Brookfield Property Partners released one of its last statements as a publicly traded REIT Friday, reporting that first quarter funds from all operations fell nearly 60% year over year to $125 million. Overall the company was in the black in the quarter, reaching net income of $731 million, up from its $373 million loss a year ago.
Its core retail business fed the decline, as funds from those operations fell 45% to $108 million, per a company press release. Brookfield trimmed the portfolio recently, handing over the keys to three malls (Florence Mall in Kentucky, Bayshore Mall in California and Pierre Bossier Mall in Louisiana), and walking away from what were delinquent commercial mortgage-backed securities loans, according to a KBRA Credit Profile report.
The company also said it gained $63 million by selling off its interest in Forever 21, which it acquired last year at a bankruptcy auction, with Authentic Brand Group and rival REIT Simon Property Group, for $81 million.
The malls where Brookfield threw in the towel recently have something in common: All have lost at least one department store anchor, or host anchors in distress.
The decline or closure of an anchor, usually a department store, equates to more than simply the loss of a tenant. When an anchor departs it loosens up the leases at the specialty retail tenants down the hall, which can renegotiate their terms or even leave, setting off a downward spiral and expanding vacancy. Preserving J.C. Penney as an anchor at Simon and Brookfield malls is a major reason, if not the sole reason, the REITs snapped up the bankrupt retailer late last year, according to several observers.
Brookfield's retail business declined "due to occupancy changes, co-tenancy claims, reduction in rents, impact of abatements and reduced overage and temporary rents," per its supplemental first quarter report. "These decreases were partially offset by interest cost savings and incremental lease termination income earned in the current quarter."
The retail operations narrowed their loss in the first quarter, though they remained in the red, their $280 million loss "due to unrealized property-level fair valuation losses of $351M due to increased risk on forecasted cashflows for certain of our lower productivity malls."
This trend is a likely reason Simon and Brookfield are lobbying Congress to make it even easier to own their tenants, though the idea is fraught with potential downsides for investors and retailers. The mall companies defend the idea as great for retailers, although so far it's mostly themselves and their own trade groups, and not retail organizations, that appear to be for it.
Meanwhile, Brookfield soon may not need any changes to REIT law, as Brookfield Asset Management is set to acquire it for $6.5 billion. Assuming the acquisition is approved by [Brookfield Property Partners] minority unitholders and the other approvals and conditions are obtained and satisfied, we expect the transaction to close in the third quarter," the company said Friday.