Brookfield’s Distressed Office and Retail Loans:
Loans in Default or Handed Over to Lender:
Loans at risk of default according to analysts and industry press:
(Numbers as of September 8, 2023. Total number of $6.3 billion is sum of loans in default or handed over to lender and loans at risk of default according to analysts and industry press.)
Brookfield CEO Bruce Flatt has attempted to reassure investors that the defaults will have little impact on the company. However, evaluating that claim is difficult, given that Brookfield took its real estate subsidiary Brookfield Property Partners (BPY) private in 2021 after BPY suffered over $2 billion in losses in 2020. Leading real estate news outlet The Real Deal reported at the time that BPY was “a firm whose asset valuations and accounting practices have attracted the scrutiny of short sellers who say the company is hiding its true distress. Privatization will mean that Brookfield will no longer have to answer to those pesky outsiders.”[1]
Now, over $1 billion of debt investments that appear to be related to Brookfield’s real estate holdings have ended up on American National’s books. It is not entirely clear when exactly these various bonds were issued, for what purposes, and whether they have been sold to any non-Brookfield-affiliated entities. But for some reason, most of them are listed as “unaffiliated” on the list of investments in American National’s sworn Annual Statement.
Brookfield has not explained what its motivations for these “unaffiliated” (but actually affiliated) real estate debt investments are. But it has told investors that “conflicts of interest will arise directly or indirectly” in related party transactions involving its insurance companies. These may include investing insurance capital in Brookfield assets that previously “have had poor investment performance” or “have a possibility of generating higher fees” than other investments.
Dumping real estate debt on American National’s books during the “office real estate apocalypse”[2] might be a good deal for Brookfield. But is it a good deal for American National’s policyholders? And if Brookfield’s purchase of American Equity Life is approved, what will AEL’s books look like after the takeover?
NEWS ROUNDUP OF BROOKFIELD’S REAL ESTATE WOES
Brookfield Property Partners (BPY) and Subsidiaries
“Brookfield Properties Lays Off Dozens of Workers as US Construction Slows” (CoStar, July 19, 2023) — https://product.costar.com/home/news/shared/1790928720
“Brookfield Properties, a major real estate developer and operator, has laid off dozens of workers as commercial property companies struggle with reduced business during an overall market slowdown.”
“Brookfield’s Internal Affairs: The Investment Giant Wants to Take Its Real Estate Arm Private. Why Now?” (The Real Deal, February 18, 2021) — https://therealdeal.com/magazine/national-february-2021/brookfields-internal-affairs/
“The parent company will inherit a firm that accumulated $2 billion in losses in 2020, and one that is heavily leveraged, with operating income just about covering its interest expenses. Not to mention a firm whose asset valuations and accounting practices have attracted the scrutiny of short sellers who say the company is hiding its true distress. Privatization will mean that Brookfield will no longer have to answer to those pesky outsiders.”
“Brookfield Property Partners Reports $2B in losses in 2020” (The Real Deal, February 2, 2021) – https://therealdeal.com/national/2021/02/02/brookfield-property-partners-reports-2b-in-losses-in-2020/
“Brookfield has previously been criticized over its valuation methods. As a Canada-based company, Brookfield does not use GAAP accounting standards like its American counterparts. Instead, it relies on IFRS, which gives management more discretion on valuations. During the Covid crisis, the company maintained valuations on some of its properties at pre-pandemic levels, raising concerns from some in the industry.”
Canary Wharf
“‘It has lost its appeal’: Canary Wharf faces an uncertain future” (The Guardian, July 5, 2023) — https://www.theguardian.com/business/2023/jul/05/it-has-lost-its-appeal-canary-wharf-faces-an-uncertain-future
“HSBC’s decision to leave its “tower of doom” in the docklands and move back to the City of London after more than two decades has dealt a hammer blow to Canary Wharf’s standing as a global financial centre.”
…
“About 15.5% of Canary Wharf offices are empty, compared with 11% in the City, according to commercial real estate firm CoStar. In the West End it is even lower at 6.6%, according to property firm Savills.”
…
“The credit agency Moody’s cut CWG’s rating to junk last month, citing a ‘difficult operating and funding environment’”
“How HSBC’s retreat threatens debt-ridden Canary Wharf” (The Daily Telegraph, June 26, 2023) — https://www.telegraph.co.uk/business/2023/06/11/canary-wharf-london-margaret-thatcher-legacy/
“Canary Wharf has become a symbol of the recent downturn in the global property market. Moody’s decision to downgrade its credit rating deeper into junk territory comes as payment of £1.4bn of debt comes due in 2024 and 2025.
The rating agency warned that Canary Wharf Group may need to offload buildings and ask shareholders for additional capital in order to refinance and pay its debts.”
“Canary Wharf debt downgrade is latest sign of real estate woes” (Bloomberg, May 30, 2023) — https://www.bloomberg.com/news/articles/2023-05-30/canary-wharf-debt-downgrade-is-latest-sign-of-real-estate-woes
“The financial district in the east of the capital, owned by Brookfield Asset Management and Qatar’s sovereign wealth fund, has more than £1.4 billion (S$2.34 billion) of debt coming due in 2024 and 2025. The company would probably be highly reliant on asset sales, and potentially shareholder support, to help it de-leverage and refinance, Moody’s said.
The ratings firm downgraded Canary Wharf Group Investment Holdings to Ba3 from Ba1 previously, said Tuesday’s statement, citing the ‘difficult operating and funding environment for real estate companies’ that it expects to persist for at least the next year.”
Los Angeles
“Brookfield’s Gas Company Tower in receivership sees almost 60% value cut” (The Real Deal, July 19, 2023)— https://therealdeal.com/la/2023/07/19/brookfields-gas-company-tower-in-receivership-sees-almost-60-value-cut/
“The 1.4 million-square-foot tower at 555 West 5th Street was recently valued at $270 million, a 57 percent cut from when it was appraised at $632 million in 2021, according to data from Trepp and Morningstar Credit.”
…
“The new appraised value also comes out to less than the debt on the building. Brookfield held $465 million loans on the tower — a $350 million commercial mortgage-backed securities loan plus $115 million in mezzanine loans.”
“Brookfield’s Woes Grow as Firm Faces Default Risk on 1.4MM SQFT Bank of America Tower in Downtown Los Angeles” (The Registry, June 22, 2023) – https://theregistrysocal.com/brookfields-woes-grow-as-firm-faces-default-risk-on-1-4mm-sqft-bank-of-america-tower-in-downtown-los-angeles/
“According to a report from Fitch Ratings, Brookfield is now confronted with a ‘heightened maturity default risk’ concerning the commercial mortgage-backed securities debt associated with its 1.4 million-square-foot Bank of America tower located at 333 South Hope Street.”
“Brookfield Cedes Defaulted Los Angeles Office Tower to Receiver” (Bloomberg, May 25, 2023) – https://www.bloomberg.com/news/articles/2023-05-25/brookfield-cedes-defaulted-los-angeles-office-tower-to-receiver
“Brookfield stopped payments in April on the EY Plaza, which has US$305 million in total debt, including a US$275 million commercial mortgage-backed security.”
“Brookfield’s Los Angeles Office Company Is Roiled by Defaults” (Wall Street Journal, May 1, 2023) https://www.wsj.com/articles/brookfields-los-angeles-office-company-is-roiled-by-defaults-37ac5751
“A major Los Angeles office owner operated by Brookfield Asset Management is struggling to make mortgage payments as vacancies and rising interest rates disrupt the city’s commercial real-estate market. The company, known as Brookfield DTLA Fund Office Trust Investor Inc., owns six Los Angeles office buildings and a retail center. Five of the office buildings face the risk of foreclosure, according to its public filings, and at least two of its mortgages are in default.
The company on April 21 filed to delist from the New York Stock Exchange after its market capitalization fell below $15 million. The company’s shares are down 87% since the start of the year to less than one dollar.”
“Brookfield Defaults on Two Los Angeles Office Towers, $784M in Loans” (GlobeSt, February 15, 2023) — https://www.globest.com/2023/02/15/brookfield-defaults-on-two-los-angeles-office-towers-784m-in-loans/
“Canadian real estate giant Brookfield has defaulted on $784M in loans for two high-profile Downtown Los Angeles office towers, including $465M owed on the Gas Company Tower and $319M in loans for 777 South Figueroa St., also known as the 777 Tower.”
…
“Brookfield reported in November that the fund had about $2.3B of total consolidated debt as of Sept. 30 and said in its filing that its “substantial indebtedness” required the fund to use “a material portion of our cash flow to service interest on the debt.”
New York
“Brookfield Hands Keys Back to Lender for Manhattan’s Brill Building” (GlobeSt, July 18, 2023) — https://www.globest.com/2023/07/18/brookfield-hands-keys-back-to-lender-for-manhattans-brill-building/
“Brookfield’s appetite for trophy buildings increasingly seems like the Achillies heel of its office portfolio.
After giving up two of its trophy towers in Downtown Los Angeles in receivership earlier this year, the Canadian real estate giant is handing back the keys to a lender on the historic Brill Building, the first asset the company has surrendered in Manhattan.”
“Brookfield to Start Talks with Lenders on $130 Million Brooklyn Office Tower Loan” (Bloomberg, June 30, 2023) – https://www.bloomberg.com/news/articles/2023-06-30/brookfield-to-start-talks-with-lenders-on-brooklyn-office-loan
“Brookfield Asset Management Ltd. is seeking to kick off talks with lenders on debt for a downtown Brooklyn office tower ahead of the loan’s maturity. Brookfield said it’s hopeful that a deal can be reached on its roughly $130 million loan for 15 MetroTech Center, a 675,000-square-foot (63,000-square-meter) office building.”
Washington, DC Area
“Real Estate Giant Brookfield Reportedly Defaults On Second Major Office Portfolio This Year—Here’s Why It Matters” (Forbes, April 18, 2023) — https://www.forbes.com/sites/katherinehamilton/2023/04/18/real-estate-giant-brookfield-reportedly-defaults-on-second-major-office-portfolio-this-year-heres-why-it-matters/
“Brookfield Corp., one of the largest public real estate companies in the world, has defaulted on $161.4 million worth of office building mortgages, according to a report from Bloomberg, as high office vacancy and interest rate hikes have contributed to a string of defaults this year and fueled concerns of a commercial real estate debt crisis.”
…
“Occupancy and interest rate hikes had hit Brookfield’s defaulted D.C. office portfolio hard—across the 12 properties, occupancy rates averaged 52%, down from 79% in 2018 when the debt was underwritten, Bloomberg reported.”
Chicago
“Brookfield Looks to Sell Loop Office Building, Dodge Foreclosure: Firm Defaulted on $280M Loan on Property” (The Real Deal, July 19, 2023) — https://therealdeal.com/chicago/2023/07/19/brookfield-looks-to-sell-loop-office-building-dodge-foreclosure/
“Brookfield was hit with a foreclosure lawsuit roughly 10 months ago after allegedly defaulting on its $280 million loan on the property, marking the biggest case of distress for a downtown office building since the start of the pandemic.
It’s unclear how much the property will fetch in a sale, but it’s likely to sell for far less than the $306 million Brookfield paid for the site in 2018.”
London
“Relics of the Last Property Crash Start to Wobble Again” (Bloomberg July 13, 2023) — https://www.bloomberg.com/news/articles/2023-07-13/relics-of-the-last-property-crash-are-starting-to-wobble-again
“CityPoint, a 36-story office building in London’s financial district, became one of the symbols of the financial crisis when a Beacon Capital Partners Inc. fund missed a payment on loans secured by the property just over a decade ago. As the turmoil receded, Brookfield Asset Management Inc. eventually took over the tower. Now, the rise of work from home and surging interest rates mean Bank of America analysts are warning that a default on loans linked to the property is likely.”
…
“’At least some of the lessons from previous crises have been forgotten,’ said Tolu Alamutu, a credit analyst at Bloomberg Intelligence, who was speaking generally. ‘The real estate sector may be facing a much more testing outlook than some issuers may be able to weather.’”
Brookfield Real Estate Income Trust
“CEO Departs After Brookfield REIT Posts $39M Loss” – (Bisnow, April 5, 2023) — https://www.bisnow.com/national/news/capital-markets/ceo-departs-after-brookfield-reit-posts-39m-loss-118405
“The head of Brookfield’s nontraded REIT has stepped down as the fund and its larger counterparts grapple with slowing fundraising, falling property values and rising investor redemptions.”
Shopping Malls
“U.S. Bank Trust Hits St. Cloud Mall Owner with Foreclosure Suit after Missed Payment” – (Minneapolis / St. Paul Business Journal, July 13, 2023) – https://www.bizjournals.com/twincities/news/2023/07/13/us-bank-st-cloud-mall-foreclosure-suit-mortgage.html
“The suit alleges the mall failed to make payments on $83 million of its original $107 million mortgage.”
…
“According to financial filings, the mall, which New York-based Brookfield Properties owns, has seen its appraised value fall over the last decade from $165 million in 2013 to just $50 million in October 2022. Brookfield Properties is a subsidiary of Brookfield Property Partners, which itself is a subsidiary of publicly traded Brookfield Asset Management (NYSE: BAM).”
“Defaults raise alarm over stability of San Francisco’s commercial property” (Financial Times, June 17, 2023) — https://www.ft.com/content/d0c0fd7b-e2fc-4da3-a698-4b959efa1bfd
“This week, Westfield and Brookfield Properties announced they had stopped making payments on a $558mn loan secured against San Francisco’s sprawling downtown mall that they have owned since 2002, and would surrender the premises to its lenders.”
“Brookfield Faces Foreclosure, Default on $1B Mall Portfolio” (The Real Deal, June 16, 2023) https://therealdeal.com/new-york/tristate/2023/06/16/debt-problems-surface-at-crop-of-brookfield-malls/
“Following heavy losses on two L.A. office towers, Brookfield now faces distress on a $1 billion crop of malls, including an East Coast giant staring down foreclosure.
North Jersey’s Woodbridge Center, a super-regional mall across the river from Staten Island, is in foreclosure proceedings after Brookfield defaulted on the property’s $225 million loan.”
…
“All told, the mall’s value has plummeted a staggering 77 percent to $86 million from the $366 million it was appraised for in 2014.”
Notes
[1] https://therealdeal.com/magazine/national-february-2021/brookfields-internal-affairs/
[2] So called by Fortune (https://fortune.com/2023/05/25/office-space-crash-harder-than-expected-remote-work-economy-cre-crash/) and Business Insider (https://www.businessinsider.com/remote-work-gutted-city-downtowns-office-real-estate-apocalypse-2022-12)