Management’s Discussion and Analysis of Financial Results

INTRODUCTION

This management’s discussion and analysis (“MD&A”) of Brookfield Property Partners L.P. (“BPY”, the “partnership”, “we”, “us”, or “our”) covers the financial position as of March 31, 2018 and December 31, 2017 and results of operations for the three months ended March 31, 2018 and 2017 . The information in this MD&A should be read in conjunction with the unaudited condensed consolidated financial statements (the “Financial Statements”) and related notes as of March 31, 2018 , included elsewhere in this report, and our annual report for the year ended December 31, 2017 on Form 20-F.

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND USE OF NON-IFRS MEASURES

This MD&A, particularly “ Objectives and Financial Highlights – Overview of the Business ” and “ Additional Information – Trend Information ”, contains “forward-looking information” within the meaning of Canadian provincial securities laws and applicable regulations and “forward-looking statements” within the meaning of “safe harbor” provisions of the United States Private Securities 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”.

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, as applicable.

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.

We disclose a number of financial measures in this MD&A that are calculated and presented using methodologies other than in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). We utilize these measures in managing our business, including performance measurement, capital allocation and valuation purposes and believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing our overall performance. These financial measures should not be considered as a substitute for similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures may differ from the calculations disclosed by other businesses, and as a result, may not be comparable to similar measures presented by others. Reconciliations of these non-IFRS financial measures to the most directly comparable financial measures calculated and presented in accordance with IFRS, where applicable, are included within this MD&A.

OBJECTIVES AND FINANCIAL HIGHLIGHTS

BASIS OF PRESENTATION

Our sole material asset is our 37% interest in Brookfield Property L.P. (the “Operating Partnership”). As we have the ability to direct its activities pursuant to our rights as owners of the general partner units, we consolidate the Operating Partnership. Accordingly, our Financial Statements reflect 100% of its assets, liabilities, revenues, expenses and cash flows, including non-controlling interests therein, which capture the ownership interests of other third parties.

We also discuss the results of operations on a segment basis, consistent with how we manage our business. The partnership’s operating segments are organized into four reportable segments: i) Core Office, ii) Core Retail, iii) Opportunistic and iv) Corporate. These segments are independently and regularly reviewed and managed by the Chief Executive Officer, who is considered the Chief Operating Decision Maker.

Our partnership’s equity interests include general partnership units (“GP Units”), publicly traded limited partnership units (“LP Units”), redeemable/exchangeable partnership units of the Operating Partnership (“Redeemable/Exchangeable Partnership Units”), special limited partnership units of the Operating Partnership (“Special LP Units”) and limited partnership units of Brookfield Office Properties Exchange LP (“Exchange LP Units”). Holders of the GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, and Exchange LP Units will be collectively referred to throughout this MD&A as “Unitholders”. The LP Units, Redeemable/Exchangeable Partnership Units and Exchange LP Units have the same economic attributes in all respects, except that the Redeemable/Exchangeable Partnership Units have provided Brookfield Asset Management Inc. (“Brookfield Asset Management”) the right to request that its units be redeemed for cash consideration. In the event that Brookfield Asset Management exercises this right, our partnership has the right, at its sole discretion, to satisfy the redemption request with its LP Units, rather than cash, on a one-for-one basis. As a result, Brookfield Asset Management, as holder of Redeemable/Exchangeable Partnership Units, participates in earnings and distributions on a per unit basis equivalent to the per unit participation of the LP Units of our partnership. We present the Redeemable/Exchangeable Partnership Units as a component of non-controlling interests. The Exchange LP Units are exchangeable at any time on a one-for-one basis, at the option of the holder, for LP Units. We present the Exchange LP Units as a component of non-controlling interests.

This MD&A includes financial data for the three months ended March 31, 2018 and includes material information up to May 11, 2018 . Financial data has been prepared using accounting policies in accordance with IFRS as issued by the IASB. Non-IFRS measures used in this MD&A are reconciled to or calculated from such financial information. Unless otherwise specified, all operating and other statistical information is presented as if we own 100% of each property in our portfolio, regardless of whether we own all of the interests in each property, excluding information relating to our interests in China Xintiandi. We believe this is the most appropriate basis on which to evaluate the performance of properties in the portfolio relative to each other and others in the market. All dollar references, unless otherwise stated, are in millions of U.S. Dollars. Canadian Dollars (“C$”), Australian Dollars (“A$”), British Pounds (“£”), Euros (“€”), Brazilian Reais (“R$”), Indian Rupees (“₨”), Chinese Yuan (“C¥”), South Korean Won (“₩”), and United Arab Emirates Dirham (“AED”) are identified where applicable.

Additional information is available on our website at bpy.brookfield.com , or on www.sedar.com or www.sec.gov .

OVERVIEW OF THE BUSINESS

We are Brookfield Asset Management’s flagship public commercial property entity and the primary vehicle through which it invests in real estate on a global basis. We are a globally-diversified owner and operator of high-quality properties that typically generate stable and sustainable cash flows over the long term. Our goal is to be a leading global owner and operator of real estate, providing investors with a diversified exposure to some of the most iconic properties in the world and to acquire high-quality assets at a discount to replacement cost or intrinsic value. With approximately 17,000 employees involved in Brookfield Asset Management’s real estate businesses around the globe, we have built operating platforms across our three reporting segments:

Through these segments, we have amassed a portfolio of premier properties and development sites around the globe, including:

    Our diversified portfolio of high-quality office and retail assets in some of the world’s most dynamic markets has a stable cash flow profile due to its long-term leases. In addition, as a result of the mark-to-market of rents upon lease expiry, escalation provisions in leases and projected increases in occupancy, these assets should generate strong same-property net operating income (“NOI”) growth without significant capital investment. Furthermore, we expect to earn between 8% and 11% unlevered, pre-tax returns on construction costs for our development and redevelopment projects and 20% on our equity invested in Brookfield-sponsored real estate opportunity funds. With this cash flow profile, our goal is to pay an attractive annual distribution to our Unitholders and to grow our distribution by 5% to 8% per annum.

 

Overall, we seek to earn leveraged after-tax returns of 12% to 15% on our invested capital. These returns will be comprised of current cash flow and capital appreciation. Capital appreciation will be reflected in the fair value gains that flow through our income statement as a result of our revaluation of investment properties in accordance with IFRS to reflect initiatives that increase property level cash flows, change the risk profile of the asset, or to reflect changes in market conditions. From time to time, we will convert some or all of these unrealized gains to cash through asset sales, joint ventures or refinancings.

We believe our global scale and best-in-class operating platforms provide us with a unique competitive advantage as we are able to efficiently allocate capital around the world toward those sectors and geographies where we see the greatest returns. We actively recycle assets on our balance sheet as they mature and reinvest the proceeds into higher yielding investment strategies, further enhancing returns. In addition, due to the scale of our stabilized portfolio and flexibility of our balance sheet, our business model is self-funding and does not require us to access capital markets to fund our continued growth.

PERFORMANCE MEASURES

We expect to generate returns to Unitholders from a combination of cash flow earned from our operations and capital appreciation. Furthermore, if we are successful in increasing cash flow earned from our operations we will be able to increase distributions to Unitholders to provide them with an attractive current yield on their investment.

To measure our performance against these targets, we focus on NOI, same-property NOI, funds from operations (“FFO”), Company FFO, fair value changes, net income attributable to Unitholders and equity attributable to Unitholders. These performance metrics do not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies. We define each of these measures as follows:

NOI is a key indicator of our ability to impact operating performance of our properties. We seek to grow NOI through pro-active management and leasing of our properties. Same-property NOI allows us to segregate the performance of leasing and operating initiatives on the portfolio from the impact to performance of investing activities and items not of a recurring nature, which for the historical periods presented consist primarily of lease termination income. We reconcile NOI to net income on page 11.

We also consider FFO an important measure of our operating performance. FFO is a widely recognized measure that is frequently used by securities analysts, investors and other interested parties in the evaluation of real estate entities, particularly those that own and operate income producing properties. Our definition of FFO includes all of the adjustments that are outlined in the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO, including the exclusion of gains (or losses) from the sale of investment properties, the add back of any depreciation and amortization related to real estate assets and the adjustment for unconsolidated partnerships and joint ventures. In

addition to the adjustments prescribed by NAREIT, we also make adjustments to exclude any unrealized fair value gains (or losses) that arise as a result of reporting under IFRS, and income taxes that arise as certain of our subsidiaries are structured as corporations as opposed to real estate investment trusts (“REITs”). These additional adjustments result in an FFO measure that is similar to that which would result if our partnership was organized as a REIT that determined net income in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), which is the type of organization on which the NAREIT definition is premised. Our FFO measure will differ from other organizations applying the NAREIT definition to the extent of certain differences between the IFRS and U.S. GAAP reporting frameworks, principally related to the timing of revenue recognition from lease terminations and sale of properties. Because FFO excludes fair value gains (losses), including equity accounted fair value gains (losses), realized gains (losses) on the sale of investment properties, depreciation and amortization of real estate assets and income taxes, it provides a performance measure that, when compared year-over-year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs and interest costs, providing perspective not immediately apparent from net income. We reconcile FFO to net income on page 11 as we believe net income is the most comparable measure. We do not use FFO as a measure of cash flow generated from operating activities.

In addition, we consider Company FFO a useful measure for securities analysts, investors and other interested parties in the evaluation of our partnership’s performance. Company FFO, similar to FFO discussed above, provides a performance measure that reflects the impact on operations of trends in occupancy rates, rental rates, operating costs and interest costs. In addition, the adjustments to Company FFO relative to FFO allow the partnership insight into these trends for the real estate operations, by adjusting for non-real estate components. We reconcile FFO to Company FFO on page 11.

Net income attributable to Unitholders and Equity attributable to Unitholders are used by the partnership to evaluate the performance of the partnership as a whole as each of the Unitholders participates in the economics of the partnership equally. In calculating Net income attributable to Unitholders per unit and Equity attributable to Unitholders per unit, the partnership excludes the impact of mandatorily convertible preferred units in determining the average number of units outstanding as the holders of mandatorily convertible preferred units do not participate in current earnings. We reconcile Net income attributable to Unitholders to net income on page 11 and Equity attributable to Unitholders to total equity on page 12.

In addition to monitoring, analyzing and reviewing earnings performance, we also review initiatives and market conditions that contribute to changes in the fair value of our investment properties. These value changes, combined with earnings, represent a total return on the equity attributable to Unitholders and form an important component in measuring how we have performed relative to our targets.

 

We also consider the following items to be important drivers of our current and anticipated financial performance:

We also believe that key external performance drivers include the availability of the following:

FAIR VALUE OF INVESTMENT AND HOSPITALITY PROPERTIES

We measure all investment properties at fair value, including those held within equity accounted investments. Valuations are prepared at a balance sheet date with changes to those values recognized as gains or losses in the statement of income as mentioned above. Our valuations are prepared at the individual property level by internal investment professionals with the appropriate expertise in the respective industry, geography and asset type. We leverage their extensive expertise and experience in the valuation of properties accumulated through involvement in acquisitions and dispositions, negotiations with lenders and interactions with institutional private fund investors.

Substantially all our investment properties are valued using one of two accepted income approaches, the discounted cash flow approach or the direct capitalization approach. The valuation methodology utilized is generally determined by asset class. Our office, retail and industrial assets are typically valued using a discounted cash flow methodology while our multifamily, triple net lease, self-storage, student housing and manufactured housing assets are typically valued under a direct capitalization methodology. Under the discounted cash flow approach, cash flows for each property are forecast for an assumed holding period, generally, ten-years. A capitalization rate is applied to the terminal year net operating income and an appropriate discount rate is applied to those cash flows to determine a value at the reporting date. The forecast cash flows include assumptions prepared at the property level for lease renewal probabilities, downtime, capital expenditures, future leasing rates and associated leasing costs. The majority of property cash flows consist of contracted leases as a result of our core real estate portfolio having a combined 93.5% occupancy level and an average seven year lease life. Valuation assumptions, such as discount rates and terminal value multiples, are determined by the relevant investment professionals and applied to the cash flows to determine the values.

Under the direct capitalization method, a capitalization rate is applied to estimated stabilized annual net operating income to determine value. Capitalization rates are determined by our investment professionals based on market data from comparable transactions and third-party reports.

Hospitality properties are valued annually, at December 31, with increases in fair value generally recognized as revaluation surplus in the statement of comprehensive income, unless the increase reverses a previously recognized revaluation loss recorded through prior period net income. Our hospitality properties are valued on an individual location basis using a depreciated replacement cost approach. These valuations are generally prepared by external valuation professionals using information provided by management of the operating business. The fair value estimates for hospitality properties represent the estimated fair value of the property, plant and equipment of the hospitality business only and do not include any associated intangible assets.

All our valuations are subject to various layers of review and controls as part of our financial reporting processes. These controls are part of our system of internal control over financial reporting that is assessed by management on an annual basis. Under the discounted cash flow model, the base cash flows are determined as part of our annual business planning process, prepared within each operating business and reviewed by the senior management teams responsible for each segment, along with senior investment professionals responsible for the relevant asset classes. Valuation assumptions such as discount rates and terminal capitalization rates are compared to market data, third party reports, research material and broker opinions as part of the review process. We have a number of properties externally appraised each year to support our valuation process and for other business purposes. We compare the results of those external appraisals to our internally prepared values and reconcile significant differences when they arise. During the three months ended March 31, 2018 , we obtained external appraisals of 33 of our properties representing a gross property value of $13 billion (or 9% of the portfolio). These external appraisals were within 1% of management’s valuations. Additionally, each year we sell a number of assets, which provides support for our valuations, as we typically contract at prices comparable to IFRS values.

FINANCIAL STATEMENTS ANALYSIS

REVIEW OF CONSOLIDATED FINANCIAL RESULTS

In this section, we review our financial position and consolidated performance as of March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and 2017 . Further details on our results from operations and our financial positions are contained within the “ Segment Performance ” section beginning on page 14.

Our investment approach is to acquire high-quality assets at a discount to replacement cost or intrinsic value. We have been actively pursuing this strategy through our flexibility to allocate capital to real estate sectors and geographies with the best risk-adjusted returns and to participate in transactions through our investments in various Brookfield Asset Management-sponsored real estate funds. Some of the more significant transactions are highlighted below:

Significant Developments in the first quarter of 2018

In our Opportunistic segment:

In our Core Office segment:

In our Core Retail segment:

Significant Developments in the first quarter of 2017

In our Opportunistic segment:

In our Core office segment:

Our basic and diluted net income attributable to Unitholders per unit and weighted average units outstanding are calculated as follows:

Commercial property revenue and direct commercial property expense     

For the three months ended March 31, 2018 , commercial property revenue increased by $102 million compared to the same period in the prior year, as a result of investments in higher yielding opportunistic activities, same-property growth in our Core Office segment and the impact of foreign currency translation. Acquisitions made in 2018 , including the acquisition of a student housing portfolio in the United Kingdom and 333 West 34th Street in New York, and the impact of acquisitions made in 2017 , including office assets in Mumbai, Houston, and San Jose, California and a manufactured housing portfolio, all of which combined, contributed to a $107 million increase in revenue. These increases were offset by the disposition or partial disposition of mature office assets. Significant dispositions, full or partial, included in 2018 : Bay Adelaide Centre East and West Towers in Toronto and 1801 California Street in Denver; and in 2017 : an industrial portfolio in Europe, 20 Canada Square in London and One Liberty Plaza in New York.

 

Direct commercial property expense increased by $40 million largely due to additional expense from acquisitions during 2018 and 2017 as mentioned above, partially offset by the disposition of mature assets and the deconsolidation of certain commercial assets following the sale of full or partial interests in the properties to third parties. Margins in 2018 were 62.7% , which was relatively flat compared to 2017 .

Hospitality revenue and direct hospitality expense

Hospitality revenue increased to $482 million for the three months ended March 31, 2018 , compared to $374 million in the same period in the prior year. Direct hospitality expense increased to $332 million for the three months ended March 31, 2018 , compared to $263 million in the same period in the prior year. Margins in 2018 were 31.1% , a increase of 1.4% over 2017 . The increase is primarily a result of acquisition made in 2018 , including a portfolio of extended-stay hotels across the U.S. and a portfolio of serviced apartments in the United Kingdom, and the impact of acquisitions made in 2017 , including a hotel property in Toronto and the positive impact of foreign currency translation. These increases were partially offset by lower bookings due to renovations at certain properties.

Investment and other revenue and investment and other expense

Investment and other revenue includes management fees, leasing fees, development fees, interest income and other non-rental revenue. Investment and other revenue decreased by $118 million for the three months ended March 31, 2018 as compared to the same period in the prior year. Investment and other expense decreased by $122 million for the three months ended March 31, 2018 as compared to the same period in the prior year. These decrease s were primarily due to revenue and expenses we recorded from the sale of develop-for-sale assets in our multifamily and industrial businesses in the prior period compared to nil in the current period, as these types of sales are sporadic in nature.

Interest expense

Interest expense increased by $48 million for the three months ended March 31, 2018 as compared to the same period in the prior year. This was due to the assumption of debt obligations as a result of acquisition activity, incremental debt raised from temporary drawdowns on our credit facilities to source the capital required for acquisitions during the period and through refinancings on individual properties, as well as an increase in the weighted average variable interest rate during the year. These increases were partially offset by disposition activity.

General and administrative expense

General and administrative expense increased by $18 million for the three months ended March 31, 2018 as compared to the same period in the prior year. This increase was primarily attributable to transaction and operating costs of newly acquired entities as mentioned above.

Fair value gains, net

Fair value gains, net includes valuation gains (losses) on commercial properties and developments as well as mark-to-market adjustments on financial instruments and derivatives and foreign currency gains (losses) on disposal of assets denominated in foreign currencies. While we measure and record our commercial properties and developments using valuations prepared by management in accordance with our policy, external appraisals and market comparables, when available, are used to support our valuations.

    

In addition, for the three months ended March 31, 2018 , we recorded fair value gains , net of $200 million ( 2017 - fair value losses , net of $8 million ), primarily related to obtaining control over Brookfield Global Real Estate Special Opportunities Inc. (“BGRESOI”) after converting our loan interest in the entity and becoming 100% common equity holder. See Note 3, Business Acquisitions and Combinations for more information.

Share of net earnings from equity accounted investments

Our most material equity accounted investments are Canary Wharf and Manhattan West in our Core Office sector, GGP in our Core Retail sector and the Diplomat hotel and our interest in the second value-add multifamily fund in our Opportunistic segment.

Reconciliation of Non-IFRS measures

As described in the “ Performance Measures ” section on page 3, our partnership uses non-IFRS measures to assess the performance of its operations. An analysis of the measures and reconciliation to IFRS measures is included below.

Commercial property NOI increased by $62 million to $688 million during the three months ended March 31, 2018 compared with $626 million during the same period in the prior year. The increase was primarily driven by new acquisitions, the positive impact of foreign currency translation and same-property growth offset by the disposition of mature assets and the deconsolidation of certain assets following partial dispositions thereof.

Hospitality NOI increased by $39 million to $150 million during the three months ended March 31, 2018 compared with $111 million during the same period in the prior year. This increase is primarily due to acquisitions made during 2018 and the positive impact of foreign currency translation offset by decreased bookings from ongoing renovations at certain properties.

    

The following table reconciles NOI to net income for the three months ended March 31, 2018 and 2017 :

The following table reconciles net income to FFO for the three months ended March 31, 2018 and 2017 :

FFO increased to $228 million during the three months ended March 31, 2018 compared with $202 million during the same period in the prior year. The increase was driven by acquisition activity since the prior period. Acquisitions made in 2018 , including the acquisition of a student housing portfolio, a portfolio of extended-stay hotels in the United States, a portfolio of serviced-apartments in the United Kingdom, and our interest in 333 West 34th Street in New York; the impact of acquisitions made in 2017 , including office assets in Mumbai, Houston, and San Jose, California, a manufactured housing portfolio and a hotel property in Toronto; as well as the positive impact of foreign currency translation and positive same-property growth in our Core Office segment contributed to the increase in FFO. These increases was partially offset by dispositions of mature assets throughout the period and an increase in interest expense due to a higher weighted-average interest rate on variable rate secured debt obligations.

As of March 31, 2018 , we had $86,626 million in total assets, compared with $84,347 million at December 31, 2017 . This $2,279 million increase reflects the aforementioned acquisition activity since the prior year. We also obtained control over BGRESOI after converting our loan interest in the entity.

Our investment properties are comprised of commercial, operating, rent-producing properties and commercial developments including active sites and those in planning for future development and land. Commercial properties increased from $48,780 million at December 31, 2017 to $49,968 million at March 31, 2018 . The increase was largely due to the aforementioned acquisitions, as well as incremental capital spent to maintain or enhance properties, and valuation gains within our opportunistic portfolio. This was offset by the full or partial disposition of certain assets during the current year and the negative impact of foreign currency translation based on closing spot rates.

Commercial developments consist of commercial property development sites, density rights and related infrastructure. The total fair value of development land and infrastructure was $2,860 million at March 31, 2018 , an increase of $283 million from the balance at December 31, 2017 . The increase is primarily attributable incremental capital spend on our active developments.

The following table presents the changes in investment properties from December 31, 2017 to March 31, 2018 :

 

Equity accounted investments, decreased by $148 million since December 31, 2017 primarily due to return of capital and distributions received during the period and lower share of net earnings from equity accounted investments driven by valuation losses on our Core Retail portfolio. This decrease was partially offset by the strengthening of the British Pound against the U.S. Dollar, primarily related to our investment in Canary Wharf.

 

The following table presents a roll-forward of changes in our equity accounted investments:

Property, plant and equipment increased by $1,206 million since December 31, 2017 , primarily as a result of acquisition activity during the period including a portfolio of extended-stay hotels across the U.S. and a portfolio of serviced apartments in the United Kingdom. Also, the increase is the result of capital spend and the positive impact of foreign currency translation related to our Center Parcs UK portfolio and a hotel within our International Finance Center (“IFC”) investment in South Korea, partially offset by depreciation expense during the current year.

As of March 31, 2018 , assets held for sale included three triple net lease assets in the U.S. and three opportunistic office assets in the U.S., as we intend to sell controlling interests in these properties to third parties in the next 12 months.

The following table presents changes in our assets held for sale from December 31, 2017 to March 31, 2018 :

Our debt obligations increased to $38,678 million at March 31, 2018 from $36,884 million at December 31, 2017 . Contributing to this increase was the addition of property-specific borrowings related to acquisition activity during the period, as noted above, as well as higher funds subscription facilities and corporate debt facilities. These increase s were partially offset by the disposition of encumbered assets during the period and the repayment of certain subsidiary borrowings.

The following table presents additional information on our partnership’s outstanding debt obligations:

The following table presents the components used to calculate equity attributable to Unitholders per unit:

Equity attributable to Unitholders was $22,549 million at March 31, 2018 , an increase of $363 million from the balance at December 31, 2017 . The increase was a primarily due to fair value gains on our opportunistic assets partially offset by result of distributions and fair value losses on our Core Retail assets. Assuming the conversion of mandatorily convertible preferred shares, equity attributable to unitholders increased to $31.22 per unit at March 31, 2018 from $30.74 per unit at December 31, 2017 .

Interests of others in operating subsidiaries and properties was $13,717 million at March 31, 2018 , an increase of $779 million from the balance of $12,938 million at December 31, 2017 . The increase was primarily a result of the acquisition of new investments through Brookfield Asset Management-sponsored funds in which the partnership is a limited partner.

Revenue varies from quarter to quarter due to acquisitions and dispositions of commercial and other income producing assets, changes in occupancy levels, as well as the impact of leasing activity at market net rents. In addition, revenue also fluctuates as a result of changes in foreign exchange rates and seasonality. Seasonality primarily affects our retail assets, wherein the fourth quarter exhibits stronger performance in conjunction with the holiday season. In addition, our North American hospitality assets generally have stronger performance in the winter and spring months compared to the summer and fall months, while our European hospitality assets exhibit the strongest performance during the summer months. Fluctuations in our net income is also impacted by the fair value of properties in the period to reflect changes in valuation metrics driven by market conditions or property cash flows.

The following table presents equity attributable to Unitholders by segment as of March 31, 2018 and December 31, 2017 :

Core Office

Our Core Office segment consists of interests in 148 office properties totaling approximately 99 million square feet, which are located primarily in the world’s leading commercial markets such as New York, London, Los Angeles, Washington, D.C., Sydney, Toronto, and Berlin, among others and consists primarily of our 100% common share interest in BPO and our 50% joint venture interest in Canary Wharf.

The following table presents FFO and net income attributable to Unitholders in our Core Office segment for the three months ended March 31, 2018 and 2017 :

FFO from our Core Office segment was $133 million for the three months ended March 31, 2018 as compared to $147 million in the same period in the prior year. This decrease is largely attributable to the impact of full or partial dispositions, including 245 Park Avenue in Midtown New York in the second quarter of 2017, 20 Canada Square in London in the third quarter of 2017 and One Liberty Plaza in New York in the fourth quarter of 2017, as we continue to recycle capital out of core, stable assets into higher-yielding opportunistic investments. These decreases are partially offset by the positive impact of foreign currency translation and same-property growth.

Net income attributable to Unitholders increased by $448 million to $258 million during the three months ended March 31, 2018 as compared to a net loss of $(190) million during the same period in 2017 . The increase is largely attributable to a gain resulting from a change in the tax status of Canary Wharf and fair value gains realized on the dispositions of Bay Adelaide Centre East and West Towers in Toronto and 1801 California Street in Denver compared to fair value losses in Downtown New York in the prior period.

The following table presents key operating metrics for our Core Office portfolio as at and for the three months ended March 31, 2018 and 2017 :

NOI from our consolidated properties increased to $276 million during the three months ended March 31, 2018 , which remained relatively flat compared to $274 million during the same period in 2017 .

 

Same-property NOI for our consolidated properties for the three months ended March 31, 2018 compared with the same period in the prior year increased by $3 million to $265 million . This increase was primarily the result of lease commencements in Sydney and Perth and higher in-place net rents.

NOI from our unconsolidated properties, which is presented on a proportionate basis, increased by $8 million to $119 million during the three months ended March 31, 2018 , compared to $111 million during the period in the prior year. This increase is attributable to the inclusion of One Liberty Plaza in New York in unconsolidated properties following the sale of a 49% interest during the fourth quarter of 2017. This increase was partially offset by the disposition of 245 Park Avenue in the third quarter of 2017.

The following table presents certain key operating metrics related to leasing activity in our Core Office segment for the three months ended March 31, 2018 and 2017 :

For the three months ended March 31, 2018 , we leased approximately 915,000 square feet at average leasing net rents of $35.15 per square foot. Approximately 65% of our leasing activity represented new leases. Our overall Core Office portfolio’s in-place net rents are currently 7% below market net rents, which gives us confidence that we will be able to increase our NOI in the coming years as we sign new leases. For the three months ended March 31, 2018 , tenant improvements and leasing costs related to leasing activity were $47.76 per square foot, compared to $84.98 per square foot in the prior year.

 

We calculate net rent as the annualized amount of cash rent receivable from leases on a per square foot basis including tenant expense reimbursements, less operating expenses being incurred for that space, excluding the impact of straight-lining rent escalations or amortization of free rent periods. This measure represents the amount of cash, on a per square foot basis, generated from leases in a given period.

The following table presents fair value gains (losses), net from consolidated and unconsolidated investments in our Core Office segment for the three months ended March 31, 2018 and 2017 :

We recorded fair value gains, net of $262 million in the three months ended March 31, 2018 as compared to fair value losses of $230 million in the same period in the prior year. The gain was driven by a change in the tax status of Canary Wharf and the fair value gains realized on dispositions as mentioned above, as well as the positive impact of foreign currency translation. The prior year included fair value losses on our New York office portfolios, partially offset by fair value gains in our Sydney and Toronto office portfolios.

The key valuation metrics for commercial properties in our Core Office segment on a weighted-average basis are as follows:

The following table provides an overview of the financial position of our Core Office segment as at March 31, 2018 and December 31, 2017 :

Equity attributable to Unitholders increased by $584 million to $14,497 million at March 31, 2018 from $13,913 million at December 31, 2017 . The increase was primarily a result of reinvesting net proceeds from the disposition of mature assets into higher-yielding opportunistic investments.

Commercial properties totaled $21,336 million at March 31, 2018 , compared to $21,671 million at December 31, 2017 . The decrease was driven by dispositions of 50% of our interest in Bay Adelaide Centre East and West Towers and our 51% interest in 1801 California Street, and the negative impact of foreign currency translation.

 

Commercial developments increased by $155 million between December 31, 2017 and March 31, 2018 due to incremental capital expenditures on active developments during the period.

The following table summarizes the scope and progress of active developments in our Core Office segment as of March 31, 2018 :