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BPY & BPYU – The End of the Dividend And Negative Equity

BPY & BPYU – The End of the Dividend And Negative Equity

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Brookfield Property Partners (BPY) and Brookfield Property REIT (BPYU) – The End of the Dividend And Negative Equity by Keith Dalrymple of RGICOUNCIL

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Q2 2020 hedge fund letters, conferences and more

A Note on Structure:

Brookfield Property Partners is ~64% owned and externally managed by Brookfield Asset Management. Brookfield Property REIT is ~95% owned by Brookfield Property Partners and is externally managed by Brookfield Asset Management.

Brookfield Property Partners (BPY) and its publicly traded subsidiary Brookfield Property REIT (BPYU), (ex-GGP) and the second largest mall operator in the U.S, are not self-sustaining enterprises. In addition to retail, BPY owns office, hospitality, student housing, multifamily and logistics assets. Embedded incentives in the structure facilitate overleverage and cash extraction through fees and overpayment of distributions by the external manager, Brookfield Asset Management (BAM).

Historical cash deficits at BPY have been filled largely by adding leverage to the properties.

The strategy has become unstable in the current environment. We believe BPY and BPYU will cut their distributions.

Issues include:

  • Overpayment of distributions – We estimate that BPY had annual cash flow deficits after distributions of approximately ($1B) before Covid that will grow in 2020.
  • Cash cow no more – BPYU was the largest source of cash for BPY. In 2019, we estimate that $790M of cash upstreamed from BPYU amounted to 67% of BPY’s distributions paid. BPYU’s cash distributions to BPY declined to $0 in 1H20.
  • Overstated NOI and operating metrics – BPYU’s steady q/q revenue and soaring accounts receivable in the face of collapsing cash flows suggests reported NOI and EBTIDA are overstated. We use reported figures, but adjusted operating metrics are likely 20% lower at BPYU and 10-15% lower at BPY.
  • Insurmountable debt – BPY and BPYU both have extremely high levels of debt. Debt/EBTIDA of 15.4x and 14.3x, respectively, are twice the peer group average of 7.4x. Interest expense is 61% and 182% of adjusted cash flow for BPY and BPYU, respectively, compared to 30% for high-quality peers.
  • Debt defaults and consequences – BPYU is in default on $1.2B of mortgage debt across 12 properties and has approximately $4.9B coming due by the end of 2021. We believe continued debt defaults may lead to a collapsing of the corporate holding structure, putting assets across BPY at risk.
  • Distribution cuts are coming – All mall REITs (except BPYU) and 36% of all REITs have cut or suspended dividends. BPY’s excessive leverage, high exposure to retail, poor cash generation and costly external management make distributions unsustainable. The distribution will have to be scaled down.
  • Bailouts for now – BAM has engineered bailout programs through various strategies for the organizations, including funding tenants, direct cash infusions and stock buy-backs, using both corporate cash and private equity funds, in what we view as deeply conflicted transactions. BAM committed nearly $2.4B to the entities in 1H20.
  • Watchful investors and lenders - Will BAM’s private equity clients watch while their cash is used to bailout BAM’s failing public entities? Will lenders accept ring-fenced, asset specific, defaults where partial and/or implied guarantees exist while the parent, BPY, continues to upstream ~$800M annually in fees and distributions to BAM?
  • The units are worthless – Using EV/EBITDA metrics from the peer group indicates that BPY’s units have negative equity.

The Endgame: Insolvency is Here

  • Historical substandard cash flows exacerbated by Covid-19
  • BPY’s largest source of cash disintegrates
  • Revenue recognition policy appears to overstate operating metrics
  • Excessive leverage and debt defaults

Brookfield Property Partners (BPY) is not a viable entity as it does not generate enough cash to sustain the enterprise. Further, it has negative real equity after years of asset stripping through a conflict-ridden incentive system by BAM (Brookfield Asset Management). Bankruptcy could be imminent given the defaults of $1.2B of property debt, which could prompt CBMS investors to test the collapse of the SPE structures as happened during GGP’s bankruptcy.

Cash flow deficits have plagued BPY since its inception (see below). We are now at the point in the cycle where declining cash flows and asset values are bringing financial mismanagement to the fore. In our analysis, BPY is teetering on the edge of insolvency.

We estimate that LP-level cash deficits after distributions were approximately ($1B) pre-Covid-19, filled largely by increasing asset-level debt. Both cash-out refinancings and asset sales are significantly more difficult in the current environment than in the past, limiting deficit-financing options.

BAM took actions to relieve the financial stress at BPY and its subsidiary BPYU in May 2020 with the announcement of Brookfield’s ‘Retail Revitalization Program’. Since then, assistance has grown to include direct cash infusions and support of stock prices.

Brookfield management pointed out that while it does not specifically target Brookfield tenants with the Retail Revitalization Program, it’s an opportunity to “utilize the knowledge, the relationships and the understanding of these tenants that we have in the real estate business through our relationships with these tenants, and bring some capital to bear on this and earn investment returns”.

In July 2020, both BPY and BPYU announced substantial issuer bids totaling $1B, though neither entity had the cash. BAM disclosed that the tender offer for BPY would be funded 50% from BAM capital and 50% from managed accounts from private equity clients. It is unclear whether this is separately raised capital from institutional investors or part of existing private equity funds.

Both the tender offer and the Retail Revitalization Programs use private equity funds in conflicted transactions to support BAM’s ailing publicly traded investment vehicles. BAM is a direct beneficiary as it earns capitalization-based fees and receives distributions on its ownership stake.

In August 2020, BPY approved certain subsidiaries as borrowers on a $500M credit facility, which is guaranteed by BAM. Additionally, BAM is also providing a liquidity facility of $500M directly to BPY’s retail subsidiary BPYU. Altogether, BAM and BAM-managed entities committed approximately $2.4B of support in 2Q20-3Q20.

1. BPYU: Loss of the Key Cash Generator as Malls Disintegrate

BPYU (ex GGP) is the key to the BPY’s dividend viability. Between 2013 and August 2018, BPY owned 29-34% of GGP. In that time, GGP’s dividends increased significantly and the company was a key source of cash dividends paid to BPY. In 2017, GGP accounted for 65% of all cash upstreamed from equity accounted investments. Purchasing the 66% of GGP BPY did not already own in 2018 allowed it to extract more cash by both relevering and selling assets.

As part of the acquisition, GGP paid a $9.8B dividend prior to the deal’s close. It was funded
largely with $7B of refinancing debt and $3B in asset sales. However, asset stripping became
problematic in 2019 as the retail apocalypse took hold, as shown in BPYU’s summary cash flow for 2019.

BPYU

The REIT paid a total of $912M of distributions with only $428M of cash flow. Including investing cash flow, the total cash deficit for the year was $1.8B. We estimate that BPY received approximately $681M of total distributions paid in 2019.

BPYU financed the deficit by raising approximately $1.9B in additional mortgage debt.

BPYU has a complex share structure. The publicly traded security is the Class A shares, which receive a distribution equal to BPY’s. BPY owns several non-traded share classes, two of which have cumulative dividends. In 1H19, the Class B and Series B preferred shares paid a total of $659M to BPY. As shown in the table below, the figure has collapsed to $0 in 1H20.

The publicly traded Class A shares pay a distribution identical to BPY’s declared distribution as part of the so-called economic equivalency of the entities. Class A distributions were $39.6M in 1H20. Thus, distributions to the outside shareholders have been maintained, but distributions to BPY have been cut to $0. The key source of cash for the limited partnership appears to have been shut-down.

BPYU’s financial performance was suffering prior to Covid-19; it has gotten a lot worse. The firm’s 10-Q states that 2Q20 collections were only 30% of rents, though the collection rate improved going into and subsequent to quarter’s end.

BPYU’s revenue declined only -3% q/q compared to -20% for peers while accounts receivable increased significantly more than comparable companies. The discrepancies suggest that BPYU continues to book revenue and accrue it in accounts receivable where peers are writing-off a portion as uncollectable. Continuing to book revenue in accounts receivable boosts reported NOI, EBITDA and FFO, which makes operating metrics at both BPYU and BPY appear more stable than those of competitors.

The operational metrics make it impossible for BPYU to continue its distributions to BPY at previous levels. Further, the devastating retail environment makes asset sales and debt increases on the asset level a virtual impossibility.

2. The Insurmountable Debt Problem – BPY & BPYU

We show comparative leverage statistics for both BPY and BPYU in the accompanying table.

BPY as a whole and BPYU as the retail subsidiary are both substantially more levered than peers. The table below shows how the leverage flows through to operating statistics.

At the BPYU level, interest expenses for 1H20 was 182%, a higher ratio than BPYU’s predecessor company’s leverage in 2008 just prior to filing bankruptcy, and significantly higher than contemporary peers, particularly the more prudently financed SPG, with whom BPYU’s assets are most often compared.

Operating statistics at the BPY level are likewise significantly higher than those of peers.

The downturn across the real estate industry has caused many REITs to down-size their dividends to reflect the current environment. Recent research by Hoya Capital notes that all mall REITs with the exception of BPYU and 36% of all REITs have cut dividends. Of companies noted, SGP and VNO have cut dividends; BXP, the most stable and least levered of the group, has maintained its dividend.

BPY’s combination of income mix with 65% of net operating income derived from retail and risky LP investments, and excessive leverage, create an extremely high-risk financial profile. While many other REITs have opted to cut payouts in the face of financial uncertainty, BPY’s external management has elected continue with unsustainable payouts. However, in our view, the bailouts will end and the BPY’s distribution will have to be eliminated.

Collapsing Cash Flow Leads to Debt Default

Unlike BPY’s IFRS statements with vague language regarding ‘suspension of payment’ of debt, BPYU’s US GAAP statements speak quite plainly regarding the REIT’s debt problems. The 2Q20 10-Q states that “the company stopped making payments on 12 property level mortgages resulting in them being in default.” The company has a total of $1.2B of mortgages in default on properties with a carrying value of $1.1B.” BPYU’s defaults represent 4% of the total debt outstanding. We show the companies consolidated debt along with its proportion of equity accounted debt below.

Read the full report here.

The post BPY & BPYU – The End of the Dividend And Negative Equity appeared first on ValueWalk.

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Survey Shows Declining Concerns Among Americans About COVID-19

Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat"…

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Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat" to the health of the US population - a sharp decline from a high of 67% in July 2020.

(SARMDY/Shutterstock)

What's more, the Pew Research Center survey conducted from Feb. 7 to Feb. 11 showed that just 10% of Americans are concerned that they will  catch the disease and require hospitalization.

"This data represents a low ebb of public concern about the virus that reached its height in the summer and fall of 2020, when as many as two-thirds of Americans viewed COVID-19 as a major threat to public health," reads the report, which was published March 7.

According to the survey, half of the participants understand the significance of researchers and healthcare providers in understanding and treating long COVID - however 27% of participants consider this issue less important, while 22% of Americans are unaware of long COVID.

What's more, while Democrats were far more worried than Republicans in the past, that gap has narrowed significantly.

"In the pandemic’s first year, Democrats were routinely about 40 points more likely than Republicans to view the coronavirus as a major threat to the health of the U.S. population. This gap has waned as overall levels of concern have fallen," reads the report.

More via the Epoch Times;

The survey found that three in ten Democrats under 50 have received an updated COVID-19 vaccine, compared with 66 percent of Democrats ages 65 and older.

Moreover, 66 percent of Democrats ages 65 and older have received the updated COVID-19 vaccine, while only 24 percent of Republicans ages 65 and older have done so.

“This 42-point partisan gap is much wider now than at other points since the start of the outbreak. For instance, in August 2021, 93 percent of older Democrats and 78 percent of older Republicans said they had received all the shots needed to be fully vaccinated (a 15-point gap),” it noted.

COVID-19 No Longer an Emergency

The U.S. Centers for Disease Control and Prevention (CDC) recently issued its updated recommendations for the virus, which no longer require people to stay home for five days after testing positive for COVID-19.

The updated guidance recommends that people who contracted a respiratory virus stay home, and they can resume normal activities when their symptoms improve overall and their fever subsides for 24 hours without medication.

“We still must use the commonsense solutions we know work to protect ourselves and others from serious illness from respiratory viruses, this includes vaccination, treatment, and staying home when we get sick,” CDC director Dr. Mandy Cohen said in a statement.

The CDC said that while the virus remains a threat, it is now less likely to cause severe illness because of widespread immunity and improved tools to prevent and treat the disease.

Importantly, states and countries that have already adjusted recommended isolation times have not seen increased hospitalizations or deaths related to COVID-19,” it stated.

The federal government suspended its free at-home COVID-19 test program on March 8, according to a website set up by the government, following a decrease in COVID-19-related hospitalizations.

According to the CDC, hospitalization rates for COVID-19 and influenza diseases remain “elevated” but are decreasing in some parts of the United States.

Tyler Durden Sun, 03/10/2024 - 22:45

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Government

Rand Paul Teases Senate GOP Leader Run – Musk Says “I Would Support”

Rand Paul Teases Senate GOP Leader Run – Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump…

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Rand Paul Teases Senate GOP Leader Run - Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump into the race to become the next Senate GOP leader, and Elon Musk was quick to support the idea. Republicans must find a successor for periodically malfunctioning Mitch McConnell, who recently announced he'll step down in November, though intending to keep his Senate seat until his term ends in January 2027, when he'd be within weeks of turning 86. 

So far, the announced field consists of two quintessential establishment types: John Cornyn of Texas and John Thune of South Dakota. While John Barrasso's name had been thrown around as one of "The Three Johns" considered top contenders, the Wyoming senator on Tuesday said he'll instead seek the number two slot as party whip. 

Paul used X to tease his potential bid for the position which -- if the GOP takes back the upper chamber in November -- could graduate from Minority Leader to Majority Leader. He started by telling his 5.1 million followers he'd had lots of people asking him about his interest in running...

...then followed up with a poll in which he predictably annihilated Cornyn and Thune, taking a 96% share as of Friday night, with the other two below 2% each. 

Elon Musk was quick to back the idea of Paul as GOP leader, while daring Cornyn and Thune to follow Paul's lead by throwing their names out for consideration by the Twitter-verse X-verse. 

Paul has been a stalwart opponent of security-state mass surveillance, foreign interventionism -- to include shoveling billions of dollars into the proxy war in Ukraine -- and out-of-control spending in general. He demonstrated the latter passion on the Senate floor this week as he ridiculed the latest kick-the-can spending package:   

In February, Paul used Senate rules to force his colleagues into a grueling Super Bowl weekend of votes, as he worked to derail a $95 billion foreign aid bill. "I think we should stay here as long as it takes,” said Paul. “If it takes a week or a month, I’ll force them to stay here to discuss why they think the border of Ukraine is more important than the US border.”

Don't expect a Majority Leader Paul to ditch the filibuster -- he's been a hardy user of the legislative delay tactic. In 2013, he spoke for 13 hours to fight the nomination of John Brennan as CIA director. In 2015, he orated for 10-and-a-half-hours to oppose extension of the Patriot Act

Rand Paul amid his 10 1/2 hour filibuster in 2015

Among the general public, Paul is probably best known as Capitol Hill's chief tormentor of Dr. Anthony Fauci, who was director of the National Institute of Allergy and Infectious Disease during the Covid-19 pandemic. Paul says the evidence indicates the virus emerged from China's Wuhan Institute of Virology. He's accused Fauci and other members of the US government public health apparatus of evading questions about their funding of the Chinese lab's "gain of function" research, which takes natural viruses and morphs them into something more dangerous. Paul has pointedly said that Fauci committed perjury in congressional hearings and that he belongs in jail "without question."   

Musk is neither the only nor the first noteworthy figure to back Paul for party leader. Just hours after McConnell announced his upcoming step-down from leadership, independent 2024 presidential candidate Robert F. Kennedy, Jr voiced his support: 

In a testament to the extent to which the establishment recoils at the libertarian-minded Paul, mainstream media outlets -- which have been quick to report on other developments in the majority leader race -- pretended not to notice that Paul had signaled his interest in the job. More than 24 hours after Paul's test-the-waters tweet-fest began, not a single major outlet had brought it to the attention of their audience. 

That may be his strongest endorsement yet. 

Tyler Durden Sun, 03/10/2024 - 20:25

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Government

The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While “Waiting” For Deporation, Asylum

The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several…

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several months we've pointed out that there has  been zero job creation for native-born workers since the summer of 2018...

... and that since Joe Biden was sworn into office, most of the post-pandemic job gains the administration continuously brags about have gone foreign-born (read immigrants, mostly illegal ones) workers.

And while the left might find this data almost as verboten as FBI crime statistics - as it directly supports the so-called "great replacement theory" we're not supposed to discuss - it also coincides with record numbers of illegal crossings into the United States under Biden.

In short, the Biden administration opened the floodgates, 10 million illegal immigrants poured into the country, and most of the post-pandemic "jobs recovery" went to foreign-born workers, of which illegal immigrants represent the largest chunk.

Asylum seekers from Venezuela await work permits on June 28, 2023 (via the Chicago Tribune)

'But Tyler, illegal immigrants can't possibly work in the United States whilst awaiting their asylum hearings,' one might hear from the peanut gallery. On the contrary: ever since Biden reversed a key aspect of Trump's labor policies, all illegal immigrants - even those awaiting deportation proceedings - have been given carte blanche to work while awaiting said proceedings for up to five years...

... something which even Elon Musk was shocked to learn.

Which leads us to another question: recall that the primary concern for the Biden admin for much of 2022 and 2023 was soaring prices, i.e., relentless inflation in general, and rising wages in particular, which in turn prompted even Goldman to admit two years ago that the diabolical wage-price spiral had been unleashed in the US (diabolical, because nothing absent a major economic shock, read recession or depression, can short-circuit it once it is in place).

Well, there is one other thing that can break the wage-price spiral loop: a flood of ultra-cheap illegal immigrant workers. But don't take our word for it: here is Fed Chair Jerome Powell himself during his February 60 Minutes interview:

PELLEY: Why was immigration important?

POWELL: Because, you know, immigrants come in, and they tend to work at a rate that is at or above that for non-immigrants. Immigrants who come to the country tend to be in the workforce at a slightly higher level than native Americans do. But that's largely because of the age difference. They tend to skew younger.

PELLEY: Why is immigration so important to the economy?

POWELL: Well, first of all, immigration policy is not the Fed's job. The immigration policy of the United States is really important and really much under discussion right now, and that's none of our business. We don't set immigration policy. We don't comment on it.

I will say, over time, though, the U.S. economy has benefited from immigration. And, frankly, just in the last, year a big part of the story of the labor market coming back into better balance is immigration returning to levels that were more typical of the pre-pandemic era.

PELLEY: The country needed the workers.

POWELL: It did. And so, that's what's been happening.

Translation: Immigrants work hard, and Americans are lazy. But much more importantly, since illegal immigrants will work for any pay, and since Biden's Department of Homeland Security, via its Citizenship and Immigration Services Agency, has made it so illegal immigrants can work in the US perfectly legally for up to 5 years (if not more), one can argue that the flood of illegals through the southern border has been the primary reason why inflation - or rather mostly wage inflation, that all too critical component of the wage-price spiral  - has moderated in in the past year, when the US labor market suddenly found itself flooded with millions of perfectly eligible workers, who just also happen to be illegal immigrants and thus have zero wage bargaining options.

None of this is to suggest that the relentless flood of immigrants into the US is not also driven by voting and census concerns - something Elon Musk has been pounding the table on in recent weeks, and has gone so far to call it "the biggest corruption of American democracy in the 21st century", but in retrospect, one can also argue that the only modest success the Biden admin has had in the past year - namely bringing inflation down from a torrid 9% annual rate to "only" 3% - has also been due to the millions of illegals he's imported into the country.

We would be remiss if we didn't also note that this so often carries catastrophic short-term consequences for the social fabric of the country (the Laken Riley fiasco being only the latest example), not to mention the far more dire long-term consequences for the future of the US - chief among them the trillions of dollars in debt the US will need to incur to pay for all those new illegal immigrants Democrat voters and low-paid workers. This is on top of the labor revolution that will kick in once AI leads to mass layoffs among high-paying, white-collar jobs, after which all those newly laid off native-born workers hoping to trade down to lower paying (if available) jobs will discover that hardened criminals from Honduras or Guatemala have already taken them, all thanks to Joe Biden.

Tyler Durden Sun, 03/10/2024 - 19:15

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