Brookfield has suffered from retail tenant bankruptcies since the beginning of 2018 resulting in a $150 million hit, it revealed during last week’s second quarter earnings call for subsidiary Brookfield Property Partners.
The firm said bankruptcies from big-box retailers have presented a challenge for the portfolio. Already, 13 major retailers have filed for bankruptcy during 2019.
Bankruptcies reduced net operating income by almost $14 million year-to-date, compared to the prior year, chief financial officer Bryan Davis said during the earnings call. For example, department store chain Sears announced the closure of five stores in Brookfield’s portfolios. While bankruptcies impacted this quarter’s results, Davis said the firm expects these hardships to be only temporary.
Indeed, the firm has made progress in leasing back some of the space lost. Brookfield has now leased back 2.1 million square feet to date-out of 2.75 million left empty – and recovered $110 million of the $150 million lost since the beginning of 2018 in the process, global head of retail Sandeep Mathrani said on the call.
While some retailers are shuttering, others are growing and giving the empty space new life, according he said. Sporting goods stores, for example, are taking up big-box space in the portfolio, according to Mathrani. The A and B-plus malls in the portfolio also reported increased sales across all retail categories, he added. Athleisure, home furnishing stores and digitally native companies like mattress company Casper, eyewear retailer Warby Parker, men’s apparel firm UNTUCKit, and clothing store Bonobos have driven growth. As a result, when Sears announced the closure of five stores within the portfolio, Brookfield was able to lease the empty space to a home furnishings store, a wholesale club, supermarket and two spaces for entertainment all within 60 days.
In addition to finding resilient new tenants, Brookfield has continued its focus on increasing the density of its malls by adding ground-up mixed-use development. The firm currently has 12 projects that should add $3 billion in value to the portfolio, according to chief executive Brian Kingston. Almost all the development projects include a residential component, and others feature hotels, office, medical office, entertainment and food options, he said.
During the call, Brookfield also said the newly curated tenant base in the portfolio should be resistant to any challenges created by the ongoing trade war between the US and China. Retailers in entertainment, food and sports, for example, are not importing any merchandise, according to Davis. For other retailers, he does not see increased costs caused by geopolitical issues as a negative for sales productivity. In fact, costs rising will create a bit of inflation, and that inflation should result in an increase in sales productivity, he said.
While media reports of store closures may seem concerning, Davis said these were a result of consolidation in some areas and growth in others. Retailers, particularly those with anchor stores, want footprints in the best shopping centers, he said. “We’re on track to lease over 10.3 million square feet this year, well ahead of our budget,” Kingston said on the call. “This is a strong indicator of the value of bricks-and-mortar stores itself, where consumers are able to browse, purchase, pick up and return online orders.”
The portfolio was 95 percent leased at the end of the quarter, and Kingston expects that figure to grow to 96 percent by the end of the year. He also reported in-place rental growth increased 2.2 percent throughout the portfolio during the quarter.
The firm also said it exited some properties in the core retail business during the quarter, which generated $569 million to pay down a portion of the term loan that helped finance the $15 billion GPP acquisition in July 2018. Brookfield intends to continue reducing leverage from the acquisition by selling assets within the portfolio. The firm can bring in partners on individual assets or conduct outright sales, Kingston explained.
Brookfield’s retail portfolio currently includes more than 170 properties in the US across 43 states, accounting for 146 mission square feet, according to the firm.