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Brookfield Property Partners LP (NASDAQ:BPY)
Q1 2020 Earnings Call
May 9, 2020, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Brookfield Property Partners First Quarter of 2020 Financial Results Conference Call. As a reminder, today's call is being recorded.

It is now my pleasure to turn the call over to Mr. Matt Cherry, Senior Vice President of Investor Relations. Please go ahead, sir.

Matt Cherry -- Senior Vice President, Investor Relations

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

With that, I'll turn the call over to Chief Executive Officer, Brian Kingston.

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Thank you, Matt, and good morning, everyone. We hope everyone listening on the call today has remained safe and healthy throughout this crisis. It goes without saying that the world has changed dramatically from our last quarterly results update during the first week of February. The impact of the COVID-19 health crisis continues to be felt around the world. And our focus during this time has been on the safety of our people, our customers and tenants and the communities in which we operate.

We continue to be inspired by the dedication of essential workers on the front lines of our businesses, who leave the safety of their homes and the comfort of their family every day in order to keep our properties safe and operational. We would also like to acknowledge and thank all of those working in the healthcare, food and retail industries more broadly for their bravery and selfless dedication during this unprecedented time.

While we are not yet out of the woods, it is refreshing to see that our teams are beginning to shift their focus to the safe reopening of our retail properties and preparing for tenants to return to the office. While this will be a gradual process, it's encouraging that we are closer to a return to normal than we thought possible even just a few weeks ago.

While the virus will have an impact on our operations over the course of the year ahead, our business remains in good shape financially due to a strong liquidity position and the high-quality nature of the assets we own. Despite this, our unit price has declined dramatically over the past two months and today trades at a price that is disconnected from the performance of our underlying assets. While we remain conscious of the importance of capital preservation, we were active in buying back our units throughout the first quarter, over $100 million in total.

Turning to our property operating segments. Our Core Office business earned company FFO of $135 million in the first quarter with same-store net operating income growth of 3% over the last year. The high-quality nature of our assets and the financial stability of the tenants we lease space to has meant that collections for the month of April were very good, no material decline from prior periods.

Our portfolio is 93% leased on a long-term basis with a remaining average lease term of almost nine years. These office properties provide our tenants with critical infrastructure from which to operate their businesses, even if their employees are working remotely for the time being. And while we expect some short-term impact on the office leasing markets, we are well protected against the downturn due to the long-term nature of the leases we have in place. We also believe that one of the results of the current crisis may be an increased demand for high-quality office space as tenants seek to reduce density within their existing premises.

With regard to new development, we currently have over 8 million square feet of active office and multifamily projects under way, primarily concentrated in New York City and London. These projects require very little equity from us to complete as we have construction facilities in place on all of them that will fund the remaining construction costs. In the first quarter, we completed a $1.5 billion refinancing of 2 Manhattan West for a term of five years at LIBOR plus 225 basis points, and that spread will decrease as certain development milestones are met.

While construction on several of our office developments were temporarily halted, as they did not qualify as essential civic projects, we have been able to put mitigation measures in place to ensure that we will deliver these buildings to their pre-committed tenants on time. As a result, we do not expect any material impact on the scheduled delivery dates. In New York City, the temporary halts are being lifted on a case-by-case basis, and we hope to be back on-site with activity resuming on all of our remaining projects shortly.

Company FFO in our retail business was $195 million in the first quarter, up 6% from last year. As we mentioned in our update to investors on March 20, our Core Retail business is where we expect to see the greatest impact from the health crisis, as the majority of our retail properties have been closed for over a month now. In some states where regulations now allow, we have begun the process of reopening centers and are working closely with our tenants and local authorities to ensure that is completed in a safe manner.

As of today, around 50 of our retail centers have reopened under restricted capacity. We're supporting these reopenings by concurrently launching curbside pickup programs at our properties designed to seamlessly integrate online shopping with inventory held in stores in our malls, effectively turning those stores into fulfillment centers located where our tenants' customers live and work. The feedback from tenants has been very positive with many of them reporting a significant proportion of their online sales being fulfilled through this channel.

We believe this is more than a short-term stop gap during the retail shutdown and expect this to become a permanent feature in our tenant supply chain in the future. This will further underpin the value of our premium assets which are located in densely populated urban areas throughout the country. Our centers are on average within one hour of 60% of the U.S. population.

In the coming months, as our tenants continue the process of restarting their businesses, we will continue to work closely with them to assist in getting them back up and running as quickly as possible. At our properties, we're implementing comprehensive health and safety mitigation measures, including PPE worn by all employees and available for guests upon request, hand sanitizing stations at high-touch locations, sanitizing wipes available in food courts, frequent signage with health and hygiene reminders and strict enforcement of social distancing and density protocols.

We're also working with our smaller and regional tenants to provide them with financial accommodation. Recognizing their ability to fund short-term operating losses is not the same as our larger brands. We expect this will have some impact on our earnings over the balance of this year, however, that's expected to rebound quickly as the industry recovers.

In addition, we've been active participants in supporting the industry's efforts to work with the U.S. Federal government on its economic stimulus packages, specifically the CARES Act. We've taken a proactive role in working with retail tenants to ensure that those who qualify for stimulus funding receive the subsidies they are entitled to. Our dedicated tenant resource page and webinar devoted to the CARES Act has attracted over 23,000 visitors, providing valuable information on how to understand and determine the potential options available for our tenants businesses.

These subsidies, if applied and distributed correctly, could play an important role in easing the financial burden that retailers and restaurant operators are faced with. The hundreds of billions of dollars earmarked for small businesses to pay their employees' wages as well as cover operating expenses, including rent, should mitigate some of the financial and emotional hardship they are facing.

And although we remain excited about the value creation opportunities we've identified in our retail portfolio, preserving liquidity within our existing operating assets is currently our primary focus. As a result, we will defer some of these projects for the time being and reassess our options once we have greater clarity regarding the recovery of the broader economy.

Turning to our current liquidity position, we're in excellent shape. While public markets have experienced extreme -- public equity markets have experienced extreme volatility over the past two months, credit markets have remained robust, particularly for high-quality borrowers and assets. Banks and other financial institutions remain open for business with strong balance sheets and discussions with our various lenders have been productive.

As a result of our latter [Phonetic] debt maturity profile with an average remaining lease term of -- remaining term of five years, we have relatively few mortgages maturing over the balance of this year and anticipate being able to refinance all of them and in some cases even increase the loan amounts. Just to give a couple of examples, two of our largest mortgage maturities remaining in 2020 are secured by 200 Vesey Street at Brookfield Place in New York and Tysons Galleria shopping center in Northern Virginia.

200 Vesey is a best-in-class office property that is 100% leased with a weighted average remaining lease term of more than eight years. Tysons Galleria is a highly productive shopping center with average tenant sales of $1,200 per square foot and is 97% leased, featuring over 20 exclusive-to-market luxury brands. These are best-in-class properties with great visibility to long-term contractual cash flows from high-quality, well-capitalized tenants. In other words, we do not anticipate any difficulty in refinancing these two assets.

Regarding our disposition initiatives, as capital markets around the world have been disrupted, we have seen a dramatic slowdown in private market transactions, which has delayed some of our planned asset sales for the year. We do believe there is significant pent-up demand for high-quality assets like the ones that we own that provide stable and predictable cash flows. With an enormous amount of capital currently sitting on the sidelines, we're expecting higher than normal transaction volume once markets begin to reopen, particularly with interest rates near zero [Phonetic] today.

We are optimistic we will be able to achieve our planned level of dispositions later this year and early into 2021. And although we are prioritizing retaining liquidity on BPY's balance sheet, we have the benefit of our participation in Brookfield-sponsored private equity real estate funds that currently have in excess of $8 billion of dry powder to put to work.

Once the market stabilizes, we expect an environment with attractive risk-adjusted investment returns in what may be a less competitive landscape. Our funds have remained active, continued to invest capital and have pivoted some of their focus toward public markets where there may be opportunities to acquire high-quality assets and/or inefficiently priced portfolios.

We are well positioned from a liquidity perspective to mitigate any short-term disruptions in our cash flows. As of the end of the first quarter, we have approximately $7.2 billion of capacity in undrawn credit lines and cash on hand. We expect this will be more than sufficient to withstand this protracted downturn. In addition, our sponsorship by Brookfield Asset Management fortifies our financial position should we ever require additional assistants.

Regarding our distribution, as we've stated in the past, our policy is based on a long-term view of our business with a healthy respect for the cyclicality of economic and real estate cycles. While a prolonged economic contraction would impact cash flow in the longer term, we continue to have more than sufficient resources to pay our stated quarterly dividend. As such, our Board of Directors today has approved the declaration of our regular $0.3325 per unit distribution.

Now before I get to some of the ways that we as an organization are contributing to the COVID crisis relief efforts around the world, I'll turn the call over to Bryan Davis for the detailed financial results from Q1. Bryan?

Bryan Davis -- Managing Partner, Real Estate

Thank you, Brian. During the first quarter of 2020, BPY earned company FFO and realized gains of $323 million or $0.33 per unit. This compares with $367 million or $0.38 per unit for the same period in 2019.

Our earnings consists of $135 million earned from our Core Office business, $195 million earned from our Core Retail business, $76 million earned from our LP investment strategy and these investment-level earnings were offset by $83 million of corporate-level interest and administrative costs.

In the current quarter, our Core Office business performed very well. We earned $333 million of net operating income compared with $313 million of NOI earned in the same period last year. Of this, $308 million represents our same-store NOI, which was 4.4% higher than the prior periods on a natural currency basis. This increase in same store was largely concentrated in our Downtown New York portfolio, in Toronto and in our London properties. Non-same-store NOI increased by $11 million to $25 million this quarter, as we are benefiting from our recently completed developments, which are over 90% leased and are about 45% occupied as of the end of the quarter.

Lastly, to provide an update to the discussions we had last quarter on our condominium projects, we have made progress this quarter, generating 29 more unit sales and 107 deliveries, but did only recognize $3 million of earnings at our share in investment and other income from our active projects.

At our 299-unit Principal Place project, we have sold 274 units, or 92%, and delivered 251 units. At our 476-unit tower at Southbank in London, we have sold 455 of those units, or 96%, and we've delivered 116 of those units. And lastly, at our 346-unit tower at Wood Wharf, we have sold 276 units, or 80%, but have not yet started delivering.

The impact of the health crisis has caused construction delays of about three months, which may impact our ability to deliver units at the same pace as we had forecasted at the end of last year and could impact sale prices for some of the remaining units. As a result, the recognition of the remaining income of approximately GBP40 million from these projects will shift to the latter part of this year and into the first half of next.

These increases in earnings were partially offset -- these increases in earnings in our office business were partially offset by the impact of asset sales over the past 12 months where proceeds were either reinvested into another business segment or used to reduce leverage, or were invested into our development and redevelopment projects, which are not yet generating a similar level of current earnings.

In our Core Retail business, we earned $423 million of net operating income compared with $430 million of NOI earned in the same period last year. Of this, $389 million represents our same-store NOI, which was 3.4% lower than the prior period. Non-same-store NOI increased by $7 million to $34 million as we are benefiting from our net acquisition activity toward the end of last year. Same-store results this quarter continue to be impacted by bankruptcies and store closures, cotenancy claims and additional reserves taken against receivables. These reduced same-store -- this reduced same-store by $24 million, but were offset in part by $10 million in contractual increases and spreads on renewals. On the space impacted by bankruptcies through the end of 2019, we expect to begin to see benefits next quarter of the leasing we have executed as tenants occupy and we begin to recognize rents. Investment and other income in this business increased this quarter to $37 million. This is primarily due to a $30 million gain as we sold our remaining interest in Authentic Brands Group and in Aeropostale.

Moving to our LP Investments. Company FFO was down 27% to $62 million this quarter. The largest contributor to this decrease were hospitality investments, which were impacted by the abruptness of the travel restrictions and stay-at-home orders that were put in place, which essentially closed the majority of our properties for the latter part of March.

Earnings from this business were $2 million this quarter compared to $27 million earned in the prior year. We will continue to see pressure on our Q2 earnings as most of these properties will have operated with low occupancy through April and May. Earnings from our other investments, however, were largely in line with the prior period. We highlight all of this information on Page 27 of our supplemental information package.

Shifting to net income attributable to unitholders. For the quarter, we had a loss of $486 million or $0.52 per unit compared to income of $333 million or $0.34 per unit in the prior year. Contributing to this loss were unrealized fair value losses of $675 million, which can be further broken down into losses of $315 million from our investment property and losses of $360 million primarily related to the mark-to-market of interest rate hedge as we put in place to swap a portion of our floating rate exposure to fixed rates. For property valuation, it was a more challenging environment to calculate fair value. There was an increased uncertainty to input factors, including capitalization rates and discount rates due to a lack of market transactions since March 2020, and to near term and potentially longer term impacts to cash flows.

Our approach this quarter was to focus on sensitizing cash flows based on expected scenarios, which are anticipated to occur over the near and midterm period. We did not adjust discount rates to reflect interest rate cuts in most of our markets as we felt it was offset by increased spread in the debt market. For terminal rates, we took the view that the markets will stabilize by the terminal year in our models, and as a result, should not have a direct impact on those rates.

For cash flows, we have assessed each asset class taking into account rent collection rates, renewal percentages and the credit quality of our tenant base. The asset classes which were most impacted were retail, hospitality and student housing. In aggregate, we had, on a proportionate basis, $650 million in losses related to our COVID-19 assumptions. These were partially offset by gains in certain assets that were not as impacted and actually benefited from higher cash flows or lower discount rates as construction and leasing advanced on our development pipeline. It is likely that there will be further cash flow and valuation metric changes in future periods as new information related to the impact of this health crisis unfold. I will point out that additional disclosure will be included in our quarterly reports related to the impact of COVID-19 on our results and our valuation process in particular.

I will end my notes, highlighting that our proportionate balance sheet, we had $13.7 billion invested in our office business with $13.8 billion invested in our retail business and another $5 billion invested in our LP investment strategy. These businesses are capitalized with a low amount of corporate debt, $2 billion, $2 billion of longer term preferred equity and $27 billion of equity attributable to unitholders, which translates to $28.52 per unit.

With those as my planned remarks, I'll turn the call back over to you, Brian.

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Thanks, Bryan. Before turning the call over to Q&A with our analysts, I wanted to provide a brief update on some of the amazing things our people are doing around the world to help contribute to the relief efforts.

As an organization, we're utilizing our various real estate locations and human resources, encouraging all of our local managers to find creative ways to support the communities in this time of need. Efforts to date include a number of our retail center parking lots are being used for blood drives, food banks, mobile testing sites or other community needs, including drive-through farmer markets.

In our global hospitality platform, our support efforts have ranged from donating property uses to first responders, accommodating military and national guard groups at no cost, the use of hotel kitchens to feed furloughed employees and providing food inventories to other employees. We're providing parking spaces at several of our properties proximate to healthcare facilities for use by medical personnel and are participating with local organizations to provide meals and other basic necessities to healthcare workers after their shifts.

We're participating in a mobile phone drive to collect and distribute mobile phones to vulnerable individuals that may not have access to communication during the lockdown. We've made a portion of our free community arts programming available virtually so that local residents can continue to access and enjoy these cultural experiences. And we've contributed meals to food-sensitive individuals by acquiring food from our idle restaurants and donating it to targeted organizations.

So to summarize, we have been preparing for an economic slowdown for some time now. And while it would have been impossible to predict the speed or depth of the COVID crisis, our business is set up to withstand its impact and capitalize on new opportunities should they present themselves.

Lastly, on behalf of our entire management team, I'd like to thank all of our 22,000 real estate professionals around the world for their hard work and dedication during this difficult time. We would also like to thank all of our unitholders for their continued interest and support.

So with those as our prepared remarks, we're happy to take any questions from our analysts on the line. Daniel, maybe you could give people instructions on how to do that.

Questions and Answers:

Operator

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

Sheila McGrath -- Evercore ISI -- Analyst

Yes. Good morning, Brian.

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Hi, Sheila.

Sheila McGrath -- Evercore ISI -- Analyst

BBAM made a big announcement yesterday on a program with retailers. And I'm just wondering if you could explain that program and any potential benefits or impact to BPY's Core Retail holdings?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Sure. So the -- for those of you -- for those who didn't see it, Brookfield announced a $5 billion retail revitalization program, which is targeted at investing in retailers who had sort of pre-COVID crisis, sales of $250 million a year or more. And I'd say this is a pretty classic or typical Brookfield approach to investing, which is we think there are a large number of very high-quality retailers or retail businesses that have been impacted on a short-term basis because of this crisis that continue to have great longer term businesses, but capital is very scarce. And we're seeing this in our discussions with our tenants, etc., that, frankly, the -- while the support from the U.S. federal government has been enormous, it's not enough. All these business have been shutdown for two months, and they continue to need access to liquidity. And we think this is a really interesting opportunity for us to utilize the knowledge, the relationships and the understanding of these tenants that we have in the real estate business through our relationships with these tenants, and bring some capital to bear on this and earn interest in [Phonetic] investment returns.

So while it's not targeted specifically at tenants of ours, you don't have to be a tenant of Brookfield to qualify for the program. With 150 retail locations around the United States and close to 2,400 tenants, no question, some of our tenants will benefit from this access to capital.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Great. And then on the collections in retail in April, you mentioned it was about 20%. Any insights on May? And what kind of actions is Brookfield taking to get this higher? Are you working on rent deferral programs? Or how should we think about attempting to model this?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. So it's -- we're only eight days into May. So it's a little early, but I would say it's tracking pretty closely to what we experienced in April. So I would anticipate this month is likely the same. Although as we mentioned, over the course of this month, we expect to have the vast majority of our centers reopened. And so what that should mean is that we should start to see that recover in June. I think we're through the worst of -- from a collections perspective, the worst of it.

We're in active dialogue with every single one of our tenants. And the conversations range from those tenants who are saying it's -- look, it's a short -- I have an ability to pay, it's a short-term liquidity issue, and I just need time, short-term deferrals. Two, some tenants whose businesses are struggling and they are looking for more of an abatement. So it's really going to be literally 2,400 individual negotiations with all of these tenants. Our retail leasing teams have been in very active dialogue from -- really from the start of this back in February as we began closing down centers in March. I think we've got a pretty good handle on where all of those retailers are. It's going to take three to four months probably to work through all of those negotiations, but we are optimistic that the vast majority of those rents that were not paid in April and May will ultimately be collected. It may just take a longer period of time.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. And one more and I'll get back in the queue. But you guys are different in the way you finance your assets with more secured debt. Just wondering how you think that positions you in the current environment? And if you are considering any purchase of debt at a discount, are there any opportunities that would, in this environment, surface?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. I think the -- these types of situations are exactly why we do finance the portfolio the way we do, which is, if we have particular assets or markets or areas where they're disproportionately impacted by a situation like this, it doesn't impact the entire business. And so for example, the lower rate of collections within our retail business isn't having a huge impact on the debt that's securing our office business. And so this is exactly why we designed the structure the way we did.

And you're right, there is potentially -- there may potentially be the opportunity to either restructure or, in some cases, buy back some of the debt on those individual assets where we maybe have a different longer term view on the prospects than the current holders of that debt. About half of our debt is -- in the retail business is in CMBS and the other half is with banks, insurance companies, Lifecos, etc. And so I think there's -- for the CMBS, there's sort of screen prices every day. And for the others, it's more on balance sheet, and it is a bit more on a direct negotiation basis. But you could see us do some of that, absolutely.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Thank you.

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah.

Operator

Thank you. Our next question comes from Mario Saric with Scotiabank. Your line is now open.

Mario Saric -- Scotiabank -- Analyst

Hi. Good morning and thank you. Maybe just a couple of follow-on questions on Core Retail. In terms of rent collection, Brian, what percentage of the 80% that hasn't been paid by tenants in April would you consider coming from tenants that have the ability to pay but are unwilling to do so given poor visibility today?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

It's more than half. It's -- I don't have the number off the top of my head, but certainly, the -- if you look at our portfolio and the type -- the nature of the tenants and the types of assets that we have, they generally -- the largest proportion of our income comes from large international, global retail companies. And so as I said, I think some of the smaller local regional players where they only have a couple of locations and they're these private businesses, that really is where the stress is the most acute. And those are the tenants that we're trying to work with. And obviously, our ability to do that is highly dependent on those large international tenants who do have an ability to pay to ultimately pay so that we are able to work with the smaller ones.

Mario Saric -- Scotiabank -- Analyst

Got it. Okay. And then just another follow-up on the revitalization fund. It's -- I guess it's our understanding that the capital is going to come from existing BAM funds that have capacity, so that would include BSREP III, I'd imagine. In BSREP III, BAM has an 18% co-invest and BPY has a 7% co-invest. So in terms of structuring potential investments, is it so that each investment that would fit within BSREP would have an 18% BAM co-invest and a 7% BPY co-invest or can you have investments that are 100% BPY in terms of fulfilling the Brookfield co-investment and 0% BAM and vice versa?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. So I think if I understand the question right, it's not so much a concept of co-investment. The fund has $15 billion of total commitments from investors, including both BAM and BPY. BAM can -- has committed to 18% of that $15 billion. BPY has committed to 7% of that $15 billion. And so to the extent that an investment gets made in that fund, whether it's these retail things or anything else, capital call goes out to all investors. And $7 -- so if it's $100, $7 capital call comes to BPY for every investment. So to the extent that any of these investments -- to answer your first question, to the extent that any of these investments do get made through BSREP, then BPY's commitment would be 7% of them. But to be very specific, the mandate of BSREP, the real estate opportunity fund, is to invest in real estate, not to invest in real estate operating companies, operating businesses. And so therefore, the -- to the extent that any of these investments for this rescue program get made through BSREP, it would really only be things that are secured by real estate. So could, as an example, be a sale-leaseback on logistics facilities from a retailer or those types of investments. It wouldn't be -- likely be a direct investment in the retailers themselves.

Mario Saric -- Scotiabank -- Analyst

Understood. Okay. I was trying to get a sense of, given the size of the fund and Brookfield's particular co-investment in the fund, I'm just trying to get a sense of what the potential incremental net investment capital from BPY could be into the fund?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. Yeah, exactly. So I would say very little to none of that $5 billion would be incremental to BPY because we do have our commitment to the global opportunity fund. And so to the extent anything got done through that global opportunity fund, those commitments were already on the books for us. There's not really a new commitment as a result of this.

Mario Saric -- Scotiabank -- Analyst

Got it. Okay. And then maybe a question for Bryan Davis. Just in terms of the IFRS valuation methodology this quarter. Can you highlight kind of the lack of visibility in terms of maybe keeping things where they are, to some extent, like how should we think about the GGP valuation this quarter in terms of, again, lack of visibility versus, call it, remaining high conviction in kind of the long-term value of the portfolio?

Bryan Davis -- Managing Partner, Real Estate

Well, so just overriding theme is that we think all of our properties, Office and Core Retail, are high quality and supported by long-term leases. Hence, the reason why we sort of focused initially this quarter on the impact to short-term cash flows. As Brian indicated, as we begin and conclude our negotiations with the tenants over the next two to three months, we're going to have a good sense as we get into Q2 valuations as to what sort of the actual impact is to near-term cash flows. And similarly, as the economy unfolds, and we get a better insight into the health of our underlying tenants, we'll get a better sense of what the next sort of two to 10 years looks like as it relates to contractual cash flows as well as our ability to lease-up space and lease it up at rental rates.

At the end of the day, we think we have a great, well-positioned portfolio. We know that there's going to be some challenges in the retail industry, but I think a lot of the retailers are going to look to adjust their balance sheet so that they can position themselves to be a profitable business going forward. And we think our malls provide them with the best opportunity to achieve that. And so our expectation is that there will be pressure on valuations, but we don't think the pressure is near what's anticipated by the public markets.

Mario Saric -- Scotiabank -- Analyst

Got it. And I think Brian mentioned there's been no transactions post March 20 to kind of point to, but that there was a proposed merger announced five days after your Q4 results between [Indecipherable]. Would that valuation have impacted your estimates this quarter or is that something that, again, you look to in the next couple of months?

Bryan Davis -- Managing Partner, Real Estate

Sure. As we look at valuation metrics for large transactions, those influence I think -- we reflect on all of that stuff. But I would say that overall, as we mentioned in our scripted remarks, we didn't adjust our discount rates or our terminal rates specific to any market transactions that may have taken place post COVID to the extent that there were any and we'll have to reflect on those as we sort of advance through this experience and into Q2.

Mario Saric -- Scotiabank -- Analyst

Got it. Okay. One last question for me, if I may, just on the distribution. Really quickly, clearly, with stock yielding 14% today, the market is concerned about kind of the sustainability of that distribution, as you pointed out many times before. And today, you've taken a longer term or you take a longer term view on the sustainability of that distribution. So in terms of the crisis that we're in today, the way I read the commentary was that it would take a kind of a prolonged economic contraction or a substantial, let's say, reduction in liquidity in terms of reassessing the distribution. I'm just curious in terms of how you would define a prolonged economic contraction?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yes. So Mario, I think, obviously, it goes to time but also severity, right? So there -- it's a combination of both things. So I would say that our comments around the sustainability of the dividend, our confidence that we're able to continue to pay that dividend are based on our current assumptions around the likely severity and the length of the -- the length of this downturn, which we think -- and I think you can probably gather from overall -- our overall comments what we think that is, which is there's a short sharp impact right now over the next couple of months as a number of our retailers struggle to pay their rent. Everybody else is paying their rent, though. So from a liquidity perspective, that's really where our cash flows are impacted in the short term. And as I said, we do expect that as our shopping centers start to reopen, those collections and numbers will normalize again. So assuming that that occurs that the way we think it will, then there's no real -- we have no liquidity concerns.

Your question is what would cause that to change. Look, a recurrence where every one of our shopping centers get closed down for a longer period of time could have some impact on that, as an example. A second wave later on in the year, those sorts of things might change our view on that. But based on our current projections around timing of reopening, our discussions with the tenants around how long post that reopening it will take before they start to become current on their rent again, as I say, we're not anticipating that that will have any meaningful impact on the distribution.

Mario Saric -- Scotiabank -- Analyst

Okay. That's very helpful. Thank you for the color.

Operator

Thank you. Our next question comes from Neil Downey with RBC Capital Markets. Your line is now open.

Neil Downey -- RBC Capital Markets -- Analyst

Thank you. Good morning. Bryan Davis, I think you made reference to some sensitivities that we may see in some future disclosures. Can you give us just a sense as to what some of those might look like for, say, the Core Retail business, where I think your balance sheet shows $35 billion of property assets? How will you express those sensitivities? And what might they look like?

Bryan Davis -- Managing Partner, Real Estate

Yeah. And without getting into specific numbers, the sensitivity that we're seeing or going to include in our disclosure materials when we file them early next week really relate to what is the impact to values if you see a movement in discount rates by 25 basis points and/or movements in terminal rates by 25 basis points. And if you think about our portfolio, and it's pretty consistent across office and retail. What you see is that if discount rates move by 25 basis points, it impacts values by about 2.5%. If both discount rates and terminal rates move by 25 basis points, it impacts value by about 5%. We're not -- and it's pretty binary. So it goes both ways if discount rates decrease and if discount rates increase, the percentage is consistent. And so that will give you a sense of what ultimately movement may be to the extent that the market would suggest that there is incremental risk over and above the current risk-free rate to suggest that there should be a movement in discount rates upwards or not.

Neil Downey -- RBC Capital Markets -- Analyst

Okay. The climate for borrowing against malls, can you talk a little bit more about that? And I believe the number is that there's $1.6 billion of debt due this year in the Core Retail business, what's the character of that debt, kind of the timing throughout the year, etc.?

Bryan Davis -- Managing Partner, Real Estate

Yeah, sure. So the majority of that debt comes due June, September and December, sort of those three time periods. I'd say probably 60% of it is CMBS type execution and the balance of it was direct with insurance companies and/or banks. As it relates to all of our maturities for 2020, we have been in front of all of our lenders and just requested 12-month extensions to give us sort of an opportunity and, of course, our lenders an opportunity to sort of reflect on what is happening in the market and to give us a time -- a chance for the market and volumes to stabilize.

But the good news with respect to our retail portfolio is these are low-levered malls. These are malls that are -- have LTVs of less than 40%. They're high-quality malls. Brian gave an example of one of them with high occupancy and good average lease life. So we feel comfortable that as the markets stabilize and volume gets worked through, we'll be able to refinance those, taking into consideration that we'll have 12-month extensions to deal with them.

CMBS was a form of refinancing that we had used quite a bit in 2019. That market just recently opened up this week with, I think, its first new issue conduit. But it is not exposing itself yet to hospitality or retail assets. And so it may be an avenue that continues to be a little bit disruptive over the next 12 months. But having said that, insurance market is open for good quality assets and good quality cash flows and banks are open as well. So we feel comfortable that we'll be able to address all of our maturities.

Neil Downey -- RBC Capital Markets -- Analyst

Okay. Thank you for that. You just mentioned the word hospitality assets, which is clearly on my mind as well. I think the NOI last year was $215 million from the hospitality assets. What might the 2020 budget NOI have looked like at the beginning of this year for -- obviously, for the assets you owned at the beginning of this year? And in terms of the short-term impact, i.e., sort of Q2 and maybe Q3, is it possible that those assets actually have an NOI deficit due to the operating leverage in those properties?

Bryan Davis -- Managing Partner, Real Estate

Yeah, Neil. And I'll sort of jump between NOI and FFO. Just to put those numbers you gave in context, we earned about $110 million in FFO from our hospitality business last year. We expected that number to be higher this year -- when we began the year without taking into consideration the impact of the health crisis. As you shift to just profitability, typically, margin on a hotel asset is about 35%. And I'd say in a normal market, you operate a hotel at about 50% occupancy, you can break even. You do have a bit of flexibility definitely in your hospitality property to deal with expenses. And so in a time when you're dealing with less than 50% occupancy, you can adjust your expenses such that breakeven is probably 30% occupancy to 40% occupancy. But if you operate below that, I think, as you indicated, there is a chance that you could run at sort of a negative margin as your fixed costs sort of remain relatively high. So as we look out into the second quarter, and I think I mentioned in my speaking notes, that is one area with most of our hotel properties being closed April and May that may put pressure on our earnings, may ultimately be negative contributions to our earnings.

One thing that we remain hopeful is there's a lot of talk that these properties get back up and open by June. We have an experience with one of our hospitality properties in the Korea market that is already at 50% occupancy and growing. And we do have a majority of our hospitality properties in the leisure sector. And we think that will be one of the quicker sectors that recovers post COVID relative to hospitality properties that cater toward business travel.

So it remains to be seen, but we will have pressure on our earnings definitely for the balance of the year.

Neil Downey -- RBC Capital Markets -- Analyst

Right. Okay. And finally, if I may. I didn't hear you comment specifically on foreign currency movements, and maybe I missed it, but presumably, that had a negative impact on your equity value, which was, as you indicated, $27 billion at March 31. But what was the -- would the net effect of currency have been sort of Q4 to Q1?

Bryan Davis -- Managing Partner, Real Estate

Yeah. Quite significant, as it relates to equity. I think the number, after you take out leverage, would have been in the $500 million negative range. If you look at the continuity that we include on our -- in our supplemental on Page 10, you'll see from a gross perspective, values of our properties were down by $1.7 billion related to -- solely to FX. We financed most of those properties in local currency. So we get the benefit of the liability being mark-to-market as well. And we had hedges that I think we -- you'll see as we show sort of the net exposure to our currencies that we took the opportunity to monetize during the quarter as well as particularly as the pound dipped to a low of $1.18, and we saw the Australian dollar dip below $0.60. And so that provided a little bit of offset to the exposure to equity, but it definitely did have an impact on the $28.52 IFRS per unit that we reported this quarter.

Neil Downey -- RBC Capital Markets -- Analyst

Okay. Yeah. I could see the asset level impact. I was aware of the hedges, but I couldn't appropriately pencil that to the equity exposure. So thank you.

Bryan Davis -- Managing Partner, Real Estate

No problem.

Operator

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

Mark Rothschild -- Canaccord Genuity -- Analyst

Thanks guys. Maybe you can just provide a little more detail on any changes in capital allocation that you're planning over next year as a result of what is going on? I realize that development is delayed slightly, but you're still growing out those projects and you have the commitments to BSREP. So maybe it would be more capex and if you could talk about what the capex budget would be and any changes you would have based on that or anything else?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. So the main place, as I sort of mentioned earlier, that where we've relooked at the capex budget is in relation to some of the retail redevelopment projects. And at the moment, it's really been a -- there's a number of projects that were not in the ground yet that we were not starting. And we said, let's delay the start of those and see how the environment looks like on the other side of this to decide whether we want to proceed with the same project or a modified project or maybe there's a different way to go at it. Or in some cases, we may decide in the new world those are no longer viable and we may cancel them entirely. And -- but I think the vast majority of them will ultimately, like to your question around capital allocation, I think that capital will ultimately get allocated to those same projects. So we don't -- I don't anticipate a big change in our overall capital allocation strategy. As I mentioned on the Office development side, the equity is largely funded in there. We have leases in place on all of these projects and the debt lined up to actually fund the remaining costs. So that will continue on. The investments in the opportunity funds are going to be driven by the pace of investment that we're putting capital to work. And at the moment, with the markets all being largely on hold, the deployment pace within those funds is relatively slow, but I expect that's going to pick up in the second half of the year. And so really, the in-depth study is going to be around retail and some of those projects.

Mark Rothschild -- Canaccord Genuity -- Analyst

Okay. Great. And maybe just one other question. In the letter and based on your comments, it sounds like you guys have a lot of confidence that the markets will open up as far as asset sales over the course of the year. Would you make that comment generally across all asset classes or would that be more specific to certain ones? And how does it relate to your budget and plans for asset sales for the next year?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. So I'd say what it's informed by is conversations that we're having regularly with our institutional investment partners who are calling saying, "Look, I've got capital to put to work. Is there more things we could be doing? What are you seeing for sale?" And so we do see a large pent-up demand on the sidelines waiting for markets to reopen. But I think where a lot of that investment focus is going to be is on very high-quality yield replacements. With the assumption that rates are going to be very close to zero [Phonetic] or lower than many of us had been anticipating, even as recently as six months ago, yield is going to be king. And so I think when you have assets in high-quality markets with long-term leases in place and a lot of that predictability, there's a ton of demand for that. And I think those will be the first things that will sort of reemerge as sale candidates.

As you get further down -- further up the risk spectrum and whether that means moving from those long-term leases to short-term leases like hotels or things that are more directly impacted like retail, that's going to take more time. And I think those institutional investors are reading the same headlines as publican equity investors are reading around future retail and what this means for some of these shopping centers. And so I think they're going to take a more cautious approach to those.

So to your question around asset classes, yes, it's going to depend on the asset class. But I think with office, as we mentioned, our collections are pretty normal -- have been pretty normal, cash flows have held up. And I think that sort of bears out the thesis that this is a pretty safe and stable asset class to invest in. I think multifamily has held up well as well. So there could potentially be a lot of interest in that. Given that -- coming out of the last crisis you saw a lot of increased demand for that product, a lot of people are saying the same thing could happen here. So I think both of those sectors are going to be in demand. Clearly, industrial and logistics continue to be in high demand as well.

Mark Rothschild -- Canaccord Genuity -- Analyst

Maybe just following up quickly on that comment. There's a lot of negative commentary regarding the New York office market. Would it be fair to say you don't agree with that commentary?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

We've never agreed with that commentary. So no question that -- look, if we head into a recession, we have 15% unemployment. It's going to make it more challenging than we had been anticipating the leasing market would be in 2020. But that being said, we -- in our conversations with office tenants, the idea that 50% of office workers are now going to start working from their living rooms is not -- we really don't think that's a big risk. These tenants are being thoughtful about timing of when they return to the office. Frankly, the biggest conversation they're asking now is do we have enough space because, clearly, when people start to come back to work, densities are going to have to be reduced from the trend that we've seen over the last 10 years. And so many of these sort of larger space users are looking around, scrambling around, frankly, for shorter term space that will help them sort of accordion back into their -- into more normal operations. So while there may be some negative impact from a slowdown in business expansion and job losses and that sort of thing, there's a huge counterweight to it, which is we think for those businesses when they do reopen, they're going to need to reduce density, and that's going to drive office demand.

Mark Rothschild -- Canaccord Genuity -- Analyst

Okay. Great. Thank you so much.

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Okay.

Operator

[Operator Instructions] Our next question comes from Dean Wilkinson with CIBC. Your line is now open.

Dean Wilkinson -- CIBC -- Analyst

Thanks. Good morning guys. Most of my questions have been answered. But just coming back to the retail revitalization program and recognizing that it's barely less than 24 hours old, give a sense of what percentage of your tenant base would qualify for that sales threshold and perhaps participation in that program?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

It's not a scientific number, so take this as sort of a rough estimate, but it would be somewhere between two-thirds and three-quarters of them. But if you -- I mean you could do a survey at the university to see how many retailers had greater than $250 million in sales, but that's a fairly large national business, but it doesn't need to be global and international. So that covers the very large proportion of our tenants.

Dean Wilkinson -- CIBC -- Analyst

It's the majority of. And would those generally be tenants that would already be in that 20% of rent has collected bucket or would it sort of be spread across?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

My guess is if they were in that 20% bucket, they don't need the capital.

Dean Wilkinson -- CIBC -- Analyst

They don't need the money.

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. And the demand for the capital is going to come from the 80% who didn't make the rent payments.

Dean Wilkinson -- CIBC -- Analyst

Yeah. That makes sense. And then just -- I know it's 2,400 individual conversations. But as an average, what are the terms you're looking at in sort of your deferral agreements? Like is it a collection over between now and the end of the year? Is it one year? Is it sort of the remaining lease term? What would sort of be the general goalpost around when you're looking to sort of recover that? It's maybe two, maybe three months of rental carry.

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. It's early to comment on where the likely outcomes are. I can tell you that where we're starting from is as shortest period as possible and where the tenants are starting from is the longest period as possible. So my expectation is, though, for the most part, those deferrals likely get repaid over the first 12 months post reopening.

Dean Wilkinson -- CIBC -- Analyst

Okay. That makes sense. That's it for me. Thanks, guys. I'll hand it back.

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Okay. Thanks, Dean.

Operator

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

Sheila McGrath -- Evercore ISI -- Analyst

Yes, Brian, I just wondered if you could comment on the fact that there seem to be more elevated bankruptcies in retailers with Neiman's, J.Crew. Do you have any sense right now if maybe this shutting the debt makes them stronger and it doesn't include a lot of store closings or what's your view on how store closings will trend for your portfolio?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. So I won't comment in any name specifically, but one of the things I do think that is going to come out of this -- out of this whole situation with the shutdown is what we're going to see is what all of us expected to play out over the next five to 10 years is going to play out over the next one to two years. And what that means is retailers with weak balance sheets or weak business models are either going to file for bankruptcy and liquidate or ultimately restructure their balance sheets and sort of emerge in a more sustainable fashion. And weak retail real estate or poorly located or low-quality retail real estate that might have been able to hang around for a longer period of time will quickly see its values diminish and possibly something different happening with it, meaning a lot of the repurposing, one of the big hold-ups to some of this lower quality retail real estate being repurposed into something else, was that it's still had a higher and better use as sort of low-quality retail real estate.

So I think bringing all of this forward is going to allow a lot of that to happen, including store closures over a much shorter period of time. That's good and that's bad. For groups like ourselves that own very high-quality centers in great locations that were always going to be the survivor in that situation, it's fantastic because it's bringing forward that consolidation. And ultimately, the strong will be stronger. There will be more demand from the tenants. But in the short term, it's going to cause a lot of disruption because while we would like to take back as many of these department store boxes and repurpose them into something else over a period of time, you don't want to get too many of them back at the same time because there is capital and earnings impact associated with that. So I think over the next 12 to 18 months, it's going to be a bumpy period for all of us. But when we come through the other side of it, both we and the retailers that remain are going to be in a much stronger position. And I think we'll get back to what we expect a long-term growth of this sector to be.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. And then just real quick on Manhattan West -- 2 Manhattan West, I guess. Is construction stopped on that? And just on leasing discussions, your prelease [Phonetic] is up 25% and just comment on leasing discussions at that property.

Ric Clark -- Managing Partner, Real Estate

Yeah. Hi, Sheila. It's Ric. So as you can imagine, most tenants at the moment are focused on what they need to do to get back into their offices. So leasing discussions are slow. Having said that, our pipeline still remains pretty strong and we expect in the near term to start picking up leasing discussions again. So we've got a lot of time to go and 25% lease to 2 Manhattan West will retain our confidence. And just today, we got the go ahead to recommence construction in that tower. So we're not that far behind schedule.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Mario Saric with Scotiabank. Your line is now open.

Mario Saric -- Scotiabank -- Analyst

Hi. Thanks for taking the follow-up. Just one real question on the office market. And just coming back to the work from home versus the lower square footage per employee equation. Just curious to hear whether internally, you have any thoughts on what percentage of previous tenants target work from home permanently coming out of this? I think, Brian, you mentioned 50% is not what you're seeing or hearing. That's a big stretch, but there's a lot of negative headlines out there. So just curious to hear kind of what you think that percentage might be and whether you do think that the incremental demand from less density could outstrip the lost demand from people working from home over the long term?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. So look, I can give you an opinion. I'm not sure anybody really knows the answer to that, nor will we know it for a year or two? I think we've seen situations in the past where there's been a disruption like this and people have debated whole new models. And ultimately, I think what it comes back to is people like working in an office. They like having the collaboration, they like having the ability for their teams to interact with one another. And you just -- and as much as all of us are surprised at the productivity of Zoom meetings and your ability to get things done over this short period of time, the vast majority of the tenants and employers that we're talking to are anxious to get their people back in the office and interacting. So while there may be differences in how -- maybe as an example, how many days of the week that people are in the office and they may allow a little bit more flexibility we don't think it's a dramatic shift in -- suddenly, there's no -- there isn't a lot of demand for office.

I think in the short term, a lot of people are going to experiment with it. They're going to look at different models as we've seen in the past. And so there could be -- as I said, there could be some negative impact as a result of that, compounded by potential economic slowdown. But we just don't see it being a, I'll say, a structural shift in the office market longer term.

Mario Saric -- Scotiabank -- Analyst

Got it. Okay. Well, I'm not sure if you heard my three year old screaming in the background during one of the questions. But if you did, that would attest to the notion that some people do want to go back to work in the office.

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

We can all relate.

Operator

Thank you. Our next question comes from Neil Downey with RBC Capital Markets. Your line is now open.

Neil Downey -- RBC Capital Markets -- Analyst

Hi. Thank you. Hopefully, maybe the last question on the Brookfield, revitalization -- retail revitalization program given this is a BPY call. But Brian Kingston, can you talk a little bit about the nature of how investments might be made? Is this akin to like a bridge lending fund or will it make preferred equity investments or some common equity investments or what will that look like to your knowledge?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Yeah. It will be all of the above, and it's going to depend on the situation. And I think the -- really, that is sort of the toolkit that we're hoping to have these conversations with retailers about is what is it that they need? Because there are some fantastic businesses out there that know that this is just a short-term cash impact, and they may be reluctant to cede control of their business. They're not looking for somebody to buy the whole business, but they need some short-term financing. So perhaps a bridge loan would be appropriate for them.

In other cases, they are looking for more longer term permanent capital and so we can provide common equity. And then -- and of course, there's everything in between. So I think there is no one size fits all or it's not targeting a particular one. I think it's going to depend on each of the individual retailers -- obviously, their situation and their desire, but also our preferred investment structure. There will be certain things where we'll say may not be willing to take risk on the common equity, but we are willing to lend against certain assets that they have, and so it may end up there instead. But it's going to span the whole gamut.Yeah.

Neil Downey -- RBC Capital Markets -- Analyst

Okay. And the second follow-up question, really relates to BPYU. Can you give us a sense as to what the liquidity numbers are within BPYU at quarter end? And are there any governors or limitations, etc., on the ability to effectively drop down additional liquidity into that entity?

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

No. So you shouldn't think of it as a separate entity or at least not in the sense that there's any sort of governors or limitations on our ability to move capital among the businesses. It is effectively BPY. And it's all one company. And so when you think about our liquidity, you shouldn't put boxes around it in particular areas. The entire balance sheet of the Company is available to the extent that we need it. So I think you're -- the -- yeah, the way it is structured up, there's no limitations on what we do.

Neil Downey -- RBC Capital Markets -- Analyst

Okay. Thank you.

Operator

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

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Okay. Thank you, Daniel, and thank you, everyone, for joining the call today. We hope all of you remain safe and healthy and look forward to providing you an update again next quarter. Thanks for joining the call today.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Matt Cherry -- Senior Vice President, Investor Relations

Brian Kingston -- Managing Partner and Chief Executive Offiicer Real Estate

Bryan Davis -- Managing Partner, Real Estate

Ric Clark -- Managing Partner, Real Estate

Sheila McGrath -- Evercore ISI -- Analyst

Mario Saric -- Scotiabank -- Analyst

Neil Downey -- RBC Capital Markets -- Analyst

Mark Rothschild -- Canaccord Genuity -- Analyst

Dean Wilkinson -- CIBC -- Analyst

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