BM&FBovespa, asclosing of AMX, GGP agreed to sell the air rights above the parking podium to AMX for $50.0 million. GGP received a result of an initial public offering of Aliansce’s common shares in Brazil (the ‘‘Aliansce IPO’’). Our ownership$50.0 million payment during the year ended December 31, 2015.
On December 1, 2014, we sold our interest in
Aliansce was approximately 31% at December 31, 2010 as a
resultjoint venture, which resulted in our recognition of
the stock sold in the Aliansce IPO. As a result of the IPO dilution, we recorded a gain of $9.7
million. The $9.7 million
gain is recognized within Unconsolidated Real Estate Affiliates - gain on investment on our
investment in Aliansce.Consolidated Statements of Operations and Comprehensive Income.
On
October 9, 2012January 29, 2015, we
acquired an additional 14.1%sold our interest in
the shares if stocka joint venture that owns Trails Village, which resulted in our recognition of
Aliansce from certain affiliates of Pershing Square Capital Management, L.P. for $195.2 million. Our ownership interest in Aliansce was increased from 31% to approximately 46%.On December 13, 2012, as a result of a secondary public offering of Aliansce’s common shares in Brazil, our ownership interest was diluted from 46% to approximately 40%. As a result of the dilution, we recorded a gain of $23.4$12.0 million. The $12.0 million is recognized within Unconsolidated Real Estate Affiliates - gain on investment on our investment in Aliansce.
AsConsolidated Statements of December 31, 2012,Comprehensive Income.
On April 10, 2015, we heldsold a 40% non-controlling ownership12.5% interest in Aliansce, as well as,Ala Moana Center, which resulted in our recognition of a 35% non-controllinggain of $311.3 million (Note 3). The $311.3 million is recognized within Unconsolidated Real Estate Affiliates - gain on investment on our Consolidated Statements of Comprehensive Income.
On September 24, 2015, we sold our interest in a large regional mall, Shopping Leblon,joint venture that owns Lake Mead & Buffalo, which resulted in Rio de Janeiro (Brazil).our recognition of a gain of $3.1 million. The ownership interests in Aliansce and Shopping Leblon are$3.1 million is recognized within Unconsolidated Real Estate Affiliates - gain on investment on our Consolidated Statements of Comprehensive Income.
To the extent that the Company contributes assets to a joint venture accounted for
underusing the equity
method. However, ourmethod, the Company’s investment in
Alianscethe joint venture is
an ownershiprecorded at the Company’s cost basis in the assets that were contributed to the joint venture. The Company will recognize gains and losses on the contribution of its real estate to joint ventures, relating solely to the outside partner’s interest,
in approximately 63,000,000 sharesto the extent the buyer is independent of the
public real estate operating company.Company, the collection of the sales price is reasonably assured, and the Company will not be required to support the operations of the property or its related obligations to an extent greater than its proportionate interest.
Unconsolidated Mortgages, Notes and Loans Payable and Retained Debt
Our proportionate share of the mortgages, notes and loans payable of the unconsolidated joint ventures was
$3.1$5.1 billion as of December 31,
20122015 and
$2.8$3.9 billion as of December 31,
2011,2014, including Retained Debt (as defined below). There can be no assurance that the Unconsolidated Properties will be able to refinance or restructure such debt on acceptable terms or otherwise, or that joint venture operations or contributions by us and/or our partners will be sufficient to repay such loans.
We have debt obligations in excess of our pro rata share of the debt
for one of our Unconsolidated Real Estate Affiliates
(‘‘(“Retained
Debt’’Debt”). This Retained Debt represents distributed debt proceeds of the Unconsolidated Real Estate Affiliates in excess of our pro rata share of the non-recourse mortgage indebtedness. The proceeds of the Retained Debt which were distributed to us are included as a reduction in our investment in Unconsolidated Real Estate Affiliates. We had retained debt of
$91.8$87.9 million at one property as of December 31,
2012,2015, and
$130.6$89.3 million
at two properties as of December 31,
2011.2014. We are obligated to contribute funds on an ongoing basis,
as needed, to our Unconsolidated Real Estate Affiliates in amounts sufficient to pay debt service on such Retained Debt. If we do not contribute such funds, our distributions from such Unconsolidated Real Estate Affiliates, or our interest in, could be reduced to the extent of such deficiencies. As of December 31,
2012,2015, we do not anticipate an inability to perform on our obligations with respect to Retained Debt.
NOTE 8 MORTGAGES,
GENERAL GROWTH PROPERTIES, INC.
NOTES
AND LOANS PAYABLEMortgages, notes and loans payable and the weighted-average interest rates are summarized as follows:
| | | | | | | | | | | | | | | | |
| | | December 31,
2012(1) | | | Weighted-Average
Interest Rate(2) | | | December 31,
2011 | | | Weighted-Average
Interest Rate(2) | |
Fixed-rate debt: | | | | | | | | | | | | | | | | |
Collateralized mortgages, notes and loans payable | | $ | 14,225,011 | | | | 4.88 | % | | $ | 13,091,080 | | | | 5.44 | % |
Corporate and other unsecured term loans | | | 729,590 | | | | 6.51 | % | | | 1,704,290 | | | | 6.73 | % |
| | | | | | | | | | | | | | | | |
Total fixed-rate debt | | | 14,954,601 | | | | 4.96 | % | | | 14,795,370 | | | | 5.59 | % |
| | | | | | | | | | | | | | | | |
Variable-rate debt: | | | | | | | | | | | | | | | | |
Collateralized mortgages, notes and loans payable | | | 1,012,265 | | | | 3.42 | % | | | 2,347,644 | | | | 3.41 | % |
| | | | | | | | | | | | | | | | |
Total Mortgages, notes and loans payable | | $ | 15,966,866 | | | | 4.86 | % | | $ | 17,143,014 | | | | 5.29 | % |
| | | | | | | | | | | | | | | | |
Variable-rate debt: | | | | | | | | | | | | | | | | |
Junior Subordinated Notes | | $ | 206,200 | | | | 1.76 | % | | $ | 206,200 | | | | 1.88 | % |
| | | | | | | | | | | | | | | | |
(1) | Includes ($23.3) million of debt market rate adjustments |
(2) | Represents the weighted-average interest rates on our principle balances, excluding the effects of deferred finance costs. |
During the year ended December 31, 2012, we refinanced 24 consolidated mortgage notes totaling $6.1 billion with net proceeds of $1.1 billion and obtained new financing of $163.0 million on two properties. In addition, we paid down $76.2 million of mortgage notes and $949.6 million of corporate unsecured bonds.
Collateralized Mortgages, Notes and Loans Payable
As of December 31, 2012, $21.7 billion of land, buildings and equipment (before accumulated depreciation) and constructionTO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in
progress have been pledged as collateral for our mortgages, notes and loans payable. Certain of these consolidated secured loans, representing $2.2 billion of debt, are cross-collateralized with other properties. Although a majority of the $15.2 billion of fixed and variable rate collateralized mortgages, notes and loans payable are non-recourse, $690.9 million of such mortgages, notes and loans payable are recourse to the Company as guarantees on secured financings. In addition, certain mortgage loans contain other credit enhancement provisions which have been provided by GGP. Certain mortgages, notes and loans payable may be prepaid but are generally subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.The following is a summary of our significant loan refinancings during 2012:
| | | | | | | | | | | | | | | | | | | | | | |
Property | | Original
Loan | | | Original
Rate | | New Loan | | | New Rate (1) | | | Net Proceeds | | | Maturity | |
| | | | | | (dollars in millions) | | | | | | | | | | |
Ala Moana Center | | $ | 1,293.4 | | | 5.59% | | $ | 1,400.0 | | | | 4.23 | % | | $ | 106.6 | | | | 2022 | |
The Grand Canal Shoppes(2) | | | 367.6 | | | 4.78% | | | 468.8 | | | | 4.24 | % | | | 101.2 | | | | 2019 | |
The Shoppes at the Palazzo(2) | | | 238.7 | | | LIBOR + 300 bps | | | 156.2 | | | | 4.24 | % | | | (82.5 | ) | | | 2019 | |
Five Property Mortgage Note | | | 763.5 | | | 7.50% | | | 763.5 | | | | 5.80 | % | | | - | | | | 2019 - 2024 | |
Fashion Show | | | 612.5 | | | 3.23% | | | 835.0 | | | | 4.03 | % | | | 222.5 | | | | 2024 | |
Fashion Place | | | 132.0 | | | 5.30% | | | 226.7 | | | | 3.64 | % | | | 94.7 | | | | 2020 | |
(1) | New rate is based on weighted-average for multiple property notes. |
(2) | Represents one note, which eliminated $238.7 million of recourse to the Company. |
Corporate and Other Unsecured Loans
We have certain unsecured debt obligations, the terms of which are described below:
| | | | | | | | | | | | | | | | |
| | | December 31,
2012 (2) | | | Weighted-Average
Interest Rate | | | December 31,
2011 | | | Weighted-Average
Interest Rate | |
Unsecured fixed-rate debt: | | | | | | | | | | | | | | | | |
Rouse Bonds - 1995 Indenture(1)(3) | | $ | 91,786 | | | | 5.38 | % | | $ | 91,786 | | | | 5.38 | % |
HHC Note(1) | | | 19,347 | | | | 4.41 | % | | | 25,248 | | | | 4.41 | % |
Rouse Bonds - 2010 Indenture(1) | | | 608,688 | | | | 6.75 | % | | | 608,688 | | | | 6.75 | % |
Rouse Bonds - 1995 Indenture | | | - | | | | - | | | | 349,472 | | | | 7.20 | % |
Rouse Bonds - 2006 Indenture | | | - | | | | - | | | | 600,054 | | | | 6.75 | % |
| | | | | | | | | | | | | | | | |
Total unsecured fixed - rate debt | | | 719,821 | | | | 6.51 | % | | | 1,675,248 | | | | 6.73 | % |
| | | | | | | | | | | | | | | | |
(1) | Matures from November 2013 through December 2015. |
(2) | Excludes a net market rate premium of $9.8 million that increases the total amount that appears outstanding in our Consolidated Balance Sheets. The market rate premium amortizes as a reduction to interest expense over the life of the respective loan. |
(3) | We repaid $91.8 million of corporate unsecured bonds in 2013 (Note 20). |
The bonds have covenants, including ratios of secured debt to gross assets and total debt to total gross assets. We are not aware of any instances of non-compliance with such covenants as of December 31, 2012. We repaid the $349.5 million bond on September 17, 2012, when it matured, with available cash on hand. On December 3, 2012, we exercised our right to an early redemption and repaid our $600.1 million bond, which previously bore interest of 6.75% and was due in May 2013. As a result of the early redemption, we were required to pay a prepayment fee of $15.0 million. The prepayment fee is recorded as Loss on extinguishment of debt in the Consolidated Statements of Operations and Comprehensive Loss.
In April 2012, we amended our revolving credit facility (the ‘‘Facility’’) providing for revolving loans of up to $1.00 billion. The Facility has an uncommitted accordion feature for a total facility of up to $1.25 billion. The Facility is scheduled to mature in April 2016 and is guaranteed by certain of our subsidiaries and secured by (i) a first-lien on the capital stock of certain of our subsidiaries and (ii) various additional collateral. No amounts have been drawn on the Facility as of December 31, 2012. Borrowings under the Facility bear interest at a rate equal to LIBOR plus 200 to 275 basis points which is determined by the Company’s leverage level. The Facility contains certain restrictive covenants which limit material changes in the nature of our business conducted, including but not limited to, mergers, dissolutions or liquidations, dispositions of assets, liens, incurrence of additional indebtedness, dividends, transactions with affiliates, prepayment of subordinated debt, negative pledges and changes in fiscal periods. In addition, we are required to maintain a maximum net debt to value ratio, a maximum leverage ratio and a minimum net cash interest coverage ratio; we are not aware of any instances of non-compliance with such covenants as of December 31, 2012.
Junior Subordinated Notes
GGP Capital Trust I, a Delaware statutory trust (the ‘‘Trust’’) and a wholly-owned subsidiary of GGPLP, completed a private placement of $200.0 million of trust preferred securities (‘‘TRUPS’’) in 2006. The Trust also issued $6.2 million of Common Securities to GGPLP. The Trust used the proceeds from the sale of the TRUPS and Common Securities to purchase $206.2 million of floating rate Junior Subordinated Notes of GGPLP due 2041. Distributions on the TRUPS are equal to LIBOR plus 1.45%. Distributions are cumulative and accrue from the date of original issuance. The TRUPS mature on April 30, 2041, but may be redeemed beginning on April 30, 2011 if the Trust exercises its right to redeem a like amount of Junior Subordinated Notes. The Junior Subordinated Notes bear interest at LIBOR plus 1.45% and are fully recourse to the Company. Though the Trust is a wholly-owned subsidiary of GGPLP, we are not the primary beneficiary of the Trust and, accordingly, it is
not consolidated for accounting purposes. We have recorded the Junior Subordinated Notes as mortgages, notes and loans payable and our common equity interest in the Trust as prepaid expenses and other assets in our Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011.
Letters of Credit and Surety Bonds
We had outstanding letters of credit and surety bonds of $21.7 million as of December 31, 2012 and $19.1 million as of December 31, 2011. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.
We are not aware of any instances of non-compliance with our financial covenants related to our mortgages, notes and loans payable as of December 31, 2012 with the exception of two properties transferred to a special servicer which are currently in default. One of these properties was sold subsequent to December 31, 2012 (Note 20).
NOTE 9 INCOME TAXES
We have elected to be taxed as a REIT under the Internal Revenue Code. We intend to maintain REIT status. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including requirements to distribute at least 90% of our ordinary taxable income and to either distribute capital gains to stockholders, or pay corporate income tax on the undistributed capital gains. In addition, the Company is required to meet certain asset and income tests.
As a REIT, we will generally not be subject to corporate level Federal income tax on taxable income we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income or property, and to Federal income and excise taxes on our undistributed taxable income. Generally, we are currently open to audit by the Internal Revenue Service for the years ending December 31, 2007 through 2012 and are open to audit by state taxing authorities for the years ending December 31, 2008 through 2012.
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10
through
December 31,
2010 | | | Period from
January 1,
2010
through
November 9,
2010 | |
Current | | $ | 5,036 | | | $ | 11,548 | | | $ | (2,636 | ) | | $ | (6,449 | ) |
Deferred | | | 4,055 | | | | (2,825 | ) | | | (6,356 | ) | | | (54,513 | ) |
| | | | | | | | | | | | | | | | |
Total from Continuing Operations | | | 9,091 | | | | 8,723 | | | | (8,992 | ) | | | (60,962 | ) |
Current | | | 23 | | | | 632 | | | | 100 | | | | (28,791 | ) |
Deferred | | | - | | | | - | | | | - | | | | (443,379 | ) |
| | | | | | | | | | | | | | | | |
Total from Discontinued Operations | | | 23 | | | | 632 | | | | 100 | | | | (472,170 | ) |
| | | | | | | | | | | | | | | | |
Total | | $ | 9,114 | | | $ | 9,355 | | | $ | (8,892 | ) | | $ | (533,132 | ) |
| | | | | | | | | | | | | | | | |
The distribution of assets from the Predecessor in the formation of HHC significantly changed the Successor’s exposure to income taxes. The majority of taxable activities within the Predecessor were distributed in the formation of HHC with relatively insignificant taxable activities remaining with the Successor. The vast majority of the Successor’s activities are conducted within the REIT structure. REIT earnings are generally not subject to federal income taxes. As such, the Successor’s provision for (benefit from) income taxes is not a material item in these financial statements.
Total provision for (benefit from) income taxes computed for continuing and discontinued operations by applying the Federal corporate tax rate for the year ended December 31, 2012, December 31, 2011, the period from November 10 through December 31, 2010 and the period from January 1, 2010 through November 9, 2010 were as follows:
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31, 2012 | | | Year Ended
December 31, 2011 | | | Period from
November 10
through
December 31, 2010 | | | Period from
January 1, 2010
through
November 9, 2010 | |
Tax at statutory rate on earnings from continuing operations before income taxes | | $ | (168,431 | ) | | $ | (109,583 | ) | | $ | (90,094 | ) | | $ | (226,465 | ) |
(Decrease) increase in valuation allowances, net . | | | (120 | ) | | | (497 | ) | | | 1,491 | | | | (24,608 | ) |
State income taxes, net of Federal income tax benefit | | | 2,766 | | | | 5,488 | | | | 576 | | | | 2,956 | |
Tax at statutory rate on REIT earnings not subject to Federal income taxes | | | 172,331 | | | | 111,748 | | | | 90,832 | | | | 228,399 | |
Tax expense from change in tax rates, prior period adjustments and other permanent differences | | | 3,520 | | | | 3,076 | | | | 95 | | | | 1,792 | |
Tax expense (benefit) from discontinued operations | | | 23 | | | | 632 | | | | 100 | | | | (472,170 | ) |
Uncertain tax position expense, excluding interest | | | (680 | ) | | | (1,185 | ) | | | (8,856 | ) | | | (34,560 | ) |
Uncertain tax position interest, net of federal income tax benefit and other | | | (295 | ) | | | (324 | ) | | | (3,036 | ) | | | (8,476 | ) |
| | | | | | | | | | | | | | | | |
Provision for (benefit from) income taxes | | $ | 9,114 | | | $ | 9,355 | | | $ | (8,892 | ) | | $ | (533,132 | ) |
| | | | | | | | | | | | | | | | |
Realization of a deferred tax benefit is dependent upon generating sufficient taxable income in future periods. Our TRS net operating loss carryforwards are currently scheduled to expire in subsequent years through 2032. All of the REIT net operating loss carryforward amounts are subject to annual limitations under Section 382 of the Code, although it is not expected that there will be a significant impact.
The amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes for our TRS’s are as follows:
| | | | | | | | |
| | | Amount | | | Expiration Dates | |
Net operating loss carryforwards - State | | $ | 22,506 | | | | 2013 - 2032 | |
Capital loss carryforwards | | | 6,638 | | | | 2016 | |
Each TRS and certain REIT entities subject to state income taxes is a tax paying component for purposes of classifying deferred tax assets and liabilities. As of December 31, 2012, we had gross deferred tax assets totaling $17.8 million, of which a valuation allowance of $16.9 million has been established against certain deferred tax assets, and gross deferred tax liabilities of $28.2 million. Net deferred tax assets (liabilities) are summarized as follows:
| | | | | | | | |
| | | 2012 | | | 2011 | |
Total deferred tax assets | | $ | 17,778 | | | $ | 21,574 | |
Valuation allowance | | | (16,876 | ) | | | (16,996 | ) |
| | | | | | | | |
Net deferred tax assets | | | 902 | | | | 4,578 | |
Total deferred tax liabilities | | | (28,174 | ) | | | (29,220 | ) |
| | | | | | | | |
Net deferred tax liabilities | | $ | (27,272 | ) | | $ | (24,642 | ) |
| | | | | | | | |
Due to the uncertainty of the realization of certain tax carryforwards, we have established valuation allowances on those deferred tax assets that we do not reasonably expect to realize. Deferred tax assets that we believe have only a remote possibility of realization have not been recorded.
The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities as of December 31, 2012 and December 31, 2011 are summarized as follows:
| | | | | | | | |
| | | 2012 | | | 2011 | |
Operating loss and tax credit carryforwards | | $ | 15,051 | | | $ | 5,489 | |
Other TRS property, primarily differences in basis of assets and liabilities | | | (25,447 | ) | | | (13,135 | ) |
Valuation allowance | | | (16,876 | ) | | | (16,996 | ) |
| | | | | | | | |
Net deferred tax liabilities | | $ | (27,272 | ) | | $ | (24,642 | ) |
| | | | | | | | |
We had unrecognized tax benefits recorded pursuant to uncertain tax positions of $5.4 million as of December 31, 2012, excluding interest, all of which would impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $0.5 million as of December 31, 2012. We had unrecognized tax benefits recorded pursuant to uncertain tax positions of $6.1 million as of December 31, 2011, excluding interest, all of which would impact our effective tax rate. Accrued interest related to these unrecognized tax benefits amounted to $0.7 million as of December 31, 2011.
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10
through
December 31,
2010 | | | Period from
January 1, 2010
through
November 9,
2010 | |
Unrecognized tax benefits, opening balance | | $ | 6,053 | | | $ | 7,235 | | | $ | 16,090 | | | $ | 103,975 | |
Gross increases - tax positions in prior period | | | - | | | | - | | | | - | | | | 3,671 | |
Gross increases - tax positions in current period | | | - | | | | 1,907 | | | | - | | | | 69,216 | |
Gross decreases - tax positions in prior period | | | - | | | | - | | | | - | | | | - | |
Lapse of statute of limitations | | | (683 | ) | | | (944 | ) | | | (8,855 | ) | | | (35,117 | ) |
Gross decreases - other | | | - | | | | (2,145 | ) | | | - | | | | (125,291 | ) |
Gross decreases - tax positions in current period | | | - | | | | - | | | | - | | | | (364 | ) |
| | | | | | | | | | | | | | | | |
Unrecognized tax benefits, ending balance | | $ | 5,370 | | | $ | 6,053 | | | $ | 7,235 | | | $ | 16,090 | |
| | | | | | | | | | | | | | | | |
Based on the Successor’s assessment of the expected outcome of existing examinations or examinations that may commence, or as a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits, excluding accrued interest, for tax positions taken regarding previously filed tax returns will change from those recorded at December 31, 2012, although such change would not be material to the 2013 financial statements.
Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income reported for financial reporting purposes due to differences for Federal income tax reporting purposes in, among other things, estimated useful lives, depreciable basis of properties and permanent and temporary differences on the inclusion or deductibility of elements of income and deductibility of expense for such purposes.
Distributions paid on our common stock and their tax status, as sent to our shareholders, is presented in the following table. The tax status of GGP distributions in 2012, 2011 and 2010 may not be indicative of future periods.
| | | | | | | | | | | | |
| | | Successor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10
through
December 31,
2010 | |
Ordinary income | | $ | 0.316 | | | $ | 0.303 | | | $ | - | |
Return of capital | | | - | | | | - | | | | - | |
Qualified dividends | | | - | | | | - | | | | 0.244 | |
Capital gain distributions | | | 0.221 | | | | 0.296 | | | | 0.136 | |
| | | | | | | | | | | | |
Distributions per share | | $ | 0.537 | | | $ | 0.599 | | | $ | 0.380 | |
| | | | | | | | | | | | |
NOTE 10 WARRANT LIABILITY
Pursuant to the terms of the Investment Agreements, the Plan Sponsors and Blackstone were issued 120,000,000 warrants (the ‘‘Warrants’’) to purchase common stock of GGP. Each Warrant is recorded as a liability as the holders of the Warrants may require GGP to settle such warrants in cash in the circumstance of a subsequent change of control. Each GGP Warrant has a term of seven years and expires on November 9, 2017, and no warrants have been exercised as of December 31, 2012.
As of December 31, 2012, the Brookfield Investor Warrants and the Blackstone (A and B) Investor Warrants were immediately exercisable, while the Fairholme Warrants and the Pershing Square Warrants are exercisable (for the initial 6.5 years from the issuance) only upon 90 days prior notice, but there is no obligation to exercise at any point from the end of the 90 day notification period through maturity. Below is a summary of the Warrants initially received by the Plan Sponsors and Blackstone.
| | | | | | | | |
Warrant Holder | | Number of
Warrants | | | Initial
Exercise Price | |
Brookfield Investor | | | 57,500,000 | | | $ | 10.75 | |
Blackstone -B(2) | | | 2,500,000 | | | | 10.75 | |
Fairholme(2) | | | 41,070,000 | | | | 10.50 | |
Pershing Square(1) | | | 16,430,000 | | | | 10.50 | |
Blackstone -A (2) | | | 2,500,000 | | | | 10.50 | |
| | | | | | | | |
| | | 120,000,000 | | | | | |
| | | | | | | | |
(1) | On December 31, 2012, the Pershing Square warrants were purchased by the Brookfield Investor, see below. |
(2) | Subsequent to year end, the Fairholme and Blackstone A and B warrants were purchased by GGP, see below. |
The Warrants were fully vested upon issuance and the exercise prices are subject to adjustment for future dividends, stock dividends, distribution of assets, stock splits or reverse splits of our common stock or certain other events. In accordance with the agreement, these calculations adjust both the exercise price and the number of shares issuable for the 120,000,000 Warrants.
In addition to the adjustment for the common stock dividends, as a result of the RPI Spin-Off, the exercise price of the Warrants was adjusted by $0.3943 for the Brookfield Investor and Blackstone — B Warrants and by $0.3852 for the Fairholme, Pershing Square and Blackstone — A Warrants, on the record date of December 30, 2011.
As a result of these investment provisions, as of the record date of our common stock dividends, the number of shares issuable upon exercise of the outstanding Warrants was increased as follows:
| | | | | | | | | | | | |
| | | | | | Exercise Price | |
Record Date | | Issuable
Shares | | | Brookfield Investor
and Blackstone - B | | | Fairholme, Pershing
Square and
Blackstone - A | |
April 15, 2011 | | | 123,960,000 | | | $ | 10.41 | | | $ | 10.16 | |
July 15, 2011 | | | 124,704,000 | | | | 10.34 | | | | 10.10 | |
December 30, 2011 | | | 131,748,000 | | | | 9.79 | | | | 9.56 | |
April 16, 2012 | | | 132,372,000 | | | | 9.75 | | | | 9.52 | |
July 16, 2012 | | | 133,116,000 | | | | 9.69 | | | | 9.47 | |
October 15, 2012 | | | 133,884,000 | | | | 9.64 | | | | 9.41 | |
December 14, 2012 | | | 134,640,000 | | | | 9.58 | | | | 9.36 | |
The estimated fair value of the Warrants was $1.5 billion as of December 31, 2012 and $986.0 million as of December 31, 2011. Changes in the fair value of the Warrants are recognized in earnings. The fair value of the Warrants was estimated using the Black Scholes option pricing model using our stock price, the Warrant term, and Level 3 inputs (Note 3). An increase in GGP’s common stock price or in the expected volatility of the Warrants would increase the fair value; whereas, a decrease in GGP’s common stock price or an increase in the lack of marketability would decrease the fair value. The estimated fair value of the Warrants as of December 31, 2012, was not adjusted when determining the fair value as a result of the Pershing Square and Fairholme/Blackstone transactions referenced below. The following table summarizes the estimated fair value of the Warrants and significant observable and unobservable inputs used in the valuation as of December 31, 2012 and December 31, 2011:
| | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
Warrant liability | | $ | 1,488,196 | | | $ | 985,962 | |
| | |
Observable Inputs | | | | | | | | |
GGP stock price per share | | $ | 19.85 | | | $ | 15.02 | |
Warrant term | | | 4.86 | | | | 5.86 | |
| | |
Unobservable Inputs | | | | | | | | |
Expected volatility | | | 33 | % | | | 37 | % |
Range of values considered | | | (20% - 65%) | | | | (20% - 65%) | |
| | |
Discount for lack of marketability | | | 3 | % | | | 3 | % |
Range of values considered | | | (3% - 7%) | | | | (3% -7%) | |
The following table summarizes the change in fair value of the Warrant liability which is measured on a recurring basis using Level 3 inputs:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
Balance as of January 1, | | $ | 985,962 | | | $ | 1,041,004 | | | $ | 835,752 | |
Warrant liability adjustment | | | 502,234 | | | | (55,042 | ) | | | 205,252 | |
| | | | | | | | | | | | |
Balance as of December 31, | | $ | 1,488,196 | | | $ | 985,962 | | | | 1,041,004 | |
| | | | | | | | | | | | |
On December 31, 2012, the Brookfield Investor acquired all of the 16,430,000 Warrants held by Pershing Square for a purchase price of approximately $272 million. In connection with the transaction, the parties are required to abide by the following undertakings, as applicable, covering a period of not less than four years from the date of the transaction:
in connection with any stockholder vote on a change of control transaction recommended by GGP’s Board of Directors, the Brookfield Investor will limit their right to vote shares in excess of 38.2% of the then-outstanding common stock;
the Brookfield Investor will participate in future repurchases of common stock by GGP so as not to exceed their 45% ownership cap;
the Brookfield Investor will not participate in any GGP dividend reinvestment plan unless first requested by GGP’s Board of Directors;
Pershing Square has acknowledged the 9.9% ownership related to GGP and agreed to not acquire shares of GGP that would cause its ownership to exceed the limit;
Pershing Square agreed that they will refrain from undertaking types of transactions with respect to GGP that are subject to disclosure under paragraphs (a)-(j) of Item 4 of Schedule 13D.
On January 28, 2013, GGPLP acquired the 41,070,000 Warrants held by Fairholme and the 5,000,000 Warrants held by Blackstone for an aggregate purchase price of approximately $633 million. The Warrants are exercisable into approximately 27 million common shares of the Company at a weighted average exercise price of approximately $9.37thousands, except per share assuming net share settlement. GGPLP funded the transaction using available cash resources, including its revolving credit facility. The Warrants acquired by GGPLP had a recorded estimated fair value of approximately $593 million as of December 31, 2012. The aggregate premium paid by GGPLP, which is expected to be recognized as a Warrant liability adjustment in the first quarter of 2013, is approximately $55 million.
As a result of transactions occurring on December 31, 2012 and January 28, 2013, the Brookfield Investor is now the sole third party owner of the Warrants, representing 73,930,000 warrants or approximately 83,000,000 common stock equivalents. As of January 3, 2013, the Brookfield Investor’s potential ownership of the Company, including the effect of shares issuable upon exercise of the Warrants, is 43.1%, which is stated in their Form 13D filed on the same date.
After these transactions, Brookfield has the option for 57,500,000 Warrants to either full share settle (i.e. deliver cash for the exercise price of the Warrants in the amount of approximately $618 million in exchange for approximately 65,000,000 shares of common stock) or net share settle (i.e. receive shares in common stock equivalent to the intrinsic value of the warrant at the time of exercise). The remaining 16,430,000 Warrants held by Brookfield must be net share settled. Due to the warrants, Brookfield’s potential ownership percentage may change as a result of payments of dividends and changes in our stock price.
amounts)
NOTE 117 MORTGAGES, NOTES AND LOANS PAYABLE
Mortgages, notes and loans payable and the weighted-average interest rates are summarized as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | December 31, 2015(1) | | Weighted-
Average
Interest
Rate(2) | | December 31, 2014(3) | | Weighted-
Average
Interest
Rate(2) |
| Fixed-rate debt: | | | | | | | | | | | | |
| Collateralized mortgages, notes and loans payable(4) | | $ | 11,921,302 | | | 4.43 | % | | $ | 13,566,852 | | | 4.52 | % |
| Corporate and other unsecured loans | | — | | | — | % | | 6,599 | | | 4.41 | % |
| Total fixed-rate debt | | 11,921,302 | | | 4.43 | % | | 13,573,451 | | | 4.52 | % |
| Variable-rate debt: | | | | | | | | | | | | |
| Collateralized mortgages, notes and loans payable(4) | | 1,991,022 | | | 2.08 | % | | 2,280,292 | | | 2.00 | % |
| Revolving credit facility | | 303,836 | | | 1.89 | % | | 90,444 | | | 1.73 | % |
| Total variable-rate debt | | 2,294,858 | | | 2.05 | % | | 2,370,736 | | | 1.99 | % |
| Total Mortgages, notes and loans payable | | $ | 14,216,160 | | | 4.05 | % | | $ | 15,944,187 | | | 4.14 | % |
| Junior Subordinated Notes | | $ | 206,200 | | | 1.77 | % | | $ | 206,200 | | | 1.68 | % |
| |
| (1) | Includes net $33.0 million of market rate adjustments and $40.2 million of deferred financing costs. |
| |
| (2) | Represents the weighted-average interest rates on our principal balances, excluding the effects of deferred finance costs. |
| |
| (3) | Includes net $19.9 million of debt market rate adjustments and $54.1 million of deferred financing costs. |
| |
| (4) | $99.1 million of the fixed-rate balance and $1.4 billion of the variable-rate balance is cross-collateralized. |
Collateralized Mortgages, Notes and Loans Payable
As of December 31, 2015, $18.0 billion of land, buildings and equipment (before accumulated depreciation) and construction in progress have been pledged as collateral for our mortgages, notes and loans payable. Certain of these consolidated secured loans, representing $1.5 billion of debt, are cross-collateralized with other properties. Although a majority of the $13.9 billion of fixed and variable rate collateralized mortgages, notes and loans payable are non-recourse, $1.5 billion of such mortgages, notes and loans payable are recourse to the Company as guarantees on secured financings. In addition, certain mortgage loans contain other credit enhancement provisions which have been provided by GGP. Certain mortgages, notes and loans payable may be prepaid but are generally subject to a prepayment penalty equal to a yield-maintenance premium, defeasance or a percentage of the loan balance.
During the year ended December 31, 2015, we refinanced consolidated mortgage notes totaling $710.0 million at four properties and generated net proceeds of $240.9 million. The prior loans totaling $469.1 million had a weighted-average term-to-maturity of 1.3 years, and a weighted-average interest rate of 5.6%. The new loans have a weighted-average term-to-maturity of 11.0 years, and a weighted-average interest rate of 3.8%. In addition, we paid down $594.3 million of consolidated mortgage notes at five properties. The prior loans had a weighted-average term-to-maturity of 1.5 years, and a weighted-average interest rate of 5.3%. We also obtained new mortgage notes totaling $250.0 million on two properties with a weighted-average term-to-maturity of 10.0 years and a weighted-average interest rate of 4.3%.
We elected to early-adopt ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” issued by the FASB. The adoption of this ASU resulted in the reclassification of deferred financing costs in the amount of $40.2 million and $54.1 million as of December 31, 2015 and 2014, respectively.
Corporate and Other Unsecured Loans
We have certain unsecured debt obligations, the terms of which are described below:
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | | | |
| | | December 31, 2015(2) | | Weighted-Average
Interest Rate | | December 31, 2014(3) | | Weighted-Average
Interest Rate |
| Unsecured debt: | | | | | | | | | | | | |
| HHC Note(1) | | $ | — | | | — | % | | $ | 6,735 | | | 4.41 | % |
| Revolving credit facility | | 315,000 | | | 1.89 | % | | 100,000 | | | 1.73 | % |
| Total unsecured debt | | 315,000 | | | 1.89 | % | | 106,735 | | | 1.90 | % |
| |
| (1) | Note matured in December 2015 and was repaid. |
| |
| (2) | Excludes deferred financing costs of 11.2 million in 2015 that decrease the total amount that appears outstanding in our Consolidated Balance Sheets. |
| |
| (3) | Excludes minimal market rate discounts and deferred financing costs of $9.6 million that decrease the total amount that appears outstanding in our Consolidated Balance Sheets. The market rate discount amortizes as an addition to interest expense over the life of the loan. |
Our Facility as amended on October 30, 2015, provides for revolving loans of up to $1.1 billion. The Facility has an uncommitted accordion feature for a total facility of up to $1.5 billion. The Facility is scheduled to mature in October 2020 and is unsecured. Borrowings under the Facility bear interest at a rate equal to LIBOR plus 132.5 to 195 basis points, which is determined by the Company’s leverage level. The Facility contains certain restrictive covenants which limit material changes in the nature of our business conducted, including but not limited to, mergers, dissolutions or liquidations, dispositions of assets, liens, incurrence of additional indebtedness, dividends, transactions with affiliates, prepayment of subordinated debt, negative pledges and changes in fiscal periods. In addition, we are required not to exceed a maximum net debt-to-value ratio, a maximum leverage ratio and a minimum net cash interest coverage ratio; we are not aware of any instances of non-compliance with such covenants as of December 31, 2015. $315.0 million was outstanding on the Facility, as of December 31, 2015.
Junior Subordinated Notes
GGP Capital Trust I, a Delaware statutory trust (the “Trust”) and a wholly-owned subsidiary of GGPN, completed a private placement of $200.0 million of trust preferred securities (“TRUPS”) in 2006. The Trust also issued $6.2 million of Common Securities to GGPN. The Trust used the proceeds from the sale of the TRUPS and Common Securities to purchase $206.2 million of floating rate Junior Subordinated Notes of GGPN due 2036. Distributions on the TRUPS are equal to LIBOR plus 1.45%. Distributions are cumulative and accrue from the date of original issuance. The TRUPS mature on April 30, 2036, but may be redeemed beginning on April 30, 2011 if the Trust exercises its right to redeem a like amount of Junior Subordinated Notes. The Junior Subordinated Notes bear interest at LIBOR plus 1.45% and are fully recourse to the Company. Though the Trust is a wholly-owned subsidiary of GGPN, we are not the primary beneficiary of the Trust and, accordingly, it is not consolidated for accounting purposes. We have recorded the Junior Subordinated Notes as a liability and our common equity interest in the Trust as prepaid expenses and other assets in our Consolidated Balance Sheets as of December 31, 2015 and December 31, 2014.
Letters of Credit and Surety Bonds
We had outstanding letters of credit and surety bonds of $76.1 million as of December 31, 2015 and $49.1 million as of December 31, 2014. These letters of credit and bonds were issued primarily in connection with insurance requirements, special real estate assessments and construction obligations.
We are not aware of any instances of non-compliance with our financial covenants related to our mortgages, notes and loans payable as of December 31, 2015.
NOTE 8 INCOME TAXES
We have elected to be taxed as a REIT under the Internal Revenue Code. We intend to maintain REIT status. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of our taxable ordinary income. In addition, the Company is required to meet certain asset and income tests.
As a REIT, we will generally not be subject to corporate level Federal income tax on taxable income we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income or property, and
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
to Federal income and excise taxes on our undistributed taxable income and capital gains. We are currently statutorily open to audit by the Internal Revenue Service for the years ended December 31, 2012 through 2015 and are statutorily open to audit by state taxing authorities for the years ended December 31, 2011 through 2015.
The (benefit from) provision for income taxes for the years ended December 31, 2015, 2014, and 2013 are as follows:
|
| | | | | | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Current | | $ | 3,134 |
| | $ | 13,994 |
| | $ | 3,855 |
|
| Deferred | | (41,468 | ) | | (6,741 | ) | | (3,510 | ) |
| Total | | (38,334 | ) | | 7,253 |
| | 345 |
|
Realization of a deferred tax benefit is dependent upon generating sufficient taxable income in future periods. Our TRS net operating loss carryforwards of $22.3 million are currently scheduled to expire in subsequent years through 2035. Substantially all of these attributes are limited under Section 382 of the Code and are subject to valuation allowances.
Each TRS and certain REIT entities subject to state income taxes are tax paying components for purposes of classifying deferred tax assets and liabilities. Net deferred tax assets (liabilities) are summarized as follows:
|
| | | | | | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Total deferred tax assets | | $ | 34,870 |
| | $ | 19,347 |
| | $ | 16,077 |
|
| Valuation allowance | | (15,127 | ) | | (15,127 | ) | | (15,171 | ) |
| Net deferred tax assets | | 19,743 |
| | 4,220 |
| | 906 |
|
| Total deferred tax liabilities | | (1,289 | ) | | (21,240 | ) | | (24,667 | ) |
| Net deferred tax assets (liabilities) | | $ | 18,454 |
| | $ | (17,020 | ) | | $ | (23,761 | ) |
Due to the uncertainty of the realization of certain tax carryforwards, we have established valuation allowances on those deferred tax assets that we do not reasonably expect to realize. Deferred tax assets that we believe have only a remote possibility of realization have not been recorded.
The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities as of December 31, 2015, December 31, 2014 and December 31, 2013 are summarized as follows:
|
| | | | | | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 | | December 31, 2013 |
| Operating loss and tax credit carryforwards | | $ | 18,541 |
| | $ | 15,699 |
| | $ | 15,477 |
|
| Other TRS property, primarily differences in basis of assets and liabilities | | 15,040 |
| | (17,592 | ) | | (24,067 | ) |
| Valuation allowance | | (15,127 | ) | | (15,127 | ) | | (15,171 | ) |
| Net deferred tax liabilities | | $ | 18,454 |
| | $ | (17,020 | ) | | $ | (23,761 | ) |
We have no unrecognized tax benefits recorded pursuant to uncertain tax positions as of December 31, 2015. The $6.1 million as of December 31, 2014, excluding interest, was recognized in 2015 upon the expiration of the statute of limitations.
NOTE 9 WARRANTS
Brookfield owns 73,930,000 warrants (the “Warrants”) to purchase common stock of GGP with an initial weighted average exercise price of $10.70. Each Warrant was fully vested upon issuance, has a term of seven years and expires on November 9, 2017. Below is a summary of Warrants that were originally issued and are still outstanding.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | | | | | |
| Initial Warrant Holder | | Number of Warrants | | Initial
Exercise Price |
| Brookfield - A | | 57,500,000 |
| | $ | 10.75 |
|
| Brookfield - B | | 16,430,000 |
| | 10.50 |
|
| | | 73,930,000 |
| | |
|
The exercise prices of the Warrants are subject to adjustment for future dividends, stock dividends, distribution of assets, stock splits or reverse splits of our common stock or certain other events. In accordance with the agreement, these calculations adjust both the exercise price and the number of shares issuable for the 73,930,000 Warrants. During 2014 and 2015, the number of shares issuable upon exercise of the outstanding Warrants changed as follows:
|
| | | | | | | | | | | |
| | | | | Exercise Price |
| Record Date | | Issuable Shares | | Brookfield - A | | Brookfield - B |
| April 15, 2014 | | 85,668,428 |
| | $ | 9.28 |
| | $ | 9.06 |
|
| July 15, 2014 | | 86,215,500 |
| | 9.22 |
| | 9.01 |
|
| October 15, 2014 | | 86,806,928 |
| | 9.16 |
| | 8.94 |
|
| December 15, 2014 | | 87,353,999 |
| | 9.10 |
| | 8.89 |
|
| April 15, 2015 | | 87,856,714 |
| | 9.05 |
| | 8.84 |
|
| July 15, 2015 | | 88,433,357 |
| | 8.99 |
| | 8.78 |
|
| October 15, 2015 | | 89,039,571 |
| | 8.93 |
| | 8.72 |
|
| December 15, 2015 | | 89,697,535 |
| | 8.86 |
| | 8.66 |
|
Brookfield has the option for 57,500,000 Warrants to either full share settle (i.e. deliver cash for the exercise price of the Warrants in the amount of approximately $618 million in exchange for approximately 70 million shares of common stock) or net share settle. The remaining 16,430,000 Warrants owned or managed by Brookfield must be net share settled. As of December 31, 2015, the Warrants are exercisable into approximately 61 million common shares of the Company, at a weighted-average exercise price of approximately $8.82 per share. Due to their ownership of Warrants, Brookfield’s potential ownership of the Company may change as a result of payments of dividends and changes in our stock price.
NOTE 10 RENTALS UNDER OPERATING LEASES
We receive rental income from the leasing of retail and other space under operating leases. The minimum future rentals based on operating leases of our Consolidated Properties as of December 31,
20122015 are as follows:
| | | | |
Year | | Amount | |
2013 | | $ | 1,408,601 | |
2014 | | | 1,318,264 | |
2015 | | | 1,180,832 | |
2016 | | | 1,038,608 | |
2017 | | | 886,314 | |
Subsequent | | | 2,940,431 | |
| | | | |
| | $ | 8,773,050 | |
| | | | |
|
| | | |
| Year | Amount |
| 2016 | $ | 1,434,422 |
|
| 2017 | 1,277,644 |
|
| 2018 | 1,117,165 |
|
| 2019 | 969,107 |
|
| 2020 | 851,565 |
|
| Subsequent | 2,669,476 |
|
| | $ | 8,319,379 |
|
Minimum future rentals exclude amounts which are payable by certain tenants based upon a percentage of their gross sales or as reimbursement of operating expenses and amortization of above and below-market tenant leases. Such operating leases are with a variety of tenants, the majority of which are national and regional retail chains and local retailers, and consequently, our credit risk is concentrated in the retail industry.
NOTE 12 EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS
Allocation to Noncontrolling Interests
Noncontrolling interests consists of the redeemable interests related to our common and preferred Operating Partnership units and the noncontrolling interest
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in
our consolidated joint ventures. The following table reflects the activity included in the allocation to noncontrolling interests. | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10,
2010 through
December 31,
2010 | | | Period from
January 1,
2010 through
November 9,
2010 | |
Distributions to preferred Operating Partnership units | | $ | (12,414 | ) | | $ | (9,655 | ) | | $ | (1,641 | ) | | $ | (8,203 | ) |
Net loss allocation to noncontrolling interests in operating partnership from continuing operations (common units) | | | 3,498 | | | | 2,212 | | | | 4,043 | | | | 36,715 | |
Net (income) loss allocated to noncontrolling interest in consolidated real estate affiliates | | | (784 | ) | | | 1,075 | | | | (534 | ) | | | (1,545 | ) |
| | | | | | | | | | | | | | | | |
Allocation to noncontrolling interests | | | (9,700 | ) | | | (6,368 | ) | | | 1,868 | | | | 26,967 | |
Other comprehensive (income) loss allocated to noncontrolling interests | | | 258 | | | | 337 | | | | 1 | | | | (46 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive (income) loss allocated to noncontrolling interests | | $ | (9,442 | ) | | $ | (6,031 | ) | | $ | 1,869 | | | $ | 26,921 | |
| | | | | | | | | | | | | | | | |
Redeemable Noncontrolling Interests
The minority interests related to the common and preferred units of the Operating Partnership are presented as redeemable noncontrolling interests in our Consolidated Balance Sheets. These are recorded at the greater of the carrying amount adjusted for the noncontrolling interest’sthousands, except per share of the allocation of income or loss (and its share of other comprehensive income or loss) and dividends or their fair value as of each measurement date. The excess of the fair value over the carrying amount from period to period is recorded within additional paid-in capital (loss) in our Consolidated Balance Sheets. Allocation to noncontrolling interests is presented as an adjustment to net income to arrive at net loss attributable to common stockholders.
The common redeemable noncontrolling interests have been recorded at fair value for all periods presented. One tranche of preferred redeemable noncontrolling interests has been recorded at fair value, while the other tranches of preferred redeemable noncontrolling interests have been recorded at carrying value.
Generally, the holders of the Common Units share in any distributions by the Operating Partnership with our common stockholders. However, the Operating Partnership agreement permits distributions solely to GGP if such distributions were required to allow GGP to comply with the REIT distribution requirements or to avoid the imposition of excise tax. Under certain circumstances, the conversion rate for each Common Unit is required to be adjusted to give effect to stock distributions. The common stock dividends paid in 2011 modified the conversion rate to 1.0397624. If the holders had requested redemption of the Common Units as of December 31, 2012, the aggregate amount of cash we would have paid would have been $132.2 million.
The Operating Partnership issued Convertible Preferred Units, are convertible with certain restrictions at any time by the holder into Common Units of the Operating Partnership at the rates below (subject to adjustment). The Common Units are convertible into common stock at a one to one ratio at the current stock price.
The holders of both the Preferred Units and the Common Units received shares of the common stock of RPI as a result of the RPI Spin-Off that occurred on January 12, 2012.
| | | | | | | | | | | | | | | | | | | | |
| | | Number of Common
Units for each
Preferred Unit | | | Number of Contractual
Convertible Preferred
Units Outstanding as of
December 31, 2012 | | | Converted Basis to
Common Units
Outstanding as of
December 31, 2012 | | | Conversion Price | | | Redemption Value | |
Series B (1) | | | 3.0000 | | | | 1,279,715 | | | | 3,991,799 | | | $ | 16.66670 | | | $ | 79,237,210 | |
Series D | | | 1.5082 | | | | 532,750 | | | | 803,494 | | | | 33.15188 | | | | 26,637,337 | |
Series E | | | 1.2984 | | | | 502,658 | | | | 652,651 | | | | 38.51000 | | | | 25,133,590 | |
Series C | | | 1.0000 | | | | 20,000 | | | | 20,000 | | | | 250.00000 | | | | 5,000,000 | |
| | | | | |
| | | | | | | | | | | | | | | | | | $ | 136,008,137 | |
| | | | | |
(1) | The conversion price of Series B preferred units is lower than the GGP December 31, 2012 closing common stock price of $19.85. Therefore, a common stock price of $19.85 is used to calculate the Series B redemption value. |
The following table reflects the activity of the redeemable noncontrolling interests for the years ended December 31, 2012 and 2011.
| | | | |
Balance at January 1, 2011 | | $ | 232,364 | |
Net loss | | | (2,212 | ) |
Distributions | | | (5,879 | ) |
Cash redemption of operating partnership units | | | (4,615 | ) |
Other comprehensive loss | | | (337 | ) |
Fair value adjustment for noncontrolling interests in Operating Partnership | | | 4,474 | |
| | | | |
Balance at December 31, 2011 | | | 223,795 | |
| | | | |
Net loss | | | (3,498 | ) |
Distributions | | | (2,850 | ) |
Cash redemption of operating partnership units | | | (2,730 | ) |
Dividend for RPI Spin-Off | | | 3,137 | |
Other comprehensive loss | | | (258 | ) |
Fair value adjustment for noncontrolling interests in Operating Partnership | | | 50,623 | |
| | | | |
Balance at December 31, 2012 | | $ | 268,219 | |
| | | | |
Common Stock Dividend and Purchase of Common Stock
Our Board of Directors declared common stock dividends during 2012 as follows:
| | | | | | |
Declaration Date
| | Record Date
| | Date Payable or Paid
| | Dividend Per Share
|
November 26, 2012
| | December 14, 2012 | | January 4, 2013 | | $0.11 |
August 1, 2012
| | October 15, 2012 | | October 29, 2012 | | 0.11 |
May 1, 2012
| | July 16, 2012 | | July 30, 2012 | | 0.10 |
February 27, 2012
| | April 16, 2012 | | April 30, 2012 | | 0.10 |
On December 20, 2011, the Board of Directors approved the distribution of RPI in the form of a special dividend for which GGP shareholders were entitled to receive approximately 0.0375 shares of RPI common stock for each
share of GGP common stock held as of December 30, 2011. RPI’s net equity was recorded as of December 31, 2011 as a dividend payable as substantive conditions for the spin-off were met as of December 31, 2011 and it was probable that the spin-off would occur. On January 12, 2012, we distributed our shares in RPI to the GGP shareholders of record as of the close of business on December 30, 2011. As of December 31, 2011, we had recorded a distribution payable of $ 526.3 million and a related decrease in retained earnings (accumulated deficit), of which $ 426.7 million relates to the special dividend, on our Consolidated Balance Sheet. This special dividend satisfied part of our 2011 and 2012 REIT distribution requirements. We adjusted the distribution in retained earnings (accumulated deficit) by $26.0 million to reflect the net change in RPI’s net assets as of the date of the spin-off as compared to the balance recorded at December 31, 2011.
Our Dividend Reinvestment Plan (‘‘DRIP’’) provides eligible holders of GGP’s common stock with a convenient method of increasing their investment in the Company by reinvesting all or a portion of cash dividends in additional shares of common stock. Eligible stockholders who enroll in the DRIP on or before the fourth business day preceding the record date for a dividend payment will be able to have that dividend reinvested. As a result of the DRIP elections, 3,111,365 shares were issued during the year ended December 31, 2012 and 7,225,345 shares were issued during the year ended December 31, 2011.
amounts)
NOTE 11 EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS
Allocation to Noncontrolling Interests
Noncontrolling interests consists of the redeemable interests related to our common and preferred Operating Partnership units and the noncontrolling interest in our consolidated joint ventures. The following table reflects the activity included in the allocation to noncontrolling interests.
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Distributions to preferred Operating Partnership units | | $ | (8,884 | ) | | $ | (8,965 | ) | | $ | (9,287 | ) |
| Net (income) loss allocation to noncontrolling interests in operating partnership from continuing operations (common units) | | (7,466 | ) | | (3,228 | ) | | (2,281 | ) |
| Net income allocation to noncontrolling interests in operating partnership from continuing operations (LTIP units) | | (2,524 | ) | | — |
| | — |
|
| Net (income) loss allocated to noncontrolling interest in consolidated real estate affiliates | | (161 | ) | | (1,851 | ) | | (3,103 | ) |
| Allocation to noncontrolling interests | | (19,035 | ) | | (14,044 | ) | | (14,671 | ) |
| Other comprehensive loss allocated to noncontrolling interests | | 233 |
| | 78 |
| | (393 | ) |
| Comprehensive income allocated to noncontrolling interests | | $ | (18,802 | ) | | $ | (13,966 | ) | | $ | (15,064 | ) |
Redeemable Noncontrolling Interests
The minority interest related to the Common and Preferred Units of the Operating Partnership are presented as redeemable noncontrolling interests in our Consolidated Balance Sheets since it is possible we could be required, under certain events outside of our control, to redeem the securities for cash by the holders of the securities.
The Common and Preferred Units of the Operating Partnership are recorded at the greater of the carrying amount adjusted for the noncontrolling interest’s share of the allocation of income or loss (and its share of other comprehensive income or loss) and dividends or their fair value as of each measurement date. The excess of the fair value over the carrying amount from period to period is recorded within additional paid-in capital in our Consolidated Balance Sheets. Allocation to noncontrolling interests is presented as an adjustment to net income to arrive at net income attributable to GGP.
The common redeemable noncontrolling interests have been recorded at fair value for all periods presented. One tranche of preferred redeemable noncontrolling interests has been recorded at fair value, while the other tranches of preferred redeemable noncontrolling interests have been recorded at carrying value.
Generally, the holders of the Common Units share in any distributions by the Operating Partnership with our common stockholders. However, the Operating Partnership agreement permits distributions solely to GGP if such distributions were required to allow GGP to comply with the REIT distribution requirements or to avoid the imposition of excise tax. Under certain circumstances, the conversion rate for each Common Unit is required to be adjusted to give effect to stock distributions. If the holders had requested redemption of the Common Units as of December 31, 2015, the aggregate amount of cash we would have paid would have been $129.7 million.
The Operating Partnership issued Convertible Preferred Units that are convertible into Common Units of the Operating Partnership at the rates below (subject to adjustment). The holder may convert the Convertible Preferred Units into Common Units of the Operating Partnership at any time, subject to certain restrictions. The Common Units are convertible into common stock at a one-to-one ratio at the current stock price.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | | |
| | | Number of Common
Units for each
Preferred Unit | | Number of
Contractual
Convertible
Preferred Units
Outstanding as of | | Converted Basis to
Common Units
Outstanding as of | | Conversion Price | | Redemption Value |
| | | December 31, 2015 | | December 31, 2015 | | |
Series B(1) | | 3.00000 |
| | 1,250,447 |
| | 3,900,504 |
| | $ | 16.66670 |
| | 106,133 |
|
| Series D | | 1.50821 |
| | 532,750 |
| | 835,447 |
| | 33.15188 |
| | 26,637 |
|
| Series E | | 1.29836 |
| | 502,658 |
| | 678,583 |
| | 38.51000 |
| | 25,133 |
|
| | | |
| | |
| | |
| | |
| | $ | 157,903 |
|
| |
| (1) | The conversion price of Series B preferred units is lower than the GGP December 31, 2015 closing common stock price of $27.21. Therefore, a common stock price of $27.21 is used to calculate the Series B redemption value. |
The following table reflects the activity of the redeemable noncontrolling interests for the years ended December 31, 2015, 2014, and 2013.
|
| | | | |
| Balance at January 1, 2013 | $ | 268,219 |
|
| Net income | 2,281 |
|
| Distributions | (3,275 | ) |
Redemption of operating partnership units (1) | (41,889 | ) |
| Other comprehensive loss | 393 |
|
| Fair value adjustment for noncontrolling interests in Operating Partnership | 3,173 |
|
| Balance at December 31, 2013 | $ | 228,902 |
|
| Balance at January 1, 2014 | 228,902 |
|
| Net income | 3,228 |
|
| Distributions | (3,059 | ) |
| Redemption of operating partnership units | (350 | ) |
| Other comprehensive income | (78 | ) |
| Fair value adjustment for noncontrolling interests in Operating Partnership | 70,653 |
|
| Balance at December 31, 2014 | $ | 299,296 |
|
| Balance at January 1, 2015 | $ | 299,296 |
|
| Net income | 7,466 |
|
| Distributions | (4,258 | ) |
| Redemption of operating partnership units | (805 | ) |
| Other comprehensive income | (233 | ) |
| Fair value adjustment for noncontrolling interests in Operating Partnership | (13,839 | ) |
| Balance at December 31, 2015 | $ | 287,627 |
|
| |
| (1) | Operating partnership unit holders redeemed 1,756,521 units in 2013. |
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Common Stock Dividend and Purchase of Common Stock
Our Board of Directors declared common stock dividends during 2015 and 2014 as follows:
|
| | | | | | | | |
| Declaration Date | | Record Date | | Payment Date | | Dividend Per Share |
| 2015 | | | | | | |
| November 2 | | December 15 | | January 4, 2016 | | $ | 0.19 |
|
| September 1 | | October 15 | | October 30, 2015 | | 0.18 |
|
| May 21 | | July 15 | | July 31, 2015 | | 0.17 |
|
| February 19 | | April 15 | | April 30, 2015 | | 0.17 |
|
| 2014 | | | | | | |
|
| November 14 | | December 15 | | January 2, 2015 | | $ | 0.17 |
|
| August 12 | | October 15 | | October 31, 2014 | | 0.16 |
|
| May 15 | | July 15 | | July 31, 2014 | | 0.15 |
|
| February 26 | | April 15 | | April 30, 2014 | | 0.15 |
|
Distributions paid on our common stock and their tax status, as sent to our shareholders, is presented in the following table. The tax status of GGP distributions in 2015, 2014, and 2013 may not be indicative of future periods.
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Ordinary income | | $ | 0.752 |
| | $ | 0.499 |
| | $ | 0.330 |
|
| Capital gain distributions | | — |
| | 0.034 |
| | 0.290 |
|
| Distributions per share | | $ | 0.752 |
| | $ | 0.533 |
| | $ | 0.620 |
|
Our Dividend Reinvestment Plan (“DRIP”) provides eligible holders of GGP’s common stock with a convenient method of increasing their investment in the Company by reinvesting all or a portion of cash dividends in additional shares of common stock. Eligible stockholders who enroll in the DRIP on or before the fourth business day preceding the record date for a dividend payment will be able to have that dividend reinvested. As a result of the DRIP elections, 23,542 shares were issued during the year ended December 31, 2015 and 22,186 shares were issued during the year ended December 31, 2014.
Preferred Stock
On February 13, 2013, we issued, in a public offering, 10,000,000 shares of 6.375% Series A Cumulative Perpetual Preferred Stock (the “Preferred Stock”) at a price of $25.00 per share, resulting in net proceeds of $242.0 million after issuance costs. The Preferred Stock is recorded net of issuance costs within equity on our Consolidated Balance Sheets, and accrues a quarterly dividend at an annual rate of 6.375%. The dividend is paid in arrears in preference to dividends on our common stock, and reduces net income available to common stockholders, and therefore, earnings per share.
The Preferred Stock does not have a stated maturity date but we may redeem the Preferred Stock after February 12, 2018, for $25.00 per share plus all accrued and unpaid dividends. We may redeem the Preferred Stock prior to February 12, 2018, in limited circumstances that preserve ownership limits and/or our status as a REIT, as well as during certain circumstances surrounding a change of control. Upon certain circumstances surrounding a change of control, holders of Preferred Stock may elect to convert each share of their Preferred Stock into a number of shares of GGP common stock equivalent to $25.00 plus accrued and unpaid dividends, but not to exceed a cap of 2.4679 common shares (subject to certain adjustments related to GGP common share splits, subdivisions, or combinations).
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Our Board of Directors declared preferred stock dividends during 2015 and 2014 as follows:
|
| | | | | | | | |
| Declaration Date | | Record Date | | Payment Date | | Dividend Per Share |
| 2015 | | | | | | |
|
| November 2 | | December 15 | | January 4, 2016 | | $ | 0.3984 |
|
| September 1 | | September 15 | | October 1, 2015 | | 0.3984 |
|
| May 21 | | June 15 | | July 1, 2015 | | 0.3984 |
|
| February 19 | | March 16 | | April 1, 2015 | | 0.3984 |
|
| 2014 | | | | | | |
|
| November 14 | | December 15 | | January 2, 2015 | | $ | 0.3984 |
|
| August 12 | | September 15 | | October 1, 2014 | | 0.3984 |
|
| May 15 | | June 16 | | July 1, 2014 | | 0.3984 |
|
| February 26 | | March 17 | | April 1, 2014 | | 0.3984 |
|
NOTE 12 EARNINGS PER SHARE
Basic earnings per share
(‘‘EPS’’(“EPS”) is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all potentially dilutive common shares. The dilutive effect of the Warrants
are computed using the ‘‘if-converted’’ method and the dilutive effect of options and their equivalents (including fixed awards and nonvested stock issued under stock-based compensation plans),
isare computed using the
‘‘treasury’’“treasury” method.
Information related to our EPS calculations is summarized as follows:
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31, 2012 | | | Year Ended
December 31, 2011 | | | Period from
November 10, 2010
through
December 31, 2010 | | | Period from
January 1, 2010
through
November 9, 2010 | |
Numerators – Basic: | | | | | | | | | | | | | | | | |
Loss from continuing operations | | $ | (494,554 | ) | | $ | (206,185 | ) | | $ | (247,408 | ) | | $ | (636,547 | ) |
Allocation to noncontrolling interests | | | (9,663 | ) | | | (6,411 | ) | | | 1,843 | | | | 13,572 | |
| | | | | | | | | | | | | | | | |
Loss from continuing operations – net of noncontrolling interests | | | (504,217 | ) | | | (212,596 | ) | | | (245,565 | ) | | | (622,975 | ) |
Discontinued operations | | | 23,021 | | | | (100,619 | ) | | | (8,676 | ) | | | (576,178 | ) |
Allocation to noncontrolling interests | | | (37 | ) | | | 43 | | | | 25 | | | | 13,395 | |
| | | | | | | | | | | | | | | | |
Discontinued operations – net of noncontrolling interests | | | 22,984 | | | | (100,576 | ) | | | (8,651 | ) | | | (562,783 | ) |
Net loss | | | (471,533 | ) | | | (306,804 | ) | | | (256,084 | ) | | | (1,212,725 | ) |
Allocation to noncontrolling interests | | | (9,700 | ) | | | (6,368 | ) | | | 1,868 | | | | 26,967 | |
| | | | | | | | | | | | | | | | |
Net loss attributable to common stockholders | | $ | (481,233 | ) | | $ | (313,172 | ) | | $ | (254,216 | ) | | $ | (1,185,758 | ) |
| | | | | | | | | | | | | | | | |
Numerators – Diluted: | | | | | | | | | | | | | | | | |
Loss from continuing operations – net of noncontrolling interests | | $ | (504,217 | ) | | $ | (212,596 | ) | | $ | (245,565 | ) | | $ | (622,975 | ) |
Exclusion of warrant adjustment | | | - | | | | (55,042 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Diluted loss from continuing operations . | | $ | (504,217 | ) | | $ | (267,638 | ) | | $ | (245,565 | ) | | $ | (622,975 | ) |
| | | | | | | | | | | | | | | | |
Net loss attributable to common stockholders | | $ | (481,233 | ) | | $ | (313,172 | ) | | $ | (254,216 | ) | | $ | (1,185,758 | ) |
Exclusion of Warrant adjustment | | | - | | | | (55,042 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Diluted net loss attributable to common stockholders | | $ | (481,233 | ) | | $ | (368,214 | ) | | $ | (254,216 | ) | | $ | (1,185,758 | ) |
| | | | | | | | | | | | | | | | |
Denominators: | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding – basic | | | 938,049 | | | | 943,669 | | | | 945,248 | | | | 316,918 | |
Effect of Warrants | | | - | | | | 37,467 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding – diluted | | | 938,049 | | | | 981,136 | | | | 945,248 | | | | 316,918 | |
| | | | | | | | | | | | | | | | |
Anti-dilutive Securities | | | | | | | | | | | | | | | | |
Effect of Common Units | | | 6,819 | | | | 6,929 | | | | 7,133 | | | | 7,369 | |
Effect of Stock Options | | | 2,352 | | | | 671 | | | | 1,409 | | | | 3,196 | |
Effect of Warrants | | | 61,065 | | | | - | | | | 40,782 | | | | - | |
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Numerators—Basic: | | |
| | |
| | |
|
| Income from continuing operations | | $ | 1,393,596 |
| | $ | 398,011 |
| | $ | 328,821 |
|
| Preferred Stock dividend | | (15,937 | ) | | (15,936 | ) | | (14,078 | ) |
| Allocation to noncontrolling interests | | (19,035 | ) | | (12,935 | ) | | (14,602 | ) |
| Income from continuing operations—net of noncontrolling interests | | 1,358,624 |
| | 369,140 |
| | 300,141 |
|
| Discontinued operations | | — |
| | 281,883 |
| | (11,622 | ) |
| Allocation to noncontrolling interests | | — |
| | (1,109 | ) | | (69 | ) |
| Discontinued operations—net of noncontrolling interests | | — |
| | 280,774 |
| | (11,691 | ) |
| Net income | | 1,393,596 |
| | 679,894 |
| | 317,199 |
|
| Preferred Stock dividend | | (15,937 | ) | | (15,936 | ) | | (14,078 | ) |
| Allocation to noncontrolling interests | | (19,035 | ) | | (14,044 | ) | | (14,671 | ) |
| Net income attributable to common stockholders | | $ | 1,358,624 |
| | $ | 649,914 |
| | $ | 288,450 |
|
| Numerators—Diluted: | | |
| | |
| | |
|
| Income from continuing operations—net of noncontrolling interests | | $ | 1,358,624 |
| | $ | 369,140 |
| | $ | 300,141 |
|
| Diluted income from continuing operations | | $ | 1,358,624 |
| | $ | 369,140 |
| | $ | 300,141 |
|
| Net income attributable to common stockholders | | $ | 1,358,624 |
| | $ | 649,914 |
| | $ | 288,450 |
|
| Diluted net income attributable to common stockholders | | $ | 1,358,624 |
| | $ | 649,914 |
| | $ | 288,450 |
|
| Denominators: | | |
| | |
| | |
|
| Weighted-average number of common shares outstanding—basic | | 884,676 |
| | 887,031 |
| | 930,643 |
|
| Effect of dilutive securities | | 66,386 |
| | 57,690 |
| | 3,425 |
|
| Weighted-average number of common shares outstanding—diluted | | 951,062 |
| | 944,721 |
| | 934,068 |
|
| Anti-dilutive Securities: | | |
| | |
| | |
|
| Effect of Preferred Units | | 5,415 |
| | 5,505 |
| | 5,506 |
|
| Effect of Common Units | | 4,783 |
| | 4,833 |
| | 6,434 |
|
| Effect of Stock Options | | 1,609 |
| | — |
| | — |
|
| Effect of Warrants | | — |
| | — |
| | 46,724 |
|
| | | 11,807 |
| | 10,338 |
| | 58,664 |
|
Options were
anti-dilutive for all periods presented because of net losses, and, as such, their effect has not been included in the calculation of diluted net loss per share. In addition, potentially dilutive
shares related to theWarrants for the years ended December 31, 20122015, 2014 and 2013 and are included in the denominator of EPS. Warrants were dilutive for the years ended December 31, 2010 have been2015 and 2014 and are included in the denominator of EPS. Potentially dilutive shares related to the Warrants for the year ended December 31, 2013 are excluded from the denominator in the computation of diluted EPS because they are also anti-dilutive. In 2011, dilutive shares related to the Warrants are included in the denominator of EPS because they are dilutive.
Outstanding Common Units have also been excluded from the diluted earnings per share calculation because including such Common Units would also require that the share of
GGPLPGGPOP income attributable to such Common Units be added back to net income therefore resulting in no effect on EPS.
NOTE 14 STOCK-BASED COMPENSATION PLANS
Incentive Stock Plans
The General Growth Properties, Inc. 2010 Equity Plan (the ‘‘Equity Plan’’) which remains in effect after Outstanding Preferred Units have been excluded from the Effective Date, reserveddiluted EPS calculation for issuance of 4% of Successor outstanding shares on a fully diluted basis as ofall periods presented because including the Effective Date. The Equity Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation (collectively, ‘‘Preferred Units would also require that the Awards’’). Directors, officers and other employees of GGP’s and its subsidiaries and affiliates are eligible for Awards. The Equity Plan is not subjectPreferred Units dividend be added back to the Employee Retirement Income Security Act of 1974, as amended. No participant may be granted more than 4,000,000 shares, or the equivalent dollar value of such shares,net income, resulting in any year. Options granted under the Equity Plan will be designated as either nonqualified stock options or incentive stock options. An option granted as an incentive stock option will, to the extent it fails to qualify as an incentive stock option, be treated as a nonqualified option. The exercise price of an option may not be less than the fair value of a share of GGP’s common stock on the date of grant. The term of each option will be determined prior to the date of grant, but may not exceed ten years.
Pursuant to the Plan, on the Effective Date, unvested options issued by the Predecessor became fully vested. Each option to acquire a share of the Predecessor common stock was replaced by two options: an option to acquire one share of Successor common stock and a separate option to acquire 0.098344 of a share of HHC common stock.
Stock Options
The following tables summarize stock option activity for the Equity Plan for the Successor and for the 2003 Incentive Stock Plan for the Predecessor for the periods ended December 31, 2012, December 31, 2011, November 9 through December 31, 2010 and January 1, 2010 through November 9, 2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | 2012 | | | 2011 | | | 2010 | | | 2010 | |
| | �� | Shares | | | Weighted
Average
Exercise
Price | | | Shares | | | Weighted
Average
Exercise
Price | | | Shares | | | Weighted
Average
Exercise
Price | | | Shares | | | Weighted
Average
Exercise
Price | |
Stock options Outstanding at January 1 | | | 11,503,869 | | | $ | 15.65 | | | | 5,427,011 | | | $ | 20.21 | | | | 5,413,917 | | | $ | 16.26 | | | | 4,241,500 | | | $ | 31.63 | |
(November 10 for Successor in 2010), | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Granted | | | - | | | | - | | | | 8,662,716 | | | | 15.26 | | | | 1,891,857 | | | | 14.73 | | | | 2,100,000 | | | | 10.56 | |
Stock dividend adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 58,127 | | | | 30.32 | |
Exercised | | | (607,473 | ) | | | 13.89 | | | | (51,988 | ) | | | 11.05 | | | | (1,828,369 | ) | | | 2.72 | | | | - | | | | - | |
Forfeited | | | (703,183 | ) | | | 14.68 | | | | (1,606,792 | ) | | | 14.96 | | | | (25,000 | ) | | | 14.73 | | | | (55,870 | ) | | | 64.79 | |
Expired | | | (500,714 | ) | | | 46.28 | | | | (927,078 | ) | | | 39.31 | | | | (25,394 | ) | | | 34.05 | | | | (929,840 | ) | | | 44.28 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options Outstanding at December 31 (November 9, for Predecessor in 2010), | | | 9,692,499 | | | $ | 13.59 | | | | 11,503,869 | | | $ | 15.65 | | | | 5,427,011 | | | $ | 20.21 | | | | 5,413,917 | | | $ | 20.61 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Intrinsic value of exercised options in period (in millions): | | | | | | $ | 3.3 | | | | | | | $ | 0.2 | | | | | | | $ | 23.7 | | | | | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The weighted average remaining contractual term of nonvested awards as of December 31, 2012 was 1.4 years.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Stock Options Outstanding | | | Stock Options Exercisable | |
Range of Exercise
Prices | | Shares | | | Weighted Average
Remaining
Contractual Term
(in years) | | | Weighted Average
Exercise Price | | | Shares | | | Weighted Average
Remaining
Contractual Term
(in years) | | | Weighted Average
Exercise Price | |
$9.00 – $13.00 | | | 2,000,000 | | | | 7.8 | | | $ | 9.69 | | | | 1,000,000 | | | | 7.8 | | | $ | 9.69 | |
$14.00 – $17.00 | | | 7,692,499 | | | | 8.2 | | | | 14.60 | | | | 1,841,600 | | | | 7.3 | | | | 14.51 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 9,692,499 | | | | 8.1 | | | $ | 13.59 | | | | 2,841,600 | | | | 7.5 | | | $ | 12.82 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Intrinsic value ($19.85 stock price) | | $ | 60,675 | | | | | | | | | | | $ | 19,976 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Stock options under the Equity Plan generally vest in 20% increments annually from one year from the grant date. Options under the 2003 Plan were replaced under the Plan with options, fully vested, in Successor common stock.
The weighted-average fair value of stock options as of the grant date was $4.59 for stock options granted duringanti-dilution.
During the year ended December 31, 2011, $ 3.922013, GGPOP repurchased 28,345,108 shares of GGP’s common stock for $566.9 million. These shares are presented as common stock options granted duringin treasury, at cost, on our Consolidated Balance Sheets. Accordingly, these shares have been excluded from the periodcalculation of EPS. In addition, GGPOP was issued 27,459,195 shares of GGP common stock on March 26, 2013. These shares are presented as issued, but not outstanding on our Consolidated Balance Sheets. Accordingly, these shares have been excluded from Novemberthe calculation of EPS.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
On February 10, 2010 through2014, GGPOP repurchased 27,624,282 shares of GGP’s common stock for $555.8 million. These shares are presented as common stock in treasury, at cost, on our Consolidated Balance Sheets. Accordingly, these shares have been excluded from the calculation of EPS.
On May 1, 2014, the shares of GGP common stock owned by GGPOP were contributed to GGPN, and as a result of these transactions, GGPN owns an aggregate of 83,428,585 shares of GGP common stock as of December 31,
2010 and $4.99 for stock options granted during the period from January 1, 2010 through November 9, 2010.Restricted Stock
Pursuant to the Equity Plan, the 2003 Stock Incentive Plan and the 2010 Equity Incentive Plan, GGP and the Predecessor, respectively, made restricted stock grants to certain employees and non-employee directors. The vesting terms2014, of these grantswhich 55,969,390, with an aggregate cost of $1,122.7 million, are specific to the individual grant. The vesting terms varied in that a portion of the shares vested either immediately or on the first anniversary and the remainder vested in equal annual amounts over the next two to five years. Participating employees were required to remain employed for vesting to occur (subject to certain exceptions in the case of retirement). Shares that did not vest were forfeited. Dividends are paid on restrictedshown as treasury stock and 27,459,195 are shown as issued, but not returnable, even if the underlying stock does not ultimately vest. All the Predecessor grants of restricted stock became vested. Each share of the Predecessor’s previously restricted common stock was replaced by one share of Successor common stock and 0.098344 of a share of HHC common stock (rounded down to the nearest whole share because no fractional HHC shares were issued in accordance with the Plan).
The following table summarizes restricted stock activity for the respective grant year ended December 31, 2012,outstanding on our Consolidated Balance Sheets.
During the year ended December 31,
2011, the periods from November 10, 2010 through December 31, 2010 and the period from January 1, 2010 through November 9, 2010: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | 2012 | | | 2011 | | | 2010 | | | 2010 | |
| | | Shares | | | Weighted
Average
Grant Date
Fair Value | | | Shares | | | Weighted
Average
Grant Date
Fair Value | | | Shares | | | Weighted
Average
Grant Date
Fair Value | | | Shares | | | Weighted
Average
Grant Date
Fair Value | |
Nonvested restricted stock grants outstanding as of beginning of period | | | 1,716,932 | | | $ | 14.19 | | | | 2,807,682 | | | $ | 14.24 | | | | - | | | $ | - | | | | 275,433 | | | $ | 33.04 | |
Granted | | | 37,731 | | | | 14.89 | | | | 84,659 | | | | 14.98 | | | | 3,053,092 | | | | 14.21 | | | | 90,000 | | | | 15.14 | |
Canceled | | | (123,183 | ) | | | 14.89 | | | | (329,292 | ) | | | 14.73 | | | | (12,500 | ) | | | 14.73 | | | | (8,097 | ) | | | 35.57 | |
Vested | | | (205,142 | ) | | | 14.73 | | | | (846,117 | ) | | | 14.23 | | | | (232,910 | ) | | | 13.87 | | | | (357,336 | ) | | | 28.48 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonvested restricted stock grants outstanding as of end of period | | | 1,426,338 | | | $ | 14.07 | | | | 1,716,932 | | | $ | 14.19 | | | | 2,807,682 | | | $ | 14.24 | | | | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Vested fair value (in millions): | | | | | | $ | 3.9 | | | | | | | $ | 12.1 | | | | | | | $ | 3.7 | | | | | | | $ | 5.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Required Disclosures
Historical data, such as the past performance2015 GGP repurchased 4,324,489 shares of ourits common stock andfor $109.5 million. Of the length of service by employees, is used to estimate expected life of the stock options, TSOs and our restricted stock and represents the period of time the options or grants are expected to be outstanding. The weighted average estimated values of options granted were based on the following assumptions:
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31, 2012 | | | Year Ended
December 31, 2011 | | | Period from
November 10,
2010 through
December 31, 2010 | | | Period from
January 1, 2010
through
November 9, 2010 | |
Risk-free interest rate (*) | | | No options granted | | | | 1.25 | % | | | 1.26 | % | | | 1.39 | % |
Dividend yield (*) | | | No options granted | | | | 2.50 | % | | | 2.72 | % | | | 2.86 | % |
Expected volatility | | | No options granted | | | | 41.16 | % | | | 38.00 | % | | | 38.00 | % |
Expected life (in years) | | | No options granted | | | | 6.5 | | | | 5.0 | | | | 5.0 | |
Compensation expense related to stock-based compensation plans is summarized in the following table:
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31, 2012 | | | Year Ended
December 31, 2011 | | | For the period
from
November 10, 2010
through
December 31, 2010 | | | For the period
from
January 1, 2010
through
November 9, 2010 | |
Stock options – Property management and other costs | | $ | 3,111 | | | $ | 2,975 | | | $ | 279 | | | $ | 7,069 | |
Stock options – General and administrative | | | 6,282 | | | | 5,650 | | | | 674 | | | | (263 | ) |
Restricted stock – Property management and other costs | | | 1,553 | | | | 2,843 | | | | 544 | | | | 7,512 | |
Restricted stock – General and administrative | | | 7,922 | | | | 8,591 | | | | 4,466 | | | | 1,873 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 18,868 | | | $ | 20,059 | | | $ | 5,963 | | | $ | 16,191 | |
| | | | | | | | | | | | | | | | |
The Successor consolidated statements of operations doshares repurchased, 270,869 have not include any expense related to the conversion of the Predecessor options to acquire the Predecessor common stock into options to acquire Successor common stock as such options were fully vested at the Effective Date and no service period expense or compensation expense is therefore recognizable.
Unrecognized compensation expensebeen canceled as of December 31, 2012 is2015. As a result, these shares are presented as follows:
| | | | |
Year | | Amount | |
2013 | | $ | 17,333 | |
2014 | | | 10,955 | |
2015 | | | 7,290 | |
2016 | | | 2,993 | |
| | | | |
| | $ | 38,571 | |
| | | | |
These amounts may be impacted by future grants, changescommon stock in forfeiture estimates or vesting terms, actual forfeiture rates which differtreasury, at cost on our Consolidated Balance Sheets. Accordingly, these shares have been excluded from estimated forfeitures and/or timingthe calculation of TSO vesting.
EPS. NOTE 15 PREPAID EXPENSES13 STOCK-BASED COMPENSATION PLANS
Incentive Stock Plans
The General Growth Properties, Inc. 2010 Equity Plan (the “Equity Plan”) reserved for issuance of 4% of outstanding shares on a fully diluted basis. The Equity Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, other stock-based awards and performance-based compensation (collectively, “the Awards”). Directors, officers and other employees of GGP’s and its subsidiaries and affiliates are eligible for Awards. The Equity Plan is not subject to the Employee Retirement Income Security Act of 1974, as amended. No participant may be granted more than 4,000,000 shares, or the equivalent dollar value of such shares, in any year. Options granted under the Equity Plan will be designated as either nonqualified stock options or incentive stock options. An option granted as an incentive stock option will, to the extent it fails to qualify as an incentive stock option, be treated as a nonqualified option. The exercise price of an option may not be less than the fair value of a share of GGP’s common stock on the date of grant. The term of each option will be determined prior to the date of grant, but may not exceed 10 years.
Stock Options
Stock options under the Equity Plan generally vest in 25% increments annually from one year from the grant date (subject to certain exceptions in the case of retirement). Options under certain previous equity plans were replaced under the Equity Plan with options, fully vested, in GGP common stock.
The following tables summarize stock option activity for the Equity Plan for GGP for the years ended December 31, 2015, 2014 and 2013:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 |
| | | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price | | Shares | | Weighted
Average
Exercise
Price |
| Stock options Outstanding at January 1, | | 19,744,224 |
| | $ | 17.36 |
| | 21,565,281 |
| | $ | 17.28 |
| | 9,692,499 |
| | $ | 13.59 |
|
| Granted | | 267,253 |
| | 29.15 |
| | 50,000 |
| | 22.41 |
| | 12,740,784 |
| | 19.97 |
|
| Exercised | | (1,374,512 | ) | | 16.70 |
| | (1,164,945 | ) | | 15.47 |
| | (339,723 | ) | | 14.33 |
|
| Forfeited | | (460,588 | ) | | 19.97 |
| | (662,820 | ) | | 18.89 |
| | (488,969 | ) | | 16.27 |
|
| Expired | | (13,677 | ) | | 17.35 |
| | (43,292 | ) | | 14.58 |
| | (39,310 | ) | | 14.35 |
|
| Stock options Outstanding at December 31, | | 18,162,700 |
| | $ | 17.51 |
| | 19,744,224 |
| | $ | 17.36 |
| | 21,565,281 |
| | $ | 17.28 |
|
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Stock Options Outstanding | | Stock Options Exercisable |
| Range of Exercise Prices | | Shares | | Weighted Average
Remaining Contractual
Term (in years) | | Weighted
Average
Exercise
Price | | Shares | | Weighted Average
Remaining Contractual
Term (in years) | | Weighted
Average
Exercise
Price |
| $8.00 - $12.00 | | 2,000,000 |
| | 4.83 |
| | $ | 9.69 |
| | 2,000,000 |
| | 4.83 |
| | $ | 9.69 |
|
| $13.00 - $17.00 | | 5,013,488 |
| | 5.42 |
| | 14.64 |
| | 4,000,017 |
| | 5.39 |
| | 14.62 |
|
| $18.00 - $23.00 | | 10,906,787 |
| | 7.46 |
| | 20.01 |
| | 4,677,440 |
| | 7.46 |
| | 20.11 |
|
| $24.00 - $30.00 | | 242,425 |
| | 9.02 |
| | $ | 29.15 |
| | — |
| | — |
| | $ | — |
|
| Total | | 18,162,700 |
| | 6.63 |
| | $ | 17.51 |
| | 10,677,457 |
| | 6.19 |
| | $ | 16.10 |
|
| Intrinsic value ($27.21 stock price as of December 31, 2015) | | $ | 176,178 |
| | |
| | |
| | $ | 118,627 |
| | |
| | |
|
The weighted-average fair value of stock options as of the grant date was $5.84 for stock options granted during the year ended December 31, 2015 and $5.33 for stock options granted during the year ended December 31, 2014. The intrinsic value of stock options exercised during the year was $22.9 million, $18.2 million, and $4.9 million for the year ended December 31, 2015, December 31, 2014, and December 31, 2013, respectively.
LTIP Units
Pursuant to the Equity Plan, GGP made LTIP Unit grants to certain employees and non-employee directors. The vesting terms of these grants are specific to the individual grant. A portion of the shares vest either immediately or on the first anniversary and the remainder vest in equal annual amounts over the next two to four years. Participating employees are required to remain employed for vesting to occur (subject to certain exceptions in the case of retirement).
The following table summarizes LTIP Unit activity for the Equity Plan for GGP for the years ended December 31, 2015, December 31, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 |
| | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| LTIP Units outstanding at January 1, | | — |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| Granted | | 1,758,396 |
| | 29.33 |
| | — |
| | — |
| | — |
| | — |
|
| Vested | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Forfeited | | (33,649 | ) | | 29.15 |
| | — |
| | — |
| | — |
| | — |
|
| Expired | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| LTIP Units outstanding at December 31, | | 1,724,747 |
| | $ | 29.33 |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
Restricted Stock
Pursuant to the Equity Plan, GGP made restricted stock grants to certain employees and non-employee directors. The vesting terms of these grants are specific to the individual grant. The vesting terms varied in that a portion of the shares vested either immediately or on the first anniversary and the remainder vested in the equal annual amounts over the next two to five years. Participating employees were required to remain employed for vesting to occur (subject to certain exceptions in the case of retirement). Shares that did not vest were forfeited. Dividends are paid on restricted stock and are not returnable, even if the underlying stock does not ultimately vest.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
The following table summarizes restricted stock activity for the respective grant year ended December 31, 2015, December 31, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 |
| | | Shares | | Weighted
Average Grant
Date Fair Value | | Shares | | Weighted
Average Grant
Date Fair Value | | Shares | | Weighted
Average Grant
Date Fair Value |
| Nonvested restricted stock grants outstanding as of beginning of period | | 104,142 |
| | $ | 14.79 |
| | 1,242,924 |
| | $ | 13.99 |
| | 1,426,338 |
| | $ | 14.07 |
|
| Granted | | 253,886 |
| | 29.12 |
| | 34,100 |
| | 20.04 |
| | 37,352 |
| | 19.97 |
|
| Vested | | (114,563 | ) | | 16.75 |
| | (1,154,894 | ) | | 14.08 |
| | (164,970 | ) | | 15.69 |
|
| Canceled | | (37,246 | ) | | 26.86 |
| | (17,988 | ) | | 14.73 |
| | (55,796 | ) | | 15.15 |
|
| Nonvested restricted stock grants outstanding as of end of period | | 206,219 |
| | $ | 29.16 |
| | 104,142 |
| | $ | 14.79 |
| | 1,242,924 |
| | $ | 13.99 |
|
The weighted average remaining contractual term of nonvested awards as of December 31, 2015 was three years. The fair value of shares vested during the year was $3.0 million, $29.5 million, and $3.4 million for the year ended December 31, 2015, December 31, 2014, and December 31, 2013, respectively.
Other Required Disclosures
Historical data, such as the past performance of our common stock and the length of service by employees, is used to estimate expected life of the stock options, restricted stock, and LTIP Units and represents the period of time the options or grants are expected to be outstanding. The weighted average estimated values of options granted were based on the following assumptions:
|
| | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Risk-free interest rate(*) | | 1.75 | % | | 2.20 | % | | 1.71 | % |
| Dividend yield(*) | | 2.33 | % | | 2.70 | % | | 2.52 | % |
| Expected volatility | | 25.00 | % | | 30.00 | % | | 32.32 | % |
| Expected life (in years) | | 6.25 |
| | 6.25 |
| | 6.50 |
|
(*) Weighted average
Compensation expense related to stock-based compensation plans is summarized in the following table:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Stock options—Property management and other costs | | $ | 7,103 |
| | $ | 7,468 |
| | $ | 5,104 |
|
| Stock options—General and administrative | | 11,006 |
| | 15,074 |
| | 9,553 |
|
| Restricted stock—Property management and other costs | | 2,853 |
| | 1,683 |
| | 1,504 |
|
| Restricted stock—General and administrative | | 603 |
| | 1,013 |
| | 6,855 |
|
| LTIP Units—Property management and other costs | | 1,046 |
| | — |
| | — |
|
| LTIP Units—General and administrative | | 10,002 |
| | — |
| | — |
|
| Total | | $ | 32,613 |
| | $ | 25,238 |
| | $ | 23,016 |
|
Unrecognized compensation expense as of December 31, 2015 is as follows:
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
|
| | | |
| Year | Amount |
| 2016 | $ | 28,514 |
|
| 2017 | 25,295 |
|
| 2018 | 13,121 |
|
| 2019 | 6,492 |
|
| | 73,422 |
|
These amounts may be impacted by future grants, changes in forfeiture estimates or vesting terms, and actual forfeiture rates which differ from estimated forfeitures.
NOTE 14 ACCOUNTS AND
OTHER ASSETSNOTES RECEIVABLE
The following table summarizes the significant components of
prepaid expensesAccounts and
other assets. | | | | | | | | |
| | | December 31,
2012 | | | December 31,
2011 | |
Intangible assets: | | | | | | | | |
Above-market tenant leases, net (Note 4) | | $ | 804,280 | | | $ | 1,163,754 | |
Below-market ground leases, net (Note 4) | | | 159,714 | | | | 198,230 | |
Real estate tax stabilization agreement, net (Note 4) | | | 97,983 | | | | 104,295 | |
| | | | | | | | |
Total intangible assets | | | 1,061,977 | | | | 1,466,279 | |
| | | | | | | | |
Remaining prepaid expenses and other assets: | | | | | | | | |
Security and escrow deposits | | | 181,481 | | | | 247,718 | |
Prepaid expenses | | | 54,514 | | | | 51,928 | |
Other non-tenant receivables | | | 12,450 | | | | 21,198 | |
Deferred tax, net of valuation allowances | | | 902 | | | | 4,578 | |
Other | | | 18,141 | | | | 13,834 | |
| | | | | | | | |
Total remaining prepaid expenses and other assets | | | 267,488 | | | | 339,256 | |
| | | | | | | | |
Total prepaid expenses and other assets | | $ | 1,329,465 | | | $ | 1,805,535 | |
| | | | | | | | |
|
| | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 |
| Trade receivables | | $ | 109,399 |
| | $ | 124,698 |
|
| Notes receivable | | 614,305 |
| | 320,881 |
|
| Straight-line rent receivable | | 236,589 |
| | 230,172 |
|
| Other accounts receivable | | 3,918 |
| | 3,638 |
|
| Total Accounts and notes receivable | | 964,211 |
| | 679,389 |
|
| Provision for doubtful accounts | | (14,655 | ) | | (15,621 | ) |
| Total Accounts and notes receivable, net | | $ | 949,556 |
| | $ | 663,768 |
|
On November 11, 2015, we entered into a promissory note with our joint venture partner, Ashkenazy Holding Co., LLC (“AHC”), in which we lent $57.6 million that bears interest at 8% per annum. The note is collateralized by AHC’s equity in Miami Design District Associates, which is part of the AACMDD Group, LLC joint venture (“AACMDD”). We have an option through November 15, 2016 to purchase the collateral in exchange for cancellation of the note. If the option is exercised, the closing date will be on January 16, 2017 and all amounts previously paid by AHC must be repaid to AHC.
On September 17, 2015, we entered into a promissory note with our joint venture partner, AHC, in which we lent $40.4 million that bears interest at 6% per annum. The note is collateralized by AHC’s equity in Miami Design District Associates, which is part of AACMDD. We have an option through August 15, 2016 to purchase the collateral in exchange for cancellation of the note. If the option is exercised, all amounts previously paid by AHC must be repaid to AHC.
On June 30, 2015, we entered into a promissory note with our joint venture partner MKB, in which we would lend MKB up to $80 million for capital calls after an initial contribution of $80 million by MKB and until the joint venture secured construction financing. This loan bears interest at LIBOR plus 6% and is secured by MKB’s partnership interest in AMX, which is constructing a luxury residential condominium tower on a site located within the Ala Moana Shopping Center. As of December 31, 2015, there was $15.4 million outstanding on this loan. Construction financing closed during the third quarter of 2015.
Notes receivable includes $204.3 million of notes receivables from our joint venture partners related to the acquisition of 730 Fifth Avenue in New York, New York (Note 3). The first note was issued for $104.3 million, bears interest at 8.0% compounded annually and matures on February 12, 2025. The second note was issued for $100.0 million to the joint venture partner acquiring the office portion of the property and bears interest at LIBOR plus 13.2% subject to terms and conditions in the loan agreement and matures on April 17, 2025. As of December 31, 2015, there was $208.3 million outstanding on these loans.
Also included in notes receivable is $103.8 million and $47.0 million due from our joint venture partner related to the acquisition of the properties at 685 Fifth Avenue and 530 Fifth Avenue in New York, New York. The notes receivable bear interest at 7.5% and 9%, respectively. Interest is compounded quarterly with accrued but unpaid interest increasing the loan balance. The notes are collateralized by our partner’s ownership interest in the joint ventures. The loans mature on June 27, 2024 and June 18, 2024, respectively.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
Included in notes receivable is a $91.6 million note receivable issued to Rique Empreendimentos e Participacoes Ltda. (“Rique”) in conjunction with our sale of Aliansce Shopping Centers, S.A. (“Aliansce”) to Rique and Canada Pension Plan Investment Board on September 30, 2013. The note receivable is denominated in Brazilian Reais, bears interest at an effective interest rate of approximately 14%, is collateralized by shares of common stock in Aliansce, and requires annual principal and interest payments over the term. On May 28, 2015, we agreed to extend the term of the note receivable issued to Rique by five years through September 30, 2023. This extension did not change the effective interest rate. We recognize the impact of changes in the exchange rate on the note receivable as gain or loss on foreign currency in our Consolidated Statements of Comprehensive Income.
NOTE 15 PREPAID EXPENSES AND OTHER ASSETS
The following table summarizes the significant components of prepaid expenses and other assets.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 |
| | | Gross Asset | | Accumulated Amortization | | Balance | | Gross Asset | | Accumulated Amortization | | Balance |
| Intangible assets: | | |
| | |
| | |
| | |
| | |
| | |
|
| Above-market tenant leases, net | | $ | 644,728 |
| | $ | (416,181 | ) | | $ | 228,547 |
| | $ | 870,103 |
| | $ | (498,016 | ) | | $ | 372,087 |
|
| Below-market ground leases, net | | 119,545 |
| | (10,761 | ) | | $ | 108,784 |
| | 119,866 |
| | (8,906 | ) | | $ | 110,960 |
|
| Real estate tax stabilization agreement, net | | 111,506 |
| | (32,458 | ) | | $ | 79,048 |
| | 111,506 |
| | (26,146 | ) | | $ | 85,360 |
|
| Total intangible assets | | $ | 875,779 |
| | $ | (459,400 | ) | | $ | 416,379 |
| | $ | 1,101,475 |
|
| $ | (533,068 | ) | | $ | 568,407 |
|
| Remaining Prepaid expenses and other assets: | | |
| | |
| | |
| | |
| | |
| | |
|
| Security and escrow deposits | | |
| | |
| | 87,818 |
| | |
| | |
| | 93,676 |
|
| Prepaid expenses | | |
| | |
| | 43,809 |
| | |
| | |
| | 76,306 |
|
| Other non-tenant receivables (1) | | |
| | |
| | 342,438 |
| | |
| | |
| | 28,712 |
|
| Deferred tax, net of valuation allowances | | |
| | |
| | 19,743 |
| | |
| | |
| | 4,220 |
|
| Marketable securities | | | | | | 45,278 |
| | | | | | — |
|
| Other | | |
| | |
| | 41,869 |
| | |
| | |
| | 42,456 |
|
| Total remaining Prepaid expenses and other assets | | |
| | |
| | 580,955 |
| | |
| | |
| | 245,370 |
|
| Total Prepaid expenses and other assets | | |
| | |
| | $ | 997,334 |
| | | | | | $ | 813,777 |
|
(1) Includes receivable due from our joint venture partners due upon completion of the redevelopment at Ala Moana.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTE 16 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table summarizes the significant components of accounts payable and accrued expenses.
| | | | | | | | |
| | | December 31,
2012 | | | December 31,
2011 | |
Intangible liabilities: | | | | | | | | |
Below-market tenant leases, net (Note 4) | | $ | 473,982 | | | $ | 634,802 | |
Above-market headquarter office leases, net (Note 4) | | | 11,875 | | | | 13,571 | |
Above-market ground leases, net (Note 4) | | | 8,951 | | | | 9,400 | |
| | | | | | | | |
Total intangible liabilities | | | 494,808 | | | | 657,773 | |
| | | | | | | | |
Remaining accounts payable and accrued expenses: | | | | | | | | |
Accrued interest | | | 185,461 | | | | 196,536 | |
Accounts payable and accrued expenses | | | 160,861 | | | | 164,139 | |
Accrued real estate taxes | | | 67,581 | | | | 77,722 | |
Deferred gains/income | | | 98,376 | | | | 65,174 | |
Accrued payroll and other employee liabilities | | | 34,802 | | | | 77,231 | |
Construction payable | | | 70,609 | | | | 69,291 | |
Tenant and other deposits | | | 22,870 | | | | 19,336 | |
Insurance reserve liability | | | 15,796 | | | | 17,796 | |
Capital lease obligations | | | 13,292 | | | | 12,774 | |
Conditional asset retirement obligation liability | | | 12,134 | | | | 16,596 | |
Uncertain tax position liability | | | 5,873 | | | | 6,847 | |
Other | | | 29,768 | | | | 64,523 | |
| | | | | | | | |
Total remaining accounts payable and accrued expenses | | | 717,423 | | | | 787,965 | |
| | | | | | | | |
Total accounts payable and accrued expenses | | $ | 1,212,231 | | | $ | 1,445,738 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 |
| | | Gross
Liability | | Accumulated
Accretion | | Balance | | Gross
Liability | | Accumulated
Accretion | | Balance |
| Intangible liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
| Below-market tenant leases, net | | $ | 356,115 |
| | $ | (203,474 | ) | | $ | 152,641 |
| | $ | 502,919 |
| | $ | (259,390 | ) | | $ | 243,529 |
|
| Above-market headquarters office leases, net | | 15,268 |
| | (8,604 | ) | | 6,664 |
| | 15,268 |
| | (6,867 | ) | | $ | 8,401 |
|
| Above-market ground leases, net | | 9,127 |
| | (1,890 | ) | | 7,237 |
| | 9,127 |
| | (1,522 | ) | | $ | 7,605 |
|
| Total intangible liabilities | | $ | 380,510 |
| | $ | (213,968 | ) | | $ | 166,542 |
| | $ | 527,314 |
| | $ | (267,779 | ) | | $ | 259,535 |
|
| Remaining Accounts payable and accrued expenses: | | |
| | |
| | |
| | |
| | |
| | |
|
| Accrued interest | | |
| | |
| | 46,129 |
| | |
| | |
| | 54,332 |
|
| Accounts payable and accrued expenses | | |
| | |
| | 64,954 |
| | |
| | |
| | 82,292 |
|
| Accrued real estate taxes | | |
| | |
| | 80,599 |
| | |
| | |
| | 85,910 |
|
| Deferred gains/income | | |
| | |
| | 125,701 |
| | |
| | |
| | 114,968 |
|
| Accrued payroll and other employee liabilities | | |
| | |
| | 66,970 |
| | |
| | |
| | 55,059 |
|
| Construction payable | | |
| | |
| | 158,027 |
| | |
| | |
| | 198,471 |
|
| Tenant and other deposits | | |
| | |
| | 25,296 |
| | |
| | |
| | 21,423 |
|
| Insurance reserve liability | | |
| | |
| | 15,780 |
| | |
| | |
| | 16,509 |
|
| Capital lease obligations | | |
| | |
| | 11,385 |
| | |
| | |
| | 12,066 |
|
| Conditional asset retirement obligation liability | | |
| | |
| | 5,927 |
| | |
| | |
| | 10,135 |
|
| Uncertain tax position liability | | |
| | |
| | — |
| | |
| | |
| | 6,663 |
|
| Other | | |
| | |
| | 17,183 |
| | |
| | |
| | 17,534 |
|
| Total remaining Accounts payable and accrued expenses | | |
| | |
| | 617,951 |
| | | | | | 675,362 |
|
| Total Accounts payable and accrued expenses | | |
| | |
| | $ | 784,493 |
| | | | | | $ | 934,897 |
|
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTE 17 ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of accumulated other comprehensive loss as of December 31,
20122015 and
20112014 are as follows:
| | | | | | | | |
| | | December 31,
2012 | | | December 31,
2011 | |
Net unrealized gains on financial instruments | | $ | 129 | | | $ | 129 | |
Foreign currency translation | | | (87,547 | ) | | | (48,131 | ) |
Unrealized gains on available-for-sale securities | | | 64 | | | | 229 | |
| | | | | | | | |
| | $ | (87,354 | ) | | $ | (47,773 | ) |
| | | | | | | | |
|
| | | | | | | | |
| | | December 31, 2015 | | December 31, 2014 |
| Net unrealized gains on financial instruments | | $ | 100 |
| | $ | 70 |
|
| Foreign currency translation | | (84,798 | ) | | (51,823 | ) |
| Unrealized gains on available-for-sale securities | | 11,894 |
| | — |
|
| | | $ | (72,804 | ) | | $ | (51,753 | ) |
In the normal course of business, from time to time, we are involved in legal proceedings relating to the ownership and operations of our properties. In management’s opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material effect on our consolidated financial position, results of operations or liquidity.
Neither the Company nor any of the Unconsolidated Real Estate Affiliates is currently involved in any material pending legal proceedings nor, to our knowledge, is any material legal proceeding currently threatened against the Company or any of the Unconsolidated Real Estate Affiliates.
In October 2004, certain limited partners (the
‘‘Urban Plaintiffs’’“Urban Plaintiffs”) of Urban Shopping Centers, L.P.
(‘‘Urban’’(“Urban”) filed a lawsuit against Urban’s general partner, Head Acquisition, L.P.
(‘‘Head’’(“Head”), as well as
TRCLP,The Rouse Company, LP, Simon Property Group, Inc., Westfield America, Inc., and various of their affiliates, including Head’s general partners
(collectively, (collectively, the ‘‘Urban Defendants’’“Urban Defendants”), in Circuit Court in Cook County, Illinois. The Predecessor, GGPLPGGP, GGP Operating Partnership, LP (“GGPOP”) and other affiliates were later included as Urban Defendants. The lawsuit alleges,alleged, among other things, that the Urban Defendants breached the Urban partnership agreement, unjustly enriched themselves through misappropriation of partnership opportunities, failed to grow the partnership, breached their fiduciary duties, and tortuouslytortiously interfered with several contractual relationships. The plaintiffs seekUrban Plaintiffs sought relief in the form of unspecified monetary damages and equitable relief and requiring, among other things, the Urban Defendants, including the Predecessorpredecessor entity to GGP (“GGP, Inc.”) and its affiliates, to engage in certain future transactions through Urban. On May 19, 2014 the Company settled the litigation and recorded a loss of $17.9 million, which is included in General and administrative expense in our Consolidated Statements of Operations and Comprehensive Income. The Company invested $60.0 million in Urban Partnership. The case is currently in the final stages of discovery. John Schreiber, one of our directors, serves on the board of directors of, and is an investor in, an entity that iscontributed, at fair value, a principal investor in the Urban Plaintiffs, and is himself an investor in the Urban Plaintiffs and, therefore, has a financial5.6% interest in the outcome of the litigation that may be adverse to us. While we do not believe that this litigation will have a material effect on our financial position, results of operations and cash flows, we are disclosing its existence due to Mr. Schreiber’s interestthree assets in the case.
Default Interest
Pursuant to the Plan, the Company cured and reinstated that certain note (the ‘‘Homart Note’’) in the original principal amount of $254.0 million between GGP Limited Partnership andexchange for preferred equity interests. The Comptroller of the State of New York as Trustee of the Common Retirement Fund (‘‘CRF’’) by payment in cash of accrued interest at the contractual non-default rate. CRF, however, contended that the Company’s bankruptcy caused the Company to default under the Homart Note and, therefore, post-petition interest accrued under the Homart Note at the contractual default rate was due for the period June 1, 2009 until November 9, 2010. On June 16, 2011, the United States Bankruptcy Court for the Southern District of New York (the ‘‘Bankruptcy Court’’) ruled in favor of CRF, and, on June 22, 2011, the Company elected to satisfy the Homart Note in full by paying CRF the outstanding default interest and principal amount on the Homart Note totaling $246.0 million. As a result of the ruling, the Company incurred and paid $11.7 million of default interest expense during the year ended December 31, 2011. However, the Company has appealed the Bankruptcy Court’s order and has reserved its rightno obligation to recover the payment of default interest.
Pursuant to the Plan, the Company agreed to pay to the holders of claims (the ‘‘2006 Lenders’’) under a revolving and term loan facility (the ‘‘2006 Credit Facility’’) the principal amount of their claims outstanding of approximately $2.6 billion plus post-petition interest at the contractual non-default rate. However, the 2006 Lenders asserted that they were entitled to receive interest at the contractual default rate. In July 2011, the Bankruptcy Court ruledengage in favor of the 2006 Lenders. As a result of the ruling, the Company has accrued $96.1 million as of December 31, 2012 and $91.5 million as of December 31, 2011. In August 2011, the Company appealed the Bankruptcy Court ruling; a decision is expected in 2013. We will continue to evaluate the appropriateness of our accrual during the appeal process.
future activity through Urban other than transactions associated with currently existing partnership assets.
Tax Indemnification Liability
Pursuant to the Investment Agreements, the Successor hasvarious agreements made during GGP’s emergence from bankruptcy in 2010, GGP previously indemnified HHCHoward Hughes Corporation (“HHC”) from and against 93.75% of any and all losses, claims, damages, liabilities and reasonable expenses to which HHC and its subsidiaries become subject, in each case solely to the extent directly attributable to MPC Taxes (as defined in the Investment Agreements)Master Planned Communities (“MPC”) taxes in an amount up to $303.8 million. Under certain circumstances, we agreed to be responsible for interest or penalties attributable to such MPC Taxestaxes in excess of the $303.8 million. The IRS disagreed with the method used to report gains for income tax purposes that are the subject of the MPC taxes. As a result of this indemnity,disagreement, The Howard Hughes Company, LLC and Howard Hughes Properties, Inc. filed petitions in the United States Tax Court on May 6, 2011, contesting this liability for the 2007 and 2008 years and a trial was held in early November 2012. We have accrued $303.8The United States Tax Court rendered its opinion on June 2, 2014, in favor of the IRS. On September 15, 2014, the United States Tax Court formally entered its decision awarding the IRS $144.1 million asin taxes for 2007 and 2008. On December 12, 2014, we reached an agreement with HHC for settlement, which included the transfer of December 31, 2012six office properties with a historical cost of $106.8 million and December 31, 2011 related toan agreed-upon value of $130.0 million and cash of $138.0 million in full settlement of the tax indemnification liability. In addition, we have accrued $21.6$322.0 million of interest related to the tax indemnification liability in accounts payable and accrued expenses($303.8 million plus applicable interest). As a result of the settlement, GGP recognized a gain on our Consolidated Balance Sheets asextinguishment of December 31, 2012 and December 31, 2011. The aggregate liability of $325.4 million represents management’s best estimate of our liability as of December 31, 2012, which will be periodically evaluated in the aggregate. We do not expect to make any significant payments on the tax indemnification liability withinof approximately $77.2 million included in discontinued operations on the next 12 months.Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2014.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
NOTE 19 COMMITMENTS AND CONTINGENCIES
We lease land or buildings at certain properties from third parties. The leases generally provide us with a right of first refusal in the event of a proposed sale of the property by the landlord. Rental payments are expensed as incurred and have, to the extent applicable, been straight-lined over the term of the lease. The following is a summary of our contractual rental expense as presented in our Consolidated Statements of Operations and Comprehensive
Loss: | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
| | | Year Ended
December 31,
2012 | | | Year Ended
December 31,
2011 | | | Period from
November 10,
2010 through
December 31,
2010 | | | Period from
January 1,
2010 through
November 9,
2010 | |
Contractual rent expense, including participation rent | | $ | 14,248 | | | $ | 13,034 | | | $ | 1,833 | | | $ | 8,520 | |
Contractual rent expense, including participation rent and excluding amortization of above- and below-market ground leases and straight-line rent | | | 9,188 | | | | 7,886 | | | | 1,123 | | | | 4,290 | |
Income:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2015 | | 2014 | | 2013 |
| Contractual rent expense, including participation rent | | $ | 8,546 |
| | $ | 13,605 |
| | $ | 13,475 |
|
| Contractual rent expense, including participation rent and excluding amortization of above and below-market ground leases and straight-line rent | | 6,183 |
| | 9,036 |
| | 8,670 |
|
See Note
9, Note 16,8 and Note 18 for our obligations related to uncertain tax positions and for disclosure of additional contingencies.
The following table summarizes the contractual maturities of our long-term commitments. Long-term debt and ground leases include the related acquisition accounting fair value adjustments:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Subsequent/
Other | | Total |
| Mortgages, notes and loans payable(1) | | $ | 701,177 |
| | $ | 516,321 |
| | $ | 1,846,027 |
| | $ | 1,040,042 |
| | $ | 1,684,772 |
| | $ | 8,427,821 |
| | $ | 14,216,160 |
|
| Retained debt-principal | | 1,605 |
| | 1,708 |
| | 1,804 |
| | 1,905 |
| | 80,885 |
| | — |
| | 87,907 |
|
| Purchase obligations | | 164,383 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 164,383 |
|
| Ground lease payments | | 4,449 |
| | 4,479 |
| | 4,397 |
| | 4,471 |
| | 4,504 |
| | 148,680 |
| | 170,980 |
|
| Junior Subordinated Notes(2) | | — |
| | — |
| | — |
| | — |
| | — |
| | 206,200 |
| | 206,200 |
|
| Total | | $ | 871,614 |
| | $ | 522,508 |
| | $ | 1,852,228 |
| | $ | 1,046,418 |
| | $ | 1,770,161 |
| | $ | 8,782,701 |
| | $ | 14,845,630 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | Subsequent/
Other | | | Total | |
Mortgages, notes and loans payable | | $ | 535,498 | | | $ | 1,292,166 | | | $ | 1,548,096 | | | $ | 2,382,100 | | | $ | 1,701,745 | | | $ | 8,507,261 | | | $ | 15,966,866 | |
Retained debt-principal | | | 1,366 | | | | 1,443 | | | | 1,524 | | | | 1,596 | | | | 1,699 | | | | 84,132 | | | | 91,760 | |
Junior Subordinated Notes (1) | | | - | | | | - | | | | - | | | | - | | | | - | | | | 206,200 | | | | 206,200 | |
Ground lease payments | | | 6,909 | | | | 6,871 | | | | 6,881 | | | | 6,765 | | | | 6,795 | | | | 203,836 | | | | 238,057 | |
Tax indemnification liability | | | - | | | | - | | | | - | | | | - | | | | - | | | | 303,750 | | | | 303,750 | |
Uncertain tax position liability | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,873 | | | | 5,873 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 543,773 | | | $ | 1,300,480 | | | $ | 1,556,501 | | | $ | 2,390,461 | | | $ | 1,710,239 | | | $ | 9,311,052 | | | $ | 16,812,506 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| (1) | The $303.8 million outstanding (net of financing costs) on the revolving credit facility as of December 31, 2015 is included in 2016. |
| |
| (2) | The $206.2 million of Junior Subordinated Notes are due in 2041,2036, but may be redeemed any time after April 30, 2011. As we do not expect to redeem the notes prior to maturity, they are included in the consolidated debt maturing subsequent to 2017.2020. |
(2) | The uncertain income tax liability for which reasonable estimates about the timing of payments cannot be made is disclosed within the Subsequent/Other column. |
NOTE 20 SUBSEQUENT EVENTS
Subsequent to December 31, 2012,
On January 8, 2016, we have closed on loansthe sale of approximately $500our 50% interest in Owings Mills to our joint venture partner for a gross sales price of $11.6 million.
On January 15, 2016, we closed on the sale of Eastridge Mall for a gross sales price of $225.0 million.
On January 29, 2016, we closed on the sale of our interest in 522 Fifth Avenue to Ashkenazy Acquisition Corporation, our joint venture partner, for $25.0 million. We received proceeds of $10.0 million with a weighted average interest rate of 3.65% that mature in 2025, resultingupon closing and will receive the remaining $15.0 million in proceeds on March 31, 2016.
On January 29, 2016 we closed on the sale of
approximately $295our interest in Provo Towne Center to our joint venture partner for a gross sales price of $37.5 million.
These new loans replace existing loans of approximately $205 million with a weighted average interest rate of 4.50% that previously matured in 2013 and 2016. On February
15, 2013,2, 2016, we
sold one property for $ 8.5 million. In addition, we reducedclosed on the acquisition of our
debt by approximately $26 million by repaying the outstanding balance of the mortgage note secured by the property.On February 14, 2013, our consolidated subsidiary, TRCLLC, redeemed the $91.8 million of unsecured corporate notes due November 26, 2013 (the ‘‘Notes’’). The Notes were redeemedjoint venture partner’s 25% interest in cash at the ‘‘Make-Whole Price’’, as definedSpokane Valley Mall.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in
the applicable indenture, plus accrued and unpaid interest up to, but excluding, the redemption date. We expect to incur debt extinguishment costs of approximately $3 million in connection with the redemption in the first quarter of 2013.On February 13, 2013, we issued 10,000,000 shares of 6.375% Series A Preferred Stock at a price of $25.00thousands, except per share under a public offering. We have granted the underwriters an option to purchase an additional 1.5 million shares within 30 days of February 13, 2013 to cover any potential over-allotments.
On February 5, 2013, one property that was previously transferred to a special servicer was sold, in a lender directed sale in full satisfaction of the related debt, for an amount less than the carrying value of the non-recourse debt of $91.2 million.
On February 4, 2013, our Board of Directors declared a first quarter common stock dividend of $0.12 per share payable on April 30, 2013, to stockholders of record on April 16, 2013.
On January 28, 2013, GGPLP purchased Warrants held by Blackstone and Fairholme for approximately $633 million. GGPLP funded the transactions using its available cash resources, including a $400 million draw down on the revolving credit facility (Note 10). On February 15, 2013, the draw on the revolving credit facility was repaid using proceeds from the public offering discussed above.
amounts)
NOTE 21 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
| | | | | | | | | | | | | | | | |
| | | 2012 | |
| | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | |
Total revenues | | $ | 600,632 | | | $ | 608,700 | | | $ | 626,803 | | | $ | 675,714 | |
Operating income | | | 166,631 | | | | 192,516 | | | | 129,865 | | | | 254,046 | |
Loss from continuing operations | | | (184,018 | ) | | | (108,880 | ) | | | (176,213 | ) | | | (25,443 | ) |
(Loss) income from discontinued operations | | | (10,228 | ) | | | 2,533 | | | | (30,392 | ) | | | 61,108 | |
Net (loss) income attributable to common shareholders | | | (197,615 | ) | | | (107,936 | ) | | | (207,887 | ) | | | 32,201 | |
Basic (loss) earnings per share from:(1) | | | | | | | | | | | | | | | | |
Continuing operations | | | (0.20 | ) | | | (0.12 | ) | | | (0.20 | ) | | | (0.03 | ) |
Discontinued operations | | | (0.01 | ) | | | - | | | | (0.03 | ) | | | 0.07 | |
Diluted (loss) earnings per share from:(1) | | | | | | | | | | | | | | | | |
Continuing operations | | | (0.20 | ) | | | (0.12 | ) | | | (0.20 | ) | | | (0.03 | ) |
Discontinued operations | | | (0.01 | ) | | | - | | | | (0.03 | ) | | | 0.07 | |
Dividends declared per share | | | 0.10 | | | | 0.10 | | | | 0.11 | | | | 0.11 | |
Weighted-average shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 937,274 | | | | 937,789 | | | | 938,316 | | | | 938,049 | |
Diluted | | | 937,274 | | | | 937,789 | | | | 938,316 | | | | 938,049 | |
| | | | | | | | | | | | | | | | |
| | | 2011 | |
| | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | |
Total revenues | | $ | 604,885 | | | $ | 587,482 | | | $ | 608,431 | | | $ | 643,986 | |
Operating income | | | 158,760 | | | | 142,763 | | | | 134,290 | | | | 185,899 | |
Income (loss) from continuing operations | | | 14,068 | | | | (195,709 | ) | | | 261,987 | | | | (286,531 | ) |
Loss from discontinued operations | | | (7,120 | ) | | | (6,389 | ) | | | (5,379 | ) | | | (81,731 | ) |
Net income (loss) attributable to common shareholders . | | | 5,662 | | | | (203,048 | ) | | | 252,050 | | | | (367,838 | ) |
Basic earnings (loss) per share from:(1) | | | | | | | | | | | | | | | | |
Continuing operations | | | 0.01 | | | | (0.21 | ) | | | 0.27 | | | | (0.30 | ) |
Discontinued operations | | | (0.01 | ) | | | (0.01 | ) | | | - | | | | (0.09 | ) |
Diluted earnings (loss) per share from:(1) | | | | | | | | | | | | | | | | |
Continuing operations | | | 0.01 | | | | (0.21 | ) | | | (0.07 | ) | | | (0.30 | ) |
Discontinued operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.09 | ) |
Dividends declared per share(2) | | | 0.10 | | | | 0.10 | | | | 0.10 | | | | 0.53 | |
Weighted-average shares outstanding: | | | | | | | | | | | | | �� | | | |
Basic | | | 957,435 | | | | 946,769 | | | | 936,260 | | | | 943,669 | |
Diluted | | | 996,936 | | | | 946,769 | | | | 970,691 | | | | 943,669 | |
(1) | Earnings (loss) per share for the quarters do not add up to annual earnings per share due to the issuance of additional common stock during the year. |
(2) | Includes $0.43 non-cash distribution of Rouse Properties, Inc. (Note 12). |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
General Growth Properties, Inc.
Chicago, Illinois
We have audited the consolidated balance sheets of General Growth Properties, Inc. and subsidiaries (the ‘‘Company’’) as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income (loss), equity, and cash flows
Quarterly data for the year ended December 31,
20122015 and
2011,2014 is summarized in the table below. In Q4 2015, they include the impact of provisions for impairment (Note 2). In each quarter of 2015 the adjustments include gains from changes in control of investment properties (Note 3) in continuing operations and
the period from November 10, 2010 to December 31, 2010 (Successor Company operations), and the period from January 1, 2010 to November 9, 2010 (Predecessor Company operations) and the Company’s internal control over financial reporting as of December 31, 2012 (such report dated February 28, 2013 and not presented herein), and have issued our reports thereon dated February 28, 2013 (which reportgains on
the consolidated financial statements expresses an unqualified opinion and includes an explanatory paragraph regarding the Company’s financial statements including assets, liabilities, and a capital structure with carrying values not comparable with prior periods). Our audits also included the consolidated financial statement schedule of the Company. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when consideredinvestment in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein./s/ Deloitte & Touche LLP
Chicago, Illinois
February 28, 2013
Unconsolidated Real Estate Affiliates (Note 6).
|
| | | | | | | | | | | | | | | | |
| | | 2015 |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Total revenues | | $ | 594,143 |
| | $ | 579,805 |
| | $ | 585,324 |
| | $ | 644,634 |
|
| Operating income | | 202,813 |
| | 227,378 |
| | 224,975 |
| | 268,727 |
|
| Income from continuing operations | | 641,750 |
| | 427,853 |
| | 127,366 |
| | 196,627 |
|
| Income from discontinued operations | | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | |
| Net income attributable to common shareholders | | 630,747 |
| | 417,956 |
| | 119,868 |
| | 190,053 |
|
| Basic Earnings Per Share: | | |
| | |
| | |
| | |
|
| Continuing operations | | 0.71 |
| | 0.47 |
| | 0.14 |
| | 0.22 |
|
| Discontinued operations | | — |
| | — |
| | — |
| | — |
|
| Diluted Earnings Per Share: | | |
| | |
| | |
| | |
|
| Continuing operations | | 0.66 |
| | 0.44 |
| | 0.13 |
| | 0.20 |
|
| Discontinued operations | | — |
| | — |
| | — |
| | — |
|
| Dividends declared per share | | $ | 0.17 |
| | $ | 0.17 |
| | $ | 0.18 |
| | $ | 0.19 |
|
| Weighted-average shares outstanding: | | |
| | |
| | |
| | |
|
| Basic | | 885,462 |
| | 886,218 |
| | 884,640 |
| | 882,419 |
|
| Diluted | | 954,432 |
| | 952,597 |
| | 949,061 |
| | 948,418 |
|
|
| | | | | | | | | | | | | | | | |
| | | 2014 |
| | | First Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Total revenues | | $ | 622,884 |
| | $ | 611,894 |
| | $ | 627,759 |
| | $ | 673,022 |
|
| Operating income | | 222,905 |
| | 206,350 |
| | 237,931 |
| | 274,327 |
|
| Income from continuing operations | | 58,915 |
| | 55,237 |
| | 68,577 |
| | 215,282 |
|
| Income from discontinued operations | | 72,972 |
| | 121,853 |
| | 8,822 |
| | 78,236 |
|
| | | | | | | | | |
| Net income attributable to common shareholders | | 124,052 |
| | 169,740 |
| | 70,624 |
| | 285,498 |
|
| Basic Earnings Per Share: | | |
| | |
| | |
| | |
|
| Continuing operations | | 0.06 |
| | 0.06 |
| | 0.07 |
| | 0.23 |
|
| Discontinued operations | | 0.08 |
| | 0.14 |
| | 0.01 |
| | 0.09 |
|
| Diluted Earnings Per Share: | | |
| | |
| | |
| | |
|
| Continuing operations | | 0.05 |
| | 0.05 |
| | 0.06 |
| | 0.22 |
|
| Discontinued operations | | 0.08 |
| | 0.13 |
| | 0.01 |
| | 0.08 |
|
| Dividends declared per share | | $ | 0.15 |
| | $ | 0.15 |
| | $ | 0.16 |
| | $ | 0.17 |
|
| Weighted-average shares outstanding: | | |
| | |
| | |
| | |
|
| Basic | | 896,257 |
| | 883,763 |
| | 883,898 |
| | 884,370 |
|
| Diluted | | 947,971 |
| | 940,725 |
| | 942,923 |
| | 947,090 |
|
GENERAL GROWTH PROPERTIES, INC.
SCHEDULE
III – III—REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31,
2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name of Center | | Location | | Encumbrances (a) | | | Acquistion Cost (b) | | | Costs Capitalized
Subsequent to
Acquisition | | | Gross Amounts at Which Carried
at Close of Period (c) | | | Accumulated
Depreciation (d) | | | Date
Acquired | | | Life Upon
Which
Latest
Statement
of
Operation
is
Computed | |
| | | | Land | | | Buildings
and
Improvements | | | Land | | | Buildings
and
Improvements | | | Land | | | Buildings
and
Improvements | | | Total | | | | |
| | | | | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ala Moana Center | | Honolulu, HI | | $ | 1,400,000 | | | $ | 571,836 | | | | 1,738,740 | | | $ | - | | | $ | 3,019 | | | $ | 571,836 | | | $ | 1,741,759 | | | $ | 2,313,595 | | | $ | 120,359 | | | | November, 2010 | | | | (d | ) |
Apache Mall | | Rochester, MN | | | 99,477 | | | | 17,738 | | | | 116,663 | | | | - | | | | 1,316 | | | | 17,738 | | | | 117,979 | | | | 135,717 | | | | 9,324 | | | | November, 2010 | | | | (d | ) |
Augusta Mall | | Augusta, GA | | | 158,498 | | | | 25,450 | | | | 137,376 | | | | - | | | | 4,747 | | | | 25,450 | | | | 142,123 | | | | 167,573 | | | | 12,977 | | | | November, 2010 | | | | (d | ) |
Baybrook Mall | | Friendswood, TX | | | 262,595 | | | | 76,527 | | | | 288,241 | | | | - | | | | (100 | ) | | | 76,527 | | | | 288,141 | | | | 364,668 | | | | 19,431 | | | | November, 2010 | | | | (d | ) |
Bayside Marketplace | | Miami, FL | | | 2,481 | | | | - | | | | 198,396 | | | | - | | | | 810 | | | | - | | | | 199,206 | | | | 199,206 | | | | 23,973 | | | | November, 2010 | | | | (d | ) |
Beachwood Place | | Beachwood, OH | | | 223,826 | | | | 59,156 | | | | 196,205 | | | | - | | | | 1,469 | | | | 59,156 | | | | 197,674 | | | | 256,830 | | | | 13,313 | | | | November, 2010 | | | | (d | ) |
Bellis Fair | | Bellingham, WA | | | 92,595 | | | | 14,122 | | | | 102,033 | | | | - | | | | 1,561 | | | | 14,122 | | | | 103,594 | | | | 117,716 | | | | 8,738 | | | | November, 2010 | | | | (d | ) |
Boise Towne Square | | Boise, ID | | | 147,060 | | | | 44,182 | | | | 163,118 | | | | - | | | | 4,491 | | | | 44,182 | | | | 167,609 | | | | 211,791 | | | | 12,702 | | | | November, 2010 | | | | (d | ) |
Brass Mill Center | | Waterbury, CT | | | 104,919 | | | | 31,496 | | | | 99,107 | | | | - | | | | 826 | | | | 31,496 | | | | 99,933 | | | | 131,429 | | | | 9,778 | | | | November, 2010 | | | | (d | ) |
Burlington Town Center | | Burlington, VT | | | 23,959 | | | | 3,703 | | | | 22,576 | | | | - | | | | (1,464 | ) | | | 3,703 | | | | 21,112 | | | | 24,815 | | | | 2,412 | | | | November, 2010 | | | | (d | ) |
Coastland Center | | Naples, FL | | | 129,805 | | | | 24,470 | | | | 166,038 | | | | - | | | | 584 | | | | 24,470 | | | | 166,622 | | | | 191,092 | | | | 12,658 | | | | November, 2010 | | | | (d | ) |
Columbia Mall | | Columbia, MO | | | 88,002 | | | | 7,943 | | | | 107,969 | | | | - | | | | (1,021 | ) | | | 7,943 | | | | 106,948 | | | | 114,891 | | | | 9,088 | | | | November, 2010 | | | | (d | ) |
Columbiana Centre | | Columbia, SC | | | 97,267 | | | | 22,178 | | | | 125,061 | | | | - | | | | (1,276 | ) | | | 22,178 | | | | 123,785 | | | | 145,963 | | | | 11,090 | | | | November, 2010 | | | | (d | ) |
Coral Ridge Mall | | Coralville, IA | | | 114,026 | | | | 20,178 | | | | 134,515 | | | | 2,219 | | | | 13,065 | | | | 22,397 | | | | 147,580 | | | | 169,977 | | | | 11,461 | | | | November, 2010 | | | | (d | ) |
Coronado Center | | Albuquerque,
NM | | | 151,443 | | | | 28,312 | | | | 153,526 | | | | - | | | | (596 | ) | | | 28,312 | | | | 152,930 | | | | 181,242 | | | | 11,921 | | | | November, 2010 | | | | (d | ) |
Crossroads Center | | St. Cloud, MN | | | 77,088 | | | | 15,499 | | | | 103,077 | | | | - | | | | 911 | | | | 15,499 | | | | 103,988 | | | | 119,487 | | | | 8,603 | | | | November, 2010 | | | | (d | ) |
Cumberland Mall | | Atlanta, GA | | | 102,586 | | | | 36,913 | | | | 138,795 | | | | - | | | | 2,015 | | | | 36,913 | | | | 140,810 | | | | 177,723 | | | | 12,469 | | | | November, 2010 | | | | (d | ) |
Deerbrook Mall | | Humble, TX | | | 150,548 | | | | 36,761 | | | | 133,448 | | | | - | | | | (251 | ) | | | 36,761 | | | | 133,197 | | | | 169,958 | | | | 11,070 | | | | November, 2010 | | | | (d | ) |
Eastridge Mall | | Casper, WY | | | 31,061 | | | | 5,484 | | | | 36,756 | | | | - | | | | 16 | | | | 5,484 | | | | 36,772 | | | | 42,256 | | | | 3,412 | | | | November, 2010 | | | | (d | ) |
Eastridge Mall | | San Jose, CA | | | 152,910 | | | | 30,368 | | | | 135,317 | | | | - | | | | 1,166 | | | | 30,368 | | | | 136,483 | | | | 166,851 | | | | 10,526 | | | | November, 2010 | | | | (d | ) |
Eden Prairie Center | | Eden Prairie,
MN | | | 72,095 | | | | 24,985 | | | | 74,733 | | | | - | | | | (1,956 | ) | | | 24,985 | | | | 72,777 | | | | 97,762 | | | | 6,832 | | | | November, 2010 | | | | (d | ) |
Fashion Place | | Murray, UT | | | 226,730 | | | | 24,068 | | | | 232,456 | | | | 1,387 | | | | 51,186 | | | | 25,455 | | | | 283,642 | | | | 309,097 | | | | 19,333 | | | | November, 2010 | | | | (d | ) |
Fashion Show | | Las Vegas, NV | | | 840,235 | | | | 564,310 | | | | 627,327 | | | | - | | | | 24,521 | | | | 564,310 | | | | 651,848 | | | | 1,216,158 | | | | 55,135 | | | | November, 2010 | | | | (d | ) |
Four Seasons Town Centre | | Greensboro, NC | | | 90,334 | | | | 17,259 | | | | 126,570 | | | | - | | | | 899 | | | | 17,259 | | | | 127,469 | | | | 144,728 | | | | 9,940 | | | | November, 2010 | | | | (d | ) |
Fox River Mall | | Appleton, WI | | | 183,405 | | | | 42,259 | | | | 217,932 | | | | - | | | | 3,130 | | | | 42,259 | | | | 221,062 | | | | 263,321 | | | | 15,512 | | | | November, 2010 | | | | (d | ) |
Glenbrook Square | | Fort Wayne, IN | | | 156,169 | | | | 30,965 | | | | 147,002 | | | | - | | | | (461 | ) | | | 30,965 | | | | 146,541 | | | | 177,506 | | | | 11,235 | | | | November, 2010 | | | | (d | ) |
Governor’s Square | | Tallahassee, FL | | | 73,968 | | | | 18,289 | | | | 123,088 | | | | - | | | | 1,032 | | | | 18,289 | | | | 124,120 | | | | 142,409 | | | | 14,021 | | | | November, 2010 | | | | (d | ) |
Grand Teton Mall | | Idaho Falls, ID | | | 47,540 | | | | 13,066 | | | | 59,658 | | | | - | | | | 1,087 | | | | 13,066 | | | | 60,745 | | | | 73,811 | | | | 5,574 | | | | November, 2010 | | | | (d | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name of Center | | Location | | Encumbrances (a) | | | Acquistion Cost (b) | | | Costs Capitalized
Subsequent to
Acquisition | | | Gross Amounts at Which
Carried at Close of Period (c) | | | Accumulated
Depreciation (d) | | | Date
Acquired | | | Life Upon
Which
Latest
Statement
of
Operation
is
Computed | |
| | | | Land | | | Buildings
and
Improvements | | | Land | | | Buildings
and
Improvements | | | Land | | | Buildings
and
Improvements | | | Total | | | | |
| | | | | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Greenwood Mall | | Bowling Green, KY | | | 63,000 | | | | 12,459 | | | | 85,370 | | | | - | | | | 1,882 | | | | 12,459 | | | | 87,252 | | | | 99,711 | | | | 7,457 | | | | November, 2010 | | | | (d | ) |
Hulen Mall | | Fort Worth, TX | | | 102,145 | | | | 8,665 | | | | 112,252 | | | | - | | | �� | 12,685 | | | | 8,665 | | | | 124,937 | | | | 133,602 | | | | 8,946 | | | | November, 2010 | | | | (d | ) |
Jordan Creek Town Center | | West Des Moines, IA | | | 170,098 | | | | 54,663 | | | | 262,608 | | | | - | | | | 2,142 | | | | 54,663 | | | | 264,750 | | | | 319,413 | | | | 20,789 | | | | November, 2010 | | | | (d | ) |
Lakeside Mall | | Sterling Heights, MI | | | 153,698 | | | | 36,993 | | | | 130,460 | | | | - | | | | 911 | | | | 36,993 | | | | 131,371 | | | | 168,364 | | | | 9,663 | | | | November, 2010 | | | | (d | ) |
Lynnhaven Mall | | Virginia Beach, VA | | | 215,235 | | | | 54,628 | | | | 219,013 | | | | - | | | | (1,400 | ) | | | 54,628 | | | | 217,613 | | | | 272,241 | | | | 17,214 | | | | November, 2010 | | | | (d | ) |
Mall of Louisiana | | Baton Rouge, LA | | | 229,985 | | | | 88,742 | | | | 319,097 | | | | - | | | | 393 | | | | 88,742 | | | | 319,490 | | | | 408,232 | | | | 21,588 | | | | November, 2010 | | | | (d | ) |
Mall of The Bluffs | | Council Bluffs, IA | | | 24,278 | | | | 3,839 | | | | 12,007 | | | | (1,410 | ) | | | (5,419 | ) | | | 2,429 | | | | 6,588 | | | | 9,017 | | | | 757 | | | | November, 2010 | | | | (d | ) |
Mall St. Matthews | | Louisville, KY | | | 133,082 | | | | 42,014 | | | | 155,809 | | | | 19 | | | | 1,802 | | | | 42,033 | | | | 157,611 | | | | 199,644 | | | | 11,945 | | | | November, 2010 | | | | (d | ) |
Market Place Shopping Center | | Champaign, IL | | | 103,647 | | | | 21,611 | | | | 111,515 | | | | - | | | | 2,179 | | | | 21,611 | | | | 113,694 | | | | 135,305 | | | | 9,119 | | | | November, 2010 | | | | (d | ) |
Mayfair Mall | | Wauwatosa, WI | | | 278,369 | | | | 84,473 | | | | 352,140 | | | | (79 | ) | | | (10,423 | ) | | | 84,394 | | | | 341,717 | | | | 426,111 | | | | 24,672 | | | | November, 2010 | | | | (d | ) |
Meadows Mall | | Las Vegas, NV | | | 95,101 | | | | 30,275 | | | | 136,846 | | | | - | | | | (161 | ) | | | 30,275 | | | | 136,685 | | | | 166,960 | | | | 10,140 | | | | November, 2010 | | | | (d | ) |
Mondawmin Mall | | Baltimore, MD | | | 67,989 | | | | 19,707 | | | | 63,348 | | | | - | | | | 5,048 | | | | 19,707 | | | | 68,396 | | | | 88,103 | | | | 6,846 | | | | November, 2010 | | | | (d | ) |
Newgate Mall | | Ogden, UT | | | 58,000 | | | | 17,856 | | | | 70,318 | | | | - | | | | 1,956 | | | | 17,856 | | | | 72,274 | | | | 90,130 | | | | 7,617 | | | | November, 2010 | | | | (d | ) |
North Point Mall | | Alpharetta, GA | | | 203,089 | | | | 57,900 | | | | 228,517 | | | | - | | | | 1,648 | | | | 57,900 | | | | 230,165 | | | | 288,065 | | | | 24,710 | | | | November, 2010 | | | | (d | ) |
North Star Mall | | San Antonio, TX | | | 338,082 | | | | 91,135 | | | | 392,422 | | | | - | | | | 4,916 | | | | 91,135 | | | | 397,338 | | | | 488,473 | | | | 26,145 | | | | November, 2010 | | | | (d | ) |
Northridge Fashion Center | | Northridge, CA | | | 245,197 | | | | 66,774 | | | | 238,023 | | | | - | | | | 22,650 | | | | 66,774 | | | | 260,673 | | | | 327,447 | | | | 18,504 | | | | November, 2010 | | | | (d | ) |
NorthTown Mall | | Spokane, WA | | | 83,928 | | | | 12,310 | | | | 108,857 | | | | - | | | | 493 | | | | 12,310 | | | | 109,350 | | | | 121,660 | | | | 8,723 | | | | November, 2010 | | | | (d | ) |
Oak View Mall | | Omaha, NE | | | 82,900 | | | | 20,390 | | | | 107,216 | | | | - | | | | 423 | | | | 20,390 | | | | 107,639 | | | | 128,029 | | | | 8,623 | | | | November, 2010 | | | | (d | ) |
Oakwood Center | | Gretna, LA | | | 89,719 | | | | 21,105 | | | | 74,228 | | | | - | | | | 1,925 | | | | 21,105 | | | | 76,153 | | | | 97,258 | | | | 5,556 | | | | November, 2010 | | | | (d | ) |
Oakwood Mall | | Eau Claire, WI | | | 76,457 | | | | 13,786 | | | | 92,114 | | | | - | | | | 603 | | | | 13,786 | | | | 92,717 | | | | 106,503 | | | | 7,759 | | | | November, 2010 | | | | (d | ) |
Oglethorpe Mall | | Savannah, GA | | | 128,316 | | | | 27,075 | | | | 157,100 | | | | - | | | | 411 | | | | 27,075 | | | | 157,511 | | | | 184,586 | | | | 13,143 | | | | November, 2010 | | | | (d | ) |
2015
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Acquisition Cost(b) | | Costs Capitalized Subsequent to Acquisition | | Gross Amounts at Which Carried at Close of Period(c) | | | | | | Life Upon Which Latest Statement of Operation is Computed |
| Name of Center | | Location | | Encumbrances(a) | | Land | | Buildings and Improvements | | Land | | Buildings and Improvements | | Land | | Buildings and Improvements | | Total | | Accumulated Depreciation (d) | | Date Acquired | |
| Apache Mall | | Rochester, MN | | 94,375 |
| | 17,738 |
| | 116,663 |
| | 8,043 |
| | 11,687 |
| | 25,781 |
| | 128,350 |
| | 154,131 |
| | 20,421 |
| | November, 2010 | | (d) |
| Augusta Mall | | Augusta, GA | | 170,000 |
| | 25,450 |
| | 137,376 |
| | — |
| | 7,947 |
| | 25,450 |
| | 145,323 |
| | 170,773 |
| | 27,471 |
| | November, 2010 | | (d) |
| Baybrook Mall | | Friendswood, TX | | 259,173 |
| | 76,527 |
| | 288,241 |
| | (1,091 | ) | | 5,642 |
| | 75,436 |
| | 293,883 |
| | 369,319 |
| | 42,849 |
| | November, 2010 | | (d) |
| Beachwood Place | | Beachwood, OH | | 220,000 |
| | 59,156 |
| | 196,205 |
| | — |
| | 2,576 |
| | 59,156 |
| | 198,781 |
| | 257,937 |
| | 28,365 |
| | November, 2010 | | (d) |
| Bellis Fair | | Bellingham, WA | | 88,253 |
| | 14,122 |
| | 102,033 |
| | — |
| | 26,787 |
| | 14,122 |
| | 128,820 |
| | 142,942 |
| | 19,030 |
| | November, 2010 | | (d) |
| Boise Towne Square | | Boise, ID | | 150,237 |
| | 44,182 |
| | 163,118 |
| | — |
| | 7,501 |
| | 44,182 |
| | 170,619 |
| | 214,801 |
| | 26,171 |
| | November, 2010 | | (d) |
| Brass Mill Center | | Waterbury, CT | | 94,492 |
| | 31,496 |
| | 99,107 |
| | — |
| | 4,424 |
| | 31,496 |
| | 103,531 |
| | 135,027 |
| | 19,877 |
| | November, 2010 | | (d) |
| Coastland Center | | Naples, FL | | 122,554 |
| | 24,470 |
| | 166,038 |
| | — |
| | 1,997 |
| | 24,470 |
| | 168,035 |
| | 192,505 |
| | 25,687 |
| | November, 2010 | | (d) |
| Columbia Mall | | Columbia, MO | | — |
| | 7,943 |
| | 107,969 |
| | (154 | ) | | (98 | ) | | 7,789 |
| | 107,871 |
| | 115,660 |
| | 15,143 |
| | November, 2010 | | (d) |
| Columbiana Centre | | Columbia, SC | | — |
| | 22,178 |
| | 125,061 |
| | — |
| | 180 |
| | 22,178 |
| | 125,241 |
| | 147,419 |
| | 20,504 |
| | November, 2010 | | (d) |
| Coral Ridge Mall | | Coralville, IA | | 112,686 |
| | 20,178 |
| | 134,515 |
| | 2,219 |
| | 13,366 |
| | 22,397 |
| | 147,881 |
| | 170,278 |
| | 23,026 |
| | November, 2010 | | (d) |
| Coronado Center | | Albuquerque, NM | | 193,705 |
| | 28,312 |
| | 153,526 |
| | 4,545 |
| | 44,736 |
| | 32,857 |
| | 198,262 |
| | 231,119 |
| | 30,026 |
| | November, 2010 | | (d) |
| Crossroads Center | | St. Cloud, MN | | 101,558 |
| | 15,499 |
| | 103,077 |
| | — |
| | 5,594 |
| | 15,499 |
| | 108,671 |
| | 124,170 |
| | 16,016 |
| | November, 2010 | | (d) |
| Cumberland Mall | | Atlanta, GA | | 160,000 |
| | 36,913 |
| | 138,795 |
| | — |
| | 9,577 |
| | 36,913 |
| | 148,372 |
| | 185,285 |
| | 25,374 |
| | November, 2010 | | (d) |
| Deerbrook Mall | | Humble, TX | | 143,437 |
| | 36,761 |
| | 133,448 |
| | — |
| | 1,100 |
| | 36,761 |
| | 134,548 |
| | 171,309 |
| | 21,222 |
| | November, 2010 | | (d) |
| Eastridge Mall | | Casper, WY | | — |
| | 5,484 |
| | 36,756 |
| | — |
| | 7,448 |
| | 5,484 |
| | 44,204 |
| | 49,688 |
| | 10,254 |
| | November, 2010 | | (d) |
| Fashion Place | | Murray, UT | | 226,730 |
| | 24,068 |
| | 232,456 |
| | 2,079 |
| | 55,446 |
| | 26,147 |
| | 287,902 |
| | 314,049 |
| | 40,017 |
| | November, 2010 | | (d) |
| Fashion Show | | Las Vegas, NV | | 839,206 |
| | 564,310 |
| | 627,327 |
| | 10,013 |
| | 121,050 |
| | 574,323 |
| | 748,377 |
| | 1,322,700 |
| | 98,061 |
| | November, 2010 | | (d) |
| Four Seasons Town Centre | | Greensboro, NC | | 79,402 |
| | 17,259 |
| | 126,570 |
| | — |
| | 4,205 |
| | 17,259 |
| | 130,775 |
| | 148,034 |
| | 27,175 |
| | November, 2010 | | (d) |
| Fox River Mall | | Appleton, WI | | 175,162 |
| | 42,259 |
| | 217,932 |
| | — |
| | 3,186 |
| | 42,259 |
| | 221,118 |
| | 263,377 |
| | 31,987 |
| | November, 2010 | | (d) |
| Glenbrook Square | | Fort Wayne, IN | | 162,000 |
| | 30,965 |
| | 147,002 |
| | 2,444 |
| | 15,619 |
| | 33,409 |
| | 162,621 |
| | 196,030 |
| | 24,386 |
| | November, 2010 | | (d) |
| Governor's Square | | Tallahassee, FL | | 70,587 |
| | 18,289 |
| | 123,088 |
| | — |
| | 10,365 |
| | 18,289 |
| | 133,453 |
| | 151,742 |
| | 30,776 |
| | November, 2010 | | (d) |
| Grand Teton Mall | | Idaho Falls, ID | | — |
| | 13,066 |
| | 59,658 |
| | (1,026 | ) | | (4,746 | ) | | 12,040 |
| | 54,912 |
| | 66,952 |
| | 9,282 |
| | November, 2010 | | (d) |
| Greenwood Mall | | Bowling Green, KY | | 63,000 |
| | 12,459 |
| | 85,370 |
| | (330 | ) | | 718 |
| | 12,129 |
| | 86,088 |
| | 98,217 |
| | 16,982 |
| | November, 2010 | | (d) |
| Hulen Mall | | Fort Worth, TX | | 125,308 |
| | 8,665 |
| | 112,252 |
| | — |
| | 16,380 |
| | 8,665 |
| | 128,632 |
| | 137,297 |
| | 18,899 |
| | November, 2010 | | (d) |
| Jordan Creek Town Center | | West Des Moines, IA | | 213,137 |
| | 54,663 |
| | 262,608 |
| | (226 | ) | | (533 | ) | | 54,437 |
| | 262,075 |
| | 316,512 |
| | 38,078 |
| | November, 2010 | | (d) |
| Lakeside Mall | | Sterling Heights, MI | | 145,989 |
| | 36,993 |
| | 130,460 |
| | — |
| | 4,107 |
| | 36,993 |
| | 134,567 |
| | 171,560 |
| | 22,592 |
| | November, 2010 | | (d) |
| Lynnhaven Mall | | Virginia Beach, VA | | 235,000 |
| | 54,628 |
| | 219,013 |
| | (90 | ) | | 32,829 |
| | 54,538 |
| | 251,842 |
| | 306,380 |
| | 36,444 |
| | November, 2010 | | (d) |
| Mall of Louisiana | | Baton Rouge, LA | | 209,186 |
| | 88,742 |
| | 319,097 |
| | — |
| | 4,885 |
| | 88,742 |
| | 323,982 |
| | 412,724 |
| | 44,681 |
| | November, 2010 | | (d) |
| Mall St. Matthews | | Louisville, KY | | 186,662 |
| | 42,014 |
| | 155,809 |
| | (5,981 | ) | | 12,104 |
| | 36,033 |
| | 167,913 |
| | 203,946 |
| | 25,348 |
| | November, 2010 | | (d) |
| Market Place Shopping Center | | Champaign, IL | | 113,425 |
| | 21,611 |
| | 111,515 |
| | — |
| | 25,772 |
| | 21,611 |
| | 137,287 |
| | 158,898 |
| | 19,417 |
| | November, 2010 | | (d) |
| Mayfair Mall | | Wauwatosa, WI | | — |
| | 84,473 |
| | 352,140 |
| | (1,950 | ) | | 38,268 |
| | 82,523 |
| | 390,408 |
| | 472,931 |
| | 50,830 |
| | November, 2010 | | (d) |
| Meadows Mall | | Las Vegas, NV | | 154,969 |
| | 30,275 |
| | 136,846 |
| | — |
| | 1,084 |
| | 30,275 |
| | 137,930 |
| | 168,205 |
| | 19,685 |
| | November, 2010 | | (d) |
| Mondawmin Mall | | Baltimore, MD | | 8,459 |
| | 19,707 |
| | 63,348 |
| | — |
| | 21,792 |
| | 19,707 |
| | 85,140 |
| | 104,847 |
| | 14,703 |
| | November, 2010 | | (d) |
| Newgate Mall | | Ogden, UT | | 58,000 |
| | 17,856 |
| | 70,318 |
| | — |
| | 7,727 |
| | 17,856 |
| | 78,045 |
| | 95,901 |
| | 21,741 |
| | November, 2010 | | (d) |
| North Point Mall | | Alpharetta, GA | | 250,000 |
| | 57,900 |
| | 228,517 |
| | — |
| | 10,597 |
| | 57,900 |
| | 239,114 |
| | 297,014 |
| | 39,171 |
| | November, 2010 | | (d) |
| North Star Mall | | San Antonio, TX | | 319,506 |
| | 91,135 |
| | 392,422 |
| | — |
| | 9,624 |
| | 91,135 |
| | 402,046 |
| | 493,181 |
| | 54,824 |
| | November, 2010 | | (d) |
GENERAL GROWTH PROPERTIES, INC.
SCHEDULE
III – III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31,
2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name of Center | | Location | | Encumbrances (a) | | | Acquistion Cost (b) | | | Costs Capitalized
Subsequent to
Acquisition | | | Gross Amounts at Which
Carried at Close of Period (c) | | | Date
Acquired | | | Life Upon
Which
Latest
Statement
of
Operation
is
Computed | |
| | | | Land | | | Buildings
and
Improvements | | | Land | | | Buildings
and
Improvements | | | Land | | | Buildings
and
Improvements | | | Total | | | Accumulated
Depreciation (d) | | | |
| | | | | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Oxmoor Center | | Louisville, KY | | | 93,139 | | | | - | | | | 117,814 | | | | - | | | | 1,981 | | | | - | | | | 119,795 | | | | 119,795 | | | | 8,255 | | | | November, 2010 | | | | (d | ) |
Paramus Park | | Paramus, NJ | | | 95,106 | | | | 31,320 | | | | 102,054 | | | | - | | | | 3,269 | | | | 31,320 | | | | 105,323 | | | | 136,643 | | | | 9,886 | | | | November, 2010 | | | | (d | ) |
Park City Center | | Lancaster, PA | | | 193,116 | | | | 42,451 | | | | 195,409 | | | | - | | | | 1,299 | | | | 42,451 | | | | 196,708 | | | | 239,159 | | | | 14,105 | | | | November, 2010 | | | | (d | ) |
Park Place | | Tucson, AZ | | | 195,705 | | | | 61,907 | | | | 236,019 | | | | - | | | | 443 | | | | 61,907 | | | | 236,462 | | | | 298,369 | | | | 15,653 | | | | November, 2010 | | | | (d | ) |
Peachtree Mall | | Columbus, GA | | | 81,735 | | | | 13,855 | | | | 92,143 | | | | - | | | | 1,459 | | | | 13,855 | | | | 93,602 | | | | 107,457 | | | | 9,619 | | | | November, 2010 | | | | (d | ) |
Pecanland Mall | | Monroe, LA | | | 50,075 | | | | 12,943 | | | | 73,231 | | | | - | | | | 6,886 | | | | 12,943 | | | | 80,117 | | | | 93,060 | | | | 7,323 | | | | November, 2010 | | | | (d | ) |
Pembroke Lakes Mall | | Pembroke Pines, FL | | | 119,204 | | | | 64,883 | | | | 254,910 | | | | - | | | | (943 | ) | | | 64,883 | | | | 253,967 | | | | 318,850 | | | | 29,214 | | | | November, 2010 | | | | (d | ) |
Pine Ridge Mall | | Pocatello, ID | | | 20,942 | | | | 7,534 | | | | 5,013 | | | | - | | | | 4,102 | | | | 7,534 | | | | 9,115 | | | | 16,649 | | | | 1,023 | | | | November, 2010 | | | | (d | ) |
Pioneer Place | | Portland, OR | | | 105,260 | | | | - | | | | 97,096 | | | | - | | | | 1,288 | | | | - | | | | 98,384 | | | | 98,384 | | | | 5,372 | | | | November, 2010 | | | | (d | ) |
Prince Kuhio Plaza | | Hilo, HI | | | 33,410 | | | | - | | | | 52,373 | | | | - | | | | 1,731 | | | | - | | | | 54,104 | | | | 54,104 | | | | 4,898 | | | | November, 2010 | | | | (d | ) |
Providence Place | | Providence, RI | | | 415,219 | | | | - | | | | 400,893 | | | | - | | | | (390 | ) | | | - | | | | 400,503 | | | | 400,503 | | | | 25,061 | | | | November, 2010 | | | | (d | ) |
Provo Towne Centre | | Provo, UT | | | 52,207 | | | | 17,027 | | | | 75,871 | | | | 943 | | | | (9,229 | ) | | | 17,970 | | | | 66,642 | | | | 84,612 | | | | 6,254 | | | | November, 2010 | | | | (d | ) |
Red Cliffs Mall | | St. George, UT | | | 19,904 | | | | 6,811 | | | | 33,930 | | | | - | | | | 793 | | | | 6,811 | | | | 34,723 | | | | 41,534 | | | | 3,409 | | | | November, 2010 | | | | (d | ) |
Ridgedale Center | | Minnetonka, MN | | | 158,786 | | | | 39,495 | | | | 151,090 | | | | 1,108 | | | | 891 | | | | 40,603 | | | | 151,981 | | | | 192,584 | | | | 11,001 | | | | November, 2010 | | | | (d | ) |
River Hills Mall | | Mankato, MN | | | 76,151 | | | | 16,207 | | | | 85,608 | | | | - | | | | 1,067 | | | | 16,207 | | | | 86,675 | | | | 102,882 | | | | 6,861 | | | | November, 2010 | | | | (d | ) |
Rivertown Crossings | | Grandville, MI | | | 165,652 | | | | 47,790 | | | | 181,770 | | | | - | | | | 1,699 | | | | 47,790 | | | | 183,469 | | | | 231,259 | | | | 13,441 | | | | November, 2010 | | | | (d | ) |
Rogue Valley Mall | | Medford, OR | | | 55,000 | | | | 9,042 | | | | 61,558 | | | | - | | | | 1,803 | | | | 9,042 | | | | 63,361 | | | | 72,403 | | | | 4,379 | | | | November, 2010 | | | | (d | ) |
Sooner Mall | | Norman, OK | | | 57,113 | | | | 9,902 | | | | 69,570 | | | | - | | | | 2,831 | | | | 9,902 | | | | 72,401 | | | | 82,303 | | | | 6,397 | | | | November, 2010 | | | | (d | ) |
Southwest Plaza | | Littleton, CO | | | 99,680 | | | | 19,024 | | | | 76,453 | | | | (16 | ) | | | 592 | | | | 19,008 | | | | 77,045 | | | | 96,053 | | | | 8,342 | | | | November, 2010 | | | | (d | ) |
Spokane Valley Mall | | Spokane, WA | | | 62,511 | | | | 16,817 | | | | 100,209 | | | | - | | | | (8,274 | ) | | | 16,817 | | | | 91,935 | | | | 108,752 | | | | 8,100 | | | | November, 2010 | | | | (d | ) |
Staten Island Mall | | Staten Island, NY | | | 277,264 | | | | 102,227 | | | | 375,612 | | | | - | | | | (1,693 | ) | | | 102,227 | | | | 373,919 | | | | 476,146 | | | | 30,658 | | | | November, 2010 | | | | (d | ) |
Stonestown Galleria | | San Francisco, CA | | | 212,553 | | | | 65,962 | | | | 203,043 | | | | - | | | | 1,187 | | | | 65,962 | | | | 204,230 | | | | 270,192 | | | | 14,967 | | | | November, 2010 | | | | (d | ) |
The Crossroads | | Portage, MI | | | - | | | | 20,261 | | | | 95,463 | | | | - | | | | (1,320 | ) | | | 20,261 | | | | 94,143 | | | | 114,404 | | | | 8,314 | | | | November, 2010 | | | | (d | ) |
The Gallery At Harborplace | | Baltimore, MD | | | 92,027 | | | | 15,930 | | | | 112,117 | | | | - | | | | 2,621 | | | | 15,930 | | | | 114,738 | | | | 130,668 | | | | 8,885 | | | | November, 2010 | | | | (d | ) |
The Grand Canal Shoppes | | Las Vegas, NV | | | 468,750 | | | | 49,785 | | | | 716,625 | | | | - | | | | (3,821 | ) | | | 49,785 | | | | 712,804 | | | | 762,589 | | | | 44,689 | | | | November, 2010 | | | | (d | ) |
The Maine Mall | | South Portland, ME | | | 196,940 | | | | 36,205 | | | | 238,067 | | | | - | | | | 893 | | | | 36,205 | | | | 238,960 | | | | 275,165 | | | | 18,553 | | | | November, 2010 | | | | (d | ) |
The Mall In Columbia | | Columbia, MD | | | 350,000 | | | | 124,540 | | | | 479,171 | | | | - | | | | 38 | | | | 124,540 | | | | 479,209 | | | | 603,749 | | | | 29,930 | | | | November, 2010 | | | | (d | ) |
The Oaks Mall | | Gainesville, FL | | | 138,654 | | | | 21,954 | | | | 173,353 | | | | - | | | | (1,864 | ) | | | 21,954 | | | | 171,489 | | | | 193,443 | | | | 7,066 | | | | April, 2012 | | | | (d | ) |
The Parks at Arlington | | Arlington, TX | | | 260,276 | | | | 19,807 | | | | 299,708 | | | | 49 | | | | 8,970 | | | | 19,856 | | | | 308,678 | | | | 328,534 | | | | 19,908 | | | | November, 2010 | | | | (d | ) |
The Shoppes at Buckland | | Manchester, CT | | | 128,714 | | | | 35,180 | | | | 146,474 | | | | - | | | | (612 | ) | | | 35,180 | | | | 145,862 | | | | 181,042 | | | | 12,740 | | | | November, 2010 | | | | (d | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name of Center | | Location | | Encumbrances (a) | | | Acquistion Cost (b) | | | Costs Capitalized
Subsequent to
Acquisition | | | Gross Amounts at Which
Carried at Close of Period (c) | | | Date
Acquired | | | Life Upon
Which
Latest
Statement
of
Operation
is
Computed | |
| | | | Land | | | Buildings
and
Improvements | | | Land | | | Buildings
and
Improvements | | | Land | | | Buildings
and
Improvements | | | Total | | | Accumulated
Depreciation (d) | | | |
| | | | | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The Shoppes at the Palazzo | | Las Vegas, NV | | | 156,250 | | | | - | | | | 290,826 | | | | - | | | | (709 | ) | | | - | | | | 290,117 | | | | 290,117 | | | | 17,718 | | | | November, 2010 | | | | (d | ) |
The Shops At Fallen Timbers | | Maumee, OH | | | 44,034 | | | | 3,785 | | | | 31,771 | | | | (16 | ) | | | 1,647 | | | | 3,769 | | | | 33,418 | | | | 37,187 | | | | 3,491 | | | | November, 2010 | | | | (d | ) |
The Shops At La Cantera | | San Antonio, TX | | | 166,752 | | | | 80,016 | | | | 350,737 | | | | - | | | | 20,473 | | | | 80,016 | | | | 371,210 | | | | 451,226 | | | | 26,477 | | | | November, 2010 | | | | (d | ) |
The Streets At SouthPoint | | Durham, NC | | | 260,000 | | | | 66,045 | | | | 242,189 | | | | - | | | | (732 | ) | | | 66,045 | | | | 241,457 | | | | 307,502 | | | | 16,945 | | | | November, 2010 | | | | (d | ) |
The Woodlands Mall | | The Woodlands,
TX | | | 263,992 | | | | 84,889 | | | | 349,315 | | | | 2,858 | | | | 11,075 | | | | 87,747 | | | | 360,390 | | | | 448,137 | | | | 23,475 | | | | November, 2010 | | | | (d | ) |
Town East Mall | | Mesquite, TX | | | 160,270 | | | | 9,928 | | | | 168,555 | | | | - | | | | 2,699 | | | | 9,928 | | | | 171,254 | | | | 181,182 | | | | 12,495 | | | | November, 2010 | | | | (d | ) |
Tucson Mall | | Tucson, AZ | | | 246,000 | | | | 2,071 | | | | 193,815 | | | | - | | | | 95,521 | | | | 2,071 | | | | 289,336 | | | | 291,407 | | | | 33,284 | | | | November, 2010 | | | | (d | ) |
Tysons Galleria | | McLean, VA | | | 255,202 | | | | 90,317 | | | | 351,005 | | | | - | | | | 1,852 | | | | 90,317 | | | | 352,857 | | | | 443,174 | | | | 21,762 | | | | November, 2010 | | | | (d | ) |
Valley Plaza Mall | | Bakersfield, CA | | | 83,210 | | | | 38,964 | | | | 211,930 | | | | - | | | | (1,661 | ) | | | 38,964 | | | | 210,269 | | | | 249,233 | | | | 15,538 | | | | November, 2010 | | | | (d | ) |
Visalia Mall | | Visalia, CA | | | 74,000 | | | | 11,912 | | | | 80,185 | | | | - | | | | 436 | | | | 11,912 | | | | 80,621 | | | | 92,533 | | | | 5,611 | | | | November, 2010 | | | | (d | ) |
Westlake Center | | Seattle, WA | | | 4,380 | | | | 19,055 | | | | 129,295 | | | | (14,819 | ) | | | (94,148 | ) | | | 4,236 | | | | 35,147 | | | | 39,383 | | | | 2,445 | | | | November, 2010 | | | | (d | ) |
Westroads Mall | | Omaha, NE | | | 156,609 | | | | 32,776 | | | | 184,253 | | | | - | | | | 904 | | | | 32,776 | | | | 185,157 | | | | 217,933 | | | | 6,217 | | | | April, 2012 | | | | (d | ) |
White Marsh Mall | | Baltimore, MD | | | 176,765 | | | | 43,880 | | | | 177,194 | | | | 4,125 | | | | 2,824 | | | | 48,005 | | | | 180,018 | | | | 228,023 | | | | 13,964 | | | | November, 2010 | | | | (d | ) |
Willowbrook | | Wayne, NJ | | | 156,963 | | | | 110,660 | | | | 419,822 | | | | - | | | | 686 | | | | 110,660 | | | | 420,508 | | | | 531,168 | | | | 29,701 | | | | November, 2010 | | | | (d | ) |
Woodbridge Center | | Woodbridge, NJ | | | 187,935 | | | | 67,825 | | | | 242,744 | | | | - | | | | 10,588 | | | | 67,825 | | | | 253,332 | | | | 321,157 | | | | 17,748 | | | | November, 2010 | | | | (d | ) |
Office, other and construction in progress (e) | | | | | 1,262,674 | | | | 117,365 | | | | 492,975 | | | | (161 | ) | | | 404,604 | | | | 117,204 | | | | 897,579 | | | | 1,014,783 | | | | 56,324 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | $ | 16,173,066 | | | $ | 4,282,264 | | | $ | 18,554,241 | | | $ | (3,793 | ) | | $ | 629,146 | | | $ | 4,278,471 | | | $ | 19,183,387 | | | $ | 23,461,858 | | | $ | 1,440,301 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Acquisition Cost(b) | | Costs Capitalized Subsequent to Acquisition | | Gross Amounts at Which Carried at Close of Period(c) | | | | | | Life Upon Which Latest Statement of Operation is Computed |
| Name of Center | | Location | | Encumbrances(a) | | Land | | Buildings and Improvements | | Land | | Buildings and Improvements | | Land | | Buildings and Improvements | | Total | | Accumulated Depreciation (d) | | Date Acquired | |
| Northridge Fashion Center | | Northridge, CA | | 233,291 |
| | 66,774 |
| | 238,023 |
| | — |
| | 33,744 |
| | 66,774 |
| | 271,767 |
| | 338,541 |
| | 39,135 |
| | November, 2010 | | (d) |
| NorthTown Mall | | Spokane, WA | | — |
| | 12,310 |
| | 108,857 |
| | — |
| | 24,921 |
| | 12,310 |
| | 133,778 |
| | 146,088 |
| | 16,738 |
| | November, 2010 | | (d) |
| Oak View Mall | | Omaha, NE | | 79,087 |
| | 20,390 |
| | 107,216 |
| | — |
| | (1,012 | ) | | 20,390 |
| | 106,204 |
| | 126,594 |
| | 14,439 |
| | November, 2010 | | (d) |
| Oakwood Center | | Gretna, LA | | — |
| | 21,105 |
| | 74,228 |
| | — |
| | 24,926 |
| | 21,105 |
| | 99,154 |
| | 120,259 |
| | 15,860 |
| | November, 2010 | | (d) |
| Oakwood Mall | | Eau Claire, WI | | — |
| | 13,786 |
| | 92,114 |
| | — |
| | 4,651 |
| | 13,786 |
| | 96,765 |
| | 110,551 |
| | 15,155 |
| | November, 2010 | | (d) |
| Oglethorpe Mall | | Savannah, GA | | 150,000 |
| | 27,075 |
| | 157,100 |
| | — |
| | 13 |
| | 27,075 |
| | 157,113 |
| | 184,188 |
| | 22,212 |
| | November, 2010 | | (d) |
| Oxmoor Center | | Louisville, KY | | 88,882 |
| | — |
| | 117,814 |
| | — |
| | 11,298 |
| | — |
| | 129,112 |
| | 129,112 |
| | 19,034 |
| | November, 2010 | | (d) |
| Paramus Park | | Paramus, NJ | | 120,000 |
| | 31,320 |
| | 102,054 |
| | — |
| | 5,870 |
| | 31,320 |
| | 107,924 |
| | 139,244 |
| | 18,043 |
| | November, 2010 | | (d) |
| Park City Center | | Lancaster, PA | | 184,242 |
| | 42,451 |
| | 195,409 |
| | — |
| | 2,878 |
| | 42,451 |
| | 198,287 |
| | 240,738 |
| | 26,758 |
| | November, 2010 | | (d) |
| Park Place | | Tucson, AZ | | 186,399 |
| | 61,907 |
| | 236,019 |
| | — |
| | 5,633 |
| | 61,907 |
| | 241,652 |
| | 303,559 |
| | 31,982 |
| | November, 2010 | | (d) |
| Peachtree Mall | | Columbus, GA | | 88,000 |
| | 13,855 |
| | 92,143 |
| | — |
| | 2,770 |
| | 13,855 |
| | 94,913 |
| | 108,768 |
| | 14,028 |
| | November, 2010 | | (d) |
| Pecanland Mall | | Monroe, LA | | 88,840 |
| | 12,943 |
| | 73,231 |
| | — |
| | 7,746 |
| | 12,943 |
| | 80,977 |
| | 93,920 |
| | 14,348 |
| | November, 2010 | | (d) |
| Pembroke Lakes Mall | | Pembroke Pines, FL | | 260,000 |
| | 64,883 |
| | 254,910 |
| | — |
| | (11,467 | ) | | 64,883 |
| | 243,443 |
| | 308,326 |
| | 34,498 |
| | November, 2010 | | (d) |
| Pioneer Place | | Portland, OR | | — |
| | — |
| | 97,096 |
| | — |
| | 15,204 |
| | — |
| | 112,300 |
| | 112,300 |
| | 13,748 |
| | November, 2010 | | (d) |
| Prince Kuhio Plaza | | Hilo, HI | | 43,132 |
| | — |
| | 52,373 |
| | — |
| | 13,035 |
| | — |
| | 65,408 |
| | 65,408 |
| | 13,893 |
| | November, 2010 | | (d) |
| Providence Place | | Providence, RI | | 394,121 |
| | — |
| | 400,893 |
| | — |
| | 11,876 |
| | — |
| | 412,769 |
| | 412,769 |
| | 56,845 |
| | November, 2010 | | (d) |
| Quail Springs Mall | | Oklahoma City, OK | | 67,120 |
| | 40,523 |
| | 149,571 |
| | — |
| | 7,815 |
| | 40,523 |
| | 157,386 |
| | 197,909 |
| | 15,920 |
| | June, 2013 | | (d) |
| Red Cliffs Mall | | St. George, UT | | — |
| | 6,811 |
| | 33,930 |
| | — |
| | 1,718 |
| | 6,811 |
| | 35,648 |
| | 42,459 |
| | 9,103 |
| | November, 2010 | | (d) |
| Ridgedale Center | | Minnetonka, MN | | — |
| | 39,495 |
| | 151,090 |
| | (4,089 | ) | | 23,954 |
| | 35,406 |
| | 175,044 |
| | 210,450 |
| | 21,561 |
| | November, 2010 | | (d) |
| River Hills Mall | | Mankato, MN | | — |
| | 16,207 |
| | 85,608 |
| | — |
| | 4,582 |
| | 16,207 |
| | 90,190 |
| | 106,397 |
| | 13,653 |
| | November, 2010 | | (d) |
| Rivertown Crossings | | Grandville, MI | | 158,257 |
| | 47,790 |
| | 181,770 |
| | — |
| | 2,561 |
| | 47,790 |
| | 184,331 |
| | 232,121 |
| | 26,726 |
| | November, 2010 | | (d) |
| Rogue Valley Mall | | Medford, OR | | 54,862 |
| | 9,042 |
| | 61,558 |
| | — |
| | 2,804 |
| | 9,042 |
| | 64,362 |
| | 73,404 |
| | 8,539 |
| | November, 2010 | | (d) |
| Sooner Mall | | Norman, OK | | — |
| | 9,902 |
| | 69,570 |
| | — |
| | 2,168 |
| | 9,902 |
| | 71,738 |
| | 81,640 |
| | 11,035 |
| | November, 2010 | | (d) |
| Spokane Valley Mall | | Spokane, WA | | 59,326 |
| | 16,817 |
| | 100,209 |
| | — |
| | (9,727 | ) | | 16,817 |
| | 90,482 |
| | 107,299 |
| | 15,733 |
| | November, 2010 | | (d) |
| Staten Island Mall | | Staten Island, NY | | 260,964 |
| | 102,227 |
| | 375,612 |
| | — |
| | (4,511 | ) | | 102,227 |
| | 371,101 |
| | 473,328 |
| | 53,294 |
| | November, 2010 | | (d) |
| Stonestown Galleria | | San Francisco, CA | | 180,000 |
| | 65,962 |
| | 203,043 |
| | (13,161 | ) | | (818 | ) | | 52,801 |
| | 202,225 |
| | 255,026 |
| | 27,628 |
| | November, 2010 | | (d) |
| The Crossroads | | Portage, MI | | 96,782 |
| | 20,261 |
| | 95,463 |
| | 1,110 |
| | 1,713 |
| | 21,371 |
| | 97,176 |
| | 118,547 |
| | 13,835 |
| | November, 2010 | | (d) |
| The Gallery At Harborplace | | Baltimore, MD | | 83,076 |
| | 15,930 |
| | 112,117 |
| | — |
| | 6,831 |
| | 15,930 |
| | 118,948 |
| | 134,878 |
| | 21,049 |
| | November, 2010 | | (d) |
| The Maine Mall | | South Portland, ME | | 235,000 |
| | 36,205 |
| | 238,067 |
| | — |
| | 9,067 |
| | 36,205 |
| | 247,134 |
| | 283,339 |
| | 34,760 |
| | November, 2010 | | (d) |
| The Mall In Columbia | | Columbia, MD | | 348,469 |
| | 124,540 |
| | 479,171 |
| | — |
| | 24,582 |
| | 124,540 |
| | 503,753 |
| | 628,293 |
| | 67,070 |
| | November, 2010 | | (d) |
| The Oaks Mall | | Gainesville, FL | | 131,895 |
| | 21,954 |
| | 173,353 |
| | — |
| | (1,302 | ) | | 21,954 |
| | 172,051 |
| | 194,005 |
| | 21,440 |
| | April, 2012 | | (d) |
| The Parks at Arlington | | Arlington, TX | | 256,711 |
| | 19,807 |
| | 299,708 |
| | 49 |
| | 19,816 |
| | 19,856 |
| | 319,524 |
| | 339,380 |
| | 47,221 |
| | November, 2010 | | (d) |
| The Shoppes at Buckland Hills | | Manchester, CT | | 122,931 |
| | 35,180 |
| | 146,474 |
| | — |
| | 6,832 |
| | 35,180 |
| | 153,306 |
| | 188,486 |
| | 20,983 |
| | November, 2010 | | (d) |
| The Shops At Fallen Timbers | | Maumee, OH | | — |
| | 3,785 |
| | 31,771 |
| | (535 | ) | | (2,029 | ) | | 3,250 |
| | 29,742 |
| | 32,992 |
| | 9,271 |
| | November, 2010 | | (d) |
| The Shops At La Cantera | | San Antonio, TX | | 350,000 |
| | 80,016 |
| | 350,737 |
| | — |
| | 24,868 |
| | 80,016 |
| | 375,605 |
| | 455,621 |
| | 61,864 |
| | November, 2010 | | (d) |
| The Streets At SouthPoint | | Durham, NC | | 253,105 |
| | 66,045 |
| | 242,189 |
| | — |
| | (143 | ) | | 66,045 |
| | 242,046 |
| | 308,091 |
| | 36,072 |
| | November, 2010 | | (d) |
| The Woodlands Mall | | The Woodlands, TX | | 250,526 |
| | 84,889 |
| | 349,315 |
| | 2,315 |
| | 18,940 |
| | 87,204 |
| | 368,255 |
| | 455,459 |
| | 51,766 |
| | November, 2010 | | (d) |
GENERAL GROWTH PROPERTIES, INC.
NOTES TO
SCHEDULE
IIIIII—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
DECEMBER 31, 2015
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Acquisition Cost(b) | | Costs Capitalized Subsequent to Acquisition | | Gross Amounts at Which Carried at Close of Period(c) | | | | | | Life Upon Which Latest Statement of Operation is Computed |
| Name of Center | | Location | | Encumbrances(a) | | Land | | Buildings and Improvements | | Land | | Buildings and Improvements | | Land | | Buildings and Improvements | | Total | | Accumulated Depreciation (d) | | Date Acquired | |
| Town East Mall | | Mesquite, TX | | 160,270 |
| | 9,928 |
| | 168,555 |
| | — |
| | 5,271 |
| | 9,928 |
| | 173,826 |
| | 183,754 |
| | 25,185 |
| | November, 2010 | | (d) |
| Tucson Mall | | Tucson, AZ | | 246,000 |
| | 2,071 |
| | 193,815 |
| | — |
| | 77,096 |
| | 2,071 |
| | 270,911 |
| | 272,982 |
| | 37,862 |
| | November, 2010 | | (d) |
| Tysons Galleria | | McLean, VA | | 312,326 |
| | 90,317 |
| | 351,005 |
| | (105 | ) | | 9,396 |
| | 90,212 |
| | 360,401 |
| | 450,613 |
| | 45,862 |
| | November, 2010 | | (d) |
| Valley Plaza Mall | | Bakersfield, CA | | 240,000 |
| | 38,964 |
| | 211,930 |
| | — |
| | 621 |
| | 38,964 |
| | 212,551 |
| | 251,515 |
| | 31,018 |
| | November, 2010 | | (d) |
| Visalia Mall | | Visalia, CA | | 74,000 |
| | 11,912 |
| | 80,185 |
| | — |
| | 1,616 |
| | 11,912 |
| | 81,801 |
| | 93,713 |
| | 11,537 |
| | November, 2010 | | (d) |
| Westlake Center | | Seattle, WA | | 46,445 |
| | 19,055 |
| | 129,295 |
| | (14,819 | ) | | (79,212 | ) | | 4,236 |
| | 50,083 |
| | 54,319 |
| | 8,327 |
| | November, 2010 | | (d) |
| Westroads Mall | | Omaha, NE | | 148,975 |
| | 32,776 |
| | 184,253 |
| | — |
| | 27,782 |
| | 32,776 |
| | 212,035 |
| | 244,811 |
| | 26,425 |
| | April, 2012 | | (d) |
| White Marsh Mall | | Baltimore, MD | | 190,000 |
| | 43,880 |
| | 177,194 |
| | 4,125 |
| | 5,839 |
| | 48,005 |
| | 183,033 |
| | 231,038 |
| | 26,402 |
| | November, 2010 | | (d) |
| Willowbrook | | Wayne, NJ | | 360,000 |
| | 110,660 |
| | 419,822 |
| | — |
| | 9,880 |
| | 110,660 |
| | 429,702 |
| | 540,362 |
| | 61,320 |
| | November, 2010 | | (d) |
| Woodbridge Center | | Woodbridge, NJ | | 250,000 |
| | 67,825 |
| | 242,744 |
| | — |
| | 25,688 |
| | 67,825 |
| | 268,432 |
| | 336,257 |
| | 59,888 |
| | November, 2010 | | (d) |
| Office, other and construction in progress (e)(f) | | 2,023,128 |
| | 112,034 |
| | 472,689 |
| | 13,614 |
| | 434,996 |
| | 125,648 |
| | 907,685 |
| | 1,033,333 |
| | 106,547 |
| | | | |
| | | Total | | $ | 14,422,360 |
| | $ | 3,589,355 |
| | $ | 15,336,969 |
| | $ | 6,999 |
| | $ | 1,351,723 |
| | $ | 3,596,354 |
| | $ | 16,688,692 |
| | $ | 20,285,046 |
| | $ | 2,452,127 |
| | | | |
(a)See description of mortgages, notes and other loans payable in Note 7 of Notes to Consolidated Financial Statements.
(b)Acquisition for individual properties represents historical cost at the end of the month acquired.
(c)The aggregate cost of land, buildings and improvements for federal income tax purposes is approximately $17 billion.
(d)Depreciation is computed based upon the following estimated useful lives:
(a) | See description of mortgages, notes and other loans payable in Note 8 of Notes to Consolidated Financial Statements. |
(b) | Acquisition cost for individual properties represents historical cost at the end of the month acquired. |
(c) | The aggregate cost of land, buildings and improvements for federal income tax purposes is approximately $16.7 billion (unaudited). |
(d) | Depreciation is computed based upon the following estimated useful lives: |
(e) | Office, other and construction in progress includes stand-alone offices, strip centers and regional malls transferred to a special servicer, as well as, construction in progress for all properties which is recorded in land and building and improvements. |
| | |
| | | Years |
Buildings and improvements | | 10 - 45 |
Equipment and fixtures | | 5-103 - 20 |
Tenant improvements | | Shorter of useful life or applicable lease term |
(e)Office and other retail properties.
(f)Includes $1.4 billion cross-collateralized corporate loan.
GENERAL GROWTH PROPERTIES, INC.
NOTES TO SCHEDULE III
(Dollars in thousands)
Reconciliation of Real Estate
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
Balance at beginning of period | | $ | 24,597,501 | | | $ | 25,140,166 | | | $ | 28,350,102 | |
Acquisition accounting adjustments and HHC distribution | | | - | | | | - | | | | (3,104,518 | ) |
Additions | | | 1,034,439 | | | | 383,001 | | | | 12,518 | |
Impairments | | | (131,156 | ) | | | (63,910 | ) | | | - | |
Dispositions and write-offs | | | (2,038,926 | ) | | | (861,756 | ) | | | (117,936 | ) |
| | | | | | | | | | | | |
Balance at end of period | | $ | 23,461,858 | | | $ | 24,597,501 | | | $ | 25,140,166 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 |
| (In thousands) | | | | | | |
| Balance at beginning of period | | $ | 22,977,310 |
| | $ | 22,998,275 |
| | $ | 23,461,858 |
|
| Additions | | 765,960 |
| | 703,227 |
| | 1,049,417 |
|
| Impairments | | — |
| | (5,278 | ) | | (18,361 | ) |
| Dispositions and write-offs | | (3,458,224 | ) | | (718,914 | ) | | (1,494,639 | ) |
| Balance at end of period | | $ | 20,285,046 |
| | $ | 22,977,310 |
| | $ | 22,998,275 |
|
Reconciliation of Accumulated Depreciation
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
Balance at beginning of period | | $ | 974,185 | | | $ | 129,794 | | | $ | 4,494,297 | |
Depreciation expense | | | 775,768 | | | | 942,661 | | | | 135,003 | |
Dispositions and write-offs | | | (309,652 | ) | | | (98,270 | ) | | | (4,499,506 | ) |
| | | | | | | | | | | | |
Balance at end of period | | $ | 1,440,301 | | | $ | 974,185 | | | $ | 129,794 | |
| | | | | | | | | | | | |
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF BROOKFIELD
PROPERTY PARTNERS L.P.
PF-1
Unaudited Pro Forma Financial Statements
BROOKFIELD PROPERTY PARTNERS L.P.
PF-2
BROOKFIELD PROPERTY PARTNERS L.P.
Unaudited Pro forma Financial Statements
The following unaudited pro forma financial statements of Brookfield Property Partners L.P. (the “company”) adjust the company’s balance sheet as at December 31, 2012 and statements of income for the year ended December 31, 2012 to give effect to the acquisition of the Business (as defined below) by the company from Brookfield Asset Management Inc. (“Brookfield” or the “parent company”), the spin-off (as defined below) and related transactions as if such transactions occurred as of December 31, 2012, in the case of the unaudited pro forma balance sheet, or as January 1, 2012, in the case of the unaudited pro forma statements of income. Prior to the acquisition, Brookfield intends to effect a reorganization (the “reorganization”) so that an interest in its commercial property operations (the “Business”), including its office, retail, multi-family and industrial, and opportunistic assets, is acquired by holding entities that will be owned by Brookfield Property L.P. (the “property partnership”).
Brookfield intends to transfer a portion of the limited partnership interests it holds in the company to holders of its Class A limited voting shares and Class B limited voting shares through a special dividend (the “spin-off”). Immediately following the reorganization and spin-off, the company’s sole direct investment will be an interest in the Business through the company’s ownership of limited partnership interests in the property partnership. The company will control the strategic, financial and operating policy decisions of the property partnership pursuant to a voting agreement to be entered into between the company and Brookfield and, through its ownership of the limited partnership units of the property partnership, benefit from the property partnership’s activities. Wholly-owned subsidiaries of Brookfield will serve as the general partners for both the company and the property partnership.
The unaudited pro forma financial statements reflect adjustments for the reorganization, the spin-off, the following related transactions and resulting tax effects:
Acquisition of interests in Brookfield’s Australian properties through participating loan notes
Exclusion of certain assets within Brookfield’s Australian operations which are not being transferred to the company as part of the reorganization
Issuance of $1.25 billion of Capital Securities to Brookfield as partial consideration for the Business acquired by the company
|
| | | | | | | | | | | | |
| | | 2015 | | 2014 | | 2013 |
| (In thousands) | | | | | | |
| Balance at beginning of period | | $ | 2,280,845 |
| | $ | 1,884,861 |
| | $ | 1,440,301 |
|
| Depreciation expense | | 607,192 |
| | 685,006 |
| | 737,565 |
|
| Dispositions and write-offs | | (435,910 | ) | | (289,022 | ) | | (293,005 | ) |
| Balance at end of period | | $ | 2,452,127 |
| | $ | 2,280,845 |
| | $ | 1,884,861 |
|
Issuance of $25 million of Preferred Shares by certain holding entities
Issuance of partnership units by the company as partial consideration for the business acquired by the company
- F-119 -
Issuance of approximately 76 million units of the company in the spin-off based on the number of Class A limited voting shares and Class B limited voting shares of Brookfield as of December 31, 2012
Reorganization of the legal structure through which the Business is held, including the issuance of certain inter-company debt between the property partnership and the holding entities, resulting in changes in the effective tax rate and the tax basis of certain investments
Annual Management Fees of $50 million paid by the company to Brookfield pursuant to a Master Services Agreement
Exclusion of Brookfield’s 3% investment in Howard Hughes Corporation
The unaudited pro forma financial statements have been prepared based upon currently available information and assumptions deemed appropriate by management. The unaudited pro forma financial statements are provided for information purposes only and are not intended to represent, or be indicative of, the results that would have occurred had the transactions reflected in the pro forma adjustments been effected on the dates indicated.
The accounting for certain of the above transactions will require the determination of pro forma adjustments to give effect to the transactions on the dates indicated. The pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma financial information. Differences between these preliminary estimates and the final accounting for these transactions may occur and these differences could have a material impact on the accompanying unaudited pro forma financial statements. Further, integration costs, if any, that may be incurred upon consummation of the aforementioned transactions have been excluded from the unaudited pro forma statements of income.
All financial data in these unaudited pro forma financial statements is presented in U.S. dollars and has been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”).
PF-3
BROOKFIELD PROPERTY PARTNERS L.P.
Unaudited Pro forma Balance Sheet
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As at December 31, 2012 | | Brookfield Property
Partners
L.P.(1) | | | | | | Pro Forma Adjustments | | | Pro Forma
Brookfield
Property
Partners L.P. | |
| (US$ Millions) | | | Brookfield
Carve-out | | | Australian
Investments
4 (a) | | | Australian
Exclusions
4 (b) | | | Capital
Securities
4 (c) | | | Preferred
Shares
4 (d) | | | Equity
4 (e) | | | Tax Impact of
Reorganization
4 (f) | | | HHC
4 (h) | | | Total Pro
Forma
Adjustments | | |
| | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-current assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment properties | | $ | - | | | $ | 31,859 | | | $ | (740) | | | $ | (163) | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | (903) | | | $ | 30,956 | |
Equity accounted investments | | | - | | | | 8,110 | | | | (568) | | | | (3) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (571) | | | | 7,539 | |
Participating loan notes | | | - | | | | - | | | | 775 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 775 | | | | 775 | |
Other non-current assets | | | - | | | | 5,636 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (99) | | | | (99) | | | | 5,537 | |
Loans and notes receivable | | | - | | | | 246 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 246 | |
| | | | - | | | | 45,851 | | | | (533) | | | | (166) | | | | - | | | | - | | | | - | | | | - | | | | (99) | | | | (798) | | | | 45,053 | |
Current assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans and notes receivable | | | - | | | | 237 | | | | - | | | | (25) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (25) | | | | 212 | |
Accounts receivable and other | | | - | | | | 1,022 | | | | - | | | | (47) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (47) | | | | 975 | |
Cash and cash equivalents | | | - | | | | 910 | | | | (3) | | | | (2) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (5) | | | | 905 | |
| | | | - | | | | 2,169 | | | | (3) | | | | (74) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (77) | | | | 2,092 | |
Total assets | | $ | - | | | $ | 48,020 | | | $ | (536) | | | $ | (240) | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | (99) | | | $ | (875) | | | $ | 47,145 | |
Liabilities and equity in net assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property debt | | $ | - | | | $ | 16,358 | | | $ | (526) | | | $ | (47) | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | (573) | | | $ | 15,785 | |
Capital securities | | | - | | | | 664 | | | | - | | | | - | | | | 1,250 | | | | - | | | | - | | | | - | | | | - | | | | 1,250 | | | | 1,914 | |
Other non-current liabilities | | | - | | | | 441 | | | | - | | | | (2) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2) | | | | 439 | |
Deferred tax liability | | | - | | | | 997 | | | | 59 | | | | (16) | | | | - | | | | - | | | | - | | | | 43 | | | | (8) | | | | 78 | | | | 1,075 | |
| | | | - | | | | 18,460 | | | | (467) | | | | (65) | | | | 1,250 | | | | - | | | | - | | | | 43 | | | | (8) | | | | 753 | | | | 19,213 | |
Current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property debt | | | - | | | | 3,366 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,366 | |
Capital securities | | | | | | | 202 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 202 | |
Accounts payable and other liabilities | | | - | | | | 1,747 | | | | (33) | | | | (11) | | | | - | | | | - | | | | - | | | | - | | | | (13) | | | | (57) | | | | 1,690 | |
| | | | - | | | | 5,315 | | | | (33) | | | | (11) | | | | - | | | | - | | | | - | | | | - | | | | (13) | | | | (57) | | | | 5,258 | |
Equity in net assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-controlling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interests of others in consolidated subsidiaries | | | - | | | | 10,870 | | | | - | | | | (13) | | | | - | | | | 25 | | | | - | | | | - | | | | (17) | | | | (5) | | | | 10,865 | |
Redeemable/exchangeable operating partnership units held by parent | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 9,923 | | | | - | | | | - | | | | 9,923 | | | | 9,923 | |
Total non-controlling interests | | | - | | | | 10,870 | | | | - | | | | (13) | | | | - | | | | 25 | | | | 9,923 | | | | - | | | | (17) | | | | 9,918 | | | | 20,788 | |
Equity in net assets attributable to parent | | | - | | | | 13,375 | | | | (36) | | | | (151) | | | | (1,250) | | | | (25) | | | | (11,809) | | | | (43) | | | | (61) | | | | (13,375) | | | | - | |
Limited partnership units | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,886 | | | | - | | | | - | | | | 1,886 | | | | 1,886 | |
Total equity in net assets | | | - | | | | 24,245 | | | | (36) | | | | (164) | | | | (1,250) | | | | - | | | | - | | | | (43) | | | | (78) | | | | (1,571) | | | | 22,674 | |
Total liabilities and equity in net assets | | $ | - | | | $ | 48,020 | | | $ | (536) | | | $ | (240) | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | (99) | | | $ | (875) | | | $ | 47,145 | |
(1) | Includes Brookfield Property Partners L.P. balance sheet as at January 15, 2013 which includes partnership equity of $ 0.001 which is not presented due to rounding.
|
See accompanying notes to the unaudited pro forma financial statements
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BROOKFIELD PROPERTY PARTNERS L.P.
Unaudited Pro forma Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the year ended
December 31, 2012 | | | | | | | | Pro Forma Adjustments | | | Pro Forma Brookfield
Property
Partners L.P. | |
| (US$ Millions) | | Brookfield Property
Partners
L.P. | | | Brookfield
Carve-out
| | | Australian
Investments
4 (a) | | | Australian
Exclusions
4 (b) | | | Capital
Securities
4 (c) | | | Preferred
Shares
4 (d) | | | Equity
4 (e) | | | Tax Impact of
Reorganization
4 (f) | | | Management
Fee 4 (g) | | | HHC
4 (h) | | | | | Total Pro
Forma
Adjustments | | |
Commercial property revenue | | $ | - | | | $ | 2,889 | | | $ | (78) | | | $ | (31) | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | | | $ | (109) | | | | $ 2,780 | |
Hospitality revenue | | | - | | | | 743 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | - | | | | 743 | |
Investment and other revenue | | | - | | | | 169 | | | | 54 | | | | (2 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | 52 | | | | 221 | |
Total revenue | | | - | | | | 3,801 | | | | (24 | ) | | | (33 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | (57 | ) | | | 3,744 | |
Direct commercial property expense | | | - | | | | 1,201 | | | | (18 | ) | | | (12 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | (30 | ) | | | 1,171 | |
Direct hospitality expense | | | - | | | | 687 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | - | | | | 687 | |
Investment and other expense | | | - | | | | 36 | | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | - | | | | 36 | |
Interest expense | | | - | | | | 1,028 | | | | (45 | ) | | | (8 | ) | | | 77 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | 24 | | | | 1,052 | |
Administration expense | | | - | | | | 171 | | | | - | | | | (2 | ) | | | - | | | | - | | | | - | | | | - | | | | 50 | | | | - | | | | | | 48 | | | | 219 | |
Total expenses | | | - | | | | 3,123 | | | | (63 | ) | | | (22 | ) | | | 77 | | | | - | | | | - | | | | - | | | | 50 | | | | - | | | | | | 42 | | | | 3,165 | |
Fair value gains | | | - | | | | 1,330 | | | | - | | | | (63 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (40 | ) | | | | | (103 | ) | | | 1,227 | |
Share of net earnings from equity accounted investments | | | - | | | | 1,235 | | | | (39 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | (39 | ) | | | 1,196 | |
Income before income taxes | | | - | | | | 3,243 | | | | - | | | | (74 | ) | | | (77 | ) | | | - | | | | - | | | | - | | | | (50 | ) | | | (40 | ) | | | | | (241 | ) | | | 3,002 | |
Income tax (expense) benefit | | | - | | | | (535 | ) | | | - | | | | 27 | | | | - | | | | - | | | | - | | | | (18 | ) | | | 13 | | | | 22 | | | | | | 44 | | | | (491 | ) |
Net income | | $ | - | | | $ | 2,708 | | | $ | - | | | $ | (47 | ) | | $ | (77 | ) | | $ | - | | | $ | - | | | $ | (18 | ) | | $ | (37 | ) | | $ | (18 | ) | | | | $ | (197 | ) | | | $ 2,511 | |
Net income attributable to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-controlling interests: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interests of others in consolidated subsidiaries | | $ | - | | | $ | 1,209 | | | $ | - | | | $ | (38 | ) | | $ | - | | | $ | 1 | | | $ | - | | | $ | - | | | $ | - | | | $ | (7 | ) | | | | $ | (44 | ) | | | $ 1,165 | |
Redeemable/exchangeable operating partnership units held by parent | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,131 | | | | - | | | | - | | | | - | | | | | | 1,131 | | | | 1,131 | |
Total non-controlling interests | | | - | | | | 1,209 | | | | - | | | | (38 | ) | | | - | | | | 1 | | | | 1,131 | | | | - | | | | - | | | | (7 | ) | | | | | 1,087 | | | | 2,296 | |
Parent company | | | - | | | | 1,499 | | | | - | | | | (9 | ) | | | (77 | ) | | | (1 | ) | | | (1,346 | ) | | | (18 | ) | | | (37 | ) | | | (11 | ) | | | | | (1,499 | ) | | | - | |
Limited partnership units | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 215 | | | | - | | | | - | | | | - | | | | | | 215 | | | | 215 | |
| | | $ | - | | | $ | 2,708 | | | $ | - | | | $ | (47 | ) | | $ | (77 | ) | | $ | - | | | $ | - | | | $ | (18 | ) | | $ | (37 | ) | | $ | (18 | ) | | | | $ | (197 | ) | | | $ 2,511 | |
Weighted average number of units – basic and diluted | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 76 Million (i) | |
Basic and diluted earnings per unit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ 2.83 (i) | |
See accompanying notes to the unaudited pro forma financial statements
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NOTES TO THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. NATURE AND DESCRIPTION OF THE LIMITED PARTNERSHIP
Brookfield Property Partners L.P. (the “company”) was established by Brookfield Asset Management Inc. (“Brookfield” or the “parent company”) as the primary entity through which it and its affiliates will own and operate commercial property on a global basis. The registered head office of the company is 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.
The company’s sole direct investment is a limited partnership interest in Brookfield Property L.P. (the “property partnership”). In addition to the Redemption-Exchange units described below, Brookfield, through Property GP L.P. (the “Property GP”), its indirect wholly-owned subsidiary, will hold a 1% general partnership interest in the property partnership. The property partnership holds all of the common shares or equity interests, as applicable, of the holding entities, which are newly formed entities under the laws of the Province of Ontario, the State of Delaware and Bermuda established to hold the company’s interest in the Business described below.
Brookfield will effect a reorganization (the “reorganization”) so that an interest in its commercial property operations, including its office, retail, multi-family and industrial and opportunistic assets, located in the United States, Canada, Australia, Brazil and Europe, that have historically been owned and operated, both directly and through its operating entities, by Brookfield, is acquired by the holding entities. The commercial property operations transferred to the company through the reorganization (the “Business”) includes all of the commercial property operations of Brookfield included in the Brookfield Carve-out financial statements except for (i) its 3% equity interest in the Howard Hughes Corporation (“HHC”), a publicly listed real estate entity; and (ii) certain assets within Brookfield’s Australian operations which are not being transferred. Also, as described in Note 4(a) to the unaudited pro forma financial statements, a subsidiary of Brookfield will continue to hold title to the commercial and other real property in Australia. The company will hold an economic interest in such property in the form of participating loan notes receivable from Brookfield.
In consideration for the Business, the company and its subsidiaries will issue to Brookfield:
$1.25 billion of redeemable preferred shares of one of the holding entities;
Redemption-Exchange units in the property partnership; and
The general and limited partnership interests in the company.
Also, in connection with the reorganization, Brookfield will provide a total of $25 million of working capital to the holding entities by subscribing for preferred shares of such entities or wholly-owned subsidiaries thereof (refer to Note 4(d)).
Subsequent to the reorganization, Brookfield intends to transfer a portion of its non-voting limited partnership units in the company to holders of its Class A limited voting shares and Class B limited voting shares, through a special dividend (the “spin-off”). Immediately following the reorganization and spin-off, the holders of Brookfield’s Class A and Class B limited voting shares will own approximately 7.5% of the issued and outstanding units of the company on a fully-exchanged basis and Brookfield will hold units of the company and Redemption-Exchange units that, taken together, on a fully exchanged basis represent 92.5% of the units of the company. On an unexchanged basis the holders of Brookfield Class A and Class B limited voting shares will own approximately 47% of the issued and outstanding units of the company with Brookfield holding the remaining 53%.
Pursuant to its accounting policy for common control transactions described further in Note 3 to the unaudited pro forma financial statements, the company will recognize the Business acquired from Brookfield at the carrying amount in Brookfield’s financial statements immediately prior to the reorganization and spin-off. As
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discussed further in Note 4(c) to the unaudited pro forma financial statements, the capital securities issued by one of the holding entities will be accounted for as a liability by the company and will be initially recognized at their fair value. The Redemption-Exchange units in the property partnership and the general and limited partnership interests in the company are recognized as components of equity in net assets of the company as discussed in 4(e).
The company and Brookfield intend for the company to have control over the property partnership and Property GP following the spin-off. Accordingly, the company will enter into a voting agreement with Brookfield (the “Voting Agreement”) pursuant to which any voting rights Brookfield holds with respect to the election of directors of the property partnership or the Property GP will be voted in favor of directors approved by the company. Also under the Voting Agreement, the company will have the right to approve or reject major strategic decisions relating to the property partnership, including the liquidation of its assets, business combinations or other material corporate transactions involving the property partnership, any proposed dissolution of the property partnership, amendments to the limited partnership agreements of the property partnership or the Property GP and the removal of the Property GP.
Prior to the spin-off, the company is expected to enter into a three-year unsecured credit facility with Brookfield that will provide borrowings on a revolving basis of up to $500 million, which will be used for working capital purposes. The credit facility will be guaranteed by the company, the property partnership and each of the holding entities. It is expected that no amounts will be drawn on the facility as of the date of the spin-off.
2. BASIS OF PRESENTATION
The company’s unaudited pro forma balance sheet as at December 31, 2012 and unaudited pro forma statements of income for the year ended December 31, 2012 have been prepared assuming the transactions described herein occurred as of December 31, 2012, in the case of the unaudited pro forma balance sheet, and as of January 1, 2012 in the case of the unaudited pro forma statements of income.
The company’s unaudited pro forma financial statements have been prepared using the carve-out financial statements of the Business (the “Brookfield Carve-out financial statements”) for the year ended December 31, 2012 included elsewhere in this Form 20-F/A.
The unaudited pro forma financial statements have been prepared for informational purposes only and should be read in conjunction with the Brookfield Carve-out financial statements and related disclosures. The preparation of these unaudited pro forma financial statements requires management to make estimates and assumptions deemed appropriate. The unaudited pro forma financial statements are not intended to represent, or be indicative of, the actual financial position and results of operations that would have occurred if the transactions described below had been effected on the dates indicated, nor are they indicative of the company’s future results.
3. SIGNIFICANT ACCOUNTING POLICIES
The company presents its financial statements in accordance with IFRS. The accounting policies used in the preparation of the company’s unaudited pro forma financial statements are those that are set out in the Brookfield Carve-out financial statements for the year ended December 31, 2012. Accounting policies applied in accounting for the impacts of the reorganization and spin-out transactions in the unaudited pro forma financial statements are summarized herein.
(a) | Basis of Consolidation |
The unaudited pro forma financial statements include the accounts of the company and its subsidiaries, which are the entities over which the company has control. Control exists when the company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
The company will control the strategic financial and operating policy decisions of the property partnership pursuant to the Voting Agreement described in Note 1 to these unaudited pro forma financial statements and,
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through its ownership of the limited partnership units of the property partnership, benefit from the property partnerships activities. Accordingly, the company has consolidated the property partnership in the unaudited pro forma financial statements.
(b) | Common control transactions |
IFRS does not include specific measurement guidance for transfers of businesses or subsidiaries between entities under common control. The company has developed a policy to account for such transactions for the purposes of preparing the unaudited pro forma financial statements taking into consideration other guidance in the IFRS framework and pronouncements of other standard-setting bodies. Consistent with the policy applied in the Brookfield Carve-out financial statements, the company’s policy is to record assets and liabilities recognized as a result of transfers of businesses or subsidiaries between entities under common control at the carrying value in the transferor’s financial statements immediately prior to such transfer.
4. PRO FORMA ADJUSTMENTS
This note should be read in conjunction with Note 2 to the unaudited pro forma financial statements, Basis of Presentation. The unaudited pro forma financial statements adjust the Brookfield Carve-out financial statements to give effect to the reorganization and the spin-off, the transactions set out below and the resulting tax effects:
Acquisition of interests in Brookfield’s Australian assets through participating loan notes
Exclusion of certain assets within Brookfield’s Australian operations which are not being transferred to the company as part of the reorganization
Issuance of $1.25 billion of Capital Securities to Brookfield as partial consideration for the Business acquired by the company
Issuance of $25 million of Preferred Shares by certain holding entities
Issuance of partnership units by the company as partial consideration for the business acquired by the company
Reorganization of the legal structure through which the Business is held, including the issuance of certain inter-company debt between the property partnership and the holding entities, resulting in changes in the effective tax rate and the tax basis of certain investments
Annual Management Fees of $50 million paid by the company to Brookfield pursuant to a Master Services Agreement
Exclusion of Brookfield’s 3% investment in HHC
Integration costs, if any, that may be incurred upon consummation of the acquisition and other transactions have been excluded from the unaudited pro forma statements of income. As the principal operating entities comprising the Business generally maintain their own independent management and infrastructure which are expected to be retained following the reorganization and spin-off, the integration costs are not expected to be significant.
(a) | Acquisition of interests in Brookfield’s Australian assets through participating loan interests |
The holding entities will hold economic interests in Brookfield’s commercial and other real property in Australia (the “referenced properties”) in the form of participating loan agreements with Brookfield, which are hybrid instruments comprising an interest bearing note, a total return swap and an option to acquire direct or indirect legal ownership to the referenced properties. The initial principal amount of the participating loan interests will be the fair value of Brookfield’s net interest in the referenced properties. The participating loan interests will provide the holding entities with an interest in the results of operations and changes in fair value of the referenced properties. At the date of the spin-off, Brookfield will continue to hold legal title to the referenced properties through a wholly-owned subsidiary that is not part of the Business in order to preserve existing financing arrangements. These participating loan notes will be convertible by the holding entities, at any time,
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into direct ownership interests in the referenced properties or the entities that have direct ownership of such properties (the “Australian property subsidiaries”). Certain of these participating loan notes will provide the holding entities with control over the Australian property subsidiaries and, accordingly, the assets, liabilities and results of those property subsidiaries will be consolidated by the holding entities. Where the participating loan interest does not provide the holding entities with control over an Australian property subsidiary, it will be accounted for as a loan receivable with related interest income reflecting the operating cash flows of the underlying property. Included in the participating loan notes that are accounted for as loans receivable is an embedded derivative representing the holding entities’ right to participate in the changes in value of the referenced properties, such embedded derivative will be measured at fair value with changes in value reflected in earnings in the period when they occur.
The unaudited pro forma balance sheet reflects the reclassification of certain investment properties, equity accounted investments, property debt and related balances to participating loan notes for those participating loan notes that do not provide the holding entities with control over the Australian property subsidiary that owns the referenced properties. Also, the net commercial property income, interest expense and share of earnings from equity accounted investments associated with the referenced properties are reclassified to net investment income in the unaudited pro forma statements of income. The fair value gains associated with those participating loan notes when the referenced properties are accounted for as equity accounted investments in the Brookfield Carve-out financial statements have been reclassified to fair value gains from share of net earnings from equity accounted investments.
In addition, the unaudited pro forma balance sheet reflects an adjustment to derecognize certain derivatives with a carrying value of $23 million, which are designated as hedges of property debt associated with the Australian operations and are included in accounts payable and other liabilities in the Brookfield Carve-out financial statements, as these instruments are in entities that will not be transferred to the holding entities.
The initial tax basis of the participating loan notes through which the economic interests in the referenced properties are held by the holding entities will initially be equal to their carrying amounts. Accordingly, the net deferred tax asset of $59 million relating to these properties reflected in the deferred tax liability in the Brookfield Carve-out financial statements has been derecognized in the unaudited pro forma financial statements.
(b) | Exclusion of certain interests in Brookfield’s Australian assets |
The Brookfield Carve-out financial statements include certain investment properties and loans and notes receivable within Brookfield’s Australian operations that will not be included in the Business pursuant to the reorganization.
The unaudited pro forma balance sheet reflects the derecognition of these assets as well as associated debt and working capital balances with a corresponding reduction in the equity in net assets attributable to the parent. The unaudited pro forma statements of income for year ended December 31, 2012 reflect a reversal of the related results of operations that were reflected in the Brookfield Carve-out financial statements for those periods.
(c) | Issuance of Capital Securities |
Brookfield will hold $750 million of Class B and $500 million of Class C redeemable preferred shares, for a total of $1.25 billion, of one of the holding entities, which it will receive as partial consideration for the Business acquired by the company. The Class B preferred shares will be entitled to receive a cumulative preferential dividend equal to 5.75% of their redemption value as and when declared by the board of directors of the holding entity until the fifth anniversary of their issuance. After the fifth anniversary of their issuance the Class B preferred shares will be entitled to receive a cumulative preferential dividend equal to 5.0% plus the prevailing yield for 5-year U.S. Treasury Notes. The holding entity may redeem the Class B preferred shares at any time and must redeem all of the outstanding Class B preferred shares on the tenth anniversary of their issuance. Brookfield will have a right of retraction following the fifth anniversary of the issuance of the Class B preferred shares. The Class C preferred shares will be entitled to receive a cumulative preferential dividend equal to 6.75%
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of their redemption value as and when declared by the board of directors of the holding entity. The holding entity may redeem the Class C preferred shares at any time and must redeem all of the outstanding Class C preferred shares on the seventh anniversary of their issuance. Brookfield will have a right of retraction following the third anniversary of the issuance of the Class C preferred shares. The Class B and Class C preferred shares will be entitled to vote with the common shares of the holding entity and each class of preferred shares will have an aggregate of 1% of the votes to be cast in respect of the holding entity.
As the company will be required to redeem the shares for cash or other consideration, they have been accounted for as liabilities within capital securities in the pro forma balance sheet. As they are a financial liability, the capital securities are initially measured at their fair value which is presumed to be the redemption amount in the unaudited pro forma financial statements as the redeemable preferred shares are at market terms. The related dividends have been presented as interest expense in the unaudited pro forma statements of income for the year ended December 31, 2012 in the amount of $77 million.
(d) | Issuance of Preferred Shares |
In connection with the reorganization, Brookfield will provide a total of $25 million of working capital to the holding entities by subscribing for $5 million of preferred shares in one of the holding entities and in each of the four wholly-owned subsidiaries of other holding entities. The preferred shares are entitled to receive a cumulative preferential cash dividend equal to $1.25 million per year as and when declared by the board of the directors of the applicable entity and are redeemable at the option of the applicable entity at any time after the twentieth anniversary of their issuance.
As the company and its subsidiaries are not obligated to redeem the preferred shares, they have been determined to be equity of the applicable entities and are reflected as a $25 million increase in non-controlling interest in the unaudited pro forma balance sheet. The unaudited pro forma statement of income for the year ended December 31, 2012 adjusts net income attributable to non-controlling interest by $1.25 million, for the dividends on the preferred shares.
On completion of the reorganization and spin-off, total partnership equity will include the general and limited partnership units issued by our company and non-controlling interests. The total non-controlling interests will be comprised of (a) interests of others in consolidated subsidiaries and (b) the Redeemption-Exchange units issued by the Property Partnership which will be presented within non-controlling interests as exchangeable operating partnership units held by parent.
In connection with the reorganization, the Property Partnership will issue Redemption-Exchange units to Brookfield that may, at the request of the holder beginning two years from the date of closing of the spin-off, require the Property Partnership to redeem all or a portion of the holder’s units of the Property Partnership for cash in an amount equal to the market value of one of the company’s units multiplied by the number of units to be redeemed (subject to certain adjustments). This right is subject to the company’s right, at its sole discretion, to elect to acquire any unit so presented to the Property Partnership in exchange for one of the company’s units (subject to certain customary adjustments). If the Company elects not to exchange the Redemption-Exchange units for units of the Company, the Redemption-Exchange units are required to be redeemed for cash. The Redeemption-Exchange units provide Brookfield the direct economic benefits and exposures to the underlying performance of the Property Partnership and accordingly to the variability of the distributions of the Property Partnership, whereas the company’s unitholders have indirect access to the economic benefits and exposures of the Property Partnership through direct ownership interest in the company which owns a direct interest in the Property Partnership. Accordingly, the Redemption-Exchange units have been presented as redeemable/exchangeable operating partnership units held by parent within non-controlling interests rather than equity of parent company in the unaudited pro forma balance sheet. The Redemption-Exchange units do not entail a contractual obligation on the part of the company to deliver cash and can be settled by the company, at its sole discretion, by issuing a fixed number of its own equity instruments.
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Equity in net assets attributable to parent company in the Brookfield Carve-out financial statements has been presented as partnership equity in the unaudited pro forma financial statements to reflect the impact of the reorganization and spin-off. Income attributable to parent company in the Brookfield Carve-out financial statements has been presented as net income attributable to partners in the pro forma statement of income and adjusted for the impact of the dividends on preferred shares issued by the holding entities.
(f) | Tax Impacts of Reorganization |
The reorganization will impact the effective tax rate of the Business as the holding entities through which the company will hold the Business are different from those through which it was historically held by Brookfield, and result in the issuance of certain inter-company debt between the property partnership and the holding entities.
The aggregate impact of the reorganization on income tax expense in the pro forma statements of income, giving effect to certain elements of the reorganization that were completed in the first quarter of 2012 as though they occurred on January 1, 2012, is an increase of $18 million for the year ended December 31, 2012. The aggregate impact of the reorganization on the deferred tax liability in the pro forma balance sheet is an increase of $43 million as at December 31, 2012.
The pro forma statements of income reflect a charge of $50 million for the year ended December 31, 2012, together with the associated tax effects of $13 million, respectively, representing an estimate of the annual management fee that would be paid by the company to a subsidiary of Brookfield for services rendered in connection with a Master Services Agreement to be entered into in connection with the reorganization and spin-off. The estimated Management Fees are based on an annual base management fee of $50 million (subject to an annual escalation by a specified inflation factor beginning on January 1, 2014).
The property partnership will also pay a quarterly equity enhancement distribution to the Property GP of 0.3125% of the amount by which the company’s total capitalization value at the end of each quarter exceeds its total capitalization value determined immediately following the spin-off. As this is based on the future capitalization value of the company, which cannot be reliably estimated, the expense associated with the equity enhancement distribution has not been included in the pro forma statements of income.
This adjustment does not reflect general and administrative costs which management expects will be approximately $5 million per year.
(h) | Exclusion of Brookfield’s 3% investment in HHC |
The Brookfield Carve-out financial statements include Brookfield’s 3% common equity interest in HHC which is classified as securities designated as available-for-sale that is not included in the Business pursuant to the reorganization.
The unaudited pro forma balance sheet reflects the derecognition of this investment with a corresponding reduction in the equity in net assets attributable to the parent. The unaudited pro forma statements of income for the year ended December 31, 2012 reflect a reversal of fair value gains of $40 million and income tax expense of $22 million for the year ended December 31, 2012, that were reflected in the Brookfield Carve-out financial statements for those periods.
(i) | Pro forma earnings per unit |
The pro forma weighted average number of units and the earnings per unit for the year ended December 31, 2012 assume that approximately 76 million units of the company will be issued as part of the spin-off, of which Brookfield will own approximately 53%, or 92.5% when including the Redeemable/Exchangeable operating partnership units, on a fully exchanged basis. A 1 million increase or decrease in the number of units that will be issued as part of the spin-off will impact earnings per unit by $0.03 for the year ended December 31, 2012.
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