UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
________________________________________________________
 
FORM 6-K
________________________________________________________
 
 
Report of Foreign Private Issuer Pursuant to
Rule 13a-16 or 15d-16
Under the Securities Exchange Act of 1934
 
For the month of November 2019
Commission File Number 001-35505
 ________________________________________________________

BROOKFIELD PROPERTY PARTNERS L.P.
(Exact name of registrant as specified in its charter)

 ________________________________________________________

73 Front Street, 5th Floor, Hamilton, HM 12 Bermuda
(Address of principal executive offices)
 ________________________________________________________

 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F ý       Form 40-F ¨
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

The information contained in Exhibits 99.1 and 99.2 of this Form 6-K is incorporated by reference into the registrant’s following registration statements on Form F-3: File No. 333-218503, 333-218504, 333-225158 and 333-225163; and the registrant’s following registration statements on Form S-8: File Nos. 333-196622, 333-203042 and 333-227082.





























DOCUMENTS FILED AS PART OF THIS FORM 6-K
 
See the Exhibit List to this Form 6-K.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:
November 8, 2019
BROOKFIELD PROPERTY PARTNERS L.P.,
 
 
by its general partner, Brookfield Property Partners Limited
 
 
 
 
 
 
By:
 /s/ Jane Sheere
 
 
Name:
Jane Sheere
 
 
Title:
Secretary
 
EXHIBIT LIST
 
Exhibit
Description

99.1 Management’s Discussion and Analysis of Financial Results of Brookfield Property Partners L.P. as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018

99.2 Unaudited condensed consolidated financial statements of Brookfield Property Partners L.P. as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018

99.3 Certification of Chief Executive Officer of Brookfield Property Group LLC, a manager of Brookfield Property Partners L.P.

99.4 Certification of Chief Financial Officer of Brookfield Property Group LLC, a manager of Brookfield Property Partners L.P.







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”, or “we”) covers the financial position as of September 30, 2019 and December 31, 2018 and results of operations for the three and nine months ended September 30, 2019 and 2018. This MD&A should be read in conjunction with the unaudited condensed consolidated financial statements (the “Financial Statements”) and related notes as of September 30, 2019, included elsewhere in this report, and our annual report for the year ended December 31, 2018 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 applicable securities laws and regulations. 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 exchange 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.


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OBJECTIVES AND FINANCIAL HIGHLIGHTS
BASIS OF PRESENTATION
Our sole direct investments are a 50% managing general partnership unit interest in Brookfield Property L.P. (the “Operating Partnership”) and an interest in BP US REIT LLC. 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. On July 1, 2018, the partnership realigned its LP Investments segment (formerly referred to as Opportunistic) to include the corporate function of the Brookfield-sponsored real estate opportunity funds, previously included in the Corporate segment, to more closely align with the how the partnership now presents financial information to the chief operating decision maker (“CODM”) and investors. The partnership is organized into four reportable segments: i) Core Office, ii) Core Retail, iii) LP Investments and iv) Corporate. These segments are independently and regularly reviewed and managed by the Chief Executive Officer, who is considered the CODM.

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”), BPY AO LTIP Units of the Operating Partnership (“AO LTIP Units”), FV LTIP Units of the Operating Partnership (“FV LTIP Units”), limited partnership units of Brookfield Office Properties Exchange LP (“Exchange LP Units”), Class A stock, par value $0.01 per share, (“BPR Units”) of Brookfield Property REIT Inc. (“BPR”) and Class A Cumulative Redeemable Perpetual Preferred Units, Series 1 and Series 2 (“Preferred Equity Units”). Holders of the GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, FV LTIP Units, Exchange LP Units and BPR Units will be collectively referred to throughout this MD&A as “Unitholders”. The LP Units, Redeemable/Exchangeable Partnership Units, Exchange LP Units and BPR Units have the same economic attributes in all respects, except that the holders of Redeemable/Exchangeable Partnership Units and BPR Units have the right to request that their units be redeemed for cash consideration. In the event that Brookfield Asset Management Inc. (“Brookfield Asset Management”), as the holders of the Redeemable/Exchangeable Partnership Units 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. However, given the redemption feature referenced above and the fact that they were issued by our subsidiary, 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. BPR Units provide their holders with the right to request that their units be redeemed for cash consideration. In the event the holders of BPR Units exercise 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, BPR Units participates in earnings and distributions on a per unit basis equivalent to the per unit participation of LP Units of our partnership. We present BPR Units as a component of non-controlling interest.

This MD&A includes financial data for the three and nine months ended September 30, 2019 and includes material information up to November 8, 2019. 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. 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.


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OVERVIEW OF THE BUSINESS
We are Brookfield Asset Management’s primary vehicle to make investments across all strategies in real estate. Our goal is to be a leading global owner and operator of high-quality real estate, that generates sustainable and growing distributions to our unitholders and capital appreciation of our asset base over the long term. With approximately 19,000 employees involved in Brookfield Asset Management’s real estate businesses around the globe, we have built operating platforms in various real estate sectors, including in our:
CORE OFFICE PORTFOLIO
 
CORE RETAIL PORTFOLIO
Class A office assets in gateway markets around the globe
 
100 of the top 500 malls in the United States
l
136 premier properties
 
l
123 best-in-class malls and urban retail properties
l
93 million square feet
 
l
122 million square feet
l
92% occupancy
 
l
95% occupancy
l
8.1 year average lease term
 
 
 
 
 
 
 
 
LP INVESTMENTS PORTFOLIO
Invested in mispriced portfolios and / or properties with significant value-add

INVESTMENT STRATEGY
    Our diversified Core portfolios consist of high-quality office and retail assets in some of the world’s most dynamic markets which have stable cash flow as a result of their long-term leases. We target between a 10% and 12% total return on our Core portfolios. The drivers of these targets include the mark-to-market of rents upon lease expiry, escalation provisions in leases and projected increases in occupancy, that should generate strong same-property net operating income (“NOI”) growth without significant capital investment. Furthermore, we target earning between 6% and 11% unlevered, pre-tax returns on construction costs for our development and redevelopment projects. We currently have approximately 13 million square feet of active development projects underway with another 8 million square feet in planning stages. Our development track record reflects successful completions on time and on budget. We expect that this portion of our balance sheet will be meaningful to earnings growth in our Core businesses throughout the next five to ten years as projects reach completion and begin to contribute rental revenue to our earnings.

Our LP Investments portfolio includes our equity invested in Brookfield-sponsored real estate opportunity funds, which target high-quality assets with operational upside across various real estate sectors, including office, retail, multifamily, logistics, hospitality, triple net lease, self-storage, student housing and manufactured housing. We target an average gross 20% total return on our LP Investments portfolio and a 2.0x multiple of capital on the equity we invest into these vehicles. These investments, unlike our Core portfolios, have a defined hold period and typically generate the majority of profits from a gain recognized from realization events including the sale of an asset or portfolio of assets, or exit of the entire investment. The combination of these gains and FFO earned represent our earnings on capital invested in these funds and provide liquidity to support our target distributions.
 
Overall, we seek to earn leveraged after-tax total returns of 12% to 15% on our invested capital. These returns will be comprised of current cash flow, distribution growth and capital appreciation. With our diversified cash flow profile from our Core Office, Core Retail, and LP Investments portfolios, our goal is to pay an attractive annual distribution to our unitholders and to grow our distribution by 5% to 8% per annum. 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, reflect changes in market conditions, or portfolio premiums realized upon sale of these assets. 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 healthy distributions and capital appreciation. Furthermore, if we are successful in increasing cash flow earned from our operations and distributions from return of capital and realization events from our LP Investments portfolio, we expect to be able to increase distributions at the targeted rate of 5% to 8% per annum to unitholders to provide them with an attractive total return on their investment.


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

increases in occupancies by leasing vacant space and pre-leasing active developments;
increases in rental rates through maintaining or enhancing the quality of our assets and as market conditions permit; and
reductions in operating costs through achieving economies of scale and diligently managing contracts.

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

debt capital at a cost and on terms conducive to our goals;
equity capital at a reasonable cost;
new property acquisitions and other investments that fit into our strategic plan; and
opportunities to dispose of peak value or non-core assets.

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.

To measure our performance against these targets, as described above, and measure our operating performance, we focus on NOI, same-property NOI, funds from operations (“FFO”), Company FFO, net income attributable to Unitholders and equity attributable to Unitholders. Some of these performance metrics do not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies.

NOI: revenues from our commercial properties operations less direct commercial property expenses (“Commercial property NOI”) and revenues from our hospitality operations less direct hospitality expenses (“Hospitality NOI”).
Same-property NOI: a subset of NOI, which excludes NOI that is earned from assets acquired, disposed of or developed during the periods presented, not of a recurring nature, or from LP Investments assets.
FFO: net income, prior to fair value gains, net, depreciation and amortization of real estate assets, and income taxes less non-controlling interests of others in operating subsidiaries and properties therein. When determining FFO, we include our proportionate share of the FFO of unconsolidated partnerships and joint ventures and associates, as well as gains (or losses) related to properties developed for sale.
Company FFO: FFO before the impact of depreciation and amortization of non-real estate assets, transaction costs, gains (losses) associated with non-investment properties, imputed interest on equity accounted investments and the partnership’s share of Brookfield Strategic Real Estate Partners III (“BSREP III”) FFO. The partnership accounts for its investment in BSREP III as a financial asset and the income (loss) of the fund is not presented in the partnership’s results. Distributions from BSREP III, recorded as dividend income under IFRS, are removed from investment and other income for Company FFO presentation.
Net income attributable to Unitholders: net income attributable to holders of GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, Exchange LP Units, FV LTIP Units and BPR Units.
Equity attributable to Unitholders: equity attributable to holders of GP Units, LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, Exchange LP Units FV LTIP Units and BPR Units.

NOI is a key indicator of our ability to impact the operating performance of our properties. We seek to grow NOI through pro-active management and leasing of our properties. Same-property NOI in our Core Office and Core Retail segments allows us to segregate the impact of leasing and operating initiatives on the portfolio from the impact of investing activities and “one-time items”, which for the historical periods presented consist primarily of lease termination income. We reconcile NOI to net income on page 13.

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 13 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

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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 net income to Company FFO on page 13.

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. We reconcile Net income attributable to Unitholders to net income on page 13 and Equity attributable to Unitholders to total equity on page 16.

FAIR VALUE OF INVESTMENT AND HOSPITALITY PROPERTIES

Investment 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. Our valuations are generally 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. Additionally, a number of properties are externally appraised each year and the results of those appraisals are compared to the partnership’s internally prepared values.

Substantially all of 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 and retail assets are typically valued using a discounted cash flow methodology while our multifamily, triple net lease, self-storage, student housing, logistics and manufactured housing assets are typically valued using 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 94% occupancy level and an average 6.7 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
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.

Valuation methodology
All of 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.

External valuations
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 September 30, 2019, we obtained external appraisals of 21 of our properties representing a gross property value of $9 billion (or 5% of the portfolio). These external appraisals were within less than 1% of management’s valuations. Also, each year we sell a number of assets, which provides support for our valuations, as we typically contract at prices comparable to IFRS values.


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FINANCIAL STATEMENTS ANALYSIS
REVIEW OF CONSOLIDATED FINANCIAL RESULTS
In this section, we review our financial position and consolidated performance as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018. Further details on our results from operations and our financial positions are contained within the “Segment Performance” section beginning on page 16.

The following acquisitions and dispositions affected our consolidated results for the three and nine months ended September 30, 2019 and 2018:
 
In our Core Office segment:
In the third quarter of 2019, we sold our interest in the Darling Park office complex in Sydney for approximately A$638 million ($438 million) and a realized gain of approximately A$247 million ($169 million). We sold 3 Spring Street in Sydney for approximately A$173 million ($119 million) and a realized gain of approximately A$98 million ($67 million).

In the second quarter of 2019, we sold our interest in 2001 M Street in Washington, D.C. for approximately $121 million and realized a gain of approximately $32 million.

In the fourth quarter of 2018, we sold 10 Shelley Street in Sydney for A$533 million ($379 million) and realized a gain of A$149 million ($104 million). We sold 12 Shelley Street in Sydney for A$270 million ($192 million) and realized a gain of A$111 million ($78 million). We sold Queen’s Quay Terminal in Toronto for C$261 million ($191 million) and realized a gain of C$173 million ($127 million). We sold our 25% interest in Jean Edmonds Tower in Ottawa for C$47 million ($34 million) and realized a gain of C$5 million ($4 million).

In the fourth quarter of 2018, we launched Brookfield Premier Real Estate Partners Pooling LLC Australia (“BPREP Australia”), an open-ended fund. We contributed interests in Jessie Street, 52 Goulburn Street and 680 George Street in Sydney and 235 St Georges Terrace in Perth to BPREP Australia. Our interest in BPREP Australia is 48%, with the remaining interests of 12% and 40% held by Brookfield Asset Management and external investors, respectively. We will continue to consolidate the properties contributed to BPREP Australia, except for 680 George Street, which we will continue to account for under the equity method.

In our Core Retail segment:
In the third quarter of 2019, we acquired an incremental 49.7% interest in 730 Fifth Avenue in New York for approximately $779 million. Prior to the acquisition, our 50% joint venture interest was reflected as an equity accounted investment. As a result, we gained control of the investment and will consolidate its results.

In the fourth quarter of 2018, we sold a 49% interest in Fashion Place in Utah for approximately $291 million. We retained joint control of the resulting joint venture and account for our remaining interest as an equity accounted investment.

On August 28, 2018, we acquired all of the outstanding shares of common stock of GGP Inc. (“GGP”) (“GGP acquisition”) other than those shares previously held by the partnership and our affiliates, which represented a 34% interest in GGP prior to the acquisition. In the transaction, former GGP shareholders elected to receive, for each GGP common share, subject to proration, either $23.50 in cash or either one LP Unit or one BPR Unit. As a result of the GGP acquisition, 161 million BPR Units and 88 million LP Units were issued to former GGP shareholders. BPR Units represent a publicly traded U.S. REIT security structured to provide an economic return identical to LP Units. BPR Units provide their holders with the right to request that their units be redeemable for cash consideration. In the event BPR Unitholders exercise 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, BPR Units participate in earnings and distributions on a per unit basis equivalent to the per unit participation of LP Units of our partnership. We present BPR Units as a component of non-controlling interest. We consolidated the results from BPR beginning August 28, 2018. The previous investment, which was reflected as an equity accounted investment, was derecognized at the time of acquisition.

In our LP Investments segment:
In the third quarter of 2019, we sold a portfolio of triple-net lease assets in the U.S. in the Brookfield Strategic Real Estate Partners I (“BSREP I”) fund, for approximately $585 million and a realized gain of approximately $36 million.

In the second quarter of 2019, we sold a portfolio of office assets in California in the BSREP I fund, for approximately $270 million and a realized gain of approximately $114 million.

In the first quarter of 2019, BSREP III held its final close with total equity commitments of $15 billion. Prior to final close, we had committed to 25%, or a controlling interest in the fund and as a result, had previously consolidated the investments made to date. Upon final close, on January 31, 2019, we reduced our commitment to $1.0 billion, representing a 7% non-voting position. As a result, we lost control and deconsolidated our investment in the fund.

In the fourth quarter of 2018, we sold a logistics portfolio in the U.S. in the BSREP I fund, for approximately $3.4 billion and a realized gain of approximately $1.1 billion.


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In the fourth quarter of 2018, we acquired a portfolio of mixed-use asset across the U.S. (“Forest City Realty Inc. acquisition”) for consideration of $6,948 million, a student housing portfolio in France for consideration of €279 million ($318 million) and a hotel in Florida for consideration of $222 million. These are BSREP III investments and we have since deconsolidated them in the first quarter of 2019 as mentioned above.

In the third quarter of 2018, we acquired a 100% leasehold interest in 666 Fifth Avenue, a commercial office asset in New York, for consideration of $1,299 million, and two community malls in Shanghai for consideration of C¥728 million ($110 million). These are BSREP III investments and we have since deconsolidated them in the first quarter of 2019 as mentioned above.

In the third quarter of 2018, we sold a portfolio of 112 self-storage properties in the Brookfield Strategic Real Estate Partners II (“BSREP II”) fund, for approximately $1.3 billion, and realized a gain of approximately $292 million.

In the first quarter of 2018, we sold the Hard Rock Hotel and Casino in Las Vegas for $510 million.

For the purposes of the following comparison between the three and nine months ended September 30, 2019 and 2018, the above transactions are referred to as the investment activities. In addition to the investment activities, we will use same-property NOI from our Core Office and Core Retail segments to evaluate our operating results.

Summary Operating Results

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Net income
$
870

$
722

$
1,606

$
2,796

Net income attributable to Unitholders(1)
474

380

934

1,444

NOI(1)
1,076

960

3,303

2,688

FFO(1)
261

123

810

561

Company FFO(1)
324

249

966

763

(1)
This is a non-IFRS measure our partnership uses to assess the performance of its operations as described in the “Performance Measures” section on page 3. An analysis of the measures and reconciliation to IFRS measures is included in the “Reconciliation of Non-IFRS measures” section on page 13.

Net income for the three months ended September 30, 2019 increased to $870 million from $722 million for the same period in the prior year. The increase is primarily attributable to incremental earnings from an increased ownership in GGP post-acquisition, contributing a full quarter of consolidated results this year compared to one month in the prior year and other investment activity since the prior year. Net income per unit attributable to Unitholders was $0.46 in the current period as compared to $0.44 in the prior year. Net income also increased as a result of same-property growth in Core Office driven by leasing activity, particularly in Downtown New York, Midtown New York, Los Angeles and Toronto at average rents higher than expiring rents and increased fee income and investment gains. This was offset by mark-to-mark losses on derivatives and the impact of a stronger U.S. dollar.

Net income for the nine months ended September 30, 2019 decreased to $1,606 million from $2,796 million for the same period in prior year. Net income per unit attributable to Unitholders for the nine months ended September 30, 2019 was $0.90 compared with $1.79 in the prior year. The decrease is primarily attributable to mark-to-market losses on derivatives and fair value losses recognized on our Core Retail portfolio, reflecting updated cashflow assumptions and valuation metrics, as well as fair value losses on our LP Investments retail portfolio. The prior year benefited from fair value gains associated with our since-sold logistics portfolio in the U.S, our office portfolio in India and a gain on extinguishment of debt associated with the sale of a hospitality asset.

FFO increased to $261 million during the three months ended September 30, 2019 compared with $123 million during the same period in the prior year. These increases were driven by incremental FFO from the GGP acquisition, investment activity since the prior year and leasing activity which resulted in higher NOI. Also contributing to the increase was investment and other revenue recorded on an incentive fee earned on a development with a joint venture partner. These increases were partially offset by higher interest and general and administrative expenses due to the GGP acquisition and other investments and the impact of a stronger U.S. dollar.

For the nine months ended September 30, 2019 FFO increased to $810 million from $561 million in the prior year.


7         




Operating Results
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Commercial property revenue
$
1,380

$
1,251

$
4,240

$
3,478

Hospitality revenue
472

502

1,466

1,460

Investment and other revenue
165

75

410

161

Total revenue
2,017

1,828

6,116

5,099

Direct commercial property expense
481

478

1,482

1,308

Direct hospitality expense
295

315

921

942

Investment and other expense

17

10

17

Interest expense
738

632

2,194

1,689

Depreciation and amortization
86

81

256

229

General and administrative expense
214

241

656

593

Total expenses
1,814

1,764

5,519

4,778

Fair value gains (losses), net
449

556

(273
)
1,943

Share of earnings from equity accounted investments
409

65

1,499

581

Income before taxes
1,061

685

1,823

2,845

Income tax expense (benefit)
191

(37
)
217

49

Net income
$
870

$
722

$
1,606

$
2,796

Net income attributable to non-controlling interests of others in operating subsidiaries and properties
396

342

672

1,352

Net income attributable to Unitholders(1)
$
474

$
380

$
934

$
1,444

(1)
This is a non-IFRS measure our partnership uses to assess the performance of its operations as described in the “Performance Measures” section on page 3. An analysis of the measures and reconciliation to IFRS measures is included in the “Reconciliation of Non-IFRS measures” section on page 13.

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

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions, except per share information)
2019

2018

2019

2018

Net income
$
870

$
722

$
1,606

$
2,796

Less: Non-controlling interests
396

342

672

1,352

Less: Preferred unit dividends
5


8


Net income attributable to Unitholders - basic(1)
$
469

$
380

$
926

$
1,444

Dilutive effect of conversion of capital securities - corporate and options

7

8

20

Net income attributable to Unitholders - diluted
$
469

$
387

$
934

$
1,464

 
 
 
 
 
Weighted average number of units outstanding - basic(1)
1,020.1

873.5

1,027.6

807.1

Conversion of capital securities - corporate and options

19.9

8.7

18.4

Weighted average number of units outstanding - diluted
1,020.1

893.4

1,036.3

825.5

Net income per unit attributable to Unitholders - basic(1)(2)
$
0.46

$
0.44

$
0.90

$
1.79

Net income per unit attributable to Unitholders - diluted(2)
$
0.46

$
0.43

$
0.90

$
1.77

(1) 
Basic net income attributable to Unitholders per unit requires the inclusion of preferred shares of the Operating Partnership that are mandatorily convertible into LP Units without an add back to earnings of the associated carry on the preferred shares.
(2) 
Net income attributable to Unitholders is a non-IFRS measure as described in the “Performance Measures” section on page 3.

8         




Commercial property revenue and direct commercial property expense
CHART-FD7EB9A7931253FC886.JPG CHART-6C1710CCCDB650629ED.JPG

For the three months ended September 30, 2019, commercial property revenue increased by $129 million compared to the same period in the prior year due to the GGP acquisition, property acquisitions in our LP Investments segment and same-property growth in our Core Office segment, offset by property dispositions in our Core Office and LP Investments segments and the negative impact of foreign currency translation. The GGP acquisition resulted in consolidation of the investment which is contributing $342 million to commercial property revenue as compared to $129 million in the prior period as the investment was previously accounted for under the equity method. Our Core Office portfolio generated 5.2% same-property growth, largely driven by leasing activity in Downtown New York, Midtown New York, Los Angeles and Toronto.

Direct commercial property expense increased by just $3 million as the acquisition of GGP and additional expenses relating to property transactions was offset by Core Office property dispositions and the negative impact of foreign currency translation. The GGP acquisition resulted in consolidation of the investment which is contributing $92 million to commercial property expense as compared to $36 million in the prior periods as the investment was previously accounted for under the equity method. Margins in 2019 were 65.1%, an increase of 3% over 2018.

For the nine months ended September 30, 2019, commercial property revenue increased by $762 million compared to the same period in the prior year due to the GGP acquisition, acquisition activity, and same-property growth in our Core Office segment. The GGP acquisition resulted in consolidation of the investment which is contributing $1,006 million to commercial property revenue as compared to $129 million in the prior periods as the investment was previously accounted for under the equity method. Property transaction acquisitions contributed to a $93 million increase in revenue. Our Core Office portfolio generated 7.1% same-property growth, largely driven by leasing activity in Downtown New York, Midtown New York, Los Angeles, Toronto and London. These increases were partially offset property transaction dispositions and the negative impact of foreign currency translation.

Direct commercial property expense increased by $174 million largely due to additional expenses relating to the GGP acquisition and other investment activity. Margins in 2019 were 65.0%, an increase of 3% over 2018.

Commercial property NOI increased by $126 million to $899 million during the three months ended September 30, 2019 compared with $773 million during the same period in the prior year. For the nine months ended September 30, 2019, commercial property NOI increased by $588 million to $2,758 million compared with $2,170 million during the same period in the prior year. The increase was primarily driven by the GGP acquisition, as well as other investment activity and same-property growth in our Core Office portfolio offset by Core Office dispositions and the impact of foreign currency translation.

9         




Hospitality revenue and direct hospitality expense
CHART-326C618DC58F596C952.JPG CHART-DD8756E6669A57A6B33.JPG
For the three months ended September 30, 2019, hospitality revenue decreased by $30 million compared to the same period in the prior year. This decrease reflects the impact of the disposition of the Hard Rock Hotel and Casino in Las Vegas in the prior year and the negative impact of foreign currency translation. Direct hospitality expense decreased to $295 million for the three months ended September 30, 2019, compared to $315 million in the same period in the prior year.

For the nine months ended September 30, 2019, hospitality revenue increased by $6 million compared to the same period in the prior year. This increase was due to strong performance at the Atlantis Paradise Island resort and other North American hotel investments after recent renovations partially offset by the sale of the Hard Rock Hotel and Casino. The impact of Hurricane Dorian in August 2019 had a minimal effect on the Atlantis Paradise Island resort and we did not sustain any material damage to the property.

Direct hospitality expense decreased to $921 million for the nine months ended September 30, 2019, compared to $942 million in the same period in the prior year primarily due to disposition activity and the impact of foreign currency translation. Margins were 37.5% and 37.2% for the three and nine ended September 30, 2019, respectively, representing increases of 0.2% and 1.7%, respectively.

Hospitality NOI decreased by $10 million to $177 million during three months ended September 30, 2019 compared to $187 million during the same period in the prior year. The decrease is attributable to the sale of the Hard Rock Hotel and Casino. For the nine months ended September 30, 2019, hospitality NOI increased by $27 million to $545 million compared to $518 million during the same period in the prior year. The increase is primarily due to incremental NOI from completed renovations at various assets, partially offset by dispositions and the negative impact of foreign currency translation.

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 increased by $90 million and increased by $249 million for the three and nine months ended September 30, 2019, respectively, as compared to the same periods in the prior year. The increase for the three and nine months ended September 30, 2019 is primarily due to $89 million and $167 million, respectively, of investment and other revenue from Core Retail, primarily consisting of fee revenues earned from our joint ventures arrangements from the GGP acquisition. Also contributing to the increase is higher development management and joint venture partner fees within Core Office as development activity has increased and we have entered into new joint venture arrangements that provide fees. Additionally, we earned a performance-based fee of $51 million for achieving certain milestones at Five Manhattan West during the current year.

Investment and other expense for the three and nine months ended September 30, 2019 remained flat at nil and $10 million, respectively, as compared the same period in the prior year.

Interest expense
Interest expense increased by $106 million and $505 million for the three and nine months ended September 30, 2019 as compared to the same period in the prior year. This increase was primarily due to the assumption of debt obligations and the acquisition debt incurred in connection with the acquisition of GGP. Additionally, interest expense from other property acquisitions and corporate bond issuances contributed to the increase, partially offset by disposition activity, the deconsolidation of our interests in investments held in BSREP III and lower average revolving corporate debt balances.

General and administrative expense
General and administrative expense decreased by $27 million for the three months ended September 30, 2019 as compared to the same period in the prior year. The decrease is driven by the deconsolidation of BSREP III which incurred general and administrative expense of $67 million in the prior year. Our investment in BSREP III was deconsolidated in early 2019 and is now accounted for as a financial asset. This decrease was partially offset by operating costs related to the GGP acquisition and other investment activity. The consolidation of GGP resulted

10         




in general and administrative expense of $63 million for the three months ended September 30, 2019 as compared to $26 million in the same period in the prior year, when we had one month of consolidated results for GGP.

General and administrative expense increased by $63 million for the nine months ended September 30, 2019 as compared to the same period in the prior year. These increases were primarily attributable to operating and transaction costs related to the GGP acquisition and investment activity. The consolidation of GGP resulted in general and administrative expense of $199 million for the nine months ended September 30, 2019 as compared to $26 million in the same period in the prior year, when we had one month of consolidated results for GGP. This increase was offset by the deconsolidation of BSREP III investments which had general and administrative expense of nil in the current period compared to $112 million in the same period in the prior year.

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.

CHART-A4D3D3C4158250C2804.JPG
 
Fair value gains, net for our Core Office segment were $124 million for the three months ended September 30, 2019. These gains primarily relate to 100 Bishopsgate in London as the development nears substantial completion, fair value gains in Brazil due to improved market outlook and historical low interest rates and fair value gains in Australia due to capitalization rate compression supported by improving market conditions. Fair value gains, net for our Core Office segment were $469 million for the nine months ended September 30, 2019 related to the gains mentioned above as well as gains recognized in the first quarter of 2019 within our New York portfolio to reflect market conditions.

The prior year included fair value gains primarily related to properties in Toronto and Sydney as a result of changes in valuation metrics, gains on our London development portfolio, and gains from disposition of an interest in Bay Adelaide Centre East and West Towers in Toronto and 1801 California Street in Denver. These gains were partially offset by losses in our Downtown New York portfolio.

 
 
 
 
 
 
 
 
 
 
 
 
 

CHART-F95D6302D9B65826B1C.JPG
 
Fair value losses, net for our Core Retail segment were $5 million and $832 million for the three and nine months ended September 30, 2019. The fair value losses, net from the Core Retail portfolio for the nine months ended September 30, 2019 reflects updated cashflow assumptions and valuation metrics agreed upon by an independent third party.

The prior year included fair value gains related to our acquisition of GGP.
 
 
 
 
 
 
 
 
 

11         




CHART-64B0BBB204615107B6F.JPG
 
Fair value gains, net for our LP Investments segment for the three months ended September 30, 2019 were $392 million primarily due to our office portfolio in Brazil which benefited from discount rate compression due to improved market conditions and historical low interest rates and in our India portfolios which benefited from capitalization rate compression.

Fair value gains, net for our LP Investments segment for the nine months ended September 30, 2019 were $213 million mainly due to fair value gains mentioned above as well as fair value gains in our student housing portfolio as a result of capitalization rate compression, partially offset by losses in our retail portfolio due to updated cashflow assumptions.

The prior year included fair value gains from our office portfolio in India due to leasing activity and the completion of several developments, our industrial portfolio due to strengthened market conditions and compressed discount rates, as well as gains on the sale of a self-storage portfolio. These gains were partially offset by fair value losses in our retail portfolio.
 
 
 
 
 
 
 
 
 
    
In addition, for the three and nine months ended September 30, 2019, we recorded fair value losses, net of $62 million and $123 million (2018 - fair value gains, net of nil and $200 million), respectively, related to mark-to-market adjustments of financial instruments and the settlement of derivative contracts during the quarter. The prior year gains related to obtaining control over Brookfield Global Real Estate Special Opportunities Inc. (“BGRESOI”) after converting our loan interest in the entity and becoming the 100% common equity holder.

Share of net earnings from equity accounted investments
Our most material equity accounted investments are:
In Core Office - Canary Wharf and Manhattan West.
In Core Retail - Ala Moana Center in Hawaii, Fashion Show in Las Vegas and Grand Canal Shoppes in Las Vegas.
In LP Investments - the Diplomat hotel and our interest in the second value-add multifamily fund.
In the prior year, our then 34% interest in GGP was accounted for under the equity method.

CHART-1EB4213280A653DA95B.JPG



Our share of net earnings from equity accounted investments for the three and nine months ended September 30, 2019 was $409 million and $1,499 million, respectively, which represents an increase of $344 million and an increase of $918 million, respectively, compared to the prior year, primarily due to Core Retail fair value gains recognized at 730 Fifth Avenue prior to our additional interest acquired in the third quarter of 2019 which resulted in consolidation, and Ala Moana Center in the second quarter of 2019. This was partially offset by a lower share of net earnings from equity accounted investments from LP Investments mainly due to the disposition of a logistics portfolio in the fourth quarter of 2018.


Income tax expense (benefit)    
The increase in income tax expense for the nine months ended September 30, 2019 compared to the prior year is primarily due to the reversal of deferred tax liabilities relating to legislative and entity tax status change, an internal restructuring of the ownership of certain retail investments and the recognition of previously unrecognized net operating losses.

12         




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.

The following table reconciles NOI to net income for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Commercial property revenue
$
1,380

$
1,251

$
4,240

$
3,478

Direct commercial property expense
(481
)
(478
)
(1,482
)
(1,308
)
Commercial property NOI
899

773

2,758

2,170

Hospitality revenue
472

502

1,466

1,460

Direct hospitality expense
(295
)
(315
)
(921
)
(942
)
Hospitality NOI
177

187

545

518

Total NOI
1,076

960

3,303

2,688

Investment and other revenue
165

75

410

161

Share of net earnings from equity accounted investments
409

65

1,499

581

Interest expense
(738
)
(632
)
(2,194
)
(1,689
)
Depreciation and amortization
(86
)
(81
)
(256
)
(229
)
General and administrative expense
(214
)
(241
)
(656
)
(593
)
Investment and other expense

(17
)
(10
)
(17
)
Fair value gains (losses), net
449

556

(273
)
1,943

Income before taxes
1,061

685

1,823

2,845

Income tax expense
(191
)
37

(217
)
(49
)
Net income
$
870

$
722

$
1,606

$
2,796

Net income attributable to non-controlling interests
396

342

672

1,352

Net income attributable to Unitholders
$
474

$
380

$
934

$
1,444


The following table reconciles net income to FFO and Company FFO for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Net income
$
870

$
722

$
1,606

$
2,796

Add (deduct):
 
 
 
 
    Fair value (gains) losses, net
(449
)
(556
)
273

(1,943
)
    Share of equity accounted fair value (gains) losses, net
(232
)
52

(877
)
(33
)
    Depreciation and amortization of real estate assets
72

70

211

201

    Income tax expense (benefit)
191

(37
)
217

49

    Non-controlling interests in above items
(191
)
(128
)
(620
)
(509
)
FFO
$
261

$
123

$
810

$
561

Add (deduct):
 
 
 
 
Depreciation and amortization of non-real-estate assets, net(1)
10

9

31

24

Transaction costs, net(1)
35

103

72

136

(Gains)/losses associated with non-investment properties, net(1)
1

1


4

Imputed interest(2)
15

13

42

38

BSREP III earnings(3)
2


11


Company FFO
$
324

$
249

$
966

$
763

(1)
Presented net of non-controlling interests.
(2) 
Represents imputed interest associated with financing the partnership’s share of commercial developments accounted for under the equity method.
(3)
BSREP III is now accounted for as a financial asset which results in FFO being recognized in line with distributions received. As such, the BSREP III earnings adjustment picks up our proportionate share of the Company FFO.



13         




Statement of Financial Position Highlights and Key Metrics

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Investment properties
 
 
    Commercial properties
$
66,296

$
76,014

    Commercial developments
4,490

4,182

Equity accounted investments
21,617

22,698

Property, plant and equipment
6,769

7,506

Cash and cash equivalents
2,141

3,288

Assets held for sale
1,780

1,004

Total assets
109,056

122,520

Debt obligations
52,402

63,811

Liabilities associated with assets held for sale
1,118

163

Total equity
44,963

46,740

Equity attributable to Unitholders(1)
$
27,518

$
28,284

Equity per unit(2)
$
28.61

$
28.72

(1)
Equity attributable to Unitholders is a non-IFRS measure as described in the “Performance Measures” section on page 3.
(2) 
Assumes conversion of mandatorily convertible preferred shares. See page 16 for additional information.

As of September 30, 2019, we had $109,056 million in total assets, compared with $122,520 million at December 31, 2018. This $13,464 million decrease was primarily due to the deconsolidation of BSREP III investments, due to loss of control upon reducing our commitment to the fund on final close; our commitment to the fund is 7% compared to 25% at December 31, 2018.

Commercial properties are commercial, operating, rent-producing properties. Commercial properties decreased from $76,014 million at the end of 2018 to $66,296 million at September 30, 2019. The decrease was largely due to the deconsolidation of BSREP III investments, 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. These decreases were partially offset by the impact of the adoption of IFRS 16, Leases (“IFRS 16”) which requires the recognition of right-of-use assets and increased the balance by $699 million. Additionally, asset acquisitions, incremental capital spent to maintain or enhance properties and valuation gains within our Core Office and LP Investments portfolio, contributed to the offset.

Commercial developments consist of commercial property development sites, density rights and related infrastructure. The total fair value of development land and infrastructure was $4,490 million at September 30, 2019, an increase of $308 million from the balance at December 31, 2018. The increase is primarily due incremental capital spend on our active developments, and a gain recognized at 100 Bishopsgate in London as the development is nearing completion, partially offset by the deconsolidation of BSREP III investments.
 
The following table presents the changes in investment properties from December 31, 2018 to September 30, 2019:


Sep. 30, 2019
(US$ Millions)
Commercial properties

Commercial developments

Investment properties, beginning of period
$
76,014

$
4,182

Acquisitions
2,957

195

Capital expenditures
1,074

910

Accounting policy change(1)
699

22

Dispositions(2)
(461
)
(25
)
Fair value gains, net
(361
)
457

Foreign currency translation
(466
)
(97
)
Transfer between commercial properties and commercial developments
289

(289
)
Impact of deconsolidation due to loss of control(3)
(10,701
)
(798
)
Reclassifications to assets held for sale and other changes
(2,748
)
(67
)
Investment properties, end of period
$
66,296

$
4,490

(1) 
Includes the impact of the adoption of IFRS 16 through the recognition of right-of-use assets. See Note 2, Summary of Significant Accounting Policies for further information.
(2) 
Property dispositions represent the carrying value on date of sale.
(3) 
Includes the impact of the deconsolidation of BSREP III investments. See Note 4, Investment Properties for further information.

Equity accounted investments decreased by $1,081 million since December 31, 2018 primarily as a result of the deconsolidation of BSREP III during the first quarter of 2019, and the associated interests in properties held through joint ventures, primarily through Forest City Realty Inc.

14         




The following table presents a roll-forward of changes in our equity accounted investments:
(US$ Millions)
Sep. 30, 2019

Equity accounted investments, beginning of period
$
22,698

Additions
522

Disposals and return of capital distributions
(463
)
Share of net earnings from equity accounted investments
1,499

Distributions received
(329
)
Foreign currency translation
(211
)
Reclassification to assets held for sale
34

Impact of deconsolidation due to loss of control(1)
(1,434
)
Other comprehensive income and other
(699
)
Equity accounted investments, end of period
$
21,617

(1) 
Includes the impact of the deconsolidation of BSREP III investments. See Note 4, Investment Properties for further information.

Property, plant and equipment decreased by $737 million since December 31, 2018, primarily due to deconsolidation of BSREP III investments, which include a portfolio of serviced apartments in the United Kingdom and two hotel properties in Florida as well as the negative impact of foreign currency translation. These decreases were offset by capital spend during the current year.

As of September 30, 2019, assets held for sale primarily included nine triple net lease assets and a portfolio of multifamily assets in our LP Investments segment as well as a Core Office asset in Sydney.

The following table presents changes in our assets held for sale from December 31, 2018 to September 30, 2019:

(US$ Millions)
Sep. 30, 2019

Balance, beginning of period
$
1,004

Reclassification to/(from) assets held for sale, net
3,031

Disposals
(2,306
)
Fair value adjustments
62

Foreign currency translation
(11
)
Balance, end of period
$
1,780


Our debt obligations decreased to $52,402 million at September 30, 2019 from $63,811 million at December 31, 2018. Contributing to this decrease was the deconsolidation of BSREP III due to loss of control as mentioned above as term debt associated with an investment in the fund and the BSREP III credit facilities are no longer being consolidated by the partnership. Also contributing to the decrease was a paydown of the partnership’s credit facilities and the negative impact of foreign currency translation. These decreases were partially offset by the addition of property-specific borrowings and senior secured notes during the period.

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

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Corporate borrowings
$
2,355

$
2,159

Funds subscription facilities
16

4,516

Non-recourse borrowings
 
 
    Property-specific borrowings
44,079

50,407

    Subsidiary borrowings
5,952

6,729

Total debt obligations
$
52,402

$
63,811

Current
6,695

5,874

Non-current
45,707

57,937

Total debt obligations
$
52,402

$
63,811


15         




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

(US$ Millions, except unit information)
Sep. 30, 2019

Dec. 31, 2018

Total equity
$
44,963

$
46,740

Less:
 
 
Interests of others in operating subsidiaries and properties
17,024

18,456

Preferred equity
421


Equity attributable to Unitholders
27,518

28,284

Mandatorily convertible preferred shares
1,643

1,622

Total equity attributable to Unitholders
29,161

29,906

Partnership units
949,024,000

971,144,432

Mandatorily convertible preferred shares
70,051,024

70,038,910

Total partnership units
1,019,075,024

1,041,183,342

Total equity attributable to Unitholders per unit
$
28.61

$
28.72


Equity attributable to Unitholders was $27,518 million at September 30, 2019, a decrease of $766 million from the balance at December 31, 2018. The decrease was primarily due to repurchases of LP Units and BPR Units and distributions partially offset by net income during the period. Assuming the conversion of mandatorily convertible preferred shares, equity attributable to Unitholders decreased to $28.61 per unit at September 30, 2019 from $28.72 per unit at December 31, 2018.
 
Interests of others in operating subsidiaries and properties was $17,024 million at September 30, 2019, a decrease of $1,432 million from the balance of $18,456 million at December 31, 2018. The decrease was primarily a result of the deconsolidation of BSREP III.

SUMMARY OF QUARTERLY RESULTS

 
2019
2018
2017
(US$ Millions, except per unit information)
Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Revenue(1)
$
2,017

$
2,026

$
2,073

$
2,140

$
1,828

$
1,651

$
1,620

$
1,578

Direct operating costs(2)
776

785

842

837

793

716

741

707

Net income
870

23

713

858

722

1,051

1,023

958

Net income (loss) attributable to Unitholders
474

127

333

534

380

534

530

134

Net income (loss) per share attributable to Unitholders - basic
$
0.46

$
0.12

$
0.32

$
0.51

$
0.44

$
0.69

$
0.69

$
0.17

Net income (loss) per share attributable to Unitholders - diluted
$
0.46

$
0.12

$
0.32

$
0.51

$
0.43

$
0.68

$
0.68

$
0.17

(1) 
We adopted IFRS 9, Financial Instruments (“IFRS 9”) and IFRS 15, Revenues from Contracts with Customers (“IFRS 15”), in 2018 using the modified retrospective method. The comparative information for periods prior to 2018 has not been restated and is reported under the accounting standards effective for those periods.
(2) 
We adopted IFRS 16 in 2019 using the modified retrospective method. The comparative information for periods prior to 2019 has not been restated and is reported under the accounting standards effective for those periods.

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.

SEGMENT PERFORMANCE

Our operations are organized into four operating segments which include Core Office, Core Retail, LP Investments and Corporate.

The following table presents FFO by segment:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Core Office
$
130

$
114

$
419

$
374

Core Retail
169

71

497

300

LP Investments
65

45

210

200

Corporate
(103
)
(107
)
(316
)
(313
)
FFO
$
261

$
123

$
810

$
561


16         




The following table presents equity attributable to Unitholders by segment as of September 30, 2019 and December 31, 2018:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Core Office
$
13,690

$
14,199

Core Retail
13,697

14,136

LP Investments
5,238

5,204

Corporate
(5,107
)
(5,255
)
Total
$
27,518

$
28,284


Core Office

Overview
Our Core Office portfolio consists of interests in 136 high-quality office properties totaling over 93 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, as well as approximately 13 million square feet of active office and multifamily developments and office redevelopments. We believe these assets have a stable cash flow profile due to long-term leases in place. We target between a 10% and 12% total return on our Core Office portfolio. The drivers of these targets include the mark-to-market of rents upon lease expiry, escalation provisions in leases and projected increases in occupancy, that should generate strong same-property NOI growth without significant capital investment. Furthermore, we expect to earn between 8% and 11% unlevered, pre-tax returns on construction costs from our development pipeline.

Summary of Operating Results
The following table presents FFO and net income attributable to Unitholders in our Core Office segment for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

FFO
$
130

$
114

$
419

$
374

Net income attributable to Unitholders
211

383

904

678


FFO from our Core Office segment was $130 million for the three months ended September 30, 2019 as compared to $114 million in the same period in the prior year. This increase is largely attributable to same-property growth driven by lease commencements mainly in New York as well as a performance-based fee of $13 million earned in the current period for achieving certain milestones at Five Manhattan West. These increases were partially offset by dispositions as mentioned in property transactions and the negative impact of foreign currency translation.

FFO from our Core Office segment was $419 million for the nine months ended September 30, 2019 as compared to $374 million in the same period in the prior year. This increase is largely attributable to same-property growth as mentioned above and a total of $51 million for a performance-based fee earned at Five Manhattan during the nine months ended September 30, 2019 as well as higher development management and joint venture partner fees as development activity has increased and we have sold interests in assets to a number of joint venture partners. These increases were partially offset by dispositions as mentioned in property transactions and the negative impact of foreign currency translation.

Net income attributable to Unitholders decreased by $172 million to $211 million during the three months ended September 30, 2019 as compared to $383 million during the same period in 2018. The decrease is largely attributable to higher fair value gains recognized in the prior period as well as the impact from dispositions and the negative impact of foreign currency translation. The decrease was partially offset by fair value gains primarily related to 100 Bishopsgate in London as the development nears substantial completion and valuation gains on Australian assets to reflect market conditions.

Net income attributable to Unitholders increased by $226 million to $904 million during the nine months ended September 30, 2019 as compared to $678 million during the same period in 2018. The increase is largely attributable to fair value gains in London and Australia as mentioned above, as well as valuation gains on our New York assets to reflect market conditions. These increases were partially offset by dispositions and the negative impact of foreign currency translation.

17         




Leasing Activity
The following table presents key operating metrics for our Core Office portfolio as at and for the three months ended September 30, 2019 and 2018:
 
Consolidated
Unconsolidated
(US$ Millions, except where noted)
Sep. 30, 2019

Sep. 30, 2018

Sep. 30, 2019

Sep. 30, 2018

Total portfolio:
 
 
 
 
    NOI(1)
$
266

$
271

$
95

$
106

    Number of properties
70

78

66

72

    Leasable square feet (in thousands)
47,910

49,255

27,683

30,896

    Occupancy
91.3
%
91.9
%
94.3
%
94.6
%
    In-place net rents (per square foot)(2)(3)
$
29.43

$
28.69

$
44.32

$
43.37

Same-property:
 
 
 
 
    NOI(1,2)
$
264

$
251

$
104

$
98

    Number of properties
69

69

64

64

    Leasable square feet (in thousands)
46,816

46,768

27,678

27,674

    Occupancy
91.9
%
91.8
%
94.3
%
94.6
%
    In-place net rents (per square foot)(2)(3)
$
29.72

$
28.68

$
44.33

$
42.61

(1)
NOI for unconsolidated properties is presented on a proportionate basis, representing the Unitholders’ interest in the property. See “Reconciliation of Non-IFRS Measures - Core Office” below for a description of the key components of NOI in our Core Office segment.
(2)
Annualized cash rent from leases on a per square foot basis including tenant expense reimbursements, less operating expenses incurred for that space, but excluding the impact of straight-line rent or amortization of free rent periods.
(3)
Presented using normalized foreign exchange rates, using the September 30, 2019 exchange rate.

NOI from our consolidated properties decreased to $266 million during the three months ended September 30, 2019 from $271 million in the same quarter in 2018. The decrease was primarily due to dispositions in Sydney, Toronto and Denver since the prior year and the negative impact of foreign currency translation. Same-property NOI for our consolidated properties for the three months ended September 30, 2019 compared with the same period in the prior year increased by $13 million to $264 million. This increase was primarily the result of higher in-place net rents and lease commencements.

NOI from our unconsolidated properties, which is presented on a proportionate basis, decreased by $11 million to $95 million during the three months ended September 30, 2019, compared to $106 million during the period in the prior year. This decrease is due to dispositions since the prior year and the negative impact of foreign currency translation. These decreases were partially offset by slightly higher same-property NOI.

The following table presents certain key operating metrics related to leasing activity in our Core Office segment for the nine months ended September 30, 2019 and 2018:

 
Total portfolio
(US$, except where noted)
Sep. 30, 2019

Sep. 30, 2018

Leasing activity (square feet in thousands)
 
 
    New leases
2,582

2,420

    Renewal leases
1,943

2,060

Total leasing activity
4,525

4,480

Average term (in years)
8.1

8.2

Year one leasing net rents (per square foot)(1)
$
39.96

$
30.88

Average leasing net rents (per square foot)(1)
42.74

33.68

Expiring net rents (per square foot)(1)
34.24

30.24

Estimated market net rents for similar space (per square foot)(1)
37.69

38.33

Tenant improvement and leasing costs (per square foot)
56.43

50.27

(1)  
Presented using normalized foreign exchange rates, using the September 30, 2019 exchange rate.

For the nine months ended September 30, 2019, we leased approximately 4.5 million square feet at average in-place net rents of $42.74 per square foot. Approximately 57% 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 nine months ended September 30, 2019, tenant improvements and leasing costs related to leasing activity were $56.43 per square foot, compared to $50.27 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.

18         




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

 
Sep. 30, 2019
Dec. 31, 2018
 
Discount rate

Terminal capitalization rate

Investment horizon
Discount rate

Terminal capitalization rate

Investment horizon
Consolidated properties
 
 
 
 
 
 
United States
6.8
%
5.5
%
12
6.9
%
5.6
%
12
Canada
5.9
%
5.4
%
10
6.0
%
5.4
%
10
Australia
6.8
%
5.9
%
10
7.0
%
6.2
%
10
Brazil
7.9
%
7.4
%
6
9.6
%
7.7
%
6
Unconsolidated properties
 
 
 
 
 
 
United States
6.8
%
4.9
%
11
6.6
%
5.1
%
10
Australia
6.5
%
5.2
%
10
6.7
%
5.7
%
10
Europe(1)
4.6
%
5.0
%
10
4.7
%
4.9
%
10
(1) 
Certain properties in Europe accounted for under the equity method are valued using both discounted cash flow and yield models. For comparative purposes, the discount and terminal capitalization rates and investment horizon calculated under the discounted cash flow method are presented in the table above.

Financial Position
The following table provides an overview of the financial position of our Core Office segment as at September 30, 2019 and December 31, 2018:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Investment properties
 
 
    Commercial properties
$
21,566

$
21,350

    Commercial developments
3,204

2,182

Equity accounted investments
8,470

8,365

Participating loan interests

268

Accounts receivable and other
1,082

1,218

Cash and cash equivalents
601

678

Assets held for sale
276

34

Total assets
$
35,199

$
34,095

Debt obligations
12,519

11,922

Capital securities
884

813

Accounts payable and other liabilities
1,825

1,345

Deferred tax liability
980

953

Liabilities associated with assets held for sale
121


Non-controlling interests of others in operating subsidiaries and properties
5,180

4,863

Equity attributable to Unitholders
$
13,690

$
14,199


Equity attributable to Unitholders decreased by $509 million to $13,690 million at September 30, 2019 from $14,199 million at December 31, 2018. The decrease relates to new financing at 300 Madison Avenue for $625 million, where proceeds were used to repay our corporate credit facility offset by net income earned.

Commercial properties totaled $21,566 million at September 30, 2019, compared to $21,350 million at December 31, 2018. The increase was driven primarily by the adoption of IFRS 16 which requires the recognition of right-of-use assets, as well as incremental capital spent to maintain or enhance properties partially offset by dispositions and the negative impact of foreign currency translation based on spot rates.

Commercial developments increased by $1,022 million from December 31, 2018 to September 30, 2019. The increase was primarily due to incremental capital spend on our active developments and a gain recognized at 100 Bishopsgate in London as the development is nearing completion.
    

19         




The following table presents changes in our partnership’s equity accounted investments in the Core Office segment from December 31, 2018 to September 30, 2019:

(US$ Millions)
Sep. 30, 2019

Equity accounted investments, beginning of period
$
8,365

Additions
226

Disposals and return of capital distributions
(85
)
Share of net income, including fair value gains
414

Distributions received
(35
)
Foreign currency translation
(180
)
Reclassification to assets held for sale
34

Other
(269
)
Equity accounted investments, end of period
$
8,470


Equity accounted investments increased by $105 million since December 31, 2018 to $8,470 million at September 30, 2019. The increase was driven by our share of income and contributions to our development assets held in joint ventures, partially offset by the change in treatment of Brookfield Premier Real Estate Partners Pooling LLC (“BPREP”) from an equity accounted investment to financial asset due to reduction in our ownership and the negative impact of foreign currency translation.

Debt obligations increased from $11,922 million at December 31, 2018 to $12,519 million at September 30, 2019. This increase is the result of refinancing activity of property-level debt related to office properties and drawdowns on existing facilities to fund capital expenditures on development properties and the impact of foreign currency translation.

The following table provides additional information on our outstanding capital securities – Core Office:
(US$ Millions)
Shares outstanding
Cumulative dividend rate
Sep. 30, 2019

Dec. 31, 2018

Brookfield Office Properties Inc. (“BPO”) Class B Preferred Shares:
 
 
 
 
Series 1(1)
3,600,000
70% of bank prime


Series 2(1)
3,000,000
70% of bank prime


Capital Securities – Fund Subsidiaries
 
 
884

813

Total capital securities
 
 
$
884

$
813

(1) 
BPO Class B Preferred Shares, Series 1 and 2 capital securities are owned by Brookfield Asset Management. BPO has an offsetting loan receivable against these securities earning interest at 95% of bank prime.

We had $884 million of capital securities – fund subsidiaries outstanding at September 30, 2019 as compared to $813 million at December 31, 2018. Capital securities – fund subsidiaries includes $820 million (December 31, 2018 - $775 million) of equity interests in Brookfield DTLA Holdings LLC (“DTLA”) held by co-investors in the fund, which have been classified as a liability, rather than as non-controlling interest, as holders of these interests can cause DTLA to redeem their interests in the fund for cash equivalent to the fair value of the interests on October 15, 2023, and on every fifth anniversary thereafter. In addition, capital securities – fund subsidiaries also includes $64 million at September 30, 2019 (December 31, 2018 - $38 million) which represents the equity interests held by the partnership’s co-investor in Brookfield D.C. Office Partners LLC ("D.C. Fund"), which have been classified as a liability, rather than as non-controlling interest, due to the fact that on June 18, 2023, and on every second anniversary thereafter, the holders of these interests can redeem their interests in the D.C. Fund for cash equivalent to the fair value of the interests.

20         




Active Developments
The following table summarizes the scope and progress of active developments in our Core Office segment as of September 30, 2019:

 
Total square feet under construction (in 000’s)

Proportionate
 square feet under construction (in 000’s)

Expected
date of accounting stabilization
 
Cost
Loan
(Millions, except square feet in thousands)
Percent
pre-leased

Total(1)

To-date

Total

Drawn

Office:
 
 
 
 
 
 
 
 
100 Bishopsgate, London
938

938

 Q3 2020
75
%
£
845

£
769

£
515

£
487

One Manhattan West, Midtown New York(2)
2,081

853

 Q4 2020
88
%
$
795

$
649

$
554

$
398

Manhattan West Retail, Midtown New York(2)
70

39

 Q1 2021
50
%
$
117

$
67

$
59

$
2

Wood Wharf, Office, London(2)
423

211

 Q2 2021
44
%
£
125

£
32

£
93

£

ICD Brookfield Place, Dubai(2)
1,156

578

 Q4 2021
22
%
AED
1,451

AED
1,212

AED
908

AED
696

1 Bank Street, London(2)
715

358

 Q3 2022
89
%
£
257

£
224

£
225

£
167

Bay Adelaide North, Toronto
820

820

 Q3 2023
78
%
C$
498

C$
123

C$
350

C$

Two Manhattan West, Midtown New York(2)
1,955

1,095

 Q4 2023
25
%
$
1,329

$
280

$

$

Office Redevelopment:
 
 
 
 
 
 
 
 
388 George Street, Sydney
441

221

 Q3 2021
52
%
A$
178

A$
43

A$
167

A$
41

110 Avenue of the Americas, Midtown New York
376

136

 Q2 2022
95
%
$
113

$
23

$

$

Multifamily:
 
 
 
 
 
 
 
 
Principal Place - Residential, London(2)(3)
303

152

 Q4 2019
n/a

£
190

£
171

£
122

£
103

Wood Wharf - 10 Park Drive, London(2)(3)
269

135

 Q2 2020
n/a

£
102

£
90

£
80

£
50

Southbank Place(2)(3)
669

167

 Q2 2020
n/a

£
232

£
193

£
135

£
96

Wood Wharf - 8 Water Street & 2 George Street, London(2)
371

186

 Q1 2021
n/a

£
151

£
108

£
96

£
57

Greenpoint Landing Building F, New York(2)
348

331

 Q1 2021
n/a

$
347

$
243

$
206

$
78

Newfoundland, London(2)
545

273

 Q2 2021
n/a

£
249

£
227

£
174

£
109

Wood Wharf - One Park Drive, London(2)(3)
430

215

 Q2 2021
n/a

£
221

£
140

£
135

£

755 Figueroa, Los Angeles(2)(3)
791

374

 Q2 2024
n/a

$
257

$
26

$

$

Hotel:
 
 
 
 
 
 
 
 
Pendry Manhattan West, Midtown New York(2)
184

103

 Q2 2023
%
$
157

$
68

$

$

Total
12,885

7,185

 
 
 
 
 
 
(1) 
Net of NOI earned during stabilization.
(2) 
Presented on a proportionate basis at our ownership interest in each of these developments.
(3)
Represents condominium/market sale developments.

Our development pipeline consists of prominent, large-scale projects located primarily in the high growth markets of London and New York. For the office developments, we generally look to secure anchor leases before launching the projects. We monitor the scope and progress of our active developments and have an established track record of completion on time and within budget. We have recently completed office towers in the prime markets of Toronto, London, and Perth and completed two urban multifamily developments in New York. In the near term we expect to complete two landmark office towers in New York and London. Our current office and redevelopment projects stand at an average 60% pre-leased. Our recently completed developments, along with our active pipeline are a large contributing factor to our target growth of 10% to 12% on our Core Office portfolio.

21         




Reconciliation of Non-IFRS Measures – Core Office

The key components of NOI in our Core Office segment are presented below:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Commercial property revenue
$
463

$
492

$
1,412

$
1,472

Hospitality revenue(1)
2

5

8

14

Direct commercial property expense
(192
)
(222
)
(593
)
(661
)
Direct hospitality expense(1)
(7
)
(4
)
(9
)
(11
)
Total NOI
$
266

$
271

$
818

$
814

(1) 
Hospitality revenue and direct hospitality expense with our Core Office segment primarily consists of revenue and expenses incurred at a hotel adjacent to the Allen Center in Houston.

The following table reconciles Core Office NOI to net income for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Same-property NOI
$
264

$
251

$
804

$
751

Currency variance

2


14

NOI related to acquisitions and dispositions
2

18

14

49

Total NOI
266

271

818

814

Investment and other revenue
55

29

171

91

Interest expense
(152
)
(153
)
(449
)
(460
)
Depreciation and amortization on real estate assets
(3
)
(3
)
(8
)
(7
)
General and administrative expense
(57
)
(53
)
(178
)
(152
)
Fair value gains (losses), net
124

135

469

164

Share of net earnings from equity accounted investments
112

274

414

596

Income before taxes
345

500

1,237

1,046

Income tax (expense) benefit
(21
)
(35
)
(66
)
(191
)
Net income
324

465

1,171

855

Net income attributable to non-controlling interests
113

82

267

177

Net income attributable to Unitholders
$
211

$
383

$
904

$
678

    
The following table reconciles Core Office net income to FFO for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Net income
$
324

$
465

$
1,171

$
855

Add (deduct):
 
 
 
 
    Fair value gains, net
(124
)
(135
)
(469
)
(164
)
    Share of equity accounted fair value losses (gains), net
(49
)
(208
)
(224
)
(396
)
    Depreciation and amortization of real estate assets
1


3

1

    Income tax expense (benefit)
21

35

66

191

    Non-controlling interests in above items
(43
)
(43
)
(128
)
(113
)
FFO
$
130

$
114

$
419

$
374


The following table reconciles Core Office share of net earnings from equity accounted investments for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Unconsolidated properties NOI
$
95

$
106

$
304

$
345

Unconsolidated properties fair value gains, net
49

208

224

396

Other expenses
(32
)
(40
)
(114
)
(145
)
Share of net earnings from equity accounted investments
$
112

$
274

$
414

$
596


22         




Core Retail

Overview
Our Core Retail segment consists of 123 best-in-class retail properties containing approximately 122 million square feet in the United States. These assets have a stable cash flow profile due to long-term leases in place. We target between a 10% and 12% total return on our Core Retail portfolio. The drivers of these targets include the mark-to-market of rents upon lease expiry, escalation provisions in leases and operating expense monitoring that should generate same-property NOI growth. Furthermore, we expect to earn between 6% and 8% unlevered, pre-tax returns on construction costs from our development pipeline, which will also drive NOI growth.

Summary of Operating Results
The following table presents FFO and net income attributable to Unitholders in our Core Retail segment for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

FFO
$
169

$
71

$
497

$
300

Net income attributable to Unitholders
296

1

398

30


FFO earned in our Core Retail segment for the three months ended September 30, 2019 was $169 million compared to $71 million for the same period in the prior year. FFO increased due to higher NOI from a full quarter from our incremental ownership in GGP post-acquisition in the third quarter of 2018 in the current year compared to one month of NOI in the prior year. These increases were partially offset by higher interest expense, including new corporate acquisition debt and senior note debt, and general and administrative expenses associated with our incremental ownership.

For the nine months ended September 30, 2019, FFO earned in our Core Retail segment was $497 million compared to $300 million for the same period in the prior year. FFO increased due to the reasons mentioned above.

Net income attributable to Unitholders increased by $295 million to $296 million for the three months ended September 30, 2019 as compared to $1 million during the same period in the prior year. The increase in net income attributable to Unitholders is primarily attributable to FFO earnings from our incremental ownership in GGP. The prior year reflects fair value losses on our equity accounted investment prior to the acquisition of GGP.
 
Net income attributable to Unitholders increased by $368 million to $398 million for the nine months ended September 30, 2019 as compared to $30 million during the same period in the prior year. The increase in net income attributable to Unitholders is primarily attributable to FFO earnings from our incremental ownership in GGP and fair value gains recognized on our equity accounted investments, mainly Ala Moana Center. The prior year included fair value losses recognized on our equity accounted investment prior to the GGP acquisition. These increases were partially offset by the fair value losses on our consolidated portfolio as it reflects updated cashflow assumptions and valuation metrics agreed upon by an independent third party.

Leasing Activity
The following table presents key operating metrics in our Core Retail portfolio as at and for the three months ended September 30, 2019 and 2018:

(US$ Millions, except where noted)
Sep. 30, 2019

Sep. 30, 2018

NOI:
 
 
    Total portfolio(1)
$
422

$
275

Number of malls and urban retail properties
123

125

Leasable square feet (in thousands)
121,602

122,406

Occupancy(2)
95.0
%
95.7
%
In-place net rents (per square foot)(2)
$
62.14

$
61.84

NOI Weighted Sales (per square foot)(2)
$
787

$
747

(1)  
NOI is presented on a proportionate basis. The current period represents 3 months of our consolidated results of BPR. The prior period represents 3 months of activity from our 34% interest in GGP (prior to the GGP acquisition in the third quarter of 2018).
(2)  
Presented on a same-property basis.

NOI, which is presented on a proportionate basis, increased to $422 million for the three months ended September 30, 2019, due to our increased ownership in GGP in the current period.

23         




The results of our operations are primarily driven by changes in occupancy and in-place rental rates. The following table presents new and renewal leases for the trailing 12 months compared to expiring leases for the prior tenant in the same suite, for leases where the downtime between new and previous tenant is less than 24 months, among other metrics.
 
Total Portfolio
(US$, except where noted)
Sep. 30, 2019

Sep. 30, 2018

Number of leases
1,266

1,263

Leasing activity (square feet in thousands)
4,973

4,142

Average term in years
6.8

6.9

Initial rent per square foot(1)
$
61.88

$
71.40

Expiring rent per square foot(2)
58.71

63.96

Initial rent spread per square foot
3.17

7.44

% change
5.4
%
11.6
%
Tenant allowances and leasing costs
$
149

$
147

(1)
Represents initial rent over the term consisting of base minimum rent and common area costs.
(2)
Represents expiring rent at end of lease consisting of base minimum rent and common area costs.

Through September 30, 2019, we leased approximately 5.0 million square feet at initial rents approximately 5.4% higher than expiring net rents on a suite-to-suite basis.

Our Core Retail portfolio same-store occupancy rate at September 30, 2019 was 95.0%, relatively flat with the same period of the prior year. In our Core Retail segment, we use same-store in-place rents as a measure of leasing performance. In-place rents are calculated on a cash basis and consist of base minimum rent plus reimbursements of common area costs, and real estate taxes. Same-store in-place rents increased to $62.14 at September 30, 2019 from $61.84 at September 30, 2018.

Valuation Metrics
The key valuation metrics of the properties in our Core Retail segment on a weighted-average basis are presented in the following table. The valuations are most sensitive to changes in the discount rate, terminal capitalization rate, and timing or variability of cash flows.
 
Sep. 30, 2019
Dec. 31, 2018
 
Discount rate

Terminal capitalization rate

Investment horizon
Discount rate

Terminal capitalization rate

Investment horizon
Consolidated properties
 
 
 
 
 
 
United States
7.0
%
5.6
%
10
7.1
%
6.0
%
12
Unconsolidated properties
 
 
 
 
 
 
United States
6.3
%
4.9
%
10
6.6
%
5.3
%
11

Financial Position

The following table presents an overview of the financial position of our Core Retail segment as at September 30, 2019 and December 31, 2018:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Investment properties
 
 
    Commercial properties
$
18,268

$
17,224

    Commercial developments
521

383

Equity accounted investments
11,686

11,158

Accounts receivable and other
507

646

Cash and cash equivalents
215

247

Total assets
31,197

29,658

Debt obligations
14,759

13,052

Accounts payable and other liabilities
766

674

Deferred tax liability
57

23

Non-controlling interest
1,918

1,773

Equity attributable to Unitholders
$
13,697

$
14,136


Equity attributable to Unitholders in the Core Retail segment decreased by $439 million at September 30, 2019 from December 31, 2018 primarily due to distribution of income during the period and the $95 million issuer bid buyback of BPR Units in the first quarter of 2019.

24         




The following table presents a roll-forward of our partnership’s equity accounted investments for the year ended September 30, 2019:
 
(US$ Millions)
Sep. 30, 2019

Equity accounted investments, beginning of year
$
11,158

Additions, net of disposals
(89
)
Share of net earnings from equity accounted investments
1,068

Distributions received
(76
)
Foreign currency translation and other
(375
)
Equity accounted investments, end of year
$
11,686


Equity accounted investments increased by $528 million to $11,686 million, primarily due to the share of net earnings BPR’s property-level joint ventures earned and fair value gains recognized at higher-tiered malls during the period, partially offset by distributions received.

Reconciliation of Non-IFRS Measures – Core Retail

The key components of NOI in our Core Retail segment are presented below:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Commercial property revenue
$
342

$
129

$
1,006

$
129

Direct commercial property expense
(92
)
(36
)
(282
)
(36
)
Total NOI
$
250

$
93

$
724

$
93

The following table reconciles Core Retail net income to net income attributable to Unitholders for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Total NOI
$
250

$
93

$
724

$
93

Investment and other revenue
89

16

167

16

Interest expense
(196
)
(52
)
(506
)
(52
)
Depreciation and amortization on real estate assets
(5
)
(2
)
(18
)
(2
)
Investment and other expense




General and administrative expense
(63
)
(26
)
(199
)
(26
)
Fair value (losses) gains, net
(5
)
78

(832
)
78

Share of net earnings from equity accounted investments
257

(259
)
1,068

(230
)
Income before taxes
327

(152
)
404

(123
)
Income tax (expense)
(12
)
150

15

150

Net income
$
315

$
(2
)
$
419

$
27

Net income attributable to non-controlling interests
19

(3
)
21

(3
)
Net income attributable to Unitholders
$
296

$
1

$
398

$
30

    
The following table reconciles Core Retail net income to FFO for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Net income
$
315

$
(2
)
$
419

$
27

Add (deduct):
 
 
 
 
    Share of equity accounted fair value (gains), net
(159
)
298

(707
)
498

    Fair value losses (gains) losses, net
5

(78
)
832

(78
)
    Income tax (benefit) expense
12

(150
)
(15
)
(150
)
    Non-controlling interests in above items
(4
)
3

(32
)
3

FFO
$
169

$
71

$
497

$
300


25         




The following table reconciles Core Retail share of net earnings from equity accounted investments for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Unconsolidated properties NOI
$
213

$
275

$
673

$
659

Unconsolidated properties fair value (losses) gains, net and income tax expense
159

(298
)
707

(498
)
Other expenses
(115
)
(236
)
(312
)
(391
)
Share of net earnings from equity accounted investments
$
257

$
(259
)
$
1,068

$
(230
)

LP Investments (formerly referred to as Opportunistic)

Overview
Our LP Investments portfolio includes our equity invested in Brookfield-sponsored real estate opportunity funds, which target high-quality assets with operational upside across various real estate sectors, including office, retail, multifamily, logistics, hospitality, triple net lease, self-storage, student housing and manufactured housing. We target an average 20% total return on our LP Investments portfolio and a 2.0x multiple of capital on the equity we invest into these vehicles.
 
The partnership has interests in the following Brookfield-sponsored real estate opportunity funds:
BSREP I - 31% interest in BSREP I, which is an opportunistic real estate fund with $4.4 billion in committed capital in aggregate, targeting gross returns of 20%. The fund is in its 8th year, is fully invested and is executing realizations.

BSREP II - 26% interest in BSREP II, which is an opportunistic real estate fund with $9.0 billion in committed capital in aggregate, targeting gross returns of 20%. The fund is in its 5th year and is fully invested.

BSREP III - 7% interest in BSREP III, which is an opportunistic real estate fund with $15.0 billion in committed capital in aggregate, targeting gross returns of 20%; the fund is in its 2nd year.

A blended 36% interest in two value-add multifamily funds totaling $1.8 billion targeting gross returns of 16%. These funds seek to invest in a geographically diverse portfolio of U.S. multifamily properties through acquisition and development.

A 33% interest in a $600 million fund which owns the Atlantis Paradise Island resort in the Bahamas.

A blended 13% interest in a series of real estate debt funds totaling $5.4 billion which seek to invest in commercial real estate debt secured by properties in strategic locations.

While our economic interest in these funds are less than 50% in each case, we generally consolidate the portfolios held through the LP Investments as Brookfield Asset Management’s oversight as general partner together with our exposure to variable returns of the investments through our LP interests provide us with control over the investments. We do not consolidate our interest in BSREP III as our interest does not provide us with control over the investment and therefore is accounted for as a financial asset.

Summary of Operating Results
Our LP investments, unlike our Core portfolios, have a defined hold period and typically generate the majority of profits from realization events including the sale of an asset or portfolio of assets, or the exit of the entire investment. The combination of gains from realization events and FFO earned during the hold period represent our earnings on capital invested in these funds and, once distributed by the Brookfield-sponsored real estate opportunity funds, provide liquidity to support our target distributions.

The following table presents distributions received on our LP Investments in Brookfield-sponsored real estate opportunity funds received on sale or refinancing events within the funds for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Return of invested capital
$
15

$
40

$
234

$
219

Distribution of earnings and gains on invested capital
68

80

592

233

Total LP Investments distributions
$
83

$
120

$
826

$
452

Less: Incentive fees
$
(3
)
$

$
(139
)
$
(9
)
Total LP Investments distributions, net
$
80

$
120

$
687

$
443


During the nine months ended September 30, 2019, distribution of earnings and gains on invested capital primarily related to distributions of income from our office assets in India, Brazil and Center Parcs in the United Kingdom, as well as the realization gains on the disposition of multifamily assets in our second value-add multifamily fund, our interest in a retail portfolio in China and an office portfolio in

26         




California. Total LP Investments distributions for the nine months ended September 30, 2019 were net of incentive fees primarily from the dispositions mentioned above and upfinancing of our office portfolio in India as several developments near completion. Distribution of earnings and gains on invested capital in the prior periods are primarily due to distributions of income from our office and multifamily assets.

The following table presents FFO and net income attributable to Unitholders in our LP Investments segment for the three and nine months ended September 30, 2019 and 2018:
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

FFO
65

45

210

200

Net income attributable to Unitholders
162

101

41

670

    
FFO increased by $20 million for the three months ended September 30, 2019 and increased by $10 million for the nine months ended September 30, 2019 primarily due to NOI earned from investment activity which contributed incremental NOI of $68 million for the nine months ended September 30, 2019. These increases were partially offset by disposition activity including a portfolio of triple-net lease assets, a portfolio of storage assets and a North American logistics portfolio sold in 2018 coupled with higher interest expense and the negative impact of foreign currency translation.

Net income attributable to Unitholders increased for the three months ended September 30, 2019 by $61 million driven by fair value gains in our office portfolio in Brazil which resulted from discount rate compression due to improved market conditions and historical low interest rates as well as fair value gains in India which resulted from capitalization rate compression.

Net income attributable to Unitholders decreased for the nine months ended September 30, 2019 by $629 million driven by fair value losses in our LP Investments retail portfolio from updated cashflow assumptions. Additionally, the prior year benefited from valuation gains, particularly related to our industrial portfolio in the U.S. and our office assets in India, as well as a gain on extinguishment of debt associated with the sale of the Hard Rock Hotel and Casino. These decreases were partially offset by current year fair value gains mentioned above, fair value gains in our student housing portfolio due to capitalization rate compression as well incremental income relating to the property transactions.

Financial Position
The following table presents an overview of the financial position of our LP Investments segment as at September 30, 2019 and December 31, 2018:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Investment properties
$
27,227

$
39,057

Property, plant and equipment
6,530

7,333

Equity accounted investments
1,461

3,175

Accounts receivable and other
4,557

5,777

Cash and cash equivalents
1,301

2,298

Assets held for sale
1,504

970

Total assets
$
42,580

$
58,610

Debt obligations
22,769

36,678

Capital securities
431

460

Accounts payable and other liabilities
3,235

4,303

Liabilities associated with assets held for sale
997

163

Non-controlling interests of others in operating subsidiaries and properties
9,910

11,802

Equity attributable to Unitholders
$
5,238

$
5,204


The decrease in investment properties is primarily the result of the deconsolidation of BSREP III investments and the sales of a portfolio of triple-net lease assets and a portfolio of office assets in California, partially offset by property transactions since the prior year, mostly in our office portfolios. Additionally, we had valuation gains from our office portfolios in Brazil and India and our student housing portfolio in the United Kingdom.

The decrease in property, plant and equipment is the result of the deconsolidation of BSREP III investments, which include a portfolio of serviced apartments in the United Kingdom and two hotel properties in Florida and the negative impact of foreign currency translation related to our Center Parcs portfolio in the United Kingdom. These decreases were offset by capital spend during the current year.

Equity accounted investments decreased during the nine months ended September 30, 2019 primarily due to the deconsolidation of BSREP III during the first quarter of 2019, as well as distributions of income and return of capital and the negative impact of foreign currency translation during the period. These decreases were partially offset by net income from these investments.

Assets held for sale and related liabilities as of September 30, 2019 includes nine triple-net lease assets in the U.S. and ten multifamily assets in the U.S., as we intend to sell controlling interests in these properties to third parties in the next 12 months.

27         




Debt obligations decreased due to the deconsolidation of BSREP III as mentioned in property transactions.

Reconciliation of Non-IFRS Measures - LP Investments
The following table reconciles LP Investments NOI to net income for the three and nine months ended September 30, 2019 and 2018:
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Commercial property revenue
$
575

$
630

$
1,822

$
1,877

Hospitality revenue
470

497

1,458

1,446

Direct commercial property expense
(197
)
(220
)
(607
)
(611
)
Direct hospitality expense
(288
)
(311
)
(912
)
(931
)
Total NOI
560

596

1,761

1,781

Investment and other revenue
19

28

64

51

Interest expense
(330
)
(355
)
(1,047
)
(964
)
General and administrative expense
(50
)
(124
)
(148
)
(310
)
Investment and other expense

(17
)
(10
)
(17
)
Depreciation and amortization
(78
)
(79
)
(230
)
(222
)
Fair value (losses) gains, net
392

342

213

1,500

Share of net earnings from equity accounted investments
40

50

17

215

Income before taxes
553

441

620

2,034

Income tax expense
(128
)
(79
)
(196
)
(187
)
Net income
425

362

424

1,847

Net income attributable to non-controlling interests
263

261

383

1,177

Net income attributable to Unitholders
$
162

$
101

$
41

$
670

    
The following table reconciles LP Investments net income to FFO for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Net income
$
425

$
362

$
424

$
1,847

Add (deduct):
 
 
 
 
    Fair value gains, net
(392
)
(342
)
(213
)
(1,500
)
    Share of equity accounted fair value losses (gains), net
(23
)
(38
)
55

(135
)
    Depreciation and amortization of real estate assets
72

70

209

200

    Income tax expense
128

79

196

187

    Non-controlling interests in above items
(145
)
(86
)
(461
)
(399
)
FFO
$
65

$
45

$
210

$
200


Corporate
Certain amounts are allocated to our corporate segment as those activities should not be used to evaluate our other segments’ operating performance.

Summary of Operating Results
The following table presents FFO and net income attributable to Unitholders in our corporate segment for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

FFO
$
(103
)
$
(107
)
$
(316
)
$
(313
)
Net income attributable to Unitholders
(195
)
(105
)
(409
)
66


FFO was a loss of $103 million (2018 - loss of $107 million) and $316 million (2018 - loss of $313 million) for the three and nine months ended September 30, 2019, respectively. Corporate FFO generally includes interest expense and general and administrative expense.

Interest expense for the three months ended September 30, 2019, totaled $60 million (2018 - $72 million), which reflects $36 million (2018 - $51 million) of interest expense paid on capital securities and $24 million (2018 - $21 million) of interest expense on our credit facilities and corporate bonds. For the nine months ended September 30, 2019, interest expense totaled $192 million (2018 - $212 million), which reflects $116 million (2018 - $160 million) of interest expense paid on capital securities and $76 million (2018 - $52 million) of interest expense on our credit facilities and corporate bonds.

28         





General and administrative expense for the three months ended September 30, 2019 was $44 million (2018 - $36 million) and consists of $25 million (2018 - $25 million) of asset management fees, equity enhancement fees of $6 million (2018 - one million) and $13 million (2018 - $10 million) of other corporate costs. For the nine months ended September 30, 2019 general and administrative expense was $131 million (2018 - $103 million) and consists of $73 million (2018 - $73 million) of asset management fees, equity enhancement fees of $20 million (2018 - one million) and $38 million (2018 - $29 million) of other corporate costs.

For the three and nine months ended September 30, 2019, we also recorded an income tax expense of $30 million and income tax benefit $30 million (2018 - income tax benefit of $2 million and income tax benefit of $179 million), respectively, allocated to the corporate segment related to the decrease of deferred tax liabilities of our holding companies and their subsidiaries. The benefit in the prior year related to a decrease of deferred tax liabilities of our holding companies and their subsidiaries.

Financial Position
The following table presents equity attributable to Unitholders at the corporate level:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Accounts receivable and other
$
56

$
92

Cash and cash equivalents
24

65

Total assets
80

157

Debt obligations
2,355

2,159

Capital securities
1,714

2,112

Deferred tax liabilities
121

91

Accounts payable and other liabilities
560

1,032

Preferred equity
421


Non-controlling interests
16

18

Equity attributable to Unitholders
$
(5,107
)
$
(5,255
)

The corporate balance sheet includes corporate debt and capital securities from our partnership. The increase in equity attributable to Unitholders is due to repayment of our credit facilities and redemptions of Class B Junior Preferred Shares of Brookfield BPY Holdings Inc., partially offset by an increase in loans and notes payable due to Brookfield Asset Management.

During the first quarter of 2019, we issued $178 million of our Class A Cumulative Redeemable Perpetual Preferred Units, Series 1 at a coupon rate of 6.5% per annum, payable quarterly in arrears.

During the third quarter of 2019, we issued $243 million of our Class A Cumulative Redeemable Perpetual Preferred Units, Series 2 at a coupon rate of 6.375% per annum, payable quarterly in arrears.

In addition, as at September 30, 2019, we had $15 million (December 31, 2018 - $16 million) of preferred shares with a cumulative dividend rate of 5% outstanding. The preferred shares were issued by various holding entities of our partnership.

The following table provides additional information on our outstanding capital securities – corporate:
(US$ Millions)
 
Shares Outstanding

Cumulative Dividend Rate

Sep. 30, 2019

Dec. 31, 2018

Operating Partnership Class A Preferred Equity Units:
 
 
 
 
Series 1
 
24,000,000

6.25
%
$
571

$
562

Series 2
 
24,000,000

6.50
%
543

537

Series 3
 
24,000,000

6.75
%
529

523

Brookfield BPY Holdings Inc. Junior Preferred Shares:
 
 
 
 
Class B Junior Preferred Shares(1)
 

7.64
%

420

Brookfield Property Split Corp. Senior Preferred Shares:
 
 
 
 
Class A Series 1
 
924,390

5.25
%
23

23

Class A Series 2
 
699,165

5.75
%
13

13

Class A Series 3
 
909,814

5.00
%
17

17

Class A Series 4
 
940,486

5.20
%
18

17

Total capital securities - corporate
 
 
$
1,714

$
2,112

(1) 
In the first quarter of 2019, $420 million of the Brookfield BPY Holdings Inc. Class B Junior Preferred Shares, held by Brookfield Asset Management, were redeemed.

29         




Reconciliation of Non-IFRS Measures – Corporate

The following table reconciles Corporate net income to net income attributable to Unitholders for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Net income (loss)
$
(194
)
$
(104
)
$
(408
)
$
67

Net income attributable to non-controlling interests
1

1

1

1

Net income (loss) attributable to Unitholders
$
(195
)
$
(105
)
$
(409
)
$
66


The following table reconciles Corporate net income to FFO for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Net income (loss)
$
(194
)
$
(104
)
$
(408
)
$
67

Add (deduct):
 
 
 
 
    Fair value (gains) losses, net
62


123

(200
)
    Income tax expense
30

(2
)
(30
)
(179
)
    Non-controlling interests in above items
(1
)
(1
)
(1
)
(1
)
FFO
$
(103
)
$
(107
)
$
(316
)
$
(313
)

LIQUIDITY AND CAPITAL RESOURCES
The capital of our business consists of debt obligations, capital securities, preferred stock and equity. Our objective when managing this capital is to maintain an appropriate balance between holding a sufficient amount of equity capital to support our operations and reducing our weighted average cost of capital to improve our return on equity. As at September 30, 2019, capital totaled $100 billion (December 31, 2018 - $114 billion).
 
We attempt to maintain a level of liquidity to ensure we are able to participate in investment opportunities as they arise and to better withstand sudden adverse changes in economic circumstances. Our primary sources of liquidity include cash, undrawn committed credit facilities, construction facilities, cash flow from operating activities and access to public and private capital markets. In addition, we structure our affairs to facilitate monetization of longer-duration assets through financings and co-investor participations.
 
We seek to increase income from our existing properties by maintaining quality standards for our properties that promote high occupancy rates and support increases in rental rates while reducing tenant turnover and related costs, and by controlling operating expenses. Consequently, we believe our revenue, along with proceeds from financing activities and divestitures, will continue to provide the necessary funds to cover our short-term liquidity needs. However, material changes in the factors described above may adversely affect our net cash flows.
 
Our principal liquidity needs for the current year and for periods beyond include:
 
Recurring expenses;
Debt service requirements;
Distributions to Unitholders;
Capital expenditures deemed mandatory, including tenant improvements;
Development costs not covered under construction loans;
Unfunded committed capital to funds;
Investing activities which could include:
Discretionary capital expenditures;
Property acquisitions;
Future developments; and
Repurchase of our units.
 

30         




We plan to meet these liquidity needs by accessing our group-wide liquidity of $7,083 million at September 30, 2019 as highlighted in the table below. In addition, we have the ability to supplement this liquidity through cash generated from operating activities, asset sales, co-investor interests and financing opportunities.
(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Proportionate cash retained at subsidiaries
$
1,714

$
2,057

Proportionate availability under credit facilities
4,081

3,092

Proportionate availability under construction facilities
1,288

1,544

Group-wide liquidity(1)
$
7,083

$
6,693

(1) 
This includes liquidity of investments which are not controlled and can only be obtained through distributions which the partnership does not control.

We finance our assets principally at the operating company level with asset-specific debt that generally has long maturities, few restrictive covenants and with recourse only to the asset. We endeavor to maintain prudent levels of debt and strive to ladder our principal repayments over a number of years.

The following table summarizes our secured debt obligations on investment properties by contractual maturity over the next five years and thereafter:

(US$ Millions)
Sep. 30, 2019

Remainder of 2019
$
832

2020
6,046

2021
8,634

2022
3,110

2023
4,009

2024 and thereafter
15,846

Deferred financing costs
(250
)
Secured debt obligations
$
38,227

Debt to capital ratio
54.0
%

We generally believe that we will be able to either extend the maturity date, repay, or refinance the debt that is scheduled to mature in 2019-2020. Currently, our debt to capital ratio is 54.0%. We are focused on decreasing our debt to capital ratio to 50% through repayment of capital securities and credit facilities with cash flows that we expect from the completion of our active development pipeline with completion dates in 2019 to 2023.

Our partnership’s operating subsidiaries are subject to limited covenants in respect of their corporate debt and are in full compliance with all material covenants at September 30, 2019. The partnership’s operating subsidiaries are also in compliance with all covenants and other capital requirements related to regulatory or contractual obligations of material consequence to our partnership.

For the three and nine month periods ended September 30, 2019 and 2018, the partnership made distributions to Unitholders of $951 million (2018 - $750 million). This compares to cash flow from operating activities of $631 million and $1,148 million for each period. The partnership has a number of alternatives at its disposal to fund any difference between the cash flow from operating activities and distributions to Unitholders. The partnership is not a passive investor and typically holds positions of control or significant influence over assets in which it invests, enabling the partnership to influence distributions from those assets. The partnership will, from time to time, convert some or all of the unrealized fair value gains on investment properties to cash through asset sales, joint ventures or refinancings. The partnership may access its credit facilities in order to temporarily fund its distributions as a result of timing differences between the payments of distributions and cash receipts from its investments. Distributions made to Unitholders which exceed cash flow from operating activities in future periods may be considered to be a return of capital to Unitholders as defined in Canadian Securities Administrators’ National Policy 41-201 - Income Trusts and Indirect Offerings.

31         




RISKS AND UNCERTAINTIES
The financial results of our business are impacted by the performance of our properties and various external factors influencing the specific sectors and geographic locations in which we operate, including: macro-economic factors such as economic growth, changes in currency, inflation and interest rates; regulatory requirements and initiatives; and litigation and claims that arise in the normal course of business.

Our property investments are generally subject to varying degrees of risk depending on the nature of the property. These risks include changes in general economic conditions (including the availability and costs of mortgage funds), local conditions (including an oversupply of space or a reduction in demand for real estate in the markets in which we operate), the attractiveness of the properties to tenants, competition from other landlords with competitive space and our ability to provide adequate maintenance at an economical cost.

Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made regardless of whether a property is producing sufficient income to service these expenses. Certain properties are subject to mortgages which require substantial debt service payments. If we become unable or unwilling to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or sale. We believe the stability and long-term nature of our contractual revenues effectively mitigates these risks.

We are affected by local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own assets. A protracted decline in economic conditions would cause downward pressure on our operating margins and asset values as a result of lower demand for space.

The majority of our properties are located in North America, Europe and Australia, with a growing presence in South America and Asia. A prolonged downturn in the economies of these regions would result in reduced demand for space and number of prospective tenants and will affect the ability of our properties to generate significant revenue. If there is an increase in operating costs resulting from inflation and other factors, we may not be able to offset such increases by increasing rents.

We are subject to risks that affect the retail environment, including unemployment, weak income growth, lack of available consumer credit, industry slowdowns and plant closures, consumer confidence, increased consumer debt, poor housing market conditions, adverse weather conditions, natural disasters and the need to pay down existing obligations. All of these factors could negatively affect consumer spending, and adversely affect the sales of our retail tenants. This could have an unfavorable effect on our operations and our ability to attract new retail tenants. In addition, our retail tenants face competition from retailers at other regional malls, outlet malls and other discount shopping centers, discount shopping clubs, catalogue companies, and through internet sales and telemarketing. Competition of these types could reduce the percentage rent payable by certain retail tenants and adversely affect our revenues and cash flows.

As owners of office and retail properties, lease rollovers also present a risk, as continued growth of rental income is dependent on strong leasing markets to ensure expiring leases are renewed and new tenants are found promptly to fill vacancies. Refer to “Lease Rollover Risk” below for further details.

For a more detailed description of the risk factors facing our business, please refer to the section entitled Item 3.D. “Key Information - Risk Factors” in our December 31, 2018 annual report on Form 20-F.

Credit Risk
Credit risk arises from the possibility that tenants may be unable to fulfill their lease commitments. We mitigate this risk by ensuring that our tenant mix is diversified and by limiting our exposure to any one tenant. We also maintain a portfolio that is diversified by property type so that exposure to a business sector is lessened. Government and government agencies comprise 8.9% of our Core Office segment tenant base and, as at September 30, 2019, no one tenant comprises more than this.

32         




The following list shows the largest tenants by leasable area in our Core Office portfolio and their respective credit ratings and exposure as at September 30, 2019:
Tenant
Primary location
Credit rating(1)
Exposure (%)(2)

Government and Government Agencies
Various
AAA/AA+
8.9
%
Morgan Stanley
NY/Toronto/London
A-
2.6
%
Barclays
London/Toronto/Calgary
BBB-
2.0
%
CIBC World Markets(3)
Calgary/NY/Toronto
AA
1.9
%
Suncor Energy Inc.
Calgary
BBB+
1.8
%
Cenovus
Calgary
BB+
1.6
%
Bank of Montreal
Calgary/Toronto
AA
1.5
%
Deloitte
Various
Not Rated
1.4
%
Bank of America | Merrill Lynch
Various
A-
1.3
%
Amazon
NY/London
A-
1.3
%
Total
 
 
24.3
%
(1) 
From Standard & Poor’s Rating Services, Moody’s Investment Services, Inc. or DBRS Limited.
(2) 
Prior to considering the partnership’s interest in partially-owned properties.
(3) 
CIBC World Markets leases 1.1 million square feet at 300 Madison Avenue in New York, of which they sublease 940,000 square feet to PricewaterhouseCoopers LLP and approximately 100,000 square feet to Sumitomo Corporation of America.

The following list reflects the largest tenants in our Core Retail portfolio as at September 30, 2019. The largest ten tenants in our portfolio accounted for approximately 21.1% of minimum rents, tenant recoveries and other.

Tenant
Primary Brands
Exposure (%)(1)

L Brands, Inc.
Victoria's Secret, Bath & Body Works, PINK
3.8
%
Foot Locker, Inc.
Footlocker, Champs Sports, Footaction USA, House of Hoops
2.8
%
LVMH
Louis Vuitton, Sephora, Fendi, Bulgari, Dior, Tag Heuer
2.6
%
The Gap, Inc.
Gap, Banana Republic, Old Navy, Athleta
2.4
%
Forever 21 Retail, Inc.
Forever 21
2.0
%
Signet Jewelers Limited
Zales, Gordon's, Kay, Jared
1.6
%
American Eagle Outfitters, Inc.
American Eagle Outfitters, Aerie
1.5
%
Ascena Retail Group
Ann Taylor, Loft, Justice, Lane Bryant
1.5
%
Express, Inc.
Express, Express Men, Express Factory
1.5
%
Abercrombie & Fitch Stores, Inc.
Abercrombie, Abercrombie & Fitch, Hollister
1.4
%
Total
 
21.1
%
(1) 
Exposure is a percentage of minimum rents and tenant recoveries.

Lease Roll-over Risk
Lease roll-over risk arises from the possibility that we may experience difficulty renewing leases as they expire or in re-leasing space vacated by tenants upon early lease expiry. We attempt to stagger the lease expiry profile so that we are not faced with disproportionate amounts of space expiring in any one year. On average, approximately 8% of our Core Office and Core Retail leases mature annually up to 2023. Our Core Office and Core Retail leases has a weighted average remaining lease life of approximately 7.1 years. We further mitigate this risk by maintaining a diversified portfolio mix by geographic location and by pro-actively leasing space in advance of its contractual expiry.

The following table sets out lease expiries, by square footage, for our Core Office and Core Retail portfolios at September 30, 2019, including our unconsolidated investments:

(Sq. ft. in thousands)
Current

2019

2020

2021

2022

2023

2024

2025

2026 and beyond

Total

Core Office
5,716

380

3,569

5,041

4,601

5,329

4,484

4,503

41,970

75,593

Total % expiring
7.6
%
0.5
%
4.7
%
6.7
%
6.1
%
7.0
%
5.9
%
6.0
%
55.5
%
100.0
%
Core Retail(1)
2,803

1,942

5,169

5,599

6,002

5,138

5,918

4,704

16,898

54,173

Total % expiring
5.0
%
3.6
%
9.5
%
10.3
%
11.1
%
9.5
%
10.9
%
8.7
%
31.4
%
100.0
%
(1) 
Represents regional malls only and excludes traditional anchor and specialty leasing agreements.

Tax Risk
We are subject to income taxes in various jurisdictions, and our tax liabilities are dependent upon the distribution of income among these different jurisdictions. Our effective income tax rate is influenced by a number of factors, including changes in tax law, tax treaties, interpretation of existing laws, and our ability to sustain our reporting positions on examination. Changes in any of those factors could change our effective tax rate, which could adversely affect our profitability and results of operations.

33         




Environmental Risk
As an owner of real property, we are subject to various federal, provincial, state and municipal laws relating to environmental matters. Such laws provide that we could be liable for the costs of removing certain hazardous substances and remediating certain hazardous locations. The failure to remove such substances or remediate such locations, if any, could adversely affect our ability to sell such real estate or to borrow using such real estate as collateral and could potentially result in claims against us. We are not aware of any material non-compliance with environmental laws at any of our properties nor are we aware of any material pending or threatened investigations or actions by environmental regulatory authorities in connection with any of our properties or any material pending or threatened claims relating to environmental conditions at our properties.

We will continue to make the necessary capital and operating expenditures to ensure that we are compliant with environmental laws and regulations. Although there can be no assurances, we do not believe that costs relating to environmental matters will have a material adverse effect on our business, financial condition or results of operations. However, environmental laws and regulations can change and we may become subject to more stringent environmental laws and regulations in the future, which could have an adverse effect on our business, financial condition or results of operations.

Economic Risk
Real estate is relatively illiquid. Such illiquidity may limit our ability to vary our portfolio promptly in response to changing economic or investment conditions. Also, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the markets in which we operate.

Our commercial properties generate a relatively stable source of income from contractual tenant rent payments. Continued growth of rental income is dependent on strong leasing markets to ensure expiring leases are renewed and new tenants are found promptly to fill vacancies. We are substantially protected against short-term market conditions, as most of our leases are long-term in nature with an average term of over six years.

Insurance Risk
Our insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates. We maintain insurance on our properties in amounts and with deductibles that we believe are in line with what owners of similar properties carry. We maintain all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and weather catastrophe).

Interest Rate and Financing Risk
We have an on-going need to access debt markets to refinance maturing debt as it comes due. There is a risk that lenders will not refinance such maturing debt on terms and conditions acceptable to us or on any terms at all. Our strategy to stagger the maturities of our mortgage portfolio attempts to mitigate our exposure to excessive amounts of debt maturing in any one year and to maintain relationships with a large number of lenders to limit exposure to any one counterparty.

Approximately 46% of our outstanding debt obligations at September 30, 2019 are floating rate debt compared to 47% at December 31, 2018. This debt is subject to fluctuations in interest rates. A 100 basis point increase in interest rates relating to our corporate and commercial floating rate debt obligations would result in an increase in annual interest expense of approximately $243 million. A 100 basis point increase in interest rates relating to fixed rate debt obligations due within one year would result in an increase in annual interest expense of approximately $7 million upon refinancing. In addition, we have exposure to interest rates within our equity accounted investments. We have mitigated, to some extent, the exposure to interest rate fluctuations through interest rate derivative contracts. See “Derivative Financial Instruments” below in this MD&A.

At September 30, 2019, our consolidated debt to capitalization was 52% (December 31, 201856%). It is our view this level of indebtedness is conservative given the cash flow characteristics of our properties and the fair value of our assets. Based on this, we believe that all debts will be financed or repaid as they come due in the foreseeable future.

Foreign Exchange Risk
As at and for the nine months ended September 30, 2019, approximately 29% of our assets and 27% of our revenues originated outside the United States and consequently are subject to foreign currency risk due to potential fluctuations in exchange rates between these currencies and the U.S. Dollar. To mitigate this risk, we attempt to maintain a natural hedged position with respect to the carrying value of assets through debt agreements denominated in local currencies and, from time to time, supplemented through the use of derivative contracts as discussed under “Derivative Financial Instruments”.

DERIVATIVE FINANCIAL INSTRUMENTS
We and our operating entities use derivative and non-derivative instruments to manage financial risks, including interest rate, commodity, equity price and foreign exchange risks. The use of derivative contracts is governed by documented risk management policies and approved limits. We do not use derivatives for speculative purposes. We and our operating entities use the following derivative instruments to manage these risks:

Foreign currency forward contracts to hedge exposures to Canadian Dollar, Australian Dollar, British Pound, Euro, Chinese Yuan, Brazilian Real, Indian Rupee and South Korean Won denominated investments in foreign subsidiaries and foreign currency denominated financial assets;
Interest rate swaps to manage interest rate risk associated with planned refinancings and existing variable rate debt; and

34         




Interest rate caps to hedge interest rate risk on certain variable rate debt.

Interest Rate Hedging
The following table provides our outstanding derivatives that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate debt as of September 30, 2019 and December 31, 2018:

(US$ Millions)
Hedging item(1)
Notional

Rates

Maturity dates
Fair value

Sep. 30, 2019
Interest rate caps of US$ LIBOR debt
$
7,763

2.7% - 6.0%

Nov. 2019 - Sep. 2023
$

 
Interest rate swaps of US$ LIBOR debt
3,077

1.6% - 2.7%

Feb. 2020 - Feb. 2024
(78
)
 
Interest rate caps of £ LIBOR debt
1,650

2.0% - 2.5%

Jan. 2021 - Jan. 2022

 
Interest rate swaps of £ LIBOR debt
65

1.5%

Apr. 2020

 
Interest rate caps of € EURIBOR debt
106

1.3%

Apr. 2021

 
Interest rate caps of C$ LIBOR debt
181

3.0%

Oct. 2020 - Oct. 2022

 
Cross currency swaps of C$ LIBOR Debt
600

4.30% - 4.85%

Mar. 2024
(8
)
 
Cross currency swaps of US$ LIBOR Debt
508

4.74% - 4.97%

Oct. 2021 - Jul. 2023
(8
)
Dec. 31, 2018
Interest rate caps of US$ LIBOR debt
$
8,180

2.3% - 6.0%

Jan. 2019 - Sep. 2023
$
2

 
Interest rate swaps of US$ LIBOR debt
1,731

1.6% - 2.8%

Feb. 2020 - May 2024
(2
)
 
Interest rate caps of £ LIBOR debt
486

2.0%

Apr. 2020 - Jan. 2021

 
Interest rate swaps of £ LIBOR debt
67

1.5%

Apr. 2020

 
Interest rate caps of € EURIBOR debt
115

1.0% - 1.3%

Apr. 2020 - Apr. 2021

 
Interest rate caps of C$ LIBOR debt
176

3.0%

Oct. 2020 - Oct. 2022

 
Interest rate swaps of C$ LIBOR debt
56

4.6
%
Sep. 2023

 
Interest rate swaps on forecasted fixed rate debt
100

4.0%

Jun. 2019
(114
)
(1) 
As of September 30, 2019, included in derivative liabilities is $83 of fair value loss relating to settled interest rate swaps that are being amortized over the term of the associated debt.

For the three and nine months ended September 30, 2019, the amount of hedge ineffectiveness recorded in earnings in connection with the our interest rate hedging activities was nil and $2 million (2018 - nil and $17 million).

Foreign Currency Hedging
The following table provides our outstanding derivatives that are designated as net investments of foreign subsidiaries or foreign currency cash flow hedges as of September 30, 2019 and December 31, 2018:

(US$ Millions)
Hedging item
 
Notional

Rates
Maturity dates
Fair value

Sep. 30, 2019
Net investment hedges
245

 €0.85/$ - €0.91/$
 Mar. 2020 - Jul. 2020
$
11

 
Net investment hedges
£
3,281

 £0.74/$ - £0.91/$
 Oct. 2019 - Sep. 2021
(38
)
 
Net investment hedges
A$
479

 A$1.38/$ - A$1.48/$
 Oct. 2019 - Mar. 2021
9

 
Net investment hedges
475

 C¥6.75/$ - C¥6.98/$
 Apr. 2020 - Dec. 2020
3

 
Net investment hedges
C$
355

 C$1.28/$ - C$1.34/$
 Oct. 2019 - Jun. 2020
2

 
Net investment hedges
1,038,405

 ₩1,114.85/$ - ₩1,174.30/$
 Aug. 2019 - Jun. 2020
24

 
Net investment hedges
Rs
5,607

 Rs71.78/$ - Rs72.55/$
 Mar. 2020 - Apr. 2020
(1
)
 
Net investment hedges
£
77

 £0.88/€ - £0.93/€
 Jan. 2020 - Apr. 2020

 
Cross currency swap on C$ LIBOR debt
C$
800

 C$1.29/$ - C$1.33/$
 Oct. 2021 - Jul. 2023
(20
)
Dec. 31, 2018
Net investment hedges
649

€0.78/$ - €0.88/$
Jan. 2019 - May 2020
$
13

 
Net investment hedges
£
3,175

£0.70/$ - £0.79/$
Feb. 2019 - Mar. 2020
104

 
Net investment hedges
A$
1,038

A$1.28/$ - A$1.42/$
Jan. 2019 - Mar. 2020
20

 
Net investment hedges
2,672

C¥6.35/$ - C¥6.91/$
Jan. 2019 - Nov. 2019
6

 
Net investment hedges
C$
118

C$1.29/$ - C$1.34/$
Oct. 2019 - Nov 2019
4

 
Net investment hedges
R$
158

R$3.90/$ - R$4.24/$
Jan. 2019 - Jun. 2019
(9
)
 
Net investment hedges
618,589

 ₩1,087.00/$ - ₩1,130.90/$
Jan. 2019 - Nov. 2019
1

 
Net investment hedges
Rs
31,422

Rs67.44/$ - Rs70.39/$
Feb. 2019 - May 2019
3

 
Net investment hedges
£
77

£0.88/€ - £0.92/€
Jan. 2019 - Feb. 2020
(1
)
 
Cross currency swaps of C$ LIBOR debt
C$
800

C$1.29/$ - C$1.33/$
Oct. 2021 - Jul. 2023
(31
)
    
For the three and nine months ended September 30, 2019 and 2018, the amount of hedge ineffectiveness recorded in earnings in connection with our foreign currency hedging activities was not significant.

35         




Other Derivatives

The following table presents details of our derivatives, not designated as hedges for accounting purposes, that have been entered into to manage financial risks as of September 30, 2019 and December 31, 2018:

(US$ Millions)
Derivative type
Notional


Rates
Maturity
dates
Fair value

Sep. 30, 2019
Interest rate caps
$
6,492

3.0% - 5.8%
Oct. 2019 - Sep. 2024
$

 
Interest rate swaps on forecasted fixed rate debt
1,610

2.7% - 6.4%
Nov. 2019 - Sep. 2031
(226
)
 
Interest rate swaps of US$ LIBOR debt
1,803

1.7% - 4.6%
Nov. 2020 - Sep. 2023
(12
)
Dec. 31, 2018
Interest rate caps
$
9,750

3.0% - 7.0%
Mar. 2019 - Jan. 2022
$
1

 
Interest rate swaps on forecasted fixed rate debt
1,660

2.3% - 6.1%
Jun. 2019 - Nov. 2030
(67
)
 
Interest rate swaps of US$ debt
835

2.4% - 5.8%
Jul. 2019 - Oct. 2039
(14
)
 
Interest rate swaps on fixed rate debt
180

4.5% - 7.3%
Feb. 2019 - Jul. 2023
2


For the three and nine months ended September 30, 2019, the partnership recognized fair value losses, net of approximately $(29) million and $(122) million (2018 - gains of $18 million and $71 million), respectively, related to the settlement of certain forward starting interest rate swaps that have not been designated as hedges.

RELATED PARTIES
In the normal course of operations, the partnership enters into transactions with related parties. These transactions are recognized in the consolidated financial statements. These transactions have been measured at exchange value and are recognized in the consolidated financial statements. The immediate parent of the partnership is Brookfield Property Partners Limited. The ultimate parent of the partnership is Brookfield Asset Management. Other related parties of the partnership include Brookfield Asset Management’s subsidiaries and operating entities, certain joint ventures and associates accounted for under the equity method, as well as officers of such entities and their spouses.

We have a management agreement with our service providers, wholly-owned subsidiaries of Brookfield Asset Management. Pursuant to a Master Services Agreement, we pay a base management fee (“base management fee”), to the service providers equal to 0.5% of the total capitalization of the partnership, subject to an annual minimum of $50.0 million plus annual inflation adjustments. The amount of the equity enhancement distribution is reduced by the amount by which the base management fee is greater than $50 million per annum, plus annual inflation adjustments.

The base management fee for the three and nine months ended September 30, 2019 was $25 million (2018 - $25 million) and $73 million (2018 - $73 million), respectively. The equity enhancement distribution was $6 million (2018 - $1 million) and $20 million (2018 - $1 million), respectively.

In connection with the issuance of preferred equity units of the operating partnership (“Preferred Equity Units”) to a third party in the fourth quarter of 2014, Brookfield Asset Management has contingently agreed to acquire the seven-year and ten-year tranches of Preferred Equity Units from such investor for the initial issuance price plus accrued and unpaid distributions and to exchange such units for Preferred Equity Units with terms and conditions substantially similar to the twelve-year tranche to the extent that the market price of the LP Units is less than 80% of the exchange price at maturity.

The following table summarizes transactions with related parties:
(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Balances outstanding with related parties:
 
 
Participating loan interests(1)
$

$
268

Net (payables)/receivables within equity accounted investments
(98
)
(26
)
Loans and notes receivable(2)
125

54

Receivables and other assets
26

50

Deposit and promissory note from Brookfield Asset Management

(733
)
Promissory note from a fund managed by Brookfield Asset Management
(190
)

Property-specific debt obligations
(325
)
(231
)
Loans and notes payable and other liabilities
(204
)
(50
)
Capital securities held by Brookfield Asset Management(3)

(420
)
Preferred shares held by Brookfield Asset Management
(15
)
(15
)
(1) 
In the third quarter of 2019, the partnership sold its participating loan interest.
(2) 
At September 30, 2019, includes $39 million (December 31, 2018 - $54 million) receivable from Brookfield Asset Management upon the earlier of our partnership’s exercise of its option to convert its participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating loan interests.
(3) 
During the nine months ended September 30, 2019, $420 million of the Brookfield BPY Holdings Inc. Class B Junior Preferred shares, held by Brookfield Asset Management, were redeemed .


36         




 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Transactions with related parties:
 
 
 
 
Commercial property revenue(1)
$
6

$
4

$
19

$
14

Management fee income
7

1

23

4

Participating loan interests (including fair value gains, net)
1

13

49

45

Interest expense on debt obligations
18

9

47

29

Interest on capital securities held by Brookfield Asset Management

16

8

54

General and administrative expense(2)
55

57

142

153

Construction costs(3)
81

64

343

289

Incentive fees
13


65


(1) 
Amounts received from Brookfield Asset Management and its subsidiaries for the rental of office premises.
(2) 
Includes amounts paid to Brookfield Asset Management and its subsidiaries for management fees, management fees associated with the partnership’s private fund investments, and administrative services.
(3) 
Includes amounts paid to Brookfield Asset Management and its subsidiaries for construction costs of development properties.

During the third quarter of 2019, the partnership sold an approximate 81% interest in a retail asset and an approximate 77% interest in a multifamily development to a Brookfield-sponsored fund. The partnership retains control over and will continue to consolidate these assets after the sale.


37         




ADDITIONAL INFORMATION
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGEMENTS
ADOPTION OF ACCOUNTING STANDARDS
The partnership adopted IFRS 16 effective January 1, 2019. The partnership adopted the standard using the modified retrospective approach with no restatement of comparatives and did not record any adjustment to equity upon adoption. See additional disclosures in Note 4, Investment Properties, Note 7, Property, Plant And Equipment, Note 16, Other Non-Current Liabilities and Note 17, Accounts Payable And Other Liabilities of the Financial Statements.

The partnership adopted the Amendments to IFRS 3 effective January 1, 2019. The partnership adopted the standard prospectively. See additional disclosures in Note 3, Business Combinations of the Financial Statements.

Refer to Note 2c, Summary of Significant Accounting Policies: Adoption of Accounting Standards of the Financial Statements for additional information.

USE OF ESTIMATES
The preparation of our financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of our ongoing evaluation of these estimates forms the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions.

For further reference on accounting policies and critical judgments and estimates, see our significant accounting policies contained in Note 2, Summary of Significant Accounting Policies to the December 31, 2018 consolidated financial statements and Note 2c, Summary of Significant Accounting Policies: Adoption of Accounting Standards of the Financial Statements.

TREND INFORMATION
We will seek to increase the cash flows from our office and retail property activities through continued leasing activity as described below. In particular, we are operating below our historical office occupancy level in the United States, which provides the opportunity to expand cash flows through higher occupancy. In addition, we believe that most of our markets have favorable outlooks, which we believe also provides an opportunity for strong growth in lease rates. We do, however, still face a meaningful amount of lease rollover in 2019 and 2020, which may restrain FFO growth from this part of our portfolio in the near future. Our belief is as to the opportunities for our partnership to increase its occupancy levels, lease rates and cash flows are based on assumptions about our business and markets that management believes are reasonable in the circumstances. There can be no assurance as to growth in occupancy levels, lease rates or cash flows. See “Statement Regarding Forward-looking Statements and Use of Non-IFRS Measures”.

Transaction activity continues to be high and we are considering a number of different opportunities to acquire single assets, development sites and portfolios at attractive returns. In our continued effort to enhance returns through capital reallocation, we are also looking to divest all of, or a partial interest in, a number of mature assets to capitalize on existing market conditions.

We continue to make progress on our development pipeline, using our expertise to not only build new Class A core assets but also to reposition and redevelop existing assets in our various other sectors, particularly in retail and hospitality, where we can add value and drive higher returns.

OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
CONTROLS AND PROCEDURES
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes made in our internal control over financial reporting that have occurred during the nine months ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

38         




Corporate Information

CORPORATE PROFILE
Brookfield Property Partners is one of the world’s largest commercial real estate companies, with over $85 billion in total assets. We are leading owners, operators and investors in commercial property assets, with a diversified portfolio of premier office and retail assets, as well as multifamily, triple net lease, logistics, hospitality, self-storage, student housing and manufactured housing assets. Brookfield Property Partners is listed on the Nasdaq Stock Market and Toronto Stock Exchange. Further information is available at bpy.brookfield.com. Important information may be disseminated exclusively via the website; investors should consult the site to access this information.


Brookfield Property Partners is the flagship listed real estate company of Brookfield Asset Management, a leading global alternative asset manager with over $500 billion in assets under management.

BROOKFIELD PROPERTY PARTNERS
73 Front Street, 5th Floor
Hamilton, HM 12
Bermuda
Tel: (441) 294-3309
bpy.brookfield.com

UNITHOLDERS INQUIRIES
Brookfield Property Partners welcomes inquiries from Unitholders, analysts, media representatives and other interested parties. Questions relating to investor relations or media inquiries can be directed to Matt Cherry, Senior Vice President, Investor Relations and Communications at (212) 417-7488 or via e-mail at matthew.cherry@brookfield.com. Inquiries regarding financial results can be directed to Bryan Davis, Chief Financial Officer at (212) 417-7166 or via e-mail at bryan.davis@brookfield.com. Unitholder questions relating to distributions, address changes and unit certificates should be directed to the partnership’s transfer agent, AST Trust Company, as listed below.

AST TRUST COMPANY (Canada)
By mail:         P.O. Box 4229
Station A
Toronto, Ontario, M5W 0G1
Tel:         (416) 682-3860; (800) 387-0825
Fax:         (888) 249-6189
E-mail:         inquiries@astfinancial.com
Web site:        www.astfinancial.com/ca

COMMUNICATIONS
We strive to keep our Unitholders updated on our progress through a comprehensive annual report, quarterly interim reports and periodic press releases.

Brookfield Property Partners maintains a website, bpy.brookfield.com, which provides access to our published reports, press releases, statutory filings, supplementary information and unit and distribution information as well as summary information on the partnership.

We maintain an investor relations program and respond to inquiries in a timely manner. Management meets on a regular basis with investment analysts and Unitholders to ensure that accurate information is available to investors.


39         

Brookfield Property Partners L.P.

Condensed consolidated financial statements (unaudited)
As at September 30, 2019 and December 31, 2018 and
for the three and nine months ended September 30, 2019 and 2018

1             


Brookfield Property Partners L.P.
Condensed Consolidated Balance Sheets
Unaudited
 
 
As at
(US$ Millions)
Note
 
Sep. 30, 2019

Dec. 31, 2018

Assets
 
 
 
 
Non-current assets
 
 
 
 
Investment properties
4
 
$
70,786

$
80,196

Equity accounted investments
5
 
21,617

22,698

Participating loan interests
6
 

268

Property, plant and equipment
7
 
6,769

7,506

Goodwill
8
 
974

1,109

Intangible assets
9
 
1,095

1,179

Other non-current assets
10
 
2,184

1,856

Loans and notes receivable
 
 
248

594

Total non-current assets
 
 
103,673

115,406

Current assets
 
 
 
 
Loans and notes receivable
 
 
73

461

Accounts receivable and other
11
 
1,389

2,361

Cash and cash equivalents
 
 
2,141

3,288

Total current assets
 
 
3,603

6,110

Assets held for sale
12
 
1,780

1,004

Total assets
 
 
$
109,056

$
122,520

 
 
 
 
 
Liabilities and equity
 
 
 
 
Non-current liabilities
 
 
 
 
Debt obligations
13
 
$
45,707

$
57,937

Capital securities
14
 
2,955

2,865

Other non-current liabilities
16
 
1,411

2,294

Deferred tax liabilities
 
 
2,548

2,378

Total non-current liabilities
 
 
52,621

65,474

Current liabilities
 
 
 
 
Debt obligations
13
 
6,695

5,874

Capital securities
14
 
74

520

Accounts payable and other liabilities
17
 
3,585

3,749

Total current liabilities
 
 
10,354

10,143

Liabilities associated with assets held for sale
12
 
1,118

163

Total liabilities
 
 
64,093

75,780

Equity
 
 
 
 
Limited partners
18
 
12,799

12,353

General partner
18
 
4

4

Preferred equity
18
 
421


Non-controlling interests attributable to:
 
 
 
 
Redeemable/exchangeable and special limited partnership units
18,19
 
12,684

12,740

Limited partnership units of Brookfield Office Properties Exchange LP
18,19
 
84

96

FV LTIP units of the Operating Partnership
18,19
 
33


Class A shares of Brookfield Property REIT Inc. (“BPR”)
18,19
 
1,914

3,091

Interests of others in operating subsidiaries and properties
19
 
17,024

18,456

Total equity
 
 
44,963

46,740

Total liabilities and equity
 
 
$
109,056

$
122,520


See accompanying notes to the condensed consolidated financial statements.

2             


Brookfield Property Partners L.P.
Condensed Consolidated Income Statements
Unaudited
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions, except per unit amounts)
Note
2019

2018

2019

2018

Commercial property revenue
20
$
1,380

$
1,251

$
4,240

$
3,478

Hospitality revenue
21
472

502

1,466

1,460

Investment and other revenue
22
165

75

410

161

Total revenue
 
2,017

1,828

6,116

5,099

Direct commercial property expense
23
481

478

1,482

1,308

Direct hospitality expense
24
295

315

921

942

Investment and other expense
 

17

10

17

Interest expense
 
738

632

2,194

1,689

Depreciation and amortization
25
86

81

256

229

General and administrative expense
26
214

241

656

593

Total expenses
 
1,814

1,764

5,519

4,778

Fair value (losses) gains, net
27
449

556

(273
)
1,943

Share of net earnings from equity accounted investments
5
409

65

1,499

581

Income before income taxes
 
1,061

685

1,823

2,845

Income tax expense (benefit)
15
191

(37
)
217

49

Net income
 
$
870

$
722

$
1,606

$
2,796

 
 
 
 
 
 
Net income attributable to:
 
 
 
 
 
Limited partners
 
$
218

$
144

$
418

$
532

General partner
 




Non-controlling interests attributable to:
 
 
 
 
 
Redeemable/exchangeable and special limited partnership units
 
218

206

427

857

Limited partnership units of Brookfield Office Properties Exchange LP
 
2

2

3

16

FV LTIP units of the Operating Partnership
 




Class A shares of Brookfield Property REIT Inc.
 
36

28

86

39

Interests of others in operating subsidiaries and properties
 
396

342

672

1,352

Total
 
$
870

$
722

$
1,606

$
2,796

 
 
 
 
 
 
Net income per LP Unit:
 
 
 
 
 
Basic
18
$
0.46

$
0.44

$
0.90

$
1.79

Diluted
18
$
0.46

$
0.43

$
0.90

$
1.77


See accompanying notes to the condensed consolidated financial statements.

3             


Brookfield Property Partners L.P.
Condensed Consolidated Statements of Comprehensive Income
Unaudited
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
Note
2019

2018

2019

2018

Net income
 
$
870

$
722

$
1,606

$
2,796

Other comprehensive income (loss)
29
 
 
 
 
Items that may be reclassified to net income:
 
 
 
 
 
Foreign currency translation
 
(308
)
(189
)
(231
)
(690
)
Cash flow hedges
 
17

9

(23
)
62

Equity accounted investments
 
(16
)
8

(67
)
29

Items that will not be reclassified to net income:
 
 
 
 
 
Securities - fair value through other comprehensive income ("FVTOCI")
 
(6
)
(1
)
(5
)
(5
)
Remeasurement of defined benefit obligations
 


(1
)
2

Revaluation surplus
 

1


3

Total other comprehensive income (loss)
 
(313
)
(172
)
(327
)
(599
)
Total comprehensive income (loss)
 
$
557

$
550

$
1,279

$
2,197

 
 
 
 
 
 
Comprehensive income attributable to:
 
 
 
 
 
Limited partners
 
 
 
 
 
Net income
 
$
218

$
144

$
418

$
532

Other comprehensive income (loss)
 
(103
)
(37
)
(114
)
(136
)
 
 
115

107

304

396

Non-controlling interests
 
 
 
 
 
Redeemable/exchangeable and special limited partnership units
 
 
 
 
 
Net income
 
218

206

427

857

Other comprehensive income (loss)
 
(106
)
(49
)
(117
)
(219
)
 
 
112

157

310

638

Limited partnership units of Brookfield Office Properties Exchange LP
 
 
 
 
 
Net income
 
2

2

3

16

Other comprehensive income (loss)
 
(1
)

(1
)
(4
)
 
 
1

2

2

12

FV LTIP units of the Operating Partnership
 
 
 
 
 
Net income
 




Other comprehensive income (loss)
 




 
 


$

$

Class A shares of Brookfield Property REIT Inc.
 
 
 
 
 
Net income
 
36

28

86

39

Other comprehensive income (loss)
 
(22
)
(10
)
(24
)
(10
)
 
 
14

18

$
62

$
29

Interests of others in operating subsidiaries and properties
 
 
 
 
 
Net income (loss)
 
396

342

672

1,352

Other comprehensive income (loss)
 
(81
)
(76
)
(71
)
(230
)
 
 
315

266

601

1,122

Total comprehensive income (loss)
 
$
557

$
550

$
1,279

$
2,197


See accompanying notes to the condensed consolidated financial statements.

4             



Brookfield Property Partners L.P.
Condensed Consolidated Statements of Changes in Equity
 
Limited partners
 
General partner
 
Preferred Equity
 
Non-controlling interests
 
Unaudited
(US$ Millions)
Capital
Retained earnings
Ownership Changes
Accumulated other comprehensive (loss) income
Total limited partners equity
 
Capital
Retained earnings
Ownership Changes
Accumulated other comprehensive (loss) income
Total general partner equity
 
Total preferred equity
 
Redeemable /
exchangeable and special limited partnership units
Limited partnership units of Brookfield Office Properties Exchange LP
FV LTIP units of the Operating Partnership
Class A shares of Brookfield Property REIT Inc.
Interests of others in operating subsidiaries and properties
Total equity
Balance as at Dec 31, 2018
$
8,987

$
2,234

$
1,657

$
(525
)
$
12,353

 
$
4

$
2

$
(2
)
$

$
4

 
$

 
$
12,740

$
96

$

$
3,091

$
18,456

$
46,740

Net income

418


 
418

 





 

 
427

3


86

672

1,606

Other comprehensive income (loss)



(114
)
(114
)
 





 

 
(117
)
(1
)

(24
)
(71
)
(327
)
Total comprehensive income (loss)

418


(114
)
304

 





 

 
310

2


62

601

1,279

Distributions

(427
)


(427
)
 





 

 
(435
)
(3
)

(86
)
(1,814
)
(2,765
)
Preferred distributions

(6
)


(6
)
 





 

 





(6
)
Issuance / repurchase of interests in operating subsidiaries
(369
)
29

(45
)

(385
)
 





 
421

 
(3
)

4

(103
)
(219
)
(285
)
Exchange of exchangeable units
8


2

(1
)
9

 





 

 
2

(11
)




Conversion of Class A shares of Brookfield Property REIT Inc.
663


343


1,006

 


 


 

 



(1,006
)


Change in relative interests of non-controlling interests


(18
)
(37
)
(55
)
 





 

 
70


29

(44
)


Balance as at Sep. 30, 2019
$
9,289

$
2,248

$
1,939

$
(677
)
$
12,799

 
$
4

$
2

$
(2
)
$

$
4

 
$
421

 
$
12,684

$
84

$
33

$
1,914

$
17,024

$
44,963

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as at Dec 31, 2017
$
5,613

$
1,878

$
140

$
(236
)
$
7,395

 
$
4

$
2

$

$

$
6

 
$

 
$
14,500

$
285

$

$

$
12,938

$
35,124

Net income

532



532

 





 

 
857

16


39

1,352

2,796

Other comprehensive (loss)



(136
)
(136
)
 





 

 
(219
)
(4
)

(10
)
(230
)
(599
)
Total comprehensive income (loss)

532


(136
)
396

 





 

 
638

12


29

1,122

2,197

Distributions

(278
)


(278
)
 





 

 
(413
)
(8
)

(51
)
(794
)
(1,544
)
Issuance / repurchase of interest in operating subsidiaries
2,202

(1
)
112


2,313

 





 

 
63

1


3,386

4,218

9,981

Exchange of exchangeable units
156


19

(2
)
173

 





 

 
30

(203
)




Conversion of Class A shares of Brookfield Property REIT Inc.
306


2


308

 





 

 
3



(311
)


Change in relative interest of non-controlling interests


971

(66
)
905

 


(2
)

(2
)
 

 
(2,138
)
11


1,224



Balance as at Sep. 30, 2018
$
8,277

$
2,131

$
1,244

$
(440
)
$
11,212

 
$
4

$
2

$
(2
)
$

$
4

 
$

 
$
12,683

$
98

$

$
4,277

$
17,484

$
45,758


See accompanying notes to the condensed consolidated financial statements.

5             



Brookfield Property Partners L.P.
Condensed Consolidated Statements of Cash Flows
Unaudited
 
 
Nine Months Ended Sep. 30,
 
(US$ Millions)
Note
 
2019

2018

Operating activities
 
 
 
 
Net income
 
 
$
1,606

$
2,796

Share of equity accounted earnings, net of distributions
 
 
(1,170
)
(219
)
Fair value (gains), net
27
 
273

(1,943
)
Deferred income tax expense (benefit)
15
 
128

(57
)
Depreciation and amortization
25
 
256

229

Working capital and other
 
 
(462
)
342

 
 
 
631

1,148

Financing activities
 
 
 
 
Debt obligations, issuance
 
 
14,757

16,704

Debt obligations, repayments
 
 
(12,799
)
(12,933
)
Capital securities redeemed
 
 
(420
)
(555
)
Preferred equity issued
 
 
421


Non-controlling interests, issued
 
 
1,423

1,643

Non-controlling interests, purchased
 
 
(15
)

Repayment of lease liabilities
 
 
(11
)

Limited partnership units, issued
 
 
13

500

Limited partnership units, repurchased
 
 
(381
)
(14
)
Class A shares of Brookfield Property REIT Inc., repurchased
 
 
(102
)

Distributions to non-controlling interests in operating subsidiaries
 
 
(1,781
)
(765
)
Distributions to limited partnership unitholders
 
 
(427
)
(278
)
Distributions to redeemable/exchangeable and special limited partnership unitholders
 
 
(435
)
(413
)
Distributions to holders of Brookfield Office Properties Exchange LP units
 
 
(3
)
(8
)
Distributions to holders of Class A shares of Brookfield Property REIT Inc.
 
 
(86
)
(51
)
 
 
 
154

3,830

Investing activities
 
 
 
 
Acquisitions
 
 
 
 
Investment properties
 
 
(2,902
)
(1,457
)
Property, plant and equipment
 
 
(296
)
(314
)
Equity accounted investments
 
 
(523
)
(424
)
Financial assets and other
 
 
(1,560
)
(1,716
)
Acquisition of subsidiaries
 
 

(4,749
)
Dispositions
 
 
 
 
Investment properties
 
 
2,210

1,926

Property, plant and equipment
 
 
11

500

Equity accounted investments
 
 
967

571

Financial assets and other
 
 
1,278

1,644

Disposition of subsidiaries
 
 
43

(12
)
Cash impact of deconsolidation
 
 
(1,132
)
102

Restricted cash and deposits
 
 
(15
)
(55
)
 
 
 
(1,919
)
(3,984
)
Cash and cash equivalents
 
 
 
 
Net change in cash and cash equivalents during the period
 
 
(1,134
)
994

Effect of exchange rate fluctuations on cash and cash equivalents held in foreign currencies
 
 
(13
)
(41
)
Balance, beginning of period
 
 
3,288

1,491

Balance, end of period
 
 
$
2,141

$
2,444

 
 
 
 
 
Supplemental cash flow information
 
 
 
 
Cash paid for:
 
 
 
 
Income taxes
 
 
$
205

$
106

Interest (excluding dividends on capital securities)
 
 
$
2,293

$
1,449

See accompanying notes to the condensed consolidated financial statements.

6             



Brookfield Property Partners L.P.
Notes to the Condensed Consolidated Financial Statements

NOTE 1. ORGANIZATION AND NATURE OF THE BUSINESS
Brookfield Property Partners L.P. (“BPY” or the “partnership”) was formed as a limited partnership under the laws of Bermuda, pursuant to a limited partnership agreement dated January 3, 2013, as amended and restated on August 8, 2013. BPY is a subsidiary of Brookfield Asset Management Inc. (“Brookfield Asset Management” or the “parent company”) and is the primary entity through which the parent company and its affiliates own, operate, and invest in commercial and other income producing property on a global basis.

The partnership’s sole direct investments are a 50% managing general partnership units (“GP Units” or “GP”) interest in Brookfield Property L.P. (the “operating partnership”) and an interest in BP US REIT LLC, which hold the partnership’s interest in commercial and other income producing property operations. The GP Units provide the partnership with the power to direct the relevant activities of the operating partnership.

The partnership’s limited partnership units (“BPY Units” or “LP Units”) are listed and publicly traded on the Nasdaq Stock Market (“Nasdaq”) and the Toronto Stock Exchange (“TSX”) under the symbols “BPY” and “BPY.UN”, respectively.

The registered head office and principal place of business of the partnership is 73 Front Street, 5th Floor, Hamilton HM 12, Bermuda.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a)
Statement of compliance
The interim condensed consolidated financial statements of the partnership and its subsidiaries have been prepared in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”). Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB, have been omitted or condensed.

These condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019 were approved and authorized for issue by the Board of Directors of the partnership on November 4, 2019.
 
b)
Basis of presentation
The interim condensed consolidated financial statements are prepared using the same accounting policies and methods as those used in the consolidated financial statements for the year ended December 31, 2018, except for accounting standards adopted as identified in Note 2c) below. Consequently, the information included in these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the partnership’s annual report on Form 20-F for the year ended December 31, 2018.

The interim condensed consolidated financial statements are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented in accordance with IFRS. The results reported in these interim condensed consolidated financial statements should not necessarily be regarded as indicative of results that may be expected for the entire year.

The interim condensed consolidated financial statements are prepared on a going concern basis and have been presented in U.S. Dollars rounded to the nearest million unless otherwise indicated.

c)
Adoption of Accounting Standards
IFRS 16, Leases (“IFRS 16”)

The partnership adopted IFRS 16, Leases (“IFRS 16”) effective January 1, 2019. It supersedes IAS 17, Leases (“IAS 17”) and related interpretations. IFRS 16 brings most leases on-balance sheet as right-of-use (“ROU”) assets and lease liabilities for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. The partnership has applied IFRS 16 using the modified retrospective approach and comparative periods are not restated. The adoption of IFRS 16 resulted in the recognition of lease liabilities for operating leases of $873 million, ROU assets of $721 million that are classified as investment properties, $122 million that are classified as property, plant and equipment, $22 million that are classified as inventory and an immaterial impact to equity. These amounts do not include the lease liabilities and ROU assets of certain investments that were deconsolidated by the partnership on January 31, 2019. See Note 4, Investment Properties for further information.

In applying IFRS 16 for the first time, the partnership has applied the following practical expedients permitted by the standard on a lease-by-lease basis. These practical expedients are only available upon adoption and cannot be applied for any new lease executed after adoption:
the accounting for operating leases with a remaining lease term of less than 12 months as of January 1, 2019 as short-term leases;
the exclusion of initial direct costs for the measurement of the ROU assets;
the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and
adjusting the measurement of the ROU assets by the amount of any provision for onerous leases recognized under IAS 37.

The partnership has also elected not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4, Determining Whether an Arrangement Contains a Lease (“IFRIC 4”) will continue to be applied to leases entered or modified before January 1, 2019.


7             



Lease obligations at December 31, 2018 are as follows, as disclosed in the partnership’s annual report on Form 20-F for the year-ended December 31, 2018:

(US$ Millions)
Dec. 31, 2018

Less than 1 year
$
104

1-5 years
401

More than 5 years
5,631

Total
$
6,136


The lease obligations as disclosed in the table above included leases that are classified as finance leases, short-term leases and low-value leases, which are immaterial. It also included operating leases held by certain investments that were deconsolidated as of January 31, 2019. The partnership calculated the lease liabilities for the operating leases by discounting the future lease obligations at the respective incremental borrowing rates at the date of initial adoption. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities recognized at the date of initial adoption was 6.8%. Total lease liabilities for the nine months ended September 30, 2019 consists of $37 million current lease liabilities and $799 million non-current lease liabilities.

Significant accounting policies
The partnership determines at the inception of a contract if the arrangement is, or contains, a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The criteria specified in IFRS 16 apply to contracts entered into, or changed, on or after January 1, 2019. Lease components and non-lease components are separated on a relative stand-alone selling price basis for the partnership’s leases as lessor. For the partnership’s leases as lessee, the partnership applies the practical expedient which is available by asset class not to allocate contract consideration between lease and non-lease components. The change in definition of a lease mainly relates to the concept of control. IFRS 16 determines whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a period of time in exchange for consideration.

The partnership as lessee
The partnership recognizes a ROU asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for leases with a lease term of 12 months or less (“short-term leases”) and leases of low value assets (“low-value leases”). For these leases, the partnership recognizes the lease payments as an expense on a straight-line basis over the term of the lease.

Lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease if that rate can be readily determined. If the rate cannot be readily determined, the partnership uses its incremental borrowing rate. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of similar value to the ROU asset in a similar economic environment. This rate is expected to be similar to the interest rate implicit in the lease. Where a lease contains a parental guarantee, the incremental borrowing rate may be determined with reference to the parent rather than the lessee. The partnership uses a single discount rate to account for portfolios of leases with similar characteristics. Lease payments included in the measurement of the lease liability is comprised of i) fixed lease payments, less any lease incentives; ii) variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; iii) the amount expected to be payable by the lessee under residual value guarantees; iv) the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and v) payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease. Lease liability is presented in Accounts payable and other liabilities (current) and Other non-current liabilities (non-current) on the consolidated balance sheets. Lease liability is subsequently measured under the effective interest method that is increased by the interest expense on the lease liability recognized on the consolidated statements of income and reduced by lease payments made that is recognized on the consolidated statements of cash flows. Lease payments not included in the measurement of lease liabilities continue to be recognized in direct commercial property expense, direct hospitality expense or general and administrative expense lines on the consolidated statements of income.

ROU asset comprises the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. ROU assets classified as investment properties are subsequently measured at fair value. ROU assets classified as property, plant and equipment are subsequently measured at depreciated cost basis over the lease term. If such lease transfers ownership of the underlying asset or the cost of the ROU asset reflects that the partnership expects to exercise a purchase option, the related ROU asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. ROU assets classified as inventory are subsequently carried at cost subject to impairment. ROU assets are presented in the respective lines based on their classification on the consolidated balance sheets. Whenever the partnership incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognized and measured under IAS 37. The costs are included in the related ROU asset.

The partnership remeasures lease liabilities and makes a corresponding adjustment to the related ROU assets when i) the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; ii) the lease payments have changed due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); or iii) a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

8             




The partnership as lessor
IFRS 16 does not change substantially how a lessor accounts for leases. Under IFRS 16, a lessor continues to classify leases as either finance leases or operating leases and account for those two types of leases differently. Under IFRS 16, an intermediate lessor accounts for the head lease and the sublease as two separate contracts. The intermediate lessor is required to classify the sublease as a finance or operating lease by reference to the right-of-use asset arising from the head lease.

Critical judgments and estimates in applying IFRS 16
The partnership has applied critical judgments in the application of IFRS 16, including: i) identifying whether a contract (or part of a contract) includes a lease; ii) determining whether it is reasonably certain that a lease extension or termination option will be exercised in determining lease term; iii) determining the classification of lease agreements for lessor leases; iv) determining whether variable payments are in-substance fixed; v) establishing whether there are multiple leases in an arrangement; and vi) determining the fair value method of ROU assets classified as investment properties. The partnership also makes judgments in determining whether certain leases are operating or finance leases.

The partnership uses critical estimates in the application of IFRS 16, including the estimation of lease term and determination of the appropriate rate to discount the lease payments.

Amendments to IFRS 3, Business Combination
    
The partnership adopted the Amendments to IFRS 3, Business Combinations (“IFRS 3 Amendments”) effective January 1, 2019 in advance of its mandatory effective date. IFRS 3 Amendments clarifies the definition of a business in determining whether an acquisition is a business combination or an asset acquisition. It has removed the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs and the reference to an ability to reduce costs, and requires, at a minimum, the acquired set of activities and assets to include an input and a substantive process to meet the definition of a business. IFRS 3 Amendments also provides for an optional concentration test to assess whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. The partnership has adopted the standard prospectively.

After the adoption of the IFRS 3 Amendments, the partnership continues to account for business combinations in which control is acquired under the acquisition method. When an acquisition is made, the partnership considers the inputs, processes and outputs of the acquiree in assessing whether it meets the definition of a business. When the acquired set of activities and assets lack a substantive process in place but will be integrated into the partnership’s existing operations, the acquisition ceases to meet the definition of a business and is accounted for as asset acquisition. Assets acquired through asset acquisitions are initially measured at cost, which includes the transaction costs incurred for the acquisitions.

d)
Estimates
The preparation of the partnership’s interim condensed consolidated financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates and assumptions. It also requires management to exercise judgment in applying the partnership’s accounting policies. The accounting policies and critical estimates and assumptions have been set out in Note 2, Summary of Significant Accounting Policies, to the partnership’s consolidated financial statements for the year ended December 31, 2018 and have been consistently applied in the preparation of the interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019, except for the adopted accounting policies as disclosed in Note 2c) above.

NOTE 3. BUSINESS COMBINATIONS
The partnership did not complete any business combinations in the nine months ended September 30, 2019.

The partnership completed the following significant business combinations (prior to the adoption of IFRS 3 Amendments) during 2018 that were accounted for on a provisional basis in Note 4, Acquisition of GGP and Note 5, Acquisitions and Business Combinations of the partnership’s annual report on Form 20-F for the year ended December 31, 2018:

On August 3, 2018, the partnership acquired a 100% leasehold interest in 660 Fifth Avenue, a commercial office asset in New York, for consideration of $1,299 million. In the first quarter of 2019, the partnership completed the purchase price allocation for 660 Fifth Avenue. No material changes were made to the provisional purchase price allocation. This asset was deconsolidated by the partnership on January 31, 2019. See Note 4, Investment Properties for further information.

On August 28, 2018, the partnership acquired all of the outstanding shares of common stock of GGP Inc. (“GGP”) (“GGP acquisition”) other than those shares previously held by the partnership and its affiliates, which represented a 34% interest in GGP prior to the acquisition. In the transaction, former GGP shareholders elected to receive, for each GGP common share, subject to proration, either $23.50 in cash or either one LP Unit or one Class A stock of Brookfield Property REIT Inc. (“BPR Unit”). As a result of the GGP acquisition, 161 million BPR Units and 88 million LP Units were issued to former GGP shareholders. In the second quarter of 2019, the partnership completed the purchase price allocation for GGP. No material changes were made to the provisional purchase price allocation.

On December 7, 2018, the partnership acquired all of the outstanding common shares of Forest City Realty Trust Inc. (“Forest City”), a publicly traded company which owned a portfolio of office, multifamily and mixed-use assets across the U.S, for consideration of $6,948 million. During 2019, the partnership finalized the review over the fair value of the investment properties and property debt obligations as at the acquisition date and recognized an opening equity adjustment of $500 million that mostly consisted of a bargain purchase gain. The bargain purchase gain was reflecting the discount to net asset value of the previously publicly traded shares of Forest City. The

9             


partnership is currently reviewing the deferred tax asset and deferred tax liability as part of the provisional purchase price allocation. This portfolio was deconsolidated by the partnership on January 31, 2019. See Note 4, Investment Properties for further information.

NOTE 4. INVESTMENT PROPERTIES
The following table presents a roll forward of the partnership’s investment property balances, all of which are considered Level 3 within the fair value hierarchy, for the nine months ended September 30, 2019 and the year ended December 31, 2018:

 
Nine months ended Sep. 30, 2019
Year ended Dec. 31, 2018
(US$ Millions)
Commercial properties

Commercial developments

Total

Commercial properties

Commercial developments

Total

Balance, beginning of period
$
76,014

$
4,182

$
80,196

$
48,780

$
2,577

$
51,357

Changes resulting from:
 
 
 
 
 
 
  Property acquisitions(1)
2,957

195

3,152

31,783

1,658

33,441

  Capital expenditures
1,074

910

1,984

1,098

1,185

2,283

Accounting policy change(2)
699

22

721




Property dispositions(3)
(461
)
(25
)
(486
)
(4,115
)
(451
)
(4,566
)
Fair value gains (losses), net
(361
)
457

96

784

462

1,246

Foreign currency translation
(466
)
(97
)
(563
)
(1,387
)
(121
)
(1,508
)
Transfer between commercial properties and commercial developments
289

(289
)

1,123

(1,123
)

Impact of deconsolidation due to loss of control(4)
(10,701
)
(798
)
(11,499
)



Reclassifications to assets held for sale and other changes
(2,748
)
(67
)
(2,815
)
(2,052
)
(5
)
(2,057
)
Balance, end of period(5)
$
66,296

$
4,490

$
70,786

$
76,014

$
4,182

$
80,196

(1) 
The prior year primarily includes the commercial properties and developments from the GGP acquisition in 2018.
(2) 
Includes the impact of the adoption of IFRS 16 through the recognition of right-of-use assets. See Note 2, Summary of Significant Accounting Policies for further information.
(3) 
Property dispositions represent the carrying value on date of sale.
(4) 
Includes the impact of the deconsolidation of Brookfield Strategic Real Estate Partners III (“BSREP III”) investments. See below for further information.
(5) 
Includes right-of-use commercial properties and commercial developments of $650 million and $29 million, respectively, as of September 30, 2019. Current lease liabilities of $33 million has been included in accounts payable and other liabilities and non-current lease liabilities of $646 million have been included in other non-current liabilities.

The partnership determines the fair value of each commercial property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the applicable balance sheet dates, less future cash outflows in respect of such leases. Investment property valuations are generally completed by undertaking one of two accepted income approach methods, which include either: i) discounting the expected future cash flows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows; or ii) undertaking a direct capitalization approach whereby a capitalization rate is applied to estimated current year cash flows. Where there has been a recent market transaction for a specific property, such as an acquisition or sale of a partial interest, the partnership values the property on that basis. In determining the appropriateness of the methodology applied, the partnership considers the relative uncertainty of the timing and amount of expected cash flows and the impact such uncertainty would have in arriving at a reliable estimate of fair value. The partnership prepares these valuations considering asset and market specific factors, as well as observable transactions for similar assets. The determination of fair value requires the use of estimates, which are internally determined and compared with market data, third-party reports and research as well as observable conditions. There are currently no known trends, events or uncertainties that the partnership reasonably believes could have a sufficiently pervasive impact across the partnership’s businesses to materially affect the methodologies or assumptions utilized to determine the estimated fair values reflected in this report. Discount rates and capitalization rates are inherently uncertain and may be impacted by, among other things, movements in interest rates in the geographies and markets in which the assets are located. Changes in estimates of discount and capitalization rates across different geographies and markets are often independent of each other and not necessarily in the same direction or of the same magnitude. Further, impacts to the partnership’s fair values of commercial properties from changes in discount or capitalization rates and cash flows are usually inversely correlated. Decreases (increases) in the discount rate or capitalization rate result in increases (decreases) of fair value. Such decreases (increases) may be mitigated by decreases (increases) in cash flows included in the valuation analysis, as circumstances that typically give rise to increased interest rates (e.g., strong economic growth, inflation) usually give rise to increased cash flows at the asset level. Refer to the table below for further information on valuation methods used by the partnership for its asset classes.

Commercial developments are also measured using a discounted cash flow model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market values for similar assets.

In accordance with its policy, the partnership generally measures and records its commercial properties and developments using valuations prepared by management. However, for certain subsidiaries, the partnership relies on quarterly valuations prepared by external valuation professionals. Management compares the external valuations to the partnership’s internal valuations to review the work performed by the external valuation professionals. Additionally, a number of properties are externally appraised each year and the results of those appraisals are compared to the partnership’s internally prepared values.

10             


(a)2019 Transactions
BSREP III deconsolidation
In the first quarter of 2019, BSREP III held its final close with total equity commitments of $15 billion. Prior to final close, the partnership had committed to 25%, or a controlling interest in the fund and as a result, had previously consolidated the investments made to date. Upon final close, on January 31, 2019, the partnership reduced its commitment to $1.0 billion, representing a 7% non-voting position. As a result, the partnership lost control and deconsolidated its investment in the fund, which primarily consists of Forest City and 666 Fifth Avenue. The partnership recognizes its investment in BSREP III as a financial asset, initially recognized at fair value and remeasured on each reporting date through fair value gain or loss. As a result of the deconsolidation, investment properties decreased by $11,499 million, equity accounted investments decreased by $1,434 million, property, plant and equipment decreased by $789 million and debt obligations decreased by $13,601 million.

Adoption of IFRS 16
The impact of the January 1, 2019 adoption of IFRS 16 resulted in the recognition of ROU investment properties of $721 million. Fair value loss related to IFRS 16 ROU assets for the nine months ended September 30, 2019 was $1 million. As of September 30, 2019, ROU investment properties was $679 million.

The key valuation metrics for the partnership’s consolidated commercial properties are set forth in the following tables below on a weighted-average basis:

 
 
Sep. 30, 2019
Dec. 31, 2018
Consolidated properties
Primary valuation method
Discount rate

Terminal capitalization rate

Investment horizon (years)
Discount rate

Terminal capitalization rate

Investment horizon (years)
Core Office
 
 
 
 
 
 
 
    United States
Discounted cash flow
6.8
%
5.5
%
12
6.9
%
5.6
%
12
    Canada
Discounted cash flow
5.9
%
5.4
%
10
6.0
%
5.4
%
10
    Australia
Discounted cash flow
6.8
%
5.9
%
10
7.0
%
6.2
%
10
    Brazil
Discounted cash flow
7.9
%
7.4
%
6
9.6
%
7.7
%
6
Core Retail
Discounted cash flow
7.0
%
5.6
%
10
7.1
%
6.0
%
12
LP Investments- Office
Discounted cash flow
10.1
%
7.2
%
6
10.2
%
7.0
%
6
LP Investments- Retail
Discounted cash flow
8.8
%
7.3
%
10
8.9
%
7.8
%
9
Mixed-use
Discounted cash flow
7.6
%
5.4
%
10
7.8
%
5.4
%
10
Logistics(1)
Direct capitalization
5.8
%
n/a

n/a
9.3
%
8.3
%
10
Multifamily(1)
Direct capitalization
5.1
%
n/a

n/a
4.8
%
n/a

n/a
Triple Net Lease(1)
Direct capitalization
6.4
%
n/a

n/a
6.3
%
n/a

n/a
Self-storage(1)
Direct capitalization
5.6
%
n/a

n/a
5.7
%
n/a

n/a
Student Housing(1)
Direct capitalization
5.6
%
n/a

n/a
5.6
%
n/a

n/a
Manufactured Housing(1)
Direct capitalization
5.4
%
n/a

n/a
5.4
%
n/a

n/a
(1)
The valuation method used to value multifamily, triple net lease, self-storage, student housing, logistics and manufactured housing properties is the direct capitalization method. The rates presented as the discount rate relate to the overall implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.

11             



The following table presents the partnership’s investment properties measured at fair value in the condensed consolidated financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as defined in Note 2(i), Summary of Significant Accounting Policies: Fair value measurement, in the consolidated financial statements as of December 31, 2018:

 
Sep. 30, 2019
Dec. 31, 2018
 
 
 
Level 3
 
 
Level 3
(US$ Millions)
Level 1

Level 2

Commercial properties

Commercial developments

Level 1

Level 2

Commercial properties

Commercial developments

Core Office
 
 
 
 
 
 
 
 
United States
$

$

$
15,004

$
949

$

$

$
14,415

$
822

Canada


4,404

156



4,127

118

Australia


1,798

370



2,342

49

Europe


18

1,729



137

1,194

Brazil


342




329


Core Retail


18,268

521



17,224

383

LP Investments
 
 
 
 
 
 
 
 
LP Investments- Office(1)


8,101

685



7,861

577

LP Investments- Retail


2,766




3,408

6

Logistics


81

9



183


Multifamily


2,900




4,151


Triple Net Lease


4,454




5,067


Self-storage


961

11



847

84

Student Housing


2,235

60



2,031

386

Manufactured Housing


2,410




2,369


Mixed-Use(1)


2,554




11,523

563

Total
$

$

$
66,296

$
4,490

$

$

$
76,014

$
4,182

(1)
Includes the impact of the deconsolidation of BSREP III investments. See above for further information.

The following table presents a sensitivity analysis to the impact of a 25 basis point movement of the discount rate and terminal capitalization or overall implied capitalization rate on fair values of the partnership’s commercial properties for the nine months ended September 30, 2019, for properties valued using the discounted cash flow or direct capitalization method, respectively:

 
Sep. 30, 2019
(US$ Millions)
Impact on fair value of commercial properties

Core Office
 
United States
$
939

Canada
492

Australia
189

Brazil
10

Core Retail
911

LP Investments
 
LP Investments- Office
308

LP Investments- Retail
164

Logistics
3

Mixed-use
118

Multifamily
191

Triple Net Lease
128

Self-storage
35

Student Housing
95

Manufactured Housing
106

Total
$
3,689


 

12             


NOTE 5. EQUITY ACCOUNTED INVESTMENTS
The partnership has investments in joint arrangements that are joint ventures, and also has investments in associates. Joint ventures hold individual commercial properties and portfolios of commercial properties and developments that the partnership owns together with co-owners where decisions relating to the relevant activities of the joint venture require the unanimous consent of the co-owners. Details of the partnership’s investments in joint ventures and associates, which have been accounted for in accordance with the equity method of accounting, are as follows:

 
 
 
Proportion of ownership interests
Carrying value
(US$ Millions)
Principal activity
Principal place of business
Sep. 30, 2019

Dec. 31, 2018

Sep. 30, 2019

Dec. 31, 2018

Joint Ventures
 
 
 
 
 
 
Canary Wharf Joint Venture(1)
Property holding company
United Kingdom
50
%
50
%
$
3,206

$
3,270

BPR JV Pool A
Property holding company
United States
50
%
50
%
1,903

1,791

Manhattan West, New York
Property holding company
United States
56
%
56
%
1,849

1,619

Ala Moana Center, Hawaii
Property holding company
United States
50
%
50
%
2,052

1,611

Forest City Joint Ventures(2)
Property holding company
United States
%
%

1,390

BPR JV Pool B
Property holding company
United States
51
%
51
%
1,361

1,217

Fashion Show, Las Vegas
Property holding company
United States
50
%
50
%
860

881

BPR JV Pool C
Property holding company
United States
50
%
50
%
744

756

BPR JV Pool D
Property holding company
United States
48
%
48
%
696

693

BPR JV Pool E
Property holding company
United States
35
%
35
%
581

629

The Grand Canal Shoppes, Las Vegas
Property holding company
United States
50
%
50
%
457

608

Grace Building, New York
Property holding company
United States
50
%
50
%
688

581

One Liberty Plaza, New York
Property holding company
United States
51
%
51
%
392

425

Southern Cross East, Melbourne(3)
Property holding company
Australia
50
%
50
%
431

402

680 George Street, Sydney
Property holding company
Australia
50
%
50
%
323

319

Brookfield Brazil Retail Fundo de Investimento em Participaçõe
Holding company
Brazil
46
%
46
%
284

309

Brookfield D.C. Office Partners LLC ("D.C. Fund"), Washington, D.C.
Property holding company
United States
51
%
51
%
289

295

Miami Design District, Florida
Property holding company
United States
22
%
22
%
272

286

The Mall in Columbia, Maryland
Property holding company
United States
50
%
50
%
288

268

Shops at Merrick Park, Florida
Property holding company
United States
55
%
55
%
294

266

Other(4)
Various
Various
14% - 68%

12% - 70%

4,091

4,237

 
 
 
 
 
21,061

21,853

Associates
 
 
 
 
 
 
Diplomat Resort and Spa
Property holding company
United States
90
%
90
%
234

390

Brookfield Premier Real Estate Partners Pooling LLC ("BPREP")(5)
Property holding company
United States
%
7
%

106

Other
Various
Various
23% - 31%

23% - 31%

322

349

 
 
 
 
 
556

845

Total
 
 
 
 
$
21,617

$
22,698

(1) 
Stork Holdco LP is the joint venture through which the partnership acquired Canary Wharf Group plc in London.
(2) 
Includes the impact of the deconsolidation of BSREP III investments, primarily Forest City. See below for further information.
(3) 
The partnership exercises joint control over these jointly controlled assets through a participating loan agreement with Brookfield Asset Management that is convertible at any time into a direct equity interest in the entity.
(4) 
Other joint ventures consists of approximately 46 joint ventures.
(5) 
In the first quarter of 2019, the partnership accounted for its interest in BPREP as a financial asset and is no longer an equity accounted investment.

(a)2019 Transactions
The deconsolidation of BSREP III resulted in a decrease to equity accounted investments of $1,434 million. Please see Note 4, Investment Properties for further information.

(b)2018 Transactions
The partnership obtained control of GGP during the third quarter of 2018 following the acquisition of the common shares not previously held by the partnership and its affiliates. Subsequent to this transaction, the partnership is consolidating the financial results of GGP, including its interests in properties held through joint ventures. The partnership’s 34% interest in GGP prior to the acquisition was deconsolidated. Please see Note 3, Business Combinations, for further information.

The partnership obtained control of Forest City during the fourth quarter of 2018 following the acquisition. The partnership was consolidating the financial results of Forest City, including its interests in properties held through joint ventures. Forest City has since been deconsolidated as mentioned above.

13             



The following table presents the change in the balance of the partnership’s equity accounted investments as of September 30, 2019 and December 31, 2018:

 
Nine months ended

Year ended

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Equity accounted investments, beginning of period
$
22,698

$
19,761

GGP joint ventures acquired from business acquisition(1)

10,829

Deconsolidation of pre-acquisition GGP equity interest(1)

(8,345
)
Additions
522

2,174

Disposals and return of capital distributions
(463
)
(1,304
)
Share of net earnings from equity accounted investments
1,499

947

Distributions received
(329
)
(518
)
Foreign currency translation
(211
)
(395
)
Reclassification to assets held for sale(2)
34

(567
)
Impact of deconsolidation due to loss of control(3)
(1,434
)

Other comprehensive income and other
(699
)
116

Equity accounted investments, end of period
$
21,617

$
22,698

(1) 
The partnership obtained control of GGP during the third quarter of 2018 following the acquisition of the common shares not previously held by the partnership and its affiliates. As a result of the acquisition, GGP’s interest in joint ventures of $10,829 million was added to the balance of equity accounted investments, offset by the deconsolidation of the partnership’s 34% interest of $7,843 million and fair value loss of $502 million from adjusting the partnership’s interest in GGP to its fair value immediately prior to acquiring control.
(2) 
The partnership’s interest in CXTD was reclassified to assets held for sale in the fourth quarter of 2018 and sold in the first quarter in 2019.
(3) 
Includes the impact of the deconsolidation of BSREP III investments, primarily Forest City. See above for further information.

The key valuation metrics for the partnership’s commercial properties held within the partnership’s equity accounted investments are set forth in the table below on a weighted-average basis:

 
 
Sep. 30, 2019
Dec. 31, 2018
Equity accounted investments
Primary valuation method
Discount rate

Terminal capitalization rate

Investment horizon (yrs)
Discount rate

Terminal capitalization rate

Investment horizon (yrs)
Core Office
 
 
 
 
 
 
 
    United States
Discounted cash flow
6.8
%
4.9
%
11
6.6
%
5.1
%
10
    Australia
Discounted cash flow
6.5
%
5.2
%
10
6.7
%
5.7
%
10
    Europe
Discounted cash flow
4.6
%
5.0
%
10
4.7
%
4.9
%
10
Core Retail
 
 
 
 
 
 
 
    United States
Discounted cash flow
6.3
%
4.9
%
10
6.6
%
5.3
%
11
LP Investments - Office
Discounted cash flow
6.0
%
5.3
%
10
6.9
%
5.2
%
9
LP Investments - Retail
Discounted cash flow
8.3
%
7.0
%
10
8.4
%
7.1
%
10
Multifamily(1)
Direct capitalization
5.3
%
n/a

n/a
5.2
%
n/a

n/a
(1) 
The valuation method used to value multifamily investments is the direct capitalization method. The rates presented as the discount rate relate to the overall implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.

14             


Summarized financial information in respect of the partnership’s equity accounted investments is presented below:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Non-current assets
$
79,214

$
90,031

Current assets
4,314

4,395

Total assets
83,528

94,426

Non-current liabilities
30,546

37,900

Current liabilities
6,916

4,778

Total liabilities
37,462

42,678

Net assets
46,066

51,748

Partnership’s share of net assets
$
21,617

$
22,698


 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Revenue
$
1,241

$
1,290

$
3,783

$
3,904

Expenses
789

1,101

2,474

1,579

Income from equity accounted investments(1)
53

61

115

323

Income before fair value gains, net
505

250

1,424

2,648

Fair value (losses) gains, net
361

(522
)
1,543

(1,663
)
Net income
866

(272
)
2,967

985

Partnership’s share of net earnings
$
409

$
65

$
1,499

$
581

(1) 
Share of net earnings from equity accounted investments recorded by the partnership’s joint ventures and associates.

NOTE 6. PARTICIPATING LOAN INTERESTS
Participating loan interests represent interests in certain properties in Australia that do not provide the partnership with control over the entity that owns the underlying property and are held at fair value through profit or loss ("FVTPL") on the condensed consolidated balance sheets. The instruments, which are receivable from a wholly-owned subsidiary of Brookfield Asset Management, are subject to the partnership’s prior right to convert into direct ownership interests in the underlying commercial properties, and have contractual interest rates that vary with the results of operations of those properties.

The outstanding principal of the participating loan interests relates to the following property:

(US$ Millions)
Participation interest
Carrying value
Name of property
Sep. 30, 2019

Dec. 31, 2018

Sep. 30, 2019

Dec. 31, 2018

Darling Park Complex, Sydney(1)
%
30
%
$

$
268

Total participating loan interests
 
 
$

$
268

(1) 
The partnership sold the Darling Park Complex in the third quarter of 2019.

For the three and nine months ended September 30, 2019, the partnership recognized interest income on the participating loan interests of $1 million (2018 - $2 million) and $8 million (2018 - $15 million), respectively, and fair value gains of nil (2018 - $9 million) and $41 million (2018 - $29 million), respectively. The partnership sold the Darling Park Complex in the third quarter of 2019.

NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment primarily consists of hospitality assets such as Center Parcs UK, Paradise Island Holdings Limited (“Atlantis”), a portfolio of extended-stay hotels in the U.S. and a hotel at IFC Seoul.

The following table presents the useful lives of each hospitality asset by class:

Hospitality assets by class
Useful life (in years)
Building and building improvements
5 to 50+
Land improvements
13 to 15
Furniture, fixtures and equipment
2 to 15

15             


The following table presents the change to the components of the partnership’s hotel assets for the nine months ended September 30, 2019 and for the year ended December 31, 2018:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Cost:
 
 
Balance at the beginning of period
$
7,461

$
5,451

Acquisitions through business acquisitions

1,748

Accounting policy change(1)
122


Additions
302

490

Disposals
(40
)
(21
)
Foreign currency translation
(124
)
(207
)
Impact of deconsolidation due to loss of control and other(2)
(789
)

 
6,932

7,461

Accumulated fair value changes:
 
 
Balance at the beginning of period
1,049

756

Revaluation (loss) gains, net

293

Impact of deconsolidation due to loss of control and other(2)
(9
)

 
1,040

1,049

Accumulated depreciation:
 
 
Balance at the beginning of period
(1,004
)
(750
)
Depreciation
(245
)
(291
)
Disposals
24

18

Foreign currency translation
15

19

Impact of deconsolidation due to loss of control and other(2)
7


 
(1,203
)
(1,004
)
Total property, plant and equipment
$
6,769

$
7,506

(1) 
Includes the impact of the adoption of IFRS 16 through the recognition of right-of-use assets. See Note 2, Summary of Significant Accounting Policies for further information.
(2) 
Includes the impact of the deconsolidation of BSREP III investments. See Note 4, Investment Properties for further information.

NOTE 8. GOODWILL
Goodwill of $974 million at September 30, 2019 (December 31, 2018 - $1,109 million) is primarily attributable to Center Parcs UK and IFC Seoul. The partnership performs a goodwill impairment test annually by assessing if the carrying value of the cash-generating unit, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell or the value in use.

NOTE 9. INTANGIBLE ASSETS
The partnership’s intangible assets are presented on a cost basis, net of accumulated amortization and accumulated impairment losses in the condensed consolidated balance sheets. These intangible assets primarily represent the trademark assets related to Center Parcs UK and Atlantis.

The trademark assets of Center Parcs UK had a carrying amount of $888 million as of September 30, 2019 (December 31, 2018 - $921 million). They have been determined to have an indefinite useful life as the partnership has the legal right to operate these trademarks exclusively in certain territories and in perpetuity. The business model of Center Parcs UK is not subject to technological obsolescence or commercial innovations in any material way.

In addition, intangible assets include the trademark and licensing assets relating to Atlantis. At September 30, 2019, intangible assets of the Atlantis had a carrying value of $205 million (December 31, 2018 - $207 million). They have been determined to have an indefinite useful life as the partnership has the legal right to operate these intangible assets granted under perpetual licenses. The business model of Atlantis is not subject to technological obsolescence or commercial innovations in any material way.

Intangible assets by class
Useful life (in years)

Trademarks
Indefinite

Management contracts
40

Customer relationships
9

Other
4 to 7


Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually and whenever there is an indication that the asset may be impaired. Intangible assets with finite useful lives are amortized over their respective useful lives as listed above. Amortization expense is recorded as part of depreciation and amortization of non-real estate assets expense.

16             



The following table presents the components of the partnership’s intangible assets as of September 30, 2019 and December 31, 2018:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Cost
$
1,194

$
1,273

Accumulated amortization
(51
)
(46
)
Accumulated impairment losses
(48
)
(48
)
Balance, end of period
$
1,095

$
1,179


The following table presents a roll forward of the partnership’s intangible assets for the nine months ended September 30, 2019 and the year ended December 31, 2018:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Balance, beginning of period
$
1,179

$
1,188

Acquisitions
9

67

Disposals

2

Amortization
(10
)
(17
)
Foreign currency translation
(34
)
(58
)
Reclassification to assets held for sale and other(1)
(49
)
(3
)
Balance, end of period
$
1,095

$
1,179

(1) 
Includes the impact of the deconsolidation of BSREP III investments. See Note 4, Investment Properties for further information.

NOTE 10. OTHER NON-CURRENT ASSETS
The components of other non-current assets are as follows:
(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Securities - FVTPL
$
1,081

$
239

Derivative assets
7

13

Securities - FVTOCI
117

260

Restricted cash
160

161

Inventory
573

435

Other
246

748

Total other non-current assets
$
2,184

$
1,856


Securities - FVTPL
Securities - FVTPL consists primarily of the partnership’s investment in convertible preferred units of a U.S. hospitality operating company. The preferred units earn a fixed cumulative dividend of 7.5% per annum compounding quarterly. Additionally, the partnership receives distributions in additional convertible preferred units of the U.S. hospitality operating company at 5.0% per annum compounding quarterly. In the first quarter of 2019, the partnership purchased an additional $222 million of convertible preferred units of a U.S. hospitality operating company. The carrying value of these convertible preferred units at September 30, 2019 was $413 million (December 31, 2018 - $175 million).

Also included in Securities - FVTPL is the partnership’s investment in BSREP III, which is accounted for as a financial asset following the deconsolidation of its investments in the first quarter of 2019. The carrying value of the BSREP III financial asset at September 30, 2019 was $379 million (December 31, 2018 - nil).

Securities - FVTOCI
Securities - FVTOCI represented the partnership’s retained equity interests in 1625 Eye Street in Washington, D.C. and Heritage Plaza in Houston, both property holding companies, that it previously controlled and in which it retained a non-controlling interest following disposition of these properties to third parties. The partnership managed these properties on behalf of the acquirer but did not exercise significant influence over the relevant activities of the properties. The interest in 1625 Eye Street was sold as of September 30, 2019.


17             


NOTE 11. ACCOUNTS RECEIVABLE AND OTHER
The components of accounts receivable and other are as follows:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Derivative assets
$
116

$
234

Accounts receivable(1)
488

794

Restricted cash and deposits
294

631

Prepaid expenses
256

317

Other current assets
235

385

Total accounts receivable and other
$
1,389

$
2,361

(1) 
See Note 32, Related Parties, for further discussion.

NOTE 12. HELD FOR SALE
Non-current assets and groups of assets and liabilities which comprise disposal groups are presented as assets held for sale where the asset or disposal group is available for immediate sale in its present condition, and the sale is highly probable.

The following is a summary of the assets and liabilities that were classified as held for sale as of September 30, 2019 and December 31, 2018:
(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Investment properties
$
1,745

$
422

Equity accounted investments

568

Accounts receivable and other assets
35

14

Assets held for sale
1,780

1,004

Debt obligations
1,069

153

Accounts payable and other liabilities
49

10

Liabilities associated with assets held for sale
$
1,118

$
163


The following table presents the change to the components of the assets held for sale for the nine months ended September 30, 2019 and the year ended December 31, 2018:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Balance, beginning of period
$
1,004

$
1,433

Reclassification to assets held for sale, net
3,031

2,382

Disposals
(2,306
)
(2,819
)
Fair value adjustments
62

81

Foreign currency translation
(11
)
(32
)
Other

(41
)
Balance, end of period
$
1,780

$
1,004


At December 31, 2018, assets held for sale included ten office assets in the U.S., three office assets in Brazil, two triple-net lease assets in the U.S. and an equity accounted investment within the LP Investments portfolio.

In the first quarter of 2019, the partnership sold nine office assets in the U.S., three office assets in Brazil, one triple-net lease asset in the U.S and an equity accounted investment within the LP Investments portfolio for net proceeds of approximately $844 million.

In the second quarter of 2019, the partnership sold a portfolio of office assets in California and three triple-net lease assets in the U.S. within the LP Investments portfolio for net proceeds of approximately $129 million.

In the third quarter of 2019, the partnership sold two office assets in Australia in the Core Office segment and a portfolio of triple-net lease assets in the U.S. and one office asset in the U.S. in the LP Investments segment for net proceeds of approximately $541 million.

At September 30, 2019, assets held for sale included nine triple-net lease assets in the U.S., a portfolio of multifamily assets in the U.S. and one office asset in the U.S. in our LP Investments segment, and one office asset in Australia in our Core Office portfolio.

18             


NOTE 13. DEBT OBLIGATIONS
The partnership’s debt obligations include the following:
 
Sep. 30, 2019
Dec. 31, 2018
(US$ Millions)
Weighted-average rate

Debt balance

Weighted-average rate

Debt balance

Unsecured facilities:
 
 
 
 
Brookfield Property Partners’ credit facilities
3.64 %

1,311

4.08
%
1,586

Brookfield Property Partners’ corporate bonds
4.25 %

1,061

4.23
%
586

Brookfield Property REIT Inc. term debt
4.41 %

4,392

4.88
%
4,726

Brookfield Property REIT Inc. senior secured notes
5.75 %

1,000

%

Brookfield Property REIT Inc. corporate facility
4.29 %

315

4.76
%
387

Brookfield Property REIT Inc. junior subordinated notes
3.72 %

206

3.97
%
206

Forest City Realty Trust Inc. term debt(1)
%

6.38
%
1,247

Subsidiary borrowings
3.59 %

90

5.62
%
495

 
 
 
 
 
Secured debt obligations:
 
 
 
 
Funds subscription credit facilities(1)(2)
3.33
%
17

3.85
%
4,517

Fixed rate
4.43
%
26,679

4.41
%
25,545

Variable rate
4.99
%
18,700

4.97
%
25,131

Deferred financing costs
 
(300
)
 
(462
)
Total debt obligations
 
$
53,471

 
$
63,964

 
 
 
 
 
Current
 
6,695

 
5,874

Non-current
 
45,707

 
57,937

Debt associated with assets held for sale
 
1,069

 
153

Total debt obligations
 
$
53,471

 
$
63,964

(1) 
In the first quarter of 2019, the partnership deconsolidated BSREP III due to loss of control. The Forest City term debt and the BSREP III credit facilities are no longer being consolidated. See Note 4, Investment Properties for further information.
(2) 
Funds subscription credit facilities are secured by co-investors’ capital commitments.

Debt obligations include foreign currency denominated debt in the functional currencies of the borrowing subsidiaries. Debt obligations by currency are as follows:
 
Sep. 30, 2019
Dec. 31, 2018
(Millions)
U.S. Dollars

 
Local
currency

U.S. Dollars

 
Local
currency

U.S. Dollars
$
38,980

$
38,980

$
50,682

$
50,682

British Pounds
5,354

£
4,356

5,172

£
4,053

Canadian Dollars
3,371

C$
4,463

2,688

C$
3,666

South Korean Won
1,505

1,805,000

1,617

1,805,000

Australian Dollars
1,338

A$
1,982

1,401

A$
1,988

Indian Rupee
2,217

Rs
156,105

1,469

Rs
102,016

Brazilian Reais
718

R$
2,992

684

R$
2,651

Chinese Yuan
11

79

70

484

Euros
277

254

643

561

Deferred financing costs
(300
)
 
 
(462
)
 
 
Total debt obligations
$
53,471

 
 
$
63,964

 
 

The components of changes in debt obligations, including changes related to cash flows from financing activities, are summarized in the table below:

 
 
 
Non-cash changes in debt obligations
 
(US$ Millions)
Dec. 31, 2018

Debt obligation issuance, net of repayments

Derecognized from loss of control of subsidiaries

Assumed by purchaser

Amortization of deferred financing costs and (premium) discount

Foreign currency translation

Other

Sep. 30, 2019

Debt obligations
$
63,964

1,958

(13,601
)
1,465

86

(395
)
(6
)
$
53,471



19             


NOTE 14. CAPITAL SECURITIES
The partnership has the following capital securities outstanding as of September 30, 2019 and December 31, 2018:

(US$ Millions)
Shares outstanding

Cumulative dividend rate

Sep. 30, 2019

Dec. 31, 2018

Operating Partnership Class A Preferred Equity Units:
 
 
 
 
Series 1
24,000,000

6.25
%
$
571

$
562

Series 2
24,000,000

6.50
%
543

537

Series 3
24,000,000

6.75
%
529

523

Brookfield BPY Holdings Inc. Junior Preferred Shares:
 
 
 
 
Class B Junior Preferred Shares(1)

7.64
%

420

Brookfield Office Properties Inc. (“BPO”) Class B Preferred Shares:
 
 
 
 
Series 1(2)
3,600,000

70% of bank prime



Series 2(2)
3,000,000

70% of bank prime



Brookfield Property Split Corp. (“BOP Split”) Senior Preferred Shares:
 
 
 
Series 1
924,390

5.25
%
23

23

Series 2
699,165

5.75
%
13

13

Series 3
909,814

5.00
%
17

17

Series 4
940,486

5.20
%
18

17

BSREP II RH B LLC (“Manufactured Housing”) Preferred Capital

9.00
%
249

249

Rouse Series A Preferred Shares
5,600,000

5.00
%
142

142

BSREP II Vintage Estate Partners LLC ("Vintage Estate") Preferred Shares
10,000

5.00
%
40

40

Forest City Enterprises L.P. (“Forest City”) Preferred Capital(3)

%

29

Capital Securities – Fund Subsidiaries
 
 
884

813

Total capital securities
 
 
$
3,029

$
3,385

 
 
 
 
 
Current
 
 
74

520

Non-current
 
 
2,955

2,865

Total capital securities
 
 
$
3,029

$
3,385

(1) 
During the nine months ended September 30, 2019, $420 million of the Brookfield BPY Holdings Inc. Class B Junior Preferred Shares, held by Brookfield Asset Management, were redeemed.
(2) 
BPO Class B Preferred Shares, Series 1 and 2 capital securities are owned by Brookfield Asset Management. BPO has an offsetting loan receivable against these securities earning interest at 95% of bank prime.
(3) 
Includes the impact of the deconsolidation of BSREP III investments, primarily Forest City. Note 4, Investment Properties for further information.
 
Cumulative preferred dividends on the BOP Split Senior Preferred Shares are payable quarterly, as and when declared by BOP Split. On September 29, 2019, BOP Split declared quarterly dividends payable for the BOP Split Senior Preferred Shares.

Capital securities includes $249 million at September 30, 2019 (December 31, 2018 - $249 million) of preferred equity interests held by a third party investor in Manufactured Housing which have been classified as a liability, rather than as a non-controlling interest, due to the fact the holders are entitled to distributions equal to their capital balance plus 9% annual return payable in monthly distributions until maturity in December 2025.

Capital securities also includes $142 million at September 30, 2019 (December 31, 2018 - $142 million) of preferred equity interests held by a third party investor in Rouse Properties, L.P. (“Rouse”) which have been classified as a liability, rather than as a non-controlling interest, due to the fact that the interests are mandatorily redeemable on or after November 12, 2025 for a set price per unit plus any accrued but unpaid distributions; distributions are capped and accrue regardless of available cash generated.

Capital securities also includes $40 million at September 30, 2019 (December 31, 2018 - $40 million) of preferred equity interests held by the partnership’s co-investor in Vintage Estate which have been classified as a liability, rather than as non-controlling interest, due to the fact that the preferred equity interests are mandatorily redeemable on April 26, 2023 for cash at an amount equal to the outstanding principal balance of the preferred equity plus any accrued but unpaid dividend.

The Capital Securities – Fund Subsidiaries includes $820 million at September 30, 2019 (December 31, 2018 - $775 million) of equity interests in Brookfield DTLA Holdings LLC (“DTLA”) held by co-investors in DTLA which have been classified as a liability, rather than as non-controlling interest, as holders of these interests can cause DTLA to redeem their interests in the fund for cash equivalent to the fair value of the interests on October 15, 2023, and on every fifth anniversary thereafter. Capital Securities – Fund Subsidiaries are measured at FVTPL.

Capital Securities – Fund Subsidiaries also includes $64 million at September 30, 2019 (December 31, 2018 - $38 million) which represents the equity interests held by the partnership’s co-investor in the D.C. Fund which have been classified as a liability, rather than as non-controlling interest, due to the fact that on June 18, 2023, and on every second anniversary thereafter, the holders of these interests can redeem their interests in the D.C. Fund for cash equivalent to the fair value of the interests.


20             


At September 30, 2019, capital securities includes $48 million (December 31, 2018 - $47 million) repayable in Canadian Dollars of C$64 million (December 31, 2018 - C$64 million).

Reconciliation of cash flows from financing activities from capital securities is shown in the table below:
 
 
 
Non-cash changes on capital securities
 
(US$ Millions)
Dec. 31, 2018

Capital securities redeemed

Derecognized from loss of control of subsidiaries

Fair value changes

Other

Sep. 30, 2019

Capital securities
$
3,385

$
(420
)
$
(29
)
$
92

$
1

$
3,029


NOTE 15. INCOME TAXES
The partnership is a flow-through entity for tax purposes and as such is not subject to Bermudian taxation. However, income taxes are recognized for the amount of taxes payable by the primary holding subsidiaries of the partnership (“Holding Entities”), any direct or indirect corporate subsidiaries of the Holding Entities and for the impact of deferred tax assets and liabilities related to such entities.

The components of income tax expense include the following:
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Current income tax
$
59

$
14

$
89

$
106

Deferred income tax
132

(51
)
128

(57
)
Income tax expense (benefit)
$
191

$
(37
)
$
217

$
49


The partnership’s income tax expense increased for the three and nine months ended September 30, 2019 as compared to the same period in the prior year primarily due the reversal of deferred tax liabilities relating to legislative and entity status change, an internal restructuring of the ownership of certain retail investments and the recognition of previously unrecognized net operating losses.

NOTE 16. OTHER NON-CURRENT LIABILITIES
The components of other non-current liabilities are as follows:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Accounts payable and accrued liabilities
$
413

$
1,770

Lease liabilities(1)
799


Derivative liabilities
103

159

Provisions
92

352

Loans and notes payables
1

5

Deferred revenue
3

8

Total other non-current liabilities
$
1,411

$
2,294

(1) 
The impact of the adoption of IFRS 16 requires the recognition of lease liabilities. See Note 2, Summary of Significant Accounting Policies for further information. For the three and nine months ended September 30, 2019, interest expense relating to total lease liabilities (see Note 17, Accounts Payable And Other Liabilities for the current portion) was $14 million and $44 million, respectively.

NOTE 17. ACCOUNTS PAYABLE AND OTHER LIABILITIES
The components of accounts payable and other liabilities are as follows:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Accounts payable and accrued liabilities
$
2,343

$
2,466

Loans and notes payable
392

779

Derivative liabilities
447

181

Deferred revenue
342

302

Lease liabilities(1)
37


Other liabilities
24

21

Total accounts payable and other liabilities
$
3,585

$
3,749

(1) 
The impact of the adoption of IFRS 16 requires the recognition of lease liabilities. See Note 2, Summary of Significant Accounting Policies for further information. See Note 16, Other Non-Current Liabilities for further information on the interest expense related to these liabilities.

At September 30, 2019, loans and notes payable includes nil (December 31, 2018 - $733 million) of on-demand deposits from Brookfield Asset Management to the partnership and $190 million (December 31, 2018 - nil) of promissory note from a fund managed by Brookfield Asset Management. See Note 32, Related Parties, for further information.

21             


NOTE 18. EQUITY
The partnership’s capital structure is comprised of seven classes of partnership units: GP 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”), limited partnership units of Brookfield Office Properties Exchange LP (“Exchange LP Units”), FV LTIP units of the Operating Partnership and BPR Units. In addition, the partnership issued Class A Cumulative Redeemable Perpetual Preferred Units, Series 1 in the first quarter of 2019 and Class A Cumulative Redeemable Perpetual Preferred Units, Series 2 in the third quarter of 2019 (“Preferred Equity Units”).

a)
General and limited partnership equity
GP Units entitle the holder to the right to govern the financial and operating policies of the partnership. The GP Units are entitled to a 1% general partnership interest.

LP Units entitle the holder to their proportionate share of distributions and are listed and publicly traded on the Nasdaq and the TSX. Each LP Unit entitles the holder thereof to one vote for the purposes of any approval at a meeting of limited partners, provided that holders of the Redeemable/Exchangeable Partnership Units that are exchanged for LP Units will only be entitled to a maximum number of votes in respect of the Redeemable/Exchangeable Partnership Units equal to 49% of the total voting power of all outstanding units.

The following table presents changes to the GP Units and LP Units from the beginning of the year:
 
General partnership units
Limited partnership units
(Thousands of units)
Sep. 30, 2019

Dec. 31, 2018

Sep. 30, 2019

Dec. 31, 2018

Outstanding, beginning of period
139

139

424,198

254,989

Issued on August 28, 2018 for the acquisition of GGP



109,702

Exchange LP Units exchanged


403

7,770

BPR Units exchanged


34,288

56,166

Distribution Reinvestment Program


163

175

Issued under unit-based compensation plan


836

57

Repurchase of LP Units


(18,511
)
(4,661
)
Outstanding, end of period
139

139

441,377

424,198


b)
Units of the operating partnership held by Brookfield Asset Management

Redeemable/Exchangeable Partnership Units
There were 432,649,105 Redeemable/Exchangeable Partnership Units outstanding at September 30, 2019 and December 31, 2018.

Special limited partnership units
Brookfield Property Special L.P. is entitled to receive equity enhancement distributions and incentive distributions from the operating partnership as a result of its ownership of the Special LP Units.

There were 4,759,997 Special LP Units outstanding at September 30, 2019 and December 31, 2018.

c)
Limited partnership units of Brookfield Office Properties Exchange LP (“Exchange LP”)
The Exchange LP Units are exchangeable at any time on a one-for-one basis, at the option of the holder, subject to their terms and applicable law, for LP Units. An Exchange LP Unit provides a holder thereof with economic terms that are substantially equivalent to those of a LP Unit. Subject to certain conditions and applicable law, Exchange LP will have the right, commencing on the seventh anniversary of June 9, 2014, the completion of the acquisition of the remaining common shares of BPO, to redeem all of the then outstanding Exchange LP Units at a price equal to the 20-day volume-weighted average trading price of an LP Unit plus all declared, payable, and unpaid distributions on such units.

The following table presents changes to the Exchange LP Units from the beginning of the year:

 
Limited Partnership Units of Brookfield Office Properties Exchange LP
(Thousands of units)
Sep. 30, 2019

Dec. 31, 2018

Outstanding, beginning of period
3,308

11,078

Exchange LP Units exchanged(1)
(403
)
(7,770
)
Outstanding, end of period
2,905

3,308

(1) 
Exchange LP Units that have been exchanged are held by an indirect subsidiary of the partnership. Refer to the Condensed Consolidated Statements of Changes in Equity for the impact of such exchanges on the carrying value of Exchange LP Units.

22             



d)
FV LTIP units of the Operating Partnership
The partnership issued Brookfield Property Partners BPY FV LTIP Unit Plan (“FV LTIP”) to certain participants. Each FV LTIP unit will vest over a period of five years and is redeemable for LP Units, BPR Units or a cash payment subject to a conversion adjustment. There were 1,156,427 FV LTIP Units outstanding at September 30, 2019.

e)
Class A shares of Brookfield Property REIT Inc.
BPR Units were issued to former GGP common shareholders who elected to receive BPR Units as consideration. Each BPR Unit is structured to provide an economic return equivalent to an LP Unit. The holder of a BPR Unit has the right, at any time, to request the share be redeemed for cash equivalent to the value of an LP Unit. In the event the holder of a BPR Unit exercises this right, the partnership has the right, at its sole discretion, to satisfy the redemption request with an LP Unit rather than cash. As a result, BPR Units participate in earnings and distribution on a per unit basis equivalent to the per unit participation of LP Units. The partnership presents BPR Units as a component of non-controlling interest.

The following table presents changes to the BPR Units from the beginning of the year:

 
Class A shares of Brookfield Property REIT Inc.
(Thousands of units)
Sep. 30, 2019

Dec. 31, 2018

Outstanding, beginning of period
106,090


Issued on August 28, 2018 for the acquisition of GGP

162,324

BPR Units exchanged(1)
(34,288
)
(56,166
)
Repurchases of BPR Units
(5,724
)

Forfeitures
(40
)
(68
)
Outstanding, end of period
66,038

106,090

(1) 
BPR Units issued for the acquisition of GGP that have been exchanged for LP Units. Refer to the Condensed Consolidated Statements of Changes in Equity for the impact of such exchanges on the carrying value of BPR Units.

f)
Class A Cumulative Redeemable Perpetual Preferred Units, Series 1 and 2 (“Preferred Equity Units”)
During the nine months ended September 30, 2019, the partnership issued 7,360,000 Class A Cumulative Redeemable Perpetual Preferred Units, Series 1 at $25.00 per unit at a coupon rate of 6.5% and 10,000,000 Class A Cumulative Redeemable Perpetual Preferred Units, Series 2 at $25.00 per unit at a coupon rate of 6.375%. In total $434 million of gross proceeds were raised and $13 million in underwriting and issuance costs were incurred. At September 30, 2019, Preferred Equity Units had a total carrying value of $421 million.

g)
Distributions
Distributions made to each class of partnership units, including units of subsidiaries that are exchangeable into LP Units, are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions, except per unit information)
2019

2018

2019

2018

Limited Partners
$
146

$
116

$
427

$
278

Holders of:
 
 
 
 
Redeemable/Exchangeable Partnership Units
144

166

430

409

Special LP Units
2

1

5

4

Exchange LP Units
1

2

3

8

FV LTIP units of the Operating Partnership




BPR Units
23

22

86

51

Total
$
316

$
307

$
951

$
750

Per unit(1)
$
0.330

$
0.315

$
0.990

$
0.945

(1) 
Per unit outstanding on the distribution record date.

23             


h)
Earnings per unit
The partnership’s net income per LP Unit and weighted average units outstanding are calculated as follows:
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions, except unit information)
2019

2018

2019

2018

Net income attributable to limited partners
$
218

$
144

$
418

$
532

Income reallocation related to mandatorily convertible preferred shares
21

19

39

80

Less: Preferred unit dividends
(5
)

(8
)

Net income attributable to limited partners – basic
234

163

449

612

Dilutive effect of conversion of preferred shares and options

8

8

27

Net income attributable to limited partners – diluted
$
234

$
171

$
457

$
639

 
 
 
 
 
(in millions of units/shares)
 
 
 
 
Weighted average number of LP Units outstanding
437.1

303.8

428.2

271.8

Mandatorily convertible preferred shares
70.1

70.0

70.1

70.0

Weighted average number of LP Units - basic
507.2

373.8

498.3

341.8

Dilutive effect of the conversion of preferred shares and options

19.9

8.7

18.4

Weighted average number of LP units outstanding - diluted
507.2

393.7

507.0

360.2


NOTE 19. NON-CONTROLLING INTERESTS
Non-controlling interests consists of the following:

(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Redeemable/Exchangeable Partnership Units and Special LP Units(1) 
$
12,684

$
12,740

Exchange LP Units(1)
84

96

FV LTIP units of the Operating Partnership(1)
33


BPR Units(1)
1,914

3,091

Interests of others in operating subsidiaries and properties:
 
 
Preferred shares held by Brookfield Asset Management
15

16

Preferred equity of subsidiaries
3,014

2,830

Non-controlling interests in subsidiaries and properties
13,995

15,610

Total interests of others in operating subsidiaries and properties
17,024

18,456

Total non-controlling interests
$
31,739

$
34,383

(1)  
Each unit within these classes of non-controlling interest has economic terms substantially equivalent to those of an LP unit. As such, income attributed to each unit or share of non-controlling interest is equivalent to that allocated to an LP unit. The proportion of interests held by holders of the Redeemable/Exchangeable Units and Exchange LP Units changes as a result of issuances, repurchases and exchanges. Consequently, the partnership adjusted the relative carrying amounts of the interests held by Limited Partners and non-controlling interests based on their relative share of the equivalent LP Units. The difference between the adjusted value and the previous carrying amounts was attributed to current LP Units as ownership changes in the Condensed Consolidated Statement of Changes in Equity.

24             


Non-controlling interests of others in operating subsidiaries and properties consist of the following:



Proportion of economic interests held by non-controlling interests
 
 
(US$ Millions)
Jurisdiction of formation
Sep. 30, 2019

Dec. 31, 2018

Sep. 30, 2019

Dec. 31, 2018

BPO(1)
Canada
%
%
$
5,068

$
4,757

Forest City Realty Trust, Inc.(2)(3)
United States
%
85
%

3,437

BPR Retail Holdings LLC(4)
United States
%
%
1,918

1,773

BSREP CARS Sub-Pooling LLC(2)
United States
71
%
71
%
965

957

Center Parcs UK(2)
United Kingdom
73
%
73
%
575

863

BSREP II Korea Office Holdings Pte. Ltd.
South Korea
78
%
78
%
738

766

BSREP II MH Holdings LLC(2)
United States
74
%
74
%
747

700

BSREP II PBSA Ltd.
Bermuda
75
%
75
%
678

687

BSREP India Office Holdings Pte. Ltd.
United States
67
%
67
%
452

612

BSREP II Aries Pooling LLC(2)
United States
74
%
74
%
601

603

BSREP II Retail Upper Pooling LLC(2)
United States
50
%
50
%
515

552

BSREP UA Holdings LLC(2)
Cayman Islands
70
%
70
%
413

507

Other
Various
18% - 76%

18% - 92%

4,354

2,242

Total
 
 
 
$
17,024

$
18,456

(1) 
Includes non-controlling interests in BPO subsidiaries which vary from 1% - 100%.
(2) 
Includes non-controlling interests representing interests held by other investors in Brookfield-sponsored real estate funds and holding entities through which the partnership participates in such funds. Also includes non-controlling interests in underlying operating entities owned by these funds.
(3) 
In the first quarter of 2019, the partnership deconsolidated BSREP III due to loss of control. Forest City is an investment in BSREP III and therefore no longer being consolidated. See Note 4, Investment Properties for further information.
(4) 
Includes non-controlling interests in BPR subsidiaries.

NOTE 20. COMMERCIAL PROPERTY REVENUE
The components of commercial property revenue are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Base rent
$
890

$
857

$
2,861

$
2,394

Straight-line rent
24

27

87

77

Lease termination
7

6

28

32

Other lease income(1)
131

161

455

427

Other revenue from tenants(2)
328

200

809

548

Total commercial property revenue
$
1,380

$
1,251

$
4,240

$
3,478

(1) 
Other lease income includes parking revenue and recovery of property tax and insurance expenses from tenants.
(2) 
Consists of recovery of certain operating expenses from tenants which are accounted for in accordance with IFRS 15, Revenue from Contracts with Customers.

NOTE 21. HOSPITALITY REVENUE
The components of hospitality revenue are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Room, food and beverage
$
354

$
357

$
1,092

$
1,032

Gaming, and other leisure activities
88

114

283

336

Other hospitality revenue
30

31

91

92

Total hospitality revenue
$
472

$
502

$
1,466

$
1,460



25             


NOTE 22. INVESTMENT AND OTHER REVENUE
The components of investment and other revenue are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Investment income
$
66

$
19

$
134

$
40

Fee revenue
67

38

189

71

Dividend income

2

3

8

Interest income and other
31

14

76

27

Participating loan notes
1

2

8

15

Total investment and other revenue
$
165

$
75

$
410

$
161


NOTE 23. DIRECT COMMERCIAL PROPERTY EXPENSE
The components of direct commercial property expense are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Property maintenance
$
180

$
196

$
558

$
544

Real estate taxes
156

138

480

374

Employee compensation and benefits
40

51

128

149

Lease expense(1)
4

14

12

43

Other
101

79

304

198

Total direct commercial property expense
$
481

$
478

$
1,482

$
1,308

(1) 
For the three and nine months ended September 30, 2019, operating expenses relating to variable lease payments not included in the measurement of the lease liability was $4 million and $11 million, respectively.

NOTE 24. DIRECT HOSPITALITY EXPENSE
The components of direct hospitality expense are as follows:
 
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Employee compensation and benefits
$
92

$
77

$
286

$
239

Cost of food, beverage, and retail goods sold
72

66

216

203

Maintenance and utilities
37

46

116

130

Marketing and advertising
14

15

53

57

Other
80

111

250

313

Total direct hospitality expense
$
295

$
315

$
921

$
942


NOTE 25. DEPRECIATION AND AMORTIZATION
The components of depreciation and amortization expense are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Depreciation and amortization of real estate assets
$
72

$
70

$
211

$
201

Depreciation and amortization of non-real estate assets(1)
14

11

45

28

Total depreciation and amortization
$
86

$
81

$
256

$
229

(1) 
For the three and nine months ended September 30, 2019, included $2 million and $6 million, respectively, of depreciation expense relating to right-of-use property, plant and equipment.


26             


NOTE 26. GENERAL AND ADMINISTRATIVE EXPENSE
The components of general and administrative expense are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Employee compensation and benefits
$
90

$
72

$
272

$
167

Management fees
40

40

112

114

Transaction costs
11

69

53

147

Other
73

60

219

165

Total general and administrative expense
$
214

$
241

$
656

$
593


NOTE 27. FAIR VALUE GAINS (LOSSES), NET
The components of fair value gains (losses), net, are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Commercial properties
$
476

$
217

$
(361
)
$
626

Commercial developments
170

70

457

454

Incentive fees(1)
(13
)

(65
)

Financial instruments and other(2)
(184
)
269

(304
)
863

Total fair values gains (losses), net
$
449

$
556

$
(273
)
$
1,943

(1) 
Represents incentive fees the partnership is obligated to pay to the general partner of the partnership’s various fund investments.
(2) 
For the three and nine months ended September 30, 2019, primarily includes fair value losses on financial instruments and fair value loss on right-of-use investment properties of $1 million and $5 million, respectively. The prior year primarily includes a gain on bargain purchase.

NOTE 28. UNIT-BASED COMPENSATION
The partnership grants options to certain employees under its amended and restated BPY Unit Option Plan (“BPY Plan”). Pursuant to the BPY Plan, options may be settled for the in-the-money amount of the option in LP Units upon exercise. Consequently, options granted to employees under the BPY Plan are accounted for as an equity-based compensation agreement.

During the three and nine months ended September 30, 2019, the partnership incurred $8 million (2018 - $4 million) and $19 million (2018 - $3 million), respectively, of expense in connection with its unit-based compensation plans.

a)
BPY Unit Option Plan
Awards under the BPY Plan (“BPY Awards”) generally vest 20% per year over a period of five years and expire 10 years after the grant date, with the exercise price set at the time such options were granted. Upon exercise of a vested BPY Award, the participant is entitled to receive LP Units or a cash payment equal to the amount by which the fair market value of an LP Unit at the date of exercise exceeds the exercise price of the BPY Award. Subject to a separate adjustment arising from forfeitures, the estimated expense is revalued every reporting period using the Black-Scholes model as a result of the cash settlement provisions of the plan for certain employees. In terms of measuring expected life of the BPY Awards with various term lengths and vesting periods, BPY will segregate each set of similar BPY Awards and, if different, exercise price, into subgroups and apply a weighted average within each group.

There were no BPY Awards granted during the period ended September 30, 2019.

27             



i.
Equity-settled BPY Awards
The change in the number of options outstanding under the equity-settled BPY Awards at September 30, 2019 and December 31, 2018 is as follows:

 
Sep. 30, 2019
Dec. 31, 2018
 
Number of
options

Weighted average
exercise price

Number of
options

Weighted average
exercise price

Outstanding, beginning of period
13,836,213

20.56

13,801,795

20.54

Granted


800,000

22.50

Exercised
(304,171
)
15.84

(36,806
)
17.71

Expired/forfeited
(52,829
)
20.59

(291,625
)
22.18

Reclassified(1)
6,703,725

20.21

(437,151
)
22.48

Outstanding, end of period
20,182,938

20.55

13,836,213

20.56

Exercisable, end of period
10,618,025

20.37

9,628,246

20.26

(1)  
Relates to the reclassification of cash-settled options for employees in Canada to equity-settled options subsequent to the amendment of the BPY Plan, which was amended on September 30, 2019. The prior year relates to the reclassification of equity-settled options for employees in Brazil to cash-settled options subsequent to the amendment of the BPY Plan, which was amended on February 7, 2018.

The following table sets out details of options issued and outstanding at September 30, 2019 and December 31, 2018 under the equity-settled BPY Awards by expiry date:

 
Sep. 30, 2019
Dec. 31, 2018
Expiry date
Number of
options
Weighted average
exercise price

Number of
options

Weighted average
exercise price

2020
110,600
$
13.07

226,800

$
13.07

2021
389,800
17.44

246,400

17.44

2022
987,700
18.09

508,300

18.07

2023
1,114,420
16.80

656,220

16.80

2024
11,888,570
20.59

7,878,998

20.59

2025
1,995,091
25.18

1,376,295

25.18

2026
2,803,007
19.51

2,049,450

19.51

2027
93,750
22.92

93,750

22.92

2028
800,000
22.50

800,000

22.50

Total
20,182,938
$
20.55

13,836,213

$
20.56


ii.
Cash-settled BPY Awards
The change in the number of options outstanding under the cash-settled BPY Awards at September 30, 2019 and December 31, 2018 is as follows:

 
Sep. 30, 2019
Dec. 31, 2018
 
Number of options

Weighted average
exercise price

Number of options

Weighted average
exercise price

Outstanding, beginning of period
7,331,416

$
20.38

7,144,871

$
20.30

Granted




Exercised
(19,400
)
12.63

(3,770)

19.51

Expired/forfeited


(246,836
)
21.87

Reclassified(1)
(6,703,725
)
20.21

437,151

22.48

Outstanding, end of period
608,291

$
21.49

7,331,416

$
20.38

Exercisable, end of period
486,872

$
21.44

5,627,610

$
20.17

(1)  
Relates to the reclassification of cash-settled options for employees in Canada to equity-settled options subsequent to the amendment of the BPY Plan, which was amended on September 30, 2019. The prior year relates to the reclassification of equity-settled options for employees in Brazil to cash-settled options subsequent to the amendment of the BPY Plan, which was amended on February 7, 2018.

28             


The following table sets out details of options issued and outstanding at September 30, 2019 and December 31, 2018 under the cash-settled BPY Awards by expiry date:

 
Sep. 30, 2019
Dec. 31, 2018
Expiry date
Number of
options

Weighted average
exercise price

Number of
options

Weighted average
exercise price

2020
4,400

$
13.07

69,000

$
13.07

2021
24,000

17.44

172,800

17.44

2022
22,200

17.93

515,800

18.09

2023
28,800

16.80

519,000

16.80

2024
175,416

20.59

4,278,663

20.59

2025
213,038

25.18

831,834

25.18

2026
140,437

19.51

944,319

19.51

Total
608,291

$
21.49

7,331,416

$
20.38


b)
Restricted BPY LP Unit Plan
The Restricted BPY LP Unit Plan provides for awards to participants of LP Units purchased on the Nasdaq (“Restricted Units”). Under the Restricted BPY LP Unit Plan, units awarded generally vest over a period of five years, except as otherwise determined or for Restricted Units awarded in lieu of a cash bonus as elected by the participant, which may vest immediately. The estimated total compensation cost measured at grant date is evenly recognized over the vesting period of five years.

During the nine months ended September 30, 2019, the partnership granted 895,744 Restricted Units with a weighted average exercise price of $19.24. As of September 30, 2019, the total number of Restricted Units outstanding was 797,434 (December 31, 2018 - 150,835) with a weighted average exercise price of $19.54 (December 31, 2018 - $20.97).

c)
Restricted BPY LP Unit Plan (Canada)
The Restricted BPY LP Unit Plan (Canada) is substantially similar to the Restricted BPY LP Unit Plan described above, except that it is for Canadian employees, there is a five-year hold period, and purchases of units are made on the TSX instead of the Nasdaq.

As of September 30, 2019, the total number of Canadian Restricted Units outstanding was 25,058 (December 31, 2018 - 21,624) with a weighted average exercise price of C$23.06 (December 31, 2018 - C$22.88).

d)
Restricted BPR Unit Plan
The Restricted BPR Unit Plan provides for awards to participants of BPR Units purchased on the Nasdaq (“Restricted BPR Units”). Under the Restricted BPR Unit Plan, units awarded generally vest over a period of five years, except as otherwise determined or for Restricted BPR Units awarded in lieu of a cash bonus as elected by the participant, which may vest immediately. The estimated total compensation cost measured at grant date is evenly recognized over the vesting period of five years.

During the nine months ended September 30, 2019, the partnership granted 357,313 Restricted BPR Units with a weighted average exercise price of $19.22.

e)
BPY Fair Value LTIP Unit Plan
The partnership issued units of the operating partnership pursuant to the Brookfield Property Partners BPY FV LTIP Unit Plan (“BPY FV LTIP Unit”) to certain participants. Each BPY FV LTIP Unit will vest over a period of five years and is redeemable for LP Units, BPR Units or a cash payment subject to a conversion adjustment.

During the nine months ended September 30, 2019, the partnership granted 895,099 BPY FV LTIP Units with a weighted average exercise price of $19.51 to employees.

f)
Deferred Share Unit Plan
In addition to the above, BPO has a deferred share unit plan. At September 30, 2019, BPO has 1,486,976 deferred share units (December 31, 2018 - 1,458,667) outstanding and vested.

g)
GGP LTIP Plans
In connection with the GGP acquisition, the partnership issued options under the Brookfield Property Partners BPY Unit Option Plan (GGP) (“GGP Options”) and BPY AO LTIP Units of the operating partnership (“AO LTIP Options”) to certain participants.  Each GGP Option will vest within ten years following the original grant date and is redeemable for LP Units or a cash payment equal to the amount by which the fair market value of an LP Unit at the date exceeds the exercise price of the BPY Option. Each AO LTIP will vest within ten years of its original grant date and is redeemable for LP Units or a cash payment subject to a conversion adjustment.

As of September 30, 2019, the total number of GGP Options outstanding was 237,881 (December 31, 2018 - 1,011,523) with a weighted average exercise price of $25.39 (December 31, 2018 - $19.71).


29             


As of September 30, 2019, the total number of AO LTIP Options outstanding was 1,657,948 (December 31, 2018 - 1,387,289) with a weighted average exercise price of $22.51 (December 31, 2018 - $22.51).

NOTE 29. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of the following:
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Items that may be reclassified to net income:
 
 
 
 
Foreign currency translation
 
 
 
 
Net unrealized foreign currency translation (losses) gains in respect of foreign operations
$
(487
)
$
(280
)
$
(487
)
$
(989
)
Reclassification of realized foreign currency translation gains to net income on dispositions of foreign operations
1


27


Gains (losses) on hedges of net investments in foreign operations, net of income taxes for the three and nine months ended Sep. 30, 2019 of ($3) million and ($3) million (2018 – ($2) million and ($7) million)(1)
174

91

223

299

Reclassification gains from hedges of net investment in foreign operation to net income on disposition of foreign operations
4


6



(308
)
(189
)
(231
)
(690
)
Cash flow hedges
 
 
 
 
Gains (losses) on derivatives designated as cash flow hedges, net of income taxes for the three and nine months ended Sep. 30, 2019 of ($1) million and ($6) million (2018 – ($3) million and ($15) million)
17

9

(23
)
62


17

9

(23
)
62

Equity accounted investments
 
 
 
 
Share of unrealized foreign currency translation (losses) gains in respect of foreign operations
(1
)
(1
)
(2
)
(2
)
Reclassification gains from hedges of net investment in foreign operation to net income on disposition of foreign operations


1


Gains (losses) on derivatives designated as cash flow hedges
(15
)
9

(66
)
31


(16
)
8

(67
)
29

Items that will not be reclassified to net income:
 
 
 
 
Unrealized (losses) on securities - FVTOCI, net of income taxes for the three and nine months ended Sep. 30, 2019 of nil and nil (2018 – nil and $2 million)
(6
)
(1
)
(5
)
(5
)
Net remeasurement (losses) on defined benefit obligations


(1
)
2

Revaluation surplus

1


3

 
(6
)

(6
)

Total other comprehensive income (loss)
$
(313
)
$
(172
)
$
(327
)
$
(599
)
(1) 
Unrealized gains (losses) on a number of hedges of net investments in foreign operations are with a related party.

NOTE 30. OBLIGATIONS, GUARANTEES, CONTINGENCIES AND OTHER
In the normal course of operations, the partnership and its consolidated entities execute agreements that provide for indemnification and guarantees to third parties in transactions such as business dispositions, business acquisitions, sales of assets and sales of services.
 
Certain of the partnership’s operating subsidiaries have also agreed to indemnify their directors and certain of their officers and employees. The nature of substantially all of the indemnification undertakings prevent the partnership from making a reasonable estimate of the maximum potential amount that it could be required to pay third parties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, neither the partnership nor its consolidated subsidiaries have made significant payments under such indemnification agreements.
 
The partnership and its operating subsidiaries may be contingently liable with respect to litigation and claims that arise from time to time in the normal course of business or otherwise.

At September 30, 2019, the partnership has commitments totaling:
approximately $1,594 million for the development of Manhattan West in Midtown New York, Greenpoint Landing in Brooklyn, as well as the redevelopment of One Allen Center, Two Allen Center, and Three Allen Center in Houston;


30             



approximately A$232 million ($157 million) for the development of 388 George Street and 680 George Street in Sydney; Southern Cross West Tower in Melbourne; 235 St Georges Terrace, 108 St George Terrace, Brookfield Place Tower 1 and Brookfield Place Tower 2 in Perth;

approximately £50 million ($61 million) for the development of 100 Bishopsgate and Principal Place Residential in London; and

approximately AED 239 million ($65 million) for the development of ICD Brookfield Place in Dubai.

During 2013, Brookfield Asset Management announced the final close on the $4.4 billion Brookfield Strategic Real Estate Partners (“BSREP”) fund, a global private fund focused on making opportunistic investments in commercial property. The partnership, as lead investor, committed approximately $1.3 billion to the fund. As of September 30, 2019, there remained approximately $170 million of uncontributed capital commitments.

In April 2016, Brookfield Asset Management announced the final close on the $9.0 billion second BSREP fund to which the partnership had committed $2.3 billion as lead investor. As of September 30, 2019, there remained approximately $680 million of uncontributed capital commitments.

In November 2017, Brookfield Asset Management announced the final close on the $2.9 billion fifth Brookfield Real Estate Finance Fund (“BREF”) to which the partnership had committed $400 million. As of September 30, 2019, there remained approximately $220 million of uncontributed capital commitments.

In September 2018, Brookfield Asset Management announced the final close on the $1.0 billion third Brookfield Fairfield U.S. Multifamily Value Add Fund (“VAMF”) to which the partnership had committed $300 million. As of September 30, 2019, there remained approximately $200 million of uncontributed capital commitments.

In January 2019, Brookfield Asset Management announced the final close on the $15.0 billion third BSREP fund to which the partnership has committed $1.0 billion. As of September 30, 2019, there remained approximately $765 million of uncontributed capital commitments.

The partnership maintains insurance on its properties in amounts and with deductibles that it believes are in line with what owners of similar properties carry. The partnership maintains all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and named windstorm). The partnership does not conduct its operations, other than those of equity accounted investments, through entities that are not fully or proportionately consolidated in these financial statements, and has not guaranteed or otherwise contractually committed to support any material financial obligations not reflected in these financial statements.

NOTE 31. FINANCIAL INSTRUMENTS
a)
Derivatives and hedging activities
The partnership and its operating entities use derivative and non-derivative instruments to manage financial risks, including interest rate, commodity, equity price and foreign exchange risks. The use of derivative contracts is governed by documented risk management policies and approved limits. The partnership does not use derivatives for speculative purposes. The partnership and its operating entities use the following derivative instruments to manage these risks:
 
foreign currency forward contracts to hedge exposures to Canadian Dollar, Australian Dollar, British Pound, Euro, Chinese Yuan, Brazilian Real, Indian Rupee and South Korean Won denominated net investments in foreign subsidiaries and foreign currency denominated financial assets;
interest rate swaps to manage interest rate risk associated with planned refinancings and existing variable rate debt; and
interest rate caps to hedge interest rate risk on certain variable rate debt.
 

31             


Interest Rate Hedging
The following table provides the partnership’s outstanding derivatives that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate debt as of September 30, 2019 and December 31, 2018:

(US$ Millions)
Hedging item(1)
Notional

Rates

Maturity dates
Fair value

Sep. 30, 2019
Interest rate caps of US$ LIBOR debt
$
7,763

2.7% - 6.0%

Nov. 2019 - Sep. 2023
$

 
Interest rate swaps of US$ LIBOR debt
3,077

1.6% - 2.7%

Feb. 2020 - Feb. 2024
(78
)
 
Interest rate caps of £ LIBOR debt
1,650

2.0% - 2.5%

Jan. 2021 - Jan. 2022

 
Interest rate swaps of £ LIBOR debt
65

1.5%

Apr. 2020

 
Interest rate caps of € EURIBOR debt
106

1.3%

Apr. 2021

 
Interest rate caps of C$ LIBOR debt
181

3.0%

Oct. 2020 - Oct. 2022

 
Cross currency swaps of C$ LIBOR Debt
600

4.30% - 4.85%

Mar. 2024
(8
)
 
Cross currency swaps of US$ LIBOR Debt
508

4.74% - 4.97%

Oct. 2021 - Jul. 2023
(8
)
Dec. 31, 2018
Interest rate caps of US$ LIBOR debt
$
8,180

2.3% - 6.0%

Jan. 2019 - Sep. 2023
$
2

 
Interest rate swaps of US$ LIBOR debt
1,731

1.6% - 2.8%

Feb. 2020 - May 2024
(2
)
 
Interest rate caps of £ LIBOR debt
486

2.0%

Apr. 2020 - Jan. 2021

 
Interest rate swaps of £ LIBOR debt
67

1.5%

Apr. 2020

 
Interest rate caps of € EURIBOR debt
115

1.0% - 1.3%

Apr. 2020 - Apr. 2021

 
Interest rate caps of C$ LIBOR debt
176

3.0%

Oct. 2020 - Oct. 2022

 
Interest rate swaps of C$ LIBOR debt
56

4.6
%
Sep. 2023

 
Interest rate swaps on forecasted fixed rate debt
100

4.0%

Jun. 2019
(114
)
(1) 
As of September 30, 2019, included in derivative liabilities is $83 million of fair value loss relating to settled interest rate swaps that are being amortized over the term of the associated debt.

For the three and nine months ended September 30, 2019, the amount of hedge ineffectiveness recorded in earnings in connection with the partnership’s interest rate hedging activities was nil and $2 million (2018 - nil and $17 million).

Foreign Currency Hedging
The following table provides the partnership’s outstanding derivatives that are designated as net investments of foreign subsidiaries or foreign currency cash flow hedges as of September 30, 2019 and December 31, 2018:

(US$ Millions)
Hedging item
 
Notional

Rates
Maturity dates
Fair value

Sep. 30, 2019
Net investment hedges
245

 €0.85/$ - €0.91/$
 Mar. 2020 - Jul. 2020
$
11

 
Net investment hedges
£
3,281

 £0.74/$ - £0.91/$
 Oct. 2019 - Sep. 2021
(38
)
 
Net investment hedges
A$
479

 A$1.38/$ - A$1.48/$
 Oct. 2019 - Mar. 2021
9

 
Net investment hedges
475

 C¥6.75/$ - C¥6.98/$
 Apr. 2020 - Dec. 2020
3

 
Net investment hedges
C$
355

 C$1.28/$ - C$1.34/$
 Oct. 2019 - Jun. 2020
2

 
Net investment hedges
1,038,405

 ₩1,114.85/$ - ₩1,174.30/$
 Aug. 2019 - Jun. 2020
24

 
Net investment hedges
Rs
5,607

 Rs71.78/$ - Rs72.55/$
 Mar. 2020 - Apr. 2020
(1
)
 
Net investment hedges
£
77

 £0.88/€ - £0.93/€
 Jan. 2020 - Apr. 2020

 
Cross currency swap on C$ LIBOR debt
C$
800

 C$1.29/$ - C$1.33/$
 Oct. 2021 - Jul. 2023
(20
)
Dec. 31, 2018
Net investment hedges
649

€0.78/$ - €0.88/$
Jan. 2019 - May 2020
$
13

 
Net investment hedges
£
3,175

£0.70/$ - £0.79/$
Feb. 2019 - Mar. 2020
104

 
Net investment hedges
A$
1,038

A$1.28/$ - A$1.42/$
Jan. 2019 - Mar. 2020
20

 
Net investment hedges
2,672

C¥6.35/$ - C¥6.91/$
Jan. 2019 - Nov. 2019
6

 
Net investment hedges
C$
118

C$1.29/$ - C$1.34/$
Oct. 2019 - Nov 2019
4

 
Net investment hedges
R$
158

R$3.90/$ - R$4.24/$
Jan. 2019 - Jun. 2019
(9
)
 
Net investment hedges
618,589

 ₩1,087.00/$ - ₩1,130.90/$
Jan. 2019 - Nov. 2019
1

 
Net investment hedges
Rs
31,422

Rs67.44/$ - Rs70.39/$
Feb. 2019 - May 2019
3

 
Net investment hedges
£
77

£0.88/€ - £0.92/€
Jan. 2019 - Feb. 2020
(1
)
 
Cross currency swaps of C$ LIBOR debt
C$
800

C$1.29/$ - C$1.33/$
Oct. 2021 - Jul. 2023
(31
)

For the three and nine months ended September 30, 2019 and 2018, the amount of hedge ineffectiveness recorded in earnings in connection with the partnership’s foreign currency hedging activities was not significant.

32             


Other Derivatives
The following table presents details of the partnership’s other derivatives, not designated as hedges for accounting purposes, that have been entered into to manage financial risks as of September 30, 2019 and December 31, 2018:

(US$ Millions)
Derivative type
Notional


Rates
Maturity
dates
Fair value

Sep. 30, 2019
Interest rate caps
$
6,492

3.0% - 5.8%
Oct. 2019 - Sep. 2024
$

 
Interest rate swaps on forecasted fixed rate debt
1,610

2.7% - 6.4%
Nov. 2019 - Sep. 2031
(226
)
 
Interest rate swaps of US$ LIBOR debt
1,803

1.7% - 4.6%
Nov. 2020 - Sep. 2023
(12
)
Dec. 31, 2018
Interest rate caps
$
9,750

3.0% - 7.0%
Mar. 2019 - Jan. 2022
$
1

 
Interest rate swaps on forecasted fixed rate debt
1,660

2.3% - 6.1%
Jun. 2019 - Nov. 2030
(67
)
 
Interest rate swaps of US$ debt
835

2.4% - 5.8%
Jul. 2019 - Oct. 2039
(14
)
 
Interest rate swaps on fixed rate debt
180

4.5% - 7.3%
Feb. 2019 - Jul. 2023
2


For the three and nine months ended September 30, 2019, the partnership recognized fair value losses, net of approximately $(29) million and $(122) million (2018 - gains of $18 million and $71 million), respectively, related to the settlement of certain forward starting interest rate swaps that have not been designated as hedges.

b)
Measurement and classification of financial instruments

Classification and Measurement
The following table outlines the classification and measurement basis, and related fair value for disclosures, of the financial assets and liabilities in the interim condensed consolidated financial statements:

 
 
Sep. 30, 2019
Dec. 31, 2018
(US$ Millions)
Classification and measurement basis
Carrying value

Fair value

Carrying value

Fair value

Financial assets
 
 
 
 
 
Participating loan interests(1)
FVTPL
$

$

$
268

$
268

Loans and notes receivable
Amortized cost
321

321

1,055

1,055

Other non-current assets
 
 
 
 
 
Securities - FVTPL
FVTPL
1,081

1,081

239

239

Derivative assets
FVTPL
7

7

13

13

Securities - FVTOCI
FVTOCI
117

117

260

260

Restricted cash
Amortized cost
160

160

161

161

Current assets
 
 
 
 
 
  Derivative assets
FVTPL
116

116

234

234

Accounts receivable(2)
Amortized cost
523

523

808

808

Restricted cash
Amortized cost
294

294

631

631

Cash and cash equivalents
Amortized cost
2,141

2,141

3,288

3,288

Total financial assets
 
$
4,760

$
4,760

$
6,957

$
6,957

Financial liabilities
 
 
 
 
 
Debt obligations(3)
Amortized cost
$
53,471

$
54,219

$
63,964

$
64,561

Capital securities
Amortized cost
2,145

2,152

2,572

2,578

Capital securities - fund subsidiaries
FVTPL
884

884

813

813

Other non-current liabilities
 
 
 
 
 
Loan payable
FVTPL
66

66

24

24

Accounts payable
Amortized cost
413

413

1,770

1,770

Derivative liabilities
FVTPL
103

103

159

159

Accounts payable and other liabilities
 
 
 
 
 
Accounts payable and other(4)
Amortized cost
2,784

2,784

3,255

3,255

Derivative liabilities
FVTPL
447

447

181

181

Total financial liabilities
 
$
60,313

$
61,068

$
72,738

$
73,341

(1) 
In the third quarter of 2019, the partnership sold its participating loan interests.
(2) 
Includes other receivables associated with assets classified as held for sale on the condensed consolidated balance sheet in the amount of $35 million and $14 million as of September 30, 2019 and December 31, 2018, respectively.
(3) 
Includes debt obligations associated with assets classified as held for sale on the condensed consolidated balance sheet in the amount of $1,069 million and $153 million as of September 30, 2019 and December 31, 2018, respectively.
(4) 
Includes accounts payable and other liabilities associated with assets classified as held for sale on the condensed consolidated balance sheet in the amount of $49 million and $10 million as of September 30, 2019 and December 31, 2018, respectively.
 

33             


Fair Value Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Fair value measurement establishes a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Quoted market prices (unadjusted) in active markets represent a Level 1 valuation. When quoted market prices in active markets are not available, the partnership maximizes the use of observable inputs within valuation models. When all significant inputs are observable, either directly or indirectly, the valuation is classified as Level 2. Valuations that require the significant use of unobservable inputs are considered Level 3, which reflect the partnership’s market assumptions and are noted below. This hierarchy requires the use of observable market data when available.

The following table outlines financial assets and liabilities measured at fair value in the consolidated financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as defined above:
 
Sep. 30, 2019
Dec. 31, 2018
 (US$ Millions)
 Level 1
Level 2
Level 3
 Total
 Level 1
Level 2
Level 3
 Total
Financial assets
 
 
 
 
 
 
 
 
Participating loan interests(1)
$

$

$

$

$

$

$
268

$
268

Securities - FVTPL


1,081

1,081



239

239

Securities - FVTOCI


117

117



260

260

Derivative assets

123


123


247


247

Total financial assets
$

$
123

$
1,198

$
1,321

$

$
247

$
767

$
1,014

 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
Capital securities - fund subsidiaries
$

$

$
884

$
884

$

$

$
813

$
813

Derivative liabilities

550


550


340


340

Loan payable


66

66



24

24

Total financial liabilities
$

$
550

$
950

$
1,500

$

$
340

$
837

$
1,177

(1) 
In the second quarter of 2019, the partnership reclassified its participating loan interests to assets held for sale.

There were no transfers between levels during the three and nine months ended September 30, 2019 and the year ended December 31, 2018.

The following table presents the change in the balance of financial assets and financial liabilities accounted for at fair value categorized as Level 3 as of September 30, 2019 and December 31, 2018:

 
Sep. 30, 2019
Dec. 31, 2018

(US$ Millions)
Financial
assets
 
Financial
liabilities
 
Financial
assets
 
Financial
liabilities
 
Balance, beginning of period
$
767

$
837

$
835

$
836

Acquisitions
 
870

 

 
201

 

Dispositions
 
(124
)
 

 
(7
)
 
(2
)
Fair value gains, net and OCI
 
108

 
113

 
(14
)
 
4

Other
 
(423
)
 

 
(248
)
 

Balance, end of period
$
1,198

$
950

$
767

$
838


NOTE 32. RELATED PARTIES
In the normal course of operations, the partnership enters into transactions with related parties. These transactions have been measured at exchange value and are recognized in the consolidated financial statements. The immediate parent of the partnership is Brookfield Property Partners Limited. The ultimate parent of the partnership is Brookfield Asset Management. Other related parties of the partnership include Brookfield Asset Management’s subsidiaries and operating entities, certain joint ventures and associates accounted for under the equity method, as well as officers of such entities and their spouses.

The partnership has a management agreement with its service providers, wholly-owned subsidiaries of Brookfield Asset Management. Pursuant to a Master Services Agreement, the partnership pays a base management fee (“base management fee”), to the service providers equal to 0.5% of the total capitalization of the partnership, subject to an annual minimum of $50 million plus annual inflation adjustments. The amount of the equity enhancement distribution is reduced by the amount by which the base management fee is greater than $50 million per annum, plus annual inflation adjustments.

The base management fee for the three and nine months ended September 30, 2019 was $25 million (2018 - $25 million) and $73 million (2018 - $73 million), respectively. The equity enhancement distribution for the three and nine months ended September 30, 2019 was $6 million (2018 - $1 million) and $20 million (2018 - $1 million), respectively.

In connection with the issuance of preferred equity units of the operating partnership to a third party in the fourth quarter of 2014, Brookfield Asset Management contingently agreed to acquire the seven-year and ten-year tranches of preferred equity units from the unitholder for the initial issuance

34             


price plus accrued and unpaid distributions and to exchange such units for Preferred Equity Units with terms and conditions substantially similar to the twelve-year tranche to the extent that the market price of the LP Units is less than 80% of the exchange price at maturity.

The following table summarizes transactions with related parties:
(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Balances outstanding with related parties:
 
 
Participating loan interests(1)
$

$
268

Net (payables)/receivables within equity accounted investments
(98
)
(26
)
Loans and notes receivable(2)
125

54

Receivables and other assets
26

50

Deposit and promissory note from Brookfield Asset Management

(733
)
Promissory note from a fund managed by Brookfield Asset Management
(190
)

Property-specific debt obligations
(325
)
(231
)
Loans and notes payable and other liabilities
(204
)
(50
)
Capital securities held by Brookfield Asset Management(3)

(420
)
Preferred shares held by Brookfield Asset Management
(15
)
(15
)
(1) 
In the third quarter of 2019, the partnership sold its participating loan interest.
(2) 
At September 30, 2019, includes $39 million (December 31, 2018 - $54 million) receivable from Brookfield Asset Management upon the earlier of the partnership’s exercise of its option to convert its participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating loan interests.
(3) 
During the nine months ended September 30, 2019, $420 million of the Brookfield BPY Holdings Inc. Class B Junior Preferred shares, held by Brookfield Asset Management, were redeemed.

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

Transactions with related parties:
 
 
 
 
Commercial property revenue(1)
$
6

$
4

$
19

$
14

Management fee income
7

1

23

4

Participating loan interests (including fair value gains, net)
1

13

49

45

Interest expense on debt obligations
18

9

47

29

Interest on capital securities held by Brookfield Asset Management

16

8

54

General and administrative expense(2)
55

57

142

153

Construction costs(3)
81

64

343

289

Incentive fees
13


65


(1) 
Amounts received from Brookfield Asset Management and its subsidiaries for the rental of office premises.
(2) 
Includes amounts paid to Brookfield Asset Management and its subsidiaries for management fees, management fees associated with the partnership’s investments in private funds, and administrative services.
(3) 
Includes amounts paid to Brookfield Asset Management and its subsidiaries for construction costs of development properties.

During the third quarter of 2019, the partnership sold an approximate 81% interest in a retail asset and an approximate 77% interest in a multifamily development to a Brookfield-sponsored fund. The partnership retains control over and will continue to consolidate these assets after the sale.
NOTE 33. SUBSIDIARY PUBLIC ISSUERS
BOP Split was incorporated for the purpose of being an issuer of preferred shares and owning a portion of the partnership’s investment in BPO common shares. Pursuant to the terms of a Plan of Arrangement, holders of outstanding BPO Class AAA Preferred Shares Series G, H, J and K, which were convertible into BPO common shares, were able to exchange their shares for BOP Split Senior Preferred Shares, subject to certain conditions. The BOP Split Senior Preferred shares are listed on the TSX and began trading on June 11, 2014. All shares issued by BOP Split are retractable by the holders at any time for cash.

In connection with an internal restructuring completed in July 2016, the partnership and certain of its related entities agreed to guarantee all of BPO’s Class AAA Preferred Shares and all of BPO’s debt securities issued pursuant to BPO’s indenture dated December 8, 2009.

In April 2018, the partnership formed two subsidiaries, Brookfield Property Finance ULC and Brookfield Property Preferred Equity Inc. to act as issuers of debt and preferred securities, respectively.  The partnership and certain of its related entities have agreed to guarantee securities issued by these entities.

35             


The following table provides consolidated summary financial information for the partnership, BOP Split, BPO, Brookfield Property Finance ULC, Brookfield Property Preferred Equity Inc. and the holding entities:

(US$ Millions)
For the three months ended Sep. 30, 2019
Brookfield Property Partners L.P.

BOP Split

BPO

Brookfield Property Preferred Equity Inc.

Brookfield Property Finance ULC

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Revenue
$

$
4

$
30

$

$
12

$
439

$
33

$
1,499

$
2,017

Net income attributable to unitholders(1)
235

67

(178
)

12

474

4

(140
)
474

For the three months ended Sep. 30, 2018
 
 
 
 
 
 
 
 
 
Revenue
$

$
4

$
28

$

$
3

$
344

$
15

$
1,434

$
1,828

Net income attributable to unitholders(1)
155

299

(980
)


380

(5
)
531

380

(1) 
Includes net income attributable to LP Units, GP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, Exchange LP Units and BPR Units.
(2) 
Includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, and BPY Bermuda Holdings II Limited.
(3) 
Includes BPY Bermuda Holdings IV Limited, BPY Bermuda Holdings V Limited and BPY Bermuda Holdings VI Limited, which serve as guarantors for BPO but not BOP Split, net of intercompany balances and transactions with other holding entities.
(4) 
Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis.

(US$ Millions)
For the nine months ended Sep. 30, 2019
Brookfield Property Partners L.P.

BOP Split

BPO

Brookfield Property Preferred Equity Inc.

Brookfield Property Finance ULC

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Revenue
$

$
27

$
90

$

$
31

$
1,711

$
311

$
3,946

$
6,116

Net income attributable to unitholders(1)
459

230

420


(20
)
934

520

(1,609
)
934

For the nine months ended Sep. 30, 2018
 
 
 
 
 
 
 
 
 
Revenue
$

$
18

$
103

$

$
3

$
807

$
30

$
4,138

$
5,099

Net income attributable to unitholders(1)
549

409

(1,307
)


1,444

(25
)
374

1,444

(1) 
Includes net income attributable to LP Units, GP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, Exchange LP Units and BPR Units.
(2) 
Includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, and BPY Bermuda Holdings II Limited.
(3) 
Includes BPY Bermuda Holdings IV Limited, BPY Bermuda Holdings V Limited and BPY Bermuda Holdings VI Limited, which serve as guarantors for BPO but not BOP Split, net of intercompany balances and transactions with other holding entities.
(4) 
Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis.

(US$ Millions)
As of Sep. 30, 2019
Brookfield Property Partners L.P.

BOP Split

BPO

Brookfield Property Preferred Equity Inc.

Brookfield Property Finance ULC

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Current assets
$

$
4

$
84

$

$
849

$
8,539

$
150

$
(6,023
)
$
3,603

Non-current assets
14,035

11,722

23,188


421

27,729

2,033

24,545

103,673

Assets held for sale







1,780

1,780

Current liabilities

1,331

231


10

5,637

1,043

2,102

10,354

Non-current liabilities

3,814

5,975


1,057

2,693

663

38,419

52,621

Liabilities associated with assets held for sale







1,118

1,118

Preferred equity
421








421

Equity attributable to interests of others in operating subsidiaries and properties


2,284





14,740

17,024

Equity attributable to unitholders(1)
$
13,614

$
6,581

$
14,782

$

$
203

$
27,938

$
477

$
(36,077
)
$
27,518

(1) 
Includes net income attributable to LP Units, GP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, Exchange LP Units and BPR Units.
(2) 
Includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, and BPY Bermuda Holdings II Limited.

36             


(3) 
Includes BPY Bermuda Holdings IV Limited, BPY Bermuda Holdings V Limited and BPY Bermuda Holdings VI Limited, which serve as guarantors for BPO but not BOP Split, net of intercompany balances and transactions with other holding entities.
(4) 
Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis.
(US$ Millions)
As of Dec. 31, 2018
Brookfield Property Partners L.P.

BOP Split

BPO

Brookfield Property Preferred Equity Inc.

Brookfield Property Finance ULC

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Current assets
$

$
52

$
151

$

$
596

$
6,144

$
330

$
(1,163
)
$
6,110

Non-current assets
13,273

11,748

20,359



30,277

1,775

37,974

115,406

Assets held for sale







1,004

1,004

Current liabilities

2,806

678


593

5,731

1,834

(1,499
)
10,143

Non-current liabilities

3,053

4,738



2,406

5

55,272

65,474

Liabilities associated with assets held for sale







163

163

Equity attributable to interests of others in operating subsidiaries and properties


2,284





16,172

18,456

Equity attributable to unitholders(1)
$
13,273

$
5,941

$
12,810

$

$
3

$
28,284

$
266

$
(32,293
)
$
28,284

(1) 
Includes net income attributable to LP Units, GP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, Exchange LP Units and BPR Units.
(2) 
Includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, and BPY Bermuda Holdings II Limited.
(3) 
Includes BPY Bermuda Holdings IV Limited, BPY Bermuda Holdings V Limited and BPY Bermuda Holdings VI Limited, which serve as guarantors for BPO but not BOP Split, net of intercompany balances and transactions with other holding entities.
(4) 
Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis.

NOTE 34. SEGMENT INFORMATION
a)
Operating segments
IFRS 8, Operating Segments, requires operating segments to be determined based on internal reports that are regularly reviewed by the chief operating decision maker (“CODM”) for the purpose of allocating resources to the segment and to assessing its performance. On July 1, 2018, the partnership realigned its LP Investments segment (formerly referred to as Opportunistic) to include the corporate function of the Brookfield-sponsored real estate opportunity funds, previously included in the Corporate segment, to more closely align with how the partnership now presents financial information to the CODM and investors. The partnership’s operating segments are organized into four reportable segments: i) Core Office, ii) Core Retail, iii) LP Investments and iv) Corporate. All prior period segment disclosures have been recast to reflect the changes in the partnership’s operating segments. These segments are independently and regularly reviewed and managed by the Chief Executive Officer, who is considered the CODM.

b)
Basis of measurement
The CODM measures and evaluates the performance of the partnership’s operating segments based on funds from operations (“FFO”). This performance metric does not have standardized meanings prescribed by IFRS and therefore may differ from similar metrics used by other companies and organizations. Management believes that while not an IFRS measure, FFO is the most consistent metric to measure the partnership’s financial statements and for the purpose of allocating resources and assessing its performance.

The partnership defines FFO as net income, prior to fair value gains, net, depreciation and amortization of real estate assets, and income taxes less non-controlling interests of others in operating subsidiaries and properties share of these items. When determining FFO, the partnership also includes its proportionate share of the FFO of unconsolidated partnerships and joint ventures and associates.

c)
Reportable segment measures
The following summaries present certain financial information regarding the partnership’s operating segments for the three and nine months ended September 30, 2019 and 2018:

(US$ Millions)
Total revenue
FFO
Three months ended Sep. 30,
2019

2018

2019

2018

Core Office
$
520

$
526

$
130

$
114

Core Retail
431

145

169

71

LP Investments
1,064

1,157

65

45

Corporate
2


(103
)
(107
)
Total
$
2,017

$
1,828

$
261

$
123



37             



(US$ Millions)
Total revenue
FFO
Nine months ended Sep. 30,
2019

2018

2019

2018

Core Office
$
1,591

$
1,577

$
419

$
374

Core Retail
1,173

145

497

300

LP Investments
3,344

3,374

210

200

Corporate
8

3

(316
)
(313
)
Total
$
6,116

$
5,099

$
810

$
561


The following summaries presents the detail of total revenue from the partnership’s operating segments for the three and nine months ended September 30, 2019 and 2018:
(US$ Millions)
Lease revenue

Other revenue from tenants

Hospitality revenue

Investment and other revenue

Total revenue

Three months ended Sep. 30, 2019
Core Office
$
292

$
171

$
2

$
55

$
520

Core Retail
267

75


89

431

LP Investments
493

82

470

19

1,064

Corporate



2

2

Total
$
1,052

$
328

$
472

$
165

$
2,017


(US$ Millions)
Lease revenue

Other revenue from tenants

Hospitality revenue

Investment and other revenue

Total revenue

Three months ended Sep. 30, 2018
Core Office
$
406

$
86

$
5

$
29

$
526

Core Retail
100

29


16

145

LP Investments
545

85

497

28

1,155

Corporate



2

2

Total
$
1,051

$
200

$
502

$
75

$
1,828


(US$ Millions)
Lease revenue

Other revenue from tenants

Hospitality revenue

Investment and other revenue

Total revenue

Nine months ended Sep. 30, 2019
Core Office
$
1,063

$
349

$
8

$
171

$
1,591

Core Retail
785

221


167

1,173

LP Investments
1,583

239

1,458

64

3,344

Corporate



8

8

Total
$
3,431

$
809

$
1,466

$
410

$
6,116


(US$ Millions)
Lease revenue

Other revenue from tenants

Hospitality revenue

Investment and other revenue

Total revenue

Nine months ended Sep. 30, 2018
Core Office
$
1,207

$
265

$
14

$
91

$
1,577

Core Retail
100

29


16

145

LP Investments
1,623

254

1,446

51

3,374

Corporate



3

3

Total
$
2,930

$
548

$
1,460

$
161

$
5,099


The following summary presents information about certain consolidated balance sheet items of the partnership, on a segmented basis, as of September 30, 2019 and December 31, 2018:

 

Total assets

Total liabilities
(US$ Millions)
Sep. 30, 2019

Dec. 31, 2018

Sep. 30, 2019

Dec. 31, 2018

Core Office
$
35,199

$
34,095

$
16,329

$
15,033

Core Retail
31,197

29,658

15,582

13,749

LP Investments
42,580

58,610

27,432

41,604

Corporate
80

157

4,750

5,394

Total
$
109,056

$
122,520

$
64,093

$
75,780


38             




The following summary presents a reconciliation of FFO to net income for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2019

2018

2019

2018

FFO(1)
$
261

$
123

$
810

$
561

Depreciation and amortization of real estate assets
(72
)
(70
)
(211
)
(201
)
Fair value gains, net
449

556

(273
)
1,943

Share of equity accounted income - non-FFO
232

(52
)
877

33

Income tax expense
(191
)
37

(217
)
(49
)
Non-controlling interests of others in operating subsidiaries and properties – non-FFO
(205
)
(214
)
(52
)
(843
)
Net income attributable to unitholders(2)
474

380

934

1,444

Non-controlling interests of others in operating subsidiaries and properties
396

342

672

1,352

Net income
$
870

$
722

$
1,606

$
2,796

(1)  
FFO represents interests attributable to GP Units, LP Units, Exchange LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and BPR Units. The interests attributable to Exchange LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and BPR Units are presented as non-controlling interests in the consolidated statements of income.
(2)  
Includes net income attributable to GP Units, LP Units, Exchange LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and BPR Units. The interests attributable to Exchange LP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and BPR Units are presented as non-controlling interests in the consolidated statements of income.

NOTE 35. SUBSEQUENT EVENTS

On October 23, 2019, the partnership sold the majority of its Manhattan multifamily portfolio for approximately $1.2 billion which was presented in assets held for sale at September 30, 2019.

On November 1, 2019 the partnership purchased the remaining interests it didn’t previously own in four retail assets in the U.S. from its joint venture partner. This resulted in the partnership obtaining 100% ownership in the entities. Concurrently the partnership sold all of its interest in another retail asset to the same joint venture partner.

On November 5, 2019, the partnership exercised the option to convert its participating loan interests into direct ownership of a portfolio of properties in Australia that were directly owned by Brookfield Asset Management. The partnership will continue to account for its interests in these properties as a controlling interest in a subsidiary or an equity accounted interest in a jointly controlled entity.


39             


Exhibit 99.3 
 
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS – FULL CERTIFICATE
 
I, Brian W. Kingston, Chief Executive Officer of Brookfield Property Group LLC, a manager of Brookfield Property Partners L.P., certify the following:
 
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Brookfield Property Partners L.P. (the “issuer”) for the interim period ended September 30, 2019.
 
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
 
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
 
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
 
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
 
(a)
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(a)
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(b)
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b)
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
 
5.2 ICFR – material weakness relating to design: N/A

5.3 Limitation on scope of design: N/A
 
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2019 and ended on September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: November 8, 2019
 
/s/ Brian W. Kingston
 
Brian W. Kingston
 
Chief Executive Officer of Brookfield Property Group LLC,
 
a manager of the issuer
 





Exhibit 99.4 
 
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS – FULL CERTIFICATE
 
I, Bryan K. Davis, Chief Financial Officer of Brookfield Property Group LLC, a manager of Brookfield Property Partners L.P., certify the following:
 
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Brookfield Property Partners L.P. (the “issuer”) for the interim period ended September 30, 2019.
 
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
 
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
 
4. Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.
 
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
 
(a)
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that
(a)
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and
(b)
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
(b)
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1 Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
 
5.2 ICFR – material weakness relating to design: N/A

5.3 Limitation on scope of design: N/A
 
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2019 and ended on September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
 
Date: November 8, 2019
 
/s/ Bryan K. Davis
 
Bryan K. Davis
 
Chief Financial Officer of Brookfield Property Group LLC,
 
a manager of the issuer