Brookfield Property Partners L.P.
Q2 2020 Earnings Call Transcript

Published: 7 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Brookfield Property Partners Second Quarter 2020 Financial Results Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Matt Cherry, Senior Vice President, Investor Relations. Thank you. Please, go ahead, sir.

[Matt Cherry:]

Thank you, Daniel. Before we begin our presentation, let me caution you that our discussion will include forward-looking statements. These statements that relate to future results and events are based on our current expectations. Our actual results in future periods may differ materially from those currently expected, because of a number of risks, uncertainties and assumptions. The risks uncertainties and assumptions that we believe are material are outlined in our press release issued this morning. With that, I'll turn the call over to Chief Executive Officer, Brian Kingston.

[Brian Kingston:]

Thank you, Matt, and good morning, everyone. With me on the call this morning are Bryan Davis, our CFO; and Jared Chupaila, the CEO of our retail real estate business. As the global economic shutdown continued into the second quarter of 2020, it brought with it many challenges. And although we could not have envisioned the force or the speed that led to this global recession, we have been preparing and positioning ourselves for an economic downturn for some time. And so, we're cautiously optimistic the worst is now behind us. While we're not completely out of the woods, we expect the severity of the impact of the shutdowns to be largely isolated within the second quarter. We're extremely proud of our dedicated employees around the world, who prepared our properties for a safe reopening, so that our tenants can return to their offices, storefronts and other premises to resume their operations confidently, knowing that we're taking the necessary measures to protect them. As we've reopened, our properties themselves look quite different. Health and safety signage is abundant, as are hand sanitizing stations, directional indicators and reminders to maintain appropriate social distancing. We've installed infrared temperature scanners at many of our office buildings, updated the air filtration systems and increased the frequency and intensity of our cleaning procedures. And with these changes in place, our properties are leading the way to reopening cities around the world. With regard to Brookfield's own corporate offices, most of our employees returned to the office in June and we're already seeing the benefits of rekindling those important connections that have been lost through remote communication. While there's been some discussion over the last several months, as it relates to the future of office, it's our belief that a corporate office represents much more than a place for employees to sit every day. Companies utilize their offices as incubators of culture and an important tool to recruit and train younger talent. Collaboration and innovation cannot take place remotely or over conference calls. And some companies are already observing a decline in these areas amongst their employees. As time goes on, we think the loss of innovation and collaboration will become even more apparent and companies will shift their emphasis back to having employees in the office. In the long run, we do not think that remote working represents a threat to the office as we know it. In fact, concerns around social distancing and density ratios are very likely to drive additional office demand in the future and may prove to reverse the trend of increased densification that we have witnessed over the past 20 years. Our portfolio remains well positioned to absorb any challenges to office fundamentals in the near term. In typical real estate cycles, our high-quality assets outperform their markets as tenants gravitate toward the best assets in order to upgrade their workspace. It's a strong testament to the high-quality nature of our portfolio and continuing demand for premier space, that despite the challenges posed by the economic shutdown in the second quarter, our operating personnel were still able to execute over 650,000 square feet of leasing volume. And importantly, these leases were signed at rents that were 16% higher than the leases expiring during the quarter. Our portfolio is 92% leased on a long-term basis, with the remaining average lease term of almost nine years. We're extremely confident in this business' ability to withstand any near-term pressure on fundamentals. And we're poised for growth over the next several years as our development pipeline delivers new best-in-class properties in our major markets. Moving to U.S. retail. As is widely known, this segment was directly impacted by the economic shutdown that began in March, with our entire portfolio being closed by government mandate for most of the second quarter. In early June, we began the process of reopening and all but one of our centers were reopened by the July 4th weekend. Nearly 15,000 of our tenants have restarted their businesses, representing more than 85% of the portfolio. Shopping traffic at reopened malls continues to increase, as people become more confident -- more comfortable and confident with the new societal norms of physical distancing and wearing masks. Importantly, retailers are seeing higher sales conversion rates in their stores. As our tenants start to get their businesses back up and running, we have been working closely with those most affected by the shutdown, providing financial accommodation, including rent deferrals and even abatements to some of our smaller tenants. At the same time, we believe our tenants have a contractual obligation to pay the rent that's due under the terms of their lease, especially when they have the financial means to do so and, as such, we've been pursuing our rights where necessary. Curbside pickup, buy online pick up in-store and ship-from-store programs continue to capture market share and are becoming critical for successful retailers to leverage the full value of their physical stores and power omnichannel offerings as well as decrease fulfillment costs. Retail executives continue to drive home the point of how important their store fleet is to the profitability of their businesses and their ability to connect with consumers and grow their brands. We continue to find creative and innovative ways to support our retail tenants and the surrounding community as we adapt to these new circumstances. We brought pop-up drive-in theaters to a handful of our mall parking lots across the country, utilized our parking garages for outdoor dining and teamed up with Fit

[Bryan Davis:]

Thank you, Brian. During the second quarter of 2020, BPY earned company FFO and realized gains of $178 million or $0.18 per unit. This compares with $362 million or $0.38 per unit for the same period in 2019. In the current quarter our core office business earned $126 million of CFFO, compared to $187 million earned in the same period in the prior year. The prior period did include a performance fee of $38 million. So excluding this, our current quarter CFFO decreased by $23 million. As Brian mentioned, this decrease was largely due to the impact of the economic shutdown, which contributed to a reduction in our property net operating income of $20 million from $331 million, earned in the prior year to $311 million. The shutdown forced the closure of retail within our office properties, the hotel at our Allen Center complex in Houston and impacted daily and monthly parking usage. This accounted for $14 million of the NOI reduction. We established some credit loss reserves which in addition to weaker foreign currencies across all of our markets, contributed to another $11 million in reduced NOI. In addition, we had incremental earnings from the termination of leases in Australia and the U.S. in the prior period that contributed a further $7 million to the decline. Partially offsetting this, we continue to benefit from our recently completed developments, in New York, London and D.C. which are in aggregate 92% leased and about 53% occupied, as of the end of the quarter and contributed $21 million in incremental NOI. We also earned $3 million in condominium income this quarter, as we closed on another 75 units. Our active condominium projects include our Principal Place project, where we have sold 267 units or 89%. And delivered 256 of those units; our tower at South Bank in London, where we have sold 456 units or 96% and delivered 176 of those units. And 10 Park in Wood Wharf, where we have sold 275 units or 79% and delivered our first 10 units this quarter. As I mentioned last quarter, the impact of the pandemic and associated economic slowdown has caused construction delays, which will impact our ability to sell and deliver units. As a result the recognition of the remaining income of approximately £40 million will be shifted to the latter part of this year and into the first half of next year. In the current quarter, our core retail business earned $140 million of CFFO, compared to $170 million earned in the same period in the prior year. A reduction in property net operating income of $22 million and fee income of $10 million due to lower leasing volumes, property revenues, and joint venture fees contributed to most of this decrease. These were partially offset by lower interest and general and administrative expenses. Same-store net operating income from this business was $368 million compared with $398 million earned in the prior year, a reduction of 7.6%. As with our office properties and office business these results in retail were impacted by the economic shutdown, which had all of our malls closed at some point during the quarter. The major variances compared to the prior year include a reduction in overage rents, percent in lieu and shorter duration rents, including parking income of $19 million; the continued impact of bankruptcies, store closures and co-tenancy claims of $11 million; and an increase in credit loss reserves of $21 million. These reductions were offset in part by about $20 million in operating cost savings across our portfolio. Non-same-store NOI increased by $8 million to $28 million this quarter as we benefited from our net acquisition activity towards the end of last year. In addition, we did earn $13 million by repurchasing debt during the quarter at a discount. However, we have not included that income in our CFFO. Moving to our LP investments. CFFO declined $87 million this quarter compared with the prior year and contributed to a loss of $8 million. As I mentioned in last quarter's conference call remarks, we expected pressure on our Q2 results in this segment as our hospitality investments were impacted by the abruptness of the traveler restrictions and stay-at-home orders that were put in place, which closed the majority of our properties or had them operating at low occupancy for the entire second quarter. This accounts for $78 million of the negative variance and was largely concentrated in center parks and the Atlantis due to the scale of these operations. We expect leisure focused hotels to recover the quickest and we have started to see that at center parks as Brian mentioned, which is now reopened to significant demand and we expect to see at the Atlantis when we reopen after the hurricane season has passed. The balance of the negative variance this quarter was focused in our opportunistic retail investments, which were impacted by many of the same items that impacted our core retail business. Despite this decline in earnings, which we feel is largely temporary, the projected returns from our LP investments continue to be strong. On a gross basis, our investment in BSREP I is projecting a 23% IRR and 2.6 times multiple of capital; our investment in BSREP II is projecting a 15% IRR and a two times multiple of capital; and BSREP III, which is now 70% invested or committed is projecting an 18% IRR and a two times multiple of capital. Shifting to net income attributable to unitholders. For the current quarter, we had a loss of $1.25 billion or $1.35 per unit, compared to income of $127 million or $0.13 per unit in the prior year. Contributing to this loss were unrealized fair value losses of $1.45 billion. It continued to be a challenging environment to determine the fair value of our properties. And similar to last quarter there was increased uncertainty in input factors including capitalization rates and discount rates really due to the lack of market transactions and to near and longer term impacts to property level cash flows. Well, last quarter we focused on impacts to short-term cash flows. Our approach this quarter was on sensitizing medium to longer term cash flows based on a property-by-property approach, including revising assumptions on occupancy, downtime, rent growth and credit quality of our tenant base. On balance, we did not adjust discount rates unless specifically warranted. And on balance, we did not adjust terminal rates unless we -- as we continue to take the view that the markets will stabilize by the terminal year. As expected our hospitality investments were the most impacted declining by 5% followed by our retail property values, which declined by 3% and then by our core office properties, which declined by 1% largely to reflect the impact to our retail tenants across those properties. I will end my notes by highlighting that BPY ended the quarter with $13.5 billion of its capital invested in our global office business, comprising properties that are 92.3% leased for an average lease term of 8.6 years; $12.9 billion of its capital invested in our core U.S. retail business, comprising properties that are 94.7% leased for an average term of over six years; and we had $4.8 billion invested in our LP investment strategy, which is predominantly focused on three series of global opportunistic funds which continue to perform very well. This $31 billion of invested capital is capitalized with approximately $2.5 billion of corporate level debt, $2.5 billion of perpetual preferred equity and $26 billion of equity attributable to our unitholders. Our IFRS value per share at the end of the quarter was $27.01 per unit. So with those as my planned remarks, I'll turn the call back over to Brian.

[Brian Kingston:]

Thanks, Bryan. To summarize prior to opening the line up for questions and answers from our analysts on the call today, we are cautiously optimistic that the worst of the economic shutdown is behind us and our business is well-positioned to withstand any lingering impacts. Many of our most successful real estate investments over the years have come during periods of economic distress or when property values become dislocated as they are today. And we have ample access to capital and the flexibility to capitalize on these new opportunities as they arise. As a management team, we extend our gratitude to the thousands of real estate employees around the world for their hard work and dedication during this challenging period. And we likewise thank our unitholders for their continued investment and support and look forward to continuing this conversation over the balance of the year. So with those with our prepared remarks, we're happy to take any questions from our analysts who are on the line today. Daniel?

[Operator:]

[Operator Instructions] Our first question comes from Sheila McGrath with Evercore. Your line is now open.

[Sheila McGrath:]

Yes. Good morning. Brian, I was wondering if you could help us understand the collections. I think on retail you said were 34%. Just wondering how they're shaping up now that more of the properties are open and in July. And also if you have any insights if some of the retailers were able to secure any government assistance or if there's anything in the works right now that might help them to perform better on their lease obligations.

[Brian Kingston:]

Yes, sure Sheila. So as you would expect as I mentioned the malls opened up over the course of June. And so really coming into July they were largely opened. And so as a consequence collections have been improving throughout July. And a lot of our conversations now are centered around that period of closure and catching up on those arrears. And as I mentioned in some cases that's deferral; some cases it's abatements. But in general, once the retailers are reopening and getting their stores back up and running we're definitely seeing an improvement in collections. I expect that will accelerate as we complete the negotiations around what to do with the arrears. And as to your question around access to government funds or loan programs, et cetera that's been a huge focus of ours literally since March. When these programs first got announced we actually set up a dedicated portal for all of our retail tenants where we had all kinds of information around how to access these assistance for some of our smaller tenants on actually filling out the loan applications, et cetera. And it's been very well-received by those tenants and a lot of them were able to access some of these loan programs et cetera that were available for them. And I think our guys did a really great job of trying to help facilitate that. So that's been a pretty important part of getting these businesses stood back up again and up and running.

[Sheila McGrath:]

Okay. And then as a follow-up in the FT, there was some mention about some CMBS mortgages that went to special servicer. Could you give us some insight there? Is this part of a deleveraging strategy? Or I think Bryan Davis mentioned you bought some loans at a discount. Is it your expectation there'll be other opportunities to repurchase debt at a discount to kind of re-equitize some properties?

[Brian Kingston:]

Yes. So as you know sort of, a hallmark of our financing strategy is that all of our -- the vast majority of our debt is at the property level on a non-recourse basis. And we always talk about the flexibility that that provides us. And that is really what you're seeing there which is in some cases some of these malls or other assets have been hit disproportionately as a result of either the forces that were worked before COVID or certainly the COVID impact. And so when we begin to -- we sort of, go through a regular process all the time of looking at these malls and deciding whether before we invest new capital in them and not whether there's an adequate return associated with it. And so as you can imagine in the period of time that we're in right now there's a number where that may no longer be the case. And so because they are non-recourse single asset mortgages, it does sort of allow us to make asset-by-asset decisions. Now within our portfolio, we have 180 malls and over 200 office buildings. And so this is a very small number by number of assets and certainly by the amount of equity that we have invested in them it's immaterial. And so it's just really allowing us to as you say either restructure the loans in some format or in some cases just relieve ourselves of that debt obligation where it no longer makes sense to continue funding the shortfalls in those assets. So I think -- and in some cases the restructuring or the process that takes place there is the lenders are willing to sell us their loans or the mortgages back at a discount. And so in that case we've been able to essentially reacquire the asset at an attractive basis.

[Sheila McGrath:]

Okay. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Mario Saric with Scotiabank.

[Mario Saric:]

Hi. Good morning.

[Brian Kingston:]

Good morning.

[Mario Saric:]

Just my first question is really quickly on the liquidity. It was down about $1.2 billion quarter-over-quarter to -- I think it was $5.9 billion. I haven't had a chance to kind of reconcile the moving parts but can you just give us a high-level sense of kind of what drove that $1.2 billion decline quarter-over-quarter? And then secondly what would be the minimum amount of liquidity that you'd like to hold particularly given kind of recent let's say facility amendments at BPR?

[Bryan Davis:]

Sure. Mario this is Bryan. I'd say there's sort of two main things that contributed to the decline the first is being that we had a number of rent that wasn't collected, particularly within our retail -- retail business but we also had some smaller amounts scattered throughout our office business. And we continue to have operating costs within those businesses. And so part of that reduced liquidity was just funding those operating costs. So I'd say that's one big piece of it; the second and the similar applies to our hotel businesses as well. And I'd say the second big piece is we continue to be active in some growth CapEx initiatives where we had momentum going into COVID and we had the ability to continue on with construction. And so we funded a good portion of those growth CapEx and development initiatives. And so those are the two big pieces. I'd say that contributed to the decline. As far as minimum amounts of liquidity operating our business with $6 billion of liquidity is more than adequate. As you know, we tend not to operate with a lot of cash because cash isn't a good returning investment. And so we feel very comfortable with $6 billion of liquidity that we have more than enough. I'm not going to necessarily put a number on where we feel comfortable operating it. But I just think that we're in a good position not only to be able to continue to invest in growth in our business, but also to be defensive through periods where operating results don't cover operating costs as well.

[Mario Saric:]

Understood. Okay. And then just maybe shifting gears a little bit to the office portfolio a little bit surprised to see the same-property NOI down as much as retail which you've indicated kind of is driven by the street-front retail as well as parking revenue coming down. Can you give us a sense in terms of what's the breakdown in the NOIs for office between those three categories on a stabilized basis typically?

[Bryan Davis:]

Yes. Well so our parking revenue we tend to earn about $100 million across our portfolio on an annual basis and parking revenues, probably contributes about $60 million of NOI. And so of the variance in particular in the second quarter the majority related to lower parking revenues because nobody was going to the office and people were postponing their monthly parking rentals as well. So I'd say that would be the lion's share of that variance. Much of our retail within our office is on a percentage rent basis as well. And so when you combine that with some credit reserves we took against the receivables that we have from some of our retailer tenants that was sort of in aggregate maybe half of that variance. And then lastly, we do have a hotel that we recently renovated in the Allen Center complex opened it up, but then had to quickly shut it down. And so it operated at 0% occupancy through all of the second quarter and there is about a $3 million variance as it relates to that as well. As tenants start to return to our office our retail will begin to reopen. As tenants start to return to our office and people start getting out and about, we'll start to see more parking revenue. So we do think that we saw the trough in the second quarter and are cautiously optimistic that those results will improve over the balance over the year.

[Mario Saric:]

Got it. And there's been in terms of the percentage revenue in terms of rent there's been an increased kind of industry discussion about converting or the desire of tenants to convert fixed rate rent on the retail side to a percentage of revenue rent. What are your general thoughts on that potential trend going forward?

[Brian Kingston:]

Yes. I'll maybe let Jared talk a little bit about specifically percentage rents versus the traditional ones but also just generally on our leasing strategy.

[Jared Chupaila:]

Yes. Thanks Brian. So I think there has been in a period of uncertainty certainly a desire by the retailers to structure their leases based on sales performance. However, it's relatively minor percentage of the overall lease structures. And I don't see that generally changing going forward.

[Mario Saric:]

Understood. Okay. Sorry, my last question comes to capital deployment. I think Bryan mentioned that historically these are the types of periods where Brookfield really makes a lot of money in terms of buying the fund on an attractive basis. How should we think about BPY's future capital allocation with respect to it coming from I think your 7% co-invest in BSREP III relative versus perhaps buying assets directly on the balance sheet? How should we think about that blend going forward?

[Bryan Davis:]

Yes. So the -- clearly the investment opportunity set within the opportunity funds is very broad. It's multiple sectors. It's around the world. And that really -- those types of investments I'll use hospitality in India as an example will generally be done through that -- through the private funds. And directly on the balance sheet or those types of opportunities for BPY, it's really going to be focused in our core businesses office retail multifamily and maybe some industrial. And so that's how I would sort of bifurcate the two. I think the -- for those acquisitions or assets or portfolios of assets that are effectively tuck-ins or additions to what currently sits on directly on our balance sheet, they will be pursued on BPY's balance sheet. And everything else will be done through the funds.

[Mario Saric:]

Got it. I guess I'm asking -- with BSREP III I think it's about 70% deployed now. So it was up 9% quarter-over-quarter. Maybe a little bit too early to highlight this, but for the successor fund which typically starts getting tension when the predecessor is 75% deployed. Is the expectation for BPY to have a co-investment that's more consistent with what we saw in BSREP I and II as opposed to III? Or is the expectation for the co-investment to be shared with BAM going forward again?

[Bryan Davis:]

Yes. We'll -- clearly we're getting closer to the time when we'll need to make that decision. I think it will be based on where our own capital position is at that time and the types of opportunities that we're seeing within -- for to put BPY capital to work otherwise, whether that's in repositionings within the retail business or office developments or a number of other things. So it's probably a late 2020, early 2021 type decision and it will really be based on where we are at that time.

[Mario Saric:]

Understood. Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Sheila McGrath with Evercore. Your line is now open.

[Sheila McGrath:]

Yes. Brian, I was wondering if you could help us understand a little bit more about the BOPIS or buy online pick up in store. What successful implementation might mean for retailers for Brookfield? And will some mall or anchor space be repurposed to warehouse or fulfillment facilities at a shopping center?

[Brian Kingston:]

Sure. So I'm going to maybe let Jared speak to some of the trends we're seeing in that area.

[Jared Chupaila:]

Yes. Thanks, Brian. So Sheila certainly we -- one of the outcomes from a positive standpoint regarding -- as we work through the pandemic as many of our retailers have had to -- they've been forced to adapt by accelerating their one channel capabilities to meet the consumers' need for convenience. So as Brian alluded to in his prepared comments, BOPIS, ship from store and contactless pickup as well as curbside have become critically important in helping the retailers be more efficient. And what we see as an outcome of that is one they're able to meet the customers' demand for convenience, but also overall reduce their shipping and fulfillment cost, which is enabling them to hold margin and improve margin and actually has been a more efficient sale for them many times. And we're having that communicated frequently by the retailers themselves and acknowledging the importance of the brick-and-mortar footprint to execute on that one channel strategy. Regarding your question as to physical space, we have begun to test and trial with retail tech companies that are providing solutions for last-mile delivery and other fulfillment solutions where we can use otherwise unused space the back end of shopping centers to help consolidate the packages and provide greater convenience to the couriers all of which is expediting the delivery of the product and the volume of the product that could be delivered to the end customer. I think we're still as an industry in the early stages of finding the ultimate and best solution. But there's certainly interest and value from both the retailer and the landlord to advance that process.

[Sheila McGrath:]

Okay. Thank you. And then just on office for a second. I think it was good news for New York and Vornado. And the office sector that Facebook was – executed a lease at Farley in Manhattan. I was just wondering, if you could tell us or give us any insights on discussions at Two Manhattan West has everything paused? Or just your thoughts on that project now and the challenge with sentiment on the office sector with work-from-home discussions.

[Brian Kingston:]

Yes sure. So maybe taking those in a little bit in reverse order. The – as I sort of said earlier, our belief is look under current circumstances where people are being asked to socially distance and not overburden public transit or other things like that clearly office populations are down and businesses are largely functioning remotely through Zoom calls and conference calls et cetera. And I think the good news is like the technology has developed over the last 20 years, or so that enables us – enables businesses to be able to do that without completely grinding to a halt. However, it really is a stop-gap measure until we get into a position where you can relax some of those social distancing and get – allow people to sort of congregate in larger groups again. We think as soon as that happens and we've seen this in parts of the world that have reopened including South Korea, including China and even starting to see it in parts of Europe as those countries have started to relax some of these there is a quick move to get back to the office as soon as possible, because you really can't effectively operate a business and build culture and train young staff et cetera with all completely remotely. And frankly, most people's homes are not set up for them to function and work from them. And the toll that it's taking on a lot of those people from a sort of mental and social respect has been pretty great. So we expect that during this period of time that we're in right now where we're trying to manage through this crisis, you will continue to see people working remotely and that's not likely to change in the very near term. But longer term the idea that everyone will work from home and never return to the office, again we just don't think seems realistic. And so the discussions that, we're having with our tenants are focused both on the short term and the long term. The short-term conversations are around how we're going to manage elevator capacity within the complexes, what cleaning procedures are in place the air filtration systems et cetera that we're putting in place to improve the air handling et cetera. And that's really focused around triage in terms of how they bring – how they stage bringing their people back into the office. And then separately from that there's the longer term conversation where they're starting to think about their own densities and what the permanent changes in how they're going to operate their businesses within the office might mean? And therefore, how does that translate into what their future space requirements maybe or what the office of the future really looks like. And I'd say, it's early, everybody is still trying to figure it out. I think when you hear companies like those that have come out and said they're going to allow people to work remotely indefinitely or maybe even forever, what they're really saying is they're going to allow increased flexibility, meaning if people want to work from home part-time or from a different location, some of the time this has shown that actually that is viable and you can do it on a relatively short-term basis. What I don't think any of them are saying is that, they're going to completely eliminate their office footprint and go to a virtual company. And as you said like Facebook is a prime example of that. They've been one of the ones that are the most vocal about giving their employees that flexibility, and yet they've just signed this lease at Farley, which brings their total space in that immediate submarket right around Manhattan West to 2.2 million square feet of occupancy. So we don't think it means the office is going away, I think it's just a change in how maybe people will think about their office going forward.

[Sheila McGrath:]

Okay. And then Brian just comments on Two Manhattan West have discussions there kind of paused with the pandemic? Or what are your thoughts on that project?

[Brian Kingston:]

Yeah. As I said, I think a lot of people are stepping back to think about what does it mean for their own space needs. And obviously, there's just a physical challenge of getting people on site to view space et cetera. And so I think the leasing has been quieter this quarter than an ordinary quarter would have been. That being said, there are still a large number of discussions that are underway that have not they've not terminated or anything like that, they've just taken a bit of a slowdown.

[Sheila McGrath:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Mark Rothschild with Canaccord. Your line is now open.

[Mark Rothschild:]

Thanks. You guys have more than $4 billion of debt from the retail portfolio maturing by year-end 2021. As things are starting to maybe improve generally in the markets and malls have reopened, is there any way to have greater confidence in the ability to refinance all of that debt? And to what extent do you think you might have to put in more equity to deal with all of those mortgages?

[Bryan Davis:]

Yeah, Mark, it's Bryan. Look, I'd say that the majority of that debt that is coming due underlies high-performing retail malls. We feel comfortable that once we get through the second quarter and get these stores back open and the malls producing the revenue in a more normalized way, post the economic slowdown and COVID that these malls will still attract debt capital and we'll be able to refinance them in the normal course. As we sort of talked about in our Q2 prepared remarks and in our press release, the focus really for now has been on pushing out maturities for a 12- to 18-month period. The lenders as well as the borrowers are all in a place where we want sort of a more normalized environment in order to be able to execute refinancings. But we think that will start to happen towards the balance of this year and put us in a good position where we can deal with all of those maturities by the end of 2021.

[Mark Rothschild:]

So that's helpful. But just so I understand, you do not anticipate needing to put any material amount of equity into – further equity into the retail portfolio to deal with the mortgages over the next couple of years?

[Bryan Davis:]

That's correct.

[Mark Rothschild:]

Okay. Just one other question just on the balance sheet for the office portfolio. The value of development, commercial developments went down quite a bit from last quarter. Is there anything there with an asset – some part moved to income producing or am I missing something there?

[Bryan Davis:]

Yes Mark, it's Brian. Yes we talked about it last quarter. We completed construction on one Manhattan West and 100 Bishopsgate. Those both sort of met the criteria of being able to be moved into commercial properties. And so those were the two items that were actually moved out of commercial developments and up into commercial properties, which when you get a chance to go through our supplemental, we do include in the fair value continuity that we present on Page 11. In fact, within our office commercial developments, the ones that remain, we did have an increase in value-based off of our fair value process of a little over $100 million this quarter to reflect the value that's being created in some of those investments that remain as developments.

[Mark Rothschild:]

So would you have a full quarter of NOI from those properties in the Q2 numbers?

[Bryan Davis:]

No. No we wouldn't. As I had indicated in my call remarks, although they're 92% leased they're only 53% physically occupied. And so we are probably 60% to 70% of our normal run rate on NOI. And so they're not yet stabilized.

[Mark Rothschild:]

Okay. Thank you so much.

[Operator:]

Thank you. Our next question comes from Dean Wilkinson with CIBC. Your line is now open.

[Dean Wilkinson:]

Thanks. Good morning, everyone.

[Brian Kingston:]

Good morning, Dean.

[Dean Wilkinson:]

I might be asking this question a week too early and maybe it's one more for Bruce and Nick. But on the $5 billion retail revitalization plan, have you seen anything sort of moving on that and flowing in into BPY's tenants? And sort of do you have any observations just generally around how that plan may be going?

[Brian Kingston:]

Yes. So just to be clear on the $5 billion retail revitalization plan, that is targeted at investments in retailers, regardless of whether there are tenants or not. So I would say that yes to some extent some of the investments that have been made through that plan have been people that are in our malls. And in particular I think, as you would expect those are tenants that we know well within the real estate business because of the relationship. And so we can – it tends to lead us in that direction for – from a due diligence perspective. I would say there are a number of – none of these transactions happen quickly. So we just got it off the ground in April. The group has made a few investments. I would expect there'll be more over the balance of this year though. There's a lot in the hopper.

[Dean Wilkinson:]

Okay. And then just when you're looking at that sort of smaller percentage of tenants that you've had to put an abatement towards, what would that roughly be as a percentage? And would that be sort of equal to maybe that 15% of those retailers that aren't reopened at this point?

[Brian Kingston:]

It's primarily – as I mentioned earlier, it's primarily concentrated – the abatements anyway are in the sort of smaller, local and probably not surprisingly the restaurant operators within the malls. And really the reasoning there is it really comes back to ability to pay. And the options are you sort of hold the line on it and they are unable to reopen or we do what we can to sort of assist them in getting up and running. 15% would be way too high though it's much smaller.

[Dean Wilkinson:]

Okay. That’s it for me. Thanks, guys.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Brian Kingston for any closing remarks.

[Brian Kingston:]

Okay. Thank you everyone for dialing in again this quarter and we hope you remain healthy and safe and look forward to updating you again next quarter.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.