Q4 2016 Letter to Unitholders

Dear Unitholders,

Overview

We continued to generate solid financial results in 2016, meaningfully growing earnings and increasing our distribution to enhance the cash returns for our unitholders. The partnership generated Company FFO of $967 million or $1.36 per unit for the year, a 15% increase over 2015. This growth in earnings is derived primarily from strong operating performance in our core office and retail segments, as well as new investments made in our opportunistic investing strategy.

Given this increase in cash flow, our Board of Directors has approved a 5.4% distribution increase for 2017, in-line with our target annual distribution growth of 5 to 8%. More importantly, we have been bringing on cash flows from developments and reducing the payout ratio. In 2014, we had a payout ratio of approximately 90% and are now at 82%, close to our target of 80%. As a result, going forward we should be able to grow our distribution at a similar rate as our cash flow.

Strategy & Goals

Over the course of 2016, we have been focused on four strategic priorities:

Enhance the Flexibility of our Balance Sheet:  Early in the year, we achieved a BBB corporate credit rating from S&P. This investment-grade rating facilitated the refinancing of our revolving corporate credit facility with a consortium of banks, upsizing its capacity from $2.0 to $2.5 billion while reducing interest expense by 55 basis points and extending its maturity to 2019. We also issued C$200 million of perpetual preferred shares into the Canadian market to refinance shorter-term capital securities, and we reduced corporate debt by a significant amount to further improve access to liquidity.

Recycle Capital from Mature Assets to Fund Growth: Over the course of the year, we successfully raised approximately $3 billion of net equity from core office and retail asset sales at attractive valuations. The majority of these transactions – which include properties in New York, London, Sydney, Las Vegas, Washington, DC and Vancouver, were executed at cap rates between 3 and 5%. Proceeds were deployed into various initiatives, including debt repayment, new investments, development spending and unit buybacks.

Increase Occupancy in Our Core Office and Retail Portfolios: We achieved significant leasing volumes in our core businesses which reduced near-term maturities and improved future earnings, with leases signed at average rents 14% and 20% higher than expiring leases, respectively, for our office and retail businesses.

Repurchase our Units: Repurchasing our units offered a compelling investment opportunity in 2016 and we bought back approximately 2.8 million units at an average price of $21.35. This represented a discount of approximately 30% to both our IFRS value per unit and analyst consensus NAV, which will provide very high returns on the capital we invested.

Operating Report

Core Office

Company FFO from our core office operations was $630 million for the year, a 3% increase over the prior year. This increase in earnings is attributable to same-property NOI growth of 6.6%, most notably at Brookfield Place New York which generated an incremental $85 million in net operating income in 2016. This growth was offset by asset sales and the conversion of foreign income into our U.S. dollar-reported results.

Occupancy finished the year at 92.3%, consistent with 2015, on 8.2 million square feet of total leasing. Leases were signed during the year at average rents 14% higher than those that expired during the period. We also continued to advance our development projects through active pre-leasing, bringing our 7.3 million-square-foot active pipeline to 60% committed. Significant development leases signed during the year included:

  • Advisory Board Company for 536,000 square feet at 655 New York Ave., Washington, DC
  • National Hockey League for 176,000 square feet at One Manhattan West
  • Bank of Nova Scotia for 140,000 square feet at Brookfield Place Calgary East
  • Jefferies Group for 115,000 square feet at 100 Bishopsgate, London
  • Incremental space commitments from anchor tenants at Principal Place, London (Amazon) and One Manhattan West (Skadden).

Real estate fundamentals in the majority of our key office markets remain positive, although our energy-driven markets remained challenged due to the impact of the price of oil and other commodities. Despite this, we completed over 300,000 square feet of leasing in our Calgary portfolio during 2016. While the London office market slowed following the unexpected BREXIT outcome in June, it has stabilized quickly, and demand for premier quality office product has remained healthy.

Subsequent to year-end, we submitted a proposal to acquire the minority public interest in our Canadian REIT subsidiary – Brookfield Canada Office Properties (“BOX”) – for C$30.10 per unit, or approximately C$475 million. The proposal is currently under review by a special committee of the BOX Board of Trustees. If successful, this transaction will allow us to fully integrate our North American office operations and further simplify our structure, following on the acquisitions in prior years of Brookfield Office Properties and Canary Wharf.

Core Retail

Company FFO from our core retail operations was $459 million for the year, a 2% increase from the prior year. We achieved same-property growth of more than 5%, but overall earnings were impacted by asset sales during the year – most notably the sale of a 50% interest in Fashion Show in Las Vegas. In-place rents and tenant sales produced modest increases over the course of the year and same-property occupancy finished 2016 at a healthy 96.5%.

Although there has been much publicity around the distress of retail department stores, this has had little to no impact on the profitability of our premier mall portfolio. There is a noticeable sector bifurcation favoring class A malls in terms of value and operating performance. Consistent with 2016, we are targeting +/-5% same-store NOI growth this year. In addition, there is significant capacity to invest into development and redevelopment initiatives within this portfolio this year – a strategy that has proven to produce 8-10% yields-on-cost.

Opportunistic

Company FFO from our opportunistic segment was $341 million for the year, up 39% over the prior year. This increase was largely due to new investments we made in 2016 and income earned on multifamily development dispositions.

We continued to allocate a larger percentage of our capital to opportunistic investment strategies, which generally produce outsized returns and provide capital appreciation. In April, Brookfield held a final close of $9 billion for its second global opportunistic fund, double the size of its predecessor fund which is now entering its maturation and realization period. BPY committed approximately $2.3 billion of equity to this fund, making it a 26% participant. To-date, the fund has successfully invested or committed to invest approximately 75% of that capital. Through this investment we have expanded into new, higher growth-generating real estate sectors such as self-storage, student housing and manufactured housing. We also expanded our global investment and operating footprint, agreeing to acquire premier, large-scale projects in both Seoul and Mumbai.

2017 Outlook and Priorities

Continuing to build upon our success in 2016, our strategic priorities for this year remain largely unchanged:

  • Continue to enhance the flexibility of our balance sheet – extend the maturity profile of our debt, reduce our floating rate exposure, and seek ways to reduce our overall cost of capital and increase our access to liquidity.
  • Recycle $1-$2 billion of net equity from mature assets to fund new investments and build out our development pipeline.
  • Increase same-property and permanent occupancy in our core businesses and achieve a meaningful increase in the pre-leasing of our active development pipeline.
  • Allocate resources to repurchasing our own units should they continue to trade at a meaningful discount to NAV.

In 2016, we achieved meaningful earnings growth, enhanced the flexibility of our balance sheet, made strategic acquisitions in several new real estate sectors, and continued to expand our global investment and operating footprint. We are positioned for further growth in 2017 and remain committed, first and foremost, to delivering 12-15% long-term total returns for our unitholders.

On behalf of our Board of Directors and all of the employees within Brookfield’s real estate group around the globe, I thank you for your continued support and partnership. We look forward to working with you again this year as our business continues to grow and evolve.

Sincerely,

Brian Kingston
Chief Executive Officer

Special Note Regarding Forward-looking Statements

This letter to unitholders contains “forward-looking information” within the meaning of Canadian provincial securities laws and applicable regulation and “forward looking statements” within the meaning of “safe harbor” provisions of the United States Private Security Litigation Reform Act of 1995. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, 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 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”.

Forward-looking statements in this letter include, without limitation, statements regarding our anticipated FFO, NOI, cash flow and net asset value (NAV) growth; targeted returns from earnings growth drivers; the growth potential of our existing and new investments; anticipated leasing; and our strategy for asset sales and acquisitions.

Although we believe that our anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information because they involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking 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 countries in which we do business; the ability 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 development or redevelopment; global equity and capital markets and the availability of equity and debt financing and refinancing within these markets; risks relating to our 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 detailed from time to time in our documents filed with the securities regulators in Canada and the United States.

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 others should carefully consider the foregoing factors and other uncertainties and potential events. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.