Brookfield Property’s debt cut to junk by S&P on real estate concerns

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Brookfield Property Partners LP’s issuer credit rating was cut to junk and put on a negative outlook by S&P Global Ratings as the real estate investors’ credit quality deteriorates amid higher borrowing costs and weak office demand.

The credit grader lowered Brookfield Property’s score by two steps to BB from BBB-, the lowest level of investment grade, according to a statement Dec. 21. It remains on negative outlook as the company is pressured by upcoming debt maturities over the next two years.

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Higher interest rates have hit commercial real estate values in the past few years, with office facing steeper drops as remote work becomes more common. United States office prices have fallen 35 per cent and malls have dropped 20 per cent since peaking in the first quarter of 2022, according to Green Street, a real estate analytics firm.

“We expect sector headwinds facing commercial office real estate will generally remain in place over the next several years, with weaker tenant retention, lower occupancy, and heightened incentives (through tenant inducements) to attract new tenants,” S&P analyst Michael H. Souers wrote.

The firm’s maturities will increase in 2025 with approximately US$2.3 billion of total debt coming due, according to S&P. A lack of progress in addressing these maturities well ahead of their due dates could hinder S&P’s view of the company’s liquidity, the grader said. S&P has a one in three chance of downgrading the debt further in the next 12 months if Brookfield Property fails to refinance upcoming debt or office occupancy weakens further.

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Brookfield Corp., the parent of the property unit, retains investment-grade rating, which is likely to help the property unit’s position with lenders, according to S&P.

“This rating relates to a specific entity within Brookfield’s real estate business and has no impact on either the pricing or ability of Brookfield to access the real estate capital markets,” a spokesperson said in an emailed statement. The report makes reference to retail assets having ‘recovered to pre-pandemic levels.’ In fact, the performance is well in excess of 2019 levels, the balance sheet was substantially deleveraged in 2021 and the prospects for these assets has never been more compelling.”

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Brookfield Property owns approximately US$130 billion in total assets, according to S&P. The company’s weighted-average debt maturity shrunk below three years in recent quarters, to 2.6 years as of Sept. 30, 2023, which “poses elevated risks.”

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