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Brookfield Optimistic, Moody’s Not So Much

Evan Clark
·3 min read

What next?

It’s the question of the day, but every time someone looks into tea leaves they come up with a different answer — and it seems to depend largely on who is peering into the future and where they sit.

More from WWD

Trying their hand at divining the age of the coronavirus on Thursday were retail real estate giant Brookfield Property Partners, where the tone is more optimistic with most stores reopening, and debt watchdog Moody’s Investors Service, which doesn’t expect operating income to bounce back to pre-COVID-19 levels until 2022 at the earliest.

After the economy shrank at a heart-pounding annual rate of 32.9 percent last quarter, anything seems possible.

Brian Kingston, chief executive officer of Brookfield, acknowledged the strain in the market as he sounded a largely upbeat note for the future, at least for his company’s operations.

“We could not have envisioned the force or the speed that led to this global recession, we have been preparing and positioning ourselves for an economic downturn for some time,” Kingston said. “And so we’re cautiously optimistic the worst is now behind us.

“While we’re not completely out of the woods, we expect the severity of the impact of the shutdowns to be largely isolated within the second quarter,” he said.

Brookfield’s funds from operations — the standard yardstick for real estate companies — fell to $178 million for the second quarter ended June 30, down from $335 million a year earlier. Net losses totaled $1.5 billion, down from earnings of $23 million a year ago.

The landlord only collected about 34 percent of the rent due in its core retail portfolio, but is working with stores trying to get them to pay up now that 85 percent of the company’s retail portfolio has reopened.

“Collections have been improving throughout July,” Kingston said. “And a lot of our conversations now are centered around that period of closure and catching up on those arrears. In some cases, that’s deferral. Some cases, it’s abatements.”

On the other hand, Moody’s sharply lowered its projections for retail profitability and warned of a long, tough road ahead for store operators.

“Our industry outlook remains negative because we still face two quarters of severe declines, before the recovery begins in 2021 amid an operating environment fraught with uncertainty,” said Mickey Chadha, vice president and senior credit officer at Moody’s, referring to U.S. retail. “We now expect operating income to plunge 25 percent to 30 percent in 2020 versus its previous sector call for a milder decline of 2 percent to 5 percent.”

While most sectors will see declining profits, Moody’s said department stores and apparel and footwear stores would take the “deepest dive.”

“Even before the COVID-19 outbreak, retailers were already fighting hard to shore up market share and margins,” Chadha said. “The road to recovery will be protracted and challenging, and we do not expect operating profit levels to return to pre-COVID-19 levels until 2022 at the earliest.”

Moody’s warned that the growing online market will “only absorb a fraction of lost sales from store closures” and that the move to digital will lead to lower margins given “higher costs associated with customer acquisition, fulfillment and delivery.”