Brookfield Property Partners LP (BPY) Q4 2020 Earnings Call Transcript

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Brookfield Property Partners LP (BPY)
Q4 2020 Earnings Call
Feb 2, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Welcome to the Brookfield Property Partners Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions]

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, Liz. 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.

We acknowledge that on January 4, Brookfield Property Partners received an offer from Brookfield Asset Management to acquire the units of BPY it didn't already own for approximately $5.9 billion. A special committee of BPY's independent directors has convened, have hired independent legal and financial advisors and collectively they are currently considering the merits of the proposal. BPY unitholders are not required to take any action at this time. We anticipate being able to provide further information to the market later this quarter.

With that said, the purpose of today's conference call is to discuss BPY's Q4 and full year 2020 financial and operational results. And accordingly, we ask that any questions from analysts pertain solely to that subject matter.

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

Brian Kingston -- Managing Partner and Chief Executive Officer

Thank you, Matt, and good morning, everyone. We hope everyone listening on the call today has remain healthy since our last update in November. With me on the call are Bryan Davis, our CFO; and Jared Chupaila, the CEO of our Retail Business.

And looking at the fourth quarter, we were encouraged by the return of private market real estate investment activity, which picked up significantly. Institutional investors continue to rotate capital from fixed income investments into real assets that generate long-term derisked yield. Following the sales of One London Wall Place and our self-storage business, as discussed last quarter, we've recently went into contract to sell our U.S. life sciences office portfolio. This agreement followed a very competitive bidding process that resulted in extremely strong execution and pricing.

In Brazil, we sold two Sao Paulo office towers, totaling 1 million square feet at a blended cap rate of 5.5%, which is very low in historic terms for the Brazilian market. These sales were prime examples of how our operations oriented approach leads to outperformance. We acquired these two buildings approximately four years ago when they were 68% and 0% leased respectively. And as a result of our strong operating capabilities and execution, occupancy in those two towers now stand at 92% and 100% with long-term leases in place with high quality tenants at both properties. The sale of these assets will return approximately $50 million of net proceeds to BPY.

And looking at our core operating portfolios, rent collection from our office tenants remained at normal levels during the quarter, even as physical occupancy continues to lag in many of our U.S. and North American operations -- operating markets. We're encouraged by markets such as China, South Korea and the Middle East, which have seen physical occupancy revert to normal. In Dubai, for example, rapid testing has been rolled out broadly and hotels restaurants, stores and offices are all open without restriction. In-person business meetings are once again the norm there. At our newly developed asset in Dubai, ICD Brookfield Place, we've recently signed office leases totaling 80,000 square feet with tenants including UBS and Dubai Aerospace Enterprise.

In London, we signed a 15-year 250,000 square foot lease with Latham & Watkins to anchor One Leadenhall, our newest office development, securing a strong tenant for about 60% of that tower. We believe this noticeable increase in leasing activity is a strong indicator of economic confidence and a desire for companies to return to innovative workspaces. Over the coming quarters, as COVID-19 vaccines become more widely available, we expect office utilization will begin to return to normal.

Collections in our retail portfolio continued to improve as retailers have adjusted to the new normal as well. In the fourth quarter, we collected more than 80% of our billings, and importantly, continued to reach settlement agreements with our tenants regarding outstanding arrears. As a result of those negotiations, we ended the year with 85% of our outstanding arrears from the second and third quarter in some form of agreement.

While shopper footfall in our malls has not yet recovered to historic levels, all of our centers remain open and our key tenants showed resilience through the holiday season with many reporting 2020 sales figures that compare favorably to 2019 holiday sales. A silver lining to the restrictions put in place during the pandemic is that there is significant pent-up demand for consumer spending given the savings that people have accumulated over the past nine months.

In addition, the $900 billion stimulus bill approved by Congress in December will help both consumers and retailers alike. The proliferation of one channel e-commerce, centered around using the store not only as a point of sale, but also as a distribution and return center continues to benefit our mall fleet. Consumer use of Buy Online Pickup In Store has grown approximately 500% since the beginning of the pandemic. Dick's Sporting Goods recently reported that stores fulfilled 70% of their online sales and contributed 90% of their quarterly sales growth.

While the showroom area of the store may shrink, retailers are using more space for inventory, returns and fulfillment, making the distribution channel itself less relevant, but the location of its physical real estate more important than ever. Retailers have quickly realized that overall sales volume can benefit from wider profit margins when maximizing a one channel strategy.

With that, I'll now turn the call over to Bryan Davis for the detailed financial report.

Bryan Davis -- Managing Partner, Real Estate and Chief Financial Officer

Thank you, Brian. During the fourth quarter of 2020, BPY earned company FFO and realized gains of $287 million or $0.30 per unit. This compares with $459 million or $0.48 per unit for the same period in 2019. Net income attributable to unitholders in the current quarter was a loss of $390 million or $0.43 per unit compared to income of $1 billion or $1.07 per unit in the prior year.

In the current quarter, our core office business earned $138 million of company FFO compared to $185 million earned in the same period in the prior year, a variance of $47 million. $25 million of that variance relates to higher transaction income earned last year. In the prior year we benefited from $26 million in income earned on condominium deliveries at our Principal Place and Southbank properties in London. We also earned $12 million in income on the monetization of tax credits associated with affordable units at The Eugene in New York. And in addition to that, we had $7 million in other investment income.

In the current quarter, our only transaction income related to the continued delivery of 210 units to their owners at our condo projects in London, Southbank and 10 Park Drive, which earned us $23 million. Of our active condo projects in London, which totaled 1,605 units, we have sold 1,336 units or 83% and we have delivered 750 units or 47%. We are targeting to both sell and deliver the remaining units in 2021. And as such, we'll recognize the remaining profits associated with these projects.

The balance of the variance over the prior period is largely due to the ongoing impact of the general economic slowdown and partial shutdowns that we continue to experience in certain markets. We estimate the direct impact to be about $13 million this quarter, which is in line with the third quarter and an improvement over the second quarter. Of the impact, $8 million represents lower than normal parking volumes and $5 million represents higher credit loss reserves and lower retail rents. Indirectly, we are also being impacted by lower leasing volumes which has caused occupancy on a same-store basis to dip from 92.7% to 90.9%.

Lastly, we had $6 million in incremental lease termination income earned in the prior year. The fair values of our office properties were largely unchanged during the quarter as cash flow projections and valuation metrics remained steady. Further evidencing our valuation process, we've had a few live examples of strong pricing for high quality well located and well leased office assets, as evidenced by the sale of London Wall Place, two of our asset -- office assets in the Brazilian market and on some recent property level financings, all of which Brian referenced in his remarks.

Our core retail business generated company FFO of $118 million for the current quarter compared with $217 million earned in 2019. Although, we saw many signs of positive improvements in our retail operations over this holiday season, as Brian highlighted and as evidenced by a 22% increase in company FFO over last quarter, our results continue to be impacted by the pandemic, which contributed to a decline in mall revenues fee income and an increase in credit loss reserves.

Net operating income for this business was $356 million compared with $466 million earned in the prior year. The major variances include a reduction in overage rents, percent in lieu rents and business development income of $47 million, an increase in credit loss reserves of $32 million and the amortization of agreed upon abatements and associated renegotiation of lease terms and payment plans of $16 million and the continued impact of bankruptcies and related co-tenancy claims of $16 million.

Fee income also declined by $15 million due to lower leasing volumes, property revenues and joint venture fees. Partially offsetting these negative variances, we did benefit from a reduction in property level operating costs, general administration expenses to reflect the cost control efforts we focused on during the year and lower interest expense.

Fair values for our retail properties declined by $600 million during the quarter as we revised cash flows and risk profile for certain properties most impacted by the events of this past year. With the vast majority of our rents being collected and the majority of our tenant negotiations completed and having extended or refinanced all of our 2020 debt maturities, we are well positioned for 2021 as the operating environment continues to improve.

And lastly, our LP Investment business generated company FFO and realized gains of $138 million this quarter compared to $150 million in the comparable period in 2019. Results in the current quarter were negatively impacted by a year-over-year decrease in earnings from our hospitality investments of $50 million due to hotel closures and largely concentrated in our investment in Center Parcs, which was required to close during the quarter and the Atlantis, which incurred incremental costs as a result of its reopening this quarter.

Realized gains in this business were $120 million as we were able to execute on a number of asset sales in the quarter, including our U.S. self-storage business, the two office assets in Brazil and the sale of a triple net lease property portfolio. In addition to these realized gains, we had $70 million in unrealized fair value gains on our LP Investments this quarter.

During the quarter, we did invest a further $125 million to fund capital calls related to our existing fund commitments. But as mentioned in previous calls, we expect to generate cash from these LP Investments in the near-term as distributions are made from recent and planned transaction activity. The projected returns for our LP Investments continue to be strong. On a gross basis, BSREP I is projecting a 23% IRR and a 2.6 times multiple of capital. BSREP II, a 16% IRR and a two times multiple of capital; and the third fund, BSREP III, a 19% IRR and a two times multiple of capital.

We ended this quarter with almost $5.5 billion of group wide liquidity, which positions us well to continue to support our existing assets, fund our LP commitments and pursue opportunities for growth. As a result, our board of directors has declared a quarterly distribution on our LP units for $0.3325 per unit, which will be payable on March 31 2021 to unitholders of record at the close of business on February 26, 2021.

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

Brian Kingston -- Managing Partner and Chief Executive Officer

Thank you, Bryan. As Bryan mentioned, we completed several large asset refinancings at attractive borrowing terms during the fourth quarter, including two in our New York office portfolio, One New York Plaza and the Grace Building. In aggregate, these two new mortgages totaled more than $2 billion at an average interest rate below 3%. And importantly, we generated over $400 million of net proceeds refinancing these assets.

In addition, we refinanced our extended mortgage maturities for an average of three years on five core retail assets, totaling approximately $900 million at a blended interest rate of just under 4%. In summarizing some of our recent ESG initiatives, we continue to focus and invest in creating healthy and safe environment for our employees and our tenants. These include enhancements to air quality, filtration and circulation in addition to sanitation and security protocols.

In our North American portfolio, we're pursuing a third-party verified WELL health safety rating for all of our buildings to ensure that we're at the forefront of the industry in a post-pandemic environment. Since the onset of COVID-19, nearly a year ago, we've encouraged our management teams to find creative ways to support their local communities during this unprecedented time of need. At the beginning of the pandemic, we offered many of our shopping center parking lots as mobile testing facilities and our hotels as kitchens for food banks and distribution centers.

This month with the rollout of vaccines under way, we're now pleased to be providing space for vaccine clinics at several of our malls, including Sooner, Lansing, Chula Vista, Barnes Crossing, Washington Park Mall. And we'll soon be opening additional clinics at Stonebriar Center and are in negotiations to open a further -- open clinics at a further 20 of our shopping centers.

So before opening up the call for questions and answers, I'd like to briefly acknowledge one of our leaders who will be leaving the organization. As many of you know, Ric Clark has been instrumental in building Brookfield's property business over the past number of decades. He led the company's response to the tragic events of September 11, 2001 and became a trusted leader and visionary in the lower Manhattan business community. In later years the oversaw Brookfield's real estate expansion beyond North America and served as BPY's Chief Executive Officer upon creation of the company in 2013. He has served as our Chairman since 2015. It's with the utmost gratitude that we wish him the best of luck in all his future endeavors.

So as we turn the page on 2020, a year we collectively will never forget, we wish you continued health and safety and appreciate your continued interest in investment in Brookfield Property Partners.

So with those as our prepared remarks, we'd be happy to take any questions from our analysts that are on the line.

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

Hi, guys. Good morning. Brian, I was wondering if you could comment on the retail portfolio, how fourth quarter results came in versus your expectations? And just any insights you might give us on how you -- how things are progressing so far in 2021 and your outlook in terms of collections and bankruptcies?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah. So I'll maybe -- I'll let Jerry chime in in a second on our tenants and how businesses are performing. I would say that the -- our expectations both with respect to collections and settlements and the outcome of the settlement negotiations with our tenants is largely in line with what we've been certainly forecasting in our own business planning and what we've been expecting since really the middle of last year. So in fact, some of those negotiations concluded a little quicker than we had otherwise anticipated. So I'd say, it's neutral to positive on that front.

As far as outlook for 2021, I'm going to let Jared speak to foot traffic in the centers and how we see that rolling out. Jared?

Jared Chupaila -- Chief Executive Officer, Retail Business

Sure. So Sheila just to follow-up on what Brian stated, he mentioned, collections in the prepared remarks. Since the close of the fourth quarter and throughout January, those collection discussions and resolution discussions with our retailers have improved. We are now greater than 90% resolved across the portfolio and continue to make headway with some of our most important retailers.

From a bankruptcy standpoint, I think as we look at our watchlist tenants throughout the upcoming year, there's still some noise out there. But I think the size of the potential bankruptcies for the most part are in our view will be smaller than what we experienced in 2020. The one potential exception to that would be potentially for the players in the entertainment side of the business, theater and others in family entertainment as we watch them through the remainder of 2021 and the reopening of the country and social activity.

With regards to traffic at the centers, we continue to see improvement. January actually closed as a higher traffic overall across the portfolio since the pandemic began back in March. So we're continuing to see a return post-holiday to footfall and traffic through the centers. We're now seeing traffic north of 70% on average and continuing to grow.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. And then Brian and/or Jared, maybe you could explain more about your vision or thoughts on the thing that you mentioned in your letter, the One Channel commerce. How do you think retailers will perform under this concept? Will they be able to pay the same rents as they did previously with less showroom space? And just how do you think retailers will desire a mall location versus other locations in this transition?

Jared Chupaila -- Chief Executive Officer, Retail Business

I'll take that, Sheila. So just to sort of set the stage on One Channel. When we speak of that, we're speaking of retailers that have merged their digital and physical owned assets and are extending them to third-party platforms, such as social media, which really means they're presenting a seamless experience and brand representation for the consumer. And what we feel has been proven through the pandemic is those retailers that were already in a place to operate in a One Channel environment, really saw success and continued success in mitigation through a difficult year.

Our view of value is that One Channel retail strategy, we would argue, actually improves value for brick-and-mortar location. As it's the closest touch point to the consumer and is enabling, Buy Online Pickup In Store, Curbside Pickup and more recently an increase in Buy Online Ship From Store where we're seeing an increase in the use of stores as micro-fulfillment centers.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. And then just quickly on office. Brian, you mentioned a lease in London bringing a development to 60% pre-leased and one in Dubai. Just wondered if you could give us a little more information with -- were these two leases under negotiations pre-pandemic or just your thoughts on these two transactions?

Brian Kingston -- Managing Partner and Chief Executive Officer

No. The negotiations really took place over the course of the second half of last year. I suspect both of these tenants may have been in the market looking for space pre-pandemic, but really our engagement with them was in the latter half of 2020. So these I would consider fully negotiated under current circumstances.

Sheila McGrath -- Evercore ISI -- Analyst

And did the rents come out where you had hoped or?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah, yeah. So Dubai was a little above what would have been underwritten for that space four years ago when we started construction. And for London, this was an office building that was not yet under construction. And so the rents hit our requirements for our feasibility to kick the rent off. So the good news with that one was we didn't need to be a price taker. We would have just not built the building if we weren't hitting the rents we wanted and we did. So it allowed us to kick that development off.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. I'll get back in the line.

Operator

Our next question comes from Mario Saric with Scotiabank.

Mario Saric -- Scotiabank -- Analyst

Hi. Thank you. Good morning. Maybe just coming back to the One Channel concept on the retail side. How -- internally, how do you think about kind of the cost delta between the tenant and dealing with the Amazons of the world in terms of distribution versus creating mini fulfillment centers within the mall? So how would the charge relate to in-place rent that those tenants are paying today? I'm just trying to get a sense of how we could maybe in terms of redeveloping that space?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah. Look, I think, Mario, your question is really centered around if this is state that have previously been taken in warehouses, how does that rent compare to what we would expect to collect in a mall. And what we've really seen over the last couple of years is a convergence between those two numbers, frankly. So shopping centers sit in close proximity to the end customers. Meaning they have a significant transportation advantage over warehouses, which are generally on other than last-mile distribution centers on outparcels on the edge of cities. So there's higher transportation costs associated with it. And so you've got to factor both of those things into it.

And so if you actually look at where rents on last-mile distribution facilities on -- in inner city locations relative to our typical retail rents, the delta is not that great anymore. And so what that means is, when these retailers are looking at putting shared fulfillment centers or taking additional space within a shopping center for this fulfillment through One Channel. The rents we're able to achieve there are pretty close to what we've been achieving. There's not a dramatic change.

And oftentimes for these fulfillment centers, they're in I'll say the lower value ends of the malls whether that's an old department store box or otherwise it was not your prime customer-facing areas of the mall. And so being able to utilize those underutilized areas is actually accretive. So from our perspective, the economics of putting this shared fulfillment or evolving our centers to be more directly facing on One Channel is net positive economic on the rents.

Mario Saric -- Scotiabank -- Analyst

Got it. And just out of curiosity like what would that delta have been let's say five years ago? How much are they compressed?

Brian Kingston -- Managing Partner and Chief Executive Officer

I mean, look, it obviously depends which market you're in, but warehouse rents, industrial warehouse rents would have been 50% of typical retail. And today they're probably 85%-ish. That's a very broad general statement, but just to give you a sense for overall movement.

Mario Saric -- Scotiabank -- Analyst

Okay. I appreciate that. That's great. And then just maybe sticking to retail, but on the capital recycling -- sorry you just closed your $362 million of core retail assets held for sale, which is only about 1% of the portfolio, but I thought it was interesting to see the number there. Can you highlight how many malls of that may be? How the average tenant sales per square foot for those malls may compared to the broader portfolio? And then in terms of the writedown that you took on the retail assets this quarter, how would the percentage writedown on those malls compared to the broader writedown you took on the portfolio?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah. So the answer on the disposition is, probably not going to give you the answer you're looking for. That was actually a sale of a shopping center in Brazil. So I can give you the metrics for it, but I think you're trying to take that and triangulate it across the broader U.S. portfolio and they're obviously quite different metrics. So that number is skewed by one large asset sale in Brazil, which was at a sub 6% cap rate. And I can get you the dollars per square foot in a sec, but it doesn't exactly translate to the rest of the portfolio.

I'd say in general on the valuations, the $600 million impact that we -- that came through not surprisingly was disproportionately on the lower 50% of the portfolio relative to the upper half. So meaning shopping centers with sales below $750 a square foot would have been the bulk of where that writedown happened.

Mario Saric -- Scotiabank -- Analyst

Got it. Okay. And then just on the distribution side, BPY, I think has been targeting kind of $1 billion to $2 billion of distributions equity value per year. What's your sense in terms of what could be accomplished in 2021 given some of the commentary that the private market seems to be picking up? And whatever that answer is whether it's going out to two or one to two, any sense of the share between office retail and LP investments for the year?

Brian Kingston -- Managing Partner and Chief Executive Officer

I'd say we had a loss six months or so in 2020 from a transaction volume perspective, which I think will get made up over the course of 2021. So if you look on a combined basis across the two years, it should average out to what we normally expect, which would tell you 2021 is going to be a pretty busy year. I do think as we mentioned and we've sort of highlighted in our comments a couple of times, there's a tremendous amount of demand for long lease stabilized assets that have a lot of predictability to them. And so we've got brand new office buildings that we've developed in a number of places around the world. I think those are high on the list of likely disposition candidates.

I think shopping centers remain a challenging story. However, the weight of capital is inevitably going to bring people back around to once they have realized that the -- for these high quality shopping centers the cash flow is more secure and they feel like the worst is behind them. I do think there will be some return there. But is that 2021? Is that 2022? I don't know. So it's possible that that would be -- that's certainly less certain. And then within our LP investments, we have a number of portfolio companies or large scale assets that are on the block to be sold this year and I think they're going to trade very well.

Mario Saric -- Scotiabank -- Analyst

Okay. Thank you. I'll turn it back.

Operator

Our next question comes from Sam Damiani with TD Securities.

Sam Damiani -- TD Securities -- Analyst

Thanks, and good morning. I wonder if you could go into a little bit of detail on what's going on the office leasing front, specifically, in North America where the bulk of the occupancy drop occurred in 2020? Is most of this drop as a result of tenants making physical changes to their premises or is it just natural burn-off of leases in a weak economy? Are you -- like what evidence, I guess, are you seeing of the pandemic actually having impact on people's long-term plans with their space needs?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah. So the drop in occupancy -- so lease is expiring and not being renewed. In most cases were tenants that were consolidating space elsewhere was probably under way anyway. So like, one I'm thinking in particular a large bank here in at Brookfield Place had been consolidating their space into a different location and really had been running the lease out here.

So as opposed to it being pandemic-driven space consolidation, this was just more natural part of their lend. The offset to that or the big impact of the current crisis is just leasing -- new leasing or expansion, as you would expect, is virtually non-existent at the moment. And so when we do have a situation like that where space doesn't get renewed, we're not terribly active on the new leasing front. Most of the new leasing, to the extent that we did any this quarter, was renewals and some small expansions. So it's a very quiet on the demand side. I'd say for the most part the leasing that we are doing is rollover.

We're not seeing dramatic -- I think your question is around, are we seeing dramatic shifts in people's decisions around space at the moment? Not really. I think a lot of people are thinking about it, but they don't know whether they need less space or more space. And so as a result, if they don't need to make a decision they're choosing not to. And so that's really the inactivity that you're seeing here.

Sam Damiani -- TD Securities -- Analyst

So the drop in occupancy last year would be kind of as expected if you simply turned off the top of new leasing? And in other words, just the natural -- just the sort of natural fall off and not the offsetting natural...

Brian Kingston -- Managing Partner and Chief Executive Officer

That's right. There wasn't any tenants we lost that we probably wouldn't have expected even pre-pandemic that they were going to move out, we would have just expected we could have relet that space by now.

Sam Damiani -- TD Securities -- Analyst

Right. And is there anything you can share in terms of your discussions with tenants that might have leases coming up over the next one, two, three years in terms of -- like, is there any hint of any changes in plans as a result of the pandemic?

Brian Kingston -- Managing Partner and Chief Executive Officer

No. As I said, I think, a lot of them are thinking through what reopening looks like. I think there's two offsetting challenges for them. One is, I think, everybody agrees they're going to need more space -- for the most part going to need more space per person, which would lend you toward maybe, we need to take on more space, certainly in the short-term.

The offset to that is, as they think about having more either remote work or different locations or in some cases some -- a bit more of a rotational workforce, they may have fewer people in the office on any given day. So while they may need more space per person, and so those two things obviously offset one another. And at the moment, I think, as I say, a lot of them are trying to keep every -- or trying to keep their options open.

And so that means, when we do have renewals, lots of them are looking for shorter term renewals until there's a bit more clarity on this or -- and nobody seems to be making large decisions around the overall direction of the business one way or the other, until they actually get people back in the office and feel how it's -- see how it's going to work.

Sam Damiani -- TD Securities -- Analyst

Got it. And just finally, you mentioned some planned disposition activity in the coming year or so. Would you care to comment specifically on Bay Adelaide North?

Brian Kingston -- Managing Partner and Chief Executive Officer

No. I think, look, it's in the market. I think everybody knows we had been marketing it. I think we'll have more to report on that next quarter. But it's exactly what I was describing earlier, which is a brand new, in fact, not even completed yet asset with a high quality long-term lease in place. It's the type of thing that's highly sought after at the moment.

Sam Damiani -- TD Securities -- Analyst

Perfect. I'll turn it back. Thank you.

Brian Kingston -- Managing Partner and Chief Executive Officer

Okay.

Operator

[Operator Instructions] We have a follow-up question from Sheila McGrath with Evercore.

Sheila McGrath -- Evercore ISI -- Analyst

Yes. Just back to the retail assets the non-recourse debt is definitely a risk mitigator. I did see that you were electing to give back an asset, I think in Georgia. What are your plans with like the bottom tier of retail assets in the portfolio? And have there been other than giving back an asset have you had many opportunities to buy back the note at a discount?

Bryan Davis -- Managing Partner, Real Estate and Chief Financial Officer

Yeah. Sheila, it's Bryan. I think we've reported in past calls that there are about say 20 or so malls in our core retail portfolio where our value is equivalent to the amount of debt associated with it. And as a result, we're in negotiations typically with the servicer because in most cases their CMBS to see what our options are. And those options include in cases where the mall isn't performing well, it's to settle either a deed in lieu or for closure or in the case where they're quality B-malls or they're in markets and they're well-positioned or they have opportunities for mixed use, whether we can achieve some sort of loan modification that can allow us to inject incremental capital, or ultimately buy back at a discount.

I'd say that we were actively in negotiation on all of these properties. The process is a little bit slow. So far we have been successful in negotiating a couple of assets where we've settled for deed in lieu, which we described. And we've also negotiated in one instance a long-term extension on the underlying debt. But there are opportunities and we're seeking to see what we can do in order to modify the existing loans so that we can pursue some sort of accretive opportunity for BPY.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. And then just curious, Brian, on your perspective when you mentioned that things were opening up in I think you said China and Korea and Dubai. Just in terms of the U.S. and the lockdowns being more restrictive in Manhattan and California. Just wondering if you're having any dialogues with local government to try to get these cities to open back up, and just your thoughts there?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah, absolutely. We spend a lot of time with local government and agency. I think wanting to be thoughtful about how you do it safely, but trying to emphasize with all of them the importance of getting people back to work. And getting them back into the -- and not just the importance to us, but the importance to the economy generally and all of these businesses that rely on people being in offices whether that's restaurants or other service providers.

And in a lot of these places these restrictions are having a huge impact on all those businesses. And so governments are, obviously, scrambling around trying to figure out how best to do that. We have -- in our own office, we have about 85% of our people here in the office every day. We've produced a white paper based on how we did that. We've been highly successful in having that many people here in the office working on a long-term basis really since last June. And a lot of the government and other tenants are trying to take some of that learning and use it.

In addition, as I mentioned, we're providing space in our buildings for testing. We'll provide space for vaccinations when that time comes and we've been working very closely with local and state governments here in the U.S. as well as in Canada on those reopening plans. But obviously, we're just sort of -- we're one voice. There's a lot of moving pieces here.

Sheila McGrath -- Evercore ISI -- Analyst

Okay. Thank you.

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah.

Operator

We have a follow-up question from the line of Mario Saric with Scotiabank.

Mario Saric -- Scotiabank -- Analyst

Hi. Thank you. So two more quick ones for me; one on office, one on retail. Maybe I'll start with the office. In the past couple of years, I know we've talked about broader occupancy target of 94% to 95%, which is kind of the historical average that BPO had operated at. Given the pandemic, is that just simply pushed out a couple of years, the valuation that you're disclosing haven't necessarily changed on the office assets that probably gone up on the margin. So just curious about whether you still think like 94% to 95% structural office occupancy is achievable? And if so, how long do you think it may take to get there relative to 91% today?

Brian Kingston -- Managing Partner and Chief Executive Officer

Yeah. No look the short answer is, we don't think anything structural has changed and that that is still the -- that should be the normalized occupancy level for a portfolio like this, office portfolio like this going forward. As to when that's going to happen, I mean, you tell me when the vaccine gets rolled out and people get back to work and I could answer the question. But I think we are hopeful that we are already seeing early green shoots of that confidence that people are now seeing at least there is a vaccine. It is getting rolled out. Maybe it's not as quick as everyone would like it to be, but there is an end in sight. And so therefore, a lot of these companies who up until now have been able to sort of kick the can and say, well, we'll just -- we'll wait another six months and figure it out. A lot of them now are saying, well, that time is coming and we do need to start thinking about all this.

And so that bodes well for activity to get back at it. But I think we all need to recognize as well. When we do -- everybody does come back to work, we are still dealing with a pretty challenging economic environment like you would typically see in a market lull. The net positive is, we don't have a lot of oversupply like we have in past cycles. So I think our product is generally at the newer end in all of the markets that we're in, which should be in higher demand, say relative to older more commodity stock in a lot of these places that should bode well for our leasing, but it's going to take time. And so I think pre-pandemic, we would have thought toward the end of this year, we would have been getting back to that more stabilized number. It's probably been pushed out a year or two.

Mario Saric -- Scotiabank -- Analyst

Got it. Okay. And then just on the core retail, maybe a question for Bryan Davis. There's a large step-up in the straight line in that this quarter from $15 million to $55 million. Can you tie that into the matter for discussions and how you see that $55 million trending over time over the next six to 18 months in terms of going into cash NOI?

Bryan Davis -- Managing Partner, Real Estate and Chief Financial Officer

Yeah. Specific to the abatement discussions, I think we had guided in the past where we think between sort of 25% and 30% of one quarter worth of rent build revenues we'll end up abating, i.e. meaning we're never going to collect that rent. Abating as part of a negotiation of their underlying lease terms. Based on the negotiations that we've completed to date, which Jared said, are up to 90% that's the right number. That translates sort of on gross rents of say a little over $200 million, maybe $200 million to $225 million, which means that if we amortize that over the life of -- the average life of the lease and the lease life is going to be a little bit shorter because it's going to include some business development type or kiosk type leases, which are shorter term in nature. And you're probably looking at $20 million to $25 million per quarter in amortization that flows through that line item. And so that's the largest sort of factor I think that's contributing to that increase this quarter. And you'll see it each quarter for the next sort of two and a half to three years. It shouldn't get any bigger.

Mario Saric -- Scotiabank -- Analyst

Okay. Thank you.

Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Brian Kingston for closing remarks.

Brian Kingston -- Managing Partner and Chief Executive Officer

Thank you everyone for dialing in again and for your continued interest in Brookfield Property Partners and we look forward to giving you an update again next quarter.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Matt Cherry -- Senior Vice President, Investor Relations

Brian Kingston -- Managing Partner and Chief Executive Officer

Bryan Davis -- Managing Partner, Real Estate and Chief Financial Officer

Jared Chupaila -- Chief Executive Officer, Retail Business

Sheila McGrath -- Evercore ISI -- Analyst

Mario Saric -- Scotiabank -- Analyst

Sam Damiani -- TD Securities -- Analyst

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